<PAGE>
As filed with the Securities and Exchange Commission on April 20, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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DURECT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2834 94-3297098
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization) ----------------
10240 Bubb Road
Cupertino, CA 95014
(408) 777-1417
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
James E. Brown
Chief Executive Officer
DURECT Corporation
10240 Bubb Road
Cupertino, CA 95014
(408) 777-1417
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Mark B. Weeks Gregory M. Gallo
Stephen B. Thau Joe C. Sorenson
Ughetta T. Manzone Sally J. Rau
Venture Law Group Bradley J. Gersich
A Professional Corporation Gray Cary Ware & Freidenrich LLP
2800 Sand Hill Road 400 Hamilton Avenue
Menlo Park, CA 94025 Palo Alto, CA 94301
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Title of Each Class of Maximum Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, par value $0.0001............. $115,000,000 $30,360
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rules 457(a) and 457(o) under the Securities
Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued April 20, 2000
[ ] Shares
[LOGO OF DURECT CORPORATION]
DURECT Corporation
COMMON STOCK
-----------
DURECT Corporation is offering shares of its common stock. This is
our initial public offering and no public market exists for our shares. We
anticipate that the initial public offering price will be between $ and
$ per share.
-----------
We have applied to list our common stock for quotation on the Nasdaq National
Market under the symbol "DRRX."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions DURECT
------ ------------- -----------
<S> <C> <C> <C>
Per Share ..................................... $ $ $
Total ......................................... $ $ $
</TABLE>
DURECT has granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
CHASE H&Q
CIBC WORLD MARKETS
, 2000
<PAGE>
[COLOR ARTWORK]
Upper right hand corner: Text "Targeted drug delivery for chronic disease
therapy."
Right side of page: The following images and words are presented from top to
bottom: (1) An image of chemistry equipment with the word "Chemistry"
underneath and an arrow pointing to the center of the page; and (2) an image
of gears with the word "Engineering" underneath and an arrow pointing to the
center of the page.
Center of page: Two images of the DUROS drug delivery system, one above the
other. The bottom image also includes a catheter connected to the DUROS drug
delivery system. Four arrows start near the center, each pointing to one of
the images at the left side of the page described below.
Left side of page: The following images and text are presented from top to
bottom: (1) an image of a molecule with the words "The right drug" underneath;
(2) an image of a graph showing curves representing drug concentration in the
body over a period of time, with the words "The Right Amount" underneath; (3)
an image of a person with arrows pointing to locations where pharmaceutical
systems may be located, with the words "The Right Place" underneath; and (4)
an image of an hourglass with the words "The Right Time" underneath.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial and Operating Data.................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 28
Management............................................................... 43
Certain Transactions..................................................... 56
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find More Information...................................... 69
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Until , 2000 (25 days after the date of this prospectus) all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their allotments or subscriptions.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
i
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
DURECT Corporation
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems to deliver the right drug
to the right place in the right amount at the right time. Our pharmaceutical
systems combine engineering innovations and delivery technology from the
medical device and drug delivery industries with our proprietary pharmaceutical
and biotechnology drug formulations. By integrating these technologies, we are
able to control the rate and duration of drug administration as well as target
the delivery of the drug to its intended site of action, allowing our
pharmaceutical systems to meet the special challenges associated with treating
chronic diseases or conditions. Our pharmaceutical systems can enable new drug
therapies or optimize existing therapies based on a broad range of compounds,
including small molecule pharmaceuticals as well as biotechnology molecules
such as proteins, peptides and genes. Our initial portfolio of products combine
the DUROS technology, a proven and patented drug delivery platform licensed for
specified fields of use from ALZA Corporation, with drugs for which medical
data on efficacy and safety are available.
According to the Centers for Disease Control, cardiovascular disease,
cancer, neurodegenerative diseases, diabetes, arthritis, epilepsy and other
chronic diseases claimed the lives of more that 1.7 million Americans in 1999.
The Centers for Disease Control also estimates that the major chronic diseases
are responsible for approximately 70% of all deaths in the U.S., and medical
care costs for these conditions totaled more than $400 billion annually.
Currently, more than 60% of total health care spending in the U.S. is devoted
to the treatment of chronic diseases. Demographic trends suggest that, as the
U.S. population ages, the incidence of chronic disease and cost of treating it
as a proportion of total health care spending will increase. While the
pharmaceutical, biotechnology, drug delivery and medical device industries have
increased overall life expectancy and improved patient quality of life, many
chronic debilitating diseases continue to be inadequately treated with current
drugs or medical devices.
Our pharmaceutical systems are suitable for providing long-term drug therapy
because they store highly concentrated, stabilized drugs in a small volume and
can protect the drug from degradation by the body. This, in combination with
our ability to deliver precise, accurate and continuous doses of a drug, allows
us to extend the therapeutic value of a wide variety of drugs, including those
which would otherwise be ineffective, too unstable, too potent or cause adverse
side effects. Delivering the drug directly to the intended site of action can
also improve efficacy while minimizing unwanted side effects elsewhere in the
body, which often limit the long-term use of many drugs. Our pharmaceutical
systems can thus provide better therapy for chronic diseases or conditions by
replacing multiple injection therapy or oral dosing, improving drug efficacy,
reducing side effects and ensuring dosing compliance. Our pharmaceutical
systems can improve patients' quality of life by eliminating more repetitive
treatments, reducing dependence on caregivers and allowing them to lead more
independent lives.
We are currently developing pharmaceutical systems based on the DUROS
technology, coupled with proprietary catheter and drug formulation technology,
to address a variety of therapeutic areas, including chronic pain, central
nervous system disorders, cardiovascular diseases and inner ear disorders. The
DUROS is a miniature drug-dispensing pump that releases minute quantities of
concentrated drug formulations in a continuous, consistent flow for as long as
one year using an osmotic engine. The miniature pump, made out of titanium, can
be as small as a wooden matchstick and can be implanted under the skin. The
potential of the DUROS technology as a platform for providing drug therapy was
recently demonstrated by the Food and Drug Administration's approval in March
2000 of ALZA's Viadur (leuprolide acetate implant), a one-year
1
<PAGE>
implant for the palliative treatment of prostate cancer, the first approved
product to incorporate the DUROS implant technology. By leveraging this proven
platform technology, we believe we can reduce our development risk and more
rapidly introduce new products to the market. Beyond the DUROS technology, we
intend to develop other technologies consistent with our objective of
delivering the right drug to the right place in the right amount at the right
time.
Our lead product is for the treatment of chronic pain and combines the DUROS
technology with a proprietary formulation of sufentanil, a potent opioid
currently used in hospitals as an anesthetic. We completed an initial Phase I
trial in November 1999 using an external pump to test the safety of continuous
chronic infusion of the drug. We intend to commence a pharmacokinetic study and
a Phase II human clinical trial in late 2000. This product is aimed at the
approximately $1 billion market for the treatment of chronic pain and will
compete with oral opioids, analgesic patches and external and implantable
infusion pumps. Our second product in development is designed to target
delivery of hydromorphone, an opioid approved for use as an analgesic, via a
catheter to the intended site of action in the central nervous system. We are
designing this product to treat end-stage cancer pain and will be conducting
preclinical studies in mid-2000. We are also researching and developing
pharmaceutical systems based on the DUROS technology in a variety of other
therapeutic areas, including central nervous system disorders, cardiovascular
disease and inner ear disorders.
Our objective is to develop and commercialize pharmaceutical systems that
address significant medical needs and improve patients' quality of life. To
achieve this objective, our strategy includes the following key elements:
. Focus on chronic debilitating medical conditions;
. Minimize product development risk and speed time-to-market;
. Enable the development of pharmaceutical systems based on biotechnology
and other new compounds; and
. Expand our technology platforms.
----------------
DURECT Corporation's executive offices are located at 10240 Bubb Road,
Cupertino, CA 95104, (408) 777-1417. IntraEAR, Round Window (mu)-Cath, Round
Window e-Cath and ALZET are trademarks of DURECT Corporation. DUROS is a
registered trademark of ALZA Corporation, and Viadur is a trademark of ALZA
Corporation. Each other trademark, trade name or service mark of any other
company appearing in this prospectus is the property of its holders.
2
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... For research, development,
manufacture and
commercialization of
existing and future
products and general
corporate purposes,
including working capital
and capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. DRRX
</TABLE>
The number of shares does not take into account:
. 738,350 shares of our common stock subject to options outstanding under
our stock plans at March 31, 2000;
. 1,265,650 shares reserved for issuance under our 2000 stock plan;
. 150,000 shares reserved for issuance under our 2000 employee stock
purchase plan;
. 300,000 shares reserved under our 2000 directors stock option plan;
. a warrant to purchase 31,395 shares of our common stock issued in
January 1999; and
. a warrant to purchase 1,000,000 shares of our common stock issued in
April 2000.
Except as otherwise indicated, information in this prospectus is based on the
following assumptions:
. The conversion of all outstanding shares of preferred stock into common
stock on a one-for-one basis upon the closing of this offering;
. No exercise of the underwriters' over-allotment option; and
. The filing of our amended and restated certificate of incorporation upon
the closing of this offering.
3
<PAGE>
SUMMARY FINANCIAL DATA
In the following summary financial data, the statement of operations data
for the period from inception (February 6, 1998), to December 31, 1998, the
year ended December 31, 1999 and the period from inception (February 6, 1998)
to December 31, 1999 are derived from and qualified in their entirety by our
consolidated financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from Period from
inception inception
(February 6, Fiscal Year (February 6,
1998) to Ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data: (in thousands, except per share data)
Revenue, net............................ $ -- $ 86 $ 86
Research and development expenses....... 709 6,363 7,072
Loss from operations.................... (1,443) (9,359) (10,802)
Net loss applicable to common
stockholders........................... (1,322) (9,310) (10,632)
Basic and diluted net loss per common
share.................................. (0.36) (1.76)
Shares used in computing basic and
diluted net loss per common share...... 3,655 5,291
Pro forma basic and diluted net loss per
common share (unaudited)............... (0.37)
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)............................ 23,771
</TABLE>
See Note 1 of the notes to financial statements for the determination of the
number of shares used in computing net loss per share and pro forma net loss
per share amounts.
The actual column in the following table presents actual summary balance
sheet data as of December 31, 1999. The pro forma balance sheet data below
reflects the sale of 3,571,429 shares of our stock in March 2000 for net
proceeds of approximately $24.8 million. The pro forma as adjusted balance
sheet data below also reflects the receipt of the net proceeds from the sale of
shares of common stock offered by us at an assumed initial public offering
price of $ per share, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us. The
pro forma and pro forma as adjusted columns below do not reflect the issuance
of 1,000,000 shares of our common stock in April 2000.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------------- ------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments...... $18,933 $43,683
Working capital............................. 15,921 40,671
Total assets................................ 22,463 47,213
Equipment loan, net of current portion...... 189 189 189
Stockholders' equity........................ 20,728 45,478
</TABLE>
4
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our common stock. If any of the
following risks actually occur, as well as other risks not mentioned here, our
business and prospects could be seriously harmed, the price of our common stock
could decline and you could lose all or part of your investment.
Risks Related to Our Business
We have not completed development of any of our pharmaceutical systems, and
we cannot be certain that our pharmaceutical systems will be able to be
commercialized
To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our pharmaceutical
systems under development. For each pharmaceutical system that we intend to
commercialize, we must successfully meet a number of critical developmental
milestones for each disease or medical condition that we target, including:
. selecting and developing drug delivery platform technology to deliver
the proper dose of drug over the desired period of time;
. selecting and developing catheter technology, if appropriate, to deliver
the drug to a specific location within the body;
. determining the appropriate drug dosage for use in the pharmaceutical
system;
. developing drug compound formulations that will be safe, effective and
compatible with the system; and
. demonstrating the drug formulation will be stable for commercially
reasonable time periods.
The time frame necessary to achieve these developmental milestones for any
individual product is long and uncertain, and we may not successfully complete
these milestones for any of our products in development. For our lead product,
DUROS sufentanil, we have not yet determined the drug dosages we intend to use
for commercialization. We may not be able to develop dosages that will be safe
and effective or compatible with the pharmaceutical system for a commercially
reasonable treatment and storage period.
Development of pharmaceutical systems is costly and requires significant
investment. In addition, we may choose to license either additional drug
delivery platform technology or rights to particular drugs for use in our
pharmaceutical systems. The license fees for these technologies or rights would
increase the costs of our pharmaceutical systems.
We must conduct and satisfactorily complete clinical trials for our
pharmaceutical systems
Before we can obtain government approval to sell any of our pharmaceutical
systems, we must demonstrate through preclinical (animal) studies and clinical
(human) trials that each system is safe and effective for human use for each
targeted disease. We have completed an initial Phase I clinical trial for our
lead product, DUROS sufentanil, using an external pump to test the safety of
continuous chronic infusion of the drug, and we plan to begin pharmacokinetic
studies and Phase II human clinical trials for this product in late 2000. We
plan to continue extensive and costly clinical trials to assess the safety and
effectiveness of DUROS sufentanil and our other potential products. We may not
be permitted to begin or continue our planned clinical trials for our potential
products or, if our trials are permitted, our potential products may not prove
to be safe or produce their intended effects.
The length of our clinical trials depends upon, among other factors, the
rate of trial site and patient enrollment. We may fail to obtain adequate
levels of patient enrollment in our clinical trials. Delays in planned patient
enrollment may result in increased costs, delays or termination of clinical
trials, which could have a material adverse effect on us. In addition, even if
we enroll the number of patients we expect in the time frame we expect, our
clinical trials may not provide the data necessary for their successful
completion.
5
<PAGE>
Additionally, we may fail to effectively oversee and monitor these clinical
trials, which would result in increased costs or delays of our clinical
trials. Even if these clinical trials are completed, we may fail to complete
and submit a new drug application as scheduled. Even if we are able to submit
a new drug application as scheduled, the Food and Drug Administration may not
clear our application in a timely manner or may deny the application entirely.
Data already obtained from preclinical studies and clinical trials of our
pharmaceutical systems do not necessarily predict the results that will be
obtained from later preclinical studies and clinical trials. Moreover,
preclinical and clinical data such as ours is susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and effectiveness of
a product under development could delay or prevent regulatory clearance of the
potential product, resulting in delays to the commercialization of our
products, and could materially harm our business. Our clinical trials may not
demonstrate the sufficient levels of safety and efficacy necessary to obtain
the requisite regulatory approvals for our products, and thus our products may
not be approved for marketing.
Our agreement with ALZA limits our fields of operation for our DUROS-based
pharmaceutical systems, requires us to spend significant funds on product
development and gives ALZA a first right to distribute selected products
for us
In April 1998, we entered into a development and commercialization
agreement with ALZA Corporation, which was amended and restated in April 1999
and April 2000. This agreement gives us exclusive rights to develop,
commercialize and manufacture products using ALZA's DUROS technology to
deliver by catheter:
. drugs to the central nervous system to treat select nervous system
disorders;
. drugs to the middle and inner ear;
. drugs to the pericardial sac of the heart; and
. select drugs into vascular grafts.
We also have the right to use the DUROS technology to deliver systemically
and by catheter:
. sufentanil to treat chronic pain; and
. select cancer antigens.
We may not develop, manufacture or commercialize DUROS-based pharmaceutical
systems outside of these specific fields without ALZA's prior approval. In
addition, if we develop or commercialize any drug delivery technology for use
in a manner similar to the DUROS technology in a field covered in our license
agreement with ALZA, then we may lose our exclusive rights to use the DUROS
technology in such field as well as the right to develop new products using
DUROS technology in such field. Furthermore, to maintain our rights under this
license agreement, we must spend at least $58.0 million to develop products in
some or all of these fields through 2004. In order to maintain
commercialization rights for our products in the U.S. and any foreign
countries, we must diligently develop our products, procure required
regulatory approvals and commercialize the products in these countries. If we
fail to meet the various diligence requirements, we may:
. lose our rights to develop, commercialize and manufacture some of our
DUROS-based pharmaceutical systems;
. lose rights for products in some or all countries, including the U.S.;
or
. lose rights in some fields of use.
These rights would revert to ALZA, which could then develop DUROS-based
pharmaceutical products in such countries or fields of use itself or license
others to do so.
6
<PAGE>
Our agreement with ALZA gives us the right to develop and manufacture the
DUROS pump component of our pharmaceutical systems in the fields described
above. In the event of a change in our corporate control, including an
acquisition of us, our right to manufacture and develop the DUROS pump would
terminate and ALZA would have the right to manufacture and develop DUROS
systems for us so long as ALZA can meet our specification and supply
requirements following such change in control.
Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-
based pharmaceutical systems we commercialize. In addition, ALZA has an
exclusive option to distribute our DUROS sufentanil product in the U.S. and
Canada and any DUROS-based pharmaceutical system we develop to deliver non-
proprietary cancer antigens worldwide. ALZA's option to acquire distribution
rights limit our ability to negotiate with other distributors for these
products and may result in lower payments to us than if these rights were
subject to competitive negotiations.
Failure to obtain product approvals or comply with ongoing governmental
regulations could delay or limit introduction of our new products and
result in failure to achieve anticipated revenues
The manufacture and marketing of our products and our research and
development activities are subject to extensive regulation for safety,
efficacy and quality by numerous government authorities in the United States
and abroad. Before receiving FDA clearance to market a product, we will have
to demonstrate that the product is safe and effective on the patient
population and for the diseases that will be treated. Clinical trials,
manufacturing and marketing of products are subject to the rigorous testing
and approval process of the FDA and equivalent foreign regulatory authorities.
The Federal Food, Drug and Cosmetic Act and other federal, state and foreign
statutes and regulations govern and influence the testing, manufacture,
labeling, advertising, distribution and promotion of drugs and medical
devices. As a result, clinical trials and regulatory approval can take a
number of years to accomplish and require the expenditure of substantial
resources. Data obtained from clinical trials are susceptible to varying
interpretations, which could delay, limit or prevent regulatory clearances. As
of the date of this prospectus, we have completed an initial Phase I clinical
trial for our DUROS sufentanil product using an external pump to test the
safety of continuous chronic infusion of the drug, but we have not begun Phase
II or Phase III trials of any products. If we fail to obtain timely clearance
or approval for our products, we will not be able to market and sell our
products, which will limit our ability to generate revenue. See "Business--
Government Regulation."
In addition, we may encounter delays or rejections based upon additional
government regulation from future legislation or administrative action or
changes in FDA policy during the period of product development, clinical
trials and FDA regulatory review. We may encounter similar delays in foreign
countries. Sales of our products outside the U.S. are subject to foreign
regulatory approvals that vary from country to country. The time required to
obtain approvals from foreign countries may be shorter or longer than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements. We may be unable to obtain requisite approvals from the
FDA and foreign regulatory authorities, and even if obtained, such approvals
may not be on a timely basis, or they may not cover the clinical uses that we
specify.
Marketing or promoting a drug for an unapproved use is subject to very
strict controls. Furthermore, clearance may entail ongoing requirements for
post-marketing studies. The manufacture and marketing of drugs are subject to
continuing FDA and foreign regulatory review and requirements that we update
our regulatory filings. Later discovery of previously unknown problems with a
product, manufacturer or facility, or our failure to update regulatory files,
may result in restrictions, including withdrawal of the product from the
market. Any of the following events, if they were to occur, could delay or
preclude us from further developing, marketing or realizing full commercial
use of our products, which in turn would materially harm our business,
financial condition and results of operations:
. failure to obtain or maintain requisite governmental approvals;
. failure to obtain approvals for clinically intended uses of our products
under development; or
. identification of serious and unanticipated adverse side effects in our
products under development.
7
<PAGE>
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include production design controls,
testing, quality control and quality assurance requirements as well as the
corresponding maintenance of records and documentation. Compliance with
current good manufacturing practices regulations is difficult and costly.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA
and corresponding state agencies, including unannounced inspections, and must
be licensed before they can be used for the commercial manufacture of our
products. We or our present or future suppliers may be unable to comply with
the applicable good manufacturing practice regulations and other FDA
regulatory requirements. We have not been subject to a good manufacturing
regulation inspection by the FDA or any state agency relating to our
pharmaceutical systems. If we do not achieve compliance for the products we
manufacture, the FDA may withdraw marketing clearance or require product
recall, which may cause interruptions or delays in the manufacture and sale of
our products.
Our limited operating history makes evaluating our stock difficult
You can only evaluate our business based on a limited operating history. We
were incorporated in February 1998 and have engaged primarily in research and
development, licensing technology, raising capital and recruiting scientific
and management personnel. This short history may not be adequate to enable you
to fully assess our ability to successfully develop our products, achieve
market acceptance of our products and respond to competition.
Acceptance of our products in the marketplace is uncertain, and failure to
achieve market acceptance will delay our ability to generate or grow
revenues
Our future financial performance will depend upon the successful
introduction and customer acceptance of our future products, including DUROS
sufentanil. Even if approved for marketing, our products may not achieve
market acceptance. The degree of market acceptance will depend upon a number
of factors, including:
. the receipt of regulatory clearance of marketing claims for the uses
that we are developing;
. the establishment and demonstration in the medical community of the
safety and clinical efficacy of our products and their potential
advantages over existing therapeutic products, including oral
medication, transdermal drug delivery products such as drug patches, or
external or implantable drug delivery products; and
. pricing and reimbursement policies of government and third-party payors
such as insurance companies, health maintenance organizations and other
health plan administrators.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products. If we are
unable to obtain regulatory approval, commercialize and market our future
products when planned and achieve market acceptance, we will not achieve
anticipated revenues.
We have a history of operating losses, expect to continue to have losses in
the future and may never achieve or maintain profitability
We have incurred significant operating losses since our inception in 1998
and, as of December 31, 1999, had an accumulated deficit of approximately
$10.6 million. We expect to continue to incur significant operating losses
over the next several years as we continue to incur increasing costs for
research and development, clinical trials and manufacturing. Our ability to
achieve profitability depends upon our ability, alone or with others, to
successfully complete the development of our proposed products, obtain the
required regulatory clearances and manufacture and market our proposed
products. To date, we have not generated significant revenue from the
commercial sale of our products and do not expect to receive significant
revenue in the near future. All revenues to date are from the sale of products
we acquired in October 1999 in connection with the acquisition of
substantially all of the assets of IntraEAR, Inc. and the ALZET product we
acquired in April 2000 from ALZA. We do not expect these revenues to increase
significantly in future periods. We do not anticipate commercialization and
marketing of our products in development in the near future, and therefore do
not expect to generate sufficient revenues to cover expenses or achieve
profitability in the near future.
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We do not control ALZA's ability to develop and commercialize DUROS
technology outside of fields licensed to us, and problems encountered by
ALZA could result in negative publicity, loss of sales and delays in market
acceptance of our DUROS-based pharmaceutical systems
ALZA retains complete rights to the DUROS technology for fields outside the
specific fields licensed to us. Accordingly, ALZA may develop and
commercialize DUROS-based products or license others to do so, so long as
there is no conflict with the rights granted to us. ALZA recently received FDA
approval to market its first DUROS-based product, Viadur (leuprolide acetate
implants) for the palliative treatment of advanced prostate cancer. If ALZA
fails to commercialize this product successfully, or encounters problems
associated with this product, negative publicity could be created about all
DUROS-based products, which could result in harm to our reputation and cause
reduced sales of our products. In addition, if any third-party that may be
licensed by ALZA fails to develop and commercialize DUROS-based products
successfully, the success of all DUROS-based systems could be impeded,
including ours, resulting in delay or loss of revenue or damage to our
reputation, any one of which could harm our business.
We do not own the trademark "DUROS" and any competitive advantage we derive
from the name may be impaired by third-party use
ALZA owns the trademark "DUROS." Because ALZA is also developing and
marketing DUROS-based systems, and may license third parties to do so, there
may be confusion in the market between ALZA, its potential licensees and us,
and this confusion could impair the competitive advantage, if any, we derive
from use of the DUROS name. In addition, any actions taken by ALZA or its
potential licensees that negatively impact the trademark "DUROS" could
negatively impact our reputation and result in reduced sales of our DUROS-
based pharmaceutical systems.
We may be sued by third parties which claim that our products infringe on
their intellectual property rights, particularly because there is
substantial uncertainty about the validity and breadth of medical patents
We may be exposed to future litigation by third parties based on claims
that our products infringe the intellectual property rights of others or that
we have misappropriated the trade secrets of others. This risk is exacerbated
by the fact that the validity and breadth of claims covered in medical
technology patents and the breadth and scope of trade secret protection
involve complex legal and factual questions for which important legal
principles are unresolved. Any litigation or claims against us, whether or not
valid, could result in substantial costs, could place a significant strain on
our financial resources and could harm our reputation. In addition,
intellectual property litigation or claims could force us to do one or more of
the following:
. cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would adversely
affect our revenue;
. obtain a license from the holder of the infringed intellectual property
right, which license may be costly or may not be available on reasonable
terms, if at all; or
. redesign our products, which would be costly and time-consuming.
If we are unable to adequately protect or enforce our intellectual property
rights or secure rights to third-party patents, we may lose valuable
assets, experience reduced market share or incur costly litigation to
protect our rights
Our success will depend in part on our ability to obtain patents, maintain
trade secret protection and operate without infringing the proprietary rights
of others. We currently hold four issued or allowed U.S. patents and one
issued or allowed foreign patent. In addition, we have 11 pending U.S. patent
applications and have filed six corresponding patent applications under the
Patent Cooperation Treaty, five of which are currently pending in Europe,
Australia and Canada. To maintain the license rights to ALZA intellectual
property granted to us under
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our development and commercialization agreement with ALZA, we must meet annual
minimum development spending requirements and develop a minimum number of
products. If we do not meet these diligence requirements, we may lose rights
to one or more of our licensed fields. Also, under our agreement with ALZA, we
must assign any intellectual property rights relating to the DUROS technology
to ALZA. In addition, ALZA retains the right to enforce and defend against
infringement actions relating to DUROS technology, and if ALZA exercises these
rights, it will be entitled to the proceeds of these infringement actions.
The patent positions of pharmaceutical companies, including ours, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before
the patent is issued. Consequently, our patent applications or those of ALZA
may not issue into patents, and any issued patents may not provide protection
against competitive technologies or may be held invalid if challenged or
circumvented. Our competitors may also independently develop products similar
to ours or design around or otherwise circumvent patents issued to us or
licensed by us. In addition, the laws of some foreign countries may not
protect our proprietary rights to the same extent as U.S. law.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
require our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements with us.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached, and in some instances, we may not
have an appropriate remedy available for breach of the agreements.
Furthermore, our competitors may independently develop substantially
equivalent proprietary information and techniques, reverse engineer our
information and techniques, or otherwise gain access to our proprietary
technology. We may be unable to meaningfully protect our rights in trade
secrets, technical know-how and other non-patented technology.
We may have to resort to litigation to protect our intellectual property
rights, or to determine their scope, validity or enforceability. Enforcing or
defending our proprietary rights is expensive, could cause diversion of our
resources and may not prove successful. Any failure to enforce or protect our
rights could cause us to lose the ability to exclude others from using our
technology to develop or sell competing products.
We rely heavily on third parties and do not control critical steps in the
manufacturing and testing of our products
We currently depend heavily and will depend heavily in the future on third
parties for support in manufacturing and clinical testing. We have an
agreement with Chesapeake Biological Labs, Inc. for the final manufacturing
steps of our DUROS sufentanil product to deliver product quantities that we
expect we will need for Phase II clinical trials of this product. The steps to
be performed by Chesapeake include filling the DUROS system with the
sufentanil drug formulation in a sterile environment, sterilization and final
product testing. Manufacturing DUROS sufentanil, including the manufacturing
steps performed by Chesapeake, is a complex process, and Chesapeake may not be
able to provide sufficient quantities of DUROS sufentanil within an acceptable
time frame. Failure by Chesapeake to do so could delay clinical trials of our
products and result in delays in regulatory approval and commercialization of
our products, either of which would materially harm our business.
We have a master services agreement with Quintiles, Inc. under which we may
engage Quintiles to provide services related to clinical trials for our
pharmaceutical systems, at terms to be agreed to and specified in subsequent
work orders. We may be unable to negotiate the terms of these work orders with
Quintiles. If we are unable to agree to terms, we will need to establish
commercial relationships with a different third party, or perform these
services ourselves, either of which could materially delay the development and
approval of our products and increase our expenses. If we do negotiate work
orders with Quintiles, Quintiles may be unable to manage these trials to
completion in the time periods or at the costs we expect. Failure of Quintiles
to do so could materially harm our business, financial condition and results
of operations.
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Key components of our DUROS-based pharmaceutical systems are provided by
sole or limited numbers of suppliers, and supply shortages or loss of these
suppliers could result in interruptions in supply or increased costs
Certain components used in our DUROS-based pharmaceutical systems are
currently purchased from a single or a limited number of outside sources. The
reliance on a sole or limited number of suppliers could result in:
. delays associated with redesigning a product due to a failure to obtain
a single source component;
. an inability to obtain an adequate supply of required components; and
. reduced control over pricing, quality and timely delivery.
We do not have long-term agreements with any of our suppliers, and
therefore the supply of a particular component could be terminated at any time
without penalty to the supplier. Any interruption in the supply of single
source components could cause us to seek alternative sources of supply or
manufacture these components internally. If the supply of any components for
our pharmaceutical systems is interrupted, components from alternative
suppliers may not be available in sufficient volumes within required
timeframes, if at all, to meet our needs. This could delay our ability to
complete clinical trials and obtain approval for commercialization and
marketing of our products, causing us to lose sales, incur additional costs
and delay new product introductions and could harm our reputation.
We have limited manufacturing experience and may not be able to manufacture
sufficient quantities of our products at an acceptable cost
We must manufacture our products in clinical and commercial quantities,
either directly or through third parties, in compliance with regulatory
requirements and at an acceptable cost. We do not own manufacturing facilities
necessary to provide clinical and commercial quantities of our products. We
currently manufacture sub-assemblies of our DUROS-based pharmaceutical systems
and rely on Chesapeake Biological Labs, Inc. to complete the final
manufacturing steps of these products. See "Risk Factors--We rely heavily on
third parties and do not control critical steps in the manufacturing and
testing of our products." Under our agreement with ALZA, we cannot subcontract
the manufacture of subassemblies of the DUROS system.
Prior to obtaining regulatory approval of our products under development,
we intend to build a manufacturing facility that will enable us to manufacture
commercial quantities of our DUROS-based pharmaceutical systems, as well as to
manufacture additional products in development on a pilot scale and our own
clinical trial supplies. The manufacture of our DUROS-based pharmaceutical
systems is a complex process, and any facility that we build must comply with
federal and state good manufacturing practices regulations. DURECT has no
experience building facilities, and we may not be able to build a facility
prior to clinical approval of our products or at currently anticipated costs.
If we build a facility, we will be subject to government audits to determine
compliance with good manufacturing practices regulations, and we may be unable
to obtain and maintain certifications for complying with these regulations. If
we fail to build a manufacturing facility before regulatory approval of our
products or at currently anticipated costs, or fail to obtain and maintain
certification for compliance with good manufacturing practices regulation, we
could experience a delay in the commercial sale of our DUROS-based
pharmaceutical systems.
In April 2000, we acquired the ALZET product and related assets from ALZA.
We intend to manufacture the ALZET product at a leased facility. We have
limited experience manufacturing this product, and we may not be able to
successfully or consistently manufacture this product at an acceptable cost,
if at all.
We lack marketing, sales and distribution experience for pharmaceutical
systems and we may not be able to sell our products if we do not enter into
relationships with third parties or develop a direct sales organization
We have yet to establish marketing, sales or distribution capabilities for
our pharmaceutical systems. We intend to enter into agreements with third
parties to sell our products or to develop our own sales and marketing
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force. We may be unable to establish or maintain third-party relationships on
a commercially reasonable basis, if at all. In addition, these third parties
may have similar or more established relationships with our competitors.
If we do not enter into relationships with third parties for the sales and
marketing of our products, we will need to develop our own sales and marketing
capabilities. DURECT has only limited experience in developing, training or
managing a sales force. If we choose to establish a direct sales force, we
will incur substantial additional expenses in developing, training and
managing such an organization. We may be unable to build a sales force, the
cost of establishing such a sales force may exceed our product revenues, or
our direct marketing and sales efforts may be unsuccessful. In addition, we
compete with many other companies that currently have extensive and well-
funded marketing and sales operations. Our marketing and sales efforts may be
unable to compete successfully against these other companies. We may be unable
to establish a sufficient sales and marketing organization on a timely basis,
if at all.
We may be unable to engage qualified distributors. Even if engaged, these
distributors may:
. fail to satisfy financial or contractual obligations to us;
. fail to adequately market our products;
. cease operations with little or no notice to us; or
. offer, design, manufacture or promote competing product lines.
If we fail to develop sales, marketing and distribution channels, we would
experience delays in product sales and incur increased costs, which would harm
our financial results.
If we are unable to train physicians to use our pharmaceutical systems to
treat patients' diseases or medical conditions, we may incur delays in
market acceptance of our products
Broad use of our pharmaceutical systems will require extensive training of
numerous physicians. The time required to begin and complete training of
physicians could delay introduction of our products and adversely affect
market acceptance of our products. We may be unable to rapidly train
physicians in numbers sufficient to generate adequate demand for our
pharmaceutical systems. Any delay in training would materially delay the
demand for our systems. In addition, we may expend significant funds towards
such training before any orders are placed for our products.
We may have difficulty raising needed capital in the future
Our business currently does not generate sufficient revenues to meet our
capital requirements and we do not expect that it will do so in the near
future. We have expended and will continue to expend substantial funds to
complete the research, development and clinical testing of our products. We
will require additional funds for these purposes, to establish additional
clinical- and commercial-scale manufacturing arrangements and to provide for
the marketing and distribution of our products. Additional funds may not be
available on acceptable terms, if at all. If adequate funds are unavailable
from operations or additional sources of financing, we may have to delay,
reduce the scope of or eliminate one or more of our research or development
programs which would materially harm our business, financial condition and
results of operations.
We believe that the net proceeds of this offering, together with our cash,
cash equivalents and investments, will be adequate to satisfy our capital
needs for at least the next 18 months. However, our actual capital
requirements will depend on many factors, including:
. continued progress and cost of our research and development programs;
. progress with preclinical studies and clinical trials;
. the time and costs involved in obtaining regulatory clearance;
. costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
. costs of developing sales, marketing and distribution channels and our
ability to sell our products;
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. costs involved in establishing manufacturing capabilities for commercial
quantities of our products;
. competing technological and market developments;
. market acceptance or our products; and
. costs for recruiting and retaining employees and consultants.
We may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. We may seek to raise any
necessary additional funds through equity or debt financings, collaborative
arrangements with corporate partners or other sources, which may be dilutive
to existing stockholders. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners or other sources, we
may have to relinquish rights to some of our technologies, product candidates
or products under development that we would otherwise seek to develop or
commercialize ourselves. If adequate funds are not available, we may be
required to significantly reduce or refocus our product development efforts,
or relinquish to ALZA rights to develop DUROS products in certain fields,
resulting in loss of sales, increased costs, and reduced revenues.
We may acquire technologies and businesses which may be difficult to
integrate, disrupt our business, dilute stockholder value or divert
management attention
We may acquire technologies, products or businesses to broaden the scope of
our existing and planned product lines and technologies. For example, in
October 1999, we acquired substantially all of the assets of IntraEAR, Inc.
and in April 2000 we acquired the ALZET product and related assets from ALZA.
These and other acquisitions expose us to:
. the risks associated with the assimilation of new technologies,
operations, sites and personnel;
. the diversion of resources from our existing business and technologies;
. the inability to generate revenues to offset associated acquisition
costs;
. the requirement to maintain uniform standards, controls, and procedures;
and
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel.
Acquisitions may also result in the issuance of dilutive equity securities,
the incurrence or assumption of debt or additional expenses associated with
the amortization of acquired intangible assets or potential businesses. Past
acquisitions, such as our acquisitions of IntraEAR and ALZET, as well future
acquisitions, may not generate any additional revenue or provide any benefit
to our business.
We depend upon key personnel who may terminate their employment with us at
any time, and we need to hire additional qualified personnel
Our success will depend to a significant degree upon the continued services
of key management, technical, and scientific personnel, including Felix
Theeuwes, our Chairman and Chief Scientific Officer and James E. Brown, our
President and Chief Executive Officer. In addition, our success will depend on
our ability to attract and retain other highly skilled personnel. Competition
for qualified personnel is intense, and the process of hiring and integrating
such qualified personnel is often lengthy. We may be unable to recruit such
personnel on a timely basis, if at all. Our management and other employees may
voluntarily terminate their employment with us at any time. The loss of the
services of key personnel, or the inability to attract and retain additional
qualified personnel, could result in delays to product development or
approval, loss of sales and diversion of management resources.
We may not successfully manage our growth
Our success will depend on the expansion of our operations and the
effective management of growth, which will place a significant strain on our
management and on our administrative, operational and financial resources.
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To manage such growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage growth effectively our business would be
harmed.
Risks Related to Our Industry
The market for our products is new, rapidly changing and competitive, and
new products or technologies developed by others could impair our ability
to grow our business and remain competitive
The pharmaceutical industry is subject to rapid and substantial
technological change. Developments by others may render our products under
development or technologies noncompetitive or obsolete, or we may be unable to
keep pace with technological developments or other market factors.
Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Many of
these entities have significantly greater research and development
capabilities than we do, as well as substantially more marketing,
manufacturing, financial and managerial resources. These entities represent
significant competition for us. Acquisitions of, or investments in, competing
pharmaceutical or biotechnology companies by large corporations could increase
such competitors' financial, marketing, manufacturing and other resources.
We are a new enterprise and are engaged in the development of novel
therapeutic technologies. As a result, our resources are limited and we may
experience technical challenges inherent in such novel technologies.
Competitors have developed or are in the process of developing technologies
that are, or in the future may be, the basis for competitive products. Some of
these products may have an entirely different approach or means of
accomplishing similar therapeutic effects than our products. Our competitors
may develop products that are safer, more effective or less costly than our
products and, therefore, present a serious competitive threat to our product
offerings.
The widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if commercialized. Chronic pain
can also be treated by oral medication, transdermal drug delivery systems,
such as drug patches, or with other implantable drug delivery devices. These
treatments are widely accepted in the medical community and have a long
history of use. The established use of these competitive products may limit
the potential for our products to receive widespread acceptance if
commercialized.
If users of our products are unable to obtain adequate reimbursement from
third-party payors, or if new restrictive legislation is adopted, market
acceptance of our products may be limited and we may not achieve
anticipated revenues
The continuing efforts of government and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers,
suppliers and collaborative partners and the availability of capital. For
example, in certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, given
recent federal and state government initiatives directed at lowering the total
cost of health care, the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of prescription
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While
we cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could materially harm
our business, financial condition and results of operations.
Our ability to commercialize our products successfully will depend in part
on the extent to which appropriate reimbursement levels for the cost of our
products and related treatment are obtained by governmental authorities,
private health insurers and other organizations, such as HMOs. Third-party
payors are increasingly challenging the prices charged for medical products
and services. Also, the trend toward managed health care in
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the United States and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care
or reduce government insurance programs, may all result in lower prices for or
rejection of our products. The cost containment measures that health care
payors and providers are instituting and the effect of any health care reform
could materially harm our ability to operate profitably.
We could be exposed to significant product liability claims which could be
time consuming and costly to defend, divert management attention and
adversely impact our ability to obtain and maintain insurance coverage
The testing, manufacture, marketing and sale of our products involve an
inherent risk that product liability claims will be asserted against us.
Although we are insured against such risks up to a $5,000,000 annual aggregate
limit in connection with clinical trials and commercial sales of our products,
our present product liability insurance may be inadequate and may not fully
cover the costs of any claim or any ultimate damages we might be required to
pay. Product liability claims or other claims related to our products,
regardless of their outcome, could require us to spend significant time and
money in litigation or to pay significant damages. Any successful product
liability claim may prevent us from obtaining adequate product liability
insurance in the future on commercially desirable or reasonable terms. In
addition, product liability coverage may cease to be available in sufficient
amounts or at an acceptable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential
product liability claims could prevent or inhibit the commercialization of our
pharmaceutical systems. A product liability claim could also significantly
harm our reputation and delay market acceptance of our products.
Our business involves environmental risks and risks related to handling
controlled substances
In connection with our research and development activities and our
manufacture of materials and products, we are subject to federal, state and
local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal
of certain materials, biological specimens and wastes. Although we believe
that we have complied with the applicable laws, regulations and policies in
all material respects and have not been required to correct any material
noncompliance, we may be required to incur significant costs to comply with
environmental and health and safety regulations in the future. Our research
and development involves the controlled use of hazardous materials, including
but not limited to certain hazardous chemicals and narcotics. Although we
believe that our safety procedures for storing, handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of such an
occurrence, we could be held liable for any damages that result and any such
liability could exceed our resources.
Risks Related to this Offering
Our stock price will fluctuate after this offering, and your investment in
our stock could decline in value
After this offering, an active trading market in our stock might not
develop or continue. If you purchase shares of our common stock in the
offering, you will pay a price that was not established in a competitive
market. Rather, you will pay a price that we negotiated with the
representatives of the underwriters based upon an assessment of the valuation
of our stock. The public market may not agree with or accept this valuation,
in which case you may not be able to sell your shares at or above the initial
offering price. See "Underwriters." The market price of our common stock may
fluctuate significantly in response to factors which are beyond our control.
In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
technology and pharmaceutical companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.
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Future sales of our common stock may depress our stock price
As many as 23,863,617 shares of our common stock can be sold in the public
market 180 days after the offering. If substantial amounts of our common stock
were to be sold in the public market following this offering, the market price
of our common stock could fall. In addition, these sales could create the
perception to the public of difficulties or problems in our business. As a
result, these sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. For a more detailed discussion of shares eligible for sale after
the offering, see "Shares Eligible for Future Sale."
We have broad discretion to use the offering proceeds, and the investment
of these proceeds may not yield a favorable return
Our management has broad discretion over how these proceeds are used and
could spend most of these proceeds in ways with which our stockholders may not
agree. The proceeds may be invested in ways that do not yield favorable
returns. See "Use of Proceeds" for more information about how we plan to use
our proceeds from this offering.
Executive officers, directors and entities affiliated with them will
continue to have substantial control over us after the offering, which
could delay or prevent a change in our corporate control favored by our
other stockholders
After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately % of our outstanding common stock following the
completion of this offering, % if the overallotment option is exercised in
full. In particular, our executive officers will control approximately % of
our common stock after this offering, % if the overallotment option is
exercised in full. The interests of these stockholders may differ from the
interests of other stockholders. As a result, these stockholders, if acting
together, would have the ability to exercise control over all corporate
actions requiring stockholder approval irrespective of how our other
stockholders may vote, including:
. the election of directors;
. the amendment of charter documents;
. the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets; or
. the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could discourage another company from acquiring us
Provisions of Delaware law, our certificate of incorporation and by-laws
may discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable, including transactions in which you might otherwise
receive a premium for your shares. These provisions include:
. authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders;
. providing for a classified board of directors with staggered terms;
. requiring supermajority stockholder voting to effect certain amendments
to our certificate of incorporation and by-laws;
. eliminating the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
See "Management--Board Composition" and "Description of Capital Stock--
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws."
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Purchasers in this offering will experience immediate and substantial
dilution of their investment
We expect that the initial public offering price per share will
significantly exceed the net tangible book value per share of the outstanding
common stock. Accordingly, purchasers of common stock in this offering will
suffer immediate and substantial dilution of their investment. In the past, we
have issued options to acquire common stock at prices below the initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus are forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's actual results, levels
of activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our common stock, you should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this prospectus
could substantially harm our business, results of operations and financial
condition, and that upon the occurrence of any of these events, the trading
price of our common stock could decline and you could lose all or part of your
investment.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock in
this offering are estimated to be approximately $ million, based upon an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and our estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, the
net proceeds would be approximately $ million.
We currently intend to use the net proceeds from this offering to fund the
research, development, manufacture and commercialization of existing and
future products and for general corporate purposes, including working capital
and capital expenditures. We may use a portion of the net proceeds to fund,
acquire or invest in complementary businesses or technologies, although we
have no present commitments with respect to any acquisition or investment. The
amount of cash that we actually expend for any of the described purposes will
vary significantly based on a number of factors, including the progress of our
research and development programs and clinical trials, the establishment of
collaborative relationships, the cost and pace of establishing and expanding
our manufacturing capabilities, the development of sales and marketing
activities if undertaken by us and competing technological and market
developments. Our management will have significant discretion in applying the
net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not intend to pay any cash dividends with respect to
our common stock in the foreseeable future. We intend to retain any earnings
for use in the operation of our business and to fund future growth. The terms
of our credit agreement prohibit the payment of dividends on our stock (except
for dividends payable solely in stock) without prior written consent.
19
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization as of December 31,
1999 on an actual basis, on a pro forma basis to reflect the sale of 3,571,429
shares of our Series C preferred stock in March 2000 for net proceeds of
approximately $24.8 million, the issuance of 1,000,000 shares of our common
stock in April 2000, and the conversion of all outstanding shares of preferred
stock into 27,502,660 shares of common stock upon the completion of this
offering, and on a pro forma as adjusted basis to reflect the application by
us of the estimated net proceeds from the sale of the shares of
common stock in this offering at the initial public offering price of $
per share after deducting estimated underwriting discounts and commissions and
our estimated offering expenses.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes to the financial
statements.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- -------------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C>
Equipment Loan, noncurrent portion........ $ 189 $ 189 $ 189
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.0001 par value;
24,242 shares authorized, 23,931 shares
issued and outstanding, actual;
shares authorized, no shares issued and
outstanding pro forma; shares
authorized, no shares issued or
outstanding, pro forma as adjusted..... 2 -- --
Common stock, $0.0001 par value: 41,542
shares authorized, 8,502 shares issued
and outstanding actual; shares
authorized, 37,005 shares issued and
outstanding pro forma; shares
authorized, shares issued and
outstanding, pro forma as adjusted..... 1 3
Additional paid-in capital................ 34,642 66,392
Notes receivable from stockholders........ (33) (33) (33)
Deferred stock compensation............... (3,252) (3,252) (3,252)
Deficit accumulated during the development
stage.................................... (10,632) (10,632) (10,632)
-------- -------- --------
Total stockholders' equity.............. 20,728 52,478
-------- -------- --------
Total capitalization.................. $ 22,463 $ 52,667 $
======== ======== ========
</TABLE>
The number of shares of common stock shown as outstanding in the table
above excludes the following:
. 1,605,000 shares of common stock issuable upon the exercise of options
outstanding December 31, 1999 with a weighted-average exercise price of
$0.23 per share;
. 296,500 shares reserved for issuance under our 1998 Stock Option Plan at
December 31, 1999;
. 31,395 shares of common stock issuable upon the exercise of a warrant
outstanding at December 31, 1999, with an exercise price of $2.15 per
share; and
. 1,000,000 shares of common stock issuable upon the exercise of a warrant
issued in April 2000 with an exercise price equal to the price at which
our common stock is sold in this offering.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $44.1 million, or $1.22 per share of common stock. Pro forma net
tangible book value per share represents our pro forma stockholders' equity
less intangible assets divided by the pro forma number of shares of common
stock outstanding after giving effect to the sale of 3,571,429 shares of our
Series C preferred stock in March 2000 for net proceeds of approximately $24.8
million and the conversion of all outstanding shares of preferred stock into
27,502,660 shares of common stock. Pro forma net tangible book value per share
does not reflect the issuance of 1,000,000 shares of our common stock in April
2000 and the issuance of a warrant to purchase 1,000,000 shares of our common
stock in April 2000. Dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of shares of common stock offered by us, at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, and
the application of the estimated net proceeds, our pro forma net tangible book
value at December 31, 1999 would have been $ million, or $ per
share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $ per share and an immediately dilution
to new investors of $ per share. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
-----
Pro forma net tangible book value per share as of December 31,
1999.............................................................
----
Increase per share attributable to new investors..................
----
Pro forma net tangible book value per share after this offering.....
-----
Dilution per share to new public investors.......................... $
=====
</TABLE>
The following table sets forth as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in
this offering, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 36,004,660 % $55,988,000 % $1.56
New public investors......
---------- ----- ----------- ------- -----
Totals.................. 100.0% $ 100.0%
========== ===== =========== ======= =====
</TABLE>
The above discussion and tables assume no exercise of any options or
warrants to purchase our capital stock. As of March 31, 2000, there were
options outstanding to purchase a total of 738,350 shares of common stock,
with a weighted average exercise price of $0.45 per share, and a warrant to
purchase a total of 31,395 shares of common stock, with an exercise price of
$2.15 per share. In addition, in April 2000 we issued to ALZA a warrant to
purchase a total of 1,000,000 shares of our common stock, with an exercise
price equal to the price per share at which our common stock is sold in this
offering. To the extent that any of the outstanding options or warrants are
exercised, there will be further dilution to new public investors.
21
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with and are qualified by reference to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
financial statements and related notes, which are included elsewhere in this
prospectus. The statement of operations data for the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999 and
the period from inception (February 6, 1998) to December 31, 1999 and the
balance sheet data at December 31, 1999 are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
prospectus. Historical operating results are not necessarily indicative of
results in the future, and the results for interim periods are not necessarily
indicative of the results that may be expected for the entire year. See Note 1
of notes to financial statements for an explanation of the determination of
the shares used in computing net loss per share and pro forma net loss per
share amounts.
<TABLE>
<CAPTION>
Period from Period from
inception inception
(February 6, 1998) (February 6, 1998)
to Fiscal Year Ended to
December 31, 1998 December 31, 1999 December 31, 1999
------------------ ----------------- -------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue, net............ $ -- $ 86 $ 86
Costs of goods sold..... -- 39 39
------- ------- --------
Gross margin............ -- 47 47
------- ------- --------
Operating costs and
expenses:
Research and
development.......... 466 5,181 5,647
Research and
development to
related party........ 243 1,182 1,425
Selling, general and
administrative....... 585 2,178 2,763
Stock-based
compensation......... 149 865 1,014
------- ------- --------
Total operating
expenses........... 1,443 9,406 10,849
------- ------- --------
Loss from
operations......... (1,443) (9,359) (10,802)
Interest income......... 121 678 799
Interest expense........ -- (27) (27)
------- ------- --------
Net loss............ (1,322) (8,708) (10,030)
Accretion of cumulative
dividend on Series B
convertible preferred
stock.................. -- 602 602
Net loss applicable to
common stockholders.... $(1,322) $(9,310) $(10,632)
======= ======= ========
Basic and diluted net
loss per common share.. $ (0.36) $ (1.76)
Shares used in computing
basic and diluted net
loss per common share.. 3,655 5,291
Pro forma basic and
diluted net loss per
common share
(unaudited)............ $ (0.37)
Shares used in computing
pro forma basic and
diluted net loss per
common share
(unaudited)............ 23,771
<CAPTION>
As of December 31,
------------------------------------
1998 1999
------------------ -----------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and investments........ $ 7,975 $18,933
Working capital......... 7,664 15,921
Total assets............ 8,283 22,463
Equipment loan, net of
current portion........ 83 189
Stockholders' equity.... 7,749 20,728
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
DURECT Corporation is pioneering the treatment of chronic diseases and
conditions by developing and commercializing pharmaceutical systems to deliver
the right drug to the right place in the right amount at the right time. These
capabilities can enable new drug therapies or optimize existing therapies
based on a broad range of compounds, including small molecule pharmaceuticals
as well as biotechnology molecules such as proteins, peptides and genes.
From our inception in February 1998 through December 31, 1998, we were
engaged in negotiating a licensing agreement with ALZA Corporation to gain
specified rights to use its DUROS system, raising capital, recruiting
scientific and management personnel and commencing research and development
activities. In late 1998, we filed an investigational new drug application
relating to our first product, DUROS sufentanil, a DUROS-based pharmaceutical
system for the treatment of chronic pain. In 1999, we began a Phase I clinical
trial for DUROS sufentanil using an external pump to test the safety of
continuous chronic infusion of this drug, initiated the development of a
spinal hydromorphone product, and initiated the research and development of
other products based on the DUROS system. Through December 31, 1999, we
financed operations primarily through the sale of private equity securities,
resulting in net proceeds of approximately $28.2 million.
We have incurred significant net losses and negative cash flows from
operations since our inception. As of December 31, 1999, we had an accumulated
deficit of $10.6 million.
Our expenses have primarily been the result of research and development
activities, and general and administrative costs associated with our
operations. We expect our research and development expenses to increase in the
future as we expand clinical trials and research and development activities.
To support these activities, we also expect to expand our infrastructure. We
do not anticipate revenues from our pharmaceutical systems, should they be
approved, for at least several years. We also expect to incur substantial non-
cash expenses relating to stock-based compensation. As a result of these
factors, we expect to incur significant losses and negative cash flow for the
foreseeable future.
In October 1999, we acquired substantially all of the assets of IntraEAR,
Inc, a developer and marketer of catheters that permit controlled fluid
delivery to the round window membrane of the ear for the treatment of ear
disorders. The total purchase price consisted of 325,023 shares of Series B-1
preferred stock and $320,000 in cash. The acquisition was accounted for using
the purchase method of accounting. As a result of this acquisition, we
recorded approximately $1.5 million of intangible assets, which will be
amortized over 2 to 6 years. From the time of the acquisition through December
31, 1999, our sales of catheters resulted in revenues of $86,000. We do not
anticipate that revenues derived from catheter sales will increase
significantly in the near future. In the future, we may research and develop
products that incorporate technology acquired from IntraEAR.
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. The total purchase price consisted of approximately $8.2
million in cash, including approximately $3.2 million of inventory, of which
$2.4 million is to be paid over twelve months. The acquisition will be
accounted for using the purchase method.
23
<PAGE>
In April 2000, we amended our development and commercialization agreement
with ALZA. The amendments included a reduction in product royalties and
upfront payments to ALZA by us under the agreement. In addition, ALZA's option
to distribute the DUROS sufentanil product was amended to cover only the U.S.
and Canada instead of worldwide. As consideration, ALZA received 1,000,000
shares of our common stock and a warrant to purchase 1,000,000 shares of our
common stock at an exercise price equal to the price at which our common stock
is sold in this offering.
Limited Operating History
We have a limited history of operations and anticipate that our quarterly
results of operations will fluctuate for the foreseeable future. We believe
that period-to-period comparisons of our operating results should not be
relied upon as predictive of future performance. Our prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies at an early stage of development, particularly companies in new and
rapidly evolving markets such as pharmaceuticals, drug delivery, and
biotechnology. To address these risks, we must, among other things, obtain
regulatory approval for and commercialize our products, which may not occur.
We may not be successful in addressing these risks and difficulties. We may
require additional funds to complete the development of our products and to
fund operating losses to be incurred in the next several years.
Results of Operations
Year ended December 31, 1999 compared to the period from inception (February
6, 1998) to December 31, 1998
Revenue. Following the acquisition of substantially all of the assets of
IntraEAR, Inc. on October 1, 1999, we began selling catheters that permit
controlled fluid delivery to the inner ear for the treatment of ear disorders.
Since this acquisition, we have derived revenues from these products of
approximately $86,000. In the near future, we do not anticipate that revenues
derived from these products will increase significantly.
Research and Development. Research and development expenses consist of
salaries and related expenses for research and development personnel, contract
research and development services, supplies and a portion of overhead
operating expenses. Research and development expenses increased to
approximately $6.4 million in 1999 from approximately $709,000 in 1998. The
increase was attributable to increases in contract research and development
services, research and development personnel and clinical activity for our
Phase I trial relating to DUROS sufentanil. In 1999, research and development
activities were initiated in other product areas. We expect research and
development expenses to increase significantly as we enter Phase II clinical
trials for DUROS sufentanil, continue to hire research and development
personnel, and develop other products.
In addition, we expect research and development expenses to continue to
increase in order to meet minimum product funding requirements under our
license agreement with ALZA. To maintain our rights under this agreement, we
must spend minimum amounts each year on product development, with the amount
and duration of funding in each field varying over time. For our two products
currently in development, we are required to fund each in the amount of at
least $3 million per year until the time of commercialization. Funding
requirements to maintain rights to additional products begin in 2001. The
future minimum annual product funding requirements for all fields of use are
as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended December 31, --------------
<S> <C>
2000.................................................... $ 6,000
2001.................................................... 8,000
2002.................................................... 13,000
2003.................................................... 14,000
2004*................................................... 17,000
-------
Total minimum funding required.......................... $58,000
=======
</TABLE>
- --------
* Funding requirements after 2004 are to be mutually agreed upon by us and
ALZA.
24
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for
administrative, finance, sales and executive personnel, legal, accounting and
other professional fees and overhead operating expenses. Selling, general and
administrative expenses increased to approximately $2.2 million in 1999 from
approximately $585,000 in 1998. The increase was primarily due to an increase
in selling, general and administrative personnel and infrastructure to support
our growth and other related expenses. We expect general and administrative
expenses to continue to increase as we increase the number of personnel and
related resources required to support our growth.
Stock-Based Compensation. Stock-based compensation expense was $149,000 for
the period from inception (February 1998) to December 31, 1998, and $865,000
for the year ending December 31, 1999. This compensation related to the
following: research and development expenses of $46,000 in 1998 and $485,000
in 1999, and selling, general and administrative expenses of $103,000 in 1998
and $380,000 in 1999. The remaining deferred stock compensation at December
31, 1999 was $3.3 million, which will be amortized as follows: $1.7 million
for the year ending December 31, 2000, $907,000 for the year ending December
31, 2001, $454,000 for the year ending December 31, 2002, and $154,000 for the
year ending December 31, 2003. Termination of option holders could cause
stock-based compensation in future years to be less than indicated. Between
January 1 and March 31, 2000, we granted options to purchase approximately
530,850 shares of common stock to our employees at exercise prices of from
$0.35 to $1.00 per share. We anticipate that we will record additional
deferred stock compensation related to these grants.
Other Income (Expense). Interest income increased to approximately $678,000
in 1999 from approximately $121,000 in 1998. The increase in interest income
was primarily attributable to higher average outstanding balance of cash and
investments resulting from the sale of convertible preferred stock in July
1999. Interest expense was approximately $27,000 in 1999 as we initiated
payments on debt obligations under an equipment loan. We expect interest
income to increase because of higher cash and investment balances resulting
from our sale of Series C preferred stock in March 2000 and our sale of common
stock in this offering.
Income Taxes
We had federal and state net operating loss carryforwards of approximately
$1.1 million at December 31, 1998 and approximately $9.2 million at December
31, 1999. The net operating losses and credit carryforwards will expire at
various dates beginning in 2006 through 2019, if not utilized. Financial
Accounting Standards Board Statement No. 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not.
Based upon available data, which includes our historical operating performance
and the reported cumulative net losses in prior years, we have provided a full
valuation allowance against our net deferred tax assets as the future
realization of the tax benefit is not sufficiently assured. We intend to
evaluate the realization of the deferred tax assets on a quarterly basis.
The net operating loss carryforwards are subject to review by the Internal
Revenue Service. Ownership changes, as defined in the Internal Revenue Code,
may limit the amount of these tax attributes that can be utilized annually to
offset future taxable income or tax liabilities. The amount of annual
limitation is determined based on our value immediately prior to the ownership
change. Subsequent ownership changes may further affect the limitation in
future years.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily from the
sale of our convertible preferred stock. From inception through December 31,
1999, we raised approximately $28.2 million, net of issuance costs, through
convertible preferred stock financings. At December 31, 1998, we had cash,
cash equivalents and short-term investments totaling $8.0 million compared to
$16.6 million at December 31, 1999.
Working capital at December 31, 1998 was approximately $7.7 million
compared to $15.9 million at December 31, 1999. The increase was primarily
attributable to the sale of convertible preferred stock. This was
25
<PAGE>
partially offset by operating losses of $9.4 million and increases in accounts
payable, accruals and other current liabilities of $1.0 million.
We used approximately $885,000 of cash for operations in 1998 compared to
$7.3 million in 1999. Cash used for operations in 1998 was primarily driven by
operating losses, offset by accrued liabilities and amortization of deferred
compensation. Cash used for operations during 1999 was primarily driven by
operating losses, offset by increases in accounts payable, amortization of
deferred compensation and accrued liabilities. We have used approximately $8.2
million for operations since our inception.
We used approximately $62,000 in 1998 for investing activities compared to
approximately $16.2 million in 1999. In 1998, we invested in equipment. In
1999, we invested $1.1 million in equipment and leasehold improvements, and
$15.1 million in investments. We have used approximately $16.2 million for
investing activities since our inception.
We received approximately $8.9 million of cash from financing activities in
1998 compared to $19.3 million in 1999. In both years, cash received from
financing activities was primarily the result of the sale of convertible
preferred stock. We have received approximately $28.2 million of cash from
financing activities since our inception through December 31, 1999.
We anticipate that cash used in operating and investing activities will
increase significantly in the future as we research, develop, and manufacture
our products, and meet our product funding requirements under our agreement
with ALZA.
In January 2000, we received $750,000 under an equipment loan, and had $1.5
million of equipment financing available for investment in our manufacturing
and other equipment. In March 2000, we received approximately $24.8 million
from the sale of convertible preferred stock, net of issuance costs.
We believe that our existing cash balances together with the net proceeds
of this offering will be sufficient to finance our planned operations and
capital expenditures through at least 18 months. We may consume available
resources more rapidly than currently anticipated, resulting in the need for
additional funding. Accordingly, we may be required to raise additional
capital through a variety of sources, including:
. the public equity market;
. private equity financing;
. collaborative arrangements; and
. public or private debt.
There can be no assurance that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, we may be
required to significantly reduce or refocus our operations or to obtain funds
through arrangements that may require us to relinquish rights to certain of
our products, technologies or potential markets, either of which could have a
material adverse effect on our business, financial condition and results of
operations. To the extent that additional capital is raised through the sale
of equity or convertible debt securities, the issuance of such securities
would result in ownership dilution to our existing stockholders.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash and
investments that have maturities of less than two years. We maintain a non-
trading investment portfolio of investment grade, liquid debt securities that
limits the amount of credit exposure to any issue, issuer or type of
instrument. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are therefore subject to interest rate
risk. We do not use derivative instruments to hedge interest rate exposure.
Due to the nature of our investments, we believe there is no material risk
exposure.
26
<PAGE>
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS
133. SFAS 133 requires us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through net income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of assets, liabilities, or firm commitments
through earnings or recognized in the other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of the
derivative's change in fair value will be immediately recognized in earnings.
SFAS 133 is effective for our fiscal year ending December 31, 2001. We do not
currently hold any derivatives and do not expect this pronouncement to
materially impact the results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 summarizes certain
areas of the Staff's views in applying generally accepted accounting
principles to revenue in financial statements and specifically addresses
revenue recognition for non-refundable technology access fees. We believe that
our current revenue recognition principles comply with SAB 101, and thus the
adoption had no effect on results of operations.
27
<PAGE>
BUSINESS
Overview
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems to deliver the right
drug to the right place in the right amount at the right time. Our
pharmaceutical systems combine engineering innovations and delivery technology
from the medical device and drug delivery industries with our proprietary
pharmaceutical and biotechnology drug formulations. By integrating these
technologies, we are able to control the rate and duration of drug
administration as well as target the delivery of the drug to its intended site
of action, allowing our pharmaceutical systems to meet the special challenges
associated with treating chronic diseases or conditions. Our pharmaceutical
systems can enable new drug therapies or optimize existing therapies based on
a broad range of compounds, including small molecule pharmaceuticals as well
as biotechnology molecules such as proteins, peptides and genes. Our initial
portfolio of products combine the DUROS technology, a proven and patented drug
delivery platform licensed for specified fields of use from ALZA Corporation,
with drugs for which data on medical efficacy and safety are available.
Our pharmaceutical systems are suitable for providing long-term drug
therapy because they store highly concentrated, stabilized drugs in a small
volume and can protect the drug from degradation by the body. This, in
combination with our ability to continuously deliver precise and accurate
doses of a drug, allows us to extend the therapeutic value of a wide variety
of drugs, including those which would otherwise be ineffective, too unstable,
too potent or cause adverse side effects. Delivering the drug directly to the
intended site of action can also improve efficacy while minimizing unwanted
side effects elsewhere in the body, which often limit the long-term use of
many drugs. Our pharmaceutical systems can thus provide better therapy for
chronic diseases or conditions by replacing multiple injection therapy or oral
dosing, improving drug efficacy, reducing side effects and ensuring dosing
compliance. Our pharmaceutical systems can improve patients' quality of life
by eliminating more repetitive treatments, reducing dependence on caregivers
and allowing them to lead more independent lives.
We are currently developing pharmaceutical systems based on the DUROS
technology in a variety of therapeutic areas, including chronic pain, central
nervous system disorders, cardiovascular diseases and inner ear disorders. The
DUROS technology is a miniature drug-dispensing pump that releases minute
quantities of concentrated drug formulations in a continuous, consistent flow
over months or years using an osmotic engine. The miniature pump, made out of
titanium, can be as small as a wooden matchstick and can be implanted under
the skin. Beyond the DUROS technology, we intend to develop other technologies
consistent with our objective of delivering the right drug to the right place
in the right amount at the right time.
Our lead product is for the treatment of chronic pain and combines the
DUROS technology with a proprietary formulation of sufentanil, a potent opioid
currently used in hospitals as an anesthetic. We completed an initial Phase I
trial in November 1999 using an external pump to test the safety of continuous
chronic infusion of the drug. We intend to commence a pharmacokinetic study
and a Phase II human clinical trial in late 2000. This product is aimed at the
approximately $1 billion market for the treatment of chronic pain and will
compete with oral opioids, analgesic patches and external and implantable
infusion pumps. We are also researching and developing pharmaceutical systems
based on the DUROS technology in a variety of other therapeutic areas,
including central nervous system disorders, cardiovascular disease and inner
ear disorders.
Our second product in development is designed to target the delivery of
hydromorphone via a catheter directly to its intended site of action in the
central nervous system for the treatment of end-stage cancer pain.
Hydromorphone is an opioid approved for use as an analgesic. We will be
conducting pre-clinical studies for this product in mid-2000.
Industry Background
Chronic Diseases and Conditions
Although the pharmaceutical, biotechnology and medical device industries
have played key roles in increasing life expectancy and improving health, many
chronic, debilitating diseases continue to be inadequately
28
<PAGE>
addressed with current drugs or medical devices. Cardiovascular disease,
cancer, neurodegenerative diseases, diabetes, arthritis, epilepsy and other
chronic diseases claim the lives of millions of Americans each year. These
illnesses are prolonged, are rarely cured completely, and pose a significant
societal burden in mortality, morbidity and cost. The Centers for Disease
Control estimates that the major chronic diseases are responsible for
approximately 70% of all deaths in the U.S., and medical care costs for these
conditions totaled more than $400 billion annually. Currently, more than 60%
of total health care spending in the U.S. is devoted to the treatment of
chronic diseases. Demographic trends suggest that, as the U.S. population
ages, the cost of treating chronic disease as a proportion of total health
care spending will increase.
Current Approaches to Treatment
Drugs are available to treat many chronic diseases, but harmful side
effects can limit prolonged treatment. In addition, patients with chronic
diseases commonly take multiple medications, often several times a day, for
the remainder of their lives. If patients fail to take drugs as prescribed,
they often do not receive the intended benefits or may experience side effects
which are harmful or decrease quality of life. These problems become more
common as the number of drugs being taken increases, the regimen of dosing
becomes more complicated, or the patient ages or becomes cognitively impaired.
It is estimated that only half of prescribed medicines are taken correctly.
The Pharmaceutical Industry. The pharmaceutical industry has traditionally
focused on the chemical structure of small molecules to create drugs that can
treat diseases and medical conditions. The ability to use these molecules as
drugs is based on their potency, safety and efficacy. Therapeutic outcome and
ultimately the suitability of a molecule as a drug depends to a large extent
on how it gets into the body, distributes throughout the body, reacts with its
intended site of action and is eliminated from the body. However, small
molecules act at locations throughout the body and are often accompanied by
unwanted side effects.
Most drugs require a minimum level in blood and tissues to have significant
therapeutic effects. Above a maximum level, however, the drug becomes toxic or
has some unwanted side effects. These two levels define the therapeutic range
of the drug. With oral dosing and injections, typically a large quantity of
drug is administered to the patient at one time, which results in high blood
levels of drug immediately after dosing. Because of these high levels, the
patient can be over-medicated during the period immediately following dosing,
resulting in wasted drug and possible side effects. Due to distribution
processes and drug clearance, the blood level of drug falls as time elapses
from the last dose. For some duration, the patient is within the desired
therapeutic range of blood levels. Eventually, the blood level of drug falls
sufficiently such that the patient becomes under-medicated and experiences
little or no drug effect until the next dose is administered.
[Insert Injection-Infusion Graph Here]
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When drugs are administered orally, transdermally or by injection, they are
absorbed into the systemic circulation and distributed throughout the body.
Because the drug is dispersed throughout the body, relatively large quantities
are necessary to create the desired effect at the intended site of action. In
addition, systemic administration of drugs in this fashion may result in
unwanted side effects, because the drug has access to many tissues and organs
in the body other than the intended site of action.
The Biotechnology Industry. Over the past twenty years, the biotechnology
revolution and the expanding field of genomics have led to the discovery of
huge numbers of proteins and genes. Tremendous resources have been committed
in the hope of developing drug therapies that would better mimic the body's
own processes and allow for greater therapeutic specificity than is possible
with small molecule drugs. Unfortunately, this huge effort has led to only a
limited number of therapeutic products. The proteins and genes identified by
the biotechnology industry are large, complex, intricate molecules, and many
are unsuitable as drugs. If these molecules are given orally, they are often
digested before they can have an effect; if given by injection, they may be
destroyed by the body's natural processes before they can reach their intended
sites of action. The body's natural elimination processes require frequent,
high dose injections that may result in unwanted side effects. As a result,
the development of biotechnology molecules for the treatment of human diseases
has been limited.
The Drug Delivery Industry. In the last thirty years, a multibillion dollar
drug delivery industry has developed on the basis that medicine can be
improved by delivering drugs to patients in a precise, controlled fashion.
Several commercially successful oral controlled release products, transdermal
controlled release patches, and injectable depot formulations have been
developed. These products demonstrate that the delivery system can be as
important to the ultimate therapeutic value of a pharmaceutical product as the
drug itself. However, to date, most drug delivery products deliver drug
systemically and do not target delivery to the intended site of action. In
addition, drug delivery products are generally limited in duration and
therefore may be less desirable for treating chronic diseases.
The Medical Device Industry. Advances in the field of medical device
technology have dramatically improved device miniaturization and
sophistication and allowed minimally invasive surgical access to remote
locations within the body. For example, a coronary bypass patient can be
treated with a stent in a procedure with a relatively short recovery, rather
than with major surgery. Most devices, however, apply only mechanical
solutions, rather than addressing chemical or biological mechanisms of
disease.
The DURECT Solution: Pharmaceutical Systems
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems that will deliver the
right drug to the right place in the right amount at the right time. By
integrating chemistry and engineering advancements, we can achieve what drugs
or devices alone cannot. Our pharmaceutical systems enable optimized therapy
for a given disease or patient population by controlling the rate and duration
of drug administration as well as targeting the delivery of the drug to its
intended site of action.
. The Right Drug: By precisely controlling the dosage and targeting
delivery to a specific site, we can expand the therapeutic use of
compounds that otherwise would be too potent to be administered
systemically, do not remain in the body long enough to be effective, or
have significant side effects when administered systemically. This
flexibility allows us to work with a variety of drug candidates
including small molecules, proteins, peptides or genes.
. The Right Place: We draw on innovations in the medical device industry
to enhance our products. With precise placement of proprietary
microcatheters, we can design our pharmaceutical systems to deliver
drugs directly to the intended site of action. This can ensure that the
drug reaches the target tissue in effective concentrations, eliminates
many side effects caused by delivery of drug to unintended sites in the
body, and may reduce the total amount of drug administered to the body.
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. The Right Amount: Our pharmaceutical systems can automatically deliver
drug dosages continuously within the desired therapeutic range for the
duration of the treatment period, for up to one year, without the
fluctuations in drug levels associated with pills or injections.
[REPEAT GRAPH AND ADD INFUSION LINE]
This can reduce side effects, eliminate gaps in drug therapy,
conveniently ensure accurate dosing and patient compliance, and may
reduce the total amount of drug administered to the body.
. The Right Time: Our pharmaceutical systems technology allows drugs to be
delivered automatically without intervention of the patient or care-
giver. In addition to reducing the cost of care, continuous drug therapy
frees the patient from repeated treatment or hospitalization, improving
convenience and quality of life. Our systems are well-suited for
treating chronic, debilitating diseases such as chronic pain, cancer,
heart disease, and neurodegenerative diseases that last for months or
years. We believe that it is more effective to treat chronic diseases
with continuous, long-term therapy than with alternatives such as
multiple injections that create short-term effects. Because our
pharmaceutical systems are designed to operate automatically, patient
compliance is assured.
DURECT Pharmaceutical Systems Technology
The technological foundation of our initial products is the DUROS implant
technology, coupled with proprietary catheter and drug formulation technology.
The DUROS system is a miniature drug-dispensing pump made out of titanium
which can be as small as a wooden matchstick. We have licensed the DUROS
technology for specified fields of use from ALZA. The potential of the DUROS
technology as a platform for providing drug therapy was recently demonstrated
by the Food and Drug Administration's approval in March 2000 of ALZA's Viadur
(leuprolide acetate implant), a once-yearly implant for the palliative
treatment of prostate cancer, the first approved product to incorporate the
DUROS implant technology. By leveraging this proven technology, we believe we
can reduce our development risk and more rapidly introduce new products to the
market.
[INSERT CROSS SECTION OF DUROS PUMP]
Most of the volume of the DUROS system will contain our proprietary drug
formulation. The DUROS pump operates like a miniature syringe. Through
osmosis, water from the body is slowly drawn through a semi-permeable membrane
into the pump by salt residing in the engine compartment. This water fills the
engine compartment and slowly and continuously pushes a piston to dispense
minute amounts of drug formulation from the drug reservoir. The osmotic engine
does not require batteries, switches or other electromechanical parts in order
to operate. The amount of drug delivered by the system is regulated by the
semi-permeable membrane's control of the rate of body water entering the
engine compartment and the concentration of the drug formulation.
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The DUROS system has performance characteristics that cannot be matched by
drug delivery pumps on the market today. First, the engine can generate
sufficient pressure to deliver highly concentrated and viscous formulations.
Second, the system can be engineered to deliver a drug formulation at the
desired dosing rate with a high degree of precision, to less than 1/100th of a
drop per day on a continuous basis. The titanium shell of the DUROS system
protects the drug formulation from degradation by enzymes and clearance
processes within the body. As a result, the DUROS system can store drugs for
up to one year as they are being released into the body.
The DUROS system can be used for therapies requiring systemic or site-
specific administration of drug. To deliver drugs systemically, the DUROS
system is placed just under the skin, for example in the upper arm, in an
outpatient procedure that is completed in just a few minutes using local
anesthetic. Removal or replacement of the product is also a simple, quick
procedure completed in the doctor's office.
To deliver drug to a specific site, we are developing proprietary
miniaturized catheter technology that can be attached to the DUROS system to
direct the flow of drug directly to the target organ, tissue or synthetic
medical structure, such as a graft. Site specific delivery enables a
therapeutic concentration of a drug to be present at the desired target
without exposing the entire body of the patient to a similar dose. The
precision, size and performance characteristics of the DUROS system will allow
for continuous site-specific delivery to a variety of precise locations within
the body.
By concentrating drug in proprietary formulations, we can store enough drug
in our pharmaceutical systems to dose a patient for extended periods of time,
for up to one year. Our proprietary formulations of traditional small molecule
drugs are much more concentrated than those currently available on the market.
Concentrated formulations allow our pharmaceutical systems to be significantly
smaller than alternative drug delivery systems available today. We also
believe that we can keep these formulations chemically and physically stable
for extended periods of time at body temperature. Our formulation expertise,
combined with the protection provided by the reservoir of the DUROS system,
may allow for the stable storage and delivery of proteins, peptides, and other
large molecule agents in a long-term continuous fashion, thus enabling the
full therapeutic potential of a wide range of biotechnology compounds.
DURECT Strategy
Our objective is to develop and commercialize pharmaceutical systems that
address significant medical needs and improve patients' quality of life. To
achieve this objective, our strategy includes the following key elements:
Focus on Chronic Debilitating Medical Conditions. Many of the diseases that
present the greatest challenges to medicine are chronic, debilitating diseases
such as chronic pain, central nervous system disorders, cardiovascular
disorders, cancer, degenerative neurological diseases and ear disorders. Our
initial efforts will focus on using the versatile DUROS platform technology to
develop products that address these diseases.
Minimize Product Development Risk and Speed Time-to-Market. Initially, we
intend to minimize product development risk and speed time-to-market by using
the proven DUROS platform to administer drugs for which medical data on
efficacy and safety are available. This strategy reduces much of the
development risk that is inherent in traditional pharmaceutical product
discovery. We anticipate that we can expand the medical usefulness of existing
well-characterized drugs in several ways:
. expand uses or create new uses for existing drugs with clear safety
profiles;
. create new uses for drugs which were previously thought to be too potent
to be used safely; and
. enhance drug performance by minimizing side effects.
We anticipate that our products can be more rapidly developed at lower cost
than comparable products that are developed purely based on chemical solutions
to the problems of efficacy, side effects, stability and delivery
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of the active agent. This allows us to use potent agents that would otherwise
not be available as therapies to treat chronic diseases. It also allows us to
innovate more rapidly in the development of products and to respond to market
feedback by optimizing our existing products or developing line extensions
that address new market needs.
Enable the Development of Pharmaceutical Systems Based on Biotechnology and
Other New Compounds. We believe there is a significant opportunity for
pharmaceutical systems to add value to therapeutic medicine by administering
biotechnology products, such as proteins, peptides and genes. We believe our
technology will improve the specificity, potency, convenience and cost-
effectiveness of proteins, genes and other newly discovered drugs. Our systems
can enable these compounds to be effectively administered, thus allowing them
to become viable medicines. We can address the stability and storage needs of
these compounds through our advanced formulation technology and package them
in a suitable pharmaceutical system for optimum delivery. Through continuous
administration, the DUROS system may eliminate the need for multiple
injections of these drugs. In addition, through the use of our proprietary
miniature catheter technology, proteins and genes can be delivered to specific
tissues for extended periods of time, thus ensuring that large molecule agents
are present at the desired site of action and minimizing the potential for
adverse side effects elsewhere in the body.
Expand Our Technology Platforms. In addition to the DUROS technology, we
will continue to develop, license and acquire other technologies consistent
with our objective of delivering the right drug to the right place in the
right amount at the right time. For example, in our October 1999 acquisition
of IntraEAR, we acquired proprietary products and intellectual property that
allow for continuous delivery of fluids to treat inner and middle ear
disorders. We have and expect to continue to license or acquire technology
from others that will complement our core capabilities.
Product Development Programs
Our pharmaceutical systems are designed to provide improved treatment
efficacy with a high level of precision and quality. Our development efforts
are focused on the application of our pharmaceutical systems technologies to
potential products in the broad areas of focus set forth in the following
table:
<TABLE>
<CAPTION>
Delivery
Areas of Focus Drug Method Indications Status
- -------------- --------------- ------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
. Chronic Pain . Sufentanil . Systemic . Opioid-Responsive . Initial Phase I
Chronic Malignant completed;
and Non-Malignant Phase II to
Pain commence late
2000
. Central . Hydromorphone . Targeted . Cancer Pain . Preclinical Stage
Nervous
System . Others . Others in Development . Research Stage
Disorders
. Ear Disorders . Gentamycin . Targeted . Meniere's Disease . Preclinical Stage
. Others . Others in Development . Research Stage
. Cardiovascular . Various . Targeted . Various . Research Stage
Diseases
. Vascular Graft . Various . Targeted . Various . Research Stage
. Cancer . Various . Targeted or . Various . Research Stage
Immunotherapy Systemic
</TABLE>
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Chronic Pain
Market Opportunity. Chronic pain, defined as pain lasting 6 months or
longer, is a significant problem associated with chronic diseases, including
cancer and various neurological and skeletal disorders. Chronic nonmalignant
pain affects as many as 34 million Americans annually. In addition, the
National Cancer Institute estimates that 8.4 million Americans alive today
have a history of cancer. About 1.2 million new cancer cases are expected to
be diagnosed in 2000, and about 50%-70% of cancer patients experience chronic
pain during the course of the disease. Sales of opioids for the treatment of
chronic malignant and nonmalignant pain are approximately $1 billion. With our
lead product, DUROS sufentanil, we intend to target patients with chronic pain
that is stable and opioid responsive and results from a variety of causes.
Sufentanil is an off-patent, highly potent opioid that is currently used in
hospitals as an anesthetic. This product will provide an alternative to
current therapies for the treatment of chronic pain, as well as ensuring
improved patient compliance and convenience.
Development Strategy. We are developing a subcutaneous, implantable DUROS-
based system that delivers sufentanil systemically at a constant rate for 3
months. We will develop a family of dosage strengths, tailored to meet market
needs. An initial Phase I trial using an external pump to test the safety of
continuous chronic infusion of the drug was completed in 1999. Pharmacokinetic
and Phase II human clinical trials are planned to commence in late 2000. These
trials are designed to develop data in support of dose selection for later
trials and commercial use as well as data to guide physicians in converting
patients from previous therapies to the DUROS sufentanil implant.
Central Nervous System Disorders
Market Opportunity. Millions of people suffer from chronic diseases and
disorders of the central nervous system, including brain and spinal cord
tumors, epilepsy, spasticity, spinal meningitis, Parkinson's disease, multiple
sclerosis and back disorders. Opportunities exist to apply our pharmaceutical
systems for treatment of these disorders. The first central nervous system
disorder we will address is end-stage cancer pain. Roughly 550,000 people in
the U.S. will die from cancer and cancer-related complications this year. It
is estimated that over half of terminal cancer patients experience severe,
chronic pain. Infusion of opiates into the spinal fluid has become accepted
medical therapy in patients who find high dose oral or transdermal opioids
ineffective or who experience side effects that make systemic therapy
unacceptable. This method of delivery increases analgesic potency and reduces
side effects. However, patients with cancer pain are often not treated with
this therapeutic regimen because currently available implantable spinal
infusion pumps are only approved for patients with life expectancies of three
months or more. Furthermore, external infusion pumps are inconvenient and
expose a patient to a risk of infection. A need exists for a minimally
invasive, spinal infusion device that has improved cost benefit for end-stage
cancer patients with chronic pain.
Development Strategy. Our strategy is to develop an infusion system that
can deliver hydromorphone into the spinal fluid via a catheter. This product
will be considerably smaller and less invasive than currently available spinal
infusion pumps. Hydromorphone is an opioid that has been approved for
treatment of pain. Pre-clinical prototypes of this device are currently being
designed and tested. We anticipate that initial clinical trials with this
device will begin in 2001 and will focus on determining its safety, efficacy
and tolerability in cancer patients with 3 months or less to live.
Middle and Inner Ear Disorders
Market Opportunity. Inner ear disorders, including tinnitus, hearing loss
and Meniere's disease impact the lives of millions of people worldwide.
Opportunities may exist to treat these inner ear disorders through continuous
low dose application of drug. For example, Meniere's disease is a debilitating
inner ear disorder characterized by vertigo, tinnitus, fluctuating hearing
loss and aural pressure. In the U.S., it is estimated that Meniere's disease
afflicts at least 3 million people with 100,000 new cases being diagnosed each
year. Current first line treatments include vestibular suppressants, diet
modifications and diuretics. We estimate that about
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30 percent of patients receive second line treatments such as large doses of
gentamycin or surgery that can destroy inner ear function. These destructive
treatments can result in permanent loss of hearing and impair balance. We are
researching treatments which therapeutically rather than destructively treat
Meniere's disease while minimizing risk of hearing loss and preserving balance
function.
Development Strategy. In October 1999, we acquired substantially all of the
assets of IntraEAR, Inc. This acquisition provided us with an extensive
intellectual property portfolio related to devices and methods for the
delivery of fluids to the round window niche of the middle ear. We are
researching pharmaceutical systems that include this proprietary catheter
technology to treat intractable inner ear disorders such as Meniere's disease,
hearing loss and tinnitus.
Ongoing Research
We plan to devote substantial resources to developing multiple products
based on our pharmaceutical systems technology in one or more of the areas of
focus in the above table or others. For example, we are currently engaged in
research on treating chronic cardiovascular diseases and other central nervous
system disorders.
Ear Catheter Business
Our acquisition in October 1999 of substantially all of the assets of
IntraEAR, Inc. provided us with catheter technology and products that had
previously received 510K marketing clearance from the FDA and European CE Mark
approval. We currently market these catheters through a direct sales force in
the U.S. and through a network of 13 distributors outside the U.S.
The Round Window ^-Cath and Round Window e-Cath products are dual- and
triple-lumen micro-catheters of proprietary design which allow controlled
fluid delivery to the round window membrane for treatment of ear disorders.
These catheters feature a proprietary tip which is designed to allow the
surgeon to secure it in the round window niche of the middle ear. When
attached to a commercially available, external infusion pump, such as those
manufactured by Disetronic Medical Systems, a variety of therapeutic fluids
can be continuously delivered to the round window membrane to potentially
treat ear disorders including Meniere's disease, hearing loss and tinnitus.
These catheters can be left in place for up to 29 days and can be connected to
a syringe or pump for continuous delivery. The dual-lumen design allows the
treating physician to add and remove fluid or flush the device without a
build-up of air or fluid pressure. The e-Cath design incorporates an
additional electrode to allow physicians to record electrical signals related
to activities in the ear.
ALZET Business
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. We currently market the ALZET product through a direct
sales force in the U.S. and through a network of 10 distributors outside the
U.S.
The ALZET product is a miniature, implantable osmotic pump used for
experimental research in mice, rats and other laboratory animals. These pumps
are not approved for use in humans, nor are they intended for such use. ALZET
pumps continuously deliver drugs, hormones and other test agents at controlled
rates from one day to four weeks without the need for external connections,
frequent handling or repeated dosing. In laboratory research, these infusion
pumps can be used for systemic administration when implanted under the skin or
in the body. They can be attached to a catheter for intravenous,
intracerebral, or intra-arterial infusion or for targeted delivery, where the
effects of a drug or test agent are localized in a particular tissue or organ.
We believe that the ALZET business provides us with innovative design and
application opportunities for potential new products.
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Marketing and Sales
In general, we intend to establish strategic distribution and marketing
alliances for our products. We recognize that pharmaceutical companies have
established sales organizations in markets we are targeting. We plan to
leverage these sales organizations to achieve greater market penetration for
our products than we could on our own. Because our first products use proven
drugs with a proven technology platform, we have the flexibility to enter into
these alliances at a later stage of clinical development when the product
development risk is diminished in order to retain greater economic
participation. We may also establish our own sales force when strategically or
economically advantageous.
We have established a small sales force in the U.S. to market our approved
catheters for delivering fluids to the inner ear. In addition, we sell our
catheters through 13 distributors outside the U.S. We market and sell our
ALZET product in the U.S. through a direct sales force, and we have a network
of ten distributors for this product outside of the U.S.
ALZA has an option to exclusively market and distribute DUROS sufentanil in
the U.S. and Canada on terms to be negotiated by the parties at arms-length.
Depending on when ALZA exercises its option, it may be required to pay for all
or part of the clinical and development costs for this product. Should ALZA
decide not to exercise its option, we will market and distribute DUROS
sufentanil in the U.S. and Canada ourselves or through a third party.
Manufacturing
The process for manufacturing our pharmaceutical systems is technically
complex, requires special skill in aseptic processing, and must be performed
in a qualified facility. For our lead product, we subcontract to third-parties
the manufacture of components of the DUROS system, which we then assemble. We
have entered into a contract with Chesapeake Biological Labs, Inc. to finish
and fill the DUROS system for Phase II clinical testing of DUROS sufentanil.
We plan to construct a flexible manufacturing facility to produce materials
for Phase III clinical testing and market launch of DUROS sufentanil and to
serve as a pilot facility for additional products under development. In
addition, we are evaluating alternative strategies to meet our long-term
commercial manufacturing needs.
For the manufacture of our ear catheter products, we have a supply
agreement with a third party manufacturer of disposable medical products.
Under this agreement, renewable annually, the third party has responsibility
for all manufacturing and packaging of finished goods and some regulatory
responsibilities. We manufacture our ALZET product in a leased facility
located in Vacaville, California.
Development and Commercialization Agreement with ALZA Corporation
On April 21, 1998, we entered into a Development and Commercialization
Agreement with ALZA Corporation, which was amended and restated on April 28,
1999 and April 14, 2000. Pursuant to this agreement, ALZA granted to us
exclusive, world-wide rights under ALZA intellectual property, including
patents, trade secrets and know-how, to develop and commercialize products
using the DUROS drug delivery technology in the fields of the delivery of
drugs by catheter (except for the sufentanil product) to the central nervous
system to treat selected central nervous system disorders, the delivery of
drugs by catheter to the middle and inner ear, the delivery of drugs by
catheter into the pericardial sac of the heart, the delivery of selected drugs
by catheter into vascular grafts and the delivery of selected cancer antigens.
To maintain the rights granted to us in our licensed fields, we must meet
annual minimum development spending requirements and develop a minimum number
of products. We must also diligently procure required regulatory approvals and
commercialize the products in each country in order to maintain
commercialization rights for such product in that country.
Under this agreement, we initiate product development by sending ALZA a
written notice containing a description of the proposed product and proposed
target dates for key milestones. These target dates are subject
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to ALZA's reasonable approval and may be adjusted from time to time by mutual
agreement. We have the right to subcontract to third parties product
development activities including development of components of the DUROS
system, provided that design of the DUROS system and other development
activities relating to the DUROS system must be performed by ourselves or ALZA
unless ALZA permits us to subcontract out such development. We also have the
right to partner with third parties to commercialize our products on a
product-by-product basis, provided that ALZA has options to distribute our
DUROS sufentanil product in the U.S. and Canada and our cancer antigen
products which do not incorporate proprietary molecules owned by a third party
throughout the world. We have the right to subcontract manufacturing
activities relating to our products other than the assemblage of the
components of the DUROS system itself. See "Risk Factor--Our agreement with
ALZA limits our field of operation for our DUROS-based pharmaceutical systems,
requires us to spend significant funds on product development and gives ALZA a
first right to distribute selected products for us."
In consideration for the rights granted to us under this agreement, ALZA
received 5,600,000 shares of our Series A-1 Preferred Stock pursuant to a
Series A-1 and Series A-2 Preferred Stock Purchase Agreement dated as of June
19, 1998. As additional consideration, ALZA is entitled to receive a royalty
on the net sales of products for so long as we sell the product and a
percentage of any up-front license fees, milestone or any special fees,
payments or other consideration we receive, excluding research and development
funding. In connection with an amendment to the agreement made in April 2000,
ALZA received 1,000,000 shares of our common stock and a warrant to purchase
1,000,000 shares of our common stock at an exercise price equal to the price
at which we sell our common stock in this offering. The amendments to our
development and commercialization agreement with ALZA include a reduction in
product royalties and up front payments payable to ALZA by us under the
agreement. In addition, ALZA's option to distribute the DUROS sufentanil
product was amended in geographic scope to cover only the U.S. and Canada,
instead of worldwide.
Under this agreement, we may engage ALZA to provide certain consulting and
development services agreed upon by the respective companies on a fee for
services basis.
The term of this agreement is for so long as we are obligated to make
product payments to ALZA. The agreement is assignable by either party to an
acquiror of all or substantially all of such party's business.
Patents, Licenses and Proprietary Rights
Our success depends in part on our ability to obtain patents, to protect
trade secrets, to operate without infringing upon the proprietary rights of
others and to prevent others from infringing on our proprietary rights. Our
policy is to seek to protect our proprietary position by, among other methods,
filing U.S. and foreign patent applications related to our proprietary
technology, inventions and improvements that are important to the development
of our business. As of February 29, 2000, we held four issued or allowed U.S.
patents and one issued or allowed foreign patent. Our patents expire at
various dates starting in the year 2012. In addition, we have 11 pending U.S.
patent applications and have filed six corresponding patent applications under
the Patent Cooperation Treaty, five of which are currently pending in Europe,
Australia and Canada. In addition, we have licensed from ALZA a portfolio of
pending, issued and future patents to permit us to develop and commercialize
products under our agreement with ALZA.
Proprietary rights relating to our planned and potential products will be
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are effectively maintained as
trade secrets. Patents owned by or licensed to us may not afford protection
against competitors, and our pending patent applications now or hereafter
filed by or licensed to us may not result in patents being issued. In
addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the U.S. The
patent positions of biopharmaceutical companies involve complex legal and
factual questions and, therefore, their enforceability cannot be predicted
with certainty. Our patents or patent applications, or those licensed to us,
if issued, may be challenged, invalidated or circumvented, and the rights
granted thereunder may not provide proprietary protection or competitive
advantages to us against competitors with similar technology. Furthermore, our
competitors may independently develop similar technologies or
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duplicate any technology developed by us. Because of the extensive time
required for development, testing and regulatory review of a potential
product, it is possible that, before any of our products can be
commercialized, any related patent may expire or remain in existence for only
a short period following commercialization, thus reducing any advantage of the
patent, which could adversely affect our ability to protect future product
development and, consequently, our operating results and financial position.
Because patent applications in the U.S. are maintained in secrecy until
patents issue and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, we cannot be certain that we
were the first to make the inventions covered by each of our issued or pending
patent applications or that we were the first to file for protection of
inventions set forth in such patent applications. Our planned or potential
products may be covered by third-party patents or other intellectual property
rights, in which case we would need to obtain a license to continue developing
or marketing these products.
Any required licenses may not be available to us on acceptable terms, if at
all. If we do not obtain any required licenses, we could encounter delays in
product introductions while we attempt to design around these patents, or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed. Litigation may be necessary to defend against or
assert such claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the U.S. Patent and Trademark Office may be necessary
to determine the priority of inventions with respect to our patent
applications. Litigation or interference proceedings could result in
substantial costs to and diversion of effort by us, and could have a material
adverse effect on our business, financial condition and results of operations.
These efforts by us may not be successful.
We may rely, in certain circumstances, on trade secrets to protect our
technology. However, trade secrets are difficult to protect. We seek to
protect our proprietary technology and processes, in part, by confidentiality
agreements with our employees and certain contractors. There can be no
assurance that these agreements will not be breached, that we will have
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors. To the extent that
our employees, consultants or contractors use intellectual property owned by
others in their work for us, disputes may also arise as to the rights in
related or resulting know-how and inventions.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. We believe that our initial products will be
regulated as drugs by the FDA rather than as biologics or devices, whereas
later products may be regulated as combination products with a device
designation for all or some of the final product components.
The process required by the FDA under the new drug provisions of the
Federal Food, Drug and Cosmetics Act before our initial products may be
marketed in the U.S. generally involves the following:
. preclinical laboratory and animal tests;
. submission of an IND application which must become effective before
clinical trials may begin;
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended use;
and
. FDA approval of a new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
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Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. We then submit the results of
the preclinical tests, together with manufacturing information and analytical
data, to the FDA as part of an IND, which must become effective before we may
begin human clinical trials. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period,
raises concerns or questions about the conduct of the trials as outlined in
the IND and imposes a clinical hold. In such a case, the IND sponsor and the
FDA must resolve any outstanding concerns before clinical trials can begin.
Our submission of an IND may not result in FDA authorization to commence
clinical trials. Further, an independent Institutional Review Board at each
medical center proposing to conduct the clinical trials must review and
approve any clinical study.
Human clinical trials are typically conducted in three sequential phases
which may overlap:
. PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion.
. PHASE II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
. PHASE III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population, often at
geographically dispersed clinical study sites.
In the case of products for severe diseases, such as chronic pain, or life-
threatening diseases such as cancer, the initial human testing is often
conducted in patients with disease rather than in healthy volunteers. Since
these patients already have the target disease or condition, these studies may
provide initial evidence of efficacy traditionally obtained in Phase II trials
and thus these trials are frequently referred to as Phase I/II trials. We
cannot be certain that we will successfully complete Phase I, Phase II or
Phase III testing of our product candidates within any specific time period,
if at all. Furthermore, the FDA or the Institutional Review Board or the
sponsor may suspend clinical trials at any time on various grounds, including
a finding that the subjects or patients are being exposed to an unacceptable
health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of a new drug application for
approval of the marketing and commercial shipment of the product. The FDA may
deny a new drug application if the applicable regulatory criteria are not
satisfied or may require additional clinical data. Even if such data is
submitted, the FDA may ultimately decide that the new drug application does
not satisfy the criteria for approval. Once issued, the FDA may withdraw
product approval if compliance with regulatory standards is not maintained or
if safety problems occur after the product reaches the market. In addition,
the FDA requires surveillance programs to monitor approved products which have
been commercialized, and the agency has the power to require changes in
labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.
In addition to the drug approval requirements applicable to our initial
product for the treatment of chronic pain through the Center for Drug
Evaluation and Research (CDER), the FDA may require an intercenter
consultation review by the Center for Devices and Radiological Health (CDRH).
This request for consultation may be based on the device-like nature of a
number of aspects of the DUROS technology.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type,
complexity and novelty of the pharmaceutical product. Government regulation
may delay or prevent marketing of potential products for a considerable period
of time and impose costly procedures upon our activities. We cannot be certain
that the FDA or any other regulatory agency will grant approval for any of our
products under
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development on a timely basis, if at all. Success in preclinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities is not always
conclusive and may be susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. Even if a product receives
regulatory approval, the approval may be significantly limited to specific
indications. Further, even after regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from
the market. Delays in obtaining, or failures to obtain regulatory approvals
would have a material adverse effect on our business. Marketing our products
abroad will require similar regulatory approvals and is subject to similar
risks. In addition, we cannot predict what adverse governmental regulations
may arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences
with the drug. Drug manufacturers and their subcontractors are required to
register their establishments with the FDA and state agencies, and are subject
to periodic unannounced inspections by the FDA and state agencies for
compliance with good manufacturing practices, which impose procedural and
documentation requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers will be able to
comply with the GMP regulations and other FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has
actively enforced regulations prohibiting the marketing of products for
unapproved uses. Under the FDA Modernization Act of 1997, the FDA will permit
the promotion of a drug for an unapproved use in certain circumstances, but
subject to very stringent requirements. We and our products are also subject
to a variety of state laws and regulations in those states or localities where
our products are or will be marketed. Any applicable state or local
regulations may hinder our ability to market our products in those states or
localities. We are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply
with such laws and regulations now or in the future.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care
costs in the U.S. and in foreign markets could result in new government
regulations that could have a material adverse effect on our business. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might arise from future legislative or administrative action,
either in the U.S. or abroad.
Competition
We may face competition from other companies in numerous industries
including pharmaceuticals, medical devices and drug delivery. Our DUROS
sufentanil product will compete with oral opioids, transdermal opioid patches,
and implantable and external infusion pumps which can be used for infusion of
opioids. Products of these types are marketed by Purdue Pharma, Knoll,
Janssen, Medtronic, AstraZeneca, Arrow International, Tricumed and others. Our
spinal hydromorphone product will compete with implantable and external
infusion pumps marketed by Medtronic, Arrow International, Tricumed, Abbott,
Deltec and others. Numerous companies are applying significant resources and
expertise to the problems of drug delivery and several of these are focusing
or may focus on delivery of drugs to the intended site of action, including
Alkermes, Genetronics, The Liposome Company, Focal, Matrix Pharmaceuticals and
others. Although we have exclusivity with respect to our license of the DUROS
technology in specific fields of therapy, ALZA is also a potential competitor
with technologies other than DUROS.
Some of these competitors may be addressing the same therapeutic areas or
indications as us. Our current and potential competitors may succeed in
obtaining patent protection or commercializing products before us. Any
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products we develop using our pharmaceutical systems technologies will compete
in highly competitive markets. Many of our potential competitors in these
markets have greater development, financial, manufacturing, marketing, and
sales resources than we do and we cannot be certain that they will not succeed
in developing products or technologies which will render our technologies and
products obsolete or noncompetitive. In addition, many of those potential
competitors have significantly greater experience than we do in their
respective fields.
Employees
As of March 31, 2000, we had 41 full-time employees, including 26 in
research, development and manufacturing and 15 in sales, general and
administrative. From time to time, we also employ independent contractors to
support our engineering and support and administrative organizations. None of
our employees are represented by a collective bargaining unit and we have
never experienced a work stoppage. We consider our relations with our
employees to be good.
Facilities
We are headquartered in Cupertino, California, where we lease approximately
30,000 square feet of space under a lease expiring in January 2004 with
options to extend for up to an additional ten years. This facility contains
both office and laboratory space. We sublease approximately 11,000 square feet
of this space under a sublease that terminates in March 2001. We are also in
the process of assuming a lease for approximately 7,800 square feet of space
in Vacaville, California. This facility contains manufacturing space for the
ALZET product. Our lease of this facility expires in March 2001 with an option
to extend for one year. We believe that our existing and planned facilities
are adequate to meet our current and foreseeable requirements or that suitable
additional or substitute space will be available as needed.
Legal Proceedings
We are not a party to any material legal proceedings.
Scientific and Medical Advisors
We have recruited and will continue to recruit leading researchers and
physicians in our fields of interest to serve as scientific and medical
advisors for each of our products under development. The scientific advisory
board advises our management on strategic issues related to our scientific
development program. In return for their services, these advisors may receive
compensation in the form of cash and/or option grants for the purchase of
common stock. Listed in alphabetical order, the following individuals serve as
scientific advisors for our lead product in the field of pain treatment:
Stuart L. DuPen, M.D.
Stuart DuPen, M.D. is an anesthesiologist specializing in pain management.
He is board certified in anesthesiology and pain management, with over twenty
years of experience. His interests include management of neuropathic pain
syndromes associated with both cancer and non-cancer sources. He lectures
widely on epidural analgesia in cancer pain management. He is the principal
investigator on two National Cancer Institute studies designed to enhance
education of doctors and nurses about pain, and to improve pain relief
outcomes. Dr. DuPen participated in our Phase I trial for DUROS sufentanil.
Elliot S. Krames, M.D.
Elliot Krames, M.D., is a board-certified anesthesiologist who has been
practicing pain medicine solely for the past 20 years. He is a pioneer and one
of the leading experts in the field of intraspinal analgesia. He is a world-
renowned leader and educator in the fields of neuromodulation for pain
control. He has written extensively on implantable technologies for pain
management and has conducted national and international symposia on this
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topic. For the past 10 years, Dr. Krames has been the Medical Director of the
Pacific Pain Treatment Centers in the San Francisco Bay Area, an organization
of pain clinics dedicated to interdisciplinary pain medicine. He is co-founder
of the National Pain Foundation, a founding member of the American
Neuromodulation Society and he participates on the Boards of the International
and American Neuromodulation Societies, World Institutes of Pain, and the
American Academy of Pain Medicine. Dr. Krames is the Chairman of the Combined
Worldwide Pain Conference of the International and American Neuromodulation
Societies, the World Institutes of Pain and the World Society of Pain
Clinicians that will take place July 15-21, 2000 in San Francisco. In
addition, he is Editor-in-Chief of Neuromodulation, the Journal of the
International Neuromodulation Society.
Dwight E. Moulin, M.D.
Dwight Moulin, M.D., is an Associate Professor, Division of Neurology,
Department of Clinical Neurological Sciences at the University of Western
Ontario, Canada. He is also an associate professor in the department of
Oncology and an Honorary Lecturer in the Department of Medicine at the
University of Western Ontario. In addition, Dr. Moulin is a Consultant
Neurologist at St. Joseph's Health Center, Head of the Division of Neurology
at the Victoria Campus of the London Health Sciences Centre as well as
Attending Neurologist at the Victoria Campus and University Campus of the
London Health Sciences Centre. He has published widely in the field of chronic
pain, and has been very active in clinical trials in chronic pain, including
trials for controlled and sustained release opioids.
Russell K. Portenoy, M.D.
Russell K. Portenoy, M.D., is chairman of the Department of Pain Medicine
and Palliative Care at Beth Israel Medical Center and Professor of Neurology
at the Albert Einstein College of Medicine. Dr. Portenoy received his medical
degree from the University of Maryland School of Medicine. He completed a
residency in neurology at the Albert Einstein College of Medicine and a
fellowship in pain management at Memorial Sloan-Kettering Cancer Center. Dr.
Portenoy has been very active as both a researcher and an educator. He has
published extensively on topics related to pain and analgesics, treatments for
symptoms other than pain, symptom assessment and quality of life. He is the
immediate past president of the American Pain Society, and the recipient of
that society's Wilbert E. Fordyce Clinical Investigator Award and the
Distinguished Service Award. Dr. Portenoy also is Secretary of the
International Association for the Study of Pain and a Trustee of the American
Board of Hospice and Palliative Medicine. Dr. Portenoy is Editor-in-Chief of
an international, peer-reviewed medical journal, The Journal of Pain and
Symptom Management. He is also Associate Editor for cancer pain for the
journal Pain, and serves on several other editorial boards.
Peter Staats, M.D.
Peter S. Staats, M.D., is currently Chief of the Division of Pain Medicine
in the Department of Anesthesiology and Critical Care Medicine at the Johns
Hopkins Hospital, where he is also the Director of the Anesthesia Pain
Medicine Clinic. His academic posts at the Johns Hopkins University School of
Medicine include Associate Professorships in the Department of Anesthesiology
and Critical Care Medicine and the Department of Oncology. Prior to joining
the medical and teaching staff at Johns Hopkins in 1994, Dr. Staats received
his medical residency training in anesthesiology and critical care medicine at
the Johns Hopkins University School of Medicine and was subsequently awarded a
fellowship in Pain Medicine. Dr. Staats has lectured throughout the world and
has written over a hundred articles, book chapters and abstracts on the
management of chronic pain.
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MANAGEMENT
The directors and executive officers of DURECT Corporation and their ages
as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Felix Theeuwes, D.S.C. .......... 62 Chairman, Chief Scientific Officer and
Director
James E. Brown, D.V.M. .......... 43 President, Chief Executive Officer and
Director
Thomas A. Schreck................ 42 Chief Financial Officer and Director
Edward M. Gillis................. 38 Vice President, Engineering
Randolph M. Johnson, Ph.D. ...... 49 Vice President, Pharmacology and
Toxicology, Director of CNS Programs
Jean I Liu....................... 31 Vice President, Legal & General Counsel
Judy A. Magruder................. 41 Vice President, Regulatory &
Development
Timothy S. Nelson................ 36 Vice President, Business and Commercial
Development
Scott M. Wheelwright, Ph.D. ..... 45 Vice President, Manufacturing
James R. Butler(2)............... 59 Director
John L. Doyle(2)................. 68 Director
Douglas A. Lee(1)................ 35 Director
Matthew V. McPherron(1)(2)....... 35 Director
Albert L. Zesiger(1)............. 70 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Felix Theeuwes, D.S.C. co-founded DURECT in February 1998 and has served as
our Chairman, Chief Scientific Officer and a Director since July 1998. He is
also currently a consultant to ALZA Corporation, a pharmaceutical and drug
delivery company which is an affiliate of us. Prior to that, Dr. Theeuwes held
various positions at ALZA Corporation, including President of New Ventures
from August 1997 to August 1998, President of ALZA Research and Development
from 1995 to August of 1997, President of ALZA Technology Institute from 1994
to April 1995 and Chief Scientist from 1982 to June 1997. Dr. Theeuwes is also
a director of Genetronics, a medical device company, and several private
companies. Dr. Theeuwes holds a D.Sc. degree in Physics from the University of
Leuven (Louvain), Belgium. He also served as a post-doctoral fellow and
visiting research assistant professor in the Department of Chemistry at the
University of Kansas and has completed the Stanford Executive Program.
James E. Brown, D.V.M. co-founded DURECT in February 1998 and has served as
our President, Chief Executive Officer and a Director since June 1998. He
previously worked at ALZA Corporation as Vice President of Biopharmaceutical
and Implant Research and Development from June 1995 to June 1998. Prior to
that, Dr. Brown held various positions at Syntex Corporation, a pharmaceutical
company, including Director of Business Development from May 1994 to May 1995,
Director of Joint Ventures for Discovery Research from April 1992 to May 1995,
and held a number of positions including Program Director for Syntex Research
and Development from October 1985 to March 1992. Dr. Brown holds a B.A. from
San Jose State University and a D.V.M. (Doctor of Veterinary Medicine) from
the University of California, Davis where he also conducted post-graduate work
in pharmacology and toxicology.
Thomas A. Schreck co-founded DURECT in February 1998 and served as Chief
Executive Officer, Chief Financial Officer and President from February 1998 to
June 1998. Since June 1998, he has served as our Chief Financial Officer and a
Director. Prior to founding DURECT, he founded and was President of Schreck
Merchant Group, Inc., an investment bank specializing in private placements
and mergers and acquisitions, from June 1994 to February 1998. Mr. Schreck
also founded and served as Risk Manager to Genesis Merchant Group/Portola
Capital Partners, L.P., a convertible arbitrage fund, from 1993 to 1994. He
also served as a Manager of the Convertible Securities Department at
Montgomery Securities, from 1988 to 1991. Mr. Schreck received a B.A. from
Williams College.
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Edward M. Gillis has served as our Vice President of Engineering since
March 2000. Prior to that, Mr. Gillis served as our Executive Director of
Engineering from April 1999 to March 2000. Prior to that he served as our
Director of Engineering from October 1998 to April 1999. From March 1997 to
October 1998, Mr. Gillis served as the Director of Pilot Manufacturing and
Process Engineering at EndoTex Interventional Systems, a private medical
device company. From July 1993 to March 1997, Mr. Gillis served as Director of
Catheter Ablation Product Development and Manufacturing Engineering Manager at
Cardiac Pathways Corporation, a medical device company. Mr. Gillis holds a
B.S. in Biological Sciences and an M.S. in Plastics Engineering from the
University of Lowell.
Randolph M. Johnson, Ph.D. has served as our Vice President and Director of
Toxicology and Pharmacology and Director of CNS (Central Nervous System)
Programs since September 1998. From July 1995 to September 1998, Dr. Johnson
held various positions at Roche Bioscience, a pharmaceutical company. From
July 1995 to October 1997 Dr. Johnson served as the Department Head of
Neurobiology, Center for Biological Research and from October 1997 to
September 1998, as the Department Head of Molecular & Cellular Biochemistry,
Center for Biological Research. From January to June 1995, Dr. Johnson served
as the Director of Preclinical Development at Syntex Development Research, a
pharmaceutical company. Dr. Johnson received a B.S. in Zoology from California
State University, Long Beach, an M.A. in Biology-Physiology from California
State University, Long Beach and a Ph.D. in Biomedical Science-Pharmacology
from the University of South Carolina School of Medicine. In addition, he was
a Postdoctoral Research Associate in the Department of Pharmacology at the
University of Virginia School of Medicine.
Jean I Liu has served as our Vice President of Legal and General Counsel
since February 1999. Previously, from October 1998, Ms. Liu served as our Vice
President of Legal. Prior to that, Ms. Liu worked as an attorney at Venture
Law Group, a law firm, from May 1997 to October 1998. Ms. Liu worked as an
attorney at Pillsbury Madison & Sutro LLP, a law firm, from September 1993 to
May 1997. Ms. Liu received a B.S. in Cellular & Molecular Biology from
University of Michigan, an M.S. in Biology from Stanford University and a J.D.
from Columbia University School of Law.
Judy A. Magruder has served as our Vice President of Regulatory and
Development since February 2000. From March 1999 to February 2000, Ms.
Magruder served as our Executive Director of Regulatory and Product
Development. Prior to that, Ms. Magruder served as Director of Product
Development at Vascular Therapeutics, Inc., a private pharmaceuticals company,
from January 1998 to March 1999. Ms. Magruder held various positions at ALZA
Corporation, including Head of Program Management, Implant Development and a
Research Scientist from February 1996 to January 1998, Product Development
Manager/Program Manager as well as Research Scientist from January 1991 to
February 1996, and Chemist from May 1984 to April 1989. Ms. Magruder received
a B.S. in Animal Science from the University of California, Davis and an
M.B.A. from Santa Clara University.
Timothy S. Nelson has served as our Vice President of Business and
Commercial Development since September 1998. Previously, Mr. Nelson held
various positions at Medtronic, Inc., a medical device company, including
Business Director of Neurological Division, Europe, Middle East and Africa
from June 1996 to September 1998, and Manager of Drug Delivery Ventures and
Business Development from August 1992 to June 1996. Mr. Nelson holds a
Bachelor of Chemical Engineering degree from the University of Minnesota and a
Master of Management degree with Distinction from the J.L. Kellogg Graduate
School of Management, Northwestern University.
Scott M. Wheelwright, Ph.D. has served as our Vice President of
Manufacturing since February 2000. Previously, Dr. Wheelwright was the Vice
President of Development and Manufacturing at Calydon, Inc., a privately held
biotechnology company developing cancer therapeutics, from March 1998 to
February 2000. From October 1992 to March 1998, he served as Senior Director
of Process Development, Manufacturing and Engineering at Scios Inc., a
biotechnology company. Dr. Wheelwright holds a B.S. in Chemical Engineering
from the University of Utah, a Ph.D. in Chemical Engineering from the
University of California, Berkeley, and conducted post-doctoral research at
the Max Planck Institute for Biophysics in Frankfurt, Germany.
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James R. Butler has served as a Director since July 1999. Mr. Butler is
currently an employee of ALZA where he holds two positions. Mr. Butler joined
ALZA in July 1993 as Vice President of Sales and Marketing and in January
2000, Mr. Butler became the Group Vice President of ALZA International. Mr.
Butler is also a director of Aronex Pharmaceuticals, a pharmaceutical company.
Mr. Butler holds a B.A. in Business Administration from the University of
Florida.
John L. Doyle has served as a Director since February 2000. Mr. Doyle is
currently an independent consultant. In 1957, he joined Hewlett-Packard, a
computer company, where from 1957 to 1991 he served in several manufacturing
and general management positions, including the Vice President of Personnel
from 1976 to 1980, Vice President of Research and Development from 1980 to
1984, Executive Vice President of the Computer Sector from 1984 to 1988, and
of Business Development until his retirement in 1991. Mr. Doyle studied naval
architecture at Glasgow University and holds a B.S. in Mechanical Engineering
as well as an M.S. in Electrical Engineering and Business from Stanford
University. Mr. Doyle is also a director of Analog Devices Inc., a
semiconductor company, Dupont Photomasks Inc., a manufacturer of semiconductor
manufacturing equipment, and Xilinx Inc., a semiconductor company.
Douglas A. Lee has served as a Director since June 1998. Since February
2000, he has been Senior Vice President of Business Development for
drspock.com, Inc., a health care internet company. From September 1997, until
joining drspock.com, Mr. Lee served as Managing Director of Premier Medical
Partner Fund L.P, a health care venture capital fund. From October 1995 to
February 1997, Mr. Lee worked at Guidant Corporation, a medical device
company, where he was Vice President and Chief Financial Officer of its new
ventures and corporate business development group. From March 1994 to April
1995, Mr. Lee was Vice President and Chief Financial Officer to Genelabs
Technologies, Inc., a biotechnology company. Mr. Lee is also a Director of
Atrionix, Inc., a private medical device company. Mr. Lee received a B.S. from
the University of California, Berkeley and an M.B.A. from the University of
Chicago.
Matthew V. McPherron has served as a Director since July 1999. Since June
1998, Mr. McPherron has been a Director of Brookside Capital Partners Fund,
L.P. Previously, Mr. McPherron served as the President and Chief Operating
Officer of US Carelink, a health care internet company from September 1997 to
March 1998. From August 1993 to September 1997, Mr. McPherron served in a
number of roles at Medtronic, Inc., most recently as the Global Marketing
Manager for Pain Therapy. Mr. McPherron holds a B.S. from the University of
Kansas and an M.B.A. from the Harvard Graduate School of Business
Administration.
Albert L. Zesiger has served as a Director since 1998. Mr. Zesiger is a
Founding Principal of Zesiger Capital Group, LLC, an investment advisory firm,
which Mr. Zesiger co-founded in October 1995. In 1968, Mr. Zesiger founded BEA
Associates, Inc., an investment advisory firm, which in 1995 became wholly-
owned by CS Holdings, the holding company for Credit Suisse Bank and CS First
Boston. Mr. Zesiger also serves on the Board of Directors of Eos
Biotechnology, Inc., Hayes Medical Inc., Praecis Pharmaceuticals Inc., and
ViroLogic Inc. Mr. Zesiger holds a B.S. in Engineering from the Massachusetts
Institute of Technology and an M.B.A. from the Harvard Graduate School of
Business Administration.
Board Composition
Directors are elected annually at our annual meeting of stockholders, and
serve for the term for which they are elected and until their successors are
duly elected and qualified. Our bylaws currently provide for a board of
directors comprised of eight directors.
Board Compensation
None of the directors is paid any fee or other cash compensation for acting
as a director. Our officers are appointed by the board of directors and serve
at its discretion. Directors who are our employees are eligible to participate
in our 1998 stock option plan and in our 2000 stock plan and, beginning upon
the effectiveness of the registration statement used in this offering, they
will also be eligible to participate in our 2000 employee stock
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option plan. Mr. Butler acquired 15,000 shares of our common stock at a
purchase price of $.20 per share upon exercise of an option granted under the
1998 stock option plan. These shares our subject to our right of repurchase in
the event of a termination of Mr. Butler's services to us, which repurchase
right lapses at a rate of 1/3 of the shares on each anniversary of the date of
the grant. Mr. Doyle was granted an option to purchase 15,000 shares of common
stock under the 2000 stock plan at an exercise price of $.35 per share in
February 2000 and 1/3 of the shares vest on each anniversary of the date of
grant. Mr. Lee acquired 15,000 shares of our common stock at a purchase price
of $.20 per share upon exercise of an option granted under the 1998 stock
option plan. These shares are subject to our right of repurchase in the event
of a termination of Mr. Lee's services to us, which repurchase right lapses at
the rate of 1/3 of the shares on each anniversary of the date of grant. Upon
the effectiveness of the registration statement used in this offering,
directors who are not our employees will be eligible to participate in our
2000 directors' stock option plan. See "Employee Benefit Plans."
We have entered into indemnification agreements with each member of the
board of directors and our executive officers providing for the
indemnification of such person to the fullest extent authorized, permitted or
allowed by law.
Board Committees
The board of directors has a compensation committee that reviews and
recommends the compensation arrangements for our management. The members of
the compensation committee are James R. Butler, John L. Doyle, and Matthew V.
McPherron.
The board of directors has an audit committee that reviews our annual audit
and meets with our independent auditors to review our internal controls and
financial management practices. The board's audit committee currently consists
of Douglas A. Lee, Matthew V. McPherron and Albert L. Zesiger. The functions
of the audit committee are to make recommendations to the board of directors
regarding the selection of independent auditors, review the results and scope
of the audit and other services provided by our independent auditors and
review and evaluate our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our board of directors are
currently James R. Butler, John L. Doyle, and Matthew V. McPherron. Neither
Mr. Butler, Mr. Doyle, nor Mr. McPherron has at any time been an officer or
employee of DURECT or any of our subsidiaries. The Chief Executive Officer,
President and Chief Scientific Officer are entitled to be non-voting
participants in each meeting of the compensation committee and are excused
from any discussion that relates to their own compensation.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation and bylaws limit or eliminate the personal
liability of our directors for monetary damages for breach of the directors'
fiduciary duty of care. The duty of care generally requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Consequently,
our directors or officers will not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as a
director, except for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; and
. any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
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Our certificate of incorporation also provides that we will indemnify, to
the fullest extent permitted by law, any person made or threatened to be made
a party to any action or proceeding by reason of the fact that he or she is or
was one of our directors or officers or serves or served at any other
enterprise as a director, officer or employee at our request.
Our bylaws provide that we will, to the maximum extent and in the manner
permitted by Delaware law, indemnify each of the following persons against
expenses, including attorneys' fees, judgments, fines, settlements, and other
amounts incurred in connection with any proceeding arising by reason of the
fact that he or she is or was our agent:
. one of our current or past directors or officers;
. a current or past director or officer of another enterprise who served
at our request; or
. a current or past director or officer of a corporation that was our
predecessor corporation or of another enterprise at the request of a
predecessor corporation.
We have entered into indemnification agreements with each of our directors
and executive officers to give them additional contractual assurances
regarding the scope of the indemnification described above and to provide
additional procedural protections. These agreements, among other things,
indemnify our directors and executive officers for certain expenses, including
attorneys' fees, judgments, fines, penalties and settlement amounts incurred
by them in any action or proceeding arising out of their services to us, our
subsidiaries or any other enterprise to which they provide services at our
request. In addition, we have directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities. We believe that these indemnification provisions and agreements
are necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement and damage awards
against our directors and officers under these indemnification provisions.
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<PAGE>
Executive Compensation
The following table provides certain summary information concerning the
compensation earned for services rendered to us during the fiscal year ended
December 31, 1999 by our Chief Executive Officer and our four other most
highly compensated executive officers who earned more than $100,000 in 1999
and were serving as executive officers at the end of 1999, whom we refer to
collectively as the named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
------------------ ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
James E. Brown, D.V.M... 1999 225,000 -- -- -- --
President, Chief
Executive Officer and
Director
Felix Theeuwes, D.R.S... 1999 177,564 -- -- -- --
Chairman, Chief
Scientific Officer
Thomas A. Schreck(1).... 1999 200,000 -- -- -- --
Chief Financial Officer
and Director
Timothy S. Nelson....... 1999 165,000 -- -- 88,500 24,543(2)
Vice President,
Business & Commercial
Development
Randolph M. Johnson,
Ph.D................... 1999 160,000 -- -- 20,000 --
Vice President,
Pharmacology &
Toxicology, Director of
CNS Programs
</TABLE>
- --------
(1) Pursuant to a Financial Advisory Services Agreement, dated May 29, 1998,
we paid an investment banking fee to Schreck Merchant Group, Inc., a
financial services company controlled by Mr. Schreck, in the amount of
$279,000. The Advisory Agreement was terminated effective December 18,
1998.
(2) Mr. Nelson receives $24,543 per year for three years, beginning in 1999,
for a housing allowance.
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Option Grants During Year Ended December 31, 1999
The following table sets forth certain information for the year ended
December 31, 1999 with respect to grants of stock options to each of the named
executive officers. All options granted by us in 1999 were granted under our
1998 stock option plan. These options have a term of 10 years. See "Employee
Benefit Plans" for a description of the material terms of these options. We
granted options to purchase common stock and issued shares of common stock
pursuant to restricted stock purchase agreements equal to a total of
934,500 shares during 1999. Options were granted at an exercise price equal to
the fair market value of our common stock, as determined in good faith by our
board of directors. Potential realizable values are net of exercise price
before taxes, and are based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
our projection or estimate of future stock price growth. Unless the market
price of the common stock appreciates over the option term, no value will be
realized from the option grants made to executive officers. Actual gains, if
any, on stock option exercises will be dependent on the future performance of
our common stock. The assigned 5% and 10% rates of stock appreciation are
based on the fair market value of our common stock at December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable
Value At Assumed
Number Of Percent Of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted To Exercise for Option Term
Options Employees In Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James E. Brown.......... -- -- -- -- -- --
Felix Theeuwes.......... -- -- -- -- -- --
Thomas A. Schreck....... -- -- -- -- -- --
Timothy S. Nelson....... 88,500 9.5% $0.35 (1) $ 19,480 $ 49,366
Randolph M. Johnson..... 20,000 2.1% $0.35 12/9/2009 $ 4,402 $ 11,156
</TABLE>
- --------
(1) Mr. Nelson's option to purchase 20,000 shares expires May 10, 2009; his
option to purchase 68,500 shares expires December 9, 2009.
Aggregated Option Exercises in Last Fiscal year and 1999 Year-End Option
Values
The following table sets forth information with respect to the named
executive officers concerning exercisable and unexercisable options held as of
December 31, 1999. The value of in-the-money options is based on an assumed
offering price of $ per share and net of the option exercise price.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value December 31, 1999 December 31, 1999
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James E. Brown.......... 0 -- --/--
Felix Theeuwes.......... 0 -- --/--
Thomas A. Schreck....... 0 -- --/--
Timothy S. Nelson....... 0 -- 302,500/0
Randolph M. Johnson..... 0 -- 170,000/0
</TABLE>
Options shown above were granted under the 1998 stock option plan and vest
at a rate of 25% of the shares on each twelve month anniversary of the vesting
commencement date. Notwithstanding the foregoing, all options are immediately
exercisable; however, the underlying shares are subject to our right of
repurchase at the original purchase price. Such repurchase right will lapse
with respect to 25% of the shares on each twelve month anniversary of the
vesting commencement date.
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<PAGE>
Employment Agreements
We have entered into an employment agreement with James E. Brown, our Chief
Executive Officer and President, for a term of three years starting on June
19, 1998. The agreement acknowledges that for the first twelve months of
employment Dr. Brown would perform services for ALZA Corporation, but after
that period, he became a full time employee of DURECT. The agreement also
provides that Dr. Brown will be paid an annual salary of $225,000 and makes
him eligible for any salary, stock option, bonus and other benefits we offer.
In the event of involuntary termination, Dr. Brown is entitled to his regular
monthly salary for the remainder of the original term of the employment
agreement, any bonus payable, and continued health insurance benefits. In the
event of termination for cause, Dr. Brown is entitled to his accrued unpaid
salary and vacation. In the event of termination by reason of death or
disability, Dr. Brown or his estate is entitled to all salary and unpaid
vacation accrued and any other benefits payable under our then existing
benefit plans. In the event of a constructive termination, Dr. Brown is
entitled to a lump sum payment of the salary we would have paid him during the
twelve-month period following his termination, as well as continuing health
insurance benefits for the twelve-month period following his termination.
We have entered into an employment agreement with Felix Theeuwes, our
Chairman and Chief Scientific Officer, for a term of three years starting on
June 19, 1998. His duties also include arranging funding and participating in
overall management of the company. The agreement acknowledges that for the
first twelve months of employment Dr. Theeuwes would perform services for ALZA
Corporation, but after that period, he became a full time employee of DURECT.
The agreement also provides that Dr. Theeuwes will be paid an annual salary of
$250,000 to be reduced by an amount to reflect his time and work for ALZA
Corporation and makes him eligible for any salary, stock option, bonus and
other benefits we may offer. In the event of involuntary termination,
Dr. Theeuwes is entitled to his regular monthly salary for the remainder of
the original term of the employment agreement, any bonus payable, and
continued health insurance benefits. In the event of termination for cause,
Dr. Theeuwes is entitled to his accrued unpaid salary and vacation. In the
event of termination by reason of death or disability, Dr. Theeuwes or his
estate is entitled to all salary and unpaid vacation accrued and any other
benefits payable under our then existing benefit plans. In the event of a
constructive termination, Dr. Theeuwes is entitled to a lump sum payment of
the salary we would have paid him during the twelve-month period following his
termination, as well as continuing health insurance benefits for the twelve-
month period following his termination.
We have entered into an employment agreement with Thomas A. Schreck, the
Chief Financial Officer for a term of three years starting June 19, 1998. The
agreement acknowledges the financial relationship with Schreck Merchant Group
Inc., of which Mr. Schreck is a principal, for financial services. The
agreement also provides for an annual salary of $100,000 for Mr. Schreck for
the first two years of the term and an increase in his annual salary to
$200,000 effective on June 19, 2000. The agreement also makes him eligible for
any salary, stock option, bonus and other benefits we may offer. In the event
of involuntary termination, Mr. Schreck is entitled to his regular monthly
salary for the remainder of the original term of the employment agreement, any
bonus payable, and continued health insurance benefits. In the event of
termination for cause, Mr. Schreck is entitled to accrued unpaid salary and
vacation. In the event of termination by reason of death or disability, Mr.
Schreck or his estate is entitled to all salary and unpaid vacation accrued
and any other benefits payable under our then existing benefit plans. In the
event of a constructive termination, Mr. Schreck is entitled to a lump sum
payment of the salary we would have paid him during the twelve-month period
following his termination, as well as continuing health insurance benefits for
the twelve-month period following his termination.
We have entered into change of control agreements with Randolph M. Johnson
and Timothy S. Nelson. These agreements provide that, in the event of a change
in our control, one half of the unvested portion of any stock option or
restricted stock held by Dr. Johnson and Mr. Nelson on the effective date of
the change of control is automatically accelerated so as to become completely
vested as of the effective date, unless such acceleration would make us
ineligible for "pooling of interests" accounting treatment in a transaction.
In addition, in the event of a termination without cause within the twelve
months following the change in our control, the number
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<PAGE>
of shares which would have vested in the second twelve month period following
the change of control is automatically accelerated so as to become completely
vested as of the effective date of the termination unless the acceleration
would make us ineligible for "pooling of interests" accounting treatment in
the change in control transaction.
Employee Benefit Plans
2000 Stock Plan.
Adoption and Reserved Shares. Our 2000 stock plan was adopted by our board
of directors and approved by our stockholders in March 2000. It provides for
the grant of incentive stock options to employees and nonstatutory stock
options and stock purchase rights to employees and consultants, including
nonemployee directors. As of March 31, 2000, 1,796,500 shares were reserved
for issuance under the 2000 stock plan of which 1,265,650 remain available for
future grants. In addition, the 2000 stock plan was amended in April 2000 to
provide for an automatic annual increase to the shares reserved under the plan
(an "evergreen" provision) on the first day of each of our fiscal years
beginning in 2001 and ending in 2010 in an amount equal to the lesser of:
. 2,250,000 shares;
. 5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as determined by the board of directors.
Purposes of the 2000 Stock Plan. The purposes of the 2000 stock plan are to
attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business.
Eligible Persons and Types of Options. The 2000 stock plan provides for the
granting to employees, including officers and directors, of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. The 2000 stock plan also provides for the granting to
employees and consultants, including non-employee directors, of nonstatutory
stock options and stock purchase rights.
Administration. The 2000 stock plan may be administered by the board of
directors or a committee of the board, each known as the administrator. The
administrator determines the terms of options and stock purchase rights
granted under the 2000 stock plan, including the number of shares subject to
the award, the exercise or purchase price, the term and the vesting and
exercisability of the award and other conditions to which the award is
subject. In no event, however, may an individual employee receive awards for
more than 1,500,000 shares under the 2000 stock plan in any fiscal year.
Decisions of the administrator are final and binding on all 2000 stock plan
participants.
Exercise Price. The exercise price of all incentive stock options granted
under the 2000 stock plan must be at least equal to the fair market value of
our common stock on the date of grant. The exercise price of any incentive
stock option granted to a person who owns stock representing more than 10% of
the total combined voting power of all classes of our outstanding capital
stock or the stock of our parent or subsidiary corporations must equal at
least 110% of the fair market value of the common stock on the date of grant.
Before this offering, the exercise of nonstatutory stock options and stock
purchase rights granted under the 2000 stock plan must have been at least
equal to 85% of the fair market value of our common stock on the date of
grant. After the date of this offering, the exercise price of nonstatutory
stock options and the purchase price of stock purchase rights will no longer
be subject to these limitations. However, incentive stock options and stock
purchase rights granted to our Chief Executive Officer and our four other most
highly compensated officers will be at least 100% of the fair market value of
the common stock on the date of grant if the award is intended to qualify as
performance based compensation under Section 162(m) of the Internal Revenue
Code. Payment of the exercise price may be made in cash or other consideration
as determined by the administrator.
Other Option Terms. The administrator determines the term of options, which
may not exceed 10 years, or 5 years in the case of an incentive stock option
granted to an employee who owns stock representing more
51
<PAGE>
than 10% of the total voting power of our outstanding capital stock or a
parent or subsidiary's stock. Generally, an option may not be transferred by
the option holder other than by will or the laws of descent or distribution
and may be exercised during the lifetime of the option holder only by such
option holder. However, the administrator may in its discretion provide for
the limited transferability of nonstatutory stock options granted under the
2000 stock plan under specified circumstances. The administrator determines
when options become exercisable. Options granted under the 2000 stock plan are
generally subject to vesting at a rate of 25% of the shares granted on each of
the first, second, third and fourth anniversaries of the date of grant. Stock
purchased pursuant to stock purchase rights granted under the 2000 stock plan
is generally subject to a repurchase right at the purchaser's original
purchase price. This repurchase right will lapse according to the terms of the
stock purchase right determined by the administrator and is exercisable by us
upon termination of the purchaser's employment or consulting relationship with
us, for any reason, including death or disability. Stock options under the
2000 stock plan generally remain exercisable for a period of three months
following termination of the optionee's employment or consulting relationship
with us (with longer periods applying in the event such termination occurs as
a result of death or disability).
Change of Control. In a merger, reorganization or similar transaction
involving us, each outstanding option shall be assumed by the successor
corporation or an equivalent option substituted for it, with appropriate
adjustments made to both the price and number of shares subject to each
option. If the successor corporation does not assume the options or substitute
new options, then the outstanding options will be fully vested and exercisable
immediately prior to the effective date of the transaction. Outstanding
repurchase rights will terminate on the effective date of the transaction
unless assigned to the successor corporation. Outstanding options will adjust
in the event of a stock split, stock dividend or other similar change in our
capital structure.
Amendment and Termination. The administrator has the authority to amend or
terminate the 2000 stock plan as long this action does not adversely affect
any outstanding option and provided that stockholder approval shall be
obtained as required by applicable law. The 2000 stock plan will terminate in
March 2010 unless the board of directors terminates it earlier.
1998 Stock Option Plan.
Adoption and Initial Reserve. Our 1998 stock option plan was originally
adopted by our board of directors and approved by our stockholders in March
1998. As of March 31, 2000, an aggregate of 1,703,500 shares was reserved for
issuance under the 1998 stock option plan, 418,500 shares of common stock were
issuable upon exercise of outstanding options granted under the 1998 stock
option plan at a weighted average exercise price of $0.24, 1,222,750 shares of
common stock have been issued upon exercise of options at purchase prices
ranging between $0.10 and $0.35, and no shares of common stock remained
available for future issuance under the 1998 stock option plan. In connection
with the adoption of the 2000 stock plan, the board of directors determined
that no further grants would be made under the 1998 stock option plan.
Option Terms. The terms of the options under the 1998 stock option plan are
generally the same as those that may be issued under the 2000 stock plan,
except for the following features. Only options could be granted under the
1998 stock option plan. Nonstatutory stock options granted under the 1998
stock option plan are nontransferable in all cases and must be granted with an
exercise price of at least 85% of the fair market value of the common stock on
the date of grant. The 1998 stock option plan does not impose a limitation on
the number of shares subject to options that may be issued to any individual
employee.
Change of Control. In a merger, reorganization or similar transaction
involving us, each outstanding option shall be assumed by the successor
corporation or an equivalent option substituted for it, with appropriate
adjustments made to both the price and number of shares subject to each
option. If the successor corporation does not assume the options or substitute
new options, then the outstanding options will be fully vested and exercisable
immediately prior to the effective date of the transaction. Outstanding
options will adjust in the event of a stock split, stock dividend or other
similar change in our capital structure.
52
<PAGE>
2000 Employee Stock Purchase Plan.
Adoption and Reserved Shares. Our 2000 employee stock purchase plan was
adopted by the board of directors in April 2000 and will be submitted to our
stockholders for approval before completion of this offering. A total of
150,000 shares of common stock has been reserved for issuance under the
purchase plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001 and ending in 2010 in an amount equal to the lesser
of:
. 225,000 shares;
. 0.5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as determined by the board of directors.
The purchase plan becomes effective on the date of this offering. Unless
terminated earlier by our board of directors, the purchase plan will terminate
in 2010.
Offering Periods. The purchase plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods, other than the first offering period, beginning on August 1 and
February 1 of each year and ending on July 31 and January 31, respectively,
two years later. Each offering period will consist of four consecutive
purchase periods of approximately six months' duration. The initial offering
period is expected to begin on the date of this offering and end on July 31,
2002; the initial purchase period is expected to end on January 31, 2001.
Administration. The purchase plan will be administered by the board of
directors or by a committee appointed by the board.
Plan Terms. Our employees, including our officers, or employees of any
majority-owned subsidiary designated by the board of directors, are eligible
to participate in the purchase plan if they are employed by us or any such
subsidiary for at least 20 hours per week and more than five months per year.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 20% of an employee's base salary, at
a price equal to the lower of 85% of the fair market value of our common stock
at the beginning of each offering period or at the end of each purchase
period. Employees may end their participation in an offering at any time
during an offering period, and participation ends automatically on termination
of employment with us. An employee cannot be granted an option under the
purchase plan if immediately after the grant the employee would own stock or
hold outstanding options to purchase stock equaling 5% or more of the total
voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee's rights to purchase
stock under the purchase plan to accrue at a rate that exceeds $25,000 of the
fair market value of the stock for each calendar year in which an option is
outstanding. In addition, no employee may purchase more than 2,000 shares of
common stock under the purchase plan in any one purchase period.
Change of Control. The purchase plan provides that in the event of our
merger with or into another corporation or a sale of all or substantially all
of our assets, each right to purchase stock under the purchase plan will be
assumed or an equivalent right substituted by the successor corporation.
However, if the successor corporation refuses to assume each purchase right or
to substitute an equivalent right, our board of directors will shorten any
ongoing offering period so that employees' rights to purchase stock under the
purchase plan are exercisable before the effective date of the transaction.
Outstanding options will adjust in the event of a stock split, stock dividend
or other similar change in our capital structure.
Amendment and Termination. The board of directors has the power to amend or
terminate the purchase plan as long as the action does not adversely affect
any outstanding rights to purchase stock under the plan. However, our board of
directors may amend or terminate the purchase plan or an offering period even
if it would adversely affect outstanding options to avoid our incurring
adverse accounting charges or if the board of directors
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<PAGE>
determines that termination of the plan or offering period is in our best
interests and the best interests of our stockholders. We must obtain
stockholder approval for any amendment to the purchase plan to the extent
required by applicable law.
2000 Directors' Stock Option Plan.
Adoption and Initial Reserve. The 2000 directors' stock option plan was
adopted by the board of directors in April 2000 and will be submitted to our
stockholders for approval before completion of this offering. A total of
300,000 shares of common stock has been reserved for issuance under the
directors' plan. No shares have been issued under the directors' plan. The
directors' plan becomes effective on the date of this offering.
Eligible Persons and Administration. The directors' plan provides for the
grant of nonstatutory stock options to our nonemployee directors. The
directors' plan is designed to work automatically without administration.
However, to the extent administration is necessary, it will be performed by
the board of directors.
Option Terms. The directors' plan provides that each person who becomes one
of our nonemployee directors after the effective date of this offering will be
granted a nonstatutory stock option to purchase 20,000 shares of common stock
on the date on which the optionee first becomes a nonemployee director of
ours. On the date of our annual stockholder meeting each year, each of our
nonemployee directors will be granted an option to purchase 5,000 shares of
common stock if, on such date, the director has served on our board of
directors for at least six months. The directors' plan sets neither a maximum
nor a minimum number of shares for which options may be granted to any one
nonemployee director. The directors' plan specifies the number of shares that
may be included in any grant and the method of making a grant.
The directors' plan provides that each option granted to a new director
shall vest at the rate of 33 1/3% per year and each annual option granted to a
director shall vest in full at the end of one year. No option granted under
the directors' plan is transferable by the option holder other than by will or
the laws of descent or distribution or pursuant to a qualified domestic
relations order, and each option is exercisable, during the lifetime of the
option holder, only by that option holder. If a nonemployee director ceases to
serve as a director for any reason other than death or disability, he or she
may, but only within 90 days after the date he or she ceases to be a director
of DURECT, exercise vested options granted under the directors' plan. If the
director does not exercise the option which the director was entitled to
exercise within this 90-day period, the option shall terminate. The exercise
price of all stock options granted under the directors' plan shall be equal to
the fair market value of a share of our common stock on the date of grant of
the option. Options granted under the directors' plan have a term of ten
years. Outstanding options will adjust in the event of a stock split, stock
dividend or other similar change in our capital structure.
Change of Control. If we sell all or substantially all of our assets or
merge with another company or conduct another similar transaction, whether or
not options are assumed, substituted for or terminated in connection with the
transaction, the vesting of each outstanding option shall accelerate in full
such that each option holder shall have the right to exercise his or her
option as to all of the optioned stock, including shares as to which the
option would not otherwise be exercisable, immediately prior to consummation
of the transaction.
Amendment and Termination. The board of directors may amend or terminate
the directors' plan. However, no action may adversely affect any outstanding
option and we must obtain stockholder approval for any amendment to the extent
required by applicable law. If not terminated earlier, the directors' plan
will terminate in April 2010.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, we have included in
our restated certificate of incorporation a provision eliminating the personal
liability of our officers and directors for monetary damages for breach or
alleged breach of their fiduciary duties as officers or directors,
respectively, subject to certain
54
<PAGE>
exceptions. In addition, our bylaws provide that we are required to indemnify
our officers and directors under certain circumstances and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We have entered
into indemnification agreements with our officers and directors containing
provisions that are in some respects broader than the specific indemnification
provisions contained in the Delaware Law. The indemnification agreements
require us, among other things, to indemnify our officers and directors
against certain liabilities that may arise by reason of their status or
service as officers and directors (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance if available on reasonable
terms. We have also obtained directors' and officers' liability insurance.
At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
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<PAGE>
CERTAIN TRANSACTIONS
Private Placements of Securities
In June 1998, we sold 5,600,000 shares of our Series A-1 preferred stock to
ALZA Corporation in consideration of the execution and delivery of our
Development and Commercialization Agreement, dated April 21, 1998 with ALZA
Corporation. This agreement is for the development, manufacture and marketing
of pharmaceutical products utilizing proprietary technology of ALZA relating
to the DUROS system for controlled delivery of drugs in select fields.
In June 1998, we sold 5,636,000 shares of our Series A-2 preferred stock
for $1.00 per share and in December 1998, we sold 3,005,867 shares of our
Series A-2 preferred stock for $1.25 per share. The purchasers of the
Series A-2 preferred stock included among others, Premier Medical Partner Fund
L.P., State of Oregon PERS/ZCG, James R. Butler, a director of DURECT, Albert
L. Zesiger, a director of DURECT, Barrie Ramsay Zesiger, the spouse of Albert
L. Zesiger, and the Zesiger Capital Group LLC, whose principal is Albert L.
Zesiger.
In July 1999, we sold an aggregate of 9,364,341 shares of our Series B
preferred stock for $2.15 per share. The purchasers of the Series B preferred
stock included, among others, Brookside Capital Partners Fund, L.P., Morgan
Guaranty Trust Company of New York, as Trustee for the Co-Mingled Pension
Trust Fund and the Multi-Market Special Investment Trust Fund, Morgan Guaranty
Trust Company of New York, as Agent and Investment Manager of The Alfred P.
Sloan Foundation, and Premier Medical Partners Fund L.P.
In October 1999, we sold 325,023 shares of our Series B-1 preferred stock
to IntraEAR, Inc. in consideration of the execution and delivery of the Asset
Purchase Agreement, dated September 24, 1999 between IntraEAR, Inc. and
DURECT.
In March 2000, we sold an aggregate of 3,571,429 shares of our Series C
preferred stock for $7.00 per share. The purchasers of the Series C preferred
stock included, among others, Biotech Growth S.A. (funds controlled by BB
Biotech), Brookside Capital Partners Fund, L.P., and the Zesiger Capital Group
LLC, whose principal, Albert L. Zesiger, is also a director of DURECT.
In April 2000, we amended our development and commercialization agreement
with ALZA. The amendments included a reduction in product royalties and
upfront payments to ALZA by us under the agreement. In addition, ALZA's option
to distribute the DUROS sufentanil product was amended to cover only the U.S.
and Canada instead of worldwide. As consideration, ALZA received 1,000,000
shares of our common stock and a warrant to purchase 1,000,000 shares of our
common stock at an exercise price equal to the price at which our common stock
is sold in this offering.
The following members of our board of directors are affiliated with certain
private investors that participated in the foregoing transactions:
. Albert L. Zesiger, principal of the Zesiger Capital Group LLC.
. Matthew V. McPherron, a director of Brookside Capital Partners, L.P.
. Douglas A. Lee, a former managing director of Premier Medical Partner
Fund L.P.
. James R. Butler, an employee of ALZA Corporation.
Other Transactions
In June and December 1998, we paid the Schreck Merchant Group, Inc., a
financial services company controlled by Mr. Schreck, an investment banking
fee of $279,000 in the aggregate. Mr. Schreck is our Chief Financial Officer
and one of our directors.
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. The total purchase price consisted of approximately
$8.2 million in cash, including approximately $3.2 million of inventory, of
which $2.4 million is to be paid over twelve months.
Since inception, from time to time we have issued and sold shares of our
common stock and granted options to purchase common stock to our employees,
directors and consultants.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of April 15, 2000 and as
adjusted to reflect the sale of the shares of common stock in this offering
by:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of our directors;
. each of the named executive officers; and
. all of our directors and executive officers of as a group.
The number and percentage of shares beneficially owned are based on
38,336,410 shares of common stock outstanding as of April 15, 2000, assuming
conversion of all outstanding shares of preferred stock into common stock.
Beneficial ownership is determined under the rules and regulations of the
Securities and Exchange Commission. Shares of common stock subject to options
or warrants that are currently exercisable or exercisable within 60 days of
April 15, 2000 are deemed to be outstanding and beneficially owned by the
person holding the options or warrants for the purpose of computing the number
of shares beneficially owned and the percentage ownership of that person, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table, and subject to applicable community property laws, these persons have
sole voting and investment power with respect to all shares of our common
stock shown as beneficially owned by them. Percentage ownership figures after
the offering do not include shares that may be purchased by each person in the
offering.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Before After
Beneficially Owned Offering Offering
------------------ ---------- ----------
<S> <C> <C> <C>
ALZA Corporation.............. 6,600,000 17.2%
1900 Charleston Road
Mountain View, CA 94043
Brookside Capital Partners(1) 3,845,514 10.0
.............................
Two Copley Place
Boston, MA 02116
Morgan Trust(2)............... 2,325,583 6.1
522 Fifth Avenue
New York, NY 10036
State of Oregon PERS/ZCG(3)... 2,208,000 5.8
c/o Zesiger Capital Group LLC
320 Park Avenue
New York, NY 10022
Biotech Growth S.A.(4)........ 2,142,857 5.6
Swiss Bank Tower
Obarie Street
Panama 1
Republic of Panama
Premier Medical Partner Fund 1,931,316 5.0
L.P.(5)......................
12225 El Camino Real
San Diego, CA 92130
Albert L. Zesiger(6).......... 6,075,000 15.8
Matthew V. McPherron(1)....... 3,845,514 10.0
Felix Theeuwes, Ph.D.(7)...... 2,884,430 7.5
Thomas A. Schreck(8).......... 2,846,568 7.4
James E. Brown, D.V.M.(9)..... 2,800,000 7.3
Randolph M. Johnson,
Ph.D.(10).................... 60,500 *
Timothy S. Nelson(11)......... 347,000 *
Douglas A. Lee(5)............. 1,931,316 5.0
James R. Butler............... 15,000 *
John L. Doyle................. * *
All executive officers and
directors as a group (13
persons)(12)................. 21,206,828 55.3
</TABLE>
57
<PAGE>
- --------
* Less than 1% of the outstanding shares of common stock.
Except as otherwise noted, the address of each person listed in the table
is c/o DURECT Corporation, 10240 Bubb Road, Cupertino, California 95104.
(1) Represents shares held by Brookside Capital Partners Fund, L.P. Matthew
V. McPherron, one of our directors, is a director of this partnership.
Mr. McPherron disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in these shares.
(2) Includes 1,627,907 shares held by Morgan (Co-Mingled) Guaranty Trust
Company of New York, 348,838 held by Morgan (Multi-Market) Guaranty Trust
Company of New York, and 348,838 shares held by BOST & Co.
(3) These shares of common stock are held in an account managed by Zesiger
Capital Group LLC, an investment advisor, for which Albert L. Zesiger is
a principal. Mr. Zesiger, in his capacity as principal, has voting and
investment power with respect to these shares but disclaims beneficial
ownership with respect hereto.
(4) Includes 714,286 shares held by Medgrowth S.A.
(5) Includes 15,000 shares held by Douglas A. Lee (of which 10,000 shares are
subject to repurchase by us at the original purchase price in the event
of termination of Mr. Lee's employment with us, which repurchase right
lapses over time) and 1,916,316 shares held by Premier Medical Partners
Fund L.P. Douglas A. Lee, one of our directors, is a former managing
director of this partnership. Mr. Lee disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in these
shares.
(6) Includes 230,000 shares held by Albert L. Zesiger and 92,000 shares held
by Barrie Ramsay Zesiger also includes an aggregate of 5,753,000 shares
of common stock held in accounts managed for various parties by Zesiger
Capital Group LLC, an investment advisor, for which Albert L. Zesiger is
a principal. Mr. Zesiger, in his capacity as a principal, has voting and
investment power with respect to these shares but disclaims beneficial
ownership with respect hereto.
(7) Includes 1,680,001 shares held by Felix and Marie-Therese Theeuwes Family
Trust (of which 519,960 shares are subject to repurchase by us at the
original purchase price in the event of termination of Dr. Theeuwes
employment with us, which repurchase right lapses over time), 80,930
shares held by Jan Frans Theeuwes, 376,833 shares held by Marc Theeuwes,
373,333 shares held by Margaret Theeuwes and 373,333 shares held by
Myriam Theeuwes.
(8) Includes 1,860,000 shares held by Thomas A. Schreck (of which 519,960
shares are subject to repurchase by us at the original purchase price in
the event of termination of Mr. Schreck's employment with us, which
repurchase right lapses over time), 840,000 shares held by Thomas A.
Schreck, Trustee for Mason and Thomas Schreck, 100,000 shares held by
Portola Capital Partners, L.P. for the benefit of Albert R. Schreck, Joel
Schreck and the Thomas A. Schreck 1959 Trust, 23,312 shares held by Joel
W. Schreck and 23,256 shares held by Albert R. Schreck.
(9) Includes 2,240,000 shares held by James E. Brown (of which 519,960 shares
are subject to repurchase by us at the original purchase price in the
event of termination of Dr. Brown's employment with us, which repurchase
right lapses over time), and 560,000 shares held by James & Karen Brown
1998 Trust U/A.
(10) Includes 20,000 shares held by Randolph M. Johnson, Ph.D. (of which
20,000 shares are subject to repurchase by us at the original purchase
price in the event of termination of Dr. Johnson's employment with us,
which repurchase right lapses over time) and 3,000 shares held by Dean
Witter Reynolds Inc. c/f Randolph M. Johnson IRA Rollover dtd. 11/10/98.
Also includes 37,500 shares issuable upon exercise of options exercisable
within 60 days of April 14, 2000.
(11) Includes 322,000 shares held by Timothy S. Nelson (of which 249,000
shares are subject to repurchase by us at the original purchase price in
the event of termination of Mr. Nelson's employment with us, which
repurchase right lapses over time) and 25,000 shares held by PaineWebber
Incorporated, not in its individual capacity but solely as Custodian of
the IRA of Timothy S. Nelson.
(12) Includes an aggregate of 37,500 shares issuable pursuant to the exercise
of outstanding stock options. Also includes an aggregate of 20,000 shares
which are subject to repurchase by us at the original purchase price in
the event of termination of consulting relationship with us, which
repurchase right terminates with respect to each consultant at the rate
of 1/3 of the consultant's shares on each annual anniversary of the
58
<PAGE>
consultant's consulting relationship with us. Also includes an aggregate
of 626,750 shares which are subject to repurchase by us at the original
purchase price in the event of the termination of individual employees'
employment with us, which repurchase right terminates with respect to each
employee at the rate of 1/4 of the employee's shares on each annual
anniversary of such employee's original option grant date. Also includes
an aggregate of 1,559,880 shares which are subject to repurchase by us at
the original purchase price in the event of termination of employment with
us, which repurchase right terminates with respect to each employee over
time.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of shares of common stock, $0.0001 par value, and 10,000,000
shares of undesignated preferred stock, $0.0001 par value. Upon completion of
this offering, there will be outstanding shares of common stock
outstanding, no outstanding shares of preferred stock, options to purchase
shares of common stock and outstanding warrants to purchase 1,031,395
shares of common stock.
Common Stock
As of March 31, 2000, there were 37,336,410 shares of common stock
outstanding (as adjusted to reflect the conversion of all outstanding shares
of Series A-1 preferred stock, Series A-2 preferred stock, Series B preferred
stock, Series B-1 preferred stock and Series C preferred stock into common
stock upon the completion of this offering, held of record by 169
stockholders. In addition, options to purchase an aggregate of 738,350 shares
of common stock were outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and satisfaction of preferential rights
of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. There are no sinking fund
provisions applicable to the common stock. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 27,502,660 shares of common stock and automatically
retired. Thereafter, the board of directors is authorized to issue preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the
stockholders.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in our control without further action by the
stockholders. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of common stock,
including voting rights, of the holders of common stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the common stock. As of the closing of the offering, no shares of
preferred stock will be outstanding and we currently have no plans to issue
any shares of preferred stock.
Options
As of March 31, 2000, options to purchase a total of 738,350 shares of
common stock were outstanding with a weighted-average exercise price of $0.45
per share. Up to 1,265,650 additional shares of common stock may be subject to
options granted in the future under the 2000 stock plan. See "Employee Benefit
Plans--2000 stock plan."
Warrants
As of April 15, 2000, we had an outstanding warrant for the purchase of
31,395 shares of Series B-1 preferred stock at an exercise price of $2.15.
This warrant expires on December 16, 2006. We also had an outstanding warrant
for the purchase of 1,000,000 shares of common stock at an exercise price
equal to the price per share at which our common stock sold in this offering.
This warrant expires four years from the date of this offering.
60
<PAGE>
Registration Rights
The holders of 35,363,295 shares of common stock and common stock issuable
upon conversion of Series A-1, A-2, B, B-1 and C preferred stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of an agreement between us and the holders of the registrable
securities. Pursuant to the agreement, on the written demand of holders of
more than 40% of the then outstanding registrable securities, we shall use our
best efforts to register these shares and those of any other stockholders who,
by prompt notice, request registration, subject to certain cutbacks in
participation made by the managing underwriter. We are not required to effect
more than three demand registrations on Form S-1 at any time and more than two
demand registrations on Form S-3 in any twelve-month period. These holders are
also entitled to unlimited piggyback registration rights, subject to certain
cutbacks in participation made by the managing underwriter. All offering
expenses in connection with the registration will be borne by us, excluding
underwriting discounts and commissions.
At any time after six months following the effective date of this offering,
the holders of at least 40% of the registrable securities then outstanding may
require us to file a registration statement covering registrable securities if
an aggregate offering price, net of underwriting discounts and commissions,
would exceed $10.0 million. In addition, beginning 180 days after this
offering, holders of registrable securities may require, up to two times a
year, that we register their shares for public resale on Form S-3 or any
successor form, provided we can use Form S-3 or any such successor form, and
provided that the holders of registrable securities propose to sell securities
with an anticipated aggregate offering price of not less than $2.0 million,
net of underwriting discounts and commissions. Furthermore, in the event we
elect to register any of our shares of common stock or other securities for
purposes of effecting any public offering, the holders of registrable
securities are entitled to include their registrable securities in the
registration, subject to our right to reduce the number of shares proposed to
be registered in view of market conditions. All expenses in connection with
any registration, other than underwriting discounts and commissions, will be
borne by us. Registration rights, other than the right to require us to
register shares on Form S-3 or any successor form, will terminate at such time
as our shares are publicly traded and the holder is entitled to sell all of
its shares in any three-month period under Rule 144 of the Securities Act. If
our stockholders with registration rights cause a large number of securities
to be registered and sold in the public market, those sales could have an
adverse effect on the market price for our common stock. If we were to
initiate a registration and include registrable securities because of the
exercise of registration rights, the inclusion of registrable securities could
have an adverse effect on our ability to raise capital.
Effect of Certain Certificate of Incorporation and Bylaw Provisions
In April 2000, our board of directors and stockholders approved certain
amendments to our certificate of incorporation and bylaws to provide, among
other things, that our directors will be elected without the application of
cumulative voting. This provision shall become effective at the first meeting
of stockholders following the annual meeting of stockholders when we shall
have had at least 800 stockholders. These amendments also provide that, after
the closing of the offering contemplated by this prospectus, any action
required or permitted to be taken by our stockholders may be taken only at a
duly called annual or special meeting of the stockholders. The bylaws also
establish procedures, including advance notice procedures with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors. See "Description of Capital Stock--
Common Stock."
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of our board of directors.
In addition, these provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of our outstanding voting stock.
61
<PAGE>
Certain Anti-Takeover Effects of Provisions of Our Certificate of
Incorporation and Bylaws and Of Delaware Law
General. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring,
control of us. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of our common stock. These
provisions of Delaware law and the certificate of incorporation and bylaws may
also have the effect of discouraging or preventing certain types of
transactions involving an actual or threatened change in our control,
including unsolicited takeover attempts, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price.
Delaware Takeover Statute. Following consummation of this offering, we will
be subject to the "business combination" provisions of Section 203 of the
Delaware General Corporation Law. In general, those provisions prohibit a
publicly-held Delaware corporation from engaging in various "business
combination" transactions with any interested stockholder for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder. A "business combination" is defined to include mergers,
asset sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years,
did own, 15% or more of a corporation's voting stock.
The statute could prohibit or delay mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Certificate of Incorporation and Bylaws. Our certificate of incorporation
provides that any action to be taken by our stockholders must be effected at
an annual or special stockholder meeting and may not be taken by written
consent. Our bylaws provide that special meetings of our stockholders may be
called by the board of directors, the Chairman of the board or by our
President. Our bylaws also require advance written notice by a stockholder of
a proposal or director nomination that such stockholder desires to present at
an annual or special stockholders meeting. No business other than that stated
in the notice may be transacted at any special meeting. These provisions will
delay consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the board of directors.
Our bylaws provide that the authorized number of directors may be changed
by an amendment to the bylaws adopted by the board of directors or by the
stockholders. Vacancies on the board of directors may be filled either by
holders of a majority our voting stock or a majority of directors in office,
although less than a quorum. Our certificate of incorporation also provides
for a staggered board of directors. Under a staggered board of directors, each
director is designated to one of three categories. Each year the directors'
positions in one of the three categories are subject to election so that it
would take three years to replace the entire board, absent resignation or
premature expiration of a director's term, which may have the effect of
deterring a hostile takeover or delaying or preventing changes in our control
or management.
62
<PAGE>
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware law. In addition, the certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We have entered into
separate indemnification agreements with its directors and executive officers
that provide these persons indemnification protection in the event the
certificate of incorporation is subsequently amended.
Transfer Agent and Registrar
Equiserve has been appointed as transfer agent and registrar for our common
stock.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "DRRX."
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public
market, or the perception that such sales may occur, could adversely affect
prevailing market prices.
Upon consummation of the offering, we will have an aggregate of shares
of common stock outstanding, based on the number of shares of common stock
outstanding as of April 15, 2000, assuming that the underwriters do not
exercise their over-allotment option and none of the outstanding options and
warrants are exercised. Of the shares outstanding after the offering, only
the shares sold in this offering will be freely tradable without
restriction under the Securities Act, except for any shares that may be
purchased by our "affiliates." Shares purchased by our affiliates will be
subject to the volume and other limitations of Rule 144 of the Securities Act,
or "Rule 144" described below. As defined in Rule 144, an "affiliate" of an
issuer is a person who, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with the
issuer. Upon the expiration of certain contractual "lock-up" restrictions
described below, 23,863,617 shares will be eligible for sale 180 days after
the date of this prospectus, with 14,029,867 of these shares subject to the
volume and other limitations of Rule 144. The remaining 14,472,793 shares will
become eligible for sale at various times after that date. All of these
remaining shares will be subject to the volume and other limitations of Rule
144.
Each of our directors and officers and certain of our other stockholders
have agreed with Morgan Stanley & Co. Incorporated, for a period of 180 days
after the date of this prospectus, not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise.
Morgan Stanley & Co. Incorporated may choose to release some of these
shares from such restrictions prior to the expiration of the 180-day period
"lock-up" period, although it has no current intention of doing so.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this prospectus, a person who has beneficially owned restricted shares of
common stock for at least one year, including the holding period of any prior
owner who is not an affiliate, would be entitled to sell a number of the
shares within any three-month period equal to the greater of 1% of the then
outstanding shares of the common stock or the average weekly reported volume
of trading of the common stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. Immediately after the offering, 1% of our
outstanding shares of common stock would equal approximately shares.
Under Rule 144, restricted shares are subject to manner of sale and notice
requirements and requirements as to the availability of current public
information concerning us. Under Rule 144(k), a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner who is not an
affiliate, is entitled to sell such shares without regard to the volume or
other limitations of Rule 144 just described.
The holders of approximately 35,363,295 shares of common stock are also
entitled to certain rights with respect to registration of their shares of
common stock for offer or sale to the public. If the holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, the sales could have a material adverse effect on
the market price for our common stock.
64
<PAGE>
Immediately after this offering, there will be options to purchase
approximately 738,350 shares of common stock outstanding, based on the number
of options outstanding as of March 31, 2000. Subject to the provisions of the
lock-up agreements described above, holders of these options may rely on the
resale provisions of Rule 701 under the Securities Act. Rule 701 permits non-
affiliates to sell their shares without having to comply with the volume,
holding period or other limitations of Rule 144 and permits affiliates to sell
their shares without having to comply with the holding period limitation of
Rule 144, in each case beginning 90 days after the consummation of this
offering. In addition, shortly after this offering, we intend to file a
registration statement on Form S-8 covering the 1,585,500 shares of common
stock reserved for issuance under the 2000 Stock Plan based upon the number of
options outstanding as of March 31, 2000. Shares of common stock registered
under any registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, unless the
shares are subject to vesting restrictions with us or the lock-up agreements
described above.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, or the "underwriting agreement," the
underwriters named below have severally agreed to purchase, and we have agreed
to sell to them, severally, the respective number of shares of common stock
set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated............................
Chase Securities Inc. .......................................
CIBC World Markets Corp. ....................................
---
Total....................................................
---
</TABLE>
The underwriters are collectively referred to as the "underwriters." The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to
take and pay for all of the shares of common stock offered by this prospectus
if any shares are taken. However, the underwriters are not required to take
the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and such dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such U.S. underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to
the names of all underwriters in the preceding table.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have requested that the underwriters reserve up to shares of
common stock to be offered at the public offering price to employees, friends
and families of employees, service providers, employees of customers and
others in the U.S. These people will agree to hold their shares for at least
180 days after the date of this prospectus. This directed share program will
be administered by Morgan Stanley & Co. Incorporated. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.
66
<PAGE>
Each of our directors, officers and certain of our other stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, it will not, during the period
ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described above do not apply to:
. the sale of shares to the underwriters,
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing, provided that purchasers enter into similar "lock-up"
agreements, or
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Entities affiliated with Chase H&Q purchased an aggregate of 309,471 shares
of our preferred stock for an aggregate amount of approximately $551,332
million. These shares will convert into 309,471 shares of common stock upon
the completion of this offering.
Certain of the underwriters from time to time perform various investment
banking services for us, for which such underwriters receive customary
compensation.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the underwriters. Among the factors will be considered in
determining the initial public offering price will be our future prospects and
our industry in general, sales, earnings and certain of our other financial
and operating information in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to ours. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
67
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
DURECT by Venture Law Group, A Professional Corporation, Menlo Park,
California. Mark B. Weeks, a director of Venture Law Group, is our Secretary.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California.
Mr. Weeks, employees of Venture Law Group and an investment partnership
affiliated with Venture Law Group own a total of 23,256 shares of our Series B
preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999 and
the period from inception (February 6, 1998) to December 31, 1999, as set
forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
68
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents
of any contract or other document that is filed as an exhibit to the
registration statement are not necessarily complete and each such statement is
qualified in all respects by reference to the full text of such contract or
document. For further information with respect to us and the common stock,
reference is hereby made to the registration statement and the exhibits
thereto, which may be inspected and copied at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained at prescribed rates from the Commission's Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Such periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and Web site
of the Commission referred to above.
69
<PAGE>
DURECT CORPORATION
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
DURECT Corporation
We have audited the accompanying balance sheets of DURECT Corporation (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 6, 1998) to December 31, 1998, the year ended
December 31, 1999, and the period from inception (February 6, 1998) to
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DURECT Corporation (a
development stage company) at December 31, 1998 and 1999, and the results of
its operations and its cash flows for the period from inception (February 6,
1998) to December 31, 1998, the year ended December 31, 1999, and the period
from inception (February 6, 1998) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 9, 2000
F-2
<PAGE>
DURECT CORPORATION
(a development stage company)
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro forma
December 31, stockholders' equity
----------------- at December 31,
1998 1999 1999
------- -------- --------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 7,975 $ 3,863
Short-term investments............... -- 12,735
Accounts receivable, net of allowance
of $0 and $5 at December 31, 1998
and 1999, respectively.............. -- 97
Inventory............................ -- 188
Prepaid expenses and other current
assets.............................. 140 584
------- --------
Total current assets................... 8,115 17,467
Property and equipment, net............ 168 1,271
Intangible assets, net................. -- 1,390
Long-term investments.................. -- 2,335
------- --------
Total assets........................... $ 8,283 $ 22,463
======= ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable..................... $ 53 $ 483
Accrued liabilities.................. 155 429
Accrued liabilities to related
party............................... 203 321
Contract research liability.......... 12 180
Equipment loan, current portion...... 28 133
------- --------
Total current liabilities.............. 451 1,546
Equipment loan, noncurrent portion..... 83 189
Commitments
Stockholders' equity:
Preferred stock, issuable in series--
$0.0001 par value, 14,800 and 24,242
shares authorized at December 31,
1998 and 1999, respectively; 14,143
and 23,931 shares issued and
outstanding in December 31, 1998 and
1999, respectively; aggregate
liquidation preference of $9,394 and
$30,226 at December 31, 1998 and
1999, respectively; pro forma
shares authorized, no shares issued
and outstanding..................... 1 2 $ --
Common stock, $0.0001 par value:
25,200 and 41,542 shares authorized
at December 31, 1998 and 1999
respectively; 8,400 and 8,502 shares
issued and outstanding at December
31, 1998 and 1999, respectively; pro
forma shares authorized,
shares issued and outstanding....... 1 1 3
Additional paid-in capital........... 9,626 34,642 34,642
Notes receivable from stockholders... (36) (33) (33)
Deferred compensation................ (521) (3,252) (3,252)
Deficit accumulated during the
development stage................... (1,322) (10,632) (10,632)
------- -------- --------
Stockholders' equity................... 7,749 20,728 $ 20,728
------- -------- ========
Total liabilities and stockholders'
equity................................. $ 8,283 $ 22,463
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DURECT CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from Period from
inception inception
(February 6, (February 6,
1998) to Year ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue, net........................... $ -- $ 86 $ 86
Cost of goods sold..................... -- 39 39
------- ------- --------
Gross margin........................... -- 47 47
------- ------- --------
Operating expenses:
Research and development............. 466 5,181 5,647
Research and development to related
party............................... 243 1,182 1,425
Selling, general and administrative.. 585 2,178 2,763
Stock-based compensation(1).......... 149 865 1,014
------- ------- --------
Total operating expenses............... 1,443 9,406 10,849
------- ------- --------
Loss from operations................... (1,443) (9,359) (10,802)
Other income (expense):
Interest income...................... 121 678 799
Interest expense..................... -- (27) (27)
------- ------- --------
Net other income....................... 121 651 772
------- ------- --------
Net loss............................... $(1,322) $(8,708) $(10,030)
Accretion of cumulative dividends on
Series B convertible preferred stock.. -- 602 602
------- ------- --------
Net loss attributable to common
stockholders.......................... $(1,322) $(9,310) $(10,632)
======= ======= ========
Net loss per common share, basic and
diluted............................... $ (0.36) $ (1.76)
======= =======
Shares used in computing basic and
diluted net loss per share............ 3,655 5,291
======= =======
Pro forma net loss per share, basic and
diluted (unaudited)................... $ (0.37)
=======
Shares used in computing pro forma net
loss per share........................ 23,771
=======
- --------
Research and development............... $ 46 $ 485 $ 531
Selling, general and administrative.... 103 380 483
------- ------- --------
$ 149 $ 865 $ 1,014
======= ======= ========
</TABLE>
(1) Stock-based compensation related to the following:
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DURECT CORPORATION
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY
For the period from inception (February 6, 1998) to December 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Convertible Deficit
Preferred Notes Accumulated
Stock Common Stock Additional Receivable During the Total
------------- ------------- Paid-In From Deferred Development Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Stage Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders at
$0.0036 per share for
cash in April 1998.... -- $ -- 8,400 $ 1 $ 29 $ -- $ -- $ -- $ 30
Issuance of Series A-1
convertible preferred
stock in June 1998 for
license rights........ 5,600 -- -- -- -- -- -- -- --
Issuance of Series A-2
convertible preferred
stock at $1.00 per
share in June 1998 for
cash, net of issuance
costs of $277......... 5,636 1 -- -- 5,359 -- -- -- 5,360
Issuance of Series A-2
convertible preferred
stock at $1.25 per
share in December 1998
for cash, net of
issuance costs of
$66................... 2,907 -- -- -- 3,568 (36) -- -- 3,532
Deferred compensation
related to stock
options............... 670 (521) 149
Net loss............... -- -- -- -- -- -- (1,322) (1,322)
------ ----- ----- --- ------- ---- ------- -------- -------
Balance at December 31,
1998................... 14,143 1 8,400 1 9,626 (36) (521) (1,322) 7,749
Issuance of common
stock upon exercise of
stock options for
notes receivable and
cash at $0.35 per
share................. -- -- 102 -- 34 (33) -- -- 1
Repayment of notes
receivable............ -- -- -- -- -- 36 -- -- 36
Issuance of Series A-2
convertible preferred
stock at $1.25 per
share in May 1999 for
cash, net of issuance
costs of $21.......... 99 -- -- -- 103 -- -- -- 103
Issuance of Series B
convertible preferred
stock at $2.15 per
share in July 1999 for
cash, net of issuance
costs of $880......... 9,364 1 -- -- 19,251 -- -- -- 19,252
Issuance of Series B-1
convertible preferred
stock at $4.40 per
share in October 1999
in connection with the
acquisition of
IntraEar.............. 325 -- -- -- 1,430 -- -- -- 1,430
Deferred compensation
related to stock
options............... -- -- -- -- 3,596 -- (2,731) -- 865
Accretion of cumulative
dividends on Series B
convertible preferred
stock -- -- -- -- 602 -- -- (602) --
Net loss............... -- -- -- -- -- -- (8,708) (8,708)
------ ----- ----- --- ------- ---- ------- -------- -------
Balance at December 31,
1999................... 23,931 $ 2 8,502 $ 1 $34,642 $(33) $(3,252) $(10,632) $20,728
====== ===== ===== === ======= ==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DURECT CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
inception inception
(February 6, (February 6,
1998) to Year ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................... $(1,322) $ (8,708) $(10,030)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 5 311 311
Amortization of deferred
compensation........................ 149 865 1,014
Changes in assets and liabilities:
Accounts receivable................ -- (97) (97)
Inventory.......................... -- (188) (188)
Prepaid expenses and other assets.. (140) (444) (584)
Accounts payable................... 53 430 483
Accrued liabilities................ 155 274 429
Accrued liabilities to related
party............................. 203 118 321
Contract research liability........ 12 168 180
------- -------- --------
Total adjustments.................... 437 1,437 1,874
------- -------- --------
Net cash and cash equivalents used in
operating activities................ (885) (7,271) (8,156)
Cash flows from investing activities
Purchase of equipment.................. (62) (1,016) (1,078)
Purchase of investments................ -- (15,070) (15,070)
Payment for acquisition of IntraEar,
net................................... -- (69) (69)
------- -------- --------
Net cash and cash equivalents used in
investing activities................ (62) (16,155) (16,217)
------- -------- --------
Cash flows from financing activities
Payments on equipment loan............. -- (78) (78)
Net proceeds from issuances of common
stock................................. 30 1 31
Net proceeds from notes receivable from
stockholders.......................... -- 36 36
Net proceeds from issuances of
convertible preferred stock........... 8,892 19,355 28,247
------- -------- --------
Net cash and cash equivalents
provided by financing activities.... 8,922 19,314 28,236
------- -------- --------
Net increase (decrease) in cash and
cash equivalents...................... 7,975 (4,112) 3,863
Cash and cash equivalents at beginning
of periods/year....................... -- 7,975 --
------- -------- --------
Cash and cash equivalents at end of
periods/year.......................... $ 7,975 $ 3,863 $ 3,863
======= ======== ========
Supplemental disclosure of cash flow
information
Equipment financed through an equipment
loan.................................. $ 111 $ 289 $ 400
======= ======== ========
Cash paid during the year for
interest.............................. $ -- $ 27 $ 27
======= ======== ========
Notes receivable issued in connection
with exercise of stock options $ 36 $ 33 $ 33
======= ======== ========
Issuance of Series B-1 convertible
preferred stock for assets acquired in
acquisition of IntraEar............... $ -- $ 1,430 $ 1,430
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
DURECT Corporation (the "Company") was incorporated in the state of
Delaware on February 6, 1998. The Company is a pharmaceutical company
developing therapies for chronic disorders that require continuous drug
dosing. The Company's lead product is for the treatment of chronic pain.
The Company's activities in 1998 consisted principally of raising capital,
arranging for facilities, acquiring equipment and licensing rights, recruiting
managerial and technical personnel, and commencing research and development
efforts. In 1999, the Company expanded its research and development
activities, acquired licensing rights, raised capital, and continued to
recruit managerial and technical personnel. Accordingly, the Company is
classified as a development stage enterprise as of December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period.
Actual results could differ materially from those estimates.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with maturities of 90
days or less from the date of purchase to be cash equivalents. Investments
with maturities of greater than 90 days but less than one year are classified
as short-term investments. Management determines the appropriate
classification of its cash equivalents and investment securities at the time
of purchase and reevaluates such determination as of each balance sheet date.
Management has classified the Company's cash equivalents and marketable
securities as available-for-sale securities in the accompanying financial
statements. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported in a separate component of stockholders'
equity, when material. Realized gains and losses are included in interest
income. The cost of securities sold is based on the specific identification
method.
The Company invests its excess cash in debt instruments of financial
institutions and corporations, and money market funds with high credit
ratings. The Company has established guidelines regarding diversification of
its investments and their maturities with the objectives of maintaining safety
and liquidity, while maximizing yield.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of interest-bearing investments and trade receivables. The
Company maintains cash and cash equivalents and investments with various major
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and limits the amount
of credit exposure with any one institution.
Hospitals and other health-care providers account for a substantial portion
of the trade receivables; collateral for these receivables is generally not
required by the Company. The risk associated with this concentration is
limited due to the large number of accounts and their geographic dispersion.
The Company monitors the creditworthiness of its customers to which it grants
credit terms in the normal course of business. The Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments, but management believes credit risk exposure to such
contracts is limited by periodically reviewing the
F-7
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
creditworthiness of the counterparties to the transactions. As of December 31,
1999, the Company has not experienced significant credit losses.
The Company maintains cash, cash equivalents and investments with various
financial institutions. The Company performs periodic evaluations of the
relative credit quality of its investments.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis. At December 31, 1999, inventories consisted of
finished goods.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation,
which is computed using the straight-line method over the estimated useful
lives of the assets, which range from three to five years. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or terms of the related leases, whichever are
shorter.
Acquisition of IntraEAR
On October 1, 1999, the Company acquired substantially all of the assets of
IntraEAR, Inc. ("IntraEAR") for a total cost of approximately $1,797,000
(consisting of $320,000 in cash, 325,023 shares of Series B-1 convertible
preferred stock, and transaction costs of approximately $46,000). IntraEAR
developed and commercialized products aimed at the treatment of inner-ear
disorders. The purchase price was allocated to the tangible and identifiable
intangible assets acquired on the basis of their fair values, as follows:
<TABLE>
<S> <C>
Tangible assets............................................... $ 297,000
Patents....................................................... 368,000
Developed technology.......................................... 75,000
Other intangibles............................................. 154,000
Goodwill...................................................... 903,000
----------
Total purchase price........................................ $1,797,000
==========
</TABLE>
The acquisition of IntraEAR has been accounted for as a purchase, with the
result of IntraEAR's operations included in the Company's results of
operations from the date of acquisition.
Intangible assets represent the excess of total acquisition cost of
IntraEAR over the fair value of identifiable net assets of businesses
acquired. Intangible assets are amortized using the straight-line method over
their estimated useful lives over periods ranging from two to six years.
Management periodically reviews the carrying amount of goodwill and other
intangible assets to assess their continued recoverability. Accumulated
amortization of patents, developed technology and other intangibles totaled
$69,000 at December 31, 1999.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-
lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than the
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through December 31, 1999, there have been no such losses.
F-8
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and has elected to follow the "disclosure only" alternative prescribed by
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Under APB No. 25, stock-based compensation is based on the difference, if any,
on the date of grant, between the fair value of the Company's stock and the
exercise price. Unearned compensation is amortized and expensed over the
vesting period of the respective options. The Company accounts for stock
options issued to nonemployees in accordance with the provisions of SFAS 123
and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments that
are Issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." The fair value of options granted to non-
employees is periodically remeasured as the underlying options vest.
Revenue Recognition
Revenue from the sale of products is primarily recognized at the time
product is shipped to customers, provided no continuing obligation exists. The
Company maintains consigned inventory at customer locations for certain
products. For these products, revenue is recognized at the time the Company is
notified that the device has been used. The Company provides credit, in the
normal course of business, to its customers. The Company also maintains an
allowance for doubtful customer accounts and charges actual losses when
incurred to this allowance.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and
development costs paid to third parties under sponsored research agreements
are recognized as the related services are performed, generally ratably over
the period of service. Purchased research and development is recognized in
purchase business combinations for the portion of the purchase price allocated
to the appraised value of in-process technologies. The portion assigned to in-
process technologies excludes the value of core and developed technologies,
which are recorded as intangible assets.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive loss and its components in the financial statements.
To date, the Company's comprehensive loss has equaled its net loss.
Segment Reporting
Effective January 1, 1999, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it did not have any separately reportable
business segments during any of the periods from inception to December 31,
1999.
Net Loss Per Share
Basic net loss per share and diluted net loss per share are computed in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). In accordance with SFAS 128,
F-9
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
basic net loss per share excludes dilutive common stock equivalents and is
calculated as net loss divided by the weighted-average number of common shares
outstanding. Diluted net loss per share is computed using the weighted-average
number of common shares outstanding and dilutive common stock equivalents
outstanding during the period. Common equivalent shares from common stock
issued to founders, investors, and employees that are subject to repurchases
(using the treasury stock method) are excluded from the calculation of net
loss per share as their effect is antidilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per share as if they
had been outstanding for all periods presented. Through December 31, 1999, the
Company had not had any issuances or grants for nominal consideration.
Pro forma basic and diluted pro forma net loss per share has been computed
as described above and also gives effect, under SEC guidance, to the
conversion of the convertible preferred stock (using the if-converted method)
as though it had happened on the original date of issuance. The following
table presents the calculations of basic and diluted and pro forma basic and
diluted net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
inception
(February 6, 1998) Year ended
to December 31, December 31,
1998 1999
------------------ ------------
<S> <C> <C>
Net loss.................................... $(1,322) $(8,708)
Less: accumulated dividend on Series B
preferred stock.......................... -- 602
------- -------
Net loss available to common stockholders... $(1,322) $(9,310)
======= =======
Basic and diluted weighted average shares:
Weighted-average shares of common stock
outstanding.............................. 8,400 8,407
Less: weighted-average shares subject to
repurchase............................... (4,745) (3,116)
------- -------
Weighted-average shares used in computing
basic and diluted net loss per share..... 3,655 5,291
======= =======
Basic and diluted net loss per share........ $ (0.36) $ (1.76)
======= =======
Pro forma:
Net loss.................................. $(1,322) $(8,708)
======= =======
Shares used above......................... 3,655 5,291
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock.............. 8,080 18,480
------- -------
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 11,735 23,771
======= =======
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (0.11) $ (0.37)
======= =======
</TABLE>
Unaudited Pro Forma Balance Sheet
If the initial public offering discussed in Note 11 is consummated, all of
the convertible preferred stock outstanding will automatically be converted
into common stock upon the closing of the offering. The conversion
F-10
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
of the convertible preferred stock that was outstanding as of December 31,
1999 has been reflected in the accompanying unaudited pro forma balance sheet.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of the derivative's change in fair value
will be immediately recognized in earnings. SFAS 133 is effective for the
Company's year ending December 31, 2001. The Company does not currently hold
any derivatives and does not expect the adoption of SFAS 133 to materially
impact the results of its operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
current revenue recognition principles comply with SAB 101.
2. Agreements with ALZA and Others
In April 1998, the Company entered into a development and commercialization
agreement with ALZA Corporation ("ALZA") for certain product development
rights, patent rights, and other know-how relating to the DUROS system. The
Company issued 5,600,000 shares of Series A-1 preferred stock to ALZA in
connection with this agreement and is required to pay ALZA a royalty on the
net sales of products and a percentage of up front license fees, milestone
payments, or any other payments or consideration received by the Company,
excluding research and development funding. Under the terms of this agreement,
the Company is required to meet annual minimum development spending
requirements and develop a minimum number of products.
As provided for in the license agreement, the Company may pursue a number
of products in specified fields of use using the DUROS technology. However, to
maintain its rights under the agreement, the Company must commit to a minimum
annual level of product development funding with the amount and duration of
such funding in each field varying over time.
The future minimum annual product development funding required under the
ALZA agreement for all fields of use is as follows (in thousands):
<TABLE>
<S> <C>
Year ended December 31,
2000.......................................................... $ 6,000
2001.......................................................... 8,000
2002.......................................................... 13,000
2003.......................................................... 14,000
2004.......................................................... 17,000
-------
Total minimum funding required.................................. $58,000
=======
</TABLE>
The agreement may be terminated by the Company, by providing ninety days
written notice to ALZA, or when the Company ceases to have royalty payment
obligations to ALZA (at least 20 years).
F-11
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In the period from inception (February 6, 1998) to December 31, 1998, the
year ended December 31, 1999, and the period from inception (February 6, 1998)
to December 31, 1999, the Company incurred development expenses of $243,000,
$1,182,000, and $1,425,000, respectively, for work performed by ALZA, of which
$40,000, $861,000, and $901,000 was paid during the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999, and
the period from inception (February 6, 1998) to December 31, 1999,
respectively. At December 31, 1998 and 1999, $203,000 and $321,000,
respectively, were included in accrued liabilities.
In 1998 and 1999, the Company entered into several contract research
agreements with numerous consultants, clinics and hospitals focused on the
general research and clinical study support. Total contract research expenses
recognized under research and development expenses for the period from
inception (February 6, 1998) to December 31, 1998, the year ended December 31,
1999, and the period from inception (February 6, 1998) to December 31, 1999
was approximately $39,000, $1,028,000, and $1,067,000, respectively. The
Company has the right to terminate these agreements at any time upon 30 days'
written notice.
3. Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The following is a summary of available-for-sale securities as of December
31, 1999:
<TABLE>
<CAPTION>
Amortized Cost and
Estimated
Fair Value
------------------
(In thousands)
<S> <C>
Money market fund..................................... $ 82
Commercial paper...................................... 18,783
-------
$18,865
=======
Reported as:
Cash equivalents.................................... $ 3,795
Short-term marketable securities.................... 12,735
Long-term marketable securities..................... 2,335
-------
$18,865
=======
As of December 31, 1999, the difference between the fair value and the
amortized cost of available-for-sale securities was immaterial.
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1999, by contractual maturity:
<CAPTION>
Cost and Estimated
Fair Value
------------------
<S> <C>
Mature in one year or less............................ $12,735
Mature after one year through two years............... 2,335
-------
Total............................................... $15,070
=======
</TABLE>
F-12
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
(In
thousands)
<S> <C> <C>
Equipment.................................................. $ 120 $ 1,161
Leasehold improvement...................................... 12 155
Construction-in-progress................................... 41 162
----- -------
173 1,478
Less accumulated depreciation.............................. (5) (207)
----- -------
Equipment, net............................................. $ 168 $ 1,271
===== =======
</TABLE>
At December 31, 1998 and 1999, equipment financed under an equipment loan
totaled approximately $111,000 and $289,000, respectively. Accumulated
depreciation for this equipment was $5,000 and $102,000 as of December 31,
1998 and 1999, respectively.
5. Equipment Loan
In October 1998, the Company financed the purchase of certain equipment
through a bank loan. The loan was renewed in April 1999 and the amount of the
loan was increased to $400,000 from $250,000 in June 1999, with an interest
rate increase to 1.25% plus the bank's base rate from 0.5% plus the bank's
base rate, respectively. This loan is repayable in equal monthly installments
over three years (payments commence April 1999). This equipment loan is
secured by substantially all of the Company's assets.
Payment on equipment loan is due as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
1999..................................................... $ 28 $ --
2000..................................................... 41 133
2001..................................................... 42 133
2002..................................................... -- 56
------- -------
$111 $ 322
======= =======
</TABLE>
The carrying value of the Company's equipment loan approximates its fair
value. The fair value of the Company's equipment loan is estimated using a
discounted cash flow analysis based on the company's current incremental
borrowing rates for similar types of borrowing arrangements.
6. Commitments
The Company leases its office and research facility under a noncancelable
operating lease which expires in January 2004, with two options to extend the
lease for 5 years each. The Company is required to pay certain maintenance
expenses in addition to monthly rent. Rent expense is recognized on a
straight-line basis over the
F-13
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
lease term which has scheduled rental payment increases. Rent expense under
this operating lease was $80,000, $313,000, and $393,000 for the period from
inception (February 6, 1998) to December 31, 1998, the year ended December 31,
1999, and the period from inception (February 6, 1998) to December 31, 1999,
respectively.
Future minimum lease payments under this noncancelable lease are as follows
(in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Year ended December 31,
2000........................................................ $ 613
2001......................................................... 775
2002......................................................... 798
2003......................................................... 806
2004 and thereafter.......................................... 34
------
Total minimum payments required................................ $3,127
======
</TABLE>
Future minimum rentals have been reduced by minimum sublease rental income
of $184,000 due in the future under noncancelable subleases. The Company
subleases office space to a third party. Rental income under this lease was
$0, $360,000, and $360,000 for the period from inception (February 6, 1998) to
December 31, 1998, the year ended December 31, 1999, and the period from
inception (February 6, 1998) to December 31, 1999, respectively.
At December 31, 1999, the Company had outstanding commitments to purchase
laboratory equipment totaling approximately $368,000.
7. Stockholders' Equity
Preferred Stock
Convertible preferred stock is issuable in series, with rights and
preferences designated by series. The shares outstanding are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
---------------------------------- ------------------------------------
Shares Shares Issued
Shares Issued and Liquidation Shares and Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A-1.............. 5,600 5,600 $ -- 5,600 5,600 $ --
Series A-2.............. 9,200 8,543 9,286 8,642 8,642 9,394
Series B................ -- -- -- 9,378 9,364 20,133
Series B-1.............. -- -- -- 450 325 699
Undesignated............ -- -- -- 172 -- --
------ ------ ------ ------ ------ -------
14,800 14,143 $9,286 24,242 23,931 $30,226
====== ====== ====== ====== ====== =======
</TABLE>
All series of preferred stock are convertible at any time at the
stockholders' option into common stock on a one-for-one basis, subject to
adjustment for certain dilutive events. Conversion is automatic upon at the
earlier of (i) the closing of an underwritten public offering with aggregate
offering proceeds in excess of $25,000,000 (as adjusted for stock splits,
stock dividends, recapitalization, or similar events) or (ii) upon agreement
of the majority of holders of all outstanding shares of preferred stock voting
together as a single class.
F-14
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Holders of Series A-1, A-2, and B-1 convertible preferred stock are
entitled to noncumulative dividends of $0.05, $0.05, and $0.13975,
respectively, if and when declared by the board of directors. These dividends
are to be paid in advance of any distributions to common stockholders. No
dividends have been declared through December 31, 1999.
Holders of Series B convertible preferred stock are entitled to receive
cumulative dividends at the rate of $0.13975 per share per annum on each
outstanding share of Series B convertible preferred stock, payable quarterly
when, as, and if declared by the board of directors. Such dividends shall
accrue on each share from July 16, 1999, and shall accrue on a day-to-day
basis whether or not declared. Accumulation of dividends on the Series B
convertible preferred stock bear no interest. As of December 31, 1999, the
accrued dividend payable is $602,000. Cumulative dividends with respect to
Series B convertible preferred stock which are accrued and/or in arrears shall
be forgiven upon conversion of such shares to common stock.
In the event of a liquidation or winding up of the Company, holders of
Series A-2, B, and B-1 convertible preferred stock shall have a liquidation
preference of $1.087, $2.15, and $2.15, respectively, per share, together with
any declared but unpaid dividends, over holders of Series A-1 convertible
preferred stock and common shares. After payments have been made to the Series
A-2, B and B-1 stockholders, the remaining assets of the Company legally
available for distribution, if any, shall be distributed ratably to the
holders of common stock and Series A-1 preferred stock pro rata based on the
number of shares of common stock that are or would be held by each on an as-
converted basis.
Preferred stockholders are entitled to the number of votes they would have
upon conversion of their preferred shares into common stock.
Common Stock
As of December 31, 1999, the Company's founders owned 8,400,000 shares of
common stock.
The founders' common stock is subject to the Company's right of repurchase
upon termination of their employment at the original issue price, and to the
extent the Company elects not to exercise its right of repurchase, the
remaining founders and certain stockholders may exercise the repurchase right.
Initially 66- 2/3% of the founders shares were subject to repurchase, but
such repurchase rights lapse over time at the rate of 1.85% for each completed
month of employment (until all shares are released from the repurchase
option).
As of December 31, 1999, an aggregate of 2,181,480 shares of the founders'
stock remained subject to repurchase.
As of December 31, 1999, shares of common stock reserved for future
issuance consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Series A-1, A-2, B, and B-1 convertible preferred stock...... 23,931,231
Stock options outstanding.................................... 1,605,000
Stock options available for grant............................ 296,500
----------
25,832,731
==========
</TABLE>
F-15
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1998 Incentive Stock Plan
In March 1998, the Company adopted the DURECT Corporation Stock Option Plan
(the "Stock Plan") under which incentive stock options and nonstatutory stock
options may be granted to employees, directors of, or consultants to, the
Company and its affiliates.
Options granted under the Stock Plan expire no later than ten years from
the date of grant. Options may be granted with different vesting terms from
time to time but not to exceed five years from the date of grant.
The option price of an Incentive Stock Option granted to an employee or of
a Nonstatutory Stock Option granted to any person who owns stock representing
more than 10% of the total combined voting power of all classes of stock of
the Company (or any Parent or Subsidiary) shall be no less than 110% of the
fair market value per share on the date of grant. The option price of an
incentive stock option granted to any other employee shall be no less than
100% of the fair market value per share on the date of grant. The option price
of a Nonstatutory Stock Option that is granted to any other person shall be no
less than 85% of the fair market value per share on the date of grant.
Activity under the Stock Plan through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Available Number of Exercise
for Grant Shares Price
--------- --------- ---------
<S> <C> <C> <C>
Shares authorized............................. 1,000,000 -- --
Options granted............................... (804,000) 804,000 $0.10
Options exercised............................. -- -- --
Options canceled.............................. -- -- --
Balance at December 31, 1998.................... 196,000 804,000 $0.10
--------- ---------
Shares authorized............................. 1,000,000 -- --
Options granted............................... (934,500) 934,500 $0.35
Options exercised............................. -- (98,500) $0.35
Options canceled.............................. 35,000 (35,000) $0.35
--------- ---------
Balance at December 31, 1999.................... 296,500 1,605,000 $0.23
========= =========
</TABLE>
The Company recorded deferred compensation in connection with certain stock
option grants, net of forfeitures, of $3,596,000 in 1999 and $670,000 in 1998.
The Company amortized deferred compensation of $865,000 in 1999 and $149,000
in 1998. The remaining unamortized deferred compensation of $3,252,000 at
December 31, 1999 will be recognized as compensation expense over the vesting
term of the related options.
The weighted-average grant-date fair value of options granted was $0.02 in
1998 and $0.12 in 1999.
The following table summarizes the information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
(In years)
<S> <C> <C> <C> <C> <C>
$0.10 774,000 8.70 $0.10 774,000 $0.10
$0.20 30,000 8.95 $0.20 30,000 $0.20
$0.35 801,000 9.34 $0.35 801,000 $0.35
--------- ---------
$0.10-$0.35 1,605,000 9.03 $0.23 1,605,000 $0.23
========= =========
</TABLE>
F-16
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, outstanding options to purchase an aggregate of
211,000 shares of common stock were vested and exercisable at a weighted-
average exercise price per share of $0.10.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the
exercise price of the employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized. Pro forma information regarding net loss has been determined as if
the Company accounted for its employee stock options under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net loss on a
pro forma basis in future years, due to additional grants and years of vesting
in subsequent years. The fair value of each option granted through the period
from inception (February 6, 1998) to December 31, 1998 and for the year ended
December 31, 1999 were estimated on the date of grant using the minimum value
method, with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Period from
inception
(February 6,
1998) to Year ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Risk-free interest rate........................ 4.5% 6.00%
Expected dividend yield........................ -- --
Expected life of option 5 years 5 years
</TABLE>
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, and results
in a pro forma net loss that is not materially different from actual net loss
for all periods presented.
8. Income Taxes
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
As of December 31, 1998 and 1999, the Company had federal and state net
operating loss carryforwards of approximately $1,100,000 and $9,200,000,
respectively. The net operating losses and credit carryforwards will expire at
various dates beginning in 2006 through 2019, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to federal and state ownership change limitations. The
annual limitation may result in the expiration of net operating losses before
utilization.
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 550 $ 3,600
Other individually immaterial items...................... -- (100)
----- -------
Total deferred tax assets.................................. 550 3,500
Valuation allowance for deferred tax assets................ (550) (3,500)
----- -------
Net deferred tax assets.................................... $ -- $ --
===== =======
</TABLE>
F-17
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has provided a full valuation allowance against the net
deferred tax assets at December 31, 1998 and 1999 because the future
realization of such assets is uncertain.
9. Related Party Transactions
In connection with the Series A-2 preferred stock financing, the Company
incurred $279,000 of advisory fees from a company controlled by an executive
officer of the Company for the period from inception (February 6, 1998) to
December 31, 1998.
10. Subsequent Event
Term Loan and Capital Lease Line
In January 2000, the Company obtained a term loan and capital lease line
with one financial institution on January 26, 2000 for $750,000 and
$1,500,000, respectively. In connection with this borrowing, the Company
issued warrants to purchase 31,395 shares of Series B-1 preferred stock at
$2.15 per share. Both the term loan and capital lease line are secured by all
equipment and other property acquired through these borrowings.
11. Subsequent Events (unaudited)
Amended Articles of Incorporation
In March 2000, the board of directors authorized an amendment to the
Company's articles of incorporation to increase the authorized stock of the
Company to 77,641,436 shares, consisting of 50,000,000 shares of common stock
and 27,641,436 shares of preferred stock.
Series C Financing
In March 2000, the Company completed a private placement of 3,571,429
shares of Series C convertible preferred stock at $7.00 per share, resulting
in net cash proceeds of approximately $24.8 million. Holders of Series C
preferred stock are entitled to annual noncumulative dividends of $0.35 per
share when and if declared by the board of directors. In the event of
voluntary or involuntary liquidation of DURECT, holders of Series C preferred
stock are entitled to a liquidation preference of $7.00 per share plus all
declared and unpaid dividends. Holders of Series C preferred stock are
entitled to one vote for each share of common stock into which the preferred
stock is convertible, currently on a one-for-one basis. Each share of Series C
preferred stock will be automatically converted into one share of common stock
upon the closing of a firm commitment underwritten initial public offering of
DURECT common stock with a per share price of at least $7.00 per share with
gross proceeds of at least $25 million.
2000 Stock Option Plan
In March 2000, the Company's Board of Directors adopted the Durect
Corporation 2000 Stock Option Plan which will be submitted to the Company's
stockholders for approval before completion of the Company's proposed initial
public offering. Under the 2000 Stock Option Plan, incentive stock options and
nonstatutory stock options and stock purchase rights may be granted to
employees and consultants, including nonemployee directors. A total of
1,796,000 shares of common stock have been reserved for issuance under this
plan.
F-18
<PAGE>
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
The Company's Board of Directors adopted the 2000 Employee Stock Purchase
Plan which will be submitted to the Company's stockholders for approval before
completion of this offering. A total of 150,000 shares of common stock have
been reserved for issuance under the purchase plan. This purchase plan will be
implemented by a series of overlapping offering periods of approximately 24
months' duration, with new offering periods, other than the first offering
period, beginning on August 1 and February 1 of each year and ending July 31
and January 31, respectively, two years later. The purchase plan allows
eligible employees to purchase common stock through payroll deductions at a
price equal to the lower of 85% of the fair market value of DURECT's common
stock at the beginning of each offering period or at the end of each purchase
period. The initial offering period will commence on the effectiveness of the
initial public offering.
2000 Directors' Stock Option Plan
In March 2000, the Board of Directors adopted the 2000 Directors' Stock
Option Plan. A total of 300,000 shares of common stock have been reserved for
issuance under this plan. The directors' plan provides that each person who
becomes a nonemployee director of DURECT after the effective date of this
offering will be granted a nonstatutory stock option to purchase 20,000 shares
of common stock on the date on which the optionee first becomes a nonemployee
director of DURECT. This plan also provides that each option granted to a new
director shall vest at the rate of 33 1/3% per year and each annual option
shall vest in full at the end of one year. No shares have been issued under
the directors' plan.
Initial Public Offering
In April 2000, the board of directors authorized the Company to file a
registration statement with the SEC for an initial public offering of the
Company's common stock.
Arrangements with Alza
In April 2000, ALZA and DURECT amended and restated their development and
commercialization agreement by entering into the Second Amended and Restated
Development and Commercialization Agreement. These amendments include a
reduction in product royalties and upfront payments in certain instances
payable to ALZA by DURECT under the Agreement. In addition, ALZA's option to
distribute the DUROS sufentanil product was amended in geographic scope to
cover only the U.S. and Canada instead of worldwide. As consideration for
these amendments, ALZA received 1,000,000 shares of the Company's common stock
and subject to conditions on exercise, a warrant to purchase 1,000,000 shares
of common stock at an exercise price equal to the price at which the Company
sells its common stock in its proposed initial public offering.
In April 2000, the Company acquired from ALZA Corporation the ALZET product
and certain assets used primarily in the manufacture, sale and distribution of
this product. This acquisition provides the Company with an ongoing business
making and selling this product worldwide. The total purchase price consisted
of approximately $8.2 million in cash, including approximately $3.2 million in
inventory, $2.4 million of which will be paid over twelve months. The
acquisition will be accounted for using the purchase method of accounting.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee............................................. $ 30,600
NASD filing fee.................................................. 12,000
Nasdaq National Market listing fee............................... 95,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 300,000
Blue Sky qualification fees and expenses......................... 10,000
Transfer Agent and Registrar fees................................ 2,000
Miscellaneous fees and expenses.................................. 60,400
Total.......................................................... $1,200,000
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII of the Company's Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of the Company's Bylaws
(Exhibit 3.3 hereto) provide for indemnification of the Company's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, the Company has entered into Indemnification
Agreements (Exhibit 10.1 hereto) with its officers and directors. The
Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification
among the Company and the Underwriters with respect to certain matters,
including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception, we have sold and issued the following unregistered
securities:
(1) From inception to March 31, 2000, we issued options to purchase an
aggregate of 1,738,500 shares of common stock under the 1998 stock
plan at exercise prices of $0.10 to $0.35 per share, of which options
to purchase 1,222,750 shares have been exercised.
(2) From inception to March 31, 2000, we issued options to purchase an
aggregate of 530,850 shares of common stock under our 2000 stock
option plan at exercise prices of $0.35 to $1.00 per share, of which
options to purchase 211,000 shares have been exercised.
(3) On June 19, 1998, we issued and sold 5,600,000 shares of Series A-1
preferred stock to ALZA Corporation, a principal stockholder of
DURECT, in consideration of the executed and delivered
Commercialization and Development Agreement with ALZA.
(4) On June 19, 1998, we issued and sold 5,636,000 shares of Series A-2
preferred stock to 43 private investors at a price of $1.00 per share
for a total price of $5,636,000.
(5) On December 18, 1998, we sold 3,005,867 shares of our Series A-2
preferred stock to 43 private investors at a price of $1.25 per share
for a total price of $3,757,334.
II-1
<PAGE>
(6) On July 19, 1999, we sold 9,364,341 shares of our Series B preferred
stock to 56 private investors at a price of $2.15 per share for a
total price of $20,133,333.
(7) On October 1, 1999, we sold 325,023 shares of our Series B-1 preferred
stock to IntraEAR in consideration of the executed and delivered Asset
Purchase Agreement.
(8) On December 31, 1999, in connection with a loan, we issued a warrant
to Silicon Valley Bank to purchase 31,395 shares of our Series B-1
preferred stock.
(9) On March 28, 2000, we sold 3,571,429 shares of our Series C preferred
stock to 12 private investors at a price of $7.00 per share for a
total purchase price of $25,000,003.
(10) On April 14, 2000, in connection with an amendment to our development
and commercialization agreement, we issued to ALZA Corporation
1,000,000 shares of our common stock and a warrant to purchase
1,000,000 shares of our common stock.
There were no underwriters employed in connection with any of the transactions
set forth in Item 15.
For additional information concerning these equity investment transactions,
please see the section entitled "Certain Transactions" in the prospectus.
The issuances described in Items 15(a)(3) thru 15(a)(10) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and
contracts relating to compensation. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amendment to Amended and Restated Certificate of Incorporation of the
Company.
3.3 Amended and Restated Certificate of Incorporation of the Company
(proposed).
3.4 Amended and Restated Bylaws of the Company.
3.5 Amended and Restated Bylaws of the Company (proposed).
3.6 Certificate of Designation of Rights, Preferences and Privileges of
Series B-1 Preferred Stock.
3.7 Certificate of Designation of Rights, Preferences and Privileges of
Series C Preferred Stock.
4.1* Specimen Stock Certificate.
4.2 Second Amended and Restated Investors' Rights Agreement.
5.1 Form of Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1 Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2 1998 Stock Option Plan.
10.3 2000 Stock Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Directors' Stock Option Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.6** Second Amended and Restated Development and Commercialization
Agreement between the Company and ALZA Corporation effective April
28, 1999.
10.7** Product Acquisition Agreement between the Company and ALZA
Corporation dated as of April 14, 2000.
10.8 Amended and Restated Loan and Security Agreement between the Company
and Silicon Valley Bank dated as of October 28, 1998.
10.9** Manufacturing and Supply Agreement between Neuro-Biometrix, Inc. and
Novel Biomedical, Inc. dated as of November 24, 1997.
10.10** Master Services Agreement between the Company and Quintiles, Inc.
dated as of November 1, 1999.
10.11 Modified Net Single Tenant Lease Agreement between the Company and
DeAnza Enterprises, Ltd. dated as of February 18, 1999.
10.12 Sublease Amendment between the Company and Ciena Corporation dated
as of November 29, 1999 and Sublease Agreement between Company and
Lightera Networks, Inc. dated as of March 10, 1999.
10.13** Project Proposal between the Company and Chesapeake Biological
Laboratories, Inc. dated as of October 11, 1999.
10.14 Employment Agreement with James E. Brown.
10.15 Employment Agreement with Felix Theeuwes.
10.16 Employment Agreement with Thomas A. Schreck.
10.17 Common Stock Purchase Agreement between the Company and ALZA
Corporation dated April 14, 2000.
10.18 Warrant issued to ALZA Corporation dated April 14, 2000.
10.19 Amended and Restated Market Stand-off Agreement between the Company
and ALZA Corporation dated as of April 14, 2000.
10.20* Asset Purchase Agreement between the Company and IntraEAR, Inc.
dated as of September 24, 1999.
10.21 Warrant issued to Silicon Valley Bank dated December 16, 1999.
10.22* Amendment to Second Amended and Restated Investors' Rights Agreement
dated as of April 14, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Attorneys (included in Exhibit 5.1).
24.1 Power of Attorney (see II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Palo Alto, State of
California on April 20, 2000.
Durect Corporation
/s/ James E. Brown
By: _________________________________
James E. Brown
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, James
Brown and Felix Theeuwes as his or her attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule
462 under the Securities Act of 1933, as amended, in connection with or
related to the Offering contemplated by this Registration Statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Brown President, Chief Executive April 20, 2000
______________________________________ Officer and Director
James E. Brown
/s/ Felix Theeuwes Chairman, Chief Scientific April 20, 2000
______________________________________ Officer
Felix Theeuwes
/s/ Thomas A. Schreck Chief Financial Officer, April 20, 2000
______________________________________ Director
Thomas A. Schreck
/s/ James R. Butler Director April 20, 2000
______________________________________
James R. Butler
/s/ Douglas A. Lee Director April 20, 2000
______________________________________
Douglas A. Lee
/s/ Albert L. Zesiger Director April 20, 2000
______________________________________
Albert L. Zesiger
/s/ Matthew V. McPherron Director April 20, 2000
______________________________________
Matthew V. McPherron
/s/ John L. Doyle Director April 20, 2000
______________________________________
John L. Doyle
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amendment to Amended and Restated Certificate of Incorporation of
the Company.
3.3 Amended and Restated Certificate of Incorporation of the Company
(proposed).
3.4 Amended and Restated Bylaws of the Company.
3.5 Amended and Restated Bylaws of the Company (proposed).
3.6 Certificate of Designation of Rights, Preferences and Privileges of
Series B-1 Preferred Stock.
3.7 Certificate of Designation of Rights, Preferences and Privileges of
Series C Preferred Stock.
4.1* Specimen Stock Certificate.
4.2 Second Amended and Restated Investors' Rights Agreement.
5.1 Form of Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1 Form of Indemnification Agreement between the Company and each of
its Officers and Directors.
10.2 1998 Stock Option Plan.
10.3 2000 Stock Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Directors' Stock Option Plan.
10.6** Second Amended and Restated Development and Commercialization
Agreement between the Company and ALZA Corporation effective April
28, 1999.
10.7** Product Acquisition Agreement between the Company and ALZA
Corporation dated as of April 14, 2000.
10.8 Amended and Restated Loan and Security Agreement between the Company
and Silicon Valley Bank dated as of October 28, 1998.
10.9** Manufacturing and Supply Agreement between Neuro-Biometrix, Inc. and
Novel Biomedical, Inc. dated as of November 24, 1997.
10.10** Master Services Agreement between the Company and Quintiles, Inc.
dated as of November 1, 1999.
10.11 Modified Net Single Tenant Lease Agreement between the Company and
DeAnza Enterprises, Ltd. dated as of February 18, 1999.
10.12 Sublease Amendment between the Company and Ciena Corporation dated
as of November 29, 1999 and Sublease Agreement between Company and
Lightera Networks, Inc. dated as of March 10, 1999.
10.13** Project Proposal between the Company and Chesapeake Biological
Laboratories, Inc. dated as of October 11, 1999.
10.14 Employment Agreement with James E. Brown.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.15 Employment Agreement with Felix Theeuwes.
10.16 Employment Agreement with Thomas A. Schreck.
10.17 Common Stock Purchase Agreement between the Company and ALZA
Corporation dated April 14, 2000.
10.18 Warrant issued to ALZA Corporation dated April 14, 2000.
10.19 Amended and Restated Market Stand-off Agreement between the Company
and ALZA Corporation dated as of April 14, 2000.
10.20* Asset Purchase Agreement between the Company and IntraEAR, Inc. dated
as of September 24, 1999.
10.21 Warrant issued to Silicon Valley Bank dated December 16, 1999.
10.22* Amendment to Second Amended and Restated Investors' Rights Agreement
dated as of April 14, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Attorneys (included in Exhibit 5.1).
24.1 Power of Attorney (see II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
EXHIBIT 1.1
_______________Shares
DURECT CORPORATION
Common Stock, Par Value $0.0001 per share
UNDERWRITING AGREEMENT
_______________, 2000
<PAGE>
_____________, 2000
Morgan Stanley & Co. Incorporated
Chase H&Q
CIBC World Markets Corp.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Durect Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of _______________ shares of its Common Stock, par
value $0.0001 per share (the "Firm Shares").
The Company also proposes to issue and sell to the several Underwriters not
more than an additional __________ shares of its Common Stock, par value $0.0001
per share (the "Additional Shares") if and to the extent that you, as managers
of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares". The shares of Common
Stock, par value $0.0001 per share of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
"Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement as amended at the time it becomes effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended
(the "Securities Act"), is hereinafter referred to as the "Registration
Statement"; the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus". If the Company has filed an
abbreviated registration statement to register additional shares of Common Stock
pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462 Registration Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve
a portion of the Shares to be purchased by it under this Agreement for sale to
the Company's directors, officers, employees and business associates and other
parties related to the Company (collectively, "Participants"), as set forth in
the Prospectus under the heading "Underwriters" (the "Directed Share Program").
The Shares to be sold by Morgan Stanley and its affiliates pursuant to the
Directed Share Program are referred to hereinafter as the "Directed Shares." Any
Directed Shares not orally confirmed for purchase by any Participants by the end
of the business day on which this Agreement is executed will be offered to the
public by the Underwriters as set forth in the Prospectus.
1
<PAGE>
1. Representations and Warranties. The Company represents and warrants to
and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
2
<PAGE>
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be required to register as an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection
3
<PAGE>
of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"),
(ii) have received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(p) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(s) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed
4
<PAGE>
to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would have a material adverse
affect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or any
of its subsidiaries exists, except as described in the Prospectus, or, to
the knowledge of the Company, is imminent; and the Company is not aware of
any existing, threatened or imminent labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(v) The Company and its subsidiaries are insured by the insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described the Prospectus
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is
5
<PAGE>
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(y) Ernst & Young LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Securities Act.
(z) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto, together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as disclosed therein; the
supporting schedules, if any, included in the Registration Statement
present fairly in accordance with generally accepted accounting principles
the information required to be stated therein; and the other financial and
statistical information and data set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) are, in all
material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(aa) The Common Stock has been approved for listing on the Nasdaq
National Market.
(bb) Except for the Shares and approximately _________ shares of
Common Stock currently outstanding, all outstanding shares of Common Stock,
and all securities convertible into or exercisable or exchangeable for
Common Stock, are subject to valid and binding agreements (collectively,
the "Lock-up Agreements") that restrict the holders thereof from selling,
making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common Stock,
or any such securities convertible into or exercisable or exchangeable for
Common Stock, for a period of 180 days after the date of the Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated or
the Company.
(cc) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement other than as described in the Registration
Statement and as have been waived in writing in connection with the
offering contemplated hereby.
(dd) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
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(ee) No consent, approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained, is
required in connection with the offering of the Directed Shares in any
jurisdiction where the Directed Shares are being offered.
(ff) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share
Program with the intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its names at U.S.$_____ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to __________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder or (B) the issuance by the Company of shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof of which the Underwriters have been
advised in writing.
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3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$_____ a share (the "Public Offering Price") and to certain dealers selected
by you at a price that represents a concession not in excess of U.S.$____ a
share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of U.S.$____ a share, to
any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to the
Company in Federal or other funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 2000, or at
such other time on the same or such other date, not later than _________, 2000,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date, in any event
not later than ___________, 2000, as shall be designated in writing by the U.S.
Representatives. The time and date of such payment are hereinafter referred to
as the "Option Closing Date".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 3:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in
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the rating accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Venture Law Group, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
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<PAGE>
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities or
claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
the Company or any of its subsidiaries that is material to the Company
and its subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale
of the Shares by the Underwriters;
(ix) the statements (A) in the Prospectus under the captions
"Risk Factors - We rely heavily on third parties and do not control
critical steps in the manufacturing and testing of our products,"
"Management - Employment Agreements", "Management - Employee Benefit
Plans," "Certain Transactions," "Description of Capital Stock",
"Shares Eligible for Future Sale" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of
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its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be required to
register as an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) the Company and its subsidiaries (A) are in compliance
with any and all applicable Environmental Laws, (B) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (C) are
in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole; and
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein as
to which such counsel need not express any opinion) comply as to form
in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (B) has no reason
to believe that (except for financial statements and schedules and
other financial and statistical data as to which such counsel need not
express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (C) has no reason to
believe that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need not
express any belief) the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Bozicevic, Field & Francis LLP, patent counsel to the Company,
dated the Closing Date, with respect to certain patent matters, to the
effect that:
(i) The Company owns or has valid licenses to use all patents,
licenses, inventions and rights described in the Prospectus as being
owned or licensed by it, and such counsel is not aware of any claim to
the contrary or any
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<PAGE>
challenge by any other person to the rights of the Company with
respect to the foregoing other than those identified in the
Prospectus;
(ii) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company, its
manufacturers, suppliers or customers other than those identified in
the Prospectus alleging that the Company is infringing or otherwise
violating any patents, licenses or inventions owned by others;
(iii) Such counsel has reviewed the descriptions of intellectual
property under the captions "Risk Factors - Our agreement with ALZA
limits our fields of operation for our DUROS-based pharmaceutical
systems, requires us to spend significant funds on product development
and gives ALZA a first right to distribute selected products for us,"
"Business - Development and Commercialization Agreement with ALZA
Corporation" and "- Patents, Licenses and Proprietary Rights" in the
Registration Statement and Prospectus, and, to the extent they
constitute matters of law or legal conclusions, these descriptions are
accurate and fairly and completely present the patent situation of the
Company or that such descriptions contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made therein, in light of the circumstances under which
they were made, not misleading, including without limitation, any
undisclosed material issue with respect to the subsequent validity or
enforceability of such patent or patent issuing from any such pending
patent application.
(iv) With respect to the patent protection on the Company's
technology for each patent or patent application described in the
Prospectus as being owned by the Company, such counsel is aware of
nothing that causes such counsel to believe that, as of the date the
Registration Statement became effective and as of the date of such
opinion, the description of patents and patent applications under the
captions "Risk Factors--If we are unable to adequately protect or
enforce our intellectual property rights or secure rights to third-
party patents, we may lose valuable assets, experience reduced market
share or incur costly litigation to protect our rights," and "Business
- Intellectual Property" in the Registration Statement and Prospectus
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading,
including without limitation, any undisclosed material issue with
respect to the subsequent validity or enforceability of such patent or
patent issuing from any such pending patent application.
(e) The Underwriters shall have received on the Closing Date an
opinion of ________________________, Food and Drug Administration ("FDA")
counsel to the Company, dated the closing date, with respect to certain FDA
matters, to the effect that:
(i) The statements in the Prospectus under the captions "Risk
Factors - We must conduct and satisfactorily complete clinical trials
for our
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pharmaceutical systems," "- Failure to obtain product approvals or
comply with ongoing governmental regulations could delay or limit
introduction of our new products and result in failure to achieve
anticipated revenues," "Business - Durect Pharmaceutical Systems
Technology," "- Product Development Programs," and "-Government
Regulation," insofar as such statements constitute legal conclusions
under the Federal Food, Drug, and Cosmetic Act ("FDC Act"), the Public
Health Service Act ("PHS Act") or the FDA regulations (such matters
(a) and (b) collectively, the "FDA Regulatory Matters"), regulations
or summaries of FDA Regulatory Matters, have been reviewed by such
counsel and fairly present and summarize, in all material respects,
the matters referred to therein.
(ii) Such counsel knows of no material action, suit, claim or
proceeding relating to FDA Regulatory Matters which is pending or
threatened against the Company or any of its officers or directors,
nor is such counsel aware of any material violation of the FDC Act,
the PHS Act or FDA regulations by the Company.
(iii) The Company has filed the Investigational New Drug ("IND")
applications and New Drug Approval ("NDA") applications with the FDA
listed on Schedule 1 (collectively, the "US Applications"). The FDA
----------
has not denied any of the Company's US Applications. Such counsel is
not aware of any material defect in form in the preparation or filing
of the US Applications. To the knowledge of such counsel, the US
Applications are being diligently pursued by the Company. To the
knowledge of such counsel, the Company is the sole owner of the US
Applications.
(iv) The FDA has not placed a clinical hold on any Company
clinical trial, and/or placed any conditions on the continuation of a
Company clinical trial, and the Company has not voluntarily or
involuntarily, on a temporary or permanent basis, suspended or
terminated a clinical trial.
(v) To such counsel's knowledge, no Adverse Event has occurred
during a clinical trial that would require the Company to report such
event to the FDA.
(f) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware & Freidenrich LLP, counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Venture Law Group and Gray
Cary Ware & Freidenrich LLP may state that their opinion and belief are
based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and
review and discussion of the contents thereof, but are without independent
check or verification, except as specified.
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The opinions of Venture Law Group, Bozicevic, Field & Francis LLP and
_____________ described in Sections 5(c), 5(d) and 5(e) above shall be
rendered to the Underwriters at the request of the Company and shall so
state therein.
(g) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the Representatives on the
Option Closing Date of such documents as they may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Additional Shares and other matters related to the issuance of the
Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when
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the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending June 30, 2001 that satisfies the provisions of Section
11(a) of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(g) The Company will use its best efforts to obtain and maintain in
effect the quotation of the Shares on the Nasdaq National Market and will
take all necessary steps to cause the Shares to be included on the Nasdaq
National Market as promptly as practicable and to maintain such inclusion
for a period of three years after the date hereof or until such earlier
date as the Shares shall be listed for regular trading privileges on
another national securities exchange approved by you.
(h) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act which may from time to time be
applicable to the Company.
(i) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(j) Prior to the Closing Date, the Company will not, directly or
indirectly, issue any press release or other communication and will not
hold any press conference with respect to the Company, or its financial
condition, results of operations, business, properties, assets, or
prospects or this offering, without your prior written consent.
(k) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
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amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws
as provided in Section 6(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
National Association of Securities Dealers, Inc., (v) all fees and expenses
in connection with the preparation and filing of the registration statement
on Form 8-A relating to the Common Stock and all costs and expenses
incident to listing the Shares on the Nasdaq National Market, (vi) the cost
of printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs
and expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, and
(ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise
made in this Section. It is understood, however, that except as provided in
this Section, Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 10 below, the Underwriters will pay all of their costs
and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
7. Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue
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statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Underwriter, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to Section 7(a) or 7(b), such person (the "indemnified
party") shall promptly notify the person against whom such indemnity may be
sought (the "indemnifying party") in writing and the indemnifying party,
upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all such indemnified parties
and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 7(a),
and by the Company, in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss
or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated by the second and third sentences
of this paragraph, the indemnifying party agrees that it shall be liable
for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by
such indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in
17
<PAGE>
respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 7(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear to
the aggregate Public Offering Price of the Shares. The relative fault of
the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 7(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages
that such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent
18
<PAGE>
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 7 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in
equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
8. Directed Share Program Indemnification.
(a) The Company agrees to indemnify and hold harmless Morgan Stanley
and its affiliates and each person, if any, who controls Morgan Stanley or
its affiliates within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material
fact contained in any material prepared by or with the consent of the
Company for distribution to Participants in connection with the Directed
Share Program, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant has agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 7(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the
Company, upon request of the Morgan Stanley Entity, shall retain counsel
reasonably satisfactory to the Morgan Stanley Entity to represent the
Morgan Stanley Entity and any other the Company may designate in such
proceeding and shall pay the fees and disbursements of such counsel related
to such proceeding. In any such proceeding, any Morgan Stanley Entity shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such Morgan Stanley Entity unless (I)
the Company shall have agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties)
include both the Company and the Morgan Stanley Entity and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The Company shall not, in
respect of the legal
19
<PAGE>
expenses of the Morgan Stanley Entities in connection with any proceeding
or related proceedings the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel)
for all Morgan Stanley Entities. Any such firm for the Morgan Stanley
Entities shall be designated in writing by Morgan Stanley. The Company
shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the Company agrees to indemnify the
Morgan Stanley Entities from and against any loss or liability by reason of
such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time a Morgan Stanley Entity shall have requested the Company to
reimburse it for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the Company agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after
receipt by the Company of the aforesaid request and (ii) the Company shall
not have reimbursed the Morgan Stanley Entity in accordance with such
request prior to the date of such settlement. The Company shall not,
without the prior written consent of Morgan Stanley, effect any settlement
of any pending or threatened proceeding in respect of which any Morgan
Stanley Entity is or could have been a party and indemnity could have been
sought hereunder by such Morgan Stanley Entity, unless such settlement
includes an unconditional release of the Morgan Stanley Entities from all
liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 7(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the
Company, in lieu of indemnifying the Morgan Stanley Entity thereunder,
shall contribute to the amount paid or payable by the Morgan Stanley Entity
as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Morgan Stanley Entities on the other
hand from the offering of the Directed Shares or (ii) if the allocation
provided by clause 7(c)(i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 7(c)(i) above but also the relative fault of the
Company on the one hand and of the Morgan Stanley Entities on the other
hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and of the Morgan Stanley Entities on the other hand in
connection with the offering of the Directed Shares shall be deemed to be
in the same respective proportions as the net proceeds from the offering of
the Directed Shares (before deducting expenses) and the total underwriting
discounts and commissions received by the Morgan Stanley Entities for the
Directed Shares, bear to the aggregate Public Offering Price of the Shares.
If the loss, claim, damage or liability is caused by an untrue or alleged
untrue statement of a material fact, the relative fault of the Company on
the one hand and the Morgan Stanley Entities on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement or the omission or alleged omission relates to
information supplied by the Company or by the Morgan Stanley Entities and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
20
<PAGE>
(d) The Company and the Morgan Stanley Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in Section 8(c). The amount paid or payable by the Morgan
Stanley Entities as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by the Morgan Stanley Entities in connection
with investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 8, no Morgan Stanley Entity shall be
required to contribute any amount in excess of the amount by which the
total price at which the Directed Shares distributed to the public were
offered to the public exceeds the amount of any damages that such Morgan
Stanley Entity has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. The remedies
provided for in this Section 8 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any Morgan Stanley
Entity at law or in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Morgan Stanley Entity or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Directed Shares.
9. Termination. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall
21
<PAGE>
be obligated severally in the proportions that the number of Firm Shares set
forth opposite their respective names in Schedule I or Schedule II bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you and
the Company for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or the Company. In any such case either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
22
<PAGE>
13. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
DURECT CORPORATION
By:__________________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Chase H&Q
CIBC World Markets
Acting severally on behalf of themselves
and the several Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:_____________________________________
Name:
Title:
23
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Firm
Underwriter Shares To Be Purchased
- ----------- ----------------------
Morgan Stanley & Co. Incorporated
Chase H&Q
CIBC World Markets
-------------
Total Firm Shares.........................
=============
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DURECT CORPORATION
The undersigned, James E. Brown and Mark B. Weeks, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Durect Corporation, a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on February 6, 1998 under the name
of "Durect Therapeutics Corporation."
3. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
"ARTICLE I
The name of this corporation is Durect Corporation (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Service Company, 1013 Centre Road, Wilmington, Delaware
19805, County of New Castle. The name of its registered agent at such address is
Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two
----------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
------------ ---------
Stock." The total number of shares which the Corporation is authorized to issue
- -----
is sixty-five million six hundred eight-three thousand seven hundred thirty-four
(65,683,734) shares, each with a par value of $0.0001 per share. Forty-one
million five hundred forty-one thousand eight hundred sixty-seven (41,541,867)
shares shall be Common Stock and twenty-four million one hundred and forty-one
thousand eight hundred and sixty-seven (24,141,867) shares shall be Preferred
Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock
-------------------------------------------------------
authorized by this Amended and Restated Certificate of Incorporation has been
designated herein in three series. The first series of Preferred Stock is
designated "Series A-1 Preferred Stock" and consists of five million six hundred
--------------------------
thousand (5,600,000) shares. The second series of Preferred
<PAGE>
Stock is designated "Series A-2 Preferred Stock" and consists of eight million
--------------------------
six hundred and forty-one thousand eight hundred sixty-seven (8,641,867) shares.
The third series of Preferred Stock is designated "Series B Preferred Stock" and
------------------------
consists of nine million three hundred ninety-five thousand three hundred
forty-nine (9,378,140) shares. The rights, preferences, privileges, and
restrictions granted to and imposed on the Series A-1, Series A-2 and Series B
Preferred Stock are as set forth below in this Article IV(B). The Board of
Directors is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon additional series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or of any of them. Subject to compliance with applicable
protective voting rights which have been or may be granted to the Preferred
Stock or series thereof in Certificates of Designations or the Corporation's
Certificate of Incorporation ("Protective Provisions"), but notwithstanding any
---------------------
other rights of the Preferred Stock or any series thereof, the rights,
privileges, preferences and restrictions of any such additional series may be
subordinated to, pari passu with (including, without limitation, inclusion in
----------
provisions with respect to liquidation and acquisition preferences, redemption
and/or approval of matters by vote or written consent), or senior to any of
those of any present or future class or series of Preferred or Common Stock.
Subject to compliance with applicable Protective Provisions, the Board of
Directors is also authorized to increase or decrease the number of shares of any
series (other than the Series A-1, Series A-2 and Series B Preferred Stock),
prior or subsequent to the issue of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
1. Dividend Provisions. Subject to the rights of the
-------------------
series of Preferred Stock that may from time to time come into existence:
(a) Series A-1 and Series A-2 Preferred. the holders
-----------------------------------
of shares of Series A-1 or Series A-2 Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor prior and in
preference to any declaration or payment of any dividend on the Common Stock of
the Corporation, at the rate of $0.05 per share per annum on each outstanding
share of Series A-1 or Series A-2 Preferred Stock, payable quarterly when, as
and if declared by the Board of Directors. Such dividends shall not be
cumulative.
(b) Series B Preferred. the holders of shares of
------------------
Series B Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Corporation, at the rate of
$0.13975 per share per annum on each outstanding share of Series B Preferred
Stock, payable quarterly when, as and if declared by the Board of Directors.
Such dividends shall accrue on each share from July 16, 1999, and shall accrue
from day to day, whether or not declared. Such dividends shall be cumulative so
that, except as provided below, if such dividends in respect of any previous or
current annual dividend period, at the annual rate specified above, shall not
have been paid the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared and set apart for the Common
Stock. Accumulation of dividends on the Series B Preferred Stock shall not bear
interest. Cumulative dividends with respect to a share of Series B Preferred
Stock which are accrued and/or in arrears
-2-
<PAGE>
shall be forgiven upon conversion (a "Specified Conversion") of such share to
Common Stock pursuant to either Section 4(a) below or Section 4(b) below so long
as any conversion pursuant to either section is in connection with a registered
offering of the Corporation's Common Stock under the Securities Act (defined
below). Cumulative dividends with respect to a share of Series B Preferred Stock
which are accrued and/or in arrears shall be paid upon any conversion of such
share into Common Stock other than a Specified Conversion either in cash or, at
the discretion of the Board of Directors, in Common Stock valued at the fair
market value of such Common Stock as determined in good faith by the Board of
Directors; provided, however, if the holders of a majority of the then
outstanding shares of the Series B Preferred Stock (the "Contesting Holders")
notify the Board of Directors of the Corporation within ten (10) days after
receiving written notification of such determination of the fair market value
that they disagree with such determination, then the fair market value of the
Common Stock shall be mutually agreed upon by the Board of Directors and the
holders of a majority of the Series B Preferred Stock within thirty (30) days
after the receipt of notice by the Board of Directors from the Contesting
Holders.
(c) Parity of Preferred Series Dividends. To the
-------------------------------------
extent that dividends have been declared and are payable on the Series A-1 or
Series A-2 Preferred Stock, such dividends shall be paid on a pari passu basis
with the dividends of the Series B Preferred Stock pro rata in accordance with
the then unpaid amounts of the dividends then payable on the respective Series
of Preferred Stock. To the extent that assets are not legally available for the
payment of such dividends on the Series A-1, Series A-2 or Series B Preferred
Stock, such dividends shall be paid pro rata as provided in the immediately
preceding sentence at such time as assets become legally available for such
purpose. Any dividends on the Preferred Stock shall be paid before payment of
the Liquidation Preferences on the Preferred Stock provided for under Section 2
below.
2. Liquidation.
-----------
(a) Preferred Stock. In the event of any liquidation,
----------------
dissolution or winding up of the Corporation, either voluntary or involuntary,
subject to the rights of any series of Preferred Stock that may from time to
time come into existence, the holders of the Series A-2 and Series B Preferred
Stock, unless such stock has been converted into Common Stock in accordance with
Section 4 below, shall be entitled to receive in addition to any dividends then
payable as provided under Section 1 above, prior and in preference to any
distribution of any of the assets of the Corporation to the holders of Series A-
1 Preferred Stock or Common Stock by reason of their ownership thereof, an
amount per share equal to (i) $1.087 per share for each share of Series A-2
Preferred Stock then held by them (the "Series A-2 Liquidation Preference") and
---------------------------------
(ii) $2.15 per share for each share of Series B Preferred Stock then held by
them (the "Series B Liquidation Preference"); provided, however, that in the
------------------------------- -------- -------
event of any transaction described in Section 2(c)(i) below that (x) is not
approved (by vote or written consent, as provided by law) by the holders of a
majority of the Series B Preferred Stock then outstanding and (y) results in
aggregate consideration to be received by the stockholders of the Corporation of
less than $115 million (a "Non-Approved Merger"), the Series B Liquidation
-------------------
Preference shall instead be an amount per share ("Non-Approved Merger
Preference") calculated as follows:
-3-
<PAGE>
Non-Approved Merger Preference = $2.15 - ($0.1075) (Y )
-------------
1,000,000
where Y is the amount equal to the excess, if any, of the aggregate
consideration to be received in the Non-Approved Merger over $95,000,000. If,
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series A-2 and Series B Preferred Stock shall be insufficient
to permit the payment to such holders of the full aforesaid Liquidation
Preferences, then, subject to the rights of any series of Preferred Stock that
may from time to time come into existence, the entire assets and funds of the
Corporation legally available for distribution shall be distributed among the
holders of the Series A-2 and Series B Preferred Stock pro rata in proportion to
the Liquidation Preference each such holder is otherwise entitled to receive.
(b) Remaining Assets. Upon the completion of
----------------
the distribution required by Section 2(a) above and any other distribution that
may be required with respect to any series of Preferred Stock that come into
existence from time to time, if assets remain in the Corporation, the holders of
the Series A-1 Preferred Stock and the Common Stock of the Corporation shall
receive all of the remaining assets of the Corporation pro rata based on the
number of shares of Common Stock held by each (on an as-converted basis);
provided, however, that notwithstanding the foregoing, in the event of a Non-
Approved Merger, upon the completion of the distribution required by Section
2(a) above, if assets remain in the Corporation, the holders of the Series A-1
Preferred Stock and Series B Preferred Stock and the Common Stock of the
Corporation shall receive all of the remaining assets of the Corporation pro
rata based on the number of shares of Common Stock that are or would be held by
each on an as-converted basis.
(c) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of
------------------
this Section 2, a liquidation, dissolution or winding up of the Corporation
shall be deemed to occur if the Corporation (or a secured party receiver or
other person or entity legally entitled to act on behalf of the Corporation)
shall sell, convey, or otherwise dispose of all or substantially all of its
assets or business or if the Corporation shall merge into or consolidate with
any other corporation or effect any other transaction or series of related
transactions and the result thereof is that more than fifty percent (50%) of the
combined voting power of the Corporation is held by persons or entities that
were not stockholders immediately prior to such merger, consolidation or other
transaction.
(ii) Valuation of Consideration. In the
--------------------------
event of a deemed liquidation as described in Section 2(c)(i) above, if the
consideration received by the Corporation is other than cash, its value will be
deemed its fair market value. Any securities shall be valued as follows:
(A) Securities not subject to
"investment letter" restrictions (e.g., federal or state securities laws
restrictions) or other similar restrictions on free marketability:
-4-
<PAGE>
(1) If traded on a securities
exchange or the Nasdaq Stock Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange over the thirty-day
period ending three (3) days prior to the closing;
(2) If actively traded over-the-
counter, the value shall be deemed to be the average of the closing bid or sale
prices (whichever is applicable) over the thirty-day period ending three (3)
days prior to the closing; and
(3) If there is no active public
market, the value shall be the fair market value thereof, as mutually determined
in good faith by the Board of Directors and the holders of at least a majority
of all then outstanding shares of Series A-2 and Series B Preferred Stock,
voting together as a single class.
(B) The method of valuation of
securities subject to investment letter or other restrictions on free
marketability (other than restrictions arising solely by virtue of a
stockholder's status as an affiliate or former affiliate) shall be to make an
appropriate discount from the fair market value determined as above in Section
2(c)(ii)(A) to reflect such restriction on marketability, as mutually determined
in good faith by the Board of Directors and the holders of at least a majority
of all then outstanding shares of Series A-2 and Series B Preferred Stock,
voting together as a single class.
(iii) Notice of Transaction. The
---------------------
Corporation shall give each holder of record of Series A-1, Series A-2 and
Series B Preferred Stock written notice of a deemed liquidation as described in
Section 2(c)(i) above not later than ten (10) days prior to the stockholders'
meeting called to approve such transaction, or ten (10) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than ten (10) days after the
Corporation has given the first notice provided for herein or sooner than ten
(10) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the written consent of the holders of Series A-1, Series A-2 and Series B
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of all then outstanding shares of such
Preferred Stock.
(iv) Effect of Noncompliance. In the
-----------------------
event the requirements of this Section 2(c) are not complied with, the
Corporation shall forthwith either cause the closing of the transaction to be
postponed until such requirements have been complied with, or cancel such
transaction, in which event the rights, preferences and privileges of the
holders of the Series A-1, Series A-2 and Series B Preferred Stock shall revert
to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section
2(c)(iii) hereof.
-5-
<PAGE>
3. Redemption. The Series A-1, Series A-2 and Series B
----------
Preferred Stock is not redeemable.
4. Conversion. The holders of the Series A-1, Series A-2
----------
and Series B Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
-----------------
(a) Right to Convert. Subject to Section 4(c), each
----------------
share of Series A-1, Series A-2 and Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing (i) $1.00 in the case of the Series A-
1 Preferred Stock, (ii) $1.087 in the case of the Series A-2 Preferred Stock and
(iii) $2.15 in the case of Series B Preferred Stock by the Conversion Price
applicable to such share, determined as hereafter provided, in effect on the
date the certificate is surrendered for conversion. The initial Conversion Price
per share shall be $1.00 for shares of Series A-1 Preferred Stock, $1.087 for
shares of Series A-2 Preferred Stock and $2.15 for shares of Series B Preferred
Stock. Such initial Conversion Price shall be subject to adjustment as set forth
in Section 4(d) below.
(b) Automatic Conversion. Each share of Series A-1,
--------------------
Series A-2 or Series B Preferred Stock shall automatically be converted into
shares of Common Stock at the Conversion Price at the time in effect for such
share immediately upon the earlier of (i) except as provided below in Section
4(c), the date immediately prior to the consummation of the Corporation's sale
of its Common Stock in a firm commitment underwritten public offering pursuant
to a registration statement under the Securities Act of 1933, as amended (the
"Securities Act") with a per share public offering price of at least $7.00 and
which results in gross proceeds to the Corporation of at least $25 million, (ii)
the date specified by vote or written consent, as provided by law, of the
holders of at least a majority of the then outstanding shares of Series A-1,
Series A-2 and Series B Preferred Stock, voting together as a single class;
provided, however, that any such conversion pursuant to this Section 4(b)(ii)
where the fair market value of the Corporation, as determined in good faith by
the Board of Directors, is less than $115 million shall require the vote or
written consent, as provided by law, of the holders of a majority of the Series
B Preferred Stock, unless: (A) such conversion is in connection with a
transaction described in Section 2(c)(i) above; and (B) the aggregate
consideration to be received by the stockholders of the Corporation as a result
of such transaction is less than $115 million, , in which event, the vote or
written consent of the holders of a majority of the Series B Preferred Stock
shall not be required provided that: (x) each holder of the Series B Preferred
Stock shall receive, prior and in preference to any distribution of any assets
of the Corporation to the holders of the Series A-1 Preferred Stock, Series A-2
Preferred Stock and Common Stock, any dividends then payable as provided under
Section 1(b) above plus the Non-Approved Merger Preference (as calculated in
accordance with Section 2(a) above) per share of Series B Preferred Stock then
held by such holder, and (y) the holders of the Series A-1 Preferred Stock,
Series A-2 Preferred Stock, Series B Preferred Stock and Common Stock shall
receive all of the remaining consideration received from such transaction pro
rata based on the number of shares of Common Stock that are or would be held by
each on an as-converted basis.
-6-
<PAGE>
(c) Mechanics of Conversion. Before any holder
-----------------------
of Series A-1, Series A-2 or Series B Preferred Stock shall be entitled to
convert the same into shares of Common Stock, he shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for such series of Preferred Stock, and shall give written
notice to the Corporation at its principal corporate office of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of such series of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act the conversion shall (unless the
holder specifies otherwise) be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive Common Stock upon conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred
-----------------------------------------
Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion
- -------------------------------------------------------------
Price of each of the Series A-1, Series A-2 and Series B Preferred Stock shall
be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below
----------------------------------
Conversion Price. If the Corporation shall issue, after the date upon which any
- ----------------
shares of Series A-1, Series A-2 or Series B Preferred Stock were first issued
(the "Purchase Date" with respect to such series), any Additional Stock (as
-------------
defined below) without consideration or for a consideration per share less than
the Conversion Price for such series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall automatically be adjusted as set
forth in this Section 4(d)(i), unless otherwise provided in this Section
4(d)(i).
(A) Adjustment Formula. Whenever the
------------------
Conversion Price is adjusted pursuant to this Section (4)(d)(i), the new
Conversion Price shall be determined by multiplying the Conversion Price then in
effect by a fraction, (x) the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issuance (the "Outstanding
-----------
Common") plus the number of shares of Common Stock that the aggregate
- ------
consideration received by the Corporation for such issuance would purchase at
such Conversion Price; and (y) the denominator of which shall be the number of
shares of Outstanding Common plus the number of shares of such Additional Stock.
For purposes of the foregoing calculation, the term "Outstanding Common" shall
include shares of Common Stock deemed issued pursuant to Section 4(d)(i)(E)
below.
-7-
<PAGE>
(B) Definition of "Additional Stock".
--------------------------------
For purposes of this Section 4(d)(i), "Additional Stock" shall mean any shares
----------------
of Common Stock issued (or deemed to have been issued pursuant to Section
4(d)(i)(E)) by the Corporation after the Purchase Date other than
(1) Common Stock issued pursuant
to a transaction described in Section 4(d)(ii) hereof,
(2) Not more than 2,000,000 shares
of Common Stock issuable or issued prior to, on or after the Purchase Date to
employees, consultants or directors of the Corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
the Corporation,
(3) Not more than 500,000 shares
of capital stock, or options or warrants to purchase capital stock, issued to
financial institutions or lessors in connection with commercial credit
arrangements, equipment financings or similar transactions approved by the Board
of Directors,
(4) Capital stock or warrants or
options to purchase capital stock issued in connection with bona fide
acquisitions, mergers, partnering transactions or similar transactions
("Transactions"), the terms of which are approved by the Board of Directors,
unless the Director designated by the Series B Preferred Stock reasonably
determines in good faith, in his or her capacity as Director of the Corporation,
that the value of the assets, consideration or rights received by the
Corporation in such Transaction, when taken as a whole, would not contribute to
increasing the value of the Corporation so as to justify issuance of such
capital stock or warrants or options to purchase capital stock in such
Transaction,
(5) Shares of Common Stock issued
or issuable upon conversion of the Series A-1, Series A-2 or Series B Preferred
Stock, and
(6) Shares of Common Stock issued
or issuable in a public offering prior to or in connection with which all
outstanding shares of Series A-1, Series A-2 and Series B Preferred Stock will
be converted into shares of Common Stock.
(C) No Fractional Adjustments. No
-------------------------
adjustment of the Conversion Price for the Series A-1, Series A-2 or Series B
Preferred Stock shall be made in an amount less than one cent per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to the earlier of three years from the date
of the event giving rise to the adjustment being carried forward or the
conversion of such shares into Common Stock in accordance with the terms hereof,
or shall be made on the earlier of the end of three years from the date of the
event giving rise to the adjustment being carried forward or such conversion.
(D) Determination of Consideration.
------------------------------
In the case of the issuance of Common Stock for cash, the consideration shall be
deemed to be the amount of cash paid therefor before deducting any reasonable
discounts, commissions or other expenses
-8-
<PAGE>
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof. In the case of the issuance of
the Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors; provided, however, if the
holders of a majority of the then outstanding shares of the Series A-1 Preferred
Stock, Series A-2 Preferred Stock and Series B Preferred Stock (the "Contesting
Holders") notify the Board of Directors of the Corporation within ten (10)
business days after receiving written notification of such determination of the
fair market value that they disagree with such determination, then the fair
market value of the consideration shall be mutually agreed upon by the Board of
Directors and the holders of a majority of the Series A-1 Preferred Stock,
Series A-2 Preferred Stock and Series B Preferred Stock within thirty (30) days
after the receipt of notice by the Board of Directors from the Contesting
Holders.
(E) Deemed Issuances of Common Stock.
--------------------------------
In the case of the issuance (whether before, on or after the applicable Purchase
Date) of options to purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable securities,
the following provisions shall apply for all purposes of this Section 4(d)(i):
(1) The aggregate maximum number of
shares of Common Stock deliverable upon exercise (assuming the satisfaction of
any conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Section 4(d)(i)(D)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution adjustments) for
the Common Stock covered thereby.
(2) The aggregate maximum number
of shares of Common Stock deliverable upon conversion of or in exchange
(assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time, but without
taking into account potential antidilution adjustments) for any such convertible
or exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Corporation (without
taking into account potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
Section 4(d)(i)(D)).
(3) In the event of any change in
the number of shares of Common Stock deliverable or in the consideration payable
to the Corporation upon
-9-
<PAGE>
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion Price of each
of the Series A-1, Series A-2 and Series B Preferred Stock, to the extent in any
way affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
(4) Upon the expiration of any
such options or rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights related to such convertible
or exchangeable securities, the Conversion Price of each of the Series A-1,
Series A-2 and Series B Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
(5) The number of shares of Common
Stock deemed issued and the consideration deemed paid therefor pursuant to
Sections 4(d)(i)(E)(1) and 4(d)(i)(E)(2) shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in either
Section 4(d)(i)(E)(3) or 4(d)(i)(E)(4).
(F) No Increased Conversion Price.
-----------------------------
Notwithstanding any other provisions of this Section (4)(d)(i), except to the
limited extent provided for in Sections 4(d)(i)(E)(3) and 4(d)(i)(E)(4), no
adjustment of the Conversion Price pursuant to this Section 4(d)(i) shall have
the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
(ii) Stock Splits and Dividends. In
--------------------------
the event the Corporation should at any time or from time to time after the
Purchase Date fix a record date for the effectuation of a split or subdivision
of the outstanding shares of Common Stock or the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
------------
Equivalents") without payment of any consideration by such holder for the
- -----------
additional shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Price of each of the
Series A-1, Series A-2 and Series B Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series of Preferred Stock shall be increased in proportion to
such increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Section 4(d)(i)(E).
-10-
<PAGE>
(iii) Reverse Stock Splits. In the event
--------------------
the number of shares of Common Stock outstanding at any time after the Purchase
Date is decreased by a combination of the outstanding shares of Common Stock,
then, immediately following the record date of such combination, the Conversion
Price of each of the Series A-1, Series A-2 and Series B Preferred Stock shall
be appropriately increased so that the number of shares of Common Stock issuable
on conversion of each share of such series shall be decreased in proportion to
such decrease in outstanding shares.
(e) Other Distributions. In the event the
-------------------
Corporation shall declare a distribution payable in securities of other persons,
evidences of indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights not referred to in Section
4(d)(ii), then, in each such case for the purpose of this Section 4(e), the
holders of Series A-1, Series A-2 and Series B Preferred Stock shall be entitled
to a proportionate share of any such distribution as though they were the
holders of the number of shares of Common Stock of the Corporation into which
their shares of Preferred Stock are convertible as of the record date fixed for
the determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(f) Recapitalizations. If at any time or from
-----------------
time to time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 4 or Section 2) provision shall be made so that the
holders of the Series A-1, Series A-2 and Series B Preferred Stock shall
thereafter be entitled to receive upon conversion of such Preferred Stock the
kind and number of shares of stock or other securities or property of the
Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of such Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares issuable upon conversion of such Preferred Stock) shall be applicable
after that event and be as nearly equivalent as practicable.
(g) No Impairment. The Corporation will not,
-------------
by amendment of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Series A-1, Series A-2 and Series B
Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to
------------------------------------------
Adjustments.
- -----------
(i) No fractional shares shall be issued
upon the conversion of any share or shares of the Series A-1, Series A-2 or
Series B Preferred Stock, and the number of shares of Common Stock to be issued
shall be rounded to the nearest whole share with one-half being rounded upward.
The number of shares issuable upon such conversion shall be determined
-11-
<PAGE>
on the basis of the total number of shares of Series A-1, Series A-2 or Series B
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment
or readjustment of the Conversion Price of Series A-1, Series A-2 or Series B
Preferred Stock pursuant to this Section 4, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of such Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A-1, Series
A-2 or Series B Preferred Stock, furnish or cause to be furnished to such holder
a like certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price for such series of Preferred Stock at the time in effect, and
(C) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of a share of
such series of Preferred Stock.
(i) Notices of Record Date. In the event
----------------------
of any taking by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series A-1, Series A-2 and Series B
Preferred Stock, at least ten (10) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion.
---------------------------------------------
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A-1, Series A-2 and Series
B Preferred Stock, such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all outstanding shares of such
series of Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of such series of Preferred Stock, in addition to
such other remedies as shall be available to the holder of such Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate of
Incorporation.
(k) Notices. Any notice required by the provisions
-------
of this Section 4 to be given to the holders of shares of Series A-1, Series A-2
or Series B Preferred Stock shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each holder of record at his
address appearing on the books of the Corporation.
-12-
<PAGE>
5. Voting Rights. Except as provided in
-------------
Section 6, the holder of each share of Series A-1, Series A-2 or Series B
Preferred Stock shall have the right to one vote for each share of Common Stock
into which such Preferred Stock could then be converted and shall have full
voting rights and powers equal to the voting rights and powers of the holders of
Common Stock, and shall be entitled, notwithstanding any provision hereof, to
notice of any stockholders' meeting in accordance with the bylaws of the
Corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis (after aggregating
all shares into which shares of Series A-1, Series A-2 or Series B Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward).
6. Protective Provisions.
---------------------
(a) Subject to the rights of any series of
Preferred Stock that may from time to time come into existence, so long as at
least three million five hundred thousand (3,500,000) shares of Series A-1,
Series A-2 and Series B Preferred Stock are outstanding (as adjusted for stock
splits, stock dividends or recapitalizations), the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series A-1,
Series A-2 and Series B Preferred Stock, voting together as a single class:
(i) effect a transaction described in
Section 2(c)(i) above or, except pursuant to the terms of the Amended and
Restated Development and Commercialization Agreement between the Corporation and
Alza Corporation effective April 28, 1999 ("Alza Agreement"), effect, in any
transaction or series of related transactions, an irrevocable sale, transfer,
license or other disposition of: (x) all significant rights associated with the
CNS Field (as defined in the Alza Agreement), (y) all rights associated with
one-third or more of the total number of Durect Fields then in existence (as
defined in the Alza Agreement); or (z) more than 35% of the fair market value of
the consolidated assets of the Corporation;
(ii) increase or decrease (other than by
redemption or conversion) the total number of authorized shares of Preferred
Stock;
(iii) authorize or issue, or obligate itself
to issue, any other equity security, including any other security convertible
into or exercisable for any equity security, having a preference over, or being
on a parity with, the Series A-1, Series A-2 or Series B Preferred Stock with
respect to voting, dividends, conversion or upon liquidation;
(iv) amend the Bylaws or the Certificate of
Incorporation to increase or decrease the number of authorized directors above
or below eight (8);
(v) redeem, purchase or otherwise acquire
(or pay into or set aside for a sinking fund for such purpose) any share or
shares of Common Stock; provided, however, that this restriction shall not apply
-------- -------
to the repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Corporation or any
subsidiary pursuant to agreements under which the Corporation has the
-13-
<PAGE>
option to repurchase such shares at cost upon the occurrence of certain events,
such as the termination of employment, or through the exercise of any right of
first refusal;
(vi) declare or pay any dividend or other
distribution on Common Stock, provided that the Corporation shall not declare or
pay any dividend on Common Stock so long as any dividends on Series B Preferred
Stock pursuant to Section 1(b) above are accrued or declared and unpaid;
(vii) except for transactions which are
contemplated in the Alza Agreement, engage in any transactions with Alza
Corporation or its successors or any person or entity who directly or indirectly
controls the Corporation or directly or indirectly owns beneficially at least
10% of the outstanding capital stock of the Corporation.
(b) So long as at least two million (2,000,000)
shares of Series B Preferred Stock are outstanding (as adjusted for stock
splits, stock dividends or recapitalizations), the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least two-thirds of the then outstanding shares of Series B
Preferred Stock, voting together as a class: (i) alter or change the rights,
preferences or privileges of the shares of Series B Preferred Stock; (ii) amend
the Certificate of Incorporation or the Bylaw of the Corporation so as to affect
adversely the shares of Series B Preferred Stock; or (iii) authorize or issue,
or obligate itself to issue, any other equity security, including any other
security convertible into or exercisable for any equity security, having a
preference over the Series B Preferred Stock with respect to voting, dividends,
conversion or upon liquidation.
7. Status of Converted Stock. In the event any shares of
-------------------------
Series A-1, Series A-2 or Series B Preferred Stock shall be converted pursuant
to Section 4 hereof, the shares so converted shall be cancelled and shall not be
issuable by the Corporation. The Certificate of Incorporation of the Corporation
shall be appropriately amended to effect the corresponding reduction in the
Corporation's authorized capital stock.
(C) Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of
---------------
all classes of stock at the time outstanding having prior rights as to
dividends, and the provisions of Section 6(a)(vi), the holders of the Common
Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of any assets of the Corporation legally available therefor, such
dividends as may be declared from time to time by the Board of Directors.
2. Liquidation Rights. Upon the liquidation,
------------------
dissolution or winding up of the Corporation, the assets of the Corporation
shall be distributed as provided in Section 2 of Article IV(B).
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock
-------------
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with
-14-
<PAGE>
the Bylaws of the Corporation, and shall be entitled to vote upon such matters
and in such manner as may be provided by law.
ARTICLE V
The Board of Directors of the Corporation is expressly authorized to
make, alter or repeal Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the
adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision."
* * *
-15-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Cupertino, California, on July 15, 1999.
/s/ James E. Brown
----------------------------
James E. Brown, President
/s/ Mark B. Weeks
----------------------------
Mark B. Weeks, Secretary
-16-
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DURECT CORPORATION
The undersigned hereby certifies that:
1. He is the duly elected and acting Secretary of Durect Corporation, a
Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware of February 6, 1998 under the name
of "Durect Therapeutics Corporation."
3. Pursuant to Section 242 of the General Corporation Law of the State
of Delaware, this Certificate of Amendment of Amended and Restated Certificate
of Incorporation amends Article IV(A) of this corporation's Certificate of
Incorporation to read in its entirety as follows:
"(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is
seventy-seven million six hundred forty-one thousand four hundred thirty six
(77,641,436) shares, each with a par value of $0.0001 per share. Fifty million
(50,000,000) shares shall be Common Stock and twenty-seven million six
hundred forty-one thousand four hundred thirty six (27,641,436) shares shall be
Preferred Stock."
4. The foregoing Certificate of Amendment has been duly adopted by this
corporation's Board of Directors and stockholders in accordance with the
applicable provisions of Section 228 and 242 of the General Corporation Law of
the State of Delaware.
Executed at Cupertino, California, March 24, 2000.
/s/ Mark B. Weeks
-----------------------------
Mark B. Weeks, Secretary
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DURECT CORPORATION
The undersigned, James E. Brown and Mark B. Weeks, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Durect Corporation, a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on February 6, 1998 under the name
"Durect Therapeutics Corporation."
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
"ARTICLE I
The name of this corporation is Durect Corporation (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle. The name of its
registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is One Hundred and Twenty
Million (120,000,000) shares, each with a par value of $0.0001 per share. One
Hundred and Ten Million (110,000,000) shares shall be Common Stock and Ten
Million (10,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the applicable law of the state of Delaware and within the
limitations and restrictions stated in this Certificate of Incorporation, to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series,
<PAGE>
but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
The following paragraph shall become effective only after such time as the
Corporation meets the criteria set forth in Subdivisions (i), (ii) or (iii) of
Section 2115(c) of the California Corporations Code (the "Effective Time").
On or prior to the date on which the Corporation first provides notice of
an annual meeting of the stockholders following the Effective Time, the Board of
Directors of the Corporation shall divide the directors into three classes, as
nearly equal in number as reasonably possible, designated Class I, Class II and
Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders or any special meeting in lieu
thereof following the Effective Time, the terms of the Class I directors shall
expire and Class I directors shall be elected for a full term of three years.
At the second annual meeting of stockholders or any special meeting in lieu
thereof following the Effective Time, the terms of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders or any special meeting in lieu
thereof following the Effective Time, the terms of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders or special meeting in lieu
thereof, directors elected to succeed the directors of the class whose terms
expire at such meeting shall be elected for a full term of three years. In
addition to the requirements of law and any other provisions hereof (and
notwithstanding the fact that approval by a lesser vote may be permitted by law
or any other provision hereof), the affirmative vote of the holders of at least
66 2/3 percent of the voting power of the then-outstanding shares of voting
stock of the Corporation entitled to vote generally in the election of directors
(the "Voting Stock"), voting together as a single class, shall be required to
amend, alter, repeal, or adopt any provision inconsistent with this paragraph.
Prior to the Effective Time, the provisions of the preceding paragraph
shall not apply, and all directors shall be elected at each annual meeting of
stockholders or any special meeting in lieu thereof to hold office until the
next annual meeting or special meeting in lieu thereof.
Notwithstanding the foregoing provisions of this Article VI, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
-2-
<PAGE>
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the Voting Stock voting
together as a single class; or (ii) by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Subject to the rights of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Any
director, or the entire Board of Directors, may be removed from office at any
time (i) with cause by the affirmative vote of the holders of at least a
majority of the voting power of the then-outstanding shares of the Voting Stock,
voting together as a single class; or (ii) without cause by the affirmative vote
of the holders of at least 66 2/3% of the voting power of the then-outstanding
shares of the Voting Stock, voting together as a single class.
ARTICLE VII
In the election of directors, each holder of shares of any class or series
of capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
ARTICLE VIII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Bylaws of the Corporation (the "Bylaws"),
and no action shall be taken by the stockholders by written consent.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE X
(A) Except as otherwise provided in the Bylaws, the Bylaws may be altered
or amended or new Bylaws adopted by the affirmative vote of at least 66 2/3% of
the voting power of all of the then-outstanding shares of the voting stock of
the Corporation entitled to vote. The Board of Directors of the Corporation is
expressly authorized to adopt, amend or repeal Bylaws.
(B) The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
-3-
<PAGE>
(C) Advance notice of stockholder nominations for the election of directors
or of business to be brought by the stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE XII
The Corporation shall have perpetual existence.
ARTICLE XIII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XIII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIV
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through Bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the General Corporation Law of Delaware, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to a corporation, its stockholders, and
others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIV shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-4-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at ____________________, on the ____ day of ___________, 2000.
_______________________________
James E. Brown, President
_______________________________
Mark B. Weeks, Secretary
-5-
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
DURECT THERAPEUTICS CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.................................................................................... 1
1.1 Registered Office................................................................................... 1
1.2 Other Offices....................................................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................................................ 1
2.1 Place Of Meetings................................................................................... 1
2.2 Annual Meeting...................................................................................... 1
2.3 Special Meeting..................................................................................... 1
2.4 Notice Of Stockholders' Meetings.................................................................... 2
2.5 Manner Of Giving Notice; Affidavit Of Notice........................................................ 2
2.6 Quorum.............................................................................................. 2
2.7 Adjourned Meeting; Notice........................................................................... 2
2.8 Conduct Of Business................................................................................. 3
2.9 Voting.............................................................................................. 3
2.10 Waiver Of Notice................................................................................... 3
2.11 Stockholder Action By Written Consent Without A Meeting............................................ 3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents........................................ 4
2.13 Proxies............................................................................................ 4
ARTICLE III - DIRECTORS.......................................................................................... 5
3.1 Powers.............................................................................................. 5
3.2 Number Of Directors................................................................................. 5
3.3 Election, Qualification And Term Of Office Of Directors............................................. 5
3.4 Resignation And Vacancies........................................................................... 5
3.5 Place Of Meetings; Meetings By Telephone............................................................ 6
3.6 Regular Meetings.................................................................................... 6
3.7 Special Meetings; Notice............................................................................ 7
3.8 Quorum.............................................................................................. 7
3.9 Waiver Of Notice.................................................................................... 7
3.10 Board Action By Written Consent Without A Meeting.................................................. 8
3.11 Fees And Compensation Of Directors................................................................. 8
3.12 Approval Of Loans To Officers...................................................................... 8
3.13 Removal Of Directors............................................................................... 8
3.14 Chairman Of The Board Of Directors................................................................. 8
ARTICLE IV - COMMITTEES.......................................................................................... 9
4.1 Committees Of Directors............................................................................. 9
4.2 Committee Minutes................................................................................... 9
4.3 Meetings And Action Of Committees................................................................... 9
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V - OFFICERS............................................................................................. 10
5.1 Officers............................................................................................ 10
5.2 Appointment Of Officers............................................................................. 10
5.3 Subordinate Officers................................................................................ 10
5.4 Removal And Resignation Of Officers................................................................. 10
5.5 Vacancies In Offices................................................................................ 10
5.6 Chief Executive Officer............................................................................. 11
5.7 President........................................................................................... 11
5.8 Vice Presidents..................................................................................... 11
5.9 Secretary........................................................................................... 11
5.10 Chief Financial Officer............................................................................ 12
5.11 Representation Of Shares Of Other Corporations..................................................... 12
5.12 Authority And Duties Of Officers................................................................... 12
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS................................. 13
6.1 Indemnification Of Directors And Officers........................................................... 13
6.2 Indemnification Of Others........................................................................... 13
6.3 Payment Of Expenses In Advance...................................................................... 13
6.4 Indemnity Not Exclusive............................................................................. 13
6.5 Insurance........................................................................................... 14
6.6 Conflicts........................................................................................... 14
ARTICLE VII - RECORDS AND REPORTS................................................................................ 14
7.1 Maintenance And Inspection Of Records............................................................... 14
7.2 Inspection By Directors............................................................................. 15
7.3 Annual Statement To Stockholders.................................................................... 15
ARTICLE VIII - GENERAL MATTERS................................................................................... 15
8.1 Checks.............................................................................................. 15
8.2 Execution Of Corporate Contracts And Instruments.................................................... 15
8.3 Stock Certificates; Partly Paid Shares.............................................................. 15
8.4 Special Designation On Certificates................................................................. 16
8.5 Lost Certificates................................................................................... 16
8.6 Construction; Definitions........................................................................... 17
8.7 Dividends........................................................................................... 17
8.8 Fiscal Year......................................................................................... 17
8.9 Seal................................................................................................ 17
8.10 Transfer Of Stock.................................................................................. 17
</TABLE>
-3-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.11 Stock Transfer Agreements.......................................................................... 18
8.12 Registered Stockholders............................................................................ 18
ARTICLE IX - AMENDMENTS.......................................................................................... 18
</TABLE>
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<PAGE>
BYLAWS
OF
DURECT THERAPEUTICS CORPORATION
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Corporate Service Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
--------------
The annual meeting of stockholders shall be held on such date, time
and place, either within or without the State of Delaware, as may be designated
by resolution of the Board of Directors each year. At the meeting, directors
shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the chairman of the board, the president or by one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the president or the chairman of the board, the request
shall be in writing, specifying the time of such meeting and the general nature
of the business proposed to be transacted, and
<PAGE>
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after the receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
2.4 Notice Of Stockholders' Meetings.
--------------------------------
All notices of meetings with stockholders shall be in writing and
shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
2.5 Manner Of Giving Notice; Affidavit Of Notice.
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the
-2-
<PAGE>
corporation may transact any business that might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
2.8 Conduct Of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
2.9 Voting.
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 Stockholder Action By Written Consent Without A Meeting.
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in
-3-
<PAGE>
writing. If the action which is consented to is such as would have required the
filing of a certificate under any section of the General Corporation Law of
Delaware if such action had been voted on by stockholders at a meeting thereof,
then the certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of stockholders, that
written notice and written consent have been given as provided in Section 228 of
the General Corporation Law of Delaware.
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders entitled to consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is delivered to the corporation.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.13 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's
-4-
<PAGE>
attorney-in-fact. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Section 212(e) of the General
Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number Of Directors.
-------------------
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be 3. Thereafter, this number
may be changed by a resolution of the Board of Directors or of the stockholders,
subject to Section 3.4 of these Bylaws. No reduction of the authorized number
of directors shall have the effect of removing any director before such
director's term of office expires.
3.3 Election, Qualification And Term Of Office Of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation And Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a
-5-
<PAGE>
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
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<PAGE>
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
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<PAGE>
3.10 Board Action By Written Consent Without A Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees And Compensation Of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal Of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman Of The Board Of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
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<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 Committees Of Directors.
-----------------------
The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate 1 or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, or in these Bylaws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by this chapter to be
submitted to stockholders for approval or (ii) adopting, amending or repealing
any Bylaw of the corporation.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings And Action Of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
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<PAGE>
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment Of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
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<PAGE>
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
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<PAGE>
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these Bylaws. He or she shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of
the corporation shall respectively have such authority and perform such duties
in the management of the business of the corporation as may be designated from
time to time by the Board of Directors or the stockholders.
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<PAGE>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
------------------------------------------------------------
AGENTS
------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent
and in the manner permitted by the General Corporation Law of Delaware, to
indemnify each of its employees and agents (other than directors and officers)
against expenses (including attorneys' fees), judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) includes any person (a) who
is or was an employee or agent of the corporation, (b) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for
which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw,
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<PAGE>
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office, to the extent that such additional rights to
indemnification are authorized in the certificate of incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive
offices or at such place or places as designated by the Board of Directors, keep
a record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these Bylaws as amended
to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection,
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the demand under oath shall be accompanied by a power of attorney or such other
writing that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in Delaware or at its principal place of business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's
stock ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by
certificates, provided that the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of
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<PAGE>
any or all classes or series of its stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the adoption
of such a resolution by the Board of Directors, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
corporation by the chairman or vice-chairman of the Board of Directors, or the
president or vice-president, and by the chief financial officer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares
as partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class
of stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
that the corporation shall issue to represent such class or series of stock;
provided, however, that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or destroyed, and the corporation may require the owner of the lost,
stolen or
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<PAGE>
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation Law
shall govern the construction of these Bylaws. Without limiting the generality
of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of
the funds of the corporation available for dividends a reserve or reserves for
any proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors and may be changed by the Board of
Directors.
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be
altered at pleasure, and may use the same by causing it or a facsimile thereof,
to be impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
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8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
DURECT THERAPEUTICS CORPORATION
Adoption by Incorporator
------------------------
The undersigned person appointed in the certificate of incorporation to
act as the Incorporator of Durect Therapeutics Corporation hereby adopts the
foregoing bylaws as the Bylaws of the corporation.
Executed this 6th day of February, 1998.
/s/ Keith Mosley
----------------
C. Keith Mosley, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that the undersigned is the duly
elected, qualified, and acting Secretary of Durect Therapeutics Corporation, and
that the foregoing Bylaws were adopted as the Bylaws of the corporation on
February 6, 1998, by the person appointed in the certificate of incorporation to
act as the Incorporator of the corporation.
Executed this 6th day of February 1998.
/s/ Tae Hea Nahm
-----------------------
Tae Hea Nahm, Secretary
-19-
<PAGE>
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
DURECT THERAPEUTICS CORPORATION
The undersigned, Tae Hea Nahm, hereby certifies that:
1. I am the duly elected and incumbent Secretary of Durect
Therapeutics Corporation, a Delaware corporation (the "Company").
-------
2. By action of the Board of Directors of the Company duly
pursuant to Action by Unanimous Written Consent effective as of June 3, 1998,
certain sections of the Bylaws of the Company were amended to read as set forth
on Exhibit A attached hereto.
3. The matters set forth in this certificate are true and correct
of my own knowledge.
Dated: June 3, 1998
/s/Tae Hea Nahm
-----------------------
Tae Hea Nahm, Secretary
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<PAGE>
EXHIBIT A
---------
1. Article III, Section 3.2 of the Bylaws of the Company is
amended to read in its entirety as follows:
"3.2 Number Of Directors
-------------------
The number of directors constituting the
entire Board of Directors shall be 7. Thereafter, this number
may be changed by a resolution of the Board of Directors or of
the stockholders, subject to Section 3.4 of these Bylaws. No
reduction of the authorized number of directors shall have the
effect of removing any director before such director's term of
office expires."
2. The first paragraph of Article III, Section 3.4 of the
Bylaws of the Company is amended to read in its entirety as follows:
"3.4 Resignation And Vacancies
-------------------------
Any director may resign at any time upon
written notice to the attention of the Secretary of the
corporation. When one or more directors so resigns and the
resignation is effective at a future date, except where
provided for to the contrary in any voting agreement to which
the corporation is a party, a majority of the directors then
in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to
take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as
provided in this section in the filling of other vacancies."
3. The first paragraph of Article III, Section 3.13 of the
Bylaws of the Company is amended to read in its entirety as follows:
"3.13 Removal Of Directors
--------------------
Unless otherwise restricted by statute, by
the certificate of incorporation or by these Bylaws, or where
provided for to the contrary in any voting agreement to which
the corporation is a party, any director or the entire Board
of Directors may be removed, with or without cause, by
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<PAGE>
the holders of a majority of the shares then entitled to vote
at an election of directors; provided, however, that if the
stockholders of the corporation are entitled to cumulative
voting, if less than the entire Board of Directors is to be
removed, no director may be removed without cause if the votes
cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of
directors shall have the effect of removing any director prior
to the expiration of such director's term of office."
4. Article IX of the Bylaws of the Company be amended to read
in its entirety as follows:
"AMENDMENTS
-----------
The Bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided,
however, that the corporation may, in its certificate of
incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors; and further provided that any
amendment to Sections 3.4 and Section 3.13 of Article III
shall only be effective upon the amendment of any voting
agreements to which the corporation is a party if such voting
agreements would otherwise be in conflict with such Sections,
as amended. The fact that such power has been so conferred
upon the directors shall not divest the stockholders of the
power, nor limit their power to adopt, amend or repeal
Bylaws."
-22-
<PAGE>
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
DURECT CORPORATION
The undersigned, Mark B. Weeks, hereby certifies that:
1. I am the duly elected and incumbent Secretary of Durect
Corporation, a Delaware corporation (the "Company").
-------
2. Pursuant to an Action by Written Consent of the Stockholders of the
Company, effective as of July 16, 1999, the first sentence of Article III,
Section 3.2 of the Bylaws of the Company was amended to read in its entirety as
follows:
"The number of directors of the corporation shall be not less than five
(5) nor more than eight (8) The exact number of directors shall be
eight (8) until changed, within the limits specified above, by a bylaw
amending this Section 3.2, duly adopted by the board of directors or by
the shareholders of the corporation."
3. The matters set forth in this certificate are true and correct
of my own knowledge.
Date: July 16, 1999
/s/ Mark Weeks
----------------------------
Mark B. Weeks, Secretary
-23-
<PAGE>
EXHIBIT 3.5
BYLAWS
OF
DURECT CORPORATION
(AS AMENDED AND RESTATED EFFECTIVE __________ __, 2000)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES....................................................................... 1
1.1 Registered Office......................................................................... 1
1.2 Other Offices............................................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................................... 1
2.1 Place of Meetings......................................................................... 1
2.2 Annual Meeting............................................................................ 1
2.3 Special Meeting........................................................................... 2
2.4 Notice of Stockholder's Meetings; Affidavit of Notice..................................... 2
2.5 Advance Notice of Stockholder Nominees and Other Stockholder Proposals.................... 3
2.6 Quorum.................................................................................... 4
2.7 Adjourned Meeting; Notice................................................................. 4
2.8 Conduct of Business....................................................................... 4
2.9 Voting.................................................................................... 4
2.10 Waiver of Notice.......................................................................... 5
2.11 Record Date for Stockholder Notice; Voting................................................ 5
2.12 Proxies................................................................................... 5
ARTICLE III - DIRECTORS............................................................................. 6
3.1 Powers.................................................................................... 6
3.2 Number of Directors....................................................................... 6
3.3 Election, Qualification and Term of Office of Directors................................... 6
3.4 Resignation and Vacancies................................................................. 7
3.5 Place of Meetings; Meetings by Telephone.................................................. 8
3.6 Regular Meetings.......................................................................... 8
3.7 Special Meetings; Notice.................................................................. 8
3.8 Quorum.................................................................................... 8
3.9 Waiver of Notice.......................................................................... 9
3.10 Board Action by Written Consent Without a Meeting......................................... 9
3.11 Fees and Compensation of Directors........................................................ 9
3.12 Approval of Loans to Officers............................................................. 9
3.13 Removal of Directors...................................................................... 10
3.14 Chairman of the Board of Directors........................................................ 10
ARTICLE IV - COMMITTEES............................................................................. 10
4.1 Committees of Directors................................................................... 10
4.2 Committee Minutes......................................................................... 11
4.3 Meetings and Action of Committees......................................................... 11
ARTICLE V - OFFICERS................................................................................ 11
5.1 Officers.................................................................................. 11
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
5.2 Appointment of Officers........................................................ 12
5.3 Subordinate Officers........................................................... 12
5.4 Removal and Resignation of Officers............................................ 12
5.5 Vacancies in Offices........................................................... 12
5.6 Chief Executive Officer........................................................ 12
5.7 President...................................................................... 13
5.8 Vice Presidents................................................................ 13
5.9 Secretary...................................................................... 13
5.10 Chief Financial Officer........................................................ 13
5.11 Representation of Shares of Other Corporations................................. 14
5.12 Authority and Duties of Officers............................................... 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS......... 14
6.1 Indemnification of Directors and Officers...................................... 14
6.2 Indemnification of Others...................................................... 15
6.3 Payment of Expenses in Advance................................................. 15
6.4 Indemnity Not Exclusive........................................................ 15
6.5 Insurance...................................................................... 15
6.6 Conflicts...................................................................... 16
ARTICLE VII - RECORDS AND REPORTS........................................................ 16
7.1 Maintenance and Inspection of Records.......................................... 16
7.2 Inspection by Directors........................................................ 16
7.3 Annual Statement to Stockholders............................................... 17
ARTICLE VIII - GENERAL MATTERS........................................................... 17
8.1 Checks......................................................................... 17
8.2 Execution of Corporate Contracts And Instruments............................... 17
8.3 Stock Certificates; Partly Paid Shares......................................... 17
8.4 Special Designation on Certificates............................................ 18
8.5 Lost Certificates.............................................................. 18
8.6 Construction; Definitions...................................................... 18
8.7 Dividends...................................................................... 19
8.8 Fiscal Year.................................................................... 19
8.9 Seal........................................................................... 19
8.10 Transfer of Stock.............................................................. 19
8.11 Stock Transfer Agreements...................................................... 19
8.12 Registered Stockholders........................................................ 19
ARTICLE IX............................................................................... 20
</TABLE>
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<PAGE>
AMENDED AND RESTARTED
BYLAWS
OFC
DURECT CORPORATION
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 Annual Meeting.
--------------
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by resolution of the Board of Directors. At the
meeting, directors shall be elected and any other proper business may be
transacted.
(b) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
<PAGE>
(c) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of
this Section 2.2, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation, as provided in Section 2.5, and
such business must be a proper matter for stockholder action under the General
Corporation Law of Delaware.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in these Bylaws. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) Nothing in this Section 2.2 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 Special Meeting.
---------------
(a) A special meeting of the stockholders may be called at any time by
the Board of Directors, the chairman of the board or the president.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders, if such election is set forth in
the notice of such special meeting. Such nominations may be made either by or
at the direction of the Board of Directors, or by any stockholder of record
entitled to vote at such special meeting, provided the stockholder follows the
notice procedures set forth in Section 2.5.
2.4 Notice of Stockholder's Meetings; Affidavit of Notice.
-----------------------------------------------------
(a) All notices of meetings of stockholders shall be in writing and
shall be sent or otherwise given in accordance with this Section 2.4 of these
Bylaws not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting (or such longer or shorter
time as is required by Section 2.5 of these Bylaws, if applicable). The notice
shall specify the place, date, and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
(b) If a special meeting is called by stockholders representing the
percentage of the total votes outstanding designated in Section 2.3(a), the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be
-2-
<PAGE>
transacted, and shall be delivered personally, or sent by registered mail or by
facsimile transmission to the chairman of the board, the president, any vice
president, or the secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such request. The officer
receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of this Section
2.4, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than 35 nor more than 60 days after the receipt of
the request. If the notice is not given within 20 days after the receipt of the
request, the person or persons requesting the meeting may give the notice.
Nothing contained in this Section 2.4(b) shall be construed as limiting, fixing,
or affecting the time when a meeting of stockholders called by action of the
Board of Directors may be held.
2.5 Advance Notice of Stockholder Nominees and Other Stockholder
------------------------------------------------------------
Proposals.
- ---------
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. Stockholders may bring other
business before the annual meeting, provided that timely notice is provided to
the secretary of the Corporation in accordance with this section, and provided
further that such business is a proper matter for stockholder action under the
General Corporation Law of Delaware. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 days nor more than 120 days prior to the
anniversary date of the prior year's meeting; provided, however, that in the
event that (i) the date of the annual meeting is more than 30 days prior to or
more than 60 days after such anniversary date, and (ii) less than 60 days notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10/th/ day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a directors, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934 (including, without limitation, such person's written consent to being name
in the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the proposal is made (i) the name and address of the
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii)
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<PAGE>
the class and number of shares of the Corporation which are owned of record by
such stockholder and beneficially by such beneficial owner. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a director shall furnish to the secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 2.5. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the Bylaws, and if he or she should
so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.8 Conduct of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
2.9 Voting.
------
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to
-4-
<PAGE>
voting rights of fiduciaries, pledgors and joint owners of stock and to voting
trusts and other voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.
2.11 Record Date for Stockholder Notice; Voting.
------------------------------------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action. If the Board of Directors does not
so fix a record date:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(b) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.12 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the
-5-
<PAGE>
stockholder and filed with the secretary of the Corporation, but no such proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, electronic or telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the Certificate of Incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number of Directors.
-------------------
The number of directors constituting the entire Board of Directors
shall be eight (8).
Thereafter, this number may be changed by a resolution of the Board of
Directors or of the stockholders, subject to Section 3.4 of these Bylaws. No
reduction of the authorized number of directors shall have the effect of
removing any director before such director's term of office expires.
3.3 Election, Qualification and Term of Office of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, and unless
otherwise provided in the Certificate of Incorporation, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Directors need not be stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed.
Each director, including a director elected to fill a vacancy, shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
-6-
<PAGE>
Unless otherwise specified in the Certificate of Incorporation,
elections of directors need not be by written ballot.
3.4 Resignation and Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the secretary of the Corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the Certificate of Incorporation, and subject to
the rights of the holders of any series of Preferred Stock that may then be
outstanding, a vacancy created by the removal of a director by the vote of the
stockholders or by court order may be filled only by the affirmative vote of a
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute a majority
of the quorum. Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole Board of Directors (as constituted immediately prior to any such
increase), then the Court of Chancery may, upon application of any stockholder
or stockholders holding at least 10% of the total number of the shares at the
time outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the
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<PAGE>
directors chosen by the directors then in office as aforesaid, which election
shall be governed by the provisions of Section 211 of the General Corporation
Law of Delaware as far as applicable.
3.5 Place of Meetings; Meetings by Telephone.
----------------------------------------
The Board of Directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware. Unless
otherwise restricted by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board of Directors.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone, telecopy, telegram, telex or other similar means of communication, it
shall be delivered at least twenty-four (24) hours before the time of the
holding of the meeting, or on such shorter notice as the person or persons
calling such meeting may deem necessary and appropriate in the circumstances.
Any oral notice given personally or by telephone may be communicated either to
the director or to a person at the office of the director who the person giving
the notice has reason to believe will promptly communicate it to the director.
The notice need not specify the purpose of the place of the meeting, if the
meeting is to be held at the principal executive office of the Corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the
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directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the Certificate of
Incorporation or these Bylaws.
3.10 Board Action by Written Consent Without a Meeting.
-------------------------------------------------
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee. Written consents
representing actions taken by the board or committee may be executed by telex,
telecopy or other facsimile transmission, and such facsimile shall be valid and
binding to the same extent as if it were an original.
3.11 Fees and Compensation of Directors.
----------------------------------
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
3.12 Approval of Loans to Officers.
-----------------------------
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without
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limitation, a pledge of shares of stock of the Corporation. Nothing in this
Section 3.2 contained shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the Corporation at common law or under any statute.
3.13 Removal of Directors.
--------------------
Unless otherwise restricted by statute, by the Certificate of
Incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the Corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman of the Board of Directors.
----------------------------------
The Corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board of Directors who shall not be considered an
officer of the Corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, with each committee
to consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in the Bylaws of the Corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (a) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares
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for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series),(b) adopt an agreement of merger or consolidation under Sections 251
or 252 of the General Corporation Law of Delaware, (c) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, (d) recommend to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or (e) amend
the Bylaws of the Corporation; and, unless the board resolution establishing the
committee, the Bylaws or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings and Action of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the Corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The Corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
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5.2 Appointment of Officers.
-----------------------
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the Corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the Board of Directors or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the secretary of the Corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the Corporation under any
contract to which the officer is a party.
5.5 Vacancies in Offices.
--------------------
Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the Corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the Corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
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5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the Corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the Board Of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts,
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disbursements, gains, losses, capital retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the Corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
5.11 Representation of Shares of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this Corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this Corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this Corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
5.12 Authority and Duties of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
---------------------------------------------------
AND OTHER AGENTS
----------------
6.1 Indemnification of Directors and Officers.
-----------------------------------------
The Corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the Corporation. For purposes of this Section 6.1, a
"director" or "officer" of the Corporation includes any person (a) who is or was
a director or officer of the Corporation, (b) who is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a Corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
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<PAGE>
6.2 Indemnification of Others.
-------------------------
The Corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the Corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other
than a director or officer) includes any person (a) who is or was an employee or
agent of the Corporation, (b) who is or was serving at the request of the
Corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (c) who was an employee or agent of a
corporation which was a predecessor corporation of the Corporation or of another
enterprise at the request of such predecessor corporation.
6.3 Payment of Expenses in Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the Corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may been
titled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Certificate of
Incorporation.
6.5 Insurance.
---------
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the Certificate
of Incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance and Inspection of Records.
-------------------------------------
The Corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection by Directors.
-----------------------
Any director shall have the right to examine the Corporation's
stockledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the Corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its
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discretion, prescribe any limitations or conditions with reference to the
inspection, or award such other and further relief as the Court may deem just
and proper.
7.3 Annual Statement to Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the Corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution of Corporate Contracts and Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the Corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of the Corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate
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is issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
Corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
Corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation on Certificates.
-----------------------------------
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
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8.7 Dividends.
---------
The directors of the Corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the Certificate
of Incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
Corporation's capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
----
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer of Stock.
-----------------
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
----------
The Bylaws of the Corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the Corporation may,
in its Certificate of Incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
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CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
OF
DURECT CORPORATION
The undersigned hereby certifies that the undersigned is the duly
elected, qualified, and acting Secretary of Durect Corporation (the
"Corporation"), and that the foregoing Amended and Restated Bylaws, comprising
20 pages, were adopted the Bylaws of the corporation on March __, 2000 by the
Board of Directors of the corporation.
Executed this _____ day of _________________, ___.
_____________________________________
Mark B. Weeks, Secretary
<PAGE>
EXHIBIT 3.6
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES B-1 PREFERRED STOCK
OF
DURECT CORPORATION
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
We, James E. Brown and Mark B. Weeks, the Chief Executive Officer and the
Secretary, respectively, of Durect Corporation, a Delaware corporation (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
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HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Amended and Restated Certificate of Incorporation of the said Corporation (the
"Restated Certificate"), the Board of Directors on September 17, 1999 adopted
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the following resolution creating a series of shares of Preferred Stock
designated as Series B-1 Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Restated Certificate, the Board of Directors does
hereby provide for the issue of a Series of Preferred Stock, $0.0001 par value,
of the Corporation, to be designated "Series B-1 Preferred Stock", initially
consisting of Four Hundred and Fifty Thousand (450,000) shares, and to the
extent that the designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of the Series B-1
Preferred Stock are not stated and expressed in the Restated Certificate, does
hereby fix and herein state and express such designations, powers, preferences
and relative and other special rights and the qualifications, limitations and
restrictions thereof, as follows (all terms used herein which are defined in the
Restated Certificate shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series B-1 Preferred Stock", par value $0.0001 per share, and the
number of shares constituting such series shall be Four Hundred and Fifty
Thousand (450,000).
Section 2. Dividend Provisions. Subject to the rights of series of
-------------------
Preferred Stock which may from time to time come into existence, the holders of
shares of Series B-1 Preferred Stock shall be entitled to receive dividends, out
of any assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) on the Common Stock of the Corporation, at the rate of $0.13975 per
share (as adjusted for stock splits, stock dividends, reclassification and the
like) per annum on each outstanding share of Series B-1
<PAGE>
Preferred Stock, payable quarterly when, as and if declared by the Board of
Directors; provided, however, that no dividend shall be declared or paid on the
shares of Series B-1 Preferred Stock unless dividends have been declared and
paid in full to the holders of Series A, Series A-1 and Series B Preferred
Stock. Such dividends shall not be cumulative.
Section 3. Liquidation.
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(a) Preference. In the event of any liquidation, dissolution or
----------
winding up of the Corporation, either voluntary or involuntary, subject to the
rights of series of Preferred Stock that may from time to time come into
existence, the holders of the Series B-1 Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Series A-1 Preferred Stock or Common Stock by
reason of their ownership thereof, an amount per share equal to $2.15 per share
(as adjusted for stock splits, stock dividends, reclassification and the like)
for each share of Series B-1 Preferred Stock then held by them, plus declared
but unpaid dividends. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A-2, Series B and Series
B-1 Preferred Stock shall be insufficient to permit the payment to such holders
of the full preferential amounts due to such holders pursuant to the foregoing
and pursuant to the Corporation's Amended and Restated Certificate of
Incorporation, then, subject to the rights of series of Preferred Stock that may
from time to time come into existence, the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A-2, Series B and Series B-1 Preferred Stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
(b) Remaining Assets. Upon the completion of the distribution
----------------
required by Section 3(a) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence, if assets remain in the Corporation, such assets will be distributed
as set forth in Article IV, Section 2(b) of the Restated Certificate.
(c) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of this Section 3, a
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liquidation, dissolution or winding up of the Corporation shall be deemed to
occur as set forth in Article IV, Section 2(c)(i) of the Restated Certificate.
(ii) Notice of Transaction. The Corporation shall give each
---------------------
holder of record of Series B-1 Preferred Stock written notice of a deemed
liquidation as described in Section 3(c)(i) hereof according to the same terms
and subject to the same provisions with respect to the shortening of such notice
periods as set forth in Article IV, Section 2(c)(iii) of the Restated
Certificate with respect to holders of Series A-1, Series A-2 and Series B
Preferred Stock.
Section 4. Redemption. The Series B-1 Preferred Stock is not redeemable.
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<PAGE>
Section 5. Conversion. The holders of the Series B-1 Preferred Stock
----------
shall have conversion rights as follows (the "Conversion Rights"):
-----------------
(a) Right to Convert. Subject to Section 5(c), each share of
----------------
Series B-1 Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
the Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing $2.15
by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.
The initial Conversion Price per share of Series B-1 Preferred Stock shall be
$2.15. Such initial Conversion Price shall be subject to adjustment as set forth
in Section 5(d).
(b) Automatic Conversion. Each share of Series B-1 Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such share immediately upon the earlier of (i)
except as provided below in Section 5(c), the Corporation's sale of its Common
Stock in a firm commitment underwritten public offering pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with a per share public offering price of at least $7.00 and
- ---------------
which results in gross proceeds to the Corporation of $25 million or (ii) the
date specified by vote or written consent, as provided by law, of the holders of
at least a majority of the then outstanding shares of Series A-1, Series A-2,
Series B and Series B-1 Preferred Stock, voting together as a single class,
provided that all shares of Series A-1, Series A-2, Series B and Series B-1
Preferred Stock are converted at such time.
(c) Mechanics of Conversion. Before any holder of Series B-1
-----------------------
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for such
series of Preferred Stock, and shall give written notice to the Corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of such series of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offering of securities registered pursuant to the
Securities Act the conversion may, at the option of any holder tendering such
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive Common Stock upon conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
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<PAGE>
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
B-1 Preferred Stock shall be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below Conversion Price. If
---------------------------------------------------
the Corporation shall issue, after the date upon which any shares of Series B-1
Preferred Stock were first issued (the "Purchase Date" with respect to such
-------------
series), any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
automatically be adjusted as set forth in this Section 5(d)(i), unless otherwise
provided in this Section 5(d)(i).
(A) Adjustment Formula. Whenever the Conversion Price
------------------
is adjusted pursuant to this Section (5)(d)(i), the new Conversion Price shall
be determined by multiplying the Conversion Price then in effect by a fraction,
(x) the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance (the "Outstanding Common") plus
------------------
the number of shares of Common Stock that the aggregate consideration received
by the Corporation for such issuance would purchase at such Conversion Price;
and (y) the denominator of which shall be the number of shares of Outstanding
Common plus the number of shares of such Additional Stock. For purposes of the
foregoing calculation, the term "Outstanding Common" shall include shares of
Common Stock deemed issued pursuant to Section 5(d)(i)(E) below.
(B) Definition of "Additional Stock". For purposes of
--------------------------------
this Section 5(d)(i), "Additional Stock" shall mean any shares of Common Stock
----------------
issued (or deemed to have been issued pursuant to Section 5(d)(i)(E)) by the
Corporation after the Purchase Date other than
(1) Common Stock issued pursuant to a transaction
described in Section 5(d)(ii) hereof,
(2) Not more than 2,000,000 shares of Common Stock
issuable or issued prior to, on or after the Purchase Date to employees,
consultants or directors of the Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of the
Corporation,
(3) Not more than 500,000 shares of capital stock, or
options or warrants to purchase capital stock, issued to financial institutions
or lessors in connection with commercial credit arrangements, equipment
financings or similar transactions approved by the Board of Directors,
(4) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers,
partnering transactions or similar transactions ("Transactions"), the terms of
which are approved by the Board of Directors, unless the Director designated by
the Series B Preferred Stock reasonably
-4-
<PAGE>
determines in good faith, in his or her capacity as Director of the Corporation,
that the value of the assets, consideration or rights received by the
Corporation in such Transaction, when taken as a whole, would not contribute to
increasing the value of the Corporation so as to justify issuance of such
capital stock or warrants or options to purchase capital stock in such
Transaction,
(5) Shares of Common Stock issued or issuable upon
conversion of the Series A-1, Series A-2, Series B or Series B-1 Preferred
Stock, and
(6) Shares of Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Series A-1, Series A-2, Series B and Series B-1 Preferred Stock will be
converted into shares of Common Stock.
(C) No Fractional Adjustments. No adjustment of the
-------------------------
Conversion Price for the Series B-1 Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
the earlier of three years from the date of the event giving rise to the
adjustment being carried forward or the conversion of such shares into Common
Stock in accordance with the terms hereof, or shall be made on the earlier of
the end of three years from the date of the event giving rise to the adjustment
being carried forward or such conversion.
(D) Determination of Consideration. In the case of the
------------------------------
issuance of Common Stock for cash, the consideration shall be deemed to be the
amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
In the case of the issuance of the Common Stock for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to be
the fair value thereof as determined in good faith by the Board of Directors;
provided, however, if the holders of a majority of the then outstanding shares
of the Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B
Preferred Stock (the "Contesting Holders") notify the Board of Directors of the
Corporation within ten (10) business days after receiving written notification
of such determination of the fair market value that they disagree with such
determination, then the fair market value of the consideration shall be mutually
agreed upon by the Board of Directors and the holders of a majority of the
Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B Preferred
Stock within thirty (30) days after the receipt of notice by the Board of
Directors from the Contesting Holders.
(E) Deemed Issuances of Common Stock. In the case of
--------------------------------
the issuance (whether before, on or after the applicable Purchase Date) of
options to purchase or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock or options to purchase
or rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 5(d)(i):
-5-
<PAGE>
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in Section
5(d)(i)(D)), if any, received by the Corporation upon the issuance of such
options or rights plus the minimum exercise price provided in such options or
rights (without taking into account potential antidilution adjustments) for the
Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the satisfaction
of any conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or exchangeable securities or
upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in Section 5(d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of each of the Series A-1, Series A-2, Series B and Series B-1
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of each of the Series A-1, Series A-2, Series B
and Series B-1 Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities.
-6-
<PAGE>
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to Sections
5(d)(i)(E)(1) and 5(d)(i)(E)(2) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either Section
5(d)(i)(E)(3) or 5(d)(i)(E)(4).
(F) No Increased Conversion Price. Notwithstanding any
-----------------------------
other provisions of this Section (5)(d)(i), except to the limited extent
provided for in Sections 5(d)(i)(E)(3) and 5(d)(i)(E)(4), no adjustment of the
Conversion Price pursuant to this Section 5(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the
--------------------------
Corporation should at any time or from time to time after the Purchase Date fix
a record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
------------------------
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price of the Series B-1 Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series of Preferred Stock shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
Section 5(d)(i)(E).
(iii) Reverse Stock Splits. In the event the number of shares
--------------------
of Common Stock outstanding at any time after the Purchase Date is decreased by
a combination of the outstanding shares of Common Stock, then, immediately
following the record date of such combination, the Conversion Price of the
Series B-1 Preferred Stock shall be appropriately increased so that the number
of shares of Common Stock issuable on conversion of each share of such series
shall be decreased in proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event the Corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 5(d)(ii), then, in
each such case for the purpose of this Section 5(e), the holders of Series B-1
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
-7-
<PAGE>
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 5 or Section 3) provision shall be made so that the holders of the
Series B-1, Preferred Stock shall thereafter be entitled to receive upon
conversion of such Preferred Stock the kind and number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of such Preferred Stock after the recapitalization to the end that
the provisions of this Section 5 (including adjustment of the Conversion Price
then in effect and the number of shares issuable upon conversion of such
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 5 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Series B-1 Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series B-1 Preferred Stock, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share
with one-half being rounded upward. The number of shares issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series B-1 Preferred Stock the holder is at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series B-1 Preferred Stock pursuant to this Section 5,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of such Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B-1 Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such series of Preferred Stock at
the time in effect, and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of such series of Preferred Stock.
-8-
<PAGE>
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series B-1 Preferred Stock, at least ten (10) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A-1, Series A-2, Series B and Series B-1 Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of such series of
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of such series of Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate of
Incorporation.
(k) Notices. Any notice required by the provisions of this
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Section 5 to be given to the holders of shares of Series B-1 Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
Section 6. Voting Rights. The holder of each share of Series B-1
-------------
Preferred Stock shall have the right to one vote for each share of Common Stock
into which such Preferred Stock could then be converted, and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series B-1
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
Section 7. Protective Provisions. So long as 200,000 shares of Series B-1
---------------------
Preferred Stock are outstanding (as adjusted for stock splits, stock dividends
or recapitalizations), the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of Series B-1
-9-
<PAGE>
Preferred Stock, voting together as a class: (i) alter or change the rights,
preferences or privileges of the shares of Series B-1 Preferred Stock or (ii)
amend the Certificate of Incorporation or the Bylaw of the Corporation so as to
affect adversely the shares of Series B-1 Preferred Stock in a manner materially
different from any other series of Preferred Stock.
Section 8. Status of Converted Stock. In the event any shares of Series
-------------------------
B-1 Preferred Stock shall be converted pursuant to Section 5 hereof, the shares
so converted shall be cancelled and shall not be issuable by the Corporation.
The Certificate of Incorporation of the Corporation shall be appropriately
amended to effect the corresponding reduction in the Corporation's authorized
capital stock.
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<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 30th day of
September, 1999.
/s/ James E. Brown
------------------
James E. Brown
Chief Executive Officer
ATTEST:
/s/ Mark B. Weeks
- -----------------
Mark B. Weeks, Secretary
-11-
<PAGE>
EXHIBIT 3.7
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES C PREFERRED STOCK
OF
DURECT CORPORATION
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
I, James E. Brown, the Chief Executive Officer of Durect Corporation, a
Delaware corporation (the "Corporation"), in accordance with the provisions of
-----------
Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Amended and Restated Certificate of Incorporation of the said Corporation (the
"Restated Certificate"), the Board of Directors on March __, 2000 adopted the
--------------------
following resolution creating a series of shares of Preferred Stock designated
as Series C Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Restated Certificate, the Board of Directors does
hereby create and provide for the issuance of a series of Preferred Stock,
$0.0001 par value, of the Corporation, to be designated "Series C Preferred
Stock", initially consisting of three million five hundred seventy one thousand,
four hundred twenty nine (3,571,429) shares, and to the extent that the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series C Preferred Stock are
not stated and expressed in the Restated Certificate, does hereby fix and herein
state and express such designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions thereof, as
follows (all terms used herein which are defined in the Restated Certificate
shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series C Preferred Stock", par value $0.0001 per share, and the
number of shares constituting such series shall be three million five hundred
seventy one thousand, four hundred twenty nine (3,571,429).
Section 2. Dividend Provisions. The holders of shares of Series C
-------------------
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior to and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of the Corporation) on the
Series B-1 Preferred Stock and on the Common Stock of the Corporation, at the
rate of $0.35 per share (as adjusted
<PAGE>
for stock splits, stock dividends, reclassification and the like) per annum on
each outstanding share of Series C Preferred Stock payable quarterly when, as
and if declared by the Board of Directors; provided, however, that dividends
declared or paid on the shares of Series C Preferred stock shall be paid on a
pari passu basis with the dividends of the Series A-1, Series A-2 and Series B
Preferred Stock pro rata in accordance with the then unpaid amounts of the
dividends then payable on the respective series of Preferred Stock. To the
extent that assets are not legally available for the payment of such dividends
on the Series A-1, Series A-2, Series B or Series C Preferred Stock, such
dividends shall be paid pro rata as provided in the immediately preceding
sentence at such time as assets become legally available for such purpose. The
dividends on the Series C Preferred Stock shall not be cumulative.
Section 3. Liquidation.
-----------
(a) Preference. In the event of any liquidation, dissolution or
----------
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Series A-1 Preferred Stock or Common Stock by reason of their
ownership thereof, an amount per share equal to $7.00 (as adjusted for stock
splits, stock dividends, reclassifications and the like) for each share of
Series C Preferred Stock then held by them, plus declared but unpaid dividends,
if any. If, upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A-2, Series B, Series B-1 and Series
C Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amounts due to such holders pursuant to the foregoing and
pursuant to the Corporation's Amended and Restated Certificate of Incorporation,
then, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A-2,
Series B, Series B-1 and Series C Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) Remaining Assets. Upon the completion of the distribution
----------------
required by Section 3(a) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence, if assets remain in the Corporation, such assets will be distributed
as set forth in Article IV, Section 2(b) of the Restated Certificate.
(c) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of this Section 3, a
------------------
liquidation, dissolution or winding up of the Corporation shall be deemed to
occur as set forth in Article IV, Section 2(c)(i) of the Restated Certificate.
(ii) Notice of Transaction. The Corporation shall give each
---------------------
holder of record of Series C Preferred Stock written notice of a deemed
liquidation as described in Section 3(c)(i) hereof according to the same terms
and subject to the same provisions with respect to the shortening of such notice
periods as set forth in Article IV, Section 2(c)(iii) of the Restated
Certificate with respect to holders of Series A-1, Series A-2, Series B and
Series B-1 Preferred Stock.
-2-
<PAGE>
Section 4. Redemption. The Series C Preferred Stock is not redeemable.
----------
Section 5. Conversion. The holders of the Series C Preferred Stock shall
----------
have conversion rights as follows (the "Conversion Rights"):
-----------------
(a) Right to Convert. Subject to Section 5(c), each share of
----------------
Series C Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
the Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing $7.00
by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.
The initial Conversion Price per share of Series C Preferred Stock shall be
$7.00. Such initial Conversion Price shall be subject to adjustment as set forth
in Section 5(d), Section 5(e) and Section 5(f) below.
(b) Automatic Conversion. Each share of Series C Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such share immediately upon the earlier of (i)
except as provided below in Section 5(c), the Corporation's sale of its Common
Stock in a firm commitment underwritten public offering pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with a per share public offering price of at least $7.00 and
--------------
which results in gross proceeds to the Corporation of at least $25 million (a
"Qualified IPO") or (ii) the date specified by vote or written consent, as
-------------
provided by law, of the holders of at least a majority of the then outstanding
shares of Series A-1, Series A-2, Series B, Series B-1 and Series C Preferred
Stock, voting together as a single class.
(c) Mechanics of Conversion. Before any holder of Series C
-----------------------
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he or she shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for such
series of Preferred Stock, and shall give written notice to the Corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of such series of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offering of securities registered pursuant to the
Securities Act the conversion may, at the option of any holder tendering such
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive Common Stock upon conversion of such Preferred
Stock shall not be
-3-
<PAGE>
deemed to have converted such Preferred Stock until immediately prior to the
closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
C Preferred Stock shall be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below Conversion Price. If the
---------------------------------------------------
Corporation shall issue, after the date upon which any shares of Series C
Preferred Stock were first issued (the "Purchase Date" with respect to such
-------------
series), any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
automatically be adjusted as set forth in this Section 5(d)(i), unless otherwise
provided in this Section 5(d)(i) or in Sections 5(e) and 5(f) below.
(A) Adjustment Formula. Whenever the Conversion Price is
------------------
adjusted pursuant to this Section (5)(d)(i), the new Conversion Price shall be
determined by multiplying the Conversion Price then in effect by a fraction, (x)
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (the "Outstanding Common") plus the number of
------------------
shares of Common Stock that the aggregate consideration received by the
Corporation for such issuance would purchase at such Conversion Price; and (y)
the denominator of which shall be the number of shares of Outstanding Common
plus the number of shares of such Additional Stock. For purposes of the
foregoing calculation, the term "Outstanding Common" shall include shares of
Common Stock deemed issued pursuant to Section 5(d)(i)(E) below.
(B) Definition of "Additional Stock". For purposes of this
--------------------------------
Section 5(d)(i), "Additional Stock" shall mean any shares of Common Stock issued
----------------
(or deemed to have been issued pursuant to Section 5(d)(i)(E)) by the
Corporation after the Purchase Date other than
(1) Common Stock issued pursuant to a transaction
described in Section 5(d)(ii) hereof,
(2) Not more than 3,000,000 shares of Common Stock
issuable or issued prior to, on or after the Purchase Date to employees,
consultants or directors of the Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of the
Corporation,
(3) Capital stock, or options or warrants to purchase
capital stock, issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings or similar transactions
approved by the Board of Directors,
-4-
<PAGE>
(4) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers,
partnering transactions or similar transactions ("Transactions"), the terms of
------------
which are approved by the Board of Directors,
(5) Shares of Common Stock issued or issuable upon
conversion of the Series A-1, Series A-2, Series B, Series B-1 or Series C
Preferred Stock,
(6) Shares of Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Series A-1, Series A-2, Series B, Series B-1 and Series C Preferred Stock will
be converted into shares of Common Stock, subject to the anti-dilution rights
set forth in Sections 5(e) and 5(f) below, and
(7) Capital stock issuable or issued upon exercise or
conversion of warrants, options, notes or other rights to acquire securities
outstanding as of the date of this Certificate of Designation.
(C) No Fractional Adjustments. No adjustment of the
-------------------------
Conversion Price for the Series C Preferred Stock shall be made in an amount
less than one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to
the earlier of three years from the date of the event giving rise to the
adjustment being carried forward or the conversion of such shares into Common
Stock in accordance with the terms hereof, or shall be made on the earlier of
the end of three years from the date of the event giving rise to the adjustment
being carried forward or such conversion.
(D) Determination of Consideration. In the case of the
------------------------------
issuance of Common Stock for cash, the consideration shall be deemed to be the
amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
In the case of the issuance of Common Stock for a consideration in whole or in
part other than cash, the consideration other than cash shall be deemed to be
the fair value thereof as determined in good faith by the Board of Directors;
provided, however, if the holders of a majority of the then outstanding shares
of the Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (the "Contesting Holders") notify
------------------
the Board of Directors of the Corporation within ten (10) business days after
receiving written notification of such determination of the fair market value
that they disagree with such determination, then the fair market value of the
consideration shall be mutually agreed upon by the Board of Directors and the
holders of a majority of the Contesting Holders within thirty (30) days after
the receipt of notice by the Board of Directors from the Contesting Holders. If,
after the passage of such time, the Contesting Holders and the Board cannot
agree, any Contesting Holder or the Board may, no later than thirty (30)
calendar days after such time put the matter to binding arbitration, subject to
lawful judicial review. The matter submitted to arbitration shall be submitted
under the Commercial Rules then in effect for the American Arbitration
Association, and the parties shall request the American Arbitration Association
to: (i)
-5-
<PAGE>
appoint a single arbitrator mutually agreeable to the parties and experienced
and knowledgeable concerning the nature of the matter in dispute; (ii) require
that all testimony in front of such arbitrator be transcribed; (iii) require
that the award, if any, be accompanied by findings of fact and a statement of
the reasons for the decision; and (iv) handle the matter with the expedited
procedures. The provision for the resolution of the matter provided by this
Section 5(d)(i)(D) constitutes a complete defense to, and may be asserted or
- ------------------
pleaded successfully as such, in any motion to a court of competent jurisdiction
for a stay of any action or proceeding commenced contrary to the intent hereof.
(E) Deemed Issuances of Common Stock. In the case of the
--------------------------------
issuance (whether before, on or after the applicable Purchase Date) of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 5(d)(i):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in Section
5(d)(i)(D)), if any, received by the Corporation upon the issuance of such
options or rights plus the minimum exercise price provided in such options or
rights (without taking into account potential antidilution adjustments) for the
Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the satisfaction
of any conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or exchangeable securities or
upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in Section 5(d)(i)(D)).
(3) In the event of any change in the number of shares
of Common Stock deliverable or in the consideration payable to the Corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, but not limited to, a
change resulting from the antidilution
-6-
<PAGE>
provisions thereof, the Conversion Price of each of the Series A-1, Series A-2,
Series B, Series B-1 and Series C Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of each of the Series A-1, Series A-2, Series B, Series B-1
and Series C Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities.
(5) The number of shares of Common Stock deemed issued
and the consideration deemed paid therefor pursuant to Sections 5(d)(i)(E)(1)
and 5(d)(i)(E)(2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Section 5(d)(i)(E)(3)
or 5(d)(i)(E)(4).
(F) No Increased Conversion Price. Notwithstanding any
-----------------------------
other provisions of this Section (5)(d)(i), except to the limited extent
provided for in Sections 5(d)(i)(E)(3) and 5(d)(i)(E)(4), no adjustment of the
Conversion Price pursuant to this Section 5(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the Corporation
--------------------------
should at any time or from time to time after the Purchase Date fix a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
------------------------
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend, distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Series C Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series of Preferred Stock shall be increased in proportion to
such increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Section 5(d)(i)(E).
-7-
<PAGE>
(iii) Reverse Stock Splits. In the event the number of shares of
--------------------
Common Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, immediately
following the record date of such combination, the Conversion Price of the
Series C Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such series shall
be decreased in proportion to such decrease in outstanding shares.
(e) Special Conversion Price Adjustments of Series C Preferred Stock
----------------------------------------------------------------
for Initial Public Offerings. If, after the Purchase Date, the Corporation shall
- ----------------------------
issue in connection with an underwritten initial public offering pursuant to a
registration statement under the Securities Act ("IPO") any Additional Stock
without consideration or for a consideration per share less than the Conversion
Price for the Series C Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, each holder of Series C Preferred Stock shall
have the right, at the option of such holder, concurrently with the consummation
of the IPO, to convert such holder's shares of Series C Preferred Stock into
such number of shares of Common Stock derived by multiplying a fraction, the
numerator of which shall be the Conversion Price then in effect for the Series C
Preferred Stock (after taking into account any adjustments to such Conversion
Price pursuant to Section 5(d)(i) above) and the denominator of which shall be
the price at which shares of Common Stock are sold to the public in the IPO, by
the number of shares of Series C Preferred Stock the holder elects to convert
into Common Stock. The foregoing conversion right shall terminate after the
closing of an IPO.
(f) Special Conversion Price Adjustments of Series C Preferred Stock
----------------------------------------------------------------
for Certain Mergers and Acquisitions. In the event of a transaction described
- ------------------------------------
in Article IV, Section 2(c)(i) of the Restated Certificate that occurs after the
Purchase Date, each holder of Series C Preferred Stock shall have the right,
prior to the consummation of such transaction, to convert all of such holder's
shares of Series C Preferred Stock into such number of shares of Common Stock
derived by multiplying a fraction, the numerator of which shall be the
Conversion Price then in effect for the Series C Preferred Stock (after taking
into account any adjustments to such Conversion Price pursuant to Section
5(d)(i) above) and the denominator of which shall be the quotient obtained by
dividing the value of the aggregate consideration received by the Corporation or
its stockholders in such transaction calculated pursuant to Article IV, Section
2(c)(ii) of the Restated Certificate by the aggregate number of shares of
Outstanding Common (including for this purpose, any Common Stock deemed issued
pursuant to Section 5(d)(i)(E) above), by the number of shares of Series C
Preferred Stock the holder elects to convert into Common Stock. The foregoing
conversion rights shall terminate upon the closing of an IPO.
(g) Other Distributions. In the event the Corporation shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 5(d)(ii), then, in each such case
for the purpose of this Section 5(g), the holders of Series C Preferred Stock
shall be entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Common Stock of the Corporation
into which their shares of Preferred Stock are convertible as of the record date
fixed for the
-8-
<PAGE>
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(h) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 5 or Section 3) provision shall be made so that the holders of the
Series C, Preferred Stock shall thereafter be entitled to receive upon
conversion of such Preferred Stock the kind and number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of such Preferred Stock after the recapitalization to the end that
the provisions of this Section 5 (including adjustment of the Conversion Price
then in effect and the number of shares issuable upon conversion of such
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
(i) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 5 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Series C Preferred Stock against impairment.
(j) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series C Preferred Stock, and the number of shares
of Common Stock to be issued shall be rounded to the nearest whole share with
one-half being rounded upward. The number of shares issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series C Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series C Preferred Stock pursuant to this Section 5, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of such Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of such series of Preferred Stock.
-9-
<PAGE>
(k) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series C Preferred Stock, at least ten (10) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
(l) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A-1, Series A-2, Series B, Series B-1 and Series C
Preferred Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of such
series of Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of such series of Preferred Stock, in addition to
any other remedies as shall be available to the holder of such Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Corporation's Certificate
of Incorporation.
(m) Notices. Any notice required by the provisions of this Section
-------
5 to be given to the holders of shares of Series C Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his or her address appearing on the books
of the Corporation.
Section 6. Voting Rights. The holder of each share of Series C Preferred
-------------
Stock shall have the right to one vote for each share of Common Stock into which
such Preferred Stock could then be converted, and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series C
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
Section 7. Protective Provisions. So long as at least 5,000,000 shares of
---------------------
Series A-1, Series A-2, Series B and Series C Preferred Stock are outstanding
(as adjusted for stock splits, stock dividends or recapitalizations), the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority of
-10-
<PAGE>
the then outstanding shares of Series A-1, Series A-2, Series B and Series C
Preferred Stock, voting together as a class:
(a) effect a transaction described in Section 2(c)(i) of the
Restated Certificate;
(b) alter, reclassify or change the rights, preferences or
privileges of the shares of the Series C Preferred Stock so as to materially and
adversely affect such shares in a manner differently than the shares of the
Series A-1, Series A-2 and Series B Preferred Stock;
(c) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series A-1, Series A-2, Series B or Series C Preferred Stock;
(e) redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose) any share or shares of capital stock;
provided, however, that this restriction shall not apply to the repurchase of
- -------- -------
shares of Common Stock from employees, officers, directors, consultants or other
persons performing services for the Corporation pursuant to agreements under
which the Corporation has the option to repurchase such shares at cost upon the
occurrence of certain events, such as the termination of employment, or through
the exercise of any right of first refusal;
(f) amend the Bylaws or the Certificate of Incorporation to
increase or decrease the number of authorized directors above or below eight
(8);
(g) liquidate, dissolve or wind up the Corporation; or
(h) enter into any transactions with any officers, directors
or holders of greater than 5% of the outstanding capital stock of the
Corporation, unless such transaction is at arms' length and shall have been
approved by the Board of Directors.
Section 8. Status of Converted Stock. In the event any shares of Series C
-------------------------
Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so
converted shall be cancelled and shall not be issuable by the Corporation. The
Certificate of Incorporation of the Corporation shall be appropriately amended
to effect the corresponding reduction in the Corporation's authorized capital
stock.
FURTHER RESOLVED, that the statements contained in the foregoing resolution
creating and designating the Series C Preferred Stock and fixing the powers,
designations, preferences and relative, optional, participating and other
special rights and the qualifications, limitations, restrictions, and other
distinguishing characteristics thereof shall, upon the effective
-11-
<PAGE>
date of said series, be deemed to be included in and be part of the Restated
Certificate pursuant to the provisions of Sections 104 and 151 of the General
Corporation Law of the State of Delaware.
No shares of Series C Preferred Stock have previously been issued.
-12-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate as the act and deed of the Corporation and does affirm the foregoing
as true under the penalties of perjury this 24th day of March, 2000.
/s/ James E. Brown
------------------
James E. Brown
Chief Executive Officer
ATTEST:
/s/ Mark B. Weeks
- -----------------
Mark B. Weeks, Secretary
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<PAGE>
EXHIBIT 4.2
DURECT CORPORATION
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
March 28, 2000
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
A. Amendment of Prior Rights Agreement/Waiver of Right of First Offer....................................2
1. Registration Rights...................................................................................2
1.1 Definitions..................................................................................2
1.2 Request for Registration.....................................................................3
1.3 Company Registration.........................................................................4
1.4 Form S-3 Registration........................................................................5
1.5 Obligations of the Company...................................................................6
1.6 Furnish Information..........................................................................7
1.7 Expenses of Registration.....................................................................7
1.8 Underwriting Requirements....................................................................8
1.9 Delay of Registration........................................................................9
1.10 Indemnification..............................................................................9
1.11 Reports Under Securities Exchange Act of 1934...............................................11
1.12 Assignment of Registration Rights...........................................................12
1.13 Limitations on Subsequent Registration Rights...............................................12
1.14 Market Stand-Off Agreement..................................................................13
1.15 Termination of Registration Rights..........................................................13
2. Covenants of the Company.............................................................................13
2.1 Delivery of Financial Statements............................................................13
2.2 Right of First Offer........................................................................14
2.3 Termination of Covenants....................................................................16
3. Miscellaneous........................................................................................16
3.1 Successors and Assigns......................................................................16
3.2 Amendments and Waivers......................................................................16
3.3 Notices.....................................................................................17
3.4 Severability................................................................................17
3.5 Governing Law...............................................................................17
3.6 Additional Parties..........................................................................17
3.7 Counterparts................................................................................17
3.8 Titles and Subtitles........................................................................17
3.9 Aggregation of Stock........................................................................17
</TABLE>
-i-
<PAGE>
DURECT CORPORATION
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
-------------------------------------------------------
This Second Amended and Restated Investors' Rights Agreement (the
"Agreement") is made as of the 28th day of March, 2000, by and among Durect
---------
Corporation, a Delaware corporation (the "Company"), the holders of the
-------
Company's Series A-1 and Series A-2 Preferred Stock set forth on Exhibit A
---------
attached hereto (the "Series A Holders"), the holders of Series B Preferred
----------------
Stock listed on Exhibit A attached hereto (the "Series B Holders"), the holders
--------- ----------------
of Series B-1 Preferred Stock listed on Exhibit A attached hereto (the "Series
--------- ------
B-1 Holders"), the holders of Series C Preferred Stock listed on Exhibit A
- ----------- ---------
attached hereto (the "Series C Holders" and together with the Series A Holders,
----------------
the Series B Holders and the Series B-1 Holders, the "Investors" or "Holders"),
--------- -------
and Thomas A. Schreck, James E. Brown and Felix Theeuwes, each of whom is herein
referred to as a "Founder".
-------
RECITALS
--------
A. The Company, the Founders, the Series A Holders, the Series B
Holders and the Series B-1 Holders have previously entered into an Amended and
Restated Investor's Rights Agreement dated as of July 19, 1999, amended on
October 1, 1999 (the "1999 Rights Agreement"), pursuant to which the Company
---------------------
granted the Founders and the Series A, Series B and Series B-1 Holders certain
rights.
B. The Company and the Series C Holders have entered into a Series C
Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date
------------------
herewith pursuant to which the Company desires to sell to the Series C Holders
and the Series C Holders desire to purchase from the Company shares of the
Company's Series C Preferred Stock. A condition to the Series C Holders'
obligations under the Purchase Agreement is that the Company, the Founders and
the Investors enter into this Agreement in order to provide the Investors with
(i) certain rights to register shares of the Company's Common Stock issuable
upon conversion of the Preferred Stock held by the Investors, (ii) certain
rights to receive or inspect information pertaining to the Company, and (iii) a
right of first offer with respect to certain issuances by the Company of its
securities. The Company desires to induce the Series C Holders to purchase
shares of Series C Preferred Stock pursuant to the Purchase Agreement by
agreeing to the terms and conditions set forth herein.
C. The Company, the Founders, the Series A Holders, the Series B
Holders and the Series B-1 Holders each desire to amend and restate the 1999
Rights Agreement to add the Series C Holders as parties to this Agreement and
make certain other changes.
AGREEMENT
---------
The parties hereby agree as follows:
<PAGE>
A. Amendment of 1999 Rights Agreement/Waiver of Right of First Offer.
-----------------------------------------------------------------
The Series A Holders, the Series B Holders and the Series B-1 Holders hereby
waive the Right of First Offer, including the notice requirements, set forth in
the 1999 Rights Agreement with respect to the issuance of Series C Preferred
Stock. Effective and contingent upon execution of this Agreement by the Company
and the holders of a majority of the Registrable Securities (as defined in
Section 1.1(b) of the 1999 Rights Agreement), not including Founders' Stock (as
defined in Section 1.1(b) of the 1999 Rights Agreement) and upon the closing of
the transactions contemplated by the Purchase Agreement, the 1999 Rights
Agreement is hereby amended and restated in its entirety to read as set forth in
this Agreement, and the Company, the Founders and the Investors hereby agree to
be bound by the provisions hereof as the sole agreement of the Company, the
Founders and the Investors with respect to registration rights of the Company's
securities and certain other rights as set forth herein.
1. Registration Rights. The Company, the Founders and the Investors
-------------------
covenant and agree as follows:
1.1. Definitions. For purposes of this Section 1:
-----------
(a) The terms "register," "registered," and
-------- ----------
"registration" refer to a registration effected by preparing and filing a
------------
registration statement or similar document in compliance with the Securities Act
of 1933, as amended (the "Securities Act"), and the declaration or ordering of
--------------
effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (i) the
----------------------
shares of common stock, par value $0.0001 ("Common Stock") issuable or issued
upon conversion of the Series A-1, Series A-2, Series B, Series B-1 and Series C
Preferred Stock, provided, however, that for the purposes of Sections 1.2, 1.4,
-------- -------
1.7(a), 1.7(c), 1.13 and 2 the Series B-1 Preferred Stock shall not be deemed
Registrable Securities and the Series B-1 Holders shall not be deemed Holders
(ii) the shares of Common Stock issued to the Founders (the "Founders' Stock"),
---------------
provided, however, that for the purposes of Sections 1.2, 1.4 and 1.13 the
- -------- -------
Founders' Stock shall not be deemed Registrable Securities and the Founders
shall not be deemed Holders, and (iii) any other shares of Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to, or in exchange for or in replacement of, the shares listed in
(i) and (ii); provided, however, that the foregoing definition shall exclude in
-------- -------
all cases any Registrable Securities sold by a person in a transaction in which
his or her rights under this Agreement are not assigned. Notwithstanding the
foregoing, Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions, and restrictive legends with respect
thereto, if any, are removed upon the consummation of such sale;
(c) The number of shares of "Registrable Securities
----------------------
then outstanding" shall be determined by the number of shares of Common Stock
- ----------------
outstanding which are, and the
-2-
<PAGE>
number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities which are, Registrable Securities;
(d) The term "Holder" means any person owning or
------
having the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.12 of this Agreement;
(e) The term "Form S-3" means such form under the
--------
Securities Act as in effect on the date hereof or any successor form under the
Securities Act;
(f) The term "SEC" means the Securities and
---
Exchange Commission; and
(g) The term "Qualified IPO" means a firm
-------------
commitment underwritten public offering by the Company of shares of its Common
Stock pursuant to a registration statement under the Securities Act having a
price per share of at least $7.00 and which results in gross proceeds to the
Company of at least $25,000,000.
1.2. Request for Registration.
------------------------
(a) If the Company shall receive at any time
after the earlier of (i) March 31, 2003 or (ii) six (6) months after the
effective date of the first registration statement for a public offering of
securities of the Company (other than a registration statement relating either
to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or similar plan or an SEC Rule 145 transaction), a
written request from the Holders of at least forty percent (40%) of the
Registrable Securities then outstanding that the Company file a registration
statement under the Securities Act covering the registration of at least forty
percent (40%) of the Registrable Securities then outstanding (or a lesser
percent if the anticipated aggregate offering price, net of underwriting
discounts and commissions, would exceed $10,000,000), then the Company shall,
within ten (10) days of the receipt thereof, give written notice of such request
to all Holders and shall, subject to the limitations of subsection 1.2(b), use
its best efforts to effect as soon as practicable, and in any event within 60
days of the receipt of such request, the registration under the Securities Act
of all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 3.3.
(b) If the Holders initiating the registration
request hereunder ("Initiating Holders") intend to distribute the Registrable
------------------
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 1.2
and the Company shall include such information in the written notice referred to
in subsection 1.2(a). The underwriter will be selected by a majority in interest
of the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include his or her Registrable Securities
in such registration shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting (unless otherwise mutually agreed by a majority in interest of
the Initiating Holders and such Holder) to the extent provided herein. All
Holders
-3-
<PAGE>
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.5(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities which each Holder requests to be registered; provided,
--------
however, that the number of shares of Registrable Securities to be included in
- -------
such underwriting shall not be reduced unless all other securities are first
entirely excluded from the underwriting.
(c) Notwithstanding the foregoing, if the
Company shall furnish to Holders requesting a registration statement pursuant to
this Section 1.2, a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for a period of not more than 120 days after receipt of the request
of the Initiating Holders; provided, however, that the Company may not utilize
-------- -------
this right more than once in any twelve-month period.
(d) In addition, the Company shall not be
obligated to effect, or to take any action to effect, any registration pursuant
to this Section 1.2:
(i) After the Company has effected three
(3) registrations pursuant to this Section 1.2 and such registrations have been
declared or ordered effective;
(ii) During the period starting with the
date sixty (60) days prior to the Company's good faith estimate of the date of
filing of, and ending on a date one hundred eighty (180) days after the
effective date of, a registration subject to Section 1.3 hereof; provided that
the Company is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective; or
(iii) If the Initiating Holders propose to
dispose of shares of Registrable Securities that may be immediately registered
on Form S-3 pursuant to a request made pursuant to Section 1.4 below.
1.3. Company Registration. If (but without any obligation
--------------------
to do so) the Company proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holders)
any of its stock under the Securities Act in connection with the public offering
of such securities (other than a registration relating solely to the sale of
securities to participants in a Company stock plan or a transaction covered by
Rule 145 under the Securities Act, a registration in which the only stock being
registered is Common Stock issuable upon conversion of debt securities which are
also being registered, or any registration on any form which does not include
substantially the same information as would be required to be
-4-
<PAGE>
included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within fifteen (15) days after notice given by the Company in accordance with
Section 3.3, the Company shall, subject to the provisions of Section 1.8, cause
to be registered under the Securities Act all of the Registrable Securities that
each such Holder has requested to be registered.
1.4. Form S-3 Registration. If the Company shall receive
---------------------
from any Holder or Holders of not less than fifteen percent (15%) of the
Registrable Securities then outstanding a written request or requests that the
Company effect a registration on Form S-3 (or a successor form) and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company shall:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after written notice given by the
Company in accordance with Section 3.3; provided, however, that the Company
-------- -------
shall not be obligated to effect any such registration, qualification or
compliance, pursuant to this Section 1.4: (i) if Form S-3 (or a successor form)
is not available for such offering by the Holders; (ii) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an anticipated aggregate offering price to the public
(net of any underwriters' discounts or commissions) of less than $2,000,000;
(iii) if the Company shall furnish to the Holders a certificate signed by the
President of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such Form S-3 registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 120 days after receipt of
the request of the Holder or Holders under this Section 1.4; provided, however,
-------- -------
that the Company shall not utilize this right more than once in any twelve month
period; (iv) if the Company has, within the twelve (12) month period preceding
the date of such request, already effected two registrations on Form S-3 for the
Holders pursuant to this Section 1.4; (v) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance; or (vi) during the period ending one hundred eighty
(180) days after the effective date of the first registration statement subject
to Section 1.3.
(c) Subject to the foregoing, the Company shall
file a registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. Registrations effected
-5-
<PAGE>
pursuant to this Section 1.4 shall not be counted as demands for registration or
registrations effected pursuant to Sections 1.2.
1.5. Obligations of the Company. Whenever required under
--------------------------
this Section 1 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to one hundred
twenty (120) days. The Company shall not be required to file, cause to become
effective or maintain the effectiveness of any registration statement that
contemplates a distribution of securities on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act.
(b) Prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for up to one hundred twenty
(120) days.
(c) Furnish to the Holders such numbers of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
--------
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, such obligation to continue for one hundred twenty (120) days.
-6-
<PAGE>
(g) Cause all such Registrable Securities
registered pursuant hereunder to be listed on each securities exchange on which
similar securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its best efforts to furnish, at the request
of any Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.6. Furnish Information. It shall be a condition
-------------------
precedent to the obligations of the Company to take any action pursuant to this
Section 1 with respect to the Registrable Securities of any selling Holder that
such Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) or subsection 1.4(b)(ii), whichever is applicable.
1.7. Expenses of Registration.
------------------------
(a) Demand Registration. All expenses other than
-------------------
underwriting discounts and commissions and stock transfer taxes incurred in
connection with registrations, filings or qualifications pursuant to Section
1.2, including (without limitation) all registration, filing and qualification
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements (not to exceed $30,000) of
one counsel for the selling Holders selected by the Holders of a majority of the
Registrable Securities to be registered with the approval of the Company, which
approval shall not be unreasonably withheld, shall be borne by the Company;
provided, however, that the Company shall not be required to
- -------- -------
-7-
<PAGE>
pay for any expenses of any registration proceeding begun pursuant to Section
1.2 if the registration request is subsequently withdrawn at the request of the
Holders of a majority of the Registrable Securities to be registered (in which
case all participating Holders shall bear such expenses), unless the Holders of
a majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2.
(b) Company Registration. All expenses other than
--------------------
underwriting discounts and commissions and stock transfer taxes incurred in
connection with registrations, filings or qualifications of Registrable
Securities pursuant to Section 1.3 (which right may be assigned as provided in
Section 1.12), including (without limitation) all registration, filing, and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company and the reasonable fees and disbursements (not to exceed
$30,000) of one counsel for the selling Holder or Holders selected by the
Holders of a majority of the Registrable Securities to be registered with the
approval of the Company, which approval shall not be unreasonably withheld,
shall be borne by the Company.
(c) Registration on Form S-3. All expenses other
------------------------
than underwriting discounts and commissions and stock transfer taxes incurred in
connection with a registration requested pursuant to Section 1.4, including
(without limitation) all registration, filing, qualification, printers' and
accounting fees and the reasonable fees and disbursements (not to exceed
$25,000) of one counsel for the selling Holder or Holders selected by the
Holders of a majority of the Registrable Securities to be registered with the
approval of the Company, which approval shall not be unreasonably withheld, and
counsel for the Company, shall be borne by the Company.
1.8. Underwriting Requirements. In connection with any
-------------------------
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities that the underwriters
determine in their sole discretion is compatible with the success of the
offering, excluding securities sold by the Company, then the Company shall be
required to include in the offering only that number of securities to be sold by
selling stockholders, including Registrable Securities, which the underwriters
determine in their sole discretion will not jeopardize the success of the
offering (the securities to be sold by selling stockholders and so included to
be apportioned pro rata among the selling stockholders according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by such
selling stockholders) but in no event shall (i) any shares being sold by a
stockholder exercising a demand registration right similar to that granted in
Section 1.2 be excluded from such offering unless all securities held by a
Founder and all securities proposed to be sold in the offering that are not
Registrable Securities are first excluded, or (ii) the amount of securities of
the selling Holders included in the offering be reduced below
-8-
<PAGE>
ten percent (10%) of the total amount of securities included in such offering,
(including shares to be sold by the Company) unless such offering is the initial
public offering of the Company's securities, in which case, selling stockholders
may be excluded if the underwriters make the determination described above and
no other stockholder's securities are included. For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder which is a
holder of Registrable Securities and which is a partnership or corporation, the
partners, retired partners and stockholders of such holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
-------
stockholder," and any pro-rata reduction with respect to such "selling
- -----------
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
1.9. Delay of Registration. No Holder shall have any right
---------------------
to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10. Indemnification. In the event any Registrable Securities
---------------
are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, any underwriter (as defined in the
Securities Act) for such Holder, each officer and director of such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any losses, claims, damages, or liabilities (joint or
------------
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
---------
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
state securities law; and the Company will pay to each such Holder, underwriter,
officer, director or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
-------- -------
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable to any Holder, underwriter or controlling person for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation
-9-
<PAGE>
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, the Exchange Act
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.10(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
-------- -------
agreement contained in this subsection 1.10(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, that in no event shall any indemnity
--------
under this subsection 1.10(b) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party
under this Section 1.10 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this
Section 1.10 is held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in lieu of
-10-
<PAGE>
indemnifying such indemnified party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage, or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the statements or omissions that resulted
in such loss, liability, claim, damage or expense as well as any other relevant
equitable considerations; provided, that in no event shall any contribution by a
--------
Holder under this Subsection 1.10(d) exceed the net proceeds from the offering
received by such Holder, except in the case of willful fraud by such Holder. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent
that the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) The obligations of the Company and Holders
under this Section 1.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 1, and
otherwise.
1.11. Reports Under Securities Exchange Act of 1934. With a
---------------------------------------------
view to making available to the Holders the benefits of Rule 144 promulgated
under the Securities Act and any other rule or regulation of the SEC that may at
any time permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration statement
filed by the Company for the offering of its securities to the general public so
long as the Company remains subject to the periodic reporting requirements under
Sections 13 or 15(d) of the Exchange Act;
(b) take such action, including the voluntary
registration of its Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as practicable after the
end of the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;
(c) file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act; and
(d) furnish to any Holder, so long as the Holder
owns any Registrable Securities, forthwith upon request (i) a written statement
by the Company that it has complied
-11-
<PAGE>
with the reporting requirements of SEC Rule 144 (at any time after ninety (90)
days after the effective date of the first registration statement filed by the
Company), the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12. Assignment of Registration Rights. The rights to cause
---------------------------------
the Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of at least 500,000 shares of such securities (or all of such Holder's
shares, if less), provided the Company is, within a reasonable time after such
--------
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
-------- -------
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act; and provided, further, that a transfer of
-------- -------
such rights to a wholly owned subsidiary or constituent partner (including
limited partners) or member shall be without restrictions as to minimum
shareholdings. Notwithstanding the foregoing, the rights to cause the Company to
register securities may be assigned to an Investor already owning Registrable
Securities at the time of such proposed assignment and to any acquirer of
Registrable Securities for whom such Registrable Securities were first acquired
by Zesiger Capital Group LLC, acting as attorney-in-fact for such acquirer, or
by Morgan Guaranty Trust Company of New York, as Trustee for two investment
funds and as Agent and Investment Manager for an institutional investor, acting
as trustee, agent or investment manager for such acquirer. Further
notwithstanding the foregoing, the rights to cause the Company to register
securities may be assigned by IntraEAR, Inc., a Delaware corporation, to its
stockholders in connection with a dissolution or winding up of IntraEAR, Inc.
For the purposes of determining the number of shares of Registrable Securities
held by a transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under Section 1
and the holdings of Investors for whom there is a single attorney-in-fact for
the purposes of exercising any rights, receiving notices or taking any action
under Section 1 shall be aggregated together.
1.13. Limitations on Subsequent Registration Rights. From
---------------------------------------------
and after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such
-12-
<PAGE>
securities in any registration filed under Section 1.2 hereof, unless under the
terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of his
securities will not reduce the amount of the Registrable Securities of the
Holders which is included or (b) to make a demand registration which could
result in such registration statement being declared effective prior to the
earlier of either of the dates set forth in subsection 1.2(a) or within one
hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.
1.14. "Market Stand-Off" Agreement. Each Holder hereby agrees
---------------------------
that, during the period of duration (up to, but not exceeding, 180 days)
specified by the Company and an underwriter of Common Stock or other securities
of the Company, following the effective date of a registration statement of the
Company filed under the Securities Act, it shall not, to the extent requested by
the Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
- -------- -------
(a) such agreement shall only be applicable to the
first such registration statement of the Company which covers Common Stock (or
other securities) to be sold on its behalf to the public in an underwritten
offering; and
(b) all officers and directors of the Company and
all five percent security holders enter into similar agreements.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in
this Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or similar forms which may be promulgated in the future.
1.15. Termination of Registration Rights. No Holder shall
----------------------------------
be entitled to exercise any right provided for in this Section 1 after such
time, with respect to any Holder, as all Registrable Securities of such Holder
may be sold either within a 3-month period pursuant to Rule 144 or pursuant to
Rule 144(k).
2. Covenants of the Company.
------------------------
2.1. Delivery of Financial Statements. The Company shall
--------------------------------
deliver to each Holder of at least 250,000 shares of Registrable Securities
(other than a Holder reasonably deemed by the Company to be a competitor of the
Company):
-13-
<PAGE>
(a) as soon as practicable, but in any event
within ninety (90) days after the end of each fiscal year of the Company, an
income statement for such fiscal year, a balance sheet of the Company and
statement of stockholder's equity as of the end of such year, and a statement of
cash flows for such year, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and audited and certified by an independent public accounting firm of
----
nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event
within thirty (30) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement, a
statement of cash flows for such fiscal quarter and an unaudited balance sheet
as of the end of such fiscal quarter;
(c) within thirty (30) days of the end of each
month, an unaudited income statement and a statement of cash flows and balance
sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event
thirty (30) days prior to the end of each fiscal year, a budget and business
plan for the next fiscal year, prepared on a monthly basis, and, as soon as
prepared, any other budgets or revised budgets prepared by the Company; and
(e) with respect to the financial statements
called for in subsections (b) and (c) of this Section 2.1, an instrument
executed by the Chief Financial Officer or President of the Company and
certifying that such financials were prepared in accordance with GAAP
consistently applied with prior practice for earlier periods (with the exception
of footnotes that may be required by GAAP) and fairly present the financial
condition of the Company and its results of operation for the period specified,
subject to year-end audit adjustment, provided that the foregoing shall not
restrict the right of the Company to change its accounting principles consistent
with GAAP, if the Board of Directors determines that it is in the best interest
of the Company to do so.
2.2. Right of First Offer. Subject to the terms and
--------------------
conditions specified in this Section 2.2, the Company hereby grants to each
Major Investor (as hereinafter defined) a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined). For purposes
of this Section 2.2, a "Major Investor" shall mean any person who holds at least
--------------
500,000 shares of the Series A-1, Series A-2, Series B or Series C Preferred
Stock (or the Common Stock issued upon conversion thereof) and any
attorney-in-fact, trustee, agent or investment manager exercising power of
attorney with respect to at least 500,000 shares of the Series A-1, Series A-2,
Series B or Series C Preferred Stock (or the Common Stock issued upon conversion
thereof). For purposes of this Section 2.2, Major Investor includes any general
partners and affiliates of a Major Investor. A Major Investor who chooses to
exercise the right of first offer may designate as purchasers under such right
itself or its partners or affiliates in such proportions as it deems
appropriate, unless such Major Investor is attorney-in-fact for a holder or
holders of the Series A-1, Series A-2, Series B or Series C Preferred Stock (or
the Common
-14-
<PAGE>
Stock issued upon conversion thereof), in which case, such right of first offer
must be allocated pro rata among such holders on the basis of the Series A-1,
Series A-2, Series B or Series C Preferred Stock (or the Common Stock issued
upon conversion thereof) held by such holder.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
------
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice
("Notice") to the Major Investors stating (i) its bona fide intention to offer
------
such Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of
the Notice, the Major Investor may elect to purchase or obtain, at the price and
on the terms specified in the Notice, up to that portion of such Shares which
equals the proportion that the number of shares of Common Stock issued and held,
or issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Major Investor bears to the total number of shares
of Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities).
(c) The Company may, during the 45-day period
following the expiration of the period provided in subsection 2.2(b) hereof,
offer the remaining unsubscribed portion of the Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the Shares within such period, or if such agreement is not
consummated within 60 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph
2.2 shall not be applicable (i) to the issuance or sale of Common Stock (or
options therefor) to employees, consultants and directors, pursuant to plans or
agreements approved by the Board of Directors for the primary purpose of
soliciting or retaining their services (including options granted prior to the
first issuance of Series C Preferred Stock), (ii) to the issuance of securities
in a public offering or after consummation of a Qualified IPO, (iii) to the
issuance of securities in connection with a bona fide business acquisition of or
by the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or otherwise, (iv) to the issuance of securities to financial
institutions or lessors in connection with commercial credit arrangements,
equipment financings, or similar transactions, (v) to the issuance or sale of
the Series C Preferred Stock as provided in the Purchase Agreement, (vi) to the
issuance of securities in connection with partnering transactions approved by
the Board of Directors of the Company, (vii) to the issuance of securities
pursuant to a stock split, stock dividend or like transaction, (viii) to the
issuance of securities pursuant to currently outstanding options, warrants,
notes or other rights to acquire securities of the Company or (ix) to the
issuance of Common Stock upon conversion of Preferred Stock.
-15-
<PAGE>
2.3. Termination of Covenants.
------------------------
(a) The covenants set forth in Section 2.2 shall
terminate as to each Holder and be of no further force or effect (i) immediately
prior to the consummation of a Qualified IPO, or (ii) when the Company (or a
secured party receiver or other person or entity legally entitled to act on
behalf of the Company) shall sell, convey, or otherwise dispose of all or
substantially all of its assets or business or if the Company shall merge into
or consolidate with any other corporation or effect any other transaction or
series of related transactions and the result thereof is that more than fifty
percent (50%) of the combined voting power of the Company is held by persons or
entities that were not stockholders immediately prior to such merger,
consolidation or other transaction.
(b) The covenants set forth in Section 2.1 shall
terminate as to each Holder and be of no further force or effect (i) so long as
the Company is subject to the periodic reporting requirements of Sections 13 or
15(d) of the Exchange Act or (ii) when the Company (or a secured party receiver
or other person or entity legally entitled to act on behalf of the Company)
shall sell, convey, or otherwise dispose of all or substantially all of its
assets or business or if the Company shall merge into or consolidate with any
other corporation or effect any other transaction or series of related
transactions and the result thereof is that more than fifty percent (50%) of the
combined voting power of the Company is held by persons or entities that were
not stockholders immediately prior to such merger, consolidation or other
transaction.
3. Miscellaneous.
-------------
3.1. Successors and Assigns. Except as otherwise provided
----------------------
in this Agreement, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective permitted successors and assigns
of the parties (including transferees of any of the Series A-1, Series A-2,
Series B, Series B-1 or Series C Preferred Stock or any Common Stock issued upon
conversion thereof). Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
For the purpose of meeting the thresholds for exercising any rights hereunder
(i) partners or former partners of an Investor to whom an Investor has
transferred shares shall be permitted to aggregate their holdings with such
Investor and with all other partners or former partners and (ii) Investors
represented by Zesiger Capital Group as attorney-in-fact and for whom Zesiger
Capital Group has investment authority with respect to their Registrable
Securities may aggregate their holdings with those of all other such Investors.
3.2. Amendments and Waivers. Any term of this Agreement
----------------------
may be amended or waived only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding, not
including the Founders' Stock; provided that if such amendment has the effect of
affecting the Founders' Stock (i) in a manner different than securities issued
to the Investors and (ii) in a manner adverse to the interests of the holders of
the Founders' Stock, then such amendment shall require the consent of the holder
or holders of a majority of the Founders' Stock. Any amendment or waiver
effected in accordance with this
-16-
<PAGE>
paragraph shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.
3.3. Notices. Unless otherwise provided, any notice
-------
required or permitted by this Agreement shall be in writing and shall be deemed
sufficient upon delivery, when delivered personally or by overnight courier or
sent by telegram or fax, or four (4) business days after being deposited in the
U.S. mail, as certified or registered mail, with postage prepaid, and addressed
to the party to be notified at such party's address or fax number as set forth
on the signature page on Exhibit A hereto or as subsequently modified by written
---------
notice.
3.4. Severability. If one or more provisions of this
------------
Agreement are held to be unenforceable under applicable law, the parties agree
to renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (a) such provision shall be excluded from this Agreement, (b)
the balance of the Agreement shall be interpreted as if such provision were so
excluded and (c) the balance of the Agreement shall be enforceable in accordance
with its terms.
3.5. Governing Law. This Agreement and all acts and
-------------
transactions pursuant hereto shall be governed, construed and interpreted in
accordance with the laws of the State of Delaware, without giving effect to
principles of conflicts of laws.
3.6. Additional Parties. From and after the date of this
------------------
Agreement, the Company shall not without prior written consent of a majority of
the Holders of Registrable Securities, enter into any agreements with any holder
or prospective holder of any securities of the Company providing for the grant
to such holder of rights superior to those granted herein. Any such additional
party to this Agreement shall execute a counter-part of this Agreement, and upon
execution by such additional party and by the company, shall be considered a
Holder for purposes of this Agreement.
3.7. Counterparts. This Agreement may be executed in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3.8. Titles and Subtitles. The titles and subtitles used
--------------------
in this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.9. Aggregation of Stock. All shares of the Preferred
--------------------
Stock held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
[Signature Page Follows]
-17-
<PAGE>
The parties have executed this Second Amended and Restated Investors'
Rights Agreement as of the date first above written.
COMPANY:
DURECT CORPORATION
By: /s/ James E. Brown
------------------
James E. Brown, President
FOUNDERS:
/s/ Thomas A. Schreck
- ---------------------
Thomas A. Schreck
/s/ James E. Brown
- ------------------
James E. Brown
/s/ Felix Theeuwes
- ------------------
Felix Theeuwes
<PAGE>
INVESTORS:
Biotech Growth S.A
- ------------------
By: /s/ Anders Hove
__________________________
Title:_______________________
Medgrowht S.A.
- --------------
By: /s/ Anders Hove
__________________________
Title:_______________________
Brookside Capital Partners Fund, L.P.
- -------------------------------------
By: /s/ Domenic Ferrante
--------------------
Title: Managing Director
-----------------
Sofinov
- -------
By: /s/ Denis Dionne
------------------
Title: President
---------
By: /s/ Jean-Christophe Renond
---------------------------
Title: Vice President
--------------
Zaffaroni Family Partnership, L.P.
- ----------------------------------
By: /s/ Alejandro Zaffaroni
-----------------------
Title: General & Limited Partner
-------------------------
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
CHL Medical Partners, L.P
- -------------------------
By: /s/ Ronald W. Lennox
--------------------
Title: Vice President
--------------
Asphalt Green, Inc. (Cudd & Co.)
- --------------------------------
Salvador O. Gutierrez
- ---------------------
Peter Looram
- ------------
Mary C. Anderson
- ----------------
Domenic J. Mizio
- ----------------
Susan Uris Haipern (Hare & Co.)
- -------------------------------
By: Zesiger Capital Group LLC,
As Attorney-in-Fact
By: /s/ Albert L. Zesiger
---------------------
Title: Principal
---------
-2-
<PAGE>
EXHIBIT A
---------
SERIES A HOLDERS
----------------
Investor Name
-----------------------------------------------------------------
Alza Corporation
Atwell & Company - Wells Family LLC
Auer & Co.
Batrus & Company - The Jennifer Altman Foundation
Booth & Company - Elizabeth Heller Mandell Trusts
Roy & Katherine Bukstein, Trustees for Roy & Katherine
Bukstein Trust
Mr. Andrew J. Butler
Mr. James R. Butler
City of Milford Pension and Retirement Fund
City of Stamford Firemen's Pension Fund
Mr. Jim Concidine
Cudd & Company - Helen Hunt
Daly & Company - Dean Witter Foundation
Dengel & Company - Trustees of Amherst College
Goldfarb & Simens Profit Sharing Plan FBO David Goldfarb
Mr. David Halpert
Hambrecht & Quist Employee Venture Fund, L.P.
Hambrecht & Quist LLC
Hare & Company - Norwalk Employees Pension Plan
HBL Charitable Unitrust
Houvis & Co. FBO NFIB Employee Pension Trust
Mr. Jonathan W. Kawaja
Mr. William B. Lazar
Mellon Bank NA custodian for PERSI-Zesiger Capital Public
Employee Retirement System of Idaho
Justine Mary Miner
Luke Ian Miner
Mary Miner, TTEE FBO the Survivors TR Est Under the R& M
Nicola Mary Miner
Ms. Jeanne L. Morency
Morgan (Bahamas) Trust Co. of the Bahamas Ltd. As Trustee
Ms. Nicola Z. Mullen
Murray Capital, LLC
Mr. John Osterweis
Premier Medical Partner Fund, L.P.
Promed Partners, L.P.
Psychology Associates
Mr. Dennis Purcell
Mr. John Rumsey
Westcoast & Company - State of Oregon PERS/ZCG
Mr. Kurt Wheeler
Harold & Grace Willens, JTWROS
Winsal & Company - Roanoke College
-2-
<PAGE>
EXHIBIT A
---------
SERIES A HOLDERS
----------------
(continued)
-----------
Investor Name
- ----------------------------------------------
Wolfson Investment Partners, L.P.
Zaffaroni Revocable Trust UTD 1/24/86
Ms. A. Carey Zesiger
Mr. Albert L. Zesiger
Ms. Alexa L. Zesiger
Ms. Barrie Ramsay Zesiger
Mr. David Zesiger
<PAGE>
EXHIBIT A
---------
SERIES B HOLDERS
----------------
Investor Name
-------------------------------------------------------------------
Ms. Teresa Alessi
Dean Witter Reynolds Inc. C/F Kenneth Barovsky IRA
Standard Dated 3/7/97
Bost & Company - Mellon Securities Trust Co.
Brookside Capital Partners Fund, L.P.
CFS Group, Inc.
Bank One Trust Co. Trustee Ronald L. Chez IRA A/C
2620804400
CHL Medical Partners, L.P.
Michael Cohen
Teresa M. Corbin
Kathleen A. DaSilva
Eagle Lake Ventures, Inc.
Steve Elms
Eugene Farber
Daniel F. Feldman
Gregory Daniel Frank
FWH Associates
Shelly Guyer
Hambrecht & Quist California
Hambrecht & Q(upsilon)ist Employee Venture Fund, L.P. II
Hambrecht & Quist LLC
Jeffrey G. Heuer
Jonathan Heuer
Zach Hulsey
Vivek Jain
Dean Witter Reynolds Inc. C/F Randolph M. Johnson IRA
Rollover dtd. 11/10/98
Carl Kawaja
Kawaja Foods Ltd.
Leonard Kingsley
Steven J. Krausse
Mr. Reggie O. Lapastora
The Magruder Living Trust
First Trust, Trustee for the benefit of Jerry Edwin Marks
Seth Miller
Morgan (Co-Mingled) Guaranty Trust Company
Morgan (Multi-Market) Guaranty Trust Company
Dallas Nelson
Dorothy Nelson
Gregory Nelson
Timothy S. Nelson
PaineWebber Incorporated, not in its individual capacity but
solely as Custodian of the IRA of Timothy S. Nelson
-3-
<PAGE>
EXHIBIT A
---------
SERIES B HOLDERS
----------------
(continued)
Investor Name
-------------------------------------------------------------------
John S. Osterweis, Trustee for the Osterweis Revocable Trust
UAD 9/13/93
Stephen H. Otto
Premier Medical Partner Fund L.P.
Dennis Purcell
Retirement Accounts, Inc. for the benefit of Nigel P. Ray
John D. and Pamela F. Richard
Mark J. Richard
The Richard Family Trust U/A dtd. 4/14/93
John Rumsey
America Sanchez
Albert R. Schreck
Joel W. Schreck
Sofinov
Stephen B. Thau
Jan Frans Maria Theeuwes
VLG Investments 1999
CNA Trust Company, TTEE VLG 401(k) Retirement Plan FBO
Mark B. Weeks
Zaffaroni Family Partnership L.P.
Zaffaroni Revocable Trust UTD 1/24/86
-4-
<PAGE>
EXHIBIT A
---------
SERIES B HOLDERS
----------------
(continued)
EXHIBIT A
---------
SERIES B-1 HOLDERS
------------------
Investor Name
----------------------------------------------------------
Daniel K. Arenberg
Irving K. Arenberg
Michael H. Arenberg
Roy M. Barbee
Vaughn D. Bryson
Joe C. Cook
Ryan Doster
Sara Doster
Dr. Sterling Doster M.D.
Harris Trust Company of California, as Escrow Agent
Ronald D. Henriksen
Miles Hobbs & Lenora Hobbs, JT TEN
Gary Hoyt
Dr. Allan M. Miller M.D.
Elizabeth D. Miller
Emily Miller & Allan Miller, JT TEN
Eric Miller
Arthur Pringle III
James Topolgus
-5-
<PAGE>
EXHIBIT A
---------
SERIES C HOLDERS
----------------
Investor Name
-------------------------------------------------------------------
Biotech Growth S.A.
Medgrowht S.A.
Brookside Capital Partners Fund, L.P.
Sofinov
CHL Medical Partners, L.P.
Zaffaroni Family Partnership, L.P.
Domenic J. Mizio
Hare & Co.
Cudd & Co.
Salvador O. Gutierrez
Peter Looram
Mary Anderson
-6-
<PAGE>
EXHIBIT 5.1
April ___, 2000
DURECT Corporation
10240 Bubb Rd
Cupertino, CA 95014
Registration Statement on Form S-1 (File No. 333-_____)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
_____) (the "Registration Statement") to be filed by you with the Securities and
----------------------
Exchange Commission on April 20, 2000 in connection with the registration
under the Securities Act of 1933 of shares of your Common Stock (the "Shares").
------
As your legal counsel in connection with this transaction, we have examined the
proceedings taken and we are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of February 19,
---------
1999 by and between Durect Corporation, a Delaware corporation (the "Company"),
-------
and ____________ (the "Indemnitee").
----------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any
<PAGE>
fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (i) Indemnitee shall have the right to employ counsel
in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
---
the position that indemnification is not permissible for
<PAGE>
liabilities arising under certain federal securities laws, and federal
legislation prohibits indemnification for certain ERISA violations. Indemnitee
understands and acknowledges that the Company has undertaken or may be required
in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
<PAGE>
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the
<PAGE>
name of the Company under this Agreement or to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all court costs
and expenses, including attorneys' fees, incurred by Indemnitee in defense of
such action (including with respect to Indemnitee's counterclaims and cross-
claims made in such action), unless as a part of such action the court
determines that each of Indemnitee's material defenses to such action were made
in bad faith or were frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
<PAGE>
[Signature Page Follows]
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
DURECT CORPORATION
By:
-----------------------------------
Title:
-----------------------------------
Address: 10240 Bubb Road
Cupertino, CA 95104
AGREED TO AND ACCEPTED:
- -----------------------------------------
(Signature)
Address:
-------------------------------
-------------------------------
<PAGE>
EXHIBIT 10.2
DURECT CORPORATION
1998 STOCK OPTION PLAN
(as amended on June 10, 1999)
(as further amended on January 31, 2000)
1. Purposes of the Plan. The purposes of this 1998 Stock Option Plan are
--------------------
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) and (b) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Durect Corporation, a Delaware corporation.
-------
(g) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(h) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an interruption of Continuous Status as an
Employee or Consultant.
<PAGE>
(i) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a director shall not be sufficient to constitute "employment"
of such director by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Option Agreement" means a written agreement between an Optionee
----------------
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(p) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
-2-
<PAGE>
(q) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(r) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(s) "Plan" means this 1998 Stock Option Plan.
----
(t) "Reporting Person" means an officer, director, or greater than
----------------
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(u) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 10 below.
(v) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(w) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(x) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(y) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(z) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 10 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 1,703,500 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. In
addition, any Shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan. Shares repurchased by the Company
pursuant to any repurchase right which the Company may have shall not be
available for future grant under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee appointed by the Board.
(b) Plan Procedure After the Date, if any, Upon Which the Company
-------------------------------------------------------------
Becomes Subject to the Exchange Act.
- -----------------------------------
(i) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) Administration With Respect to Reporting Persons. With
------------------------------------------------
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a Committee designated by the Board to make grants to Reporting Persons
under the Plan, which Committee shall be constituted in such a manner as to
permit grants under the Plan to comply with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
make grants to Reporting Persons under the Plan, all to the extent permitted by
Rule 16b-3.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options or Stock Purchase Rights to
- ---------
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of Incentive Stock Option plans, if
any, of applicable corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
---------------
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
-4-
<PAGE>
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has
been granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) Type of Option. Each Option shall be designated in the Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However,
-5-
<PAGE>
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares subject to an Incentive Stock Option shall be determined as of the
date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or Stock
Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
-6-
<PAGE>
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or performance criteria with respect to the
Company and/or the Optionee; provided, however, that such Option shall become
exercisable at the rate of at least 20% per year over five years from the date
the Option is granted. In the event that any of the Shares issued upon exercise
of an Option should be subject to a right of repurchase in the Company's favor,
such repurchase right shall lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer, director or Consultant of the Company
or any Parent or Subsidiary of the Company, the Option may become fully
exercisable, and a repurchase right, if any, in favor of the Company shall
lapse, at any time or during any period established by the Administrator.
-7-
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three months (or such other period of time not less than 30 days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
-8-
<PAGE>
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), such Optionee may, but only within six months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
---
422 of the Code) within three months of the date of such termination, the Option
will not qualify for ISO treatment under the Code. To the extent that the
Optionee was not entitled to exercise the Option at the date of termination, or
if the Optionee does not exercise such Option to the extent so entitled within
six months from the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
10. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer), and the time within which such person must accept such
offer, which shall in no event exceed 30 days from the date upon which the
Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
-9-
<PAGE>
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that with respect to an Optionee
who is not an officer, director or Consultant of the Company or of any Parent or
Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash or check payment, or (b) out
of the Optionee's current compensation, (c) if permitted by the Administrator,
in its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (ii) have a fair market value
on the date of surrender equal to or less than the Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
--------
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
-10-
<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
-11-
<PAGE>
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's stockholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall accelerate immediately prior to the
consummation of the merger or sale of assets. For purposes of this Section
12(c), an Option or a Stock Purchase Right shall be considered assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
such merger or sale of assets, each holder of an Option or a Stock Purchase
Right would be entitled to receive upon exercise of the Option or Stock Purchase
Right the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of such transaction if the holder had been, immediately
prior to such transaction, the holder of the number of Shares of Common Stock
covered by the Option or the Stock Purchase Right at such time (after giving
effect to any adjustments in the number of Shares covered by the Option or Stock
Purchase Right as provided for in this Section 12).
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or
-12-
<PAGE>
discontinuation shall be made that would impair the rights of any Optionee under
any grant theretofore made, without his or her consent. In addition, to the
extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of
the Code (or any other applicable law or regulation, including the requirements
of any Stock Exchange), the Company shall obtain stockholder approval of any
Plan amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
19. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in the
degree and manner required under applicable state and federal law and the rules
of any Stock Exchange upon which the Common Stock is listed. All Options and
Stock Purchase Rights issued under the Plan shall become void in the event such
approval is not obtained.
20. Information and Documents to Optionees and Purchasers. The Company
-----------------------------------------------------
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares Pursuant to the Plan, during the period such
Optionee or purchaser has one or
-13-
<PAGE>
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information. In addition, at the time of issuance of
any securities under the Plan, the Company shall provide to the Optionee or the
Purchaser a copy of the Plan and any agreement(s) pursuant to which securities
granted under the Plan are issued.
-14-
<PAGE>
EXHIBIT 10.3
DURECT CORPORATION
2000 STOCK PLAN
(as amended, April 2000)
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) and (b) of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Durect Corporation, a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not.
(i) "Continuous Status as an Employee or Consultant" means the absence
----------------------------------------------
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Administrator, provided that
<PAGE>
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an interruption of Continuous Status as an
Employee or Consultant.
(j) "Director" means a member of the Board of Directors of the
--------
Company.
(k) "Employee" means any person (including, if appropriate, Officers,
--------
Directors and Named Executives), employed by the Company or any Parent or
Subsidiary of the Company, with the status of employment determined based upon
such minimum number of hours or periods worked as shall be determined by the
Administrator in its discretion, subject to any requirements of the Code. The
payment by the Company of a director's fee to a Director shall not be sufficient
to constitute "employment" of such Director by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(o) "Listed Security" means any security of the Company that is listed
---------------
or approved for listing on a national securities exchange or designated or
approved for designation
-2-
<PAGE>
as a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.
(p) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(s) "Option" means a stock option granted pursuant to the Plan.
------
(t) "Option Agreement" means a written agreement between an Optionee
----------------
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(u) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(v) "Optionee" means an Employee or Consultant who receives an Option
--------
or a Stock Purchase Right.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(x) "Plan" means this 2000 Stock Plan.
----
(y) "Reporting Person" means an Officer, Director, or greater than
----------------
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(z) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(aa) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(bb) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
-3-
<PAGE>
(cc) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(dd) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(ff) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(gg) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 1,796,500 shares of Common Stock, plus an automatic annual
increase on the first day of each of the Company's fiscal years beginning in
2001 and ending in 2010 equal to the lesser of (i) 2,250,000 Shares, (ii) five
percent (5%) of the Shares outstanding on the last day of the immediately
preceding fiscal year, or (iii) such lesser number of shares as is determined by
the Board of Directors. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. In addition, any Shares of Common Stock which are
retained by the Company upon exercise of an Option or Stock Purchase Right in
order to satisfy the exercise or purchase price for such Option or Stock
Purchase Right or any withholding taxes due with respect to such exercise shall
be treated as not issued and shall continue to be available under the Plan.
Shares repurchased by the Company pursuant to any repurchase right which the
Company may have shall not be available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options and Stock Purchase Rights to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect
------------------------------------------------
to Options and Stock Purchase Rights granted to Reporting Persons and Named
Executives, the Plan may (but need not) be administered so as to permit such
Options and Stock Purchase Rights
-4-
<PAGE>
to qualify for the exemption set forth in Rule 16b-3 and to qualify as
performance-based compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed
---------------------
pursuant to this Section 4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) and remove all members of
a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee administering
the Plan pursuant to Section 4(b) above, to the extent permitted or required by
Rule 16b-3 and Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights; and
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign
-5-
<PAGE>
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(e) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has
been granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) Type of Option. Each Option shall be designated in the Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) Employment Relationship. The Plan shall not confer upon the
-----------------------
holder of any Option or Stock Purchase Right any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with such holder's right or the Company's right to
terminate his or her employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 20 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
-6-
<PAGE>
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 13 below, the maximum number of Shares which may be subject to
Options granted to any one Employee under this Plan for any fiscal year of the
Company shall be 1,500,000 Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security, to a person who, at the time of the grant of
such Option, is a Ten Percent Holder, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of the grant.
(B) granted, prior to the date, if any on which the Common
Stock becomes a Listed Security, to any other person, the per share Exercise
Price shall be no less than 85% of the Fair Market Value on the date of grant,
if required by the Applicable Laws and, if not so required, shall be such price
as it determined by the Administrator; or
(C) granted on or after the date, if any, on which the
Common Stock becomes a Listed Security to any person, the per Share exercise
price shall be such price as determined by the Administrator; provided, however,
that if the person is, at the time of grant of such option, a Named Executive of
the Company, the per share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant if such Option is intended to
qualify as performance-based compensation under Section 162(m) of the Code; or
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired
-7-
<PAGE>
upon exercise of an Option, have been owned by the Optionee for more than six
months on the date of surrender or such other period as may be required to avoid
a charge to the Company's earnings, and (y) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
such Option shall be exercised, (5) authorization for the Company to retain from
the total number of Shares as to which the Option is exercised that number of
Shares having a Fair Market Value on the date of exercise equal to the exercise
price for the total number of Shares as to which the Option is exercised, (6)
delivery of a properly executed exercise notice together with such other
documentation as the Administrator and the broker, if applicable, shall require
to effect an exercise of the Option and delivery to the Company of the sale or
loan proceeds required to pay the exercise price and any applicable income or
employment taxes, (7) delivery of an irrevocable subscription agreement for the
Shares that irrevocably obligates the option holder to take and pay for the
Shares not more than twelve months after the date of delivery of the
subscription agreement, (8) any combination of the foregoing methods of payment,
or (9) such other consideration and method of payment for the issuance of Shares
to the extent permitted under the Applicable Laws. In making its determination
as to the type of consideration to accept, the Administrator shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided, however, that if required by the Applicable Laws, any
Option granted prior to the date, if any, upon which the Common Stock becomes a
Listed Security shall become exercisable at the rate of at least 20% per year
over five years from the date the Option is granted. In the event that any of
the Shares issued upon exercise of an Option (which exercise occurs prior to the
date, if any, upon which the Common Stock becomes a Listed Security) should be
subject to a right of repurchase in the Company's favor, such repurchase right
shall, if required by the Applicable Laws, lapse at the rate of at least 20% per
year over five years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer (including but not limited
to Officers), Director or Consultant of the Company or any Parent or Subsidiary
of the Company, the Option may become fully exercisable, and a repurchase right,
if any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to
-8-
<PAGE>
the Optioned Stock, not withstanding the exercise of the Option. The Company
shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 10(c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three months (or such other period of time not less than 30 days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 10(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of termination
of an Optionee's Continuous Status as an Employee or Consultant as a result of
his or her total and permanent disability (within the meaning of Section
22(e)(3) of the Code), such Optionee may, but only within twelve months from the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that the Optionee was not entitled to exercise the Option at the
date of termination, or if the Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous Status as
an Employee or Consultant as a result of a disability which does not fall within
the meaning of total and permanent disability (as set forth in Section 22(e)(3)
of the Code), such Optionee may, but only within six months from the date of
such termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise the Option to the
extent otherwise entitled to exercise it at the date of such termination.
However, to the extent that such Optionee fails to exercise an Option which is
an Incentive Stock Option ("ISO") (within the meaning of Section 422 of the
---
Code) within three months of the date of such termination, the Option will not
qualify for ISO treatment under the Code. To the extent that the Optionee was
not entitled to exercise the Option at the date of termination, or if the
Optionee
-9-
<PAGE>
does not exercise such Option to the extent so entitled within six months from
the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 10(b), 10(c)
and 10(d) above or in the Option Agreement to such greater time as the Board
shall deem appropriate, provided that in no event shall such Option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement.
(f) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. If required by the Applicable Laws, the purchase price of Shares subject
to Stock Purchase Rights shall not be less than 85% of the Fair Market Value of
the Shares as of the date of the offer, or, in the case of a Ten Percent Holder,
the price shall not be less than 100% of the Fair Market Value of the Shares as
of the date of the offer. If the Applicable Laws do not impose restrictions on
the purchase price, the purchase price of Shares subject to Stock Purchase
Rights shall be as determined by the Administrator. The offer to purchase
Shares subject to Stock Purchase Rights shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the Administrator.
-10-
<PAGE>
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that with respect to an Optionee
who is not an officer, director or Consultant of the Company or of any Parent or
Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year if
required by the Applicable Laws.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
12. Taxes.
-----
(a) As a condition of the exercise of an Option granted under the
Plan, the Participant (or in the case of the Participant's death, the person
exercising the Option) shall make such arrangements as the Administrator may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option and the issuance of Shares. The Company shall not be required to issue
any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option that number of Shares having a Fair Market Value
determined as of the applicable Tax Date (as defined below) equal to the minimum
statutory amounts required to be withheld. For purposes of this Section 12, the
Fair Market Value of the Shares to be withheld
-11-
<PAGE>
shall be determined on the date that the amount of tax to be withheld is to be
determined under the Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of surrender, and (ii)
have a Fair Market Value determined as of the applicable Tax Date equal to the
minimum statutory amounts required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option is exercised but such
Participant shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the applicable Tax Date.
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, and the number of shares set forth in Sections 3(a)(i) and 8
above, as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
-12-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's stockholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall accelerate immediately prior to the
consummation of the merger or sale of assets. For purposes of this Section
13(c), an Option or a Stock Purchase Right shall be considered assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
such merger or sale of assets, each holder of an Option or a Stock Purchase
Right would be entitled to receive upon exercise of the Option or Stock Purchase
Right the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of such transaction if the holder had been, immediately
prior to such transaction, the holder of the number of Shares of Common Stock
covered by the Option or the Stock Purchase Right at such time (after giving
effect to any adjustments in the number of Shares covered by the Option or Stock
Purchase Right as provided for in this Section 13).
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
14. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. Options and Stock Purchase Rights may be exercised or purchased
during the lifetime of the Optionee or Stock Purchase Rights Holder only by the
Optionee or Stock Purchase Rights Holder.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
-13-
<PAGE>
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time
-------------------------------
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with the Applicable
Laws, the Company shall obtain stockholder approval of any Plan amendment in
such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
20. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve months before or after
the date the Plan is
-14-
<PAGE>
adopted. Such stockholder approval shall be obtained in the degree and manner
required under the Applicable Laws. All Options and Stock Purchase Rights issued
under the Plan shall become void in the event such approval is not obtained.
21. Information and Documents to Optionees and Purchasers. Prior to the
-----------------------------------------------------
date, if any, on which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
Pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information. In addition, at the time of issuance of
any securities under the Plan, the Company shall provide to the Optionee or the
Purchaser a copy of the Plan and any agreement(s) pursuant to which securities
granted under the Plan are issued.
-15-
<PAGE>
EXHIBIT 10.4
DURECT CORPORATION
2000 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of Durect Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Durect Corporation, a Delaware corporation.
-------
(e) "Compensation" means all regular straight time gross earnings, and
------------
shall not include payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions and other compensation.
(f) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
(h) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if
<PAGE>
the issuance of options to such Subsidiary's Employees pursuant to the Plan
would not cause the Company to incur adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Offering Date" means the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" means a period of [twenty-four (24)] months
---------------
commencing on [August 1] and [February 1] of each year, except for the first
Offering Period and as otherwise as set forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
----
(p) "Purchase Date" means the last day of each Purchase Period of the
-------------
Plan.
(q) "Purchase Period" means a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(r) "Purchase Price" means with respect to a Purchase Period an amount
--------------
equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) of any increase in the number of
Shares available for issuance under the Plan as a result of a stockholder-
approved amendment to the Plan, and (ii) all or a portion of such additional
Shares are to be issued with respect to one or more Offering Periods that are
underway at the time of such increase ("Additional Shares"), and (iii) the Fair
-----------------
Market Value of a Share of Common Stock on the date of such increase (the
"Approval Date Fair Market Value") is higher than the Fair Market Value on the
- --------------------------------
Offering Date for any such Offering Period, then in such instance the Purchase
Price with respect to Additional Shares shall be 85% of the Approval Date Fair
Market Value or the Fair Market Value of a Share of Common Stock on the Purchase
Date, whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
-----
with Section 19 of the Plan.
(t) "Subsidiary" means a corporation, domestic or foreign, of which
----------
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
-2-
<PAGE>
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
-------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of approximately twenty-four (24) months duration, with new
Offering Periods commencing on or about August 1 and February 1 of each year (or
at such other time or times as may be determined by the Board of Directors).
The first Offering Period shall commence on the beginning of the effective date
of the Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until July 31, 2002. The
--------
Plan shall continue until terminated in accordance with Section 20 hereof. The
Board of Directors of the Company shall have the power to change the duration
and/or the frequency of Offering Periods with respect to future offerings
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive Purchase Periods of six (6) months' duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
-------------
Purchase Period commencing on August 1 shall end on the next January 31 and a
Purchase Period commencing on February 1 shall end on the next July 31. The
first Purchase Period shall commence on the IPO Date and shall end on January
31, 2001. The Board of Directors of the Company shall have the power to change
the duration and/or frequency of Purchase Periods with respect to future
purchases without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Purchase Period to be
affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing an enrollment agreement on the form provided by the Company and it to
the Company prior to
-3-
<PAGE>
the applicable Offering Date. The enrollment agreement shall set forth the
percentage of the participant's Compensation (subject to Section 6(a) below) to
be paid as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first full payroll paid
following the Offering Date and shall end on the last payroll paid on or prior
to the last Purchase Period of the Offering Period to which the enrollment
agreement is applicable, unless sooner terminated by the participant as provided
in Section 10.
6. Method of Payment of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less that one percent (1%)
and not more than 20 (or such greater percentage as the Board may establish from
time to time before an Offering Date) of such participant's Compensation on each
payday during an Offering Period; provided that to the extent a participant is
participating in more than one Offering Period, the maximum percentage of
Compensation that may be contributed under the Plan shall be twenty percent
(20%). All payroll deductions made by a participant shall be credited to his or
her account under the Plan. A participant may not make any additional payments
into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during a Purchase
Period may increase and on one occasion only during a Purchase Period may
decrease the rate of his or her Contributions with respect to the Offering
Period, by completing and filing with the Company a new enrollment agreement
authorizing a change in the payroll deduction rate. Any change in rate of
Contributions pursuant to the preceding sentence shall be effective as of the
beginning of the next calendar month following the date of filing of the new
enrollment agreement, provided the agreement indicating such change is filed at
least ten (10) business days prior to such date and, if not, then as of the
beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b), a participant's payroll
deductions may be decreased by the Company to 0% at any time during a Purchase
Period. Payroll deductions shall re-commence at the rate provided in such
participant's enrollment agreement at the beginning of the first Purchase Period
which is scheduled to end in the following calendar year, unless terminated by
the participant as provided in Section 10. In addition, a participant's payroll
deductions may be decreased by the Company to 0% at any time during a Purchase
Period in order to avoid unnecessary payroll contributions as a result of
application of the maximum share limit set forth in Section 7(a), in which case
payroll deductions shall re-commence at the rate provided in such participant's
enrollment agreement at the beginning of the next Purchase Period, unless
terminated by the participant as provided in Section 10.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase
-4-
<PAGE>
Date a number of Shares of the Company's Common Stock determined by dividing
such Employee's Contributions accumulated prior to such Purchase Date and
retained in the participant's account as of the Purchase Date by the applicable
Purchase Price; provided however that the maximum number of Shares an Employee
may purchase during each Purchase Period shall be 2,000 Shares (subject to any
adjustment pursuant to Section 19 below), and provided further that such
purchase shall be subject to the limitations set forth in Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
-----------------
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date under the first
-----------------------
Offering Period under the Plan, the Fair Market Value of a share of the Common
Stock of the Company shall be the Price to Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, the Shares purchased upon exercise of his or her option. No
fractional Shares shall be purchased; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full Share shall be
retained in the participant's account for the subsequent Purchase Period or
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 below. Any other amounts left over in a participant's account after
a Purchase Date shall be returned to the participant.
10. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and
-5-
<PAGE>
his or her option for the current period will be automatically terminated, and
no further Contributions for the purchase of Shares will be made during the
Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. To the extent permitted by any applicable laws,
--------------------
regulations or stock exchange rules, if the Fair Market Value of the Shares on
an Offering Date for an Offering Period (the "New Offering Period") commencing
in an Offering Period (the "Ongoing Offering Period") then in progress, is lower
than was the Fair Market Value of the Shares on the Offering Date for the
Ongoing Offering Period, then every participant in the Ongoing Offering Period
shall automatically be deemed to have (i)withdrawn from the Ongoing Offering
Period at the close of the Purchase Period immediately preceding the New
Offering Period, and (ii) to have enrolled in such New Offering Period. In
addition, participants shall automatically be withdrawn as of July 31, 2000 from
the Offering Period beginning on the IPO Date and re-enrolled in the Offering
Period beginning on August 1, 2000 if the Fair Market Value of the Shares on the
IPO Date is greater than the Fair Market Value of the Shares on August 1, 2000,
unless a participant notifies the Administrator prior to July 31, 2000 that he
or she does not wish to be withdrawn and re-enrolled under these circumstances.
All payroll deductions accumulated in a participant's account as of any
withdrawal date pursuant to this Section 11 shall be returned to the
participant.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
150,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2001 through 2010 equal to the lesser of (i)
225,000 Shares (before giving effect to a stock split effected in connection
with the Company's initial public offering), (ii) one-half of one percent (0.5%)
of the Shares outstanding on the last day of the immediately preceding fiscal
year, or (iii) such lesser
-6-
<PAGE>
number of Shares as is determined by the Board. If the Board determines that, on
a given Purchase Date, the number of shares with respect to which options are to
be exercised may exceed (i) the number of shares of Common Stock that were
available for sale under the Plan on the Offering Date of the applicable
Offering Period, or (ii) the number of shares available for sale under the Plan
on such Purchase Date, the Board may in its sole discretion provide (x) that the
Company shall make a pro rata allocation of the Shares of Common Stock available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and continue all Offering Periods then in
effect, or (y) that the Company shall make a pro rata allocation of the shares
available for purchase on such Offering Date or Purchase Date, as applicable, in
as uniform a manner as shall be practicable and as it shall determine in its
sole discretion to be equitable among all participants exercising options to
purchase Common Stock on such Purchase Date, and terminate any or all Offering
Periods then in effect pursuant to Section 20 below. The Company may make pro
rata allocation of the Shares available on the Offering Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional Shares for issuance under the Plan by the Company's
stockholders subsequent to such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Shares and/or cash to the executor or
-7-
<PAGE>
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
16. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders
----------
of the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
--------
Common Stock which may be purchased by a participant in a Purchase Period, the
number of shares of Common Stock set forth in Section 13(a) above, and the price
per Share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
(b) Corporate Transactions. In the event of a dissolution or
----------------------
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate immediately prior to the consummation of such action,
unless otherwise provided by the Board.
-8-
<PAGE>
In the event of a Corporate Transaction, each option outstanding under the Plan
shall be assumed or an equivalent option shall be substituted by the successor
corporation or a parent or Subsidiary of such successor corporation. In the
event that the successor corporation refuses to assume or substitute for
outstanding options, each Purchase Period and Offering Period then in progress
shall be shortened and a new Purchase Date shall be set (the "New Purchase
------------
Date"), as of which date any Purchase Period and Offering Period then in
- ----
progress will terminate. The New Purchase Date shall be on or before the date of
consummation of the transaction and the Board shall notify each participant in
writing, at least ten (10) days prior to the New Purchase Date, that the
Purchase Date for his or her option has been changed to the New Purchase Date
and that his or her option will be exercised automatically on the New Purchase
Date, unless prior to such date he or she has withdrawn from the Offering Period
as provided in Section 10. For purposes of this Section 19, an option granted
under the Plan shall be deemed to be assumed, without limitation, if, at the
time of issuance of the stock or other consideration upon a Corporate
Transaction, each holder of an option under the Plan would be entitled to
receive upon exercise of the option the same number and kind of shares of stock
or the same amount of property, cash or securities as such holder would have
been entitled to receive upon the occurrence of the transaction if the holder
had been, immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving effect
to any adjustments in the number of Shares covered by the option as provided for
in this Section 19); provided however that if the consideration received in the
transaction is not solely common stock of the successor corporation or its
parent (as defined in Section 424(e) of the Code), the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the stockholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally accepted accounting rules applicable to the
Plan. Except as provided in Section 19 and in this Section 20, no amendment to
the Plan shall make any change in any option previously granted which adversely
affects the rights of any participant. In addition, to the extent necessary to
-9-
<PAGE>
comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code
(or any successor rule or provision or any applicable law or regulation), the
Company shall obtain stockholder approval in such a manner and to such a degree
as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20.
-10-
<PAGE>
DURECT CORPORATION
2000 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT AGREEMENT
--------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the Durect
Corporation 2000 Employee Stock Purchase Plan (the "Plan") for the Offering
----
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Enrollment
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Enrollment Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions during
an Offering Period by completing and filing with the Company a new Enrollment
Agreement with such increase or decrease taking effect as of the beginning of
the next following calendar month, if filed at least ten (10) business days
prior to the beginning of such month. Further, I may change the rate of
deductions for future Offering Periods by filing a new Enrollment Agreement, and
any such change will be effective as of the beginning of the next Offering
Period. In addition, I acknowledge that, unless I discontinue my participation
in the Plan as provided in Section 10 of the Plan, my election will continue to
be effective for each successive Offering Period.
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Durect Corporation 2000 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
<PAGE>
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
__________________________ _____________________________________
(Relationship) (Address)
Social Security #:________ _____________________________________
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company shall be entitled, to the extent
- -------------------------------
required by applicable law, to withhold from my Compensation any amount
necessary to comply with applicable tax withholding requirements with respect to
the purchase or sale of shares under the Plan.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the shares
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.
-2-
<PAGE>
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. In connection with the initial public offering of the Company's
securities and upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, I agree not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company, however or whenever I acquired them, without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed 180 days) from the effective date of
such registration as may be requested by the Company or such managing
underwriters and to execute an agreement reflecting the foregoing as may be
requested by the underwriters at the time of the public offering.
11. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Enrollment Agreement is dependent upon my eligibility to
participate in the Plan.
NAME (print):____________________________
SIGNATURE:_______________________________
SOCIAL SECURITY #:_______________________
DATE:____________________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
________________________________________
(Signature)
________________________________________
(Print name)
-3-
<PAGE>
DURECT CORPORATION
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Durect Corporation 2000 Employee Stock Purchase Plan (the "Plan") for the
----
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Enrollment Agreement.
Dated:___________________ ____________________________________
Signature of Employee
____________________________________
Social Security Number
<PAGE>
EXHIBIT 10.5
DURECT CORPORATION, INC.
2000 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or a merger, consolidation or other capital reorganization
of the Company with or into another corporation, or any other transaction or
series of related transactions in which the Company's stockholders immediately
prior thereto own less than 50% of the voting stock of the Company (or its
successor or parent) immediately thereafter.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Common Stock" means the Common Stock of the Company.
------------
(e) "Company" means Durect Corporation, Inc., a Delaware corporation.
-------
(f) "Continuous Status as a Director" means the absence of any
-------------------------------
interruption or termination of service as a Director.
(g) "Director" means a member of the Board.
--------
(h) "Employee" means any person, including any officer or Director,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Option" means a stock option granted pursuant to the Plan. All
------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means an Outside Director who receives an Option.
--------
<PAGE>
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 2000 Directors' Stock Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 300,000 Shares of Common Stock (the "Pool"). The Shares may
----
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 20,000 Shares, (the "Initial Option") on the date on which
such person first becomes an Outside Director after the effective date of this
Plan, whether through election by the shareholders of the Company or appointment
by the Board of Directors to fill a vacancy.
-2-
<PAGE>
(iii) Each Outside Director, including an Outside Director who did
not receive an Initial Option grant, shall be automatically granted an Option to
purchase 5,000 Shares (the "Annual Option") on the date of each Annual Meeting
of the Company's shareholders immediately following which such Outside Director
is serving on the Board, provided that, on such date, he or she shall have
served on the Board for at least six (6) months prior to the date of such Annual
Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors receiving an Option on
the automatic grant date. Any further grants shall then be deferred until such
time, if any, as additional Shares become available for grant under the Plan
through action of the stockholders to increase the number of Shares which may be
issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any grant of an Option made before the Company has obtained stockholder
approval of the Plan in accordance with Section 17 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
17 hereof.
(vi) The terms of each Initial Option granted hereunder shall be
as follows:
(1) each Initial Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of each Initial Option, determined
in accordance with Section 8 hereof;
(3) each Initial Option shall vest and become exercisable at the
rate of thirty three and one-third percent (33 1/3%) of the Shares subject to
the Initial Option on each of the first, second and third anniversaries of the
date of grant of the Initial Option.
(vii) The terms of each Annual Option granted hereunder shall be as
follows:
(1) each Annual Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of each Annual Option, determined in
accordance with Section 8 hereof;
-3-
<PAGE>
(3) each Annual Option shall vest and become exercisable at the
rate of one hundred percent (100%) of the Shares subject to the Annual Option on
the first anniversary of the date of grant of the Annual Option.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per Share of Options to be granted, which exercise price
shall be determined in accordance with Section 8 of the Plan; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
-----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating
-4-
<PAGE>
to the Company's initial public offering of securities. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13 of
the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
--------
Street Journal, or if there is a public market for the Common Stock but the
- --------------
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
------------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer
-5-
<PAGE>
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee: (A)
-----------------
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or (B) three (3) months after
the termination of Continuous Status as a Director, the Option may be exercised,
at any time within twelve (12) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of death or the date of termination, as applicable.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that an Optionee was not
entitled to exercise the Option at the date of death or termination or if he or
she does not exercise such Option (to the extent he or she was entitled to
exercise) within the time specified above, the Option shall terminate and the
Shares underlying the unexercised portion of the Option shall revert to the
Plan.
-6-
<PAGE>
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii),
(iii) and (iv) above, and the number of Shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per Share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(b) Change of Control. In the event of any transaction that qualifies
-----------------
as a Change of Control and notwithstanding whether or not outstanding Options
are assumed, substituted for or terminated in connection with the transaction,
the vesting of each outstanding Option shall accelerate in full such that each
Optionee shall have the right to exercise his or her Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable, immediately prior to consummation of the transaction.
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Change of Control, each Optionee would be entitled to
receive upon exercise of an Option the same number and kind of shares of stock
or the same amount of property, cash or securities as the Optionee would have
been entitled to receive upon the occurrence of such transaction if the Optionee
had been, immediately prior to such transaction, the holder of the number of
Shares of Common Stock covered by the Option at such time (after giving effect
to any adjustments in the number of Shares covered by the Option as provided for
in this Section 11); provided however that if such consideration received in the
transaction was not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the Option to be
solely
-7-
<PAGE>
common stock of the successor corporation or its Parent equal to the Fair Market
Value of the per Share consideration received by holders of Common Stock in the
transaction.
(c) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the
---------------
Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
-8-
<PAGE>
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
-9-
<PAGE>
DURECT CORPORATION, INC.
2000 DIRECTORS' STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
((Optionee))
((Optionee Address 1))
((Optionee Address 2))
You have been granted an option to purchase Common Stock of Durect
Corporation, Inc. (the "Company") as follows:
-------
Date of Grant ((Grant Date))
Vesting Commencement Date ((Vesting Start Date))
Exercise Price per Share ((Exercise Price))
Total Number of Shares Granted ((Shares Granted))
Total Exercise Price ((Total Exercise Price))
Expiration Date ((Expir Date))
Vesting Schedule: This Option may be exercised,
----------------
in whole or in part, in
accordance with the following
schedule: [_________ of the
Option Shares shall vest and be
exercisable on each _____
anniversary of the Vesting
Commencement Date.]
Termination Period: This Option may be exercised
------------------
for 90 days after termination
of Optionee's Continuous Status
as a Director, or such longer
period as may be applicable
upon death or Disability of
Optionee as provided in the
Plan, but in no event later
than the Expiration Date as
provided above.
-10-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 2000 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: DURECT CORPORATION, INC.
By:__________________________
_____________________________
Signature
Title:_______________________
_____________________________
Print Name
-2-
<PAGE>
DURECT CORPORATION, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
---------------
to the Optionee named in the Notice of Stock Option Grant attached as Part I of
this Agreement (the "Optionee"), an option (the "Option") to purchase a number
-------- ------
of Shares, as set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "Exercise
--------
Price"'), subject to the terms and conditions of the 2000 Directors' Stock
- -----
Option Plan (the "Plan"), which is incorporated herein by reference.
----
(Capitalized terms not defined herein shall have the meanings ascribed to such
terms in the Plan.) In the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Nonstatutory Stock Option
Agreement, the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's employment or consulting relationship, the exercisability of the
Option is governed by the applicable provisions of the Plan and this
Nonstatutory Stock Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
--------- ---------------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall
be deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
<PAGE>
(c) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
----------------
federal tax consequences relating to this Option under the law in effect as of
the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal income tax liability upon exercise. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. The long-
term capital gain will be taxed for federal income tax purposes at a maximum
rate of 20 percent.
-2-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
DURECT CORPORATION, INC.
_______________________________ By:_________________________________
((Optionee))
Title:______________________________
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Nonstatutory Stock Option Agreement. In
consideration of the Company's granting his or her spouse the right to purchase
Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Nonstatutory Stock Option Agreement and further
agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the
undersigned with respect to any amendment or exercise of rights under the Plan
or this Nonstatutory Stock Option Agreement.
____________________________________
Spouse of Optionee
-3-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
To: Durect Corporation, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of Durect Corporation,
Inc. Common Stock, under and pursuant to the Company's 2000 Directors' Stock
Option Plan and the Nonstatutory Stock Option Agreement dated _______________,
as follows:
Grant Number: __________________________
Date of Purchase: __________________________
Number of Shares: __________________________
Purchase Price: __________________________
Method of Payment of
Purchase Price: __________________________
Social Security No.: __________________________
The shares should be issued as follows: __________________________
Name: __________________________
Address: __________________________
__________________________
__________________________
Signed: __________________________
Date: __________________________
-4-
<PAGE>
CONFIDENTIAL
EXHIBIT 10.6
SECOND AMENDED AND RESTATED
DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
between
ALZA CORPORATION
and
DURECT CORPORATION
*Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
TABLE OF CONTENTS
PAGE
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
i
<PAGE>
SECOND AMENDED AND RESTATED
---------------------------
DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
-------------------------------------------
This Second Amended and Restated Development and Commercialization
Agreement (the "Agreement") is effective as of April 28, 1999 ("Effective Date")
between ALZA Corporation, a Delaware corporation ("ALZA"), and Durect
Corporation, a Delaware corporation ("Durect").
RECITALS
--------
A. ALZA and Durect have previously entered into that certain Development
and Commercialization Agreement with an effective date of April 21, 1998 and
subsequently entered into an Amended and Restated Development and
Commercialization Agreement with an effective date of April 28, 1999
(collectively "Previous Agreement") for the development, manufacture and
marketing of pharmaceutical products utilizing proprietary technology of ALZA
relating to the DUROS(R) System for the controlled delivery of drugs in certain
fields, as set forth herein.
B. The parties wish to amend such Previous Agreement and restate their
understandings herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
provided herein, the parties hereby agree as follows:
SECTION 1 - DEFINITIONS
-----------------------
For purposes of this Agreement, the following terms shall have the
respective meanings set forth below:
1.1 "Affiliate" shall mean a corporation or any other entity that
---------
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
1
<PAGE>
common control with, the designated party, but only for so long as the
relationship exists. "Control" shall mean ownership of shares of stock having at
least 50% of the voting power entitled to vote for the election of directors in
the case of a corporation, and at least 50% of the interests in profits in the
case of a business entity other than a corporation.
1.2 "Catheter" shall mean a device for transporting Drug from the
--------
System to a specific anatomical site for delivery, which device is selected,
identified or developed by Durect (and not by ALZA) for use in a Product.
1.3 "Commercialization" shall mean the ongoing process and activities
-----------------
generally engaged in by a company marketing life-science products to establish
and maintain a nationwide presence for a product, including, but not limited to
offering for sale, selling, marketing, promoting, distributing and importing
such product.
1.4 "Confidential Information" shall mean all non-public Technical
------------------------
Information, whether in oral, written or other tangible form that one party
discloses to the other under this Agreement and designates as confidential at
the time of disclosure or within 30 days thereafter.
1.5 "Development Costs" shall mean [* * *].
-----------------
1.6 "Drug" shall mean an active pharmaceutical agent, in its pure
----
form or in a formulation, that is incorporated in a System to create a Product
under the terms and conditions of this Agreement.
1.7 "Durect Field" shall mean, subject to modification under the
------------
terms of this Agreement, one of the following fields of use, and no others:
(a) "CNS Field" shall mean delivery of drugs for the treatment of
---------
pain, [* * *] directly into a component of the central nervous system from an
implantable pump via a catheter; provided, however, solely with respect to a
Product using Sufentanil as the Drug, there shall be no requirement that the
Drug be delivered via a catheter.
(b) "Middle/Inner Ear Field" shall mean delivery of drugs
----------------------
directly into the middle and/or inner ear from an implantable or external pump
via a catheter.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
2
<PAGE>
(c) "Pericardium Field" shall mean delivery of drugs directly
-----------------
into the pericardial sac from an implantable pump via a catheter.
(d) "Vascular Graft Field" shall mean delivery of drugs
--------------------
consisting of and limited to [* * *] directly into vascular grafts from an
implantable pump via a catheter .
(e) "Cancer Antigen Field" shall mean delivery from an
--------------------
implantable pump of an anti-cancer antigen from the list of anti-cancer antigens
attached hereto as Exhibit A or a combination of such anti-cancer antigens,
solely for treatment by immunization therapy. Such list of anti-cancer antigens
may be reviewed for additions or deletions from time to time by representatives
of ALZA and Durect, such determination to be made by mutual written agreement at
the discretion of each party.
To provide further clarification, the Durect Fields shall not include
applications of any ALZA drug delivery technology other than applications of
DUROS(R) Technology as set forth in this Agreement.
1.8 "DUROS(R) Technology" shall mean all Technical Information
-------------------
relating to the System.
1.9 "FDA" shall mean the United States Food and Drug Administration
---
or any successor United States governmental agency performing similar functions
with respect to pharmaceutical products.
1.10 "IND" shall mean the application for Investigation of a New Drug
---
submitted to the FDA.
1.11 "Intellectual Property Rights" shall mean trade secrets, patents,
----------------------------
copyrights, know-how and similar rights of any type under the laws of any
governmental authority, domestic or foreign, including all applications and
registrations relating to any of the foregoing.
1.12 "Major Market Country" shall mean any one of [* * *]
--------------------
1.13 "Minimum Payments" shall have the meaning set forth in Section
----------------
6.2 hereof.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
3
<PAGE>
1.14 "Minimum Payment Year" shall mean a period of four consecutive
--------------------
Payment Computation Periods beginning with the first day of the Payment
Computation Period following the Payment Computation Period during which all
necessary regulatory approvals to market the Product in a Major Market Country
have been received, and each successive four Payment Computation Periods
thereafter. The first four Payment Computation Periods shall be the First
Minimum Payment Year; the next four Payment Computation Periods shall be the
Second Minimum Payment Year; etc.
1.15 "NDA" shall mean a "New Drug Application," "Product License
---
Application," or other application for approval to market a product submitted to
the FDA, as amended or supplemented from time to time.
1.16 "Net Sales" shall mean the amounts invoiced on sales of a Product
---------
by Durect and its Affiliates and Subcontractors to independent, unrelated third
parties in bona fide arms-length transactions, less the following deductions
actually allowed by Durect, its Affiliates and Subcontractors and taken by such
third parties and not otherwise recovered by or reimbursed to Durect, or its
Affiliates or Subcontractors: (i) trade, cash and quantity discounts; (ii)
taxes or government charges levied on the sale of Product to the extent added to
the sales price and set forth separately as such in the amount invoiced; (iii)
amounts repaid or credited by reason of rejections, defects or returns or
because of rebates or retroactive price reductions; and (iv) delivery charges
(including transportation and insurance costs) actually included in the Net
Sales invoiced. Net sales shall not include the prices charged (at fair market
value) for separate products such as catheter access devices, syringes, gloves,
and gauze pads, that may be either sold separately from the Product or bundled
with the Product in the form of a kit; provided, however, that any Net Sales
shall be deemed to include the amount or fair market value of any consideration
(other than consideration described in Section 6.1(b)) received by Durect or its
Affiliates or Subcontractors that can be attributable to a Product, whether such
consideration is in cash or payments in kind. Net Sales shall not include sales
of a Product between or among Durect and its Affiliates and Subcontractors.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
4
<PAGE>
1.17 "Payment Computation Period" shall mean each three month period,
--------------------------
or any portion thereof, ending March 31, June 30, September 30, or December 31
of each year during the term of this Agreement.
1.18 "Primary Field" shall mean the [***].
-------------
1.19 "Product" shall mean at any time: (i) any human pharmaceutical
-------
product consisting of a Drug incorporated in or combined with a System and
(except in cases where the Durect Field definition does not require a catheter)
Catheter, which product is: (A) designed for use in a Durect Field; and (B)
selected as a Product under Section 2.2; or (ii) another product that is
substantially similar to the Product of clause (i), for example, a different
strength (i.e., a different amount of active ingredient delivered in the same
----
pattern and by the same route of administration), or having only cosmetic
changes such as size, color, shape, etc., or similar nontherapeutic changes.
----
1.20 "Product Candidate" shall mean any human pharmaceutical product
-----------------
consisting of a Drug incorporated in or combined with a System and (except in
cases where the Durect Field definition does not require a catheter) Catheter,
which product is designed for use in a Durect Field and which enters the
Screening Stage of development (as described in Exhibit C). Product Candidates
shall be listed on Schedule 1, which Schedule shall be amended from time to time
as required by adding those Product Candidates in accordance with Section 2.1
and deleting those Product Candidates that have become Products or are no longer
being developed as provided hereunder. A Product Candidate shall become a
Product when it enters the Feasibility Stage of development (as described in
Exhibit C).
1.21 "Product Payments" shall mean the payments described in Section
----------------
6.1.
1.22 "Program" shall mean all activities for developing and obtaining
-------
regulatory approval to Commercialize Product(s) developed under this Agreement
in the Durect Fields in the Territory.
1.23 "Program Information" shall mean any Technical Information
-------------------
developed or acquired by either party and/or a Subcontractor under or in
connection
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
5
<PAGE>
with the Program, and any Technical Information developed by one party using any
other Program Information or any of the other party's Confidential Information.
1.24 "Regulatory Data" shall mean the medical, toxicological,
---------------
pharmacological and clinical data included within Technical Information to the
extent necessary to, required for, or included in any governmental regulatory
filing to obtain or maintain regulatory approval to market a Product.
1.25 "Secondary Fields" shall mean the [***].
----------------
1.26 "Subcontractors" shall mean any third party persons or entities
--------------
(other than wholesalers) to which Durect or any Durect Affiliate directly or
indirectly grants any right to Commercialize a Product as provided for
hereunder.
1.27 "Supply Agreement" shall mean an agreement for the supply of
----------------
Durect's, its Affiliates' and Subcontractors' total requirements of each Product
by ALZA, referenced in Section 5.6.
1.28 "Subterritory" shall mean one of the following:
------------
Subterritory A -- [* * *]
Subterritory B -- [* * *]
Subterritory C -- [* * *]
Subterritory D -- [* * *]
1.29 "System" shall mean a drug delivery system which includes and is
------
contained within an implantable (or externally worn) osmotic pump intended to
function by releasing the active agent or agents on a controlled basis. The term
"System" shall include all materials, technology and attributes contained
within, or incorporated in the osmotic pump (other than the Drug itself) and
shall include the formulation and stabilization of a therapeutic agent (such as
the Drug) in the System. The System shall not include a Catheter as defined in
Section 1.2, or (except to the extent agreed upon in writing by the parties) any
docking mechanism or other components used to connect a Catheter to the osmotic
pump, and shall not include by way of example, any delivery system that is
ingested in the gastrointestinal tract or that delivers drug through
substantially intact skin.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
6
<PAGE>
1.30 "Technical Information" shall mean know-how, trade secrets,
---------------------
formulations, inventions, data (including Regulatory Data), technology,
processes and information necessary or useful to the Products and/or the
Program, which a party hereto has the lawful and contractual right to disclose
to the other party, and any and all Intellectual Property Rights therein and
thereto. "Technical Information" shall include, without limitation, processes
and analytical methodology used in development, testing, analysis and
manufacture, and medical, clinical, toxicological and other scientific data.
Notwithstanding the foregoing, "Technical Information" shall not include
trademarks. Subject to the foregoing, ALZA Technical Information shall include:
(A) DUROS Technology (including but not limited to all information relating to
manufacture of Systems) and any other Technical Information owned by or licensed
to ALZA prior to April 21, 1998; (B) ALZA's Program Information (as set forth in
Section 8.1); and (C) Technical Information developed by ALZA outside the
Program after April 21, 1998 ("ALZA Technical Information"); and Durect
Technical Information shall include: (a) Technical Information owned by or
licensed to Durect prior to April 21, 1998; (b) Durect's Program Information (as
set forth in Section 8.1); and (c) Technical Information developed by Durect
outside the Program after April 21, 1998 ("Durect Technical Information").
1.31 "Territory" shall mean all of the countries of the world, but
---------
shall exclude, for any Product: (i) countries which may be eliminated from the
Territory from time to time in accordance with this Agreement, and (ii) any
countries for which Durect does not have rights to commercialize the Drug
incorporated in such Product.
1.32 "Work Plan" and "Cost Estimate" shall have the meaning set forth
--------- -------------
in Section 2.3.
SECTION 2- DEVELOPMENT PROGRAM
------------------------------
2.1 Product Development. Subject to the terms and conditions herein,
-------------------
Durect shall diligently develop Products under the Program in accordance with
this Agreement, including making available such of its personnel, and taking
such steps as are
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
7
<PAGE>
reasonably necessary, in order to carry out its obligations. In the event Durect
desires to initiate development work on a new product, it shall send to ALZA a
written notice setting forth a description of the proposed new product and
projected target dates for the filing of an IND, start of Phase III and filing
of an NDA (each a "Milestone"), which target dates shall be reasonable by
industry standards and shall be consistent with the timeline used by Durect for
internal planning and presentation to investors. Upon ALZA's written approval of
the target dates for the Milestones, which approval shall not be unreasonably
withheld, the proposed new product shall be added as a Product Candidate to
Schedule 1. From time to time, the parties will review the target dates for the
Milestones in good faith and, by mutual written agreement, revise and update the
target dates if necessary. Durect shall notify ALZA in writing when a Product
Candidate is ready to pass into the clinical development stage as outlined in
Exhibit C, in which event it shall be added as a Product to Schedule 2. Subject
to the terms and conditions of this Agreement, the addition or deletion of a
Product Candidate or Product to Schedule 1 or Schedule 2 shall be determined
based on the reasonable, good faith judgment of Durect, provided that any
proposed Product Candidate or proposed Product will not be added in the event
that: (i) such proposed Product Candidate or proposed Product was within the
past 12 months removed by ALZA from the Program pursuant to Section 2.5; or (ii)
ALZA determines, reasonably and in good faith, based on medical or technical
reasons, that the proposed Product Candidate or proposed Product is not suitable
for development because development or Commercialization of such proposed
Product or Product Candidate would be likely to be harmful to the reputation of
ALZA and/or DUROS Technology, provided, however, that: (a) ALZA's determination
pursuant to this clause (iii) shall be subject to review by a mutually
acceptable third party expert in the event of disagreement by the parties as to
such determination, and (b) ALZA shall not initiate development of such proposed
Product Candidate (or proposed Product), pursuant to Section 5.3 or otherwise,
for its own account or with a third party for a period of [***] from the date of
ALZA's determination without first proposing such proposed Product Candidate (or
proposed Product) to Durect for development and providing Durect with a period
of [***] in which to accept or reject such proposed Product Candidate (or
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
8
<PAGE>
Proposed Product) in writing and diligently initiate development under the terms
of this Agreement.
2.2 Sharing of Information.
----------------------
During the term of this Agreement, representatives of ALZA and Durect
shall meet within 30 days after the end of each calendar quarter, unless
mutually agreed to by the parties, to discuss and provide information regarding
the status of development, clinical programs, regulatory applications and
development costs and expenses incurred for the Products and Product Candidates
listed on Schedules 1 and 2 including without limitation progress against
diligence obligations. Upon request by ALZA or Durect, the parties shall also
meet from time to time to discuss improvements made to the System by each party.
In addition, each party shall promptly provide any information as reasonably
requested by the other party from time to time regarding its activities and
progress with respect to the Program. The information exchanged by the parties
pursuant to this Section 2.2 shall be in confidence subject to the terms of
Section 4.1.
2.3 Work Plans and System Development.
---------------------------------
(a) In the event that Durect desires that ALZA provide certain
development services relating to any Product or Product Candidate, and ALZA
agrees to provide such services to Durect, Durect and ALZA shall develop a
mutually acceptable development plan ("Work Plan") for each Product Candidate
(or Product) which shall set forth: (i) the development activities to be
performed by ALZA and estimated time schedule therefor; (ii) and the estimated
Development Costs therefor ("Cost Estimates"); which Work Plans and Cost
Estimates shall be signed by an authorized officer of each party. ALZA shall
diligently perform those development activities assigned to it under the Work
Plan and shall use diligent efforts to complete tasks in the Work Plan in an
expeditious and cost-effective manner.
(b) Development work for the System may be performed by Durect or
ALZA (to the extent agreed upon in the Work Plans). Durect shall have the right
to subcontract to third parties development of System components (but not
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
9
<PAGE>
System design). The subcontracting of all other System development work will be
subject to the prior written consent of ALZA. If Durect desires to subcontract
out the development of System components as permitted herein to any third party,
prior to providing any information relating to Systems to such third party,
Durect shall notify ALZA of the identity of such third party, and Durect shall
enter into a confidentiality and invention assignment agreement with such third
party in a form previously approved by ALZA which expressly makes ALZA a third-
party beneficiary of such agreement and permits ALZA to directly enforce its
terms. Unless agreed to in writing by ALZA, the rights granted to Durect to
perform development work for the System pursuant to this Section 2.3 shall
terminate after a change in control of Durect in which Durect becomes controlled
by a third party company, in which event ALZA shall have the right to elect to
perform all development work relating to the System and ALZA and Durect shall
enter into a Work Plan for such System development work which shall provide for
the continued diligent performance of such System development work so as to
minimize disruption of Product timelines. If ALZA elects not to perform
development work relating to the System after such change in control, then
Durect shall continue to have the right to perform development work relating to
the System as set forth in this Section 2.3. For the purposes of this Section
2.3, "control" shall have the same meaning as set forth in Section 1.1. All
other Product development activities may be performed by Durect, ALZA (to the
extent agreed upon in Work Plans) or subcontracted to third parties.
2.4 Development Payments. In consideration for ALZA's work on the
--------------------
Program, Durect shall pay to ALZA [* * *], provided that Durect shall not be
obligated to pay [* * *], and ALZA shall not be obligated to perform work-which
would result in [* * *]
2.5 Durect Field(s) Diligence and Loss of Rights. Durect shall
--------------------------------------------
approve, fund and take other actions necessary to provide for development of
Products in each of the Durect Fields in accordance with the minimum diligence
requirements set forth in Exhibit F, and to pursue and fund proof of principle
work for Products in the Secondary
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
10
<PAGE>
Fields in accordance with Exhibit F. If Durect fails to meet the diligence
requirements relating to a Durect Field as set forth in Exhibit F, for which
such failure continues for [* * *] after-the delivery of written notice thereof
by ALZA, then ALZA's sole and exclusive remedy shall be to terminate the
restrictions on ALZA provided for in Section 5.3 upon written notice from ALZA
solely in the Durect Field in which such requirements were not met (or such
Durect Field as is otherwise provided for in Exhibit F under "Consequences for
Fields"), in which event such Durect Field shall be deemed to be eliminated from
the "Durect Fields" definition, and thereafter no Product Candidates shall be
added to Schedule 1 within such Durect Field and no Products shall be added to
Schedule 2 for such Durect Field except for those Product Candidates existing at
the time of such elimination and for which the screening stage has been or
subsequently is successfully completed. Notwithstanding the elimination of any
Durect Field hereunder, Durect shall continue to have rights to the Product
Candidates and Products already included in Schedules 1 and 2 as of the date
that such field is eliminated so long as it continues to meet its obligations
for such Product Candidates and/or Products, including those set forth in
Exhibit F, provided, however, that if Durect fails to meet such obligations with
respect to a Product Candidate or Product and such failure continues for [* * *
] after the delivery of written notice thereof by ALZA, then ALZA may eliminate
such Product Candidate or Product from this Agreement and ALZA shall have the
rights set forth in Section 11.6.
2.6 Regulatory Activities.
---------------------
(a) Durect shall diligently take all steps necessary to obtain
regulatory approval to market each Product in each Major Market Country of the
Territory, so long as Durect retains Commercialization rights for such Product
under this Agreement, including promptly preparing and filing necessary
applications for regulatory approval to market the Product in each such country
(including the IND and NDA and corresponding regulatory filings outside the
United States) and shall work diligently to obtain such approvals as
expeditiously as possible. Durect shall use reasonable commercial diligence to
obtain such regulatory approvals in other countries of the
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
11
<PAGE>
Territory. ALZA may be delegated certain duties relating to clinical and
regulatory activities under the Program on a Product-by-Product basis by mutual
agreement as set forth in Work Plans. The CMC Section of any regulatory filing,
to the extent it relates to the System, may be maintained by ALZA, in one or
more of ALZA's Drug Master Files to the extent permissible under applicable laws
and regulations, for which Durect shall have the right of reference for each
Product hereunder. Durect shall prepare the CMC Section subject to ALZA's review
and decision-making authority under Section 2.6(b).
(b) Notwithstanding the allocation of regulatory responsibilities
in this Section 2.6, the representatives of each party shall have the right to
review and comment upon all regulatory filings proposed to be made with respect
to any Product for each country of the Territory as to which Durect maintains
rights hereunder, provided that for any such comments to be considered, the
comments shall be provided within [* * *] after the receipt of any draft filings
for review. To the extent ALZA performs review of regulatory filings or attends
meetings with regulatory agencies as to matters beyond the requirements of its
activities under the Program (and not at Durect's request), it shall do so at
its cost and expense. Durect shall have the right to make final decisions with
regard to any regulatory filings relating to any Product, provided that
notwithstanding anything to the contrary herein, due to ALZA's continuing
interest in development and production of Systems for multiple applications,
ALZA shall have the right to approve regulatory matters relating to the System
or its function, manufacture or safety, including manufacturing specifications
and the relevant portions of the CMC Section of an NDA or its equivalent. Each
party shall with reasonable promptness provide the other party with copies of
all correspondence from or to such regulatory authorities concerning each such
Product. ALZA shall have the right to participate in any conference or meeting
with regulatory authorities with respect to each Product. Durect shall notify
ALZA in writing of its receipt of regulatory approval to market the Product in
any country of the Territory within [* * *] after receipt of any such approval.
(c) Representatives of each party shall have the right to review and
comment on all proposed protocols for any clinical studies to be conducted by
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
12
<PAGE>
either party with respect to any Product, and each party shall make such changes
in such protocols as may be reasonably requested by the other in writing within
[* * *] after receiving the proposed protocols, provided that Durect shall make
final decisions on the protocols and their implementation. To the extent ALZA
conducts review of protocols as to matters beyond the requirements of its
activities in the Program (and not at Durect's request), ALZA shall do so at its
cost and expense.
(d) From time to time during the term of this Agreement, ALZA
may wish to include certain patent information in the patent certification of an
NDA filed or which may be filed by or on behalf of Durect under this Agreement
relating to a Product. If ALZA advises Durect in writing of the patent number
and expiration date, or such other information as the FDA may from time to time
require, of patents to be included in the NDA patent certification or any
amendment thereof, Durect shall include such information in the NDA, or amend
the NDA, within the applicable time limits required by law.
(e) Nothing contained in this Section 2.6 or elsewhere in this
Agreement is intended to conflict with any applicable regulations and laws
relating to procuring and maintaining regulatory approval for the Products in
all countries of the Territory where the Products will be developed and
Commercialized, and in the event of any conflict with the terms of this
Agreement and applicable laws, the applicable laws will control.
SECTION 3 - DISCLOSURE OF INFORMATION
-------------------------------------
3.1 Disclosure. Upon execution of this Agreement, and thereafter
----------
during the term hereof, at such times as the parties shall mutually agree, each
party shall disclose to the other, in confidence subject to Section 4.1 hereof,
relevant Confidential Information and Program Information necessary or useful to
the Program. Each party may use such Confidential Information and Program
Information disclosed by the other party for the purposes permitted by this
Agreement, but for no other purpose. Each party shall, at the request of the
other and on a confidential basis
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
13
<PAGE>
subject to Section 4.1, allow personnel of the other party to consult with its
staff at mutually agreeable times, to discuss and review such Confidential
Information and Program Information. All Confidential Information and Program
Information heretofore or hereafter disclosed by either party to the other
relating to the subject matter hereof shall be deemed to have been disclosed
pursuant to this Agreement and shall be subject to the provisions of this
Agreement including, but not limited to, Section 4.1.
SECTION 4 - CONFIDENTIALITY OF INFORMATION
------------------------------------------
4.1 Confidentiality. Except as specifically authorized by this
---------------
Agreement, each party shall, for the term of this Agreement and for [* * *]
after its expiration or termination for any reason, keep confidential, not
disclose to others and use only for the purposes authorized herein, all of the
other party's Confidential Information and Program Information, except as
permitted by this Agreement; provided, however that the foregoing obligation
shall not apply to the extent that any such information is (i) already known to
the recipient at the time of disclosure, as evidenced by its prior written
records (but not including information known to Durect personnel as a result of
prior association with ALZA), (ii) publicly known prior to or after disclosure
other than through unauthorized acts or omissions of the recipient, or (iii)
disclosed in good faith to the recipient by a third party lawfully entitled to
make such disclosure, or (iv) independently developed by the recipient without
use of the disclosing party's Confidential Information as evidenced by written
records of the recipient; [***]. Notwithstanding the foregoing, any
Confidential Information may be (A) disclosed to governmental agencies and to
others where such information may be required to be included in patent
applications or regulatory filings permitted under the terms of this Agreement;
(B) provided to third
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
14
<PAGE>
parties under appropriate terms and conditions including confidentiality
provisions substantially equivalent to those in this Agreement for consulting,
manufacturing, development, external testing and marketing trials with respect
to the Product; (C) published, if and to the extent such publication has been
approved in writing by ALZA, to the extent it relates to ALZA Confidential
Information, or Durect, to the extent it relates to Durect Confidential
Information; or (D) disclosed to the extent required by applicable laws or
regulations or as ordered by a court or other regulatory body having competent
jurisdiction. In each of the foregoing cases, the recipient will use its
reasonable efforts to limit the disclosure and maintain confidentiality to the
extent possible.
SECTION 5 - COMMERCIALIZATION RIGHTS
------------------------------------
5.1 Grant of Rights.
---------------
(a) On the terms and conditions of this Agreement and subject to
ALZA's rights set forth in Section 5.5: (i) Durect shall have the exclusive
right to Commercialize each of the Products in the Territory, with the right to
record sales for its own account; (ii) on a Product-by-Product basis, Durect
shall have the right to appoint an Affiliate or Affiliates of Durect to
Commercialize Products in any country or countries of the Territory; (iii)
Durect shall also have the right, on a Product-by-Product basis, to appoint
and/or enter into agreements with Subcontractor(s) to Commercialize, sell and
distribute such Product in any country or countries of the Territory; and (iv)
Durect shall have the exclusive right (subject to the rights and obligations
under this Agreement respecting the development of the Systems including the
provisions of Section 2.3) to develop the Products and to appoint and/or enter
into agreements with Subcontractors to perform such development pursuant to this
Agreement. In the case of such appointment in any country by Durect of a non-
Affiliate: (i) such Subcontractor shall be subject to the terms and conditions
of this Agreement; (ii) [***]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
15
<PAGE>
[***] and (iii) the rights of ALZA under this Agreement shall not be prejudiced
or in any other way reduced or limited by such subcontracting arrangement.
Subject to the terms and conditions of this Agreement, ALZA hereby grants to
Durect and its Affiliates a license under Intellectual Property Rights covering
ALZA Confidential Information (including information owned by ALZA as of April
21, 1998 relating to catheters and mechanisms for docking catheters to the
Systems), ALZA Program Information, and the Systems solely to the extent
necessary for Durect to Commercialize and Manufacture (subject to Section 5.6
hereof) Products, to perform development activities as contemplated herein, and
to otherwise perform its obligations in accordance with this Agreement.
(b) Subject to the terms and conditions of this Agreement,
including but not limited to Section 5.3, Durect shall have the exclusive right
to Commercialize each Product on Schedule 2: (A) in Subterritories A, B and C
for a period of [* * *] from the [* * *] in such Subterritory; (B) in
Subterritory D for a period of [* * *] from the [* * *]
(c) Subject to the terms and conditions of this Agreement,
Durect shall have an option to extend year-by-year the period of
Commercialization rights granted under Section 5.1(a) on a Product-by-Product,
Subterritory-by-Subterritory basis (with respect to the Products, Subterritories
and countries for which Durect has retained rights), by written notice to ALZA
given at least [* * *] prior to the expiration of Durect's rights under Section
5.1(b) for such Product in such Subterritory.
(d) If the option to extend Commercialization rights is
exercised in accordance with Section 5.1(c) for any Product in any Subterritory,
Durect shall commence making payments automatically under the provisions of
Section 6.3 for such
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
16
<PAGE>
Product with respect to such Subterritory as the obligations to make Product
Payments for such Product in such Subterritory under Section 6.1 expire. In the
event that Durect exercises its option to extend its rights described in Section
5.1(c), the Commercialization rights granted under Section 5.1(a) for such
Product in such Subterritory shall continue for the extension term(s) and under
the conditions set forth in Section 6.3.
[***]
5.2 Commercial Diligence. Within 30 days after the filing for
--------------------
regulatory approval in the first Major Market Country for each Product, Durect
shall notify ALZA in writing as to its plans for Commercializing such Product in
the Territory. Durect shall diligently pursue regulatory approval and
Commercialization of the Products in the Territory. Promptly after obtaining the
necessary regulatory approvals (and pricing approval where applicable) in any
country of the Territory (and in any event within [* * *] after such approvals)
Durect (or its Affiliates or Subcontractors) shall commence and shall continue
diligently to Commercialize the Product on a nationwide basis in such country
using the same efforts that an established pharmaceutical company normally
devotes to its own comparable products, so long as Durect retains
Commercialization rights under this Agreement. Without limiting the foregoing,
at any time after the [* * *] ALZA may, upon [* * *] prior written notice to
Durect, identify any country in which a Product is not being commercially sold
by Durect, its Affiliates or Subcontractors and
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
17
<PAGE>
for which neither Durect or its Affiliates or Subcontractors are, nor have been
for at least the preceding [* * *], diligently seeking regulatory approval to
Commercialize the Product in such country (the "Identified Country"). ALZA and
Durect shall attempt in good faith, for up to [* * *] from the date of such
notice, to seek a mutually acceptable means of Commercializing the Product in
such Identified Country, which may include both ALZA and Durect negotiating an
agreement with a third party. If after such [* * *] no such means has been
agreed upon, then ALZA may, by written notice to Durect, terminate the rights of
Durect hereunder to Commercialize such Product in such Identified Country. For
each Product with respect to which Durect does not retain Commercialization
rights in any particular country ("Terminated Countries"), ALZA shall have the
rights to such Product in such Terminated Countries in accordance with Section
11.6.
5.3 Durect Field Exclusivity.
------------------------
(a) Subject to the terms and conditions of this Agreement
(including without limitation Section 5.3(c) and Section 2.5), ALZA shall not:
(i) develop for its own account a product using the System that is designed for
use in any Durect Field, or (ii) grant to a third party any rights to develop,
manufacture or Commercialize products using the System (or license Intellectual
Property Rights covering ALZA Technical Information) that ALZA knows or has
reason to know, at the time such third party arrangement is entered into, would
be a product designed for use in a Durect Field. Nothing herein shall be deemed
to restrict ALZA from developing or granting rights with respect to any products
that are not designed and developed for use in a Durect Field, subject to the
following:
(A) ALZA may not itself develop or Commercialize, nor grant
rights to a third party to develop or Commercialize any product using the System
which incorporates Sufentanil so long as Durect and/or a Subcontractor
(including ALZA) is diligently developing or Commercializing the non-
catheterized Product using Sufentanil as the Drug ("Sufentanil Product") in
accordance with the terms of this Agreement.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
18
<PAGE>
(B) In the event ALZA (or a third party to whom ALZA has granted
rights) Commercializes a product using the System which incorporates an opioid
compound (other than Sufentanil) as the active ingredient, then starting upon
the FDA approval for such other product and during such period as Durect and/or
a Subcontractor is diligently developing or Commercializing the Sufentanil
Product in accordance with the terms of this Agreement, [***]
(C) In the event that ALZA (or a third party to whom ALZA has
granted rights) Commercializes the Sufentanil Product as a result of ALZA's
exercise of its option right under Section 5.5(a), then if ALZA (or any third
party to whom ALZA has granted rights) commences Commercialization of any
product using the System which incorporates any opioid other than Sufentanil,
then commencing upon the FDA approval of such other product, [* * *] in which
event [* * *]
If Durect can reasonably show that a third party contractor of ALZA is
manufacturing or Commercializing products using the System, which products are
being used in the Durect Fields, then ALZA agrees to notify such third party
contractor of Durect's rights in the Durect Fields and, to the extent it has the
legal right to do so, to use its reasonable commercial efforts to stop such
third party from manufacturing or Commercializing such products in the Durect
Fields. However, Durect acknowledges that ALZA may not have the right to limit
uses of products that are not designed for use in a Durect Field. The
obligations of ALZA under Section 5.3 shall continue only for such period as is
covered by specifically agreed-upon diligence requirements as set forth in
Section 2.5 or Exhibit F.
(b) From time to time during the term of this Agreement, Durect
and ALZA may, at their discretion, discuss opportunities to add either
additional products or additional fields of products to the definition of Durect
Fields under this Agreement, by written agreement of the parties; provided that
neither party shall be obligated to enter into negotiations or into such an
agreement, or to reserve for the other party rights to any additional products
or fields until such time as an agreement is
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
19
<PAGE>
made to that effect. In addition, if any such additional Products, or Products
in such additional fields, involves clinical applications in the areas of [* *
*] or delivery of drugs to the [* * *] and subject to the exception provided in
the next sentence below, then ALZA shall have an option to obtain exclusive
Commercialization rights to such Products as set forth in Section 5.5(a). The
foregoing option to ALZA shall not apply to any Product which Durect
Commercializes through a Subcontractor who holds exclusive rights (by ownership
or exclusive license) to a United States patent which: (i) covers the Drug
incorporated into such Product, or the Drug's manufacture or use which but for a
license from the Subcontractor would preclude Durect from the development,
Commercialization or manufacture of such Product incorporating such Drug, and
(ii) will provide at least [***] from the time Durect and the Subcontractor
enter into an agreement for the development and/or Commercialization of such
Product (any such Product shall herein be referred to as "Proprietary Product").
(c) Notwithstanding Section 5.3(a), if ALZA is requested by a
third party to develop a product using the System without a catheter, which
product is designed for use in the Cancer Antigen Field, then ALZA shall notify
Durect in writing of such opportunity. Durect shall notify ALZA within [* * *]
after the receipt of such notice from ALZA as to whether or not Durect wishes to
pursue such opportunity as a Product under this Agreement with such third party.
If Durect and such third party enter into a written agreement providing for the
development and Commercialization of the product within [* * *] after Durect's
receipt of the notice from ALZA described in the first sentence of this Section
5.3(c), then such product shall be developed as a Product under this Agreement,
and if such condition has not been met, then ALZA shall be free to pursue such
opportunity using the System without a catheter with such third party; provided,
however, that: (A) ALZA may not develop or grant rights to a third party to
develop or Commercialize any such product using the System in the Cancer Antigen
Field which product incorporates the same Drug as a Product which is then being
developed or Commercialized diligently by Durect or a Subcontractor under this
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
20
<PAGE>
Agreement in the Cancer Antigen Field; and (B) for a period of [* * *]
("Exclusion Period"), ALZA will refrain from developing or granting rights to a
third party to Commercialize any such product in the Cancer Antigen Field which
product is designed for the same clinical use for which a Product is then being
developed or Commercialized diligently by Durect or a Subcontractor under this
Agreement in the Cancer Antigen Field. Durect may extend such Exclusion Period,
by written notice to ALZA at least [* * *] before expiration of such Exclusion
Period, by up to an additional [* * *] if Durect (i) has met and continues to
meet all of its diligence requirements under Section 2.5 in a timely manner, and
(ii) is [* * *] in the Cancer Antigen Field, but in no event shall any extension
to the Exclusion Period be granted beyond [* * *] Subject to the foregoing,
[* * *]
5.4 Other Technologies; Conversion of Rights. The parties acknowledge
----------------------------------------
that ALZA is relying on Durect's commitment to utilizing DUROS Technology in
development of its products. Accordingly, the Commercialization rights for
Products granted to Durect under this Agreement shall become non-exclusive
rights, and the restrictions on ALZA provided for in Section 5.3 will terminate
upon written notice from ALZA, if at any time during the term of this Agreement
Durect develops or Commercializes any drug delivery technology for use in any of
the Durect Fields and that would be used in a manner similar to the DUROS
Technology. In such event, no additional Product Candidates or Products shall be
added to Schedules 1 or 2 (but Durect shall retain exclusive rights only to
Products already included in Schedule 2 and only for so long as Durect continues
to meet its obligations for such Products including those set forth in Exhibit F
and does not develop any product using such other drug delivery technology that
contains the same Drug for use in the same Durect Field as any of such
Products). Nothing in this Section 5.4 shall be deemed to restrict Durect from
developing and Commercializing any type of drug delivery technology in any
fields of use outside of the Durect Fields. During the term of this Agreement,
Durect shall have the right to delete any Durect Field(s) from the "Durect
Fields" definition by written notice to ALZA effective [* * * ] after
such notice is received by ALZA, in which event,
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
21
<PAGE>
all rights of Durect in such Durect Field shall terminate; provided, however,
such deletion of any Durect Field by Durect shall not affect the rights and
obligations of the parties with respect to any other Durect Fields not deleted
in accordance with this Section 5.4.
5.5 ALZA Rights.
-----------
(a) Durect hereby grants to ALZA options to obtain exclusive
worldwide Commercialization rights to each Product in the Cancer Antigen Field
which is not a Proprietary Product (as defined in Section 5.3(b) above) and each
additional Product for which ALZA has option rights under Section 5.3(b) (each
an "Option Product") and an option to obtain exclusive Commercialization rights
in the U.S. and Canada to the Sufentanil Product subject to the following
conditions. At the time that [* * *], Durect may deliver written notice thereof
to ALZA, along with the data and a report summarizing such data regarding such
Product, provided that Durect must deliver such notice to ALZA [* * *] unless
mutually agreed to in writing by the parties. No later than [* * *] after such
notice from Durect ("Option Period"), ALZA shall notify Durect in writing
whether it elects to:
(i) enter into an agreement with Durect to develop and
Commercialize such Product, in which case the parties shall negotiate in good
faith an agreement for the development and Commercialization of such Product,
which agreement shall require ALZA to Commercialize such Product with the same
degree of diligence as required of Durect under Section 5.2; or
(ii) not obtain Commercialization rights to such Product, in
which event Durect shall be entitled to enter into an agreement with a third
party to develop and Commercialize such Product; or
(iii) solely with respect to an Option Product, extend the Option
Period by increments of [***] until such time as [* * *] and thereafter by
increments of [***] until such time [***] (each increment an "Extension
Period"), provided that ALZA shall be required to fund development work for such
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
22
<PAGE>
Product during each such Extension Period, but provided further that ALZA shall
not be required to fund development work on more than [***] in order to extend
its options for all Products in such Durect Field. [***]
If ALZA elects to exercise its option to the Sufentanil Product or any
other Product subject to this Section 5.5(a) at any time during the Option
Period or any Extension Period, and the parties are unable to agree on terms for
such Commercialization rights within [***] after such exercise, either party
may elect to submit the determination of such terms to special arbitration in
accordance with Section 15, provided that judgment must be rendered no later
than [***] after the commencement of arbitration (as defined in Section 15).
In such arbitration, the arbitrators shall be instructed to make a determination
as to the fair market value of the rights granted to the Product in question as
between two independent companies negotiating at arms' length and shall
determine appropriate terms, including reasonable diligence provisions, taking
into account, among other things, evidence presented concerning the terms agreed
upon by other parties in arms' length negotiations for products at a similar
stage of development and with similar market potential. Upon such decision by
the arbitrators, the decision shall become a binding agreement of the parties.
[***]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
23
<PAGE>
[***]
5.6 Manufacture of Product.
----------------------
(a) Subject to the terms and conditions of this Agreement,
including those set forth in this Section 5.6: (i) Durect shall have the
exclusive right, in the Territory, to manufacture, assemble and finish
commercial and clinical supplies of Products, including the right to make
Systems and fill Systems solely and specifically for incorporation into Products
and not for any other purpose (collectively "Manufacture"); (ii) on a
-----------
Product-by-Product basis, Durect shall have the right to appoint such Affiliates
for which Durect possesses, directly or indirectly, the power to direct or cause
the direction of the management or policies of such Affiliates to Manufacture
Products in [* * *] and such other countries as shall be agreed upon by the
parties from time to time; and (iii) on a Product-by-Product basis, Durect shall
also have the right to subcontract out to third parties who normally engage in
such subcontract assembly work for others the manufacture of production and
process equipment, System components, the filling of Systems, and sterilization
and final assembly of Product for commercial and clinical supplies of Products,
provided that System subassembly may not be subcontracted to third parties
without ALZA's written approval. Other than subcontracting as specifically set
forth in Section 5.6(a)(ii)-(iii) above, the Manufacture of Product shall be
performed only by Durect and may not be subcontracted to any parties other than
ALZA without the prior written consent of ALZA. Unless agreed to in writing by
ALZA, the rights granted to Durect pursuant to this Section 5.6 or manufacturing
rights granted elsewhere in this Agreement shall terminate upon a change in
control of Durect in which Durect becomes controlled by a third party company,
in which event, ALZA shall have the right to elect to supply all of Durect's and
its Affiliates and Subcontractor's clinical and commercial requirements for
Product (excluding any Catheter or other components as agreed upon by the
parties which are external to the System), at ALZA's [* * *] as determined in
accordance with Exhibit G
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
24
<PAGE>
hereto, and ALZA and Durect shall enter into a written supply agreement for such
manufacture and supply to Durect, its Affiliates and Subcontractors which shall
include such provisions for interim supply to ensure uninterrupted supply of
Products (at a price to Durect of ALZA's [* * *] until ALZA is able to fully
meet Durect and its Affiliates and Subcontractor's requirements after such a
change in control. If ALZA elects not to supply Durect and its Affiliates and
Subcontractor's requirements after such a change in control, then Durect shall
continue to have the right to Manufacture Product as set forth in this Section
5.6. For the purposes of this Section 5.6(a), "control" shall have the same
meaning as set forth in Section 1.1.
(b) The parties acknowledge that ALZA has provided Durect with
reasonable assistance (including making available scientific, engineering and
manufacturing and other personnel) and transferred to Durect appropriate
documentation relating to Systems manufacture in accordance with a work plan
agreed upon by the Parties. All such materials and information shall remain the
sole property of ALZA. At the request of ALZA, Durect shall promptly transfer
back to ALZA any and all improvements, documentation or other Technical
Information that may be developed by Durect or its subcontractors relating to
Manufacture of Systems. To the extent such transfer requires technical
assistance from Durect, ALZA shall reimburse Durect for the cost of such
assistance as determined in accordance with Exhibit E.
(c) All Manufacturing of Product by Durect hereunder shall be in
strict accordance with all applicable laws and regulations, including the
"current good manufacturing practices" regulations of the U.S. Food and Drug
Administration. If Durect desires to subcontract any part of manufacturing of
Systems as permitted herein to any third party, prior to providing any
manufacturing information relating to Systems to such third party, Durect shall
notify ALZA of the identity of such third party, and Durect shall enter into a
confidentiality and invention assignment agreement in a form previously approved
by ALZA with such third party which expressly makes ALZA a third-party
beneficiary of such agreement and permits ALZA to directly enforce its terms.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
25
<PAGE>
5.7 Identification of ALZA. At ALZA's request, Durect shall cause
----------------------
each Product and its packaging to display prominently, in a manner reasonably
acceptable to ALZA, an ALZA name and logo, and to identify ALZA as a developer
of such Product. All uses of the ALZA name and marks shall be subject to prior
review and approval by ALZA within 30 days.
SECTION 6 - PAYMENTS
--------------------
6.1 Product Payments. In consideration of the rights granted to
----------------
Durect hereunder, the performance of the Program by ALZA and ALZA's other
obligations under this Agreement, Durect shall make Product Payments to ALZA on
Net Sales of the Product for the term of the Commercialization rights set forth
in Section 5.1. The payments to be made under this Section 6.1 are in
recognition of the unusual nature of the arrangements between the parties,
pursuant to which ALZA will provide access to technology over several years,
without profit, in anticipation of possible future payments under this section
6.1. By the payments under this Section 6.1, it is the intent of the parties
that ALZA's efforts and expenditures in creating DUROS Technology to be utilized
in the Program be recognized by a long-term financial sharing in Durect's
Product revenues.
(a) Product Payments on Net Sales of Product due under this
Section 6.1 for any calendar year shall be based on the prior calendar year's
total Net Sales of Product in the Territory, with payment rates for such
calendar year to be the applicable percentages set forth herein. The applicable
payment rate shall be calculated by [* * *] but shall not be [* * *]. During
the first calendar year of Product sales, the payment rate will be [* * *].
Examples:
Sales in Year X-1* Payment Rate
($ Million) For Year X**
------------------ ------------
[* * * * * *]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
26
<PAGE>
[* * * * * *]
[* * * * * *]
[* * * * * *]
[* * * * * *]
* Net Sales in the Territory by Durect, its Affiliates and Subcontractors for
the prior calendar year.
** The applicable payment rate for the current calendar year.
(b) In addition to Product Payments under Section 6.1(a), Durect
shall make payments to ALZA equal to [* * *] with respect to Products after
deducting from such consideration: (i) any tax or other government charge (other
than income tax) levied on such consideration to the extent borne by Durect, its
Affiliates and Subcontractors and (ii) any payments (or portions thereof) that
constitute reimbursement of (and are determined based upon) genuine research,
development and/or manufacturing costs incurred by Durect, its Affiliates and
Subcontractors including but not limited to reimbursement of expenses for
reagents, materials, equipment, salaries, testing, clinical trials, insurance
and any overhead reasonably attributable to such research, development or
manufacture.
6.2 Minimum Payments. Durect shall make Minimum Payments to ALZA, on
----------------
a Subterritory by Subterritory basis for Subterritories A, B and C, as follows:
With respect to each Product, periodically during the Program, commencing in the
calendar quarter when a Product first becomes a Product, Durect shall provide
ALZA with good faith projections of Net Sales for each of the first [* * *] of
marketing such Product in each Subterritory. At least [* * *] Durect shall
update such projections, with one update to be delivered no later than [* * *]
days after NDA filing (or if earlier, the first filing for regulatory clearance
to market the Product in a Major Market Country), and a final update to be
delivered within [* * *] after the first regulatory clearance to market the
Product in a Major Market Country. Such projections shall be consistent with
those provided for purposes of forecasting amounts to be manufactured by Durect
or supplied by ALZA pursuant to the Supply Agreement. Minimum Payments shall
commence and shall be paid as follows:
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
27
<PAGE>
Subterritory Minimum Payment Commences With
------------ ------------------------------
A or B* First Minimum Payment Year
A or B** Second Minimum Payment Year
C Third Minimum Payment Year
* Whichever of Subterritory A or B in which the Product is first approved in a
Major Market Country.
** The other of Subterritory A or B.
Once commenced in accordance with the above table, [* * *] of the total final
projection for each of the first [* * *] of marketing of the Product for such
Subterritory [* * *], and Minimum Payments for each such Subterritory shall
-----
continue thereafter at the [* * *] Minimum Payments paid to ALZA by Durect shall
be fully creditable against Product Payments on Net Sales under Section 6.1 for
the Minimum Payment Year for which the Minimum Payments are made. No Minimum
Payments will be payable in Subterritory D.
6.3 Optional Payments to Extend Commercialization Rights; Payment
-------------------------------------------------------------
Adjustments. If Durect exercises its option to extend its sole Commercialization
- -----------
rights under Section 5.1 in accordance with Section 5.1(c) hereof for any
Subterritory, Durect shall pay to ALZA, for each country of such Subterritory,
beginning on the date when the obligation to make Product Payments under Section
6.1 has terminated for such Subterritory and for as long as Durect elects to
continue its sole Commercialization rights under Section 5.1(c) hereof for such
Subterritory [* * *]. Payments by Durect under this Section 6.3 for each
Subterritory shall continue until such time as Durect provides written notice to
ALZA, not less than [* * *] before the beginning of any calendar year, that
payments under this Section 6.3 will cease as to such Subterritory at the
beginning of the calendar year set forth in such notice, at which time the
rights under Section 5.1 shall terminate for such Product for such Subterritory.
6.4 Compulsory License. During the period that Durect retains the
------------------
sole Commercialization rights to a Product in any country, if in such country
any third party tries to obtain from ALZA or Durect or any Affiliate or
Subcontractor thereof a compulsory license or rights pursuant to governmental
authority to market the Product
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
28
<PAGE>
in such country, ALZA and Durect will use all reasonable efforts to oppose the
grant of such license or rights and to obtain the highest royalty or payment
rate possible if such compulsory license cannot be avoided. In the event that a
third party obtains such compulsory license in such country, Durect shall have
the benefit of any more favorable payment terms with respect to such Product in
such country as is granted under such compulsory license or right, from the date
of first commercial sale by the third party of the Product in such country.
6.5 Payment Estimates. Within [* * *] after the end of each Payment
-----------------
Computation Period, beginning with the Payment Computation Period as to which
payments are first due to ALZA under this Section 6, Durect shall provide ALZA
with a written estimate of Product sales as to which payments will be due in
respect of the Payment Computation Period in question.
6.6 Other Consideration.
-------------------
(i) Simultaneous with the execution of this Agreement, Durect
is issuing to ALZA 1,000,000 shares of Durect Common Stock pursuant to the
Common Stock Purchase Agreement attached hereto as Exhibit I.
(iii) Simultaneously with the execution of this Agreement, Durect
is issuing to ALZA warrants to purchase, 1,000,000 shares of Durect Common Stock
pursuant to the Warrant Agreement attached hereto as Exhibit J.
SECTION 7 - PAYMENT PROCEDURES
------------------------------
7.1 Development Cost Payments. Payments due under Sections 2.4 and
-------------------------
2.6 hereof shall be made [[* * *]] after the date of receipt by Durect of ALZA's
invoice.
7.2 Product-Based Payments. Payments to ALZA from Durect due under
----------------------
Sections 6.1 and 6.3 hereof shall be made [[* * *] after the end of each Payment
Computation Period with respect to Net Sales of the applicable Products during
such Payment Computation Period. Payments to ALZA from Durect due under Section
6.2 shall be made [[* * *] after the end of each Payment Computation
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
29
<PAGE>
Period as to which payments are due. Each payment under this Section 7.2 shall
be accompanied by a report setting forth the calculations of the amounts payable
to ALZA on a Product-by-Product and Subterritory-by-Subterritory basis.
7.3 Manner of Payment. All payments due hereunder shall be made in
-----------------
United States dollars and, unless otherwise agreed in writing, shall be made by
wire transfer to such bank as ALZA may designate in writing without set-off and
free and clear of, and without any deduction or withholding for or on account
of, any taxes, duties, levies, fees or charges except those taxes or duties
levied against ALZA which are legally required to be withheld by Durect.
Payments due on Net Sales made in currency other than United States dollars
shall first be calculated in the foreign currency and then converted to United
States dollars on the basis of the exchange rate in effect for the purchase of
United States dollars with such foreign currency as quoted in the Wall Street
-----------
Journal (or comparable publication if not quoted in the Wall Street Journal)
- -------
with respect to the currency of the country of origin of such payment on the
last business day of the Payment Computation Period for which the payment is
being made. If restrictions on the transfer of currency exist in any country
such as to prevent Durect from making payments in the United States, Durect
shall take all reasonable steps to obtain a waiver of such restrictions or
otherwise to enable Durect to make such payments, failing which Durect shall, or
shall cause a United States Affiliate to, pay the amounts due upon sales in such
country in United States dollars.
7.4 Books of Account. Each party shall maintain true and complete
----------------
books of account containing an accurate record of all data necessary for the
proper computation of payments due from it or charges made by it under this
Agreement. Each party shall have the right, through the independent certified
public accountant employed by the other party to conduct its regular annual
audit, or through a firm of independent public accountants selected by mutual
agreement of the parties, to examine the books of account of the other party at
any time within two years after the date of the payment or charges to which they
relate (but not more than once in each calendar year) for the purpose of
verifying the amount of such payments or charges
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
30
<PAGE>
and the accuracy of such books of account. Such examination shall be made during
normal business hours at the place of business of the party being audited. The
parties agree that information furnished as a result of any such examination
shall be limited to a written statement by such certified public accountants to
the effect that they have reviewed the books of account of the party being
audited and either (i) the amounts of the payments due or charges made under
this Agreement are in conformity with such books of account and the applicable
provisions of this Agreement or (ii) setting forth any required adjustments. The
fees and expenses of the accountants performing such verification shall be borne
by the party requesting the audit. If any such audit shows any underpayment or
overcharge, a correcting payment or refund shall be made within 30 days after
receipt of the written statement described above. Notwithstanding the foregoing,
if any such audit results in any underpayment or overcharge with respect to any
Payment Computation Period of more than the greater of (i) [[* * *] or (ii) [[*
* *] of the payment or charge actually due, then the party being audited shall
bear all costs of the audit.
7.5 Late Payments. All payments not made when due hereunder shall
-------------
bear interest [***].
SECTION 8 - OWNERSHIP AND USE OF PROGRAM INFORMATION
----------------------------------------------------
8.1 Ownership. All Program Information, including but not limited to
---------
Program Information relating to the site specific administration of drugs (e.g.
pharmaco-kinetics and pharmaco-distribution) and/or relating to any Drug as
such, or any Catheter as such, except for any Program Information that is the
property of ALZA as set forth herein, shall be the sole property of Durect (and
shall be included in Durect Technical Information for purposes of this
Agreement). ALZA shall promptly disclose to Durect any such Program
Information, and ALZA and its personnel and subcontractors working on the
Program shall execute and deliver such assignments, confirmations of
assignments, or other written instruments as are necessary to vest in Durect
clear and marketable title to Program Information assigned to Durect hereunder.
Notwithstanding
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
31
<PAGE>
the foregoing, all Program Information relating to the System or its manufacture
or to any combination of Systems with other components, active agents, features
or processes and any Technical Information developed by Durect (whether or not
pursuant to the Program) that relates to DUROS Technology shall be the sole
property of ALZA (and shall be included in ALZA Technical Information for
purposes of this Agreement). Durect shall promptly disclose to ALZA any such
Program Information and Technical Information, and Durect and its personnel and
Subcontractors working on the Program shall execute and deliver such
assignments, confirmations of assignments, or other written instruments as are
necessary to vest in ALZA clear and marketable title to Program Information
assigned to ALZA hereunder. In addition to the foregoing, to the extent Durect
develops any Technical Information relating to [***] and subject to ALZA abiding
by the terms and conditions of the Amended and Restated Market Stand-Off
Agreement entered into between Durect and ALZA dated June 19, 1998 and attached
hereto as Exhibit H, Durect grants to ALZA a worldwide, royalty free,
nonexclusive license, with the right to grant sublicenses, to any such Technical
Information.
8.2 Use. Each party shall have the right to use, disclose and
---
license to any third party all Program Information owned by such party under
Section 8.1, provided such use, disclosure or license does not conflict with the
rights granted to the other party under this Agreement.
8.3 Patents. Each party shall be responsible, at its own expense,
-------
for filing and prosecuting patent applications as it deems appropriate and for
paying maintenance fees on patents issued therefrom, for the term of this
Agreement, with respect to Technical Information owned by it. Each party shall
promptly render all necessary assistance reasonably requested by the other party
in applying for and prosecuting patent applications based on Technical
Information owned by the other party under this Agreement.
SECTION 9 - INTELLECTUAL PROPERTY INDEMNITY AND ENFORCEMENT
-----------------------------------------------------------
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
32
<PAGE>
9.1 Claims by Third Parties. If a claim, suit or proceeding
-----------------------
("Claim") is brought by a third party against Durect and/or ALZA alleging that
the making, using, selling, offering for sale or importing of Product infringes
an Intellectual Property Right of such third party (except for any patent which
covers a manufacturing process used by Durect and not by ALZA), then each party
will give prompt written notice to the other of such Claim. If such alleged
infringement of such third party's Intellectual Property Right arises from or
relates to DUROS Technology, the System or ALZA Technical Information, then ALZA
shall have the right to conduct the defense of any suit resulting from such
Claim. ALZA shall advise Durect in writing, within 30 days after Durect's
notice, whether it intends to defend at its own expense such Claim. If ALZA
elects not to so defend or to otherwise dispose of such Claim, Durect may,
subject to Section 9.2 below, defend at its own expense such Claim. Except as
specifically provided above, Durect shall indemnify and hold harmless ALZA from
and against any claims of infringement by a third party.
9.2 Infringement by Third Parties. If, at any time during the term
-----------------------------
of this Agreement, either party shall become aware of any third party who is
infringing or suspected to be infringing any patent owned by ALZA by the
manufacture, use or sale of any product that is substantially similar to a
Product and contains the same Drug as such Product (an "Infringing Product"),
the following provisions shall apply:
(a) The party becoming so aware shall forthwith give written
notice to the other ("Notice"). If there is disagreement as to whether the act
complained of is in fact an infringement of an ALZA patent, the parties shall
refer such issue to a mutually acceptable independent patent counsel. The costs
incurred in this regard shall be shared equally.
(b) If, with or without the advice of independent counsel, ALZA
desires to litigate such alleged third party infringement, ALZA shall bear all
costs thereof and shall be entitled to all recoveries. ALZA shall have the
right to join Durect in such suit at ALZA's cost and expense. ALZA shall notify
Durect within 90 days after the delivery of Notice by one party to the other
above whether it intends to so litigate.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
33
<PAGE>
(c) If ALZA determines not to litigate in accordance with paragraph
(b) above, the parties will promptly confer, and if both parties jointly desire
to litigate such third party infringement, they shall share any costs thereof
and any recovery therein equally, unless otherwise agreed by the parties.
(d) With respect to alleged infringement of such patents, the claims
of which are limited to applications of DUROS Technology in the Durect Fields,
and which do not include claims for other applications, if no action is taken or
agreed to be taken under paragraph (b) or (c) above within 90 days after the
Notice and (i) the unit sales volume of the Infringing Product in any country is
equal to or exceeds [* * *] of the unit sales volume by Durect and its
Affiliates and Subcontractors of the Product that is substantially similar to
the Infringing Product in such country, and (ii) the patent counsel described in
paragraph (a) above has opined that the act complained of is, or most likely is,
an infringement in such country, then Durect may, in its sole discretion, and at
its sole cost and expense, bring suit in its name (or, if ALZA is an
indispensable party, in the name of and on behalf of ALZA) to restrain such
third party infringement in such country, and in such instance, Durect shall be
entitled to receive and retain, for its own use and benefit, any recovery
awarded in such suit.
9.3 Cooperation. Each party shall cooperate with the other party, to
-----------
the extent reasonably requested, in any legal action brought by or against the
other party or both of them and relating to the subject matter of this
Agreement, provided that such cooperation shall be at the expense of the party
bringing the action, and each party shall have the right to participate at its
own expense in any defense, compromise or settlement of any such legal action,
to the extent that in its judgment it may be prejudiced thereby. Neither party
shall settle any claim or suit in any manner that may adversely affect any
patent of the other party or that would require any payment or grant of license
or other rights by the other party, without the prior written consent of the
other party, to be given or withheld in the other party's sole discretion.
SECTION 10 - REPORTS OF ADVERSE REACTION
----------------------------------------
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
34
<PAGE>
10.1 Reports. During the term of this Agreement, each party shall
-------
promptly inform the other party of any information that it obtains or develops
regarding the efficacy or safety of any Product and shall promptly report to the
other party any information or notice of adverse or unexpected reactions or side
effects related to the utilization or medical administration of any Product
(and, in the case of ALZA, the System, and in case of Durect, the Drug, Catheter
or other part of the Product, but in each case, only if such adverse reaction
appears to be potentially relevant to the Product). Each party shall comply,
and shall cooperate with the other party in complying, with the adverse reaction
reporting requirements of the Food, Drug and Cosmetic Act, 21 USC 321 et seq.,
and regulations thereunder with respect to the Product. Each party shall
provide the other party with copies of Adverse Drug Experience Reports filed
with the FDA as to the Product. Each party's obligations under this Section
10.1 shall be subject to its legal and contractual obligations prohibiting the
disclosure of such information. Durect agrees and acknowledges that ALZA may
provide information it obtains under this Section 10.1 to ALZA's other clients
developing and/or marketing products incorporating the System.
SECTION 11 - TERM AND TERMINATION; MODIFICATION OF RIGHTS
---------------------------------------------------------
11.1 Term. This Agreement shall remain in effect for as long as
----
Durect is obligated to make payments to ALZA under this Agreement, unless
earlier terminated pursuant to this Section 11.
11.2 Termination for Breach; Insolvency.
----------------------------------
(a) In addition to the rights and remedies provided elsewhere in
this Agreement, if either party breaches or defaults in the performance or
observance of any of its material obligations under this Agreement, and such
breach or default is not cured within [* * *] after receipt by such party of a
written notice from the nonbreaching party specifying the breach or default (or
such longer period as is reasonably necessary if the breach is of such a nature
that it cannot reasonably be cured within [* * *] the nonbreaching party shall
have the right to terminate this
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
35
<PAGE>
Agreement upon [* * *] written notice to the breaching or defaulting party.
Failure to pay any amounts due under this Agreement within [* * *] after notice
that such amounts are overdue shall be deemed a material breach of this
Agreement.
(b) Either party may terminate this Agreement and the rights granted
hereunder, effective upon giving written notice of such termination to the other
party, if such other party is liquidated or dissolved, or enters into any
proceeding, whether voluntary or otherwise, in bankruptcy, reorganization, or
arrangement for the appointment of a receiver or trustee to take possession of
such other party's assets or any other proceeding under any law for the relief
of creditors, or makes an assignment for the benefit of creditors.
11.3 Termination by Durect. Durect may terminate this Agreement at
---------------------
any time upon not less than [* * *] prior written notice to ALZA. In such
event, this Agreement shall terminate as of the effective date of such notice.
11.4 Effect of Termination. Except as provided in Section 16.8, all
---------------------
rights and obligations of the Parties shall cease upon expiration or termination
of this Agreement. The expiration or termination of this Agreement for whatever
reason shall not affect: (i) Durect's obligation to pay ALZA, within [* * *]
after the receipt of ALZA's invoice, for all Development Costs incurred up to
the effective date of the termination and for all uncancellable obligations of
ALZA incurred in connection with the Program prior to the date of termination
pursuant to approved Work Plans; and (ii) the parties' obligations to pay to
each other all other amounts due under this Agreement accruing prior to and up
to the effective date of such expiration or termination.
11.5 [***]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
36
<PAGE>
[***]
11.6 Certain Program Information and Other Rights. Solely with
--------------------------------------------
respect to (i) any Product which has been eliminated from this Agreement
pursuant to Section 2.5; (ii) any country for which the Commercialization rights
granted to Durect under Section 5.1 have expired, or have been terminated
pursuant to this Agreement with respect to any Product or (iii) upon the
expiration or termination of this Agreement (except for termination by Durect
due to a breach by ALZA under Section 11.2); and in each case solely to the
extent required by ALZA to develop, make, have made, use and sell the Product to
which such termination or elimination relates in the relevant Subterritory or
country, Durect hereby grants to ALZA the exclusive right and license, with the
right to sublicense, solely to use any and all data, rights and information
necessary for such purpose, including but not limited to regulatory filings and
Program Information to which ALZA does not already have rights hereunder, and
the right to cross-reference any and all regulatory filings with respect to the
Product. (To the extent possible, regulatory filings for those countries for
which ALZA obtains commercialization rights shall be transferred to ALZA.) If
and when ALZA Commercializes a Product pursuant to this Section, in order to
compensate Durect for its investment in developing such filings and information,
ALZA shall make payments to Durect at a rate as set forth in Section 6.1 (but
determined based on ALZA's net sales of Product), but only until the aggregate
of such payments is equal to [* * *] with respect to the applicable
Product (or with respect to the Product in such applicable country if ALZA
obtains rights only as
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
37
<PAGE>
to a specified country or countries). Notwithstanding the foregoing, in the
event of the elimination of a Product under this Agreement, if Durect has
developed and successfully filed an NDA covering such Product prior to such
elimination, then in consideration of the rights granted ALZA respecting such
Product ALZA shall pay Durect [* * *] after the obligation to make payments
under the preceding sentence has expired, provided that the obligations to pay
royalties shall expire for the Territory [* * *] In each case, such payments by
ALZA will be subject to adjustments under the same terms as are applicable to
Durect's Product Payment obligations under this Agreement.
SECTION 12 - FORCE MAJEURE
--------------------------
12.1 Force Majeure. Neither party to this Agreement shall be liable
-------------
for failure or delay in the performance of any of its obligations hereunder, if
such failure or delay is due to causes beyond its reasonable control, including,
without limitation, acts of God, earthquakes, fires, strikes, acts of war, or
intervention of any governmental authority, but any such delay or failure shall
be remedied by such party as soon as possible after the removal of the cause of
such failure or delay.
SECTION 13 - ASSIGNMENT
-----------------------
13.1 Assignment. This Agreement shall not be assigned by either party
----------
without the prior written consent of the other party, except that either party
may assign this Agreement, in whole or in part, to an Affiliate of such party or
to the successor (including the surviving company in any consolidation,
reorganization or merger) or assignee of all or substantially all of its
business. This Agreement will be binding upon any permitted assignee of either
party. No assignment shall have the effect of relieving any party to this
Agreement of any of its obligations hereunder.
SECTION 14 - INDEMNIFICATION
----------------------------
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
38
<PAGE>
14.1 Durect Indemnity. Durect shall defend, indemnify and hold
----------------
harmless ALZA and its Affiliates, and their officers, directors, employees and
agents (collectively, "ALZA Indemnitees") from and against any and all losses,
liabilities, claims, obligations, costs and expenses (including without
limitation reasonable attorneys' fees) (collectively, "Losses") arising out of
the Program (including the use, storage and handling of the Drug hereunder) or
the use, design, labeling or manufacture, processing or packaging (subject to
the terms of the Supply Agreement) or sale or Commercialization of Products by
Durect, its Affiliates and Subcontractors, including without limitation any
product liability claims with respect to any Products, except for Losses arising
from the gross negligence or willful misconduct of ALZA, material breach of this
Agreement by ALZA, or breach by ALZA of any product warranty in the Supply
Agreement; provided that such ALZA Indemnitee: (i) provides reasonable notice
to Durect of such Loss and permits Durect to control, in a manner not adverse to
such ALZA Indemnitee, the defense, settlement, adjustment or compromise of any
such Claim using counsel reasonably acceptable to such ALZA Indemnitee; and (ii)
reasonably cooperates with Durect in the defense of any such Claim, subject to
Durect's payment of all reasonable costs and expenses associated with such
cooperation, and further provided that Durect shall not be liable for any such
costs or expenses incurred without its prior written authorization. Durect
shall not enter into any settlement that affects an ALZA Indemnitee's rights or
interest without prior written approval by the ALZA Indemnitee. The ALZA
Indemnitee shall have no authority to settle any claim for Losses on behalf of
Durect. The ALZA Indemnitee shall have the right to participate, at its own
expense, in the defense of any such claim or demand to the extent it so desires.
14.2 ALZA Indemnity. ALZA shall defend, indemnify and hold harmless
--------------
Durect and its Affiliates, and their officers, directors, employees and agents
(collectively, "Durect Indemnitees") from and against any Losses arising from
the gross negligence or willful misconduct of ALZA, material breach of this
Agreement by ALZA, or breach by ALZA of any product warranty in the Supply
Agreement; provided that
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
39
<PAGE>
such Durect Indemnitee: (i) provides reasonable notice to ALZA of such Loss and
permits ALZA to control, in a manner not adverse to such Durect Indemnitee, the
defense, settlement, adjustment or compromise of any such Claim using counsel
reasonably acceptable to such Durect Indemnitee; and (ii) reasonably cooperates
with ALZA in the defense of any such Claim, subject to ALZA's payment of all
reasonable costs and expenses associated with such cooperation, and further
provided that ALZA shall not be liable for any such costs or expenses incurred
without its prior written authorization. ALZA shall not enter into any
settlement that affects a Durect Indemnitee's rights or interest without prior
written approval by the Durect Indemnitee. The Durect Indemnitee shall have no
authority to settle any claim for Losses on behalf of ALZA. The Durect
Indemnitee shall have the right to participate, at its own expense, in the
defense of any such claim or demand to the extent it so desires.
14.3 Disclaimer of Consequential Damages. IN NO EVENT WILL EITHER
-----------------------------------
DURECT OR ALZA BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR PUNITIVE DAMAGES INCURRED BY A PARTY ARISING UNDER OR AS A RESULT
OF THIS AGREEMENT (OR THE TERMINATION HEREOF) INCLUDING, BUT NOT LIMITED TO, THE
LOSS OF PROSPECTIVE PROFITS OR ANTICIPATED SALES, OR ON ACCOUNT OF EXPENSES,
INVESTMENTS, OR COMMITMENTS IN CONNECTION WITH THE BUSINESS OR GOODWILL OF ALZA
OR DURECT OR OTHERWISE.
14.4 Insurance. Durect shall obtain and maintain in full force and
---------
effect during the term of this Agreement a policy of products liability
insurance covering liabilities that may arise from the Products and naming ALZA
as an additional named insured, in such amounts as are reasonable in view of the
development and Commercialization status of the Products. Durect shall provide
ALZA a certificate of such insurance within 15 days after request by ALZA.
SECTION 15 - ARBITRATION
------------------------
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
40
<PAGE>
15.1 Arbitration. All disputes which may arise under, out of, in
-----------
connection with, or relating to this Agreement shall be settled by arbitration
conducted in Santa Clara County, California, in accordance with the then
existing rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The parties hereby agree that service of any notices in
the course of such arbitration at their respective addresses as provided for in
Section 16.4 of this Agreement shall be valid and sufficient.
15.2 Arbitrators. In any arbitration pursuant to this Section 15, the
-----------
award shall be rendered by a majority of the members of a board of arbitration
consisting of three members who shall be appointed by the parties jointly, or if
the parties cannot agree as to three arbitrators within 30 days after the
commencement of the arbitration proceeding, then one arbitrator shall be
appointed by ALZA and one arbitrator shall be appointed by Durect within 60 days
after the commencement of the arbitration proceeding. The third arbitrator
shall be appointed by mutual agreement of such two arbitrators. In the event of
failure of the two arbitrators to agree within 75 days after commencement of the
arbitration proceeding upon the appointment of the third arbitrator, the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules. Notwithstanding the foregoing, in the
event that any party shall fail to appoint an arbitrator it is required to
appoint within the specified time period, such arbitrator and the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules. For purposes of this Section 15, the
"commencement of the arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by the American Arbitration
Association from one of the parties.
SECTION 16 - MISCELLANEOUS
--------------------------
16.1 Amendment. Any waiver by any party hereto of a breach of any
---------
provisions of this Agreement shall not be implied and shall not be valid unless
such
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
41
<PAGE>
waiver is recited in writing and signed by such party. Failure of any party to
require, in one or more instances, performance by the other party in strict
accordance with the terms and conditions of this Agreement shall not be deemed a
waiver or relinquishment of the future performance of any such terms or
conditions or of any other terms and conditions of this Agreement. A waiver by
either party of any term or condition of this Agreement shall not be deemed or
construed to be a waiver of such term or condition for any other term. All
rights, remedies, undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be a limitation of any
other remedy, right, undertaking, obligation or agreement of either party. This
Agreement may not be amended except in a writing signed by both parties.
16.2 Relationship of the Parties. For all purposes of this Agreement,
---------------------------
Durect and ALZA shall be deemed to be independent entities and anything in this
Agreement to the contrary notwithstanding, nothing herein shall be deemed to
constitute Durect and ALZA as partners, joint venturers, co-owners, an
association or any entity separate and apart from each party itself, nor shall
this Agreement constitute any party hereto an employee or agent, legal or
otherwise, of the other party for any purposes whatsoever. Neither party hereto
is authorized to make any statements or representations on behalf of the other
party or in any way obligate the other party, except as expressly authorized in
writing by the other party. Anything in this Agreement to the contrary
notwithstanding, no party hereto shall assume nor shall be liable for any
liabilities or obligations of the other party, whether past, present or future.
16.3 Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California, excluding any choice of law rules which may direct the
application of the laws of another jurisdiction.
16.4 Notices. Notices required under this Agreement shall be in
-------
writing and sent by registered or certified mail, postage prepaid, or by telex
or facsimile and confirmed by registered or certified mail and addressed as
follows:
If to ALZA: ALZA Corporation
1900 Charleston Rd.
Mountain View, CA 94309
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
42
<PAGE>
Attention: General Counsel
If to Durect: Durect Corporation
10240 Bubb Road
Cupertino, CA 95014
Attention: Chief Executive Officer
All notices shall be deemed to be effective five days after the date of mailing
or upon receipt if sent by facsimile (but only if followed by certified or
registered confirmation). Either party may change the address at which notice
is to be received by written notice pursuant to this Section 16.4.
16.5 Severability. If any provision of this Agreement is held by a
------------
court of competent jurisdiction to be invalid or unenforceable, it shall be
modified, if possible, to the minimum extent necessary to make it valid and
enforceable or, if such modification is not possible, it shall be stricken and
the remaining provisions shall remain in full force and effect; provided,
however, that if a provision is stricken so as to significantly alter the
economic arrangements of this Agreement, the party adversely affected may
terminate this Agreement upon 60 days' prior written notice to the other party.
16.6 Headings. The headings set forth at the beginning of the various
--------
sections of this Agreement are for reference and convenience and shall not
affect the meanings of the provisions of this Agreement.
16.7 Public Disclosure.
-----------------
(a) Neither party shall, without the prior written consent of the
other party, disclose to third parties, nor originate any publicity, news
release or public announcement, written or oral, whether to the public, the
press, stockholders or otherwise, referring to the existence or terms of this
Agreement, including its existence, the subject matter to which it relates, the
performance under it or any of its specific terms and conditions, except such
announcements or disclosures as, in the opinion of the counsel for the party
making such announcement, are required by law, including United States
securities laws, and each party may disclose the existence of this Agreement and
the material terms and conditions hereof under circumstances that
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
43
<PAGE>
reasonably ensure the confidentiality thereof to: (i) any government or
regulatory authorities, including without limitation the United States
Securities and Exchange Commission to the extent required by applicable law,
(ii) its legal representatives, advisors and prospective investors, and (iii) to
prospective Subcontractors to the extent required for entering into agreements
with such Subcontractors. If a party decides to make an announcement it believes
to be required by law with respect to this Agreement, it will give the other
party such notice as is reasonably practicable and an opportunity to comment
upon the announcement.
(b) Durect shall submit for review to ALZA, and obtain ALZA's
prior written consent for any reference to or description of ALZA or its
technology, proprietary rights or products that is to be disseminated to third
parties.
16.8 Survival. The provisions of Sections 1, 4, 8, 11, 15, 16.3,
--------
16.4, 16.5, 16.6, 16.7 and this Section 16.8, (and Sections 6.1, 6.2, 6.3, 6.6,
7, 9, 10, and 14 with respect to events occurring prior to termination), shall
survive the termination for any reason of this Agreement. Neither party shall be
liable to the other due to the termination of this Agreement as provided herein,
whether in loss of goodwill, anticipated profits or otherwise.
16.9 No Conflict. Each party represents that neither this Agreement
-----------
nor any of its obligations hereunder will conflict or result in a breach of any
arrangement or agreement between such party and any third party. Each party
represents that it has not been debarred and has not been the subject of
debarment proceedings by the FDA.
16.10 Entire Agreement. This Agreement, including the exhibits hereto,
----------------
sets forth the entire understanding between the parties hereto as to the subject
matter hereof and supersedes all other documents, agreements, verbal consents,
arrangements and understandings by or between the parties with respect to the
subject matter hereof including but not limited to the Prior Agreement. Prior to
the execution of this Agreement, the parties have had numerous discussions,
conversations and negotiations, and have generated correspondence, writings and
other memoranda with respect to the subject matter hereof. Notwithstanding all
of such activities, this
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
44
<PAGE>
Agreement (including the exhibits hereto) is intended to define the full extent
of the parties' respective agreements, arrangements and obligations with respect
to the subject matter hereof, and each party represents that it is not relying
on any such other discussions, conversations, negotiations, correspondence,
writings and memoranda in executing and delivering this Agreement or performing
its respective obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their duly authorized
representatives.
DURECT
CORPORATION ALZA CORPORATION
By: /s/ Peter Staple By: /s/ James E. Brown
__________________________ __________________________
Title: Executive Vice President Title: Chief Executive Officer
__________________________ __________________________
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
45
<PAGE>
EXHIBIT A - Specified Anticancer Antigens for
Immunization Therapy
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Name and/or Reference
Abbreviation
==============================================================================
<S> <C>
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
* * * * * *
==============================================================================
</TABLE>
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
46
<PAGE>
EXHIBIT B - Manufacturing Process Transfer
[work plan attached]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
47
<PAGE>
EXHIBIT C - Development Stages
[* * *]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
48
<PAGE>
EXHIBIT D - Countries of Sub-Territory C [***]
[* * *]
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
49
<PAGE>
EXHIBIT E - Cost Calculation for Purposes of Section 2.3(a)
Development Costs are equal to the sum of (i) research expenses, (ii) general
and administrative expenses and (iii) capital asset expenditures.
(i) Research expenses include both direct expenses and indirect expenses.
(a) Direct expenses include direct research salaries (including
project management and temporary labor), clinical expenses,
supplies and other expenses incurred specifically in connection
with the Program.
(b) Indirect expenses include general research management and
support costs of the research and product development
organization. Indirect expenses are allocated to all projects
and billed to clients at a fixed rate* of 160% of direct
research salaries.
Examples of items included in direct and indirect expenses are listed
on Exhibit E-1
(ii) General and administrative expenses are allocated among the
research and product development, manufacturing and marketing
organizations. The portion allocated to the research and product
development organization is then allocated to all research and
development projects and billed to clients at a fixed rate* of 80% of
direct research salaries.
Examples of items included in general and administrative
expenses are listed on Exhibit E-1.
(iii) Capital asset expenditures are the actual costs of new capital
assets acquired specifically for the project.
- --------------
* This fixed billing rate will not be changed prior to January 1, 1999 and,
if changed on or after January 1, 1999, such changes will be limited to not more
than one change per calendar year and shall be a maximum of 10% of the rate in
effect at the time of the increase.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
50
<PAGE>
EXHIBIT E-1 - Examples of Research Expenses
Direct Expenses
Direct research salaries*
Project clinical expenses and outside services
Project specific supplies
Project travel and related expenses
Miscellaneous project expenses
Regulatory and filing fees and maintenance payments
Indirect Expenses
Research management and indirect salaries*
General research supplies and materials
General research consulting and outside services
Facilities expenses
Telephone and communications
Equipment depreciation, rent, maintenance and services
Research travel and related expenses
Patent and trademark expenses
Miscellaneous indirect research expenses
Examples of
-----------
General and Administrative Expense
----------------------------------
Corporate management, administrative, and indirect salaries*
Telephone and communications
Equipment depreciation, rent, maintenance and services
Board of directors and corporate consulting
Annual audit, accounting and legal expenses
Facilities expenses
Information services (data processing) expenses
Interest expense
Miscellaneous general and administrative expenses
*Salaries include fringe benefits at a fixed rate of 52% of salaries. This fixed
rate will not be changed prior to January 1, 1999 and, if changed on or after
January 1, 1999, such changes will be limited to not more than one change per
calendar year and shall be a maximum of 10% of the rate in effect at the time of
the increase.
51
<PAGE>
EXHIBIT F - Minimum Diligence Obligations
Durect will comply with the following minimum diligence obligations of
Durect respecting research and development of Products:
A. Diligence in Durect Fields
--------------------------
Durect will fund the amounts as described below for the development of
Products in the Durect Fields. The first partial "Contract Year" will start on
September 1, 1998 and end on December 31, 1998, and each subsequent "Contract
Year" will start on January 1 of each subsequent year.
<TABLE>
<CAPTION>
Number of Total development
Products being separate costs per Contract
developed in Products being Year for each
Contract Year Fields identified funded(1) Product ($mm)/(2)//(3)/
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(Partial) 1 [* * *] [* * *] [* * *]
2 [* * *] [* * *] [* * *]
3 [* * *] [* * *] [* * *]
4 [* * *] [* * *] [* * *]
5 [* * *] [* * *]/(4)/ [* * *]
6 [* * *] [* * *]/(4)/ [* * *]
7 [* * *] [* * *]/(4)/ [* * *]
</TABLE>
(1) To be included, a Product must be funded to the extent of at least [* * *]]
-
of fully allocated development costs per year
(2) During the year a Product is initiated after Contract Year 1, the "total
development cost" for that year can be the year-end spending rate based on
at least 3 months' activity.
(3) For each Contract Year for which more than one cost level is given, the
lower cost figures apply to the Products in earlier stages of development.
(4) At least [* * *] Products which shall be [[* * *].
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
52
<PAGE>
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
53
<PAGE>
Notwithstanding the table above, Durect shall be deemed to be meeting its
minimum obligations under this Part A with respect to a particular Field (other
than the [* * *]) during Contract Years 5, 6, and 7 if Durect funds at least
[[* * *]] during each such year for development of at least [* * *] Product in
that Field and conducts a research program to determine the feasibility of
other Products in that Field in an amount equal to at least [[* * *]] for each
such year. -
Consequences for Fields:
- -----------------------
Years 1, 2 and 3: If the above development obligations for Years 1, 2 and 3 are
- ----------------
not met in one of such Contract Years, then [* * *]. In such case, if Durect had
not identified in writing prior to the commencement of each Contract Year which
Field it intends to pursue for purposes of the above table, then ALZA may select
the Field [* * *]; otherwise it will be the Field as previously identified by
Durect. If such obligations are not met for two of such Contract Years, [* * *].
Year 4: If obligations are not met for the [* * *], then the Field for which
- ------
the obligation is not met [* * *]. If obligations are not met for any Field,
then [* * *].
Years 5, 6 and 7: If obligations are not met for any specific Field, then
- ----------------
[* * *].
After Year 7: Product development levels must be sufficient to fully develop
- ------------
the commercial potential of each Field. In order to maintain rights to each
Field, appropriate levels of development efforts for such Field need to be
jointly agreed upon before the end of Year 7.
________________________________________________________________________________
B. Proof of Principle: Secondary Fields
-------------------------------------
During Year 1, Durect will fund at least [[* * *]] of proof of principle
-
work in at least [* * *] of the Secondary Fields (which amount shall be
reasonably pro-rated if the initial financing of Durect is completed later
than August 1, 1998). Durect will diligently pursue and fund proof of
principle work in each Secondary Field during each subsequent Contract Year
until proof of principle is positively established. Proof of Principle shall
be established for a Secondary Field when Durect has received, for a Product
Candidate in such Secondary Field, [* * *]
Proof of Principle will be positively established for at least [* * *]
Secondary Field in Contract Year 3, for [* * *] Secondary Field by the end of
Contract Year 4, and for the [* * *] by the end of Contract Year 5; for each
such year in which Durect has not met the foregoing Proof of Principle
requirements, ALZA will have the right to [* * *].
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
54
<PAGE>
C. Product Development Diligence
-----------------------------
Durect's minimum diligence obligations with regard to development of a
particular Product will be deemed to have been met if Durect has achieved each
Milestone (as defined in Section 2.1) within [[* * *]] of the corresponding
-
target date.
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
55
<PAGE>
EXHIBIT G - Manufacturing Costs
"Cost of Manufacturing" shall mean ALZA's standard cost of manufacturing
Product, including packaging thereof, determined in accordance with generally
accepted accounting procedures and consistent with ALZA's accounting practices
on its other products, and including the cost of materials, direct labor and
benefits, and allocated overhead, the total expressed as Manufacturing Cost per
Unit of Product manufactured.
A. Materials. Includes those items which form an integral and direct
part of the Product, or are necessary for its production, as well as cartons,
labels, package inserts, shippers, etc.
B. Direct Labor and Benefits. Includes labor and related payroll
taxes and employment benefits spent in the actual production of the Product. It
is that portion of basic wages, taxes and benefits which can be identified with
or charged to a specific product.
C. Overhead. Overhead includes all operating expenses incurred by and
in support of all manufacturing cost centers and quality operations. Cost
elements included are:
- Direct labor, related payroll taxes and employee benefits
- Depreciation
- Taxes
- Insurance
- Rent
- Repairs and maintenance
- Supplies, scrap and inventory expenses
- Utilities
- Factory administration expenses
- Other similar cost elements of factory overhead
- Allocation of general and administrative overhead allocated to
Product manufacturing centers and quality operations.
56
<PAGE>
EXHIBIT H - Amended and Restated Market Stand-Off Agreement
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
57
<PAGE>
EXHIBIT I - Common Stock Purchase Agreement
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
58
<PAGE>
EXHIBIT J - Warrant Agreement
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
59
<PAGE>
SCHEDULE 1 - Product Candidates
**Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
60
<PAGE>
SCHEDULE 2 - Products
<PAGE>
EXHIBIT 10.7
PRODUCT ACQUISITION AGREEMENT
PRODUCT ACQUISITION AGREEMENT, dated as of April 14, 2000, by and
between DURECT Corporation, a Delaware corporation, and ALZA Corporation, a
Delaware corporation.
RECITALS
WHEREAS, Seller manufactures and sells osmotic, miniature, implantable
pumps for research use in laboratory animals (the "Business"); and
WHEREAS, Seller desires to sell and cause to be transferred to Buyer
(including either existing Affiliates of Buyer or those organized for that
purpose), and Buyer (including such Affiliates) desires to purchase and accept
the transfer from Seller certain assets and properties of Seller used primarily
in the Business, including the Product as defined below, all as hereinafter
specifically provided;
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties and agreements herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such definitions to be equally applicable to
both the singular and plural forms of the terms defined):
"Accessory Products" means any products or devices including without
limitation those products set forth on Schedule 1 and other products or devices,
e.g., catheters and cannulas, to the extent such products and devices are sold
specifically for use with the Product or an Improvement.
"Action" means any notice of material noncompliance or violation, or
any claim, demand, action, suit, audit, assessment or arbitration, or any other
request (including any request for information), proceeding or investigation, by
or before any Governmental Authority or any nongovernmental arbitration,
mediation or other nonjudicial dispute resolution body.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
under the Securities Exchange Act of 1934, as amended.
"Agreement" means this Product Acquisition Agreement, including all
schedules and exhibits hereto, as it may be further amended from time to time as
herein provided.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-1-
<PAGE>
"Ancillary Agreements" means the General Support Services Agreement,
Coating Services Agreement and New Models Development Agreement attached hereto
as Exhibit A, Exhibit B and Exhibit C respectively, each of which is required by
this Agreement to be executed and delivered by the parties hereto at or before
the Closing.
"Assets" has the meaning specified in Section 2.1.
"Assumed Liabilities" has the meaning specified in Section 3.1.
"Books and Records" means all of the following which are maintained at
Seller's facilities in Mountain View, California and the Vacaville Facility
which relate solely to the making, using and sale of the Product and Accessory
Products: books, records, manuals and other materials, accounting books and
records, property records for property, plant and equipment, files, computer
tapes, disks and other storage media and records, advertising matter, market
research, catalogues, price lists, correspondence, mailing lists, lists of
customers and suppliers, distribution lists, photographs, production data (for
two years), sales and promotional materials and records, purchasing materials
and records, personnel records, credit records, manufacturing and quality
control records and procedures, lot records, blueprints, copies of research and
development files, data and laboratory books, trademark files and disclosures,
media materials and plates, sales order files, and artwork.
"Business" has the meaning specified in the Recitals to this
Agreement.
"Buyer" means DURECT Corporation, a Delaware corporation, and, as
applicable, Affiliates of Buyer used or formed for the purpose of consummating
the transactions contemplated by this Agreement.
"Buyer Indemnified Parties" has the meaning specified in Section 8.2.
"Buyer Loss" has the meaning specified in Section 8.2.
"Closing" means the closing of the transactions contemplated by this
Agreement as specified in Section 4.1.
"Contracts" has the meaning specified in subsection 2.1(c).
"Employee" has the meaning specified in Section 5.9.
"Encumbrance" means any interest (including any security interest),
pledge, mortgage, lien (including environmental liens), charge, claim (including
any adverse claim) or other right of third Persons, whether created by law or in
equity, including any such restriction on the use, voting, transfer, receipt of
income or other exercise of any attributes of ownership.
"Environmental Laws" means all laws, regulations, ordinances, codes,
policies, Governmental Orders and consent decrees, and any judicial or
administrative interpretations thereof, of Governmental Authorities, or any
common law doctrines, in effect from time to time relating to pollution or
protection of the environment, natural resources or protection of health
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
from Hazardous Material exposure, including those relating to emissions,
discharges, releases or threatened releases of Hazardous Material into the
environment (including ambient air, surface water, groundwater or land), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Material.
"Governmental Authority" means any international, national, federal,
state, territorial or provincial, municipal or local government, governmental
authority, regulatory or administrative agency, governmental commission,
department, board, bureau, agency or instrumentality, political subdivision,
court, tribunal, official, arbitrator or arbitral body.
"Governmental Order" means any order, writ, rule, judgment,
injunction, decree, stipulation, determination, award, citation or notice of
violation entered by or with any Governmental Authority
"Hazardous Material" means all substances, materials, chemicals,
compounds, pollutants or wastes regulated by, under or pursuant to any
Environmental Laws.
"Improvements" means an improved version of the Product which meets
all of the following criteria: [ * * * ]
"Inventories" has the meaning specified in subsection 2.1(a).
"Lease" has the meaning specified in subsection 2.1(d).
"Liabilities" means any and all debts, liabilities and obligations of
any nature whatsoever, whether accrued or fixed, absolute or contingent, mature
or unmatured or determined or determinable, including those arising under any
law, rule, regulation, Action, Governmental Order, and those arising under any
contract, agreement, commitment or undertaking.
"Material Adverse Effect" means any event(s) with respect to,
change(s) in, or effect(s) on, the Product or the Assets or the Business which,
individually or in the aggregate, may be adverse to the Business or the results
of operations, the condition (financial or otherwise), assets, properties,
Liabilities of the Business in a manner that is material to the Business taken
as a whole, excluding any effects of a general nature which do not affect the
Business uniquely.
"Person" shall include any individual, trustee, firm, corporation,
partnership, limited liability company, Governmental Authority or other entity,
whether acting in an individual, fiduciary or any other capacity.
"Product" means the ALZET(R) osmotic, implantable pumps for research
use in laboratory animals as existing on the Closing Date, as described on
Schedule 1.
"Product Trademark" means the ALZET(R) trademark, including all common
law rights and applications and registrations therefor, throughout the world.
"Purchase Price" has the meaning specified in Section 2.4.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
"Retained Liabilities" has the meaning specified in Section 3.2.
"Seller" means ALZA Corporation, a Delaware corporation.
"Seller Indemnified Parties" has the meaning specified in Section 8.3.
"Seller Loss" has the meaning specified in Section 8.3.
"Vacaville Facility" means Seller's facility used for the manufacture
of Product prior to the Closing located in Vacaville, California.
1.2 Other Defined Terms. In addition to the terms defined in Section 1.1,
certain other terms are defined elsewhere in this Agreement and, whenever such
terms are used in this Agreement, they shall have their respective defined
meanings.
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 Purchase of Assets. Upon the terms and subject to the conditions herein
set forth, in consideration of the payment of the Purchase Price, Seller hereby
sells, conveys, assigns, transfers and delivers to Buyer, and Buyer hereby
purchases and acquires from Seller, subject only to the express representations
set forth in Article V, all of Seller's rights, title and interests in and to
the following (collectively, the "Assets"):
(a) the Product and all raw materials and inventories, including
inventories of work in process, stores, supplies and finished goods, which are
used solely in the manufacture, use or sale of the Product and Accessory
Products as listed on Schedule 2.1(a) (collectively, the "Inventories");
(b) that machinery, manufacturing equipment, laboratory and testing
equipment, computers, tools and other tangible personal property, whether owned,
leased or subleased, set forth on Schedule 2.1(b) (collectively, the "Fixed
Assets");
(c) the contracts listed on Schedule 2.1(c) (collectively, the
"Contracts");
(d) subject to the consent by the landlord to the assignment, the
lease to the Vacaville Facility described on Schedule 2.1(d) (the "Lease"),
together with all of Seller's rights to improvements thereon and fixtures
thereto;
(e) (1) the Product Trademark and other trademarks listed on Schedule
2.1(e), including all applications and registrations therefor, and any and all
common law trademarks pertaining to the Product or as used with Accessory
Products throughout the world and the goodwill associated with the foregoing
trademarks; (2) all copyrights, including any common law copyrights and
applications therefor throughout the world for Product and Accessory Products
related advertising material, and (3) the good will associated with the Product
(collectively, the "Intangible Personal Property"); and
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
(f) all Books and Records and the marketing assets as listed in
Schedule 2.1(f).
In the event that assets which are used primarily in the manufacture, use
or sale of the Product and Accessory Products are inadvertently omitted from the
above schedules, then Buyer and Seller shall in good faith, upon mutual
agreement, revise the schedules to include such assets.
2.2 License. Seller hereby grants to Buyer a nonexclusive license to
Seller's know-how, trade secrets, confidential information, software, technical
information, process technology, plans, drawings, analytical and process methods
related to the manufacture, testing and packaging of the Product, designs,
inventions, research records, procedures, manuals and blue prints in order for
Buyer to make, use and sell the Product.
2.3 Product Trademark.
(a) Buyer acknowledges that the Product Trademark is similar to
Seller's name and that Seller has a continuing interest in the manner that the
Product Trademark is used. Buyer agrees to use the Product Trademark only in
connection with the Product, Improvements and Accessory Products and will not
without Seller's prior written consent: (a) modify or alter in any way the
Product Trademark; (b) transfer the Product Trademark, other than to an
Affiliate of Buyer; or (c) authorize any use of the Product Trademark other than
in connection with the Product, Improvements or Accessory Products. Buyer
further agrees not to use the DUROS(R) trademark, Seller's name or any other
trademark of Seller in any manner in association with the Product, Improvements
or Accessory Products except as provided in Section 7.8.
(b) Buyer shall notify ALZA in writing of any conflicting uses of, or
of any acts of infringement, unfair competition or imitation by others involving
the Product Trademark promptly after such matters are brought to Buyer's
attention or Buyer obtains knowledge thereof.
2.4 Purchase Price and Payment. Upon the terms and subject to the
conditions herein set forth, and in consideration of the sale, assignment,
transfer and delivery to Buyer and its Affiliates of the Assets, at the Closing,
Buyer or its Affiliates shall pay to Seller an aggregate of [* * *] the
-
"Purchase Price"); and Buyer shall, or shall cause its Affiliates to, assume, as
of the Closing, the Assumed Liabilities as and to the extent provided in Article
III.
2.5 Full Possession. Subject to the terms and conditions of this
Agreement, and subject to the Ancillary Agreements, at the Closing, Seller shall
put Buyer and its Affiliates into full and actual possession and enjoyment of
the Product and the Assets. The sale of the Product and the Assets contemplated
hereby shall be effected by instruments of conveyance, transfer and assignment
as Buyer may request that are necessary to vest in Buyer all of the rights,
title and interests of Seller in the Product and the Assets as provided herein
and to put Buyer in full and actual possession, enjoyment and operating control
of the Product and the Assets.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
ARTICLE I
ASSUMPTION OF LIABILITIES
3.1 Assumption of Liabilities. Effective as of the Closing, without any
further responsibility or Liability of or recourse to Seller or any of Seller's
Affiliates, subsidiaries, stockholders, officers, directors, employees, agents,
successors or assigns, Buyer hereby absolutely and irrevocably assumes, and
shall pay, perform and be liable and responsible for, only the following
Liabilities of Seller (collectively, the "Assumed Liabilities"):
(a) all obligations of Seller arising after the Closing Date under the
Contracts; and
(b) subject to the assignment of the Lease to Buyer, all obligations
of Seller arising after the Closing Date under the Lease.
3.2 Retained Liabilities. Except as provided in Section 3.1, Buyer and its
Affiliates shall not assume and shall not be responsible for, and there shall
not be transferred to or assumed by Buyer or any of its Affiliates, any
Liabilities of Seller or its Affiliates (or any predecessors thereof).
ARTICLE I
CLOSING
4.1 Closing. The consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements (the "Closing") shall take place at
Seller's principal executive offices located at 1900 Charleston Road, Mountain
View, CA, at 2 p.m., local time, on April 14, 2000 or at such other place, time
and date as the parties hereby may agree in writing. The consummation of such
transactions is herein collectively referred to as the "Closing." The date and
time of the Closing are sometimes referred to herein as the "Closing Date."
4.2 Seller's Obligations at Closing. At the Closing, Seller shall deliver or
cause to be delivered to Buyer:
(a) All bills of sale and other instruments of conveyance, transfer
and assignment, including a trademark assignment in connection with the
trademarks assigned in Section 2.1(e) in the form attached as Exhibit D, that
are necessary to vest in Buyer all of the rights, title and interests of Seller
in the Assets, free and clear of all Encumbrances;
(b) This Agreement and the Ancillary Agreements, duly executed by
Seller.
4.3 Buyer's Obligations at Closing. At the Closing, Buyer shall deliver or
cause to be delivered to Seller:
(a) The Purchase Price, which shall be delivered to Seller by wire
transfer of immediately available funds to an account or accounts designated in
writing by Seller;
(b) A California resale certificate pursuant to Sections 6091 et seq
of the California Revenue and Taxation Code; and
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
(c) This Agreement and the Ancillary Agreements, duly executed by
Buyer or its Affiliates, as the case may be.
ARTICLE I
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
5.1 Organization, Standing and Power. Seller is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has full corporate power and authority to own its assets and
properties and to conduct its business as and where it is being conducted,
including to own the Assets owned by it and conduct its business as and where it
is being conducted by it. Seller is 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 qualified or licensed would not result in a Material Adverse
Effect.
5.2 Authorization.
(a) Seller has full corporate power and authority to enter into this
Agreement and the Ancillary Agreements and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Seller. This Agreement has been duly executed
and delivered by Seller. This Agreement constitutes, and upon the execution and
delivery thereof by Seller each Ancillary Agreement will constitute, a legal,
valid and binding obligation of Seller, enforceable against Seller in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
(b) Except for transfer of Seller's interest in the Lease, no consent,
waiver, approval, order or authorization of, notice to, or registration,
declaration, designation, qualification or filing with, any Governmental
Authority or third Person, domestic or foreign, is or has been or will be
required on the part of Seller in connection with the execution and delivery of
this Agreement or any Ancillary Agreement or the consummation of the
transactions contemplated hereby or thereby, except where the failure to obtain
such consent would not result in a Material Adverse Effect.
5.3 Non-Contravention. Neither the execution and delivery of this Agreement or
any Ancillary Agreement, nor the consummation of the transactions contemplated
hereby or thereby, will violate or conflict with or provide a right of
termination to any Person under (a) any provision of the Charter or Bylaws of
Seller, (b) any law, rule, regulation or Governmental Order to which Seller or
the Product and the Assets are bound or subject or (c) any agreement, indenture,
undertaking, permit, license or other instrument to which Seller is a party or
by which it or any of
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-7-
<PAGE>
its properties may be bound or affected, other than (x) the requirements of any
applicable bulk sales or bulk transfer laws or (y) where such violation,
conflict or right of termination would not result in a Material Adverse Effect.
5.4 Disclosure. There is no fact (other than matters of a general societal,
economic or political nature which do not affect the business of Seller or Buyer
uniquely) known to Seller, and there have been no events or transactions or
information which have come to the attention of Seller, which might reasonably
be expected to have a Material Adverse Effect on the Product or the Assets.
5.5 Real Property.
(a) The Lease is a legal, valid and binding agreement enforceable in
accordance with its terms and is in full force and effect. There are no existing
material defaults under the Lease by Seller and no event of default on the part
of Seller or, to the knowledge of Seller, on the part of any other party thereto
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default
thereunder permitting landlord to terminate. Subject to consent by the landlord
to assignment of the Lease to Buyer, upon consummation of the transactions
contemplated by this Agreement, the Lease will continue in full force and effect
without penalty or other adverse consequence and shall be unaffected by such
transactions. The Lease has not been amended or otherwise affected by any side
letter, interpretation or correspondence relating thereto except for amendments
provided to Buyer. Seller has made available to Buyer true and correct copies of
the Lease.
5.6 Title to Assets. Seller has good and marketable title to the Product and
all of the Assets, free and clear of any Encumbrances.
5.7 Intangible Personal Property.
(a) The execution, delivery and performance of this Agreement, the
Ancillary Agreements, and the consummation of the transactions contemplated
hereby and thereby will not breach, violate or conflict with any instrument or
agreement governing any intellectual property necessary or required for, or used
in, the conduct of the Business as presently conducted; and
(b) Seller has not been notified of any claim by a third party that
Seller's manufacture or sales of the Product violate any proprietary right of
any other party. The Product Trademark is subsisting and Seller has no notice of
any claims that a third party has any rights thereto. There are no existing or
pending patents held by Seller that would prevent Buyer from manufacturing,
using or selling the Product. Seller has not received any notice asserting that
the manufacture, use or sale of the Product conflicts with the rights of any
other party. Seller is not aware of any material unauthorized use, infringement
or misappropriation on the part of any third party of the Assets or the
Intangible Personal Property.
5.8 Litigation; Legal Matters. There is no Action pending or, to the
knowledge of Seller, threatened against or involving Seller or any of the
officers, directors, stockholders, properties, assets or businesses of Seller,
whether at law or in equity, or before or by any
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
Governmental Authority, nor any Governmental Order against, or the subject of
which is, the Product or the Assets.
5.9 Employees; Employee Benefit Plans; Labor.
(a) Schedule 5.9 contains a complete and correct list of all
employees of Seller whose employment is primarily devoted to the manufacture or
sale of the Product (collectively, the "Employees").
(b) There are no employment agreements or other similar arrangements
that pertain to any Employee, except standard secrecy agreements for all
employees.
(c) Except to the extent provided in Article X, Buyer will incur no
Liability with respect to, or on account of, and Seller will retain any
Liability for, and on account of, any employee benefit plan of Seller including,
but not limited to, Liabilities Seller may have to such employees under all
employee benefit schemes, incentive compensation plans, bonus plans, pension and
retirement plans, vacation, profit-sharing plans (including any profit-sharing
plan with a cash-or-deferred arrangement) share purchase and option plans,
savings and similar plans, medical, dental, travel, accident, life, disability
and other insurance and other plans or arrangements, whether written or oral and
whether "qualified" or "non-qualified," or to any employee as a result of
termination of employment by Seller as contemplated by this Agreement.
(d) No Employee is covered under any collective bargaining agreement.
With respect to the use of the Assets: (a) there is no unfair labor practice
complaint against Seller pending or, to the knowledge of Seller, threatened
before the National Labor Relations Board or any comparable state or local
Governmental Authority; (b) there is no labor strike, dispute, slowdown or
stoppage actually pending or, to the knowledge of Seller, threatened against or
directly affecting Seller; (c) no union representation question exists or
negotiations regarding union representation have taken place or are ongoing
respecting the employees of any of the Business and no notice or demand for
union recognition has been received by Seller; (d) no grievance or any Action
arising out of or under collective bargaining agreements is pending and no
claims therefor exist; (e) no collective bargaining agreement which is binding
on Seller prevents it from relocating or closing any of its operations; (f)
Seller has not experienced any work stoppage or other labor difficulty; and (g)
there are no pending or, to the knowledge of Seller, threatened unfair
employment practice charges or administrative proceedings relating to any past
or present employees of the Business.
5.10 Environmental Matters. Except as set forth in Schedule 5.10:
(a) to Seller's knowledge, prior to the Closing, Seller has operated
and maintained the Business and the Assets, in compliance with all applicable
Environmental Laws and Governmental Orders and the requirements of all
Environmental Permits held or required to be held by Seller and Seller has not
received a notice of violation or other demand from a third Person alleging that
the Business is in violation of any Environmental Law;
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
(b) to Seller's knowledge, no Environmental Permits are necessary or
required for any activities currently conducted by or on behalf of the Business
except for the permit required for the coating process currently conducted in
Seller's Mountain View facility;
(c) to Seller's knowledge, there are no underground storage tanks at
the Vacaville Facility containing Hazardous Materials or which formerly
contained Hazardous Materials; nor is there, to Seller's knowledge, Hazardous
Material in any of the fixtures, structures, soils, groundwater, surface water
or air on, under or about or emanating from the Assets or the Vacaville
Facility,
(d) to Seller's knowledge, the Vacaville Facility is not listed nor
proposed for listing on the U.S. National Priorities List under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
42 U.S.C. (S)(S) 9601 et seq. or on the Comprehensive Environmental Response
Compensation Liability Information System or any foreign or state list of sites
requiring investigation, remediation or cleanup;
(e) Seller has provided Buyer with true, accurate and complete copies
of any Governmental Orders applicable to the Product, the Vacaville Facility and
the Assets, and written reports, if any, of material releases of Hazardous
Materials on, under, or emanating from the Vacaville Facility in Seller's
possession or reasonable control.
5.11 Contracts and Commitments.
(a) True and complete copies of all Contracts (together with all
ancillary documents thereto, including any amendments, consents for alterations
and documents regarding variations) set forth in Schedule 2.1(c) have been
delivered to Buyer.
(b) With respect to the Contracts, (i) each is a legal, valid and
binding obligation of Seller and, to the knowledge of Seller, each other party
thereto, and is in full force and effect, and (ii) Seller has not been notified
that it is in breach of any such Contract, nor has Seller notified the other
party that it is in breach of any such Contract.
5.12 Compliance With Laws. Seller has not been notified of any violation
of laws or regulations in connection with its manufacture and sale of Product.
5.13 Inventory. All of the Inventories consist of a quality and quantity
usable and salable in the ordinary course of business.
5.14 Brokers and Finders. Neither Seller nor any of its officers, directors
or employees has employed any broker or finder or incurred any liability for any
brokerage fee, commission or finder's fee in connection with the transactions
contemplated by this Agreement.
5.15 Permits. Except as disclosed in Section 5.10(b), to Seller's knowledge,
there are no governmental licenses, permits, approvals, license applications and
product registrations required for the making, using and selling of the Product.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
5.16 Patents. As of the Closing Date, there are no unexpired patents (or
equivalent rights) nor applications pending anywhere in the world which are
owned or controlled by Seller which would be infringed by the manufacture, use
and sale of the Product.
ARTICLE I
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
6.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
6.2 Authorization.
(a) Buyer has full corporate power and authority to enter into this
Agreement and the Ancillary Agreements and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Buyer. This Agreement has been duly executed and
delivered by Buyer. This Agreement constitutes, and upon the execution and
delivery thereof by Buyer, each Ancillary Agreement will constitute, a legal,
valid and binding obligation of Buyer, enforceable against Buyer in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
(b) No consent, waiver, approval, order or authorization of, notice
to, or registration, declaration, designation, qualification or filing with, any
Governmental Authority or third Person, domestic or foreign, is or has been or
will be required on the part of Buyer or any of its Affiliates in connection
with the execution and delivery of this Agreement or any Ancillary Agreement or
the consummation of the transactions contemplated hereby or thereby.
6.3 Non-Contravention. Neither the execution and delivery of this
Agreement or any Ancillary Agreement, nor the consummation of the transactions
contemplated hereby or thereby, will violate or conflict with (a) any provision
of the charter or bylaws of Buyer or any of its Affiliates, (b) any law, rule,
regulation or Governmental Order to which Buyer or any such Affiliate or any of
their business or assets are bound or subject or (c) any agreement, indenture,
undertaking, permit, license or other instrument to which Buyer or any such
Affiliate is a party or by which any of them or any of their properties may be
bound or affected.
ARTICLE II
CERTAIN COVENANTS
7.1 Access to Information. To the extent reasonably requested by Buyer,
Seller shall provide Buyer with information about the Product and the Business
following the Closing.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
7.2 Transition. For the [* * *], Seller will conduct the Business on
behalf of Buyer under the General Support Services Agreement.
7.3 Confidentiality. After the Closing Date, each party shall, and shall
cause its representatives, Affiliates and employees: (a) to treat and hold as
confidential (and not to disclose or provide access to any Person to) any
confidential information of the other party disclosed in connection with this
transaction or in performance of this Agreement or the Ancillary Agreements; and
(b) in the event that any of them becomes legally compelled to disclose any such
information: (i) to provide the other party with prompt written notice of such
requirement so that such other party or an Affiliate thereof may seek a
protective order or other remedy or waive compliance with this Section 7.3; (ii
in the event that such protective order or other remedy is not obtained, or such
other party waives compliance with this Section 7.3, to furnish only that
portion of such information which is legally required to be provided and to
exercise its best efforts to obtain assurances that confidential treatment will
be accorded such information; and (iii) to the extent permitted by law, to
promptly furnish (prior to, at, or as soon as practicable following such
required disclosure) to the other party any and all copies (in whatever form or
medium) of all such disclosed information; provided, however, that this sentence
shall not apply to any information which, at the time of disclosure, is
available publicly and was not disclosed in breach of this Agreement, or is
subsequently disclosed to the public, or to Seller or Buyer by a third party.
Each party agrees and acknowledges that remedies at law for any breach of its
obligations under this Section 7.3 may be inadequate and that in addition
thereto the other party (or its Affiliate) shall be entitled to seek equitable
relief, including injunction and specific performance, in the event of any such
breach.
7.4 Bulk Sales Compliance. Buyer will not seek to enforce compliance by
Seller with the provisions of any bulk sales or transfers law or similar law of
any jurisdiction in respect of the transactions contemplated by this Agreement
and the Ancillary Agreements.
7.5 Restrictive Covenants.
(a) Except to perform its obligations under this Agreement or the
Ancillary Agreements, for a period of [* * *], Seller will not sell for research
use in laboratory animals any products that compete directly with the Product
and that work in substantially the same way as the Product, or manufacture any
such products for such purpose, nor will Seller grant rights to any third party
to do so, or own, directly or indirectly, more than [* * *] in any other entity
that engages in such activity. Nothing herein shall be deemed to limit the
activities of any entity that is the successor or assignee of all or
substantially all of Seller's business.
(b) For a period of [* * *], Seller shall not, without Buyer's
written consent, solicit for employment at Seller nor hire any Employee, unless
such Employee has ceased to be employed by Buyer or any of its Affiliates for at
least [* * *]; provided, however, the restriction in this Section 7.5(b) shall
not apply to any Employee who Buyer has terminated at its own initiative.
(c) Seller agrees and acknowledges that remedies at law for any
breach of Seller's obligations under this Section 7.5 may be inadequate and that
in addition thereto Buyer (or its
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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Affiliate) shall be entitled to seek equitable relief, including injunction and
specific performance, in the event of any such breach.
7.6 Purchase of Inventory. On the Closing Date, Buyer shall purchase the
Inventories from Seller at the per unit standard cost set forth on Schedule 7.6.
Buyer shall pay Seller the purchase price for the Inventories in accordance with
the following schedule: [* * *]; provided, however, that the purchase price
shall be paid in full within [* * *], if such purchase price has not been paid
in full by that time.
7.7 Product Discussions. At the request of Seller, Buyer shall participate
in periodic discussions with Seller summarizing the type and quantity of
products sold in connection with the Business, the identity of all customers of
the Business and, to the extent known by Buyer, the purpose for which each such
product was ordered.
7.8 Promotional and Marketing Material.The parties acknowledge that Buyer
intends to continue to utilize the Product Trademark in the marketing and sale
of the Product after the Closing. As soon as practicable after the Closing Date,
Buyer shall make such changes to the packaging, product labeling, and
promotional and marketing materials in connection with the Business as necessary
to reflect (i) Buyer as the manufacturer and seller of the Product and (ii) to
include Seller's logo and identify Seller as the developer of the Product;
provided, however, that finished Product in the Inventories as of the Closing
Date may be sold as currently packaged in the ordinary course of business so
long as such packaging is modified to indicate Buyer as the seller of such
products.
7.9 Vendors. Upon written request by Buyer, after the Closing Date Seller
will provide all reasonable assistance to Buyer in contacting and establishing
an ongoing business relationship with vendors of supplies, raw materials and
services used by Seller in connection with the manufacture and sale of the
Product prior to the Closing Date.
7.10 Exploitation of the Business; Discontinuation of the Business. After
the Closing, Buyer will use its [* * *]. If at any time after the Closing
Date, Buyer discontinues the Business (other than as a result of transferring
the Business to a third party), Seller may, at its sole discretion, obtain from
Buyer (i) all rights, title and interest in the Product and the Assets (to the
extent then existing) at a purchase price to be negotiated by the parties and
(ii) the Product inventory then in Buyer's possession at the standard cost
incurred by Buyer therefor.
7.11 No Action. Seller, on behalf of itself, its assigns, successors and
Affiliates, hereby covenants that neither it nor its Affiliates, assigns or
successors will institute or bring any Action against Buyer, its assigns,
successors or Affiliates alleging that the making, using, selling, offering for
sale or importation of the Product and Improvements will infringe any patent or
equivalent intellectual property rights anywhere in the world owned or
controlled by Seller or any of its Affiliates, provided that such Products and
Improvements are sold solely for research use in laboratory animals.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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ARTICLE III
INDEMNIFICATION, LIMITATION OF LIABILITY
AND DISCLAIMER OF WARRANTY
8.1 Survival. All representations and warranties of Seller and Buyer and
their Affiliates contained in this Agreement and the Ancillary Agreements
(including all schedules and exhibits hereto and thereto and all certificates,
documents, instruments and undertakings furnished pursuant to this Agreement and
the Ancillary Agreements) shall survive the consummation of the transactions
contemplated hereby and thereby. All indemnification obligations of Seller and
Buyer in this Agreement or the Ancillary Agreements (including all schedules and
exhibits thereto and all certificates, documents, instruments and undertakings
furnished pursuant to this Agreement and the Ancillary Agreements) shall survive
indefinitely. All covenants, obligations and agreements of Buyer and Seller and
their Affiliates contained in this Agreement and the Ancillary Agreements
(including all schedules and exhibits hereto and thereto and all certificates,
documents, instruments and undertakings furnished pursuant to this Agreement and
the Ancillary Agreements) shall survive the consummation of the transactions
contemplated hereby and thereby.
8.2 Indemnification by Seller. Seller shall indemnify and hold harmless
Buyer, its subsidiaries and Affiliates, any assignee or successor thereof, and
each officer, director, employee, agent and representative of each of the
foregoing (collectively, the "Buyer Indemnified Parties") from and against, and
pay or reimburse the Buyer Indemnified Parties for, any and all losses, Actions,
Liabilities, damages, claims, costs and expenses (including reasonable expenses
of investigation and legal fees and costs in connection therewith), interest,
awards, judgments, penalties and Encumbrances suffered or incurred by any of the
Buyer Indemnified Parties (hereinafter a "Buyer Loss") to the extent arising
from any Action instituted by a third party against any of the Buyer Indemnified
Parties relating to the manufacture, use, sale, distribution, import, export or
testing of Products, the operation of the Business or the use, operation,
ownership, lease, possession, control, occupancy, maintenance or condition of
the Assets, in each case, prior to the Closing.
8.3 Indemnification by Buyer. Buyer shall indemnify and hold harmless
Seller, any assignee or successor of Seller, and each officer, director,
employee, agent and representative of each of the foregoing (collectively, the
"Seller Indemnified Parties") from and against, and pay or reimburse the Seller
Indemnified Parties for, any and all losses, Actions, Liabilities, damages,
claims, costs and expenses (including reasonable expenses of investigation and
legal fees and costs in connection therewith), interest, awards, judgments,
penalties and Encumbrances suffered or incurred by any of the Seller Indemnified
Parties (hereinafter a "Seller Loss") to the extent arising from any Action
instituted by a third party against any of the Seller Indemnified Parties
relating to any Assumed Liability or the manufacture, use, sale, distribution,
import, export or testing of Products, the operation of the Business or the use,
operation, ownership, lease, possession, control, occupancy, maintenance or
condition of the Assets, in each case, after the Closing.
8.4 General Indemnification Provisions.
(a) For the purposes of this Section 8.4, the term "Indemnitee" shall
refer to the Person or Persons indemnified, or entitled, or claiming to be
entitled, to be indemnified, pursuant
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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to the provisions of Section 8.2 or 8.3, as the case may be; the term
"Indemnitor" shall refer to the Person having the obligation to indemnify
pursuant to such provisions; and "Losses" shall refer to Seller Losses or Buyer
Losses, as the case may be.
(b) Within a reasonable time following the determination thereof, an
Indemnitee shall give the Indemnitor written notice of any matter which such
Indemnitee has determined has given rise to a right of indemnification under
this Agreement stating the amount of the Loss, if known, and method of
computation thereof, all with reasonable particularity and containing a
reference to the provisions of this Agreement in respect of which such right of
indemnification is claimed or arises (subject to the last sentence of this
subsection). The obligations and Liabilities of any party under this Article
VIII with respect to Losses arising from claims, assertions, events or
proceedings of any third party (including claims by any assignee or successor of
the Indemnitee or any Governmental Authority), which are subject to the
indemnification provided for in this Article VIII ("Third Party Claims") shall
be governed by and be subject to the following additional terms and conditions:
If any Indemnitee shall receive written notice of any Third Party Claim, the
Indemnitee shall promptly give the Indemnitor written notice of such Third Party
Claim (subject to the last sentence of this subsection) and shall permit the
Indemnitor, at its option, to participate in the defense of such Third Party
Claim by counsel of its own choice and at its expense. If the Indemnitor
acknowledges in writing its obligation to indemnify the Indemnitee hereunder
against any Loss (without limitation) that may result from such Third Party
Claim, then the Indemnitor shall be entitled, at its option, to assume and
control the defense against such Third Party Claim at its expense and through
counsel of its choice if it gives written notice of its intention to do so to
the Indemnitee within 15 calendar days of the receipt of notice of such Third
Party Claim from Indemnitee, unless, in the reasonable opinion of counsel for
the Indemnitee, there is a conflict or a potential conflict of interest between
the Indemnitee and the Indemnitor in such Action, in which event the Indemnitee
shall be entitled to direct the defense with respect to those issues as to which
such conflict exists with separate counsel of its choice reasonably acceptable
to the Indemnitor. The fees and expenses of any such separate counsel shall be
borne by the Indemnitor. In the event that the Indemnitor exercises its right to
undertake the defense against any such Third Party Claim as provided above, the
Indemnitee shall cooperate with the Indemnitor in such defense and make
available to the Indemnitor, at Indemnitor's expense, all witnesses, pertinent
records, materials and information in its possession or under its control
reasonably relating thereto as is required by the Indemnitor. Similarly, in the
event the Indemnitee is, directly or indirectly, conducting the defense against
any Third Party Claim, the Indemnitor shall cooperate with the Indemnitee in
such defense and make available to it all witnesses, pertinent records,
materials and information in its possession or under its control reasonably
relating thereto as is reasonably required by the Indemnitee. No such Third
Party Claim, except the settlement thereof which involves the payment of money
only either by a party other than the Indemnitee or for which the Indemnitee is
totally indemnified (without limitation) by the Indemnitor and the unconditional
release from all related liability of the Indemnitee, may be settled by the
Indemnitor without the written consent of the Indemnitee. In the event that an
Indemnitee reasonably determines, and gives notification to the Indemnitor, that
the failure to resolve a Third Party Claim is having a material adverse effect
on the Indemnitee's ongoing business, and as a result the Indemnitee wishes to
propose a settlement of the Third Party Claim and the third party will
unconditionally release the Indemnitor from any and all Liabilities relating
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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<PAGE>
to or arising from such Third Party Claim, then the Indemnitor shall not
unreasonably withhold its consent to such settlement. If the Indemnitor does not
consent to such settlement, the Indemnitee may settle the Third Party Claim on
the terms proposed without discharging the Indemnitor from its liability
hereunder with respect to such Third Party Claim. The foregoing notwithstanding,
the failure of any Indemnitee to give any notice required to be given hereunder
shall not affect such Indemnitee's right to indemnification hereunder except to
the extent the Indemnitor from whom such indemnity is sought shall have been
actually and materially prejudiced in its ability to defend the claim or action
for which such indemnification is sought by reason of such failure.
(c) Payment by an Indemnitee to a third party with respect to a Loss
shall not affect such Indemnitee's rights to indemnification pursuant to this
Article VIII.
8.5 Limitation on Liability.
(a) EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTIONS
8.2 AND 8.3 OR AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, IN NO EVENT
SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INDIRECT, PUNITIVE OR
CONSEQUENTIAL DAMAGES ARISING OUT OF OR RELATING TO THE TRANSACTION CONTEMPLATED
BY THIS AGREEMENT, REGARDLESS OF THE FORM OF THE CLAIM, INCLUDING WITHOUT
LIMITATION CLAIMS FOR INDEMNIFICATION, TORT, BREACH OF CONTRACT, WARRANTY,
REPRESENTATION OR COVENANT OR ANY LOSS OF PROFITS, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES AND WHETHER OR NOT SUCH DAMAGES ARE REASONABLY
FORESEEABLE.
(b) Except for the indemnification obligations set forth in Sections
8.2 and 8.3, Buyer's obligation to pay for the inventory set forth in section
7.6 or as otherwise expressly provided in this Agreement, (i) Seller or Buyer's
aggregate liability arising out of or related to the transaction contemplated by
this Agreement, regardless of the form of the claim or action, is limited to the
amount [* * *], and (ii) neither party shall have any claim against the other
for any inaccuracy in any representation or breach of warranty set forth in
Articles V and VI unless such party shall have given the other party notice of
such claim not later than [* * *] after the Closing Date.
8.6 Disclaimer of Warranty. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, SELLER MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY
KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF
QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND OTHER THAN
EXPRESSLY SET FORTH IN THIS AGREEMENT, SPECIFICALLY DISCLAIMS ALL SUCH
WARRANTIES.
ARTICLE II
TAX MATTERS
9.1 Taxes Relating to Transactions Contemplated by This Agreement. All
sales and use taxes imposed in connection with the transfer of the Assets,
whether such taxes are
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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assessed initially against Seller or Buyer or any Affiliate of Buyer, shall be
borne and paid by Buyer.
ARTICLE I
EMPLOYEES AND EMPLOYEE BENEFIT PLANS
10.1 Business Employees.
(a) Within seven (7) days after the Closing, Buyer shall offer to
employ, for at least a [* * *] period following the Closing, the Employees;
provided that Buyer shall not be obligated to hire any Employee (i) [* * *]. For
---
any Employee, such employment shall be offered on terms which include no less
than (i) [* * *]
(b) Seller will coordinate with Buyer in communicating with the
Employees so offered employment by Buyer.
(c) If the employment of any Employee is terminated by Buyer, other
than for cause, at any time within [* * *], Buyer agrees to provide [* * *].
(d) Buyer and Seller acknowledge and agree that the Employees are
deemed to be third party beneficiaries of this Article X.
10.2 Modification of Confidentiality and Related Agreements. Seller agrees
that disclosure of information relating specifically to manufacture, use or sale
of the Product or provision of any services by any Person who becomes an
employee of Buyer or its Affiliates in connection with the transactions
contemplated hereby (a "New Employee") to Buyer or its Affiliates shall not be a
violation of any provision of any trade secret, confidentiality, non-compete or
comparable agreements entered into prior to the Closing between Seller, on the
one hand, and any New Employee, on the other hand.
ARTICLE II
GENERAL PROVISIONS
11.1 Fees and Expenses. Except as otherwise provided in this Agreement, each
party will pay all fees and expenses incurred by it in connection with this
Agreement, the Ancillary Agreements and the transactions contemplated hereby and
thereby.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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11.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), or
sent by facsimile transmission, (confirmation received) to the parties at the
following addresses and facsimile transmission numbers (or at such other address
or number for a party as shall be specified by like notice), except that notices
after the giving of which there is a designated period within which to perform
an act and notices of changes of address or number shall be effective only upon
receipt:
(a) If to Seller
ALZA Corporation
1900 Charleston Road
Mountain View, California 94043
Attention: General Counsel
Telecopy No.: 650-564-7848
Telephone No.: 650-564-5260
(b) if to Buyer:
DURECT Corporation
10240 Bubb Road
Cupertino, California 95014-4166
Attention: General Counsel
Telecopy No.: (408) 777-3577
Telephone No.: (408) 777-1827
with a copy to:
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
Attention: Richard V. Smith, Esq.
Telecopy No.: (415) 773-5759
Telephone No.: (415) 392-1122
11.3 Interpretation; Conflict Between Agreements.
(a) When a reference is made in this Agreement to Sections,
subsections, Schedules or Exhibits, such reference shall be to a Section,
subsection, Schedule or Exhibit to this Agreement unless otherwise indicated.
The words "include," "includes" and "including" when used herein shall be deemed
in each case to be followed by the words "without limitation." The word "herein"
and similar references mean, except where a specific Section or Article
reference is
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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expressly indicated, the entire Agreement rather than any specific Section or
Article. The table of contents and the headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Except as otherwise expressly provided herein,
all monetary amounts referenced in this Agreement shall mean U.S. dollars.
(b) In the event of any inconsistency, conflict or ambiguity as to
the rights and obligations of the parties under this Agreement and any Ancillary
Agreement, the terms of this Agreement shall control and supersede any such
inconsistency, conflict or ambiguity.
11.4 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of statute, law,
regulation, Governmental Order 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 transactions contemplated
hereby is not affected in any manner adverse to any party. In such event, any
such term or provision shall be modified, amended and limited to the extent
necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful.
11.5 Assignment. This Agreement may not be assigned by operation of law or
otherwise, except that either party (including its Affiliates) may assign its
rights and benefits hereunder and under the Ancillary Agreements (provided that
the assigning party or its Affiliates, as applicable, shall remain responsible
for its obligations hereunder) (a) to any Affiliate of the assigning party, (b)
to any Person acquiring all or substantially all of the assets and properties of
the assigning party or, (c) in the case of Buyer, to any person acquiring all or
substantially all of the assets and properties of the Business, as such Business
is then conducted by Buyer and its Affiliates. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon and
inure to the benefit of the successors and permitted assigns of Buyer and
Seller.
11.6 No Third-Party Beneficiaries. Other than as set forth in Section
10.1(d), this Agreement is for the sole benefit of the parties hereto and their
permitted assigns and nothing herein expressed or implied shall give or be
construed to give to any Person, other than the parties hereto and such assigns,
any legal or equitable rights hereunder.
11.7 Amendment, Other Remedies and Waiver.
(a) This Agreement may not be amended or modified except by an
instrument in writing signed by Seller and Buyer.
(b) The rights and remedies of the parties to this Agreement are
cumulative and not alternative of any other remedy conferred hereby or by law or
equity, and the exercise of any remedy will not preclude the exercise of any
other.
(c) Neither the failure nor any delay by any party in exercising any
right, power or privilege under this Agreement or any Ancillary Agreement will
operate as a waiver of such right, power or privilege, and single or partial
exercise of any such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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other right, power or privilege. To the maximum extent permitted by law, (i) no
Action or right arising out of this Agreement or the Ancillary Agreements can be
discharged by one party, in whole or in part, by a waiver or renunciation of the
Action or right unless in a writing signed by the other party; (ii) no waiver
that may be given by a party will be applicable except in the specific instance
for which it is given; and (iii) no notice to or demand on one party will be
deemed to be a waiver of any obligation of such party or of the right of the
party giving such notice or demand to take further action without notice or
demand as provided in this Agreement or the documents referred to in this
Agreement.
11.8 Further Assurances. Each of Buyer and Seller agrees to (a) cooperate
fully with the other party, and to cause its Affiliates to cooperate fully, (b)
execute and cause such Affiliates to execute such further instruments, documents
and agreements, and (c) give such further written assurances as may be
reasonably requested by Buyer or Seller, as the case may be, to evidence and
reflect the transactions described herein and contemplated hereby and to carry
into effect the intents and purposes of this Agreement. If at any time and from
time to time after the Closing Date (without limitation as to time or otherwise)
Buyer reasonably determines that all of Seller's rights, title and interests in
and to an Asset has failed to be fully transferred and conveyed in accordance
with this Agreement to Buyer or an Affiliate thereof, as the case may be, then
Seller shall cause such Asset to be transferred and conveyed to Buyer or an
Affiliate thereof in accordance with this Agreement as soon as reasonably
practicable after notice from Buyer to Seller. If requested by Buyer, Seller
shall prosecute or otherwise enforce in its own name for the benefit of Buyer
any claims, rights or benefits that are transferred to Buyer and its Affiliates
by this Agreement and that require prosecution or enforcement in the name of
Seller. Any prosecution or enforcement of claims, rights or benefits under this
Section 11.8 shall be solely at Buyer's expense, unless the prosecution or
enforcement is made necessary by a breach of this Agreement by Seller. Following
the Closing Date, Seller shall refer to Buyer and its Affiliates, as
appropriate, as promptly as practicable, any telephone calls, letters, orders,
notices, requests, inquiries and other communications relating to the Assets and
the Business.
11.9 Mutual Drafting. This Agreement is the joint product of Buyer and Seller
and each provision hereof has been subject to the mutual consultation,
negotiation and agreement of Buyer and Seller and shall not be construed for or
against any party hereto.
11.10 Governing Law; Consent to Jurisdiction. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of California
(without giving effect to its choice of law principles). Subject to Section
11.11, each of the parties hereto irrevocably submits to the exclusive
jurisdiction of (a) the Superior Court of the State of California, San Francisco
County, and (b) the United States District Court for the Northern District of
California, for the purposes of any Action arising out of this Agreement, any
Ancillary Agreement or any transaction contemplated hereby or thereby. Each of
the parties hereto agrees to commence any Action relating hereto either in the
United States District Court for the Northern District of California, or if such
Action may not be brought in such court for jurisdictional reasons, in the
Superior Court of the State of California, San Francisco County. Each of the
parties hereto further agrees that service of any process, summons, notice or
document by U.S. registered mail to such party's respective address set forth in
Section 11.2 shall be effective service of process for any Action in
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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California with respect to any matters to which it has submitted to jurisdiction
in this Section 11.10. Each of the parties hereto irrevocably and
unconditionally waives any objection to the laying of venue of any Action
arising out of this Agreement, any Ancillary Agreement or any transaction
contemplated hereby or thereby in (i) the Superior Court of the State of
California, San Francisco County, or (ii) the United States District Court for
the Northern District of California, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Action brought in any such court has been brought in an inconvenient
forum.
11.11 Dispute Resolution. Any dispute, controversy or claim between the
parties relating to, arising out of or in connection with this Agreement or the
Ancillary Agreements (or any subsequent agreements or amendments thereto),
including as to their existence, enforceability, validity, interpretation,
performance, indemnification, breach or damages, including claims in tort,
whether arising before or after the termination of this Agreement, shall be
settled only by binding arbitration pursuant to the Commercial Arbitration
Rules, as then amended and in effect, of the American Arbitration Association
(the "Rules"), subject to the following:
(a) The arbitration shall take place in San Francisco County,
California, and in no other place.
(b) There shall be one arbitrator, who shall be selected under the
normal procedures prescribed in the Rules.
(c) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(d) The arbitrators shall comply with Section 11.10, provided that
the procedural law shall be the U.S. Arbitration Act, as amended, to the extent
not inconsistent with the Rules and this Section 11.11.
(e) At the arbitration hearing, each party may make written and oral
presentations to the arbitrator, present testimony and written evidence and
examine witnesses.
(f) The arbitrators' decision shall be in writing, shall be binding
and final and may be entered and enforced in any court of competent
jurisdiction.
(g) The arbitrators shall have the authority to grant injunctive
relief and order specific performance.
(h) No party shall be eligible to receive, and the arbitrators shall
not have the authority to award, exemplary or punitive damages.
(i) Each party to the arbitration shall bear their own attorney's
fees and costs, but shall pay one-half of the fees and expenses of the
arbitrators and the American Arbitration Association.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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11.12 Counterparts. This Agreement may be executed 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.
11.13 Public Announcements. Neither Buyer, Seller nor the representatives of
either of them shall issue to the media any news release or other public
announcement with respect to this Agreement or the transactions contemplated
hereby without the prior written consent of the other party hereto. The
foregoing notwithstanding, any such news release or other public announcement
may be made if required by applicable law or a securities exchange rule,
provided that the party required to make such news release or other public
announcement shall confer with the other party concerning the timing and content
of such news release or other public announcement before the same is made. Buyer
and Seller will consult with each other concerning the means by which employees,
customers and suppliers and others having dealings with Seller with respect to
the Business will be informed of the transactions contemplated hereby, and Buyer
shall be allowed to have present for any such communication a representative of
Buyer.
11.14 Entire Agreement. This Agreement, together with all Schedules and
Exhibits hereto, and the documents and instruments and other agreements among
the parties delivered pursuant hereto, constitute the entire agreement and
supersede all prior agreements and undertakings, both written and oral, among
Buyer and Seller with respect to the subject matter hereof and are not intended
to confer upon any other Person any rights or remedies hereunder, except as
otherwise expressly provided herein.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
DURECT CORPORATION, INC.,
a Delaware corporation
By: /s/ James E. Brown
________________________________
Name: James E. Brown
Title: Chief Executive Officer
ALZA CORPORATION,
a Delaware corporation
By: /s/ Peter Staple
________________________________
Name: Peter Staple
Title: Executive Vice President
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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ATTACHMENTS
EXHIBITS
Exhibit A General Support Services Agreement
Exhibit B Coating Services Agreement
Exhibit C New Models Development Agreement
Exhibit D Form of Trademark Assignment
Schedule 1 Product and Accessory Products
Schedule 2.1 (a) Inventories
Schedule 2.1 (b) Fixed Assets
Schedule 2.1 (c) Contracts
Schedule 2.1 (d) Lease
Schedule 2.1 (e) Trademarks
Schedule 2.1 (f) Marketing Materials
Schedule 5.9 Employees
Schedule 5.10 Environmental Matters
Schedule 7.6 Inventory Price List
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
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GENERAL SUPPORT SERVICES AGREEMENT
This GENERAL SUPPORT SERVICES AGREEMENT (this "Agreement"), dated as
of April 14, 2000 (the "Effective Date" ), is made by and between ALZA
CORPORATION, a Delaware corporation ("Seller"), and DURECT CORPORATION, a
Delaware corporation ("Buyer").
R E C I T A L S
A. Seller and Buyer have entered into a Product Acquisition Agreement
of even date herewith (the "Acquisition Agreement"), providing for the sale by
Seller to Buyer of certain Assets (as defined in the Acquisition Agreement).
B. Buyer desires that Seller render certain services to Buyer on an
interim basis to assist in the operation of the Business (as defined in the
Acquisition Agreement) of the manufacture and sale of the Product (as defined in
the Acquisition Agreement). Seller is willing to perform such services on the
terms and subject to the conditions set forth herein.
A G R E E M E N T
In consideration of the premises and the respective covenants and
obligations set forth herein the parties agree as follows:
1. Services. (a) For the [ * * * ], or a shorter period as Buyer
--------
may designate, commencing on the Effective Date, Seller shall conduct all
aspects of the ALZET osmotic pump business ("Business") on behalf of Buyer in
its usual, regular and ordinary manner, substantially in the same manner as
conducted prior to the Effective Date (the "Transition Period").
(b) For the period commencing on the cessation of the Transition
Period through the term hereof, Seller shall provide to Buyer for use in
connection with the manufacture and sale of the Product the services described
in the Schedule of Services attached hereto as Exhibit A and incorporated herein
---------
by this reference. Except as otherwise noted on Exhibit A, the Services shall
---------
be of the type and at the level of use provided by Seller to the Business
immediately prior to the Effective Date. Such services will be provided at
reasonable times and upon reasonable notice, as mutually agreed.
(c) The services provided by Seller to Buyer under subsection
1(a) and 1(b) are individually and collectively referred to hereafter as the
"Services".
2. Term. The term of this Agreement shall commence on the Effective
----
Date. The parties acknowledge that the purpose of this Agreement is to provide
Services on an interim basis to permit Buyer to develop its ability to provide
the Services or to obtain alternate sources of supply of Services within a
reasonable period of time after the date hereof. Buyer shall use its best
efforts to
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
<PAGE>
develop its ability to provide to itself the Services and/or obtain alternate
sources of supply for the Services as soon as practicable after the Effective
Date. Buyer may terminate this Agreement with respect to any item of Service
upon [* * *] prior written notice to Seller. Unless this Agreement is renewed by
mutual agreement of the parties, this Agreement shall terminate not later than
December 31, 2000; provided that, no such termination shall affect the
obligations of Buyer to make payments due hereunder.
3. Compensation. On the Effective Date, Buyer shall pay [* * *].
------------
With respect to Services during the Transition Period, it is intended that [* *
*]. Buyer and Seller shall coordinate with each other to account for and
--
implement the foregoing provision in a mutually acceptable manner. After the
Transition Period [* * *]. Seller's [* * *].
--
4. Invoicing. Seller shall invoice Buyer for the Services on one or
---------
more invoices at such intervals as Seller shall determine, provided that Seller
will not invoice Buyer more than once per month. All payments shall be due and
payable 30 days after the date of the invoice.
5. Disputes. If Buyer disputes any charge set forth in an invoice,
--------
Buyer shall notify Seller in writing within 30 days after receipt of such
invoice. The parties shall promptly attempt to resolve any such dispute. If
either party determines that the dispute cannot be resolved in a mutually
agreeable manner, the dispute shall be resolved exclusively as set forth in
Section 11.11 of the Acquisition Agreement.
6. Force Majeure. Neither Seller nor Buyer shall have any liability
-------------
to the other for any failure to fulfill any obligations hereunder during a
period in which they are prevented from doing so by act of God, fire, riot,
labor disturbance, accident, war, act of any government, partial or total
interruption or loss, or shortage of transportation facilities or supplies or by
other causes beyond the reasonable control of the parties, whether similar to
the causes specified or not. The party claiming benefit of this provision shall
notify the other promptly of the cause and attempt in good faith to resume
performance as soon as reasonably possible, and there shall be no charge for
supplies not in fact delivered or services not performed. Neither party shall
be obligated to settle a dispute or otherwise take any action which is not
commercially reasonable to terminate an event of force majeure.
7. Notice of Scheduled Shutdowns. Seller will provide to Buyer
-----------------------------
reasonable notice, consistent with Seller's past practices, of any scheduled
shutdowns which are reasonably likely to interrupt the Services.
8. Indemnities. Subject to the terms of the Acquisition Agreement,
-----------
(a) Seller shall indemnify, defend and hold harmless Buyer and its affiliates,
officers, directors, stockholders, employees, agents, representatives,
successors and assigns, from and against any and all claims, liabilities,
obligations, losses, deficiencies and damages (except for criminal penalties) or
judgments of any kind or nature whatsoever caused by the willful misconduct or
gross negligence of Seller or its affiliates, officers, directors, stockholders,
employees, agents, representatives, successors and assigns arising from or
associated with provision of the Services set forth on Exhibit A, including
reasonable fees and expenses of counsel and (b) except as provided in clause
(a), Buyer shall indemnify, defend and hold harmless Seller and its affiliates,
officers, directors, stockholders, employees, agents,
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
2
<PAGE>
representatives, successors and assigns, from and against any and all claims,
liabilities, obligations, losses, deficiencies and damages (except for criminal
penalties) or judgments of any kind or nature whatsoever arising from or
associated with provision of the Services set forth on Exhibit A, including
reasonable fees and expenses of counsel.
9. Relationship of the Parties. For purposes of this Agreement,
---------------------------
Buyer and Seller shall be deemed to be independent contractors, and anything in
this Agreement to the contrary notwithstanding, nothing herein shall be deemed
to constitute Buyer and Seller as partners, joint venturers, co-owners, an
association or any entity separate and apart from each party itself, nor shall
this Agreement constitute any party hereto an employee or agent, legal or
otherwise, of the other party for any purposes whatsoever. Neither party hereto
is authorized to make any statements or representations on behalf of the other
party or in any way obligate the other party, except as expressly authorized in
writing by the other party. Anything in this Agreement to the contrary
notwithstanding, no party hereto shall assume nor shall be liable for any
liabilities or obligations of the other party, whether past, present or future.
10. Confidentiality. The parties agree to keep confidential any and
---------------
all information and data received or generated pursuant to this Agreement except
for such disclosures which are required by law or other governmental authority
or which are reasonably necessary to be disclosed by Seller in order to provide
any Services.
11. Expenses, Taxes, Etc. Except as otherwise provided in this
--------------------
Agreement, each party will pay all fees and expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby and
thereby.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
3
<PAGE>
12. Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), or
sent by facsimile transmission, (confirmation received) to the parties at the
following addresses and facsimile transmission numbers (or at such other address
or number for a party as shall be specified by like notice), except that notices
after the giving of which there is a designated period within which to perform
an act and notices of changes of address or number shall be effective only upon
receipt:
(a) If to Seller
ALZA Corporation
1900 Charleston Road
Mountain View, California 94043Attention: General
CounselTelecopy No.: (650) 564-7848
Telephone No.: (650) 564-5260
(b) if to Buyer:
DURECT Corporation10240 Bubb RoadCupertino,
California 95014-4166Attention: Jean Liu,
Esq.Telecopy No.: (408)777-3577Telephone No.:
(408) 777-1417
13. Interpretation. Capitalized terms used in this Agreement and not
--------------
defined herein shall have the meanings assigned to them in the Acquisition
Agreement. When a reference is made in this Agreement to Sections or Exhibits,
such reference shall be to a Section or Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The word "herein" and similar references mean, except where a
specific Section reference is expressly indicated, the entire Agreement rather
than any specific Section. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Except as otherwise expressly provided
herein, all monetary amounts referenced in this Agreement shall mean U.S.
dollars.
14. Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of statute, law,
regulation, judgment, injunction, decree 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 transactions
contemplated hereby is not affected in any manner adverse to any party. In such
event, any such term or provision shall be deemed, without further action on the
part of the parties hereto, modified, amended and limited to the extent
necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
4
<PAGE>
15. Assignment. This Agreement may not be assigned by operation of
----------
law or otherwise, except that either party (including its Affiliates) may assign
its rights and benefits hereunder (provided that the assigning party or its
Affiliates, as applicable, shall remain responsible for its obligations
hereunder) (a) to any Affiliate of the assigning party, (b) to any Person
acquiring all or substantially all of the assets and properties of the assigning
party, or in the case of Buyer, the Business, as such Business is then conducted
by Buyer and its Affiliates or (c) to any Person acquiring a distinct line or
division of such Business, with respect to the rights and benefits of Buyer
hereunder that pertain thereto. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon and inure to the
benefit of the successors and permitted assigns of Buyer and Seller.
16. No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the parties hereto and their permitted assigns and nothing herein
expressed or implied shall give or be construed to give to any Person, other
than the parties hereto and such assigns, any legal or equitable rights
hereunder.
17. Amendment, Other Remedies and Waiver.
------------------------------------
(a) This Agreement may not be amended or modified except by an
instrument in writing signed by Seller and Buyer.
(b) The rights and remedies of the parties to this Agreement are
cumulative and not alternative of any other remedy conferred hereby or by law or
equity, and the exercise of any remedy will not preclude the exercise of any
other.
(c) Neither the failure nor any delay by any party in exercising any
right, power or privilege under this Agreement will operate as a waiver of such
right, power or privilege, and single or partial exercise of any such right,
power or privilege will preclude any other or further exercise of such right,
power or privilege or the exercise of any other right, power or privilege. To
the maximum extent permitted by law, (i) no Action or right arising out of this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the Action or right unless in a writing signed by the other
party; (ii) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (iii) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to in this Agreement.
18. Mutual Drafting. This Agreement is the joint product of Buyer
---------------
and Seller and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of Buyer and Seller and shall not be
construed for or against any party hereto.
19. Governing Law; Consent to Jurisdiction. This Agreement shall be
--------------------------------------
governed by, and construed in accordance with, the laws of the State of
California (without giving effect to its choice of law principles). Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of (a) the
Superior Court of the State of California, San Francisco County,
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
5
<PAGE>
and (b) the United States District Court for the Northern District of
California, for the purposes of any Action arising out of this Agreement or any
transaction contemplated hereby or thereby. Each of the parties hereto agrees to
commence any Action relating hereto either in the United States District Court
for the Northern District of California, or if such Action may not be brought in
such court for jurisdictional reasons, in the Superior Court of the State of
California, San Francisco County. Each of the parties hereto further agrees that
service of any process, summons, notice or document by U.S. registered mail to
such party's respective address set forth in Section 12 shall be effective
--
service of process for any Action in California with respect to any matters to
which it has submitted to jurisdiction in this Section 19. Each of the parties
hereto irrevocably and unconditionally waives any objection to the laying of
venue of any Action arising out of this Agreement or any transaction
contemplated hereby or thereby in (i) the Superior Court of the State of
California, San Francisco County, or (ii) the United States District Court for
the Northern District of California, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Action brought in any such court has been brought in an inconvenient
forum.
20. Counterparts. This Agreement may be executed 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.
21. Public Announcements. Neither Buyer, Seller nor the
--------------------
representatives of either of them shall issue to the media any news release or
other public announcement with respect to this Agreement or the transactions
contemplated hereby without the prior written consent of the other party hereto.
The foregoing notwithstanding, any such news release or other public
announcement may be made if required by applicable law or a securities exchange
rule, provided that the party required to make such news release or other public
announcement shall confer with the other party concerning the timing and content
of such news release or other public announcement before the same is made.
Buyer and Seller will consult with each other concerning the means by which
employees, customers and suppliers and others having dealings with Seller with
respect to the Business will be informed of the transactions contemplated
hereby, and Buyer shall be allowed to have present for any such communication a
representative of Buyer.
22. Entire Agreement. This Agreement, together with all Exhibits
----------------
hereto, and the documents and instruments and other agreements among the parties
delivered pursuant hereto constitute the entire agreement and supersede all
prior agreements and undertakings, both written and oral, among Buyer and Seller
with respect to the subject matter hereof and are not intended to confer upon
any other Person any rights or remedies hereunder, except as otherwise expressly
provided herein.
23. Survival. The provisions of Sections 5, 8, 9, 10, 11, 12, 14,
--------
19, 21 and this Section 23 shall survive the termination for any reason of this
Agreement. Any payments due under this Agreement with respect to any period
prior to its termination shall be made notwithstanding the termination of this
Agreement.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
DURECT CORPORATION, ALZA CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ James E. Brown By: /s/ Peter Staple
_________________________ _________________________
Name: James E. Brown Name: Peter Staple
Title: Chief Executive Officer Title: Executive Vice President
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
7
<PAGE>
EXHIBIT A
Schedule of Services
Services to be Provided:
[* * *]
-
Payment for Services:
DIRECT EXPENSES
- ---------------
[* * *]
INDIRECT EXPENSES**
- -----------------
[* * *]
-
*Materials has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-1-
<PAGE>
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-2-
<PAGE>
COATING SERVICES AGREEMENT
This COATING SERVICES AGREEMENT (this "Agreement"), dated as of April
14, 2000 (the "Effective Date"), is made by and between ALZA CORPORATION, a
Delaware corporation ("Seller"), and DURECT CORPORATION, a Delaware corporation
("Buyer").
R E C I T A L S
A. Seller and Buyer have entered into a Product Acquisition
Agreement of even date herewith (the "Acquisition Agreement"), providing for the
sale by Seller to Buyer of certain Assets (as defined in the Acquisition
Agreement).
B. Buyer desires that Seller render certain services to Buyer on an
interim basis to assist in the operation of the Business (as defined in the
Acquisition Agreement) of the manufacture and sale of the Product (as defined in
the Acquisition Agreement). Seller is willing to perform such services on the
terms and subject to the conditions set forth herein.
A G R E E M E N T
In consideration of the premises and the respective covenants and
obligations set forth herein the parties agree as follows:
1. Services. Seller shall provide to Buyer for use in connection
--------
with the manufacture and sale of the Product the services described in the
Schedule of Services attached hereto as Exhibit A and incorporated herein by
---------
this reference (individually and collectively, the "Services"). Except as
otherwise noted on Exhibit A, the Services shall be of the type and at the level
---------
of use provided by Seller to the Business immediately prior to the Effective
Date. Such services will provided at reasonable times and upon reasonable
notice, as mutually agreed.
2. Term. The term of this Agreement shall commence on the Effective
----
Date. The parties acknowledge that the purpose of this Agreement is to provide
Services on an interim basis to permit Buyer to develop its ability to provide
the Services or to obtain alternate sources of supply of Services within a
reasonable period of time after the date hereof. Buyer shall use its best
efforts to develop its ability to provide to itself the Services and/or obtain
alternate sources of supply for the Services as soon as practicable after the
Effective Date. Buyer may terminate this Agreement with respect to any item of
Service upon [* * *] prior written notice to Seller. Unless this Agreement is
renewed by mutual agreement of the parties, this Agreement shall terminate not
later than the date which is three (3) years following the Closing Date (as
defined in the Acquisition Agreement); provided that, no such termination shall
affect the obligations of Buyer to make payments due hereunder.
3. Compensation. On the Effective Date, Buyer shall pay Seller
------------
[* * *]. In addition, [* * *]. Seller's [* * *.]
-
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-3-
<PAGE>
4. Invoicing. Seller shall invoice Buyer for the Services on one or
---------
more invoices at such intervals as Seller shall determine, provided that Seller
will not invoice Buyer more than once per month. All payments shall be due and
payable 30 days after the date of the invoice.
5. Disputes. If Buyer disputes any charge set forth in an invoice,
--------
Buyer shall notify Seller in writing within 30 days after receipt of such
invoice. The parties shall promptly attempt to resolve any such dispute. If
either party determines that the dispute cannot be resolved in a mutually
agreeable manner, the dispute shall be resolved exclusively as set forth in
Section 11.11 of the Acquisition Agreement.
6. Specific Performance. Each of the parties hereto acknowledges
--------------------
and agrees that the extent of damages to Buyer in the event of a breach by
Seller of this Agreement would be impossible to ascertain and there is and will
be available to Buyer no adequate remedy at law to compensate it in the event of
such a breach. Consequently, the Seller agrees that, in the event that it fails
to perform any Services hereunder, Buyer shall be entitled, in addition to any
other relief to which it may be entitled including without limitation money
damages, to enforce any or all of such covenants to perform any Services by
injunctive or other equitable relief ordered by any court of competent
jurisdiction.
7. Indemnities. Subject to the terms of the Acquisition Agreement,
-----------
(a) Seller shall indemnify, defend and hold harmless Buyer and its affiliates,
officers, directors, stockholders, employees, agents, representatives,
successors and assigns, from and against any and all claims, liabilities,
obligations, losses, deficiencies and damages (except for criminal penalties) or
judgments of any kind or nature whatsoever caused by the willful misconduct or
gross negligence of Seller or its affiliates, officers, directors, stockholders,
employees, agents, representatives, successors and assigns arising from or
associated with provision of the Services set forth on Exhibit A, including
---------
reasonable fees and expenses of counsel and (b) except as provided in clause
(a), Buyer shall indemnify, defend and hold harmless Seller and its affiliates,
officers, directors, stockholders, employees, agents, representatives,
successors and assigns, from and against any and all claims, liabilities,
obligations, losses, deficiencies and damages (except for criminal penalties) or
judgments of any kind or nature whatsoever arising from or associated with
provision of the Services set forth on Exhibit A, including reasonable fees and
---------
expenses of counsel.
8. Force Majeure. Neither Seller nor Buyer shall have any liability
-------------
to the other for any failure to fulfill any obligations hereunder during a
period in which they are prevented from doing so by act of God, fire, riot,
labor disturbance, accident, war, act of any government, partial or total
interruption or loss, or shortage of transportation facilities or supplies or by
other causes beyond the reasonable control of the parties, whether similar to
the causes specified or not. The party claiming benefit of this provision shall
notify the other promptly of the cause and attempt in good faith to resume
performance as soon as reasonably possible, and there shall be no charge for
supplies not in fact delivered or services not performed. Neither party shall
be obligated to settle a dispute or otherwise take any action which is not
commercially reasonable to terminate an event of force majeure.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-4-
<PAGE>
9. Notice of Scheduled Shutdowns. Seller will provide to Buyer
-----------------------------
reasonable notice, consistent with Seller's past practices, of any scheduled
shutdowns which are reasonably likely to interrupt the Services.
10. Relationship of the Parties. For purposes of this Agreement,
---------------------------
Buyer and Seller shall be deemed to be independent contractors, and anything in
this Agreement to the contrary notwithstanding, nothing herein shall be deemed
to constitute Buyer and Seller as partners, joint venturers, co-owners, an
association or any entity separate and apart from each party itself, nor shall
this Agreement constitute any party hereto an employee or agent, legal or
otherwise, of the other party for any purposes whatsoever. Neither party hereto
is authorized to make any statements or representations on behalf of the other
party or in any way obligate the other party, except as expressly authorized in
writing by the other party. Anything in this Agreement to the contrary
notwithstanding, no party hereto shall assume nor shall be liable for any
liabilities or obligations of the other party, whether past, present or future.
11. Confidentiality. The parties agree to keep confidential any and
---------------
all information and data received or generated pursuant to this Agreement except
for such disclosures which are required by law or other governmental authority
or which are reasonably necessary to be disclosed by Seller in order to provide
any Services.
12. Expenses, Taxes, Etc. Except as otherwise provided in this
--------------------
Agreement, each party will pay all fees and expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby and
thereby.
13. Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), or
sent by facsimile transmission, (confirmation received) to the parties at the
following addresses and facsimile transmission numbers (or at such other address
or number for a party as shall be specified by like notice), except that notices
after the giving of which there is a designated period within which to perform
an act and notices of changes of address or number shall be effective only upon
receipt:
(a) If to Seller
ALZA Corporation
1900 Charleston Road
Mountain View, California 94043
Attention: General Counsel
Telecopy No.: (650) 564-7848
Telephone No.: (650) 564-5260
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-5-
<PAGE>
(b) if to Buyer:
DURECT Corporation
10240 Bubb Road
Cupertino, California 95014-4166
Attention: Jean Liu, Esq.
Telecopy No.: (408) 777-3577
Telephone No.: (408) 777-1417
14. Interpretation. Capitalized terms used in this Agreement and not
--------------
defined herein shall have the meanings assigned to them in the Acquisition
Agreement. When a reference is made in this Agreement to Sections or Exhibits,
such reference shall be to a Section or Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The word "herein" and similar references mean, except where a
specific Section reference is expressly indicated, the entire Agreement rather
than any specific Section. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Except as otherwise expressly provided
herein, all monetary amounts referenced in this Agreement shall mean U.S.
dollars.
15. Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of statute, law,
regulation, judgment, injunction, decree 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 transactions
contemplated hereby is not affected in any manner adverse to any party. In such
event, any such term or provision shall be deemed, without further action on the
part of the parties hereto, modified, amended and limited to the extent
necessary to render the same and the remainder of this Agreement valid,
enforceable and lawful.
16. Assignment. This Agreement may not be assigned by operation of
----------
law or otherwise, except that Buyer (including its Affiliates) may assign its
rights and benefits hereunder (provided that Buyer or its Affiliates, as
applicable, shall remain responsible for its obligations hereunder) (a) to any
Affiliate of Buyer, (b) to any Person acquiring all or substantially all of the
assets and properties of the Business, as such Business is then conducted by
Buyer and its Affiliates or (c) to any Person acquiring a distinct line or
division of such Business, with respect to the rights and benefits of Buyer
hereunder that pertain thereto. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon and inure to the
benefit of the successors and permitted assigns of Buyer and Seller.
17. No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the parties hereto and their permitted assigns and nothing herein
expressed or implied shall give or be construed to give to any Person, other
than the parties hereto and such assigns, any legal or equitable rights
hereunder.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-6-
<PAGE>
18. Amendment, Other Remedies and Waiver.
------------------------------------
(a) This Agreement may not be amended or modified except by an
instrument in writing signed by Seller and Buyer.
(b) The rights and remedies of the parties to this Agreement are
cumulative and not alternative of any other remedy conferred hereby or by law or
equity, and the exercise of any remedy will not preclude the exercise of any
other.
(c) Neither the failure nor any delay by any party in exercising any
right, power or privilege under this Agreement will operate as a waiver of such
right, power or privilege, and single or partial exercise of any such right,
power or privilege will preclude any other or further exercise of such right,
power or privilege or the exercise of any other right, power or privilege. To
the maximum extent permitted by law, (i) no Action or right arising out of this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the Action or right unless in a writing signed by the other
party; (ii) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (iii) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to in this Agreement.
19. Mutual Drafting. This Agreement is the joint product of Buyer
---------------
and Seller and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of Buyer and Seller and shall not be
construed for or against any party hereto.
20. Governing Law; Consent to Jurisdiction. This Agreement shall be
--------------------------------------
governed by, and construed in accordance with, the laws of the State of
California (without giving effect to its choice of law principles). Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of (a) the
Superior Court of the State of California, San Francisco County, and (b) the
United States District Court for the Northern District of California, for the
purposes of any Action arising out of this Agreement or any transaction
contemplated hereby or thereby. Each of the parties hereto agrees to commence
any Action relating hereto either in the United States District Court for the
Northern District of California, or if such Action may not be brought in such
court for jurisdictional reasons, in the Superior Court of the State of
California, San Francisco County. Each of the parties hereto further agrees
that service of any process, summons, notice or document by U.S. registered mail
to such party's respective address set forth in Section 12 shall be effective
service of process for any Action in California with respect to any matters to
which it has submitted to jurisdiction in this Section 19. Each of the parties
hereto irrevocably and unconditionally waives any objection to the laying of
venue of any Action arising out of this Agreement or any transaction
contemplated hereby or thereby in (i) the Superior Court of the State of
California, San Francisco County, or (ii) the United States District Court for
the Northern District of California, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Action brought in any such court has been brought in an inconvenient
forum.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-7-
<PAGE>
21. Counterparts. This Agreement may be executed 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.
22. Public Announcements. Neither Buyer, Seller nor the
--------------------
representatives of either of them shall issue to the media any news release or
other public announcement with respect to this Agreement or the transactions
contemplated hereby without the prior written consent of the other party hereto.
The foregoing notwithstanding, any such news release or other public
announcement may be made if required by applicable law or a securities exchange
rule, provided that the party required to make such news release or other public
announcement shall confer with the other party concerning the timing and content
of such news release or other public announcement before the same is made.
Buyer and Seller will consult with each other concerning the means by which
employees, customers and suppliers and others having dealings with Seller with
respect to the Business will be informed of the transactions contemplated
hereby, and Buyer shall be allowed to have present for any such communication a
representative of Buyer.
23. Entire Agreement. This Agreement, together with all Exhibits
----------------
hereto, and the documents and instruments and other agreements among the parties
delivered pursuant hereto constitute the entire agreement and supersede all
prior agreements and undertakings, both written and oral, among Buyer and Seller
with respect to the subject matter hereof and are not intended to confer upon
any other Person any rights or remedies hereunder, except as otherwise expressly
provided herein.
24. Survival. The provisions of Sections 5, 6, 7, 10, 11, 12, 13,
--------
15, 20, 22 and this Section 24 shall survive the termination for any reason of
this Agreement. Any payments due under this Agreement with respect to any
period prior to its termination shall be made notwithstanding the termination of
this Agreement.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
DURECT CORPORATION, ALZA CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ James E. Brown By: /s/ Peter Staple
------------------------------- ---------------------------------
Name: James E. Brown Name: Peter Staple
Title: Chief Executive Officer Title: Executive Vice President
EXHIBIT A
Schedule of Services
Services to be Provided:
[* * *]
-
Responsibilities of ALZA in Provision of Services:
[* * *]
-
Responsibilities of DURECT in Provision of Services:
[* * *]
-
Payment for Services: [* * *]
-
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
-9-
<PAGE>
NEW MODELS DEVELOPMENT AGREEMENT
THIS NEW MODELS DEVELOPMENT AGREEMENT ("AGREEMENT") IS ENTERED INTO AS OF
APRIL 14, 2000 BETWEEN ALZA CORPORATION ("ALZA") AND DURECT CORPORATION
("DURECT").
R E C I T A L S
---------------
A. ALZA and DURECT are parties to a Product Acquisition Agreement
("Acquisition Agreement") dated the date hereof, whereby DURECT acquired ALZA's
right, title and interest in and to the osmotic, miniature, implantable pumps
for research use in laboratory animals, sold under the trademark ALZET(R) (the
"Product").
B. The parties desire that ALZA continue certain in-process development
of two New Models of the Product.
NOW THEREFORE, in consideration of the mutual covenants and agreements
provided herein, the parties hereby agree as follows:
1. Definitions. For the purposes of this Agreement, the following terms
-----------
will have the respective meanings set forth below:
1.1 "Development Costs" means the costs of the Program incurred by
ALZA pursuant to this Agreement and determined in accordance with Exhibit A
hereto.
1.2 "New Models" means either of and each of (1) [* * *] and (2)
[* * *].
-
1.3 "Program" means all activities undertaken by either or both
parties in accordance with the terms hereof for the development of the New
Models.
2. Product Development Program.
---------------------------
2.1 Promptly after execution of this Agreement and approval of a work
plan as described in Section 2.2, ALZA will commence the Program activities
necessary to continue development of the New Models. In connection with the
Program, both parties will make available appropriate scientific, engineering
and other
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC. 10
<PAGE>
personnel to perform tasks under the Program. The parties will use reasonable
commercial efforts to carry out the Program, will participate in periodic
conferences to review its status and will cooperate in the prompt preparation
and review of, and discussion concerning, work plans and cost estimates and
revisions thereto described in Section 2.2.
2.2 ALZA and DURECT agree to cooperate to devise mutually acceptable
work plans and cost estimates for the development of the New Models. The
parties understand and agree that it is difficult to accurately predict the
activities that will be necessary to develop the New Models, or the cost
thereof, and significant uncertainties exist in any product development effort.
As a result, any such work plan and cost estimate will be diligently reviewed
and revised from time to time in order that it remain a faithful best-estimate
of work to be done by the parties under the Program and, with regard to ALZA's
activities, the Development Costs thereof.
2.3 DURECT will pay to ALZA, on a monthly basis, [* * *]. ALZA will
invoice DURECT on or before the fifteenth day of each month for the preceding
month's Development Costs. All payments will be made within 30 days after the
date of the invoice. Notwithstanding the foregoing, [* * *]
-
3. Ownership.
---------
Any inventions and information solely relating to the New Models
("Inventions") and any intellectual property rights therein and thereto will be
the property of DURECT, without regard to whether the Inventions are made by
employees of DURECT, ALZA or both parties. ALZA shall promptly disclose any
such Inventions to DURECT, execute all required instruments to assign ownership
of such Inventions to DURECT and cooperate with DURECT to obtain and enforce any
patents or other registrations covering such Inventions. This provision will
survive the termination of this Agreement for any reason.
4. Term and Termination.
--------------------
4.1 Unless earlier terminated under Section 4.2, this Agreement will
remain in effect until completion of the development of the New Models.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC. 11
<PAGE>
4.2 DURECT may terminate this Agreement at any time upon not less
than 30 days' written notice to ALZA. ALZA may terminate this Agreement upon
not less than 30 days' written notice to DURECT, if DURECT fails to pay any
amounts due to ALZA under this Agreement within 30 days after the date of
invoice, unless DURECT shall have paid such outstanding amounts within 30 days
of DURECT's receipt of ALZA's written notice thereof.
4.3 Termination of this Agreement will be without prejudice to ALZA's
right to receive payment of all Development Costs incurred prior to the
effective date of the termination. After termination of this Agreement by
DURECT or termination by ALZA due to a breach of this Agreement by DURECT,
DURECT will reimburse ALZA, within 30 days after invoice, for any uncancellable
obligations and expenses incurred by ALZA prior to such termination in
connection with the Program and all costs incurred by ALZA in terminating the
Program.
5. Miscellaneous.
-------------
5.1 This Agreement will be governed by and construed in accordance
with the laws of the State of California, excluding any choice of law rules
which may direct the application of the laws of another jurisdiction.
5.2 This Agreement will not be amended or modified except in a
writing signed by each of the parties hereto.
5.3 All notices, requests and other communications required or
permitted to be given hereunder or with respect hereto will be in writing, and
may be given by (i) personal delivery, (ii) registered first-class United States
mail, postage prepaid by the sender, return receipt requested, (iii) overnight
delivery service, charges prepaid by the sender, or (iv) via facsimile and, in
each case, addressed to the other party at the address for such party as set
forth below, and will be effective upon receipt in the case of (i) (iii) or (iv)
above, and five days after mailing in the case of (ii) above.
If to ALZA: ALZA Corporation
1900 Charleston Road
Mountain View, CA 94043
Fax #: 650-564-7848
Attention: Senior Vice President and General Counsel
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC. 12
<PAGE>
If to DURECT: DURECT CORPORATION
10240 Bubb Road
Cupertino, CA 95014
Fax #: (408) 777-3577
Attention: General Counsel
Any party may change its address at which notice is to be received by written
notice provided pursuant to this Section 5.3.
5.4 Each party will be responsible for assuring that all applicable
rules, laws and regulations are met in the performance of its duties hereunder.
5.5 This Agreement, together with the exhibits hereto, sets forth the
entire agreement and understanding between the parties with respect to the
subject matter hereof, and supersedes all prior agreements and understandings
between the parties with respect to the subject matter hereof, whether oral or
in writing.
5.6 Neither party will be liable to the other due to the termination
of this Agreement as provided herein, whether in loss of good will, anticipated
profits or otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
ALZA CORPORATION DURECT CORPORATION
By: /s/ Peter Staple By: /s/ James E. Brown
__________________________ _________________________
Title: Executive Vice President Title: Chief Executive Officer
__________________________ _________________________
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC. 13
<PAGE>
EXHIBIT A
DEVELOPMENT COSTS
Development Costs are equal to the sum of (i) research expenses, (ii) general
and administrative expenses and (iii) capital asset expenditures.
(i) Research expenses include both direct expenses and indirect expenses.
(a) Direct expenses include direct research salaries (including
project management and temporary labor), clinical expenses,
supplies and other expenses incurred specifically in connection
with the Program.
(b) Indirect expenses include general research management and
support costs of the research and product development
organization. Indirect expenses are allocated to all projects
and billed to clients at a fixed rate* of 160% of direct
research salaries.
Examples of items included in direct and indirect expenses are listed
on Exhibit A-1
(ii) General and administrative expenses are allocated among the
research and product development, manufacturing and marketing
organizations. The portion allocated to the research and product
development organization is then allocated to all research and
development projects and billed to clients at a fixed rate* of 80% of
direct research salaries.
Examples of items included in general and administrative
expenses are listed on Exhibit A-1.
(iii) Capital asset expenditures are the actual costs of new capital
assets acquired specifically for the project.
- --------------
* This fixed billing rate will not be changed prior to January 1, 2001 and, if
changed on or after January 1, 2001, such changes will be limited to not more
than one change per calendar year and shall be a maximum of 10% of the rate in
effect at the time of the increase.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC. 1
<PAGE>
EXHIBIT A-1
Examples of
Research Expenses
-----------------
Direct Expenses
- ---------------
Direct research salaries*
Project clinical expenses and outside services
Project specific supplies
Project travel and related expenses
Miscellaneous project expenses
Regulatory and filing fees and maintenance payments
Indirect Expenses
- -----------------
Research management and indirect salaries*
General research supplies and materials
General research consulting and outside services
Facilities expenses
Telephone and communications
Equipment depreciation, rent, maintenance and services
Research travel and related expenses
Patent and trademark expenses
Miscellaneous indirect research expenses
Examples of
General and Administrative Expense
----------------------------------
Corporate management, administrative, and indirect salaries*
Telephone and communications
Equipment depreciation, rent, maintenance and services
Board of directors and corporate consulting
Annual audit, accounting and legal expenses
Facilities expenses
Information services (data processing) expenses
Interest expense
Miscellaneous general and administrative expenses
*Salaries include fringe benefits at a fixed rate of 52% of salaries. This fixed
rate will not be changed prior to January 1, 2001 and, if changed on or after
January 1, 2001, such changes will be limited to not more than one change per
calendar year and shall be a maximum of 10% of the rate in effect at the time
of the increase.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
SCHEDULE 1
----------
THE PRODUCT
-----------
A General Description
[* * *.]
--
------------------------------------------------------------------
Item Part #
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
------------------------------------------------------------------
[ * * * ] [ * * * ]
Ancillary products:
- ------------------
. [ * * * ]
. [ * * * ]
Non-Profiled Document
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-7-
<PAGE>
SCHEDULE 2.1(a)
---------------
INVENTORY
---------
The attached inventory list is subject to confirmation by Seller and Buyer.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-8-
<PAGE>
SCHEDULE 2.1(b)
---------------
FIXED ASSETS
------------
Asset No. Description
-------- -----------
[[ * * * ] [ * * * ]
-
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-9-
<PAGE>
SCHEDULE 2.1(c)
---------------
CONTRACTS
---------
1. Distributorship Agreement between ALZA and [[ * * * ].]
- --
2. Distributorship Agreement between ALZA and [[ * * * ].]
--
3. Distributorship Agreement between ALZA and[[ * * * ].]
--
4. Distributorship Agreement between ALZA and[[ * * * ].]
--
5. Distributorship Agreement between ALZA and [[ * * * ]
6. Distributorship Agreement between ALZA and [[ * * * ]
7. Distributorship Agreement between ALZA and [ * * * ]
8. Distributorship Agreement between ALZA and [[ * * * ]
9. Distributorship Agreement between ALZA and [[ * * * ]
10. Distributorship Agreement between ALZA and [ * * * ]
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-10-
<PAGE>
SCHEDULE 2.1(d)
---------------
LEASE
-----
Lease between ALZA and Chevron Land and Development Company dated February 1,
1986, as amended October 15, 1990, January 25, 1995, March 27, 1997 and December
1, 1999.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-11-
<PAGE>
SCHEDULE 2.1(e)
---------------
TRADEMARKS
1. ALZET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Trademark Name: Country Name Registration No: Reg. Date: Classes:
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
ALZET [***] [***] [***] [***]
- ------------------------------------------------------------------------------------------------------------
</TABLE>
2. SPECIAL DELIVERY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Country Trademark Name: Owner Name Registration No: Reg. Date: Classes:
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[***] SPECIAL DELIVERY [***] [***] [***] [***]
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3. ALZAID
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Country Trademark Name: Owner Registration No: Reg. Date: Classes:
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[***] ALZAID [***] [***] [***] [***]
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-12-
<PAGE>
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-13-
<PAGE>
SCHEDULE 2.1(f)
---------------
MARKETING ASSETS
----------------
[[ * * * ]
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-14-
<PAGE>
SCHEDULE 5.9
------------
EMPLOYEES
---------
Name Title
- ---- -----
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
[ * * * ] [ * * * ]
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-15-
<PAGE>
SCHEDULE 5.10
-------------
ENVIRONMENTAL MATTERS
---------------------
The following are exceptions to the representations and warranties of Seller in
Section 5.10:
[ * * * ]
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-16-
<PAGE>
SCHEDULE 7.6
------------
PER UNIT PRICE OF PRODUCTS IN INVENTORIES
-----------------------------------------
Part # Price (per Unit)
----- ----------------
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
[ * * * ] [ * * * ] [ * * * ]
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-17-
<PAGE>
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-18-
<PAGE>
EXHIBIT 10.8
================================================================================
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
DURECT CORPORATION
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 ACCOUNTING AND OTHER TERMS.............................................. 4
--------------------------
2 LOAN AND TERMS OF PAYMENT............................................... 4
-------------------------
2.1 Credit Extensions.................................................. 4
2.2 Interest Rate, Payments............................................ 5
2.3 Fees............................................................... 6
3 CONDITIONS OF LOANS..................................................... 6
-------------------
3.1 Conditions Precedent to Initial Credit Extension................... 6
3.2 Conditions Precedent to all Credit Extensions...................... 6
4 CREATION OF SECURITY INTEREST........................................... 7
-----------------------------
4.1 Grant of Security Interest......................................... 7
5 REPRESENTATIONS AND WARRANTIES.......................................... 7
------------------------------
5.1 Due Organization and Authorization................................. 7
5.2 Collateral......................................................... 7
5.3 Litigation......................................................... 7
5.4 No Material Adverse Change in Financial Statements................. 7
5.5 Solvency........................................................... 8
5.6 Regulatory Compliance.............................................. 8
5.7 Subsidiaries....................................................... 8
5.8 Full Disclosure.................................................... 8
6 AFFIRMATIVE COVENANTS................................................... 8
---------------------
6.1 Government Compliance.............................................. 8
6.2 Financial Statements, Reports, Certificates........................ 9
6.3 Inventory; Returns................................................. 9
6.4 Taxes.............................................................. 9
6.5 Insurance.......................................................... 9
6.6 Primary Accounts................................................... 9
6.7 Loss; Destruction; or Damage....................................... 9
6.8 Further Assurances................................................. 10
7 NEGATIVE COVENANTS...................................................... 10
------------------
8 EVENTS OF DEFAULT....................................................... 11
-----------------
8.1 Payment Default.................................................... 11
8.2 Covenant Default................................................... 11
8.3 Material Adverse Change............................................ 11
8.4 Attachment......................................................... 11
8.5 Insolvency......................................................... 11
8.6 Other Agreements................................................... 12
8.7 Judgments.......................................................... 12
8.8 Misrepresentations................................................. 12
9 BANK'S RIGHTS AND REMEDIES.............................................. 12
--------------------------
9.1 Rights and Remedies................................................ 12
9.2 Power of Attorney.................................................. 12
9.3 Accounts Collection................................................ 13
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
9.4 Bank Expenses...................................................... 13
9.5 Bank's Liability for Collateral.................................... 13
9.6 Remedies Cumulative................................................ 13
9.7 Demand Waiver...................................................... 13
10 NOTICES................................................................. 13
-------
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER............................. 14
-------------------------------------------
12 GENERAL PROVISIONS...................................................... 14
------------------
12.1 Successors and Assigns............................................ 14
12.2 Indemnification................................................... 14
12.3 Time of Essence................................................... 14
12.4 Severability of Provision......................................... 14
12.5 Amendments in Writing, Integration................................ 14
12.6 Counterparts...................................................... 15
12.7 Survival.......................................................... 15
12.8 Confidentiality................................................... 15
12.9 Effect of Amendment and Restatement............................... 15
12.10 Attorneys' Fees, Costs and Expenses............................... 15
13 DEFINITIONS............................................................. 15
-----------
13.1 Definitions....................................................... 15
</TABLE>
3
<PAGE>
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated December 16,
1999, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 and DURECT CORPORATION ("Borrower"), whose address
is 10240 Bubb Road, Cupertino, California 95014.
RECITALS
A. Bank and Borrower are parties to that certain QuickStart Loan and
Security Agreement, dated October 29, 1998, as amended (the "Original
Agreement").
B. Borrower and Bank desire in this Agreement to set forth their agreement
with respect to an equipment line and term loan and to amend and restate in its
entirety without novation the Original Agreement in accordance with the
provisions herein. This Agreement shall be construed to impart upon Bank a duty
to act reasonably at all times.
AGREEMENT
The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 Equipment Advances.
(a) Subject to the terms and conditions of this Agreement, Bank agrees to
lend to Borrower, from time to time prior to the Commitment Termination Date,
equipment advances (each an "Equipment Advance" and collectively the "Equipment
Advances") in an aggregate amount not to exceed the Committed Equipment Line.
When repaid, the Equipment Advances may not be re-borrowed. The proceeds of the
Equipment Advances will be used solely to reimburse Borrower for the purchase of
Eligible Equipment purchased prior to September 30, 1999. Each Equipment
Advance shall be considered a promissory note evidencing the amounts due
hereunder for all purposes. Bank's obligation to lend hereunder shall terminate
on the earlier of (i) the occurrence and continuance of an Event of Default, or
(ii) the Commitment Termination Date. For purposes of this Section, the
minimum amount of each Equipment Advance is $750,000 and the maximum number of
Equipment Advances that will be made is 1.
(a) (b) To obtain an Equipment Advance, Borrower will deliver to Bank a
completed supplement in substantially the form attached as Exhibit C ("Loan
Supplement"), copies of invoices for the Financed Equipment, together with a UCC
Financing Statement covering the Equipment described on the Loan Supplement, and
such additional information as Bank may request at least five (5) Business Days
before the proposed funding date (the "Funding Date"). On each Funding Date,
Bank will specify in the Loan Supplement for each Equipment Advance, the Basic
Rate, the Loan Factor, and the Payment Dates. If Borrower satisfies the
conditions of each Equipment Advance specified herein, Bank will disburse such
Equipment Advance by
4
<PAGE>
internal transfer to Borrower's deposit account with Bank. Each Equipment
Advance may not exceed 100% of the Original Stated Cost.
(c) Bank's obligation to lend the undisbursed portion of the Committed
Equipment Line will terminate if, in Bank's sole discretion, there has been a
material adverse change in the general affairs, management, results of
operation, condition (financial or otherwise) or the prospects of Borrower,
whether or not arising from transactions in the ordinary course of business, or
there has been any material adverse deviation by Borrower from the most recent
business plan of Borrower presented to and accepted by Bank prior to the
execution of this Agreement.
2.1.2 Term Loan.
(a) Bank will continue to make a Term Loan available to Borrower, pursuant
to the Original Agreement.
(b) Borrower will continue to pay its Term Loan obligations in a total of
30 equal installments of principal of $11,111.12 plus Interest (the "Term Loan
Payment"). Each Term Loan Payment is payable on the 29th of each month during
the term of the loan. Borrower's final Term Loan Payment, due on May 29, 2002,
includes all outstanding Term Loan principal and accrued interest.
2.2 Interest Rate, Payments.
2.2.1 Equipment Facility.
Principal and Interest Payments On Payment Dates. Borrower will repay
the Equipment Advances on the terms provided in the Loan Supplement. Borrower
will make payments monthly of principal and accrued interest for each Equipment
Advance (collectively, "Scheduled Payments"), beginning one month following the
Funding Date with respect to such Equipment Advance and continuing thereafter
during the Repayment Period on the same day of each calendar month (each a
"Payment Date"), in an amount equal to the Loan Factor multiplied by the Loan
Amount for such Equipment Advance as of such Payment Date. All unpaid principal
and accrued interest is due and payable in full on the last Payment Date with
respect to such Equipment Advance. Payments received after 12:00 noon Pacific
time are considered received at the opening of business on the next Business
Day. An Equipment Advance may only be prepaid in accordance with Sections
2.2.1(d) and 2.2.1(f).
(b) Interest Rate. Borrower will pay interest on the Payment Dates (as
described above) at the per annum rate of interest equal to the Basic Rate
determined by Bank as of the Funding Date for each Equipment Advance in
accordance with the definition of the Basic Rate. Any amounts outstanding
during the continuance of an Event of Default shall bear interest at a per annum
rate equal to the Basic Rate plus five percent (5%) or the maximum permitted by
law. If any change in the law increases Bank's expenses or decreases its return
from the Equipment Advances, Borrower will pay Bank upon request the amount of
such increase or decrease.
(c) Final Payment. On the Maturity Date with respect to each Equipment
Advance, Borrower will pay, in addition to the unpaid principal and accrued
interest and all other amounts due on such date with respect to such Equipment
Advance, an amount equal to the Final Payment.
(d) Prepayment Upon an Event of Loss. If any Financed Equipment is
subject to an Event of Loss and Borrower is required to or elects to prepay the
Equipment Advance with respect to such Financed Equipment pursuant to Section
6.7, then such Equipment Advance shall be prepaid to the extent and in the
manner provided in such section.
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(e) Mandatory Prepayment Upon an Acceleration. If the Equipment Advances
are accelerated following the occurrence of an Event of Default or otherwise
(other than following an Event of Loss), then Borrower will immediately pay to
Bank (i) all unpaid Scheduled Payments (including principal and interest) with
respect to each Equipment Advance, (ii) all remaining Scheduled Payments
(including principal and interest unpaid) (iii) all accrued unpaid interest,
including the default rate of interest, to the date of the prepayment, (iv) the
Final Payment and (v) all other sums, if any, that shall have become due and
payable with respect to any Equipment Advance.
(f) Permitted Prepayment of Loans. Borrower shall have the option to
prepay all, but not less than all, of the Equipment Advances advanced by Bank
under this Agreement, provided Borrower (i) provides written notice to Bank of
--------
its election to prepay the Equipment Advances at least ten (10) days prior to
such prepayment, and (ii) pays, on the date of the prepayment, discounted by 7%
per annum (A) all unpaid principal and interest accrued to the date of the
prepayment; (B) the Final Payment; and (C) all other sums, if any, that shall
have become due and payable hereunder with respect to this Agreement.
2.2.2 Term Loan.
(a) Interest Rate. The Term Loan accrues interest at a per annum rate of
1.25 percentage points above the Prime Rate. After an Event of Default,
Obligations accrue interest at 5 percent above the rate effective immediately
before the Event of Default. The interest rate increases or decreases when the
Prime Rate changes. Interest is computed on a 360 day year for the actual number
of days elapsed.
(b) Payments received after 12:00 noon Pacific time are considered
received at the opening of business on the next Business Day. When a payment is
due on a day that is not a Business Day, the payment is due the next Business
Day and additional fees or interest accrue.
2.2.3 Request to Debit Accounts.
Bank may debit any of Borrower's deposit accounts including Account Number
3300076017 for principal and interest payments or any amounts Borrower owes Bank
when due. Bank will notify Borrower when it debits Borrower's accounts. These
debits are not a set-off.
2.3 Fees.
Borrower will pay:
Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and
reasonable expenses) incurred through and after the date of this Agreement, are
payable when due.
3 CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements and documents that it
reasonably requires and fees that it requires; provided, however, that fees
shall not exceed $5,000.
3.2 Conditions Precedent to all Credit Extensions.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
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(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain materially true.
4 CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral. If this Agreement is terminated, Bank's lien and security interest
in the Collateral will continue until Borrower fully satisfies its Obligations.
Notwithstanding the foregoing, at such time as the Term Loan is paid in full,
Bank will release the Negative Pledge Agreement and its interest in all
Collateral, except for any and all Equipment (including all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements, wherever located) financed by Equipment Advances.
5 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Authorization.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it
is bound in which the default could cause reasonably be expected to cause a
Material Adverse Change.
5.2 Collateral.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. All Inventory is in all material respects of good and marketable
quality, free from material defects.
5.3 Litigation.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers, threatened by
or against Borrower or any Subsidiary in which a likely adverse decision could
reasonably be expected to cause a Material Adverse Change.
5.4 No Material Adverse Change in Financial Statements.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
7
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consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 Solvency.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 Regulatory Compliance.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act. To
its knowledge, Borrower has not violated any laws, ordinances or rules, the
violation of which could reasonably be expected to cause a Material Adverse
Change. None of Borrower's or any Subsidiary's properties or assets has been
used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by
previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all material taxes, except those being contested in good faith with
adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary to
continue its business as currently conducted, except where the failure to do so
could not reasonably be expected to cause a Material Adverse Change.
5.7 Subsidiaries.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 Full Disclosure.
No written representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. It
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.
6 AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
6.1 Government Compliance.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify would reasonably be expected to
cause a material adverse effect on Borrower's business or operations. Borrower
will comply, and have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could have a
material adverse
8
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effect on Borrower's business or operations or would reasonably be expected to
cause a Material Adverse Change.
6.2 Financial Statements, Reports, Certificates.
(a) Borrower will deliver to Bank: (i) as soon as available, but no later
than 30 days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during the period, in a form and certified by a Responsible Officer acceptable
to Bank; (ii) as soon as available, but no later than 90 days after the last day
of Borrower's fiscal year, audited consolidated financial statements prepared
under GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
reasonably acceptable to Bank; (iii) a prompt report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of $100,000 or more; and (iv)
budgets, sales projections, operating plans or other financial information Bank
reasonably requests.
(b) Bank has the right to audit Borrower's Collateral at Borrower's
expense, but the audits will be conducted no more often than every quarter
unless an Event of Default has occurred and is continuing.
6.3 Inventory; Returns.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than $50,000.
6.4 Taxes.
Borrower will make, and cause each Subsidiary to make, timely payment or
filing of extensions of all material federal, state, and local taxes or
assessments and will deliver to Bank, on demand, appropriate certificates
attesting to the payment.
6.5 Insurance.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are reasonably customary for companies similar to
Borrower and Borrower's industry. All property policies will have a lender's
loss payable endorsement showing Bank as an additional loss payee and all
liability policies will show the Bank as an additional insured and all policies
will provide that the insurer must give Bank at least 20 days notice before
canceling its policy. At Bank's request, Borrower will deliver certified copies
of policies and evidence of all premium payments. Subject to Section 6.7(a)
below, so long as no Event of Default has occurred and is continuing, Borrower
shall have the option of applying the proceeds of any casualty policy to the
replacement or repair of destroyed or damaged property; provided that, after the
occurrence and during the continuance of an Event of Default, all proceeds
payable under any such casualty policy shall, at the option of Bank, be payable
to Bank on account of the Obligations.
6.6 Primary Accounts.
Borrower will maintain its primary depository and operating accounts with
Bank.
6.7 Loss; Destruction; or Damage.
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Borrower will bear the risk of the Financed Equipment being lost, stolen,
destroyed, or damaged. If during the term of this Agreement any item of
Financed Equipment is lost, stolen, destroyed, damaged beyond repair, rendered
permanently unfit for use, or seized by a governmental authority for any reason
for a period equal to at least the remainder of the term of this Agreement (an
"Event of Loss"), then in each case, Borrower:
(a) prior to the occurrence of an Event of Default, at Borrower's option,
will (i) pay to Bank on account of the Obligations all accrued interest to the
date of the prepayment, plus all outstanding principal, plus the Final Payment;
or (ii) repair or replace any Financed Equipment subject to an Event of Loss
provided the repaired or replaced Financed Equipment is of equal or like value
to the Financed Equipment subject to an Event of Loss and provided further that
Bank has a first priority perfected security interest in such repaired or
replaced Financed Equipment.
(b) during the continuance of an Event of Default, on or before the
Payment Date after such Event of Loss for each such item of Financed Equipment
subject to such Event of Loss, Borrower will, at Bank's option, pay to Bank an
amount equal to the sum of: (i) all accrued and unpaid Scheduled Payments (with
respect to such Equipment Advance related to the Event of Loss) due prior to the
next such Payment Date, (ii) all Regularly Scheduled Payments (including
principal and interest), (iii) the Final Payment plus (iv) all other sums, if
any, that shall have become due and payable, including interest at the Default
Rate with respect to any past due amounts.
(c) On the date of receipt by Bank of the amount specified above with
respect to each such item of Financed Equipment subject to an Event of Loss,
this Agreement shall terminate as to such Financed Equipment. If any proceeds
of insurance or awards received from governmental authorities are in excess of
the amount owed under this Section, Bank shall promptly remit to Borrower the
amount in excess of the amount owed to Bank.
6.8 Further Assurances.
Borrower will execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
------------------
Borrower will not do any of the following without Bank's prior written
consent, which will not be unreasonably withheld:
(i) Enter into any transaction outside the ordinary course of business
except for the sale of capital stock to venture investors, provided that
Borrower promptly delivers written notification to Silicon of any such sale;
(ii) Sell or transfer any Collateral, except in the ordinary course of business;
(iii) pay or declare any dividends on Borrower's stock (except for dividends
payable solely in stock of Borrower); (iv) Redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of Borrower's stock other than the
repurchase of the Borrower's stock upon termination of the employee, consultant
or director's relationship with Borrower pursuant to the repurchase provisions
of the stock purchase agreement with Borrower; provided, however, such payments
shall not exceed $30,000 in any fiscal year and provided further no Event of
Default exists, is continuing or would result from such action; (v) Change its
name or the chief executive office or principal place of business, move or
dispose of any interest in the Collateral, permit any lien or security interest
to attach to the Collateral, or enter into any transaction outside the ordinary
course of Borrower's business; (vi) Become an "investment company" or a company
controlled by an "investment company," under the Investment Company Act of 1940
or undertake as one of its important activities extending credit to purchase or
carry margin stock, or use the proceeds of any Advance for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to
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comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could have a material adverse effect on Borrower's
business or operations or cause a Material Adverse Change, or permit any of its
Subsidiaries to do so; (vii) Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than Permitted
Indebtedness; (viii) Create, incur, or allow any Lien on any of its property, or
assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit any Collateral not to be subject to the first priority security
interest granted here, subject to Permitted Liens.
8 EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
8.1 Payment Default.
If Borrower fails to pay any of the Obligations within 3 days after their
due date. During the additional period the failure to cure the default is not
an Event of Default (but no Credit Extension will be made during the cure
period);
8.2 Covenant Default.
If Borrower violates any covenant in Section 7 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured the
default within 10 days after it occurs, or if the default cannot be cured within
10 days or cannot be cured after Borrower's attempts within 10 day period, and
the default may be cured within a reasonable time, then Borrower has an
additional period (of not more than 30 days) to attempt to cure the default.
During the additional time, the failure to cure the default is not an Event of
Default (but no Credit Extensions will be made during the cure period);
8.3 Material Adverse Change.
If there (i) occurs a material impairment in the perfection or priority of
the Bank's security interest in the Collateral or in the value of such
Collateral (other than normal depreciation) which is not covered by adequate
insurance or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations.
8.4 Attachment.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 Insolvency.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
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8.6 Other Agreements.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change or if a default exists or
is declared in the Master Lease Agreement between Borrower as Lessee and Bank as
Lessor;
8.7 Judgments.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 Misrepresentations.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 Power of Attorney.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other
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forms of payment or security; (ii) sign Borrower's name on any invoice or bill
of lading for any Account or drafts against account debtors, (iii) make, settle,
and adjust all claims under Borrower's insurance policies; (iv) settle and
adjust disputes and claims about the Accounts directly with account debtors, for
amounts and on terms Bank determines reasonable; and (v) transfer the Collateral
into the name of Bank or a third party as the Code permits. Bank may exercise
the power of attorney to sign Borrower's name on any documents necessary to
perfect or continue the perfection of any security interest regardless of
whether an Event of Default has occurred. Bank's appointment as Borrower's
attorney in fact, and all of Bank's rights and powers, coupled with an interest,
are irrevocable until all Obligations have been fully repaid and performed and
Bank's obligation to provide Credit Extensions terminates.
9.3 Accounts Collection.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 Bank's Liability for Collateral.
If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Borrower bears all risk of loss, damage or destruction of the
Collateral.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 Demand Waiver.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery
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service, by certified mail, postage prepaid, return receipt requested, or by
telefacsimile to the addresses set forth at the beginning of this Agreement. A
party may change its notice address by giving the other party written notice.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
-------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
------------------
12.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 Indemnification.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 Severability of Provision.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 Amendments in Writing, Integration.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.
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12.6 Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 Survival.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until all
statutes of limitations for actions that may be brought against Bank have run.
12.8 Confidentiality.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information
that either: (a) is in the public domain or in Bank's possession when disclosed
to Bank, or becomes part of the public domain after disclosure to Bank; or (b)
is disclosed to Bank by a third party, if Bank does not know that the third
party is prohibited from disclosing the information.
12.9 Effect of Amendment and Restatement.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall continue to be
outstanding under this Agreement. All security interests granted under the
Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
12.10 Attorneys' Fees, Costs and Expenses.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other reasonable costs and expenses incurred, in addition to
any other relief to which it may be entitled.
13 DEFINITIONS
-----------
13.1 Definitions.
In this Agreement:
"Accounts" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
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"Bank Expenses" are all audit fees and expenses and reasonable costs and
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Basic Rate" is, as of the Funding Date, the per annum rate of interest
(based on a year of 360 days) equal to the sum of (a) the U.S. Treasury note
yield to maturity for a term equal to the Treasury Note Maturity as quoted in
The Wall Street Journal on the day the Loan Supplement is prepared, plus (b) the
Loan Margin.
"Borrower's Books" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
"Business Day" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"Closing Date" is December 31, 1999.
"Code" is the California Uniform Commercial Code.
"Collateral" is the property described on Exhibit A.
---------
"Commitment Termination Date" is the Closing Date.
"Committed Equipment Line" is a Credit Extension of up to $750,000.
"Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"Credit Extension" is each Equipment Advance, Term Loan, or any other
extension of credit by Bank for Borrower's benefit.
"Eligible Equipment" is general purpose computer equipment, manufacturing
and laboratory equipment, test and laboratory equipment, furnishings that
complies with all of Borrower's representations and warranties to Bank and which
is acceptable to Bank in all respects. All Equipment financed with the proceeds
of Equipment Advances shall be new, provided that Bank, in its sole discretion,
may finance used equipment.
"Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"Equipment Advance" is defined in Section 2.1.1.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
16
<PAGE>
"Final Payment" is a payment (in addition to and not a substitution for
the regular monthly payments of principal plus accrued interest) due on the
Maturity Date for such Equipment Advance equal to the Loan Amount for such
Equipment Advance multiplied by the Final Payment Percentage.
"Final Payment Percentage" is, for each Equipment Advance, 10%.
"Financed Equipment" is defined in the Loan Supplement.
"Funding Date" is any date on which an Equipment Advance is made to or on
account of Borrower.
"GAAP" is generally accepted accounting principles.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceeding" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Inventory" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"Investment" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Amount" is the aggregate amount of the Equipment Advance.
"Loan Documents" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"Loan Factor" is the percentage which results from amortizing the
Equipment Advance over the Repayment Period, using the Basic Rate as the
interest rate. As an example, based on a treasury note yield of 6.10% for a
Treasury Note Maturity as published August 10, 1999, two (2) Loan Factors are
derived: (i) the Loan Factor for the first 12 months of the Repayment Period is
1.50%; and (ii) the Loan Factor for the remaining 30 months in the Repayment
Period is 3.40%
"Loan Margin" is a negative -303.61 basis points increasing to a positive
+849.24 basis points beginning January 1, 2001.
"Loan Supplement" is attached as Exhibit C
17
<PAGE>
"Material Adverse Change" is defined in Section 8.3.
"Maturity Date" is, with respect to each Equipment Advance, the last day
of the Repayment Period for such Equipment Advance, or if earlier, the date of
acceleration of such Equipment Advance by Bank following an Event of Default.
"Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.
"Original Agreement" has the meaning set forth in recital paragraph A.
"Original Stated Cost" is (i), the original cost to the Borrower of the
item of new Equipment net of any and all freight, installation, tax or (ii) the
fair market value assigned to such item of used Equipment by mutual agreement of
Borrower and Bank at the time of making of the Equipment Advance.
"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investments" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's Corporation
or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit
issued maturing no more than 1 year after issue.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
--
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
18
<PAGE>
(d) Licenses or sublicenses granted in the ordinary course of Borrower's
business and any interest or title of a licensor or under any license or
sublicense, if the licenses and sublicenses permit granting Bank a security
--
interest;
(e) Leases or subleases granted in the ordinary course of Borrower's
business, including in connection with Borrower's leased premises or leased
property;
(f) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"Repayment Period" as to the Equipment Advances, is 42 months.
"Responsible Officer" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" is any attached schedule of exceptions.
"Subordinated Debt" is debt incurred by Borrower subordinated to
Borrower's indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form acceptable to Bank and approved by Bank in
writing.
"Subsidiary" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.
---
"Term Loan" a loan of $333,333 (originally $400,000 advanced under the
Original Agreement).
"Term Loan Maturity Date" is May 29, 2002.
"Total Liabilities" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"Treasury Note Maturity" is 42 months.
19
<PAGE>
BORROWER:
Durect Corporation
By: /s/ Thomas A. Schreck
---------------------
Title: Chief Financial Officer
-----------------------
BANK:
SILICON VALLEY BANK
By: /s/ Kathryn Lungaro
-------------------
Title: Senior Vice President
---------------------
<PAGE>
EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, leases, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims, computer
programs, computer discs, computer tapes, literature, reports, catalogs, design
rights, income tax refunds, payments of insurance and rights to payment of any
kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, financial assets, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing; and
All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyrights, copyright applications, copyright registration and like
protection in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents, patent
applications and like protections including without limitation improvements,
divisions, continuations, renewals, reissues, extensions and continuations-in-
part of the same, trademarks, servicemarks and applications therefor, whether
registered or not, and the goodwill of the business of Borrower connected with
and symbolized by such trademarks, any trade secret rights, including any rights
to unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired; or any
claims for damage by way of any past, present and future infringement of any of
the foregoing (collectively, the "Intellectual Property"), except that the
Collateral shall include the proceeds of all the Intellectual Property that are
accounts, (i.e. accounts receivable) of Borrower, or general intangibles
consisting of rights to payment, if a judicial authority (including a U.S.
Bankruptcy Court) holds that a security interest in the underlying Intellectual
Property is necessary to have a security interest in such accounts and general
intangibles of Borrower that are proceeds of the Intellectual Property, then the
Collateral shall automatically, and effective as of the Closing Date, include
the Intellectual Property to the extent necessary to permit perfection of Bank's
security interest in such accounts and general intangibles of Borrower that are
proceeds of the Intellectual Property.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: __________________________
FAX#: (408) 496-2426 TIME: __________________________
________________________________________________________________________________
FROM: Durect Corporation
------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-----------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
----------------------------------------------------------
PHONE NUMBER:
------------------------------------------------------------------
FROM ACCOUNT # _________________________ TO ACCOUNT # ______________________
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- -------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $ _________________________________________
PRINCIPAL PAYMENT (ONLY) $ _________________________________________
INTEREST PAYMENT (ONLY) $ _________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $ _________________________________________
OTHER INSTRUCTIONS:
------------------------------------------------------------
- -------------------------------------------------------------------------------
All Borrower's representations and warranties in the Amended and Restated Loan
and Security Agreement are true, correct and complete in all material respects
on the date of the telephone request for and Advance confirmed by this Borrowing
Certificate; but those representations and warranties expressly referring to
another date shall be true, correct and complete in all material respects as of
that date.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ---------------------------------- ------------------------------------
Authorized Requester Phone #
- ---------------------------------- ------------------------------------
Received By (Bank) Phone #
----------------------------------
Authorized Signature (Bank)
________________________________________________________________________________
<PAGE>
EXHIBIT C
---------
FORM OF LOAN AGREEMENT SUPPLEMENT
LOAN AGREEMENT SUPPLEMENT No. [ ]
LOAN AGREEMENT SUPPLEMENT No. [ ], dated ______________, 199____ ("Supplement"),
to the Loan and Security Agreement dated as of ______________, 199____ (the
"Loan Agreement) by and between the undersigned ("Borrower"), and Silicon Valley
Bank ("Bank").
Capitalized terms used herein but not otherwise defined herein are used with the
respective meanings given to such terms in the Loan Agreement.
To secure the prompt payment by Borrower of all amounts from time to time
outstanding under the Loan Agreement, and the performance by Borrower of all the
terms contained in the Loan Agreement, Borrower grants Bank, a first priority
security interest in each item of equipment and other property described in
Annex A hereto, which equipment and other property shall be deemed to be
additional Financed Equipment and Collateral. The Loan Agreement is hereby
incorporated by reference herein and is hereby ratified, approved and confirmed.
Annex A (Equipment Schedule) and Annex B (Loan Terms Schedule) are attached
hereto.
The proceeds of the Loan should be transferred to Borrower's account with Bank
set forth below:
Bank Name: Silicon Valley Bank
Account No.:
Borrower hereby certifies that (a) the foregoing information is true and correct
and authorizes Bank to endorse in its respective books and records, the Basic
Rate applicable to the Funding Date of the Loan contemplated in this Loan
Agreement Supplement and the principal amount set forth in the Loan Terms
Schedule; (b) the representations and warranties made by Borrower in the Loan
Agreement are true and correct on the date hereof and will be true and correct
on such Funding Date. No Event of Default has occurred and is continuing under
the Loan Agreement. This Supplement may be executed by Borrower and Bank in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
This Supplement is delivered as of this day and year first above written.
SILICON VALLEY BANK DURECT Corporation
-------------------------------------
By: /s/ Kathryn Lungaro By: /s/ Felix Theeuwes
---------------------------- --------------------------------------
Name: Kathryn Lungaro Name: Felix Theewes
-------------------------- ------------------------------------
Title: Senior Vice President Title: Chief Scientific Officer &
------------------------- ------------------------------------
Chairman
------------------------------------
Annex A - Description of Financed Equipment
Annex B - Loan Terms Schedule
<PAGE>
Annex A to Exhibit C
--------------------
The Financed Equipment being financed with the Equipment Advance which this Loan
Agreement Supplement is being executed is listed below. Upon the funding of
such Equipment Advance, this schedule automatically shall be deemed to be a part
of the Collateral.
Description of Equipment: Make Model Serial # Invoice #
2
<PAGE>
Annex B to Exhibit C
--------------------
LOAN TERMS SCHEDULE #________
Loan Funding Date: ______________, 199__
Original Loan Amount: $______________
Basic Rate: ____________%
Loan Factor: ______________%
Scheduled Payment Dates and Amounts, subject to prepayment as described in
Section 2.2.1(d)*:
______ payment of $_______ due monthly from ______ through ________
______ payment of $_______ due monthly from ______ through ________
One (1) payment of $_______ due ______________
Maturity Date: ______________
Final Payment: An additional amount equal to the Final Payment Percentage
multiplied by the Loan Amount then in effect, shall be paid on
the Maturity Date with respect to such Loan.
Payment No. Payment Date
1
2
3
4
...
35
[36]
...
*/ The amount of each Scheduled Payment will change as the Loan Amount
changes.
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: Durect Corporation
LOAN OFFICER: Lois Fisher
3
<PAGE>
DATE: December 16, 1999
Documentation Fee 1,500.00
Legal Fee 500.00
TOTAL FEE DUE $2,000.00
------------- =========
Please indicate the method of payment:
{ } A check for the total amount is attached.
{ } Debit DDA # __________________ for the total amount.
{ } Loan proceeds
Borrower:
By:
(Authorized Signer)
_________________________________________________
Silicon Valley Bank (Date)
Account Officer's Signature
2
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of December 16, 1999 by and between
Durect Corporation ("Borrower") and Silicon Valley Bank ("Bank").
In connection with, among other documents, the Loan and Security Agreement (the
"Loan Documents") being concurrently executed herewith between Borrower and
Bank, Borrower agrees as follows:
1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Borrower's
intellectual property, including, without limitation, the following:
a. Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held;
b. All mask works or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired;
c. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
d. Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
e. All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the
same, including without limitation the patents and patent
applications;
f. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks, including
without limitation;
g. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the
right, but not the obligation, to sue for and collect such
damages for said use or infringement of the intellectual property
rights identified above;
h. All licenses or other rights to use any of the Copyrights,
Patents, Trademarks or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such
license or rights; and
i. All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
j. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing;
2. It shall be an event of default under the Loan Documents between
Borrower and Bank if there is a breach of any term of this Negative
Pledge Agreement.
3. Capitalized terms used but not otherwise defined herein shall have the
same meaning as in the Loan Documents.
<PAGE>
BORROWER:
Durect Corporation
By: /s/ Thomas A. Schreck
-------------------------------
Name: Thomas A. Schreck
---------------------------
Title: Chief Financial Officer
--------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Kathryn Lungaro
------------------------------
Name: Kathryn Lungaro
----------------------------
Title: Senior Vice President
---------------------------
2
<PAGE>
CORPORATE BORROWING RESOLUTION
Borrower: Durect Corporation Bank: Silicon Valley Bank
10240 Bubb Road 3003 Tasman Drive
Cupertino, CA 95014 Santa Clara, CA 95054-1191
I, the Secretary or Assistant Secretary of Durect Corporation ("Borrower"),
CERTIFY that Borrower is a corporation existing under the laws of the State of
Delaware.
I certify that at a meeting of Borrower's Directors (or by other authorized
corporate action) duly held the following resolutions were adopted.
It is resolved that any one of the following officers of Borrower, whose name,
title and signature is below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
Thomas A. Schreck Chief Financial Officer /s/ Thomas A. Schreck
- ------------------ ----------------------------------- -------------------------
James E. Brown President & Chief Executive Officer /s/ James E. Brown
- ------------------ ----------------------------------- -------------------------
Felix Theeuwes Chairman & Chief Scientific Officer /s/ Felix Theeuwes
- ------------------ ----------------------------------- -------------------------
- ------------------ ----------------------------------- -------------------------
may act for Borrower and:
Borrow Money. Borrow money from Silicon Valley Bank ("Bank").
Execute Loan Documents. Execute any loan documents Bank requires.
Grant Security. Grant Bank a security interest in any of Borrower's
assets.
Negotiate Items. Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest
and receive cash or otherwise use the proceeds.
Letters of Credit. Apply for letters of credit from Bank.
Foreign Exchange Contracts. Execute spot or forward foreign exchange
contracts.
Issue Warrants. Issue warrants for Borrower's stock.
Further Acts. Designate other individuals to request advances, pay fees
and costs and execute other documents or agreements (including documents or
agreement that waive Borrowers right to a jury trial) they think necessary
to effectuate these Resolutions.
Further resolved that all acts authorized by these Resolutions and performed
before they were adopted are ratified. These Resolutions remain in effect and
Bank may rely on them until Bank receives written notice of their revocation.
I certify that the persons listed above are Borrower's officers with the titles
and signatures shown following their names and that these resolutions have not
been modified are currently effective.
-1-
<PAGE>
CERTIFIED TO AND ATTESTED BY:
X /s/ Mark B. Weeks
-----------------------------------------------
*Secretary or Assistant Secretary
X _______________________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
-2-
<PAGE>
Exhibit 10.9
MANUFACTURING AND SUPPLY AGREEMENT
This Manufacturing and Supply Agreement ("Agreement") is entered into
by and between Neuro-Biometrix, Inc., a Colorado corporation, with its principal
place of business at 7995 E. Prentice Ave., Suite 110, Greenwood Village,
Colorado 80111 (hereinafter "Neuro-Biometrix") and Novel Biomedical, Inc., a
Minnesota corporation with its principal place of business at 13845 Industrial
Park Blvd., Plymouth, Minnesota 55441 (hereinafter "Novel").
RECITALS
1. Neuro-Biometrix markets and sells medical devices for use in the
middle ear. The two human use devices currently being made by Novel are called
the RW(mu)Cath(TM) (Novel Part #90077-5XX) and the RWE-Cath(TM) (Novel Part
#90078-5XX) (the "Human Products"). The two animal models are called the Animal
RW(mu)Cath(TM) (Novel Part #70012-5XX) and the Animal RWE-Cath (Novel Part
#70013-5XX) (the "Animal Products"). The Human Products and the Animal Products
are collectively called the ("FINISHED PRODUCTS").
2. Novel is in the business of designing, developing, manufacturing,
sterilizing and packaging medical devices.
3. The parties have entered into a confidentiality agreement dated
July 9, 1996. The parties entered into a Consulting Agreement dated September
18, 1996. This Consulting Agreement includes two sections (Confidentiality and
Inventions/Assignment) which supplement the July 9, 1996 confidentiality
agreement. The parties entered a second confidentiality agreement dated August
12, 1997. These three agreements shall be collectively referred to as the
"Confidentiality Agreements." The Confidentiality Agreements are hereby
incorporated in this Manufacturing and Supply Agreement.
4. The parties desire to enter into an agreement under which Novel
will manufacture and supply FINISHED PRODUCTS to Neuro-Biometrix, according to
Neuro-Biometrix' specifications which is described in Top Level Novel Drawings
(90077-5XX, 90078-5XX, 70012-5XX and 70013-5XX) (hereafter referred to as the
"top level drawings"). This Manufacturing and Supply Agreement is not intended
to alter or amend the Confidentiality Agreements.
In consideration of the foregoing and of the mutual covenants,
promises and conditions set forth below, the parties intending to be bound,
agree as follows.
AGREEMENT
ARTICLE 1
NEURO-BIOMETRIX OBLIGATIONS
1. Placement of Orders:
-------------------
A. Purchase Orders: Neuro-Biometrix purchase of the FINISHED
---------------
PRODUCTS shall be governed by purchase orders issued for a period of six (6)
months. The purchase order will cover a total number of FINISHED PRODUCTS.
However, other products
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
(i.e. the balloon RW(mu)Cath(TM)/RWE-Cath(TM)) may be substituted for FINISHED
PRODUCTS, when agreed to by both parties. Firm releases will be authorized by
Neuro-Biometrix against the purchase order as indicated in Section B(i) below.
The terms and conditions of this Agreement supersede the terms and conditions
contained on the Neuro-Biometrix purchase order form. The First Purchase order
will cover [***] FINISHED PRODUCTS.
B. Forecasts: Neuro-Biometrix agrees to share with Novel a six (6)
---------
month rolling forecast of Neuro-Biometrix' reasonably anticipated cumulative
quantity of FINISHED PRODUCTS. Neuro-Biometrix agrees to update the forecast
monthly and provide it to Novel by the 1st day of each month. The forecast will
contain three levels of order commitment; Firm Releases, Scheduled Releases, and
Forecasted Releases:
(i) Firm Releases: The first sixty (60) days of the forecast
are fixed with respect to both quantity and delivery date. "Delivery date" shall
be the date that the Finished Products are received by Neuro-Biometrix. The
parties will mutually agree upon delivery dates. Novel is authorized to produce
these items and Neuro-Biometrix is committed to purchase them as planned. Neuro-
Biometrix may reschedule firm delivery dates with Novel's written agreement when
necessary.
(ii) Scheduled Releases: The next sixty (60) days of the
forecast are for the procurement of materials. Novel is authorized to purchase
materials needed to fill these requirements, subject to minimum order
requirements. Upon termination of this Agreement (see Article 3, Section 16),
Neuro-Biometrix commits to purchase, at Novel's direct out of pocket cost, [***]
all the non-cancelable or non-returnable materials purchased by Novel in
reasonable reliance on the Scheduled Releases. No material procurement or
capacity scheduling will take place until Neuro-Biometrix has transmitted the 6-
month Rolling Forecast to Novel. In the event of a Technology Transfer (See
Article 2, Section 9 below), all materials that Neuro-Biometrix is required to
purchase under this paragraph shall be used in the production of FINISHED
PRODUCTS that Novel is supplying during the transfer or, if reasonable,
transferred to the transferee.
(iii) Forecasted Releases: The last sixty (60) days of the
forecast contain Neuro-Biometrix' current estimate of the demand for the
FINISHED PRODUCTS and is offered only for planning purposes. Neuro-Biometrix
makes no commitment except that this is its best estimate at the time of the
Forecast. Circumstances may develop during the course of business, which would
make it prudent for larger range commitments to Novel's suppliers by Novel.
Prior to making such a commitment, the parties must agree in writing to the
commitment.
2. Inventory: Novel agrees to maintain a stock of components and
---------
materials of sufficient quantity to cover production of the forecasted needs by
Neuro-Biometrix. Novel will not maintain a FINISHED PRODUCTS inventory unless a
specific Finished Goods Inventory Agreement is negotiated between the parties.
3. Delivery: Novel shall ship the FINISHED PRODUCTS in accordance with
--------
Neuro-Biometrix' instructions for method of shipment as designated by Neuro-
Biometrix in the purchase order. Upon shipment, Novel must inform Neuro-
Biometrix of Novel's lot number,
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-2-
<PAGE>
quantity of each FINISHED PRODUCT shipped, product destination, carrier, bill to
and ship to address, and package weight. Novel will insure, at the invoice
price, all shipments. Neuro-Biometrix will pay the costs of such insurance.
Novel reserves the right to ship a partial order (must be at least [***] of
order). Novel also reserves the right to over-ship by a maximum of [***] of
order).
4. Right to Inspect: Neuro-Biometrix shall have ten days upon receipt of
----------------
a shipment of FINISHED PRODUCTS from Novel to inspect the products. Upon the
discovery of a defect, Neuro-Biometrix may return the FINISHED PRODUCTS to
Novel. Novel will replace (or repair) the defective FINISHED PRODUCTS free of
charge, in the next month's shipment. A "defect" shall be defined as a failure
to meet the specifications (including notes on the drawings) set forth in the
"top-level" drawings.
5. Charges for Development, Engineering, Assembly and related
----------------------------------------------------------
expenses: If Neuro-Biometrix requests that Novel work on significantly
- --------
modifying a FINISHED PRODUCT, the parties will agree in advance to any charges
associated with such development. If no such request is made by Neuro-
Biometrix, there will be no engineering, assembly or expense charges.
6. Device Charges: Neuro-Biometrix will pay the following per unit
--------------
"device charges." All prices are FOB Novel.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
[***] [***] [***]
UNITS UNITS UNITS
<S> <C> <C> <C>
RW(mu)Cath(TM) (Novel Part #90077) $ [***] $ [***] $ [***]
----------------------------------------------------------------------------------------
RWE-Cath(TM) (Novel Part #90078) $ [***] $ [***] $ [***]
----------------------------------------------------------------------------------------
Animal RW(mu)Cath(TM) (Novel Part #70012) $ [***] $ [***] $ [***]
----------------------------------------------------------------------------------------
Animal RWE-Cath(TM) (Novel Part #70013) $ [***] $ [***] $ [***]
----------------------------------------------------------------------------------------
</TABLE>
If one of the following occur, after this Agreement is signed by both
parties, the parties will, in good faith, determine a revised per unit price:
. There is a significant design change to a FINISHED PRODUCT
. There is a significant price increase from one of the suppliers used
by Novel for the manufacture of the FINISHED PRODUCTS, and Novel has
made reasonable efforts to locate an alternative supplier.
. Neuro-Biometrix makes a special order request, above and beyond the
order supplied in Article 1, Paragraph 1 (Purchase Orders) above.
. Neuro-Biometrix requests less than [***] FINISHED PRODUCTS for a
particular month.
. Novel determines that the cost of materials is lower than expected
. Neuro-Biometrix pays to upgrade the equipment or staff involved in the
production which lowers the unit price, per a mutually agreeable plan
and budget.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-3-
<PAGE>
ARTICLE 2
NOVEL'S OBLIGATIONS
1. Manufacture and Supply: Novel shall manufacture, package, label and
----------------------
provide sterilized FINISHED PRODUCTS and shall supply the FINISHED PRODUCTS in
accordance with the terms of this agreement. Novel shall utilize controlled
procedures and processes for product manufacturing. The processes used for
packaging and sterilization shall be validated. Sterilization may be performed
only by an FDA registered facility, that has been certified by a Notified Body
to be in compliance with EN 46002. Each FINISHED PRODUCT must be identified by
lot # to maintain traceability, and stamped with an expiration date.
2. Sale Only to Neuro-Biometrix: Novel agrees not to sell or give or
----------------------------
otherwise provide access to FINISHED PRODUCTS to anyone other than Neuro-
Biometrix, without the prior written consent of Neuro-Biometrix.
3. Legal/Quality Compliance: The activities performed by Novel under
------------------------
this agreement will be performed in substantial compliance with all applicable
FDA Regulations, EN46001/ISO 9001, and certain portions of the Medical Device
Directive (EC Council Directive 93/42/EEC) (the "MDD") as defined in Article 2,
Section 8 below, and other US federal, state and local laws, rules, regulations,
quality standards and guidelines. Any noncompliance will be remedied within 90
days of the time that Novel becomes aware of such noncompliance, by written
communication from Neuro-Biometrix, the FDA, a Notified Body or another
regulatory agency.
4. No Defects in Products Shipped to Neuro-Biometrix: Novel agrees to
-------------------------------------------------
manufacture and ship to Neuro-Biometrix sterile, packaged FINISHED PRODUCTS that
are free from "defect" in material and workmanship in accordance with the top-
level drawings.
5. Changes to Performance Characteristics: Novel agrees to notify Neuro-
--------------------------------------
Biometrix of any changes (of which Novel is aware) in the performance
characteristics (per top level drawings) or regulatory status of a FINISHED
PRODUCT, or to any component/material thereof, or to the manufacturing,
packaging, labeling, quality control, quality assurance, or sterilization
processes, or any other issue that may affect the quality, safety or
effectiveness of a FINISHED PRODUCT supplied to Neuro-Biometrix under this
agreement.
6. Change Control: A Neuro-Biometrix officer will be required to approve
--------------
and sign off on any changes to the "top-level drawings" of the configuration of
each of NBI's FINISHED PRODUCTS -- including device design, labeling, packaging
and sterilization. Neuro-Biometrix' signature is required before Novel can
implement the change. This "top-level drawing" must be referred to by Novel in
its Bill of Materials and other lower level documents utilized by Novel's
employees and subcontractors during manufacturing, packaging, sterilization and
labeling. The Notes on the "top-level drawing" are considered to be a material
part of the drawing. Therefore, Neuro-Biometrix must approve and sign off on
any change to one of these notes, prior to any change in the notes going into
effect. Neuro-Biometrix will also own this "top-level drawing." A list of
Neuro-Biometrix' officers is included as Exhibit A. If and when this officer
list is changed, Novel will be notified.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-4-
<PAGE>
7. Novel's Production Ability: Novel shall deliver all FINISHED
--------------------------
PRODUCTS, by the date set forth in the purchase order; provided however, that it
shall not be deemed a breach of Novel's delivery obligation hereunder to the
extent Novel fails to deliver, in any particular month, any FINISHED PRODUCTS in
excess of the lesser of [***] FINISHED PRODUCTS, or 150% of the number of units
ordered for delivery in the prior month.
8. Novel's Assistance to Neuro-Biometrix for Regulatory
----------------------------------------------------
Compliance/Quality Assurance: All of the documents and records maintained by
- ----------------------------
Novel related to the FINISHED PRODUCTS shall be maintained and controlled in
compliance with Article 2, paragraph 3 above. All documents retained by Novel
that are related to the production of the FINISHED PRODUCTS shall be available
to Neuro-Biometrix, the FDA, a Notified Body, a Competent Authority or another
regulatory body when reasonably requested upon five business days' notice.
Novel's obligation to maintain and control these records and documents shall
continue for a period of five years from the date of delivery of the applicable
FINISHED PRODUCT to Neuro-Biometrix. The costs of maintaining these documents
shall be borne by Novel.
The following list is not exhaustive. It is meant only as an example of
some of the documents and records that Novel will maintain and control.
. a Device Master Record for each type of FINISHED PRODUCT, per 21 CFR
(S)820.181 (Quality System Regulation);
. a Design History File for each type of FINISHED PRODUCT, per QSR 21
CFR (S)820.30(j) (Quality System Regulation);
. Device History Records for each lot of FINISHED PRODUCTS shipped to
Neuro-Biometrix per 21 C.F.R. (S)820.184, (Quality System Regulation)
. Technical Documentation/Quality System Records required by EN
46001/ISO 9001.
. "Technical Documentation" required by the Medical Device Directive (EC
Council Directive 93/42/EEC), as defined by the items listed in Neuro-
Biometrix Standard Operating Procedure Q-l6 (copy attached as Exhibit
B) labeled "Maintained by Turn-key." Any changes to SOP Q-16, that
place additional requirements on Novel will require the approval of
both parties.
9. Technology Transfer: Solely, at Neuro-Biometrix' option, Neuro-
-------------------
Biometrix shall have the right to require Novel to transfer to Neuro-Biometrix
or a third party of Neuro-Biometrix' choice, all of the technology (including
Novel's proprietary and confidential information) related to the manufacture of
the FINISHED PRODUCTS in accordance with Exhibit C. This technology transfer
can be initiated by Neuro-Biometrix at any time.
10. ISO/EN 46001/46002--MDD Compliance: Neuro-Biometrix has been audited
----------------------------------
and expects to be certified for EN 46002 (ISO 9002) by TUV Product Service.
Neuro-Biometrix also expects to be recommended for EC (CE Mark) certification
for the RW(mu)Cath and the RWE-Cath by TUV Product Service. Neuro-Biometrix
expects to have its ISO 9002 certificate by the end of November 1997. Neuro-
Biometrix expects to be able to affix the CE Mark to its Human Products by the
end of 1997. Novel will be audited for ISO/EN 9001/46001 compliance in February
1998. If, as a result of something that Novel is in sole control of, the
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-5-
<PAGE>
Notified Body or Competent Authority determine that Neuro-Biometrix loses its
ISO certification or is unable to affix the CE Mark to its products, Novel will
remedy the situation at Novel's cost within 60 days. The situation would be
"remedied" when Neuro-Biometrix is again able to affix the CE Mark to the
RW(mu)Cath and the RWE-Cath, and regains its ISO Certification. If Novel is
unable to remedy the situation in 60 days, Neuro-Biometrix can compel Novel to
complete a technology transfer, as defined in Article 2, Section 9 (in 90 days
or less) at [***] of the costs described in Exhibit C.
11. Continuation Of Confidentiality Obligations in the event of a
-------------------------------------------------------------
Technology Transfer: In the event of a technology transfer, the parties'
- -------------------
confidentiality obligations will continue in accordance with the confidentiality
agreements mentioned above. Prior to the transfer of any of Novel's
confidential information, the third party will be required to sign a reasonable
confidentiality agreement to protect Novel's confidential information. The
transferee will then have Novel's permission to use Novel's confidential and
proprietary information only in the manufacture of the FINISHED PRODUCTS.
12. Neuro-Biometrix' Right To Inspect and Audit Novel: Neuro-Biometrix or
-------------------------------------------------
its agent, shall have the right during reasonable business hours to inspect
and/or audit Novel's facilities and records in order to verify Novel's
compliance with this contract, product specifications and applicable regulatory
requirements. The cost of conducting such inspections/audits shall be borne by
Neuro-Biometrix.
13. QSR Certificates: Each shipment of FINISHED PRODUCTS from Novel to
----------------
Neuro-Biometrix will be accompanied by a Certificate of QSR compliance from
Novel and the contract sterilization firm involved in the sterilization of the
Neuro-Biometrix shipment. This certificate must identify and clearly mark the
lot # and Novel Part # with Rev #, for each lot of FINISHED PRODUCTS. If and
when Novel is certified to ISO 9001/EN 46001, Novel will include this in its
Certificates.
14. Packaging: Novel will use reasonable efforts when packaging all
---------
Neuro-Biometrix FINISHED PRODUCTS to protect the FINISHED PRODUCTS during
shipment to Neuro-Biometrix, so that the FINISHED PRODUCTS will be ready for
subsequent shipment to Neuro-Biometrix' customers.
15. Tooling: Novel shall continue to procure and/or produce, at Neuro-
-------
Biometrix' costs, all tools, molds, dies, jigs, fixtures and other similar items
(hereafter collectively referred to as "tooling") required to make Neuro-
Biometrix' products. Tooling purchases must be authorized by Neuro-Biometrix
before the purchase is made. Neuro-Biometrix shall continue to own all tooling
purchased by Neuro-Biometrix, including any replacement tooling purchased by
Neuro-Biometrix. In the event of a technology transfer, Neuro-Biometrix shall
own and Novel shall transfer all tooling and copies of a detailed set of current
assembly drawings for all tooling. During the term of this agreement Novel
shall maintain the tooling, at Novel's expense. Neuro-Biometrix has the right
to inspect all tooling during normal business hours. Upon request by Neuro-
Biometrix during this agreement, or upon termination of this agreement, Novel
shall surrender all tooling to Neuro-Biometrix. The reasonable costs of
removing and transferring tooling shall be borne by Neuro-Biometrix, unless the
tooling is being removed/transferred as part
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-6-
<PAGE>
of a technology transfer, in which case the costs will be included in the
technology transfer fee. Novel will maintain an inventory of Neuro-Biometrix'
tooling, and this inventory list will be updated and provided to Neuro-Biometrix
on a semi-annual basis, beginning November 15, 1997, upon Neuro-Biometrix'
request.
16. Process Control: Novel will utilize controlled procedures and
---------------
processes for product manufacturing, packaging and sterilizing. Validated
processes will be performed by a qualified person(s) and be documented. All
controlled processes utilized will ensure conformance to Neuro-Biometrix'
requirements and the requirements set forth in Article 2, Paragraph 3. Specific
work instructions will be developed by Novel where the lack of such instructions
could adversely affect the quality of the FINISHED PRODUCTS. All Novel records
related to process control will be available to Neuro-Biometrix during its audit
of Novel or for another legitimate purpose.
17. Inspection and Testing: Inspections and testing will be performed by
----------------------
Novel prior to each shipment of FINISHED PRODUCTS to Neuro-Biometrix to assure
compliance with quality and legal requirements (See Article 2, Paragraph 3), and
product specifications. Novel will only ship FINISHED PRODUCTS that have been
inspected and tested (and that passed the inspections and tests) to Neuro-
Biometrix. All inspections and testing are performed per Novel's procedures and
work instructions and is documented by Novel in the Device History Records to be
maintained by Novel. All Novel records related to inspection and testing will
be available to Neuro-Biometrix during its audit of Novel or for another
legitimate purpose.
18. Purchasing Records and Data: Novel is responsible for purchasing all
---------------------------
materials and services related to the production, packaging, labeling and
sterilization of Neuro-Biometrix' products. Novel will use its own purchasing
procedures for verification methods concerning quality of product components,
materials and services. Novel will test components in a statistically valid way
to show their acceptability in the FINISHED PRODUCT. Purchasing records and
data will be maintained by Novel and this data will always be available to
Neuro-Biometrix during an audit or for another legitimate purpose.
19. Inspection, Measuring and Test Equipment Used by Novel: Inspection,
------------------------------------------------------
measurement and test equipment will be used and maintained by Novel to assess
conformance to Novel's performance requirements. Equipment calibration and
maintenance will occur at regularly scheduled intervals according to Novel's
specifications and standards. The calibrations will be performed to written
specifications based on appropriate standards and records will be maintained per
Novel's Procedures. These records will be available to Neuro-Biometrix during
an audit of Novel or for any other legitimate purpose.
20. Cross-Indemnification: Neuro-Biometrix will indemnify and hold
---------------------
harmless Novel for loss and/or liability arising out of the negligence or
intentionally wrongful conduct of Neuro-Biometrix. Novel will indemnify and
hold harmless Neuro-Biometrix for loss and/or liability arising out of the
negligence or intentionally wrongful conduct of Novel. "Liability" includes all
litigation costs, including reasonable attorney's fees and expenses, court costs
and any settlement or award entered.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-7-
<PAGE>
21. Insurance: Novel agrees to maintain at least [***] in product
---------
liability insurance coverage. Novel agrees to add Neuro-Biometrix as an
additional named insured on Novel's products liability insurance policy
effective the day this Agreement is executed. The [***] cap in Article 3,
Section 9 is not for the benefit of Novel's insurer[s], and will not limit the
coverage provided to Neuro-Biometrix hereunder. In the event of a claim, Neuro-
Biometrix will be eligible for coverage for the full [***]. With respect
to Neuro-Biometrix' products liability insurance in the event of a claim against
Neuro-Biometrix resulting from Novel's manufacture of a "defective" FINISHED
PRODUCT, the parties agree that Novel's products liability insurance will be
primary and non-contributory. Novel will provide Neuro-Biometrix with a
Certificate of Insurance (and a copy of the policy endorsement adding Neuro-
Biometrix as a named insured) demonstrating that Neuro-Biometrix is an
additional named insured on Novel's product liability policy, within 30 days of
execution of this agreement.
ARTICLE
MISCELLANEOUS PROVISIONS
1. Term: This agreement shall be one year beginning November 1, 1997 and
----
expiring on October 31, 1998, unless sooner terminated as provided hereafter or
by operation of law.
2. Renewal: Neuro-Biometrix reserves the right to extend the terms of
-------
this agreement at Neuro-Biometrix' option, for successive one year periods.
Notice of intent to extend this agreement shall be sent in writing, to Novel,
ninety (90) days prior to the anniversary date of this Agreement.
3. Integration: This is the final and entire agreement and understanding
-----------
between the parties and supersedes all prior agreements and understandings, oral
or written (except the Confidentiality Agreements discussed above), as to the
subject matter described herein. No modifications made to this agreement will
be valid unless such modification is in writing and signed by an authorized
representative of the party against whom enforcement is sought.
4. Waiver: No term, covenant, or written condition of this agreement
------
shall be deemed waived except by the written agreement of the parties.
Forbearance or indulgence by either party in any regard whatsoever shall not
constitute a waiver of the term, covenant, or condition to be performed by the
other party to which the same may apply, and until complete performance by the
other party of such term, covenant or condition, the performing party shall be
entitled to invoke any remedy available to it under this agreement or otherwise
available to it in law or in equity despite such forbearance or indulgence.
5. Savings Clause: If any provision of this agreement shall be held by a
--------------
court of competent jurisdiction to be contrary to law, such provision shall be
deemed to be null and void, and the remainder of this agreement shall be in full
force and effect.
6. Assignment/Delegation: Neither party shall delegate or assign its
---------------------
duties under this agreement without the other party's prior written consent, and
any purported delegation or
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-8-
<PAGE>
assignment without such consent shall be void, except that, Novel may delegate
its sterilization responsibilities, but sterilization is still in Novel's
"control."
7. Independent Contractors: During the term of this agreement, the
-----------------------
relationship of each of the parties to the other is that of independent
contractor. Nothing herein shall be deemed to authorize or empower either
party, its agents or employees to act as agent for the other party or conduct
business in the name, or for the account of, the other party or any of the other
party's affiliates or otherwise bind the other party in any manner.
8. Governing Law: This agreement shall be governed by the laws of the
-------------
state of Colorado, irrespective of the location of the parties' signing, and
without giving effect to conflict of law rules.
9. Warranty and Limitations of Remedies: Novel guarantees good
------------------------------------
workmanship in accordance with generally accepted professional standards for
work of this nature. Novel makes no other guarantees or warranties, expressed or
implied, including any implied warranty of merchantability or fitness for a
particular purpose. In no event will either party be liable for any lost profits
or incidental or consequential damages regardless of whether advised of the
possibility of such damages, nor any claim against such party by any other
party. Novel's maximum liability arising out of its performance under this
Agreement, whether in contract or in tort, including negligence, is limited to
the lesser of [***] or a refund of total moneys paid to Novel by Neuro-
Biometrix, Inc., including moneys paid prior to the execution of this agreement.
10. Notices: Any notice given under this Agreement shall be mailed by
-------
first class registered or certified airmail, express delivery, postage prepaid,
and return receipt requested, or sent by telefax, to the receiving party at the
address set forth below, or at such other address as the party may from time to
time designate:
Novel Biomedical, Inc.
13845 Industrial Park Blvd.
Plymouth, MN 55441
Attention: Jon Kagan, President
612-557-0920 (fax)
Neuro-Biometrix, Inc.
7995 E. Prentice Ave., Suite 110
Englewood, CO 80111
Attention: Dan Arenberg, Vice President
303-850-0671 (fax)
Notices shall be considered given on the date mailed or sent, if mailed or sent
in accordance with the provisions of the Paragraph above, subject to proof of
receipt by telecopy confirmation or return receipt.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-9-
<PAGE>
11. Remedies: No right or remedy conferred or reserved by the Agreement
--------
shall be exclusive of any other right or remedy herein or provided by law or in
equity. To the extent any provision of this Agreement may be inconsistent with
any remedy provided by law, this Agreement shall be controlling.
12. Force Majeure: Neither party shall be liable for failure to perform
-------------
or for any delay in performing any of its obligations hereunder other than as
provided for in hereof, when such failure or delay is caused, directly or
indirectly, by fire, flood, earthquake, riot, accident, explosion, strike, or
other labor disturbances (regardless of the unreasonableness of the degree of
the demand of labor), war, seizure under legal process orders or acts of any
government or branch or agency thereof, or acts of God.
13. Arbitration: Any and all disputes reserved for arbitration in this
-----------
Agreement which cannot be resolved through negotiations between the parties
shall be submitted to binding arbitration. If the parties fail to reach a
settlement of their dispute within fifteen (15) days after the earliest date
upon which one of the parties notified the other(s) of its desire to attempt to
resolve the dispute, then the dispute shall be promptly submitted to arbitration
by a single arbitrator who is a former state or federal judge. Unless the
parties agree otherwise, the arbitration shall be conducted by Judicial
Arbitration and Mediation Services JAMS) or any similar arbitration provider who
can provide a former judge to conduct such arbitration if JAMS is no longer in
existence. Venue shall be Colorado. The decision of the arbitrator shall be
final, nonappealable and binding upon the parties, and it may be entered in any
court of competent jurisdiction. The arbitrator shall be bound by the laws of
the state in which the arbitration is held and all rules relating to the
admissibility of evidence, including, without limitation, all relevant
privileges and the attorney work product doctrine. Discovery shall be permitted
in accordance with the rules and procedures of the forum state unless otherwise
agreed to by the parties or ordered by the arbitrator on the basis of strict
necessity adequately demonstrated by the party requesting an extension of time.
The arbitrator shall have the power to grant equitable relief including
attorney's fees and costs, where applicable under law. The arbitrator shall
issue a written opinion setting forth his or her decision and the reasons
therefor within thirty (30) days after the arbitration proceeding is concluded.
The obligation of the parties to submit any dispute arising under or related to
this Agreement to arbitration as provided in this Section shall survive the
expiration or earlier termination of this Agreement. Notwithstanding the
foregoing, either party may seek and obtain an injunction or other appropriate
relief from a court to preserve or protect intellectual property rights or to
preserve the status quo with respect to any matter pending conclusion of the
arbitration proceeding, but no such application to a court shall in any way be
permitted to stay or otherwise impede the progress of the arbitration
proceeding.
14. Failure to Perform: If Novel or Neuro-Biometrix fail to perform any
------------------
material obligation hereunder, the other party may, in addition to any other
remedy it may have at law or in equity, give notice of its intent to terminate
this Agreement for material breach, specifying the act or omission upon which
such notice is based. If the specified breach is not cured within sixty (60)
days of the date of such notice, the non-breaching party shall be entitled to
terminate this Agreement forthwith upon written notice effective on the date of
such notice.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-10-
<PAGE>
15. Termination Upon Notice: Either party may terminate this agreement
-----------------------
effective any time commencing six months after the effective date of this
Agreement by giving the other party at least [***] advance notice in writing.
Should Neuro-Biometrix institute a Technology Transfer pursuant to Article 2,
Section 9 of this Agreement, the completion of such technology transfer,
including the payment of any cancellation liability, will be treated as a
termination of this Agreement.
16. Termination/Cancellation Liability: Neuro-Biometrix will share with
----------------------------------
Novel a 6 month rolling forecast as per Article 1, Section 1 of this Agreement.
If Neuro-Biometrix terminates this Agreement because of Novel's failure to
perform and subsequent failure to cure a material breach, Neuro-Biometrix will
not have any cancellation liability. Cancellation of this Agreement by Neuro-
Biometrix for any other reason (including a technology transfer pursuant to
Article 2, Section 9) shall result in Neuro-Biometrix' liability for all
FINISHED PRODUCTS scheduled for delivery ("Firm Releases") per Article 1,
Section 1, and for the cost of all materials required to be purchased under
Article 1, Section 1.B (ii). Novel shall use reasonable efforts to minimize any
and all purchase order cancellation charges, bill-backs, and/or re-stocking
charges.
17. Bankruptcy: If either party is adjudged bankrupt, or becomes
----------
insolvent, or makes an assignment for the benefit of creditors, or if its
business is placed in the hands of a trustee, whether by voluntary action or
otherwise, the other party may, if permitted under applicable law, terminate
this Agreement immediately upon notice effective on the date of such notice.
18. Corrective/Preventive Action taken by Novel: If Corrective/Preventive
-------------------------------------------
Action is taken by Novel effecting the top-level drawing of a FINISHED PRODUCT,
Novel must notify Neuro-Biometrix of the action and keep Neuro-Biometrix up to
date on the progress of the implementation of such Corrective/Preventive Action.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-11-
<PAGE>
IN WITNESS HEREOF, Neuro-Biometrix, Inc. and Novel Biomedical, Inc.
executed this agreement on the respective dates indicated.
NEURO-BIOMETRIX, INC. NOVEL BIOMEDICAL, INC.
By: /s/ Daniel K. Arenburg By: /s/ Jonathan Kagar
------------------------------ ------------------------------
Printed: Daniel K. Arenburg Printed: Jonathan Kagar
------------------------- -------------------------
Title: Vice President Title: President
--------------------------- ---------------------------
Date: November 3, 1997 Date: November 24, 1997
---------------------------- ----------------------------
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
Exhibit A
NEURO-BIOMETRIX, INC.
OFFICERS
October 23, 1997
1. I. Kaufman Arenberg, MD, President
2. Daniel Arenberg, Vice President of Operations
3. Michael Arenberg, Vice President of Marketing
4. Christine Lemke, Vice President of Research and Development
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
EXHIBIT B
NEURO-BIOMETRIX, INC.
Standard Operating Procedure
for
Maintaining a Technical File for Compliance with the Medical Device Directive
Procedure No. Q-16
Revision Date: October 23, 1997
Approved: /s/ Daniel K. Arenburg
------------------------------
Training and Distribution Complete (Effective Date) 10/23/97
---------------------------
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
TECHNICAL FILE
A. PURPOSE
The purpose of this procedure is to establish the content of a technical
file as required by the Medical Device Directive.
B. SCOPE
This procedure applies to products distributed by NBI within the European
Union.
C. REFERENCE DOCUMENTS
Medical Device Directive NBI Quality Manual EN 46002
D. DEFINITIONS
Technical File - a compilation of information and data regarding the
construction, materials, processing, testing, labeling and packaging of a NBI
product distributed in Europe.
E. RESPONSIBILITY
The Quality Department is responsible for the maintenance of the technical
file.
F. PROCEDURE
1. The technical file has an index clearly stating the information
contained within.
2. The technical file shall reside at NBI and be available for review
by a Notified Body or a Competent Authority within the European Union
within five (5) working days from the date of request.
3. A copy of the technical file or summaries of the information
contained in the technical file may also reside in Europe with the
Authorized Representative.
4. Similar products (i.e., product family extensions) may be in the
same technical file.
5. The technical file contains the following information:
. Index
. Administrative information
. Product name
. Product classification per MDD
. Name and address of manufacturer
. Name and address of Authorized Representative
. EC Declaration of Conformity
. Power of Attorney Granted to Authorized Representative
. Photographs of the product
. Product description
. Brief product history
. Intended use
. Indications and contraindications
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
. Description of any accessories
. Description of other models in product family
. Labeling
. Instructions for use
. Operator's manual
. Service manual
. Package labels
. Patient information
. Specifications and product performance information (Maintained by
Turn-key)
. Materials list
. Specifications
. Risk analysis
. EN1441
. FMEA
. Complaint history
. Clinical experience
. Essential requirements per Annex 1 of the MDD
. List of standards
. Company procedures (Maintained by Turn-key)
. Work instructions (Maintained by Turn-key)
. Specifications (Maintained by Turn-key)
. Quality steps (Maintained by Turn-key)
. Biocompatibility
. Sterilization
. Cycle description
. Validation report
. Packaging Qualification
. Physical package qualification
. Shelf life information
. Product test data
. Bench testing
. Biostability
. Design qualification testing
. Design qualification plan summary
. Clinical report
. Manufacturing flow diagram (Maintained by Turn-key)
. Include all QA steps
. Bioburden testing
. Pyrogen testing
. Traceability
. Compatibility with other products intended to be connected with
this product.
. Declaration as to the content of a substance (drug) per Annex 1
section 7.4.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
. Summary of other regulatory approvals and registrations.
G. Attachments
None
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
EXHIBIT C
TECHNOLOGY TRANSFER
Scope:
- -----
To accomplish a transfer of the technology used by Novel to manufacture the
FINISHED PRODUCTS, as that term is defined in the Manufacturing and Supply
Agreement ("Supply Agreement") between Novel and Neuro-Biometrix dated November
1, 1997, to Neuro-Biometrix or a third-party designated by Neuro-Biometrix
("Transferee").
A technology transfer will be coordinated by Ricci Smelser, R&D engineer at
Novel, or Mr. Smelser's replacement. The technology transfer team will include:
Mr. Smelser, a manufacturing manager, a documentation specialist, a QA
department representative, assemblers and/or technicians who assemble the
FINISHED PRODUCTS, and other personnel as appropriate (e.g. manufacturing
engineer & equipment department personnel.
A technology Transfer will be "initiated" by Neuro-Biometrix when it
informs Novel of the name of the Transferee. Transferee must agree in writing
to keep all Novel Confidential Information confidential, not to use it for any
products other than the FINISHED PRODUCTS, and take reasonable steps to maintain
its confidentiality.
Commitments:
- -----------
1. Provide Transferee with current revisions of all Novel Component
master, Novel Device Master (processes) and SOP documents used in the
manufacture of the FINISHED PRODUCTS. Information found in Novel Component
masters not related to the FINISHED PRODUCTS may be deleted.
2. Provide Transferee with a copy of the FINISHED PRODUCTS Design History
File and Device Master Record. Novel will maintain Device History Records for
five years, per the MDD.
3. Construct and calibrate (per Novel standard practice) equipment and
fixtures per the options selected by Neuro-Biometrix.
4. Supply FINISHED PRODUCTS as ordered by Neuro-Biometrix, per the Supply
Agreement.
5. Train Transferee personnel at Novel (max. 2 people for 10 days each).
This training must begin within 14 days of Novel's indication to Neuro-Biometrix
that Novel is ready to begin training.
6. Transfer, install and setup all tooling and equipment to Transferee.
Novel's ability to supply FINISHED PRODUCTS will end at this point unless
tooling is duplicated for 2 site production.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
7. Train Transferee at Transferee's location (5 days max.). This
training must begin within 14 days of Novel's indication to Neuro-Biometrix that
Novel is ready to begin training.
Fees and Terms:
- --------------
1. Fees: [***] Fee for technology transfer. [***] to be paid at the
----
completion of: steps 1,2, 5, 6 & 7. All commitments will be complete within 90
days of initiation of the Technology Transfer, unless optional custom equipment
is required by Neuro-Biometrix or the Transferee. If optional custom equipment
is required, all commitments will be complete within 150 days of initiation of
the Technology Transfer. If the Transferee is outside of the US, there will be
an additional fee to be agreed upon by the parties.
2. Estimated Expenses/Required Equipment: [***]. Expenses are
-------------------------------------
billed as incurred on a monthly basis (net 30 days). Estimate does not include
any client or Transferee facility expenses. Estimate does not include costs of
duplicating FINISHED PRODUCT tooling (if manufacturing is continued at Novel
following completion of Commitment 7). Purchase of Air Torch [***]. Estimate
does not include any standard capital equipment (e.g. microscope, pouch sealer).
3. Estimated Optional Custom Equipment Costs: [***]. Molding Press
-----------------------------------------
[***], Fusing Machine [***]. Custom Equipment terms are 50% in advance and 50%
billed upon shipment. Prices are FOB Novel. Crating and shipping charges are not
included.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
September 30, 1999
BY FACSIMILE
Jon Kagan, President
Novel Biomedical, Inc.
13845 Industrial Park Blvd.
Plymouth, MN 55441
Re: Assignment of Manufacturing and Supply Agreement
Dear Mr. Kagan:
This letter is in reference to the Manufacturing and Supply Agreement
entered into by and between IntraEAR, Inc., formerly Neuro-Biometrix, Inc.
("IntraEAR") and Novel Biomedical, Inc. ("Novel") effective November 1, 1997
("Supply Agreement").
Durect Corporation ("Durect") and IntraEAR have executed an Asset Purchase
Agreement dated September 24, 1999 ("Asset Purchase Agreement") for the
acquisition by Durect of substantially all of the assets and business of
IntraEAR ("Acquisition"). Under the Asset Purchase Agreement, IntraEAR has
agreed to assign to Durect and Durect has agreed to take assignment of the
Supply Agreement subject to Novel's written consent to such assignment.
This letter confirms that Novel consents to IntraEAR's assignment of the
Supply Agreement to Durect upon the closing of the Acquisition (currently
anticipated to be October 1, 1999) subject to the following conditions:
1. Payment shall have been received by Novel for all outstanding amounts
due and payable by IntraEAR under the Supply Agreement as of October 1, 1999;
2. Durect shall assume the obligations for the purchase order in effect
as of the date of this letter; and
3. Durect shall render payments under the Agreement within 30 days after
the receipt of Novel's invoice. Durect shall be entitled to a reduction of [***]
off the amount due for payments made within 10 days of the receipt of Novel's
invoice.
This consent by Novel shall be effective upon the receipt by Novel of
payment for all outstanding amounts due and payable by IntraEAR under the Supply
Agreement as of October 1, 1999.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
Please sign below to indicate Novel's acceptance of the foregoing and fax a
copy back to my attention at (408) 777-3577.
Please feel free to call me if you have any questions (408) 777-1419.
Durect looks forward to working with Novel.
Very truly yours,
James E. Brown
Chief Executive Officer
AGREED TO AND ACCEPTED
NOVEL BIOMEDICAL, INC.
By: __________________________
Jon Kagan, President
Dated: ________________________
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
<PAGE>
EXHIBIT 10.10
MASTER SERVICES AGREEMENT
This Master Services Agreement ("Agreement") is made between Durect
Corporation, which has a place of business at 10240 Bubb Road, Cupertino,
California 95014 (hereinafter "Sponsor"), and Quintiles, Inc., a North Carolina
corporation having its principal place of business at 1007 Slater Road, Chelsea
Place, Durham, North Carolina 27703 (hereinafter "Quintiles"). When signed by
both parties, this Agreement will set forth the terms and conditions under which
Quintiles agrees to provide certain services to Sponsor as set forth herein.
Recitals:
A. Sponsor is in the business of developing, manufacturing and/or
distributing pharmaceutical products, medical devices and/or biotechnology
products. Quintiles is in the business of providing clinical trial services,
research, and other services for the pharmaceutical, medical device and
biotechnology industries.
B. Sponsor and Quintiles desire to enter into this Agreement to provide
the terms and conditions upon which Sponsor may engage Quintiles from time-to-
time to provide services for individual studies or projects by executing
individual Work Orders (as defined below) specifying the details of the services
and the related terms and conditions.
Agreement:
1.0 Scope of the Agreement; Work Orders; Nature of Services.
(a) Scope of Agreement. As a "master" form of contract, this Agreement
------------------
allows the parties to contract for multiple projects through the issuance of
multiple Work Orders (as discussed in Section 1(b) below), without having to
re-negotiate the basic terms and conditions contained herein. This Agreement
covers the provision of services by Quintiles and Quintiles' corporate
affiliates (see Section 16) and, accordingly, this Agreement represents a
vehicle by which Sponsor can efficiently contract with Quintiles and its
corporate affiliates for a broad range of services.
(b) Work Orders. The specific details of each project under this Agreement
-----------
(each "Project") shall be separately negotiated and specified in writing on
terms and in a form acceptable to the parties (each such writing, a "Work
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
Order"). A sample Work Order is attached hereto as Exhibit A. Each Work Order
will include, as appropriate, the scope of work, time line, budget and
payment schedule. Each Work Order shall be subject to all of the terms and
conditions of this Agreement, in addition to the specific details set forth
in the Work Order. To the extent any terms or provisions of a Work Order
conflict with the terms and provisions of this Agreement, the terms and
provisions of this Agreement shall control, except to the extent that the
applicable Work Order expressly and specifically states an intent to
supersede the Agreement on a specific matter.
(c) Nature of Services. The services covered by this Agreement may include
------------------
strategic planning, expert consultation, clinical trial services, statistical
programming and analysis, data processing, data management, regulatory,
clerical, project management, central laboratory services, preclinical
services, pharmaceutical sciences services, medical device services, and
other research and development services requested by Sponsor and agreed to by
Quintiles as set forth in the relevant Work Order (collectively, the
"Services"). Quintiles and Sponsor, where appropriate, shall cooperate in the
completion of a Transfer of Obligations Form in conjunction with the relevant
Work Order. Any responsibilities not specifically transferred in the Transfer
of Obligations Form shall remain the regulatory responsibility of Sponsor.
The Transfer of Obligations Form will be filed with the Food and Drug
Administration ("FDA") by Sponsor where appropriate, or as required by law or
regulation.
2.0 Payment of Fees and Expenses. Sponsor will pay Quintiles for fees,
expenses and pass-through costs in accordance with each Work Order. Sponsor
agrees that the budget and payment schedule for each Work Order will be
structured in an effort to maintain cash neutrality for Quintiles (with respect
to the payment of professional fees, pass-through costs and otherwise). Upon
execution of a Work Order, Sponsor shall pay Quintiles an agreed upon percentage
of each budget as set forth in such Work Order as an advance against the total
compensation value of the budget. Sponsor will draw from these funds in order
to pay for services and related costs and expenses consistent with the terms of
the Work Order. In developing the payment schedule, the parties, as one of the
considerations, will take into account the timing of work performed by Quintiles
and payments received from Sponsor. Unless otherwise agreed in a particular
Work Order, the following shall apply: (a) Quintiles will invoice Sponsor
monthly for the fees, expenses and pass-through costs relating to the Project;
and, (b) Sponsor shall pay each invoice within [* * ] of the
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
date of the invoice. If any portion of an invoice is disputed, then Sponsor
shall pay the undisputed amounts as set forth in the preceding sentence and the
parties shall use good faith efforts to reconcile the disputed amount as soon as
practicable. Sponsor shall pay Quintiles interest in an amount equal to [ * **]
(or the maximum lesser amount permitted by law) of all undisputed amounts owing
hereunder and not paid within thirty (30) days of the date of the invoice.
3.0 Term. This Agreement shall commence on the date of execution and shall
continue until terminated by either party in accordance with Section 15 below.
4.0 Change Orders. Any material change in the details of a Work Order or the
assumptions upon which the Work Order is based (including, but not limited to,
changes in fees, expenses and pass-through costs, an agreed starting date for a
Project or suspension of the Project by Sponsor) may require changes in the
budget and/or time lines, and shall require a written amendment to the Work
Order (a "Change Order"). Each Change Order shall detail the requested changes
to the applicable task, responsibility, duty, budget, time line or other matter.
The Change Order will become effective upon the execution of the Change Order by
both parties, and Quintiles will be given a reasonable period of time within
which to implement the changes. Both parties agree to act in good faith and
promptly when considering a Change Order requested by the other party. Without
limiting the foregoing, Sponsor agrees that it will not unreasonably withhold
approval of a Change Order, even if it involves a fixed price contract, if the
proposed changes in budgets or time lines result from, among other appropriate
reasons, forces outside the reasonable control of Quintiles or changes in the
assumptions upon which the initial budget or time lines were based. Quintiles
reserves the right to postpone effecting material changes in the Project's scope
until such time as the parties agree to and execute the corresponding Change
Order. For any Change Order that affects the scope of the regulatory obligations
that have been transferred to Quintiles, Quintiles and Sponsor shall execute a
corresponding amendment to the Transfer of Obligations Form. Such amendment
shall be filed by Sponsor where appropriate, or as required by law or
regulation.
5.0 Confidentiality. It is understood that during the course of this Agreement,
Quintiles and its employees may be exposed to data and information which is
confidential and proprietary to Sponsor. All such data and information
(hereinafter "Sponsor Confidential Information") written or verbal, tangible or
intangible, made available, disclosed, or otherwise made known to
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-3-
<PAGE>
Quintiles and its employees as a result of Services under this Agreement shall
be considered confidential and shall be considered the sole property of Sponsor.
All information regarding Quintiles' pricing and Quintiles' Property (as defined
in Section 6.0 below), disclosed by Quintiles to Sponsor in connection with this
Agreement is proprietary, confidential information belonging to Quintiles (the
"Quintiles Confidential Information", and together with the Sponsor Confidential
Information, the "Confidential Information"). The Confidential Information shall
be used by the receiving party and its employees only for purposes of performing
the receiving party's obligations hereunder. Each party agrees that it will not
reveal, publish or otherwise disclose the Confidential Information of the other
party to any third party without the prior written consent of the disclosing
party. Each party agrees that it will not disclose the terms of this Agreement
or any Work Order to any third party without the written consent of the other
party, which shall not unreasonably be withheld. These obligations of
confidentiality and nondisclosure shall remain in effect for a period of [* * *]
after the termination of the applicable Work Order.
The foregoing obligations shall not apply to Confidential Information to the
extent that it: (a) is or becomes generally available to the public other than
as a result of a disclosure by the receiving party; (b) becomes available to
the receiving party on a non-confidential basis from a source which is not
prohibited from disclosing such information; (c) was developed independently
of any disclosure by the disclosing party or was known to the receiving party
prior to its receipt from the disclosing party, as shown by contemporaneous
written evidence; or (d) is required by law or regulation to be disclosed.
6.0 Ownership and Inventions. All data and information generated or derived by
Quintiles as the result of services performed by Quintiles under this Agreement
shall be and remain the exclusive property of Sponsor. Any inventions that may
evolve from the data and information described above or as the result of
services performed by Quintiles under this Agreement shall belong to Sponsor and
Quintiles agrees to assign its rights in all such inventions and/or related
patents to Sponsor. Notwithstanding the foregoing, Sponsor acknowledges that
Quintiles possesses certain inventions, processes, know-how, trade secrets,
improvements, other intellectual properties and other assets, including but not
limited to analytical methods, procedures and techniques, procedure manuals,
personnel data, financial information, computer technical expertise and
software, which have been independently developed by Quintiles and which
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
relate to its business or operations (collectively "Quintiles' Property").
Sponsor and Quintiles agree that any Quintiles' Property or improvements thereto
which are used, improved, modified or developed by Quintiles under or during the
term of this Agreement are the sole and exclusive property of Quintiles.
At the completion of the Services by Quintiles, all materials, information and
all other data owned by Sponsor, regardless of the method of storage or
retrieval, shall be delivered to Sponsor in such form as is then currently in
the possession of Quintiles, subject to the payment obligations set forth in
Paragraph 2 herein. Alternatively, at Sponsor's written request, such materials
and data may be retained by Quintiles for Sponsor for a period of [* * ], or
disposed of pursuant to the written directions of Sponsor. [ * * * ] Quintiles,
however, reserves the right to retain, at its own cost and subject to the
confidentiality provisions herein, one copy of all materials provided to Sponsor
as the result of the Services, to be used to satisfy regulatory requirements or
to resolve disputes regarding the Services. Nothing in this Agreement shall be
construed to transfer from Sponsor to Quintiles any FDA or regulatory record-
keeping requirements unless such transfer is specifically provided for in the
applicable Transfer of Obligations Form.
7.0 Independent Contractor Relationship. For the purposes of this Agreement,
the parties hereto are independent contractors and nothing contained in this
Agreement shall be construed to place them in the relationship of partners,
principal and agent, employer/employee or joint venturers. Neither party shall
have the power or right to bind or obligate the other party, nor shall it hold
itself out as having such authority.
8.0 Regulatory Compliance; Inspections. Quintiles agrees that its Services will
be conducted in compliance with all applicable laws, rules and regulations,
including but not limited to the Federal Food, Drug and Cosmetic Act and the
regulations promulgated pursuant thereto, and with the standard of care
customary in the contract research organization industry. Quintiles certifies
that it has not been debarred under the Generic Drug Enforcement Act and that it
will not knowingly employ any person or entity that has been so debarred to
perform any Services under this Agreement. Sponsor represents and certifies
that it will not require Quintiles to perform any assignments or tasks in a
manner that would violate any applicable law or regulation. Sponsor further
represents that it will cooperate with Quintiles in taking any actions that
Quintiles reasonably believes are necessary to comply with the regulatory
obligations that have been transferred to Quintiles.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
Each party acknowledges that the other party may respond independently to
any regulatory correspondence or inquiry in which such party or its affiliates
is named. Each party, however, shall: a) notify the other party promptly of
any FDA or other governmental or regulatory inspection or inquiry concerning any
study or Project of Sponsor in which Quintiles is providing Services, including,
but not limited to, inspections of investigational sites or laboratories; b)
forward to the other party copies of any correspondence from any regulatory or
governmental agency relating to such a study or Project, including, but not
limited to, Form FD-483 notices, and FDA refusal to file, rejection or warning
letters, even if they do not specifically mention the other party; and, c)
obtain the written consent of the other party, which will not unreasonably be
withheld, before referring to the other party or any of its affiliates in any
regulatory correspondence. Where reasonably practicable, each party will be
given the opportunity to have a representative present during an FDA or
regulatory inspection. Each party, however, acknowledges that it may not direct
the manner in which the other party fulfills its obligations to permit
inspection by governmental entities.
Each party agrees that, during an inspection by the FDA or other regulatory
authority concerning any study or Project of Sponsor in which Quintiles is
providing Services, it will not disclose information and materials that are not
required to be disclosed to such agency, without the prior consent of the other
party, which shall not unreasonably be withheld. Such information and
materials includes, but are not limited to, the following: 1) financial data
and pricing data (including, but not limited to, the Budget and Payment sections
of the Work Order); 2) sales data (other than shipment data); and, 3)
personnel data (other than data as to qualification of technical and
professional persons performing functions subject to regulatory requirements).
During the term of this Agreement, Quintiles will permit Sponsor's
representatives (unless such representatives are competitors of Quintiles) to
examine or audit the work performed hereunder and the facilities at which the
work is conducted upon reasonable advance notice during regular business hours
to determine that the Project assignment is being conducted in accordance with
the agreed task and that the facilities are adequate. Unless the [ * * * ]
9.0 Relationship with Investigators. If a particular Work Order obligates
Quintiles to contract with investigators or investigative sites (collectively,
"Investigators") then any such contract shall be on a form mutually acceptable
to Quintiles and
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
Sponsor. If an Investigator requests any material changes to such form,
Quintiles shall submit the proposed change to Sponsor, and Sponsor shall
promptly review, comment on and/or approve such proposed changes. If Sponsor
approves a form Investigator Agreement, or any changes to the form, that differ
from the terms of this Agreement or a Work Order (including, but not limited to,
allowing an Investigator to publish results or data that Quintiles is prohibited
from revealing), then Quintiles shall have no liability for any such approved
provisions or changes. The parties acknowledge and agree that Investigators
shall not be considered the employees, agents, or subcontractors of Quintiles or
Sponsor, and that Investigators shall exercise their own independent medical
judgment. Quintiles' responsibilities with respect to Investigators shall be
limited to those responsibilities specifically set forth in this Agreement and
the applicable Work Order.
If Quintiles will be paying Investigators on behalf of Sponsor, the parties
will agree in the applicable Work Orders as to a schedule of amounts to be paid
to Investigators. Sponsor acknowledges and agrees Quintiles will only pay
Investigators from advances or pre-payments received from Sponsor for
Investigators' services, and that Quintiles will not make payments to
Investigators prior to receipt of sufficient funds from Sponsor. Sponsor
acknowledges and agrees that Quintiles will not be responsible for delays in a
study or Project to the extent that such delays are caused by Sponsor's failure
to make adequate pre-payment for Investigators' services. Sponsor further
acknowledges and agrees that payments for Investigators' services are pass-
through payments to third parties and are separate from payments for Quintiles'
Services. Sponsor agrees that it will not withhold Investigator payments except
to the extent that it has reasonable questions about the services performed by a
particular Investigator.
10.0 Conflict of Agreements. Quintiles represents to Sponsor that it is not a
party to any agreement which would prevent it from fulfilling its obligations
under this Agreement and that during the term of this Agreement, Quintiles
agrees that it will not enter into any agreement to provide services which would
in any way prevent it from providing the services contemplated under this
Agreement. Sponsor agrees that it will not enter into an agreement with a third
party that would alter or affect the regulatory obligations delegated to
Quintiles in any study or Project without the written consent of Quintiles,
which will not be unreasonably withheld.
11.0 Publication. Project results may not be published or referred to, in
whole or in part, by Quintiles or its affiliates
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
without the prior expressed written consent of Sponsor. Neither party will use
the other party's name in connection with any publication or promotion without
the other party's prior, written consent.
12.0 Limitation of Liability. Neither party, nor its affiliates, nor any of its
or their respective directors, officers, employees or agents shall have any
liability of any type (including, but not limited to, contract, negligence, and
tort liability), for any special, incidental, indirect or consequential damages,
including, but not limited to the loss of opportunity, loss of use, or loss of
revenue or profit, in connection with or arising out of this Agreement, any Work
Order, or the Services contemplated hereunder, even if such damages may have
been foreseeable to such party. In addition, in no event shall the collective,
aggregate liability (including, but not limited to, contract, negligence and
tort liability) of Quintiles and its affiliates and its and their respective
directors, officers, employees and agents under this Agreement or any Work Order
hereunder exceed the amount of fees actually received by Quintiles from Sponsor
for the assignment or task from which such liability arose.
13.0 Indemnification. Sponsor shall indemnify, defend and hold harmless
Quintiles and its affiliates, and its and their directors, officers, employees
and agents (each, a "Quintiles Indemnified Party"), from and against any and all
losses, damages, liabilities, reasonable attorney fees, court costs, and
expenses (collectively "Losses") resulting or arising from any third-party
claims, actions, proceedings, investigations or litigation relating to or
arising from or in connection with this Agreement, any Work Order, or the
Services contemplated herein (including, without limitation, any Losses arising
from or in connection with any study, test, device, product or potential product
to which this Agreement or any Work Order relates), except to the extent such
Losses are determined to have resulted solely from the negligence or intentional
misconduct of the Quintiles Indemnified Party seeking indemnity hereunder, in
which event Quintiles shall indemnify, defend and hold harmless Sponsor and its
Affiliates, and its and their directors, officers, employees, and agents
("Durect Indemnified Parties") from and against any such Losses.
14.0 Indemnification Procedure. Each Indemnified Party shall give the
indemnifying party prompt notice of any such claim or lawsuit (including a copy
thereof) served upon it and shall fully cooperate with the Indemnifying Party
and its legal representatives in the investigation of any matter the subject of
indemnification. The Indemnified Party shall not unreasonably
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
withhold its approval of the settlement of any claim, liability, or action
covered by this Indemnification provision.
15.0 Termination. This Agreement or any Work Orders may be terminated without
cause by Sponsor or by Quintiles at any time during the term of the Agreement on
[ * * * ] prior written notice to Quintiles or Sponsor, as appropriate. Either
party may terminate this Agreement or any Work Order for material breach upon
[ * * * ] written notice specifying the nature of the breach, if such breach has
not been substantially cured within the [ * * * ] period. In the event that
Quintiles or Sponsor determines, in its sole discretion, that the continued
performance of the Services contemplated by this Agreement would constitute a
potential or actual violation of regulatory or scientific standards of
integrity, such Party may terminate this Agreement or the applicable Work Order,
by giving written notice stating the effective date (which may be less than
[ * * * ] from the notice date) of such termination. Any written termination
notice shall identify the specific Work Order or Work Orders that are being
terminated.
In the event this Agreement or any Work Order is terminated, Sponsor shall pay
Quintiles for all Services performed in accordance with the applicable Work
Order(s) hereunder, and reimburse Quintiles for all costs and expenses incurred
in performing those Services. If payments in a terminated Work Order are
milestone-based, and the Work Order is terminated after costs have been incurred
by Quintiles toward achieving a milestone, but that milestone has not yet been
completed, Sponsor will pay Quintiles' standard fees for actual work performed
toward that milestone up to the date of termination. In the event this Agreement
is terminated and Quintiles is determined to have breached this Agreement,
Sponsor may deduct from its payment obligations amounts directly related to the
damages suffered by Sponsor as a result of such breach. Upon receipt of a
termination notice, Quintiles shall cease performing any work not necessary for
the orderly close out of the affected Project or for the fulfillment of
regulatory requirements. Sponsor shall pay for all actual costs, including time
spent by Quintiles personnel (which shall be billed at Quintiles' standard rates
in effect as of the date of the termination notice), incurred to complete
activities associated with the termination and close out of affected Projects,
including the fulfillment of any regulatory requirements.
Upon the termination of this Agreement or any Work Order, Quintiles shall
deliver to Sponsor all data and materials provided by Sponsor to Quintiles for
the conduct of Services under the impacted Project(s). All statistical data,
all
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-9-
<PAGE>
statistical reports, all data entries and any other documentation produced as
the result of Services performed by Quintiles under the impacted Project(s)
shall be delivered to Sponsor upon payment to Quintiles for all Services
completed in accordance with the applicable Work Order.
16.0 Relationship with Affiliates; Request for Personnel. Sponsor agrees that
Quintiles may use the Services of its corporate affiliates to fulfill Quintiles'
obligations under this Agreement and any Work Order. Any affiliate so used
shall be subject to all of the terms and conditions applicable to Quintiles
under this Agreement or any Work Order, and entitled to all rights and
protections afforded Quintiles under this Agreement and any Work Order.
Quintiles agrees that Sponsor's affiliates may use the services of Quintiles
(and its affiliates) under this Agreement. In such event, such Sponsor's
affiliates shall be bound by all the terms and conditions of this Agreement and
any Work Order and entitled to all rights and protections afforded Sponsor under
this Agreement and any Work Order. Any such affiliate of Sponsor or Quintiles
may execute a Work Order directly. The term "affiliate" shall mean all entities
controlling, controlled by or under common control with Sponsor or Quintiles, as
the case may be. The term "control" shall mean the ability to vote fifty
percent (50%) or more of the voting securities of any entity or otherwise having
the ability to influence and direct the polices and direction of an entity. In
addition, Quintiles shall use its reasonable efforts to accommodate Sponsor's
requests for specific personnel to be assigned to specific tasks and/or
projects.
17.0 Cooperation; Sponsor Delays; Disclosure of Hazards. Sponsor shall forward
to Quintiles in a timely manner all data and information in Sponsor's possession
or control necessary for Quintiles to conduct the Services. Quintiles shall not
be liable to Sponsor nor be deemed to have breached this Agreement or any Work
Order for errors, delays or other consequences arising from Sponsor's failure to
timely provide documents, materials or information or to otherwise cooperate
with Quintiles in order for Quintiles to timely and properly perform its
obligations. Sponsor acknowledges that, if it materially delays or suspends
performance of the Services, then the personnel and/or resources originally
allocated to the Project may be re-allocated, and Quintiles will not be
responsible for delays due to required re-staffing or re-allocation of
resources. Sponsor shall provide Quintiles with all information available to it
regarding known or potential hazards associated with the use of any substances
supplied to Quintiles by Sponsor and Sponsor shall comply with all current
legislation and regulations concerning the shipment of substances by the land,
sea or air.
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-10-
<PAGE>
18.0 Force Majeure. In the event either party shall be delayed or hindered in
or prevented from the performance of any act required, hereunder by reasons of
strike, lockouts, labor troubles, inability to procure materials or services,
failure of power or restrictive government or judicial orders, or decrees,
riots, insurrection, war, Acts of God, inclement weather or other reason or
cause beyond that party's control, then performance of such act (except for the
payment of money owed) shall be excused for the period of such delay.
19.0 Notices and Deliveries. Any notice required or permitted to be given
hereunder by either party hereunder shall be in writing and shall be deemed
given on the date received if delivered personally or by a reputable overnight
delivery service, or three days after the date postmarked if sent by registered
or certified mail, return receipt requested, postage prepaid to the following
addresses:
If to Quintiles: If to Sponsor:
Paula Brown Stafford Jean Liu
Executive Vice President Vice President and General Counsel
Quintiles, Inc. Durect Corporation
1007 Slater Road 10240 Bubb Road
Chelsea Place Cupertino, California 95104
Durham, North Carolina 27703
With a copy to:
Quintiles Transnational Legal Department
P.O. Box 13979
Research Triangle Park, North Carolina
27709-3979
Attention: John Russell
If Sponsor delivers, ships, or mails materials or documents to Quintiles, or
requests that Quintiles deliver, ship, or mail materials or documents to Sponsor
or to third parties, then the expense and risk of loss for such deliveries,
shipments, or mailings shall be borne by Sponsor. Quintiles disclaims any
liability for the actions or omissions of third-party delivery services or
carriers.
20.0 Insurance. Each party will maintain, for the duration of this Agreement,
insurance in an amount reasonably adequate to
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
cover its obligations hereunder, and, upon request, each party will provide to
the other party a certificate of insurance showing that such insurance is in
place.
21.0 Foreign Currency Exchange. For all Work Orders in which Quintiles will
earn fees or incur expenses in excess of one million U.S. Dollars in a currency
differing from the invoice and payment currency, a foreign currency exchange
provision will be included in the Work Order.
22.0 [ * * * ]. Where services in a Work Order are provided by Quintiles
[ * * *].
23.0 Assignment. Except as stated above in Section 16, neither party may
assign any of its rights or obligations under this Agreement to any party
without the express, written consent of the other party.
24.0 Enforceability. This Agreement shall be construed, governed, interpreted,
and applied in accordance with the laws of the State of New York, exclusive of
its conflict of law provisions. The failure to enforce any right or provision
herein shall not constitute a waiver of that right or provision. If any
provisions herein are found to be unenforceable on the grounds that they are
overly broad or in conflict with applicable laws, it is the intent of the
parties that such provisions be replaced, reformed or narrowed so that their
original business purpose can be accomplished to the extent permitted by law,
and that the remaining provisions shall not in any way be affected or impaired
thereby.
25.0 Survival. The rights and obligations of Sponsor and Quintiles, which by
intent or meaning have validity beyond such termination (including, but not
limited to, rights with respect to product-related inventions, confidentiality,
discoveries and improvements, indemnification and liability limitations) shall
survive the termination of this Agreement or any Work Order.
26.0 Arbitration. Any controversy or claim arising out of or relating to this
Agreement or the breach thereof shall be settled by arbitration administered by
the American Arbitration Association ("AAA") under its Commercial Arbitration
Rules, and judgment on the award rendered by the arbitrator shall be binding and
may be entered in any court having jurisdiction thereof. Such arbitration shall
be filed and conducted at the office of the AAA closest to the Quintiles office
having responsibility for the Project if filed for by Sponsor and the AAA office
in Santa Clara County, California, if filed for by Quintiles, and shall be
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-12-
<PAGE>
conducted in English by one arbitrator mutually acceptable to the parties
selected in accordance with AAA Rules.
27.0 Entire Agreement and Modification. This Agreement contains the entire
understandings of the parties with respect to the subject matter herein, and
supersedes all previous agreements (oral and written), negotiations and
discussions. Any modifications to the provisions herein must be in writing and
signed by the parties.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
through their duly authorized officers on the date(s) set forth below.
ACKNOWLEDGED, ACCEPTED AND AGREED TO:
Quintiles, Inc. Durect Corporation
By: /s/ Paula Brown Stafford By: /s/ James E. Brown
Print Name: Paula Brown Stafford Print Name: James E. Brown
Title: Executive Vice President Title: President
and Chief Executive Officer
Date: October 19, 1999 Date: November 1, 1999
FEDERAL ID # 56-1323952
EXHIBIT A
SAMPLE WORK ORDER
WORK ORDER
This Work Order ("Work Order") is between Durect Corporation ("Sponsor") and
Quintiles ____________ ("Quintiles") and relates to the Master Services
Agreement dated the ___ day of _________, 19__, (the "Master Agreement").
Pursuant to the Master Agreement, Quintiles has agreed to perform certain
services in
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
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<PAGE>
accordance with written work orders, such as this one, entered into from time-
to-time describing such services.
The parties hereby agree as follows:
1. Work Order. This document constitutes a "Work Order" under the Master
Agreement and this Work Order and the services contemplated herein are subject
to the terms and provisions of the Master Agreement.
2. Services and Payment of Fees and Expenses. The specific services
contemplated by this Work Order (the "Services") and the related payment terms
and obligations are set forth on the following attachments, which are
incorporated herein by reference:
SCOPE OF WORK ATTACHMENT 1
PROJECT BUDGET ATTACHMENT 2
TIMELINE ATTACHMENT 3
PAYMENT SCHEDULE ATTACHMENT 4
TRANSFER OF OBLIGATIONS ATTACHMENT 5
3. Term. The term of this Work Order shall commence on the date of execution
and shall continue until the services described in Attachment 1 are completed,
unless this Work Order is terminated in accordance with the Master Agreement.
4. Affiliates and Subcontractors. Sponsor agrees that Quintiles may use the
services of its corporate affiliates to fulfill Quintiles' obligations under
this Work Order. Any such affiliates shall be bound by all the terms and
conditions of, and be entitled to all rights and protections afforded under, the
Master Agreement and this Work Order. Any subcontractors or consultants (other
than Quintiles' affiliates) that will be used by Quintiles in performing the
Services are listed below:
5. Amendments. No modification, amendment, or waiver of this Work Order shall
be effective unless in writing and duly executed and delivered by each party to
the other.
ACKNOWLEDGED, ACCEPTED AND AGREED TO:
Quintiles ____________ Durect Corporation
By: By:
Title: Title:
Date: Date:
* Material has been omitted pursuant to a request for confidential treatment,
and such material has been filed separately with the SEC.
-14-
<PAGE>
EXHIBIT 10.11
MODIFIED NET SINGLE TENANT
LEASE AGREEMENT
1. PARTIES
-------
THIS LEASE, dated February 18, 1999, is entered into by and between DE ANZA
ENTERPRISES, LTD., Joint Venture of HOVER FAMILY TRUST 25%, SARAH T. BEHEL,
JULIA G. HOVER SMOOT, DAVID H. HOVER & TERESA KOROL each as to 6.25% and JOHNSON
FAMILY TRUST as to 50%, all as tenants in common, whose address is 101 CHURCH
STREET, #12, LOS GATOS, CALIFORNIA (hereinafter referred to as "Landlord") and
DURECT CORPORATION, a Delaware Corporation, whose address is 10240 Bubb Road,
Cupertino, CA 95014 (hereinafter referred to as "Tenant"), and shall be
effective on the date set forth below.
2. DEFINITIONS
-----------
As used in this Lease:
A. Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, upon the terms, conditions and covenants hereinafter set forth, those
certain Premises (hereinafter referred to as the "Premises"), consisting of that
certain real property, as shown in the Official Records of Santa Clara County,
recorded at Book 245 Page(s) 55 Maps, on October 17, 1968, together with all
buildings and, improvements thereon and appurtenances thereto, consisting of one
(1) building on approximately 74,448 square feet and containing a total building
are of 30,149 square feet, commonly known as 10240 Bubb Road in the City of
Cupertino, California, all as more particularly shown on Exhibit "A" attached
hereto and made a part hereof.
B. There terms "Premises" shall mean all areas and facilities at the
same address including, without limitation, parking areas, access and perimeter
roads, sidewalks, landscaped area, trash disposal facilities, and similar area
facilities.
3. TERM
----
A. The term of this Lease shall be a period of Five (5) years and -0-
months, commencing on the Effective Date, as that term is defined in that
certain Termination Agreement Regarding Norian Master Lease and Durect Sublease
entered by and between Norian Corporation, Tenant and Landlord dated February
18, 1999, unless sooner terminated as provided herein, terminating on the end of
the sixtieth full calendar month after the Commencement Date.
Tenant agrees that if Landlord, for any reasons whatsoever, is unable to
deliver possession of the Premises on the commencement date set out in the
foregoing Subparagraph A, Landlord shall not be liable to Tenant for any loss or
damage therefrom, nor shall this Lease be void or voidable; but in such event
the commencement, termination and all other dates of this Lease shall be
extended to conform to the time of Landlord's tender of possession of the
<PAGE>
Premises to Tenant, and Tenant shall not be obligated to pay rent or other sums
due Landlord until possession of the Premises is tendered to Tenant.
4. RENT AND EXPENSES
-----------------
A. Tenant shall pay in lawful money of the United States to Landlord for
each month of the term of this Lease, rent in the amount set forth below in
advance on the first day of each calendar month, except as otherwise provided
herein, without abatement, deduction, offset, prior notice or demand and also
increasing as scheduled.
Month Rate sq. ft.
----- ------------
01-12 $2.10
13-24 $2.17
25-36 $2.19
37-48 $2.21
49-60 $2.23
B. Landlord hereby acknowledges receipt of Tenant's payment of Rent for
period first month of the Lease term in the amount of $63,312.90, Prorated Real
Property Taxes from February 1, 1999 to June 30, 1999 in the amount of $5,942.45
and Security Deposit of $75,000.00.
C. If the Commencement Date is not the first (1st) day of a month, or if
the termination date is not the last day of a month, a prorated monthly
installment based on a thirty (30) day month shall be paid at the then current
rate for the fractional month during which the leases commence or terminates.
5. LATE PAYMENT CHARGES
--------------------
Tenant acknowledges that late payment by Tenant to Landlord of rent and
other charges provided for under this Lease will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of such cost being extremely
difficult and impracticable to fix. Such costs include, without limitation,
processing and accounting charges, and late charges that may be imposed on
Landlord by the terms of any encumbrance and notes secured by any encumbrance
covering the Premises or late charges and penalties by virtue of late payment of
taxes due on the Premises. Therefore, if any installment of rent or any other
charge due from Tenant is not received by Landlord in five (5) days of the date
due, Tenant shall pay to Landlord an additional sum of $1,000.00 as a late
charge for every month that the rent or other charge remains unpaid. The
parties agree that this late charge represents a fair and reasonable estimate of
the cost that Landlord will incur by reason of the late payment by Tenant.
Acceptance of any late charge shall not constitute a waiver of Tenant's default
with respect to the overdue amount, nor prevent Landlord from exercising any of
the rights and remedies available to Landlord.
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<PAGE>
6. SECURITY DEPOSIT
----------------
Tenant has deposited with Landlord the sum of SEVENTY FIVE THOUSAND AND
NO/100 DOLLARS ($75,000.00) as a security for the full and faithful performance
of ever portion of this Lease to be performed by Tenant. If Tenant defaults
(beyond any applicable cure period) with respect to any provision of this Lease,
including but not limited to the provisions relating to the payment of rent and
other sums due or the repair of damage to the Premises caused by Tenant,
Landlord may use, apply, or retain all or any part of this security deposit for
the payment of any rent or any other sum in default, the repair of such damage
to the Premises or the payment of any amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reasons of Tenant's
default to the full extent permitted by law. If any portion of said deposit is
so used or applied, Tenant shall within ten (10) days after written demand
therefor, deposit cash with Landlord in the amount sufficient to restore the
security deposit to its original amount, and Tenant's failure to do so shall be
a material breach of this Lease. Landlord shall not be required to keep this
security deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to Tenant within thirty (30)
days of termination of the Lease term except for amounts that Landlord has
deducted therefrom that are needed by Landlord to cure defaults of Tenant under
this Lease or compensate Landlord for damages for which Tenant is liable
pursuant to this Lease.
7. HOLDING OVER
------------
If Tenant remains in possession of all or any part of the Premises after
the expiration of the term hereof, with or without the expressed or implied
consent of Landlord, such tenancy shall be month-to-month only and shall not
constitute a renewal or extension for any further term. In such event, rent
shall be increased to any amount equal to one hundred twenty-five percent (125%)
of the rent paid during the last month of the Lease term, and any other sums due
hereunder shall be payable in the amount and at the time specified in this
Lease, and such month-to-month tenancy shall be subject to every other term,
condition, covenant and agreement contained herein.
8. TENANT IMPROVEMENTS
-------------------
None by Landlord.
9. ACCEPTANCE OF PREMISES
----------------------
Except as provided below, by taking possession of the Premises, Tenant
accepts and acknowledges the Premises as being in good and sanitary order,
condition and repair and accepts them in their then-existing condition providing
the building and improvements shall comply with all applicable laws, codes, and
ordinances. Notwithstanding the foregoing, however, Landlord hereby
acknowledges that Landlord shall be responsible for repairing the air
conditioning support structure on the roof of the Premises. Landlord hereby
agrees to cooperate with Tenant in order to cause the air conditioning support
system on the roof to be properly repaired at the same time
-3-
<PAGE>
as Tenant undertakes to replace the roof membrane. Should it be established by a
structural engineer prior to the replacement of the roof membrane that the roof
structure requires repair, Landlord hereby agrees to cooperate with Tenant in
order to cause repairs to the roof structure as may be required to be made at
the same time as Tenant undertakes to replace the roof membrane pursuant to
Section 17 of this Lease. Landlord shall be solely responsible for the costs of
upgrading the air conditioning support system and for the repairs necessary to
the roof structure and Tenant shall be solely responsible for the costs of
replacing the roof membrane.
Notwithstanding the foregoing or anything to the contrary contained in this
Lease, Landlord shall also be obligated to deliver the Premises in broom clean
condition, free of debris, with all building and other improvements in existence
as of the date of the execution of this Lease by Tenant except as related to the
laboratory construction commenced by Tenant as subtenant to Norian Corporation.
Tenant acknowledges that neither Landlord nor its agent(s) has made any
representation or warranty as to the suitability or fitness of the Premises for
the conduct of Tenant's business or for any other purpose, nor has Landlord
agreed to undertake any modification, alteration or improvement to the Premises
except as expressly provided in this Lease. Except as provided above, the
taking of possession of the Premises by Tenant shall conclusively establish that
the Premises were at such time in satisfactory condition unless within thirty
(30) days after such date Tenant shall give Landlord written notice specifying
in reasonable detail the respects in which the Premises were not in satisfactory
condition. Landlord also hereby assigns to Tenant all warranties with respect
to the Premises which would reduce Tenant's maintenance obligations hereunder
and shall cooperate with Tenant to enforce all such warranties.
10. USE OF THE PREMISES
-------------------
A. Tenant shall use the Premises solely for office, R & D,
manufacturing, warehousing , the development of pharmaceuticals and drug
delivery systems and other legal purposes and shall not use the Premises for any
other purpose without obtaining the prior written consent of the Landlord which
consent shall not be unreasonably withheld.
B. Tenant shall not use the Premises or suffer or permit anything to be
done in or about the Premises which will in any way conflict with any law,
statute, zoning ordinance, regulation or requirement of duly constituted public
authorities now in force or which may hereafter be in force, or Board of Fire
Underwriters requirements or other similar body now or hereafter constituted
relating to or affecting the condition, use or occupancy of the Premises.
Tenant shall not commit any public or private nuisance or any other act or
things which might or would disturb the quiet enjoyment of any occupant of
nearby property. Tenant shall not place loads upon the floors, walls, or
ceilings in excess of the maximum designed load or which endanger the structure,
place any harmful liquids in the drainage systems unless Tenant installs proper
neutralizers; dump or store waste materials or refuse or allow such to remain
in, or about any part of the Premises outside of the building proper and Tenant
shall not store or permit to be stored or otherwise place any materials of any
nature whatsoever outside the building proper. Tenant may store materials
provided they are properly and attractively screened, in compliance with all
applicable city ordinances and approved, in writing, by Landlord.
-4-
<PAGE>
11. QUIET ENJOYMENT
---------------
Landlord covenants that it has the right to make this Lease and that
Tenant, upon performing the terms, conditions, and covenants of this Lease,
shall have quiet and peaceful possession of the Premises and against any person
claiming the same by, through or under Landlord.
12. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS
----------------------------------------
A. Tenant shall not make or permit any alterations, additions or
improvements in, on or about the Premises, except for non-structural alterations
not exceeding Ten Thousand Dollars ($10,000.00) in cost, without the prior
written consent of Landlord which consent shall not be unreasonably withheld.
All alterations, additions or improvements shall be installed at Tenant's sole
expense in compliance with all applicable laws and by a licensed contractor
approved in writing by Landlord. Any such alterations, additions or
improvements including but not limited to heating, lighting, electrical, air
conditioning, partitioning, drapery and carpentry installations made by Tenant
which become an integral part of the Premises or are affixed to the Premises so
that it cannot be removed without material damage to the Premises shall be and
become the property of Landlord upon installation and shall not be deemed trade
fixtures; provided, however, that Landlord may as a condition of its giving
consent require that Tenant, at Tenant's sole expense agree to remove nay or all
alterations, additions or improvements installed by Tenant and repair any damage
to the Premises caused by such removal and prior to the termination of the
Lease.
B. Tenant shall give Landlord at least (20) twenty days' prior written
notice of the date of commencement of any construction of alterations, additions
or improvements in, on or about the Premises and Landlord shall have the right
at any time to post notice of non-responsibility or similar notices on the
Premises in connection therewith.
C. Tenant shall submit drawings and specifications to Landlord for
Landlord's approval, and no work shall be commenced until Landlord has approved
such drawings and specifications and the contracts, contractors, performance and
payment bonds and the sureties thereon; provided however, that an such approvals
by Landlord shall not be unreasonably denied or delayed and no performance or
payment bonds shall be required on projects costing less than One Hundred
Thousand Dollars ($100,000.00).
13. SURRENDER OF THE PREMISES
-------------------------
On or before the expiration or earlier termination of the term of this
Lease, Tenant shall surrender the Premises to Landlord in their condition
existing as of the commencement of the term of this Lease, normal wear and tear
expected, acts of God, casualties, condemnation, Hazardous Materials, (other
than those released or emitted by Tenant in or about the Premises), and interior
improvements which Landlord states in writing may be surrendered at the
termination of the Lease, with all interior walls repainted or repaired, if
marked or damaged, all carpets shampooed and cleaned, all floors cleaned and
waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all
of Tenant's personal property and trade fixtures from the
-5-
<PAGE>
Premises, and all such property not so removed shall be deemed abandoned by
Tenant. If Landlord so elects, Tenant, prior to the termination hereof, shall
remove at its expense any and all fixtures and improvements installed by it
which would otherwise remain a part of the realty and restore the Premises to
their condition as of the commencement of this Lease. If Tenant fails to remove
any trade fixtures, equipment, or improvements, the removal of which is required
by Landlord, and such failure continues after the termination of the Lease,
Landlord may retain such property and all rights of Tenant with respect to it
shall cease, or Landlord may place such property in public storage for Tenant's
account. Tenant shall be liable to Landlord for the costs of removal of any such
trade fixtures, improvements or equipment of or installed by Tenant, the
transportation and storage costs of same, the cost of returning the Premises to
their condition as of the commencement of the term of this Lease, together with
interest at fifteen (15%) per annum, but in no event to exceed the maximum rate
allowed by law on all such expenses from the date of expenditure by Landlord. If
the Premises are not so surrendered at the termination of this Lease, Tenant
shall indemnify Landlord against all loss or liability resulting from delay by
Tenant in so surrendering the Premises, including, without limitation, any clams
made by any succeeding tenants, attorneys' fees and other costs incurred.
14. WAIVER OF SUBROGATION
---------------------
Notwithstanding anything to the contrary contained in this lease, Landlord
and Tenant each hereby waive any and all rights of recovery against the other or
against the officers, employees, agents and representatives of the other on
account of loss or damage occasioned to such waiving party for its property or
the property of others under its control to the extent that such loss or damage
is insured against under any property insurance policies which either may have
in force at the time of the loss or damage. Tenant and Landlord shall, upon
obtaining policies of property insurance required hereunder give notice to the
insurance carrier that the foregoing mutual waiver or subrogation is containing
in this lease and Tenant and Landlord shall cause each insurance policy obtained
by them to provide that the insurance company waives all right of recovery by
way of subrogation against either Landlord or Tenant in connection with any
damage covered by such policy.
15. REAL PROPERTY TAXES
-------------------
A. As used in this Lease, the term "Real Property Tax" shall include any
form of assessment, license fee, rent tax, levy, penalty or tax (other than net
income or franchise taxes) imposed by any authority having the direct or
indirect power to tax including without limitation any city, county, state or
federal government or any improvement or other district or division thereof,
whether such tax is (i) determined by the area of the Premises or any part
thereof or the rent and other sums payable hereunder by Tenant, including
without limitation, any gross income or excise tax levied by any of the
foregoing authorities with respect to receipt of such rent or other sums, or
(ii) upon or with respect to any legal or equitable interest of Landlord in the
Premises or any part thereof, or (iii) upon this transaction or any document to
which Tenant is a part creating or transferring any interest in the Premises, or
(iv) taxes of every kind and nature levied or assessed in lieu of, in
substitution for, or in addition to, existing or additional taxes on the
Premises whether or not now customary or within the contemplation of the
parties.
-6-
<PAGE>
B. On or before April 1 and December 1 of each calendar year during the
term of this lease, Tenant shall pay to Landlord, all Real Property Taxes as set
forth on the county tax assessor's tax statement for the Premises. Landlord
shall give Tenant at last fifteen (15) days prior written notice of the amount
so due. Upon Landlord's receipt of said tax payment, Landlord shall pay said
taxes, and in the event that Tenant shall fail to pay said taxes on or before
April 10 and December 10, respectively, Tenant shall pay to Landlord any penalty
incurred by said delinquency. Tenant shall pay any Real Property Tax not
included within the county tax assessor's tax statement within ten (10) days
after being billed for the same by Landlord. In the event this Lease or any
extension thereof shall expire on a date earlier than the end of a fiscal tax
year, Landlord shall prepare a statement setting forth the Real Property Taxes
to the date of such expiration and the parties shall adjust the Tenant's
obligation to pay the Real Property Taxes to the date of the expiration of
termination of this Lease.
C. Anything to the contrary notwithstanding contained herein, Tenant
shall pay any increases in Real Property taxes resulting from any and all
improvements of any kind whatsoever placed in, on or about the Premises for the
benefit of, at the request of, or by Tenant.
Tenant's liability to pay any Real Property Tax increase pursuant to this
Paragraph 15 shall be pro-rated on the basis of 365-day year to account for any
fractional portion of a fiscal tax year included at the commencement or
expiration of the term of the Lease. With respect to any assessment which may
be levied against or upon the Premises, or which under the laws then in force
may be evidenced by improvements or other bonds or may be paid in annual
installments, only the amount of such annual installment (with appropriate
proration for any partial year) and interest due thereon shall be included
within the computation of the annual taxes and assessments levied against the
Premises.
D. Tenant shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenants contained in, on or about the Premises or elsewhere. When
possible Tenant shall cause said trade fixtures, furnishings, equipment and all
other personal property to the assessed and billed separately from the real or
personal property of Landlord.
E. Failure of Tenant to pay any of the charges required to be paid under
this Paragraph 15 shall constitute a default under the terms hereof the like
manner as failure to pay rental when due.
F. Notwithstanding anything to the contrary contained herein, Tenant
shall not be required to pay any portion of any tax or assessment expense or any
increase therein (i) levied on Landlord's rental income, unless such tax or
assessment expense is imposed in lieu of real property taxes; (ii) in excess of
the amount which would be payable if such tax or assessment expense were paid in
installments over the longest possible term; (iii) imposed on land and
improvements other than the Premises; (iv) attributable to Landlord's net
inheritance, gift, transfer, estate or state taxes, or any penalties resulting
from Landlord's failure to pay any taxes or assessments in a timely fashion; or
(v) resulting from a change of ownership or transfer of any or all of the
Premises. Additionally, Tenant shall have the right, by appropriate
proceedings, to
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<PAGE>
protest or contest any assessment, reassessment or allocation of property taxes
or any change therein or any application of any Law to the Premises or Tenant's
use thereof. Landlord shall notify Tenant in writing of any change in property
taxes within sufficient time to allow Tenant to review and, if it so desires, to
contest or protest such change. In the contest or proceedings, Tenant may act in
its own name and/or the name of Landlord and Landlord will, at Tenant's request
and expense, cooperate with Tenant in any way Tenant may reasonably require in
connection with such contest. If Tenant does not pay the property taxes when due
which are the subject of such protest or contest, Tenant shall post a bond in
lieu thereof in an amount reasonably determined by Landlord but not less than
one hundred twenty-five percent (125%) of the amount demanded by the taxing
authorities which holds Landlord and the Premises harmless from any damage
arising out of the contest and ensuring the payment of any judgment that may be
rendered. With respect to any contest of property taxes or law, Tenant shall
hold Landlord and the Premises harmless from any damage arising out of such
protest or contest and shall pay any judgment that may be rendered for which
Tenant would otherwise be liable under the lease without such contest or
protest. Any contest conducted by Tenant under the paragraph shall be at
Tenant's expense and if interest or late charges become payable as a result of
such contest or protest, Tenant shall pay the same. Tenant shall receive the
benefit of all refunds of property taxes received with respect to the Lease
term.
16. UTILITIES AND SERVICES
----------------------
Tenant shall be responsible for and shall pay promptly, as the same become
due and payable, all charges for water, sewer rental, gas, electricity,
telephone, refuse pickup, janitorial services and all other utilities, materials
and services furnished directly to or used by Tenant in, on or about the
Premises during the term of the Lease, together with any taxes thereon.
Landlord shall not be liable in damages or otherwise for any failure or
interruption of any utility services or other services furnished to the
Premises, except that resulting from the negligence or willful misconduct of
Landlord and its agents, employees or contractors, and no such failure or
interruption shall entitle Tenant to terminate this Lease or withhold rent or
other sums hereunder.
17. BUILDING MAINTENANCE
--------------------
Landlord shall keep in good order, condition and repair the structural
parts of the building which structural parts include only the foundation,
exterior walls (excluding the interior of all walls and the exterior and
interior of all windows, doors, plate glass, showcases and interior ceiling),
roof structure not the membrane and subflooring of the Premises, except for any
damage thereto caused by negligent of Tenant or of Tenant's agents, employees or
invitees, or by reason of the failure of Tenant to perform or comply with any
terms, conditions or covenants in this Lease, or caused by alterations,
additions or improvements made by Tenant or Tenant's agents, employees or
contractors. It is an express condition precedent to all obligations of
Landlord to repair and maintain that Tenant shall have notified Landlord in
writing of the need for such repair of maintenance.
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<PAGE>
18. TENANTS' OBLIGATION TO REPAIR AND MAINTAIN
------------------------------------------
A. Tenant shall at all times clean, keep and maintain in good order,
condition and repair the Premises and every part thereof, including without
limitation all plumbing and sewage facilities within the Premises, fixtures,
interior walls, floors, ceilings, windows, roofing membrane, doors, entrances,
plate glass, showcases, skylights, all electrical facilities and equipment,
including without limitation lighting fixtures, lamps, fans and any exhaust
equipment and systems, and automatic fire extinguisher equipment within the
Premises, electrical motors and all other appliances and equipment of every kind
and nature located in, upon or about the Premises, except as otherwise provided
hereunder. All glass, both interior and exterior is at the sole risk of Tenant,
and any broken glass shall promptly be replaced by Tenant at Tenant's expense
with glass of the same kind, size and quality. Tenant shall obtain heating,
ventilating and air conditioning systems preventive maintenance contract with
quarterly service, which shall be subject to the reasonable approval of Landlord
and paid for by Tenant, which shall provide for and include without limitation
replacement of filters, oiling and lubricating of machinery, parts replacements,
adjustment of drive belts, or changes and other preventive maintenance;
provided, however, that the Tenant shall have the benefit of all warranties
available to landlord regarding the equipment in said systems. Tenant agrees to
assign to Landlord any warranties obtained by Tenant for the roof membrane upon
the termination of the Lease. Tenant waives the provisions of Section 1941 and
1942 of the California Civil Code and any similar or successor law regarding
Tenant's right to make repairs and deduct the expenses of such repairs from the
rent due under this Lease.
B. Unless the same is caused by the negligence or willful misconduct of
Landlord or any of its agents, employees or contractors, Landlord shall not be
liable to Tenant or to any other person for any damage occasioned by a failure
in any utility system or by the bursting or leaking of any vessel or pipe in or
about the Premises, or for any damage occasioned by water coming into the
Premises or arising from the acts of neglect of occupants of adjacent property,
or the public.
C. Notwithstanding anything to the contrary contained in this lease, in
the event of the failure of the HVAC equipment and it is not reasonably
economical to repair the same, then Landlord shall replace the failed equipment
as follows: (i) the replacement shall be made with improvements, materials
and/or equipment which are of a type and quality equal to or better than the
items that are being replaced, and (ii) such replacements shall be made at its
sole expense, but the cost thereof shall be amortized and Tenant shall pay
additional rent on account of such amortization in accordance with the following
procedures: the cost of such replacement shall be amortized on a straight line
basis for ten (10) years with interest on the unamortized balance at either (a)
if Landlord borrows the needed funds, the then prevailing market rate Landlord
would pay if it borrowed funds to perform such replacement work from a
Institutional Lender (as defined below), or (v) if Landlord does not borrow such
funds, the annual rate of ten percent (10%) or the maximum rate allowed by Law,
whichever is less. Landlord shall inform Tenant of the monthly amortized
payment required to amortize such cost and shall also provide Tenant with the
information upon which such determination is made. As additional rent, Tenant
shall pay an amount equal to such monthly amortization payment for each month
after such
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<PAGE>
replacement is completed until the first to occur of (i) the expiration of the
term of the Lease, or (ii) the end of the term over which such costs were
amortized. The amount of such additional rent that Tenant is to pay shall be due
at the same time rent is due.
D. Tenant shall at all times clean, keep and maintain in good order,
condition and repair, the parking and landscaping areas associated with the
Premises including without limitation, fences, landscape irrigation systems
parking lot and striping.
19. FIXTURES
--------
Tenant shall, at its own expense, provide, install and maintain in good
condition all trade fixtures and equipment required in the conduct of its
business in the Premises. All fixtures and improvements other than Tenant's
trade fixtures and equipment which are installed or constructed upon or attached
to the Premises by either Landlord or Tenant shall become a part of the reality
and belong to Landlord. If Tenant is not then in default, Tenant may, at the
termination of this Leases or at any other time, remove from the Premises all
trade fixtures, equipment and other personal property not permanently affixed
to the Premises. Upon such removal, Tenant shall restore the Premises to its
original condition at the time of occupancy, normal wear and tear expected.
20. LIENS
-----
Tenant hereby indemnifies and agrees to hold Landlord free and harmless
from all liens, claims and demands arising out of any work performed or
materials supplied in, on or about the Premises by or on behalf of Tenant, its
agents, employees or contractors. Tenant shall cause any such lien imposed to
be released of record by payment or posting of proper bond within twenty (20)
days after imposition of the lien or upon written request by Landlord.
21. LANDLORD'S RIGHT TO ENTER THE PREMISES
--------------------------------------
Tenant shall permit Landlord and its agents to enter the Premises at all
reasonable times upon not less than twenty-four (24) hours prior written notice,
(except in case of emergency), to inspect the same, to post notices of non
responsibility and similar notices and "For Sale" signs, to submit the Premises
to prospective purchasers, to make necessary alterations, additions,
improvements, or repairs to discharge alterations, additions, improvements or
repairs, to discharge Tenant's obligation hereunder when Tenant has failed to do
so within a reasonable time after written notice from Landlord, and at any
reasonable time within one hundred and eight (180) days prior to the expiration
of this Lease or any extension thereof, to place upon the Leased Premises
ordinary "For Lease" signs and to submit the Premises to prospective Tenants.
The above rights are subject to reasonable security regulations of Tenant. Any
such entry by Landlord and Landlord's agents shall not repair Tenant's
operations more than reasonably necessary.
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22. SIGNS
-----
Landlord shall provide a sign location on the Premises which may be used by
Tenant ("Designated Location"). In addition, Landlord hereby agrees to allow
Tenant to install one or more additional signs on or about the Premises at
locations other than the Designated Location ("Addition Signs") so long as such
signs comply with all applicable laws including all applicable zoning laws and
Tenant agrees to remove any such Additional Signs on termination of the Lease.
The costs of installing and maintaining the signs shall be Tenant's obligation.
23. INSURANCE
---------
A. Tenant hereby agrees to indemnify and hold harmless Landlord, its
subsidiaries, directors, officers, agents, and employees from and against any
and all damage, loss, liability or expense including, but not limited to,
attorneys' fees and legal costs suffered by same directly or by reason of any
claim, suit or judgment brought by or in favor of any person or persons for
damage, loss or expense due to, but not limited to, bodily injury, including
death resulting anytime therefrom, and property damage sustained by such person
or persons which arises out of, is occasioned by or in any way attributable to
the use or occupancy of the demised Premises and adjacent areas by the Tenant,
the acts or omissions of the Tenant, its agents, employees or any contractors
brought onto said Premises by the Tenant, except to the extent caused by the
negligence or willful misconduct of Landlord or its agents, employees or
contractors. Tenant agrees that the obligations assumed herein shall survive
this Lease.
B. Tenant hereby agrees to maintain in full force and effect at all
times during the term of this lease, at its own expense, for the protection of
Tenant and Landlord, as their interest may appear, policies of insurance issued
by a responsible carrier or carriers acceptable to Landlord which afford the
following coverages:
1. Employers' Liability__Not less than $1,000,000
2. Commercial General
Liability Insurance, Including Blanket Contractual Liability,
Broad Form Property Damage,
Personal Injury,
Completed Operations Products Liability,
Fire Damage and
Legal LiabilityNot less than $2,000,000
3. "All Risk" Property, Fire, Extended Coverage, and Special
Extended Insurance including without limitation, vandalism,
malicious mischief, inflation endorsement, sprinkler leakage
endorsement on the Premises, including without limitation, the
Improvements and all equipment, trade fixtures, inventory,
fixtures and personal property located on or installed in the
Premises. Such insurance shall be in the full amount of the
replacement cost of the aggregate of the foregoing as the same
may from time to time increase as a result of inflation or
otherwise.
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<PAGE>
4. Rent Insurance covering those risks referred to in B(3) in an
amount equal to all rents (and any sums payable under the lease)
for a period of at least twelve (12) months commencing with the
date of loss.
5. Boiler and Machinery Insurance including, but not limited to,
steam pipes, return pipes, condensation return pipes and other
pressure vessels and HVAC, in an amount satisfactory to Landlord.
6. Earthquake insurance with deductibles approved by Landlord not
less than $200,000.
C. Tenant may, with the written consent of Landlord, elect to have
reasonable deductibles in connection with Items B(3), B(4) and B(5). Landlord
shall have no obligation to pay for repairs within the deductible amount except
as provided in B(6).
D. Tenant shall deliver to Landlord at least thirty (30) days prior to
the time such insurance is first required to be carried by Tenant, and
thereafter at least thirty (30) days prior to expiration of such policy,
Certificates of Insurance of copies of the policy evidencing the above coverage
with limits not less than those specified above. Such Certificates, with the
exception of Workers Compensation, shall name Landlord, as described herein and
its agents and employees as additional insured. Further, all Certificates shall
expressly provide that no less than thirty (30) days prior written notice shall
be given Landlord in the event of a material alteration or to or cancellation of
the coverages evidenced by such Certificates.
E. Upon demand, Tenant shall provide Landlord, at Tenant's expense, with
such increased amount of existing insurance, and such other insurance with
respect to increase in risk due to any change in use of the Premises by Tenant
hereafter, as Landlord may reasonably require to afford Landlord adequate
protection for said risks.
F. If, on account of the failure of Tenant to comply with the foregoing
provisions, Landlord is adjudge a co-insurer by its insurance carrier, then any
loss or damage Landlord shall sustain by reason thereof shall be borne by Tenant
and shall be immediately paid by Tenant upon receipt of a bill thereof and
evidence of such loss.
G. Landlord makes no representation that the limits of liability
specified to be carried by Tenant under the terms of this Lease are adequate to
protect Tenant against Tenant's undertaking under this Article, and in the event
Tenant believes that any such insurance coverage called for under this Lease is
insufficient Tenant shall provide, at its own expense, such additional increase
as Tenant deems adequate.
H. All such insurance shall be in a form reasonably satisfactory to
Landlord and shall be carried with companies that have a general policy holder's
rating not less than "A" and a financial rating of not less than Class "X" in
the most current edition of Best's Insurance Reports, shall provide that such
policies shall not be subject to cancellation or change except after at least
thirty (30) days' prior written notice to Landlord, and the policy or policies,
or duly executed certificates for them, together with satisfactory evidence of
payment of the premium
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<PAGE>
thereon shall be deposited with Landlord prior to the time Tenant enters into
possession of the Premises, and upon renewal of such policies, not less than
thirty (30) days prior to the expiration of the term of such coverage. If Tenant
fails to procure and maintain the insurance required hereunder, Landlord may,
but shall not be required to, order such insurance and Tenant shall pay the cost
and expense of same upon demand, plus interest at fifteen percent (15%) per
annum, but in no event to exceed maximum rate allowed by law.
24. DAMAGE OR DESTRUCTION
---------------------
A. If the Premises are damaged or destroyed, Landlord shall repair the
Premises to their prior condition unless it has the option to terminate this
Lease as provided herein and it elects to so terminate. Landlord shall have the
option to terminate this Lease in the event any of the following occur:
1. The building(s) which is located on the Premises is destroyed or
damaged by fire or other casualty required to be insured against by
Tenant pursuant to Paragraph 23(B)(1), then in force to the extent of
fifty percent (50%) or more of the replacement cost thereof.
Notwithstanding the foregoing, however, in the event Landlord elects
to terminate the Lease due to the fact that the Premises is destroyed
to the extent of 50% or more of the replacement costs thereof, Tenant
shall have the election to cause this Lease to continue in full force
and effect by agreeing to pay for all of the costs necessary to repair
or replace the Premises to the extent such costs exceed the insurance
proceeds. Tenant shall make such election within thirty (30) days
following Landlord's election to terminate this Lease. In the event
Tenant makes the election to pay such additional expenses in order to
avoid the termination of this Lease, the parties shall cooperate and
work together in good faith in order to enable the Premises to be
rebuilt as quickly as reasonably possible following any such damage
and destruction. Tenant also agrees to pay Landlord's reasonable
costs and expenses associated with assisting Tenant in reconstruction.
2. The building(s) which is located on the Premises is damaged or
destroyed by an uninsured casualty and the cost to repair such damage
will exceed 5% of the replacement cost of the building; provided,
however, that in the event Landlord elects to terminate the Lease as a
result of any such uninsured casualty, Tenant shall have the election
to cause this Lease to continue in full force and effect by agreeing
to pay for all of the costs necessary to repair or replace the
Premises to the extent there are no insurance proceeds available.
Durect shall make such election within thirty (30) days following
Landlord's election to terminate this Lease. In the event Tenant
makes the election to pay such additional expenses in order to avoid
the termination of this Lease, the parties shall cooperate and work
together in good faith in order to enable the Premises to be rebuilt
as quickly as reasonably possible following any such damage and
destruction. Tenant also agrees to pay Landlord's reasonable costs and
expenses associated with assisting Tenant in reconstruction.
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<PAGE>
3. If one of the above events occurs, Landlord may terminate this
Lease by giving Tenant written notice of its election to terminate
within thirty (30) days after such damage or destruction, in which
event this Lease shall terminate as of the date Tenant receives such
notice unless Tenant has elected to pay for all costs necessary to
replace the Premises to the extent such costs exceed the insurance
proceeds as provided above. If any of the above events occurs and
Landlord elects not to terminate the Lease, Landlord and Tenant shall
work together in good faith so as to commence the repair or
replacement of the Premises and all of Tenant's fixtures and other
property and improvements within ninety (90) days following the date
of such damage and destruction in accordance with the terms hereof,
and shall thereafter cooperate with each other in good faith in order
to prosecute the same diligently to completion in which event this
Lease will continue in full force and effect. Landlord shall not be
responsible for any costs in replacement or repair of Tenant's trade
fixtures and other property and improvements. Notwithstanding the
foregoing or anything to the contrary contained in this Lease, if the
Premises are condemned or damaged by any peril and the Landlord does
not elect to terminate the Lease or is not entitled to terminate the
Lease pursuant to its terms, then Tenant shall have the option to
terminate the Lease if the Premises are condemned or damaged by any
peril and the Landlord does not elect to terminate the Lease or is not
entitled to terminate the Lease pursuant to its terms, then Tenant
shall have the option to terminate the Lease if the Premises cannot be
or are not in fact, fully restored by Landlord to their prior
condition within two hundred seventy days (270) days after the
condemnation or damage.
All insurance proceeds for the Premises that shall be payable under all
risk, property fire and extended coverage and extended insurance provided for in
paragraph 23 shall be payable to Landlord and Tenant, as their interests shall
appear, and the parties hereby agree to cooperate in good faith with each other
to cause such insurance proceeds to be used to repair the Premises and all of
Tenant's fixtures and other property. In the event the Lease is terminated as a
result of any damage or destruction, such insurance proceeds shall be payable to
the parties as their interests may appear. Landlord shall not be liable to
tenant for any shortfall in insurance proceeds.
B. In the event of any damage or destruction to the Premises which does
not result in a termination of this Lease, and if rent loss proceeds are not
available, the rent and other sums payable hereunder shall be temporarily abated
proportionately with the degree to which Tenant's use of the Premises is
impaired by such damage or destruction commencing from the date of such damage
or destruction and continuing during the period required by Landlord to complete
its repair and restoration of the Premises. Provided Landlord complies with its
obligations under this Section 24, Tenant shall not be entitled to any
compensation of damages from Landlord for loss of the use of the Premises,
damage to Tenant's personal property or any inconvenience occasioned by such
damage, repair or restoration. Tenant hereby waives the provisions of Section
1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil
Code, and the provisions of any similar law hereinafter enacted.
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<PAGE>
25. CONDEMNATION
------------
A. If title to all of the Premises or so much thereof be taken for any
public or quasi-public use under any statute or by right of eminent domain, or
by private purchase in lieu thereof, so that a reasonable amount of
reconstruction of the Premises will not result in the Premises being reasonably
suitable for Tenant's continued occupancy for the uses and purposes permitted by
this Lease, this Lease shall terminate as of the date that possession of the
Premises or part thereof be taken.
B. If any part of the Premises shall be so taken and the remaining part
thereof (after reconstruction of the then existing building in which the
Premises are located) is reasonably suitable for Tenant's continued occupancy
for the purposes and uses permitted by this Lease, this Lease shall, as to the
part taken, terminate as of the date that possession of such part of the
Premises be so taken and the rental and other sums payable hereunder shall be
reduced in the same proportion that the floor areas of the portion of the
Premises so taken (less any addition thereto by reason of any reconstruction)
bears to the original floor area of the Premises, and Landlord shall, at is own
cost and expense, make all necessary repairs or alterations to the building in
which the Premises are located so as to make the portion of the building not
taken a complete architectural unit and the remaining Premises a complete unit.
A proportionate part of the rental and other sums payable hereunder shall be
temporarily abated during such restoration to the extent there is a substantial
interference with Tenant's business. Each party thereto waives the provisions
of Section 1265.130, California Code of Civil Procedure allowing either party to
petition the Superior Court to terminate this Lease in the event of a partial
taking of the Premises.
C. No award for any partial or entire taking shall be apportioned, and
Tenant hereby assigns to Landlord its interest in any award which may be made in
such taking or condemnation, together with any and all rights of Tenant now or
hereafter arising in or to the same or part thereof; provided, however, that
nothing contained herein shall be deemed to give Landlord any interest in or
require Tenant to assign Landlord any award made to Tenant for the taking of
personal property belonging to Tenant, for the interruption of Tenant's business
for its moving cost, or for the loss of good will. No temporary taking of the
Premises, defined as a taking for less than 180 days, shall terminate this Lease
or give Tenant any right to any abatement of rent hereunder. Any award made to
Tenant by reason of such temporary taking shall belong entirely to Tenant and
Landlord shall not be entitled to share instruments that may be required to
effectuate the provisions of this paragraph.
26. ASSIGNMENT AS SUBLETTING
------------------------
A. Landlord's Consent. Tenant shall not transfer, sublet, assign or
------------------
enter into any license or concession agreement, mortgage or hypothecate this
Lease or Tenant's interest in this Lease or in or to any portion of the Premises
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. Any attempt or purported sublet without
Landlord's prior written consent shall be void and confer no rights upon any
third person and, at Landlord's election shall allow Landlord to terminate this
Lease.
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<PAGE>
B. Sublease Form. Each sublet to which Landlord has consented shall be
-------------
by an instrument in writing in a form reasonably satisfactory to Landlord, and
shall be executed by all parties to the transaction. Each subtenant shall agree
in writing, for the benefit of Landlord to assume, to be bound by, and to
perform the terms, conditions and covenants of this Lease to be performed by
Tenant. Notwithstanding anything contained herein, Tenant shall not be released
from personal liability for the performance of each term, condition and covenant
of this Lease unless Landlord specifically consents to such release in writing.
C. No Waiver. Consent by Landlord to one such subletting shall not be
---------
deemed a consent to any subsequent subletting.
D. Information To Be Furnished. If Tenant desires at any time to sublet
---------------------------
the premises, it shall first notify Landlord of its desire to do so and shall
submit in writing to Landlord (i) the name of the proposed subtenant; (ii) the
nature of the proposed subtenant's business to be carried on in the Premises,
(iii) the terms and provisions of the proposed sublease and a copy of the
proposed sublease form; (iv) such financial information, including financial
statements, as Landlord may reasonably request concerning the proposed
subtenant.
E. Consent and Excess Rent. If Landlord consents to the sublet, Tenant
-----------------------
may thereafter enter into a valid sublease of the Premises or portion thereof,
upon the terms and conditions set forth in the information furnished by Tenant
to Landlord pursuant to Subparagraph D above, subject, however, at Landlord's
election, to the following conditions:
Any excess of the monies paid to Tenant under the sublease ("Excess Rent")
over the rental required to be paid by Tenant hereunder shall be paid to
Landlord and Tenant, in equal shares after deducting reasonably direct sublease
expenses. Any such Excess Rent to be paid to Landlord pursuant hereto shall be
payable to Landlord as and with the monthly rent payable to Landlord hereunder
pursuant to the terms of Article 4 above.
F. Subrental. The term "Excess Rent" as used herein shall include any
---------
consideration of any kind received, or to be received, by Tenant from the
subtenant as a result of the sublet, including, but not limited to, key money,
bonus money, and payments (in excess of book value thereof) for Tenant's assets,
fixtures, inventory, accounts, good will, equipment, furniture, general
intangibles, and any capital stock or other equity ownership on Tenant.
G. Proration. If less than the whole of the Premises is sublet, the
---------
prorata share of the rental attributable to such partial area of the Premises
shall be determined by Landlord by dividing the monthly rental payable to Tenant
hereunder by the total square footage of the Premises and multiplying the
resulting quotient (the per square foot rent) by the number of feet of the
Premises which are being sublet.
H. Extended Counterpart. No sublease shall be valid nor shall any
--------------------
subtenant take possession of the Premises until an executed counterpart of the
sublease has been delivered to Landlord.
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<PAGE>
I. Permitted Transfers. Notwithstanding anything to the contrary
-------------------
contained in this Section 26, Tenant may, without Landlord's prior written
consent and without being subject to any of the provisions of this Section 26
including, without limitation, Landlord's right to participate in subrental
proceeds, sublet the Premises or assign this Lease to (i) a subsidiary,
affiliate, division or corporation controlling, controlled by or under common
control with Tenant; (ii) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization, or government action or (iii) a
purchaser of substantially all of Tenant's assets. For the purpose of this
Lease, the sale or transfer of Tenant's capital stock, including without
limitation, a transfer in connection with the merger, consolidation or non-
bankruptcy reorganization of Tenant and any sale of such stock through any
public exchange or any public or private offering, shall not be deemed an
assignment, subletting, or any other transfer of the Lease or the Premises. It
shall be a condition for the operation of this clause that the proposed
transferee shall provide Landlord with an assumption of this Lease Agreement in
a form reasonably approved by Landlord which agreement shall continue all
Tenant's duties hereunder.
J. Landlord Cooperation. Landlord hereby acknowledges that Tenant intends
--------------------
to enter into one or more subleases of all or a portion of the Premises and
Landlord hereby agrees to cooperate in good faith with Tenant and Tenant's
subtenants in connection with any tenant improvements which any such subtenants
propose to make to the Premises so long as subtenants agree and conform to the
requirements of Article 13 "Surrender of the Premises" of this Lease.
Additionally, Landlord shall cooperate with and allow any and all such
subtenants to install any signs on or about the Premises which are otherwise
agreed to by Tenant and which comply with all applicable laws including zoning
laws.
27. DEFAULT
-------
A. Upon an "Event of Default" (as defined herein), Landlord shall have
the following remedies, in addition to all other rights and remedies provided by
law or otherwise provided in this Lease, to which Landlord may resort
cumulatively or in the alternative:
1. Landlord can continue this Lease in full force and effect, and
the Lease will continue in effect as long as Landlord does not terminate
Tenant's right to possession, and Landlord shall have the right to collect rent
when due. During the period Tenant is in default, Landlord can enter the
Premises and rent them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to Landlord to all costs Landlord
incurs in reletting the Premises, including, without limitation, broker's
commissions, expenses of remodeling the Premises required by the reletting and
like cost. Such reletting cannot be for a period shorter or longer than the
remaining term of this lease. Tenant shall pay to Landlord the rent and other
sums due under this Lease on the dates the rent is due, less the rent and other
sums Landlord receives from any reletting. No act by Landlord allowed by this
paragraph shall terminate this Lease unless Landlord notifies Tenant in writing
that Landlord elects to terminate this Lease.
2. Landlord can terminate Tenant's right to possession of the
Premises at any time. No act by Landlord other than giving written notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises or the appointment of a receiver on Landlord's
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interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord has the right to remove all personal
property of Tenant and store same at Tenant's cost and to recover from Tenant as
damages:
a. The worth at the time of award of unpaid rent and other sums due
and payable which had been earned at the time of termination; plus
b. The worth at the time of award of the amount by which the unpaid
rent and other sums due and payable which would have been payable after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus
c. The worth at the time of award of the amount by which the unpaid
rent and other sums due and payable for the balance of the term after the time
of award exceeds the amount of such rental loss the Tenant proves could be
reasonably avoided; plus
d. Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform Tenant's obligation
under this Lease, or which in the ordinary course of things would be likely to
result therefrom, including but not limited to any cost of expenses incurred by
Landlord (i) in retaking possession of the Premises, including reasonable
attorneys' fees and costs therefore, (ii) maintaining or preserving the Premises
after such a new tenant, including repairs or alterations to the Premises for
such reletting, (iii) leasing commissions, or (iv) any other cost necessary or
appropriate to relet the Premises.
The "worth at the time of award" of the amounts referred to in
Subparagraphs 2a and 2b of this Paragraph is computed by allowing interest at
the rate of fifteen percent (15%) per annum, but in no event to exceed the
maximum rate allowed by law, on the unpaid rent and other sums due and payable
from the termination date through the date of award, The "worth at the time of
award" of the amount referred to in Subparagraph 2c of this Paragraph is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
B. At the option of Landlord, a breach of this Lease shall exist if any
of the following events (severally "Event of Default" and collectively "Events
of Default") shall occur:
1. Tenant shall have failed to pay rent, real property insurance,
building maintenance expenses, real estate taxes or any other sum required to be
aid hereunder when due and such failure shall not have been cured within ten
(10) days after Tenant's receipt of written notice of delinquency; provided,
however, that Landlord shall not be required to provide two (2) such notices for
a similar default in any twelve (12) month period of the lease. Tenant may cure
said default at any time prior to a termination of this Lease by Landlord or a
re-entry by Landlord by paying all rents and other expenses or charges then due.
2. Tenant shall have failed to perform any term, covenant or
condition of this Lease, except those requiring the payment of money, and Tenant
shall have failed to cure such breach within thirty (30) days after written
notice from Landlord if such breach could reasonably
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<PAGE>
be cured within said 30-day period. In the event any such breach could not
reasonably be cured within said 30-day period, then Tenant shall not be in
default under the terms of this Lease unless Tenant fails to commence to cure
such breach within such 30-day period or fails to diligently prosecute such cure
thereafter until completion, or
3. Tenant shall have assigned its assets for the benefit of its
creditors, or
4. The sequestration or attachment of or execution on any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business shall have occurred, and Tenant shall have failed
to obtain a return or release of such property within thirty (30) days
thereafter, or prior to sale pursuant to such sequestration, attachment or levy,
whichever is earlier; or
5. Tenant shall have abandoned or vacated the Premises without
paying rent.
6. A court shall have made or entered any decree or order which is
not rescinded within sixty (60) days of its issuance and Tenant is not otherwise
in default:
a. other than under the bankruptcy laws of the United States or
b. appointing a receiver, trust or assignee of Tenant in bankruptcy or
insolvency or for its property; or
c. directing the winding up or liquidation of Tenant and such decree
or order shall have continued for a period of thirty (30) days.
C. The waiver by either party of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental or other sum accepted, regardless
of Landlord's knowledge of such preceding breach at the time of acceptance of
such payment. No covenant, term or condition of this Lease shall be deemed to
have been waived by Landlord or Tenant unless such waiver be in writing signed
by such party.
28. SUBORDINATION
-------------
This Lease is subject and subordinate to all mortgages and deeds of trust
which now affect the Premises and to all renewals, modifications,
consolidations, replacements, and extension thereof and Landlord shall have the
right to cause this Lease to be and become and remain subject and subordinate to
mortgages or deeds of trust which may hereafter be executed covering the
Premises or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof, provided only that any such subordination to any existing or future
-19-
<PAGE>
mortgage or deed of trust shall at all times be expressly subject to the
condition that the holder of any such mortgage or deed of trust agree that in
the event of the foreclosure of any such mortgage or deed of trust, Tenant's
leasehold interest in the Premises shall not be disturbed so long as Tenant is
not in default beyond any applicable cure period. Additionally, the holder of
any such mortgage or deed of trust shall agree to enter into a new lease with
Tenant upon the same terms and conditions as this Lease with respect to the
Premises in the event such holder acquires title to the Premises. Within ten
(10) days after Landlord's written request therefor, Tenant shall execute any
and all documents reasonably required by Landlord or the Holder (or Holders) of
the mortgage or deed of trust required to effectuate such subordination
attornment and non-disturbance agreement to make this Lease prior to any lien of
any mortgage, or deed of trust, as the case may be, so long as such documents
provide that the holder or holders of such mortgage or deed of trust will not
disturb Tenant's leasehold interest in the Premises following foreclosure so
long as Tenant is not in default beyond any applicable cure period.
Notwithstanding anything to the contrary set forth in this paragraph, Tenant
hereby attorns and agrees to attorn to any person, firm or corporation
purchasing or otherwise acquiring the Premises at any sale or other proceeding
or pursuant to the exercise of any other rights, powers or remedies under such
mortgage or deeds of trust as if such person, firm or corporation had been named
as Landlord herein, it being intended hereby that Tenant's right to quiet
possession of the Premises shall not be disturbed if Tenant is not in default
and so long as Tenant shall pay the rent and observe and perform all of the
provisions of this Lease, unless this Lease is otherwise terminated, pursuant to
its terms. If acceptable to Landlord's lender and in an acceptable form, this
Lease may be prior to the mortgage.
Landlord shall, within thirty (30) days of the execution of this Lease by
the parties, provide a written acknowledgement to Tenant from the holder or
holders of any mortgage or deed of trust encumbering the Premises which (i)
provides that this Lease shall not be terminated so long as Tenant is not in
default under any applicable cure period under this Lease and (ii) recognizes
all of Tenant's rights hereunder.
29. NOTICES
-------
Any notice or demand required or desired to be given under this Lease,
except inspection requests, shall be in writing and shall be personally served
or in lieu of personal service may e given by mail in which latter event such
notice shall be deemed to have been given when three (3) business days have
elapsed from the time when such notice was deposited in the United States mail,
certified and postage prepaid, addressed to the party to be served. At the date
of execution of this Lease, the addresses of Landlord and Tenant are as first
above set forth; provided that from and after the date the term of this Lease
commences the address of Tenant shall be the address of the Premises. Either
party may change its address by giving notice of same in accordance with this
paragraph.
30. ATTORNEY'S FEES
---------------
In the event either party shall bring any action or legal proceeding for
damages for an alleged breach of any provision of this Lease, to recover rent,
or other sums due, to terminate the
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<PAGE>
tenancy of the Premises or to enforce, protect or establish any term, condition
or covenant of this Lese or right of either party, the prevailing party shall be
entitled to recover as a part of such action or proceedings, or in a separate
action brought for that purpose, reasonable attorneys' fees and court costs as
may be fixed by the court or jury.
31. ESTOPPEL CERTIFICATES
---------------------
Tenant shall within fifteen (15) days following request by Landlord:
A. Execute and deliver to Landlord any document, including estoppel
certificates as prepared by Landlord (i) certifying that this Lease is
unmodified and in full force and effect or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or if there
are uncured defaults on the part of Landlord, stating the nature of such uncured
defaults, and (iii) evidencing the status of the Lease as may be reasonably
required either by a lender making a loan to Landlord to be secured by deed of
trust or mortgage covering the Premises or a purchaser of the Premises from
Landlord; and
B. In connection with any refinancing or sale of the Premises by
Landlord, to deliver to Landlord the current financial statements of Tenant with
an opinion of a certified public accountant, if available, including a balance
sheet and profit and loss statement for the most recent prior year, all prepared
in accordance with generally accepted accounting principles consistently
applied. Tenant's failure to deliver an estoppel certificate within fifteen
(15) days after the delivery of Landlord's request therefor shall be conclusive
upon Tenant (i) that his Lease is in full force and effect, without modification
except as may be represented by Landlord, (ii) that there are now no uncured
defaults in Landlord's performance, and (iii) that no rent has been paid in
advance.
32. TRANSFER OF THE PROPERTY BY LANDLORD
------------------------------------
In the event of any conveyance of the Premises and assignment by Landlord
of this Lease, Landlord shall be and is hereby entirely freed and relieved of
all liability under any and all of its covenants and obligations contained in or
derived from this Lease first arising and occurring after the consummation of
such conveyance assignment so long as Landlord's successor agrees and covenants
to assume all of Landlord's obligations under this Lease occurring after the
consummation of such conveyance assignment.
33. GENERAL
-------
A. The captions used in this Lease are for the purpose of convenience
only and shall not be constructed to limit or extend the meaning of any part of
this Lease.
B. Any executed copy of this Lease Agreement shall be deemed an original
for all purposes.
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<PAGE>
C. Time is of the essence for the performance of each term, condition and
covenant of this Agreement.
D. In case any one or more of the provisions contained herein, except for
the payment of rent, shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Lease, but this Lease shall be
construed as if such invalid, illegal or unenforceable provision had not been
contained herein. This Lease shall be construed and enforced in accordance with
the laws of the State of California.
E. The language in all parts of this Lease shall in all cases be
construed as a whole according to its fair meaning and not strictly for or
against either Landlord or Tenant. When the content of this Lease requires the
neuter gender, it includes the masculine, the feminine, a partnership or
cooperation or joint venture, and the singular includes the plural.
F. The covenants and agreements contained in this Lease shall be binding
on the parties hereto and on their respective successors and assigns (to the
extent this Lease is assignable).
G. The waiver of Landlord of any breach of any term, condition or
covenant of this Lease shall not be deemed to be a waiver of such provision or
any subsequent breach of the same or nay other term, condition or covenant of
this Lease.
34. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS
----------------------------------------------
If Tenant shall at any time be in default (beyond any applicable cure
period) of its obligations to make any payment or perform any other act on its
part to be made or performed under this Lease, Landlord may, but shall not be
obligated to and without waiving or releasing Tenant from any obligation of
Tenant under this Lease, make such payment or perform such other act to the
extent Landlord may deem desirable, and in connection therewith, pay expenses
and employ counsel. All sums so paid by Landlord and all penalties, interest
and costs in connection therewith shall be due and payable by Tenant on the next
day after any such payment by Landlord, together with interest thereon at the
rate of fifteen percent (15%) per annum, but in no event to exceed the maximum
rate allowed by law, from such date to the date of payment thereof by Tenant to
Landlord plus collection costs and attorneys' fees. Landlord shall have the
same rights and remedies for the non-payment thereof as in the case of default
in the payment of rent.
35. RENEWAL OPTIONS
---------------
A. At the expiration of the original five (5) year term hereof, and if
Tenant is not in default of any of the terms and conditions of this Lease,
Tenant shall have an option to extend this Lease for one additional term of five
(5) years (herein referred to as the "First Renewal Term"). The option to
extend the Lease for the First Renewal Term shall be exercised by giving
Landlord written notice of Tenant's intention to do so at least one hundred
eighty (180) days prior to the expiration of the present term. Such First
Renewal Term shall be upon all the terms
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<PAGE>
and conditions hereof, except that the monthly rental for the new term shall be
ninety-five percent (95%) of the then current fair market rental value of the
Premises. In determining the then fair market rental value, the value of any
tenant improvements in the Premises which were paid for by Tenant or any
subtenant shall not be taken into account except for those improvements which
Landlord has agreed to in writing need not be removed by Tenant upon the
termination of this Lease. The parties acknowledge that the value of the
laboratory improvements which construction was commenced by Tenant as subtenant
to Norian Corporation prior to the Commencement Date shall not be taken into
account when determining the fair market rental value of the Premises for the
First Renewal Term.
At the expiration of the First Renewal Term and if Tenant is not in default
of any of the terms and conditions of this Lease, Tenant shall have a second
option to extend this Lease for one additional term of five (5) years (herein
the "Second Renewal Term"). This option to extend the term of this Lease for
the Second Renewal Term shall be exercised by giving Landlord written notice of
Tenant's election to do so at least one hundred eighty (180) days prior to the
expiration of the First Renewal Term. Such Second Renewal Term shall be upon
all the terms and conditions hereof except that the monthly rental for the
Second Renewal Term shall be an amount equal to ninety-five percent (95%) of the
then current fair market rental value of the Premises. In determining the then
fair market rental value, the value of any tenant improvements in the Premises
which were paid for by Tenant or any subtenant shall not be taken into account
except for those improvements which Landlord has agreed to in writing need not
be removed by Tenant upon the termination of this Lease. The parties
acknowledge that the value of the laboratory improvements which construction was
commenced by Tenant as subtenant to Norian Corporation prior to the Commencement
Date shall not be taken into account when determining the fair market rental
value of the Premises for the Second Renewal Term.
B. In the event Landlord and Tenant cannot agree upon the sum which is
ninety-five percent 95% of the then current fair market rental value of the
Premises within fifteen (15) days after the expiration of the first five (5)
year term or the First Renewal Term, the parties shall have the fair market
rental value of the Premises determined by the appraisal procedure set forth
below.
Each party shall, within, appoint one (1) representative who shall be an
MAI real estate appraiser with at least five (5) years full-time commercial
appraisal experience in Santa Clara County to act as an appraiser. The two (2)
appraisers within thirty (30) days from the expiration of the fifteen (15) day
period shall submit their determination in writing signed by both appraisers to
each party.
If the two (2) appraisers cannot agree upon the fair market rental value of
the Premises within said thirty (30) days, they shall appoint a third appraiser
who is similarly qualified. If the two (2) appraisers cannot agree on a third
appraiser within fifteen (15) days from the date they were to have submitted
their appraisal to Landlord and Tenant, either of the parties to this Lease, by
giving five (5) days notice to the other party, can apply to the presiding judge
of the Santa Clara County Superior Court for the selection of a third appraiser
who meets the qualifications stated above.
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<PAGE>
Within thirty (30) days after the selection of the third appraiser, a
majority of the appraisers shall set the fair market value of the Premises. If
a majority of the appraisers are unable to set the fair market rental value
within the stipulated time, three (3) appraisals shall be added together and
their total divided by three; the resulting quotient shall be the fair market
rental value.
If, however, the low appraisal and/or the high appraisal are more than ten
percent (10%) lower and/or higher than the middle appraisal, the low and/or high
appraisal shall be disregarded. If only one (1) appraisal is disregarded, the
remaining two 92) appraisals shall be added together and their total divided by
two (2); the resulting quotient shall be the fair market rental value of the
Premises. If both the low appraisal and the high appraisal are disregarded as
stated in this paragraph, the middle appraisal shall be the fair market rental
value of the Premises.
In appraising the Premises as provided for in this paragraph, the
appraisers shall take into consideration the fair market rental value of the
space which is comparable in quality and nature to the Premises; provided,
however, in determining the fair market rental value, the value of any tenant
improvements in the Premises which were paid for by Tenant or any subtenant
shall not be taken into account except for those improvements which Landlord has
agreed to in writing need not be removed by Tenant upon the termination of this
Lease. The parties acknowledge that the value of the laboratory improvements
which construction was commenced by Tenant as subtenant to Norian Corporation
prior to the Commencement Date shall not be taken into account when determining
the fair market rental value of the Premises for either the First Renewal Term
or the Second Renewal Term. If feasible, comparable space within the adjacent
business park shall be the basis of the appraisers' determination of fair market
rental value of the Premises. In no event shall the new fair market rental
value be less than the rent last payable under the terms of the Lease.
If Tenant objects to the fair market rental that is finally determined
pursuant to the appraisal process set forth above, Tenant shall have the right
to elect not to extend the term of the lease so long as such determination is
made in writing to Landlord within fifteen (15) days from the date of the final
determination of the renewal term rent. If Tenant fails to so notify Landlord
of its election to terminate the Lease, it shall be deemed that the Lease shall
continue in effect and the rent payable shall be the final determination on the
appraisers.
Landlord and Tenant shall each pay for the cost of the appraiser appointed
by them and they shall each pay one-half of the cost of the third appraiser in
the event it is necessary to appoint a third appraiser.
In the event Landlord or Tenant fails to appoint an appraiser within the
time specified, the determination of the appointed appraiser shall be final and
binding on both parties.
In the event the third appraiser fails to present a fair market rent within
the thirty (30) day period, then by mutual consent of Landlord and Tenant (1)
the time period shall be extended or (2) if Landlord or Tenant do not wish to
extend the period, a new third appraiser shall be selected by Landlord's and
Tenant's appraisers and a new thirty (30) day period shall begin.
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<PAGE>
36. ENTIRE AGREEMENT
----------------
This Lease and the Exhibits and Addenda, if any, attached hereto is the
entire Agreement between the Parties, and there are no agreements or
representations between the Parties except as expressed herein. Except as
otherwise provided herein, no subsequent changes or additions to this Lease
shall be binding unless in writing and signed by the Parrots hereto.
37. OFFSETS
-------
No claim the Tenant may have against the Landlord for any reason shall be
offset against the Rents due from Tenant to Landlord.
38. COMPLIANCE WITH THE AMERICANS DISABILITY ACT
--------------------------------------------
Tenant, at its sole cost and expense, shall be responsible for full
compliance with the Americans with Disabilities Act of 1990, as amended,
including, without limitation, Title III thereof and the regulations promulgated
thereunder (collectively ADA), with regard to the leased premises and Tenant's
business conducted therein. Notwithstanding anything to the contrary contained
herein, Tenant shall not be required to construct or pay the cost of complying
with any Laws, including, without limitation, the ADA, requiring the
construction of structural or other improvements to the Premises unless such
compliance is necessitated by new legislation becoming effective during the
Lease term or because of Tenant's particular use of the Premises or any
improvements to the Premises made by Tenant.
39. TENANT'S ENVIRONMENTAL RESPONSIBILITY
-------------------------------------
Tenant shall not permit or conduct any activity on the Premises which would
violate or cause Landlord to be in violation of applicable laws, statutes,
ordinances, rules, regulations, policies, orders and determinations of any
governmental authority pertaining to health or the environmental (collectively
the "Applicable Law"), including, but not limited to, the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, the
Resource Conversion and recovery Act of 1967, as amended, and State Laws, as
amended, nor which would cause the presence of any substance or the existence of
any condition, or the threatened release of any substance in, on, or under the
surface of the Premises, or occurrence of any event in which any substance has
been disposed of or released on, in or from the Premises in any manner not
permitted under Applicable Law such that Applicable Law would require (i) a
report or other notice of such condition or event to any federal, state or local
governmental agency or (ii) remodel, treatment, or other procedures or remedial
action with respect to such condition or event in order to bring the Premises
into compliance with all Applicable Law or (iii) contribution by any current or
former owner or operator of the Premises toward removal, treatment or other
procedures or remedial action required by or that may be brought under
Applicable Law with respect to the Premises or any other site or location
affected by such condition or event.
To the best knowledge of Landlord, (i) no Hazardous Material is present on
the Premises or the soil, surface water or ground water thereof, and no action,
proceeding or claim is pending
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<PAGE>
or threatened regarding the Premises concerning any Hazardous Material or
pursuant to any Applicable Law. Under no circumstance shall Tenant be liable for
any losses, costs, claims, liabilities and damages (including attorneys' and
consultants' fees) of every type and nature, directly or indirectly arising out
of or in connection with any Hazardous material present at any time on or about
the Premises, or the soil, air improvements, ground water or surface water
thereof, or the violation of any law, orders or regulations, relating to any
such Hazardous Material except to the extent that any of the foregoing actually
results from the release or emission of Hazardous Material on or about the
Premises during the Lease term by Tenant or its agents or employees in violation
of Applicable Laws. As used herein, "Hazardous Material" shall mean any material
which is now or hereafter regulated by any governmental authority or which poses
a hazard to the environment or human life. Tenant acknowledges receipt of
Earthmetrics (1990) report showing presence of underground storage tank, but
shall not be responsible for such removal if compelled by government action.
40. WASTE COVENANT/EASEMENTS PROHIBITED
-----------------------------------
Tenant agrees not to commit nor suffer any waste to the leased premises.
Tenant will not use or permit the use of the leased premises in any manner which
would result, or would with the passage of time result in the creation of any
easement or prescriptive right.
41. MAINTENANCE OF CORPORATE EXISTENCE & ASSETS; MERGER CONSOLIDATION
-----------------------------------------------------------------
Tenant covenants that it will maintain its corporate existence and that it
will not during the term hereof sell, transfer or assign all or substantially
all of its assets, or merge into or consolidate with any other corporation
unless the surviving corporation shall have a new worth at lest equal to the net
worth of Tenant immediately prior to such merger or consolidation and unless
such surviving corporation shall execute and deliver to Landlord and to any
mortgagees of the leased premises written assumption of the obligations of
Tenant under this Lease.
42. MEMORANDUM OF LEASE
-------------------
At Tenant's request, Landlord shall execute in recordable form, a "
Memorandum of Lease" referencing the Lease and setting forth the true and legal
description and assessor's parcel number of the Premises in a form reasonably
acceptable to Tenant, and which Memorandum of Lease shall be recorded in the
Official Records of Santa Clara County, California.
43. AUTHORITY
---------
Each of the parties executing this Lease hereby represent that (i) they
have the authority to do so and (ii) all requisite approvals from any other
parties, if necessary, have been obtained.
44. REPRESENTATION
--------------
Landlord hereby represents to Tenant that Landlord owns the Premises free
and clear of all exceptions to title other than those exceptions to title set
forth in that Preliminary Report No.
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<PAGE>
69720012 issued by Commonwealth Land Title Insurance Company attached hereto as
Exhibit B.
Landlord further represents to Tenant that to the best of Landlord's
knowledge, no claims, lawsuits or other actions have been filed or made against
Landlord with regard to its ownership and operation of the Premises except
Superior Court action #CV 762983 entitled De Anza et al. v. Johnson Family Trust
et al. Landlord hereby agrees to indemnify, defend (with counsel reasonably
acceptable to Tenant), protect and hold harmless Tenant and its officers,
employees, agents and assigns from and against all claims, demands, losses,
costs (including attorney's fees and costs) or liabilities arising from or
relating to the foregoing civil action.
Landlord has not received any notice from any city, county or other public
agency that the Premises or any portion thereof may be the subject of any taking
or condemnation action.
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<PAGE>
SIGNATURE PAGE
In witness whereof, the undersigned have executed this document of 29 pages
this ___ day of February, 1999.
DURECT CORPORATION DE ANZA ENTERPRISES, LTD.
By: /s/ Thomas A. Schreck By: /s/ Wade H. Hover
----------------------- --------------------------
Chief Financial Officer Wade H. Hover, Manager
By: /s/ Joseph C. Johnson
---------------------------
Joseph C. Johnson
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<PAGE>
EXHIBIT "A"
-----------
-29-
<PAGE>
EXHIBIT "B"
-----------
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<PAGE>
EXHIBIT 10.12
November 24, 1999
James Griffin
V.P. Manufacturing
Ciena Corporation/Core Switching Division
10201 Bubb Road
Cupertino, CA 95014
Re: Sublease Amendment
Dear Jim:
This Letter Agreement is entered into between Durect Corporation ("Sublessor")
and Ciena Corporation ("Sublessee") for the purpose of amending the Sublease
Agreement between Sublessor and Sublessee dated March 10, 1999 ("Sublease") to
include additional space as part of the Subleased Premises for a specified
duration during the Term of the Sublease.
Ciena and Durect hereby agree that effective as of November 29, 1999 until March
31, 2000:
a. The Subleased Premises as defined in Section 2 of the Sublease
shall include all of the space designated as Area W1 on Exhibit B of the
Sublease (a copy of which is attached hereto for convenience of reference) which
is deemed to contain 3,655 rentable square feet ("Additional Space").
b. The Base Monthly Rent as defined in Section 4 A of the Sublease shall be
$34,128.60.
c. Sublessee's Pro Rata Share as defined in Section 4 B for the purposes of
computing Additional Rent shall be forty-nine percent (49%).
d. Sublessor and Sublessee acknowledge that Sublessee intends to provide
heating and/or air conditioning to the Additional Space, whereas
Sublessor will continue to use the space designated as Area W2 on
Exhibit B of the Sublease for warehouse and storage use and will not be
providing air conditioning or heating to such space. Therefore, with
respect to the allocation of Utilities in Section 8 A of the Sublease,
Sublessee's share shall be fifty-nine percent (59%).
e. This terms of this Letter Agreement shall terminate on March 31, 2000 in
which event Sublessee shall surrender the Additional Space in accordance
with the terms of Section 20 of the Sublease.
f. Except as specifically provided herein, all other terms of the Sublease
shall remain unaltered.
<PAGE>
If the foregoing is acceptable, please sign below where indicated to acknowledge
acceptance of this Letter Agreement by Sublessee.
Very truly yours,
/s/ Thomas A. Schreck
---------------------
Thomas A. Schreck
Chief Financial Officer
APPROVED AND ACCEPTED:
Ciena Corporation:
By /s/ Jim Griffin
---------------
Title Vice President, Manufacturing
-----------------------------
Date November 29, 1999
-----------------
ACKNOWLEDGED AND CONSENT GRANTED:
Provided that this Sublease Agreement does not modify or change in anyway the
Excess Rents due DeAnza as described in letter dated July 13, 1999
De Anza Enterprises, Ltd.
By /s/ Wade H. Hover
------------------------
Title Manager
---------------------
Date November 30, 1999
----------------------
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<PAGE>
SUBLEASE
--------
THIS SUBLEASE ("Sublease") is dated for reference purposes as of March 10,
1999, and is made by and between Durect Corporation, a Delaware corporation
("Sublessor"), and Lightera Networks, Inc., a Delaware corporation
("Sublessee"). Sublessor and Sublessee hereby agree as follows:
1. Recitals: This Sublease is made with reference to the fact that De
--------
Anza Enterprises, as landlord ("Master Lessor"), and Sublessor, as tenant,
entered into that certain Modified Net Single Tenant Lease Agreement dated
February 18, 1999 (the "Master Lease"), for the lease of certain real property
located at 10240 Bubb Road, Cupertino, California (the "Master Premises"). A
copy of the Master Lease is attached hereto as Exhibit A. Capitalized terms
---------
used and not defined herein shall have the meaning ascribed to them in the
Master Lease.
2. Subleased Premises: Subject to the terms and conditions of this
------------------
Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby
subleases from Sublessor, a portion of the building located on the Master
Premises, which portion is deemed to contain 11,072 rentable square feet and is
more particularly described on Exhibit B attached hereto and incorporated herein
---------
by reference (hereinafter, the "Subleased Premises").
A. Shared Space. The space identified as "common area" on Exhibit B
------------ ---------
shall constitute "Shared Space". All space within the Master Premises other
than the Subleased Premises and the Shared Space is reserved for the exclusive
use of Sublessor or Sublessor's other tenants, if any. Subject to the terms and
conditions set forth herein, Sublessee and its employees, agents and invitees
shall have the non-exclusive right with Sublessor and its employees, agents and
invitees to use the Shared Space, except that Sublessee shall only be entitled
to non-exclusive use of thirty (30) parking spaces located on the Master
Premises. Sublessor makes no warranty express or implied with respect to the
condition of the Shared Space or any equipment located therein. Sublessee shall
be responsible for any damage to the Shared Space caused by Sublessee or its
employees, agents, invitees or contractors. Sublessor shall be responsible for
any damage to the Shared Space caused by Sublessor or its employees, agents,
invitees or contractors. Sublessor may from time to time promulgate reasonable
rules and regulations for the care and orderly management of the Shared Space
and the safety of Sublessor, Sublessee and their employees, agents and invitees.
Such rules and regulations shall be binding upon Sublessee upon delivery of a
copy thereof to Sublessee, and Sublessee agrees to abide by such rules and
regulations.
3. Term:
----
A. Term. The term (the "Term") of this Sublease shall be for the
----
period commencing on the later of: (i) March 15,1999 or (ii) the date by which
the Master Lessor's consent to the Sublease is obtained (the "Commencement
Date") and ending twenty-four (24) months thereafter ("Expiration Date"), unless
this Sublease is sooner terminated pursuant to its terms or the Master Lease is
sooner terminated pursuant to its terms.
B. No Option to Extend. Sublessee shall have no option to extend the
-------------------
Term of this Sublease. However, if at any time during the Term, Sublessor, in
its sole and absolute discretion, determines that it desires to sublet, rather
than occupy, the Subleased Premises after the expiration date of this Sublease,
and if Sublessee is not then in default (or would not then be in default but for
the pendency of any grace period) under this Sublease, then prior to offering
the Subleased Premises to any third party, Sublessor shall give Sublessee
written notice of such determination to Sublessee (the "Offer Notice"). The
Offer Notice shall state the terms on which Sublessor is willing to sublease the
Subleased Premises after the expiration of the Term. If, within ten (10) days
after receipt of Sublessor's notice, Sublessee agrees in writing to sublease
<PAGE>
the Subleased Premises upon such terms or such other terms as are mutually
acceptable to Sublessor and Sublessee, then Sublessor and Sublessee shall
execute a sublease upon such terms within twenty (20) days after Sublessee's
receipt of Sublessor's Offer Notice. If Sublessee does not deliver its notice of
intent to sublease the Subleased Premises within said ten (10)-day period, or if
Sublessor and Sublessee do not enter into a fully executed sublease within said
twenty (20)-day period, then this right of first offer to sublease shall lapse
and be of no further force or effect; in such event, Sublessor shall have the
right to sublease the Subleased Premises to a third party on any other terms
more or less favorable than those offered herein to Sublessee. This right of
first offer is personal to Sublessee and is not transferable.
4. Rent:
----
A. Base Month Rent. Commencing on the Commencement Date and
---------------
continuing throughout the initial term of this Sublease, Sublessee shall pay
monthly rent ("Base Monthly Rent") to Sublessor in the amount of Twenty-six
Thousand Eight Hundred and Eighteen Dollars and Sixty Cents ($26,818.60), the
amount of $1000 of which shall be attributable to Sublessee's rental of certain
office furniture owned by Sublessor, an inventory of which shall be agreed upon
by Sublessee and Sublessor and attached hereto as Exhibit C no later than ten
(10) days after the Commencement Date. Base Monthly Rent and Additional Rent,
as defined in Paragraph 4.B below, (collectively, hereinafter "Rent") shall be
paid in advance on or before the first (1st) day of each month. Rent shall be
payable without notice or demand and without any deduction, offset, or, except
as otherwise provided herein, abatement, in lawful money of the United States of
America. Rent shall be paid directly to Sublessor at 10240 Bubb Road,
Cupertino, California, Attention: Chief Financial Officer, or such other address
as may be designated in writing by Sublessor.
B. Additional Rent. All monies other than Base Monthly Rent required
---------------
to be paid by Sublessee under this Sublease, including, without limitation, (i)
all amounts payable by Sublessor to the Master Lessor with respect to or
reasonably allocate to the Subleased Premises (including, without limitation,
Sublessee's Pro Rata Share of Real Property Taxes as defined in Article 15 of
the Master Lease) (ii) Sublessee's share of costs for Utilities (as set forth
in Paragraph 8 below), (iii) Sublessee's Pro Rata Share of costs of insurance
premiums and deductibles incurred by Sublessor for insurance maintained by
Sublessor pursuant to Article 23 of the Master Lease, and (iv) Sublessee's Pro
Rata Share of Maintenance Expenses (as defined in Paragraph 7 hereof), shall be
deemed additional rent ("Additional Rent") and shall be payable within twenty
(20) days after receiving an invoice from Sublessor, except that Sublessee's Pro
Rata Share of Real Property Taxes shall be paid within ten (10) days after
receiving Sublessor's invoice. The term "Sublessee's Pro Rata Share" shall mean
that amount, expressed as a percentage, equal to the number of square feet
included in the Subleased Premises divided by the number of square feet in the
building located on the Master Premises. The parties hereto acknowledge that
except as otherwise provided herein, Sublessee's Pro Rata Share is thirty-seven
percent (37%). Sublessee and Sublessor agree, as a material part of the
consideration given by Sublessee to Sublessor for this Sublease, except as
otherwise provided herein, Sublessee shall pay Sublessee's Pro Rata Share of all
costs, expenses, taxes, insurance, maintenance and other charges of every kind
and nature arising in connection with the Master Lease or the Subleased Premises
(excluding, however, costs to the extent arising from (i) any default by
Sublessor, through no fault of Sublessee, under the Master Lease or this
Sublease, or (ii) Sublessor's or its agents', employees' or contractors'
negligence or willful misconduct), such that Sublessor shall receive, as net
consideration for this Sublease, full reimbursement thereof to the extent
applicable to the Subleased Premises. Notwithstanding the foregoing, in the
event any Additional Rent is incurred for Sublessee's sole benefit or as a
result of Sublessee's request for certain services (i.e., extra hours' charges,
etc.) or otherwise, Sublessee shall pay the entire cost thereof, and such
charges shall not be pro rated between Sublessor and Sublessee.
<PAGE>
Sublessee, and not Sublessor, shall be responsible for (i) the prompt and
timely payment of any personal property taxes or assessments levied against
Sublessee's personal property improvements, alterations or trade fixtures
located within the Subleased Premises, (ii) any telephone service provided to
the Subleased Premises during the Term, and (iii) any permit, license,
governmental fees or charges arising out of Sublessee's specific use and
operation of the Subleased Premises.
Upon the execution of the Lease by Sublessee, Sublessee shall pay to
Sublessor Base Month Rent for the month of March, 1999 in the amount of
$13,409.30 in immediately available funds.
5. Security Deposit: Upon execution hereof, Sublessee shall deposit with
----------------
Sublessor the sum of Twenty-Six Thousand Eight Hundred and Eighteen Dollars and
Sixty Cents ($26,818.60) (the "Security Deposit"), in cash, as security for the
performance by Sublessee of the terms and conditions of this Sublease. If
Sublessee defaults (beyond any applicable notice and cure period) with respect
to any provision of this Sublease, then Sublessor may draw upon, use, apply or
retain all or any portion of the Security Deposit for the payment of any Rent or
other charge in default, for the payment of any other sum which Sublessor has
become obligated to pay by reason of Sublessee's default, or to compensate
Sublessor for any loss or damage which Sublessor has suffered thereby. If
Sublessor so uses or applies all or any portion of the Security Deposit, then
Sublessee, within ten (10) days after receipt of demand by Sublessor therefor,
shall deposit cash with Sublessor in the amount required to restore the Security
Deposit to the full amount stated above. Sublessor may commingle the Security
Deposit with its own funds and Sublessee shall not be entitled to interest on
the Security Deposit. Within thirty (30) days after the expiration of this
Sublease and Sublessee's vacation of the Subleased Premises, Sublessor shall
return to Sublessee so much of the Security Deposit as has not been applied by
Sublessor pursuant to this Paragraph, or which is not otherwise required to cure
Sublessee's defaults.
6. Holdover: In the event that Sublessee does not surrender the Subleased
--------
Premises in accordance with the terms of this Sublease, Sublessee shall
indemnify, defend and hold harmless Sublessor from and against all loss, claims,
liabilities and damages resulting from Sublessee's delay in surrendering the
Subleased Premises in the condition required under the terms of this Sublease
and shall pay to Sublessor holdover rent equal to one hundred fifty percent
(150%) of Rent payable hereunder.
7. Repairs:
-------
A. The parties acknowledge and agree that Sublessee is subleasing the
Subleased Premises on an "as is" basis, and that Sublessor has made no
representations or warranties, express or implied, with respect to the Subleased
Premises, whatsoever, including, without limitation, any representation or
warranty as to the suitability of the Subleased Premises for Sublessee's
intended use, provided, however, Sublessor hereby agrees that the roof membrane
on the Master Premises shall be replaced at no cost to Sublessee within twelve
(12) months following the Commencement Date. Sublessee shall, at its sole cost
and expense, keep and maintain in good condition, repair and replace, the
Subleased Premises and every part thereof (including, without limitation,
improvements constructed by or for the benefit of Sublessee); provided, however,
that Sublessee shall not be required to perform (i) any repair, maintenance or
improvements to the heating, ventilating, air conditioning, electrical, water,
sewer, and plumbing systems which do not exclusively serve the Subleased
Premises, it being understood that Sublessor shall be responsible for the repair
and maintenance of any building systems which serve the entire Master Premises
(except as otherwise set forth in the Master Lease) and Sublessee shall be
responsible for the repair and maintenance of any building systems which
exclusively serve the Subleased Premises, or (ii) any maintenance or repair
obligations to the Subleased Premises which are required to be performed by
Sublessor under this Sublease or Master Lessor under the Master Lease. If any
repair, maintenance or improvements are (i) required to be performed by
Sublessor under the Master Lease and not required to be performed by Sublessee
hereunder, or (ii) required to be paid for by Sublessor under the Master Lease
(including, without limitation, the cost of repairs set forth in Section 18.C of
the Master Lease and the cost of any maintenance contracts required to be
carried by Sublessor under the Master Lease), Sublessee shall reimburse
Sublessor
<PAGE>
for Sublessee's pro rata share of costs incurred by Sublessor to perform or to
pay for the foregoing (collectively "Maintenance Expenses") within twenty (20)
days after receiving an invoice therefor from Sublessor; provided, however, that
Sublessee shall have no obligation to reimburse Sublessor for any Maintenance
Expenses applicable to building equipment or systems exclusively serving any
portion of the Master Premises other than the Subleased Premises and Shared
Space. Notwithstanding anything to the contrary contained in this Sublease,
Sublessor shall have no obligation to perform any repairs or any other
obligation of Master Lessor required to be performed by Master Lessor under the
terms of the Master Lease (including, without limitation Master Lessor's
obligations under Articles 17, 24 and 25 of the Master Lease and Master Lessor's
obligation to comply with laws) and Sublessee shall look solely to Master Lessor
for performance of said obligations; provided, however, Sublessor shall request
performance of the same in writing from Master Lessor promptly after being
requested to do so by Sublessee, and shall use Sublessor's reasonable good faith
efforts (provided Sublessee pays all costs incurred by Sublessor in connection
therewith, unless the matter at issue also affects the portion of the Master
Premises retained for the exclusive use of Sublessor, in which event Sublessee
shall only be required to pay an equitable share of such costs as reasonably
determined by Sublessor) to obtain Master Lessor's performance.
B. Notwithstanding anything to the contrary contained in this
Sublease, (i) there shall be no abatement of Rent or liability of Sublessor on
account of any (a) injury or interference with Sublessee's business (including
loss of profits) with respect to any improvements, alterations or repairs made
by Sublessor to the Subleased Premises or Master Premises or any part thereof or
(b) the cessation of any utilities supplied to the Subleased Premises or the
limitation, curtailment, rationing or restrictions required by and governmental
authority on the use of water, electricity, or any other form of energy serving
the Subleased Premises, and (ii) Sublessor shall not be responsible for repairs
required by an accident, fire or other peril, or for damage caused to any part
of the Subleased Premises or Master Premises by any act, negligence or omission
of Sublessee or its agents, contractors, employees or invitees. It is an
express condition precedent to all obligations of Sublessor to repair and
maintain the Subleased Premises that Sublessee shall have notified Sublessor of
the need for such repairs and maintenance, whereupon Sublessor shall promptly
commence and diligently prosecute its repair obligations. Sublessee hereby
waives the benefits of any statute which would afford Sublessee the right to
make repairs at Sublessor's expense including but not limited to Sections 1941
and 1942 of the Civil Code of California, or to terminate this Sublease because
of Sublessor's failure to keep the Subleased Premises or Master Premises in good
order, condition and repair.
8. Utilities:
---------
A. The parties acknowledge that other than the Subleased Premises to
be occupied by Sublessee hereunder, the Shared Space, and that portion of the
Master Premises occupied by Sublessor consisting of 10,421 square feet (as shown
on Exhibit B hereto), the remaining portion of the Master Premises ("Area W1"
and "Area W2" as shown on Exhibit B hereto) shall be used solely for warehouse
and storage use, and therefore solely with regard to allocation of the cost of
Utilities, Sublessee's share shall be fifty-one percent (51%) of the costs
incurred by Sublessor for all Utilities set forth in Article 16 of the Master
Lease, which amount shall be payable by Sublessee to Sublessor as Additional
Rent. Sublessor agrees that heating and air conditioning shall not be provided
to Area W1 and Area W2 without prior written notice to Sublessee. In the event
Sublessor desires to: (a) change the use of Area W1 or Area W2 to any other use
other than warehouse and storage use or (b) provide heating or air conditioning
to Area W1 or W2, then Sublessor shall provide prior written notice to
Sublessee, in which event Sublessor and Sublessee shall agree to an equitable
allocation of the cost of Utilities.
B. Sublessor shall provide air conditioning to the Subleased Premises
consistent with the normal capacity (as opposed to maximum capacity) of the
current air conditioning system in the Master Premises Monday through Friday
8:00 a.m. to 6:00 p.m. and Saturday from 8:00 a.m. to 12:00 p.m., Sundays
<PAGE>
and holidays excepted. Should Tenant use such services in excess of the
foregoing or at hours other than those listed above, Sublessor reserves the
right to charge Sublessee for such excess use as Additional Rent and may charge
Sublessee as Additional Rent Sublessor's actual costs (as reasonably determined
by Sublessor) in providing such excess services. Sublessor shall provide to the
Subleased Premises electric power consistent with normal office use for lighting
and small office machines such as desktop computers, copiers and fax machines.
In addition to Sublessee's Pro Rata Share of utilities set forth hereinabove,
Sublessee shall pay to Sublessor the cost of excessive electricity consumed by
Sublessee as determined by meter, or if not metered, as otherwise reasonably
estimated by Sublessor, plus any actual reasonable accounting expenses incurred
by Sublessor in connection with said determination. Sublessor may cause the
Subleased Premises to be separately metered at Sublessee's expense, including
without limitation, the cost of installing, maintaining, repairing and replacing
such meters. Notwithstanding anything to the contrary contained herein,
Sublessee shall have no obligation to pay for all or any portion of any
excessive utility usage by Sublessor.
9. Indemnity:
---------
A. Sublessee shall indemnify, defend with counsel reasonably
acceptable to Sublessor, protect and hold Sublessor harmless from and against
any and all claims, liabilities, judgments, causes of action, damages, costs and
expenses (including, without limitation, reasonable attorneys' and experts'
fees), to the extent caused by or arising in connection with: (i) the use or
occupancy by Sublessee or its agents, employees, contractors or invitees of the
Subleased Premises or the condition of the Subleased Premises; (ii) the
negligence or willful misconduct of Sublessee or its agents, employees,
contractors or invitees, except to the extent caused by the negligence or
willful misconduct of Sublessor or its authorized employees, agents or
contractors; (iii) a breach of Sublessee's obligations under this Sublease; and
(iv) a breach (through no fault of Sublessor) of Sublessee's obligations under
the Master Lease to the extent such obligations are incorporated herein by this
Sublease. Sublessee's indemnification of Sublessor shall survive termination of
this Sublease.
B. Sublessor shall indemnify, defend with counsel reasonably
acceptable to Sublessee, protect and hold Sublessor harmless from and against
any and all claims, liabilities, judgments, causes of action, damages, costs and
expenses (including, without limitation, reasonable attorneys' and experts'
fees), to the extent caused by or arising in connection with: (i) the
negligence or willful misconduct of Sublessor or its agents, employees,
contractors or invitees; or (ii) a breach (through no fault of Sublessee) of
Sublessor's obligations as "Tenant" under the Master Lease to the extent such
obligations are not incorporated herein as obligations of Sublessee under this
Sublease. Sublessor's indemnification of Sublessee shall survive termination of
this Sublease.
10. Right to Cure Defaults:
----------------------
A. If Sublessee fails to pay any sum of money to Sublessor, or fails
to perform any other act on its part to be performed hereunder, then Sublessor
may, but shall not be obligated to, after passage of any applicable notice and
cure periods, make such payment or perform such act. All such sums paid, and
all reasonable costs and expenses of performing any such act, shall be deemed
Additional Rent payable by Sublessee to Sublessor within ten (10) days after
receipt of demand, together with interest thereon at the rate set forth in
Article 34 of the Master Lease (the "Interest Rate") from the date of the
expenditure until repaid.
B. If Sublessor is in default (beyond the applicable notice and cure
period) of any of its monetary obligations under the Master Lease, then
Sublessee may, at its option, cure such default, and Sublessee shall be entitled
to collect promptly from Sublessor, Sublessee's reasonable expenses in so doing;
provided, however, that (i) Master Lessor accepts such performance by Sublessee
on behalf of Sublessor, (ii) if Sublessor notifies Sublessee that it disputes
any amount demanded by Master Lessor, Sublessee shall not make any such payment
to Master Lessor unless Master Lessor has provided a three-day notice to pay
such
<PAGE>
amount or forfeit the Master Lease, and (iii) Sublessee shall have provided
Sublessor with at least two (2) business days' written notice of such intention
to cure, and Sublessor shall not cure such default within two (2) business days
after receiving such notice. Additionally, if Sublessor fails to perform any of
its repair and maintenance obligations hereunder within a reasonable time, but
in no event later than thirty (30) days after Sublessor's receipt of written
notice from Sublessee (or such longer period of time if such default cannot
reasonably be cured within said thirty (30)-day period, provided Sublessor
commences such cure within said thirty (30)-day period and thereafter diligently
prosecutes such cure to completion), Sublessee may perform such repair and
maintenance work. If Sublessee so performs such repair and maintenance work, the
full amount of the reasonable and actual cost and expense incurred by Sublessee
shall be owed by Sublessor to Sublessee, and Sublessor shall within ten (10)
days after its receipt of written demand from Sublessee pay to Sublessee the
full amount thereof, it being understood, however, that Sublessee may enforce
its right to such reimbursement by legal action, if necessary, but in no event
shall Sublessee be entitled to offset or otherwise deduct such amounts from
Rent.
11. Assignment and Subletting: Subject to the terms of Article 26 of the
-------------------------
Master Lease, incorporated herein, as modified by the terms of this Sublease,
Sublessee may not assign this Sublease, sublet the Subleased Premises, transfer
any interest of Sublessee therein or permit any use of the Subleased Premises by
another party (collectively, "Transfer"), without the prior written consent of
Sublessor, which consent shall not be unreasonably withheld, and Master Lessor.
A consent to one Transfer shall not be deemed to be a consent to any subsequent
Transfer. Any Transfer without such consent shall be void and, at the option of
Sublessor, shall terminate this Sublease. Sublessor's waiver or consent to any
assignment or subletting shall be ineffective unless set forth in writing, and
Sublessee shall not be relieved from any of its obligations under this Sublease
unless the consent expressly so provides. As a condition of granting its
consent to any Transfer, Sublessor may require Sublessee to pay to Sublessor
fifty percent (50%) of all Excess Rents received by Sublessee which remain after
the portion of such Excess Rents which is payable to Master Lessor under the
Master Lease is deducted therefrom. As used herein, the term "Excess Rents"
shall mean all Rents and other consideration payable by a subtenant or assignee
to Sublessee in connection with the Transfer (as more particularly described in
Section 26 F. of the Master Lease), less any brokerage commissions, costs
incurred by Sublessee with respect to alterations or improvements made to the
portion of the Subleased Premises that is the subject of the Transfer, and
reasonable attorneys' fees incurred by Sublessee in connection with the
Transfer. Notwithstanding anything to the contrary contained in this Sublease
or in the Master Lease, (i) Sublessee may assign this Sublease or sublet the
Premises, or any portion thereof, without Sublessor's consent, to (a) any entity
which controls, is controlled by, or is under common control with Sublessee, (b)
to any entity which results from a merger of, reorganization of, or
consolidation with Sublessee, or (c) to any entity which acquires substantially
all of the stock or assets of Sublessee, as a going concern, with respect to the
business that is being conducted in the Premises; provided that in each of the
foregoing Transfers, the net worth of the surviving entity is equal to or
greater than that of the Sublessee immediately prior to the date of the
Transfer, (ii) Sublessee shall reimburse Sublessor and Master Lessor for all
costs and expenses incurred by them in considering any request by Sublessee to a
Transfer, and (iii) a bona fide public or private offering of the capital stock
of Sublessee shall not be deemed a Transfer.
12. Use:
---
A. Sublessee may use the Subleased Premises for general office
purposes, final assembly to configure equipment to customers order(s) and final
quality assurance testing and for no other use without the express written
consent of Sublessor.
B. Sublessee shall not use, store, keep, handle, manufacture,
transport, release, discharge, emit or dispose of any Hazardous Materials (as
defined in the Master Lease) in, on, under, about, to or from the Subleased
Premises without the prior written consent of Sublessor; provided, however, that
Sublessee may, without Sublessor's consent, use, in compliance with all
applicable laws, normal types and quantities of Hazardous Materials typically
used in connection with general purpose offices (such as
<PAGE>
copier toner, janitorial supplies and the like). Without limiting the generality
of the foregoing, Sublessee, at its sole cost, shall comply with all laws
relating to Hazardous Materials. Sublessee shall indemnify, defend with counsel
reasonably acceptable to Sublessor and hold Sublessor harmless from and against
all claims, actions, suits, proceedings, judgments, losses, costs, personal
injuries, damages, liabilities, deficiencies, fines, penalties, damages,
reasonable attorneys' fee and consultants' fees, investigations,
detoxifications, remediations, removals, and expenses of every type and nature,
to the extent caused by the use, storage, handling, manufacture, transportation,
release, discharge, emission or disposal of Hazardous Materials on or about the
Subleased Premises or Master Premises by Sublessee or its agents, employees,
contractors or invitees. Sublessor shall indemnify, defend with counsel
reasonably acceptable to Sublessee and hold Sublessee harmless from and against
all claims, actions, suits, proceedings, judgments, losses, costs, personal
injuries, damages, liabilities, deficiencies, fines, penalties, damages,
reasonable attorneys' fee and consultants' fees, investigations,
detoxifications, remediations, removals, and expenses of every type and nature,
to the extent caused by the use, storage, handling, manufacture, transportation,
release, discharge, emission or disposal of Hazardous Materials on or about the
Subleased Premises or Master Premises by Sublessor or its agents, employees,
contractors or invitees.
C. Sublessee shall not, without the prior written consent of
Sublessor, store any materials, supplies, finished or unfinished products or
articles of any nature on any area of the Master Premises (including outside the
building) except on the Subleased Premises. Sublessor shall not, without the
prior written consent of Sublessee, store any materials, supplies, finished or
unfinished products or articles of any nature on the Subleased Premises.
Sublessee shall not do or permit anything to be done in, on or about the
Subleased Premises which would (i) injure the Subleased Premises, or (ii)
vibrate, shake, overload, or impair the efficient operation of the Subleased
Premises or any portion of the Master Premises or the sprinkler systems,
heating, ventilating or air conditioning equipment, or utilities systems located
therein. Sublessee shall comply with all reasonable rules and regulations
promulgated from time to time by Sublessor or Master Lessor.
The obligations of Sublessor and Sublessee under this Paragraph 12 shall survive
the expiration or earlier termination of the Term.
13. Effect of Conveyance: As used in this Sublease, the term "Sublessor"
--------------------
means the holder of the Tenant's interest under the Master Lease. In the event
of any assignment, transfer or termination of the Tenant's interest under the
Master Lease, which assignment, transfer or termination may occur at any time
during the Term hereof in Sublessor's sole discretion, Sublessor shall be and
hereby is entirely relieved of all covenants and obligations first accruing from
and after the date of such transfer so long as such transferee agrees to assume
and carry out all covenants and obligations thereafter to be performed by
Sublessor hereuder. Sublessor shall transfer and deliver any security of
Sublessee to the transferee of the Tenant's interest under the Master Lease, and
thereupon Sublessor shall be discharged from any further liability with respect
thereto.
14. Delivery. This Sublease shall not be void or voidable, nor shall
--------
Sublessor be liable to Sublessee for any loss or damage by reason of delays in
the Commencement Date or delays in Sublessor delivering the Subleased Premises
to Sublessee for any reason whatsoever; provided, however, that in the event
that Sublessor does not deliver the Subleased Premises on or before April 1,
1999, then Sublessee may by written notice delivered to Sublessor no later than
April 10, 1999 elect to terminate this Sublease.
15. Improvements: No alterations or improvements shall be made to the
------------
Subleased Premises, except in accordance with this Sublease and the Master
Lease, and with the prior written consent, when required, of both Master Lessor
and Sublessor. Sublessor shall not be required to provide a tenant improvement
allowance to Sublessee in connection with Sublessee's construction of any
improvements to the Subleased Premises.
16. Release and Waiver of Subrogation: Notwithstanding anything to the
---------------------------------
contrary in this Sublease, Sublessor, Sublessee and Master Lessor (by reason of
its consent hereto) hereby release each other and their respective employees,
agents and assigns from any damage to property or loss of any kind which is
<PAGE>
caused by or results from any risk insured against under any property insurance
policy carried by any of such parties or any risk which would normally be
covered by so called "all risk" extended coverage property insurance, without
regard to the negligence or willful misconduct of the party so released. Each
party shall use reasonable efforts to cause each insurance policy obtained by it
to provide that the insurer waives all right of recovery against the other party
and its agents and employees in connection with any damage or injury covered by
the policy, and each party shall notify the other party if it is unable to
obtain a waiver of subrogation. Sublessor shall not be liable to Sublessee, nor
shall Sublessee be entitled to terminate this Sublease or to abate Rent for any
reason, including, without limitation, (i) failure or interruption of any
utility system or service; or (ii) failure of Master Lessor to maintain the
Subleased Premises or the Master Premises as may be required under the Master
Lease. The obligations of Sublessor and Sublessee shall not constitute the
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders or other principals or representatives
of their respective business entity. To the extent that rent is abated with
respect to the Subleased Premises under the Master Lease, Sublessee's rental
obligations hereunder shall be abated.
17. Insurance: Sublessee shall, with respect to this Sublease, obtain and
---------
keep in full force and effect, at Sublessee's sole cost and expense, during the
Term the same types and amounts of insurance coverage required to be carried by
the "Tenant" under the Master Lease, except that instead of the building
insurance coverages set forth in Sections 23 B.(3), (4), (5) and (6), Sublessee
shall carry (in accordance with the requirements set forth in Article 23 of the
Master Lease, as incorporated herein) fire and property damage insurance in so-
called "all risk" form insuring Sublessee's personal property, inventory,
improvements and alterations to the Subleased Premises made by Sublessee, and
trade fixtures within the Subleased Premises, for the full replacement cost
thereof. Sublessee shall include Sublessor and Master Lessor as an additional
insured in any policy of liability insurance carried by Sublessee in connection
with this Sublease.
18. Default: Sublessee shall be in material default of its obligations
-------
under this Sublease if any of the following events occur:
A. Sublessee fails to pay any Rent when due, when such failure
continues for five (5) days after written notice from Sublessor to Sublessee
that any such sum is due; or
B. Sublessee fails to perform any term, covenant or condition of this
Sublease (except those requiring payment of Rent) and fails to cure such breach
within fifteen (15) days after delivery of a written notice specifying the
nature of the breach; provided, however, that if more than fifteen (15) days are
reasonably required to remedy the failure, then Sublessee shall not be in
default if Sublessee commences the cure within the fifteen (15) day period and
thereafter completes the cure within thirty (30) days after the date of the
notice; or
C. Sublessee makes a general assignment of its assets for the benefit
of its creditors, including attachment of, execution on, or the appointment of a
custodian or receiver with respect to a substantial part of Sublessee's property
or any property essential to the conduct of its business; or
D. Sublessee abandons the Subleased Premises; or
E. A petition is filed by or against Sublessee under the bankruptcy
laws of the United States or any other debtors' relief law or statute, unless
such petition is dismissed within sixty (60) days after filing; or
F. A court directs the winding up or liquidation of Sublessee; or
G. A substantial part of Sublessee's property or any property
essential to the conduct of its business is attached or executed upon and not
released from the attachment or execution within sixty (60) days; or
<PAGE>
H. A custodian or receiver is appointed for a substantial part of
Sublessee's property or any property essential to the conduct of its business
and not discharged within sixty (60) days; or
I. Sublessee commits any other act or omission which constitutes a
default under the Master Lease, which has not been cured after delivery of
written notice and passage of the applicable grace period provided in the Master
Lease as modified, if at all, by the provisions of this Sublease.
19. Remedies: In the event of any default by Sublessee, Sublessor shall
--------
have all remedies provided to the "Landlord" in the Master Lease (including
those remedies set forth in Article 27 of the Master Lease, except that the time
periods referred to therein shall be reduced to correspond to the cure periods
set forth in this Sublease) and by applicable law. Sublessor may resort to its
remedies cumulatively or in the alternative.
20. Surrender: On or before the Expiration Date or any sooner termination
---------
of this Sublease, Sublessee shall remove all of its trade fixtures, personal
property and alterations constructed by Sublessee in the Subleased Premises
which are required to be removed under the terms of this Sublease and shall
surrender the Subleased Premises to Sublessor in the condition required by
Section 13 of the Master Lease and with the furniture listed on Exhibit C
accounted for and in the condition existing as of the Commencement Date, normal
wear and tear expected. If the Subleased Premises are not so surrendered, then
Sublessee shall be liable to Sublessor for all costs incurred by Sublessor in
returning the Subleased Premises to the required condition, plus interest
thereon at the Interest Rate.
21. Broker: Each party hereto represents and warrants that it has dealt
------
with no broker, in connection with this Sublease and the transactions
contemplated herein, except Corporate Real Estate Consulting and Cornish & Carey
Commercial. Each party shall indemnify, protect, defend and hold the other
party harmless from all costs and expenses (including reasonable attorneys'
fees) arising from or relating to a breach of the foregoing representation and
warranty. Sublessor and Norian Corporation shall pay any brokerage commissions
which might be due to Corporate Real Estate Consulting in accordance with
Sublessor and Norian Corporation's respective separate agreements with Corporate
Real Estate Consulting.
22. Notices: Unless at least five (5) days' prior written notice is given
-------
in the manner set forth in this paragraph, the address of each party for all
purposes connected with this Sublease shall be that address set forth below
their signatures at the end of this Sublease. All notices, demands or
communications in connection with this Sublease shall be properly addressed and
delivered as follows: (a) personally delivered; or (b) submitted to an
overnight courier service, charges prepaid; or (c) deposited in the mail
(certified, return-receipt requested, and postage prepaid). Notices shall be
deemed delivered upon receipt, if personally delivered, one (1) business day
after being submitted to an overnight courier service and two (2) business days
after deposit in the United States mail, if mailed as set forth above. All
notices given to Master Lessor under the Master Lease shall be considered
received only when delivered in accordance with the Master Lease.
23. Other Sublease Terms:
--------------------
A. Incorporation By Reference. Except as set forth below and except
--------------------------
as otherwise provided in this Sublease, the terms and conditions of this
Sublease shall include all of the terms of the Master Lease and such terms are
incorporated into this Sublease as if fully set forth herein, except that: (i)
each reference in such incorporated sections to "Lease" shall be deemed a
reference to this "Sublease"; (ii) each reference to the "Premises" shall be
deemed a reference to the "Subleased Premises"; (iii) each reference to
"Landlord" and "Tenant" shall be deemed a reference to "Sublessor" and
"Sublessee", respectively, except as otherwise expressly set forth herein; (iv)
with respect to work, services, utilities, electricity, repairs (or damage
caused by Master Lessor), restoration, insurance, indemnities, reimbursements,
representations, warranties or the performance of any other obligation of Master
Lessor under the Master Lease, whether or not incorporated herein, the sole
obligation of Sublessor shall be to request the same in writing from Master
Lessor as and when requested to do so by Sublessee, and to use
<PAGE>
Sublessor's reasonable good faith efforts (provided Sublessee pays all costs
incurred by Sublessor in connection therewith, unless the matter at issue also
affects the portion of the Master Premises which is not part of the Subleased
Premises, in which event Sublessee shall only be required to pay an equitable
share of such costs as reasonably determined by Sublessor) to obtain Master
Lessor's performance; (v) with respect to any obligation of Sublessee to be
performed under this Sublease, wherever the Master Lease grants to "Tenant" a
specified number of days to perform its obligations under the Master Lease,
except as otherwise provided herein, Sublessee shall have three (3) fewer days
to perform the obligation, including, without limitation, curing any defaults
(provided, however, that if any cure period provides for three (3) days or less
to perform, Sublessee shall have one (1) business day to perform); (vi) with
respect to any approval required to be obtained from the "Landlord" under the
Master Lease, such consent must be obtained from both Master Lessor and
Sublessor, and the approval of Sublessor may be withheld if Master Lessor's
consent is not obtained; (vii) in any case where the "Landlord" reserves or is
granted the right to manage, supervise, control, repair, alter, regulate the use
of, enter or use the Premises or any areas beneath, above or adjacent thereto,
such reservation or grant of right of entry shall be deemed to be for the
benefit of both Master Lessor and Sublessor; (viii) in any case where "Tenant"
is to indemnify, release or waive claims against "Landlord", such indemnity,
release or waiver shall be deemed to run from Sublessee to both Master Lessor
and Sublessor; (ix) in any case where "Tenant" is to execute and deliver certain
documents or notices to "Landlord", such obligation shall be deemed to run from
Sublessee to both Master Lessor and Sublessor; (x) the following modifications
shall be made to the Master Lease as incorporated herein:
(a) the following provisions of the Master Lease are not
incorporated herein: Sections 1, 2, 3, 4, 6, 9, 26(I), 28 (last paragraph), 29
(except with respect to Master Lessor), 30, 35 and 42 and Exhibit "B".
(b) references to "Landlord" in the following provisions shall
mean "Master Lessor" only: Sections 17, 18.C, 24.A (first, third, fifth and
seventh references to "Landlord" only), 24.B, 24.C (first reference), 25.B, and
39 (first sentence of second paragraph).
(c) the reference to $10,000 in Section 12.A shall be replaced by
$3,000;
(d) any right to abate rent provided to Sublessee through
incorporation of the provisions of the Master Lease shall not exceed the rent
actually abated under the Master Lease with respect to the Subleased Premises.
B. Incorporation of Obligations. This Sublease is and at all times
----------------------------
shall be subject and subordinate to the Master Lease and the rights of Master
Lessor thereunder. Sublessee hereby expressly agrees: (i) to comply with all
provisions of the Master Lease which are incorporated by reference in this
Sublease; and (ii) except as otherwise provided in this Sublease, to perform all
the obligations on the part of the "Tenant" to be performed under the terms of
the Master Lease with respect to the Subleased Premises during the term of this
Sublease. Sublessor shall perform or cause to be performed all of the
obligations of "Tenant" under the Master Lease, except to the extent such
obligations are incorporated herein as obligations of Sublessee under this
Sublease. In the event the Master Lease is terminated for any reason,
whatsoever, this Sublease shall terminate simultaneously with such termination;
provided, however, that if, without the fault of Sublessor, the Master Lease
should terminate prior to the expiration of this Sublease, Sublessor shall have
no liability to Sublessee on account of such termination. In the event of a
conflict between the provisions of this Sublease and the Master Lease, as
between Sublessor and Sublessee, the provisions of this Sublease shall control.
<PAGE>
24. Right to Contest: If Sublessor does not have the right to contest any
----------------
matter in the Master Lease due to expiration of any time limit that may be set
forth therein or for any other reason, then notwithstanding any incorporation of
any such provision from the Master Lease in this Sublease, Sublessee shall also
not have the right to contest any such matter.
25. Covenant of Quiet Enjoyment: Sublessee peacefully shall have, hold and
---------------------------
enjoy the Subleased Premises, subject to the terms and conditions of this
Sublease, provided that Sublessee pays all Rent imposed hereunder and otherwise
performs all of Sublessee's covenants and agreements contained herein.
26. Conditions Precedent: Notwithstanding anything to the contrary in this
--------------------
Sublease: this Sublease and Sublessor's and Sublessee's obligations hereunder
are conditioned upon the written consent of Master Lessor to this Sublease. If
Sublessor does not receive such consent within thirty (30) days after execution
of this Sublease by Sublessor, then until such time consent is obtained,
Sublessor may terminate this Sublease by giving Sublessee written notice
thereof, and upon such termination, Sublessor shall return to Sublessee its
payment of Base Monthly Rent paid by Sublessee pursuant to Paragraph 4 hereof
and the Security Deposit.
27. No Third Party Rights: The benefit of the provisions of this Sublease
---------------------
is expressly limited to Sublessor and Sublessee and their respective permitted
successors and assigns. Under no circumstances will any third party be
construed to have any rights as a third party beneficiary with respect to any of
said provisions.
28. Choice of Law; Severability: This Sublease shall in all respects be
---------------------------
governed by and construed in accordance with the laws of the State of
California. If any term of this Sublease is held to be invalid or unenforceable
by any court of competent jurisdiction, then the remainder of this Sublease
shall remain in full force and effect to the fullest extent possible under the
law, and shall not be affected or impaired.
29. Amendment: This Sublease may not be amended except by the written
---------
agreement of all parties hereto.
30. Attorneys' Fees: If either party brings any action or legal proceeding
---------------
with respect to this Sublease, the prevailing party shall be entitled to recover
from the other party reasonable attorneys' fees, experts' fees, and court costs.
If either party becomes the subject of any bankruptcy or insolvency proceeding,
then the other party shall be entitled to recover all reasonable attorneys'
fees, experts' fees, and other costs incurred by that party in protecting its
rights hereunder and in obtaining any other relief as a consequence of such
proceeding.
3.1 Authority to Execute: Sublessee and Sublessor each represent and
--------------------
warrant to the other that each person executing this Sublease on behalf of each
party is duly authorized to execute and deliver this Sublease on behalf of that
party.
32. Counterparts: This Sublease may be executed in one (1) or more
------------
counterparts each of which shall be deemed an original but all of which together
shall constitute one (1) and the same instrument. Signature copies may be
detached from the counterparts and attached to a single copy of this Sublease
physically to form one (1) document.
33. ADA: Sublessor represents to Sublessee that Sublessor has no actual
----
knowledge that any portion of the Master Premises does not comply with the
Americans With Disabilities Act (the "ADA"). However, Sublessee acknowledges
that Sublessor has made no inquiry nor done any investigation whatsoever with
regard to ADA compliance.
34. Gates: Sublessor hereby agrees to use its good faith efforts in order
------
to cause the gates to the parking lots on the Master Premises to remain open at
all times. In addition, subject to the consent of the Master Lessor, Sublessee
may, at its cost, remove those gates and that portion of the fencing as
indicated on Exhibit B hereto.
35. Demising Space: Sublessee shall at its cost construct a wall which
--------------
demises Area W1 and the Subleased Premises as shown on Exhibit B.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of the day
and year first above written.
SUBLESSOR: SUBLESSEE:
DURECT CORPORATION, a Delaware LIGHTERA NETWORKS, INC., a Delaware
corporation corporation
By: /s/ Thomas A. Schreck By: /s/ David E. Chambers
------------------------- --------------------------------
Name: Thomas A. Schreck Name: David E. Chambers
------------------------ ------------------------------
Its: Chief Financial Officer Its: Vice President of Engineering &
----------------------- -------------------------------
Manufacturing
-------------
Address: 10240 Bubb Road Address: 10201 Bubb Road
Cupertino, CA 95014 Cupertino, CA 95014
<PAGE>
CONSENT TO SUBLEASE
Master Lessor hereby acknowledges receipt of a copy of this Sublease, and
consents to the terms and conditions of this Sublease. Master Lessor represents
and warrants that the Master Lease is in full force and effect and has not been
modified, and to Master Lessor's knowledge, there exists under the Master Lease
no default or event of default by either Master Lessor or Sublessor, nor has
there occurred any event which, with the giving of notice or the passage of time
or both, could constitute such a default or event of default. By this consent,
Master Lessor shall not be deemed in any way to have entered into the Sublease
or to have consented to any further assignment or sublease.
MASTER LESSOR:
DE ANZA ENTERPRISES, LTD.
By: /s/ Julia Hoover-Smoot
-----------------------------------
Print Name: Julia Hoover-Smoot
---------------------------
Title: Attorney
--------------------------------
Dated: March 18, 1999
--------------------------------
<PAGE>
EXHIBIT A
---------
MASTER LEASE
(Attached)
<PAGE>
EXHIBIT B
---------
SUBLEASED PREMISES
(Attached)
<PAGE>
EXHIBIT C
---------
FURNITURE INVENTORY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Description Count Tag #
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Gray Metal File Cabinet - 4 drawer 36 00153-54, 00205-08,
00215, 00220-21,
00228, 00235, 00269,
00275-80, 00290,
00295, 00325,
00327-31, 00339-40,
00350-51, 00362,
00367, 00371-74
- -------------------------------------------------------------------------------------------
Dark Blue Metal File Cabinet - 2 drawer 1 00199
- -------------------------------------------------------------------------------------------
Blond Wood Top File Cabinet - 2 drawer 1 00211
- -------------------------------------------------------------------------------------------
Gray/Blond Wood Top Storage Cabinets 3 00222-00224
- -------------------------------------------------------------------------------------------
Burgundy High Back Swivel Office Chairs 41 00158-59, 00177,
00230-31, 00236,
00241-47, 00250-66,
00273, 00284, 00294,
00300, 00303,00310,
00313, 00317, 00324,
00341, 00347,
00354, 00358-59,
00368, 00378-, 00382,
00386-87, 00390,
00393-94
- -------------------------------------------------------------------------------------------
Green Office Guest Chairs 3 001160-62
- -------------------------------------------------------------------------------------------
Burgundy Office Guest Chairs 52 00163-76, 00178-97,
00267-68, 00285-86,
00292-93, 00301-02,
00342-43, 00348-49,
00360-61, 00369-70,
00391-92
- -------------------------------------------------------------------------------------------
Gray Metal 5 Shelf Bookshelf 1 00326
- -------------------------------------------------------------------------------------------
Gray Metal 4 Shelf Bookshelf 8 00203-04, 00219,
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
00229, 00272, 00335,
00363, 00375
- -------------------------------------------------------------------------------------------
Furniture Inventory
- -------------------------------------------------------------------------------------------
Description Count Tag #
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Gray Metal 3 Shelf Bookshelf 1 00296
- -------------------------------------------------------------------------------------------
Gray Metal 2 Shelf Bookshelf 2 00237, 00291
- -------------------------------------------------------------------------------------------
Black Lobby Coffee Table 1 00238
- -------------------------------------------------------------------------------------------
Lobby Ashtray Canister 1 00239
- -------------------------------------------------------------------------------------------
Large Oval Blond Wood Conference Table 1 00240
- -------------------------------------------------------------------------------------------
Small Oval Blond Wood Conference Table 2 00248-49
- -------------------------------------------------------------------------------------------
Blond Wood Top Round Table 1 00157
- -------------------------------------------------------------------------------------------
Gray Round Tables 2 00156, 00198
- -------------------------------------------------------------------------------------------
Gray Rectangular Table 1 00274
- -------------------------------------------------------------------------------------------
</TABLE>
Acknowledged by:
Durect Corp:
By:___________________________ Dated:_____________________________
Lightera Networks, Inc.:
By:___________________________ Dated:_____________________________
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Exhibit 10. 13
Quote 1090 - Revised 10/27/99, 12/22/99, 1/17/00, 2/11/00 and 2/16/00
To
Durect Corporation
CBL Approval Page
Two signatures are required.
Tom Rice: _________________________________________
Chief Executive Officer
John Botek: _________________________________________
Chief Operating Officer
Narlin Beaty: _________________________________________
Chief Operating Officer
Henry Clark: _________________________________________
Director of Client Relations
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
PROJECT PROPOSAL
TO: Barbara Laidlaw FROM: Charles Proby
Durect Corporation Chesapeake Biological Labs., Inc.
10240 Bubb Road 1111 S. Paca Street
Cupertino, CA 95014 Baltimore, MD 21230
Issue Date: October 11, 1999 Quotation No.: 1090 - Revised 10/27/99
- ---------- -------------
Revised 12/22/99
Revised 1/17/00
Revised 2/11/00
Revised 2/16/00
Subject: Duros(R) Sufentanil
- -------
Duration: This quote is valid for 60 days from issue date.
- --------
Schedule: See CBL Scheduling Policy.
- --------
CHESAPEAKE BIOLOGICAL LABORATORIES, INC. will provide materials and perform work
as described in the Scope of Work. This quotation consists of the following
sections.
1. Scope of Work
A. Project Description
B. Process Diagram
C. Development and Validation Work
2. Project Price or Budget
3. CBL Scheduling Policy
4. Cancellation and Postponement Policy
5. Terms and Conditions
**Hazardous waste will be manifested and discarded as required by state and
federal laws. This expense is not included in the quoted price and will
be charged to the client at [* * *]
-----
DURECT CORPORATION will provide the following:
1. Pre-released active pharmaceutical ingredient, label text, MSDS,
Certificate of Analysis and all
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 1 of 16
<PAGE>
documentation necessary for release.
2. Approval by signature of the batch record.
3. Any necessary approvals for the use of the product.
4. Perform all additional testing necessary for release of the product not
performed by CBL.SCOPE OF WORK
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 2 of 16
<PAGE>
SCOPE OF WORK
DURECT CORPORATION
================================================================================
CONTACT: Barbara Laidlaw Phone: 408-777-3554 Fax: 408-777-3577
PRODUCT NAME: Duros(R) Sufentanil (Schedule II)
PRODUCT USE: Narcotic Analgesic
EXPECTED BATCH SIZE: ~500, 20 cc vials
BIOHAZARD: Yes FDA STATUS: IND Phase II
================================================================================
Targeted fill date: See attached CBL Scheduling Policy.
General Project Description:
This project will consist of component receipt and control, formulation,
filtration, aseptic filling, inspection, testing, stability, labeling and
packaging.
1. Client will supply active pharmaceutical ingredient, label text, MSDS,
Certificate of Analysis and all documentation necessary for release. Label
-----
text must be received at CBL a minimum of 6 weeks prior to the date of
----------------------------------------------------------------------
filling.
-------
2. [* * *]
3. CBL will supply cGMP released chemicals, containers, closures, labels and
processing and laboratory equipment.
4. All product contact equipment will be virgin, product dedicated or released
as clean, unless specified otherwise.
5. Validation work as listed in this Scope of Work will, in general, precede
sterile fill.
6. A CBL batch record will be developed from the process diagram submitted by
Client.
7. Remaining bulk product and all inspection rejects will be returned to
Client or destroyed at Client's instruction.
8. At completion of all work, CBL will provide Client with a copy of the
completed Batch Production Record including a Certificate of Analysis.
9. The Quality Agreement (Appendix 2) defines the quality performance
conditions agreed to between CBL and Client.
NOTE: DEA Schedule II; Respiratory protection required when handling drug
substance.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 3 of 16
<PAGE>
- --------------------------------------------------------------------------------
DEVELOPMENTAL/VALIDATION WORK
- --------------------------------------------------------------------------------
IQ/OQ/PQ of Custom Filling Equipment
Client will provide process and analytical equipment required for any novel
manufacturing methods. CBL will perform installation qualification (IQ),
operational qualification (OQ) and performance qualification (PQ) as required by
CBL SOP5211 and others. A portion of the PQ will be the evaluation of
modifications which might be necessary to use the equipment in the clean room in
such a way as to eliminate the chance of particulate or microbiological
contamination during operation. The cost estimate assumes that relatively
straightforward engineering solutions for clean room use of the equipment will
be found. To minimize timing delays, CBL engineering staff will participate in
final stages of equipment qualification at Client facility prior to shipment of
equipment to CBL.
[* * *]
Fill Process Development
This refers to the aseptic design for operations within the clean area. It
involves the arrangement of support equipment and sequence of assembly and
preparation operations. Whenever more than the usual filling equipment is going
to be located within class 100 space, and additional time will be devoted to
that compounding/processing activity, then it is especially important, that
thorough consideration be given to possible generation of particulates.
Engineering Technical Services has the responsibility to design both the
physical and temporal operations, including preparation of a bill of materials
necessary to assure a smooth operation, without delays for unanticipated sterile
parts. Fill process development will include the filling of pumps with
formulation or a suitable surrogate. These pumps could be evaluated for
performance to ensure that the filling process is functioning correctly.
Aseptic Process Validation (media fills)
Three media fill processes will be performed in the class 100 area simulating
the entire process up to and including the actual filling of vials. Each fill
requires NLT 14 days for incubation to determine sterility. The purpose of
these fills is to demonstrate aseptic operations within the clean environment.
Assay Validation ([* * *] Sufentanil - Customer to supply).
Assays will be validated according compendial methods of the US Pharmacopeia 23
<1225>. Typical analytical parameters will be considered in the validation of
all assays. In particular, CBL will consider accuracy, precision, specificity,
limit of detection, limit of quantitation, linearity and range. All of these
parameters are not necessarily suitable to every analytical test. In addition
to the analytical parameters CBL will also consider ruggedness and robustness.
Clearly different test methods require different validation schemes. Category
I includes analytical methods for quantitation of major components of bulk drug
substances or active ingredients. Category II includes analytical methods for
determination of impurities in bulk drug substances. Category III is for
analytical methods used in the determination of performance characteristics.
CBL will generate a validation protocol consistent with USP 23 <1225>. Data
will be collected and reviewed and a final validation report written.
Bacteriostasis/Fungistasis (for Product)
B/F is required in order to establish the potential of the formulation to
interfere with sterility assays. B/F testing can be performed on developmental
batches as long as they are prepared with material equivalent to that intended
for clinical use and have the same formulation as will the GMP batches.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 4 of 16
<PAGE>
Enhancement/Inhibition (for Product)
E/I evaluates the potential for interference by the formulation with the assay
used to measure endotoxin. A preliminary E/I determination will be required to
allow quantitation of endotoxin in developmental batches. Full validation of E/I
is required once preparation of GMP batches begins. Validation involves
performing E/I on three consecutive batches.
Cleaning Recovery Study
This product will use product-dedicated equipment only. Contract manufacturers
must be able to assure themselves, their clients, and the FDA that no
significant chance exists for cross contamination to occur among products
sharing equipment which may conceivably contact product. CBL requires
demonstration that products are easily removed from glass or stainless steel
surfaces (as appropriate) by the routine cleaning methods called for in CBL
cleaning procedures. The cleaning study involves spotting product onto a
stainless steel coupon or tray and simulating the method for cleaning the
equipment. Recovery of the product from a stainless steel surface and
evaluation of cleaning are monitored by TOC (Total Organic Carbon) analysis
which, while lacking the specificity of methods such as HPLC, compensates by
virtue of its sensitivity. The cleaning study is expected to demonstrate removal
of product from the steel or glass surface. While a negative result is not
expected, such a result would require additional evaluation of the data obtained
and close consultation with the Client regarding the ability of CBL to proceed.
Specifically, for swab recovery, data must be developed to demonstrate the
following:
a) The swab does recover the material of interest.
b) The amount of material recovered on the swab can be detected using a
validated and appropriate analytical method.
c) The quantity of material detected on the swab can be correlated to the mass
of residual on the surface being cleaned.
d) The correlation described above is strong and covers the range of interest.
Filling Machine Fill Volume Qualification
CBL will perform a fill volume study with the actual product (or placebo) to
assure machine process capability. This study will set the target volume for
the fill using volume specifications or label data for the product. Typically,
a minimum alert level is set at +/- 3 sigma from the target weight for the fill
volume. The specification is then set slightly outside of those alert levels.
No fill volume qualification will be performed due to the unique filling machine
used for this process. The filling process for this product utilizes a fill
level check performed on each unit by a machine vision system.
[* * *]
Point 1: [* * *] Point 9: [* * *]
Point 2: [* *] Point 10: [* * *]
Point 3: [* *] Point 11: [* * *]
Point 4: [* *] Point 12: [* * *]
Point 5: [* *] Point 13: [* * *]
Point 6: [* *] Point 14: [* * *]
Point 7: [* *] Point 15: [* * *]
Point 8: [* * *]
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 5 of 16
<PAGE>
[* * *]. The following document outlines [* * * ] is based on that described in
[* * *]
The following assumptions are made with regard to [* * *]:
> [* * *] in this study.
> [* * *] is included in the program.
> [* * *] and should be considered [* * *]
-----
> [* * *] will be developed separately.
> [* * *] and is not included in the program herein.
> The [* * *] will only be included [* * *].
-----
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Activity ** ** ** ** ** **
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[* * * ] ** ** ** ** ** ** ** ** ** **
------
---------------------------------------------------------------------------------------------
[* * * ] ** ** ** ** ** ** ** ** ** **
---------------------------------------------------------------------------------------------
[* * * ] ** ** ** ** ** ** ** ** ** **
---------------------------------------------------------------------------------------------
[* * * ] ** ** ** ** ** ** ** ** ** **
---------------------------------------------------------------------------------------------
[* * * ] ** ** ** ** ** **
---------------------------------------------------------------------------------------------
[* * * ] ** ** ** ** ** ** ** ** ** **
---------------------------------------------------------------------------------------------
</TABLE>
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 6 of 16
<PAGE>
DURECT
Nbb 10/4/99
[Flow chart describing product supply, product manufacture and product testing
omitted pursuant to request for confidential treatment]
[* * *]
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 7 of 16
<PAGE>
Project Budget:
- --------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Activity Deliverable Estimated Price
----------------------------------------------------------------------------------------------------
<S> <C> <C>
IQ/OQ/PQ Custom Filling Equipment/(7)/ Report [* * *]
----------------------------------------------------------------------------------------------------
Fill Process Development Report [* * *]
----------------------------------------------------------------------------------------------------
Aseptic Process Validation (media fills) Report [* * *]
----------------------------------------------------------------------------------------------------
Assay Validation/Testing
[* * *] Report [* * *]
Report [* * *]
----------------------------------------------------------------------------------------------------
Bacteriostasis/Fungistasis Report [* * *]
----------------------------------------------------------------------------------------------------
Enhancement/Inhibition1 Report [* * *]
----------------------------------------------------------------------------------------------------
Cleaning Recovery Study Report [* * *]
----------------------------------------------------------------------------------------------------
Total Development/Validation Package [* * *]
----------------------------------------------------------------------------------------------------
Fill Finish (3 lots at [* * /2/] Final Product [* * *]
----------------------------------------------------------------------------------------------------
Stability (excluding "release rate assay") Report [* * *]
Pump Release Rate Assay/4/ [* * *]
Maximum price at 12 months [* * *]
----------------------------------------------------------------------------------------------------
Finished Product Pump Release Rate Assay/6/ QC Batch [* * *]
Maximum estimate for 15 timepoints x 3 lots Record [* * *]
----------------------------------------------------------------------------------------------------
Project Management and Initiation Fee/3/ NA [* * *]
----------------------------------------------------------------------------------------------------
TOTAL [* * *]
----------------------------------------------------------------------------------------------------
</TABLE>
/1/These studies must be performed three times and will be invoiced each
time, once for each of the first three lots produced at CBL. Price
represents the total cost.
/2/Each lot will run for[* * * ]are produced, whichever comes first.
/3/Project Management Fee to remain fixed independent of the number of
fills.
/4/[* * *]
/5/[* * *]
/6/Other finished product testing is included in the filling price.
/7/[* * *]
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 8 of 16
<PAGE>
Terms: Purchase Order for Quote 1090 is to be issued for the Total of[* * *]
- -----
. The Project Management and Initiation Fee must accompany the
Purchase Order.
. [* * *] of the Fill/Finish Price will be invoiced at completion of
QC testing by CBL, or at product shipment, [* * *].
. [* * *] of the Fill/Finish Price will be invoiced at shipment of
completed batch record, [* * *].
. The Pump Release Rate Assay will be invoiced with each time point,
[* * *].
. Qualification/Validation Studies will be invoiced with each report,
[* * *].
. Stability will be invoiced with each time point, [* * *].
. The prices set forth in the Project Budget are firm quotes and shall
be applicable unless the activities or services contemplated in this
Quote 1090 are changed by mutual agreement of CBL and Client.
FOB Sellers Dock, freight collect.
Cancellation and Postponement and Terms and Conditions policies will
apply.
The opportunity to work with Durect Corporation on this project is appreciated.
Sincerely,
Charles Proby
Director, Sales
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 9 of 16
<PAGE>
CBL SCHEDULING POLICY
In order for CBL to maintain a smooth manufacturing schedule, and offer maximum
flexibility to our Clients without punitive fees, CBL adheres to this policy.
This policy allows our project managers to provide each Client with an estimated
filling date for the purposes of completing a timeline. However, CBL's
manufacturing schedule will be set by the manufacturing division and only those
projects, which have achieved the following milestones will be put on the
schedule.
! Receipt of purchase order and requisite prepayment.
! All required validations/qualifications have been performed and
approved.
! Production batch record signed by all parties.
! All equipment and preparation items in-house and available for use.
! Components, excipients, and/or active ingredients have been received and
released.
Every effort will be made to schedule product fills as soon as practicable after
achieving the above, events. After CBL and Durect have agreed to a filling date,
then CBL will fill no later than five working days after the scheduled date. We
recognize that some products have sensitive active ingredients that must be
chilled, filled and lyophilized within a short time window. Once on the
manufacturing schedule, the Client will be notified of the actual fill date and
charged for any postponement or cancellation caused by the Client.
CBL will work closely with you to ensure that your requirements are met. Should
scheduling changes be necessary, you will be notified immediately by your
project manager.
Effective: January 17, 2000
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 10 of 16
<PAGE>
CANCELLATION AND POSTPONEMENT POLICY
1. Clean room and lyophilizer dates will not be assigned without a valid
purchase order.
2. All purchase orders must be accompanied by the Project Management and
Initiation Fee.
3. If a fill lot is CANCELED, the fee schedule in effect at the time of the
cancellation will apply. The current fee schedule is:
Notification Prior to Fill Day Fee
----------------------------------------------------------
>60 days [* * *]
----------------------------------------------------------
30 - 60 days [* * *]
----------------------------------------------------------
15- 29 days [* * *]
----------------------------------------------------------
8 - 14 days [* * *]
----------------------------------------------------------
<8 days [* * *]
----------------------------------------------------------
4. If a fill lot is POSTPONED, the fee schedule in effect at the time of the
postponement will apply. The current fee schedule is:
Notification Prior to Fill Day Fee
----------------------------------------------------------
>60 days [* * *]
----------------------------------------------------------
30 - 60 days [* * *]
----------------------------------------------------------
21 - 29 days [* * *]
----------------------------------------------------------
15 - 20 days [* * *]
----------------------------------------------------------
8 - 14 days [* * *]
----------------------------------------------------------
<8 days [* * *]
----------------------------------------------------------
5. A postponement of a fill lot of greater than 60 days will be considered a
cancellation of such lot. A new quote and purchase order will be required to
renew the order.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 11 of 16
<PAGE>
___________________________________________
PROPOSAL ACCEPTANCE SHEET
-------------------------
________________________________________________________________________________
Completion of this appendix signifies Durect, Inc. acceptance of CBL proposal
No. 1090, dated October 11, 1999, revised February 16, 2000, including the terms
and conditions listed on the reverse side of this form. These terms and
conditions will take precedence over any specified in the customer's
documentation.
Appendix 1 must be fully completed before CBL will schedule services and
allocate resources. If Appendix 1 is incomplete when submitted (i.e., missing
the Purchase Order No., Accounts Payable contact information, required payment
or approval signature, etc.), delays in scheduling will result.
All invoicing for this contract is to be referenced against customer's Purchase
- -------------------------------------------------------------------------------
Order No.: ____________
- ----------
All invoicing is to be sent directly to:
Accounts Payable Optional additional Addressee:
Name: _____________________ Name: _________________________
Telephone No.: ____________ Address: ______________________
Address: __________________ _______________________________
___________________________ _______________________________
___________________________ _______________________________
Preferred Initial Payment Method [X]: [_] Check Enclosed [_] Wire Transfer
Any modifications of this Proposal must be made with an approved Change Order
and are subject to the same terms and conditions as this Proposal.
Durect, Inc._______________ Chesapeake Biological Laboratories, Inc.
----------------------------------------
Client
/s/ James E. Brown /s/ Thomas P. Rice
___________________________ __________________________________
Signature Signature
Chief Executive Officer President
__________________________ ----------------------------------
Title Title
James E. Brown Thomas P. Rice
__________________________ ----------------------------------
Name (type or print) Name (type or print)
___________________________ __________________________________
Date Date
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 12 of 16
<PAGE>
Please send this completed Proposal Acceptance Sheet via fax (410-843-4414) and
mail the original and required payment to:
Henry P. Clark, Director of Client Relations
Chesapeake Biological Laboratories, Inc.
1111 South Paca Street
Baltimore, Maryland 21230
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 13 of 16
<PAGE>
CHESAPEAKE BIOLOGICAL LABORATORIES, INC.
Terms and Conditions Precedent to the Acceptance of a Purchase Order
1. CBL will be responsible for dutifully performing instructions according to
a batch record, which has been jointly agreed to by the Customer and CBL.
The customer acknowledges that the work to be performed by CBL is
experimental in nature and portions of the work may not have been fully
validated within generally accepted standards of the pharmaceutical
industry. As such, CBL will not be responsible for unexpected results that
can be attributed to a process or procedure either supplied by, or
requested by the Customer, that has not been fully validated provided that
CBL has performed all procedures in accordance with instructions provided
by Customer and that the instructions conform to applicable CBL procedures
and cGMP's.
2. All documentation and submissions to regulatory authorities in support of
the Customer's product are the responsibility of the Customer. No
documentation will be provided by CBL except as specifically contracted
between the Customer and CBL.
3. CBL makes no representation or warranties regarding the suitability of the
Customer's product for any purpose whatsoever, or for the efficacy of such
product.
4. The Customer is solely responsible for providing complete and accurate
scientific data to CBL regarding Customer's product and Customer's
requirements for formulation, fill and finish of Customer's product.
5. In accepting its obligations under the terms of the Purchase Order, CBL has
relied upon the accuracy, completeness and correctness of the data and
information provided by the Customer in developing the project, any
associated time line and the estimated or fixed cost for the project. It
is understood by the Customer that additional charges may be billed to the
Customer in the event that any data or information provided by the customer
proves to be incorrect, incomplete or in error and as a result requires
more effort by CBL than anticipated in the original project proposal.
6. The Customer warrants to CBL that all substances delivered by Customer to
CBL will be free of hazardous or toxic material and that no specific safe
handling instructions are applicable to any such substance or materials,
except as disclosed to CBL in writing by Customer in sufficient time for
review by CBL and prior to delivery to CBL.
7. The Customer represents and warrants to CBL that all finished product
delivered by CBL to Customer will be held and/or used or disposed of by
Customer in a safe and responsible manner, and in accordance with all
applicable laws, rules and regulations.
8. Prepayment fees (not including Commencement/Project initiation fees), where
applicable, are refundable less charges under CBL's Cancellation and
Postponement Policy and/or the expenses incurred by CBL prior to the
cancellation or postponement. Other payments including
Commencement/Project Initiation fees are non-refundable.
9. CBL hereby represents and warrants to customer that the services and goods
rendered shall be provided in accordance with this Proposal and applicable
Good Laboratory Practice and current Good Manufacturing Practice, and the
products will conform to applicable specifications provided by Customer.
In the event that the foregoing warranty is not met, CBL shall at
Customer's option re-perform the non-conforming services immediately or
refund to Customer the applicable purchase price. The Customer
acknowledges and agrees that CBL's monetary liability to Customer is
limited to the value of the amounts invoiced by CBL and that CBL's
obligations to Customer are limited to performance by CBL of services
(formulation, sterilization, fill and finish) in accordance with the master
batch record and applicable Good Manufacturing Practices (GMP's).
10. The arrangement between CBL and Customer is one of service provider and
Customer. No joint venture, partnership or agency is to be created or
deemed as between CBL and Customer.
11. Except for the matters for which CBL is required to indemnify Customer as
set forth in Paragraph 12, the Customer agrees to indemnify and hold CBL
and its employees and agents harmless from any claim or liability,
including attorney's fees, incurred or made against CBL arising out of or
relating to any breach of any representation or warranty made by Customer
hereunder, or otherwise, including, without limitation, any claim or
liability asserted by any organization, clinic, patient or any other group
or participant in any clinical trial of Customer's product.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 14 of 16
<PAGE>
12. CBL shall indemnify and hold harmless Customer, its officers, agents,
employees and affiliates from any claim or liability, including attorney's
fee, incurred or made against any of them arising out of or relating to any
breach of any representation of warranty made by CBL to customer hereunder
or CBL's negligence or willful misconduct.
13. CBL will acquire no rights of any kind with respect to the product, active
agent, methods developed by or exclusively for Customer as work product as
part of this Proposal, materials, compounds, formulations, methodology or
procedures provided by Customer under the terms hereunder. All such rights
shall be owned exclusively by Customer or its nominee and CBL agrees to
execute any required assignments as necessary in order for Customer or its
nominee to attain full and marketable title to any such rights.
14. CBL agrees to maintain in confidence all information provided by customer
to CBL hereunder in accordance with the Confidentiality Agreement dated
September 2, 1999.
Appendix 2
Quality Agreement
Supplier: Chesapeake Biological Laboratories, Inc.
Client: Durect Corporation
Supplier Quote: Quote 1090, Duros(R) Sufentanil
1. All activities specified in the Quote listed above, which could potentially
affect the quality of the Duros(R) Sufentanil product must be performed in
compliance with Code of Federal Regulation 21 Part 210 Current Good
Manufacturing Practice in Manufacturing, Processing, Packaging, or Holding
of Drugs: General and Part 211-Current Good Manufacturing Practices for
Finished Pharmaceuticals, any applicable Food and Drug Guidance to Industry
document and recognized industry standard.
2. All validation protocols including but not limited to facility validation,
equipment qualification, analytical method validation, cleaning validation
and stability protocols generated as part of the above quote will be
submitted to Durect Corporation for review and approval, prior to
implementation.
3. All activities performed in compliance with a CBL approved procedure will
indicate the procedure number.
4. Durect Corporation retains the right to perform a compliance audit of CBL's
facility, processes and systems to evaluate the level of compliance to CFR
21, 210 & 211, prior to initiation of the activities specified in this
Quote. Furthermore, Durect Corporation retains the right to have a man in
the plant all times during the execution of the activities specified in
this Quote.
5. CBL will submit validation report for each validation activity required as
part of the activities specified in this Quote. The report will include
among others:
. A summary of the data generated in support of each validation activity,
. A list of all suspect or non-conforming data identified and considered
acceptable upon investigation,
. A list of all un-planned deviations,
. Results of any investigations performed as a result of deviations or suspect
analytical data and corrective action taken.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 15 of 16
<PAGE>
6. Validation reports which are for the facility or general use can be
reviewed at CBL. Copies of all CBL procedures used as a basis for any of
the Durect specific GMP activities performed as a part of this quote will
be made available to Durect for retention in their files. General SOP's or
SOP's serving multiple clients can be reviewed at CBL.
7. All documents generated in support of products manufactured for Durect will
be retained for a minimum of 3 years, or one year after the expiration date
and will be made available to Durect at their request for retention in
their files.
8. A preliminary copy of the production batch record, less the QC section will
be provided to Durect five (5) working days after the completion of
finished product sterility testing.
9. A copy of the completed Batch Record will be submitted to Durect within ten
working days from completion of the last processing step (completion of
finished product testing).
10. Durect will be notified in writing of any changes agreed upon requirements
prior to implementation of said changes.
11. Durect will be notified in writing of any verified out of specification
results within 48 hours of verification. No product-re-testing will be
performed without Durect's approval.
12. Durect retains the right to perform a document audit, at CBL's facility, of
all GMP documentation generated in support of this project prior to release
of clinical supplies.
*Material has been omitted pursuant to a request for confidential treatment, and
such material has been filed separately with the SEC.
Page 16 of 16
<PAGE>
-------------------------------------
PROPOSAL ACCEPTANCE SHEET
-------------------------
- ------------------------------------------------------------------------
Completion of this appendix signifies Durect, Inc. acceptance of CBL proposal
No. 1090, dated October 11, 1999, revised February 16, 2000, including the terms
and conditions listed on the reverse side of this form. These terms and
conditions will take precedence over any specified in the customer's
documentation.
Appendix 1 must be fully completed before CBL will schedule services and
allocate resources. If Appendix 1 is incomplete when submitted (i.e., missing
the Purchase Order No., Accounts Payable contact information, required payment
or approval signature, etc.), delays in scheduling will result.
All invoicing for this contract is to be referenced against customer's Purchase
- --------------------------------------------------------------------------------
Order No.: 021700-01
- --------------------
All invoicing is to be sent directly to:
Accounts Payable Optional additional Addressee:
Name: /s/ Surabhi Desai Name: /s/ Scott Wheelwright
-------------------------- ----------------------------
Telephone No.: 408-346-1056 Address: Durect Corporation
----------------- -------------------------
Address: Durect Corporation 10240 Bubb Rd.
----------------------- ---------------------------------
10240 Bubb Rd. Cupertino, CA 95014
------------------------------- ---------------------------------
Cupertino, CA 95014
-------------------------------
Preferred Initial Payment Method (X): [_] Check Enclosed [_] Wire Transfer
Any modifications of this Proposal must be made with an approved Change Order
and are subject to the same terms and conditions as this Proposal.
Durect, Inc. Chesapeake Biological Laboratories, Inc.
- ----------------------- ----------------------------------------
Client
/s/ James E. Brown /s/ Thomas P. Rice
- ----------------------- -------------------------------------
Signature Signature
CEO President
- ----------------------- -------------------------------------
Title Title
James E. Brown Thomas P. Rice
- ----------------------- -------------------------------------
Name (type or print) Name (type or print)
2-17-00 2/16/00
- ----------------------- -------------------------------------
Date Date
Please send this completed Proposal Acceptance Sheet via fax (410-843-4414) and
mail the original and required payment to:
Henry P. Clark, Director of Client Relations
Chesapeake Biological Laboratories, Inc.
1111 South Paca Street
Baltimore, Maryland 21230
<PAGE>
EXHIBIT 10.14
DURECT THERAPEUTICS CORPORATION
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is dated as of June 19,
---------
1998, by and between James E. Brown ("Employee") and Durect Therapeutics
--------
Corporation, a Delaware corporation (the "Company").
-------
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall have a term of three years (the "Original Term"). This
-------------
Agreement may be extended for an additional one year after the end of the
Original Term if the parties mutually agree in writing to such extension.
2. Duties.
------
(a) Position. Employee shall be employed as Chief Executive
--------
Officer and President of the Company, and as such will have responsibility for
establishing the Company's goals and objectives, setting the Company's strategic
focus and plan, arranging funding for the Company, establishing corporate
alliances and agreements, arranging the hiring of the Company's management team,
and overseeing the management of the Company in a manner that is consistent with
the achievement of the Company's goals and objectives, and such other duties
that are consistent with the positions of Chief Executive Officer and President,
as reasonably directed by the Board of Directors of the Company from time to
time. Employee will report to the Board of Directors of the Company.
(b) Obligations to the Company. Employee agrees to the best of
--------------------------
his ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof. During the term of Employee's
employment relationship with the Company, and except as provided below, Employee
further agrees that he will devote all his business time and attention to the
business of the Company, the Company will be entitled to all of the benefits and
profits arising from or incident to all such work services and advice, Employee
will not render commercial or professional services of any nature to any person
or organization, whether or not for compensation, provided, however, that the
Company acknowledges that Employee expects to perform services for Alza
Corporation ("Alza") during the term of this Agreement as an employee or
consultant, such services to Alza to require no more than one-half of Employee's
working time, with the amount of time to be determined jointly by the Company,
Employee and Alza; Company agrees that Employee's performance of such services
to Alza, even to the extent that the performance reduces the number of hours
that Employee works for the Company, shall not be considered to be a violation
of the terms of this Agreement. After the first twelve (12) months of the term
of this Agreement, Employee will become a full-time employee of the Company,
while potentially retaining a relationship with Alza. The Company agrees that
Employee may, in Employee's discretion, serve on boards of directors of other
companies, with or without compensation. Employee will comply with and be bound
by the Company's operating policies, procedures and practices from time to time
in effect during the term of Employee's
<PAGE>
employment, to the extent such policies, procedures and practices do not
conflict with the terms of this Agreement.
3. At Will Employment. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by Employee at any time for any or no reason and may be terminated by
the Company in accordance with the provisions of Section 5(a)(i), 5(a)(iii) and
5(a)(iv) of this Agreement. If Employee's employment terminates for any reason,
Employee shall not be entitled to any payments, benefits, damages, award or
compensation other than as provided in this Agreement, and the Company shall
have no right of repurchase with respect to Common Stock of the Company
purchased by Employee pursuant to that certain Common Stock Purchase Agreement,
dated April 2, 1998 by and between the Company and the Employee, except as
provided in such Common Stock Purchase Agreement.
4. Compensation. For the duties and services to be performed by
------------
Employee hereunder, the Company shall pay Employee, and Employee agrees to
accept, the salary, stock options, bonuses and other benefits described below in
this Section 4.
(a) Salary. Employee shall receive a monthly salary of Eighteen
------
Thousand Seven Hundred Fifty Dollars ($18,750), which is equivalent to Two
Hundred Twenty-Five Thousand Dollars ($225,000) on an annualized basis,
provided, however, that Employee's monthly salary shall be reduced while
- -----------------
Employee is employed by Alza to reflect the fraction of Employee's time that is
devoted to performing services for the Company. Employee's monthly salary will
be payable pursuant to the Company's normal payroll practices. In the event
this Agreement is extended beyond the Original Term, the base salary shall be
reviewed at the time of such extension by the Board, and any increase will be
effective as of the date determined appropriate by the Board or its Compensation
Committee.
(b) Stock Options and Other Incentive Programs. Employee shall
------------------------------------------
be eligible to participate in any stock option or other incentive programs
available to officers or employees of the Company.
(c) Bonuses. Employee's entitlement to incentive bonuses from
-------
the Company is discretionary and shall be determined by the Board or its
Compensation Committee in good faith based upon the extent to which Employee's
individual performance objectives and the Company's profitability objectives and
other financial and nonfinancial objectives are achieved during the applicable
bonus period.
(d) Additional Benefits. Employee will be eligible to
-------------------
participate in the Company's employee benefit plans of general application,
including without limitation, those plans covering medical, disability and life
insurance in accordance with the rules established for individual participation
in any such plan and under applicable law. Employee will be eligible for
vacation and sick leave in accordance with the policies in effect during the
term of this Agreement and will receive such other benefits as the Company
generally provides to its other employees of comparable position and experience.
-2-
<PAGE>
(e) Reimbursement of Expenses. Employee shall be authorized to incur
-------------------------
on behalf and for the benefit of, and shall be reimbursed by, the Company for
reasonable expenses, provided that such expenses are substantiated in accordance
with Company policies.
5. Termination of Employment and Severance Benefits.
------------------------------------------------
(a) Termination of Employment. This Agreement may be terminated
-------------------------
during its Original Term (or any extension thereof) only upon the occurrence of
any of the following events:
(i) This Agreement may be terminated by the Company following
the Company's reasonable determination in good faith that it is terminating
Employee for good cause related to Employee's performance;
(ii) This Agreement may be terminated by Employee following a
change in Employee's status such that a Constructive Termination has occurred.
Constructive Termination shall be deemed to occur if (A)(1) there is a material
adverse change in Employee's position causing such position to be of materially
reduced stature or responsibility, or (2) Employee's refusal to relocate to a
facility or location more than 50 miles from the Company's current location; and
(B) within the 30-day period immediately following such material change or
reduction Employee elects to terminate employment;
(iii) This Agreement may be terminated without cause by the
Company following a reasonable determination by the Company's Board of Directors
that such termination would be in the reasonable best interests of the Company
("Termination Without Cause"); or
(iv) Following Employee's death or Disability (as defined in
Section 7 below).
(b) Severance Benefits. Employee shall be entitled to receive
------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) Involuntary Termination. If Employee's employment is
-----------------------
terminated under 5(a)(iii) above (such termination, an "Involuntary
-----------
Termination"), Employee will be entitled to receive payment of severance
- -----------
benefits equal to Employee's regular monthly salary for the remainder of the
Original Term (the "Severance Period") which payments shall not limit Employee's
rights against Company for any breach of this Agreement. Such payments shall be
made ratably over the Severance Period according to the Company's standard
payroll schedule. Employee will also be entitled to receive payment on the date
of termination of any bonus payable under Section 4(C). Health insurance
benefits with the same coverage provided to Employee prior to the termination
(e.g. medical, dental, optical, mental health) and in all other respects
significantly comparable to those in place immediately prior to the termination
will be provided at the Company's cost over the Severance Period.
(ii) Termination for Cause. If Employee's employment is
---------------------
terminated for cause (as described in Section 5(a)(i)), then Employee shall not
be entitled to receive payment of any severance benefits. Employee will receive
payment(s) for all salary and unpaid vacation
-3-
<PAGE>
accrued as of the date of Employee's termination of employment and Employee's
benefits will be continued under the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination and in accordance with applicable law.
(iii) Termination by Reason of Death or Disability. In the event
--------------------------------------------
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 7 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
accordance with applicable law.
(iv) Constructive Termination. If the Employee terminates his
-------------------------
employment pursuant to this Agreement following a Constructive Termination, then
the Company shall (A) within five (5) days after such termination, pay to
Employee a lump sum equal to all salary payments that the Company would have
paid to Employee during the twelve-month period following such termination and
(B) provide health insurance benefits with the same coverage provided to
Employee prior to the termination for the twelve month period following such
termination.
(v) Survival. The Company's obligations to Employee pursuant to
--------
this Section 5 of the Agreement shall survive any termination of this Agreement.
6. [Reserved.]
--------
7. Definition of Disability. For purposes of this Agreement,
------------------------
"Disability" shall mean that Employee has been unable to perform his duties
hereunder as the result of his incapacity due to physical or mental illness, and
such inability, which continues for at least 180 consecutive calendar days or
240 calendar days during any consecutive twelve-month period, if shorter, after
its commencement, is determined to be total and permanent by a physician
selected by the Company and its insurers and acceptable to Employee or to
Employee's legal representative (with such agreement on acceptability not to be
unreasonably withheld).
8. Confidentiality Agreement. Employee shall sign, or has signed, a
-------------------------
Confidential Information and Invention Assignment Agreement (the
"Confidentiality Agreement") substantially in the form attached hereto as
- --------------------------
Exhibit A, the terms of which Confidentiality Agreement must first be agreed to
- ---------
by Alza and the Company. Employee hereby represents and warrants to the Company
that he has complied with all obligations under the Confidentiality Agreement
and agrees to continue to abide by the terms of the Confidentiality Agreement
and further agrees that the provisions of the Confidentiality Agreement shall
survive any termination of this Agreement or of Employee's employment
relationship with the Company.
9. Noncompetition Covenant. Except in connection with his employment
-----------------------
by Alza, as contemplated by Section 2(b) of this Agreement, Employee hereby
agrees that he shall not, during the term of his employment pursuant to this
Agreement, do any of the following without the prior written consent of the
Company's Board of Directors:
-4-
<PAGE>
(a) Compete. Carry on any business or activity (whether directly or
-------
indirectly, as a partner, stockholder, principal, agent, director, affiliate,
employee or consultant) which is competitive with the business conducted by the
Company (as conducted now or during the term of Employee's employment), nor
engage in any other activities that conflict with Employee's obligations to the
Company.
(b) Solicitation of Employees, Consultants and Other Parties.
--------------------------------------------------------
Employee agrees that during the term of Employee's employment with the Company,
and for a period of twenty-four (24) months immediately following the
termination of Employee's employment with the Company for any reason, whether
with or without cause, Employee shall not solicit any of the Company's employees
or consultants to terminate their relationship with the Company, or attempt to
solicit employees or consultants of the Company, either for Employee or for any
other person or entity. Further, for a period of twenty-four (24) months
following termination of Employee's employment with the Company for any reason,
with or without cause, Employee shall not solicit any licensor to or customer of
the Company or licensee of the Company's products, in each case, that are known
to Employee, with respect to any business, products or services that are
competitive to the products or services offered by the Company or under
development as of the date of termination of Employee's employment with the
Company.
10. Conflicts. The Company acknowledges that Employee may, pursuant to his
---------
employment agreement with Alza, as contemplated by Section 2(b) of this
Agreement, be required to develop intellectual property for Alza during the term
of this Agreement and to assign all rights to such intellectual property to
Alza. The Company also acknowledges that Employee has developed intellectual
property for Alza in the past and Employee may, in addition to his other
obligations to Alza, be subject to certain confidentiality, non-disclosure and
non-competition agreements with Alza. The Company has reviewed the terms and
conditions of Employee's employment agreement with Alza and all other agreements
between Employee and Alza, and the Company represents and warrants to Employee
that the Company has made all appropriate arrangements with Alza so that
Employee's obligations to the Company and Employee's performance of the terms
and conditions of this Agreement do not conflict with any of Employee's
obligations to Alza or the terms and conditions of Employee's employment
agreement with Alza. Employee has not, and will not during the term of this
Agreement, enter into any other oral or written agreement (other than those with
Alza) in conflict with any of the provisions of this Agreement. Employee further
represents that he is entering into or has entered into an employment
relationship with the Company of his own free will and that he has not been
solicited as an employee in any way by the Company.
11. Successors. Any successor to the Company (whether direct or indirect
----------
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agrees expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
-5-
<PAGE>
12. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that Employee may
receive from any other source.
(b) Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the parties.
(c) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or 48 hours after being deposited in the U.S. mail as certified
or registered mail with postage prepaid, if such notice is addressed to the
party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(e) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(f) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(g) Arbitration. Any dispute or claim arising out of or in connection
-----------
with this Agreement will be finally settled by binding arbitration in San Jose,
California in accordance with the rules of the American Arbitration Association
by one arbitrator appointed in accordance with said rules. The arbitrator shall
apply California law, without reference to rules of conflicts of law or rules of
statutory arbitration, to the resolution of any dispute. Judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for preliminary or interim equitable relief, or to compel
arbitration in accordance with this paragraph, without breach of this
arbitration provision. This Section 12(g) shall not apply to the
Confidentiality Agreement.
(h) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
-----------------
THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK
THE ADVICE OF INDEPENDENT LEGAL COUNSEL,
-6-
<PAGE>
AND HAS READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT.
THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE
DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
-7-
<PAGE>
The parties have executed this Agreement the date first written above.
DURECT THERAPEUTICS CORPORATION
By: /s/ Thomas A. Schreck
-------------------------------------
Title: President
-------------------------------------
Address: ___________________________________
___________________________________
___________________________________
EMPLOYEE
Signature: /s/ James E. Brown
--------------------------------
Address: ___________________________________
___________________________________
___________________________________
-8-
<PAGE>
EXHIBIT A
---------
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
<PAGE>
DURECT CORPORATION
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
As a condition of my becoming employed (or my employment being continued)
by or retained as a consultant (or my consulting relationship being continued)
by Durect Corporation, a Delaware corporation or any of its current or future
subsidiaries, affiliates, successors or assigns (collectively, the "Company"),
-------
and in consideration of my employment or consulting relationship with the
Company and my receipt of the compensation now and hereafter paid to me by the
Company, I agree to the following:
1. Employment or Consulting Relationship. I understand and acknowledge
-------------------------------------
that this Agreement does not alter, amend or expand upon any rights I may have
to continue in the employ of, or in a consulting relationship with, or the
duration of my employment or consulting relationship with, the Company under any
existing agreements between the Company and me or under applicable law. Any
employment or consulting relationship between the Company and me, whether
commenced prior to or upon the date of this Agreement, shall be referred to
herein as the "Relationship."
------------
2. At-Will Employment. I understand and acknowledge that my Relationship
------------------
with the Company is and shall continue to be at-will, as defined under
applicable law, meaning that either I or the Company may terminate the
Relationship at any time for any reason or no reason, without further obligation
or liability.
3. Confidential Information.
------------------------
(a) Company Information. I agree at all times during the term of my
-------------------
Relationship with the Company and thereafter, to hold in strictest confidence,
and not to use, except for the benefit of the Company, or to disclose to any
person, firm, corporation or other entity without written authorization of the
Board of Directors of the Company, any Confidential Information of the Company
which I obtain or create. I further agree not to make copies of such
Confidential Information except as authorized by the Company. I understand that
"Confidential Information" means any Company proprietary information, technical
------------------------
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, suppliers, customer lists and customers
(including, but not limited to, customers of the Company on whom I called or
with whom I became acquainted during the Relationship), prices and costs,
markets, software, developments, inventions, laboratory notebooks, processes,
formulas, technology, designs, drawings, engineering, hardware configuration
information, marketing, licenses, finances, budgets or other business
information disclosed to me by the Company either directly or indirectly in
writing, orally or by drawings or observation of parts or equipment or created
by me during the period of the Relationship, whether or not during working
hours. I understand that "Confidential Information" includes, but is not limited
------------------------
to, information pertaining to any aspects of the Company's business which is
either information not known by actual or potential competitors of the Company
or is proprietary information of the Company or its customers or suppliers,
whether of a technical nature or otherwise. I further understand that
Confidential Information does not include any of the foregoing items which has
become publicly and widely known and made generally available through no
wrongful act of mine or of others who were under confidentiality obligations as
to the item or items involved.
(b) Former Employer Information. I represent that my performance of
---------------------------
all terms of this Agreement as an employee or consultant of the Company have not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by me in confidence or trust prior or
subsequent to the commencement of my Relationship with the Company, and I will
not disclose to the Company, or induce the Company to use, any inventions,
confidential or proprietary information or material belonging to any previous
employer or any other party.
(c) Third Party Information. I recognize that the Company has
-----------------------
received and in the future will receive confidential or proprietary information
from third parties subject to a duty on the Company's part to
10
<PAGE>
maintain the confidentiality of such information and to use it only for certain
limited purposes. I agree to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out my work for
the Company consistent with the Company's agreement with such third party.
4. Inventions.
----------
(a) Inventions Retained and Licensed. I have attached hereto, as
--------------------------------
Exhibit A, a list describing with particularity all inventions, original works
- ---------
of authorship, developments, improvements, and trade secrets which were made by
me prior to the commencement of the Relationship (collectively referred to as
"Prior Inventions"), which belong solely to me or belong to me jointly with
- -----------------
another, which relate in any way to any of the Company's proposed businesses,
products or research and development, and which are not assigned to the Company
hereunder; or, if no such list is attached, I represent that there are no such
Prior Inventions. If, in the course of my Relationship with the Company, I
incorporate into a Company product, process or machine a Prior Invention owned
by me or in which I have an interest, the Company is hereby granted and shall
have a non-exclusive, royalty-free, irrevocable, perpetual, worldwide license
(with the right to sublicense) to make, have made, copy, modify, make derivative
works of, use, sell and otherwise distribute such Prior Invention as part of or
in connection with such product, process or machine.
(b) Assignment of Inventions. I agree that I will promptly make full
------------------------
written disclosure to the Company, will hold in trust for the sole right and
benefit of the Company, and hereby assign to the Company, or its designee, all
my right, title and interest throughout the world in and to any and all
inventions, original works of authorship, developments, concepts, know-how,
improvements or trade secrets, whether or not patentable or registrable under
copyright or similar laws, which I may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to
practice, during the period of time in which I am employed by or a consultant of
the Company (collectively referred to as "Inventions"), except as provided in
----------
Section 4(e) below. I further acknowledge that all inventions, original works
of authorship, developments, concepts, know-how, improvements or trade secrets
which are made by me (solely or jointly with others) within the scope of and
during the period of my Relationship with the Company are "works made for hire"
-------------------
(to the greatest extent permitted by applicable law) and are compensated by my
salary (if I am an employee) or by such amounts paid to me under any applicable
consulting agreement or consulting arrangements (if I am a consultant), unless
regulated otherwise by the mandatory law of the state of California.
(c) Maintenance of Records. I agree to keep and maintain adequate and
----------------------
current written records of all Inventions made by me (solely or jointly with
others) during the term of my Relationship with the Company. The records may be
in the form of notes, sketches, drawings, flow charts, electronic data or
recordings, laboratory notebooks, and any other format. The records will be
available to and remain the sole property of the Company at all times. I agree
not to remove such records from the Company's place of business except as
expressly permitted by Company policy which may, from time to time, be revised
at the sole election of the Company for the purpose of furthering the Company's
business.
(d) Patent and Copyright Rights. I agree to assist the Company, or
---------------------------
its designee, at the Company's expense, in every proper way to secure the
Company's rights in the Inventions and any copyrights, patents, trademarks, mask
work rights, moral rights, or other intellectual property rights relating
thereto in any and all countries, including the disclosure to the Company of all
pertinent information and data with respect thereto, the execution of all
applications, specifications, oaths, assignments, recordations, and all other
instruments which the Company shall deem necessary in order to apply for,
obtain, maintain and transfer such rights and in order to assign and convey to
the Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. I further
agree that my obligation to execute or cause to be executed, when it is in my
power to do so, any such instrument or papers shall continue after the
termination of this Agreement until the expiration of the last such intellectual
property right to expire in any country of the world. If the Company is unable
because of my mental or physical incapacity or unavailability or for any other
reason to secure my signature to apply for or to pursue any application for any
United States or foreign patents or copyright registrations covering Inventions
or original works of authorship assigned to the Company as above, then I hereby
irrevocably designate and appoint the Company and its duly authorized officers
and agents as my agent and attorney in fact, to act for and in my behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal
11
<PAGE>
force and effect as if originally executed by me. I hereby waive and irrevocably
quitclaim to the Company any and all claims, of any nature whatsoever, which I
now or hereafter have for infringement of any and all proprietary rights
assigned to the Company.
(e) Exception to Assignments. I understand that the provisions of
------------------------
this Agreement requiring assignment of Inventions to the Company do not apply to
any invention which qualifies fully under the provisions of California Labor
Code Section 2870 (attached hereto as Exhibit B). I will advise the Company
---------
promptly in writing of any inventions that I believe meet such provisions and
are not otherwise disclosed on Exhibit A.
---------
5. Returning Company Documents. I agree that, at the time of termination
---------------------------
of my Relationship with the Company, I will deliver to the Company (and will not
keep in my possession, recreate or deliver to anyone else) any and all devices,
records, data, notes, reports, proposals, lists, correspondence, specifications,
drawings, blueprints, sketches, laboratory notebooks, materials, flow charts,
equipment, other documents or property, or reproductions of any aforementioned
items developed by me pursuant to the Relationship or otherwise belonging to the
Company, its successors or assigns. I further agree that to any property
situated on the Company's premises and owned by the Company, including disks and
other storage media, filing cabinets or other work areas, is subject to
inspection by Company personnel at any time with or without notice. In the
event of the termination of the Relationship, I agree to sign and deliver the
"Termination Certification" attached hereto as Exhibit C.
- -------------------------- ---------
6. Notification to Other Parties.
-----------------------------
(a) Employees. In the event that I leave the employ of the Company, I
---------
hereby consent to notification by the Company to my new employer about my rights
and obligations under this Agreement.
(b) Consultants. I hereby grant consent to notification by the
-----------
Company to any other parties besides the Company with whom I maintain a
consulting relationship, including parties with whom such relationship commences
after the effective date of this Agreement, about my rights and obligations
under this Agreement.
7. Solicitation of Employees, Consultants and Other Parties. I agree
--------------------------------------------------------
that during the term of my Relationship with the Company, and for a period of
twenty-four (24) months immediately following the termination of my Relationship
with the Company for any reason, whether with or without cause, I shall not
either directly or indirectly solicit, induce, recruit or encourage any of the
Company's employees or consultants to terminate their relationship with the
Company, or take away such employees or consultants, or attempt to solicit,
induce, recruit, encourage or take away employees or consultants of the Company,
either for myself or for any other person or entity. Further, for a period of
twenty-four (24) months following termination of my Relationship with the
Company for any reason, with or without cause, I shall not solicit any licensor
to or customer of the Company or licensee of the Company's products, in each
case, that are known to me, with respect to any business, products or services
that are competitive to the products or services offered by the Company or under
development as of the date of termination of my Relationship with the Company.
8. Representations and Covenants.
-----------------------------
(a) Facilitation of Agreement. I agree to execute promptly any proper
-------------------------
oath or verify any proper document required to carry out the terms of this
Agreement upon the Company's written request to do so.
(b) Conflicts. I represent that my performance of all the terms of
---------
this Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to commencement of my
Relationship with the Company. I have not entered into, and I agree I will not
enter into, any oral or written agreement in conflict with any of the provisions
of this Agreement.
(c) Voluntary Execution. I certify and acknowledge that I have
-------------------
carefully read all of the provisions of this Agreement and that I understand and
will fully and faithfully comply with such provisions.
12
<PAGE>
9. General Provisions.
------------------
(a) Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(b) Entire Agreement. This Agreement sets forth the entire agreement
----------------
and understanding between the Company and me relating to the subject matter
herein and merges all prior discussions between us. No modification or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by the party to be charged. Any
subsequent change or changes in my duties, obligations, rights or compensation
will not affect the validity or scope of this Agreement.
(c) Severability. If one or more of the provisions in this Agreement
------------
are deemed void by law, then the remaining provisions will continue in full
force and effect.
(d) Successors and Assigns. This Agreement will be binding upon my
----------------------
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
(e) Survival. The provisions of this Agreement shall survive the
--------
termination of the Relationship and the assignment of this Agreement by the
Company to any successor in interest or other assignee.
(f) ADVICE OF COUNSEL. I ACKNOWLEDGE THAT, IN EXECUTING THIS
-----------------
AGREEMENT, I HAVE HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL
COUNSEL, AND I HAVE READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS
AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF
THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
13
<PAGE>
The parties have executed this Agreement on the respective dates set forth
below:
COMPANY: EMPLOYEE:
DURECT JAMES E. BROWN, an Individual:
CORPORATION
/s/ Thomas A. Schreck /s/ James E. Brown
- ------------------------------- --------------------------------
Signature
By: ___________________________ ________________________________
Printed Name
Title: ________________________
Date: _________________________ Date: __________________________
Address: ______________________ Address: _______________________
_______________________________ _______________________
14
<PAGE>
EXHIBIT A
---------
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
EXCLUDED FROM SECTION 4
Identifying Number
Title Date or Brief Description
- ----------------------- ---------------------- --------------------
<PAGE>
EXHIBIT 10.15
DURECT THERAPEUTICS CORPORATION
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is dated as of June 19,
---------
1998, by and between Felix Theeuwes ("Employee") and Durect Therapeutics
--------
Corporation, a Delaware corporation (the "Company").
-------
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall have a term of three years (the "Original Term"). This
-------------
Agreement may be extended for an additional one year after the end of the
Original Term if the parties mutually agree in writing to such extension.
2. Duties.
------
(a) Position. Employee shall be employed as Chairman and Chief
--------
Scientist of the Company and as such will have responsibility for providing
guidance and participating in the formulation of the strategic plans of the
Company and the scientific approach to projects; bringing key employees into the
Company; assisting with arranging funding for the Company; creating the
intellectual property of the Company; executing the Company's work plans; and
participating in the overall management of the Company, and such other duties
that are consistent with the position of Chairman and Chief Scientist, as
reasonably directed by the Board of Directors of the Company from time to time.
Employee will report to the Board of Directors of the Company.
(b) Obligations to the Company. Employee agrees to the best of his
--------------------------
ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof. During the term of Employee's
employment relationship with the Company, and except as provided below, Employee
further agrees that he will devote all his business time and attention to the
business of the Company, the Company will be entitled to all of the benefits and
profits arising from or incident to all such work services and advice, Employee
will not render commercial or professional services of any nature to any person
or organization, whether or not for compensation, provided, however, that the
Company acknowledges that Employee expects to perform services for Alza
Corporation ("Alza") during the term of this Agreement, and expects to devote
approximately one-half of his working time for the first (12) twelve months of
the term of this Agreement to the performance of such services, and expects to
devote some portion of his working time subsequently to the performance of such
services, with the amount of time to be determined jointly by the Company,
Employee and Alza; Company agrees that Employee's performance of such services
to Alza, even to the extent that the performance reduces the number of hours
that Employee works for the Company, shall not be considered to be a violation
of the terms of this Agreement. After the first twelve (12) months of the term
of this Agreement, Employee will become a full-time employee of the Company,
while potentially retaining a relationship with Alza. The Company agrees that
Employee may, in Employee's discretion, serve on boards of directors of other
companies, with or without compensation. Employee will
<PAGE>
comply with and be bound by the Company's operating policies, procedures and
practices from time to time in effect during the term of Employee's employment,
to the extent such policies, procedures and practices do not conflict with the
terms of this Agreement.
3. At Will Employment. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by Employee at any time for any or no reason and may be terminated by
the Company in accordance with the provisions of Section 5(a)(i), 5(a)(iii) and
5(a)(iv) of this Agreement. If Employee's employment terminates for any reason,
Employee shall not be entitled to any payments, benefits, damages, award or
compensation other than as provided in this Agreement, and the Company shall
have no right of repurchase with respect to Common Stock of the Company
purchased by Employee pursuant to that certain Common Stock Purchase Agreement,
dated April 2, 1998 by and between the Company and the Employee, except as
provided in such Common Stock Purchase Agreement.
4. Compensation. For the duties and services to be performed by
------------
Employee hereunder, the Company shall pay Employee, and Employee agrees to
accept, the salary, stock options, bonuses and other benefits described below in
this Section 4.
(a) Salary. Employee shall receive a monthly salary of Twenty
------
Thousand Eight Hundred Thirty-Three and 33/100 Dollars ($20,833.33) which is
equivalent to Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) on an
annualized basis, provided, however, that Employee's monthly salary shall be
-----------------
reduced while Employee is employed by Alza to reflect the fraction of Employee's
time that is devoted to performing services for the Company; thus, assuming that
the allocation of services contemplated in Section 2 is accurately stated, for
the first twelve months of the Original Term, Employee's monthly salary shall be
Ten Thousand Four Hundred Sixteen and 66/100 Dollars ($10,416.66) (to reflect
that one-half of Employee's services will be devoted to the Company); after the
first twelve months, Employee's salary may be reduced to reflect the allocation
of Employee's working time to Alza, to the extent agreed to by Alza, Employee
and the Company. Employee's monthly salary will be payable pursuant to the
Company's normal payroll practices. In the event this Agreement is extended
beyond the Original Term, the base salary shall be reviewed at the time of such
extension by the Board, and any increase will be effective as of the date
determined appropriate by the Board or its Compensation Committee.
(b) Stock Options and Other Incentive Programs. Employee shall be
------------------------------------------
eligible to participate in any stock option or other incentive programs
available to officers or employees of the Company.
(c) Bonuses. Employee's entitlement to incentive bonuses from the
-------
Company is discretionary and shall be determined by the Board, its Compensation
Committee or the Chief Executive Officer of the Company in good faith based upon
the extent to which Employee's individual performance objectives and the
Company's profitability objectives and other financial and nonfinancial
objectives are achieved during the applicable bonus period.
-2-
<PAGE>
(d) Additional Benefits. Employee will be eligible to participate in
-------------------
the Company's employee benefit plans of general application, including without
limitation, those plans covering medical, disability and life insurance in
accordance with the rules established for individual participation in any such
plan and under applicable law. Employee will be eligible for vacation and sick
leave in accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company generally provides
to its other employees of comparable position and experience.
(e) Reimbursement of Expenses. Employee shall be authorized to incur
-------------------------
on behalf and for the benefit of, and shall be reimbursed by, the Company for
reasonable expenses, provided that such expenses are substantiated in accordance
with Company policies.
5. Termination of Employment and Severance Benefits.
------------------------------------------------
(a) Termination of Employment. This Agreement may be terminated
-------------------------
during its Original Term (or any extension thereof) only upon the occurrence of
any of the following events:
(i) This Agreement may be terminated by the Company following
the Company's reasonable determination in good faith that it is terminating
Employee for good cause related to Employee's performance;
(ii) This Agreement may be terminated by Employee following a
change in Employee's status such that a Constructive Termination has occurred.
Constructive Termination shall be deemed to occur if (A)(1) there is a material
adverse change in Employee's position causing such position to be of materially
reduced stature or responsibility, or (2) Employee's refusal to relocate to a
facility or location more than 50 miles from the Company's current location; and
(B) within the 30-day period immediately following such material change or
reduction Employee elects to terminate employment;
(iii) This Agreement may be terminated without cause by the
Company following a reasonable determination by the Company's Board of Directors
that such termination would be in the reasonable best interests of the Company
("Termination Without Cause"); or
(iv) Following Employee's death or Disability (as defined in
Section 7 below).
(b) Severance Benefits. Employee shall be entitled to receive
------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) Involuntary Termination. If Employee's employment is
-----------------------
terminated under 5(a)(iii) above (such termination, an "Involuntary
-----------
Termination"), Employee will be entitled to receive payment of severance
- -----------
benefits equal to Employee's regular monthly salary for the remainder of the
Original Term (the "Severance Period") which payments shall not limit Employee's
rights against Company for any breach of this Agreement. Such payments shall be
made ratably over the Severance Period according to the Company's standard
payroll schedule. Employee will also be entitled to receive payment on the date
of termination of any
-3-
<PAGE>
bonus payable under Section 4(c). Health insurance benefits with the same
coverage provided to Employee prior to the termination (e.g. medical, dental,
optical, mental health) and in all other respects significantly comparable to
those in place immediately prior to the termination will be provided at the
Company's cost over the Severance Period.
(ii) Termination for Cause. If Employee's employment is terminated
---------------------
for cause (as described in Section 5(a)(i)), then Employee shall not be entitled
to receive payment of any severance benefits. Employee will receive payment(s)
for all salary and unpaid vacation accrued as of the date of Employee's
termination of employment and Employee's benefits will be continued under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination and in accordance with
applicable law.
(iii) Termination by Reason of Death or Disability. In the event
--------------------------------------------
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 7 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
accordance with applicable law.
(iv) Constructive Termination. If the Employee terminates his
------------------------
employment pursuant to this Agreement following a Constructive Termination, then
the Company shall (A) within five (5) days after such termination, pay to
Employee a lump sum equal to all salary payments that the Company would have
paid to Employee during the twelve-month period following such termination and
(B) provide health insurance benefits with the same coverage provided to
Employee prior to the termination for the twelve month period following such
termination.
(v) Survival. The Company's obligations to Employee pursuant to
--------
this Section 5 of the Agreement shall survive any termination of this Agreement.
6. [Reserved.]
--------
7. Definition of Disability. For purposes of this Agreement, "Disability"
------------------------ ----------
shall mean that Employee has been unable to perform his duties hereunder as the
result of his incapacity due to physical or mental illness, and such inability,
which continues for at least 180 consecutive calendar days or 240 calendar days
during any consecutive twelve-month period, if shorter, after its commencement,
is determined to be total and permanent by a physician selected by the Company
and its insurers and acceptable to Employee or to Employee's legal
representative (with such agreement on acceptability not to be unreasonably
withheld).
8. Confidentiality Agreement. Employee shall sign, or has signed, a
-------------------------
Confidential Information and Invention Assignment Agreement (the
"Confidentiality Agreement") substantially in the form attached hereto as
-------------------------
Exhibit A, the terms of which Confidentiality Agreement must first be agreed to
- ---------
by Alza and the Company. Employee hereby represents and warrants to the Company
that he has complied with all obligations under the Confidentiality
-4-
<PAGE>
Agreement and agrees to continue to abide by the terms of the Confidentiality
Agreement and further agrees that the provisions of the Confidentiality
Agreement shall survive any termination of this Agreement or of Employee's
employment relationship with the Company.
9. Noncompetition Covenant. Except in connection with his employment by
-----------------------
Alza, as contemplated by Section 2(b) of this Agreement, Employee hereby agrees
that he shall not, during the term of his employment pursuant to this Agreement,
do any of the following without the prior written consent of the Company's Board
of Directors:
(a) Compete. Carry on any business or activity (whether directly or
-------
indirectly, as a partner, stockholder, principal, agent, director, affiliate,
employee or consultant) which is competitive with the business conducted by the
Company (as conducted now or during the term of Employee's employment), nor
engage in any other activities that conflict with Employee's obligations to the
Company.
(b) Solicitation of Employees, Consultants and Other Parties.
--------------------------------------------------------
Employee agrees that during the term of Employee's employment with the Company,
and for a period of twenty-four (24) months immediately following the
termination of Employee's employment with the Company for any reason, whether
with or without cause, Employee shall not solicit any of the Company's employees
or consultants to terminate their relationship with the Company, or attempt to
solicit employees or consultants of the Company, either for Employee or for any
other person or entity. Further, for a period of twenty-four (24) months
following termination of Employee's employment with the Company for any reason,
with or without cause, Employee shall not solicit any licensor to or customer of
the Company or licensee of the Company's products, in each case, that are known
to Employee, with respect to any business, products or services that are
competitive to the products or services offered by the Company or under
development as of the date of termination of Employee's employment with the
Company.
10. Conflicts. The Company acknowledges that Employee may, pursuant to
---------
his employment agreement with Alza, as contemplated by Section 2(b) of this
Agreement, be required to develop intellectual property for Alza during the term
of this Agreement and to assign all rights to such intellectual property to
Alza. The Company also acknowledges that Employee has developed intellectual
property for Alza in the past and Employee may, in addition to his other
obligations to Alza, be subject to certain confidentiality, non-disclosure and
non-competition agreements with Alza. The Company has reviewed the terms and
conditions of Employee's employment agreement with Alza and all other agreements
between Employee and Alza, and the Company represents and warrants to Employee
that the Company has made all appropriate arrangements with Alza so that
Employee's obligations to the Company and Employee's performance of the terms
and conditions of this Agreement do not conflict with any of Employee's
obligations to Alza or the terms and conditions of Employee's employment
agreement with Alza. Employee has not, and will not during the term of this
Agreement, enter into any other oral or written agreement (other than those with
Alza) in conflict with any of the provisions of this Agreement. Employee
further represents that he is entering into or has entered into an employment
relationship with the Company of his own free will and that he has not been
solicited as an employee in any way by the Company.
-5-
<PAGE>
11. Successors. Any successor to the Company (whether direct or indirect
----------
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agrees expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
12. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that Employee may
receive from any other source.
(b) Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the parties.
(c) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or 48 hours after being deposited in the U.S. mail as certified
or registered mail with postage prepaid, if such notice is addressed to the
party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(e) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(f) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(g) Arbitration. Any dispute or claim arising out of or in connection
-----------
with this Agreement will be finally settled by binding arbitration in San Jose,
California in accordance with the rules of the American Arbitration Association
by one arbitrator appointed in accordance with said rules. The arbitrator shall
apply California law, without reference to rules of conflicts of law or rules of
statutory arbitration, to the resolution of any dispute. Judgment on the award
-6-
<PAGE>
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for preliminary or interim equitable relief, or to compel
arbitration in accordance with this paragraph, without breach of this
arbitration provision. This Section 12(g) shall not apply to the Confidentiality
Agreement.
(h) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
-----------------
THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK
THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE
TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED
AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
-7-
<PAGE>
The parties have executed this Agreement the date first written above.
DURECT THERAPEUTICS CORPORATION
By: /s/ Thomas A. Schreck
---------------------------------
Title: President
---------------------------------
Address: ________________________________
________________________________
________________________________
EMPLOYEE
Signature: /s/ Felix Theeuwes
-----------------------------
Address: ________________________________
________________________________
________________________________
-8-
<PAGE>
EXHIBIT A
---------
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
<PAGE>
DURECT CORPORATION
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
As a condition of my becoming employed (or my employment being continued)
by or retained as a consultant (or my consulting relationship being continued)
by Durect Corporation, a Delaware corporation or any of its current or future
subsidiaries, affiliates, successors or assigns (collectively, the "Company"),
-------
and in consideration of my employment or consulting relationship with the
Company and my receipt of the compensation now and hereafter paid to me by the
Company, I agree to the following:
1. Employment or Consulting Relationship. I understand and acknowledge
-------------------------------------
that this Agreement does not alter, amend or expand upon any rights I may have
to continue in the employ of, or in a consulting relationship with, or the
duration of my employment or consulting relationship with, the Company under any
existing agreements between the Company and me or under applicable law. Any
employment or consulting relationship between the Company and me, whether
commenced prior to or upon the date of this Agreement, shall be referred to
herein as the "Relationship."
------------
2. At-Will Employment. I understand and acknowledge that my Relationship
------------------
with the Company is and shall continue to be at-will, as defined under
applicable law, meaning that either I or the Company may terminate the
Relationship at any time for any reason or no reason, without further obligation
or liability.
3. Confidential Information.
------------------------
(a) Company Information. I agree at all times during the term of my
-------------------
Relationship with the Company and thereafter, to hold in strictest confidence,
and not to use, except for the benefit of the Company, or to disclose to any
person, firm, corporation or other entity without written authorization of the
Board of Directors of the Company, any Confidential Information of the Company
which I obtain or create. I further agree not to make copies of such
Confidential Information except as authorized by the Company. I understand that
"Confidential Information" means any Company proprietary information, technical
------------------------
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, suppliers, customer lists and customers
(including, but not limited to, customers of the Company on whom I called or
with whom I became acquainted during the Relationship), prices and costs,
markets, software, developments, inventions, laboratory notebooks, processes,
formulas, technology, designs, drawings, engineering, hardware configuration
information, marketing, licenses, finances, budgets or other business
information disclosed to me by the Company either directly or indirectly in
writing, orally or by drawings or observation of parts or equipment or created
by me during the period of the Relationship, whether or not during working
hours. I understand that "Confidential Information" includes, but is not limited
------------------------
to, information pertaining to any aspects of the Company's business which is
either information not known by actual or potential competitors of the Company
or is proprietary information of the Company or its customers or suppliers,
whether of a technical nature or otherwise. I further understand that
Confidential Information does not include any of the foregoing items which has
become publicly and widely known and made generally available through no
wrongful act of mine or of others who were under confidentiality obligations as
to the item or items involved.
(b) Former Employer Information. I represent that my performance of
---------------------------
all terms of this Agreement as an employee or consultant of the Company have not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by me in confidence or trust prior or
subsequent to the commencement of my Relationship with the Company, and I will
not disclose to the Company, or induce the Company to use, any inventions,
confidential or proprietary information or material belonging to any previous
employer or any other party.
-10-
<PAGE>
(c) Third Party Information. I recognize that the Company has
-----------------------
received and in the future will receive confidential or proprietary information
from third parties subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. I agree to hold all such confidential or proprietary information in
the strictest confidence and not to disclose it to any person, firm or
corporation or to use it except as necessary in carrying out my work for the
Company consistent with the Company's agreement with such third party.
4. Inventions.
----------
(a) Inventions Retained and Licensed. I have attached hereto, as
--------------------------------
Exhibit A, a list describing with particularity all inventions, original works
- ---------
of authorship, developments, improvements, and trade secrets which were made by
me prior to the commencement of the Relationship (collectively referred to as
"Prior Inventions"), which belong solely to me or belong to me jointly with
- -----------------
another, which relate in any way to any of the Company's proposed businesses,
products or research and development, and which are not assigned to the Company
hereunder; or, if no such list is attached, I represent that there are no such
Prior Inventions. If, in the course of my Relationship with the Company, I
incorporate into a Company product, process or machine a Prior Invention owned
by me or in which I have an interest, the Company is hereby granted and shall
have a non-exclusive, royalty-free, irrevocable, perpetual, worldwide license
(with the right to sublicense) to make, have made, copy, modify, make derivative
works of, use, sell and otherwise distribute such Prior Invention as part of or
in connection with such product, process or machine.
(b) Assignment of Inventions. I agree that I will promptly make full
------------------------
written disclosure to the Company, will hold in trust for the sole right and
benefit of the Company, and hereby assign to the Company, or its designee, all
my right, title and interest throughout the world in and to any and all
inventions, original works of authorship, developments, concepts, know-how,
improvements or trade secrets, whether or not patentable or registrable under
copyright or similar laws, which I may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to
practice, during the period of time in which I am employed by or a consultant of
the Company (collectively referred to as "Inventions"), except as provided in
----------
Section 4(e) below. I further acknowledge that all inventions, original works
of authorship, developments, concepts, know-how, improvements or trade secrets
which are made by me (solely or jointly with others) within the scope of and
during the period of my Relationship with the Company are "works made for hire"
-------------------
(to the greatest extent permitted by applicable law) and are compensated by my
salary (if I am an employee) or by such amounts paid to me under any applicable
consulting agreement or consulting arrangements (if I am a consultant), unless
regulated otherwise by the mandatory law of the state of California.
(c) Maintenance of Records. I agree to keep and maintain adequate and
----------------------
current written records of all Inventions made by me (solely or jointly with
others) during the term of my Relationship with the Company. The records may be
in the form of notes, sketches, drawings, flow charts, electronic data or
recordings, laboratory notebooks, and any other format. The records will be
available to and remain the sole property of the Company at all times. I agree
not to remove such records from the Company's place of business except as
expressly permitted by Company policy which may, from time to time, be revised
at the sole election of the Company for the purpose of furthering the Company's
business.
(d) Patent and Copyright Rights. I agree to assist the Company, or
---------------------------
its designee, at the Company's expense, in every proper way to secure the
Company's rights in the Inventions and any copyrights, patents, trademarks, mask
work rights, moral rights, or other intellectual property rights relating
thereto in any and all countries, including the disclosure to the Company of all
pertinent information and data with respect thereto, the execution of all
applications, specifications, oaths, assignments, recordations, and all other
instruments which the Company shall deem necessary in order to apply for,
obtain, maintain and transfer such rights and in order to assign and convey to
the Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. I further
agree that my obligation to execute or cause to be executed, when it is in my
power to do so, any such instrument or papers shall continue after the
termination of this Agreement until the expiration of the last such intellectual
property right to expire in any country of the world. If the Company is unable
because of my mental or physical incapacity or unavailability or for any other
reason to secure my signature to apply for or to pursue any application for any
United States or foreign patents or copyright registrations covering Inventions
or original works of authorship assigned to the Company as above, then I hereby
irrevocably designate and appoint the Company and
-11-
<PAGE>
its duly authorized officers and agents as my agent and attorney in fact, to act
for and in my behalf and stead to execute and file any such applications and to
do all other lawfully permitted acts to further the application for,
prosecution, issuance, maintenance or transfer of letters patent or copyright
registrations thereon with the same legal force and effect as if originally
executed by me. I hereby waive and irrevocably quitclaim to the Company any and
all claims, of any nature whatsoever, which I now or hereafter have for
infringement of any and all proprietary rights assigned to the Company.
(e) Exception to Assignments. I understand that the provisions of
------------------------
this Agreement requiring assignment of Inventions to the Company do not apply to
any invention which qualifies fully under the provisions of California Labor
Code Section 2870 (attached hereto as Exhibit B). I will advise the Company
---------
promptly in writing of any inventions that I believe meet such provisions and
are not otherwise disclosed on Exhibit A.
---------
5. Returning Company Documents. I agree that, at the time of termination
---------------------------
of my Relationship with the Company, I will deliver to the Company (and will not
keep in my possession, recreate or deliver to anyone else) any and all devices,
records, data, notes, reports, proposals, lists, correspondence, specifications,
drawings, blueprints, sketches, laboratory notebooks, materials, flow charts,
equipment, other documents or property, or reproductions of any aforementioned
items developed by me pursuant to the Relationship or otherwise belonging to the
Company, its successors or assigns. I further agree that to any property
situated on the Company's premises and owned by the Company, including disks and
other storage media, filing cabinets or other work areas, is subject to
inspection by Company personnel at any time with or without notice. In the
event of the termination of the Relationship, I agree to sign and deliver the
"Termination Certification" attached hereto as Exhibit C.
------------------------- ---------
6. Notification to Other Parties.
-----------------------------
(a) Employees. In the event that I leave the employ of the Company, I
---------
hereby consent to notification by the Company to my new employer about my rights
and obligations under this Agreement.
(b) Consultants. I hereby grant consent to notification by the
-----------
Company to any other parties besides the Company with whom I maintain a
consulting relationship, including parties with whom such relationship commences
after the effective date of this Agreement, about my rights and obligations
under this Agreement.
7. Solicitation of Employees, Consultants and Other Parties. I agree
--------------------------------------------------------
that during the term of my Relationship with the Company, and for a period of
twenty-four (24) months immediately following the termination of my Relationship
with the Company for any reason, whether with or without cause, I shall not
either directly or indirectly solicit, induce, recruit or encourage any of the
Company's employees or consultants to terminate their relationship with the
Company, or take away such employees or consultants, or attempt to solicit,
induce, recruit, encourage or take away employees or consultants of the Company,
either for myself or for any other person or entity. Further, for a period of
twenty-four (24) months following termination of my Relationship with the
Company for any reason, with or without cause, I shall not solicit any licensor
to or customer of the Company or licensee of the Company's products, in each
case, that are known to me, with respect to any business, products or services
that are competitive to the products or services offered by the Company or under
development as of the date of termination of my Relationship with the Company.
8. Representations and Covenants.
-----------------------------
(a) Facilitation of Agreement. I agree to execute promptly any proper
-------------------------
oath or verify any proper document required to carry out the terms of this
Agreement upon the Company's written request to do so.
(b) Conflicts. I represent that my performance of all the terms of
---------
this Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to
-12-
<PAGE>
commencement of my Relationship with the Company. I have not entered into, and I
agree I will not enter into, any oral or written agreement in conflict with any
of the provisions of this Agreement.
(c) Voluntary Execution. I certify and acknowledge that I have
-------------------
carefully read all of the provisions of this Agreement and that I understand and
will fully and faithfully comply with such provisions.
9. General Provisions.
------------------
(a) Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(b) Entire Agreement. This Agreement sets forth the entire agreement
----------------
and understanding between the Company and me relating to the subject matter
herein and merges all prior discussions between us. No modification or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by the party to be charged. Any
subsequent change or changes in my duties, obligations, rights or compensation
will not affect the validity or scope of this Agreement.
(c) Severability. If one or more of the provisions in this Agreement
------------
are deemed void by law, then the remaining provisions will continue in full
force and effect.
(d) Successors and Assigns. This Agreement will be binding upon my
----------------------
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
(e) Survival. The provisions of this Agreement shall survive the
--------
termination of the Relationship and the assignment of this Agreement by the
Company to any successor in interest or other assignee.
(f) ADVICE OF COUNSEL. I ACKNOWLEDGE THAT, IN EXECUTING THIS
-----------------
AGREEMENT, I HAVE HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL
COUNSEL, AND I HAVE READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS
AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF
THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
-13-
<PAGE>
The parties have executed this Agreement on the respective dates set forth
below:
COMPANY: EMPLOYEE:
DURECT FELIX THEEUWES, an Individual:
CORPORATION
/s/ Thomas A. Schreck /s/ Felix Theeuwes
- ------------------------------- ---------------------------------
Signature Signature
By: ___________________________ _________________________________
Printed Name
Title: ________________________
Date: _________________________ Date: ___________________________
Address: ______________________ Address: ________________________
_______________________________ __________________________
-14-
<PAGE>
EXHIBIT A
---------
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
EXCLUDED FROM SECTION 4
Identifying Number
Title Date or Brief Description
----------- ---------- --------------------
<PAGE>
EXHIBIT 10.16
DURECT THERAPEUTICS CORPORATION
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is dated as of June 19,
---------
1998, by and between Thomas A. Schreck ("Employee") and Durect Therapeutics
--------
Corporation, a Delaware corporation (the "Company").
-------
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall have a term of three years (the "Original Term"). This
-------------
Agreement may be extended for an additional one year after the end of the
Original Term if the parties mutually agree in writing to such extension.
2. Duties.
------
(a) Position. Employee shall be employed as Chief Financial
--------
Officer of the Company, and as such will have responsibility for overseeing the
administration and operations of the Company, overseeing the accounting and
financing operations of the Company, arranging for facilities for the Company,
assisting with arranging funding for the Company (for which the Schreck Merchant
Group, of which Employee is a principal, will also provide services and receive
compensation), identifying and hiring key personnel, assisting in the
establishment and implementation of the Company's goals and objectives, and such
other duties that are consistent with the position of Chief Financial Officer,
as reasonably directed by the Board of Directors of the Company from time to
time. Employee will report to the Chief Executive Officer of the Company.
(b) Obligations to the Company. Employee agrees to the best of
--------------------------
his ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof. During the term of Employee's
employment relationship with the Company, and except as provided below, Employee
further agrees that he will devote all his business time and attention to the
business of the Company, the Company will be entitled to all of the benefits and
profits arising from or incident to all such work services and advice. Employee
will not render commercial or professional services of any nature to any person
or organization, whether or not for compensation; provided however, that the
Company acknowledges that, subject to the approval of the Board of Directors of
the Company and provided such services do not interfere with Employee's
performance of services for the Company, (i) Employee may perform services for
third parties during the term of this Agreement, and (ii) Employee will
determine the allocation of his working hours among such parties and the
Company. The Company agrees that Employee may, in Employee's discretion, serve
on boards of directors of other companies, with or without compensation.
Employee will comply with and be bound by the Company's operating policies,
procedures and practices from time to time in effect during the term of
Employee's employment, to the extent such policies, procedures and practices do
not conflict with the terms of this Agreement.
<PAGE>
3. Compensation. For the duties and services to be performed by Employee
------------
hereunder, the Company shall pay Employee, and Employee agrees to accept, the
salary, stock options, bonuses and other benefits described below in this
Section 3.
(a) Salary. Employee shall receive a monthly salary of Eight Thousand
------
Three Hundred Thirty-Three and 33/100 Dollars ($8,333.33), which is equivalent
to One Hundred Thousand and No/100 Dollars ($100,000.00) on an annualized basis.
Employee's monthly salary will be payable pursuant to the Company's normal
payroll practices. On the two-year anniversary of the commencement of the term
of this Agreement, Employee's monthly salary will be increased to Sixteen
Thousand Six Hundred Sixty-Six and 66/100 Dollars ($16,666.66)(which is
equivalent to an annual salary of Two Hundred and No/100 Dollars ($200,000.00)).
The Company acknowledges that Employee is a principal of the Schreck Merchant
Group, and that the Company has agreed to pay certain fees to the Schreck
Merchant Group pursuant to a separate financial advisory agreement with the
Schreck Merchant Group. If the agreement between the Company and the Schreck
Merchant Group is terminated before the two-year anniversary of the commencement
of the term of this Agreement, then, concurrently with such termination,
Employee's monthly salary will be increased to Sixteen Thousand Six Hundred
Sixty-Six and 66/100 Dollars ($16,666.66)(which is equivalent to an annual
salary of Two Hundred Thousand and No/100 Dollars ($200,000.00)). In the event
this Agreement is extended beyond the Original Term, the base salary shall be
reviewed at the time of such extension by the Board, and any increase will be
effective as of the date determined appropriate by the Board or its Compensation
Committee.
(b) Stock Options and Other Incentive Programs. Employee shall be
------------------------------------------
eligible to participate in any stock option or other incentive programs
available to officers or employees of the Company.
(c) Bonuses. Employee's entitlement to incentive bonuses from the
-------
Company is discretionary and shall be determined by the Board, its Compensation
Committee or the Chief Executive Officer of the Company in good faith based upon
the extent to which Employee's individual performance objectives and the
Company's profitability objectives and other financial and nonfinancial
objectives are achieved during the applicable bonus period.
(d) Additional Benefits. Employee will be eligible to participate in
-------------------
the Company's employee benefit plans of general application, including without
limitation, those plans covering medical, disability and life insurance in
accordance with the rules established for individual participation in any such
plan and under applicable law. Employee will be eligible for vacation and sick
leave in accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company generally provides
to its other employees of comparable position and experience.
(e) Reimbursement of Expenses. Employee shall be authorized to incur
-------------------------
on behalf and for the benefit of, and shall be reimbursed by, the Company for
reasonable expenses, provided that such expenses are substantiated in accordance
with Company policies.
-2-
<PAGE>
4. At Will Employment. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by Employee at any time for any or no reason and may be terminated by
the Company in accordance with the provisions of Section 5(a)(i), 5(a)(iii) and
5(a)(iv) of this Agreement. If Employee's employment terminates for any reason,
Employee shall not be entitled to any payments, benefits, damages, award or
compensation other than as provided in this Agreement, and the Company shall
have no right of repurchase with respect to Common Stock of the Company
purchased by Employee pursuant to that certain Common Stock Purchase Agreement,
dated April 2, 1998 by and between the Company and the Employee, except as
provided in such Common Stock Purchase Agreement.
5. Termination of Employment and Severance Benefits.
------------------------------------------------
(a) Termination of Employment. This Agreement may be terminated
-------------------------
during its Original Term (or any extension thereof) only upon the occurrence of
any of the following events:
(i) This Agreement may be terminated by the Company following
the Company's reasonable determination in good faith that it is terminating
Employee for good cause related to Employee's performance;
(ii) This Agreement may be terminated by Employee following a
change in Employee's status such that a Constructive Termination has occurred.
Constructive Termination shall be deemed to occur if (A)(1) there is a material
adverse change in Employee's position causing such position to be of materially
reduced stature or responsibility, or (2) Employee's refusal to relocate to a
facility or location more than 50 miles from the Company's current location; and
(B) within the 30-day period immediately following such material change or
reduction Employee elects to terminate employment.
(iii) This Agreement may be terminated without cause by the
Company following a reasonable determination by the Company's Board of Directors
that such termination would be in the reasonable best interests of the Company
("Termination Without Cause"); or
-------------------------
(iv) Following Employee's death or Disability (as defined in
Section 7 below).
(b) Severance Benefits. Employee shall be entitled to receive
------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) Involuntary Termination. If Employee's employment is
-----------------------
terminated under 5(a)(iii) above (such termination, an "Involuntary
-----------
Termination"), Employee will be entitled to receive payment of severance
- -----------
benefits equal to Employee's regular monthly salary for the remainder of the
Original Term (the "Severance Period") which payments shall not limit Employee's
----------------
rights against Company for any breach of this Agreement. Such payments shall be
made ratably over the Severance Period according to the Company's standard
payroll schedule. Employee will also be entitled to receive payment on the date
of termination of any
-3-
<PAGE>
bonus payable under Section 4(c). Health insurance benefits with the same
coverage provided to Employee prior to the termination (e.g. medical, dental,
optical, mental health) and in all other respects significantly comparable to
those in place immediately prior to the termination will be provided at the
Company's cost over the Severance Period.
(ii) Termination for Cause. If Employee's employment is terminated
---------------------
for cause (as described in Section 5(a)(i)), then Employee shall not be entitled
to receive payment of any severance benefits. Employee will receive payment(s)
for all salary and unpaid vacation accrued as of the date of Employee's
termination of employment and Employee's benefits will be continued under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination and in accordance with
applicable law.
(iii) Termination by Reason of Death or Disability. In the event
--------------------------------------------
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 7 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
accordance with applicable law.
(iv) Constructive Termination. If the Employee terminates his
-------------------------
employment pursuant to this Agreement following a Constructive Termination, then
the Company shall (A) within five (5) days after such termination, pay to
Employee a lump sum equal to all salary payments that the Company would have
paid to Employee during the twelve-month period following such termination and
(B) provide health insurance benefits with the same coverage provided to
Employee prior to the termination for the twelve month period following such
termination.
(v) Survival. The Company's obligations to Employee pursuant to
--------
this Section 5 of the Agreement shall survive any termination of this Agreement.
6. [Reserved.]
--------
7. Definition of Disability. For purposes of this Agreement, "Disability"
------------------------ ----------
shall mean that Employee has been unable to perform his duties hereunder as the
result of his incapacity due to physical or mental illness, and such inability,
which continues for at least 180 consecutive calendar days or 240 calendar days
during any consecutive twelve-month period, if shorter, after its commencement,
is determined to be total and permanent by a physician selected by the Company
and its insurers and acceptable to Employee or to Employee's legal
representative (with such agreement on acceptability not to be unreasonably
withheld).
8. Confidentiality Agreement. Employee shall sign, or has signed, a
-------------------------
Confidential Information and Invention Assignment Agreement (the
"Confidentiality Agreement") substantially in the form attached hereto as
- --------------------------
Exhibit A, the terms of which Confidentiality Agreement must first be agreed to
- ---------
by Alza and the Company. Employee hereby represents and warrants to the Company
that he has complied with all obligations under the Confidentiality
-4-
<PAGE>
Agreement and agrees to continue to abide by the terms of the Confidentiality
Agreement and further agrees that the provisions of the Confidentiality
Agreement shall survive any termination of this Agreement or of Employee's
employment relationship with the Company.
9. Noncompetition Covenant. Employee hereby agrees that he shall not,
-----------------------
during the term of his employment pursuant to this Agreement, do any of the
following without the prior written consent of the Company's Board of Directors:
(a) Compete. Carry on any business or activity (whether directly or
-------
indirectly, as a partner, stockholder, principal, agent, director, affiliate,
employee or consultant) which is competitive with the business conducted by the
Company (as conducted now or during the term of Employee's employment), nor
engage in any other activities that conflict with Employee's obligations to the
Company.
(b) Solicitation of Employees, Consultants and Other Parties.
--------------------------------------------------------
Employee agrees that during the term of Employee's employment with the Company,
and for a period of twenty-four (24) months immediately following the
termination of Employee's employment with the Company for any reason, whether
with or without cause, Employee shall not solicit any of the Company's employees
or consultants to terminate their relationship with the Company or attempt to
solicit employees or consultants of the Company, either for Employee or for any
other person or entity. Further, for a period of twenty-four (24) months
following termination of Employee's employment with the Company for any reason,
with or without cause, Employee shall not solicit any licensor to or customer of
the Company or licensee of the Company's products, in each case, that are known
to Employee, with respect to any business, products or services that are
competitive to the products or services offered by the Company or under
development as of the date of termination of Employee's employment with the
Company.
10. Conflicts. Employee has not, and will not during the term of this
---------
Agreement, enter into any other oral or written agreement in conflict with any
of the provisions of this Agreement. Employee further represents that he is
entering into or has entered into an employment relationship with the Company of
his own free will and that he has not been solicited as an employee in any way
by the Company.
11. Successors. Any successor to the Company (whether direct or indirect
----------
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agrees expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of Employee's rights hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
12. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement (whether by seeking new
employment
-5-
<PAGE>
or in any other manner), nor, except as otherwise provided in this Agreement,
shall any such payment be reduced by any earnings that Employee may receive from
any other source.
(b) Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the parties.
(c) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or 48 hours after being deposited in the U.S. mail as certified
or registered mail with postage prepaid, if such notice is addressed to the
party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(e) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(f) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(g) Arbitration. Any dispute or claim arising out of or in connection
-----------
with this Agreement will be finally settled by binding arbitration in San Jose,
California in accordance with the rules of the American Arbitration Association
by one arbitrator appointed in accordance with said rules. The arbitrator shall
apply California law, without reference to rules of conflicts of law or rules of
statutory arbitration, to the resolution of any dispute. Judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties may apply to any court of
competent jurisdiction for preliminary or interim equitable relief, or to compel
arbitration in accordance with this paragraph, without breach of this
arbitration provision. This Section 12(g) shall not apply to the
Confidentiality Agreement.
(h) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
-----------------
THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK
THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE
TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED
AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
-6-
<PAGE>
[Signature Page Follows]
-7-
<PAGE>
The parties have executed this Agreement the date first written above.
DURECT THERAPEUTICS CORPORATION
By: /s/ Thomas A. Schreck
-------------------------------------
Title: President
-------------------------------------
Address: ____________________________________
____________________________________
____________________________________
EMPLOYEE
Signature: /s/ Thomas A. Schreck
----------------------------------
Address: ____________________________________
____________________________________
____________________________________
-8-
<PAGE>
EXHIBIT A
---------
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
<PAGE>
DURECT CORPORATION
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
As a condition of my becoming employed (or my employment being continued)
by or retained as a consultant (or my consulting relationship being continued)
by Durect Corporation, a Delaware corporation or any of its current or future
subsidiaries, affiliates, successors or assigns (collectively, the "Company"),
-------
and in consideration of my employment or consulting relationship with the
Company and my receipt of the compensation now and hereafter paid to me by the
Company, I agree to the following:
1. Employment or Consulting Relationship. I understand and acknowledge
-------------------------------------
that this Agreement does not alter, amend or expand upon any rights I may have
to continue in the employ of, or in a consulting relationship with, or the
duration of my employment or consulting relationship with, the Company under any
existing agreements between the Company and me or under applicable law. Any
employment or consulting relationship between the Company and me, whether
commenced prior to or upon the date of this Agreement, shall be referred to
herein as the "Relationship."
------------
2. At-Will Employment. I understand and acknowledge that my Relationship
------------------
with the Company is and shall continue to be at-will, as defined under
applicable law, meaning that either I or the Company may terminate the
Relationship at any time for any reason or no reason, without further obligation
or liability.
3. Confidential Information.
------------------------
(a) Company Information. I agree at all times during the term of my
-------------------
Relationship with the Company and thereafter, to hold in strictest confidence,
and not to use, except for the benefit of the Company, or to disclose to any
person, firm, corporation or other entity without written authorization of the
Board of Directors of the Company, any Confidential Information of the Company
which I obtain or create. I further agree not to make copies of such
Confidential Information except as authorized by the Company. I understand that
"Confidential Information" means any Company proprietary information, technical
------------------------
data, trade secrets or know-how, including, but not limited to, research,
product plans, products, services, suppliers, customer lists and customers
(including, but not limited to, customers of the Company on whom I called or
with whom I became acquainted during the Relationship), prices and costs,
markets, software, developments, inventions, laboratory notebooks, processes,
formulas, technology, designs, drawings, engineering, hardware configuration
information, marketing, licenses, finances, budgets or other business
information disclosed to me by the Company either directly or indirectly in
writing, orally or by drawings or observation of parts or equipment or created
by me during the period of the Relationship, whether or not during working
hours. I understand that "Confidential Information" includes, but is not limited
------------------------
to, information pertaining to any aspects of the Company's business which is
either information not known by actual or potential competitors of the Company
or is proprietary information of the Company or its customers or suppliers,
whether of a technical nature or otherwise. I further understand that
Confidential Information does not include any of the foregoing items which has
become publicly and widely known and made generally available through no
wrongful act of mine or of others who were under confidentiality obligations as
to the item or items involved.
(b) Former Employer Information. I represent that my performance of
---------------------------
all terms of this Agreement as an employee or consultant of the Company have not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by me in confidence or trust prior or
subsequent to the commencement of my Relationship with the Company, and I will
not disclose to the Company, or induce the Company
10
<PAGE>
to use, any inventions, confidential or proprietary information or material
belonging to any previous employer or any other party.
(c) Third Party Information. I recognize that the Company has
-----------------------
received and in the future will receive confidential or proprietary information
from third parties subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. I agree to hold all such confidential or proprietary information in
the strictest confidence and not to disclose it to any person, firm or
corporation or to use it except as necessary in carrying out my work for the
Company consistent with the Company's agreement with such third party.
4. Inventions.
----------
(a) Inventions Retained and Licensed. I have attached hereto, as
--------------------------------
Exhibit A, a list describing with particularity all inventions, original works
- ---------
of authorship, developments, improvements, and trade secrets which were made by
me prior to the commencement of the Relationship (collectively referred to as
"Prior Inventions"), which belong solely to me or belong to me jointly with
- -----------------
another, which relate in any way to any of the Company's proposed businesses,
products or research and development, and which are not assigned to the Company
hereunder; or, if no such list is attached, I represent that there are no such
Prior Inventions. If, in the course of my Relationship with the Company, I
incorporate into a Company product, process or machine a Prior Invention owned
by me or in which I have an interest, the Company is hereby granted and shall
have a non-exclusive, royalty-free, irrevocable, perpetual, worldwide license
(with the right to sublicense) to make, have made, copy, modify, make derivative
works of, use, sell and otherwise distribute such Prior Invention as part of or
in connection with such product, process or machine.
(b) Assignment of Inventions. I agree that I will promptly make full
------------------------
written disclosure to the Company, will hold in trust for the sole right and
benefit of the Company, and hereby assign to the Company, or its designee, all
my right, title and interest throughout the world in and to any and all
inventions, original works of authorship, developments, concepts, know-how,
improvements or trade secrets, whether or not patentable or registrable under
copyright or similar laws, which I may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to
practice, during the period of time in which I am employed by or a consultant of
the Company (collectively referred to as "Inventions"), except as provided in
----------
Section 4(e) below. I further acknowledge that all inventions, original works
of authorship, developments, concepts, know-how, improvements or trade secrets
which are made by me (solely or jointly with others) within the scope of and
during the period of my Relationship with the Company are "works made for hire"
-------------------
(to the greatest extent permitted by applicable law) and are compensated by my
salary (if I am an employee) or by such amounts paid to me under any applicable
consulting agreement or consulting arrangements (if I am a consultant), unless
regulated otherwise by the mandatory law of the state of California.
(c) Maintenance of Records. I agree to keep and maintain adequate and
----------------------
current written records of all Inventions made by me (solely or jointly with
others) during the term of my Relationship with the Company. The records may be
in the form of notes, sketches, drawings, flow charts, electronic data or
recordings, laboratory notebooks, and any other format.
11
<PAGE>
The records will be available to and remain the sole property of the Company at
all times. I agree not to remove such records from the Company's place of
business except as expressly permitted by Company policy which may, from time to
time, be revised at the sole election of the Company for the purpose of
furthering the Company's business.
(d) Patent and Copyright Rights. I agree to assist the Company, or
---------------------------
its designee, at the Company's expense, in every proper way to secure the
Company's rights in the Inventions and any copyrights, patents, trademarks, mask
work rights, moral rights, or other intellectual property rights relating
thereto in any and all countries, including the disclosure to the Company of all
pertinent information and data with respect thereto, the execution of all
applications, specifications, oaths, assignments, recordations, and all other
instruments which the Company shall deem necessary in order to apply for,
obtain, maintain and transfer such rights and in order to assign and convey to
the Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. I further
agree that my obligation to execute or cause to be executed, when it is in my
power to do so, any such instrument or papers shall continue after the
termination of this Agreement until the expiration of the last such intellectual
property right to expire in any country of the world. If the Company is unable
because of my mental or physical incapacity or unavailability or for any other
reason to secure my signature to apply for or to pursue any application for any
United States or foreign patents or copyright registrations covering Inventions
or original works of authorship assigned to the Company as above, then I hereby
irrevocably designate and appoint the Company and its duly authorized officers
and agents as my agent and attorney in fact, to act for and in my behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal force and effect as if originally executed by me. I hereby
waive and irrevocably quitclaim to the Company any and all claims, of any nature
whatsoever, which I now or hereafter have for infringement of any and all
proprietary rights assigned to the Company.
(e) Exception to Assignments. I understand that the provisions of
------------------------
this Agreement requiring assignment of Inventions to the Company do not apply to
any invention which qualifies fully under the provisions of California Labor
Code Section 2870 (attached hereto as Exhibit B). I will advise the Company
---------
promptly in writing of any inventions that I believe meet such provisions and
are not otherwise disclosed on Exhibit A.
---------
5. Returning Company Documents. I agree that, at the time of termination
---------------------------
of my Relationship with the Company, I will deliver to the Company (and will not
keep in my possession, recreate or deliver to anyone else) any and all devices,
records, data, notes, reports, proposals, lists, correspondence, specifications,
drawings, blueprints, sketches, laboratory notebooks, materials, flow charts,
equipment, other documents or property, or reproductions of any aforementioned
items developed by me pursuant to the Relationship or otherwise belonging to the
Company, its successors or assigns. I further agree that to any property
situated on the Company's premises and owned by the Company, including disks and
other storage media, filing cabinets or other work areas, is subject to
inspection by Company personnel at any time with or without notice. In the
event of the termination of the Relationship, I agree to sign and deliver the
"Termination Certification" attached hereto as Exhibit C.
- -------------------------- ---------
12
<PAGE>
6. Notification to Other Parties.
-----------------------------
(a) Employees. In the event that I leave the employ of the Company, I
---------
hereby consent to notification by the Company to my new employer about my rights
and obligations under this Agreement.
(b) Consultants. I hereby grant consent to notification by the
-----------
Company to any other parties besides the Company with whom I maintain a
consulting relationship, including parties with whom such relationship commences
after the effective date of this Agreement, about my rights and obligations
under this Agreement.
7. Solicitation of Employees, Consultants and Other Parties. I agree
--------------------------------------------------------
that during the term of my Relationship with the Company, and for a period of
twenty-four (24) months immediately following the termination of my Relationship
with the Company for any reason, whether with or without cause, I shall not
either directly or indirectly solicit, induce, recruit or encourage any of the
Company's employees or consultants to terminate their relationship with the
Company, or take away such employees or consultants, or attempt to solicit,
induce, recruit, encourage or take away employees or consultants of the Company,
either for myself or for any other person or entity. Further, for a period of
twenty-four (24) months following termination of my Relationship with the
Company for any reason, with or without cause, I shall not solicit any licensor
to or customer of the Company or licensee of the Company's products, in each
case, that are known to me, with respect to any business, products or services
that are competitive to the products or services offered by the Company or under
development as of the date of termination of my Relationship with the Company.
8. Representations and Covenants.
-----------------------------
(a) Facilitation of Agreement. I agree to execute promptly any proper
-------------------------
oath or verify any proper document required to carry out the terms of this
Agreement upon the Company's written request to do so.
(b) Conflicts. I represent that my performance of all the terms of
---------
this Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to commencement of my
Relationship with the Company. I have not entered into, and I agree I will not
enter into, any oral or written agreement in conflict with any of the provisions
of this Agreement.
(c) Voluntary Execution. I certify and acknowledge that I have
-------------------
carefully read all of the provisions of this Agreement and that I understand and
will fully and faithfully comply with such provisions.
9. General Provisions.
------------------
(a) Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
(b) Entire Agreement. This Agreement sets forth the entire agreement
----------------
and understanding between the Company and me relating to the subject matter
herein and merges all prior discussions between us. No modification or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by the party to be charged. Any
subsequent change or changes in my duties, obligations, rights or compensation
will not affect the validity or scope of this Agreement.
13
<PAGE>
(c) Severability. If one or more of the provisions in this Agreement
------------
are deemed void by law, then the remaining provisions will continue in full
force and effect.
(d) Successors and Assigns. This Agreement will be binding upon my
----------------------
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
(e) Survival. The provisions of this Agreement shall survive the
--------
termination of the Relationship and the assignment of this Agreement by the
Company to any successor in interest or other assignee.
(f) ADVICE OF COUNSEL. I ACKNOWLEDGE THAT, IN EXECUTING THIS
-----------------
AGREEMENT, I HAVE HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL
COUNSEL, AND I HAVE READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS
AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF
THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
14
<PAGE>
The parties have executed this Agreement on the respective dates set forth
below:
COMPANY: EMPLOYEE:
DURECT THOMAS A. SCHRECK, an Individual:
CORPORATION
/s/ Thomas A. Schreck /s/ Thomas A. Schreck
- --------------------------------- -----------------------------------
Signature Signature
By: _____________________________ ___________________________________
Printed Name
Title: __________________________
Date: ___________________________ Date: _____________________________
Address: ________________________ Address: __________________________
_________________________________ ___________________________
15
<PAGE>
EXHIBIT A
---------
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
EXCLUDED FROM SECTION 4
Identifying Number
Title Date or Brief Description
- ------------------------ -------------- --------------------
___ No inventions or improvements
___ Additional Sheets Attached
Signature of Employee/Consultant:_________________________
Print Name of Employee/Consultant:________________________
Date:_____________________________________________________
<PAGE>
EXHIBIT B
---------
Section 2870 of the California Labor Code is as follows:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE>
EXHIBIT C
---------
TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed
to return, any devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, sketches, laboratory
notebooks, flow charts, materials, equipment, other documents or property, or
copies or reproductions of any aforementioned items belonging to Durect
Corporation, its subsidiaries, affiliates, successors or assigns (together the
"Company").
- --------
I further certify that I have complied with all the terms of the Company's
Confidential Information and Invention Assignment Agreement signed by me,
including the reporting of any inventions and original works of authorship (as
defined therein), conceived or made by me (solely or jointly with others)
covered by that agreement.
I further agree that, in compliance with the Confidential Information and
Invention Assignment Agreement, I will preserve as confidential all trade
secrets, confidential knowledge, data or other proprietary information relating
to products, processes, know-how, designs, formulas, developmental or
experimental work, computer programs, data bases, other original works of
authorship, customer lists, business plans, financial information or other
subject matter pertaining to any business of the Company or any of its
employees, clients, consultants or licensees.
I further agree that for twenty-four (24) months from the date of this
Certificate, I shall not either directly or indirectly solicit, induce, recruit
or encourage any of the Company's employees or consultants to terminate their
relationship with the Company, or take away such employees or consultants, or
attempt to solicit, induce, recruit, encourage or take away employees or
consultants of the Company, either for myself or for any other person or entity.
Further, for a period of twenty-four (24) months from the date of this
Certificate, I shall not solicit any licensor to or customer of the Company or
licensee of the Company's products, in each case, that are known to me, with
respect to any business, products or services that are competitive to the
products or services offered by the Company or under development as of the date
of termination of my Relationship with the Company.
Date: __________________
___________________________________________
(Employee's Signature)
___________________________________________
(Type/Print Employee's Name)
-2-
<PAGE>
EXHIBIT 10.17
DURECT CORPORATION
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
This Common Stock Purchase Agreement (the "Agreement") is made as of April
---------
14, 2000, by and between Durect Corporation, a Delaware corporation (the
"Company"), and ALZA Corporation, a Delaware corporation ("Purchaser").
------- ---------
1. Issuance of Stock. Subject to the terms and conditions of this
-----------------
Agreement, the Company will issue Purchaser 1,000,000 shares of Common Stock
(the "Shares"), in consideration of Purchaser's agreement to amend that certain
------
Amended and Restated Development and Commercialization Agreement entered into
between the Company and Purchaser dated April 28, 1999. The term "Shares"
------
refers to the issued Shares and all securities received in replacement of or in
connection with the Shares pursuant to stock dividends or splits, all securities
received in replacement of the Shares in a recapitalization, merger,
reorganization, exchange or the like, and all new, substituted or additional
securities or other properties to which Purchaser is entitled by reason of
Purchaser's ownership of the Shares.
2. Purchase of Stock.
-----------------
(a) The issuance of the Shares under this Agreement shall occur at the
principal office of the Company simultaneously with the execution of this
Agreement by the parties, or on such other date as the Company and Purchaser
shall agree (the "Purchase Date"). On the Purchase Date, the Company will
-------------
deliver to Purchaser a certificate representing the Shares to be acquired by
Purchaser (which shall be issued in Purchaser's name) against payment therefor
by Purchaser's agreement to enter into the Second Amended and Restated
Development and Commercialization Agreement effective April 28, 1999.
(b) Purchaser understands that it is responsible for the payment of all
taxes on the receipt of the Shares, including but not limited to federal and
state income taxes, local taxes and FICA, if any. Purchaser agrees to indemnify
the Company with respect to any obligations or expenses related to such taxes.
3. Investment and Taxation Representations. In connection with the
---------------------------------------
acquisition of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment for its own account only and not with a
view to, or for resale in connection with, any "distribution" thereof within the
meaning of the Securities Act. Purchaser does not have any present intention to
transfer the Shares to any other person or entity.
(b) Purchaser understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
-1-
<PAGE>
(c) Purchaser understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of Purchaser's control,
and which the Company is under no obligation and may not be able to satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection the purchase or disposition of the Shares and that
Purchaser is not relying on the Company for any tax advice.
4. Company Covenant. The Company hereby covenants that it will
----------------
amend the Second Amended and Restated Investors' Rights Agreement dated March
28, 2000, among the Company and certain investors (the "Rights Agreement") to
include as Registrable Securities (as defined in the Rights Agreement) the
Common Stock issued pursuant to this agreement so that such shares of Common
Stock have the same registration rights under the Rights Agreement as shares of
the Company's Series A-1 Preferred Stock held by Purchaser. If such amendment is
not completed within 30 days after the date of this Agreement, then the Shares
shall not be subject to the Amended and Restated Market Stand-off Agreement
dated June 19, 1998.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. The certificate or certificates representing the
-------
Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION
THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL IN A FORM
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
(ii) any other legend required by federal or state
securities laws.
-2-
<PAGE>
(b) Stop-Transfer Notices. Purchaser agrees that, in order to
---------------------
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required
-------------------
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii) to
treat as owner of such Shares or to accord the right to vote or pay dividends to
any purchaser or other transferee to whom such Shares shall have been so
transferred.
6. No Employment Rights. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a Parent or Subsidiary
of the Company, to terminate Purchaser's employment or consulting relationship,
for any reason, with or without cause.
7. Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the Company's
initial public offering. In addition to the foregoing restrictions, subject to
Section 4 above, Purchaser agrees that the Shares are also subject to the terms
of that certain Amended and Restated Market Stand-Off Agreement entered into by
and between the Company and Purchaser dated June 19, 1998.
8. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for
-3-
<PAGE>
such provision, then (i) such provision shall be excluded from this Agreement,
(ii) the balance of the Agreement shall be interpreted as if such provision were
so excluded and (iii) the balance of the Agreement shall be enforceable in
accordance with its terms.
(d) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient when delivered personally or
sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) Successors and Assigns. The rights and benefits of this
----------------------
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
(h) California Corporate Securities Law. THE SALE OF THE SECURITIES
-----------------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
-4-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
DURECT CORPORATION
By: /s/ James E. Brown
________________________________
Title: Chief Executive Officer
_____________________________
Address: ___________________________
____________________________________
PURCHASER:
ALZA CORPORATION
By: /s/ Peter Staple
________________________________
Title: Executive Vice President
_____________________________
Address: ___________________________
____________________________________
-5-
<PAGE>
EXHIBIT 10.18
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
Warrant No. CS-1 Number of Shares: 1,000,000
Date of Issuance: April 14, 2000 (subject to adjustment)
DURECT CORPORATION
Durect Corporation (the "Company"), for value received, hereby certifies
-------
that ALZA Corporation, or its registered assigns (the "Registered Holder"), is
-----------------
entitled, subject to the terms set forth below, to purchase from the Company,
commencing on the date the warrant is first exercisable in accordance with
Section 1(a) below until the Expiration Date (as defined in Section 5 below), up
to 1,000,000 shares (as adjusted from time to time pursuant to the provisions of
this Warrant) of Common Stock of the Company, at a purchase price (the "Purchase
--------
Price") equal to $7.00 per share; provided, however, that prior to the time when
- -----
the Warrant shall first become exercisable in accordance with Section 1(a), each
time, if any, that the Company sells equity securities in a private placement
transaction or series of related transactions in which the aggregate value of
securities sold exceeds $2,000,000 and in which the price per share of such
securities on an as converted basis (the "Sale Price") is greater than $7.00,
then the Purchase Price shall be adjusted so as to equal the Sale Price, and
provided further that in the event the Warrant shall first become exercisable
under Section 1(a) as a result of the completion by the Company of a registered
offering under the Securities Act of 1933, as amended, then the Purchase Price
shall equal the price per share at which the Company's Common Stock is offered
to the public in such offering. The Purchase Price shall be subject to further
adjustment as set forth below. The shares purchasable upon exercise of this
Warrant, as adjusted from time to time pursuant to the provisions of this
Warrant, are sometimes hereinafter referred to as the "Warrant Stock."
--------------
1. Exercise.
--------
(a) Ability to Exercise. This Warrant shall be first exercisable on
-------------------
the date that is the earlier of: (i) October 14, 2001, (ii) the date on which
the Company completes a registered offering under the Securities Act of 1933, as
amended, or (iii) the date on which the Company completes the sale, conveyance
or disposal of all or substantially all of the Company's property or business or
the Company's merger into or consolidation with any other corporation (other
than a wholly-owned subsidiary of the Company) or any other transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of, provided that this sub-Section
--------
1(a)(iii) shall not apply to a merger effected exclusively for the purpose of
changing the domicile of the Company.
-1-
<PAGE>
(b) Manner of Exercise. This Warrant may be exercised by the
------------------
Registered Holder, in whole or in part, by surrendering this Warrant, with the
purchase/exercise form appended hereto as Exhibit A duly executed by such
---------
Registered Holder or by such Registered Holder's duly authorized attorney, at
the principal office of the Company, or at such other office or agency as the
Company may designate, accompanied by payment in full of the Purchase Price
payable in respect of the number of shares of Warrant Stock purchased upon such
exercise. The Purchase Price may be paid by cash, check, wire transfer or by
the surrender of promissory notes or other instruments representing indebtedness
of the Company to the Registered Holder.
(c) Effective Time of Exercise. Each exercise of this Warrant shall
--------------------------
be deemed to have been effected immediately prior to the close of business on
the day on which this Warrant shall have been surrendered to the Company as
provided in Section 1(b) above. At such time, the person or persons in whose
name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 1(e) below shall be deemed to have become the
holder or holders of record of the Warrant Stock represented by such
certificates.
(d) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided
above in Section 1(b), the Registered Holder may elect to receive shares equal
to the value of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Company together with
notice of such election on the purchase/exercise form appended hereto as Exhibit
-------
A duly executed by such Registered Holder or such Registered Holder's duly
- -
authorized attorney, in which event the Company shall issue to holder a number
of shares of Common Stock computed using the following formula:
X = Y (A - B)
---------
A
Where X = The number of shares of Common Stock to be issued to the
Registered Holder.
Y = The number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = The fair market value of one share of Common Stock (at the date of
such calculation).
B = The Purchase Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 1(d), the fair market value
of one share of Common Stock on the date of calculation shall mean:
(A) if the exercise is in connection with an initial
public offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by the
Securities and Exchange Commission, then the
-2-
<PAGE>
fair market value per share of Common Stock shall be the initial "Price to
Public" specified in the final prospectus with respect to the offering;
(B) if this Warrant is exercised after, and not in
connection with, the Company's initial public offering, and if the Company's
Common Stock is traded on a securities exchange or The Nasdaq Stock Market or
actively traded over-the-counter:
(1) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market, the fair market value shall be
deemed to be the average of the closing prices over a thirty (30) day period
ending three days before date of calculation, or since the shares were first
traded on such exchange, if less than thirty three (33) days; or
(2) if the Company's Common Stock is actively traded
over-the-counter, the fair market value shall be deemed to be the average of the
closing bid or sales price (whichever is applicable) over the thirty (30) day
period ending three days before the date of calculation, or since the shares
were first traded on such exchange, if less than thirty three (33) days; or
(C) if neither (A) nor (B) is applicable, the fair market
value shall be at the highest price per share which the Company could obtain on
the date of calculation from a willing buyer (not a current employee or
director) for shares of Common Stock sold by the Company, from authorized but
unissued shares, as reasonably determined in good faith by the Board of
Directors, unless the Company is at such time subject to a transaction as
described in Section 1(a)(iii) above, in which case the fair market value per
share of Common Stock shall be deemed to be the value of the consideration per
share received by the holders of such stock pursuant to such transaction.
(e) Delivery to Holder. As soon as practicable after the exercise of
------------------
this Warrant in whole or in part, and in any event within ten (10) days
thereafter, the Company at its expense will cause to be issued in the name of,
and delivered to, the Registered Holder, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of shares of
Warrant Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) and in the same form as this warrant, calling
in the aggregate on the face or faces thereof for the number of shares of
Warrant Stock equal (without giving effect to any adjustment therein) to the
number of such shares called for on the face of this Warrant minus the number of
such shares purchased by the Registered Holder upon such exercise as provided in
Section 1(b) above.
2. Adjustments.
-----------
(a) Stock Splits and Dividends. If outstanding shares of the
--------------------------
Company's Common Stock shall be subdivided into a greater number of shares or a
dividend in Common
-3-
<PAGE>
Stock shall be paid in respect of Common Stock, the Purchase Price in effect
immediately prior to such subdivision or at the record date of such dividend
shall simultaneously with the effectiveness of such subdivision or immediately
after the record date of such dividend be proportionately reduced. If
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the
exercise of this Warrant shall be changed to the number determined by dividing
(i) an amount equal to the number of shares issuable upon the exercise of this
Warrant immediately prior to such adjustment, multiplied by the Purchase Price
in effect immediately prior to such adjustment, by (ii) the Purchase Price in
effect immediately after such adjustment.
(b) Reclassification, Etc. In case of any reclassification or change
----------------------
of the outstanding securities of the Company or of any reorganization of the
Company (or any other corporation the stock or securities of which are at the
time receivable upon the exercise of this Warrant) or any similar corporate
reorganization on or after the date hereof, then and in each such case the
holder of this Warrant, upon the exercise hereof at any time after the
consummation of such reclassification, change, reorganization, merger or
conveyance, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise hereof prior to such
consummation, the stock or other securities or property to which such holder
would have been entitled upon such consummation if such holder had exercised
this Warrant immediately prior thereto, all subject to further adjustment as
provided in Section 2(a); and in each such case, the terms of this Section 2
shall be applicable to the shares of stock or other securities properly
receivable upon the exercise of this Warrant after such consummation.
(c) Adjustment Certificate. When any adjustment is required to be
----------------------
made in the Warrant Stock or the Purchase Price pursuant to this Section 2, the
Company shall promptly mail to the Registered Holder a certificate setting forth
(i) a brief statement of the facts requiring such adjustment, (ii) the Purchase
Price after such adjustment and (iii) the kind and amount of stock or other
securities or property into which this Warrant shall be exercisable after such
adjustment.
3. Transfers.
---------
(a) Unregistered Security. Each holder of this Warrant acknowledges
---------------------
that this Warrant and the Warrant Stock have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and agrees not to
--------------
sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this
Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Act as to this Warrant or such
Warrant Stock and registration or qualification of this Warrant or such Warrant
Stock under any applicable U.S. federal or state securities law then in effect
or (ii) an opinion of counsel, reasonably satisfactory to the Company, that such
registration and qualification are not required. Each certificate or other
instrument for Warrant Stock issued upon the exercise of this Warrant shall bear
a legend substantially to the foregoing effect.
-4-
<PAGE>
(b) Transferability. Subject to the provisions of Section 3(a) hereof
---------------
and of Section 1.14 of the Second Amended and Restated Investors' Rights
Agreement dated March 28, 2000 among the Company and certain holders of the
Company's securities, this Warrant and all rights hereunder are transferable, in
whole or in part, upon surrender of the Warrant with a properly executed
assignment (in the form of Exhibit B hereto) at the principal office of the
---------
Company; provided, however, that this Warrant may not be transferred to any
-------- -------
party whom the Company reasonably determines is a competitor of the Company.
(c) Warrant Register. The Company will maintain a register
----------------
containing the names and addresses of the Registered Holders of this Warrant.
Until any transfer of this Warrant is made in the warrant register, the Company
may treat the Registered Holder of this Warrant as the absolute owner hereof for
all purposes; provided, however, that if this Warrant is properly assigned in
-------- -------
blank, the Company may (but shall not be required to) treat the bearer hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary. Any Registered Holder may change such Registered Holder's address as
shown on the warrant register by written notice to the Company requesting such
change.
4. No Impairment. The Company will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will (subject to Section 13 below) at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
5. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the date (the "Expiration Date") that is
---------------
the fourth anniversary after the Warrant first becomes exercisable in accordance
with Section 1(a) above.
6. Notices of Certain Transactions. In case:
-------------------------------
(a) the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time deliverable upon the exercise of
this Warrant) for the purpose of entitling or enabling them to receive any
dividend or other distribution, or to receive any right to subscribe for or
purchase any shares of stock of any class or any other securities, or to receive
any other right, to subscribe for or purchase any shares of stock of any class
or any other securities, or to receive any other right, or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company, any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving entity), or any transfer of all or substantially all of the
assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
-5-
<PAGE>
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon such reorganization, reclassification, consolidation,
merger, transfer, dissolution, liquidation or winding-up) are to be determined.
Such notice shall be mailed at least ten (10) days prior to the record date or
effective date for the event specified in such notice.
7. Reservation of Stock. The Company will at all times reserve and keep
--------------------
available, solely for the issuance and delivery upon the exercise of this
Warrant, such shares of Warrant Stock and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
8. Exchange of Warrants. Upon the surrender by the Registered Holder of
--------------------
any Warrant or Warrants, properly endorsed, to the Company at the principal
office of the Company, the Company will, subject to the provisions of Section 3
hereof, issue and deliver to or upon the order of such Holder, at the Company's
expense, a new Warrant or Warrants of like tenor, in the name of such Registered
Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may direct, calling in the aggregate on the face
or faces thereof for the number of shares of Common Stock called for on the face
or faces of the Warrant or Warrants so surrendered.
9. Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
10. Notices. Any notice required or permitted by this Warrant shall be in
-------
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or forty-eight
(48) hours after being deposited in the regular mail as certified or registered
mail (airmail if sent internationally) with postage prepaid, addressed (a) if to
the Registered Holder, to the address of the Registered Holder most recently
furnished in writing to the Company and (b) if to the Company, to the address
set forth below or subsequently modified by written notice to the Registered
Holder.
11. No Rights as Stockholder. Until the exercise of this Warrant, the
------------------------
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
12. Registration Rights. The Company covenants that it will amend that
--------------------
certain Second Amended and Restated Investors' Rights Agreement dated March 28,
2000 to include the
-6-
<PAGE>
shares of Common Stock issuable upon exercise of this Warrant as "Registrable
Securities" as defined in Section 1.1(b) of said agreement so that such shares
of Common Stock shall have the same registration rights under the Rights
Agreement as with respect to shares of the Company's Series A-1 Preferred Stock
held by the Registered Holder. If such amendment is not completed within 30 days
after the date of this Warrant, then the Warrant Stock shall not be subject to
the Amended and Restated Market Stand-Off Agreement dated June 19, 1998.
13. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
14. Amendment or Waiver. Any term of this Warrant may be amended or
-------------------
waived only by an instrument in writing signed by the party against which
enforcement of the amendment or waiver is sought.
15. Headings. The headings in this Warrant are for purposes of reference
--------
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
16. Governing Law. This Warrant shall be governed, construed and
-------------
interpreted in accordance with the laws of the State of California, without
giving effect to principles of conflicts of law.
DURECT CORPORATION
By: /s/ James E. Brown
_____________________________________
James E. Brown, President
Address: 10240 Bubb Road
Cupertino, CA 95014
-7-
<PAGE>
EXHIBIT A
---------
PURCHASE/EXERCISE FORM
----------------------
To: DURECT CORPORATION Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant No. CS-1, hereby irrevocably elects to (a) purchase _____ shares of the
Common Stock covered by such Warrant and herewith makes payment of $ _________,
representing the full purchase price for such shares at the price per share
provided for in such Warrant, or (b) exercise such Warrant for _______ shares
purchasable under the Warrant pursuant to the Net Issue Exercise provisions of
Section 1(c) of such Warrant.
The undersigned acknowledges that:
A. The Warrant Stock to be acquired by the undersigned will be acquired
for investment for the undersigned's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
undersigned has no present intention of selling, granting any participation in,
or otherwise distributing the same. By executing this form, the undersigned
further represents that the undersigned does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Warrant Stock. The undersigned has not been formed for the specific purpose of
acquiring the Warrant Stock.
B. The undersigned understands that the Warrant Stock has not been, and
will not be, registered under the Securities Act, by reason of a specific
exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent and the
accuracy of the undersigned's representations as expressed herein. The
undersigned understands that the Warrant Stock is "restricted securities" under
applicable U.S. federal and state securities laws and that, pursuant to these
laws, the undersigned must hold the Warrant Stock indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Except as set forth in the Second Amended and
Restated Investors' Rights Agreement dated March 28, 2000, as amended, the
undersigned acknowledges that the Company has no obligation to register or
qualify the Warrant Stock for resale. The undersigned further acknowledges that
if an exemption from registration or qualification is available, it may be
conditioned on various requirements including, but not limited to, the time and
manner of sale, the holding period for the Warrant Stock, and on requirements
relating to the Company which are outside of the undersigned's control, and
which the Company is under no obligation and may not be able to satisfy.
C. The undersigned understands that the Warrant Stock and any securities
issued in respect of or exchange for the Warrant Stock, may bear one or all of
the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
-i-
<PAGE>
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
D. The undersigned is an accredited investor as defined in Rule 501(a) of
Regulation D promulgated under the Securities Act.
E. The undersigned further acknowledges that it has reviewed the market
standoff provisions set forth in Section 1.14 of the Second Amended and Restated
Investors' Rights Agreement dated March 28, 2000 among the Company and certain
holders of the Company's securities and agrees to be bound by such provisions.
In addition to the foregoing restrictions, and subject to Section 12 of the
Warrant, the undersigned further agrees that the Warrant Stock is also subject
to the terms of that certain Amended and Restated Market Stand-Off Agreement
entered into by and between the Company and Purchaser dated June 19, 1998, and
for the purposes of such agreement, the undersigned shall be deemed to hold the
Warrant Stock as of the date of the Warrant.
Signature: ______________________
Name (print): ___________________
Title (if applic.): _____________
Company (if applic.): ___________
-ii-
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, _________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of Common Stock covered thereby set
forth below, to:
-3-
<PAGE>
EXHIBIT 10.19
AMENDED AND RESTATED MARKET STAND-OFF AGREEMENT
This Market Stand-Off Agreement (the "Agreement") is effective as of June
19, 1998 (the "Effective Date") between ALZA Corporation, a Delaware corporation
--------------
("ALZA") and Durect Corporation ("Durect").
---- ------
RECITALS
--------
A. ALZA and Durect are parties to that certain Amended and Restated
Development and Commercialization Agreement dated April 28, 1999 (the "DUROS
-----
Agreement"), providing for the development, manufacture and marketing of
- ---------
pharmaceutical products utilizing proprietary technology of ALZA relating to the
DUROS(R) System for the controlled delivery of drugs in certain fields.
B. In consideration for a worldwide, royalty free, nonexclusive license,
with the right to grant sublicenses, to any Technical Information (as defined in
the DUROS Agreement) that Durect develops relating to a means of connecting or
"docking" a catheter to a System (as defined in the DUROS Agreement) granted to
ALZA pursuant to the last sentence of Section 8.1 of the DUROS Agreement (the
"Docking License"), ALZA is willing to agree to certain restrictions on the
transferability of any securities of Durect that ALZA currently owns or expects
to own.
C. The parties wish to set forth the terms of such restriction and to
enter into this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. Unless otherwise defined herein, all capitalized terms
-----------
shall have the same defined meanings as in the DUROS Agreement.
2. Covenants of ALZA.
-----------------
2.1 "Market Stand-Off" Agreement. ALZA hereby agrees that, during
----------------------------
the period (the "Lock-Up Period") that is two years after the termination of any
--------------
market stand-off or similar agreement that ALZA enters into with Durect or with
any underwriter of Common Stock or other securities of Durect in connection with
Durect's initial public offering of Common Stock (the "IPO"), ALZA (or any
---
affiliated entity or person of ALZA) shall not, during any six month period,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), pledge, grant any option to purchase or otherwise
transfer or dispose of twenty five percent (25%) or more of the maximum number
of all securities of Durect held by ALZA (and any affiliated entity or person of
ALZA) at any given time during the period commencing on the date of the Series
A-1 Closing (as defined in the Series A-1 and Series A-2 Preferred Stock
Purchase Agreement dated June 19, 1998) and ending on the closing of the IPO;
provided, however, that such restrictions shall not apply to any conversion of
Durect securities held by ALZA, or to any transfer of Durect securities by ALZA
in connection with a merger, exchange offer or other transaction affecting
Durect shareholders generally.
<PAGE>
To the extent necessary in order to enforce the foregoing covenant,
Durect may impose stop-transfer instructions with respect to the securities held
by ALZA until the end of the Lock-Up Period. Durect shall provide appropriate
releases to such stop transfer instructions for transactions in compliance with
this Agreement within two business days of ALZA's request therefor.
2.2 Termination of Docking License. ALZA hereby agrees that, in the
-------------------------------
event that it or any of its affiliated entities or persons shall violate the
covenant in Section 2.1 of this Agreement, ALZA and its affiliates shall forfeit
any and all rights under the Docking License and such Docking License shall
terminate as of the time that the covenant in Section 1.1 of this Agreement is
first violated without any further action on the part of Durect.
3. Miscellaneous.
-------------
3.1 Controlling Law; Language. This Agreement and the performance of
-------------------------
the parties hereunder shall be construed in accordance with and be governed by
the laws of the State of California, as applied to agreements between California
residents to be performed entirely within California.
3.2 Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of, and be binding upon, the successor and assigns of the
parties hereto.
3.3 Amendments and Waivers. Neither this Agreement nor any term of
----------------------
this Agreement may be amended, waived or terminated other than by the written
consent of the party against whom enforcement of any such amendment, waiver or
termination is sought.
3.4 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
3.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereby caused this Agreement to
be executed as of the date first written above by their duly authorized
representatives.
ALZA CORPORATION DURECT CORPORATION
By: /s/ Peter Staples By: /s/ James E. Brown
-------------------------------- ------------------------------------
Title: Executive Vice President Title: Chief Executive Officer
----------------------------- ---------------------------------
SIGNATURE PAGE TO MARKET STAND-OFF AGREEMENT
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Durect Corporation, a Delaware corporation
Number of Shares: 31,395
Class of Stock: Series B-1 Preferred
Initial Exercise Price: $2.15
Issue Date: December 16, 1999
Expiration Date: December 16, 2006
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
--------
1.1 Method of Exercise. Holder may exercise this Warrant by
------------------
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as
----------------
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.4.
1.3 Intentionally Omitted
---------------------
1.4 Fair Market Value. If the Shares are traded in a public market,
-----------------
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
<PAGE>
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1. "Acquisition". For the purpose of this Warrant,
-------------
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. Assumption of Warrant. If upon the closing of any
---------------------
Acquisition Holder has not otherwise exercised this Warrant in full, then the
unexercised portion of this Warrant shall be deemed to have been automatically
converted pursuant to Section 1.2 and thereafter, Holder shall participate in
the acquisition on the same terms as other holders of the same class of
securities of the Company.
1.8 Exercise upon IPO. With respect to an underwritten initial public
-----------------
offering of the Shares of the Company where the net proceeds to the Company are
in excess of at least $10,000,000, the Warrant shall be deemed automatically
exercised on a net exercise basis on the first date the Bank is permitted to
sell the Shares without restriction.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or
----------------------------
pays a dividend on its common stock (or the Shares if the Shares are securities
other than common stock) payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
or, if the Shares are securities other than common stock, subdivides the Shares
in a transaction that increases the amount of common stock into which the Shares
are convertible, then upon exercise of this Warrant, for each Share acquired,
Holder shall receive, without cost to Holder, the total number and kind of
securities to which Holder would have been entitled had Holder owned the Shares
of record as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding shares
---------------------------------
are combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the
----------------------------------
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit
A).
<PAGE>
2.5 No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the
Company takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder an amount
computed by multiplying the fractional interest by the fair market value of a
full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the
-----------------------------
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents
------------------------------
and warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than (i) the price per share at which shares of the
Company's Series B Preferred Stock were last issued in an arms-length
transaction in which at least $500,000 of such Series B Preferred Stock was
sold.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
(c) The Capitalization Table attached to this Warrant is true
and complete as of the Issue Date.
3.2 Notice of Certain Events. If the Company proposes at any time
------------------------
(a) to declare any dividend or distribution upon its common stock, whether in
cash, property, stock, or other securities and whether or not a regular cash
dividend; (b) to effect any reclassification or recapitalization of common
stock; (c) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (d) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the company's
securities for cash, then, in connection with each such event, the Company shall
give Holder (1) at least 10 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (b) and (c) above; (2) in the case of the matters referred to in
(b) and (c) above at least 10 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (d) above, the same notice as is given to the holders
of such registration rights.
<PAGE>
3.3 Information Rights. So long as the Holder holds this Warrant
------------------
and/or any of the Shares, the Company shall deliver to the Holder (a) promptly
after mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) such other financial statements required under and in accordance with any
loan documents between Holder and the Company (or if there are no such
requirements [or if the subject loan(s) no longer are outstanding]), then within
forty-five (45) days after the end of each of the first three quarters of each
fiscal year, the Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The
-----------------------------------------------------
Company agrees that the Shares or, if the Shares are convertible into common
stock of the Company, such common stock, shall be subject to the registration
rights set forth in the Company's Investors' Rights Agreement.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term. This Warrant is exercisable, in whole or in part, at any
----
time and from time to time on or before the Expiration Date set forth above
except as set forth in Section 1.7.2. The Company shall give Holder written
notice of Holder's right to exercise this Warrant in the form attached as
Appendix 2 not more than 90 days and not less than 30 days before the Expiration
Date. If the notice is not so given, the Expiration Date shall automatically be
extended until 30 days after the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the securities
-------
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and
-------------------------------------------
the Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder s notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3
------------------
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) at any time to Silicon Valley Bancshares
or The Silicon Valley Bank Foundation, or to any affiliate of Holder, or, to any
other transferree by giving the Company notice of the portion of the Warrant
being transferred setting forth the name, address and taxpayer identification
number of the transferee and surrendering this Warrant to the Company for
reissuance to the transferee(s) (and Holder if applicable). Unless the Company
is filing financial information with the SEC pursuant to the Securities Exchange
Act of 1934, the Company shall have the right to refuse to transfer any portion
of this Warrant to any person who directly competes with the Company.
4.5 Notices. All notices and other communications from the Company
-------
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail at such address
as may have been furnished to the Company or the Holder, as
<PAGE>
the case may be, in writing by the Company or such holder from time to time. All
notices to be provided under this Warrant shall be sent to the following
address:
Silicon Valley Bank
Attn: Treasury Department
3003 Tasman Drive
Santa Clara, CA 95054
4.6 Waiver. This Warrant and any term hereof may be changed,
------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
4.7 Attorneys Fees. In the event of any dispute between the parties
--------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed
-------------
in accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
----------------------------------
By: /s/ James E. Brown
---------------------------
Name: President
---------------------------
(Print)
Title: Chairman of the Board, President or
Vice President
By: /s/ Thomas A. Schreck
---------------------------
Name: Chief Financial Officer
---------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _____________ shares of the
Common/Preferred Series ___ [Strike one] Stock of ______________. pursuant to
the terms of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.
2. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________ of the Shares
covered by the Warrant.
[Strike paragraph that does not apply.]
3. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
___________________________________________
(Name)
___________________________________________
___________________________________________
(Address)
4. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
____________________________________
(Signature)
____________________
(Date)
<PAGE>
APPENDIX 2
Notice that Warrant Is About to Expire
--------------------------------------
_____________________, ___
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear : ______________________
This is to advise you that the Warrant issued to you described below will
expire on _________________________, 19___.
Issuer:
Issue Date:
Class of Security Issuable:
Exercise Price per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
-------------------------------------
(Name of Issuer)
By:
---------------------------------
Its:
---------------------------------
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
(For Preferred Stock Warrants With Existing Anti-Dilution Protection)
-------------------------------------------------------------------
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Warrant Price, then the number of shares of common stock issuable upon
conversion of the Shares shall be adjusted in accordance with those provisions
(the "Provisions") of the Company's Certificate of Designation of Rights,
Preferences and Privileges which apply to Diluting Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 9, 2000, in the Registration Statement
(Form S-1) and related Prospectus of Durect Corporation for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 19, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> FEB-06-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 7,975 3,863
<SECURITIES> 0 15,070
<RECEIVABLES> 0 102
<ALLOWANCES> 0 5
<INVENTORY> 0 188
<CURRENT-ASSETS> 8,115 17,467
<PP&E> 173 1,478
<DEPRECIATION> 5 207
<TOTAL-ASSETS> 8,283 22,463
<CURRENT-LIABILITIES> 451 1,546
<BONDS> 0 0
0 0
1 2
<COMMON> 1 1
<OTHER-SE> 7,747 20,725
<TOTAL-LIABILITY-AND-EQUITY> 8,283 22,463
<SALES> 0 86
<TOTAL-REVENUES> 0 86
<CGS> 0 39
<TOTAL-COSTS> 0 39
<OTHER-EXPENSES> 1,443 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 27
<INCOME-PRETAX> (1,322) (8,708)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,322) (8,708)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,322) (8,708)
<EPS-BASIC> (0.36) (1.76)
<EPS-DILUTED> (0.36) (1.76)
</TABLE>
