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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 0-19222
GENELABS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-3010150
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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505 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 369-9500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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AS OF
FEBRUARY 27, 1998
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Aggregate market value of the voting stock held by
non-affiliates of the Registrant.......................... $145,000,000
Number of shares of Common Stock outstanding................ 39,490,032
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III (Items 10,
11, 12 and 13) hereof.
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GENELABS TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 1997
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 4A. Executive Officers of the Registrant........................ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 17
Item 6. Selected Consolidated Financial Data........................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 8. Consolidated Financial Statements and Supplementary Data.... 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
PART III
Item 10. Directors and Executive Officers of Registrant.............. 21
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Item 13. Certain Relationships and Related Transactions.............. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 22
SIGNATURES............................................................. 25
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Genelabs(R), MERLIN(TM) and VIRIA(TM) are trademarks of Genelabs Technologies,
Inc. This Form 10-K also includes trade names and trademarks of companies other
than Genelabs Technologies, Inc.
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PART I
ITEM 1. BUSINESS.
All statements in this 10-K that are not historical are forward-looking
statements which involve a number of risks and uncertainties, including, but not
limited to, those statements concerning the commencement and completion of
clinical trials and the announcement of trial data results, the Company's
strategic plans, anticipated expenditures and the timing and need for additional
funds. Among the factors that could cause actual results of the Company's
activities to differ materially include, but are not limited to, product non-
approval or delays by the U.S. Food and Drug Administration and foreign
regulatory authorities, product development, manufacturing and market acceptance
risks, the impact of competitive products, pricing and intellectual property
rights, the results of current and future licensing and other collaborative
relationships and other factors and risks discussed in "Risk Factors" at the end
of this Item 1 (page 12 through 15 of this Report). Shareholders and prospective
investors in the Company should carefully consider these risk factors. The
Company disclaims any obligation to update these statements for subsequent
events.
Genelabs Technologies, Inc. (together with its subsidiaries, "Genelabs" or
the "Company") is a biopharmaceutical company with research focused on the
discovery of small molecule drugs that function by binding to DNA to regulate
gene expression or inactivate pathogens. The lead research program is based on a
proprietary enabling technology, MERLIN, for creating gene-specific, small
organic, DNA-binding molecules. A recently developed technology, VIRIA, is being
applied to the discovery of novel anti-viral RNA-binding compounds. The
Company's development efforts are focused on its lead compound, GL701, which is
in Phase III clinical trials as a new therapy for systemic lupus erythematosus
("SLE").
The Company conducts its diagnostic business through its wholly-owned
subsidiary Genelabs Diagnostics (Pte.) Ltd. ("GLD"), located in Singapore, which
sells diagnostic tests for infectious diseases primarily in Europe and Asia.
Genelabs has an equity interest in a Taiwan-based company, Genelabs
Biotechnology Co., Ltd. ("GBL"), which is focused on late-stage development,
manufacture and commercialization of newly developed or formulated
pharmaceuticals for the Asian market.
The Company's business is comprised of its discovery technologies, drug
development programs, diagnostic business and its Asian biopharmaceutical
investment.
The following discussion reviews each of these areas of the Company's
business.
DISCOVERY TECHNOLOGIES
Genelabs' expertise and proprietary technology are primarily focused on the
discovery of small molecule drugs that function by binding to nucleic acids to
regulate gene expression or inactivate pathogens.
Gene Regulating Drugs
The main focus of the Company's research program is to discover sequence
specific, low molecular weight DNA-binding molecules that target the regulatory
regions of certain disease-causing genes. The Company's aim is for these
sequence specific DNA-binding molecules to be used to inhibit the binding of
critical regulatory proteins and thereby produce changes in the activity of the
disease-causing genes. The Company believes that this approach has the potential
for therapeutic application in a wide variety of disease indications. A
fundamentally enabling element of Genelabs' approach to the design of
DNA-binding molecules is provided through the use of the Company's proprietary
MERLIN technology, which is able to identify DNA-binding molecules and determine
the DNA sequence preference effective in protein displacement. The Company
believes that MERLIN can enable the discovery of novel DNA-binding chemistries
and the characterization of these molecules, which could permit the design of
molecules that can be optimized and targeted to specific gene sequences.
The number of human genes that have been identified and characterized as
having an association with various disease states is growing rapidly. This
wealth of information must be translated, and the functions of
disease-associated genes must be elucidated in order for conventional drug
discovery processes to be used to
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combat these diseases. Genelabs' drug discovery approach is to directly target
the regulatory regions of disease-associated genes. These regulatory or promoter
regions are sequences that lie adjacent to the coding sequences of a gene.
MERLIN is designed to operate by evaluating small molecules for their
effectiveness in displacing proteins from DNA. The ability to control gene
expression or block the replication of pathogens offers the potential
opportunity to create an entirely new class of drugs, sequence specific
DNA-binding drugs.
The characterization of DNA-binding molecules using MERLIN has demonstrated
different sequence preferences for different molecules. Several compounds have
been designed, synthesized and tested to demonstrate that the concept of
building sequence specific DNA-binding drugs is valid. This first series of
sequence specific, DNA-binding molecules are research tools that have allowed
Genelabs scientists to demonstrate gene-targeted effects in cell-based assays.
The treatment of tissue-cultured human cells with these molecules results in the
altered expression of a few genes while exerting little effect on the expression
of other genes. Furthermore, preliminary evidence indicates specific effects on
the expression of two predicted target genes. Collectively, these data suggest
that pharmaceuticals developed using this technology can be targeted to specific
genes; and due to sequence specificity and high binding affinity, it is
anticipated that these pharmaceuticals can be more efficacious and less toxic
than the currently known DNA-binding drugs. In addition to MERLIN, a recently
developed sister technology, VIRIA (Viral Inhibition Assay), is being applied to
the discovery of novel anti-viral RNA-binding molecules. These technologies,
particularly VIRIA, are in the early stage and still under development. See
"Risk Factors -- Early Stage of Development."
Collaborations and Grants
DuPont Merck -- In December 1996, the Company signed a collaborative
research and license agreement with The DuPont Merck Pharmaceutical Company
("DuPont Merck") to jointly develop small molecule gene-regulating drugs using
the Company's DNA-binding technology, including its MERLIN assay system. Under
this collaboration, the Company and DuPont Merck are jointly conducting a drug
discovery program directed towards a number of target genes. Each company will
have the right to develop or out-license products resulting from a shared
library of compounds and chemistries developed by the collaboration, although
DuPont Merck will have certain exclusive rights to pharmaceutical products
resulting from the collaboration. Under the terms of the agreement, the Company
received an up-front payment and will receive research funding for at least two
years. The Company will also receive payments for milestones reached for each
gene target as well as royalty payments for each successful product resulting
from this collaboration. However, there can be no assurance that the milestones
will be achieved or that the Company or DuPont Merck will be successful in
identifying DNA-binding compounds for the selected target genes.
DARPA -- In February 1998, the Company received a three year, $13.6 million
research grant from the Defense Advanced Research Projects Agency ("DARPA") to
apply Genelabs' DNA-binding and RNA-binding technologies towards the discovery
of drugs that can be used as countermeasures to agents of biological warfare.
Under the terms of the grant, Genelabs will receive research funding and has the
right to commercialize any invention it makes during the term of the grant.
Although the grant term is for three years, like most government grants the
grant is incrementally funded, and funding for the second and third years are
contingent upon the availability of funds. There can be no assurance that the
funds will be available and that the grant will continue for its second and/or
third year.
Genelabs currently is seeking additional drug discovery research
collaborations using its DNA-binding technology with various other
pharmaceutical companies. No assurance can be given as to the ability of the
Company to complete an agreement with any additional collaborators on a timely
basis or at all.
Novel Immunomodulatory Genes
The Company's scientists have used advanced technologies to isolate novel
human genes encoding immunomodulatory molecules such as cytokines, cytokine
receptors, and immunomodulatory transcription factors from a large cluster of
immunomodulatory genes encoded on human chromosome 5. Using a positional cloning
method called direct selection, the Company's researchers have selected cDNAs
from genes encoded within the immunomodulatory gene cluster on chromosome 5,
which is thought to contain a genetic locus
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associated with asthma. Patent applications have been filed in the U.S. to claim
these novel sequences. In July 1997, the Company announced a clinical study
agreement with University of California San Francisco to determine whether the
expression of any of the novel gene candidates is altered in atopic asthmatic
patients. The Company is actively pursuing funding through potential external
collaborators to investigate the biological function and commercial potential of
these genes and to isolate additional novel human genes. No assurance can be
given as to the ability of the Company to complete an agreement with any
additional collaborators on a timely basis or at all.
Novel Viruses
In connection with its discovery of the hepatitis E virus ("HEV"), Genelabs
has granted SmithKline Beecham ("SKB") a worldwide license under certain
Genelabs patents and know-how to make, use and sell an HEV vaccine. In this
agreement, Genelabs retained co-marketing rights to any HEV vaccine in Asia and
has the co-marketing rights to combine SKB's existing hepatitis A virus vaccine
with an HEV vaccine in Asia. SKB is in the process of developing an HEV vaccine.
In addition, Genelabs has granted Abbott a non-exclusive worldwide license under
certain Genelabs patents and know-how to make, use and sell tests for the
diagnosis of HEV.
In 1995, Genelabs announced the discovery of hepatitis G virus ("HGV").
Findings indicate that this virus is associated with hepatitis and can be
transmitted through transfusion of contaminated blood. Genelabs has entered into
a limited co-exclusive, royalty-bearing licensing agreement with Boehringer
Mannheim to develop and commercialize diagnostic screening products for new
hepatitis viruses, including HGV. The Company also has entered into an agreement
with Chiron Corporation and Ortho Diagnostic Systems Inc., which, among other
things, provides them a worldwide, limited co-exclusive, royalty-bearing license
to develop and commercialize diagnostic screening products specifically for HGV.
Although the presence of HGV has been detected in blood samples contained in the
U.S., Europe, Japan and elsewhere, to date there are no known diseases
specifically caused by HGV. Additionally, there are currently no assays
developed for screening the blood bank supply. The Company's ongoing
expenditures on this program are limited to supporting disease association
efforts conducted by Genelabs' collaborators.
DRUG DEVELOPMENT
Genelabs has focused its internal biopharmaceutical product programs on the
development of its therapeutic product for the treatment of systemic lupus
erythematosus and on a potential therapeutic agent for cancer.
GL701: Systemic Lupus Erythematosus
Systemic lupus erythematosus is a severe, chronic and frequently
debilitating autoimmune disease that can affect the skin, joints, kidneys and
nervous system. Current treatment is often inadequate, due either to limited
benefits or to severe adverse side effects. With an estimated prevalence of 40
to 50 cases per 100,000 people, SLE affects approximately 150,000 patients in
the U.S. according to the American College of Rheumatology, and Genelabs
believes that there are at least three times that number of patients worldwide.
Industry sources have estimated that SLE is ten times more common in women than
men and more severe in Asian and African-American populations.
GL701, Genelabs' therapeutic candidate for SLE, is a pharmaceutical
formulation designed for oral administration that contains
dehydroepiandrosterone ("DHEA") as the active ingredient. DHEA is a naturally
occurring hormone that is produced by the adrenal glands.
Studies by Genelabs' scientific collaborators at Stanford University have
indicated that oral use of DHEA may be effective and safe for the treatment of
SLE. SLE patients generally have abnormally low levels of DHEA, and studies have
shown that hormonal influences play a role in the development and progression of
SLE. A Phase II clinical study conducted at Stanford University in 1993 involved
28 women with SLE who received either DHEA or a placebo over the three-month
study period. Results of this study, published in Arthritis and Rheumatism in
December 1995, indicated that DHEA-treated patients showed improvement on
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the basis of the patients' own assessments, the physicians' clinical assessments
and a commonly accepted disease activity index, while placebo-treated patients
did not. In addition, mean prednisone dose was decreased in patients treated
with DHEA. Prednisone, a glucocorticoid drug that is commonly used to treat SLE,
has many serious side effects and is a cause of disability and death in SLE
patients. Genelabs has exclusive worldwide rights under a U.S. patent granted to
Stanford for the use of DHEA to treat SLE and to use Stanford's clinical trial
results.
The Company has completed a 191 patient randomized, double-blind, placebo
controlled, multi-center, Phase III human clinical trial of GL701 for the
treatment of mild to moderate SLE in women who require prednisone or other
steroids for their treatment. Patients in the trial received one of two daily
GL701 doses or placebo for seven to nine months. Data presented on behalf of the
Company in November 1997 showed that, compared to placebo, more patients who
received daily doses of 200 mg of GL701 achieved the study's primary endpoint,
which was a sustained reduction in their steroid dose to 7.5 mg per day or less.
This beneficial effect was most evident in the 137 SLE patients with active
disease, defined as a SLE Disease Activity Index (SLEDAI) score greater than 2.
In these patients, 51% of the group who received daily doses of 200 mg of GL701
achieved the primary endpoint compared to 29% of the placebo group.
The Company's second Phase III trial, which started in March 1996, will
conclude patient enrollment in March 1998 with over 350 patients. This
double-blind, placebo controlled trial is designed to determine whether GL701
can improve clinical outcome or disease symptoms. As patients in the trial will
be treated for one year, the Company anticipates the clinical portion of this
trial to be completed in March 1999. See "Risk Factors -- Uncertainties Related
to Clinical Trials."
The U.S. Food and Drug Administration ("FDA") has recognized the severely
debilitating nature of SLE and the lack of adequate treatment by granting
Subpart E designation to GL701. This designation permits the possibility of
expedited development of the candidate drug and has typically only been granted
for products addressing life threatening diseases, such as cancer and AIDS
therapies. The FDA also granted Orphan Drug status to GL701 for the treatment of
SLE, a designation that provides seven years of U.S. marketing exclusivity for
this indication to Genelabs if it is the first company to sponsor an approved
new drug application for such indication. See "Risk Factors -- No Assurance of
Regulatory Approvals; Uncertainty of Government Regulation."
DHEA is currently being marketed by others as a dietary supplement. The
Company believes that DHEA is a drug that should be subject to regulation and
approval by the FDA. The Company further believes that in a few instances these
supplements do not contain true DHEA, but instead contain related substances
that are not biologically equivalent. The Company has submitted documentation to
the FDA requesting clarification of DHEA's status as a drug and removal from the
market as a dietary supplement. However, to date the FDA has taken no action to
limit or regulate the sale of these dietary supplements, and no assurance can be
given as to the willingness or ability of the FDA to do so in the future. In the
event that clinical trials for GL701 are promising and the drug candidate
receives FDA marketing approval, the concurrent sale of these dietary
supplements could adversely affect the market for or the selling price of GL701.
While the Company has obtained a U.S. patent for the use of GL701 to treat SLE
through reduction of steroid dose, it is not able to obtain patent protection
for the compound itself.
Genelabs has licensed certain GL701 development and marketing rights for
Asia to GBL and a third Phase III trial is currently being conducted by GBL in
Taiwan.
GL331: Multiple Drug Resistant Cancers
Genelabs and its affiliate GBL are currently developing GL331, an etoposide
analog, as a potential treatment for multiple drug resistant cancers. In
laboratory and animal tests, GL331 has demonstrated anti-cancer activity against
malignant cells that had already developed resistance to chemotherapeutic agents
most frequently used for the treatment of small cell lung cancer. Genelabs has
completed a Phase I human clinical safety study at M.D. Anderson Cancer Center
in Houston, Texas. The study achieved its objective to determine the maximum
tolerable dose of the drug. In 1997, GBL received approval from the Taiwan
Department of Health for a new Phase IIa study of this agent in patients with
gastric carcinoma and has
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recently initiated the study. Depending on the results of this study, Genelabs
may further develop GL331 in collaboration with a third party.
DIAGNOSTICS BUSINESS
Using its technological expertise in molecular virology, Genelabs has built
an international diagnostics business with a global infrastructure. Its fully
owned diagnostics subsidiary, Genelabs Diagnostics (Pte.) Ltd., is headquartered
in Singapore, which houses manufacturing, research and development, as well as
its Asian sales office. Marketing, sales and distribution for Europe, the Middle
East and Africa are managed from offices in Geneva, Switzerland and Leuven,
Belgium while the Americas are managed from the Company's corporate headquarters
in Redwood City, California. GLD has affiliate offices in Thailand and Taiwan,
and two sales office in China. The Company's strategy is to market both directly
as well as through a network of distributors where appropriate. Genelabs has
focused its diagnostics business on the European, Asian, and Middle East markets
and is now expanding into South America.
GLD is engaged in virology blood testing with a focused mix of Western Blot
assays and rapid and ELISA tests, for the diagnosis of infectious diseases,
principally human immunodeficiency virus ("HIV"), human T-cell leukemia virus
("HTLV"), and hepatitis viruses including hepatitis C virus and HEV, in addition
to others. Recent market expansion into gastroenterology includes a novel
immunodiagnostic method for serological detection of helicobacter pylori, the
bacteria known to cause stomach ulcers which is also linked to cancer. GLD also
manufactures hepatitis B surface antigen and related raw materials used for the
production of diagnostic kits.
Genelabs believes that the future growth of its diagnostics business will
require additional research and development efforts, and that over time sales
may decline without further research and development efforts. Due to the
Company's limited resources, Genelabs may not be able to independently or
adequately support such efforts.
Pursuant to the terms of Genelabs' Series A Convertible Preferred Stock
("Preferred Stock") issued to Chiron Corporation and Johnson & Johnson
Development Corporation ("Chiron and J&J"), in May 2000 Chiron and J&J have the
option to convert the Preferred Stock into 49.99% of Genelabs' diagnostics
business, if the remainder of this business is purchased by these two companies
at its then fair market value.
ASIAN BIOPHARMACEUTICAL INVESTMENT
In November 1995, Genelabs invested approximately $4.8 million and assigned
the Asian rights to several of its products in exchange for a 40% ownership
interest in Genelabs Biotechnology Co., Ltd., a company organized under the laws
of Taiwan, Republic of China. The government of Taiwan invested approximately
$5.7 million and Asian institutional investors invested approximately $4.1
million in exchange for 35% and 25% ownership interests, respectively. GBL's
business strategy is to focus on late-stage development, manufacture and
commercialization of newly developed or formulated pharmaceuticals for the Asian
market.
In August 1997, GBL entered into agreements under which it purchased a
Bristol Myers Squibb (Taiwan) Ltd. ("BMST") pharmaceutical manufacturing plant.
In addition, GBL acquired rights to manufacture BMST's Taiwan requirements for a
number of pharmaceutical products for a minimum of three years and to act as
BMST's distributor for certain products in selected territories in Taiwan. In
September 1997, GBL began toll manufacturing BMST key products. In March 1998,
GBL entered into an agreement to purchase a sales and marketing organization
specializing in pharmaceutical products for Taiwan hospitals.
Consistent with the original investment plan, GBL has commenced a second
financing round which is expected to close in April 1998. The Company will
contribute additional technology to this affiliate in this financing round, but
will not invest additional cash. As a result, the Company expects its ownership
interest to decrease to approximately 30%. The Company may from time to time
elect to further decrease its ownership interest in the future.
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MARKETING AND SALES
The Company's current marketing and sales activities relate primarily to
its diagnostics business, which is conducted through the Company's
Singapore-based subsidiary, GLD. GLD currently markets its confirmatory
diagnostic tests worldwide, but for research use only in the U.S.; its rapid
tests in markets outside the U.S.; its screening tests primarily in Asia and its
reagents to multinational diagnostic companies on a worldwide basis. GLD sells
its products directly through its own sales offices in the U.S., Europe and Asia
and through distributors.
The Company has only limited sales, marketing and distribution
capabilities. If the Company successfully develops any new products, including
pharmaceutical products, Genelabs must either rely on large pharmaceutical
companies to market such products or must develop a marketing and sales force
with technical expertise and supporting distribution capability in order to
market such products directly. Genelabs has established a number of strategic
alliances with selected market leaders such as Abbott, Boehringer Mannheim,
Chiron, DuPont Merck, Ortho Diagnostic Systems and SmithKline Beecham. In these
alliances, Genelabs generally receives a royalty or will receive royalties on
the sale of products by the licensor if a licensed product is ever successfully
introduced and also has retained certain rights to market the products on its
own. The Company has also licensed certain rights for selected products to GBL
for development and marketing in Asia.
COMPETITION
Competition is intense in the human healthcare industry, particularly in
the application of biotechnology, and the level of competition is expected to
increase in the future. In seeking to develop proprietary pharmaceutical and
diagnostic products and technologies, Genelabs faces competition from a number
of major pharmaceutical companies as well as emerging biotechnology companies.
The Company faces particularly significant competition from a number of large
pharmaceutical and diagnostic companies with respect to the Company's diagnostic
business. Many of these competitors have substantially greater financial and
other resources, larger research and development staffs and more extensive
manufacturing and marketing capabilities than the Company. In addition, many of
the Company's competitors have significantly greater experience than the Company
in preclinical testing and in conducting human clinical trials of potential
pharmaceutical products and in obtaining FDA and other regulatory approvals.
These factors may enable these competitors to develop products competitive with
or superior to those the Company plans to develop. Such competitive products
could enter the marketplace before the Company's products.
A significant amount of research in biotechnology is performed at
universities and nonprofit research organizations. These entities are becoming
more active in seeking patent protection and licensing revenues for their
discoveries. The competition among large pharmaceutical companies and smaller
biotechnology companies to acquire technologies from these entities also is
intensifying. While Genelabs has actively collaborated with such entities in
research and has and plans to continue to license their technologies for further
development, these institutions also compete with Genelabs to recruit scientific
personnel and to establish proprietary technology positions.
Genelabs believes that success in any of its product development efforts
will depend on its ability or the ability of its collaborators to enter the
marketplace with superior, cost-effective products in a timely manner, as well
as on scientific and technological superiority, managerial competence in
identifying, pursuing and securing opportunities, operational efficiency in
developing, protecting, producing and marketing products and the ability to
obtain timely regulatory agency approvals and adequate funds. Achieving success
will also depend on the Company's continued ability to attract and retain
skilled and experienced personnel and to develop and secure the rights to
advanced proprietary technologies and products.
PATENTS AND LICENSES
The Company seeks patent protection for its proprietary technologies and
potential products in the U.S. and in foreign countries. The Company has
received several U.S. patents and patent allowances with claims relating to the
MERLIN assay technology, methods for constructing small molecule,
sequence-specific drugs,
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and therapeutic uses in which a small molecule drug acts by binding to a
sequence specific region of a gene and displacing a regulatory protein from its
binding site. Patents with claims relating to the MERLIN assay technology also
have issued in Europe, Canada and Australia. In addition, the Company is
currently prosecuting a number of patent applications in the U.S. and in various
other countries relating to the Company's proprietary technologies and products,
including those relating to the MERLIN and VIRIA technologies, immunomodulatory
genes and the Company's HEV and HGV discoveries. It is not known how many of
these pending patent applications will be granted as patents. The Company has
licenses under a number of patents and patent applications owned by third
parties.
Patents and patent applications in the biotechnology field involve complex
legal and factual issues. Due to unresolved issues regarding the scope of
protection provided by such patents, as well as the possibility of patents being
granted to others, there can be no assurance that the patents owned or licensed
to the Company will provide substantial protection or commercial benefit. The
Company is unable to predict how the courts will resolve issues relating to the
validity and scope of such patents. The rapid rate of development and the
intense research efforts throughout the world in biotechnology, the significant
time lag between the filing of a patent application and its review by
appropriate authorities and the lack of significant legal precedent involving
biotechnology inventions make it difficult to predict accurately the breadth or
degree of protection that patents will afford the Company's biotechnology
products or their underlying technology.
GL701 is a pharmaceutical formulation designed for oral administration that
contains DHEA as the active ingredient. DHEA is a compound that has been in the
public domain for many years and the Company is thus unable to obtain patent
protection covering GL701's composition of matter. Genelabs does have an
exclusive license under a U.S. patent relating to the use of DHEA for the
treatment of SLE through reduction in steroid dose.
The Company is aware that others, including various competitors,
educational institutions and governmental organizations, have intellectual
property, particularly patents and pending patent applications, in the U.S. and
other countries potentially useful or necessary to the Company's businesses. The
Company is aware that others are pursuing and have obtained patents covering
inventions in the field of HTLV-I, HTLV-II and HIV-2 peptides. There can be no
assurance that the Company will be able to manufacture or sell its diagnostics
products without obtaining licenses to such patents or without modifying certain
of its diagnostic products to avoid the claims in such patents. There can be no
assurance that the Company will be able to obtain licenses to such patents, or
that the Company will not have to limit the countries where its applicable
diagnostic products are made and sold to avoid such patents, which could have a
material adverse effect on the Company's product revenues.
There may be similar third-party intellectual property important to the
business of the Company of which the Company is not currently aware. It is
likely that in the future others will obtain patents or develop proprietary
rights that might be necessary or useful for the manufacture, use or sale of
some products by the Company. Certain of these patents or rights may be
sufficiently broad to prevent or delay the Company from practicing necessary
technology, including the manufacture and/or marketing of products important to
the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which the Company may
wish or need to obtain licenses thereunder and the cost and availability of such
licenses cannot be accurately predicted. If the Company does not obtain such
licenses, or such licenses are terminated, products may be required to be
withdrawn from the market, or delays could be encountered in market introduction
while an attempt is made to design around such patents. The Company could incur
substantial costs in challenging the validity or scope of such patents. Such
others could bring legal actions against the Company or its licensees or
distributors claiming damages and seeking to enjoin them from manufacturing,
marketing and clinically testing the affected products. No assurance can be
given that the Company or its licensees or distributors would prevail in such
action or that any license required under any such patent would be made
available.
In addition to pursuing patent protection in appropriate cases, the Company
also relies on trade secret protection for its unpatented proprietary
technology. Although the Company seeks to protect trade secrets and confidential
information they believe to be significant through a policy of having its
employees, consultants,
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and advisors execute proprietary information and assignment of invention
agreements, there can be no assurance that these agreements will provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such information.
There also can be no assurance that others will not either develop independently
the same or similar trade secrets or confidential information or obtain access
to such trade secrets or confidential information. Furthermore, there can be no
assurance that others have not obtained or will not obtain patent protection
that will preclude the Company from using its trade secrets or confidential
information. See "Risk Factors -- Uncertainties Regarding Patents and Trade
Secrets."
GOVERNMENT REGULATION
The research and development, manufacture, distribution and marketing of
human pharmaceutical and medical device products are subject to regulation by
the FDA in the U.S. and by comparable authorities in other countries. These
national agencies and other federal, state and local entities regulate, among
other things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the products that the Company is developing. In the U.S., prior
to the testing of a new drug in human subjects, the FDA requires the submission
of an Investigational New Drug Application ("IND") which consists of, among
other things, results of preclinical laboratory and animal tests, information on
the chemical compositions, manufacturing and controls of the products, a
protocol, an investigator's brochure and a proposed clinical program.
Preclinical tests include laboratory evaluation of the product and animal
studies to assess the potential safety and efficacy of the product and its
formulation.
Unless the FDA objects, the IND becomes effective 30 days after receipt by
the FDA. FDA objection to the initiation of clinical trials is not uncommon, and
may involve a request for additional data, clarification or validation of data
submitted, or modification of the proposed clinical trial design.
Clinical trials are conducted in accordance with protocols that detail the
objectives and designs of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
Institutional Review Board ("IRB"). The IRB will consider, among other things,
ethical factors, the informed consent and the safety of human subjects and the
possible liability of the institution. Clinical trials are typically conducted
in three sequential phases, although the phases may overlap. In Phase I, the
initial introduction of the drug into human subjects, the product is tested for
safety, dosage tolerance, absorption, metabolism, distribution and excretion.
Phase II involves studies in a limited patient population to (i) determine the
efficacy of the product for specific, targeted indications, (ii) determine
dosage tolerance and optimal dosage and (iii) identify the common short-term
adverse effects and safety risks. When Phase II evaluations indicate that a
product is effective and has an acceptable safety profile, two Phase III trials
are normally required to further test for safety and efficacy within an expanded
patient population at multiple clinical sites. Although the Company has been
granted Subpart E designation with respect to GL701, which provides for the
potential accelerated development of the drug, the Company plans to complete its
second Phase III trial of GL701 and further demonstrate satisfactory results of
GL701 prior to filing of a New Drug Application ("NDA"). No assurance can be
given that the results of the Company's second Phase III trial will warrant
proceeding with an NDA or continuing with the development of GL701.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of the NDA for approval of the
marketing and commercial shipment of the new drug. The FDA may deny approval if
applicable regulatory criteria are not satisfied or may require additional
clinical or other testing. Even if additional testing data are submitted, the
FDA may ultimately decide that the NDA does not satisfy the criteria for
approval or it may limit the scope of any approval it does grant. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur or are first discovered after the product
reaches the market. The FDA may also require post-approval testing and
surveillance programs to monitor the effect of products that have been
commercialized, and has the power to prevent or limit further marketing of the
product based on the results of these post-marketing programs.
10
<PAGE> 11
Each manufacturing establishment must be determined to be adequate by the
FDA before approval of product manufacturing. Drug product manufacturing
establishments located in California also must be licensed by the State of
California. Manufacturing establishments are subject to inspections by the FDA
for compliance with current Good Manufacturing Practices and licensing
specifications before and after an NDA has been approved and foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities.
Sales of the Company's products outside the U.S. are subject to regulatory
requirements governing human clinical trials and marketing for drugs and
biological products. The requirements vary widely from country to country. The
process of obtaining FDA and other domestic and foreign government approval for
a new human drug, biological product or diagnostic is likely to take a number of
years and involve the expenditure of substantial resources. There can be no
assurance that any of the Company's products will be approved by the FDA or
foreign regulatory agencies on a timely basis or at all.
The Company's manufacturing, research and development programs involve the
use of hazardous, chemical, radiological and biological materials, such as
infectious disease agents. Accordingly, the Company's present and future
business is subject to regulations under state and federal laws regarding work
force safety, environmental protection and hazardous substance control and to
other present and possible future local, state and federal regulations. See
"Risk Factors -- No Assurance of Regulatory Approvals; Uncertainty of Government
Regulation."
MANUFACTURING
GLD manufactures all of its diagnostics products in its Singapore facility
or through OEM arrangements. In 1993, GLD's Singapore manufacturing facility was
jointly certified by the British Standards Institute and the Singapore Institute
of Standards and Industrial Research, now known as the Singapore Productivity
and Standards Board, as compliant with ISO 9002, a set of internationally
recognized guidelines on quality management systems. This certification is
generally required for pre-marketing approval in most countries outside the
U.S.. In 1996, GLD's Singapore manufacturing facility received EN46002
certification from TUV Product Services of Germany. This certification provides
evidence of conformance to specific requirements for suppliers of medical
devices that are more specific than the general requirements in ISO 9002. It
embraces the principles of current Good Manufacturing Practices used in the
manufacture of medical devices.
The Company currently has no manufacturing facilities for production of
clinical or commercial quantities of any compounds under development as
pharmaceutical products, including GL701. The Company is and will be relying
upon third parties to manufacture its products in quantities sufficient to meet
both clinical and commercial needs. The Company will be dependent upon these
manufacturers to comply with current Good Manufacturing Practices and to meet
its production requirements. There can be no assurance that these manufacturers
will timely deliver sufficient quantities of the Company's products or that the
Company would be able to find substitute manufacturers, if necessary. See "Risk
Factors -- Dependence on Third-Party Manufacturing and Sole-Source Suppliers;
Manufacturing Risks."
EMPLOYEES
As of February 27, 1998, the Company had 147 full time employees, including
65 employees for its diagnostics subsidiary. Of the 82 employees that are not
employed in diagnostics, 63 were involved in research and development, and 19
were involved in administration. The Company's employees are not represented by
any collective bargaining agreements, and the Company has never experienced a
work stoppage.
11
<PAGE> 12
RISK FACTORS
The following risks should be considered by shareholders and prospective
investors in the Company.
EARLY STAGE OF DEVELOPMENT
Genelabs' technology and product candidates are at an early stage of
development. The Company's technologies, including the DNA and RNA-binding
technologies, are in many cases new and still under development. These
approaches have not yet been proven to have a therapeutic effect. There can be
no assurance that these technologies or any of the Company's product candidates
resulting therefrom will be successfully developed. All of Genelabs' proposed
therapeutic products, including GL701 for the treatment of SLE, are in research
or development and will require substantial additional research and development
efforts prior to any commercial use, including extensive clinical testing as
well as potentially lengthy regulatory approval. There can be no assurance that
any of these therapeutic products or others resulting from Genelabs' research
programs will be successfully developed, prove to be safe and efficacious at
each stage of clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at reasonable costs or be
successfully marketed.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and initial
clinical trials of products under development by the Company may not be
predictive of results that will be obtained in large-scale testing, and there
can be no assurance that the Company's clinical trials will demonstrate the
safety and efficacy of any products or will result in marketable products. The
safety and efficacy of a therapeutic product under development by the Company,
such as GL701, must be supported by extensive data from clinical trials. Many
biopharmaceutical companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. No
assurance can be given as to whether the FDA will view the results of the
Company's Phase III trials of GL701 for SLE to be sufficient to serve as the
basis for the filing of an NDA.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. The Company is dependent on
third parties including hospitals and physicians to conduct the clinical trials.
If the Company is unable to successfully complete its clinical trials, its
business, financial condition and results of operations could be materially
adversely affected.
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials and
approval by the FDA, by comparable agencies in other countries and by state
regulatory authorities prior to marketing. The process of conducting clinical
trials and obtaining regulatory approval for a product typically takes a number
of years and involves substantial expenditures. In addition, product approvals
may be withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company may
encounter significant delays or excessive costs in its efforts to secure and
maintain necessary approvals or licenses. Future federal, state, local or
foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance that
the Company will be able to obtain or maintain the necessary approvals for
manufacturing or marketing the Company's products for proposed indications or
that the data it obtains in clinical trials will be sufficient to establish the
safety and efficacy of its products. In particular, no assurance can be given
that the results of the Company's second Phase III trial of GL701 will warrant
proceeding with an NDA or continuing with the development of the drug candidate.
Even if the Company obtains regulatory approval for any particular product,
there can be no assurance that it will be economically feasible for the Company
to commercialize its products. In addition, identification of certain side
effects after a drug is on the market or the occurrence of manufacturing
problems could cause
12
<PAGE> 13
subsequent withdrawal of approval, reformulation of the drug, additional
preclinical testing or clinical trials, and changes in labeling of the product.
Failure to obtain or maintain requisite governmental approvals, failure to
obtain approvals of the clinically intended uses or the identification of side
effects could delay or preclude the Company from further developing particular
products or from marketing its products, or could limit the commercial use of
its products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has obtained orphan drug status for GL701 for the treatment of
SLE. Orphan drug status may, under present regulations, entitle the Company to
seven years of U.S. marketing exclusivity provided that the Company is the first
to sponsor an approved new drug application for such indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent the same compound from being approved for a different use. There can be
no assurance that the scope of protection or the level of exclusivity that is
currently afforded by orphan drug status will remain in effect in the future.
DHEA is currently being marketed by others as a dietary supplement. The
Company believes that DHEA is a drug that should be subject to regulation and
approval by the FDA. The Company further believes that in a few instances these
supplements do not contain true DHEA, but instead contain related substances
that are not biologically equivalent. The Company has submitted documentation to
the FDA requesting clarification of DHEA's status as a drug and removal from the
market as a dietary supplement. However, to date the FDA has taken no action to
limit or regulate the sale of these dietary supplements, and no assurance can be
given as to the willingness or ability of the FDA to do so in the future. In the
event that clinical trials for GL701 are promising and the drug candidate
receives FDA marketing approval, the concurrent sale of these dietary
supplements could adversely affect the market for or the selling price of GL701.
While the Company has obtained a U.S. patent relating to the use of GL701 to
reduce steroid dose in SLE patients, Genelabs is unable to obtain patent
protection for the compound itself.
The Company is also subject to regulation under numerous federal, state and
local laws regarding, among other things, occupational safety, laboratory
practices, the use and handling of radioisotopes and hazardous chemicals,
prevention of illness and injury, environmental protection and hazardous
substance control. Failure to comply with such regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $123.9 million in net losses through December 31,
1997, including a net loss of $12.9 million in 1997. The Company anticipates
realizing a net loss at least until 2000, and profitability thereafter is
subject to significant uncertainty. There can be no assurance that revenues will
be sufficient to fund operations or that the Company will achieve profitability
or positive cash flow. Additional financing may be required to fund the
Company's continuing operations and research and development activities in the
form of debt or equity securities or bank financing. There can be no assurances
that such financing will be available on acceptable terms, if at all. The
unavailability of such financing could delay or prevent the development,
testing, regulatory approval, manufacturing or marketing of some or all of the
Company's products and technologies and could have a material adverse effect on
the Company's business, financial condition and results of operations.
UNCERTAINTIES REGARDING PATENTS AND TRADE SECRETS
There has been increasing litigation in the biotechnology, diagnostic and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic, diagnostic and vaccine products that are the subject of conflicting
patent rights. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and diagnostic companies, including Genelabs, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's existing patents will provide significant proprietary
13
<PAGE> 14
protection or will be circumvented or invalidated. Since 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, the Company cannot be certain that it was the first inventor of
inventions covered by its pending patent applications or that it was the first
to file patent applications for such inventions. Moreover, the Company may have
to participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. Others, including competitors of Genelabs,
may have filed applications for, or may have been issued patents or may obtain
additional patents and proprietary rights relating to products or technology
competitive with those of Genelabs, particularly with respect to its diagnostics
business. There can be no assurance that any patents owned or controlled by the
Company will protect Genelabs against infringement litigation or afford
commercially significant protection of the Company's technology. None of the
Company's patents has been tested in court to determine their validity and
scope. Moreover, the patent laws of foreign countries differ from those of the
U.S. and the degree of protection, if any, afforded by foreign patents may
therefore be different.
If another company were to successfully bring legal actions against the
Company claiming patent or other intellectual property right infringements, in
addition to any liability for damages, the Company could be enjoined by a court
from using or selling such products or technologies or might be required to
obtain a license to use, manufacture or sell the affected product or technology.
There can be no assurance that the Company would prevail in any such action or
that the Company could obtain any license required under any such patent on
acceptable terms, if at all. Any litigation, whether or not resolved in favor of
the Company, could be expensive and time-consuming, could consume substantial
management resources and could have a material adverse effect on the Company's
business, financial condition and results of operations.
GL701 is a pharmaceutical formulation designed for oral administration that
contains DHEA as the active ingredient. DHEA is a compound that has been in the
public domain for many years and the Company is thus unable to obtain patent
protection covering GL701's composition of matter.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. Although
Genelabs has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by others.
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS; MANUFACTURING
RISKS
The Company has no internal manufacturing capabilities for pharmaceutical
products and is entirely dependent on contract manufacturers to manufacture
clinical and, if successfully developed, commercial-scale quantities of GL701
pursuant to supply agreements. There can be no assurance that these third party
manufacturers will continue to meet FDA or product specification standards or
that the Company's manufacturing requirements can be met in a consistent and
timely manner. The Company has in the past experienced batch failures in the
manufacturing process for GL701. In addition, the Company may be unable to
obtain sufficient contract manufacturing capacity due to competing demands on
the contract manufacturer's capacity or other reasons. In the event of any
interruption of supply from the contract manufacturer due to regulatory reasons,
significant batch failures, capacity constraints or other causes, there can be
no assurance that the Company could make alternative manufacturing arrangements
on a timely basis, if at all. Such an interruption would have a material adverse
effect on the Company's business, financial condition and results of operations.
Completion of the Company's clinical trials and any submission of an NDA will be
subject to the establishment of a commercial formulation and manufacturing
process. As manufacturing process development and formulation activities are
ongoing throughout the development process, the Company may encounter
difficulties at any time that could result in delays in clinical trials,
regulatory submissions and commercialization of its products, or cause potential
negative financial and competitive consequences.
The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, GL701 currently is
supplied to the Company by a single source, and the number of alternative
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<PAGE> 15
sources is limited. The disqualification or loss of a sole-source supplier could
have a material adverse effect on the Company because of a delay or inability in
obtaining and qualifying an alternate supplier and the costs associated with
such delay and in finding and qualifying an alternate supplier. Regulatory
requirements applicable to pharmaceutical products tend to make the substitution
of suppliers costly and time consuming. The unavailability of adequate
commercial quantities, the loss of a supplier's regulatory approval, the
inability to develop alternative sources, a reduction or interruption in supply
or a significant increase in the price of materials could impair the Company's
ability to manufacture and market its products which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company's operating results may fluctuate significantly depending on a
variety of factors, including the scope of clinical trials for GL701; changes in
the Company's level of research and development; changes in manufacturing
capabilities; and variations in gross margins of the Company's diagnostic
products which may be caused by cost increases from third-party manufacturers,
availability and cost of raw materials, competitive pricing pressures and
currency fluctuations. The Company expects operating expenses to increase in
1998, and there can be no assurance that the Company will maintain or increase
revenues or ever achieve profitability.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, like the stock prices of
many publicly traded biopharmaceutical companies, has been and may continue to
be highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as problems with clinical
development of the Company's potential products; announcements of technological
innovations, regulatory developments or new commercial products by the Company
or its competitors; continued or expanded marketing of DHEA as a dietary
supplement; the level of sales of the Company's diagnostics products; delays or
other developments relating to regulatory approvals; developments or disputes
relating to patent or proprietary rights; comments and reports by securities
analysts; product liability claims; as well as period-to-period fluctuations in
the Company's financial results, may each have a significant negative impact on
the market price of the Common Stock. Any large sale of securities of the
Company could have a significant adverse effect on the market price of the
Common Stock.
IMPACT OF YEAR 2000
The Company has assessed its computer systems and believes that such
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company is assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers, contractors and
collaborators; however, the potential impact and related costs are not known at
this time.
ITEM 2. PROPERTIES.
The table below sets forth certain information with respect to the
principal facilities of the Company.
<TABLE>
<CAPTION>
APPROX.
FLOOR AREA ANNUAL BASE
LOCATION PRINCIPAL OPERATIONS (SQ. FT.) RENT LEASE EXPIRATION DATE
-------- -------------------- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Redwood City, CA.......... Research, clinical 50,000 $855,000 November 2002
development and office
facilities
Singapore................. Manufacturing, research, 21,000 $557,000 March 1999
clinical development and
office facilities
</TABLE>
The Company has an option to extend the lease for a certain portion of the
Singapore facility for an additional two years. The Company believes that the
above-described facilities are adequate for its current needs and that suitable
additional or substitute space will be available as needed to accommodate the
Company's operations.
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<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, who are chosen by and serve at the
discretion of the Board of Directors, at March 26, 1998, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Irene A. Chow, Ph.D........ 59 Chief Executive Officer, President and Director
James A. D. Smith.......... 39 Chief Operating Officer
Cynthia A. Edwards, Ph.D... 44 Vice President, Research
Melinda Griffith........... 43 Vice President, General Counsel and Secretary
Marc Gurwith, M.D.......... 58 Vice President, Drug Development and Chief Medical Officer
</TABLE>
Irene A. Chow has been Chief Executive Officer and President since July
1995. Before being appointed President and Chief Operating Officer of Genelabs
in May 1995, she served the Company as President of the Biopharmaceutical
Division beginning in August 1993 when she also became a Director. In addition
to her duties at the Company, Dr. Chow also chairs GBL's Board of Directors.
From 1975 to 1993, Dr. Chow held several positions at Ciba-Geigy Corporation,
USA, a pharmaceutical company, most recently as Senior Vice President of Drug
Development for the pharmaceuticals division. In this capacity, she directed all
scientific, medical, technical and regulatory activities related to the
development of new drugs. During her last 8 years at Ciba-Geigy, Dr. Chow was
responsible for overseeing the approval of 10 NDA's by the FDA and submission of
an additional 26 IND's to the FDA. She holds a B.A. degree in Literature from
National Taiwan University, and both an M.A. and a Ph.D. in Biostatistics from
the University of California, Berkeley.
James A. D. Smith has been Chief Operating Officer since October 1996, and
was Vice President, Marketing and Business Development from June 1995 through
September 1996. From January 1994 through June 1995 he was Director of
Marketing. Prior to joining Genelabs in early 1994, Mr. Smith served for more
than ten years in various marketing and business development positions with ICN
Pharmaceuticals, most recently as Director of Worldwide Business Development.
Mr. Smith has a B.S. in Molecular and Cellular Biology from the University of
California, San Diego.
Cynthia A. Edwards has been Vice President, Research since July 1995. From
1994 to July 1995 Dr. Edwards served as Vice President, Pharmaceutical Research,
preceded by various Director and Scientist positions with Genelabs. Before
joining the Company in 1987, Dr. Edwards completed postdoctoral studies at the
National Institutes of Health. She has a Ph.D. in Biology from the University of
California, San Diego; an M.A. in Plant Physiology from Oregon State University
and a B.S. in Botany from Oregon State University.
Melinda Griffith has been Vice President, General Counsel and Secretary of
Genelabs since May 1996. From October 1995 through May 1996 she was Vice
President and Chief Legal Counsel for Genelabs. During 1995, she served as
Senior Counsel for Mitsubishi Electric America, Inc. From 1992 to 1995, she was
Director of Legal Affairs for Arris Pharmaceutical Corporation and previously
had served as Senior Counsel for Cetus Corporation. She received her J.D. from
Hastings College of the Law and has a B.S. in Business Administration from the
University of California, Berkeley.
Marc Gurwith has been Vice President, Drug Development and Chief Medical
Officer since August 1997. From January 1995 until August 1997 he was Vice
President, Clinical Research and Associate Medical Director at Sequus
Pharmaceuticals. Previously, he served as Vice President of Medical and
Scientific Affairs at Boehringer Mannheim Pharmaceuticals and Senior Director of
Clinical Research at Wyeth-Ayerst Research. Dr. Gurwith received his M.D. from
Harvard University, his J.D. from Temple University School of Law and his B.A.
from Yale University.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock of the Company began trading publicly on the NASDAQ
National Market on June 13, 1991 under the symbol "GNLB." The following table
sets forth for the periods indicated the high and low sale prices reported by
the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
1st Quarter.......................................... 8 1/8 4 1/2
2nd Quarter.......................................... 9 9/16 6
3rd Quarter.......................................... 6 5/8 3 3/4
4th Quarter.......................................... 6 7/16 3 3/8
1997
1st Quarter.......................................... 7 3/4 4 3/8
2nd Quarter.......................................... 4 5/8 1 15/16
3rd Quarter.......................................... 5 5/16 2 1/4
4th Quarter.......................................... 4 3/8 2 7/16
</TABLE>
As of February 27, 1998, there were approximately 758 holders of record of
the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Total revenues...................... $12,790 $13,330 $ 18,648 $ 16,064 $ 12,930
Net loss............................ (12,897) (11,397) (10,511) (15,609) (22,013)
Net loss per share.................. (0.33) (0.32) (0.38) (0.68) (1.06)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Cash, cash equivalents and
short-term investments........... $21,099 $30,465 $ 22,557 $ 4,584 $ 14,036
Working capital..................... 18,715 30,224 18,776 5,346 13,689
Total assets........................ 31,139 44,119 36,198 14,958 25,181
Long-term debt including current
portion.......................... -- -- 3,324 3,535 3,614
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical are forward-looking
statements which involve a number of risks and uncertainties, including, but not
limited to, those statements concerning the commencement and completion of
clinical trials and the announcement of trial data results, the Company's
strategic plans, anticipated expenditures and the timing and need for additional
funds. Among the factors that could cause actual results of the Company's
activities to differ materially are product non-approval or delays by the U.S.
Food and Drug Administration and foreign regulatory authorities, product
development, manufacturing and market acceptance risks, the impact of
competitive products, pricing and intellectual property rights, the results of
current and future licensing and other collaborative relationships and other
factors and risks detailed elsewhere in this Report. The Company disclaims any
obligation to update these statements for subsequent events.
Genelabs Technologies, Inc. (together with its subsidiaries, "Genelabs" or
the "Company") is a biopharmaceutical company with research focused on the
discovery of small molecule drugs that act by binding to DNA to regulate gene
expression or inactivate pathogens. The lead research program is based on a
proprietary enabling technology, MERLIN, for creating gene-specific, small
organic, DNA-binding molecules. A recently developed technology, VIRIA, is being
applied to the discovery of novel anti-viral RNA-binding compounds. The
Company's clinical development efforts are focused on its lead compound, GL701,
which is in Phase III clinical trials as a new therapy for systemic lupus
erythematosus ("SLE").
The Company conducts its diagnostic business through its wholly-owned
subsidiary Genelabs Diagnostics (Pte.) Ltd. ("GLD"), located in Singapore, which
sells diagnostic tests for infectious diseases primarily in Europe and Asia. In
addition, Genelabs has an equity interest in a Taiwan-based company, Genelabs
Biotechnology Co., Ltd. ("GBL"), which is focused on late-stage development,
manufacture and commercialization of newly developed or formulated
pharmaceuticals for the Asian market.
The Company expects to continue to invest in biopharmaceutical product
research and development. Revenue from the sale of therapeutic products is not
expected until the launch of its first product, which is not expected to occur
for several years, if at all. The Company has several collaborations and is
seeking additional collaborations with other pharmaceutical companies for some
of its technologies to maximize its profitability for products that may result
from those technologies and to obtain funding for a portion of its research and
development expenses. However, Genelabs expects to continue to incur operating
losses for at least the next several years.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues
Revenues include both diagnostic product sales and contract revenue. Total
revenue was $12.8 million in 1997, $13.3 million in 1996, and $18.6 million in
1995.
Diagnostic product sales were $9.7 million in 1997, $11.3 million in 1996,
and $10.1 million in 1995. The decrease in 1997 was primarily due to lower sales
of the Company's Western Blot products and reagents across the major geographic
areas, more than offsetting increases in European sales and sales of Western
Blot products from the year before.
Contract revenues were $3.1 million in 1997, $2.0 million in 1996, and $8.5
million in 1995. Contract revenues include royalties, licensing, milestone and
research and development payments. The increase in 1997 as compared to 1996 was
primarily due to increased revenue from a drug discovery research collaboration
that began in January 1997, which was partially offset by a decline in milestone
revenue under a separate collaboration. The decrease in 1996 was due in main
part to the 1995 recognition of $6.0 million in revenue from a collaboration for
development of diagnostic products for the hepatitis G virus ("HGV"). Because
this $6.0 million was in the form of up-front license payments, there was no
comparable revenue in 1996 or 1997, and the Company does not anticipate
additional payment under this collaboration in 1998. Contract revenues
recognized in the future will be dependent in part upon the Company's achieving
milestones under current
18
<PAGE> 19
agreements, and entering into new research and development and licensing
agreements with corporate collaborators.
Cost of Product Sales
Cost of diagnostic product sales were $5.8 million in 1997, $6.2 million in
1996, and $6.1 million in 1995; gross margins were 40%, 45% and 40%,
respectively. The decline in gross margins in 1997, compared to 1996, was
primarily due to a decline in sales of certain higher margin products combined
with a lower production yield on manufactured products earlier in 1997. The
improvement in 1996 gross margins, compared to 1995, was due to lower costs
after a consolidation of the Company's production facilities, higher production
yields, and differences in the mix of products sold.
Research and Development Expenses
The Company's research and development expenses were $12.4 million in 1997,
$10.1 million in 1996, and $12.6 million in 1995. The Company's principal
ongoing research and development expenses are directed toward its priority
projects which are the discovery of drugs that act by binding to DNA to regulate
gene expression or inactivate pathogens and the development of GL701 for SLE.
The increase in research and development in 1997, compared to 1996, resulted
primarily from additional research conducted for a gene-regulating drug
discovery collaboration that began in 1997 and also from higher development
costs as a result of higher patient enrollment in the Company's clinical trials
of GL701 for SLE. The decrease in 1996, compared to 1995, was due to the
Company's decision to focus primarily on gene-regulating drug discovery and
GL701, while reducing or eliminating expenditures on other projects, namely HGV.
In the future, the Company expects its annual research and development expenses
to increase and to exceed the contract revenues associated with these programs.
In 1995, related to the acquisition of GLD in 1993, the Company issued an
additional 497,000 shares of Common Stock to the original GLD shareholders who
retained their shares for a certain holding period. In connection with this
stock issuance, the Company recorded a non-cash charge of $0.9 million for
purchased in-process research and development.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $8.3 million in
1997, $9.3 million in 1996 and $10.0 million in 1995. The decrease in SG&A
expenses in 1997, compared to 1996, was due to lower marketing expenses for the
Company's diagnostics subsidiary, the lower value of the Singapore dollar in
which GLD's expenses are denominated and a small reduction in corporate
administrative headcount. The decrease in 1996, compared to 1995, primarily
reflects the Company's reduced headcount. The Company presently anticipates that
further SG&A expense decreases in 1998 are not likely.
Net Interest Income
The Company recognized net interest income of $1.4 million in 1997, $1.2
million in 1996, and $0.5 million in 1995. The increases in interest income in
both 1997 and 1996 represent higher average cash and investment balances
compared to the previous years, as well as lower interest expense after the
Company repaid certain debentures in early 1996.
Equity in Loss of Genelabs Biotechnology Co., Ltd.
The increased loss in 1997, compared to 1996, reflects additional business
activity resulting from GBL's purchase of a pharmaceutical manufacturing
facility during 1997. The increased loss in 1996, compared to 1995, results from
a full year of operations in 1996 compared to two months in 1995.
19
<PAGE> 20
Net Losses
The Company has operated at a loss since its inception and had an
accumulated deficit of $123.9 million as of December 31, 1997. The net loss was
$12.9 million in 1997, $11.4 million in 1996, and $10.5 million in 1995. The
higher net loss in 1997 as compared to 1996 was primarily due to lower gross
profit from the Company's diagnostics subsidiary as well as increased research
and development spending. The 1996 net loss is higher than that of 1995 mainly
due to $6.0 million received in 1995 as up-front license payments from a
diagnostics collaboration, largely offset by lower recurring operating expenses,
higher gross margins and a non-cash charge for in-process research and
development.
Foreign Currency Translation
The functional currency of GLD is the Singapore dollar, and the functional
currency of GBL is the New Taiwan Dollar. In addition, the Company receives
diagnostics revenues from other countries throughout the world. As a result,
risks exist that revenues and/or asset values may be impacted by changes in
global currency exchange rates. In 1997, the US dollar value of net assets held
by the Company in Singapore and Taiwan declined. The 1997 decline in value of
the Singapore dollar did not have a significant impact on the Company's
financial position as certain GLD Singapore-based assets are offset by
comparable liabilities; additionally, the 1997 currency devaluation was largely
offset by appreciation from the previous several years. The decline in value of
the New Taiwan dollar, however, did not offset any previous appreciation and has
resulted in a lower value for the Company's investment. The unrealized impact of
foreign currency changes are reported as "cumulative foreign currency
translation adjustment" on the balance sheet.
Income Taxes
Because Genelabs has generated net losses since its inception, income taxes
have not been a significant expense. At December 31, 1997, the Company has net
operating loss carryforwards for federal and California income tax purposes of
approximately $96 million and $13 million, respectively. In addition, the
Company has federal and California research and development tax credit
carryforwards of approximately $1.7 million and $0.6 million, respectively. The
federal net operating loss and California tax credit carryforwards expire in
various amounts between the years 2000 and 2012. The California net operating
loss carryforwards expire in various amounts between the years 1998 and 2002.
Under provisions of the Internal Revenue Code, as amended, the availability of
the Company's net operating loss and tax credit carryforwards may be subject to
future limitations because of changes in ownership resulting from financing
transactions. To date, no restriction in the ability to utilize the Company's
carryforwards is anticipated. However, future equity transactions which the
Company may enter into could cause ownership changes which may result in
substantial limitation, or expiration, of net operating loss and tax credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $21.1 million at December 31, 1997, compared to $30.5 million at
December 31, 1996. The $9.4 million decrease in cash, cash equivalents and
short-term investments was largely attributable to cash used in operations as
the company continued, and even expanded, its research into drug discovery to
regulate gene expression or inactivate pathogens and the development of GL701
for SLE.
The Company has funded its operations since inception primarily through
public and private offerings of its common stock, private offerings of its
preferred stock, contract revenues and product sales. The Company has no bank
debt or open credit lines. Genelabs expects to incur substantial additional
costs, including costs for clinical trials for products currently under
development and costs for further research on drug discovery. The amount of the
additional costs, as well as increased expenditures necessary for working
capital and capital requirements, will depend on numerous factors including the
timing and outcome of any regulatory actions related to the Company's products.
In addition, funding requirements will depend on the progress of the Company's
research and development programs as well as its ability to establish and
maintain collaborations with other pharmaceutical companies to fund these
programs.
20
<PAGE> 21
The Company anticipates that its current resources and expected revenues
from existing collaborative agreements will enable it to maintain its current
and planned operations through 1999. The Company anticipates realizing a net
loss at least until 2000, and profitability thereafter is subject to significant
uncertainty. There can be no assurance that revenues from product sales or
royalties or from other sources will be sufficient to fund operations or that
the Company will achieve profitability or positive cash flow. Additional
financing may be required to fund the Company's continuing operations and
research and development activities in the form of debt or equity securities or
bank financing. There can be no assurance that such financing will be available
on acceptable terms, if at all. The unavailability of such financing could delay
or prevent the development, testing, regulatory approval, manufacturing or
marketing of some or all of the Company's products and technologies and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements are set forth in the
"Genelabs Technologies, Inc. Consolidated Financial Statements and Annual Report
on Form 10-K Index" on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information concerning the Company's directors required by Item 10 is
incorporated herein by reference to the section entitled "Proposal No.
1 -- Election of Directors" of the definitive Proxy Statement for the Company's
1998 Annual Meeting of Shareholders to be held on May 21, 1998 (the "Proxy
Statement"), and the information concerning the Company's executive officers
required by Item 10 is incorporated herein by reference to Item 4A of this
Annual Report on Form 10-K. The information concerning compliance with Section
16 of the Securities Exchange Act of 1934 required by Item 10 is incorporated
herein by reference to the section entitled "Compliance Under Section 16(a) of
the Securities Exchange Act of 1934" of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation" and "Compensation of Directors"
of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Transactions" of the Proxy Statement.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1), (a)(2) and (d) Financial Statements and Schedules.
Reference is made to "Genelabs Technologies, Inc. Consolidated Financial
Statements Annual Report on Form 10-K Index" on page F-1 of this Annual
Report on Form 10-K.
(a)(3) and (c) Index to Exhibits.
The following documents are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
------- -------------
<C> <S>
3.01 Registrant's Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.01 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991 (the "1991 Form 10-K")).
3.02 Registrant's Bylaws, as amended to date (incorporated herein
by reference to Exhibit 3.02 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K")).
4.01 Specimen Certificate for Registrant's Common Stock
(incorporated herein by reference to Exhibit 4.01 to
Registrant's Registration Statement on Form S-1 filed with
the Commission on April 29, 1991 (File No. 33-40120) (the
"Form S-1")).
4.02 Certificate of Determination of Preferences of Series A
Convertible Preferred Stock of Genelabs Technologies, Inc.
(incorporated herein by reference to Exhibit 10.37 to
Registrant's Form 10-Q for the quarter ended June 30, 1995).
10.01 Registrant's 1985 Employee Stock Option Plan and related
documents, as amended to date (incorporated herein by
reference to Exhibit 4.03 to the Registrant's Registration
Statement on Form S-8 (File No. 33-81894) filed on July 25,
1994 (the "July 1994 Form S-8").
10.02 Registrant's 1987 Directors Stock Option Plan and related
documents, as amended to date (incorporated herein by
reference to Exhibit 10.02 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995
Form 10-K")).
10.03 Registrant's 1991 Employee Stock Purchase Plan, as amended
to date (incorporated herein by reference to Exhibit 4.04 to
Registrant's Registration Statement on Form S-8 (File No.
333-30083) filed on June 26, 1997).
10.04 Registrant's 1994 Annual and Long-Term Incentive Based
Compensation Program (incorporated herein by reference to
Exhibit 4.03 to Registrant's Registration Statement on Form
S-8 (File No. 33-85914) filed on November 3, 1994).
10.05 Amendment to Registrant's 1994 Annual and Long-Term
Incentive Based Compensation Program.
10.06 Registrant's 1992 Restricted Stock Award Plan, as amended to
date (incorporated herein by reference to Exhibit 4.06 to
the Registrant's Registration Statement on Form S-8 (File
No. 333-4806) filed on May 7, 1996).
10.07 Registrant's 1995 Stock Option Plan, as amended to date.
10.08 Form of Registrant's Indemnity Agreement entered into by
Registrant with certain officers and directors (incorporated
herein by reference to Exhibit 10.04 to the Form S-1).
10.09 Industrial Net Lease Agreement by and between Registrant and
Lincoln Property Company N.C., Inc. dated July 29, 1986, as
amended to date (incorporated herein by reference to Exhibit
10.06 to the Form S-1).
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
------- -------------
<C> <S>
10.10 Amendment to Industrial Net Lease Agreement by and between
Registrant and Metropolitan Life Insurance Company dated
June 17, 1997 (incorporated herein by reference to Exhibit
10.36 to Registrant's Form 10-Q for the quarter ended
September 30, 1997 (the "3rd Quarter 1997 Form 10-Q")).
10.11 Tenancy Agreement for Research Unit(s) at Singapore Science
Park, by and between Technology Parks Private Limited and
Genelabs Diagnostics (Pte.) Ltd. dated April 27, 1994
(incorporated herein by reference to Exhibit 10.12 to the
1995 Form 10-K).
10.12 Amendment to Tenancy Agreement for Research Unit(s) at
Singapore Science Park, by and between Technology Parks
Private Limited and Genelabs Diagnostics (Pte.) Ltd. dated
July 8, 1997 (incorporated herein by reference to Exhibit
10.37 to the 3rd Quarter 1997 Form 10-Q).
10.13 Tenancy Agreement for Research Unit(s) at Singapore Science
Park, by and between Technology Parks Private Limited and
Genelabs Diagnostics (Pte.) Ltd. dated February 22, 1996
(incorporated herein by reference to Exhibit 10.13 to the
1995 Form 10-K).
10.14 License Agreement, dated October 2, 1991, by and between
Registrant, the University of North Carolina at Chapel Hill
and Yale University (incorporated herein by reference to
Exhibit 10.16 to the 1991 Form 10-K).*
10.15 Heads of Agreement, dated August 27, 1992, by and between
Registrant and SmithKline Beecham p.l.c. (incorporated
herein by reference to Exhibit 10.19 to the Registrant's
Form 10-Q for the quarter ended September 30, 1992).*
10.16 License Agreement, dated May 26, 1993, by and between the
Registrant and Boehringer Mannheim America Ltd.
(incorporated herein by reference to Exhibit 10.22 to the
Registrant's Form 10-Q for the quarter ended June 30,
1993).*
10.17 Agreement, dated as of January 26, 1996, by and between
Registrant and Dr. Edgar G. Engleman (incorporated herein by
reference to Exhibit 10.15 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996
Form 10-K")).*
10.18 License Agreement, dated as of October 1, 1993, by and
between Registrant and Stanford University (incorporated
herein by reference to Exhibit 10.16 to the 1996 Form
10-K).*
10.19 Common Stock and Warrant Purchase Agreement, dated as of
December 31, 1992, by and between Registrant and Abbott
Laboratories (incorporated herein by reference to Exhibit
10.19 to Registrant's Annual Report on the 1992 Form 10-K).*
10.20 Common Stock Purchase Agreement, dated May 26, 1993, by and
between Registrant and Boehringer Mannheim America Ltd.
(incorporated herein by reference to Exhibit 10.32 to the
1993 Form 10-K).
10.21 Stock Purchase Agreement, dated as of May 15, 1995, by and
among Registrant, Genelabs Diagnostic, Inc., a wholly owned
subsidiary of the Registrant, Johnson & Johnson Development
Corporation, and Chiron Corporation (incorporated herein by
reference to Exhibit 10.34 to Registrant's Form 10-Q for the
quarter ended March 31, 1995 (the "1st Quarter 1995 Form
10-Q")).*
10.22 License and Supply Agreement, dated as of May 15, 1995, by
and among Registrant, Genelabs Diagnostic, Inc., Chiron
Corporation, and Ortho Diagnostic Systems, Inc.
(incorporated herein by reference to Exhibit 10.35 to the
1st Quarter 1995 Form 10-Q).*
10.23 Asset Purchase Agreement, dated as of May 15, 1995, by and
between Registrant and Genelabs Diagnostic, Inc.
(incorporated herein by reference to Exhibit 10.36 to the
1st Quarter 1995 Form 10-Q).*
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
------- -------------
<C> <S>
10.24 Joint Investment Agreement for formation of Genelabs
Biotechnology Co., Ltd., a company organized under the laws
of Taiwan, Republic of China (incorporated herein by
reference to Exhibit 10.28 to the 1995 Form 10-K).*
10.25 Technology Transfer Agreement, dated as of November 21,
1995, by and between Registrant and Genelabs Biotechnology
Co., Ltd. (incorporated herein by reference to Exhibit 10.29
to the 1995 Form 10-K).*
10.26 Common Stock Purchase Agreement, dated as of November 15,
1996, by and between Registrant and Veron International
Limited (incorporated herein by reference to Exhibit 10.30
to Registrant's Current Report on Form 8-K filed on November
22, 1996).
10.27 Collaborative Research and License Agreement, dated as of
December 13, 1996, by and between Registrant and The DuPont
Merck Pharmaceutical Company (incorporated herein by
reference to Exhibit 10.27 to the 1996 Form 10-K).*
10.28 Grant from the Space and Naval Warfare Systems Command,
sponsored by the Defense Advanced Research Projects Agency,
effective as of February 3, 1998.
21.01 List of Significant Subsidiaries.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Annual Report
on Form 10-K submitted to the Securities and Exchange
Commission).
</TABLE>
- ---------------
* Confidential treatment has been granted with respect to certain portions of
this document.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed for the quarter ended December 31,
1997.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENELABS TECHNOLOGIES, INC.
March 26, 1998 By: /s/ IRENE A. CHOW
------------------------------------
Irene A. Chow
Chief Executive Officer, President
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Irene A. Chow and Melinda Griffith, and
each of them, his or her true and lawful attorneys-in-fact and agents with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto and all documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or his, her or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
<TABLE>
<S> <C> <C>
/s/ IRENE A. CHOW Chief Executive Officer, March 26, 1998
- ------------------------------------------------ President and Director
Irene A. Chow
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES A.D. SMITH Chief Operating Officer March 26, 1998
- ------------------------------------------------
James A.D. Smith
PRINCIPAL ACCOUNTING OFFICER:
/s/ MATTHEW M. LOAR Director of Finance and March 26, 1998
- ------------------------------------------------ Controller
Matthew M. Loar
BOARD OF DIRECTORS:
/s/ FRANK L. DOUGLAS March 26, 1998
- ------------------------------------------------
Frank L. Douglas
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
/s/ EDGAR G. ENGLEMAN March 26, 1998
- ------------------------------------------------
Edgar G. Engleman
/s/ ARTHUR GRAY, JR. March 26, 1998
- ------------------------------------------------
Arthur Gray, Jr.
/s/ H. H. HAIGHT March 26, 1998
- ------------------------------------------------
H. H. Haight
/s/ DAMARIS SKOURAS March 26, 1998
- ------------------------------------------------
Damaris Skouras
/s/ NINA K. WANG March 26, 1998
- ------------------------------------------------
Nina K. Wang
</TABLE>
26
<PAGE> 27
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
ANNUAL REPORT ON FORM 10-K
INDEX
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements................ F-7 - F-16
</TABLE>
All schedules are omitted because they are not required or the required
information is included in the consolidated financial statements or notes
thereto.
F-1
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Genelabs Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Genelabs
Technologies, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Genelabs Technologies, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 11, 1998
F-2
<PAGE> 29
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 4,230 $ 4,377
Cash held in escrow.................................... -- 6,953
Short-term investments................................. 16,869 19,135
--------- ---------
Cash, cash equivalents and short-term investments......... 21,099 30,465
Receivables, net of allowance for doubtful accounts of
$364 and $343 at December 31, 1997 and 1996,
respectively........................................... 2,014 3,170
Inventories............................................... 2,281 3,535
Other current assets...................................... 554 726
--------- ---------
Total current assets.............................. 25,948 37,896
Property and equipment, net................................. 1,239 1,463
Investment in Genelabs Biotechnology Co., Ltd............... 3,658 4,628
Other assets................................................ 294 132
--------- ---------
$ 31,139 $ 44,119
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............ $ 4,458 $ 4,778
Accrued compensation and related expenses................. 1,932 1,694
Unearned contract revenue................................. 843 1,200
--------- ---------
Total current liabilities......................... 7,233 7,672
Long-term obligations..................................... 696 523
--------- ---------
Total liabilities................................. 7,929 8,195
--------- ---------
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, 10
shares convertible Series A issued and outstanding,
with liquidation preference of $10,000................. 9,682 9,682
Common stock, no par value, 75,000 shares authorized,
39,410 and 37,197 shares issued and outstanding at
December 31, 1997 and 1996, respectively............... 137,604 129,591
Common stock to be issued................................. -- 6,953
Accumulated deficit....................................... (123,892) (110,995)
Cumulative foreign currency translation adjustment........ (184) 693
--------- ---------
Total shareholders' equity........................ 23,210 35,924
--------- ---------
$ 31,139 $ 44,119
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 30
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales............................................ $ 9,675 $ 11,324 $ 10,149
Contract................................................. 3,115 2,006 8,499
-------- -------- --------
Total revenues................................... 12,790 13,330 18,648
-------- -------- --------
Operating costs and expenses:
Cost of product sales.................................... 5,818 6,177 6,090
Research and development................................. 12,360 10,133 12,551
Selling, general and administrative...................... 8,310 9,333 9,994
Purchased in-process research and development............ - - 949
-------- -------- --------
Total operating costs and expenses............... 26,488 25,643 29,584
-------- -------- --------
Operating loss............................................. (13,698) (12,313) (10,936)
Interest income, net....................................... 1,378 1,181 478
Equity in loss of Genelabs Biotechnology Co., Ltd.......... (577) (265) (53)
-------- -------- --------
Net loss................................................... $(12,897) $(11,397) $(10,511)
-------- -------- --------
Net loss per share......................................... $ (0.33) $ (0.32) $ (0.38)
======== ======== ========
Weighted average shares outstanding........................ 38,983 35,746 27,497
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
SERIES A FOREIGN
CONVERTIBLE CURRENCY TOTAL
PREFERRED COMMON COMMON STOCK ACCUMULATED TRANSLATION SHAREHOLDERS'
STOCK STOCK TO BE ISSUED DEFICIT ADJUSTMENT EQUITY
----------- -------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994...................... $ -- $ 92,239 $ 2,000 $ (89,096) $ 598 $ 5,741
81 shares issued under the
employee stock purchase
plan...................... -- 82 -- -- -- 82
298 shares issued under
stock options............. -- 673 -- -- -- 673
843 shares issued to
SmithKline Beecham PLC.... -- 2,000 (2,000) -- -- --
497 shares issued to former
shareholders of GLD....... -- 949 -- -- -- 949
6,500 shares issued in a
private placement, net.... -- 19,059 -- -- -- 19,059
10 shares preferred stock
issued to Chiron and J&J,
net....................... 9,682 -- -- -- -- 9,682
Foreign currency translation
adjustment................ -- -- -- -- 68 68
Change in unrealized
securities loss........... -- -- -- 9 -- 9
Net loss.................... -- -- -- (10,511) -- (10,511)
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31,
1995...................... 9,682 115,002 -- (99,598) 666 25,752
89 shares issued under the
employee stock purchase
plan...................... -- 223 -- -- -- 223
711 shares issued under
stock options............. -- 1,526 -- -- -- 1,526
3,169 shares issued upon
exercise of warrants,
net....................... -- 10,313 -- -- -- 10,313
700 shares issued and 1,900
shares to be issued in a
private placement, net.... -- 2,527 6,953 -- -- 9,480
Foreign currency translation
adjustment................ -- -- -- -- 27 27
Net loss.................... -- -- -- (11,397) -- (11,397)
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31,
1996...................... 9,682 129,591 6,953 (110,995) 693 35,924
124 shares issued under the
employee stock purchase
plan...................... -- 413 -- -- -- 413
189 shares issued under
stock options............. -- 647 -- -- -- 647
1,900 shares issued in a
private placement, net.... -- 6,953 (6,953) -- -- --
Foreign currency translation
adjustment................ -- -- -- -- (877) (877)
Net loss.................... -- -- -- (12,897) -- (12,897)
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31,
1997...................... $9,682 $137,604 $ -- $(123,892) $(184) $ 23,210
====== ======== ======= ========= ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 32
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(12,897) $(11,397) $(10,511)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense............... 555 863 958
Purchased in-process research and development....... -- -- 949
Equity in loss of Genelabs Biotechnology Co.,
Ltd............................................... 577 265 53
Changes in assets and liabilities:
Receivables......................................... 1,156 (681) 423
Inventories......................................... 1,254 (199) (50)
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations............ 129 (633) 2,368
Unearned contract revenue........................... (357) 1,200 (889)
-------- -------- --------
Net cash used in operating activities.......... (9,583) (10,582) (6,699)
-------- -------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale............. (19,797) (43,488) --
Proceeds from sale and maturities of securities
available-for-sale.................................. 22,063 24,353 1,031
Capital expenditures................................... (517) (329) (240)
Investment in Genelabs Biotechnology Co., Ltd.......... -- -- (4,817)
Other.................................................. (291) 98 565
-------- -------- --------
Net cash provided by/(used in) investing
activities................................... 1,458 (19,366) (3,461)
-------- -------- --------
Cash flows from financing activities:
Payments on long-term obligations...................... -- (2,828) (387)
Proceeds from issuance of convertible preferred stock,
net................................................. -- -- 9,682
Proceeds from issuance of common stock and warrants,
net................................................. 8,013 14,589 19,814
-------- -------- --------
Net cash provided by financing activities...... 8,013 11,761 29,109
-------- -------- --------
Effect of exchange rate change on cash................... (35) 7 46
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents..... (147) (18,180) 18,995
Cash and cash equivalents, beginning of the period....... 4,377 22,557 3,562
-------- -------- --------
Cash and cash equivalents, end of the period............. 4,230 4,377 22,557
Cash held in escrow, end of the period................... -- 6,953 --
Short-term investments, end of the period................ 16,869 19,135 --
-------- -------- --------
Cash, cash equivalents and short-term investments, end of
the period............................................. $ 21,099 $ 30,465 $ 22,557
======== ======== ========
Supplemental Cash Flow Information:
Interest paid.......................................... -- $ 170 $ 320
Property and equipment acquired under capital lease
obligations......................................... $ 102 -- $ 176
</TABLE>
See accompanying notes.
F-6
<PAGE> 33
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a
biopharmaceutical company with research focused on the discovery of small
molecule drugs that act by binding to DNA to regulate gene expression or
inactivate pathogens. The lead research program is based on a proprietary
enabling technology, MERLIN, for creating gene-specific, small organic,
DNA-binding molecules. A recently developed technology, VIRIA, is being applied
to the discovery of novel anti-viral RNA-binding compounds. The Company's
development efforts are focused on its lead compound, GL701, which is in Phase
III clinical trials as a new therapy for systemic lupus erythematosus. The
Company also operates a wholly-owned subsidiary, Genelabs Diagnostics (Pte.)
Ltd., which sells diagnostic tests for infectious diseases primarily in Europe
and Asia.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. Investments in which Genelabs holds a 20%-50% ownership
interest are accounted for on the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. It is possible that actual amounts will differ from those
estimates.
REVENUE RECOGNITION
Revenue on product sales is recognized upon shipment.
Contract revenue consists of revenue from contracts and grants awarded to
the Company by corporations and government agencies and is recognized in
accordance with the terms of the contracts and grants. Revenues related to
research contracts and grants are recognized ratably over the related funding
periods for each contract. The Company is generally required to perform research
activities as specified in the agreements, and the Company is generally
reimbursed based on the costs associated with the number of full time equivalent
employees working on the contract. Revenues related to license agreements with
noncancelable, nonrefundable terms and no significant future obligations are
recognized upon the execution of the agreements. Milestone payments are
recognized pursuant to collaborative agreements upon the achievement of
specified events.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to diagnostics companies, clinical
laboratories and distributors located in the United States, Europe and Asia. The
Company performs ongoing credit evaluations of its customers, does not require
collateral and provides for potential credit losses at the time of shipment.
No single customer accounted for 10% or more of total product sales for
1997 or 1996. In 1995, product sales to one customer represented 10% of total
product sales.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's wholly-owned subsidiary, Genelabs
Diagnostics (Pte.) Ltd. ("GLD"), is the Singapore dollar. The functional
currency of the Company's equity investment, Genelabs Biotechnology Co., Ltd.
("GBL"), is the New Taiwan dollar. GLD's assets and liabilities and Genelabs'
investment in GBL are translated at the exchange rate in effect at year end.
GLD's revenue and expenses and the Company's 40% share of GBL's net income or
loss are translated at the average exchange rate for the period. Adjustments
resulting from the translation of financial statements denominated in foreign
currency are reflected as a separate component of shareholders' equity.
F-7
<PAGE> 34
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
STOCK BASED COMPENSATION
The Company grants stock options at an exercise price equal to the fair
market value of the shares at the date of grant. The Company accounts for
stock-based compensation using the intrinsic value method and, accordingly,
recognizes no compensation expense for stock options granted to employees.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments are held primarily in
demand deposit, money market and custodial accounts with United States banks.
Cash equivalents consist of financial investments with maturities of 90 days or
less at time of acquisition that are readily convertible into cash and have
insignificant interest rate risk.
The Company invests funds which are not required for immediate operating
needs principally in a diversified portfolio of debt securities. Management
determines the appropriate classification of these marketable debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. As of December 31, 1997 and 1996, all marketable securities are classified
as available-for-sale. These securities are stated at estimated fair value based
upon market quotes. Unrealized gains and losses, when material, are included in
retained earnings. Amortization of premiums and discounts and realized gains and
losses are included in interest income. The cost of securities sold is based on
the specific identification method. The Company has not experienced any
significant losses on its investments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on equipment,
including equipment under capital leases, is calculated on a straight-line basis
over the estimated useful lives of the assets, generally five years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful lives of the improvements.
CHANGES IN ACCOUNTING STANDARDS
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS No. 128, net loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period.
Diluted net loss per share has not been presented as, due to the Company's net
loss position, it is antidilutive. Had the Company been in a net income
position, diluted earnings per share for 1997, 1996, and 1995 would have
included an additional 598,000, 1,273,000, and 1,262,000 shares, respectively,
related to the Company's outstanding stock options, and 3,333,000 shares related
to the Series A Convertible Preferred Stock. The Company's previous reported net
loss per share amounts conformed to SFAS No. 128 and, accordingly, its adoption
has no effect on these financial statements.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires presentation of disaggregated
information about business segments based on the way management makes decisions
and assesses performance. This information is presented in Note 12.
F-8
<PAGE> 35
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. AVAILABLE-FOR-SALE SECURITIES
The following table summarizes the estimated fair value of
available-for-sale securities at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
DESCRIPTION:
U.S. Treasury securities and obligations of U.S.
government agencies.................................... $11,873 $13,181
Corporate debt securities................................ 6,043 4,037
Asset-backed securities.................................. 954 3,412
Money-market mutual funds................................ 228 206
------- -------
$19,098 $20,836
======= =======
BALANCE SHEET CLASSIFICATION:
Included in cash and cash equivalents.................... $ 2,229 $ 1,701
Included in short-term investments....................... 16,869 19,135
------- -------
$19,098 $20,836
======= =======
MATURITY:
Due within one year...................................... $13,890 $10,202
Due after one year through two years..................... 5,208 10,634
------- -------
$19,098 $20,836
======= =======
</TABLE>
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts at December 31, 1997, 1996 and 1995 was
$364,000, $343,000 and $271,000, respectively. In 1997, 1996 and 1995, there
were write-offs of $83,000, $17,000 and $149,000, respectively, and no
recoveries.
4. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in/first-out method. The components of inventories are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $1,113 $2,126
Work-in process............................................ 542 389
Finished Goods............................................. 626 1,020
------ ------
$2,281 $3,535
====== ======
</TABLE>
F-9
<PAGE> 36
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Laboratory equipment................................... $ 4,364 $ 4,670
Leasehold improvements................................. 4,532 4,674
Office and other equipment............................. 2,354 2,311
-------- --------
11,250 11,655
Less accumulated depreciation and amortization......... (10,011) (10,192)
-------- --------
$ 1,239 $ 1,463
======== ========
</TABLE>
6. INVESTMENT IN GENELABS BIOTECHNOLOGY CO., LTD.
The Company owns 40% of Genelabs Biotechnology Co., Ltd., which is located
in Taiwan, Republic of China. The Ministry of Finance of the government of
Taiwan, Republic of China owns 35% and private investors own 25%. GBL was formed
in 1995 and focuses on the late-stage development, manufacture and
commercialization of newly developed or formulated pharmaceuticals for the Asian
market. Both the General Manager and Chairman of the Board of GBL are employees
of the Company. The Company's investment in GBL is accounted for under the
equity method. Summarized financial information for GBL is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents..................................... $ 1,600 $14,000
Accounts receivable and other current assets............. 1,100 400
Property, plant and equipment, net....................... 8,800 500
------- -------
Total assets............................................. $11,500 $14,900
======= =======
Liabilities.............................................. $ 1,400 $ 1,000
Shareholders' equity..................................... 10,100 13,900
------- -------
Total liabilities and shareholders' equity............... $11,500 $14,900
======= =======
Net (loss)............................................... $(1,500) $ (500)
======= =======
</TABLE>
7. LEASE OBLIGATIONS
OPERATING LEASE OBLIGATIONS
The Company leases its primary office and laboratory facilities under a
noncancelable operating lease which has a term expiring November 2002. The
Company is required to pay certain maintenance expenses in addition to monthly
rent. The Company also leases certain office and production facilities and
laboratory equipment under other noncancelable operating leases. At December 31,
1997, future minimum lease payments under all operating leases with original
terms greater than one year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998................................................... $1,510
1999................................................... 1,096
2000................................................... 918
2001................................................... 883
2002................................................... 858
------
$5,265
======
</TABLE>
Total lease expense was $1,433,000, $1,693,000 and $1,565,000 for 1997,
1996 and 1995, respectively.
F-10
<PAGE> 37
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CAPITAL LEASE OBLIGATIONS
Laboratory equipment at December 31, 1997 and 1996 includes assets under
capitalized leases of $520,000 and $441,000, respectively, with related
accumulated amortization of $355,000 and $397,000, respectively. Future minimum
payments are $58,000 due in 1998 and $25,000 due in 1999.
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Pursuant to the terms of a 1995 stock purchase agreement, in May 2000 the
10,000 outstanding shares of Series A Convertible Preferred Stock issued to
Chiron Corporation and Johnson & Johnson Development Corporation can be
converted into 49.99% of Genelabs' diagnostics business, if the remainder of
this business is purchased by these two companies at its then fair market value.
Alternatively, these shares, purchased for $10 million, can be converted into
Genelabs common stock at the lesser of the fair market value at the time of
conversion or $3.00 per share, but in no event more than 49.99% of Genelabs
common stock after the conversion. The Series A Convertible Preferred
stockholders are entitled to noncumulative dividends in preference to common
stock dividends at the annual rate of $40 per share, payable quarterly, if
declared by the Company's Board of Directors. No dividends have been declared or
paid by the Company. Preferred stockholders are entitled to one vote for each
share of common stock into which their preferred stock could be converted at the
time of voting.
COMMON STOCK
In 1996, the Company received gross proceeds of $2.8 million and issued
700,000 shares of Common Stock through a private offering to Veron International
Limited ("Veron"). In connection with this offering, the Company agreed to issue
an additional 1,900,000 shares of Common Stock to Veron for gross proceeds of
$7.6 million, which the Company held in escrow and recorded as "Common Stock to
be Issued" at December 31, 1996. In 1997, upon termination of a waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the funds held
in escrow were released to Genelabs and the shares were issued to Veron. Also in
connection with this offering, the Company paid $950,000 to an affiliate of
Veron in commissions and expenses, which include Hart-Scott-Rodino filing and
compliance and legal, accounting, tax and other fees and expenses of Veron and
its affiliates. There were no additional brokerage commissions or fees
associated with this transaction. In February 1997, Ms. Nina K. Wang, the
controlling shareholder of Veron, was elected to the Company's Board of
Directors.
At December 31, 1997 the Company had 33,964,000 shares reserved for future
issues and conversions.
9. STOCK-BASED COMPENSATION
EMPLOYEE STOCK PURCHASE PLAN ("STOCK PURCHASE PLAN"). Employees who meet
certain minimum requirements are eligible to participate in the Company's Stock
Purchase Plan, for which 1,000,000 shares of Common Stock have been reserved.
Eligible employees are entitled to purchase stock at 85% of the lower of the
closing price at the beginning or ending of six-month purchase periods, and
stock may be purchased at the same price for up to four periods. Purchases are
limited to a maximum of $25,000 per year and employees can contribute up to 10%
of total compensation. Through December 31, 1997 and 1996, 451,000 and 341,000
shares, respectively, had been issued under the Stock Purchase Plan. The Company
has also established the Genelabs Biotechnology Co., Ltd. Employee Stock
Purchase Plan ("GBL Plan") for eligible employees of GBL. The GBL Plan contains
essentially the same terms as the Company's Stock Purchase Plan and there are
100,000 shares of Common Stock reserved for issuance under this plan, with
14,000 shares issued as of December 31, 1997.
F-11
<PAGE> 38
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
STOCK AWARD PLANS. The Company has stock award plans which provide for the
issuance of shares of Common Stock to employees and independent contractors who
are not officers or directors. There are 700,000 shares of Common Stock reserved
for issuance under these plans and through December 31, 1997 and 1996, 106,000
shares had been issued.
STOCK OPTION PLAN. The Company's stock option plan provides for the
issuance of incentive stock options and nonqualified stock options to employees,
officers, directors and independent contractors. The number of stock options
granted is determined by the Board of Directors or a committee designated by the
Board of Directors, except for grants to directors, who receive options based on
a formula. Stock options generally may not be granted at prices lower than fair
market value on the date of grant and vest over periods ranging from two to four
years, with expiration no later than ten years from the date of grant. At
December 31, 1997, 781,000 shares were available for future grants.
Stock option transactions from 1995 through 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE RANGE OF
SHARES EXERCISE PRICE EXERCISE PRICES
---------- -------------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1994................ 3,135,000 $3.09 $0.07 - $7.06
Granted....................................... 1,085,000 $2.39 $1.41 - $4.59
Exercised..................................... (224,000) $2.37 $1.25 - $2.63
Canceled...................................... (1,030,000) $3.19 $0.07 - $7.06
---------- ----- -------------
Outstanding at December 31, 1995................ 2,966,000 $2.85 $1.25 - $7.06
Granted....................................... 967,000 $6.01 $3.56 - $9.16
Exercised..................................... (758,000) $2.34 $1.25 - $5.00
Canceled...................................... (273,000) $4.97 $1.25 - $7.62
---------- ----- -------------
Outstanding at December 31, 1996................ 2,902,000 $3.83 $1.41 - $9.16
Granted....................................... 880,000 $4.34 $2.09 - $7.09
Exercised..................................... (260,000) $2.66 $1.41 - $4.81
Canceled...................................... (282,000) $5.02 $2.37 - $8.56
---------- ----- -------------
Outstanding at December 31, 1997................ 3,240,000 $3.96 $1.41 - $9.16
========== ===== =============
</TABLE>
There were options for 1,373,000 and 1,317,000 shares exercisable at
December 31, 1996 and 1995, respectively. For options outstanding and
exercisable at December 31, 1997, the exercise price ranges and average
remaining terms were:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
RANGE OF OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
EXERCISE OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
PRICES 12/31/97 REMAINING TERM EXERCISE PRICE 12/31/97 EXERCISE PRICE
- --------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.41 - $2.97 1,717,000 7.0 years $2.48 1,158,000 $2.34
$3.06 - $5.88 632,000 7.3 years $4.36 294,000 $4.35
$6.06 - $9.16 891,000 7.8 years $6.54 326,000 $6.61
--------- --------- ----- --------- -----
$1.41 - $9.16 3,240,000 7.3 years $3.96 1,778,000 $3.45
========= ========= ===== ========= =====
</TABLE>
DISCLOSURE OF FAIR VALUE OF STOCK OPTIONS As disclosed in Note 1, Genelabs
accounts for stock options using their intrinsic value at the time of grant.
However, generally accepted accounting principals require companies that account
for stock options under the intrinsic value method to also disclose the pro
forma impact as if they had accounted for stock options using a fair value
approach. Accordingly, for disclosure purposes, the fair value of stock options
was estimated at the date of grant using a Black-Scholes option valuation model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value
F-12
<PAGE> 39
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
of traded options which have no vesting restrictions and are fully transferable.
This model requires highly subjective assumptions regarding expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and changes in the
volatility assumptions can materially affect the fair value estimate, the
Company's management believes that this model does not necessarily provide a
representative measure of the fair value of the options actually granted under
the Company's stock-based compensation plans. To determine the pro forma
disclosure, the Company used the following weighted average assumptions for
1997, 1996 and 1995, respectively: dividend yields of zero; risk-free interest
rates of 5.6%, 5.8% and 6.3%; volatility factors of the expected market price of
the Company's common stock of .81; and a one-year expected life of the options
after vesting. Based on these assumptions, the weighted-average fair value of
options granted during 1997, 1996 and 1995 was $2.56, $3.48, and $1.25,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is expensed ratably over the options' vesting period. If the Company
elected to record the fair value estimate of stock options in its financial
statements, the net loss for 1997, 1996 and 1995, respectively, would have been
$14,767,000, $13,072,000 and $11,048,000 and the net loss per share would have
been $0.38, $0.37 and $0.40. Finally, note that because this pro forma
disclosure is applicable only to options granted after 1994, its effect will not
be fully reflected until 1998 since options granted by Genelabs generally vest
over four years.
10. COLLABORATIVE AGREEMENTS
The Company has the following collaborative agreements in place:
The DuPont Merck Pharmaceutical Company -- Gene-Regulating Drugs. The
Company has a collaborative research and license agreement with The DuPont Merck
Pharmaceutical Company ("DuPont Merck") to jointly develop small molecule
gene-regulating drugs. Genelabs and DuPont Merck are conducting a drug discovery
program directed towards a number of target genes. Each company has the right to
develop or out-license products resulting from a shared database of compounds
and chemistries developed by the collaboration, although DuPont Merck has
certain exclusive rights to pharmaceutical products resulting from the
collaboration. Under the terms of the agreement, Genelabs receives research
funding, a portion of which was an up-front payment. Genelabs will also receive
payments for milestones reached for each gene target as well as royalty payments
for each successful product resulting from this collaboration.
Defense Advanced Research Projects Agency -- Countermeasures to Agents of
Biological Warfare. In February 1998, the Company received a research grant from
the Defense Advanced Research Projects Agency ("DARPA") to apply Genelabs'
DNA-binding and RNA-binding technologies towards the discovery of drugs that can
be used as countermeasures to agents of biological warfare. Under the terms of
the grant, Genelabs will receive research funding and has the right to
commercialize any invention it makes during the term of the grant.
Stanford University -- SLE. The Company has an exclusive licensing
agreement with Stanford University for worldwide rights to certain patent rights
for the development, manufacture and sale of GL701 (dehydroepiandrosterone) for
the treatment of systemic lupus erythematosus ("SLE"). Under this agreement,
Stanford receives milestone payments based on clinical development goals and may
receive royalty payments on sales. A director of Genelabs will also receive a
fee based on sales of the product for SLE. Genelabs has completed one Phase III
clinical trial and a second Phase III trial is ongoing in the United States.
F-13
<PAGE> 40
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Boehringer Mannheim America Ltd. -- HGV. The Company has a licensing
agreement with Boehringer Mannheim America Ltd. for development and
commercialization of diagnostic products resulting from the Company's discovery
of hepatitis G virus ("HGV"). This agreement provides for milestone payments to
Genelabs when Boehringer Mannheim reaches certain research and development goals
and royalties to Genelabs on sales of HGV products.
Chiron Corporation and Ortho Diagnostic Systems, Inc. -- HGV. In return for
certain revenue payments to Genelabs, including payments for reaching research
and development goals and royalties on sales of licensed HGV products, the
Company granted Chiron Corporation and Ortho Diagnostic Systems, Inc. ("Chiron
and Ortho") worldwide, limited co-exclusive rights to develop and commercialize
diagnostic products for HGV. Genelabs has also granted Chiron and Ortho
worldwide, non-exclusive, royalty-bearing rights to commercialize diagnostic
products for human T-cell leukemia virus I/II. Chiron and Ortho have in turn
licensed to Genelabs non-exclusive, royalty-bearing rights to commercialize
certain diagnostic products for the hepatitis C virus ("HCV") in certain
territories, including Asia.
SmithKline Beecham p.l.c. -- HEV Vaccine. The Company has granted
SmithKline Beecham p.l.c. ("SKB") exclusive worldwide manufacturing and
marketing rights for a hepatitis E virus ("HEV") vaccine, except for certain
Asian countries where Genelabs has retained co-exclusive rights. The agreement
provides for milestone payments to Genelabs when SKB reaches certain research
and development goals, and, should development efforts result in a marketable
product, Genelabs will also receive royalty payments based on sales of licensed
HEV vaccine products.
Sanofi Diagnostics Pasteur -- HCV Diagnostic. In exchange for certain
royalty payments to Genelabs, the Company has granted Sanofi Diagnostics Pasteur
exclusive and co-exclusive licenses to sell certain HCV products.
11. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $96 million and $13
million, respectively. In addition, the Company has federal and California
research and development tax credit carryforwards of approximately $1.7 million
and $0.6 million, respectively. The federal net operating loss and California
tax credit carryforwards expire in various amounts between the years 2000 and
2012. The California net operating loss carryforwards expire in various amounts
between the years 1998 and 2002. Under provisions of the Internal Revenue Code,
as amended, the availability of the Company's net operating loss and tax credit
carryforwards may be subject to future limitations because of changes in
ownership resulting from financing transactions. To date, no restriction in the
ability to utilize the Company's carryforwards is anticipated. However, future
equity transactions which the Company may enter into could cause ownership
changes which may result in substantial limitation, or expiration, of loss and
tax credit carryforwards.
F-14
<PAGE> 41
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 tax
reporting. Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 33,500 $ 27,800
Research credits..................................... 2,100 1,700
Capitalized research expenditures.................... 1,300 1,700
Other individually immaterial items, net............. 2,400 2,400
-------- --------
Total deferred tax assets.................... 39,300 33,600
Valuation allowance for deferred tax assets............ (39,300) (33,600)
-------- --------
Total net deferred tax assets................ $ -- $ --
======== ========
</TABLE>
For 1997, 1996 and 1995, the valuation allowance increased by $5.7 million,
$4.2 million and $1.8 million, respectively. Approximately $1.3 million of the
valuation allowance for deferred tax assets relates to benefits of stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
12. BUSINESS SEGMENTS
The Company operates in two business segments, biopharmaceuticals and
diagnostics. The biopharmaceutical business is engaged in research and
development directed towards drugs that treat human disease. Headquarters for
the biopharmaceutical business is integrated with the corporate headquarters in
Redwood City, California. The diagnostics business primarily sells tests for
detection of infectious diseases. The diagnostics' manufacturing headquarters
are located in Singapore and the principal sales office is based in Switzerland.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
F-15
<PAGE> 42
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Information regarding business segments are presented in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers
Biopharmaceuticals............................... $ 3,115 $ 2,006 $ 8,499
Diagnostics...................................... 9,675 11,324 10,149
-------- -------- --------
$ 12,790 $ 13,330 $ 18,648
======== ======== ========
Segment operating income/(loss)
Biopharmaceuticals............................... $(13,804) $(12,696) $ (8,987)
Diagnostics...................................... 106 383 (1,949)
-------- -------- --------
$(13,698) $(12,313) $(10,936)
======== ======== ========
Assets at December 31
Biopharmaceuticals............................... $ 25,223 $ 36,298 $ 28,322
Diagnostics...................................... 5,916 7,821 7,876
-------- -------- --------
$ 31,139 $ 44,119 $ 36,198
======== ======== ========
Depreciation and amortization
Biopharmaceuticals............................... $ 250 $ 436 $ 472
Diagnostics...................................... 305 427 486
-------- -------- --------
$ 555 $ 863 $ 958
======== ======== ========
Expenditures for long-lived assets
Biopharmaceuticals............................... $ 357 $ 189 $ 223
Diagnostics...................................... 219 140 273
-------- -------- --------
$ 576 $ 329 $ 496
======== ======== ========
</TABLE>
The Company's interest income and the equity investment and loss in GBL are
part of the biopharmaceutical business. Segment operating income includes all
costs related to ongoing operations of each business segment.
Information regarding geographic operations are presented in the table
below.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers:
United States.................................... $ 3,524 $ 3,067 $ 8,876
Asia............................................. 3,622 5,069 3,989
Europe........................................... 5,644 5,194 5,783
-------- -------- --------
$ 12,790 $ 13,330 $ 18,648
======== ======== ========
Long-lived assets:
United States.................................... $ 496 $ 386 $ 554
Asia............................................. 807 1,079 1,472
-------- -------- --------
$ 1,303 $ 1,465 $ 2,026
======== ======== ========
</TABLE>
No foreign country accounted for more than 10% of total revenue in 1997,
1996 or 1995.
F-16
<PAGE> 43
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.05 Amendment to Registrant's 1994 Annual and Long-Term
Incentive Based Compensation Program.
10.07 Registrant's 1995 Stock Option Plan, as amended to date.
10.28 Grant from the Space and Naval Warfare Systems Command,
sponsored by the Defense Advanced Research Projects Agency,
effective as of February 3, 1998.
21.01 List of Significant Subsidiaries.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.05
AMENDMENT TO
1994 ANNUAL AND LONG-TERM
INCENTIVE BASED COMPENSATION PROGRAM
This Amendment is dated as of July 29, 1997 (the "Amendment") and amends
that certain 1994 Annual and Long-Term Incentive Based Compensation Program
effective as of July 29, 1994 (the "Program") of Genelabs Technologies, Inc.
("Genelabs").
Whereas the Board of Directors of Genelabs, at its regularly scheduled
meeting on May 22, 1997, approved the extension of the Program for an additional
three year term;
Now, therefor, the Program is hereby amended to extend its term from July
29, 1997 through July 28, 2000. Except as expressly amended by this Amendment,
all other terms and conditions remain in full force and effect.
GENELABS TECHNOLOGIES, INC.
By: /s/ MELINDA GRIFFITH
Its: Vice President, General Counsel
and Secretary
<PAGE> 1
EXHIBIT 10.07
GENELABS TECHNOLOGIES, INC.
1995 STOCK OPTION PLAN
Adopted April 14, 1995
(As Amended May 30, 1996, September 17, 1997 and February 6, 1998)
1. PURPOSE. This 1995 Stock Option Plan (this "Plan") is established as
a compensatory plan to attract, retain and provide equity incentives to selected
persons to promote the financial success of Genelabs Technologies, Inc., a
California corporation (the "Company"). Capitalized terms not previously defined
herein are defined in Section 17 of this Plan.
2. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
(b) non-qualified stock options ("NQSOs"), as designated at the time of grant.
The shares of stock that may be purchased upon exercise of Options granted under
this Plan (the "Shares") are shares of the Common Stock of the Company.
3. NUMBER OF SHARES. Shares of Common Stock remaining available for
future grants of stock options under the Company's 1985 Employee Stock Option
Plan (the "1985 Plan") and shares of Common Stock issuable upon exercise or
currently outstanding pursuant to the 1985 Plan that expire or become
unexercisable for any reason without having been exercised in full, will be
available for issuance under the Plan, subject to adjustment as provided in this
Plan. Upon adoption of the Plan by the Company's shareholders on June 2, 1995,
the number of shares of Common Stock reserved for issuance under this Plan was
3,912,889. On May 30, 1996, the Company's shareholders approved an amendment to
increase the aggregate number of shares that may be issued pursuant to options
granted under this Plan to 4,912,889 shares. At all times during the term of
this Plan, the Company shall reserve and keep available such number of Shares as
shall be required to satisfy the requirements of outstanding Options under this
Plan.
4. ELIGIBILITY. Options may be granted to employees, directors,
consultants , officers, independent contractors and advisers (provided such
consultants, independent contractors and advisers render bona fide services not
in connection with the offer and sale of securities in a capital-raising
transaction) of the Company or any Parent, Subsidiary or Affiliate of the
Company. ISOs may be granted only to employees (including officers and directors
who are also employees) of the Company or a Parent or Subsidiary of the Company.
Non-Employee Directors shall only be eligible for grants of NQSOs pursuant to
Section 7. The Committee (as defined in Section 14) in its sole discretion shall
select the recipients of Options ("Optionees"). An Optionee may be granted more
than one Option under this Plan. No one Optionee shall be eligible to receive
more than 800,000 Shares at any time during the term of this Plan pursuant to
the grant of Options hereunder.
5. TERMS AND CONDITIONS OF OPTIONS. For grants other than to
Non-Employee Directors pursuant to Section 7, the Committee shall determine
whether each Option is to be an ISO or an NQSO, the number of Shares subject to
the Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
1
<PAGE> 2
(a) Form of Option Grant. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant (the "Grant") in such form
(which need not be the same for each Optionee) as the Committee shall from time
to time approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
(b) Date of Grant. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee. The Grant representing the Option will be
delivered to Optionee with a copy of this Plan within a reasonable time after
the granting of the Option.
(c) Exercise Price. The exercise price of an Option shall be
determined by the Committee on the date the Option is granted; provided that (i)
the exercise price of an NQSO shall be not less than 85% of the Fair Market
Value of the Shares on the date the Option is granted; (ii) the exercise price
of an ISO shall be not less than 100% of the Fair Market Value of the Shares on
the date the Option is granted; and (iii) the exercise price of any ISO granted
to a person owning more than l0% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten
Percent Shareholder") shall not be less than 110% of the Fair Market Value of
the Shares on the date the Option is granted.
(d) Exercise Period. Options shall be exercisable within the times
or upon the events determined by the Committee as set forth in the Grant;
provided, however, that no Option shall be exercisable after the expiration of
ten (10) years from the date the Option is granted, and provided further that no
ISO granted to a Ten Percent Shareholder shall be exercisable after the
expiration of five (5) years from the date the Option is granted.
(e) Limitations on ISOs. The aggregate Fair Market Value
(determined as of the time an Option is granted) of stock with respect to which
ISOs are exercisable for the first time by an Optionee during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed $100,000. If the
Fair Market Value of Shares with respect to which ISOs are exercisable for the
first time by an Optionee during any calendar year exceeds $100,000, the Options
for the first $100,000 worth of Shares to become exercisable in such year shall
be ISOs and the Options for the amount in excess of $100,000 that become
exercisable in that year shall be NQSOs. In the event that the Code or the
regulations promulgated thereunder are amended after the effective date of this
Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISOs, such different limit shall be incorporated
herein and shall apply to any Options granted after the effective date of such
amendment.
(f) Options Non-Transferable. Options granted under this Plan, and
any interest therein, shall not be transferable or assignable by Optionee, and
may not be made subject to execution, attachment or similar process, otherwise
than by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of Optionee only by Optionee; provided, however,
that NQSOs may be transferred to such family members, trusts and charitable
institutions as the Committee, in its sole discretion, shall approve at the time
of the grant of such Option.
2
<PAGE> 3
(g) Assumed Options. In the event the Company assumes an option
granted by another company, the terms and conditions of such option shall remain
unchanged (except the exercise price and the number and nature of shares
issuable upon exercise, which will be adjusted appropriately pursuant to Section
424(a) of the Code). In the event the Company elects to grant a new option
rather than assuming an existing option, such new option may be granted with a
similarly adjusted exercise price.
6. EXERCISE OF OPTIONS.
(a) Notice. Options may be exercised only by delivery to the
Company of a written stock option exercise agreement (the "Exercise Agreement")
in a form approved by the Committee (which need not be the same for each
Optionee), stating the number of Shares being purchased, the restrictions
imposed on the Shares, if any, and such representations and agreements regarding
Optionee's investment intent and access to information, if any, as may be
required by the Company to comply with applicable securities laws, together with
payment in full of the exercise price for the number of Shares being purchased.
(b) Payment. Payment for the Shares may be made in cash (by check)
or, where approved by the Committee in its sole discretion at the time of grant
and where permitted by law: (i) by cancellation of indebtedness of the Company
to the Optionee; (ii) by surrender of shares of Common Stock of the Company
having a Fair Market Value equal to the applicable exercise price of the
Options, that have been owned by Optionee for more than six (6) months (and
which have been paid for within the meaning of Securities and Exchange
Commission ("SEC") Rule 144 and, if such Shares were purchased from the Company
by use of a promissory note, such note has been fully paid with respect to such
shares), or were obtained by Optionee in the open public market; (iii) by tender
of a full recourse promissory note having such terms as may be approved by the
Committee and bearing interest at a rate sufficient to avoid imputation of
income under Sections 483 and 1274 of the Code; (iv) by waiver of compensation
due or accrued to Optionee for services rendered; (v) provided that a public
market for the Company's stock exists, through a "same day sale" commitment from
Optionee and a broker-dealer that is a member of the National Association of
Securities Dealers (an "NASD Dealer") whereby Optionee irrevocably elects to
exercise the Option and to sell a portion of the Shares so purchased to pay for
the exercise price and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the exercise price directly to the Company; (vi)
provided that a public market for the Company's stock exists, through a "margin"
commitment from Optionee and an NASD Dealer whereby Optionee irrevocably elects
to exercise the Option and to pledge the Shares so purchased to the NASD Dealer
in a margin account as security for a loan from the NASD Dealer in the amount of
the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the exercise price directly to the Company; or (vii)
by any combination of the foregoing. Optionees who are not employees of the
Company shall not be entitled to purchase Shares with a promissory note unless
the note is adequately secured by collateral other than the Shares.
(c) Withholding Taxes. Prior to issuance of the Shares upon
exercise of an Option, Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable.
3
<PAGE> 4
(d) Limitations on Exercise. Notwithstanding the exercise periods
set forth in the Grant, exercise of an Option shall always be subject to the
following:
(i) If Optionee ceases to be employed or retained by the
Company or any Parent, Subsidiary or Affiliate of the Company for any reason
except death or disability, Optionee may exercise such Optionee's ISOs or NQSOs
to the extent (and only to the extent) that they would have been exercisable
upon the date of termination, within three (3) months after the date of
termination (or such shorter time period as may be specified in the Grant).
(ii) If Optionee's employment or retention with the Company
or any Parent, Subsidiary or Affiliate of the Company is terminated because of
the death of Optionee or disability of Optionee within the meaning of Section
22(e)(3) of the Code, Optionee's ISOs or NQSOs may be exercised to the extent
(and only to the extent) that they would have been exercisable by Optionee on
the date of termination, by Optionee (or Optionee's legal representative) within
twelve (12) months after the date of termination (or such shorter time period as
may be specified in the Grant), but in any event no later than the expiration
date of the ISOs.
(iii) The Committee shall have discretion to determine whether
Optionee has ceased to be employed or retained by the Company or any Parent,
Subsidiary or Affiliate of the Company and the effective date on which such
employment terminated.
(iv) In the case of an Optionee who is a director,
consultant, independent contractor or adviser, the Committee will have the
discretion to determine whether Optionee is employed or retained by the Company
or any Parent, Subsidiary or Affiliate of the Company pursuant to the foregoing
Sections.
(v) The Committee may specify a reasonable minimum number of
Shares that may be purchased on any exercise of an Option, provided that such
minimum number will not prevent Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
(vi) An Option shall not be exercisable unless such exercise
is in compliance with the Securities Act of 1933, as amended (the "Securities
Act"), all applicable state securities laws and the requirements of any stock
exchange or national market system upon which the Shares may then be listed, as
they are in effect on the date of exercise. The Company shall be under no
obligation to register the Shares with the SEC or to effect compliance with the
registration, qualification or listing requirements of any state securities
laws, stock exchange or national market system, and the Company shall have no
liability for any inability or failure to do so.
4
<PAGE> 5
7. OPTION GRANTS FOR NON-EMPLOYEE DIRECTORS
(a) Eligibility and Award Formula. Options may be granted only to
such Non-Employee Directors of the Company or any Parent, Subsidiary or
Affiliate of the Company as the Committee shall select from time to time in its
sole discretion. Directors may be granted more than one option under the Plan.
Each director, upon his or her first election to the Board, will be granted an
option to purchase 20,000 shares of the Company's Common Stock. At the Company's
Annual Meeting of Shareholders following the second anniversary of his or her
election to the Board, and at each subsequent Annual Meeting of Shareholders,
each director will be granted an additional option to purchase 10,000 shares.
(b) Terms and Conditions of Options. The Committee shall determine
the exercise price of the Option, the period during which the Option may be
exercised, and all other terms and conditions of the Option, subject to the
following:
(i) Date of Grant. The date of grant of an Option shall be
the dates described in Section 7 (a) above. The Grant representing the Option
will be delivered to the Optionee within a reasonable time after the granting of
the Option.
(ii) Exercise Price. The exercise price of an Option shall be
not less than the Fair Market Value of the Shares at the time that the Option is
granted.
(iii) Exercise Period. Options shall be exercisable as to 50%
of the Shares on the first anniversary of the date of grant and the remaining
50% on the second anniversary thereof; provided however, that no Option shall be
exercisable after the expiration of five years from the date the Option is
granted.
(iv) Limitation on Exercise. If the Optionee ceases to be a
director for any reason except death or disability, Optionee may exercise his or
her options to the extent (and only to the extent) that they would have been
exercisable upon the date of termination, within six (6) months after the date
of termination. If the Optionee ceases to be a director because of death or
disability, Optionee (or Optionee's legal representative) may exercise his or
her options to the extent (and only to the extent) that they would have been
exercisable upon the date of termination, within twelve (12) months after the
date of termination.
8. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Committee shall
have the power to modify, extend or renew outstanding Options and to authorize
the grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of Optionee, impair any rights under any
Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section 424(h)
of the Code. The Committee shall have the power to reduce the exercise price of
outstanding Options without the consent of Optionees by a written notice to the
Optionees affected; provided, however, that the exercise price per Share may not
be reduced below the minimum exercise price that would be permitted under
Section 5(c) of this Plan for Options granted on the date the action is taken to
reduce the exercise price.
9. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
such Option is properly exercised. No adjustment shall be made for dividends or
distributions or other rights for which
5
<PAGE> 6
the record date is prior to such date, except as provided in this Plan. Upon
written request, the Company shall provide to each Optionee a copy of the annual
financial statements of the Company at such time after the close of each fiscal
year of the Company as such statements are released by the Company to its common
shareholders generally.
10. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Option granted
under this Plan shall confer on any Optionee any right to continue in the employ
of, as a director of, or other relationship with, the Company or any Parent,
Subsidiary or Affiliate of the Company or limit in any way the right of the
Company or any Parent, Subsidiary or Affiliate of the Company to terminate
Optionee's employment or other relationship at any time, with or without cause.
11. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration, or
if a substantial portion of the assets of the Company are distributed, without
consideration in a spin-off or similar transaction, to the shareholders of the
Company, the number of Shares available under this Plan and the number of Shares
subject to outstanding Options and the exercise price per Share of such Options
shall be proportionately adjusted, subject to any required action by the Board
of Directors (the "Board") or shareholders of the Company and compliance with
applicable securities laws; provided, however, that a fractional share shall not
be issued upon exercise of any Option and any fractions of a Share that would
have resulted shall either be cashed out at Fair Market Value or the number of
Shares issuable under the Option shall be rounded up to the nearest whole
number, as determined by the Committee; and provided further that the exercise
price may not be decreased to below the par value, if any, for the Shares.
12. ASSUMPTION OF OPTIONS BY SUCCESSORS. In the event of a dissolution
or liquidation of the Company, a merger in which the Company is not the
surviving corporation, a transaction in which 100% of the then-outstanding
voting stock is sold or otherwise transferred or the sale of substantially all
of the assets of the Company any or all outstanding Options shall,
notwithstanding any contrary terms of the Grant, accelerate and become
exercisable in full at least 10 days prior to (and shall expire on) the
consummation of such dissolution, liquidation, merger or sale of assets on such
conditions as the Committee shall determine unless the successor corporation
assume the outstanding options or substitutes substantially equivalent options.
The aggregate Fair Market Value of ISOs which first become exercisable in the
year of such dissolution, liquidation, merger or sale of assets cannot exceed
$100,000. Any remaining accelerated options shall be treated as NQSOs.
6
<PAGE> 7
13. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become effective
on the date that it is adopted by the Board of the Company. This Plan shall be
approved by the shareholders of the Company, in any manner permitted by
applicable corporate law, within twelve months before or after the date this
Plan is adopted by the Board. Upon the effective date of the Plan, the Board may
grant Options pursuant to this Plan; provided that, in the event that
shareholder approval is not obtained within the time period provided herein, all
Options granted hereunder shall terminate. No Option that is issued as a result
of any increase in the number of shares authorized to be issued under this Plan
shall be exercised prior to the time such increase has been approved by the
shareholders of the Company and all such Options granted pursuant to such
increase shall similarly terminate if such Shareholder approval is not obtained.
14. ADMINISTRATION. This Plan may be administered by the Board or a
committee appointed by the Board (the "Committee"). As used in this Plan,
references to the "Committee" shall mean either such Committee or the Board if
no Committee has been established. If the Company is registered under the
Exchange Act and two or more members of the Board are Non-Employee Directors,
the Committee shall be comprised of at least two members of the Board, all of
whom are Non-Employee Directors. The interpretation by the Committee of any of
the provisions of this Plan or any Option granted under this Plan shall be final
and binding upon the Company and all persons having an interest in any Option or
any Shares purchased pursuant to an Option. The Committee may delegate to
officers of the Company the authority to grant Options under this Plan to
Optionees who are not officers or directors of the Company whose transactions in
the Company's Common Stock are subject to Section 16(b) of the Exchange Act.
15. TERM OF PLAN. Options may be granted pursuant to this Plan from time
to time within a period of ten (10) years from the date on which this Plan is
adopted by the Board.
16. AMENDMENT OR TERMINATION OF PLAN. The Committee may at any time
terminate or amend this Plan in any respect including (but not limited to)
amendment of any form of grant, exercise agreement or instrument to be executed
pursuant to this Plan; provided, however, that the Committee shall not, without
the approval of the shareholders of the Company, amend this Plan in any manner
that requires such shareholder approval pursuant to the Code or the regulations
promulgated thereunder as such provisions apply to ISO plans or pursuant to the
Exchange Act or Rule 16b-3 (or its successor) promulgated thereunder.
17. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall
have the following meanings:
(a) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
(b) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock
7
<PAGE> 8
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(c) "Affiliate" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
(d) "Fair Market Value" shall mean the fair market value of the
Shares as determined by the Committee from time to time in good faith. If a
public market exists for the Shares, the Fair Market Value shall be the average
of the last reported bid and asked prices for common stock of the Company on the
last trading day prior to the date of determination, or in the event the common
stock of the Company is listed on the Nasdaq National Market, the Fair Market
Value shall be the average of the high and low prices of the common stock on the
option grant date as quoted on the Nasdaq National Market and reported in the
Wall Street Journal.
(e) "Non-Employee Director" means a Director who either (i) is not
a current Employee or Officer of the Company or its parent or subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
8
<PAGE> 1
EXHIBIT 10.28
N65236-98-1-5400
Grant No.:N65236-98-1-5400
DARPA Order No.: F854/00
Program Code: P8310
Effective Date: 03 FEB 1998
Grantor: Space and Naval Warfare Systems Command (SPAWAR)
Systems Center Charleston
P.O. Box 190022
North Charleston, SC 29419-9022
Grantee: Genelabs Technologies, Inc.
505 Penobscot Drive
Redwood City, CA 94063
Grantee Identification Numbers/Codes:
DUNS No.: 180695348
TIN: 94-3010150
Cage Code: 0K7W3
Total Grant Amount: $13,592,769.00
Accounting and Appropriation Data:
ACRN: AA 9780400 1320 F854 P8310 2525 DPAM 8 0578 62383E S12123
JO #BMUE5X8I23 DOC #DRPA01980578/AA
REQ: N65236-8006-8F22 $3,775.985.00
Authority: This Grant is issued pursuant to the authority of 10 U.S.C. 2358.
GRANT SCHEDULE
1. Purpose: The purpose of this Grant is for Genelabs Technologies for building
a stockpiled arsenal of chemically protected, sequence-specific DNA- and
RNA-binding subunits that may be rapidly deprotected and assembled
combinatorially into target-specific dimer drugs to combat biological weaponry,
including novel pathogens and the human response to toxins. This effort shall be
carried out generally as set forth in the Grantee's proposal entitled
"Stockpiling Drug Subunits for Rapid Response to Biological Warfare" dated 10
SEP 1997, a copy of which is in the possession of both parties.
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N65236-98-1-5400
2. Term: The term of this Grant commences on the effective date of the grant and
continues through three (3) years thereafter.
3. Terms and Conditions: This Grant is subject to the General Terms and
Conditions set forth in the attached Exhibit A, entitled "DARPA Grant General
Terms and Conditions," and to any special terms and conditions in this Grant
Schedule.
4. Project Officer: The Project Officer representing the Government under this
Grant is Dr. Shaun B. Jones, Defense Advanced Research Projects Agency (DARPA),
3701 North Fairfax Drive, Arlington VA 22203-1714, telephone: (703) 696-4427.
5. Administrative Grants Officer: The Administrative Grants Officer (AGO) for
this Grant is the DCMC San Francisco, 1265 Borregas Avenue, Sunnyvale, CA 94089,
(408) 541-7099.
6. Principal Investigator: The Principal Investigator, Dr. Cynthia Edwards,
shall be responsible for this effort. The Grantee agrees to notify the Grantor
before changing the Principal Investigator.
7. This Grant is incrementally funded. The total amount of this Grant is
$13,592,769.00. The amount currently available for payment is $3,775,985.00,
which amount covers the period from the effective date of the grant through 31
JAN 1999. The Government's obligation for the difference of $9,816,784.00 is
contingent upon the availability of funds. Accordingly, no legal liability on
the part of the Government for payment of this difference shall exist unless and
until funds are made available to the Grantee by an amendment to the Grant.
8. Payments:
8.1. Payment Method: Upon acceptance of the terms and conditions of this
Grant and submission of a Standard Form (SF) 270, "Request for Advance or
Reimbursement," by the Grantee to the AGO, the Grantee shall be entitled to an
initial advance payment covering work to be performed during the first three
months of the Grant (and any preaward costs as applicable). Subsequent quarterly
payments will be initiated upon receipt of the Grantee's SF 270 (original + 2
copies) by the AGO who will certify and transmit it for payment to the DFAS
Columbus Center, DFAS-CO/Van Nuys Division, PO Box 182157, Columbus, OH
43218-2157, (1-800-553-2839). Cash advances shall be limited to the minimum
amounts needed and be timed to be in accordance with the Grantee's actual,
immediate cash requirements in carrying out the purpose of the Grant. The timing
and amount of cash advances shall be as close as is administratively feasible to
2
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N65236-98-1-5400
to the Grantee's actual disbursements for direct program costs and the
proportionate share of any allowable indirect costs.
8.2. AGO Certification: The AGO shall not certify the Grantee's request
for additional cash payments until the Grantee has first disbursed any funds
available from repayments to and interest earned on a revolving fund, program
income, rebates, refunds, contract settlements, audit recoveries and interest
earned on such funds.
9. Reports and Reports Distribution: Reports shall be furnished as specified
below:
9.1. Report Types:
a. Quarterly R&D Status Report - This report shall keep the Government
informed of Grantee activity and progress toward accomplishment of Grant
objectives and advancement in state-of-the-art on the research and development
involved.
b. Special Technical Report - This report, due as required, shall
document the results of a significant task, test, event or symposium.
c. Final Technical Report - This report, due upon completion of the
Grant, shall document the results of the complete effort.
d. Final Financial Status Report - This report, due 90 days after
completion of the Grant, shall be submitted on a Standard Form 269 or 269A. The
report shall be on a cash or accrual basis, depending on how the Grantee's
accounting records are normally kept.
e. Report of Federal Cash Transactions - This report, due 15 days
following the end of each quarter, shall be submitted on a Standard Form 272
and, when necessary, its continuation sheet, SF-272a. The Grantee shall provide
forecasts of Federal cash requirements in the "Remarks" section of the report.
9.2. Report Distribution:
<TABLE>
<CAPTION>
Addressees Report Types (9.1) Number of Copies
- ---------- ------------------ ----------------
<S> <C> <C>
Project Officer a., b., c. 2
d., e. 1
Administrative Grants Officer c. 1
d., e. 2
</TABLE>
3
<PAGE> 4
N65236-98-1-5400
<TABLE>
<CAPTION>
Addressees Report Types (9.1) Number of Copies
- ---------- ------------------ ----------------
<S> <C> <C>
DARPA/OASB Library c. 1
3701 North Fairfax Drive
Arlington, VA 22203-1714
Defense Technical Information Center c. 2
ATTN: OCC
8725 John J. Kingman Road, Suite 0944
Ft. Belvoir, VA 22060-6218
SPAWAR Systems Center Charleston
Grants Officer d., e. 1
</TABLE>
10. Title to Property: Title to all real property and equipment purchased by the
Grantee with grant funds shall vest in the Grantee in accordance with the
provisions of Office of Management and Budget (OMB) Circular A-110. Title to all
equipment shall vest in the Grantee upon acquisition.
11. Audit: The Comptroller General and the Inspector General of the Department
of Defense shall have direct access to sufficient records and information of the
Grantee, as they determine, to ensure full accountability for federal funds.
Audit requirements shall be as set forth in either OMB Circular A-128 or A-133,
whichever is appropriate as determined by the organizational nature of the
Grantee.
12. Uniform Administrative Requirements: This Grant shall be administered in
accordance with the provisions of OMB Circular A-110.
13. Uniform Cost Principles: This Grant is subject to the uniform cost
principles of either OMB Circular A-21 or A-122, whichever is appropriate as
determined by the organizational nature of the Grantee.
14 Drug-Free Requirements: This Grant is subject to the requirements of the
Drug-Free Workplace Act of 1988 and the Drug-Free Schools and Communities Act
Amendments of 1989.
15. Revocation: Either party may terminate this Grant, in whole or in part, upon
notice to and consultation with the other party, and upon agreement of the
parties that continuation of the project would not produce beneficial results
commensurate with the further expenditure of funds. In addition, the Grants
Officer may revoke this Grant upon a finding that the Grantee has failed
materially to comply with the provisions of the Grant.
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N65236-98-1-5400
16. Interest: The Grantee shall maintain grant funds in interest bearing
accounts. Interest earned on grant funds shall be remitted annually to the
Department of Health and Human Services, Division of Payment Management, P. O.
Box 6021, Rockville, MD 20852. A copy of each remittance shall be forwarded to
the AGO. Interest amounts up to $250.00 per year may be retained by the Grantee
for administrative expenses.
17. Program Income: Program income earned during the project period shall be
retained by the Grantee and shall be deducted from the total project or program
allowable cost in determining the net allowable costs on which the Government's
share of costs is based.
18. The United States is a State Party to the Convention on Biological and Toxin
Weapons (BWC). The contractor agrees that information learned or generated by
them as a result of this effort will not be used by them at any time to support
offensive biological warfare purposes.
FOR GRANTEE:
/S/ IRENE A. CHOW
- ---------------------------------------------
(Grantee)
President and Chief Executive Officer
- ---------------------------------------------
(Title)
February 3, 1998
- ---------------------------------------------
(Date)
FOR THE UNITED STATES OF AMERICA, SPACE AND
NAVAL WARFARE SYSTEMS COMMAND, SYSTEMS CENTER
CHARLESTON
By: /S/ GRANT OFFICER
----------------------------------------
(Grant Officer)
February 3, 1998
----------------------------------------
(Date)
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 1
EXHIBIT A
GRANT GENERAL TERMS AND CONDITIONS
ARTICLE
1. Federal Requirements
2. Order of Precedence
3. Administration and Cost Principles
4. Research Responsibilities
5. Amendment Grant
6. Prior Approvals
7. Principal Investigator
8. Restrictions on Printing
9. Publications
10. Acknowledgement of Sponsorship
11. Grantee-Acquired Property
12. Patent Rights
13. Rights in Technical Data and Computer Software
14. Human Subject
15. Animal Welfare
16. Research Involving Recombinant DNA Molecules
17. Foreign Travel Approval
18. Activities Abroad
19. Civil Rights Act
20. Clean Air and Water
21. U.S. Flag Carriers
22. Security
23. Military Recruiting on Campus
24. Subawards and Contracts/Subcontracts
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 2
1. Federal Requirements
This Grant is subject to the laws and regulations of the United States. If any
statute expressly prescribes policies or specific requirements that differ from
the requirements, standards, provisions, or terms and conditions of this Grant,
the provisions of the statute shall govern.
2. Order of Precedence
Any inconsistency or conflict in the terms and conditions specified in this
Grant shall be resolved according to the following order of precedence:
(a) The Grant Schedule
(b) Terms and Conditions In Exhibit A of this Grant
3. Administration and Cost Principles
Applicable to this Grant, and incorporated herein by reference, are the
requirements, standards, and provisions of the appropriate OMB Circulars and
attachments thereto, as revised as of the effective date of this Grant, listed
below. For purposes of this paragraph, the term "appropriate" is determined by
the organizational nature of the Grantee (educational institution, nonprofit
organization, state or local government).
(a) A-21, "Cost Principles for Educational Institutions"
(b) A-87, "Cost Principles for State and Local Governments"
(c) A-102, "Uniform Administrative Requirements for Grants-In-Aid to State and
Local Governments"
(d) A-110, "Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations"
(e) A-122, "Cost Principles for Nonprofit Organizations"
(f) A-128, "Audits of State and Local Governments"
(g) A-133, "Audits of Institutions of Higher Education and Other Nonprofit
Institutions"
7
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 3
4. Research Responsibility
The Grantee has full responsibility for the conduct of the research activity
supported by this Grant, in accordance with the Grantee's proposal, and the
terms and conditions specified in this Grant.
Grantees are encouraged to suggest or propose to discontinue or modify
unpromising lines of investigation or to explore interesting leads which may
appear during the development of the research. However, they must consult the
Project Officer through the Administrative Grants Officer before significantly
deviating from the objectives or overall program of the research originally
proposed.
5. Amendment of Grant
The only method by which this Grant can be amended is by a formal written
amendment signed by either the Grants Officer or the Administrative Grants
Officer. No other communications, whether oral or in writing, are valid.
6. Prior Approvals (Universities only)
The provisions of this Article are applicable to universities only.
a. All prior approvals required by OMB Circulars A-21 and A-110 are waived
hereby except for the following:
(1) Change of scope or objectives as required by Article 4 of the Terms and
Conditions entitled "Research Responsibility."
(2) Change of key personnel as required by Article 7 of the Terms and Conditions
entitled "Principal Investigator."
(3) Foreign travel as required by Article 17 of the Terms and Conditions
entitled "Foreign Travel Approval."
(4) Extension of the expiration period of this Grant.
b. Preaward Costs
(1) Grantees may incur preaward costs of up to ninety (90) days prior to the
effective date of the Grant award.
(2) Preaward costs as incurred by the Grantee must be necessary for the
effective and economical conduct of the project and the costs must be otherwise
allowable in accordance with the appropriate cost principles.
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 4
(3) Any preaward costs are made at the Grantee's risk. The incurring of preaward
costs by the Grantee does not impose any obligation on the Government, in the
absence of appropriations, if an award is not subsequently made or if an award
is made for a lesser amount than the Grantee expected.
c. Unobligated Balances
In the absence of any specific notice to the contrary, Grantees are authorized
to carry forward unexpended balances to subsequent funding periods.
7. Principal Investigator
Support for the project may not continue without the active direction of the
Principal Investigator (PI) approved for, and identified in, this Grant. If the
approved PI (1) severs his or her connection with the Grantee, or (2) otherwise
relinquishes active direction of the project, either permanently or for a
significant length of time (three months or more), then the Grantee must either:
(a) appoint a replacement PI with the approval of the Project Officer, or
(b) relinquish the Grant, in which case the Grant shall be terminated for
convenience in accordance with Attachment L of OMB Circular A-110.
8. Restrictions on Printing
Unless otherwise authorized in writing by the Grants Officer, reports, data, or
other written material produced using funds provided by this Grant and submitted
hereunder shall be reproduced only by duplicating processes and shall not exceed
5,000 single page reports or a total of 25,000 pages of a multiple page report.
These restrictions do not preclude the writing, editing, preparation of
manuscript or reproducible copy of related illustrative materials if required as
a part of this Grant, or incidental printing such as forms or materials
necessary to be used by the Grantee to respond to the terms of the Grant. To
satisfy the requirements of the Defense Technical Information Center, at least
one copy of each technical report submitted to the Defense Technical Information
Center must be black typing or reproduction of black on white paper or suitable
for reproduction by photographic techniques. Reprints of published technical
articles are not within the scope of this paragraph.
9. Publication
Publication of results of the research project in appropriate professional
journals is encouraged as an important method of recording and reporting
scientific information. One copy of each paper planned for publication shall be
submitted to the Project Officer simultaneously with its submission for
publication. Following publication, copies of published papers shall be
submitted to the Project Officer.
9
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 5
10. Acknowledgement of Sponsorship
(a) The Grantee agrees that in the release of information relating to this
Grant, such release shall include a statement to the effect that (1) the project
or effort depicted was or is sponsored by the Defense Advanced Research Projects
Agency, (2) the content of the information does not necessarily reflect the
position or the policy of the Government, and (3) no official endorsement should
be inferred.
(b) For the purpose of this article, information includes news releases,
articles, manuscripts, brochures, advertisements, still and motion pictures,
speeches, trade association proceedings, symposia, etc.
(c) Nothing in the foregoing shall affect compliance with the requirements of
the clause entitled "Security."
11. Grantee-Acquired Property
Title to all nonexpendable and expendable tangible personal property purchased
by the Grantee with grant funds shall be deemed to have vested in the Grantee
upon purchase, unless stated otherwise in this Grant schedule.
12. Patent Rights
Patent rights are as specified in 48 CFR 227 and 252, as amended, and 37 CFR
401.14 of July 1, 1987, which titles and sections are incorporated herein by
reference.
The Grantee shall utilize DD Form 882, Report of Inventions and Subcontracts,
for submission of interim and final invention reports. The DD Form 882 and all
invention disclosures shall be submitted to the Administrative Grants Officer
for proper disposition and forwarding to the Grants Officer.
13. Rights in Technical Data and Computer Software
Rights in Technical Data and Computer Software are as specified in the DoD FAR
Supplement (DFARS) clause 252.227.7013 which is incorporated herein by
reference.
14. Human Subjects
Grant funds may NOT be used for research that uses uninformed or nonvoluntary
humans as experimental subjects. The Grantee is responsible for the protection
of the rights and welfare of any human subjects involved in research,
development, and related activities supported by this Grant. The Grantee agrees
to comply, as appropriate, with the following directive and regulations which
are incorporated in the Grant by reference:
(a) DoD Directive 3216.2, DoD Directive 3216.2, "Protection of Human
Subjects in DoD
10
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 6
Supported Research," 7 January 1983;
(b) DHHS Regulations, "Protection of Human Subjects" (45 Code of Federal
Regulations, Part 46) of 26 January 1981, as amended; and,
(c) FDA Regulations (21 Code of Federal Regulations, subchapters A, D, and
H).
15. Animal Welfare
Any Grantee performing research on warm blooded vertebrate animals shall comply
with the Laboratory Animal Welfare Act of 1966, as amended, (7 U.S.C. 2131 et
seq.), and the regulations promulgated thereunder by the Secretary of
Agriculture (9 CFR, Subchapter A, Parts I through 4) pertaining to the care,
handling, and treatment of vertebrate animals held or used for research,
teaching, or other activities supported by Federal awards. In addition, the
Grantee shall comply with the provisions of DoD Directive 3216.1 and DFARS
clause 252.235-7003.
The Grantee is also expected to ensure that the guidelines described in DHHS
Publication No. (NIH) 85-23, "Guide for the Care and Use of Laboratory Animals,"
are followed and to comply with the U.S. Government Principles for the
Utilization and Care of Vertebrate Animals Used in Testing, Research, and
Training," included as an Appendix to the NIH Guide.
16. Research Involving Recombinant DNA Molecules
Any Grantee performing research involving recombinant DNA molecules and/or
organism and viruses containing recombinant DNA molecules agrees, by acceptance
of this award, to comply with the National Institutes of Health "Guidelines for
Research Involving Recombinant DNA Molecules," Nov 1984 (49 CFR 46266-46291, or
such later revision of those guidelines as may be published in the Federal
Register.
17. Foreign Travel Approval
Foreign travel requires liaison with the Project Officer for advance approval.
Grantee is cautioned that such advance approval could require 90 days in certain
situations.
18. Activities Abroad
The Grantee shall assure that project activities carried on outside the United
States are coordinated, as necessary, with appropriate Government authorities
and that appropriate licenses, permits, or approvals are obtained prior to
undertaking proposed activities. The awarding agency does not assume
responsibility for Grantee compliance with the laws and regulations of the
country in which the activity(ies) is (are) to be conducted.
19. Civil Rights Act
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 7
Grantees shall comply with the provisions of the Civil Rights Act of 1964, as
amended, and implementing regulations, and the Assurance of Compliance which the
Grantee must have on file prior to award of this Grant. Said Act, as amended,
and regulations are incorporated in this Grant by reference.
20. Clean Air and Water
If the amount of the Grant exceeds $100,000, the Grantee shall comply with the
Clean Air Act (42 U.S.C. 1857), as amended; the Water Pollution Control Act (33
U.S.C. 1251), as amended; Executive Order No. 11738; and the related regulations
of the Environmental Protection Agency (40 CFR, Part 15). Said regulations,
Executive Order, and Acts are incorporated in this Grant by reference.
21. U.S. Flag Carriers
The Grantee shall comply with Section 5 of the International Air Transportation
Fair Competitive Practices Act of 1974; the Comptroller General's Guidelines for
Implementation of said Act, March 12, 1976; and Comptroller General's Decision
B-138942, clarifying the guidelines. Such Act and guidelines are incorporated
into this Grant by reference.
22. Security
The Grantee shall not be granted access to classified information under this
Grant. If security restrictions should happen to apply to certain aspects of the
proposed research, the Grantee will be so informed. In the event that the
scientific work under this Grant may need classification, or involve access to
or storage of any classified data, the Government shall make its decision on the
need to classify, or require such access or storage, within 30 days after
receipt of written notice from the Grantee. If the decision is affirmative, the
Government shall invoke the clause in OMB Circular A-110, Attachment L,
paragraph 4.b. entitled, "Termination for Convenience."
23. Military Recruiting on Campus (Universities only)
As a condition for receipt of funds available to the Department of Defense (DoD)
under this award, the recipient agrees that it is not an institution of higher
education (as defined in 32 CFR part 216) that has a policy of denying, and that
it is not an institution of higher education that effectively prevents, the
Secretary of Defense from obtaining for military recruiting purposes: (A) entry
to campuses or access to students on campuses; or (B) access to directory
information pertaining to students. If the recipient is determined, using the
procedures in 32 CFR part 216, to be such an institution of higher education
during the period of performance of this agreement, and therefore to be in
breach of this clause, the Government will cease all payments of DoD funds under
this agreement and all other DoD grants and cooperative agreements to the
recipient, and it may suspend or terminate such grants and agreements
unilaterally for material failure to comply with the terms and conditions of
award.
24. Subawards and Contracts/Subcontracts
12
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GRANT NO. N65236-98-1-5400
EXHIBIT A - PAGE 8
The applicable Federal cost principles for subawards and contracts/subcontracts
under this Grant shall be those otherwise applicable to the type of organization
receiving the subaward, contract or subcontract. In addition to OMB Circular
A-21, the other applicable cost principles are:
(a) OMB Circular A-122, applicable to other nonprofit organizations, except
those specifically exempted by the circular.
(b) Subpart 31.2 of the Federal Acquisition Regulation (48 CFR 31.2), applicable
to commercial firms and those nonprofit organizations specifically exempted from
the provisions of OMB Circular A-122.
(c) OMB Circular A-87 (34 CFR 255), for state and local governments.
(d) 45 CFR 74, Appendix E, for hospitals.
13
<PAGE> 1
EXHIBIT 21.01
GENELABS TECHNOLOGIES, INC.
LIST OF REGISTRANT'S SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENT OWNED
STATE OR COUNTRY BY GENELABS
NAME OF ORGANIZATION TECHNOLOGIES, INC.
---- ---------------- ------------------
<S> <C> <C>
Accelerated Clinical Research Organization, Inc............. Delaware 100%
Genelabs Asia (Pte.) Ltd.................................... Singapore 100%*
Genelabs Biotechnology Co., Ltd............................. Taiwan 40%
Genelabs Diagnostic, Inc.................................... Delaware 100%
Genelabs Diagnostics (Pte.) Ltd............................. Singapore 100%**
</TABLE>
- ---------------
* Wholly-owned by Genelabs Diagnostic, Inc.
** Wholly-owned by Genelabs Asia (Pte.) Ltd.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-97336 and Form S-8 No.'s 333-5769, 33-85914, 33-81894, 333-4806
and 33-52250) pertaining to the Unit Purchase Agreement; the 1995 Stock Option
Plan; the 1994 Annual and Long-Term Incentive Based Compensation Program; the
1985 Employee Stock Option Plan and the 1991 Employee Stock Purchase Plan; the
1992 Restricted Stock Award Plan; and the 1987 Directors Stock Option Plan of
Genelabs Technologies, Inc. of our report dated February 11, 1998, with respect
to the consolidated financial statements of Genelabs Technologies, Inc. included
in this Annual Report on Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
Palo Alto, California
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997, AND NOTES THERETO,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,230
<SECURITIES> 16,869
<RECEIVABLES> 2,378
<ALLOWANCES> 364
<INVENTORY> 2,281
<CURRENT-ASSETS> 25,948
<PP&E> 11,250
<DEPRECIATION> 10,011
<TOTAL-ASSETS> 31,139
<CURRENT-LIABILITIES> 7,233
<BONDS> 0
0
9,682
<COMMON> 137,604
<OTHER-SE> (124,076)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 31,139
<SALES> 9,675
<TOTAL-REVENUES> 12,790
<CGS> 5,818
<TOTAL-COSTS> 5,818
<OTHER-EXPENSES> 21,247<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,378)
<INCOME-PRETAX> (12,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,897)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, AND EQUITY LOSS.
</FN>
</TABLE>
