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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-19222
GENELABS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 94-3010150
(STATE OR OTHER JURISDICTION OF (IRS 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 MARCH 10, 1999
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Aggregate market value of the voting stock held by
non-affiliates of the Registrant............................ $76,000,000
Number of shares of Common Stock outstanding................ 39,785,042
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III (Items 10,
11, 12 and 13) hereof.
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PART I
ITEM 1. BUSINESS.
All statements in this 10-K that are not historical are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning clinical trials, progress of drug discovery
programs, the Company's business plans, anticipated expenditures and the timing
and need for additional funds. Forward-looking statements may be identified by
terminology such as "may," "will," "expects," "anticipates," "intends," "plans,"
"believes," "potential" and similar expressions. Some of the factors that could
cause material differences in actual results of the Company's activities are
product development, regulatory approval and manufacturing risks. Additional
factors include intellectual property rights and the Company's relationships
with its collaborators and potential collaborators. These and additional factors
and risks are discussed in "Risk Factors" at the end of this Item 1.
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. ("Genelabs" or the "Company") is a
biopharmaceutical company that focuses on the discovery and development of
drugs. The Company's principal drug discovery program is based on proprietary
enabling technologies for creating gene-specific, small organic, DNA-binding
molecules. Related technologies are being applied to the discovery of novel
antiviral RNA-binding compounds. The lead development program is in its second
Phase III clinical trial as a new therapy for systemic lupus erythematosus
("SLE"), following successful completion of the initial Phase III trial in 1997.
The Company's business is primarily comprised of drug discovery and
development programs. The Company also has investments in other companies, which
include Genelabs Diagnostics Pte. Ltd. ("GLD") and Genelabs Biotechnology Co.,
Ltd. ("GBL"). GLD, which is based in Singapore, develops, manufactures and
distributes tests for the diagnosis of infectious disease. While Genelabs has
previously consolidated the results of GLD in its financial statements, the
Company recently adopted a plan to divest this subsidiary and, accordingly, no
longer consolidates GLD but instead accounts for it as a discontinued operation.
GBL, which is based in Taiwan, develops, manufactures and distributes
pharmaceutical products for the Asian market.
DRUG DISCOVERY PROGRAM
Genelabs' research focus is to produce drug candidates targeted to specific
genes using its novel drug discovery approach. The Company believes its
DNA-binding program, an integrated platform of drug discovery technologies, has
the potential to create an entirely new class of pharmaceutical products. While
traditional drugs typically affect the activity of proteins derived from the
expression of genes, Genelabs' drug discovery approach targets the
disease-causing genes directly. The Company believes its techniques for
discovering drug candidates are applicable to a number of diseases and other
therapeutic areas.
The Company's DNA-binding drug discovery program is comprised of an
integrated platform of technologies that include:
- High-throughput screening of random and structure-biased chemical
libraries to select small DNA-binding molecules, or drug subunits, that
are the building blocks for Genelabs' drug candidates.
- Multiple proprietary and nonproprietary assay systems, including the
proprietary Merlin(TM) assay system, for identifying the DNA
sequence-binding preferences of the DNA-binding molecules. These assays
characterize the specific DNA sequences to which the compounds will bind.
- Chemistry capabilities for generating additional DNA-binding drug
subunits and for combining the DNA-binding molecules in multiple
combinations to create molecules that bind to longer, more gene-specific
strands of DNA.
- Gene promoter analysis for discovering and validating key DNA sequences
of disease-causing genes. This analysis determines the specific DNA
sequence targets for which Genelabs will design a drug.
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- Generation of lead compounds using cell-based assays to validate the
effects of a DNA-binding molecule against a specific gene target.
The initial phase of the drug discovery process utilizes Genelabs'
expertise and proprietary technologies to identify and characterize small
organic molecules, called monomers, that bind to short sections of DNA. A
database of information on the monomer's DNA-binding properties forms the basis
for selecting drug candidate subunits. In the next phase, based on information
about the DNA sequences of disease-causing genes, the Company links these
monomers together in selected combinations to form dimers that bind to longer (8
to 12 base pair) sections of DNA. Genelabs believes that the dimers, which
represent potential drug candidates for further optimization into drugs, will be
sufficiently gene-target specific to produce the desired therapeutic effect with
minimal toxicity.
In addition to technologies for identifying and characterizing DNA-binding
molecules, the Company has related technologies for the discovery and creation
of novel antiviral RNA-binding molecules. Genelabs believes that drug candidates
in this program may have advantages over existing antiviral therapeutics and
could address large unmet market needs.
To date, the Company's technologies have identified DNA sequence-binding
preferences for many molecules. Several compounds have been designed and
synthesized from these molecules. In addition, the Company has performed tests
that demonstrated predicted effects on the expression of target genes. In these
tests, Genelabs' scientists engineered a dimer-binding DNA sequence into the
regulatory site of a test gene and inserted the engineered test gene into
cultured human cells, the results of which demonstrated a dose dependent
alteration in the expression of the targeted test gene. Tests performed in
unaltered bacterial cells on dimer binding sites also demonstrated alterations
in the expression of test genes. These data demonstrated that the dimer affects
the targeted gene and is not toxic at the levels shown to alter gene expression.
Genelabs has already identified key DNA sequences in several
disease-related genes that are likely to be effective drug targets. The Company
is actively engaged, on its own and in collaboration with corporate partners, in
synthesizing drug candidates that may alter the expression of these medically
important gene targets. The Company believes that its focus on sequence
specificity will produce pharmaceutical products that are more efficacious and
less toxic than currently known DNA-binding drugs.
Through its DNA- and RNA-binding technologies, the Company believes it has
an entirely new approach to identifying therapeutics for disease intervention.
The Company's business strategy is to identify, develop and commercialize a
broad portfolio of lead compounds from its integrated drug discovery program,
both independently and in collaboration with established pharmaceutical and
biotechnology companies. Genelabs maintains a flexible business model that
allows its technology to be used in other applications for which the Company is
also exploring corporate collaborations.
The Company is in its third year of a collaborative research and license
agreement with DuPont Pharmaceuticals Company ("DuPont") under which Genelabs is
working on a number of target genes. This agreement provides Genelabs with
research funding, milestone payments upon reaching predetermined research and
development objectives, and royalties upon the commercial sale of products
resulting from the collaboration. Additionally, the Company is in its second
year of a research grant from the Defense Advanced Research Projects Agency
("DARPA") to apply Genelabs' DNA-binding and RNA-binding technologies to the
discovery of drugs that can be used as countermeasures to agents of biological
warfare. Genelabs receives research funding and has the right to commercialize
any invention it makes during the term of the grant. Genelabs currently is
pursuing additional drug discovery research collaborations with various other
pharmaceutical and biotechnology companies.
DRUG DEVELOPMENT PROGRAM: GL701 FOR 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. According to the American College of
Rheumatology, SLE affects approximately 150,000 patients in the U.S., and
Genelabs believes that there are at least three times
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that number of patients worldwide. 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.
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. Genelabs has exclusive worldwide rights under U.S. patents granted to
Stanford University for the use of DHEA to treat SLE. Genelabs has sublicensed
Asian marketing rights, excluding Japan, to GBL.
Genelabs has completed its first Phase III trial of GL701 for SLE. This 191
patient double-blind, placebo controlled clinical trial was designed to evaluate
GL701's ability to reduce steroid dependency in women with mild to moderate SLE.
All women in this trial previously required prednisone or other steroids for
their treatment. Patients in the trial received daily doses of either 200 mg of
GL701, 100 mg of GL701 or placebo for seven to nine months. Data presented to
the American College of Rheumatology on behalf of the Company showed that
patients who received 200 mg daily doses of GL701 achieved the study's primary
endpoint at a higher rate than patients who received placebo. This primary
endpoint was a sustained reduction in their steroid dose to 7.5 mg per day or
less. The 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 those who received daily doses of 200 mg of GL701
achieved the primary endpoint compared to 29% of those who received placebo.
Patient enrollment in the Company's second Phase III trial was completed in
March 1998 with approximately 380 patients. This double-blind, placebo
controlled trial is designed to determine whether GL701 can improve clinical
outcome or disease symptoms. Patients in the trial receive daily doses of either
200 mg of GL701 or placebo for one year. The Company anticipates the clinical
portion of this trial to be completed at the end of March 1999 with preliminary
results available approximately mid-year 1999. Like the results of all
double-blind clinical trials, the results of this clinical trial are uncertain.
Genelabs will not know how GL701 has performed in this trial until the data
analysis is completed. For further discussion, see "Risk Factors -- Clinical
trial results are unpredictable."
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 such as cancer and AIDS therapies. The FDA also granted Orphan Drug
status to GL701 for the treatment of SLE, a designation that provides up to
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. In late March 1999, the FDA designated GL701 for SLE as a Fast Track
product. Fast Track designation provides for expedited submission and review of
a New Drug Application.
INVESTMENTS AND OTHER PROGRAMS
Diagnostics Business -- Genelabs' wholly owned diagnostics subsidiary,
Genelabs Diagnostics Pte. Ltd., is headquartered in Singapore, which houses its
manufacturing, research and development, administrative and Asian sales
functions. Marketing, sales and distribution for Europe, the Middle East and
Africa are managed from offices in Geneva, Switzerland, while these functions
for North and South America are managed from the Company's corporate
headquarters in Redwood City, California. GLD markets both directly and through
a network of distributors. GLD's products include Western Blot assays, rapid and
ELISA tests. These products are used primarily for the diagnosis of human
immunodeficiency virus ("HIV"), human T-cell leukemia virus ("HTLV"), and
hepatitis viruses, in addition to others. GLD also manufactures hepatitis B
surface antigen and related raw materials used for the production of diagnostic
kits.
In or around May 2000, Genelabs' Series A Convertible Preferred Stock
("Preferred Stock") is convertible into one of two options. The first of these
options is conversion into 49.99% of Genelabs' diagnostics business. This option
also requires the Preferred Stockholders to purchase the remaining 50.01% of
Genelabs' diagnostics business at its then fair market value. In the event that
this conversion option is exercised, Genelabs will no longer own its diagnostics
subsidiary. If the Preferred Stock is not converted into
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Genelabs' diagnostics business, the Preferred Stock will be converted into
Genelabs Technologies, Inc. common stock based upon a formula. If this is the
manner in which the Preferred Stock is converted, Genelabs plans to divest its
interest in GLD through a sale of this subsidiary. As a result, under either
conversion scenario the Company will not maintain a continuing interest in its
diagnostics business, and, accordingly, Genelabs has accounted for GLD as a
discontinued operation. The Company is currently exploring other options for
earlier divestment of its diagnostics subsidiary. However, Genelabs can provide
no assurance as to its ability to obtain favorable terms upon the eventual
divestment of GLD, whether through conversion of the Preferred Stock or any
other manner of divestment.
Asian Biopharmaceutical Investment -- Genelabs' Taiwan-based affiliate,
Genelabs Biotechnology Co. Ltd., develops, manufactures and distributes
pharmaceutical products in Asia. Since its formation in late 1995, GBL has
purchased a pharmaceutical manufacturing plant, acquired rights to manufacture
and distribute pharmaceutical products in parts of Taiwan, and acquired a
pharmaceutical product marketing organization. In 1998, through a GBL equity
offering in which Genelabs did not contribute any cash and through the sale of a
portion of its investment, Genelabs reduced its ownership of GBL from 40% to
16%. Approximately 60% of the GBL shares owned by Genelabs were not paid for in
cash and contain restrictions preventing their immediate sale; Genelabs intends
to sell the remainder of its holdings in GBL.
Novel Immunomodulatory Genes -- The Company's scientists have isolated
certain novel immunomodulatory genes on human chromosome 5 which may be
associated with asthma. Patent applications have been filed in the U.S. to claim
these novel sequences, and Genelabs is pursuing funding through government
grants and external collaborations in order to investigate the biological
function and commercial potential of these genes.
Novel Viruses -- In connection with its discovery of the hepatitis E virus
("HEV"), Genelabs has granted SmithKline Beecham p.l.c. ("SB") an exclusive
worldwide royalty-bearing license to make, use and sell an HEV vaccine. SB is
currently in the process of developing this vaccine. In addition, Genelabs has
granted Abbott Laboratories a royalty-bearing, non-exclusive worldwide license
to develop and commercialize diagnostic products for HEV.
In connection with its discovery of the hepatitis G virus ("HGV"), Genelabs
has entered into royalty-bearing license agreements with Roche Diagnostics GmbH,
Chiron Corporation and Ortho Diagnostic Systems Inc. to develop and
commercialize diagnostic products 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.
GL331: Multiple Drug Resistant Cancers -- Genelabs and GBL are currently
developing GL331, a topoisomerase II inhibitor, 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, which
determined the maximum tolerable dose of the drug. GBL is initiating a Phase II
study of this agent in patients with small cell lung cancer. Depending on the
results of this study, Genelabs may further develop GL331.
PATENTS AND LICENSES
The Company seeks patent protection for its proprietary technologies and
potential products in the U.S. and internationally. Genelabs owns 26 issued U.S.
patents, eight of which cover the novel drug discovery technologies. The
remaining 18 issued U.S. patents cover GL701, the Company's HEV and HGV
discoveries, immunomodulatory genes, and other proprietary technologies.
Genelabs also owns 39 international patents that cover similar claims to its
U.S. patents. In addition, Genelabs possesses many pending patent applications
covering the Company's novel drug discovery technologies and other proprietary
technologies, but Genelabs cannot estimate how many of these pending patent
applications will be granted as patents. The Company also has exclusive and
non-exclusive licenses under a number of patents and patent applications owned
by third parties.
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Genelabs(R) and the Genelabs logo are registered trademarks of Genelabs
Technologies, Inc. Merlin(TM) and Viria(TM) are trademarks of Genelabs. This
Form 10-K also includes trade names and trademarks of companies other than
Genelabs.
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 the FDA may request 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"). The Company can provide
no assurance that the results of the Company's second Phase III trial will
warrant continuing the development of GL701 or proceeding with an NDA.
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.
Each manufacturing establishment must be determined to be adequate by the
FDA before approval of product manufacturing. 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.
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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 or biological product is likely to take a number of years and
involve the expenditure of substantial resources.
The Company's 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.
EMPLOYEES
As of March 10, 1999, the Company had 91 full time employees. 70 employees
were involved in research and development, and 21 were in administration. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage.
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RISK FACTORS
There are a number of risk factors that should be considered by Genelabs'
shareholders and prospective investors. It is not possible to comprehensively
address all risks that exist, but the following risks in particular should be
considered.
- Clinical trial results are unpredictable
- Regulatory approvals are uncertain
- Research programs are likely to require additional funds
- Genelabs has limited sales, marketing and distribution capabilities
- Genelabs is in an early stage of drug discovery
- The Company depends on key employees for the execution of its business
plan
- Competition in biotechnology is intense
- Patent and trade secret protection is uncertain
- The Company is dependent on outside manufacturing and supplier sources
- The Company's stock price is volatile
A more detailed discussion of each of these risk factors follows.
CLINICAL TRIAL RESULTS ARE UNPREDICTABLE
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. The Company
cannot ensure that 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. In 1999, Genelabs expects to
receive the data from its second Phase III trial of GL701 for SLE and to decide
on whether to continue with the development of this drug candidate. Many
biopharmaceutical companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. The
Company can provide no assurance that it will view the results of this second
Phase III trial of GL701 for SLE as sufficient to support proceeding with an NDA
or continuing development of the drug candidate.
REGULATORY APPROVALS ARE UNCERTAIN
The production and marketing of the Company's products are subject to
rigorous requirements by the FDA as described in more detail under the caption
"Government Regulation" in Item 1 of this Form 10-K, and also by comparable
agencies in other countries and by state regulatory authorities. 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, Genelabs can
provide no assurance that the FDA will view the results of the Company's Phase
III trials of GL701 as sufficient to serve as the basis for filing or approval
of an NDA.
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Even if the Company obtains regulatory approval for GL701, identification
of certain side effects after it is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval or require
reformulation, additional testing, and changes in labeling of the product. The
Company's inability to obtain or maintain requisite governmental approvals, the
identification of side effects or other factors could delay or preclude the
Company from further developing or marketing GL701, 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.
The Company is also subject to other regulations 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.
RESEARCH PROGRAMS ARE LIKELY TO REQUIRE ADDITIONAL FUNDS
The Company has incurred losses in each year since its inception and has
accumulated approximately $130 million in net losses through December 31, 1998,
including a net loss of $6.6 million in 1998. The Company anticipates realizing
a net loss at least until 2000, and profitability thereafter is subject to
significant uncertainty. Genelabs cannot provide 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. This financing
may dilute existing shareholders or provide certain rights to Genelabs' assets.
Genelabs fundraising strategy is to minimize dilution to current
shareholders to the extent feasible in the currently unfavorable equity market
for small capitalization biotechnology companies. The Company's business plan
involves raising funds primarily through corporate collaborations and license
agreements, and secondarily through sales of assets that are not essential for
the Company's core business of drug discovery and drug development. Genelabs is
currently pursuing additional drug discovery research collaborations and GL701
licensing agreements, but can provide no assurance that collaborations or
license agreements can be obtained on acceptable terms, if at all. The Company
is also pursuing sales of several assets that it does not consider essential for
its primary business, including its interest in GLD and GBL. Genelabs can
provide no assurance that it will be able to find buyers willing to purchase
these assets within an acceptable timeframe or on commercially favorable terms,
if at all.
The unavailability of additional funds through the above-described
potential financing sources 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.
GENELABS HAS LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES
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. If the Company successfully develops GL701 and
obtains FDA approval, there is a possibility that it may not be economically
feasible for Genelabs to commercially introduce the product.
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DHEA, the active ingredient in GL701, 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 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 exclusive licenses under U.S.
patents relating to the use of GL701 to treat SLE and to reduce steroid dosage
in SLE patients, Genelabs is unable to obtain patent protection for the compound
itself.
GENELABS IS IN AN EARLY STAGE OF DRUG DISCOVERY
Genelabs' drug discovery technologies are at an early stage of development,
and its product candidates are varying stages 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.
Genelabs' drug discovery technologies will require substantial additional
research and development efforts prior to any commercial use, including
extensive preclinical testing and clinical trials as well as potentially lengthy
regulatory approval. There can be no assurance that any of these products or
technologies 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.
THE COMPANY DEPENDS ON KEY EMPLOYEES FOR THE EXECUTION OF ITS BUSINESS PLAN
The introduction of chemistry capabilities into the Company's research
department required restructuring of the responsibilities of some scientists.
Genelabs' success depends on the services of key employees in executive and
research and development positions. The April 1, 1999 retirement of the
Company's President and Chief Executive Officer and her appointment to Chairman
will result in her spending relatively less time at the Company. The loss of the
services of key executives or other employees could have a material adverse
impact on Genelabs' ability to execute its business plan.
COMPETITION IN BIOTECHNOLOGY IS INTENSE
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
products and technologies, Genelabs faces competition from a number of major
pharmaceutical companies as well as emerging biotechnology companies. 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 resources and more 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
9
<PAGE> 11
companies to acquire technologies from these entities also is intensifying.
These institutions also compete with Genelabs to recruit scientific personnel
and to establish proprietary technology positions.
The Company faces particularly significant competition from a number of
large companies with respect to the Company's diagnostic business. Many of these
competitors have substantially greater resources and more extensive marketing
capabilities than the Company's diagnostics subsidiary. These factors may enable
these competitors to develop products competitive with or superior to GLD's and
may adversely impact the Company's ability to successfully divest its
diagnostics business.
PATENT AND TRADE SECRET PROTECTION IS UNCERTAIN
The biotechnology, pharmaceutical and diagnostic industries are subject to
conflicting patent rights of various parties. The patent positions of all
companies in these industries, including Genelabs, are uncertain and involve
complex legal and factual issues. A patent application may be rejected or the
claims may be significantly altered or narrowed before a patent issues. As a
consequence, Genelabs does not know whether any of its patent applications will
result in the issuance of patents. Genelabs can provide no assurance that its
patents will effectively protect its technologies. The priority of patent
applications is determined under complex and sometimes conflicting U.S. and
international laws. Therefore, Genelabs cannot assure that its patent
applications would have priority over competitors' patent applications, if any.
Should the priority of a patent application come into question, Genelabs may
have to participate in interference proceedings to determine priority of
invention, which could result in substantial costs, even if the eventual outcome
is favorable. Additionally, Genelabs may have to participate in opposition
proceedings in European and other countries prior to the granting of a patent.
The biotechnology industry is very competitive and other companies may own
patents and applications and other proprietary rights relating to products or
technology similar Genelabs' technologies. Genelabs cannot provide assurance
that any patents it owns or controls will protect it against infringement
litigation or afford commercially significant protection of its technology. 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 be different.
If another company were to successfully bring legal action against Genelabs
claiming patent or other intellectual property right infringements, Genelabs
could be liable for damages and prevented from using or selling such products or
technologies. Genelabs might also be required to obtain a license to use,
manufacture or sell the affected product or technology. Genelabs cannot provide
assurance that it will prevail in any dispute regarding its intellectual
property or that it will be able to obtain an acceptable license. Any
litigation, whether or not resolved in favor of Genelabs, could be expensive and
time-consuming, could consume substantial management resources and could have a
material adverse effect on Genelabs' 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 even though the Company has obtained U.S.
patents relating to the use of GL701 to treat SLE and reduce steroid dosage in
SLE patients, Genelabs is unable to obtain patent protection for the compound
itself.
There may be intellectual property owned by third parties that is important
to Genelabs' drug discovery programs of which Genelabs is not currently aware.
Furthermore, in the future others may obtain patents or develop proprietary
rights necessary or useful for the operation of Genelabs' business. Certain of
these potentially competing patents or rights may be sufficiently broad to
prevent or delay the Company from practicing its technology, and Genelabs may
need to obtain licenses under these patents.
Genelabs also relies on unpatented proprietary technology including trade
secrets, know-how and continuing technological innovation to enhance and develop
its competitive position. The Company seeks to protect these types of
information through a policy of having its employees, consultants and advisors
execute confidentiality and assignment of invention agreements. Genelabs cannot
assure that these agreements will not be breached or that Genelabs will have
adequate legal recourse in case of such breach. It is possible that others will
independently develop the same or similar proprietary information, and Genelabs
cannot provide assurance about protecting its rights in unpatented proprietary
technology. Furthermore, there can be no
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<PAGE> 12
assurance that others have not obtained or will not obtain patent protection
that will preclude the Company from using its unpatented proprietary technology.
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 diagnostic
subsidiary. 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.
In particular, one of GLD's competitors and the owner of a patent have filed a
claim in Singapore alleging that two GLD products infringe their patent as
described in Item 3 -- Legal Proceedings. While the Company and its diagnostics
subsidiary believe there are substantial defenses and they are defending the
suit vigorously, it is possible that the competitor will receive monetary
damages and injunctive relief. Such an outcome could have a material adverse
effect on the Company. There can be no assurance that the Company's diagnostic
subsidiary will be able to continue manufacturing or selling its products
without obtaining licenses to such patents or without modifying certain of its
products to avoid the claims in such patents. The Company cannot assure that the
diagnostic subsidiary will be able to obtain acceptable licenses to such
patents. This could have a material adverse effect on the diagnostics business
and the value of Genelabs' investment in it.
THE COMPANY IS DEPENDENT ON OUTSIDE MANUFACTURING AND SUPPLIER SOURCES
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. 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. In
particular, GL701 currently is supplied to the Company by a limited number of
sources. The disqualification or loss of one of these suppliers could have a
material adverse effect on the Company because of difficulties and costs in
obtaining and qualifying alternate suppliers. 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 or an interruption in supply could impair the Company's ability to
manufacture and market its products. If Genelabs is unable to renew or extend an
agreement with a third party manufacturer or supplier, if an existing agreement
is terminated, or if a third party manufacturer or supplier otherwise cannot
meet our needs for a product, the Company may not be able to obtain an
alternative source of manufacture or supply. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
The year 2000 issue is a result of computer programs being written using
only two digits to define the applicable year. Any date-sensitive computer
programs, hardware or embedded chips may recognize a date ending in "00" as 1900
rather than 2000. This could result in a system failure or a miscalculation that
causes operating disruptions. A system failure or operating disruption at one of
our key manufacturers or suppliers could result in their failure to provide
Genelabs with adequate supplies of products or services, potentially
11
<PAGE> 13
impacting Genelabs' ability to engage in its planned business activities. While
Genelabs has obtained representations that its key suppliers are year 2000
compliant, the Company cannot provide assurance that their computer systems will
adequately handle all year 2000 issues, and such noncompliance could have an
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of Year 2000."
THE COMPANY'S STOCK PRICE IS VOLATILE
The market price of the Company's common stock, like the stock prices of
many publicly traded biopharmaceutical companies, has been and will probably
continue to be highly volatile. A variety of events can impact the stock price.
Several of the events concerning Genelabs that can impact the price are
discussed in this Risk Factor section. Numerous events occurring outside of
Genelabs' control may also impact the price of Genelabs common stock. Securities
class action lawsuits have been brought against other companies following
periods of volatility in the market price of their common stock. This type of
litigation, if brought against Genelabs, could result in substantial costs and
diversion of management's time, which could materially affect our business plan,
financial condition and results of operations.
ITEM 2. PROPERTIES.
The Company leases its principal research, clinical development and office
facilities under an operating lease expiring in November 2002. This location
encompasses approximately 50,000 square feet located in Redwood City,
California, with an annual base rent of $855,000. Genelabs believes that this
facility is adequate for its current needs and that suitable additional or
substitute space will be available as needed to accommodate the Company's
operations.
ITEM 3. LEGAL PROCEEDINGS.
On October 5, 1998, Institut Pasteur and Pasteur Sanofi Diagnostics
(collectively, the "Plaintiffs") filed a Writ of Summons in the High Court of
the Republic of Singapore against GLD, the wholly-owned diagnostics subsidiary
of Genelabs and Nagase Singapore Pte. Ltd., GLD's Malaysian distributor. In the
Writ, the Plaintiffs allege that GLD has, by making, using and selling HIV-2
Western Blot diagnostic products, infringed a Singaporean patent owned by
Institut Pasteur and exclusively licensed to Pasteur Sanofi. The Plaintiffs are
seeking injunctive relief and damages in an unspecified amount. See "Risk
Factors -- Patent and trade secret protection is uncertain." GLD believes that
it has substantial defenses and is defending the suit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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<PAGE> 14
ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT.
The executive officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Irene A. Chow, Ph.D. ......... 60 Chief Executive Officer, President and Director
through March 31, 1999. Chairman of the Board of
Directors effective April 1, 1999.
James A. D. Smith............. 40 Chief Operating Officer through March 31, 1999.
President effective April 1, 1999.
Cynthia A. Edwards, Ph.D. .... 45 Chief Scientific Officer
Marc Gurwith, M.D. ........... 59 Vice President, Drug Development and Chief
Medical Officer
Rich B. Meyer, Jr., Ph.D. .... 55 Vice President, Research
Debra Catz Bannister.......... 46 Vice President, Corporate Communications and
Investor Relations
Matthew M. Loar............... 36 Vice President, Finance
Gilbert R. Mintz, Ph.D. ...... 47 Vice President, Business Development
Marco F. Rosa................. 48 Vice President, Human Resources
Heather Criss Keller.......... 33 Director of Legal Affairs
</TABLE>
Irene A. Chow has been Chief Executive Officer and President since July
1995. As part of her planned transition to retirement, Dr. Chow becomes Chairman
of the Board of Directors effective April 1, 1999, and resigns from her role as
President and Chief Executive Officer. 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. 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.
Effective April 1, 1999, Mr. Smith becomes President. From June 1995 through
September 1996 he was Vice President, Marketing and Business Development, and
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 Chief Scientific Officer since October 1998.
From July 1995 through October 1998 she was Vice President, Research. From 1994
to July 1995 Dr. Edwards was Vice President, Pharmaceutical Research, preceded
by various Director and Scientist positions at 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.
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.
Rich B. Meyer, Jr. has been Vice President, Research since October 1998.
From 1993 to October 1998 he was Vice President, Research and Development and
Chief Scientific Officer of Epoch Pharmaceuticals,
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<PAGE> 15
Inc., a company he joined in 1986. Before joining Epoch, Dr. Meyer was a group
leader at the Nucleic Acid Research Institute and Associate Professor of
Medicinal Chemistry and Acting Associate Dean for Research of the Graduate
School at Washington State University. He has also been Assistant Professor in
the Department of Pharmaceutical Chemistry at the University of California, San
Francisco. Dr. Meyer received his Ph.D. in Chemistry from the University of
California, Santa Barbara.
Debra Catz Bannister has been Vice President, Corporate Communications and
Investor Relations since April 1996. From 1993 until April 1996 she was
Director, Corporate Relations at CV Therapeutics. Previously, she served in
similar positions at several biotechnology companies including Aviron, Synergen
and as the first investor relations manager at Genentech. Ms. Bannister has also
been a Senior Consultant at Regis McKenna, Inc., providing corporate
communications and investor relations counsel to high technology and
biotechnology clients. She began working in the biotechnology industry in 1983
and previously held a number of positions in advertising and marketing
communications.
Matthew M. Loar has been Vice President, Finance since January 1999. From
November 1996 until January 1999 he was Director of Finance and Controller, and
from September 1995 through November 1996 he was Finance Manager. From 1991
through September 1995 he was Corporate Accounting Manager at CBR Cement
Corporation and prior to that was Audit Manager at Coopers & Lybrand. Mr. Loar
is a Certified Public Accountant and has a B.A. in Legal Studies from the
University of California, Berkeley.
Gilbert R. Mintz has been Vice President, Business Development since May
1998. Prior to joining the Company, he was Vice President, Marketing and
Business Development at Anergen from March 1997 to May 1998, and was Director,
Marketing and Business Development at Cygnus, Inc. from 1994 until 1997. Dr.
Mintz has also held the position of Director of Licensing and Business
Development with Trega Biosciences prior to joining Cygnus. Dr, Mintz received
his Ph.D. in biochemistry from Washington University in St. Louis and completed
his post-graduate training at Johns Hopkins School of Medicine, Department of
Biological Chemistry. He received his B.S. in Chemistry from the University of
Pittsburgh.
Marco F. Rosa has been Vice President, Human Resources since October 1996.
From 1994 through September 1996, he was Senior Human Resources Business
Strategist for Sony Electronics, Inc. From 1992 through 1994 he was Director of
Human Resources at Centigram Communications and before then held senior human
resource positions at Conner Peripherals and the General Electric Company. Mr.
Rosa received his M.A. in Counseling Psychology from New York University and his
B.A. in Psychology from St. Michael's College. He also served as a Captain in
the United States Air Force.
Heather Criss Keller has been Director of Legal Affairs since October 1998.
From September 1996 until July 1998 she was Senior Corporate Counsel at
Heartport, Inc. Prior to joining Heartport, Ms. Keller was an associate with the
law firm of Brobeck, Phleger & Harrison LLP. Ms. Keller received a J.D. from
Vanderbilt University School of Law and a B.A. from Duke University.
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<PAGE> 16
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 of the
Company's common stock as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
1st Quarter.................................. 4 5/8 2 7/16
2nd Quarter.................................. 4 1/32 2 3/4
3rd Quarter.................................. 3 3/32 1 1/2
4th Quarter.................................. 3 1/16 1 1/2
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 March 10, 1999, there were approximately 700 holders of record of
Genelabs Common Stock. In addition, there were approximately 7,800 beneficial or
"street-name" stockholders.
Genelabs 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 FINANCIAL DATA.
The selected financial data presented below summarizes certain financial
information from the Company's consolidated financial statements. The data
presented below reflects GLD as a discontinued operation.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue................... $ 7,800 $ 3,115 $ 2,006 $ 8,499 $ 4,474
Research and development
expenses........................ 12,615 12,022 9,647 11,451 13,821
General and administrative
expenses........................ 4,349 4,508 5,063 5,474 5,310
Loss from continuing operations.... (8,139) (12,038) (11,482) (7,823) (14,521)
Net loss........................... (6,605) (12,897) (11,397) (10,511) (15,609)
Loss per share from continuing
operations...................... (0.21) (0.31) (0.32) (0.28) (0.63)
Net loss per share................. (0.17) (0.33) (0.32) (0.38) (0.68)
DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.......... $20,301 $ 21,099 $ 30,465 $ 22,557 $ 4,584
Working capital.................... 12,310 15,793 25,805 15,289 1,015
Total assets....................... 26,807 29,925 41,908 33,862 13,009
Long-term debt..................... -- -- -- -- 2,828
Shareholders' equity............... 17,786 23,210 35,924 25,752 5,741
</TABLE>
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<PAGE> 17
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. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning clinical trials, progress of drug discovery
programs, the Company's business plans, anticipated expenditures and the timing
and need for additional funds. Forward-looking statements may be identified by
terminology such as "may," "will," "expects," "anticipates," "intends," "plans,"
"believes," "potential" and similar expressions. Some of the factors that could
cause material differences in actual results of the Company's activities are
product development, regulatory approval and manufacturing risks. Additional
factors include intellectual property rights and the Company's relationships
with its collaborators and potential collaborators. These and additional risks
are discussed under "Risk Factors" in Item 1 and elsewhere in 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. is a biopharmaceutical company that focuses on
the discovery and development of drugs. The Company's principal drug discovery
program is based on proprietary enabling technologies for creating
gene-specific, small organic, DNA-binding molecules. Related technologies are
being applied to the discovery of novel antiviral RNA-binding compounds. The
lead development program is in its second Phase III clinical trial as a new
therapy for systemic lupus erythematosus, following successful completion of the
initial Phase III trial in 1997.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Genelabs has adopted a plan to divest its diagnostics operations. As a
result, the Company's financial statements have been reclassified to reflect the
results of Genelabs' diagnostics subsidiary as a discontinued operation for all
periods that the financial statements are presented. This reclassification
changes how the diagnostics subsidiary is incorporated into the financial
statements, but does not change the previously reported net loss or
shareholders' equity. With the diagnostics subsidiary reported as a discontinued
operation, its net assets and results of operations are now reported in one
line-item on each of the balance sheets and statements of operations, rather
than being combined into the individual line-item descriptions.
1998 COMPARED TO 1997
The net loss decreased 49% in 1998, to $6.6 million from $12.9 million in
1997. The decrease in net loss was due to increased contract revenue and a gain
on the sale of an investment, partially offset by slightly higher operating
expenses.
Contract revenues increased 150% in 1998, to $7.8 million from $3.1 million
in 1997. The increase is attributable to two primary factors. The first of these
was recognition of approximately $3.5 million in revenue under a grant from the
Defense Advanced Research Projects Agency for development of agents to
counteract biological warfare. Second, the Company received a $1 million payment
from SmithKline Beecham for expansion of their rights to market a vaccine they
are developing for the hepatitis E virus under license from Genelabs.
Operating expenses increased 3% in 1998, to $17.0 million from $16.5
million in 1997. In 1998, 74% of the operating expenses were in research and
development, compared to 73% in 1997. Research and development expenses
increased 5% in 1998, to $12.6 million from $12.0 million in 1997. The increase
in research and development was due to significantly higher spending on the
Company's drug discovery program, partially offset by lower spending on GL701
for SLE. Increased expenditures on the drug discovery program consisted
primarily of sourcing chemical compounds as possible DNA- or RNA-binding agents,
screening these compounds for DNA- and RNA-binding activity, and characterizing
potential drug target binding sites on disease-causing genes. The decreased
expenditures on the GL701 program consisted of lower purchases of drug supply
necessary for conducting the clinical trials and lower clinical trial costs
since the majority of patients had completed their treatment by the end of 1998.
General and Administrative expenses decreased
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<PAGE> 18
4% in 1998, to $4.3 million from $4.5 million in 1997. The Company anticipates
that further declines in general and administrative expenses are unlikely.
Interest income decreased 26% in 1998, to $1.0 million from $1.4 million in
1997 due to declines in short-term interest rates and lower average balances in
the Company's short-term investment accounts.
In 1998, the Company recorded a $1.6 million gain on the partial sale of an
investment in its Taiwan-based affiliate, GBL, offset by $0.2 million of equity
in losses through the time of the sale, which occurred during the second quarter
of 1998. Since the sale reduced Genelabs' ownership of this company to less than
20%, Genelabs no longer records its proportionate share of this affiliate's
income or loss, accounting for the decreased equity in loss compared to 1997.
Results from the discontinued diagnostics business, GLD, improved to income
of $0.1 million in 1998 compared to a loss of $0.3 million in 1997. The improved
operating results in 1998 were due to a 1997 charge resulting from a terminated
sales agreement in which the customer could not meet its contractual
obligations.
1997 COMPARED TO 1996
The net loss increased 13% in 1997, to $12.9 million from $11.4 million in
1996. The increase in net loss was due to increased research and development
expenses and higher losses from the Company's affiliates, which were only
partially offset by higher contract revenues.
Contract revenues increased 55% in 1997, to $3.1 million from $2.0 million
in 1996. The increase is attributable to revenue from a research collaboration
with DuPont, which was partially offset by a decline in milestone revenue from a
separate collaboration.
Operating expenses increased 12% in 1997, to $16.5 million from $14.7
million in 1996. In 1997, 73% of the operating expenses were in research and
development compared to 66% in 1996. Research and development expenses increased
25% in 1997, to $12.0 million from $9.6 million in 1996. The increase in
research and development in 1997 compared to 1996 resulted primarily from
additional research conducted for a gene-regulating drug discovery collaboration
and also from higher development costs as a result of higher patient enrollment
in the Company's clinical trials of GL701 for SLE. In 1997, general and
administrative expenses decreased 11%, to $4.5 million from $5.1 million in
1996. The decrease in 1997 compared to 1996 was due to a reduction in corporate
administrative headcount.
Interest income increased 13% in 1997, to $1.4 million from $1.2 million in
1996 due to higher average balances in the Company's short-term investment
accounts.
Equity in loss of the Company's Taiwan-based affiliate increased by $0.3
million in 1997 to $0.6 million from $0.3 million in 1996, reflecting costs
incurred after this affiliate purchased a pharmaceutical manufacturing facility.
The 1997 loss of $0.3 million from the Company's diagnostics business was
due to a $0.4 million charge resulting from a terminated sales agreement in
which the customer could not meet its contractual obligations. Without this
charge, operating results would have been income of $0.1 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $20.3 million at December 31, 1998, compared to $21.1 million at
December 31, 1997. The $0.8 million decrease in cash, cash equivalents and
short-term investments was attributable to $7.6 million cash used in operations
and $1.4 million used to purchase research equipment. The net cash used in
operations included the expansion of the drug discovery research program and the
continuation of the development of GL701 for SLE. The cash uses were partially
offset by $4.3 million received on the sale of a portion of the GBL investment,
$2.5 million in short-term borrowings, $0.7 million received from issuance of
common stock under employee stock plans, and $0.7 million received from the
Company's diagnostics subsidiary.
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<PAGE> 19
Genelabs has operated at a loss since its inception and has funded its
operations primarily through public and private offerings of its common stock,
private offerings of its preferred stock and contract revenues. Due to the net
losses, income taxes have not been a significant expense. Genelabs expects to
incur substantial additional costs, including research costs for the Company's
drug discovery technologies and development costs for GL701. The amount of the
additional costs will depend on numerous factors including the progress of
Genelabs' research and development programs, the status of its corporate
partnerships, results of clinical trials and actions of regulatory agencies.
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 2000, although the Company intends to seek
additional funds through corporate collaborations, asset sales or other means
prior to such time. The Company anticipates realizing a net loss for this time
frame and profitability thereafter is subject to significant uncertainty.
Additional funds for the Company's research and development activities may not
be available on acceptable terms, if at all. The unavailability of additional
funds could delay or prevent the development, approval or marketing of some or
all of the Company's products and technologies, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
IMPACT OF YEAR 2000
The Company has evaluated 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, which is nearly complete and is expected to be completed by
mid-year 1999. To date, no problems have been identified. While Genelabs has
obtained representations that its key suppliers are year 2000 compliant, the
Company cannot provide assurance that their computer systems will adequately
handle all year 2000 issues. In addition, there are a few additional suppliers
that have not yet indicated their year 2000 readiness. The potential impact and
related costs of the year 2000 issue are not expected to be significant at this
time, and the Company does not anticipate that these costs will exceed $0.2
million in aggregate, most of which has already been incurred. Genelabs expects
to continually assess its year 2000 readiness.
Certifications from Genelabs' software and hardware providers indicate that
Genelabs will not be exposed to any material year 2000 costs, but there can be
no assurance of this. While third-party assurances and internal testing are
useful in assessing year 2000 issues, neither can provide absolute assurance
about whether the Company will experience year 2000 problems and/or costs. The
Company currently does not have contingency plans to deal with major year 2000
failures.
ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Genelabs' exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments. Genelabs considers the risk
minimal as the Company maintains a short six to nine-month average maturity,
does not use derivative instruments, and places its investments with high
quality debt issuers, primarily the U.S. government.
Genelabs' exposure to market risk for changes in foreign currency exchange
rates relates primarily to the Company's investments in its diagnostics
subsidiary, GLD, and its Taiwan-based affiliate, GBL, which are both separately
identified on the balance sheet. GLD manufactures products in Singapore and its
principal sales office is located in Switzerland, but sales are largely
denominated in U.S. dollars. Genelabs is attempting to divest both GLD and GBL.
Changes in foreign currency exchange rates may impact the proceeds received upon
divestiture of Genelabs' investments in these entities, but the Company does not
believe that such foreign currency exchange rate changes will materially impact
the value reported in the financial statements, even if the changes are
significant.
18
<PAGE> 20
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
1999 Annual Meeting of Shareholders to be held on June 16, 1999 (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.
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.
19
<PAGE> 21
(a)(3) and (c) Index to Exhibits.
The following documents are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
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.
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 (incorporated herein by
reference to Exhibit 10.05 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997 ("the 1997
Form 10-K")).
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
(incorporated herein by reference to the 1997 Form 10-K).
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).
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).
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
10.11 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).*
10.12 Heads of Agreement, dated August 27, 1992, by and between
Registrant and SmithKline Beecham p.l.c. ("Heads of
Agreement") (incorporated herein by reference to Exhibit
10.19 to the Registrant's Form 10-Q for the quarter ended
September 30, 1992).*
10.13 Second Amendment to Heads of Agreement.**
10.14 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).*
10.15 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).*
10.16 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")).*
10.17 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).*
10.18 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")).*
10.19 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).*
10.20 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).*
10.21 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).*
10.22 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).*
10.23 Collaborative Research and License Agreement, dated as of
December 13, 1996, by and between Registrant and The DuPont
Merck Pharmaceutical Company ("Collaborative Research and
License Agreement") (incorporated herein by reference to
Exhibit 10.27 to the 1996 Form 10-K).*
10.24 Second Amendment to Collaborative Research and License
Agreement.**
10.25 Grant from the Space and Naval Warfare Systems Command,
sponsored by the Defense Advanced Research Projects Agency,
effective as of February 3, 1998 (incorporated herein by
reference to the 1997 Form 10-K).
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
10.26 First Modification to Grant from the Space and Naval Warfare
Systems Command.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedules (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.
** Confidential treatment has been requested 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,
1998.
22
<PAGE> 24
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.
By: /s/ IRENE A. CHOW
------------------------------------
Irene A. Chow
Chief Executive Officer, President
and Director
March 26, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Irene A. Chow and James A.D. Smith, 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.
<TABLE>
<C> <C> <S>
PRINCIPAL EXECUTIVE OFFICER:
/s/ IRENE A. CHOW Chief Executive Officer, March 26, 1999
--------------------------------------------------- President
Irene A. Chow and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ MATTHEW M. LOAR Vice President, Finance March 26, 1999
---------------------------------------------------
Matthew M. Loar
ADDITIONAL DIRECTORS:
/s/ J. RICHARD CROUT March 26, 1999
---------------------------------------------------
J. Richard Crout
/s/ THOMAS E. DEWEY, JR. March 26, 1999
---------------------------------------------------
Thomas E. Dewey, Jr.
---------------------------------------------------
Frank L. Douglas
/s/ EDGAR G. ENGLEMAN March 26, 1999
---------------------------------------------------
Edgar G. Engleman
/s/ ARTHUR GRAY, JR. March 26, 1999
---------------------------------------------------
Arthur Gray, Jr.
/s/ H. H. HAIGHT March 26, 1999
---------------------------------------------------
H. H. Haight
/s/ ALAN Y. KWAN March 26, 1999
---------------------------------------------------
Alan Y. Kwan
/s/ NINA K. WANG March 26, 1999
---------------------------------------------------
Nina K. Wang
</TABLE>
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.02 Registrant's Bylaws, as amended to date.
10.13* Second Amendment to Heads of Agreement.
10.24* Second Amendment to Collaborative Research and License
Agreement.
10.26 Modification to Grant from the Space and Naval Warfare
Systems Command.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27.1996 1996 Restated Financial Data Schedule.
27.1997 1997 Restated Financial Data Schedule.
27.1998 1998 Financial Data Schedule.
27.97Q1 1st Quarter 1997 Restated Financial Data Schedule.
27.97Q2 2nd Quarter 1997 Restated Financial Data Schedule.
27.97Q3 3rd Quarter 1997 Restated Financial Data Schedule.
27.98Q1 1st Quarter 1998 Restated Financial Data Schedule.
27.98Q2 2nd Quarter 1998 Restated Financial Data Schedule.
27.98Q3 3rd Quarter 1998 Restated Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment has been requested with respect to certain portions of
this document.
<PAGE> 26
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, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7-F-14
</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> 27
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 10, 1999
F-2
<PAGE> 28
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents.............................. $ 3,631 $ 4,230
Short-term investments................................. 16,670 16,869
--------- ---------
Total cash, cash equivalents and short-term investments... 20,301 21,099
Other current assets...................................... 383 713
--------- ---------
Total current assets........................................ 20,684 21,812
Property and equipment, net................................. 1,401 432
Net assets of diagnostics subsidiary........................ 3,372 3,882
Investment in Taiwan-based affiliate........................ 1,174 3,658
Other assets................................................ 176 141
--------- ---------
$ 26,807 $ 29,925
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 2,500 $ --
Accounts payable and other accrued liabilities............ 3,671 3,631
Accrued compensation and related expenses................. 1,458 1,545
Unearned contract revenue................................. 745 843
--------- ---------
Total current liabilities................................... 8,374 6,019
Long-term obligations....................................... 647 696
--------- ---------
Total liabilities........................................... 9,021 6,715
--------- ---------
Commitments and contingencies
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,
39,737 and 39,410 shares issued and outstanding at
December 31, 1998 and 1997,
respectively........................................... 138,335 137,604
Accumulated deficit....................................... (130,497) (123,892)
Accumulated other comprehensive income.................... 266 (184)
--------- ---------
Total shareholders' equity.................................. 17,786 23,210
--------- ---------
$ 26,807 $ 29,925
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 29
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Contract revenue............................................ $ 7,800 $ 3,115 $ 2,006
------- -------- --------
Operating expenses:
Research and development.................................. 12,615 12,022 9,647
General and administrative................................ 4,349 4,508 5,063
------- -------- --------
Total operating expenses.......................... 16,964 16,530 14,710
------- -------- --------
Operating loss.............................................. (9,164) (13,415) (12,704)
Interest income, net........................................ 1,025 1,377 1,222
------- -------- --------
Loss from continuing operations............................. (8,139) (12,038) (11,482)
------- -------- --------
Equity in loss of Taiwan-based affiliate, net of $1,645 gain
on partial sale in 1998................................... 1,422 (577) (265)
Income/(loss) from discontinued operations of diagnostics
subsidiary................................................ 112 (282) 350
------- -------- --------
Net loss.................................................... $(6,605) $(12,897) $(11,397)
======= ======== ========
Loss per share from continuing operations................... $ (0.21) $ (0.31) $ (0.32)
======= ======== ========
Net loss per share.......................................... $ (0.17) $ (0.33) $ (0.32)
======= ======== ========
Weighted average shares outstanding......................... 39,603 38,983 35,746
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 30
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A ACCUMULATED
CONVERTIBLE COMMON OTHER TOTAL
PREFERRED COMMON STOCK TO BE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK ISSUED DEFICIT INCOME EQUITY
----------- -------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........ $9,682 $115,002 $ -- $ (99,598) $ 666 $ 25,752
--------
Comprehensive loss:
Net loss.......................... (11,397) (11,397)
Foreign currency translation
adjustment...................... 27 27
--------
Total comprehensive
loss................... (11,370)
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
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1996........ 9,682 129,591 6,953 (110,995) 693 35,924
--------
Comprehensive loss:
Net loss.......................... (12,897) (12,897)
Foreign currency translation
adjustment...................... (877) (877)
--------
Total comprehensive
loss................... (13,774)
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) --
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1997........ 9,682 137,604 -- (123,892) (184) 23,210
--------
Comprehensive loss:
Net loss.......................... (6,605) (6,605)
Foreign currency translation
adjustment...................... 450 450
--------
Total comprehensive
loss................... (6,155)
222 shares issued under the
employee stock purchase plan.... 499 499
105 shares issued under stock
options......................... 232 232
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1998........ $9,682 $138,335 $ -- $(130,497) $ 266 $ 17,786
====== ======== ======= ========= ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 31
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (6,605) $(12,897) $(11,397)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense................. 437 54 333
(Income)/loss of discontinued diagnostics
subsidiary.......................................... (112) 282 (350)
Equity in loss of Taiwan-based affiliate, net of
$1,645 gain on partial sale in 1998................. (1,422) 577 265
Changes in assets and liabilities:
Receivables and other current assets.................. 330 611 (482)
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations.............. (96) 1,088 (498)
Unearned contract revenue............................. (98) (357) 1,200
-------- -------- --------
Net cash used in operating activities.................... (7,566) (10,642) (10,929)
-------- -------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale............... (24,556) (19,797) (43,488)
Proceeds from sale and maturities of securities
available-for-sale.................................... 24,755 22,063 24,353
Capital expenditures..................................... (1,434) (100) (165)
Proceeds from partial sale of Taiwan-based affiliate..... 4,300 -- --
Net remittances from diagnostics subsidiary.............. 678 457 317
Other.................................................... (7) (141) (29)
-------- -------- --------
Net cash provided by/(used in) investing activities...... 3,736 2,482 (19,012)
-------- -------- --------
Cash flows from financing activities:
Payments on long-term obligations........................ -- -- (2,828)
Proceeds from short-term borrowings...................... 2,500 -- --
Proceeds from issuance of common stock................... 731 8,013 14,589
-------- -------- --------
Net cash provided by financing activities................ 3,231 8,013 11,761
-------- -------- --------
Net decrease in cash and cash equivalents.................. (599) (147) (18,180)
Cash and cash equivalents, beginning of the period......... 4,230 4,377 22,557
-------- -------- --------
Cash and cash equivalents, end of the period............... 3,631 4,230 4,377
Cash held in escrow, end of the period..................... -- -- 6,953
Short-term investments, end of the period.................. 16,670 16,869 19,135
-------- -------- --------
Cash, cash equivalents and short-term investments, end of
the period............................................... $ 20,301 $ 21,099 $ 30,465
======== ======== ========
Supplemental Cash Flow Information:
Interest paid............................................ -- -- $ 170
</TABLE>
See accompanying notes.
F-6
<PAGE> 32
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a
biopharmaceutical company that focuses on the discovery and development of
drugs. The Company's principal drug discovery program is based on proprietary
enabling technologies for creating gene-specific, small organic, DNA-binding
molecules. Related technologies are being applied to the discovery of novel
antiviral RNA-binding compounds. The lead development program is in its second
phase III clinical trial as a new therapy for systemic lupus erythematosus
("SLE"), following successful completion of the initial phase III trial in 1997.
The Company also operates a wholly-owned subsidiary, Genelabs Diagnostics
Pte. Ltd. ("GLD"), which sells diagnostic tests for infectious diseases
primarily in Europe and Asia. In the fourth quarter of 1998, the Company adopted
a plan to divest this subsidiary, and accordingly, the operating results of GLD
have been segregated from continuing operations and reported separately (see
Note 4). The Company has restated its prior financial statements in order to
present the operating results and net assets of GLD as a discontinued operation.
Since the restatement is only a change in the manner by which GLD is included in
the financial statements, there is no impact on the previously reported net
income or shareholders' equity. As a result of the discontinued operation, the
Company now operates in one business segment, the discovery and development of
pharmaceutical products.
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
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. Revenue related to
research contracts and grants is recognized 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 incurred on the contract. Revenue related to license agreements with
non-cancelable, nonrefundable terms and no significant future obligations is
recognized upon the execution of the agreements. Revenue from milestone payments
is recognized upon the achievement of specified events under collaborative
agreements.
Revenue recognized from several of the Company's grants and collaborations
represent 10% or more of total contract revenue. There were three significant
sources of revenue which accounted for 45%, 29%, and 13% of total contract
revenue in 1998. There were two sources of revenue in the previous two years
which accounted for 70% and 15% of total contract revenue in 1997, and 50% and
20% of total contract revenue in 1996.
F-7
<PAGE> 33
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the U.S. Dollar. The functional
currency of GLD is the Singapore dollar. The Company's share of the net assets
in this foreign operation is translated at the exchange rate in effect at
year-end and the net operating results are translated at the average exchange
rate for the period. Adjustments resulting from the translation of financial
statements denominated in foreign currency are reflected in accumulated other
comprehensive income, a separate component of shareholders' equity.
STOCK BASED COMPENSATION
The Company grants employee stock options at an exercise price equal to the
fair market value of the shares at the date of grant. The Company accounts for
employee stock-based compensation using the intrinsic value method and,
accordingly, recognizes no compensation expense for stock options granted to
employees.
EARNINGS PER SHARE
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 1998, 1997 and 1996 would have included an additional 230,000,
598,000 and 1,273,000 shares, respectively, related to the Company's outstanding
stock options, and 3,465,000, 3,333,000 and 3,333,000 shares, respectively,
related to the Series A Convertible Preferred Stock.
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 that 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, 1998 and 1997, 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 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.
F-8
<PAGE> 34
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
CHANGES IN ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components, although it has no impact on Company's financial position or
results of operations. Comprehensive income is comprised of net income and other
comprehensive income, which includes certain changes to shareholders' equity
that are excluded from net income. Specifically, SFAS No. 130 requires certain
foreign currency translation adjustments, which are currently reported in
shareholders' equity, to be included in other comprehensive income.
Comprehensive income for the years ended December 31, 1998, 1997 and 1996 has
been reflected in the Consolidated Statement of Shareholders' Equity to conform
to the requirements of SFAS No. 130.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 requires carrying derivative instruments at their fair
value on the balance sheet. Due to the Company's limited use of derivatives, the
adoption of SFAS No. 133 did not impact the Company's financial position or
results of operations.
2. AVAILABLE-FOR-SALE SECURITIES
The following table summarizes the estimated fair value, which approximates
cost, of available-for-sale securities at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
DESCRIPTION:
U.S. Treasury securities and obligations of U.S. government
agencies.................................................. $12,333 $11,873
Corporate debt securities................................... 4,054 6,043
Asset-backed securities..................................... 1,081 954
Money-market mutual funds................................... 89 228
------- -------
$17,557 $19,098
======= =======
BALANCE SHEET CLASSIFICATION:
Included in cash and cash equivalents....................... $ 887 $ 2,229
Included in short-term investments.......................... 16,670 16,869
------- -------
$17,557 $19,098
======= =======
MATURITY:
Due within one year......................................... $12,117 $13,890
Due after one year through two years........................ 5,440 5,208
------- -------
$17,557 $19,098
======= =======
</TABLE>
F-9
<PAGE> 35
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Laboratory equipment........................................ $ 3,384 $ 2,279
Leasehold improvements...................................... 4,009 3,819
Office and other equipment.................................. 1,682 1,627
------- -------
9,075 7,725
Less accumulated depreciation and amortization.............. (7,674) (7,293)
------- -------
$ 1,401 $ 432
======= =======
</TABLE>
4. DISCONTINUED OPERATION -- DIAGNOSTICS SUBSIDIARY
The Company owns 100% of Genelabs Diagnostics Pte. Ltd. The Company has
adopted a plan to divest this subsidiary, and accordingly has accounted for GLD
as a discontinued operation. Summarized financial information for GLD is as
follows:
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Product sales........................................... $7,905 $9,675 $11,324
Cost of sales........................................... 4,207 5,818 6,177
------ ------ -------
Gross margin............................................ 3,698 3,857 5,147
Operating expenses...................................... 3,586 4,139 4,797
------ ------ -------
Net income/(loss)....................................... $ 112 $ (282) $ 350
====== ====== =======
</TABLE>
BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS,
AT DECEMBER 31)
<S> <C> <C>
Accounts receivable......................................... $1,551 $1,855
Inventories................................................. 2,098 2,281
Net property & equipment and other assets................... 716 960
------ ------
Total assets................................................ $4,365 $5,096
====== ======
Liabilities, principally current............................ $ 993 $1,214
Net equity of Genelabs Diagnostics (Pte.) Ltd............... 3,372 3,882
------ ------
Total liabilities and net equity............................ $4,365 $5,096
====== ======
</TABLE>
5. INVESTMENT IN TAIWAN-BASED AFFILIATE
At the beginning of 1998 the Company owned 40% of its Taiwan-based
affiliate, Genelabs Biotechnology Co., Ltd. ("GBL"), which manufactures and
distributes pharmaceutical products for the Asian market. In 1998 the Company
reduced its ownership in this affiliate to 16% by not contributing cash during a
GBL equity offering and also by selling a portion of its investment. The
realized gain of $1.6 million from the sale consisted of $4.3 million in
proceeds less its basis of $2.4 million and an accumulated foreign currency
translation adjustment of $0.3 million. Concurrent with the reduction in
F-10
<PAGE> 36
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
ownership interest to less than 20%, the Company changed its method of
accounting for this investment from the equity method to the cost method. GBL's
net loss for 1997 and 1996 was $1.5 million and $0.5 million, respectively, and
sales were not material. At December 31, 1997, GBL had cash and cash equivalents
of $1.6 million, accounts receivable of $1.1 million and property, plant and
equipment of $8.8 million for total assets of $11.5 million; liabilities were
$1.4 million.
6. SHORT-TERM BORROWINGS
At December 31, 1998, the Company's short-term borrowings consisted of a
$2.5 million reverse repurchase agreement bearing interest at 5.04%,
collateralized by certain U.S. treasury securities held in the Company's
short-term investment accounts.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its primary office and laboratory facilities under a
non-cancelable 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 non-cancelable operating leases. At December
31, 1998, future minimum lease payments under all operating leases with original
terms greater than one year are $1,010,000, $967,000, $928,000 and $859,000 for
1999, 2000, 2001, and 2002, respectively, for a total of $3,764,000, excluding
sublease rentals. Total lease expense, net of sublease income, was $953,000,
$838,000 and $1,055,000 for 1998, 1997 and 1996, respectively.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect Genelabs' financial
position or results of operations. However, the ultimate outcome of any
litigation is uncertain. If an unfavorable outcome were to occur, the impact
could be material. Furthermore, any litigation, regardless of the outcome, can
have an adverse impact on the Company's results of operations as a result of
defense costs, diversion of management resources, and other factors.
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In May 2000 the 10,000 outstanding shares of Series A Convertible Preferred
Stock can be converted into 49.99% of Genelabs' diagnostics business, if the
remainder of this business is purchased by the Preferred Stockholders 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 non-cumulative 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
At December 31, 1998, the Company had 19,777,000 shares reserved for future
issues and conversions.
F-11
<PAGE> 37
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 price at the
beginning or ending of six-month purchase periods, whichever is lower, 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, 1998 and 1997, 663,000 and 451,000 shares,
respectively, had been issued under the Stock Purchase Plan. In 1998, the
Company terminated the Genelabs Biotechnology Co., Ltd. Employee Stock Purchase
Plan and prior to such termination, 24,000 shares had been issued under terms
similar to the Stock Purchase Plan.
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, 1998 and 1997, 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, 1998, 419,000 shares were available for future grants.
Stock option transactions from 1996 through 1998 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED RANGE OF
NUMBER OF AVERAGE EXERCISE
SHARES EXERCISE PRICE PRICES
--------- --------------- -------------
<S> <C> <C> <C>
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
Granted................................................... 626,000 $2.94 $1.78 - $4.38
Exercised................................................. (104,000) $1.97 $1.41 - $2.63
Canceled.................................................. (340,000) $4.44 $1.41 - $8.50
--------- ----- -------------
Outstanding at December 31, 1998............................ 3,422,000 $3.79 $1.41 - $9.16
========= ===== =============
</TABLE>
There were options for 1,778,000 and 1,373,000 shares exercisable at
December 31, 1997 and 1996, respectively. For options outstanding and
exercisable at December 31, 1998, the exercise price ranges and average
remaining terms were:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPTIONS WEIGHTED OPTIONS WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AT AVERAGE
PRICES 12/31/98 REMAINING TERM EXERCISE PRICE 12/31/98 EXERCISE PRICE
- ----------------- ----------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.41 - $2.97.. 1,734,000 6.4 years $2.44 1,212,000 $2.42
$3.03 - $5.81.. 892,000 7.8 years $3.97 325,000 $4.31
$6.19 - $9.16.. 796,000 7.1 years $6.51 547,000 $6.54
------------- --------- --------- ----- --------- -----
$1.41 - $9.16.. 3,422,000 6.9 years $3.79 2,084,000 $3.80
============= ========= ========= ===== ========= =====
</TABLE>
F-12
<PAGE> 38
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
DISCLOSURE OF FAIR VALUE OF STOCK OPTIONS. As disclosed in Note 1, Genelabs
accounts for employee 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 of traded options that 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
1998, 1997 and 1996, respectively: dividend yields of zero, risk-free interest
rates of 5.0%, 5.6% and 5.8%, a volatility factor of the expected market price
of the Company's common stock of .80, and a one-year expected life of the
options after vesting. Based on these assumptions, the weighted-average fair
value of options granted during 1998, 1997 and 1996 was $1.70, $2.56, and $3.48,
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 1998, 1997 and 1996, respectively, would have been
$8,168,000, $14,767,000 and $13,072,000 and the net loss per share would have
been $0.21, $0.38 and $0.37.
10. COLLABORATIVE AGREEMENTS
The Company has the following collaborative agreements:
DuPont Pharmaceuticals Company -- Gene-Regulating Drugs. On January 1,
1997, the Company commenced work under a collaborative research and license
agreement with DuPont Pharmaceuticals Company ("DuPont") to develop small
molecule gene-regulating drugs. Genelabs is conducting a drug discovery program
directed towards a number of target genes, and DuPont plans to develop any drug
candidates discovered under this collaboration by Genelabs. Under the terms of
the agreement, Genelabs receives research funding, will receive payments for
milestones reached and will receive royalties upon commercial sale of products
resulting from this collaboration.
Defense Advanced Research Projects Agency -- Countermeasures to Agents of
Biological Warfare. Effective February 1, 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 receives research funding for up to three years
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 rights to certain U.S. patents covering
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
will receive royalty payments on sales. A director of Genelabs will also receive
a fee based on sales of the product for SLE.
F-13
<PAGE> 39
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Sanofi Diagnostics Pasteur -- HCV Diagnostic. The Company has granted
Sanofi Diagnostics Pasteur exclusive and co-exclusive licenses to sell certain
HCV products in exchange for royalty payments to Genelabs.
SmithKline Beecham p.l.c. -- HEV Vaccine. The Company has granted
SmithKline Beecham p.l.c. ("SB") exclusive worldwide manufacturing and marketing
rights for a hepatitis E virus ("HEV") vaccine. In return, Genelabs receives
milestone payments when SB reaches predetermined goals and Genelabs will receive
royalties based on sales of licensed HEV vaccine products.
Chiron Corporation, Ortho Diagnostic Systems, Inc. and Roche Diagnostics
GmbH -- HGV. The Company has granted these companies the rights to develop and
commercialize hepatitis G virus diagnostic products. In return, Genelabs
receives milestone payments when its partners reach predetermined goals and
Genelabs receives royalties based on sales of licensed HGV products.
11. INCOME TAXES
At December 31, 1998, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $104 million and $7
million, respectively. In addition, the Company has federal and California
research and development tax credit carryforwards of approximately $2 million
and $1 million, respectively. The federal net operating loss and federal and
California credit carryforwards expire in various amounts between the years 2000
and 2018. The California net operating loss carryforwards expire in various
amounts between the years 1999 and 2003. Under provisions of the Internal
Revenue Code 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.
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 income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 35,800 $ 33,500
Research credits..................................... 2,500 2,100
Capitalized research expenditures.................... 1,300 1,300
Other individually immaterial items, net............. 1,500 2,400
-------- --------
Total deferred tax assets............................ 41,100 39,300
Valuation allowance for deferred tax assets............ (41,100) (39,300)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
For 1998, 1997 and 1996, the valuation allowance increased by $1.8 million,
$5.7 million and $4.2 million, respectively. Approximately $1.4 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.
F-14
<PAGE> 1
EXHIBIT 3.02
AMENDED AND RESTATED BYLAWS
OF
GENELABS TECHNOLOGIES, INC.
(A CALIFORNIA CORPORATION)
<PAGE> 2
BYLAWS
OF
GENELABS TECHNOLOGIES, INC.
(A CALIFORNIA CORPORATION)
Originally Adopted October 23, 1985
Amended: September 30, 1986 (Name Change)
June 24, 1988 (Article XVI)
May 5, 1989 (2.2 Amended)
March 1, 1991 (Change in No. Directors)
April 23, 1993 (Change in No. Directors)
July 29, 1993 (Change in No. Directors)
October 2, 1998 (Article X amended)
ARTICLE I
OFFICES
SECTION 1.1: PRINCIPAL OFFICE. The principal executive office for the
transaction of the business of this corporation shall be located at such place
as the Board of Directors may from time to time decide. The Board of Directors
is hereby granted full power and authority to change the location of the
principal executive office from one location to another.
SECTION 1.2: OTHER OFFICES. One or more branch or other subordinate
offices may at any time be fixed and located by the Board of Directors at such
place or places within or outside the State of California as it deems
appropriate.
ARTICLE II
DIRECTORS
SECTION 2.1: EXERCISE OF CORPORATE POWERS. Except as otherwise provided
by these Bylaws, by the Articles of Incorporation of this corporation or by the
laws of the State of California now or hereafter in force, the business and
affairs of this corporation shall be managed and all corporate powers shall be
exercised by or under the ultimate direction of a board of directors (the "Board
of Directors").
SECTION 2.2: NUMBER. The number of directors of this corporation shall
not be less than five (5) nor more than nine (9) with the exact number of
directors to be fixed from time to time by resolution of the Board of Directors
of his corporation. There shall be nine (9) directors until such number is
changed by resolution of the Board of Directors. The number of directors
1
<PAGE> 3
of this corporation shall be so variable until changed by an amendment of this
Section 2.2 adopted by the affirmative vote or written consent of holders of a
majority of the outstanding shares of this corporation entitled to vote.
SECTION 2.3: NEED NOT BE SHAREHOLDERS. The directors of this corporation
need not be shareholders of this corporation.
SECTION 2.4: COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any director from serving this corporation in any
other capacity and receiving compensation therefor.
SECTION 2.5: ELECTION AND TERM OF OFFICE. The directors shall be elected
annually by the shareholders at the annual meeting of the shareholders. The term
of office of the directors shall begin immediately after their election and
shall continue until the next annual meeting of the shareholders and until their
respective successors are elected and qualified.
SECTION 2.6: VACANCIES. A vacancy or vacancies on the Board of Directors
shall exist in case of the death, resignation or removal of any director, or if
the authorized number of directors is increased, or if the shareholders fail, at
any annual meeting of shareholders at which any director is elected, to elect
the full authorized number of directors to be voted for at that meeting. The
Board of Directors may declare vacant the office of a director if he or she is
declared of unsound mind by an order of court or convicted of a felony or if,
within 60 days after notice of his election, he does not accept the office. Any
vacancy, except for a vacancy created by removal of a director as provided in
Section 2.7 hereof, may be filled by a person selected by a majority of the
remaining directors then in office, whether or not less than a quorum, or by a
sole remaining director. Vacancies occurring in the Board of Directors by reason
of removal of directors shall be filled only by approval of shareholders. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent, other than to fill a
vacancy created by removal, requires the consent of a majority of the
outstanding shares entitled to vote. If, after the filling of any vacancy by the
directors, the directors then in office who have been elected by the
shareholders shall constitute less than a majority of the directors then in
office, any holder or holders of an aggregate of 5% or more of the total number
of shares at the time outstanding having the right to vote for such directors
may call a special meeting of shareholders to be held to elect the entire Board
of Directors. The term of office of any director then in office shall terminate
upon such election and qualification of a successor. Any director may resign
effective upon giving written notice to the Chairman of the Board, if any, of
the President, the Secretary or the Board of Directors of this corporation,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a successor may
be elected to take office when the resignation becomes effective. A reduction of
the authorized number of directors shall not remove any director prior to the
expiration of such director's term of office.
SECTION 2.7: REMOVAL. The entire Board of Directors or any individual
director may be removed without cause from office by an affirmative vote of a
majority of the outstanding shares entitled to vote; provided that, unless the
entire Board of Directors is removed, no director shall be removed when the
votes cast against removal, or not consenting in writing to such removal, would
be sufficient to elect such director if voted cumulatively at an election at
which the same
2
<PAGE> 4
total number of votes were cast, or, if such action is taken by written consent,
all shares entitled to vote were voted, and the entire number of directors
authorized at the time of the director's most recent election were then being
elected. If any or all directors are so removed, new directors may be elected at
the same meeting or at a subsequent meeting. If at any time a class or series of
shares is entitled to elect one or more directors under authority granted by the
Articles of Incorporation of this corporation, the provisions of this Section
2.7 shall apply to the vote of that class or series and not to the vote of the
outstanding shares as a whole.
SECTION 2.8: POWERS AND DUTIES. Without limiting the generality or
extent of the general corporate powers to be exercised by the Board of Directors
pursuant to Section 2.1 of these Bylaws, it is hereby provided that the Board of
Directors shall have full power with respect to the following matters:
(a) To purchase, lease and acquire any and all kinds of property,
real, personal or mixed, and at its discretion to pay therefor in money, in
property and/or in stocks, bonds, debentures or other securities of this
corporation.
(b) To enter into any and all contracts and agreements which in
its judgment may be beneficial to the interests and purposes of this
corporation.
(c) To fix and determine and to vary from time to time the amount
or amounts to be set aside or retained as reserve funds or as working capital of
this corporation or for maintenance, repairs, replacements or enlargements of
its properties.
(d) To declare and pay dividends in cash, shares and/or property
out of any funds of this corporation at the time legally available for the
declaration and payment of dividends on its shares.
(e) To adopt such rules and regulations for the conduct of its
meetings and the management of the affairs of this corporation as it may deem
proper.
(f) To prescribe the manner in which and the person or persons by
whom any or all of the checks, drafts, notes, bills of exchange, contracts and
other corporate instruments shall be executed.
(g) To accept resignations of directors; to declare vacant the
office of a director as provided in Section 2.6 hereof; and, in case of vacancy
in the office of directors, to fill the same to the extent provided in Section
2.6 hereof.
(h) To create offices in addition to those for which provision is
made by law or these Bylaws; to elect and remove at pleasure all officers of
this corporation, fix their terms of office, prescribe their titles, powers and
duties, limit their authority and fix their salaries in any way it may deem
advisable which is not contrary to law or these Bylaws; and, if it sees fit, to
require from the officers or any of them security for faithful service.
(i) To designate some person to perform the duties and exercise
the powers of any officer of this corporation during the temporary absence or
disability of such officer.
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(j) To appoint or employ and to remove at pleasure such agents
and employees as it may see fit, to prescribe their titles, powers and duties,
limit their authority and fix their salaries in any way it may deem advisable
which is not contrary to law or these Bylaws; and, if it sees fit, to require
from them or any of them security for faithful service.
(k) To fix a time in the future, which shall not be more than 60
days nor less than 10 days prior to the date of the meeting nor more than 60
days prior to say other action for which it is fixed, as a record date for the
determination of the shareholders entitled to notice of and to vote at any
meeting, or entitled to receive any payment of any dividend or other
distribution, or allotment of any rights, or entitled to exercise any rights in
respect of any other lawful actions and in such case only shareholders of record
on the date so fixed shall be entitled to notice of and to vote at the meeting
or to receive the dividend, distribution or allotment of rights or to exercise
the rights, as the case may be, notwithstanding any transfer of any shares on
the books of this corporation after any record date fixed as aforesaid. The
Board of Directors may close the books of this corporation against transfers of
shares during the whole or any part of such period.
(l) To fix and locate from time to time the principal office for
the transaction of the business of this corporation and one or more branch or
other subordinate office or offices of this corporation within or without the
State of California; to designate any place within or without the State of
California for the holding of any meeting or meetings of the shareholders or the
Board of Directors, as provided in Sections 10.1 and 11.1 hereof; to adopt, make
and use a corporate seal, and to prescribe the forms of certificates for shares
and to alter the form of such seal and of such certificates from time to time as
in its judgment it may deem best, provided such seal and such certificates shall
at all times comply with the provisions of law now or hereafter in effect.
(m) To authorize the issuance of shares of stock of this
corporation in accordance with the laws of the State of California and the
Articles of Incorporation of this corporation.
(n) Subject to the limitation provided in Section 14.2 hereof, to
adopt, amend or repeal from time to time and at any time these Bylaws and any
and all amendments thereof.
(o) To borrow money and incur indebtedness on behalf of this
corporation, including the power and authority to borrow money from any of the
shareholders, directors or officers of this corporation, and to cause to be
executed and delivered therefor in the corporate name promissory notes, bonds,
debentures, deeds of trust, mortgages, pledges, hypothecations, or other
evidences of debt and securities therefor, and the note or other obligation
given for any indebtedness of this corporation, signed officially by any officer
or officers thereunto duly authorized by the Board of Directors shall be binding
on this corporation.
(p) To approve a loan of money or property to an officer,
guarantee the obligation of an officer, or approve an employee benefit plan
authorizing such a loan or guarantee to an officer, provided that, on the date
of approval of such loan or guarantee, this corporation has outstanding shares
held of record by 100 or more persons. Approval shall
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require a determination by the Board of Directors that the loan or guarantee may
reasonably be expected to benefit this corporation and should be by vote
sufficient without counting the vote of any interested director.
(q) Generally to do and perform every act and thing whatsoever
that may pertain to the office of a director or to a board of directors.
Section 2.9: Deleted. See Article XVI.
ARTICLE III
OFFICERS
SECTION 3.1: ELECTION AND QUALIFICATIONS. The officers of this
corporation shall consist of a President, one or more Vice Presidents, a
Secretary, a Chief Financial Officer and such other officers, including, but not
limited to, a Chairman of the Board of Directors, a Treasurer, and Assistant
Vice Presidents, Assistant Secretaries and Assistant Treasurers, as the Board of
Directors shall deem expedient, who shall be chosen in such manner and hold
their offices for such terms as the Board of Directors may prescribe. Any number
of offices may be held by the same person. Any Vice President, Assistant
Treasurer or Assistant Secretary, respectively, may exercise any of the powers
of the President, the Chief Financial Officer or the Secretary, respectively, as
directed by the Board of Directors, and shall perform such other duties as are
imposed upon him or her by these Bylaws or the Board of Directors.
SECTION 3.2: TERM OF OFFICE AND COMPENSATION. The term of office and
salary of each of said officers and the manner and time of the payment of such
salaries shall be fixed and determined by the Board of Directors and may be
altered by said Board from time to time at its pleasure, subject to the rights,
if any, of an officer under any contract of employment. Any officer may resign
at any time upon written notice to this corporation, without prejudice to the
rights, if any, of this corporation under any contract to which the officer is a
party. If any vacancy occurs in any office of this corporation, the Board of
Directors may appoint a successor to fill such vacancy.
ARTICLE IV
CHAIRMAN OF THE BOARD OF DIRECTORS
SECTION 4.1: POWERS AND DUTIES. The Chairman of the Board of Directors,
if there be one, shall have the power to preside at all meetings of the Board of
Directors and shall have such other powers and shall be subject to such other
duties as the Board of Directors may from time to time prescribe.
ARTICLE V
PRESIDENT
SECTION 5.1: POWERS AND DUTIES. The powers and duties of the President
are:
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(a) To act as the general manager and chief executive officer of
this corporation and, subject to the control of the Board of Directors, to have
general supervision, direction and control of the business and affairs of this
corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board of Directors or if there be no Chairman, at
all meetings of the Board of Directors.
(c) To call meetings of the shareholders and meetings of the
Board at Directors to be held at such times and, subject to the limitations
prescribed by law or by these Bylaws, at such places as he or she shall deem
proper.
(d) To affix the signature of this corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which, in the judgment of the President, should be executed on
behalf of this corporation; to sign certificates for shares of stock of this
corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of this corporation and to supervise and control
all officers, agents and employees of this corporation.
SECTION 5.2: PRESIDENT PRO TEM. If neither the Chairman of the Board of
Directors, the President, nor any Vice President is present at any meeting of
the Board of Directors, a President pro tem may be chosen by the directors
present at the meeting to preside and act at such meeting. If neither the
President nor any Vice President is present at any meeting of the shareholders,
a President pro tem may be chosen by the shareholders present at the meeting to
preside at such meeting.
ARTICLE VI
VICE PRESIDENT
SECTION 6.1: POWERS AND DUTIES. The titles, powers and duties of the
Vice President or Vice Presidents, if any, shall be as prescribed by the Board
of Directors. In case of the absence, disability or death of the President, the
Vice President, or one of the Vice Presidents, shall exercise all his or her
powers and perform all his or her duties. If there is more than one Vice
President, the order in which the Vice Presidents shall succeed to the powers
and duties of the President shall be as fixed by the Board of Directors.
ARTICLE VII
SECRETARY
SECTION 7.1: POWERS AND DUTIES. The powers and duties of the Secretary
are
(a) To keep a book of minutes at the principal executive office
of this corporation, or such other place as the Board of Directors may order, of
all meetings of its directors and shareholders with the time and place of
holding of such meeting, whether regular or
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special, and, if special, how authorized, the notice thereof given, the names of
those present at directors' meetings, the number of shares present or
represented at shareholders' meetings and the proceedings thereof.
(b) To keep the seal of this corporation and to affix the same to
all instruments which may require it.
(c) To keep or cause to be kept at the principal executive office
of this corporation, or at the office of the transfer agent or agents, a record
of the shareholders of this corporation, giving the names and addresses of all
shareholders and the number and class of shares held by each, the number and
date of certificates issued for shares and the number and date of cancellation
of every certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of this
corporation, to fill in all certificates issued, and to make a proper record of
each such issuance; provided that so long as this corporation shall have one or
more duly appointed and acting transfer agents of the shares, or any class or
series of shares, of this corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents.
(e) To transfer upon the share books of this corporation any and
all shares of this corporation; provided that so long as this corporation shall
have one or more duly appointed and acting transfer agents of the shares, or any
class or series of shares, of this corporation, such duties with respect to such
shares shall be performed by such transfer agent or transfer agents, and the
method of transfer of each certificate shall be subject to the reasonable
regulations of the transfer agent to which the certificate is presented for
transfer and, if this corporation then has one or more duly appointed and acting
registrars, subject to the reasonable regulations of the registrar to which a
new certificate is presented for registration; and provided further, that no
certificate for shares of stock shall be issued or delivered or, if issued or
delivered, shall have any validity whatsoever until and unless it has been
signed or authenticated in the manner provided in Section 12.3 hereof.
(f) To make service and publication of all notices that may be
necessary or proper and without command or direction from anyone. In case of the
absence, disability, refusal or neglect of the Secretary to make service or
publication of any notices, then such notices may be served and/or published by
the President or a Vice President, or by any person thereunto authorized by
either of them or by the Board of Directors or by the holders of a majority of
the outstanding shares of this corporation.
(g) Generally to do and perform all such duties as pertain to
such office and as may be required by the Board of Directors.
ARTICLE VIII
CHIEF FINANCIAL OFFICER
SECTION 8.1: POWERS AND DUTIES. The powers and duties of the Chief
Financial Officer are:
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(a) To supervise and control the keeping and maintaining of
adequate and correct accounts of this corporation's properties and business
transactions, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, surplus and shares. The books of accounts
shall at all reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidences of
indebtedness and other valuable documents of this corporation and, at his or her
discretion, to cause any or all thereof to be deposited for the account of this
corporation with such depository as may be designated from time to time by the
Board of Directors.
(c) To receive or cause to be received, and to give or cause to
be given, receipts and acquittances for monies paid in for the account of this
corporation.
(d) To disburse, or cause to be disbursed, all funds of this
corporation as may be directed by the President or the Board of Directors,
taking proper vouchers for such disbursements.
(e) To render to the President or to the Board of Directors,
whenever either may require, accounts of all transactions as Chief Financial
Officer and of the financial condition of this corporation.
(f) Generally to do and perform all such duties as pertain to
such office and as may be required by the Board of Directors.
ARTICLE IX
EXECUTIVE COMMITTEE
SECTION 9.1: APPOINTMENT AND PROCEDURE. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors, appoint
from among its members an executive Committee of two or more directors. The
Executive Committee may make its own rules of procedure subject to Section 11.9
hereof, and shall meet as provided by such rules or by resolution adopted by the
Board of Directors (which resolution shall take precedence). A majority of the
members of the Executive Committee shall constitute a quorum, and in every case
the affirmative vote of a majority of all members of the Committee shall be
necessary to the adoption of any resolution.
SECTION 9.2: POWERS. During the intervals between the meetings of the
Board of Directors, the Executive Committee, in all cases in which specific
directions shall not have been given by the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of this corporation in such manner as the
Committee may deem best for the interests of this corporation, except with
respect to:
(a) any action for which the laws of the State of California also
require shareholder approval or approval of the outstanding shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
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(c) the fixing of compensation of the directors for serving on
the Board of Directors or on any committee;
(d) the amendment or repeal of these Bylaws or the adoption of
new Bylaws;
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of this corporation,
except at a rate or in a periodic amount or within a price range determined by
the Board of Directors; and
(g) the appointment of other committees of the Board of Directors
or the members thereof.
ARTICLE X
MEETINGS OF SHAREHOLDERS
SECTION 10.1: PLACE OF MEETINGS. Meetings (whether regular, special or
adjourned) of the shareholders of this corporation shall be held at the
principal executive office for the transaction of business of this corporation,
or at any place within or outside the State of California which may be
designated by written consent of all the shareholders entitled to vote thereat,
or which may be designated by resolution of the Board of Directors. Any meeting
shall be valid wherever held if held by the written consent of all the
shareholders entitled to vote thereat, given either before or after the meeting
and filed with the Secretary of this corporation.
SECTION 10.2: ANNUAL MEETINGS.
(a) The annual meetings of the shareholders shall be held at the
place provided pursuant to Section 10.1 hereof and at such time in a particular
year as may be designated by written consent of all the shareholders entitled to
vote thereat or which may be designated by resolution of the Board of Directors
of the Company. Said annual meetings shall be held for the purpose of the
election of directors, for the making of reports of the affairs of this
corporation and for the transaction of such other business as may properly come
before the meeting.
(b) At an annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date
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contemplated at the time of the previous year's proxy statement, notice by the
shareholder to be timely must be so received not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or, in the event public announcement of the date of such annual
meeting is first made by the corporation fewer than seventy (70) days prior to
the date of such annual meeting, the close of business on the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made by the corporation. A shareholder's notice to the Secretary shall set
forth as to each matter the shareholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the shareholder proposing such business, (iii) the class and number of shares
of the corporation which are beneficially owned by the shareholder, (iv) any
material interest of the shareholder in such business and (v) any other
information that is required to be provided by the shareholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his or her capacity as a proponent to a shareholder proposal.
Notwithstanding the foregoing, in order to include information with respect to a
shareholder proposal in the proxy statement and form of proxy for a
shareholder's meeting, shareholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this paragraph (b), and, if he or she
should so determine, he or she shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of shareholders by or at the direction of
the Board of Directors or by any shareholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 10.2. Such shareholder's notice
shall set forth (i) as to each person, if any, whom the shareholder proposes to
nominate for election or re-election as a director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the corporation
which are beneficially owned by such person, (D) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the shareholder, and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a director if elected); and (ii) as to such
shareholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 10.2. At the request of the Board of Directors,
any person nominated by a shareholder for election as a
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director shall furnish to the Secretary of the corporation that information
required to be set forth in the shareholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this paragraph (c). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he
(c) or she should so determine, he or she shall so declare at the
meeting, and the defective nomination shall be disregarded.
(d) For purposes of this Section 10.2, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
SECTION 10.3: SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes whatsoever may be called at any time by the President,
the Chairman of the Board of Directors or by the Board of Directors, or by two
or more members thereof, or by one or more holders of shares entitled to cast
not less than 10% of the votes at the meeting. Upon request in writing sent by
registered mail to the Chairman of the Board of Directors, President, Vice
President or Secretary, or delivered to any such officer in person, by any
person (other than the Board of Directors) entitled to call a special meeting of
shareholders, it shall be the duty of such officer forthwith to cause notice to
be given to the shareholders entitled to vote that a meeting will be held at a
time requested by the person or persons calling the meeting, which shall be not
less than 35 days nor more than 60 days after the receipt of such request. If
the notice is not given within 20 days after receipt of the requests, the person
entitled to call the meeting may give the notice.
SECTION 10.4: NOTICE OF MEETINGS. Except as otherwise may be required by
law and subject to Section 10.3 above, written notice of each meeting of
shareholders shall be given to each shareholder entitled to vote at that meeting
(see Section 10.9 below), by the Secretary, assistant secretary or other person
charged with that duty, not less than ten (10) (or, if sent by third class mail,
thirty (30)) nor more than sixty (60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transacted at such
meeting;
(b) in the case of an annual meeting, the general nature of
matters which the Board of Directors, at the time the notice is given, intends
to present for action by the shareholders;
(c) in the case of any meeting at which directors are to be
elected, the names of the nominees intended at the time of the notice to be
presented by management for election; and
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(d) in the case of any meeting, if action is to be taken on any
of the following proposals, the general nature of such proposal:
(i) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest);
(ii) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 902 (relating to amending
the Articles of Incorporation of the corporation);
(iii) a proposal to approve a transaction within the
provisions of California Corporations Code, Sections 181 and 1201 (relating to
reorganization);
(iv) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 1900 (winding up and
dissolution);
(v) a proposal to approve a plan of distribution within
the provisions of California Corporations Code, Section 2007 (relating to
certain plans providing for distribution not in accordance with the liquidation
rights of preferred shares, if any).
At a special meeting, notice of which has been given in
accordance with this Section, action may not be taken with respect to business,
the general nature of which has not been stated in such notice. At an annual
meeting, action may be taken with respect to business stated in the notice of
such meeting, given in accordance with this Section, and, subject to subsection
8(d) above, with respect to any other business as may properly come before the
meeting.
SECTION 10.5: MANNER OF GIVING NOTICE. Notice of any meeting of
shareholders shall be given either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by 500 or more persons
(determined as provided in California Corporations Code Section 605) on the
record date for such meeting, third-class mail, or telegraphic or other written
communication, addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by first-class mail or telegraphic or other written
communication to the corporation's principal executive office, or if published
at least once in a newspaper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the shareholder on
written demand by the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
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SECTION 10.6: CONSENT TO SHAREHOLDERS' MEETINGS. The transactions of any
meeting of shareholders, however called and noticed, and wherever held, are as
valid as though had at a meeting duly held after regular call and notice, if a
quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the shareholders entitled to vote, not present in person or
by proxy, signs a written waiver of notice or a consent to the holding of such
meeting or in approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance of a person at a meeting shall constitute a
waiver of notice of and presence at such meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required by law to be included in the notice but not so
included, if such objection is expressly made at the meeting. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of shareholders need be specified in any written waiver of notice, consent to
the holding of the meeting or approval of the minutes thereof, except as to
approval of contracts between this corporation and any of its directors,
amendment of the Articles of Incorporation, reorganization of this corporation
or winding up the affairs of this corporation.
SECTION 10.7: QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of the shareholders
shall constitute a quorum for the transaction of business, but in no event shall
a quorum consist of less than one-third of the shares entitled to vote at the
meeting. Shares shall not be counted to make up a quorum for a meeting if voting
of such shares at the meeting has been enjoined or for any reason they cannot be
lawfully voted at the meeting. Shareholders present at a duly called or held
meeting at which a quorum is present may continue to transact business until
adjournment notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum. Except as
provided herein, the affirmative vote of a majority of the shares represented
and voting at a duly held meeting it which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
voting by classes is required.
SECTION 10.8: ADJOURNED MEETINGS. Any shareholders' meeting, whether or
not a quorum is present, may be adjourned from time to time by the vote of a
majority of the shares, the holders of which are either present in person or
represented by proxy thereat, but, except as provided in Section 10.6 hereof, in
the absence of a quorum, no other business may be transacted at such meeting.
When a meeting is adjourned for more than 45 days or if after adjournment i new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at a
meeting. Except as aforesaid, it shall not be necessary to give any notice of
the time and place of the adjourned meeting or of the business to be transacted
thereat other than by announcement at the meeting at which such adjournment is
taken. At any adjourned meeting the shareholders may transact any business which
might have been transacted at the original meeting.
SECTION 10.9: VOTING RIGHTS. Only persons in whose names shares entitled
to vote stand on the stock records of this corporation at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held or, if some other day be fixed for the
determination of shareholders of record pursuant to Section 2.8(k) hereof, then
on such
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other day, shall be entitled to vote at such meeting. The record date for
determining shareholders entitled to give consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors has been
taken, shall be the day on which the first written consent is given. In the
absence of any contrary provision in the Articles of Incorporation or in any
applicable statute relating to the election of directors or to other particular
matters, each such person shall be entitled to one vote for each share.
SECTION 10.10: ACTION BY WRITTEN CONSENTS. Any action which may be taken
at any annual or special meeting of shareholders may be taken without a meeting
and without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Unless the consents of all shareholders entitled to vote have been
solicited in writing, notice of any shareholder approval of (i) contracts
between this corporation end any of its directors, (ii) indemnification of any
person, (iii) reorganization of this corporation or (iv) distributions to
shareholders upon winding up of the affairs of this corporation in certain
circumstances without a meeting by less than unanimous written consent shall be
given at least 10 days before the consummation of the action authorized by such
approval, and prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous written
consent, to those shareholders entitled to vote who have not consented in
writing. All notices given hereunder shall conform to the requirements of
Section 10.4 hereto and applicable law. When written consents are given with
respect to any shares, they shall be given by and accepted from the persons in
whose names such shares stand on the books of this corporation at the time such
respective consents are given, or their proxies. Any shareholder giving a
written consent, or any shareholder's proxy holder, or a transferee of the
shares or a personal representative of the shareholder or their respective proxy
holders, may revoke the consent by a writing received by this corporation prior
to the time that written consents of the number of shares required to authorize
the proposed action have been filed with the Secretary of this corporation, but
may not do so thereafter. Such revocation is effective upon its receipt by the
Secretary of this corporation. Notwithstanding anything herein to the contrary,
and subject to Section 305(b) of the California Corporations Code, directors may
not be elected by written consent except by unanimous written consent of all
shares entitled to vote for the election of directors.
SECTION 10.11: ELECTION OF DIRECTORS. Every shareholder entitled to vote
at any election of directors of this corporation may cumulate such shareholder's
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute the shareholder's votes on the same
principle among as many candidates as such shareholder thinks fit. No
shareholder, however, may cumulate such shareholder's votes for one or more
candidates unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting, prior to voting, of such shareholder's intention to cumulate such
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination. The
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for them up to the
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<PAGE> 16
number of directors to be elected by such shares shall be declared elected.
Votes against the director and votes withheld shall have no legal effect.
Election of directors need not be by ballot except upon demand made by a
shareholder at the meeting and before the voting begins.
SECTION 10.12: PROXIES. Every person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or such person's duly
authorized agent and filed with the Secretary of this corporation. No proxy
shall be valid (i) after revocation thereof, unless the proxy is specifically
made irrevocable and otherwise conforms to this Section 10.11 and applicable
law, or (ii) after the expiration of eleven months from the date thereof, unless
the person executing it specifies therein the length of time for which such
proxy is to continue in force. Revocation may be effected by a writing delivered
to the Secretary of this corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or as to any meeting by attendance at the meeting and voting in
person by, the person executing the proxy. A proxy is not revoked by the death
or incapacity of the maker unless, before the vote is counted, a written notice
of such death or incapacity is received by the Secretary of this corporation. A
proxy which states that it is irrevocable is irrevocable for the period
specified therein when it is held by any of the following or a nominee of any of
the following (i) a pledgee; (ii) a person who has purchased or agreed to
purchase or holds an option to purchase the shares or a person who has sold a
portion of such person's shares in this corporation to the maker of the proxy;
(iii) a creditor or creditors of this corporation or the shareholder who
extended or continued credit to this corporation or the shareholder in
consideration of the proxy if the proxy states that it was given in
consideration of such extension or continuation of credit and the name of the
person extending or continuing the credit; (iv) a person who has contracted to
perform services as an employee of this corporation, if a proxy is required by
the contract of employment and if the proxy states that it was given in
consideration of such contract of employment, the name of the employee and the
period of employment contracted for; (v) a person designated by or under a close
corporation shareholder agreement or a voting trust agreement; or (vi) a
beneficiary of a trust with respect to shares held by the trust. In addition, a
proxy may be made irrevocable if it is given to secure the performance of a duty
or to protect a title, either legal or equitable, until the happening of events
which, by its terms, discharge the obligation secured by it. Notwithstanding the
period of irrevocability specified, the proxy becomes revocable when the pledge
is redeemed, the option or agreement to purchase is terminated or the seller no
longer owns any shares of this corporation or dies, the debt of this corporation
or the shareholder is paid, the period of employment provided for in the
contract of employment has terminated, the close corporation shareholder
agreement or the voting trust agreement has terminated, or the person ceases to
be a beneficiary of the trust. In addition, a proxy may be revoked,
notwithstanding a provision making it irrevocable, by a transferee of hares
without knowledge of the existence of the provision unless the existence of the
proxy and its irrevocability appears on the certificate representing such
shares. Every form of proxy or written consent, which provides an opportunity to
specify approval or disapproval with respect to any proposal, shall also contain
an appropriate space marked "abstain," whereby a shareholder may indicate a
desire to abstain from voting his or her shares on the proposal. A proxy marked
"abstain" by the shareholder with respect to a particular proposal shall not be
voted either for or against such proposal. In any election of directors, any
form of proxy in which the directors to
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be voted upon are named therein as candidates and which is marked by a
shareholder "withhold" or otherwise marked in a manner indicating that the
authority to vote for the election of directors is withheld shall not be voted
either for or against the election of a director.
SECTION 10.13: INSPECTORS OF ELECTION. Before any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office to act as inspectors of election at the meeting or its adjournment.
If no inspectors of election are so appointed, the Chairman of the meeting may,
and on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one or three. If inspectors are appointed at a meeting on the request of one or
more shareholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one or three inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the Chairman of the meeting may, and upon the request
of any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
ARTICLE XI
MEETINGS OF DIRECTORS
SECTION 11.1: PLACE OF MEETINGS. Meetings (whether regular, special or
adjourned) of the Board of Directors of this corporation shall be held at the
principal executive office of this corporation or at any other place within or
outside the State of California which may be designated from time to time by
resolution of the Board of Directors or which is designated in the notice of the
meeting.
SECTION 11.2: REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held after the adjournment of each annual meeting of the
shareholders (which regular directors' meeting shall be designated the "regular
Annual Meeting") and at such other times as may be designated from time to time
by resolution of the Board of Directors. Notice of the time and place of all
regular meetings shall be given in the same manner as for special meetings,
except
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that no such notice need be given if (i) the time and place of such meetings are
fixed by the Board of Directors or (ii) the Regular Annual Meeting is held at
the principal executive office of this Corporation hereof and on the date
specified by the Board of Directors.
SECTION 11.3: SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board of Directors,
if any, or the President, or any Vice President, or the Secretary or by any two
or more directors.
SECTION 11.4: NOTICE OF SPECIAL MEETINGS. Special meetings of the Board
of Directors shall be held upon no less than four days' notice by mail or 48
hours' notice delivered personally or by telephone or telegraph to each
director. Notice need not be given to any director who signs a waiver of notice
or a consent to holding the meeting or an approval of the meeting thereof,
whether before or after the meeting or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to the person at the home or office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. A
notice or waiver of notice need not specify the purpose of any meeting of the
Board of Directors. If the address of a director is not shown on the records and
is not readily ascertainable, notice shall be addressed to him at the city or
place in which meetings of the directors are regularly held. If a meeting is
adjourned for more than 24 hours, notice of any adjournment to another time or
place shall be given prior to the time of the adjourned meeting to all directors
not present at the time of adjournment.
SECTION 11.5: QUORUM. A majority of the authorized number of directors
constitutes a quorum of the Board of Directors for the transaction of business.
Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present is the act of the Board of
Directors subject to provisions of law relating to interested directors and
indemnification of agents of this corporation. A majority of the directors
present, whether or not a quorum is present, may adjourn any meeting to another
time and place. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
SECTION 11.6: CONFERENCE TELEPHONE. Members of the Board of Directors
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all directors participating in such meeting
can hear one another. Participation in a meeting pursuant to this Section 11.6
constitutes presence in person at such meeting.
SECTION 11.7: WAIVER OF NOTICE AND CONSENT. The transactions of any
meeting of the Board of Directors, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum is present, and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, a consent to
holding such meeting or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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SECTION 11.8: ACTION WITHOUT A MEETING. Any action required or permitted
by law to be taken by the Board of Directors may be taken without a meeting, if
all members of the Board of Directors shall individually or collectively consent
in writing to such action. Such written consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors. Such action by written
consent shall have the same force and effect as the unanimous vote of such
directors.
SECTION 11.9: COMMITTEES. The provisions of this Article XI apply also
to committees of the Board of Directors and incorporators and action by such
committees and incorporators, mutatis mutandis.
ARTICLE XII
SUNDRY PROVISIONS
SECTION 12.1: INSTRUMENTS IN WRITING. All checks, drafts, demands for
money, notes and written contracts of this corporation shall be signed by such
officer or officers, agent or agents, as the Board of Directors may from time to
time designate. No officer, agent, or employee of this corporation shall have
the power to bind this corporation by contract or otherwise unless authorized to
do so by these by-laws or by the Board of Directors.
SECTION 12.2: SHARES HELD BY THE CORPORATION. Shares in other
corporations standing in the name of this corporation may be voted or
represented and all rights incident thereto may be exercised on behalf of this
corporation by any officer of this corporation authorized to do so by resolution
of the Board of Directors.
SECTION 12.3: CERTIFICATES FOR SHARES. There shall be issued to every
holder of shares in this corporation a certificate or certificates signed in the
name of this corporation by the Chairman of the Board of Directors, if any, or
the President or a Vice President and by the Chief Financial Officer or an
Assistant Chief Financial Officer or the Secretary or any Assistant Secretary,
certifying the number of shares and the class or series of shares owned by the
shareholder. Any or all of the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by this corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
SECTION 12.4: LOST CERTIFICATES. Where the owner of any certificate for
shares of this corporation claims that the certificate has been lost, stolen or
destroyed, a new certificate shall be issued in place of the original
certificate if the owner (i) so requests before this corporation has notice that
the original certificate has been acquired by a bona fide purchaser, (ii) files
with this corporation an indemnity bond in such form and in such amount as shall
be approved by the President or a Vice President of this corporation, and (iii)
satisfies any other reasonable requirements imposed by this corporation. The
Board of Directors may adopt such other provisions and restrictions with
reference to lost certificates, not inconsistent with applicable law, as it
shall in its discretion deem appropriate.
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SECTION 12.5: CERTIFICATION AND INSPECTION OF BYLAWS. This corporation
shall keep at its principal executive office the original or a copy of these
by-laws as amended or otherwise altered to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours.
SECTION 12.6: ANNUAL REPORTS. Provided that this corporation has 100 or
fewer shareholders, the making of annual reports to the shareholders is
dispensed with and the requirement that such annual reports be made to
shareholders is expressly waived, except as may be directed from time to time by
the Board of Directors or the President.
ARTICLE XIII
CONSTRUCTION OF BYLAWS WITH
REFERENCE TO PROVISIONS OF LAW
SECTION 13.1: BYLAW PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO PROVISIONS
OF LAW. All restrictions, limitations, requirements and other provisions of
these by-laws shall be construed, insofar as possible, as supplemental and
additional to all provisions of law applicable to the subject matter thereof and
shall be fully complied with in addition to the said provisions of law unless
such compliance shall be illegal.
SECTION 13.2: BYLAWS PROVISIONS CONTRARY TO OR INCONSISTENT WITH
PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence,
clause or phrase of these by-laws which, upon being construed in the manner
provided in Section 13.1 hereof, shall be contrary to or inconsistent with any
applicable provision of law, shall not apply so long as said provisions of law
shall remain in effect, but such result shall not affect the validity or
applicability of any other portions of these by-laws, it being hereby declared
that these by-laws, and each article, section, subsection, subdivision,
sentence, clause or phrase thereof, would have been adopted irrespective of the
fact that any one or more articles, sections, subsections, subdivisions,
sentences, clauses or phrases is or are illegal.
ARTICLE XIV
ADOPTION, AMENDMENT OR REPEAL OF BYLAWS
SECTION 14.1: BY SHAREHOLDERS. Bylaws may be adopted, amended or
repealed by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote. Bylaws specifying or changing a fixed
number of directors or the maximum or minimum number or changing from a fixed to
a variable board or vice versa may only be adopted by the shareholders;
provided, however, that a Bylaw or amendment of the Articles of Incorporation
reducing the fixed number or the minimum number of directors to a number less
than 5 cannot be adopted if the votes cast against its adoption at a meeting or
the shares not consenting in the case of action by written consent are equal to
more than 16-2/3% of the outstanding shares entitled to vote.
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SECTION 14.2: BY THE BOARD OF DIRECTORS. Subject to the right of
shareholders to adopt, amend or repeal Bylaws, Bylaws, other than a Bylaw or
amendment thereof specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa, may be adopted, amended or repealed by the Board of Directors. A Bylaw
adopted by the shareholders may restrict or eliminate the power of the Board of
Directors to adopt, amend or repeal Bylaws.
ARTICLE XV
RESTRICTIONS ON TRANSFER OF STOCK
SECTION 15.1: SUBSEQUENT AGREEMENT OR BYLAW. If (a) any two or more
shareholders of this corporation shall enter into any agreement abridging,
limiting or restricting the rights of any one or more of them to sell, assign,
transfer, mortgage, pledge, hypothecate or transfer on the books of this
corporation any or all of the shares of this corporation held by them, and if a
copy of said agreement shall be filed with this corporation, or if (b)
shareholders entitled to vote shall adopt any Bylaw provision abridging,
limiting or restricting the aforesaid rights of any shareholders, then, and in
either of such events, all certificates of shares of stock subject to such
abridgements, limitations or restrictions shall have a reference thereto
endorsed thereon by an officer of this corporation and such certificates shall
not thereafter be transferred on the books of this corporation except in
accordance with the terms and provisions of such agreement or Bylaw, as the case
may be; provided, that no restriction shall be binding with respect to shares
issued prior to adoption of the restriction unless the holders of such shares
voted in favor of or consented in writing to the restriction.
ARTICLE XVI
INDEMNIFICATION
SECTION 16.1: INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. This
corporation shall indemnify each person who was or is a party, or is threatened
to be made a party, to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding") by reason of the fact that such person is or was a director,
officer or employee of this corporation, or is or was serving at the request of
this corporation as a director, officer or employee of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer or employee of a foreign or domestic corporation which
was a predecessor corporation of this corporation or of another enterprise at
the request of such predecessor corporation, to the fullest extent permitted by
the California Corporations Code, against all expenses, including, without
limitation, attorneys' fees and any expenses of establishing a right to
indemnification, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such Proceeding, and such indemnification
shall continue as to a person who has ceased to be such a director, officer or
employee, and shall inure to the benefit of the heirs, executors and
administrators of such person; provided, however, that this corporation shall
indemnify any such person seeking indemnity in connection with a Proceeding (or
part thereof) initiated by such person only if such Proceeding (or part thereof)
was authorized by the Board of Directors of this corporation.
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SECTION 16.2: ADVANCEMENT OF EXPENSES. This corporation shall pay
expenses incurred by such a director, officer or employee in defending any
Proceeding as they are incurred in advance of its final disposition; provided,
however, that if the California Corporations Code then so requires, the payment
of such expenses incurred by a director, officer or employee in advance of the
final disposition of a Proceeding shall be made only upon receipt by this
corporation of an undertaking by or on behalf of such director, officer or
employee to repay such amount if it shall be determined ultimately that such
person is not entitled to be indemnified under this Article XVI or otherwise.
SECTION 16.3: NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person in this Article XVI shall not be deemed exclusive of any other rights
that such person may have or hereafter acquire under any statute, bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office. Additionally, nothing in this Article XVI shall limit the
ability of this corporation, in its discretion, to indemnify persons whom this
corporation is not obligated to indemnify pursuant to this Article XVI.
SECTION 16.4: INDEMNIFICATION CONTRACTS. The Board of Directors is
authorized to cause this corporation to enter into a contract with any director,
officer, employee or agent of this corporation, or any person serving at the
request of this corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than (to the extent permitted by this Corporation's Articles
of Incorporation and the California Corporations Code), those provided for in
this Article XVI.
SECTION 16.5: EFFECT OF AMENDMENT. Any amendment, repeal or modification
of any provision of this Article XVI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article XVI and existing at the time of such amendment, repeal or modification.
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EXHIBIT 10.13
SECOND AMENDMENT
TO
THE HEADS OF AGREEMENT
This Second Amendment to the Heads of Agreement (the "Amendment") is made as of
this 7th day of August, 1998, by and between Genelabs Technologies, Inc.
("Genelabs") and SmithKline Beecham p.l.c. ("SKB") and amends that certain Heads
of Agreement dated August 27, 1992, between Genelabs and SKB, as amended by a
letter agreement dated September 15, 1993 and by that Amendment No. 1 dated as
of October 1, 1995 (as amended, the "Agreement").
The parties now wish to amend the Agreement to (i) terminate Genelabs'
co-exclusive license under certain patents and know-how to make, have made, use
and sell HEV Vaccines, either alone or in combination with other vaccines, in
Asia and PAKIPI, and (ii) change the terms of payment by SKB to Genelabs of two
development milestones. In partial consideration for these amendments, SKB has
agreed to pay to Genelabs U.S. $1 million.
Unless otherwise defined herein, all capitalized terms used in this Amendment
shall have the same meaning as such terms are defined in the Agreement.
NOW, THEREFORE, the parties have agreed as follows:
1. Termination of Co-exclusive License.
Genelabs hereby grants to SKB an exclusive, worldwide license, under PATENTS and
KNOW-HOW, to make, have made, use and sell HEV Vaccine. Accordingly, the
Agreement is amended as follows:
(a) The definition of "SKB TERRITORY", set forth in Paragraph
1.16, is amended to mean all countries of the world.
(b) The restrictions provided for under Paragraph 2.01, last
sentence, to LICENSEE'S rights to sub-license are hereby
terminated.
(c) Genelabs' co-exclusive license, set forth in Paragraph 2.02,
under PATENTS and KNOW-HOW to make, have made, use and sell
HEV Vaccine alone or in combination with other vaccines in
ASIA and PAKIPI is hereby terminated.
(d) Consistent with such termination of Genelabs' co-exclusive
license, the rights and licenses granted to Genelabs in
Paragraphs 2.03, 2.04, 2.05, 2.06, 2.09 and 2.10 (as such
Paragraph relates to the rights contained in Article 2) are
hereby terminated. The provisions of Paragraph 2.10 continue
in effect to the extent they apply to the rights granted to
Genelabs pursuant to Paragraph 6.03.
<PAGE> 2
2. Amendment of Two Development Milestone Payments.
(a) Paragraph 4.02(a) is hereby amended to change the minimum
payment from [*]. Paragraph 4.02 (a) shall read in its
entirety as follows:
"US [*] upon LICENSEE entering into Phase I of
clinical trials with the HEV Vaccine; however, if the
price (the `STOCK PRICE') of LICENSOR's common stock
in the First Stock Purchase (as defined in Article
4.08 below) in the Stock Purchase Agreement (as
defined in Article 4.08 below) is less than [*] and
the stock purchase is made as provided for in the
Stock Purchase Agreement, this milestone will be
reduced by the product of [*], but under no
circumstance will the milestone be less than [*]."
(b) Paragraph 4.02(b) is hereby amended to read in its entirety as
follows:
"US [*] upon the earlier of (i) demonstration in
humans of protection by the HEV Vaccine against
disease, or (ii) three months following the
successful completion of a Phase III trial in any
country".
3. Payment by SKB.
In consideration for the foregoing amendments, SKB agrees to pay to Genelabs the
amount of US $1,000,000 (one million US dollars). Such amount shall be due and
payable promptly upon the execution of this Amendment.
Except as expressly amended by this Amendment, all terms and conditions of the
Agreement remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
written above by the duly authorized representatives of the parties hereto.
GENELABS TECHNOLOGIES, INC. SMITHKLINE BEECHAM p.l.c.
By: /s/ GILBERT R. MINTZ, Ph.D. By: /s/ President and General Manager
------------------------------ ----------------------------------
Title: Vice President, Business Development Title: President and General
Manager
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.24
SECOND AMENDMENT TO
COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
THIS SECOND AMENDMENT (the "Second Amendment") to the Collaborative
Research and License Agreement dated December 13, 1996 (the "Agreement") is
entered into by and between GENELABS TECHNOLOGIES, INC., a California
corporation with its principal offices at 505 Penobscot Drive, Redwood City,
California 94063 ("Genelabs") and DUPONT PHARMACEUTICALS COMPANY, a Delaware
general partnership with its principal offices at Chestnut Run Plaza, 974 Centre
Road, Wilmington, DE 19807 ("DPC"), having entered into the Agreement under its
former name, THE DUPONT MERCK PHARMACEUTICAL COMPANY, a Delaware general
partnership with its principal offices at Chestnut Run Plaza, Walnut Run, 974
Centre Road, Wilmington, DE 19807 ("DuPont Pharma"). This Second Amendment is
effective as of this 29th day of December 1998 (the "Amendment Date") and
supersedes the First Amendment which had an effective date of August 24, 1998,
and DPC contract file number #400628-001.01.
RECITALS
WHEREAS, Genelabs and DPC, pursuant to the Agreement, have established a
Research Collaboration using certain Genelabs technology directed towards the
discovery of gene regulating DNA-binding drugs for human therapeutic
applications; and
WHEREAS, the parties, in the course of carrying out their Research
Collaboration have determined that it is in their mutual interest to re-allocate
certain of their respective responsibilities under the Collaboration; and
WHEREAS, the parties agree that it is to their mutual benefit that
Genelabs focus on the chemistry required for the discovery of lead compounds and
assays targeting Collaboration Target Genes; and
WHEREAS, the parties agree that it is to their mutual benefit that DPC
focus its chemistry resources on the optimization of Collaboration Lead
Compounds as well as preclinical and clinical development; and
WHEREAS, the parties wish to formalize their understanding regarding each
of their roles in the Collaboration and to amend the Agreement to adjust certain
rights and obligations of the parties under the Agreement in light thereof;
NOW, THEREFORE, Genelabs and DPC agree, pursuant to Section 10.7 of the
Agreement, to amend the Agreement as follows:
AMENDMENTS TO THE AGREEMENT
-1-
<PAGE> 2
Unless otherwise defined as set forth herein, all capitalized terms used
herein shall have the meaning set forth in the Agreement. The captions to the
amendments stated below are not part of the amendments to the Agreement, but are
merely descriptive of the amendments. In the event of any conflict between this
Second Amendment and the Agreement, the provisions of this Second Amendment
shall control. All other terms and conditions of the Agreement shall remain in
full force and effect. This Second Amendment to the Agreement is acknowledged to
have been made in and shall be construed, governed, interpreted, and applied in
accordance with the laws of Delaware, without giving effect to its conflict of
laws provisions.
OVERVIEW AND INTENT
The parties hereby agree that the "Overview and Intent" section be
deleted and replaced with the following:
The parties intend to continue the research collaboration established on
December 13, 1996. Each party will contribute compounds and chemistries which it
currently has or develops during the course of the research collaboration. The
parties agree that the primary goals of the collaboration have changed as a
result of accomplishments obtained to date. The primary goal of the
collaboration is to create drugs targeted at the Collaboration Target Genes. In
order to accomplish the primary goal the parties agree that Genelabs will
perform activities in support of the identification and characterization of lead
compounds for the Collaboration Target Genes. The specific tasks are set forth
in the Research Plan (Attachment I). DPC will have certain exclusive rights to
pharmaceutical products resulting from the collaboration.
1. AMENDMENTS TO ARTICLE I "CERTAIN DEFINITIONS"
(a) The parties hereby agree that the definition of "Collaboration
Technology" be deleted and replaced with the following definition:
"Collaboration Technology" means any information and data
concerning [*], and all related intellectual property, including
information, data, trade secrets, know-how, inventions,
discoveries and Collaboration Patent Rights, owned or licensable
by one party to the other, excluding clinical information and
data, and excluding that portion of such information, data, trade
secrets, know-how, inventions, discoveries and [*].
(b) "Functional Assay" means an assay that [*].
(c) The parties hereby agree that the definition of "Genelabs Lead
Compounds" be deleted and replaced with the following definition:
"Genelabs Lead Compounds" means Lead Compounds [*].
(d) The parties hereby agree that the definition of "Genelabs Lead
Compound Program" be deleted and replaced with the following definition:
"Genelabs Lead Compound Program" means a program which is [*].
(e) "Ligand Binding Assay" means an assay that [*].
-2-
<PAGE> 3
(f) The parties hereby agree that the definition of "Net Proceeds" be
deleted and replaced with the following definition:
"Net Proceeds" means the gross amount of the revenues received
by Genelabs from outlicensing or sublicensing a Lead Compound
[*] to third parties including but not limited to: [*].
(g) The parties hereby agree that the definition of "Third Party Lead
Compound Program" be deleted and replaced with the following definition:
"Third Party Lead Compound Program" means a program [*].
(h) The parties hereby agree to add the following two new definitions to
Article 1:
"Active Collaboration Investigation" means, with respect to a
[*].
"Derived from DPC Chemistry Effort" is hereby deleted.
2. AMENDMENTS TO ARTICLE II "RESEARCH COLLABORATION"
(a) The parties hereby agree that Section 2.2 of the Agreement be
deleted and replaced by the following:
2.2 Scope of Collaboration. Notwithstanding anything else in this
Agreement, the parties recognize that in conducting the Research
Program compounds and components of compounds may be identified
that could have applications outside the Field of Use.[*].
(b) The parties hereby agree that Section 2.3 of the Agreement be
deleted and replaced by the following:
2.3 Term of Research Program. The Initial Research Term, having
commenced January 1, 1997, shall continue through [*]. The
Initial Research Term may be [*]. The Initial Research Term may
be extended as provided herein, and upon written agreement of the
parties. During the remainder of the Initial Research Term, DPC
shall fund a [*]. Payment to Genelabs of such research funding
shall be made in equal quarterly installments payable within 15
days of the beginning of each Calendar Quarter commencing on the
Effective Date. Payment shall be made in immediately available
funds. Such funding by DPC of FTEs at Genelabs shall be
contingent upon Genelabs providing and retaining the indicated
number of qualified FTEs and upon Genelabs making a good faith
effort in accordance with industry standards to achieve the goals
of the Research Collaboration as set forth in the Research Plan.
Without limiting DPC's rights or remedies, DPC shall have the
right to reduce the level of funding described above to reflect
the failure by Genelabs to provide or retain the required number
of qualified FTEs or to make the required effort to achieve the
goals of the Research Collaboration. The names, curriculum vitae
and percentage of time devoted to the Research Program for each
scientist comprising the required number of FTEs will be provided
to DPC within thirty (30) days of the Effective Date and not
later than sixty (60) days prior to the start of each subsequent
Calendar Year of the Research Collaboration. The mixture of
skills and levels of expertise of such scientists shall be
appropriate to the objectives of the Research Program. The
selection of such scientists shall be subject to the approval of
DPC, such approval not to be unreasonably withheld.
-3-
<PAGE> 4
(c) The parties hereby agree that Section 2.4 of the Agreement be
deleted and replaced by the following:
Research Term Extension; Funding Commitments. DPC shall provide
Genelabs with written notice no later than [*]. Upon any
extension of the Initial Research Term, the RSC shall revise the
Research Plan and assign responsibilities and determine manpower
requirements of the parties for such extended term.
(d) The parties hereby agree to add a new Section 2.7 as follows:
2.7 Discovery Chemistry and Lead Optimization. The parties agree
that, pursuant to the Research Plan (Attachment I), as may be
amended from time to time, Genelabs shall assume responsibility
for and allocate resources funded by DPC to the [*], as specified
in the Research Plan; specifically the [*].
3. AMENDMENTS TO ARTICLE III "TARGET GENES"
(a) The parties hereby agree that Section 3.1 of the Agreement be
deleted and replaced by the following:
3.1 Collaboration Target Genes.
(a) The RSC has designated [*].
(b) The parties agree that the title to Section 3.2 and Section 3.2(a)
of the Agreement be deleted and replaced by the following:
3.2 Genelabs Lead Compound and Third Party Lead Compound Programs.
(a) Genelabs may initiate a Genelabs Lead Compound Program
[*], it may initiate a Third Party Lead Compound Program in
collaboration with a third party; provided, however, that in
no event may the [*].
(c) The parties hereby agree that Section 3.2(b) of the Agreement be
deleted and replaced by the following:
Genelabs may initiate a Genelabs Lead Compound Program [*],
subject to Section 3.2(a) and the following conditions:
(i) [*]; and
(ii) [*]
[*]
(d) The parties hereby agree that Section 3.2(c) of the Agreement be
deleted and replaced by the following:
-4-
<PAGE> 5
Genelabs may initiate a [*], subject to Section 3.2(a), and the
following conditions:
(i) [*].
(ii) [*].
(e) The parties hereby agree that Section 3.2(d) of the Agreement be
deleted in its entirety.
(f) The parties hereby agree that 3.3 of the Agreement be deleted and
replaced in its entirety with the following:
3.3 Outlicensing by Genelabs. Genelabs may develop and commercialize
Genelabs Lead Compounds arising from a Genelabs Lead Compound Program
or may choose at any time to outlicense such a Genelabs Lead Compound
to a third party,[*]:
(i) [*];
(ii) [*];
(iii) [*];
(iv) [*].
Genelabs' obligations under this Section 3.3 shall terminate upon [*].
The parties understand and agree that DPC's rights under this Section
3.3 do not cover any Genelabs Lead Compound resulting from any Third
Party Lead Compound Program.
(g) The parties hereby agree that Section 3.4 of the Agreement be
deleted and be replaced in its entirety by the following:
3.4 Genelabs Screening - Collaboration. During the term of the Research
Collaboration, Genelabs may, at its sole discretion, enter into Genelabs
Screening Collaborations with third parties. It is understood that a
Genelabs Screening Collaboration as defined in the Agreement means a
service agreement in which Genelabs provides screening and/or assay
services to a third party. As part of Genelabs Screening Collaborations,
Genelabs may disclose Collaboration Technology to its third party
collaborator and may receive any information concerning such third
parties' chemistries or the targets or promoters being screened.
Genelabs shall not pay DPC any portion of the proceeds received as part
of such Genelabs Screening Collaboration.
4. AMENDMENTS TO ARTICLE IV "GRANT OF RIGHTS"
(a) The parties hereby agree that Section 4.1 of the Agreement be
deleted and replaced in its entirety by the following:
4.1 Monomer Database. Except as otherwise set forth in this
Section 4.1,[*].
(b) The parties hereby agree to amend Section 4.2(i)-(iii) by
substituting the words "to develop" for the words "to discover" (or
"Discover").
-5-
<PAGE> 6
(c) The parties hereby agree that Section 4.3 of the Agreement be
deleted in its entirety.
5. AMENDMENTS TO ARTICLE V "PAYMENTS"
(a) The parties hereby agree that introduction to Section 5.1(b), and
Section 5.1(b) (i) of the Agreement, be deleted and replaced by the
following:
Milestones. DPC shall also make the following payments (which may
be used for any purpose by Genelabs) to Genelabs within thirty
(30) days (except where deferred under Section 5.1(b)(i)) of the
achievement of the following milestones related to commercial
Licensed Products which are derived directly or indirectly
through utilization of the Genelabs Technology or Collaboration
Technology, regardless of whether the milestone is achieved
during or after termination of the Research Collaboration, and
regardless of whether the entity achieving the milestone is DPC
itself or one of its Sublicensees or Affiliates:
(i) [*].
5(b) The parties agree to delete Section 5.2(a) of the
Agreement and replace it with the following:
5.2(a) Outlicensing Revenues if [*]. In the event that a
[*], then Genelabs agrees to pay to DPC a fee based on the
Net Proceeds Genelabs receives from outlicensing or
sublicensing any Genelabs Lead Compound during the period
commencing [*] (the "Period"). During that portion of the
Period commencing [*] and ending on the earlier of [*] the
fee shall be equal to [*] of the Net Proceeds Genelabs
receives from any such outlicensing or sublicensing of
Genelabs Lead Compound. Thereafter, for the remainder of
the Period, the fee shall be equal to [*] of the Net
Proceeds Genelabs receives from any such outlicensing or
sublicensing of a Genelabs Lead Compound.
5(c) The parties agree to delete Section 5.2(b) of the
Agreement and replace it with the following: 5.2(b)
Outlicensing Revenues if [*]. In the event that a [*],
then Genelabs agrees to pay to DPC a fee of [*] of the Net
Proceeds Genelabs receives from outlicensing or
sublicensing any Genelabs Lead Compound. This obligation
shall only apply to outlicensing or sublicensing of a
Genelabs Lead Compound during the period commencing [*].
8. AMENDMENTS TO ARTICLE VIII "TERM AND TERMINATION"
(a) The parties hereby agree that Section 8.1 of the Agreement be
deleted and replaced by the following:
8.1 Term and Expiration. This Agreement shall be effective as
of the Effective Date and unless terminated earlier pursuant
to Section 8.2 or 8.5 below, the terms of this Agreement shall
continue in effect on a country-by-country basis until
expiration date of the last obligation of a party to pay fees
or royalties to the other party for the sale of a Licensed
Product in that country. Upon expiration of this Agreement as
to any country
-6-
<PAGE> 7
due to the expiration of the obligation of a party to pay
royalty to the other party for the sale of a Licensed Product
in that country, the licenses hereunder with respect to
Licensed Product shall become fully paid-up, perpetual
licenses.
(b) The parties hereby agree to add the following Section 8.5.
8.5 Termination Not for Cause. This Agreement may be
terminated [*].
(c) The parties agree to delete Exhibit B, the Research Plan and replace
with Attachment I, Research Plan for [*] (herein attached).
-7-
<PAGE> 8
ATTACHMENT I
RESEARCH PLAN FOR [*]
DUPONT PHARMACEUTICALS/GENELABS TECHNOLOGIES COLLABORATION
[*]
-8-
<PAGE> 9
IN WITNESS WHEREOF, Genelabs and DPC have duly executed this Second
Amendment as of the Effective Date first written above.
DUPONT PHARMACEUTICALS COMPANY GENELABS TECHNOLOGIES,
INC.
By /S/ PAUL A. FRIEDMAN, M.D. By: /S/ IRENE CHOW, PH.D.
------------------------------------ --------------------------------
Printed Name: Paul A. Friedman, M.D. Printed Name: Irene Chow, Ph.D.
------------------------ ---------------------
Title: President Title: President & CEO
------------------------------- ----------------------------
DuPont Pharmaceuticals
Research Labs
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-9-
<PAGE> 1
Exhibit 10.26 First Modification to Grant from the Space and Naval Warfare
Systems Command.
Grant No.: N65236-98-1-5400
MODIFICATION: P00001
DARPA Order No.: F854/01
Program Code: P8310
Effective Date: 18 DEC 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: AB 9790400 1320 F854 P9310 2525 DPAM 9 0102 62383E S12123
JO #BMUE5X9I17 DOC #HR00119999F854/AA
REQ: N65236-8337-8F08 $4,810,871.00
Authority: This Grant is issued pursuant to the authority of 10 U.S.C. 2358.
GRANT SCHEDULE
The purpose of this modification is to provide for an increment of funding under
Grant N65236-98-1-5400. Effective as of the date of this modification:
1. The amount of funding available under this Grant is hereby increased by the
amount shown in the accounting and appropriation data set forth above.
2. Revise Paragraph 7 to read as follows:
<PAGE> 2
"7. This Grant is incrementally funded. The total amount of this Grant is
$13,592,769.00. The amount currently available for payment is $8,586,856.00. The
Government's obligation for the difference of $5,005,913.00 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.
FOR THE UNITED STATES OF AMERICA,
SPACE AND NAVAL WARFARE SYSTEMS COMMAND,
SYSTEMS CENTER CHARLESTON
By: /S/ GRANTS OFFICER
-------------------------------
(Grants Officer)
December 18, 1998
-------------------------------
(Date)
<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-8 No.'s 333-30083, 333-5769, 33-85914, 33-81894, 333-4806 and 33-52250)
pertaining to the 1991 Employee Stock Purchase Plan, 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 10, 1999, 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, 1998.
ERNST & YOUNG LLP
Palo Alto, California
March 26, 1999
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<CHANGES> 0
<NET-INCOME> (2,214)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
<F3>CONSISTS OF INCOME FROM DISCONTINUED OPERATIONS AND EQUITY IN LOSS OF
AFFILIATE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,218
<SECURITIES> 18,069
<RECEIVABLES> 174
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,685
<PP&E> 8,747
<DEPRECIATION> 7,482
<TOTAL-ASSETS> 27,129
<CURRENT-LIABILITIES> 5,753
<BONDS> 0
0
9,682
<COMMON> 137,982
<OTHER-SE> (126,830)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 27,129
<SALES> 0
<TOTAL-REVENUES> 3,437
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,586<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (486)
<INCOME-PRETAX> (4,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,663)
<DISCONTINUED> 1,483<F3>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,180)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
<F3>CONSISTS OF INCOME FROM DISCONTINUED OPERATIONS AND EQUITY IN LOSS OF
AFFILIATE, NET OF GAIN ON PARTIAL SALE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1998
<CASH> 2,528
<SECURITIES> 16,825
<RECEIVABLES> 57
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,774
<PP&E> 9,043
<DEPRECIATION> 7,583
<TOTAL-ASSETS> 26,103
<CURRENT-LIABILITIES> 6,175
<BONDS> 0
0
9,682
<COMMON> 138,174
<OTHER-SE> (128,575)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 26,103
<SALES> 0
<TOTAL-REVENUES> 5,915
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,015<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (749)
<INCOME-PRETAX> (6,351)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,351)
<DISCONTINUED> 1,459<F3>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,892)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
<F3>CONSISTS OF INCOME FROM DISCONTINUED OPERATIONS AND EQUITY IN LOSS OF
AFFILIATE, NET OF GAIN ON PARTIAL SALE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, AND NOTES THERETO,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,631
<SECURITIES> 16,670
<RECEIVABLES> 87
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,684
<PP&E> 9,075
<DEPRECIATION> 7,674
<TOTAL-ASSETS> 26,807
<CURRENT-LIABILITIES> 8,374
<BONDS> 0
0
9,682
<COMMON> 138,335
<OTHER-SE> (130,231)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 26,807
<SALES> 0
<TOTAL-REVENUES> 7,800
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,964<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,025)
<INCOME-PRETAX> (8,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,139)
<DISCONTINUED> 1,534<F3>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,605)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
<F3>CONSISTS OF INCOME FROM DISCONTINUED OPERATIONS AND EQUITY IN LOSS OF
AFFILIATE, NET OF GAIN ON PARTIAL SALE.
</FN>
</TABLE>
