<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-27972
HOUGHTEN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0336233
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3550 GENERAL ATOMICS COURT, SAN DIEGO, CA 92121
(619) 455-3814
(Address, including zip code, and telephone, including
area code, of registrant's principal executive offices)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
----- -------------------------------
Common stock, $0.001 par value 13,361,805
<PAGE> 2
HOUGHTEN PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at September 30, 1996 and December 31, 1995 ............. 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995 ....................................................... 4
Consolidated Statements of Cash Flows for the nine months ended September
30, 1996 and 1995 ................................................................. 5
Notes to Consolidated Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 14
Item 6. Exhibits and Reports on Form 8-K .................................................... 14
SIGNATURE .................................................................................... 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statement
HOUGHTEN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,841 $ 1,161
Short term investments 21,600 --
Accounts receivable 383 241
Other current assets 669 132
-------- --------
Total current assets 32,493 1,534
Property and equipment, net 1,424 935
Other assets 646 277
-------- --------
$ 34,563 $ 2,746
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (net capital deficiency)
Current liabilities:
Accounts payable $ 567 $ 216
Accrued compensation 472 341
Other accrued liabilities 1,796 957
Current portion of obligations under capital leases 455 361
Current portion of notes payable 12
Deferred revenue 2,233 2,004
-------- --------
Total current liabilities 5,535 3,879
Obligations under capital leases 549 470
Long term notes payable 49 --
Series One redeemable preferred stock
2,100,000 shares authorized, issued and outstanding; -- 2,772
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $.001 par value:
Authorized shares - 5,000,000 at September 30, 1996
Issued and outstanding shares - none and 15,931,493 at
September 30, 1996 and December 31, 1995, respectively -- 16
Common stock, $.001 par value:
Authorized shares - 40,000,000 at September 30, 1996
Issued and outstanding shares - 13,355,769 and 310,374 at
September 30, 1996 and December 31, 1995, respectively 13 --
Additional paid-in capital 70,652 30,367
Deferred compensation, net (1,742) (236)
Accumulated deficit (40,493) (34,522)
-------- --------
Total stockholders' equity (net capital deficiency) 28,430 (4,375)
-------- --------
$ 34,563 $ 2,746
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE> 4
HOUGHTEN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 1,200 $ 499 $ 3,655 $ 1,033
License Fees 3,369 -- 3,369 --
------------ ------------ ------------ ------------
4,569 499 7,024 1,033
COSTS AND EXPENSES:
Cost of sales 479 508 1,429 921
Research and development 3,241 1,969 8,410 5,086
In process research and development 1,303 -- 1,303 --
Selling, general and administrative 994 657 2,654 1,786
------------ ------------ ------------ ------------
6,017 3,134 13,796 7,793
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,448) (2,635) (6,772) (6,760)
OTHER INCOME (EXPENSE):
Interest income 408 53 917 111
Interest expense (26) (21) (69) (63)
Corporate joint venture -- -- -- 414
------------ ------------ ------------ ------------
NET LOSS $ (1,066) $ (2,603) $ (5,924) $ (6,298)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.08) $ (0.27) $ (0.49) $ (0.65)
============ ============ ============ ============
SHARES USED IN COMPUTING
NET LOSS PER SHARE 13,274,475 9,668,945 11,995,761 9,644,070
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
HOUGHTEN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,924) $ (6,298)
Adjustments to reconcile net loss to net cash flows
used for operating activities:
Depreciation and amortization 436 311
Corporate joint venture -- (414)
Amortization of deferred compensation 341 --
Changes in operating assets and liabilities, net of effects
from the transfer of assets to and from corporate joint
venture in 1994 and 1995:
Accounts receivable (122) 497
Other current assets (537) (461)
Accounts payable 238 272
Other accrued liabilities 911 (39)
Deferred revenue 229 1,598
-------- --------
Net cash flows used for operating activities (4,428) (4,534)
INVESTING ACTIVITIES
Additions to property and equipment, net (374) (35)
Purchase of ChromaXome Corp., net of cash acquired 6 --
Short term investments (21,738) --
Other assets (306) (358)
-------- --------
Net cash flows used for investing activities (22,412) (393)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (295) (217)
Proceeds from issuance of notes payable 62 --
Redemption of preferred stock (2,819) --
Issuance of convertible preferred stock, net of issuance costs 10,049 8,000
Issuance of common stock 28,523 15
-------- --------
Net cash flows provided by financing activities 35,520 7,798
-------- --------
Net increase in cash and cash equivalents 8,680 2,871
Cash and cash equivalents at beginning of period 1,161 516
======== ========
Cash and cash equivalents at end of period $ 9,841 $ 3,387
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 69 $ 63
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Property and equipment acquired under capital lease obligations $ 268 $ 130
======== ========
Unrealized loss on investment available for sale $ 138 $ --
======== ========
Deferred compensation related to stock options $ 1,847 $ --
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
HOUGHTEN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Houghten Pharmaceuticals, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 1996,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1995,
included in the Company's prospectus dated March 29, 1996, filed with the
Securities and Exchange Commission pursuant to Rule 424 (b) under the Securities
Act of 1933, as amended, with reference to Registration No. 333-1376 and
Registration No. 333-2982.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The adoption of the new
standard had no effect on the financial statements.
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting and Disclosure of Stock-Based Compensation." As allowed under the
SFAS, the Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in
accounting for its employee stock options. The adoption of the standard had no
effect on the financial statements.
2. CORPORATE JOINT VENTURE
Effective January 1, 1994, the Company transferred substantially all
tangible assets and certain liabilities having a net carrying value of $497,242
from its wholly-owned subsidiary, Multiple Peptide Systems, Inc. ("MPS"), to a
newly formed entity, Chiron Mimotopes Peptide Systems, LLC ("CMPS"), a Delaware
limited liability company. Chiron Corporation ("Chiron") also transferred
certain tangible assets of its peptide product line to CMPS. As of January 1,
1994, CMPS was 25% owned by MPS and 75% owned by Chiron. CMPS engaged in the
manufacture and sale of peptides and peptide libraries to the research
community.
Effective March 31, 1995, Chiron and the Company determined to cease
the operations of CMPS and return the previously contributed technology and
certain assets back to the stockholders. In connection with the dissolution, the
Company agreed to provide Chiron certain products at no cost and Chiron loaned
the Company $145,000, which has been repaid.
<TABLE>
<S> <C>
The effect of the transaction on the Company is as follows:
Assets received:
Cash......................................................... $ 130,000
Accounts receivable, net..................................... 448,913
Other, net................................................... 71,150
Cost of products to be provided................................... (236,000)
---------
Gain on dissolution.......................................... $ 414,063
=========
</TABLE>
The Company also received property and equipment for which no value has
been assigned. The net monetary assets received over the cost to provide product
to Chiron of approximately $414,000 is reported as other income from corporate
joint venture.
6
<PAGE> 7
HOUGHTEN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
During the three months ended March 31, 1995, there were no operations
in MPS, as these operations were conducted through CMPS. The consolidated
statements of operations and consolidated statements of cash flows for the three
and nine months ended September 30, 1996 include MPS's operations.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
common shares outstanding during the periods as adjusted for the effects of
certain rules of the Securities and Exchange Commission for the periods prior to
the Company's initial public offering which closed April 3, 1996. The
calculation of the shares used in computing net loss per share also includes the
Series A, B, C, D, E, F and G Preferred Stock, which converted into shares of
common stock upon the closing of the initial public offering, as if they were
converted into common stock as of the original dates of issuance.
4. COLLABORATIVE ARRANGEMENTS
In connection with the sale of the Company's Series G Preferred Stock,
the Company entered into an agreement with Dura Pharmaceuticals, Inc. ("Dura").
The Company's chairman of the board of directors is a member of the board of
directors of Dura and Dura's chairman and chief executive officer is a member of
the Company's board of directors. Under the contract, Dura will perform research
to apply Dura's drug delivery technology to compounds developed by the Company.
The Company is required to make minimum contract payments of $6 million over
four years. Payments are due quarterly and must aggregate $2 million in each of
the first two years of the contract and $1 million in each of the last two years
of the contract. Concurrent with the execution of this contract, Dura purchased
$5 million of the Company's Series G Preferred Stock.
In February 1996, the Company entered into a collaborative arrangement
with Novo Nordisk A/S whereby the Company received $2 million for library access
fees and will receive additional fees in February 1997. The Company will also
receive milestone and royalty payments on products discovered and subsequently
developed and marketed by Novo Nordisk A/S.
5. STOCKHOLDERS' EQUITY
In January and February 1996, the Company issued 3,366,670 shares of
its Series G Preferred Stock for net cash proceeds of $10.1 million.
In February 1996, the Board of Directors approved a one-for-2.15
reverse stock split of the Company's outstanding common stock. All share and per
share amounts in the accompanying consolidated financial statements have been
retroactively restated to reflect the reverse stock split.
In the first quarter of 1996, the Company recorded $1.8 million in
deferred compensation relating to options granted under its Stock Incentive Plan
which will be expensed over the vesting period of these options.
On April 3, 1996, the Company closed its initial public offering of
3,300,000 shares of common stock at $8.00 per share for total gross proceeds of
$26,400,000 and net cash proceeds of $23,776,220. Upon closing of the initial
public offering, the Series A, B, C, D, E, F and G Preferred Stock automatically
converted into 8,975,845 shares of common stock. Also in connection with the
closing of the initial public offering, in April 1996, the 2,100,000 shares of
the Company's Series One Preferred Stock were redeemed for $2,818,820 (including
cumulative dividends of $718,820) in cash.
7
<PAGE> 8
HOUGHTEN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In April 1996, the underwriters of the Company's initial public
offering exercised an over-allotment option to purchase 495,000 shares of common
stock at $8.00 per share for net cash proceeds of $3,682,800.
6. CHROMAXOME ACQUISITION
Effective August 1, 1996, the Company acquired all the outstanding
shares of ChromaXome Corp. ("CXC") for approximately 193,170 shares of the
Company's common stock, plus issuance of options to acquire up to approximately
27,660 shares of the Company's common stock. As part of the acquisition, a
wholly-owned subsidiary of the Company merged with and into CXC, and CXC became
a wholly-owned subsidiary of the Company. CXC is developing proprietary
technology to transfer metabolic pathways from microbes into bacteria that may
then be able to rapidly reproduce these pathways.
The Company accounted for the acquisition of CXC using the purchase
method of accounting. The purchase price of $1,321,000 consists of the
following: (i) $1,093,000 related to market value of shares and options to
acquire shares of the Company common stock issued in connection with the
transaction, (ii) $100,000 in outstanding advances to CXC and (iii) transaction
costs of approximately $128,000. The purchase price has been allocated to the
fair market value of the tangible and intangible assets acquired and liabilities
assumed. Based on the purchase price, the Company has allocated $1,303,000 to
acquired in-process research and development which has been charged to the
Company's statement of operations for the quarter ended September 30, 1996.
In addition to the issuance of shares at the time of acquisition, the
Company is also committed to issue additional stock to former CXC stockholders
and additional options to consultants upon the achievement of certain scientific
and business milestones by the business of CXC. The maximum number of additional
shares that may be issued is approximately 412,600 shares of the Company's
common stock, including up to approximately 26,260 shares issuable upon the
exercise of options. Upon any such additional issuance of shares, the Company
will record an additional charge to acquisition of in-process technology in the
quarter of such issuance, the amount of which will be dependent upon the market
price of the Company's common stock at that time, the number of shares issued
and the value of milestone-based options which vest at that time.
7. MAGAININ LICENSE FEE
On September 26, 1996, the Company entered into an agreement with
Magainin Pharmaceuticals Inc. ("Magainin") pursuant to which the Company
subsequently received 275,000 shares of Magainin common stock with a then
current market value of $3,369,000 in exchange for the Company's royalty
interest in Magainin's lead compound, MSI-78, held by the Company.
In accordance with FASB Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities", the Company has classified the stock
as an investment available for sale. At September 30, 1996, the Company recorded
an unrealized loss to stockholder's equity of approximately $138,000 as the
result of a decline in market value of the Magainin stock.
8
<PAGE> 9
HOUGHTEN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(unaudited)
8. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1996
On November 13, 1996, the Company entered into a binding letter of
intent, subject to receipt of third party approval, to sell its peptide
manufacturing subsidiary, MPS, to a new company to be formed by Dr. Richard
Houghten, the Company's founder, Chief Technical Officer and member of the
Company's board of directors. Pursuant to the arrangements outlined in the
letter of intent, the Company would receive initial consideration of $1.5
million in 1997, with future payments over a five-year period of at least
$750,000. Upon the sale of MPS contemplated by such letter of intent, Dr.
Houghten will resign as an officer of the Company (although Dr. Houghten will
remain as a member of the Company's board of directors). Consummation of the
transactions contemplated by the letter of intent is subject to certain
contingencies, including the receipt of required third party approvals, and will
close upon satisfaction of those conditions, but even in the absence of
definitive agreements, no later than February 14, 1996, subject to extension by
agreement of the parties.
9
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged primarily in the development of combinatorial
chemistry libraries for use by corporate collaborators and for internal research
and development programs. The Company has devoted substantially all of its
resources since its founding to developing methods to synthesize and screen
large libraries of chemicals for new drug discovery and optimization, and to
developing a select number of chemical compounds as potential pharmaceutical
products.
The Company expects that its revenue sources for at least the next
several years will be limited to licensing fees and milestone payments (if and
when achieved) from existing corporate partners and possible future corporate
partners. The timing and amounts of such revenues, if any, will be subject to
significant fluctuations and therefore the Company's results of operations for
any period may not be comparable to the results of operations for any other
period. The Company will be required to conduct significant research,
development and production activities during the next several years to fulfill
its obligations to corporate partners and for the development of its own
compounds. The Company has been unprofitable since its inception and does not
anticipate having net income in the next several years. As of September 30,
1996, the Company's accumulated deficit was approximately $40,493,000.
The Company's wholly-owned subsidiary, Multiple Peptide Systems, Inc.,
a California corporation ("MPS"), was founded in 1986 and manufactures and
markets peptides to government entities, universities, research institutions and
private companies. Effective as of January 1, 1994, MPS entered into a Limited
Liability Company Agreement with Chiron Mimotopes U.S. ("CMUS"), pursuant to
which MPS agreed to contribute substantially all of its assets and certain of
its liabilities to Chiron Mimotopes Peptide Systems, LLC, a Delaware limited
liability company ("CMPS"), in exchange for a 25% ownership interest in CMPS.
CMUS and MPS agreed to form CMPS for the purpose of engaging in the business of
synthesizing and producing peptides and peptide libraries for commercial sale on
a joint basis. Pursuant to the terms of an agreement entered into as of March
31, 1995, among Chiron Corporation ("Chiron"), CMPS, CMUS, the Company and MPS,
CMPS was dissolved and the remaining net assets were transferred to MPS and
CMUS. The Company does not anticipate substantial revenue growth from, or the
investment by the Company of material amounts of resources in, MPS. On November
13, 1996, the Company signed a binding letter of intent to sell MPS for
approximately $2.25 million to an entity to be formed by Dr. Richard Houghten
(the Company's founder, Chief Technical Officer and member of the Company's
board of directors). (See Note 8 of Notes to Consolidated Financial Statements.)
Effective August 1, 1996 the Company acquired all the outstanding
shares of ChromaXome Corp. ("CXC") in exchange for shares of the Company's
common stock and options to acquire the Company's common stock. CXC is
developing proprietary technology to transfer metabolic pathways from naturally
occuring microbes into bacteria more suited to the rapid reproduction of these
pathways. In addition to the issuance of shares at the time of acquisition, the
Company is also committed to issue additional stock to former CXC stockholders
and additional options to consultants upon the achievement of certain scientific
and business milestones by the business of CXC. (See Note 6 of Notes to
Consolidated Financial Statements)
On September 26, 1996, the Company entered into an agreement with
Magainin Pharmaceuticals Inc. ("Magainin") pursuant to which the Company
received 275,000 shares of Magainin common stock in exchange for the Company's
royalty interest in Magainin's lead compound, MSI-78. In 1990, a subsidiary of
the Company and The Scripps Research Institute entered into an agreement to
license certain compounds to Magainin in exchange for royalties on sales of
successfully commercialized compounds. MSI-78 was covered by this license. Under
the terms of the agreement of September 26, 1996 , the Company and The Scripps
Research Institute equally split 550,000 shares of Magainin common stock in lieu
of the potential receipt of royalties from MSI-78. (See Note 7 of Notes to
Consolidated Financial Statements)
10
<PAGE> 11
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q are forward-looking statements
that involve risks and uncertainties, including whether existing collaborations
will be successful, any new collaborations can be entered into on favorable
terms, any potential products can be timely developed, receive necessary
regulatory approvals and be successfully marketed, the Company's combinatorial
chemistry technology can be successfully developed and applied, competitors'
technology will eclipse or render obsolete or uncompetitive the Company's
technology, other risks detailed throughout this Form 10-Q and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. Actual results may differ materially from those projected.
These forward-looking statements represent the Company's judgment as of the date
of the filing of this Form 10-Q. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
The Company recorded revenues of approximately $4,569,000 for the
third quarter and $7,024,000 for the nine-month period ended September 30, 1996,
compared with $499,000 and $1,033,000 for the same periods in 1995 (first
quarter 1995 operating results did not include revenues from MPS as explained
above). The third quarter revenues for 1996 include $3,369,000 recorded as the
result of the receipt of 275,000 shares of Magainin common stock in exchange for
a royalty interest in Magainin's lead compound, MSI-78. In addition, third
quarter revenues include $609,000 derived from the sale of custom peptides by
the Company's subsidiary, MPS, compared to revenues of $430,000 for the same
period in 1995. The remaining $591,000 in third quarter 1996 and $69,000 in
third quarter 1995 revenue was generated from the shipment of combinatorial
libraries or individual compounds under collaborative agreements. For the nine
months ended September 30, 1996, revenues from collaborative agreements were
approximately $1,932,000 compared to $293,000 in the prior year period as a
result of higher shipments of combinatorial libraries. Although the Company
typically receives a payment at the initiation of a collaboration agreement, the
Company does not recognize revenue from those payments until the associated
libraries are shipped to the collaboration partner. As of September 30, 1996,
the Company's balance sheet reflects a liability of approximately $2,233,000 for
deferred revenue of which $2,146,000 relates to these agreements. The liability
balance reflects cash payments received in excess of revenue recognized for
libraries shipped. For the nine months ended September 30, 1996, MPS revenues of
$1,723,000 substantially exceeded those recorded for the same period in 1995,
which included only six months of operating results. Although MPS operated
profitably in the first nine months of 1996, the financial results from its
ongoing operations did not have a material impact on the Company's loss.
Cost of sales decreased to approximately $479,000 for the quarter ended
September 30, 1996 from approximately $508,000 for the quarter ended September
30, 1995. In the third quarter of 1996, the Company recorded a year-to-date
adjustment to decrease cost of sales approximately $71,000 with a corresponding
offset to research and development in connection with an intercompany
elimination. Had it not been for the year-to-date adjusting entry, cost of sales
would have been $550,000, an increase from the prior year due to higher sales
volume for MPS. For the nine months ended September 30, 1996, cost of sales was
$1,429,000, substantially higher than the $921,000 recorded for the same period
in 1995 and primarily reflecting the absence of MPS cost of sales from the first
quarter of 1995.
Research and development expenses increased to approximately $3,241,000
for the three months ended September 30, 1996 and $8,410,000 for the nine months
ended September 30, 1996, as compared to $1,969,000 and $5,086,000,
respectively, for the same periods in 1995. The higher spending in research and
development results primarily from increased funding for the Company's
combinatorial chemistry program, largely reflecting establishment of an internal
combinatorial chemistry program. Funding to the Torrey Pines Institute for
Molecular Studies ("TPIMS"), the Company's external research partner for
combinatorial chemistry technology, was $622,000 for the three months ended
September 30, 1996 and $1,944,000 for the nine months ended September 30, 1996,
as compared to $713,000 and $1,691,000, respectively, for the same periods ended
September 30, 1995. Increased research and development spending is also
attributable to the Company's drug discovery and development collaboration with
Dura
11
<PAGE> 12
Pharmaceuticals, Inc. ("Dura"). Research and development expense for
the three and nine months ended September 30, 1996 include $500,000 and
$1,285,000, respectively, of funding to Dura; this collaboration was initiated
in February 1996. The chairman of the board of directors of the Company is a
member of the board of directors of Dura, and Dura's chairman and chief
executive officer is a member of the Company's board of directors. The Company's
president and chief executive officer who, is also a director of the Company, is
a member of the board of directors of a research and development affiliate of
Dura. The Company expects to incur continued and substantial increases in
research and development expenses relating to product development, clinical
trials and combinatorial chemistry development as well as for the development of
the combinatorial biology and related technologies acquired through the
acquisition of CXC (effective August 1, 1996). In connection with the
acquisition of CXC, in the third quarter the Company recorded an expense of
$1,303,000 related to the acquisition of in-process research and development.
Dependent on the achievement of certain scientific and business milestones by
the business of CXC, the Company may record additional charges in future
quarters to acquisition of in-process research and development.
The Company's selling, general and administrative expenses were
approximately $994,000 and $2,654,000 for the three and nine months ended
September 30, 1996, respectively, as compared to $657,000 and $1,786,000,
respectively, for the same periods in 1995. Higher selling, general and
administrative expenses in the third quarter of 1996 compared to the same period
in 1995 resulted from amortization of deferred compensation associated with
stock options issued prior to the Company's initial public offering in addition
to increases in recruiting costs and other administrative expenses. Increases in
selling, general and administrative expenses for the nine months ended September
30, 1996 compared to the same period in 1995 are primarily attributable to
amortization of deferred compensation along with higher legal costs incurred for
patents and corporate development activities. Selling, general and
administrative costs are expected to continue to increase as a result of various
costs associated with being a public company.
As a result of higher cash balances, the Company's interest income has
increased to approximately $408,000 and $917,000 for the three and nine months
ended September 30, 1996, respectively, as compared to $53,000 and $111,000 for
the same periods in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash, cash equivalents and short
term investments totaling approximately $31,441,000 compared with $1,161,000 at
December 31, 1995.
Historically, the Company has funded its operations primarily through
private placements of preferred stock, raising approximately $39,359,000 in net
proceeds from such issuances. In January and February 1996, the Company issued
3,366,670 shares of its Series G Preferred Stock for net cash proceeds of
$10,100,000 million of which $5,000,000 million (1,666,667 shares) was
purchased by Dura.
On April 3, 1996, the Company closed its initial public offering of
3,300,000 shares of its common stock raising $23,776,220, net of underwriting
discounts and commissions and estimated offering expenses. In April 1996, the
Company issued an additional 495,000 shares of its common stock in accordance
with the underwriters' option exercise to cover over-allotments. The sale of
these additional shares resulted in net proceeds to the Company of $3,682,800.
As required by the terms of the Company's Series One Redeemable
Preferred Stock, in April 1996, the Company redeemed all outstanding shares of
Series One Redeemable Preferred Stock resulting in a cash disbursement of
$2,818,820.
The Company has financed a significant amount of its equipment
purchases through a master lease line of credit. As of September 30, 1996, the
Company had exhausted its master lease line of credit. The Company is presently
in negotiations to obtain additional leaseline financing.
The Company's research and development commitments include a research
agreement with TPIMS which expires in June 1997. Under that agreement the
Company is committed to spend
12
<PAGE> 13
approximately an additional $1,378,000 prior to July 1997. In addition, the
Company's research agreement with Dura commits the Company to fund $6,000,000
over four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and the Company's cytokine regulating
agents. As of September 30, 1996, $1,285,000 had been funded under the Dura
agreement.
The Company has an option to acquire certain technology from TPIMS
which expires in June 1997. The Company presently intends to exercise this
option, which will require a cash payment of approximately $1,300,000 from the
Company to TPIMS.
Pursuant to a drug discovery collaboration with Novo Nordisk A/S ("Novo
Nordisk"), the Company received $2,000,000 in February 1996 as an advance
payment of library access fees and will receive a further $2,000,000 in February
1997. The initial upfront payment has been treated as deferred revenue and is
being recognized as revenue as libraries are shipped.
The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs involved
in obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patents, competing technological and market developments and the cost
of product commercialization. It is probable, however, that for the foreseeable
future, the Company's cash requirements will exceed its revenues. The Company
intends to seek additional funding through research and development agreements
with suitable corporate collaborators and through public or private financings.
The Company also intends to seek equipment lease financing to fund future
capital expenditures. The Company expects that its primary potential revenue
source for the foreseeable future will be additional collaborative agreements.
There can be no assurances, however, that such collaboration arrangements, or
any public, private or equipment lease financings, will be available on
acceptable terms, or at all. If adequate funds are not available, the Company
may be required to delay, reduce the scope of, or eliminate one or more of its
research or development programs.
The Company estimates that its existing capital resources, including
the net proceeds of its initial public offering, together with facility and
equipment financing, will be sufficient to fund its current and planned
operations through 1997. There can be no assurances, however, that changes in
the Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the expenditure of such
resources before such time. In any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 7, 1996, a complaint was filed in San Diego Superior Court
naming the Company, ChromaXome Corp. ("CXC"), and the officers and directors of
the Company as defendants. The complaint, filed by Michael Dickman and Katie
Thompson, the founders of CXC, alleges various contract and tort claims against
the defendants, including that the defendants acted wrongfully in connection
with the Company's acquisition of CXC to deny Mr. Dickman and Ms. Thompson
access to and employment with CXC and to prevent them from obtaining certain
consideration in connection with the CXC acquisition. The complaint seeks
compensatory and punitive damages from the defendants as well as certain
declaratory relief, including an avoidance of certain non-competition provisions
applicable to Mr. Dickman and Ms. Thompson as part of the acquisition-related
arrangements. The Company believes that the claims of Mr. Dickman and Ms.
Thompson are without merit. Moreover, the Company believes it has valid claims
against Mr. Dickman and Ms. Thompson regarding their conduct in connection with
the business of CXC. Although there can be no assurances in this regard, the
Company believes that the claims of Mr. Dickman and Ms. Thompson, and any
related litigation, will have no material adverse effect on the Company. The
Company intends to vigorously defend against the claims of Mr. Dickman and Ms.
Thompson in any litigation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
Exhibit No. Description
10.1 1996 Stock Incentive Plan of Houghten
Pharmaceuticals, Inc., as amended
27 Financial Data Schedule
(b) The Company filed a Form 8-K, dated August 15, 1996, announcing
that the Company had acquired all of the outstanding shares of CXC and that CXC
had become a wholly-owned subsidiary of the Company, effective August 1, 1996.
The following financial statements were filed as part of this report: (i) the
audited balance sheets of CXC (a development stage company) as of April 30, 1996
and December 31, 1995, 1994 and 1993 and the related audited statements of
operations, net capital deficiency and cash flows for the four months ended
April 30, 1996, each of the two years in the period ended December 31, 1995, the
period from March 10, 1993 (inception) to December 31, 1993 and the period from
March 10, 1993 (inception) to April 30, 1996; and (ii) an unaudited pro forma
condensed combined balance sheet as of June 30, 1996 and unaudited pro forma
condensed combined statements of operations for the year ended December 31, 1995
and the six months ended June 30, 1996, giving effect to the acquisition of CXC
by the Company as of June 30, 1996 for the pro forma condensed combined balance
sheet and as of January 1, 1995 for the pro forma condensed combined statements
of operations.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.
Houghten Pharmaceuticals, Inc.
Date: 11/13/96 /s/ ROBERT S. WHITEHEAD
----------------- -------------------------------------------------
Robert S. Whitehead
President and Chief Executive Officer
(Principal Executive Officer)
Date: 11/13/96 /s/ TERENCE E. McMORROW
----------------- -------------------------------------------------
Terence E. McMorrow
Vice President, Finance and Corporate Development
(Principal Financial and Accounting Officer)
15
<PAGE> 1
Exhibit 10.1
1996 STOCK INCENTIVE PLAN OF
HOUGHTEN PHARMACEUTICALS, INC.
(ADOPTED EFFECTIVE MARCH 29, 1996)
(Amended Effective October 23, 1996)
<PAGE> 2
TABLE OF CONTENTS
ARTICLE 1. INTRODUCTION................................... 1
ARTICLE 2. ADMINISTRATION................................. 1
2.1 Committee Composition................ 1
2.2 Committee Responsibilities........... 2
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.................... 2
3.1 Basic Limitation..................... 2
3.2 Additional Shares.................... 2
3.3 Dividend Equivalents................. 2
ARTICLE 4. ELIGIBILITY.................................... 2
4.1 General Rules........................ 2
4.2 Outside Directors.................... 3
4.3 Incentive Stock Options.............. 4
ARTICLE 5. OPTIONS........................................ 4
5.1 Stock Option Agreement............... 4
5.2 Number of Shares..................... 4
5.3 Exercise Price....................... 4
5.4 Exercisability and Term.............. 5
5.5 Effect of Change in Control.......... 5
5.6 Modification or Assumption of Options 5
ARTICLE 6. PAYMENT FOR OPTION SHARES...................... 5
6.1 General Rule......................... 5
6.2 Surrender of Stock................... 5
6.3 Exercise/Sale........................ 6
6.4 Exercise/Pledge...................... 6
6.5 Promissory Note...................... 6
6.6 Other Forms of Payment............... 6
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 7. STOCK APPRECIATION RIGHTS............................................................... 6
7.1 SAR Agreement................................................................. 6
7.2 Number of Shares.............................................................. 6
7.3 Exercise Price................................................................ 6
7.4 Exercisability and Term....................................................... 6
7.5 Effect of Change in Control................................................... 7
7.6 Exercise of SARs.............................................................. 7
7.7 Modification or Assumption of SARs............................................ 7
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS....................................................... 7
8.1 Time, Amount and Form of Awards............................................... 7
8.2 Payment for Awards............................................................ 8
8.3 Vesting Conditions............................................................ 8
8.4 Form and Time of Settlement of Stock Units.................................... 8
8.5 Death of Recipient............................................................ 8
8.6 Creditors' Rights............................................................. 8
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.............................................................. 9
9.1 Restricted Shares............................................................. 9
9.2 Stock Units................................................................... 9
ARTICLE 10. PROTECTION AGAINST DILUTION............................................................. 9
10.1 Adjustments................................................................... 9
10.2 Reorganizations............................................................... 9
ARTICLE 11. AWARDS UNDER OTHER PLANS................................................................ 10
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES................................................ 10
12.1 Effective Date................................................................ 10
12.2 Elections to Receive NSOs, Restricted Shares
or Stock Units..................................................................... 10
12.3 Number and Terms of NSOs, Restricted Shares
or Stock Units..................................................................... 10
</TABLE>
-ii-
<PAGE> 4
ARTICLE 13. LIMITATION ON RIGHTS........................ 10
13.1 Retention Rights.................. 10
13.2 Stockholders' Rights.............. 10
13.3 Regulatory Requirements........... 11
ARTICLE 14. LIMITATION ON PAYMENTS...................... 11
14.1 Basic Rule........................ 11
14.2 Reduction of Payments............. 11
14.3 Overpayments and Underpayments.... 12
14.4 Related Corporations.............. 12
ARTICLE 15. WITHHOLDING TAXES........................... 12
15.1 General........................... 12
15.2 Share Withholding................. 12
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS............ 13
16.1 General........................... 13
16.2 Trusts............................ 13
ARTICLE 17. FUTURE OF THE PLAN.......................... 13
17.1 Term of the Plan.................. 13
17.2 Amendment or Termination.......... 13
ARTICLE 18. DEFINITIONS................................. 14
ARTICLE 19. EXECUTION................................... 17
-iii-
<PAGE> 5
1996 STOCK INCENTIVE PLAN OF
HOUGHTEN PHARMACEUTICALS, INC.
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board on February 7, 1996, and subsequently
approved by the Company's stockholders in March 1996. An amendment to Section
4.2(c) of the Plan was approved by the Board on October 23, 1996. The Plan is
effective as of the date of the Company's initial public offering. The Plan
replaces the 1992 Stock Plan of Houghten Pharmaceuticals, Inc. and the 1995
Stock Plan of Houghten Pharmaceuticals, Inc.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging Key Employees
to focus on critical longrange objectives, (b) encouraging the attraction and
retention of Key Employees with exceptional qualifications and (c) linking Key
Employees directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of directors of the Company,
who shall be appointed by the Board. In addition, the composition of the
Committee shall satisfy:
(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended
to qualify for exemption under Rule 16b-3 (or its successor) under the
Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify
for exemption under section 162(m)(4)(C) of the Code.
The Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not satisfy the
foregoing requirements, who may administer the Plan with respect to Key
Employees who are not considered officers or directors of the Company under
section 16 of the Exchange Act, may grant Awards under the Plan to such Key
Employees and may determine all terms of such Awards.
-1-
<PAGE> 6
2.2 Committee Responsibilities. The Committee shall (a) select the Key
Employees who are to receive Awards under the Plan, (b) determine the type,
number, vesting requirements and other features and conditions of such Awards,
(c) interpret the Plan and (d) make all other decisions relating to the
operation of the Plan. The Committee may adopt such rules or guidelines as it
deems appropriate to implement the Plan. The Committee's determinations under
the Plan shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall
not exceed 1,860,465 minus the number of Common Shares that have been issued or
are subject to option under the 1992 Stock Plan of Houghten Pharmaceuticals,
Inc. or the 1995 Stock Plan of Houghten Pharmaceuticals, Inc. The limitation of
this Section 3.1 shall be subject to adjustment pursuant to Article 10.
3.2 Additional Shares. If Stock Units, Options or SARs are forfeited or
if Options or SARs terminate for any other reason before being exercised, then
the corresponding Common Shares shall again become available for Awards under
the Plan. If Restricted Shares are forfeited before any dividends have been paid
with respect to such Shares, then such Shares shall again become available for
Awards under the Plan. If Stock Units are settled, then only the number of
Common Shares (if any) actually issued in settlement of such Stock Units shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If SARs are exercised, then only the number
of Common Shares (if any) actually issued in settlement of such SARs shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan.
3.3 Dividend Equivalents. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 General Rules. Only Key Employees (including, without limitation,
independent contractors who are not members of the Board) shall be eligible for
designation as Participants by the Committee. Key Employees who are Outside
Directors shall only be eligible for the grant of the NSOs described in Section
4.2 and for making an election described in Article 12.
-2-
<PAGE> 7
4.2 Outside Directors. Any other provision of the Plan notwithstanding,
the participation of Outside Directors in the Plan shall be subject to the
following conditions:
(a) Outside Directors shall receive no Awards except as
described in this Section 4.2 and Article 12.
(b) Each Outside Director who first becomes a member of the
Board after the date of the Company's initial public offering shall
receive a one-time grant of an NSO covering 10,000 Common Shares
(subject to adjustment under Article 10). Such NSO shall be granted on
the date when such Outside Director first joins the Board and shall
become exercisable in 12 equal installments at three-month intervals
over the 36-month period commencing on the date of grant.
(c) Upon the conclusion of each regular annual meeting of
the Company's stockholders held in the year 1997 or thereafter, each
Outside Director who will continue serving as a member of the Board
thereafter shall receive an NSO covering 3,500 Shares (subject to
adjustment under Article 10), except that such NSO shall not be granted
in the calendar year in which the same Outside Director received the
NSO described in Subsection (b) above. NSOs granted under the first
sentence of this Subsection (c) shall become exercisable in full on the
first anniversary of the date of grant. On October 23, 1996, each
Outside Director who will continue serving as a member of the Board
thereafter shall receive an NSO covering 3,500 Shares (subject to
adjustment under Article 10), except that such NSO shall not be granted
to any Outside Director who received the NSO described in Subsection
(b) above in the year 1996. NSOs granted under the immediately
preceding sentence of this Subsection (c) shall become exercisable in
full on the earlier of (1) the date of the regular annual meeting of
the Company's stockholders held in the year 1997 or (2) the first
anniversary of the date of grant.
(d) All NSOs granted to an Outside Director under this
Section 4.2 shall also become exercisable in full in the event of (i)
the termination of such Outside Director's service because of death,
total and permanent disability or retirement at or after age 65 or (ii)
a Change in Control with respect to the Company.
(e) The Exercise Price under all NSOs granted to an Outside
Director under this Section 4.2 shall be equal to 100% of the Fair
Market Value of a Common Share on the date of grant, payable in one of
the forms described in Sections 6.1, 6.2, 6.3 and 6.4.
(f) All NSOs granted to an Outside Director under this
Section 4.2 shall terminate on the earliest of (i) the 10th anniversary
of the date of grant, (ii) the date three months after the termination
of such Outside Director's service for
-3-
<PAGE> 8
any reason other than death or total and permanent disability or (iii)
the date 12 months after the termination of such Outside Director's
service because of death or total and permanent disability.
The Committee may provide that the NSOs that otherwise would be granted to an
Outside Director under this Section 4.2 shall instead be granted to an affiliate
of such Outside Director. Such affiliate shall then be deemed to be an Outside
Director for purposes of the Plan, provided that the service-related vesting and
termination provisions pertaining to the NSOs shall be applied with regard to
the service of the Outside Director.
4.3 Incentive Stock Options. Only Key Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, a Key Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a cash payment
or in consideration of a reduction in the Optionee's other compensation. A Stock
Option Agreement may provide that a new Option will be granted automatically to
the Optionee when he or she exercises a prior Option and pays the Exercise Price
in the form described in Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single calendar year shall in no event cover more than 250,000
Common Shares, subject to adjustment in accordance with Article 10.
5.3 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than the par
value of the Common Shares subject to such NSO. In the case of an NSO, a Stock
Option Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.
-4-
<PAGE> 9
5.4 Exercisability and Term. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option; provided that
the term of an ISO shall in no event exceed 10 years from the date of grant. A
Stock Option Agreement may provide for accelerated exercisability in the event
of the Optionee's death, disability or retirement or other events and may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited. NSOs may also be awarded in
combination with Restricted Shares or Stock Units, and such an Award may provide
that the NSOs will not be exercisable unless the related Restricted Shares or
Stock Units are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company.
5.6 Modification or Assumption of Options. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the applicable
Stock Option Agreement. The Stock Option Agreement may specify that
payment may be made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time
accept payment in any form(s) described in this Article 6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which have already been owned by the Optionee for more than six
months. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan.
-5-
<PAGE> 10
6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Common Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to pledge Common Shares to a securities broker or lender
approved by the Company, as security for a loan, and to deliver all or part of
the loan proceeds to the Company in payment of all or part of the Exercise Price
and any withholding taxes.
6.5 Promissory Note. To the extent that this Section 6.5 is applicable,
payment may be made with a full-recourse promissory note; provided that the par
value of the Common Shares shall be paid in cash.
6.6 Other Forms of Payment. To the extent that this Section 6.6 is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than 250,000 Common
Shares, subject to adjustment in accordance with Article 10.
7.3 Exercise Price. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration prior to
-6-
<PAGE> 11
the end of its term in the event of the termination of the Optionee's service.
SARs may also be awarded in combination with Options, Restricted Shares or Stock
Units, and such an Award may provide that the SARs will not be exercisable
unless the related Options, Restricted Shares or Stock Units are forfeited. An
SAR may be included in an ISO only at the time of grant but may be included in
an NSO at the time of grant or thereafter. An SAR granted under the Plan may
provide that it will be exercisable only in the event of a Change in Control.
7.5 Effect of Change in Control. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.
7.6 Exercise of SARs. The exercise of an SAR shall be subject to the
restrictions imposed by Rule 16b-3 (or its successor) under the Exchange Act, if
applicable. If, on the date when an SAR expires, the Exercise Price under such
SAR is less than the Fair Market Value on such date but any portion of such SAR
has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion. Upon
exercise of an SAR, the Optionee (or any person having the right to exercise the
SAR after his or her death) shall receive from the Company (a) Common Shares,
(b) cash or (c) a combination of Common Shares and cash, as the Committee shall
determine. The amount of cash and/or the Fair Market Value of Common Shares
received upon exercise of SARs shall, in the aggregate, be equal to the amount
by which the Fair Market Value (on the date of surrender) of the Common Shares
subject to the SARs exceeds the Exercise Price.
7.7 Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 Time, Amount and Form of Awards. Awards under the Plan may be
granted in the form of Restricted Shares, in the form of Stock Units, or in any
combination of both. Restricted Shares or Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Restricted
Shares or Stock Units will be forfeited in the event that the related NSOs or
SARs are exercised.
-7-
<PAGE> 12
8.2 Payment for Awards. To the extent that an Award is granted in the
form of newly issued Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares. To the extent that an Award is
granted in the form of Restricted Shares from the Company's treasury or in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.
8.3 Vesting Conditions. Each Award of Restricted Shares or Stock Units
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. A Stock Award Agreement may
provide for accelerated vesting in the event of the Participant's death,
disability or retirement or other events. The Committee may determine, at the
time of making an Award or thereafter, that such Award shall become fully vested
in the event that a Change in Control occurs with respect to the Company.
8.4 Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Common Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the
Stock Units have been satisfied or have lapsed, or it may be deferred to any
later date. The amount of a deferred distribution may be increased by an
interest factor or by dividend equivalents. Until an Award of Stock Units is
settled, the number of such Stock Units shall be subject to adjustment pursuant
to Article 10.
8.5 Death of Recipient. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
8.6 Creditors' Rights. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.
-8-
<PAGE> 13
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 Restricted Shares. The holders of Restricted Shares awarded under
the Plan shall have the same voting, dividend and other rights as the Company's
other stockholders. A Stock Award Agreement, however, may require that the
holders of Restricted Shares invest any cash dividends received in additional
Restricted Shares. Such additional Restricted Shares shall be subject to the
same conditions and restrictions as the Award with respect to which the
dividends were paid. Such additional Restricted Shares shall not reduce the
number of Common Shares available under Article 3.
9.2 Stock Units. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan
may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of (a) the number of Options,
SARs, Restricted Shares and Stock Units available for future Awards under
Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the number
of NSOs to be granted to Outside Directors under Section 4.2, (d) the number of
Stock Units included in any prior Award which has not yet been settled, (e) the
number of Common Shares covered by each outstanding Option and SAR or (f) the
Exercise Price under each outstanding Option and SAR. Except as provided in this
Article 10, a Participant shall have no rights by reason of any issue by the
Company of stock of any class or securities convertible into stock of any class,
any subdivision or consolidation of shares of stock of any class, the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class.
10.2 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, Restricted Shares and
Stock Units shall be subject to the
-9-
<PAGE> 14
agreement of merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the Company
is a surviving corporation), for accelerated vesting and accelerated expiration,
or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Common Shares
issued in settlement of Stock Units and shall, when issued, reduce the number of
Common Shares available under Article 3.
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
12.1 Effective Date. No provision of this Article 12 shall be effective
unless and until the Board has determined to implement such provision.
12.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An
Outside Director may elect to receive his or her annual retainer payments and
meeting fees from the Company in the form of cash, NSOs, Restricted Shares,
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 12 shall be filed with the Company on the prescribed form.
12.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.
ARTICLE 13. LIMITATION ON RIGHTS.
13.1 Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent or a Subsidiary. The Company and
its Parents and Subsidiaries reserve the right to terminate the service of any
employee, consultant or director at any time, with or without cause, subject to
applicable laws, the Company's certificate of incorporation and by-laws and a
written employment agreement (if any).
13.2 Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award
-10-
<PAGE> 15
prior to the issuance of a stock certificate for such Common Shares. No
adjustment shall be made for cash dividends or other rights for which the record
date is prior to the date when such certificate is issued, except as expressly
provided in Articles 8, 9 and 10.
13.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 14. LIMITATION ON PAYMENTS.
14.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer by
the Company under the Plan to or for the benefit of a Participant (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" in section 280G of the
Code, then the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the time of
making an Award under this Plan or at any time thereafter, may specify in
writing that such Award shall not be so reduced and shall not be subject to this
Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of section 280G of the Code.
14.2 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 14, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determina-
-11-
<PAGE> 16
tions made by the Auditors under this Article 14 shall be binding upon the
Company and the Participant and shall be made within 60 days of the date when a
Payment becomes payable or transferable. As promptly as practicable following
such determination and the elections hereunder, the Company shall pay or
transfer to or for the benefit of the Participant such amounts as are then due
to him or her under the Plan and shall promptly pay or transfer to or for the
benefit of the Participant in the future such amounts as become due to him or
her under the Plan.
14.3 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
14.4 Related Corporations. For purposes of this Article 14, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 15. WITHHOLDING TAXES.
15.1 General. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
15.2 Share Withholding. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or
-12-
<PAGE> 17
by surrendering all or a portion of any Common Shares that he or she previously
acquired. Such Common Shares shall be valued at their Fair Market Value on the
date when taxes otherwise would be withheld in cash. Any payment of taxes by
assigning Common Shares to the Company may be subject to restrictions, including
any restrictions required by rules of the Securities and Exchange Commission.
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS.
16.1 General. Except as provided in Article 15, an Award granted under
the Plan shall not be anticipated, assigned, attached, garnished, optioned,
transferred or made subject to any creditor's process, whether voluntarily,
involuntarily or by operation of law. An Option or SAR may be exercised during
the lifetime of the Optionee only by him or her or by his or her guardian or
legal representative. Any act in violation of this Article 16 shall be void.
However, this Article 16 shall not preclude a Participant from designating a
beneficiary who will receive any outstanding Awards in the event of the
Participant's death, nor shall it preclude a transfer of Awards by will or by
the laws of descent and distribution.
16.2 Trusts. Neither this Article 16 nor any other provision of the
Plan shall preclude a Participant from transferring or assigning Restricted
Shares to (a) the trustee of a trust that is revocable by such Participant
alone, both at the time of the transfer or assignment and at all times
thereafter prior to such Participant's death, or (b) the trustee of any other
trust to the extent approved in advance by the Committee in writing. A transfer
or assignment of Restricted Shares from such trustee to any person other than
such Participant shall be permitted only to the extent approved in advance by
the Committee in writing, and Restricted Shares held by such trustee shall be
subject to all of the conditions and restrictions set forth in the Plan and in
the applicable Stock Award Agreement, as if such trustee were a party to such
Agreement.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, was originally
adopted on February 7, 1996, and became effective on the date of the Company's
initial public offering. The Plan shall remain in effect until it is terminated
under Section 17.2, except that no ISOs shall be granted after February 6, 2006.
17.2 Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan, except that the provisions of Section 4.2
relating to the amount, price and timing of Option grants to Outside Directors
shall not be amended more often than permitted by Rule 16b-3 under the Exchange
Act. An amendment of the Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable laws, regulations or
rules. No Awards shall be granted under the
-13-
<PAGE> 18
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 18. DEFINITIONS.
18.1 "Award" means any award of an Option, an SAR, a Restricted Share
or a Stock Unit under the Plan.
18.2 "Board" means the Company's Board of Directors, as constituted
from time to time.
18.3 "Change in Control" shall mean the occurrence of any of the
following events:
(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the
continuing or surviving entity's securities outstanding immediately
after such merger, consolidation or other reorganization is owned by
persons who were not stockholders of the Company immediately prior to
such merger, consolidation or other reorganization;
(b) A change in the composition of the Board, as a result of
which fewer than one-half of the incumbent directors are directors who
either:
(A) Had been directors of the Company 24 months
prior to such change; or
(B) Were elected, or nominated for election, to
the Board with the affirmative votes of at least a majority
of the directors who had been directors of the Company 24
months prior to such change and who were still in office at
the time of the election or nomination; or
(c) Any "person" (as such term is used in sections 13(d) and
14(d) of the Exchange Act) by the acquisition or aggregation of
securities is or becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities ordinarily
(and apart from rights accruing under special circumstances) having the
right to vote at elections of directors (the "Base Capital Stock");
except that any change in the relative beneficial ownership of the
Company's securities by any person resulting solely from a reduction in
the aggregate number of outstanding shares of Base Capital Stock, and
any decrease thereafter in such person's ownership of securities, shall
be disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company.
-14-
<PAGE> 19
The term "Change in Control" shall not include a transaction, the sole purpose
of which is to change the state of the Company's incorporation.
18.4 "Code" means the Internal Revenue Code of 1986, as amended.
18.5 "Committee" means a committee of the Board, as described in
Article 2.
18.6 "Common Share" means one share of the common stock of the Company.
18.7 "Company" means Houghten Pharmaceuticals, Inc., a Delaware
corporation.
18.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
18.9 "Exercise Price," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
18.10 "Fair Market Value" means the market price of Common Shares,
determined by the Committee as follows:
(a) If the Common Shares were traded over-the-counter on the
date in question but was not traded on the Nasdaq system or the Nasdaq
National Market System, then the Fair Market Value shall be equal to
the mean between the last reported representative bid and asked prices
quoted for such date by the principal automated inter-dealer quotation
system on which the Common Shares are quoted or, if the Common Shares
are not quoted on any such system, by the "Pink Sheets" published by
the National Quotation Bureau, Inc.;
(b) If the Common Shares were traded over-the-counter on the
date in question and were traded on the Nasdaq system or the Nasdaq
National Market System, then the Fair Market Value shall be equal to
the last-transaction price quoted for such date by the Nasdaq system or
the Nasdaq National Market System;
(c) If the Common Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite transactions report
for such date; and
-15-
<PAGE> 20
(d) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in the Western Edition of The Wall Street
Journal. Such determination shall be conclusive and binding on all persons.
18.11 "ISO" means an incentive stock option described in section 422(b)
of the Code.
18.12 "Key Employee" means (a) a common-law employee of the Company, a
Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or adviser
who provides services to the Company, a Parent or a Subsidiary as an independent
contractor. Service as an Outside Director or as an independent contractor shall
be considered employment for all purposes of the Plan, except as provided in
Sections 4.2 and 4.3.
18.13 "NSO" means a stock option not described in sections 422 or 423
of the Code.
18.14 "Option" means an ISO or NSO granted under the Plan and entitling
the holder to purchase one Common Share.
18.15 "Optionee" means an individual or estate who holds an Option or
SAR.
18.16 "Outside Director" shall mean a member of the Board who is not a
common-law employee of the Company, a Parent or a Subsidiary.
18.17 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
18.18 "Participant" means an individual or estate who holds an Award.
18.19 "Plan" means this 1996 Stock Incentive Plan of Houghten
Pharmaceuticals, Inc., as amended from time to time.
18.20 "Restricted Share" means a Common Share awarded under the Plan.
18.21 "SAR" means a stock appreciation right granted under the Plan.
-16-
<PAGE> 21
18.22 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
18.23 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Stock Unit which contains the terms,
conditions and restrictions pertaining to such Restricted Share or Stock Unit.
18.24 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
18.25 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
18.26 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ARTICLE 19. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to affix the corporate name and seal hereto.
HOUGHTEN PHARMACEUTICALS, INC.
By: /s/ Robert S. Whitehead
-------------------------
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE
SHEET AT SEPTEMBER 30, 1996 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9841
<SECURITIES> 21600
<RECEIVABLES> 383
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 669
<PP&E> 1424
<DEPRECIATION> 0
<TOTAL-ASSETS> 34563
<CURRENT-LIABILITIES> 5535
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 28430
<TOTAL-LIABILITY-AND-EQUITY> 34563
<SALES> 3655
<TOTAL-REVENUES> 7024
<CGS> 1429
<TOTAL-COSTS> 1429
<OTHER-EXPENSES> 12367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (5924)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5924)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
