<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 0-27972
TREGA BIOSCIENCES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its charter)
DELAWARE 51-0336233
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9880 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121
(619) 410-6500
-----------------------------------------------------------------
(Address, including zip code, and telephone, including area code,
of registrant's principal executive offices)
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 June 30, 1999
------------------------------ ----------------------------
Common Stock, $0.001 par value 18,072,095
<PAGE>
TREGA BIOSCIENCES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at June 30, 1999 and December 31,
1998........................................................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998............................ 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998......................................... 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits....................................................... 15
SIGNATURE.............................................................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Trega Biosciences, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,539 $ 9,755
Short-term investments 1,053 6,507
Accounts receivable and other current assets 1,849 778
-------- --------
Total current assets 10,441 17,040
Property and equipment, net 3,860 4,123
Other assets 7,948 8,372
-------- --------
$ 22,249 $ 29,535
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,011 $ 1,539
Accrued compensation and other accrued liabilities 2,533 2,399
Current portion of debt obligations 1,269 1,251
Deferred revenue 2,776 3,794
-------- --------
Total current liabilities 7,589 8,983
Long-term debt obligations, net of current portion 2,429 2,689
Deferred rent 379 223
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000 at June 30, 1999
Issued and outstanding shares - 18,072,095 and
17,481,097 at June 30, 1999 and December 31, 1998,
respectively 18 18
Additional paid-in capital 86,700 86,645
Common stock issuable 16 16
Deferred compensation (283) (609)
Accumulated deficit (74,599) (68,430)
-------- --------
Total stockholders' equity 11,852 17,640
-------- --------
$ 22,249 $ 29,535
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1998 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.
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<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Operations
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended,
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Compound revenues $ 1,196 $ 114 1,561 $ 270
Related party contract research 825 2,320 1,650 2,320
Contract research and license fees 540 1,573 1,381 2,585
Net sales 84 -- 189 --
-------- -------- -------- --------
2,645 4,007 4,781 5,175
Costs and expenses:
Cost of sales 99 -- 158 --
Research and development 4,353 5,300 8,941 8,875
Selling, general and administrative 1,709 1,224 3,505 2,392
-------- -------- -------- --------
6,161 6,524 12,604 11,267
-------- -------- -------- --------
Loss from operations (3,516) (2,517) (7,823) (6,092)
Other income:
Interest income, net 27 132 141 287
Gain on sale of ChromaXome -- -- 1,513 --
-------- -------- -------- --------
Net loss $ (3,489) $ (2,385) $ (6,169) $ (5,805)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per share $ (.19) $ (.17) $ (.34) $ (.42)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing basic and diluted
net loss per share 18,053 13,950 17,953 13,930
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
4
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,169) $ (5,805)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 1,007 687
Amortization of note receivable discount (25) (25)
Amortization of deferred compensation 326 330
Accrued interest on notes payable -- (81)
Gain on disposal of assets -- (68)
Gain on sale of CXC (1,513) --
Changes in operating assets and liabilities, net of effects
from the transfer of assets from sale of CXC in 1999:
Accounts receivable (1,080) (454)
Other current assets 10 (775)
Accounts payable (528) 851
Other accrued liabilities 134 221
Deferred rent 156 56
Deferred revenue (1,018) (481)
-------- --------
Net cash (used in) operating activities (8,700) (5,544)
INVESTING ACTIVITIES
Purchase of short-term investments -- (1,656)
Maturities of short-term investments 5,453 13,500
Purchase of property and equipment (630) (2,247)
Proceeds from disposition of equipment -- 198
Net proceeds from sale of CXC 1,705 --
Other assets 143 22
-------- --------
Net cash provided by investing activities 6,671 9,817
FINANCING ACTIVITIES
Principal payments under debt obligations (684) (1,690)
Proceeds from equipment notes and notes payable 442 672
Issuance of common and preferred stock 55 146
-------- --------
Net cash provided by financing activities (187) (872)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,216) 3,401
Cash and cash equivalents at beginning of period 9,755 13,615
-------- --------
Cash and cash equivalents at end of period $ 7,539 $ 17,016
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 170 $ 105
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Trega
Biosciences, 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 six month periods ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For more complete information, these financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1998, included
in the Company's Form 10-K filed with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 requires the presentation of basic and diluted earnings per
share amounts. Basic earnings per share is calculated based upon the weighted
average number of common shares outstanding during the period while diluted
earnings per share also gives effect to all potential diluted common shares
outstanding during the period such as those outstanding options, warrants and
convertible securities and contingently issuable shares. SFAS No. 128 is
effective for periods ending after December 15, 1997. All common shares,
outstanding options, warrants and convertible securities and contingently
issuable shares have been excluded from the calculation of diluted earnings per
share, as their inclusion would be anti-dilutive.
New Accounting Standards
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and Statement of
Financial Accounting Standard No. 131 ("SFAS No. 131"), "Segment Information."
SFAS No. 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign currency
translation adjustments and unrealized gains and losses on investments, are
required to be reported, net of their related tax effect, to arrive at
comprehensive income. For the three and six months ended June 30, 1999 and 1998,
comprehensive loss is the same as net loss. SFAS No. 131 amends the requirements
for public enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is required to
be reported on the basis that is used internally for evaluating the segment
performance. The Company operates in one business and operating segment only,
and therefore the adoption of this standard did not have a material impact on
the Company's financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
presentation for the three and six months ended June 30, 1999.
6
<PAGE>
3. LEASES
LONG-TERM DEBT
In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it drew down approximately $1.5 million by June 30, 1999. The
loan, which is secured by the equipment, bears interest between 7.6% and 8.7%
and is to be repaid monthly over a four-year term.
In September 1998, the Company obtained an equipment financing line under an
existing master agreement established in 1997. This equipment financing line of
$750,000 was completely drawn down in September 1998. Approximately $2.3 million
is owed under the previous equipment financing line. No additional amounts are
available under the line. The loans are secured by the equipment. The terms of
the Company's loan agreement call for amounts drawn down under the loans to be
repaid monthly over a four-year term, including interest payments based on an
interest rate of approximately 8.85%.
In September 1997, the Company entered into a 10-year lease for its facility
in San Diego, California. The Company has occupied such premises since May 1998.
Annual rent is $1.7 million and is subject to annual increases of 3.5%. The
Company has the option to extend the lease for an additional term of 5 years
subject to terms and conditions specified in the lease.
4. COLLABORATIVE ARRANGEMENTS
In June 1999, the Company entered into a Library Sales Agreement with
Janssen Research Foundation ("Janssen"), a division of Janssen Pharmaceutica
N.V. by which Janssen acquires combinatorial libraries as part of the Company's
Chem.Folio-TM- program. Under the terms of the agreement, the Company will give
Janssen non-exclusive access to its small-molecule combinatorial libraries in
exchange for an up-front payment on each compound delivered. The Company will
recognize revenue as libraries are shipped.
In June 1999, the Company signed a Mutual Release with Dura Pharmaceuticals
("Dura") which releases the parties from certain responsibilities set forth by
the original research agreement signed in February 1996 and terminates the
original research agreement other than in certain limited regards. Under the
original research agreement, the Company was committed to fund $6 million over
four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and Company compounds (such as HP 228). As
of June 30, 1999, $4.9 million of this obligation had been paid by the Company.
The Mutual Release provides that the outstanding balance due on this obligation
shall be limited to payments of $200,000, which was made upon signing, and
$138,414 due by March 31, 2000.
5. COMMON STOCK
During the three and six months ended June 30, 1999, the Company issued
45,624 and 590,998, respectively, shares of common stock upon the exercise of
options, which are included in common stock outstanding at June 30, 1999.
6. SUBSEQUENT EVENT
In August 1999, the Company entered into a line of credit for $1.5 million
that provides funds to be used primarily for working capital purposes. The line
of credit, which is secured by the general assets of the Company, bears interest
at prime plus .75% and is for a term of one year. The line of credit contains
covenants relating to cash flow coverage and minimum cash balances.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 (SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL,"
"EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND
SIMILAR EXPRESSIONS). THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES (INCLUDING THOSE SET FORTH BELOW, IN THE SECTION OF THIS ITEM 2 OF
THIS QUARTERLY REPORT ON FORM 10-Q UNDER THE CAPTION "RISK FACTORS" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998) THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
OVERVIEW
Trega Biosciences, Inc. (the "Company" or "Trega") is a drug discovery
company focused on accelerating the process of drug discovery by using small
molecule combinatorial chemistry and other drug discovery technologies to create
novel drugs having greater chances of clinical success. In combination with its
wholly owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers drug
discovery products and services to the pharmaceutical and biopharmaceutical
industries. Trega also uses its drug discovery technologies in its internal
development programs, which are focused on discovering small molecules acting on
melanocortin receptors, which may be important in the treatment of inflammatory
and metabolic diseases.
In November 1998, the Company acquired NaviCyte, a privately-held company
engaged in (i) the sale of devices and licensing of a cell line used in
connection with predictive testing of drug candidates for absorption
characteristics and (ii) the development of a range of drug candidate selection
tools intended to be used to predict the pharmacokinetic characteristics of drug
candidates.
In March 1999, ChromaXome Corp. ("ChromaXome"), a wholly-owned subsidiary of
the Company, sold substantially all of its assets. ChromaXome had focused on the
development and use of combinatorial biology techniques to create drug
candidates and other molecules of potential commercial interest from naturally
occurring microbial sources.
While at the time of these transactions the respective sizes of the
workforces of NaviCyte and ChromaXome were comparable, the Company anticipates
an increase in costs at NaviCyte over those at ChromaXome as development costs
related to NaviCyte's products and services under development are incurred. It
can be anticipated, in addition, that the development of NaviCyte's products and
services will necessitate the hiring of additional employees, although their
number has not yet been ascertained. It is further anticipated that any revenues
from the sale of products and services by NaviCyte will offset, at least in
part, these increased costs.
The Company has entered into pharmaceutical alliances, providing partners
access to the Company's technologies in exchange for licensing fees and
potential milestone payments and royalties. The timing and occurance of such
transactions in the future, if any, can not be predicted. The timing and amounts
of revenues from such alliances, if any, are 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 and may not be
indicative of future operating results. 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 the Company is unable to predict when, if ever, it will become
profitable. As of June 30, 1999, the Company's accumulated deficit was
approximately $74,599,000.
RESULTS OF OPERATIONS
Second Quarter 1999 Compared With Second Quarter 1998
The Company recorded revenues of approximately $2.6 million for the three
months ended June 30, 1999 compared with approximately $4 million for the same
period in 1998. Excluding a one-time $2 million payment received from Novartis
Pharma AG ("Novartis"), in the second quarter of 1998, revenues increased
$638,000, or 31% over the same quarter in the prior year. This
8
<PAGE>
increase was due primarily to a $1 million increase in revenues from the sale of
the Company's Chem.Folio-TM- combinatorial libraries. Partially offsetting this
increase was a decrease in revenues from research conducted under collaborative
research agreements.
As of June 30, 1999, the Company's financial statements reflect a liability
for deferred revenue in the amount of approximately $2.8 million. This
represents the excess of payments received from research collaborators over the
revenue from libraries and cells shipped or work performed, and will be
recognized when the correlative shipments are made or services are performed or
the period for performance expires.
Cost of sales in the second quarter of 1999 were primarily related to device
sales from the Company's subsidiary, Navicyte, acquired in November 1998. There
were no device sales in the comparable quarter of 1998.
The Company incurred research and development expenses totaling
approximately $4.4 million and $5.3 million for the three months ended June 30,
1999 and 1998, respectively. This 17% decrease was due primarily to the
termination of a Research and Option Agreement with Torrey Pines Institute for
Molecular Studies, reduced clinical trials expense related to the completion of
the Phase II clinical trials for HP228 and the sale of ChromaXome Corporation in
March 1999, which was partially offset by increased expenditures from the
acquisition of NaviCyte.
The Company's selling, general and administrative expenses total
approximately $1.7 million and $1.2 million for the three months ended June 30,
1999 and 1998, respectively. These expenses include administrative salaries and
legal, finance, investor relations and business development activities. The
increase in selling, general and administrative expenses are primarily
attributable to the addition of NaviCyte, its expenses and the costs associated
with attempting to expand its business base. Selling, general and
administrative expenses are expected to increase as the Company's activities
increase.
The Company's interest income decreased to approximately $119,000 for the
quarter ended June 30, 1999, compared to $174,000 for the same quarter in 1998.
The decrease is a result of lower cash balances.
Interest expense for the three months ended June 30, 1999 and 1998 was
approximately $92,000 and $42,000, respectively. The increase in interest
expense for the quarter is a result of additional equipment financing
obligations which were not in place during the comparative quarter last year.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
The Company recorded revenues of approximately $4.8 million for the six
months ended June 30, 1999 compared with approximately $5.2 million for the same
period in 1998. Excluding the one-time $2 million payment noted above, revenues
increased $1.6 million, or 50% over the same period in the prior year. This
increase was due primarily to increased revenues from the sale of the Company's
Chem.Folio-TM- combinatorial libraries.
Cost of sales for the six months ended June 30, 1999 is primarily related to
device sales from the Company's subsidiary, Navicyte, acquired in November 1998.
There were no device sales in the comparable six months of 1998.
The Company incurred research and development expenses totaling
approximately $8.9 million for both the six months ended June 30, 1999 and 1998.
The Company expects to continue to incur significant expenses in research and
development relating to combinatorial chemistry, melanocortin biology and the
development of other drug discovery technologies.
The Company's selling, general and administrative expenses total
approximately $3.5 million and $2.4 million for the six months ended June 30,
1999 and 1998, respectively. These expenses include administrative salaries and
legal, finance, investor relations and business development activities. The
increase in selling, general and administrative expenses are primarily
attributable to the addition of NaviCyte, its expenses and the costs associated
with attempting to expand its business base. Selling, general and
administrative expenses are expected to increase as the Company's activities
increase.
The Company's interest income decreased to approximately $300,000 for the
six months ended June 30, 1999, compared to $424,000 for the same quarter in
1998. The decrease is a result of lower cash balances.
The increase in interest expense for the quarter is a result of additional
equipment financing obligations which were not in place during the comparative
quarter last year.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through June 30, 1999, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries (through its former subsidiary, Multiple Peptide
Systems, Inc.), sales of devices and CACO-2 cells (through NaviCyte), other drug
discovery technologies (through NaviCyte), sales of its business believed to be
no longer strategic to the Company and interest income. At June 30, 1999, the
Company had cash, cash equivalents and marketable securities aggregating $8.6
million compared to $16.3 million on December 31, 1998. The Company has invested
a significant portion of its excess funds in cash equivalents and short-term
investments primarily of highly-rated debt instruments of financial institutions
and corporations. See Item 3, Qualitative and Quantitative Disclosure About
Market Risk.
The decrease in cash, cash equivalents and marketable securities at June 30,
1999, resulted primarily from $8.7 million used to fund operating activities,
$630,000 invested in property and equipment, and $684,000 repaid on debt from
property and equipment financing agreements. The decrease was offset, in part,
by $1.7 million received through the sale of assets of the Company's former
subsidiary, ChromaXome Corp. and proceeds from property and equipment financing
agreements of $442,000.
In August 1999, the Company entered into a line of credit for $1.5 million
that provides funds to be used primarily for working capital purposes. The line
of credit, which is secured by the general assets of the Company, bears interest
at prime plus .75% and is for a term of one year. The line of credit contains
covenants relating to cash flow coverage and minimum cash balances.
In June 1999, the Company entered into a Library Sales Agreement with
Janssen Research Foundation ("Janssen"), a division of Janssen Pharmaceutica
N.V. by which Janssen acquires combinatorial libraries as part of the Company's
Chem.Folio-TM- program. Under the terms of the agreement, the Company will give
Janssen non-exclusive access to its small-molecule combinatorial libraries in
exchange for an up-front payment on each compound delivered. The Company will
recognize revenue as libraries are shipped.
In March 1999 and February 1999, the Company entered into Software License
Agreements, through its subsidiary NaviCyte, with the R.W. Johnson
Pharmaceutical Research Institute ("PRI") and Schering-Plough Research Institute
("Schering-Plough") to collaborate on the use and development of NaviCyte's
proprietary Pk-Informatics tools for the identification of new candidates for
drug development. Under the terms of the agreements, both companies will provide
data and make initial and milestone payments over the course of the further
development of NaviCyte's proprietary In Vitro Determination for Evaluation of
ADME (IDEA -TM-) simulation software system and database. NaviCyte will license
its software and computational models for use with both companies' compound
libraries. The Company has recorded a portion of upfront payments as well as two
milestones as revenue while the remaining portion of the upfront payments have
been recorded as deferred revenue.
In March 1999, the Company entered into a Library Sales Agreement with Isis
Pharmaceuticals, Inc. ("ISIS") by which ISIS acquires combinatorial libraries as
part of the Company's Chem.Folio-TM- program. Under the terms of the agreement,
the Company will give Isis non-exclusive access to its small-molecule
combinatorial libraries in exchange for an up-front payment on each compound
delivered. ISIS also has the option to license synthetic protocols for libraries
from which active compounds are identified. The Company will recognize revenue
as libraries are shipped.
As of June 30, 1999, the Company had approximately $700,000 available under
property and equipment financing agreements. Certain of the existing property
and equipment financing arrangements require the Company to provide a security
deposit if cash, cash equivalents and marketable securities fall below certain
levels as defined in the agreements.
During 1998, the Company moved into a combined research and development
facility and corporate headquarters in San Diego, California. The ten-year lease
covering the facility calls for annual rent of approximately $1.7 million and is
subject to a 3.5% annual escalation clause. (See Note 3 to the Company's
Consolidated Financial Statements.)
In June 1999, the Company signed a Mutual Release with Dura Pharmaceuticals
("Dura") which releases the parties from certain responsibilities set forth by
the original research agreement signed in February 1996 and terminates the
original research agreement other than in certain limited regards. Under the
original research agreement, the Company was committed to fund $6 million over
four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and Company compounds (such as HP 228). As
of June 30, 1999, $4.9 million of this obligation had been paid by the Company.
The Mutual Release provides that the outstanding balance due on this obligation
shall be limited to payments of $200,000, which was made upon signing, and
$138,414 due by March 31, 2000.
10
<PAGE>
The Company intends to use its financial resources primarily to fund
research and development, the expansion of its combinatorial library inventories
and to fund its NaviCyte technology operations. The amounts actually expended
for each purpose may vary significantly depending on many factors. These factors
include the continuation of its research and development programs, the
acquisition or initiation of new research and development programs, the costs
involved in filing, prosecuting and enforcing patents, competing technological
and market developments, and the scope and results of clinical trials.
The Company anticipates that its existing capital resources and funding
under an existing (i) research and development collaboration, (ii) product sales
agreements and notes due to the Company in connection with the sale of assets of
its wholly-owned subsidiary, ChromaXome Corp., together with its currently
available property and equipment financing and line of credit, will be
sufficient to fund its current and planned operations at least through the
second quarter of 2000. 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.
The Company will need to raise additional capital to fund its operations
beyond the second quarter of 2000. The Company expects that its primary
potential revenue sources for the foreseeable future will be additional
collaborative agreements, the outlicensing of HP228, sales of combinatorial
libraries or compounds and revenues generated by the Company's NaviCyte
technologies. The Company intends to seek additional funding through additional
research and development agreements with suitable corporate collaborators,
extensions of existing corporate collaborations, and through public or private
financings if available and consistent with the Company's business objectives.
There can be no assurances, however, that such collaboration arrangements,
licensing or public or private financings, will be available on acceptable
terms, if at all. If funds are raised through equity arrangements, further
dilution to stockholders may result. 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 and development programs or take other measures to cut costs,
which could have a material adverse effect on the Company.
OTHER MATTERS
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
In 1998, Trega Biosciences Inc. developed a three-phase program for Y2K
information systems compliance. Phase 1 is to identify and solve Y2K issues in
the Company's significant information systems infrastructure and enterprise
business applications, including telecommunications and networking systems, as
well as accounting software. Phase 2 is to identify and plan for Y2K issues that
are specific to the Company's business units, including local software, product
matters, facilities related systems and vendor concerns. Phase 3 is the final
testing of each major area of exposure to ensure compliance, and the development
of contingency plans for unsolved Y2K deficiencies
In Phase 1 of the program, the Company has inventoried and is in the process
of assessing company-wide systems, many of which have been identified as being
Y2K compliant. Some systems software, hardware and firmware are in need of
upgrades. These upgrades are available from third party suppliers, and are in
the process of being evaluated. Systems which are not Y2K compliant are
currently being upgraded. A plan for in-house testing has been developed and is
scheduled for completion by August 30, 1999.
Under Phase 2, the Company is currently identifying and evaluating exposure
to Y2K risk from third-party vendors. The Company has developed a list of
critical vendors that are either sole-source suppliers or preferred suppliers.
The Company is currently contacting significant third parties regarding their
Y2K readiness. Preliminary findings indicate that only one such company's
product may have Y2K issues, and upgrades to this product are being addressed.
There is another class of third party vendors, however, from which the Company
cannot obtain assurances with regard to the Y2K compliance of their systems. For
example, the Company is dependent on electric, natural gas, water and telephone
utilities. Similarly, the Company is dependent upon its banks, payroll processor
and insurers. Disruption in one or more of the foregoing services could have a
material adverse impact on the Company.
The testing and contingency plan development under Phase 3 began in early
1999 with completion expected by August 30, 1999.
11
<PAGE>
The anticipated costs relating to resolving Company Y2K issues are not
currently believed to be significant (i.e., less than $100,000). However, as
additional Y2K remediation activities are developed and planned, there can be no
guarantee that actual costs will not differ materially from those in the current
estimate. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the completion of the Company's Y2K investigations (including matters
relating to the Company's customers and vendors), the ability to locate and
correct all relevant computer codes and similar uncertainties. In addition,
there can be no assurance that Y2K compliance problems will not be revealed in
the future which could have a material adverse affect on the Company's business,
financial condition and results of operation. Many of the Company's customers
and vendors may be affected by Y2K issues which may result in those customers
having reduced funds to purchase the Company's products, or those suppliers
experiencing difficulties in producing or shipping key components to the Company
on a timely basis or at all. Such third party issues could have a material
adverse affect on the Company's business, financial condition and results of
operations.
THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT.
RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS (INCLUDING THOSE NOTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998), IN SOME CASES HAVE AFFECTED, AND IN THE
FUTURE COULD AFFECT, THE COMPANY'S ACTUAL CONSOLIDATED RESULTS AND COULD CAUSE
THE COMPANY'S ACTUAL CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON
BEHALF OF, THE COMPANY.
NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS
Drug discovery methods based upon combinatorial chemistry technology are
relatively new compared to traditional methods of drug discovery and there can
be no assurance that these methods will lead to the discovery or development of
commercial pharmaceutical products or that the Company will be able to employ
these or other methods of drug discovery successfully. Moreover, the Company's
technology development programs, including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds through automation, are at early
stages of development, and there can be no assurance that such technology
programs will be developed or employed successfully, work efficiently or
otherwise enhance the Company's ability to engage effectively in drug discovery.
The types of combinatorial libraries the Company is capable of offering, the
nature of the compounds the Company is able to synthesize and the relative value
of any other drug development technologies which the Company may be able to
provide will, in large part, determine the demand for the Company's drug
discovery capabilities. An inability to offer competitive libraries or other
drug development technologies, or an inability to synthesize compounds that have
actual or potential utility, would have a material adverse effect on the
Company. Failures in the field of drug discovery, including combinatorial
chemistry, could have a material adverse effect on the Company.
DEPENDENCE ON COLLABORATORS
The Company's strategy for the utilization of its drug discovery
technologies and for the development, clinical testing, manufacturing and
commercialization of any compounds depends upon the formation of collaborations
and arrangements with corporate collaborators, licensors, licensees and others.
There may only be a limited number of pharmaceutical and biotechnology companies
that would potentially collaborate with the Company. Historically,
pharmaceutical and biotechnology companies have conducted lead compound
identification and optimization within their own research departments, due to
the highly proprietary nature of the activities being conducted, the central
importance of these activities to their drug discovery and development efforts
and the desire to obtain maximum patent and other proprietary protection on the
results of their internal programs. Pharmaceutical and biotechnology companies
must be convinced that the Company's drug discovery technologies and expertise
justify outsourcing these programs to the Company. The amount and timing of
resources that current and future collaborators, if any, devote to
collaborations with the Company are not within the control of the Company. There
can be no assurance that such collaborators will perform their obligations as
expected or that the Company will derive any additional revenue from such
arrangements. Because the Company's arrangements with its collaborators may
entail the provision of identical or similar libraries or compounds to multiple
parties, there can be no assurance that conflicts will not arise between
collaborators as to proprietary rights to particular libraries or as to
particular compounds in the Company's libraries. Moreover, the Company's
collaborations may be terminated under certain circumstances by its
collaborators, which terminations could result in the
12
<PAGE>
Company relinquishing rights to products developed jointly with its
collaborators. Any such conflicts or terminations could have a material and
adverse effect on the Company.
There can be no assurance that (i) the Company's present or any future
collaborators will not pursue their existing or alternative technologies in
preference to those of the Company, (ii) any product will be developed and
marketed as a result of such collaborations or (iii) the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that such current or future collaborative arrangements will
be successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it will require substantially greater capital to
undertake the research, development and marketing of products at its own
expense. In addition, the Company may encounter significant delays in developing
compounds or find that the development, manufacture or sale of its proposed
products is materially and adversely affected by the absence of such
collaborative agreements.
EARLY STAGE OF PRODUCT DEVELOPMENT
The Company's research and product development programs (including the
Company's program with respect to potential drug candidates for the treatment of
diseases believed to be mediated by the melanocortin receptor pathway) are at
early stages. Any compounds resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years, if ever, even if any such compounds are successfully developed and
proven to be safe and effective. There can be no assurances that any of the
Company's product development efforts will be successfully completed, that
development arrangements with pharmaceutical partners will be established on
acceptable terms, if at all, that regulatory approvals will be obtained or will
be as broad as sought, that any candidate products will be capable of being
produced in commercial quantities at reasonable cost, or that any products, if
introduced, will achieve market acceptance or profitability.
Certain of the Company's technology development programs, including the
Company's selection, screening and predictive technology programs (conducted
through NaviCyte), may not result in products or services that can be utilized,
other than for certain limited development consortium purposes, within the
foreseeable future, if ever. There can be no assurances that these programs will
be successfully completed or result in products or services that are
efficacious, perceived as valuable by pharmaceutical partners or customers,
useful in the Company's internal development programs or otherwise an
enhancement to the Company's ability to engage effectively in drug discovery.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The continued development of the Company's technologies and compounds will
require the commitment of substantial additional funds to maintain the
competitiveness of its combinatorial chemistry technologies, to continue its
technology development programs (including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds through automation) and to conduct the
costly and time consuming research and preclinical and clinical testing
necessary to advance potential drug candidates. The Company's future capital
requirements will depend on many factors, including, among others, (i) continued
scientific progress in its research and development programs, (ii) the ability
of the Company to establish and maintain collaborative arrangements with respect
to the Company's drug discovery technologies and the clinical testing of
candidate products, (iii) progress with preclinical and clinical trials, (iv)
the costs involved in further developing and sustaining internal combinatorial
chemistry and other drug discovery capabilities, (v) the costs involved in
developing additional drug discovery technologies (including the Company's
selection, screening and predictive technology programs (conducted through
NaviCyte) and the Company's efforts to synthesize compounds through automation),
(vi) the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, (vii) competing technological and market developments
and (viii) changes in the Company's existing research relationships. Although
the Company estimates that its existing capital resources and funding under an
existing (i) research and development collaboration, (ii) product sales
agreements and notes due to the Company in connection with the sale of assets of
its wholly-owned subsidiary, ChromaXome, Corp, together with its currently
available property and equipment financing and line of credit, will be
sufficient to fund its current and planned operations through the second quarter
of 2000, there can be no assurance that changes will not occur that would
consume available capital resources before such time or that sufficient funds
will be available thereafter.
The Company anticipates that it will be required to raise additional capital
over a period of several years in order to conduct its operations. Such capital
may be raised through additional public or private financings, as well as
collaborative arrangements, borrowings and other available sources. There can be
no assurance that additional financing will be available on acceptable terms, if
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, which could have a material adverse effect on the Company.
13
<PAGE>
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has experienced significant operating losses since inception.
For the years ended December 31, 1998, 1997 and 1996, the Company had net losses
of approximately $12,801,000, $9,372,000 and $11,688,000, respectively. For the
six months ended June 30, 1999, the Company recorded a net loss of $6,169,000
and had an accumulated deficit at June 30, 1999 of approximately $74,599,000.
The Company expects that its ability to achieve profitability will be partly
dependent upon the ability of the Company to enter into and achieve success
under additional collaborative arrangements or to expand and achieve success
under existing relationships. There can be no assurance that the Company will be
successful in entering into additional collaboration arrangements that will
result in revenues or that the Company will receive additional revenues under
existing collaboration arrangements. If the Company is unable to receive
significant additional revenues under collaboration arrangements, the Company
expects to incur additional operating losses in the future and expects
cumulative losses to increase as the Company's research and development efforts
and preclinical and clinical testing are expanded. Any revenues from the
achievement of milestones, royalties or license fees from the discovery,
development or sale of a commercial drug by a collaborator are not expected to
be material to the Company's financial position for several years, if at all.
The Company is unable to predict when, if ever, it will become profitable.
As a result of factors affecting the Company's business (including the
importance to the Company of collaborative arrangements and the Company's
inability to control the actions, timing, funding or success of its current and
potential collaborative partners), the revenues of the Company may vary
substantially from period to period. Thus, the Company's results for any one
period may not be indicative of the results which can be expected for any other
period.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
held-to-maturity securities. The Company invests its excess cash in highly
liquid short-term investments that are typically held for the duration of the
term of the respective instrument. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions to manage exposure to interest
rate changes. Accordingly, the Company believes that, while the securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Mutual Release dated June 30, 1999 between the
Registrant and Dura Pharmaceuticals, Inc.
10.2 Employment Agreement dated May 12, 1999 between the
Registrant and Mark W. Schwartz.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the second quarter.
15
<PAGE>
SIGNATURE
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.
Trega Biosciences, Inc.
Date: August 16, 1999 /s/ Michael G. Grey
--------------------
Michael G. Grey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard A. Wills
---------------------
Gerard A. Wills
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
Exhibit 10.1
MUTUAL RELEASE
This MUTUAL RELEASE is entered into as of the 30th day of June 1999, by and
between Trega Biosciences, Inc. 9880 Campus Point Drive, San Diego, CA 92121
(formerly known as Houghten Pharmaceuticals, Inc.)("Trega") and Dura
Pharmaceuticals, Inc. 7475 Lusk Boulevard, San Diego, CA 92121 ("Dura").
WITNESSETH:
WHEREAS, Trega and Dura are parties to a certain Research and Development
Agreement dated February 7, 1996 (the "Agreement");
WHEREAS, the parties, respectively, derived certain rights and were subject
to certain responsibilities under the terms of the Agreement; and
WHEREAS, the parties now wish to resolve their respective rights and
responsibilities under the Agreement.
In consideration of the payments reflected herein and the other respective
and mutual promises and covenants herein, the receipt and sufficiency are hereby
acknowledged, the parties intending to be legally bound, agree as follows:
1. PAYMENT. Trega, coincidental with the delivery of this release, has paid
Dura the sum of two hundred thousand dollars ($200,000), with an additional one
hundred thirty eight thousand four hundred fourteen dollars ($138,414) to be
paid by Trega on March 31, 2000.
2. RELEASE OF CLAIMS BY TREGA AND DURA. Trega and Dura, each on their own
behalf, do hereby covenant not to sue or to allow suit to be brought on their
behalf, and acknowledge complete satisfaction of and hereby release, absolve and
discharge each other and their respective affiliates as follows:
(a) RELEASED CLAIMS. This release and covenant not to sue extends to
any and all manner of action or actions, cause or causes of action, in law or
equity, and all suits, debts, liens, contracts, agreements, promises,
liabilities, claims, demands, damages, losses, costs or expenses which either
Trega or Dura may now have, or hereafter may claim to have, against each other
or their respective affiliates arising out of or in connection with any matter,
cause or thing raised or related to the Agreement and the Agreement shall be
deemed performed, completed, and fulfilled with neither party having any further
obligation to the other under, or in connection with, the Agreement from this
day forward, except as may be otherwise expressly set forth herein.
(b) PARTIES AGAINST WHOM CLAIMS RELEASED. This release of claims
against and covenant not to sue Trega and Dura, respectively, shall extend to
each of
<PAGE>
Trega and Dura and to each of their respective heirs, successors and assigns,
parent corporations and entities, subsidiaries and affiliated corporations and
entities, past and present, and their directors, officers, shareholders,
partners, members, trustees, agents, representatives, attorneys, administrators,
advisors, insurers and employees, past and present, and each of them.
(c) EXCEPTIONS. This release and covenant does not extend to any claim
of Trega or Dura arising under or relating to the following:
(i) any agreements between Trega and Dura (or other wise for
the benefit of Trega or Dura) which relate to
confidentiality or nondisclosure obligations;
(ii) any agreements other than the Agreement; and
(iii) this Mutual Release.
(d) EFFECT OF TREGA DEFAULT. Notwithstanding the foregoing, in the
event of the failure of Trega to pay, when due, the payment described in Section
1 hereof to be made on March 31, 2000, each of the Dura covenants herein not to
sue Trega and its affiliates, the Dura releases of Trega and its affiliates
herein, and the Dura agreements set forth in Section 4 hereof shall immediately
become null and void in their entirety, and Dura shall be entitled to pursue any
and all claims it may have against Trega and/or its affiliates with respect to
the Agreement.
3. WAIVER. Each of the parties to this Mutual Release acknowledge that
there is a risk that subsequent to their execution of this Mutual Release any or
all of them may incur, suffer, or sustain injury, loss, damage, costs,
attorneys' fees, expenses, or any of these, which are in some way caused by or
connected with the persons, entities and matters referred to above, or which are
unknown and unanticipated at the time this Mutual Release is signed, or which
are not presently capable of being ascertained; and, further, that there is a
risk that such damages as are known may become more serious than any party now
expects or anticipates. Nevertheless, each of the parties to this Mutual Release
acknowledges that this Mutual Release has been negotiated and agreed upon in
light of that realization, and each of the parties hereby expressly waives any
rights they may have in such claims (whether suspected or unsuspected). In so
doing, each of the parties acknowledges that they have had the benefit of
counsel and have been advised of, understand and knowingly and specifically
waive their respective rights under California Civil Code Section 1542, which
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
4. ACCORD AND SATISFACTION. Trega and Dura each acknowledge and agree
<PAGE>
that (a) their acceptance of the provisions of this Mutual Release is in full
accord and satisfaction of any doubtful and disputed claims relating to the
Agreement and (b) the agreement of the parties to the terms and conditions of
this Mutual Release is not an admission by either party to any liability or
as to the validity of any such claims, liability for which is expressly
denied by the parties, respectively.
5. FEES AND COSTS. Each of the parties hereto shall bear such party's own
costs and attorneys' fees incurred in connection with this Mutual Release.
6. INTEGRATION. This Mutual Release constitutes and contains the entire
agreement and understanding concerning the resolution of disputes between the
parties hereto regarding the Agreement and supersedes and replaces all prior
negotiations and all agreements (proposed or otherwise, whether written or oral)
concerning such subject matter. This is an integrated document.
7. CALIFORNIA LAW. This Agreement shall be deemed to have been executed and
delivered within the State of California, and the rights and obligations of the
parties hereunder shall be construed and enforced in accordance with, and
governed by, the laws of the State of California without regard to principles of
conflict of laws.
8. DRAFTING AGREEMENT. Each party has cooperated in the drafting and
preparation of this Mutual Release. Therefore, in any construction to be made of
this Agreement, it shall not be construed against any party on the basis that
the party (or such party's counsel) was the drafter.
9. EXECUTION BY COUNTERPART. This Mutual Release may be executed in
counterparts, and each counterpart, when executed, shall have the efficacy of a
signed original. Photographic or telefaxed copies of such signed counterparts
may be used in lieu of the originals for any purpose.
10. NO WAIVER. No waiver of any breach of any term or provision of this
Mutual Release shall be construed to be, and no such waiver shall be, a waiver
of any other breach of this Mutual Release. No waiver shall be binding unless in
writing and signed by the party waiving the breach.
11. COOPERATION. All parties hereto agree to cooperate fully and to take
all additional actions that may be necessary or appropriate to give full force
to the basis terms and intent of this Mutual Release and which are not
inconsistent with its terms.
12. NO PAROL REPRESENTATIONS. Each of the parties acknowledges and agrees
that no other party, nor any agent or attorney of any other party, has made any
promise, representation, or warranty whatsoever, express or implied, written or
oral, not contained herein concerning the subject matter hereof to induce such
party to execute this Mutual Release, and each of the parties acknowledges and
agrees that it has not executed this Mutual Release in reliance upon any
promise, representation or warranty not contained herein. Each of the parties
further acknowledges and agrees that its execution of this
<PAGE>
Mutual Release is based upon independent investigation of the facts and is not
based upon any representation not contained herein.
13. NO TRANSFER OF CLAIMS. Each of the parties hereby represents and
warrants to each of the other parties that such party has not heretofore
assigned or transferred, or purported to assign or transfer, to any person, firm
or corporation whatsoever, any of the claims or rights released, waived, or
affected hereunder. Each of the parties agrees to indemnify and hold harmless
each other party against any claim, demand, debt, obligation, liability, cost,
expense (including, without limitation, fees and costs of counsel), right of
action or cause of action, based in, arising out of, or in connection with any
such transfer or assignment or purported transfer or assignment.
14. RESOLUTION OF DISPUTES.
(a) NEGOTIATION OF DISPUTES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Mutual Release, or the
breach, termination, or validity hereof, by negotiations between representatives
who have authority to settle the controversy. Any party may give the other party
written notice of any dispute not resolved in the normal course of business.
Within 20 days after delivery of such notice, representatives of both parties
shall meet at a mutually acceptable time and place, and thereafter as often as
they reasonably deem necessary, to exchange relevant information and to attempt
to resolve the dispute. If the matter has not been resolved within 60 days of
the disputing party's notice, or if the parties fail to meet within 20 days,
either party may initiate arbitration of the controversy or claim as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three working days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this clause are confidential and shall be treated as
compromise and settlement negotiations for purposes of the Federal Rules of
Evidence and state rules of evidence.
(b) ARBITRATION. If a dispute arising out of or relating to this
Mutual Release, or the breach termination, or validity hereof (including the
determination of the interpretation or scope of this agreement to arbitrate),
has not been resolved by negotiation as provided herein, it shall be settled by
binding arbitration in accordance with the Center for Public Resources Institute
for Dispute Resolution Rules for Non-Administered Arbitration of Business
Disputes. It is the intention of the parties that the period of 90 days should
be substituted for the period of "six months" in rule 13.7. The arbitration
shall take place in San Diego, California, shall be governed by the United
States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof.
15. HEADINGS/GENDER/PLURAL. The headings of the several sections of this
Mutual Release are inserted for convenience of reference only and are not
intended to affect the meaning or interpretation of this Mutual Release. Any
reference to the masculine, feminine, or neutral gender shall be deemed to
include any or all other
<PAGE>
genders as appropriate. Any reference to the singular form of a word or phrase
shall be deemed to include or mean the plural, if appropriate and vice versa.
16. SUCCESSORS. Without limiting the other provisions hereof, this Mutual
Release shall be binding upon and shall inure to the benefit of any successors
or assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Mutual
Release as of the date first above written.
TREGA BIOSCIENCES, INC. DURA PHARMACEUTICALS, INC.
By: /s/ Gerard A. Wills By: /s/ Michael T. Borer
------------------------------ ---------------------------------
Name: Gerard A. Wills Name: Michael T. Borer
Title: VP Finance & Chief Title: Senior VP and Chief
Financial Officer Financial Officer
<PAGE>
Exhibit 10.2
May 12 1999
Mark Schwartz, Ph.D.
619 Exeter Place
Danville, CA 94506
Re: revision to offer letter dated May 10, 1999
Dear Mark:
We are pleased to extend you an offer of employment with Trega Biosciences, Inc.
(the "Company"). This letter shall serve to clarify the terms and conditions of
the job we are offering you.
We are offering you a full-time position as Vice President, Commercial
Operations & Chief Commercial Officer, working under the direction of Michael
G. Grey, Chief Executive Officer of Trega. Your employment will begin on a
mutually agreed upon date with an exempt monthly salary of $15,416.67.(1)
Additionally, you will receive a $15,000.00 signing bonus to be paid with
your first paycheck. The signing bonus is subject to Federal and State tax
withholding. In addition to your base compensation, you will be eligible to
participate in the Company's annual performance-based bonus program. Should
the Company meet its annual goals you will be eligible to receive a bonus,
with a target of 50% of your annual salary.
As we discussed you will maintain your residence in Danville, CA and travel to
San Diego on an as needed basis. Trega will pay reasonable expenses incurred as
required by your travel. Additionally, we will pay reasonable expenses to set up
a home office. In the event you relocate to San Diego from Danville, CA, Trega
will reimburse you for reasonable relocation expenses: for the shipment of your
household goods; a pre-move house-hunting trip; temporary living quarters and
temporary transportation; specific costs relating to the sale and purchase of
your primary residence as pre-approved by Trega; and all travel expenses
incurred for the move of your family. Any payments made to you or third parties
on your behalf for relocation, other than the moving of household goods and
travel, is required to be included in your gross earnings for the year. Trega
agrees to pay you a cash bonus "grossed up" to compensate you for the taxes you
will be required to pay on this additional income. Should you elect to terminate
your employment within 12 months of your date of hire you will be required to
repay Trega for these relocation costs, pre-move house-hunting trip and the
costs paid by Trega regarding the sale and purchase of your primary residence.
Your repayment obligation would be reduced by a prorated amount for each month
of employment with Trega.
- -------------------
(1) Please be advised that this offer is contingent on your completing an I-9
form and submitting support information regarding your right to work in the
United States within three days of hire.
<PAGE>
Page 2
You will be eligible to participate in the Company's health-care benefit plans
on the first of the month following your hire date and in the Company's 401 (k)
Retirement Plan during the first enrollment period after your hire date. You
will be entitled to 15 days of vacation per year, with an additional day of
vacation for every year of service up to a maximum of 20 days. Subject to the
approval of the Compensation Committee, you will be granted an option to acquire
150000 shares of stock. The option is subject to the terms of the Option
Agreement and the 1996 Stock Incentive Plan.
You acknowledge that as a condition of employment you will be required to
execute a Confidentiality Agreement and any and all other documents reasonably
required by the Company to protect its proprietary trade secrets from disclosure
and to prevent the unauthorized use by the Company of any proprietary trade
secrets of other parties or entities. These documents are attached to this
letter as Exhibit A and are incorporated into this letter by reference.
You acknowledge and agree that in accordance with California law, your
employment with the Company is "at will" and you understand that the Company or
you may terminate your employment at any time, for any reason whatsoever, with
or without cause and with or without notice. The Company also reserves the right
to make personnel decisions regarding your employment, including but not limited
to discussions regarding any promotion, salary adjustment, transfer or
disciplinary action, up to and including termination, consistent with the needs
of the business.
You and the Company further agree that all disputes, claims or causes of action
arising out of or relating to your employment or its termination, shall be
submitted to binding arbitration before a neutral arbitrator, except where the
law specifically forbids the use of arbitration as a final and binding remedy
(See Exhibit B).
Mark, my colleagues and I look forward to your joining our organization. We are
pleased to have someone of your expertise and leadership assist in the
facilitation of Trega's continued growth and success. I would like to do
whatever I can over the next few days to facilitate a quick, but informed
decision on your part. Please do not hesitate to contact me either at work,
619-410-6631 or home at 619-509-9648. If this letter accurately reflects our
agreement and your acceptance of these terms, please sign one copy and return it
to me by May 14, 1999. The other copy is for your records.
Sincerely,
/s/ Michael G. Grey
Michael G. Grey
Chief Executive Officer
<PAGE>
Page 3
ACKNOWLEDGMENT
I agree to the terms and conditions of employment set forth in this letter.
/s/ Mark W. Schwartz 5/13/99
- ---------------------------------------- --------------
Mark Schwartz, Ph.D. Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT JUNE 30, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,539
<SECURITIES> 1,053
<RECEIVABLES> 1,279
<ALLOWANCES> 0
<INVENTORY> 42
<CURRENT-ASSETS> 10,441
<PP&E> 7,335
<DEPRECIATION> 3,475
<TOTAL-ASSETS> 22,249
<CURRENT-LIABILITIES> 7,589
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 11,834
<TOTAL-LIABILITY-AND-EQUITY> 22,249
<SALES> 189
<TOTAL-REVENUES> 4,781
<CGS> 158
<TOTAL-COSTS> 158
<OTHER-EXPENSES> 12,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> (6,169)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,169)
<EPS-BASIC> (.34)
<EPS-DILUTED> (.34)
</TABLE>
