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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code): (619) 410-6500
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 26,
1999, as reported on the Nasdaq National Market, was approximately $16,468,975.
Shares of Common Stock beneficially held by each officer and director of the
Registrant and by each person who beneficially owns 10% or more of the
Registrant's outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 26, 1999, there were 18,022,272 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders which is presently expected to be held on May 18, 1999, which Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or before April 16, 1999 and is referred to herein as the "Proxy Statement," are
incorporated herein by reference into Part III hereof as provided in such Part.
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TREGA BIOSCIENCES, INC.
FORM 10-K
INDEX
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PART I PAGE
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Item 1. Business.............................................. 3
Item 2. Properties............................................ 15
Item 3. Legal Proceedings..................................... 15
Item 4. Submission of Matters to a Vote of Security Holders... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 17
Item 6. Selected Financial Data............................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 19
Item 7a. Qualitative and Quantitative Disclosure About Market
Risk.................................................. 22
Item 8. Financial Statements and Supplementary Data........... 24
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.... 24
Item 11. Executive Compensation................................ 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 24
Item 13. Certain Relationships and Related Transactions........ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 25
SIGNATURES.............................................................. 28
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, STATEMENTS USING SUCH WORDS AS "MAY,"
"POTENTIAL," "EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS,"
"ANTICIPATES" AND SIMILAR EXPRESSIONS). FOR A DISCUSSION OF CERTAIN FACTORS
WHICH MAY AFFECT THE OUTCOMES PROJECTED IN SUCH STATEMENTS, SEE "RISK
FACTORS" ON PAGES 9 TO 15 OF THIS ANNUAL REPORT ON FORM 10-K. 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 ANNUAL
REPORT ON FORM 10-K. THE COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR
OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
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 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 ("MC")
receptors, which may be important in the treatment of inflammatory and metabolic
diseases.
TREGA'S BUSINESS STRATEGY
Trega's objective is to be a leading developer of and resource for drug
discovery and selection technologies and to deliver early-stage clinical
development candidates that are active against disease targets of importance to
major pharmaceutical and biotechnology companies. In 1998, Trega invested
significantly in three areas:
(1) the further development of combinatorial chemistry libraries formatted
in singles-based compound arrays;
(2) the screening of the Company's combinatorial chemistry libraries
against a series of MC receptors; and
(3) the addition of expertise and technology development programs with
respect to drug selection tools (through the acquisition of NaviCyte).
Trega's commercial approach focuses on the development and implementation of a
sustainable business strategy principally through a mix of corporate
collaborations, internal discovery programs and value added products and
services not dependent on regulatory approval for marketing. To implement its
strategy Trega intends to:
- Enter into collaborations to provide pharmaceutical companies with access
to Trega's combinatorial chemistry libraries and individually synthesized
compounds. Trega has current drug discovery collaborations which include
an arrangement with Ono Pharmaceuticals Co., Ltd. ("Ono"), focusing on the
identification of small-molecule agonists of MC-1 to treat inflammatory
conditions, and an arrangement with Novartis Pharma AG ("Novartis"),
focusing on treatments of certain diseases believed to be mediated by the
MC-4 receptor pathway such as obesity, Type II diabetes and Syndrome X.
- Discover and develop selected compounds through early-stage clinical
trials in an effort to demonstrate their potential value. Presently,
Trega is pursuing the discovery and development of small-molecule
compounds that are active against MC receptors. Trega is currently
screening its small-molecule combinatorial chemistry libraries against
these receptors, which have been identified as playing a role in the
body's inflammatory processes and in metabolic diseases, in an effort to
discover potential drug leads. In 1993, Trega used its combinatorial
chemistry technologies to discover a family of proprietary compounds
that appear to influence the production and activity of
anti-inflammatory and pro-inflammatory cytokines through interaction
with the MC receptors. One of these compounds, HP 228, is in the final
stages of a Phase II clinical study evaluating its effectiveness in
relieving post-surgical pain (an inflammatory condition) in patients
undergoing elective hip or knee replacement surgery. If the results of
the study support further development, Trega intends to seek a
pharmaceutical partner to undertake such development. Trega intends to
selectively develop, to early-stage clinical development, a limited
number of future discoveries from internal efforts or screening
alliances with other companies. For further development, Trega would
attempt to partner any such discoveries with major
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pharmaceutical companies (prior to the initiation of Phase II clinical
trials when possible) in order to mitigate the costs associated with
development and commercialization, and to gain access to development and
marketing expertise.
- - Support the drug discovery efforts of pharmaceutical and biopharmaceutical
customers by offering, through Chem.Folio-TM-, non-exclusive access to
diverse, small-molecule compound libraries. Since the introduction of its
Chem.Folio-TM- program in mid-1998, Trega has entered into arrangements for
the sale of combinatorial chemistry libraries to Biogen, Inc. ("Biogen"),
Isis Pharmaceuticals, Inc. ("Isis") and the Parke-Davis Division of
Warner-Lambert Company ("Parke-Davis").
- - Develop, through NaviCyte, products and services to facilitate the rapid
screening of drug development candidates for pharmacokinetic
characteristics. NaviCyte, acquired by Trega in November 1998, is
developing products and services to facilitate the rapid screening of drug
development candidates for pharmacokinetic characteristics (such as how
such candidates are absorbed in humans, distributed through the body,
metabolized and excreted). In addition, NaviCyte is in the early stages of
developing a model that is intended to assist in predicting the
pharmacokinetic and toxicological properties of new compounds based on
their chemical structure. The products and services under development by
NaviCyte are intended to provide critical information necessary for drug
candidate selection early in the drug discovery process.
RECENT DEVELOPMENTS
ChromaXome
On March 16, 1999, substantially all of the assets of ChromaXome Corp., a
wholly owned subsidiary of Trega ("ChromaXome"), were sold to TerraGen Discovery
Inc. ("Discovery"), the wholly owned subsidiary of TerraGen Diversity Inc.
("Diversity"). As consideration for the sale, ChromaXome received $2 million in
cash, interest-bearing promissory notes of Discovery with an aggregate principal
amount of $3 million and 600,000 shares of Diversity preferred stock. Of the $3
million in principal amount of notes, $2 million is payable no later than
December 31, 1999 and the remaining $1 million is payable no later than June 30,
2000, with the entire amount secured by Discovery's pledge of the assets
acquired from ChromaXome.
Until the closing of such sale, Trega had been conducting an early-stage
combinatorial biology program through ChromaXome (which the Company acquired in
August 1996). In combinatorial biology, scientists attempt to create libraries
of potentially new compounds through the molecular manipulation, cloning and
transfer of genetic material from a naturally occurring microorganism into a
suitable industrial microbial host. As a result of Trega's current focus on
developing technologies that add to its drug discovery techniques (such as the
drug candidate selection tools under development by NaviCyte), the Company
determined that further development of a parallel technology to create molecular
diversity (i.e., combinatorial biology as compared to Trega's core competency in
combinatorial chemistry) created unneeded redundancy and diverted funds and
other resources away from complementary development programs.
As a result of the sale, eight persons formerly employed by ChromaXome have
become employees of Discovery (comprising the entire staff of ChromaXome at the
time of the sale).
NaviCyte
On November 23, 1998, Trega acquired all of the outstanding shares of
NaviCyte's capital stock. In exchange, (i) holders of NaviCyte capital stock
prior to the acquisition received, in the aggregate: (a) $210,000 in cash and
(b) 1,428,231 shares of Trega's Common Stock; and (ii) holders of options to
acquire NaviCyte capital stock prior to the acquisition received, in the
aggregate, options to acquire 1,071,756 shares of Trega's Common Stock. In
addition, Trega made an aggregate of $350,000 in advances to NaviCyte.
TREGA'S DRUG DISCOVERY TECHNOLOGIES
Combinatorial Chemistry
A principal technique for discovering drugs involves screening chemical
compounds against biological assays to identify those compounds that trigger a
desired activity. This technique requires access to a large collection of
compounds that can be rapidly tested for activity in assays representing
biologic intervention points (targets). Combinatorial chemistry, which is a
technique for simultaneously creating thousands of chemical compounds, directly
addresses the demand for large collections of compounds. Combinatorial
chemistry involves rapidly and systematically assembling a variety of molecular
entities, or building blocks, in many different combinations to create libraries
of diverse compounds that can be tested in drug discovery screening assays to
identify potential lead compounds.
The Company believes that its combinatorial chemistry technologies facilitate
the rapid identification of lead compounds for its pharmaceutical partners and
for its internal discovery programs by creating compounds that offer the
following important characteristics:
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- - PHARMACEUTICALLY RELEVANT COMPOUNDS. The Company believes that its
libraries are designed to produce significant numbers of pharmaceutically
relevant compounds. Trega's combinatorial chemistry libraries are
carefully created to meet the design, diversity, quality and purity
criteria preferred by the pharmaceutical industry.
- TEMPLATE NOVELTY. The Company believes that the distinctive core
structures, or templates, around which the Company's small-molecule
libraries are built possess the physico-chemical weights and structures
characteristic of pharmaceutical compounds, yet have not previously been
thoroughly explored as potential drugs. Trega has applied for patents on
nearly all of these libraries.
- - EASY-TO-SCREEN FORMATS. Trega's libraries are formatted in
singles-based compound arrays and consist of compounds free in solution,
without interfering solid supports, such as beads, pins, chips or tags.
These libraries do not require use of deconvolution strategies commonly
employed to identify active compounds in mixture-based libraries.
Moreover, compounds formatted as singles-based compound arrays are
created and screened as individual compounds to facilitate the rapid
identification of active compounds.
- - VALIDATION. Multiple leads and highly active compounds have been
identified and/or optimized utilizing Trega's technologies, both by Trega
and in several of the Company's external collaborations.
Design of Libraries
Trega's screening libraries are designed and constructed by medicinal chemists
to meet stringent purity, molecular weight and quantity requirements optimized
for the pharmaceutical industry. Trega's combinatorial chemistry approach to
the design and synthesis of novel, diverse chemical libraries involves the
integration of medicinal chemistry, computational design, solid-phase chemical
synthesis, the patented Tea-Bag method of simultaneous parallel synthesis and
automated library synthesis.
Trega focuses its combinatorial library synthesis program on creating diverse,
low molecular weight compounds, especially heterocyclic structures.
Heterocycles, as a class of compounds, are considered desirable pharmaceutical
candidates because they are more likely to be orally available, are generally
less expensive to manufacture and typically have a longer duration of action
than other compound classes such as peptides and proteins. The Company believes
that compounds of low molecular weight, especially heterocycles, represent the
majority of drugs currently on the market.
Extending the range of Trega's libraries involves developing novel templates
and, subsequently, libraries based on those templates. These new libraries are
designed to add to the structural diversity of Trega's existing libraries,
thereby enhancing their utility by increasing the likelihood that screening of
the libraries against a particular biological target will result in
identification of a compound with activity against that target.
Once a lead compound is identified from a screening library, Trega utilizes a
computational representation of the possible compounds that can be created
around that structure to uncover a set of closely related compounds that can be
synthesized in highly purified form and screened to identify the most active
chemical structure.
Melanocortin Biology
In 1993, Trega used its early combinatorial chemistry technologies to discover
a family of proprietary peptide compounds that appear to influence the
production and activity of anti-inflammatory and pro-inflammatory cytokines
(hormone-like proteins that act as messengers between cells) through interaction
with the MC receptors. HP 228, the only compound from this family currently
being advanced by the Company, is presently the subject of a Phase II clinical
trial to evaluate its effectiveness in treating acute, post-surgical pain (an
inflammatory condition) in patients undergoing elective hip or knee replacement
surgery. If the results of the study support further development, Trega intends
to seek a pharmaceutical partner to undertake such development.
Trega's internal drug discovery programs are currently focused on the
identification of small-molecule compounds active against a series of known MC
receptors, some of which have been shown to play a role in inflammatory
processes and metabolic diseases. Active compounds that interact with these
receptors may be useful in treating inflammatory conditions (such as pain,
asthma and arthritis) or metabolic conditions (such as diabetes and obesity).
Trega's internal discovery strategy includes collaborating with
pharmaceutical partners to identify small-molecule compounds active against
the MC receptors by screening the Company's small-molecule combinatorial
chemistry libraries. In 1997, Trega entered into an alliance with Ono to
identify small-molecule agonists of MC-1 to treat inflammatory conditions.
(See "Trega's Collaborations--Ono" below.) In May 1998, Trega entered into a
collaboration with Novartis to identify, develop and
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commercialize orally-active small molecules for the treatment of certain
diseases believed to be mediated by the MC-4 receptor pathway, including
obesity, Type II diabetes and Syndrome X. (See "Trega's
Collaborations--Novartis" below.)
NaviCyte
NaviCyte, acquired by Trega in November 1998, is developing products and
services to facilitate the rapid screening of drug development candidates for
pharmacokinetic characteristics (such as how such candidates are absorbed into
humans, distributed through the body, metabolized and excreted). In addition,
NaviCyte is in the early stages of developing a model that is intended to assist
in predicting the pharmacokinetic and toxicological properties of new compounds
based on their chemical structure. The products and services under development
by NaviCyte are intended to provide critical information necessary for drug
candidate selection early in the drug discovery process.
As part of its efforts, NaviCyte has assembled a collaborative consortium,
presently focused on the early stage development of a model to predict the
absorption into the human body of potential drug candidates. Current
consortium subscribers include SmithKline Beecham PLC, Parke-Davis, Genentech
Inc., Schering-Plough Corp. and Johnson & Johnson's R.W. Johnson
Pharmaceutical Research Institute. Subscription, which requires the payment
of an up-front fee and certain milestone payments, yields access to the
current phase of the evolving predictive model. Following the completion of
the current phase of the model regarding absorption, NaviCyte intends to
continue with a second phase to predict human metabolism of potential drug
candidates.
NaviCyte has acquired, from the Memorial Sloan-Kettering Cancer Research
Institute, a worldwide, exclusive license for all commercial applications of the
Caco-2 cell line and its derivatives. The Company believes that the Caco-2 cell
line is currently the most widely used cell line for in-vitro estimation of the
oral absorption of compounds. NaviCyte currently grants nonexclusive
sublicenses at a relatively modest cost to companies wishing to use the Caco-2
cell line for their internal use and to service firms for use in contract
research studies. NaviCyte also sells Caco-2 cells, which are time consuming to
grow and require skill in cell culture techniques.
In addition to the foregoing, NaviCyte presently markets (for distribution by
Corning, Incorporated (United States, Europe and Japan) or Toyobo (Japan)) two
types of diffusion chambers. NaviCyte also has developed a contract testing
business for pharmaceutical and biotechnology companies, with an emphasis on in
vitro permeability and metabolism studies.
TREGA'S COLLABORATIONS
Trega has current drug discovery collaborations with Novartis, Ono and Chugai
Biopharmaceuticals, Inc. ("Chugai").
- - NOVARTIS. In May 1998, Trega entered into a Research, Development and
License Agreement with Novartis pursuant to which the companies are focused
on the identification and development of orally-active small molecules for
the treatment of certain diseases believed to be mediated by the MC-4
receptor pathway, including obesity, Type II diabetes and Syndrome X. The
Agreement provides for (i) an equity investment at Trega's option, which
the Company exercised in November 1998 and received $7 million in exchange
for approximately 1.9 million shares of the Company's Common Stock; (ii) an
additional $12 million in committed funding (consisting of $2 million
received upon the execution of the Agreement for past research activities
and $10 million over a three-year period); and (iii) potential milestone
payments and royalties from the successful development and
commercialization of products (for which Novartis has worldwide rights).
- - ONO. In June 1997, Trega entered into a Research and Development Agreement
with Ono pursuant to which the Company is screening its combinatorial
chemistry libraries and certain of Ono's chemical compounds against an MC-1
receptor screen to identify potential small-molecule agonists of the
receptor to treat inflammatory conditions. Trega received an up-front
license fee and an additional payment for work to be done during the first
12 months under the Agreement. In July 1998, as a result of achieving a
milestone under the Agreement, Trega received $2 million to fund the next
phase of the program. Trega will also receive milestone and royalty
payments on products it discovers which are subsequently developed and
marketed by Ono, if any. Rights to commercialize products resulting from
the arrangement, if any, will belong to Ono in China, Japan, South Korea
and Taiwan and to Ono and Trega in Europe, with Trega holding such rights
with respect to North America and the rest of the world. In May 1998,
Trega and Ono reached a definitive agreement to expand their relationship.
Under the new agreement, Trega is creating additional custom combinatorial
libraries and optimizing lead compounds discovered by Ono, and has
undertaken screening of those compounds in a target of interest to Ono. As
part of the new relationship, Trega received approximately $1.9 million in
research funding.
- - CHUGAI. The collaboration with Chugai, a subsidiary of Chugai
Pharmaceutical Co., Ltd., was initiated in January 1997. Pursuant to this
arrangement, Trega provides Chugai with combinatorial libraries which
Chugai screens against a range of targets. Compounds identified with
activity in bone, cardiovascular and infectious diseases as well as
hematological growth factors and oncology may be developed by Chugai, and
Chugai would pay milestone payments and royalties on compounds, if any,
discovered from Trega's libraries and subsequently developed and marketed
by Chugai (for which Chugai would have worldwide rights). Chugai and Trega
would jointly own any compounds with identified activity in Chugai's
inflammation screens. In addition, Trega may develop any compounds
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discovered in selected Chugai screens targeted at obesity and central
nervous system diseases, with a royalty obligation payable to Chugai for
any compounds that are commercialized.
With respect to certain of Trega's other collaborations, the screening periods
or active phases for collaborations between the Company and each of Novo Nordisk
A/S, Proctor & Gamble and a major ophthalmic company have expired within the
past year. In addition, Trega's drug discovery alliances with Chiroscience
Group, plc., RiboGene, Inc. and Cadus Pharmaceutical Corporation have either
terminated or are presently inactive.
CHEM.FOLIO-TM-
In July 1998, Trega introduced Chem.Folio-TM-, a portfolio of combinatorial
chemistry screening libraries, to provide companies with the opportunity to
benefit from access to Trega's existing combinatorial chemistry libraries.
Chem.Folio-TM- is targeted at organizations requiring only non-exclusive access
to compounds for use in their internal screening programs. Optimization and
resupply services, as well as technology transfer and screening for drug
selection, are also available from Trega for Chem.Folio-TM- customers.
Chem.Folio-TM- customers include (i) Biogen which, pursuant to an October 1998
agreement, will provide Trega with funding of $7.5 million over two years for
the purchase of Trega's combinatorial chemistry libraries; (ii) Parke-Davis
which, pursuant to a December 1998 agreement (which superseded a May 1997
agreement calling for Parke-Davis' purchase of $1.5 million worth of the
Company's Common Stock), agreed to purchase $1.5 million worth of the Company's
combinatorial chemistry libraries; and (iii) Isis pursuant to a March 1999
agreement.
Chem.Folio-TM- screening libraries are designed by experienced medicinal
chemists using state-of-the-art computational software to include diverse,
drug-like molecules. Each Chem.Folio-TM- library is designed to be maximally
diverse within the constraints of producing drug leads. Each library is put
through a two-step quality control process to ensure the final product meets
industry purity standards.
CERTAIN LICENSE AND OTHER TECHNOLOGY ARRANGEMENTS
Torrey Pines Institute for Molecular Studies ("TPIMS")
Pursuant to a Restated and Third Amended Research and Option Agreement with
TPIMS (the "TPIMS Agreement"), Trega historically has relied upon TPIMS, a
not-for-profit biomedical research institute founded by the founder of the
Company (Dr. Richard Houghten), for certain basic research and laboratory
facilities and scientific personnel necessary for the Company to conduct a
significant portion of its combinatorial chemistry business. As a result of
(i) Trega's development of internal resources and personnel to support the
conduct of its combinatorial chemistry business and (ii) Trega's adoption of
techniques for the creation of combinatorial libraries in singles-based
arrays, which techniques are not within the special interest of TPIMS in
creating mixture-based libraries, the Company is no longer dependent upon
TPIMS for those facilities and services previously provided.
Given their divergence in directions and Trega's development of internal
resources, the Company notified TPIMS that it would not extend the TPIMS
Agreement (which thus expired on April 14, 1998). However, pursuant to the
TPIMS Agreement, Trega continued with funding for TPIMS through July 14, 1998.
Pursuant to the TPIMS Agreement, Trega purchased TPIMS' entire right, title
and interest in and to certain technology that arose at TPIMS and was
identified in the Agreement, subject to the continuing rights of the United
States government, if any, and of TPIMS to use the technology for academic
purposes. This purchase eliminated the obligation of Trega to make milestone
payments and to pay royalties in respect of products based upon this
technology. The purchase price pertaining to these rights was $1.3 million.
Subsequently, as of March 4, 1998, Trega entered into a Services and License
Agreement (the "Services Agreement") with TPIMS which gives the Company the
opportunity to call upon TPIMS for chemistry services on an as-needed basis.
Under the Services Agreement, Trega returned to TPIMS for its use certain
combinatorial chemistry libraries which were of no further interest to the
Company, and TPIMS agreed to give the Company a right of first refusal in the
field of MC receptor ligands.
Dura Pharmaceuticals, Inc.
In February 1996, Trega entered into a Research and Development Agreement with
Dura Pharmaceuticals, Inc. ("Dura"). Dura markets pharmaceuticals for the
treatment of respiratory diseases and is developing a dry powder inhalation
system for pulmonary delivery of respiratory drugs and other pharmaceuticals.
Pursuant to this Agreement, Trega committed to provide funding totaling
$6,000,000 over four years to seek to apply Dura's proprietary drug delivery
technology to Company compounds. As of December 31, 1998, $4,650,000 had been
funded by Trega since the inception of the Agreement. Concurrent with the
execution of the Agreement, Dura purchased shares
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of the Company's preferred stock, which were converted to shares of the
Company's Common Stock upon closing of Trega's initial public offering, for
$5,000,000.
In April 1998, Trega initiated a Phase I dose-escalation trial evaluating the
safety of administering HP 228 to the lungs. In the trial, HP 228 was delivered
using Dura's proprietary pulmonary drug delivery system. In September 1998,
Trega announced completion of four of the five planned dosage groups, with the
Company electing not to study the highest dosage level. Preliminary data
indicated systemic absorption to the lungs and no safety problems at the doses
studied.
If applicable, Trega and Dura have agreed to negotiate certain manufacturing
and licensing agreements for any Company compounds successfully developed using
Dura's technologies. Separately, Dura will have the option to participate in
funding the development of, and to receive a commensurate share of the
commercial benefits from, respiratory compounds discovered and owned by Trega in
the course of its drug discovery efforts.
The Scripps Research Institute ("Scripps")
Trega is the assignee of a license to the method patent covering the Tea Bag
simultaneous parallel solid-phase synthesis technology from Scripps. This
license was acquired from the technology's inventor, Dr. Richard Houghten.
Trega, under certain circumstances, may be required to pay royalties to Scripps
for use of the Tea Bag technology.
Chiron Corporation
Pursuant to agreements with Chiron Corporation ("Chiron"), in January 1994,
Trega and Chiron cross-licensed certain patent rights held by each company
related to the synthesis and screening of peptide libraries. The combined
cross-licensed portfolios of patent rights provide substantial research
platforms and methodologies for developing and screening peptide libraries. The
rights granted by Trega to Chiron include rights to utilize the Tea Bag method
of synthesis (including synthesis of non-peptide libraries). Trega is required
to pay royalties to Chiron on products generated using Chiron's technology.
Northwest Neurologic, Inc.
As of May 30, 1997, Trega entered into a Research & License Agreement with
Northwest Neurologic, Inc. ("NNL"), which was subsequently amended (the "NNL
License Agreement"). Under the NNL License Agreement, Trega acquired a
nonexclusive license to certain technology related to the MC receptors for use
in a defined field. In exchange, Trega agreed to pay cash to NNL and to provide
NNL with the use of up to 10 combinatorial libraries and certain other services
to be provided by the Company. Each party will owe milestone payments and
royalties to the other based upon the development and commercialization of
products employing the technology received under the NNL License Agreement. In
March 1998, NNL was acquired by Neurocrine Biosciences, Inc.
PATENTS
The Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development
of its business. The Company currently pursues patent protection for its
combinatorial chemistry technologies and libraries, its efforts in the
melanocortin area, and its selection technologies through its NaviCyte
subsidiary. Currently, the Company has approximately 26 issued United States
patents and 34 pending United States patent applications. It is the Company's
policy to pursue foreign patent protection where appropriate and the Company
currently has over 150 pending foreign patent applications or foreign issued
patents. The patent positions of pharmaceutical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved.
RESEARCH AND DEVELOPMENT EXPENSES
Trega incurred research and development expenses totaling approximately
$17.9 million, $14.8 million and $11.8 million in 1998, 1997 and 1996,
respectively. (See "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" below.)
EMPLOYEES
As of March 12, 1999, the Company had 108 full-time employees, including 81
in research and development. Of the Company's total employees, approximately
48 hold advanced degrees. Trega places an emphasis on obtaining the highest
available quality of staff. Trega has selected and assembled a group of
experienced scientists and managers with skills in a wide variety of
disciplines, including chemistry, biology and pharmaceutical development.
None of the Company's employees are covered by collective bargaining
arrangements and management considers relations with its employees to be
good.
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RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT
FACTORS, AMONG OTHERS (INCLUDING THOSE NOTED ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K), IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT,
THE COMPANY'S ACTUAL 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 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
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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 (such as HP 228). 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 existing
research and development collaborations and product sales agreements,
together with currently available property and equipment financing, will be
sufficient to fund its current and planned operations for the next 12 months,
there can be no assurance that changes will not occur that would consume
available capital resources before such time.
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.
COMPETITION
The Company is engaged in a highly competitive and rapidly changing industry.
The Company competes not only with other combinatorial chemistry companies, but
also with companies utilizing other technologies (such as high or ultrahigh
throughput screening) for the same objectives. Competition from fully
integrated pharmaceutical companies, biotechnology companies and other drug
discovery companies is intense and is expected to increase. Many pharmaceutical
and biotechnology companies, which represent the largest potential market for
the Company's combinatorial chemistry and other drug discovery technologies,
have developed or are developing internal combinatorial chemistry and other drug
discovery technology programs (including selection, screening and predictive
technologies) or have entered into collaborations with companies conducting such
programs. Many of these pharmaceutical companies, as compared with the Company,
have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical and established biotechnology companies. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and marketing
which may be competitive with the Company's efforts. These companies and
institutions compete with the Company in recruiting and retaining highly
qualified scientific and management personnel. There is also competition for
access to novel pharmacophores and desirable assays to use for screening of
libraries, and any inability of the Company to develop novel pharmacophores or
maintain access to a sufficiently broad range of assays for screening potential
drugs would have a material adverse effect on the Company. There can be no
assurance that the Company's competitors will not develop more effective or more
affordable technology or products, or achieve earlier product development and
commercialization than the Company, thus rendering the Company's technologies
and/or products obsolete, uncompetitive or uneconomical.
In combinatorial chemistry and other drug discovery technologies, the Company
faces competition based on a number of factors, including price, size and
diversity of libraries, ease of use of libraries, speed and costs of identifying
and optimizing potential lead compounds, access to novel pharmacophores and
desirable assays, patent position and the ability to provide drug discovery
technologies
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desired by or useful to potential partners. In view of the competitive
nature of the Company's industry, the Company expects to face continued and
substantial downward pressure on the prices which the Company is able to
charge for its products and services.
In addition, products and therapies that will compete directly with any
compounds that the Company seeks to develop (such as HP 228), or that the
Company's collaborative partners may seek to develop, currently exist or are
being developed. In product development and marketing, the Company and its
collaborative partners will face competition based on product efficacy and
safety, the timing and scope of regulatory approvals, availability of supply,
marketing and sales capability, reimbursement coverage, price and patent
position.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in large part on its ability to obtain
patents for its methodologies and the compounds and other products, if any,
resulting from the application of such methodologies, defend patents once
obtained, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the U.S. and in foreign countries. The
patent positions of pharmaceutical and biotechnology companies, and companies
utilizing drug discovery technologies such as combinatorial chemistry (including
the Company), are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved. There can be no
assurance that the Company will develop or obtain the rights to products or
processes that are patentable, that patents will issue from any of the pending
applications or that claims allowed will be sufficient to protect the Company's
technologies or products. Pending patent applications for which rights are
uncertain include applications being prosecuted by the Company with respect to
the Company's combinatorial chemistry libraries and certain uses for HP 228, as
well as patent applications filed by the Company (through NaviCyte) with respect
to certain aspects of the selection, screening and predictive technology
programs being developed by the Company (through NaviCyte). There can be no
assurance that the patents of, or with respect to which rights have been
licensed to, the Company will not be challenged, invalidated or circumvented, or
that the rights granted or licensed to the Company will provide proprietary
protection or competitive advantages to the Company. Such patents include a
U.S. patent for the Tea Bag technology, which is licensed to the Company, and
the Company's U.S. patent for the composition of matter of HP 228 and certain
uses of HP 228. The U.S. patent on the Tea Bag technology, that the Company
believes is important to the Company's business, expires in 2003. Competitors
(some of which have, or are affiliated with companies having, substantially
greater resources than the Company) may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights to or the
use of certain methodologies relating to products or processes competitive with
those of the Company or which could block the Company's efforts to obtain
patents or conduct its business.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
the fields of combinatorial chemistry and other drug discovery technologies and
with respect to products and therapies that may have potential uses which are
similar to the Company's current research and development areas. The commercial
success of the Company will depend in part on the Company's not infringing
patents and not breaching the patent and know-how licenses upon which any of the
Company's technologies or compounds are based or having such licenses breached
or terminated by others. Certain patent applications or patents may conflict
with the Company's patent applications and patents either by claiming the same
methods or compounds or by claiming methods or compounds which would dominate
those of the Company. A U.S. patent application is maintained under conditions
of confidentiality while the application is pending in the U.S. Patent and
Trademark Office ("PTO") so that the Company cannot determine the inventions
being claimed in pending patent applications filed by its competitors in the
PTO. Any such conflicts could result in a significant reduction of the coverage
of the Company's issued or licensed patents and its ability to obtain issuance
of significant patent protection from its applications. In addition, if patents
are issued to other companies which contain competitive or conflicting claims,
the Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any license is required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable terms, if at all. If such licenses are not obtained, the
Company could be prevented from pursuing the development or commercialization of
its technologies or potential products. The Company's breach of an existing
license or failure to obtain a license to any technology that it may require to
commercialize its technologies or its potential products may have a material
adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights. There can
be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction or that an alleged infringer would be
found to be infringing. Further, with respect to certain technology in-licensed
by the Company, the Company does not have the right to control any litigation
with respect to such technology. An adverse outcome could subject the Company
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company.
Moreover, merely the uncertainties resulting from institution and continuation
of any technology-related litigation could have a material adverse effect on the
Company's ability to compete in the marketplace pending resolution of the
disputed matters. If competitors of the Company prepare and file patent
applications in the U.S. that claim technology also claimed by the Company, the
Company may have to participate in interference proceedings declared by the PTO
to determine the priority of the invention, which could result in substantial
cost to the Company, even if the outcome is favorable to the Company. An
adverse outcome could subject the Company to significant liabilities to third
parties and require the Company to license disputed rights from third parties or
discontinue using the technology.
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The Company also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. The
Company attempts to protect its proprietary technology and processes in part
through confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance, however, that these agreements will not
be breached or terminated, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. The Company, as well as its
consultants and research collaborators in their work for the Company, use
intellectual property owned by others. Disputes may arise as to the rights in
technology resulting from collaborations and in the related know-how and
inventions. The Company relies on certain technologies to which it does not have
exclusive rights or which may not be patentable or proprietary and thus may be
available to competitors.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; IRREGULAR
REVENUE FLOW
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. As of
December 31, 1998, the Company had an accumulated deficit of approximately
$68,430,000.
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.
CLINICAL DEVELOPMENT OF HP 228
To date, the Company has itself developed one drug candidate (HP 228) that has
entered the early stages of human clinical testing. Even though HP 228 has
demonstrated indications of efficacy in preclinical models and the results of
certain Phase I and II studies have shown no significant safety concerns, there
can be no assurance that HP 228 will be demonstrated to be effective in treating
human diseases or safe in further trials. Lack of progress, adverse results or
discontinuation of the HP 228 clinical programs could have a material adverse
effect on the Company. HP 228 is not expected to be commercially available for
a number of years, if ever, even if it is successfully developed and proven to
be safe and effective.
NAVICYTE'S PRODUCTS AND SERVICES
The Company presently receives a limited amount of revenues from the sale
by NaviCyte of non-exclusive Caco-2 cell licenses, products (i.e., Caco-2
cells and diffusion chambers) and services (i.e., contract testing) by
NaviCyte. Although the Company believes that the Caco-2 cell line is
currently the most widely used cell line for in-vitro estimation of the oral
absorption of compounds, there can be no assurances that third parties will
continue to use such cells or seek to license related rights or acquire
Caco-2 cells or any derivatives from NaviCyte. Furthermore, the Company is
aware that third parties are claiming the right to use Caco-2 cells without a
license from NaviCyte. Such circumstances may require the Company to enforce
its rights through litigation. Furthermore, although NaviCyte is working to
develop selection, screening and predictive technologies that, if
successfully developed, may be valuable to potential partners, there can be
no assurances that the business of NaviCyte will ever achieve or sustain a
meaningful level of revenues.
GOVERNMENT REGULATION
The manufacturing and marketing of any products developed by the Company or
its collaborators will be subject to regulation for safety and efficacy by
governmental authorities in the U.S. and other countries. In the U.S.,
pharmaceuticals are subject to rigorous regulation by the Food and Drug
Administration ("FDA"). The Federal Food, Drug and Cosmetic Act and the Public
Health Service Act govern the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of pharmaceutical
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products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in
the U.S. include (i) preclinical laboratory and animal tests, (ii)
submission to the FDA of an Investigational New Drug application
("IND"), which must be deemed acceptable before human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug, (iv) submission of a
New Drug Application ("NDA") or Product License Application ("PLA") to
the FDA and (v) FDA approval of the NDA or PLA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval
for each product, each domestic drug manufacturing facility is subject
to inspections every two years by the FDA and must comply with current
Good Laboratory Practices and Good Manufacturing Practices ("GMP").
To supply products for use in the U.S., foreign manufacturing
facilities also must comply with GMP and are subject to periodic
inspection by the FDA or by regulatory authorities in such countries
under reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the safety and efficacy of the product
and its formulation. The results of the preclinical tests are
submitted to the FDA as part of an IND and, unless the FDA objects,
the Company submitting the IND may start clinical studies 30 days
following its submission to the FDA.
Clinical trials involve the administration of the pharmaceutical product to
volunteers or to patients identified as having the condition for which the
pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are
conducted in accordance with protocols previously submitted to the FDA as part
of the IND which detail the objectives of the study, the parameters used to
monitor safety and the efficacy criteria evaluated. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution at which the study is conducted. The IRB considers,
among other things, ethical factors, the safety of the human subjects and the
possible liability risk for the institution.
Clinical trials are typically conducted in three sequential phases that may
overlap. Phase I consists of the initial introduction of the pharmaceutical
into human volunteers, and the emphasis is on testing for safety (adverse
effects), dosage tolerance, absorption, metabolism, distribution, excretion and
clinical pharmacology. Phase II involves studies in a limited patient
population to determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance, optimal dosage and dosing frequency,
and to identify possible adverse side effects and safety risks. Once a compound
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further evaluate both clinical
efficacy and safety within an expanded patient population at multiple clinical
study sites. The FDA reviews both the clinical plans and results of the trials
and may order suspension of the trials at any time if there are significant
safety issues.
Results of the preclinical and clinical trials are submitted to the FDA in the
form of an NDA or PLA for marketing approval. The testing and approval process
is likely to require substantial time and effort, and there can be no assurance
that any approval will be granted on a timely basis, if at all. The approval
process is affected by a number of factors, including severity of the disease,
availability of alternative treatments, and risks and benefits demonstrated in
clinical trials. Additional animal studies or clinical trials may be requested
during the FDA review process and may delay marketing approval. After FDA
approval for the initial indications, further clinical trials are necessary to
gain approval for use of the product for any additional indications. The FDA
may also require post-marketing testing to monitor for adverse effects, which
can involve significant expense. Failure to comply with applicable regulatory
requirements after obtaining regulatory approval can, among other things, result
in the suspension of regulatory approval, as well as possible civil and criminal
sanctions. In addition, changes in regulations could have a material adverse
effect on this industry.
For marketing outside the U.S., the Company's collaborators and the Company
will also be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
With respect to any potential products that enter clinical trials (such as
HP 228), there can be no assurance that the Company or its collaborators will
be permitted to continue or undertake new human clinical testing of such
potential products, or, if permitted, that such potential products will be
demonstrated to be safe and efficacious. The lead compounds of the Company
or its collaborators may prove to have undesirable and unintended side
effects or other characteristics that may prevent or limit their commercial
use. In addition, there can be no assurance that any of the potential
products of the Company or its collaborators will ultimately obtain FDA or
foreign marketing approval for any indication, that an approved compound will
be capable of being produced in commercial quantities at reasonable cost or
that any such compound will be successfully marketed. Furthermore, even if
approval is ultimately obtained, delays in the approval process could have a
material adverse effect on the Company.
In addition to regulations enforced by the FDA, the Company is also subject
to other regulation, including regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act, regulations promulgated by
the United States Department of Agriculture, and other federal, state and
local laws and regulations.
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MANAGEMENT
The Company has multiple collaborative arrangements and drug development
technologies, and the Company desires to enter into additional collaborative
relationships and to further develop and expand its drug discovery
capabilities. The Company's success will depend upon the effective management
of these current and prospective collaborative relationships and drug
development technologies and capabilities, including maintaining
confidentiality of the research being provided for collaborators as well as
the maintenance and further development of the Company's technologies and
progress in the Company's research and development programs. To further
develop its technologies (including combinatorial chemistry, automated
compound synthesis and the Company's selection, screening and predictive
technology programs conducted through NaviCyte), and to pursue its product
development plans, the Company will be required to hire additional qualified
scientific personnel to perform research and development, as well as
personnel with expertise in clinical testing and government regulation.
These requirements, as well as the management of current and prospective
collaborative arrangements, are expected to demand the addition of management
personnel and the development of additional expertise by existing management
personnel. The Company faces intense competition for qualified individuals
from numerous pharmaceutical and biotechnology companies, universities and
other research institutions.
MANUFACTURING
The Company has no manufacturing facilities for its pharmaceutical products
or certain products offered by NaviCyte (such as diffusion chambers) and will
need to rely on contract manufacturers to produce these items (including any
compounds for clinical trials and commercialization). The Company's products
under development have never been manufactured on a commercial scale and
there can be no assurance that such products can be manufactured at a cost or
in quantities necessary to make them commercially viable. If the Company
were unable to produce internally or to contract for a sufficient supply of
its pharmaceutical products on acceptable terms, or if it should encounter
delays or difficulties in its relationships with manufacturers, the Company's
human clinical testing schedule would be delayed, resulting in delay in the
submission of products for regulatory approval and the market introduction
and subsequent sales of such products, which could have a material adverse
effect on the Company. Moreover, contract manufacturers that the Company may
use must adhere to GMP regulations enforced by the FDA through its facilities
inspection program. If these facilities cannot pass a pre-approval plant
inspection, the FDA pre-market approval of the products will not be granted.
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products and other facets of the drug development process. The
Company does have product liability insurance, but there can be no assurance
that the Company will be able to maintain such insurance on acceptable terms
or that this insurance will provide adequate coverage against potential
liabilities. The Company also has clinical trial liability insurance, but
there can be no assurance that the Company will be able to maintain such
insurance for any of its clinical trials or that such insurance will provide
adequate coverage against potential liabilities.
POTENTIAL LIABILITY REGARDING HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. In addition, there
can be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future.
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POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of life sciences companies have been
highly volatile and the market has experienced significant price and volume
fluctuations, some of which are unrelated to the operating performance of
particular companies. Announcements of technological innovations or new
commercial products or failures of potential products by the Company, its
collaborators or its competitors, developments in the Company's relationships
with current or future collaborative partners, developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential results with respect to compounds under
development by the Company or its collaborators, regulatory developments in
both the U.S. and foreign countries, public concern as to the efficacy of
combinatorial chemistry or other new drug discovery technologies, changes in
reimbursement policies, general market conditions, as well as quarterly
fluctuations in the Company's revenues and financial results and other
factors, may have a significant impact on the market price of the Company's
Common Stock. In particular, the realization of any of the risks described in
these "Risk Factors" may have a material adverse impact on such market price.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power and other rights of the holders of the Company's Common Stock.
Although the Company has no current plans to issue any shares of preferred
stock, the issuance of preferred stock or of rights to purchase preferred stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of preferred stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Company's Certificate of
Incorporation provides for staggered terms for the members of the Board of
Directors. A staggered Board of Directors and certain provisions of the
Company's by-laws and Certificate of Incorporation and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. In addition, the Company is
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder. These
provisions, and certain other provisions of the Certificate of Incorporation and
the Company's by-laws, may have the effect of delaying or preventing a change of
control of the Company without action by the stockholders and, therefore, could
adversely affect the price of the Company's Common Stock.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM
The Company expects that significantly all of its revenues in the foreseeable
future will be derived from services and compounds provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future is directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
services and compounds. The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means and the initiatives of third party payors with
respect to the availability of reimbursement. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
governmental control. In the U.S., there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the business, financial condition and profitability of
pharmaceutical or biotechnology companies that are actual or prospective
collaborators for the Company's services or potential products, the Company's
market value, access to financing, business, financial condition and results of
operations could be materially and adversely affected.
ITEM 2. PROPERTIES
The Company currently leases a facility of 71,625 square feet (approximately
55,000 square feet of laboratory and office space) located at 9880 Campus Point
Drive, San Diego, California. The lease term extends until May 1, 2008.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
15
<PAGE>
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth at Item 10(b) below is incorporated herein by
reference.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market (the
Nasdaq National Market) under the symbol "TRGA". The following table sets forth
the high and low sale prices for the Company's Common Stock as reported on the
Nasdaq National Market for the periods indicated. These prices reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1997 High Low
---- -------- ---------
<S> <C> <C>
First Quarter......................... $ 8 1/4 $ 5
Second Quarter........................ 6 3/4 3 3/8
Third Quarter......................... 6 1/4 3 1/2
Fourth Quarter........................ 5 1/2 2 5/8
1998 High Low
----- -------- ---------
First Quarter......................... $ 5 1/4 $ 2 13/16
Second Quarter........................ 6 2 7/8
Third Quarter......................... 4 1/2 1 3/16
Fourth Quarter........................ 3 1/4 1 3/8
1999 High Low
----- -------- ---------
First Quarter (through March 12, 1999) $ 4 $ 1 3/4
</TABLE>
There were approximately 179 holders of record of the Company's Common Stock
as of March 12, 1999. The Company has not paid any cash dividends to date on its
Common Stock and does not anticipate any being paid in the foreseeable future.
Exempt Sales of Securities
On November 9, 1998, Trega sold 1,866,667 shares of the Company's Common
Stock to Novartis Pharma AG ("Novartis") for an aggregate purchase price of
$7 million. The sale occurred pursuant to arrangements entered into in
connection with a Research, Development and License Agreement between the
Company and Novartis (see "Trega's Collaborations--Novartis" in item 1
above). The sale of such Common Stock was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "1933 Act"),
by virtue of Section 4(2) thereof and Rule 506 of Regulation D thereunder
("Rule 506") as a transaction not involving any public offering. An
appropriate filing on Form D was made, Novartis represented its intention to
acquire the shares for investment only and not with a view to the
distribution thereof, an appropriate legend was affixed to the certificate
representing the securities and Novartis had adequate access to information
about the Company.
On November 12, 1998, the Company, TBNC Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of the Company ("Acquisition
Corporation"), NaviCyte, Inc. ("NaviCyte"), George M. Grass, Ph.D. and
Patrick J. Sinko, Ph.D. entered into an Agreement and Plan of Reorganization
(the "Merger Agreement") providing for the merger of Acquisition Corporation
with and into NaviCyte (the "Merger"), with NaviCyte being the surviving
corporation. On November 23, 1998, the Merger was consummated with the
filing of a Certificate of Merger in Delaware. As a result of the Merger,
the following took place: (i) Trega acquired all of the outstanding shares of
NaviCyte capital stock; (ii) the holder of NaviCyte's issued and outstanding
capital stock prior to the Merger (Dr. Grass) received, in the aggregate,
$210,000 in cash and 1,428,231 shares of the Company's Common Stock; and
(iii) holders of options to acquire NaviCyte capital stock prior to the
Merger received, in the aggregate, options to acquire 1,071,756 shares of the
Company's Common Stock (subject to vesting). The amount of cash paid and the
number of shares of the Company's Common Stock issued as a result of the
Merger were determined by negotiation between Trega and NaviCyte. The
issuance of shares of the Company's Common Stock in connection with the
Merger was not registered under the 1933 Act by virtue of Section 4(2)
thereof and Rule 506 as a transaction not involving any public offering. The
Merger entailed the issuance of shares of the Company's Common Stock to one
person who was deemed to be either an "accredited" investor (as defined in
Regulation D under the 1933 Act) or sufficiently sophisticated for purposes
of Rule 506. An appropriate filing on Form D was made, the recipient of the
Company's Common Stock in the Merger represented his intention to acquire the
shares for investment only and not with a view to the distribution thereof,
an appropriate legend was affixed to the certificate representing the
Company's Common Stock and the recipient was provided with appropriate
information about the Merger and the Company.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The data presented below should be read in conjunction with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company (and the
notes thereto) contained elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997(1) 1996 1995 (1) 1994(1)
----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (in thousands, except net loss per share)
Revenues:
Contract research and license fees ......... $ 6,799 $ 7,334 $ 5,750 $ 293 $ 315
Related party contract research ............ 3,970 -- -- -- --
-------- -------- -------- -------- --------
Net sales .................................. 21 430 2,507 1,077 315
-------- -------- -------- -------- --------
Total revenues ..................... 10,790 7,764 8,257 1,370 630
Costs and expenses:
Cost of sales .............................. 7 341 2,025 1,313 249
Research and development ................... 17,934 14,819 11,781 7,289 6,524
Acquired in-process research and development 1,000 -- 2,585 -- --
Selling, general and administrative ........ 5,181 4,346 4,191 2,722 2,319
-------- -------- -------- -------- --------
Total costs and expenses ........... 24,122 19,506 20,582 11,324 9,092
-------- -------- -------- -------- --------
Loss from operations ......................... (13,332) (11,742) (12,325) (9,954) (8,462)
Other income (expense):
Net interest income and other .............. 531 1,115 637 50 (33)
Gain on sale of MPS ........................ -- 1,255 -- -- --
Corporate joint venture ..................... -- -- -- 414 (557)
-------- -------- -------- -------- --------
Net loss ..................................... $(12,801) $ (9,372) $(11,688) $ (9,490) $ (9,052)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per share(2) ...... $ (.89) $ (.69) $ (1.17) $ (33.53) $ (33.90)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing basic and diluted
net loss per share(2) ...................... 14,380 13,603 9,956 283 267
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA: (in thousands)
Cash, cash equivalents and short-term investments.. $ 16,262 $ 19,427 $ 27,443 $ 1,161 $ 516
Working capital.................................... 8,057 12,791 22,482 (2,345) (721)
Total assets....................................... 29,535 25,119 30,513 2,746 1,882
Notes payable and obligations under capital
leases, less current portion..................... 2,689 1,589 633 470 647
Series One Redeemable Preferred Stock.............. -- -- -- 2,772 2,604
Accumulated deficit................................ (68,430) (55,629) (46,257) (34,522) (24,865)
Total stockholders' equity (deficit)............... 17,640 16,218 24,156 (4,375) (2,799)
</TABLE>
- ----------
(1) The 1994 and a portion of the 1995 results do not
include revenues from the Company's former subsidiary, MPS, as
substantially all of MPS's assets were transferred to a separate
entity, Chiron Mimotopes Peptide Systems, LLC, as of January 1, 1994;
however, the separate entity was dissolved and certain assets were
transferred to MPS beginning April 1, 1995. The 1997 results reflect
MPS operations through February 1997 after which time MPS was sold.
See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of basic and diluted net loss per share.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS ANNUAL REPORT ON FORM 10-K 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 AND IN ITEM 1 OF THIS ANNUAL
REPORT ON FORM 10-K UNDER THE CAPTION "RISK FACTORS," 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.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6 - SELECTED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY (AND
NOTES THERETO) CONTAINED ELSEWHERE HEREIN.
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 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, the Company sold substantially all of the assets of ChromaXome
Corp. ("ChromaXome"), its wholly-owned subsidiary, which focused on the
development and use of combinatorial biology techniques to create drug
candidates and other molecules of 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 revenues from the sale of products and
services by NaviCyte will offset, in part, these increased costs.
The Company leverages its technology platform by entering 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 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 December 31, 1998, the Company's accumulated deficit was
approximately $68,430,000.
19
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 COMPARED TO 1997
The Company recorded revenues of approximately $10.8 million in 1998 as
compared to approximately $7.8 million in 1997. Revenues for 1998 consist
primarily of approximately $10 million derived from research conducted under
collaborative research agreements and shipments of combinatorial libraries or
individual compounds as well as $750,000 derived from licensing payments.
Revenues for 1997 include approximately $7.3 million derived from research
conducted under collaborative research agreements and shipments of combinatorial
libraries or individual compounds. In addition, net sales of custom peptides and
combinatorial peptide libraries by the Company's former subsidiary, Multiple
Peptide Systems, Inc. ("MPS"), accounted for approximately $430,000 of the total
revenues for 1997. MPS was sold on February 28, 1997. The revenue increase in
1998 as compared to 1997 was due to increased revenues under collaborative
research agreements offset, in part, by a decrease in shipments of combinatorial
libraries or individual compounds. See Note 4 to the Company's Consolidated
Financial Statements.
Cost of sales in 1998 is related to device sales from the Company's
subsidiary, Navicyte, acquired in November 1998. In prior years, cost of sales
resulted primarily from sales made by MPS.
The Company's research and development costs totaled $17.9 million for 1998 as
compared to $14.8 million for 1997. The increase of 21% is due to additional
research and development costs associated with the Company's partnered drug
discovery and melanocortin programs. Additionally, the Company recorded an
expense related to in-process research and development of $1 million in 1998 in
connection with the acquisition of Navicyte. See Note 3 to the Company's
Consolidated Financial Statements.
Selling and administrative expenses totaled $5.2 million in 1998 as compared
to $4.3 million in 1997. This increase of 19% was due primarily to higher
headcount as well as costs associated with the Company's newly leased facility.
Net interest income and other for 1998 totaled $531,000 as compared to
$1,115,000 in 1997. This decrease was the result of lower interest income due
to lower average cash and short-term investment balances and higher interest
expense associated with equipment financing obligations. This was somewhat
offset by a 1997 loss on investments related to the sale of stock received by
the Company's former subisidary, MPS, in 1996.
In 1997, the Company recorded a gain of approximately $1.3 million in
connection with the sale of MPS on February 28, 1997.
No tax benefit has been recognized for 1998 or 1997, as the utilization of
these operating losses is uncertain. As of December 31, 1998, the Company had
federal and state operating loss carryforwards of approximately $53.4 million
and $7.2 million, respectively. Realization of future tax benefits from
utilization of net operating loss carryforwards is uncertain. See Note 12 to the
Company's Consolidated Financial Statements.
1997 COMPARED TO 1996
The Company recorded revenues of approximately $7.8 million in 1997 as
compared to $8.3 million in 1996. Revenues for 1997 consist primarily of $7.3
million derived from research conducted under collaborative research
agreements and shipments of combinatorial libraries or individual compounds.
Revenues for 1996 include $2.4 million from research conducted under
collaborative research agreements and $3.4 million in stock received by the
Company's former subsidiary, MPS, recognized as contract research revenues,
as well as $2.5 million in sales of custom peptides and combinatorial peptide
libraries by MPS. Although revenues under collaborative research agreements
increased during the year, overall revenues decreased in 1997 as compared to
1996 due primarily to the sale of MPS in February 1997.
Cost of sales in 1997 and 1996 resulted from sales made by MPS and reflect
primarily the decrease in sales due to the sale of MPS noted above.
The Company's research and development costs totaled $14.8 million for 1997 as
compared to $11.8 million for 1996. The increase of 26% is due to additional
research and development costs associated with increased funding for (i) the
Company's combinatorial chemistry program, (ii) the Company's automation and
robotics synthesis program, (iii) the Company's melanocortin program, and (iv)
the Company's combinatorial biology technology program. Additionally, the
Company recorded an expense of approximately $2.6 million in 1996 in connection
with the acquisition of ChromaXome related to in-process research and
development. See Note 5 to the Company's Consolidated Financial Statements.
20
<PAGE>
Selling and administrative expenses increased 4% to $4.3 million in 1997 as
compared to $4.2 million in 1996. This increase was primarily due to higher
legal costs as well as costs associated with being a public company.
During 1997, net interest income and other increased to $1,115,000 from
$637,000 in 1996. This increase was attributed to interest income from higher
average cash and short-term investment balances offset by a loss on
investment related to the sale of stock received by MPS in 1996.
In 1997, the Company recorded a gain of approximately $1.3 million in
connection with the sale of MPS on February 28, 1997.
No tax benefit has been recognized for 1997 or 1996 as the utilization of
these operating losses is uncertain. As of December 31, 1997, the Company had
federal and state operating loss carryforwards of approximately $45.1 million
and $9.5 million, respectively. Realization of future tax benefits from
utilization of net operating loss carryforwards is uncertain. See Note 12 to the
Company's Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1998, 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 by MPS and interest income. At December 31,
1998, the Company had cash, cash equivalents and marketable securities
aggregating $16.3 million compared to $19.4 million on December 31, 1997. The
Company's working capital at December 31, 1998 was $8.1 million compared to
$12.8 million at December 31, 1997. 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 7a, Qualitative and Quantitative Disclosure About Market
Risk.
The decrease in cash, cash equivalents and marketable securities, at December
31, 1998, resulted primarily from $7.3 million used to fund operating
activities, $2.8 million invested in property and equipment, and $2.2 million
repaid on debt from property and equipment financing agreements. The decrease
was offset, in part, by proceeds from the issuance of $7 million of common stock
to Novartis Pharma AG ("Novartis"), and proceeds from property and equipment
financing agreements of $2.5 million. See Notes 6 and 8 to the Company's
Consolidated Financial Statements.
As of December 31, 1998, the Company had approximately $1.1 million available
under property and equipment financing agreements and may need to secure
additional property and equipment financing before the end of 1999 to fund
planned purchases. 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 6 to the Company's
Consolidated Financial Statements.
In connection with the Company's research agreement with Dura Pharmaceuticals
("Dura"), the Company is committed to fund $6,000,000 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 December 31, 1998,
$4,650,000 had been funded since the inception of the 1996 Dura agreement. See
Note 8 to the Company's Consolidated Financial Statements.
The Company intends to use its financial resources primarily to fund research
and development, the expansion of its combinatorial library inventories and to
fund NaviCyte's 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
existing research and development collaborations and product sales agreements
(which provide for $7.1 million to be received in each 1999 and 2000), together
with currently available property and equipment financing, will be sufficient to
fund its current and planned operations for at least the next 12 months. 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 substantial capital to fund its operations in
future periods. The Company expects that its primary potential revenue sources
for the foreseeable future will be additional collaborative agreements, sales of
combinatorial libraries or
21
<PAGE>
compounds and revenues generated by the Company's wholly owned subsidiary,
NaviCyte. 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, 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 the end of the second quarter.
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 preferable 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 in mid-1999.
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.
ITEM 7a. 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,
22
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's Consolidated Financial Statements (and
notes thereto) and supplementary data required by this item and set forth at the
pages indicated in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption "Election
of Directors" appearing in the Proxy Statement to be filed on or about April
16, 1999 is incorporated herein by reference.
(b) Identification of Executive Officers.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 26, 1999 are as
follows:
MICHAEL G. GREY, age 46, has served as a Director of the Company since
December 1998. As of January 1999, Mr. Grey also became the President and
Chief Executive Officer of the Company. Prior to joining the Company, Mr.
Grey was the President of BioChem Pharma Inc. from November 1994 to August
1998. In that role, he was responsible for all company operations including
research, development, sales and marketing, finance and human resources.
During 1994, Mr. Grey was the President and Chief Operating Officer for
Ansan, Inc. From 1974 to 1993, Mr. Grey served in various roles with Glaxo
Inc. and Glaxo Holdings, p.l.c., culminating in his position as Vice
President, Corporate Development. Mr. Grey serves on the Board of Directors
of Cortex Pharmaceuticals, Inc. Mr. Grey received a B.Sc. in Chemistry from
the University of Nottingham, England.
STEPHEN F. FLAIM, PH.D., age 50, has served as Vice President, Biological
Research and Development since July 1998. Prior to joining the Company, Dr.
Flaim held positions from April 1990 to June 1998 with Alliance
Pharmaceutical Corp., culminating with his position as Vice President,
Biological Sciences. During his time at Alliance, Dr. Flaim led preclinical
research and development activities on 4 products currently in clinical
trials. From 1987 to 1990, Dr. Flaim held several positions at the Bristol
Myers Squibb Institute for Medical Research culminating in Associate Director
of Cardiovascular Pharmacology. From 1982 to 1987, Dr. Flaim held positions
in Biological Sciences at McNeil Pharmaceutical, a Johnson & Johnson Company,
culminating with his position as Research Fellow in Cardiovascular Research.
From 1975 to 1982, Dr. Flaim was an Assistant Professor of Medicine and
Physiology at the Pennsylvania State University College of Medicine at
Hershey, Pennsylvania. Dr. Flaim received his Ph.D. in Human Physiology and
Pharmacology from the University of California, Davis.
GEORGE M. GRASS, PHARM.D., PH.D., age 41, has served as President of
NaviCyte, Inc., a wholly owned subsidiary of the Company since November 1998.
In addition to co-founding NaviCyte, Inc. in 1996 and serving as its Chief
Executive Officer, Dr. Grass has also been serving as the President of
Precision Instrument Design, Inc., a developer and manufacturer of devices to
determine the transport of drug substances through biological tissues and
cell culture monolayers since December 1987. From 1985 to 1991 Dr. Grass
worked at Syntex Research, Inc. at the Institute of Pharmaceutical Sciences
and was responsible for the development of early stage (pre IND, IND and pre
NDA) compounds for oral delivery. Dr. Grass received his Pharm.D. from the
University of Nebraska Medical Center College of Pharmacy and his Ph.D. in
Pharmacy from the University of Wisconsin, Madison. He is the 1981
co-recipient of the Ebert Prize, which he received for his work in the ocular
delivery of drugs.
MICHAEL J. GREEN, PH.D., age 56, has served as Vice President, Chemistry since
February 1996. He is responsible for all Company activities in combinatorial and
medicinal chemistry programs. Before joining the Company, Dr. Green held
positions with Schering-Plough Research Institute, culminating with his position
as a director of chemistry (first in the anti-allergy and anti-inflammatory, and
then in the cardiovascular and central nervous system therapy areas). During his
24 years at Schering-Plough, Dr.
23
<PAGE>
Green discovered the topical anti-inflammatory corticosteroid, alclometasone
dipropionate (Legerderm-Registered Trademark- and Aclovate-Registered
Trademark-) and was part of the team that discovered the non-sedating
antihistamine, loratadine (Claritin-Registered Trademark-), and also led the
discovery efforts of several compounds that were tested clinically in asthma
and psoriasis. Dr. Green received his Ph.D. in Organic Chemistry from the
University of Sheffield, United Kingdom.
LAWRENCE D. MUSCHEK, PH.D., age 55, has served as President, Research and
Development of the Company and as a Director of the Company since October
1997. Prior to joining the Company, Dr. Muschek worked for Solvay
Pharmaceuticals as Senior Vice President, Research and Development worldwide
from April 1994 to September 1997 and Senior Vice President, Research &
Development, United States from March 1990 to April 1994. Dr. Muschek
received a B.S. in Chemistry from the Philadelphia College of Pharmacy and
Science and a Ph.D. in Biochemistry from Michigan State University.
JOHN E. WEHRLI, J.D., M.B.A., age 35, has served as Senior Director Legal
Affairs and Corporate Secretary since February 1999. Prior to joining the
Company, Mr. Wehrli was employed by the law firm of Cooley Godward LLP, from
May 1996 to January 1999, where he focused on litigation, intellectual property
and general business matters pertaining to biotechnology companies. Mr.
Wehrli is a co-founder, and from October 1996 to November 1998, served as its
Vice President, Business Development & Intellectual Property. Previously, he
served as Vice President and Chief Financial Officer for Precision Instrument
Design, Inc. from November 1989 to October 1996 and as Patent & Licensing
Associate for the Lawrence Berkeley National Laboratory from May 1995 to May
1996. From 1985 to 1994, Mr. Wehrli served in a number of research positions
in chemistry and management positions in scientific computing at Syntex
Research, Inc. Mr. Wehrli received his J.D. from the University of
California, Hastings College of the Law and his M.B.A. in Management of
Technology from the Haas School at the University of California, Berkeley.
GERARD A. WILLS, CPA, age 41, joined the Company in January 1999 as the
Company's Vice President, Finance and Chief Financial Officer. Prior to
joining the Company, Mr. Wills was employed by Molecular Biosystems, Inc.
where he served as Vice President, Finance and Chief Financial Officer from
August 1994 to December 1998 and as its Controller from February 1993 to
August 1994. From 1990 to February 1993, Mr. Wills served as the Corporate
Manager of Finance for Maxwell Laboratories, Inc. and from 1986 through 1990,
Mr. Wills was employed by Intermark, Inc. where he last served as the
Corporate Controller. Mr. Wills received a Bachelor of Business
Administration from the University of Notre Dame.
(c) Compliance with Section 16(a) of the Exchange Act. The information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" appearing
in the Proxy Statement to be filed on or about April 16, 1999 is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings "Election of Directors - Compensation of
Directors," "Executive Compensation" and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation - Compensation Committee
Interlocks and Insider Participation" appearing in the Proxy Statement to be
filed on or about April 16, 1999 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement to be file on or about
April 16, 1999 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the headings "Election of Directors," "Executive
Compensation" and "Certain Transactions" appearing in the Proxy Statement to be
filed on or about April 16, 1999 is incorporated herein by reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this Annual Report on Form 10-K:
<TABLE>
<S> <C>
Report of Ernst & Young LLP,
Independent Auditors....................... F-2
Consolidated Balance Sheets at December
31, 1998 and 1997.......................... F-3
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1998.................... F-4
Consolidated Statements of Stockholders'
Equity (Deficit) for each of the
three years in the period ended
December 31, 1998.......................... F-5
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1998............. F-6
Notes to Consolidated Financial
Statements................................. F-7
</TABLE>
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required or not applicable, or the information is otherwise included.
(3) Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K has been identified with
an asterisk ("*") in the table of exhibits set forth below at item 14(c).
(B) REPORTS ON FORM 8-K
During the fourth quarter of 1998, the Company filed a report on Form 8-K
announcing the acquisition of NaviCyte, Inc. (See "Item 1--Recent
Developments--NaviCyte" above.)
(C) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------
<S> <C>
2.1+(1) Stock Purchase Agreement dated as of February 28, 1997 among the
Registrant, Multiple Peptide Systems, Inc., RAH Acquisition Corp.
and Richard A. Houghten, Ph.D.
2.2(8) Agreement and Plan of Reorganization dated as of
November 12, 1998 by and among the Registrant, NaviCyte,
TPNC Acquisition Corporation, George M. Grass, Ph.D. and
Patrick J. Sinko, Ph.D.
2.3(9) Purchase and Sale of Assets Agreement dated March 12,
1999 among the Registrant, ChromaXome Corp. and TerraGen
Discovery Inc.
3.3(2) Restated Certificate of Incorporation of the Registrant.
3.4(3) Certificate of Ownership and Merger (amending Section 1 of the
Restated Certificate of Incorporation)
3.5(4) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.3, 3.4 and 3.5.
10.1(2) Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
*10.2(2) Amended and Restated 1992 Stock Plan of the Registrant (the "1992
Plan").
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------
<S> <C>
*10.3(2) Forms of agreements under the 1992 Plan.
*10.4(2) 1995 Stock Plan of the Registrant (the "1995 Plan").
*10.5(2) Forms of agreements under the 1995 Plan.
*10.6(5) 1996 Incentive Stock Plan of the Registrant, as amended.
*10.7(10)1996 Employee Stock Purchase Plan, as amended.
10.8(2) Form of Agreement Regarding Confidentiality and Non-Competition.
*10.9(2) The 401(k) Plan of the Registrant, as amended.
*10.11(2) Executive Employment Agreement between Robert S. Whitehead and the
Registrant dated August 16, 1993.
*10.12(2) Promissory Note in the initial principal amount of $100,000 dated
March 11, 1994 made by Robert S. Whitehead in favor of the
Registrant.
10.13(11)NaviCyte, Inc. 1997 Stock Plan (the "NaviCyte Plan").
10.14(11)Form of Registrant's Stock Option Agreement relating to
options originally granted under the NaviCyte Plan
(Incentive Stock Options).
10.15(11)Form of Registrants' Stock Option Agreement relating to
options originally granted under the NaviCyte Plan
(Nonstatutory Stock Options).
10.28(2) Master Equipment Lease Agreement No. 8020 between Dominion
Ventures, Inc. and the Registrant dated October 7, 1992, with
amendments.
10.29+(2) April 11, 1985 License Agreement between The Scripps Clinic and
Research Foundation and Richard Houghten (re: "Means for
Sequential Solid Phase Organic Syntheses and Methods Using the
Same; Patent Disclosure #85-35)-- the "Tea Bag" License Agreement,
including assignments to the Registrant.
10.33+(2) January 1, 1994 License and Option to License Agreement between
Chiron Corporation, Chiron Mimotopes Pty Ltd. and the Registrant.
10.34+(2) January 1, 1994 Sub-License Agreement between Chiron Corporation
and the Registrant
10.35+(2) Letter of Understanding Concerning Licensing Agreements from the
Registrant to Chiron Corporation and Chiron Mimotopes U.S. dated
December 15, 1994.
10.36+(2) March 31, 1995 Heads of Agreement Contract between Chiron
Corporation, the Registrant, Multiple Peptide Systems, Chiron
Mimotopes U.S. and Chiron Mimotopes Peptide Systems L.L.C.
10.46+(2) Research and Development Agreement dated February 7, 1996 between
Dura Pharmaceuticals, Inc. and the Registrant.
10.47++ Officers & Associates Bonus Plan (1997 - June 1998)
10.48+(6) Restated and Third Amended Research and Option Agreement entered into
as of April 15, 1997 between Torrey Pines Institute for Molecular Studies
and the Company
10.49+(6) Research and Development Agreement dated as of June 18, 1997 between
Ono Pharmaceutical Co., Ltd. and the Company.
10.50 (7) Lease between the Company and Aid Associations for Lutherans, dated
September 24, 1997, for premises at 9880 Campus Point Drive.
10.51 (7) Equipment Financing Line between the Company and Lease Management
Services, Inc. dated September 19, 1997.
*10.52 (7) Note for $100,000 from Robert S. Whitehead dated June 12, 1997.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------
<S> <C>
*10.53 Executive Employment Agreement between Lawrence D. Muschek and the
Registrant dated October 6, 1997.
10.54 Reference is made to Exhibits 2.1 and 2.2.
10.55 Master Loan and Security Agreement between the Company
and Transamerica Business Credit Corporation dated
December 23, 1998.
10.56+(12)Stock Purchase Agreement made as of May 26, 1998 between
Novartis Pharma AG and the Registrant.
10.57+(12)Research, Development and License Agreement dated as of
May 26, 1998 between Novartis Pharma AG and the
Registrant (as amended).
10.58+(13)Library Supply and Sublicense Agreement dated as of
September 30, 1998 between Biogen, Inc. and the
Registrant.
*10.59 Employment letter dated June 30, 1998 between the
Registrant and Stephen F. Flaim, Ph.D.
*10.60 Employment letter dated November 6, 1998 between the
Registrant and Michael G. Grey.
*10.61 Secured Promissory Note dated January 8, 1999 in the
amount of $150,000 from Michael G. Grey.
*10.62 Secured Promissory Note dated January 11, 1999 in the
amount of $120,000 from John E. Wehrli.
*10.63 Employment letter dated January 11, 1999 between the
Registrant and John E. Wehrli.
*10.64 Employment letter dated December 16, 1998 between the
Registrant and Gerard A. Wills.
*10.65 Employment letter dated January 15, 1996 between the
Registrant and Michael J. Green, Ph.D.
21.1(4) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included in Signature section of this Report).
27.1 Financial Data Schedule.
</TABLE>
- ---------
(1) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated February 28, 1997 (Exhibit 1).
(2) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (File No. 333-1376) which was declared effective on March 29,
1996 (to the Exhibits of the same numbers in such Registration Statement).
(3) Incorporated by reference from the Registrant's Current Report on
Form 8-K dated May 1, 1997 (Exhibit 1).
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 (Exhibit 3.4).
(5) Incorporated by reference from Appendix A of the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(6) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1997.
(7) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1997.
(8) Incorporated by reference from the Registrant's Current Report on
Form 8-K dated November 23, 1998 (Exhibit 2.1).
(9) Incorporated by reference from the Registrant's Current Report on
Form 8-K dated March 16, 1999 (Exhibit 2.1).
(10) Incorporated by reference from Appendix B of the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(11) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed on November 24, 1998 with respect to the NaviCyte Plan
(Exhibits 99.1, 99.2 and 99.3).
(12) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1998 (Exhibits 10.1 and 10.2)
(13) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1998 (Exhibit 10.1).
+ The Registrant has been granted confidential treatment of certain portions
of these agreements or arrangements.
(D) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
TREGA BIOSCIENCES, INC.
Date: March 30, 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)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Grey and Gerard A. Wills, and each one
of them, his true and lawful attorney-in-fact, each with full power of
substitution, in any and all capacities to sign any amendments to this Annual
Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact or their
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
----------------------- ----------------------------------- -------
<S> <C> <C>
/s/ Robert S. Whitehead Chairman of the Board of Directors March 28, 1999
-----------------------
Robert S. Whitehead
/s/ James C. Blair Director March 30, 1999
-----------------------
James C. Blair
/s/ Michael G. Grey Director, President and Chief March 30, 1999
----------------------- Executive Officer
Michael G. Grey
/s/ Harry D. Lambert Director March 30, 1999
-----------------------
Harry D. Lambert
/s/ Jeremy M. Levin Director March 29, 1999
-----------------------
Jeremy M. Levin
/s/ Lawrence D. Muschek Director and President, March 30, 1999
----------------------- Research and Development
Lawrence D. Muschek
/s/ Harvey S. Sadow Director March 30, 1999
-----------------------
Harvey S. Sadow
/s/ Ronald R. Tuttle Director March 30, 1999
-----------------------
Ronald R. Tuttle
/s/ Anders P. Wiklund Director March 30, 1999
-----------------------
Anders P. Wiklund
</TABLE>
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TREGA BIOSCIENCES, INC.
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each
of the three years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Trega Biosciences, Inc.
We have audited the accompanying consolidated balance sheets of Trega
Biosciences, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Trega Biosciences,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
February 19, 1999
F-2
<PAGE>
Trega Biosciences, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,755 $ 5,457
Short-term investments 6,507 13,970
Accounts receivable and other current assets 778 676
-------- --------
Total current assets 17,040 20,103
Property and equipment, at cost:
Machinery and equipment 5,868 4,531
Leasehold improvements 859 422
Furniture and fixtures 412 241
-------- --------
7,139 5,194
Less accumulated depreciation and amortization (3,016) (2,453)
-------- --------
4,123 2,741
Other assets 8,372 2,275
-------- --------
$ 29,535 $ 25,119
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,539 $ 211
Accrued compensation and other accrued liabilities 2,399 1,976
Current portion of debt obligations 1,251 2,123
Deferred revenue 3,794 3,002
-------- --------
Total current liabilities 8,983 7,312
Long-term debt obligations, net of current portion 2,689 1,589
Deferred rent 223 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000 at December 31, 1998 and 1997
Issued and outstanding shares - 17,481,097 and 13,863,562
at December 31, 1998 and 1997, respectively 18 14
Additional paid-in capital 86,645 73,087
Common stock issuable 16 16
Deferred compensation (609) (1,270)
Accumulated deficit (68,430) (55,629)
-------- --------
Total stockholders' equity 17,640 16,218
-------- --------
$ 29,535 $ 25,119
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-3
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Operations
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Revenues:
Contract research and license fees $ 6,799 $ 7,334 $ 5,750
Related party contract research 3,970 - -
Net sales 21 430 2,507
------------ ------------ ----------
10,790 7,764 8,257
Costs and expenses:
Cost of sales 7 341 2,025
Research and development 17,934 14,819 11,781
Acquired in-process research and
development 1,000 - 2,585
Selling, general and administrative 5,181 4,346 4,191
------------ ------------ ----------
24,122 19,506 20,582
------------ ------------ ----------
Loss from operations (13,332) (11,742) (12,325)
Other income:
Net interest income and other 531 1,115 637
Gain on sale of MPS - 1,255 -
------------ ------------ ----------
Net loss $ (12,801) $ (9,372) $ (11,688)
------------ ------------ ----------
------------ ------------ ----------
Basic and diluted net loss per share $ (.89) $ (.69) $ (1.17)
------------ ------------ ----------
------------ ------------ ----------
Shares used in computing basic and diluted
net loss per share 14,380 13,603 9,956
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
TREGA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------ ----------------- PAID-IN STOCK DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUABLE COMPENSATION DEFICIT TOTAL
------------------ -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 15,931,493 $16 310,374 $ - $ 30,367 $ - $ (236) $ (34,522) $ (4,375)
Issuance of preferred stock 3,366,670 3 - - 10,054 - - - 10,057
Exercise of stock options - - 94,383 - 100 - - - 100
Deferred compensation for
issuance of stock options - - - - 2,218 - (2,218) - -
Amortization of deferred
compensation - - - - 523 - 523
Dividends on Series One
preferred stock at $.08 per
share - - - - - (47) (47)
Initial public offering of
common stock - - 3,795,000 4 27,339 - - - 27,343
Conversion of preferred stock to
common stock (19,298,163) (19) 8,975,845 9 10 - - - -
Issuance of common stock for
business acquisition of
ChromaXome Corp. - - 193,170 - 1,093 - - - 1,093
Recognition of ChromaXome Corp.
milestones - - - - - 1,281 - - 1,281
Unrealized loss on short-term
investments - - - - (131) - - - (131)
Net loss - - - - - - - (11,688) (11,688)
------------ --- ----------- --- -------- ----- -------- -------- --------
Balance at December 31, 1996 - - 13,368,772 13 71,050 1,281 (1,931) (46,257) 24,156
------------ --- ----------- --- -------- ----- -------- -------- --------
Exercise of stock options and
other - - 211,284 - 473 - - - 473
Issuance of common stock under
employee stock purchase plan - - 30,581 - 119 - - - 119
Amortization of deferred
compensation - - - - - - 661 - 661
Reverse unrealized loss on
short-term investments - - - - 131 - - - 131
Issuance of common stock
related to previous
recognition of ChromaXome
Corp milestones 240,804 1 1,264 (1,265) -
Issuance of common stock for
services - 12,121 - 50 - - - 50
Net loss - - - - - - - (9,372) (9,372)
------------ --- ----------- --- -------- ----- -------- -------- --------
Balance at December 31, 1997 - - 13,863,562 14 73,087 16 (1,270) (55,629) 16,218
------------ --- ----------- --- -------- ----- -------- -------- --------
Exercise of stock options - - 282,055 - 140 - - - 140
Issuance of common stock under
employee stock purchase plan - - 40,582 - 122 - - - 122
Amortization of deferred
compensation - - - - - - 661 - 661
Issuance of common stock to
Novartis Pharma - - 1,866,667 2 6,998 - - - 7,000
NaviCyte acquisition - - 1,428,231 2 6,187 - - - 6,189
Extension of officer options - - - - 111 - - - 111
Net loss - - - - - - - (12,801) (12,801)
------------ --- ----------- --- -------- ----- -------- -------- --------
Balance at December 31, 1998 - - 17,481,097 $18 $ 86,645 $ 16 $ (609) $ (68,430) $ 17,640
------------ --- ----------- --- -------- ----- -------- -------- --------
------------ --- ----------- --- -------- ----- -------- -------- --------
</TABLE>
F-5
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (12,801) $ (9,372) $(11,688)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 1,604 1,033 790
Amortization of note receivable discount (50) (37) -
Amortization of deferred compensation 661 661 523
Accrued interest on TPIMS notes payable (81) - -
Gain on sale of asset (68) - -
Realized loss on sale of investment - 88 534
License fee income - - (3,369)
Common stock and options issued for services 111 50 -
Gain on sale of MPS - (1,255) -
Acquired in-process research and development 1,000 - 2,374
Changes in operating assets and liabilities, net of
effects from the transfer of assets from
sale of MPS in 1997:
Accounts receivable (134) (61) (220)
Other current assets 148 (422) (150)
Accounts payable 962 (479) 481
Other accrued liabilities 423 (522) 1,361
Deferred rent 223 - -
Deferred revenue 660 1,244 (243)
--------- --------- --------
Net cash used in operating activities (7,342) (9,072) (9,607)
INVESTING ACTIVITIES
Purchase of short-term investments (7,064) (21,540) (26,574)
Maturities of short-term investments 14,527 21,441 15,450
Additions to property and equipment, net (2,788) (2,045) (798)
Proceeds from disposition of equipment 198 - -
Proceeds from sale of MPS, net - 1,149 -
Purchase of NaviCyte, net of cash acquired (557) - -
Other assets (226) (39) (282)
--------- --------- --------
Net cash provided by (used in) investing activities 4,090 (1,034) (12,204)
FINANCING ACTIVITIES
Principal payments under debt obligations (2,177) (569) (416)
Proceeds from equipment notes and notes payable 2,465 1,925 -
Redemption of preferred stock - - (2,819)
Issuance of common and preferred stock 7,262 592 37,500
--------- --------- --------
Net cash provided by financing activities 7,550 1,948 34,265
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 4,298 (8,158) 12,454
Cash and cash equivalents at beginning of year 5,457 13,615 1,161
--------- --------- --------
Cash and cash equivalents at end of year $ 9,755 $ 5,457 $13,615
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 232 $ 117 $ 87
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital lease
obligations $ - $ - $ 450
--------- --------- --------
--------- --------- --------
Receipt of Magainin common stock in exchange for
license agreement $ - $ - $ 3,369
--------- --------- --------
--------- --------- --------
Common stock issued and common stock issuable in
connection with the purchase of ChromaXome Corp. $ - $ - $ 2,374
--------- --------- --------
--------- --------- --------
Dividends on Series One preferred stock at $.08 per
share $ - $ - $ 47
--------- --------- --------
--------- --------- --------
Notes received in connection with the sale
of MPS, net of discount of $213,000 $ - $ 537 $ -
--------- --------- --------
--------- --------- --------
Note payable issued in exchange for TPIMS patent and purchased
technology $ - $ 1,300 $ -
--------- --------- --------
--------- --------- --------
Issuance of common stock and options to acquire NaviCyte $ 6,189 $ - $ -
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
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
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. All intercompany accounts and
transactions have been eliminated in consolidation.
The Company's success is largely dependent on its ability to enter into
collaborations for drug discovery which utilize the Company's combinatorial
chemistry, melanocortin biology and other drug discovery technologies, and
for drug development based on drug candidates discovered in internal research
programs or through alliances with biotechnology or pharmaceutical companies.
The Company faces risks associated with companies whose products are in
development. These risks include, among others, the Company's need for
additional financing to maintain the competitiveness of its combinatorial
chemistry and other drug discovery technologies and to conduct research and
development and clinical testing. There is no assurance such financing will be
available to the Company when required or that such financing will be available
under favorable terms.
The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements that are considered important to the
development of its business. The patent positions of pharmaceutical and
biotechnology firms, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved.
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.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with maturities, when
purchased, of three months or less to be cash equivalents. The Company invests
in short-term debt securities with original maturities in excess of 90 days,
which are presented as short-term investments in the accompanying consolidated
balance sheets. At December 31, 1998 and 1997, the cost of cash equivalents and
short-term investments was the same as the market value. Accordingly, there
were no unrealized gains or losses. The Company evaluates the financial
strength of institutions at which significant investments are made and believes
the related credit risk is limited to an acceptable level.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
U.S. corporate debt securities.. $ 6,354 $15,571
Other .......................... 153 412
------- -------
$ 6,507 $15,983
------- -------
------- -------
</TABLE>
All available-for-sale securities by contractual maturities are due in one
year or less. There were no cash and cash equivalents classified as
available-for-sale at December 31, 1998. Included in cash and cash
equivalents at December 31, 1997 was $2,013,000 of securities classified as
available-for-sale.
F-7
<PAGE>
REVENUE RECOGNITION
Contract research is recorded as earned, generally ratably, as research and
development activities are performed under the terms of the contract.
Payments received in excess of amounts earned are deferred. Revenue from
product sales and library access fees are recognized upon shipment.
Non-refundable license fees and milestone payments are recognized when
received as the Company has no other performance obligations.
Novartis Pharma AG ("Novartis") is a related party based on its ownership
interest in the Company, and revenues received from Novartis therefore are
classified as related party revenue.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of three to five years or the lease
term. Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the remaining lease term or the life
of the asset. Amortization of property held under capital leases is included
in depreciation expense.
PATENTS AND PURCHASED TECHNOLOGY
Patents and purchased technology are stated at cost and are included in
other assets in the accompanying consolidated balance sheets. The patents
and purchased technology are being amortized using the straight-line method
over a useful life of ten years. Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
Company periodically monitors the patents and purchased technology for
indications of impairment of value. At December 31, 1998, management
believes that no impairment has occurred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current years' presentation.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," which is effective for the year ending December
31, 1996. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions
of Accounting Principles Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees," but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company has continued accounting for its stock-based
compensation in accordance with the provisions of APB No. 25.
F-8
<PAGE>
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 options, warrants, convertible
securities and contingently issuable shares. SFAS No. 128 is effective for
periods ending after December 15, 1997. All potential dilutive common shares
have been excluded from the calculation of diluted earnings per share, as
their inclusion would be anti-dilutive.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in computing
certain earnings-per-share data. The Company previously considered
convertible preferred stock as outstanding in pre-IPO periods from the date
of the original issuance in computing earnings per share. To conform with
the recent interpretations, the Company has revised its calculation of
earnings per share for all pre-IPO periods to exclude the impact of the
convertible preferred shares.
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 year ended
December 31, 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.
FINANCIAL STATEMENT DETAILS
OTHER ASSETS
Other assets consist of the following major classes (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Patents and purchased technology $ 1,274 $ 1,300
Developed technology 6,356 --
------- -------
7,630 1,300
Less: Accumulated amortization (274) (94)
------- -------
7,356 1,206
Other assets 1,016 1,069
------- -------
$ 8,372 $ 2,275
------- -------
------- -------
</TABLE>
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consist of the following
major classes (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Accrued compensation $ 662 $ 497
Other accrued liabilities 1,737 1,479
------ ------
$2,399 $1,976
------ ------
------ ------
</TABLE>
F-9
<PAGE>
NET INTEREST INCOME AND OTHER
Net interest income and other consist of the following major classes (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income $ 769 $ 1,405 $ 1,274
Interest expense (238) (202) (103)
Loss on investment -- (88) (534)
------- ------- -------
$ 531 $ 1,115 $ 637
------- ------- -------
------- ------- -------
</TABLE>
3. ACQUISITION OF NAVICYTE, INC.
In November 1998, the Company acquired all of the outstanding common stock of
NaviCyte, Inc. in a transaction accounted for as a purchase. Total
consideration included 1,428,000 shares of the Company's common stock, the
assumption of options to acquire 1,071,000 shares of the Company's common stock
and $560,000 of cash. A summary of the acquisition costs and allocation to the
assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Total acquisition costs:
Cash paid at acquisition date $ 560,000
Issuance of common stock and options 6,189,000
Acquisition of related expenses 378,000
Assumed liabilities 520,000
---------------
$ 7,647,000
---------------
---------------
Allocation to assets and liabilities as follows:
Tangible assets acquired $ 291,000
Acquired in-process technology 1,000,000
Developed technology 6,356,000
---------------
$ 7,647,000
---------------
---------------
</TABLE>
Assuming that the acquisition of NaviCyte had occurred on the first day of the
Company's fiscal year ended December 31, 1997, pro forma condensed consolidated
results of operations would be as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
-------- -------
<S> <C> <C>
(unaudited)
Net revenues $ 11,947 $ 8,551
Net loss (12,720) (10,343)
Basic and diluted net loss per share $ (.80) $ (.69)
</TABLE>
4. SALE OF MULTIPLE PEPTIDE SYSTEMS, INC.
In February 1997, the Company sold its wholly-owned subsidiary, Multiple
Peptide Systems, Inc. ("MPS"), to an entity owned by Richard A. Houghten,
Ph.D. ("Dr. Houghten"). Dr. Houghten is a founder of the Company and prior
to the sale of MPS was the Chief Technical Officer and a Director of the
Company. In connection with the sale, Dr. Houghten resigned as an officer of
the Company. Dr. Houghten did not stand for re-election as a director at the
Annual Stockholder's Meeting held on June 11, 1997. Dr. Houghten also is the
founder, an executive officer and a Director of Torrey Pines Institute for
Molecular Studies ("TPIMS"), a not-for-profit biomedical research institution
which performed contract research services for the Company. Prior to the
Company's sale of MPS, the business of MPS was comprised of manufacturing and
marketing certain peptides and other compounds to government entities,
universities, research institutions and private companies.
In exchange for the sale of MPS, the Company received consideration of $1.5
million (net $1.25 million cash) and a $750,000 non-interest bearing note
with payments due on the third, fourth, and fifth anniversaries of the sale.
The $750,000 was discounted by $213,000 to a present value of $537,000, using
an imputed rate of interest of 9%. The Company recorded a gain on the sale
of MPS of $1.255 million. In connection with the sale, the Company has
agreed, for a period of seven years, not to (i) engage in certain activities
which would be competitive with the business of MPS or (ii) license certain
technologies (which are presently licensed from the Company to MPS) to
entities which are engaged primarily in a business similar to the business of
MPS.
F-10
<PAGE>
5. CHROMAXOME ACQUISITION
Effective August 1, 1996, the Company acquired all the outstanding shares of
ChromaXome in exchange for (i) 193,170 shares of the Company's common stock and
options to acquire 27,660 shares of the Company's common stock with a total
combined value of approximately $1.1 million and (ii) approximately $228,000 in
transaction costs and cash advances to ChromaXome. The Company accounted for
the acquisition of ChromaXome using the purchase method of accounting.
Substantially the entire purchase price was allocated to acquired in-process
research and development which resulted in a charge to operations of $1.3
million in 1996.
In connection with the acquisition, the Company also issued an additional
240,804 shares of the Company's common stock in August and November 1997 as the
result of certain milestones being achieved in December 1996. An additional
amount of 659 shares, currently reflected as common stock issuable, may be
issuable at December 31, 1998. The fair value of these shares resulted in an
additional charge of approximately $1.3 million for acquired in-process research
and development in the statement of operations for the year ended December 31,
1996.
6. COMMITMENTS AND LONG-TERM DEBT
LEASES
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.
The Company moved out of its former facility completely as of June 1998. Rent
expense for both premises for the years ending December 31, 1998, 1997 and 1996
was approximately $1.8 million, $.8 million and $.8 million, respectively. The
Company leases certain equipment under a capital lease obligation. The Company
did not acquire any equipment under capital leases during December 31, 1998 and
1997.
Annual future minimum payments under capital and operating leases at December
31 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDED DECEMBER 31 LEASES LEASES
- ----------------------- ------------- ---------
<S> <C> <C>
1999 $ 1,976,000 $ 212,000
2000 2,045,000 107,000
2001 2,117,000 9,000
2002 2,190,000 -
2003 2,267,000 -
------------- -----------
$10,595,000 328,000
-------------
-------------
Less amounts representing interest (30,000)
-----------
Present value of remaining minimum payments 298,000
Less current portion of obligations (186,000)
-----------
Long-term obligations $ 112,000
-----------
-----------
</TABLE>
LONG-TERM DEBT
In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it drew down approximately $1.1 million by December 31, 1998.
The loan, which is secured by the equipment, bears interest at 11.3% 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. The previous
equipment financing line expired in July 1998 with an outstanding balance of
approximately $2.3 million. 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%.
F-11
<PAGE>
Principal payments due on long-term debt at December 31 are as follows:
<TABLE>
<CAPTION>
LONG-TERM
YEARS ENDED DECEMBER 31 DEBT
- ----------------------- ---------
<S> <C>
1999 $1,065,000
2000 1,021,000
2001 1,020,000
2002 536,000
------------
3,642,000
Less current portion of obligations (1,065,000)
------------
Long-term obligations $ 2,577,000
------------
------------
</TABLE>
The carrying value of the Company's obligations under long-term debt
approximates its fair value and the implicit interest rate approximates the
Company's borrowing rate.
7. TPIMS AGREEMENT
Since 1992, the Company has been party to a Research and Option Agreement,
as amended, with Torrey Pines Institute for Molecular Studies ("TPIMS"). A
primary purpose of the Company's relationship with TPIMS has been to give the
Company access to support services provided by TPIMS scientific personnel and
to provide a source of combinatorial libraries and other discoveries. As of
April 15, 1997, the Company entered into a Restated and Third Amended
Research and Option Agreement with TPIMS (the "TPIMS Agreement"). In
connection with the TPIMS Agreement, the Company acquired certain patents and
purchased technology, previously invented by TPIMS, in exchange for $1.3
million (the "Purchase Price") which, together with $115,000 of accrued
interest, was paid to TPIMS on April 14, 1998. In addition, the TPIMS
Agreement eliminated potential related royalties otherwise payable on such
patents and purchased technology. The TPIMS Agreement also extended, through
July 14, 1998, the existing funded research relationship between the parties.
In January 1998, the Company announced that the TPIMS Agreement would not be
extended.
8. COLLABORATIVE ARRANGEMENTS
In December 1998, the Company entered into an agreement with Warner-Lambert,
which supercedes a previous agreement for the purchase of $1.5 million of the
Company's stock. The new agreement is a Library Supply Agreement in which the
Company shipped $1.5 million worth of combinatorial libraries, as part of its
Chem.Folio-TM- Program, in December 1998.
In November 1998, the Company sold approximately 1.9 million shares of
common stock to Novartis for $7 million. The stock was sold pursuant to a
put option the Company had received in connection with its collaboration with
Novartis entered into in May 1998. The agreement called for the companies to
conduct a joint research program. Under the terms of the agreement, the
Company received $2 million, upon execution in May 1998, for past research
activities. This non-refundable fee was recognized as revenue at that time.
Additionally, Novartis is obligated to make payments to the Company totaling
approximately $10 million over three years to support this research. These
payments are made semiannually. Through December 31, 1998, the Company had
received approximately $3.3 million in guaranteed payments under this
provision, under which $2 million was recognized as revenue in 1998 and the
balance was recorded as deferred revenue. In addition, the Company may earn
future milestones and royalties under this agreement.
In September 1998, the Company entered into a Library Supply and Sublicense
Agreement with Biogen, Inc. ("Biogen") under which the Company will receive a
minimum of $7.5 million over two years for supplying combinatorial chemistry
libraries. In addition, the Company has agreed to provide Biogen with
non-exclusive worldwide licenses to certain of its chemical-synthesis
technologies. As of December 31, 1998, the Company has received a license fee
under the terms of this agreement.
In July 1998, as the result of achieving a milestone under its agreement
with Ono Pharmaceuticals Co., Ltd., ("Ono"), the Company received $2 million
to fund the next phase of the program. In June 1997, the Company entered
into its 1997 Research and Development Agreement with Ono, whereby the
Company received $2 million as a license fee in connection with the screening
by the Company of certain of its combinatorial libraries against certain
biological screens. The Company received $2 million in both July 1997 and
July 1998 (noted above) for research to be done under this agreement. These
payments are treated as deferred revenue and are recognized as revenues as
related work is performed under the contract during the period July 1997
through July 1999. Relating to this contract, through December 31, 1998, $3
million had been recognized as revenue and $1 million is included in deferred
revenue. The non-refundable license fee was recognized as revenue in 1997.
F-12
<PAGE>
In May 1998, the Company and Ono reached definitive agreement to expand
their existing relationship. Under the new agreement, the Company will
additionally create custom combinatorial libraries, optimize lead compounds
discovered by Ono and undertake screening of those compounds in a target of
interest to Ono. The Company received research funding of approximately $1.9
million of which all but $115,000 had been recognized as revenue through
December 31, 1998. In addition, the Company may earn future milestones and
royalties under this agreement.
In connection with the Company's research agreement with Dura
Pharmaceuticals ("Dura"), the Company is committed to fund $6,000,000 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 December 31, 1998, $4,650,000 had been funded since the inception of
the 1996 Dura agreement.
9. LICENSE FEE
In September 1996, the Company received, through MPS, 275,000 shares of
common stock of Magainin Pharmaceuticals Inc. ("Magainin"), with a then
current market value of $3,369,000, in exchange for a royalty interest in
Magainin's lead compound MSI-78. The Company subsequently sold 225,000
shares of the stock at a loss of approximately $534,000 in 1996. The
remaining shares were sold in January 1997 at a loss of approximately $88,000.
10. STOCKHOLDERS' EQUITY
In April 1996, the Company completed its initial public offering of
approximately 3.8 million shares of common stock at $8.00 per share for net cash
proceeds of $27.3 million. Upon closing of the initial public offering, shares
of the Company's preferred stock automatically converted into approximately 9
million shares of common stock. Additionally, the Company redeemed 2.1 million
shares of the Company's Series One Preferred Stock for cash of approximately
$2.8 million (including cumulative dividends of $719,000.)
COMMON STOCK WARRANTS
At December 31, 1998, the Company had outstanding warrants to purchase
35,437 shares of its common stock at $4.52 per share and 8,118 shares of
common stock at $5.91 per share, expiring on October 7, 2002 and June 21,
2005, respectively. An aggregate of 43,555 shares of common stock have been
reserved for issuance upon the exercise of the warrants.
STOCK INCENTIVE PLANS
The Company is authorized to issue 6,032,221 shares of common stock to
eligible employees, officers, directors and consultants. Of the authorized
shares, 1,038,153 options were granted under the Company's 1992 Stock Option
Plan and 1995 Stock Plan (the "Predecessor Plans") and 1,071,756 options were
granted under the 1997 Stock Plan of NaviCyte. In November 1998, pursuant to
a Merger Agreement between the Company and NaviCyte, the Company assumed the
1997 Stock Plan of NaviCyte. In February 1996, the Board of Directors
approved the 1996 Stock Plan (the "1996 Plan") under which an additional
822,312 shares of common stock were reserved for issuance. In the second
quarter of 1997 and third quarter of 1998, the Company's Board of Directors
and stockholders approved an additional 1.1 million and 2 million shares,
respectively, of common stock for issuance under the 1996 Plan. As of
December 31, 1998, an aggregate of 5,176,718 shares of common stock have been
reserved for issuance upon exercise of the options.
The 1996 Plan provides for awards in the form of restricted shares, stock
units, options or stock appreciation rights. The 1996 Plan replaces the
Predecessor Plans whereby shares available under the Predecessor Plans were
transferred to the 1996 Plan. All outstanding options under the Predecessor
Plans will remain exercisable in accordance with their original terms, which are
substantially the same terms and conditions specified for option grants under
the 1996 Plan. The 1996 Plan provides for the grant of incentive and
nonstatutory stock options. Terms of the stock option agreements, including
vesting requirements, are determined by the Board of Directors. The exercise
price of incentive stock options must equal at least the fair market value on
the date of grant and the maximum term of options granted is ten years.
In February 1998, the Company's Board of Directors approved an exchange
program for certain stock options under the 1996 Plan. Options having a price
greater than the closing price of the Company's stock, as reported by the Nasdaq
National Market, on the date of approval were eligible to participate; however,
options granted to executive officers, directors, consultants and advisors of
the Company were excluded from exchange. There were 360,174 options eligible
for participation, which resulted in an effective repricing to an exercise price
of $3.375 (as well as the modification of certain terms). Of the total
eligible, 237,768 options were repriced. Eligible employees who elected to
participate were subject to a 12 month "no-vest" clause. Following the 12 month
period, the vesting schedules reverted to their original vesting schedules prior
to participation in the exchange program.
F-13
<PAGE>
A summary of the Company's stock option activity and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,409,972 $ 3.10 1,111,027 $ 1.99 614,847 $ 0.86
Granted 2,084,962 1.61 653,019 4.43 795,856 2.51
Exercised (282,055) 0.50 (212,084) 1.76 (93,583) 1.07
Forfeited (407,767) 4.04 (141,990) 3.74 (206,093) 1.02
--------- ---------- ----------
Outstanding at end of year 2,805,112 $ 2.12 1,409,972 $ 3.10 1,111,027 $ 1.99
--------- ------------ ---------- ----------- ---------- ----------
--------- ------------ ---------- ----------- ---------- ----------
Exercisable at end of year 1,733,149 643,965 493,394
--------- ---------- ----------
--------- ---------- ----------
Weighted average fair value of
options granted during the
year $ 2.72 $ 4.45 $ 3.97
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ------------------------------------------
Weighted
Remaining Weighted Average
Number Contractual Average Number Exercise
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Price
- -------------------------------------- ----------- ----------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.0085 - $0.2059 850,966 8.55 $0.08 846,745 $0.08
$0.3700 - $2.1500 720,407 7.08 1.63 518,027 1.45
$2.5000 - $3.3750 760,138 8.95 3.32 180,138 3.37
$3.4380 - $6.0000 473,601 8.27 4.61 188,239 4.64
--------- ---------
2,805,112 8.23 $2.12 1,733,149 $1.24
--------- ---- ----- --------- -----
--------- ---- ----- --------- -----
</TABLE>
The Company recorded approximately $2.2 million of deferred compensation for
options granted during the year ended December 31, 1996, representing the
difference between the option exercise price and the fair market value for
financial statement presentation purposes. The Company is amortizing the
deferred compensation ratably over the vesting period of the options.
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
of these options for the year ended December 31, 1998 was estimated at the
date of grant using the "Black-Scholes" method for option pricing with the
following weighted-average assumptions: risk-free interest rate of 5.32%;
dividend yield of 0%; volatility of 1.0222; and a weighted-average expected
life of the option of 1 year to 6 years. The fair value of these options for
the years ended December 31, 1997 and 1996 was estimated at the date of grant
using the "Black-Scholes" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 5.71%; dividend
yield of 0%; volatility of .9168; and a weighted-average expected life of the
option of 1 year to 6 years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma information may not be
representative of that to be expected in future years. The Company's
adjusted pro forma information is as follows (in thousands, except for per
share information):
F-14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
Adjusted pro forma net loss $ (14,123) $ (10,380) $(12,321)
----------- --------- ---------
----------- --------- ---------
Adjusted pro forma basic and diluted net loss per share $ (.98) $ (.76) $ (1.00)
----------- --------- ---------
----------- --------- ---------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1998, the Board of Directors amended the Employee Stock Purchase
Plan (the "Purchase Plan") under which an additional 150,000 shares of common
stock were reserved for sale to eligible employees. As of December 31, 1998,
the Company had 178,837 shares available for future issuance under the
purchase plan. On January 1 or July 1, employees may enroll in the Purchase
Plan and purchase stock over a six-month participation period valued at up to
but not exceeding 10% of each employee's earnings. The stock purchase price
shall be the lesser of 85% of the fair market value of the stock on the last
day before the participation period commences or 85% of the fair market value
on the last day of the participation period.
11. 401(k) PLAN
The Company has a 401(k) defined contribution savings and retirement plan
(the "Plan"). The Plan is for the benefit of all qualifying employees and
permits employee voluntary contributions of up to 15% of base salary (as
defined) and elective Company matching contributions. Company contributions
to the Plan totaled $107,000, $80,000 and $66,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
12. INCOME TAXES
As of December 31, 1998, the Company had federal and California income tax net
operating loss carryforwards of approximately $53,400,000 and $7,240,000
respectively. The difference between the federal and California tax loss
carryforwards are primarily attributable to the capitalization of research and
development expenses for California income tax purposes, the 50% limitation on
California loss carryforwards, and the expiration of California loss
carryforwards. The federal tax loss carryforwards will begin to expire in 2007
unless previously utilized. Approximately $3,700,000 of California tax loss
carryforwards expired in 1998. The California tax loss carryforwards will
continue to expire in 1999 unless utilized. The Company also has federal and
California research and development tax credit carryforwards of $2,967,000 and
$1,525,000, respectively, which will begin to expire in 2007 unless previously
utilized. Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and tax credit carryforwards may be limited due to
a cumulative change in ownership of more than 50% within a three-year period,
which occurred in April 1996. However, the Company's management does not
anticipate that such limitation would materially affect the Company's ability to
utilize the net operating loss and tax credit carryforwards.
Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $25,223,000 has been recognized to offset the deferred
tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax liabilities:
Developed technology $ (2,547,000) $ --
------------ -----------
Total deferred tax liability (2,547,000) --
<CAPTION>
DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,111,000 $ 16,350,000
Research and development credits 3,959,000 2,844,000
Capitalized research and development 1,800,000 1,429,000
Deferred revenue 1,492,000 1,231,000
Other, net 1,408,000 851,000
------------ ------------
Total deferred tax assets 27,770,000 22,705,000
Valuation allowance for deferred tax assets (25,223,000) (22,705,000)
------------ ------------
Net deferred tax assets $ -- $ --
------------ ------------
------------ ------------
</TABLE>
F-15
<PAGE>
13. SUBSEQUENT EVENT (UNAUDITED)
In March 1999, the Company sold substantially all the assets (valued at
approximately $110,000) of its wholly-owned subsidiary, ChromaXome Corp., to
TerraGen Discovery, Inc. ("Discovery"), a privately held company. As
consideration for the sale, the Company received $2 million in cash, two
interest bearing notes in the amounts of $2 million and $1 million plus 600,000
shares of preferred stock in the parent of Discovery, which is also a privately
held company. The two notes are due no later than December 31, 1999 and June
30, 2000, respectively, and may be accelerated in certain events.
F-16
<PAGE>
Customer No. 1208
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of December 23, 1998, is made by Trega
Biosciences, Inc. (the "Borrower"), a Delaware corporation having its principal
place of business and chief executive office at 9880 Campus Point Drive, San
Diego, California, 92121 in favor of Transamerica Business Credit Corporation, a
Delaware corporation (the "Lender"), having its principal office at Riverway II,
West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it from
time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the Lender
to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings, and
shall be equally applicable to both the singular and plural forms of the terms
defined:
AGREEMENT shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
APPLICABLE LAW shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
BUSINESS DAY shall mean any day other than a Saturday, Sunday, or public holiday
or the equivalent for banks in New York City.
CODE shall have the meaning specified in Section 8(d).
COLLATERAL shall have the meaning specified in Section 2.
COLLATERAL ACCESS AGREEMENT shall mean any landlord waiver, mortgagee waiver,
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession of any Equipment.
EFFECTIVE DATE shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
EQUIPMENT shall have the meaning specified in Section 2.
EVENT OF DEFAULT shall mean any event specified in Section 7.
FINANCIAL STATEMENTS shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United States of
America, as in effect from time to time.
LOANS shall mean the loans and financial accommodations made by the Lender to
the Borrower in accordance with
<PAGE>
the terms of this Agreement and the Notes.
LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, and all
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
MATERIAL ADVERSE CHANGE shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole and in light of the nature of such person's business.
MATERIAL ADVERSE EFFECT shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole and in light of the nature of such person's business.
NOTE shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time.
OBLIGATIONS shall mean all indebtedness, obligations, and liabilities of the
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
PERMITTED LIENS shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Equipment which do not materially impair either the use of the
Equipment in the operation of the business of the Borrower or the value of the
Equipment; and (d) attachment or judgment liens that do not constitute an Event
of Default.
PERSON shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
SCHEDULE shall mean each Schedule in the form of Schedule A hereto delivered by
the Borrower to the Lender from time to time.
SOLVENT means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total amount
of its liabilities (including contingent liabilities as valued in accordance
with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
TAXES shall have the meaning specified in Section 5.5.
2
<PAGE>
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower
hereby assigns and grants to the Lender a continuing general, first priority
lien on, and security interest in, all the Borrower's right, title, and
interest in and to the collateral described in the next sentence (the
"Collateral") to secure the payment and performance of all the Obligations.
The Collateral consists of all equipment set forth on all the Schedules
delivered from time to time under the terms of this Agreement (the
"Equipment"), together with all present and future additions, parts,
accessories, attachments, substitutions, repairs, improvements, and
replacements thereof or thereto, and any and all proceeds thereof, including,
without limitation, proceeds of insurance and all manuals, blueprints,
know-how, warranties, and records in connection therewith, all rights against
suppliers, warrantors, manufacturers, sellers, or others in connection
therewith, and together with all substitutes for any of the foregoing.
SECTION 3. THE CREDIT FACILITY.
Section 3.1. BORROWINGS. Each Loan shall be in an amount not
less than $100,000, and in no event shall the sum of the aggregate Loans made
exceed the amount of the Lender's written commitment to the Borrower in
effect from time to time. Notwithstanding anything herein to the contrary,
the Lender shall be obligated to make the initial Loan and each other Loan
only after the Lender, in its sole discretion, determines that the applicable
conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied.
The timing and financial scope of Lender's obligation to make Loans hereunder
are limited as set forth in a commitment letter executed by Lender and
Borrower, dated as of November 25, 1998 and attached hereto as Exhibit A (the
"Commitment Letter").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3. CONDITIONS TO INITIAL LOAN.
(a) The obligation of the Lender to make the initial Loan is subject to
the Lender's receipt of the following, each dated the date of the initial Loan
or as of an earlier date acceptable to the Lender, in form and substance
satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing all
effective Uniform Commercial Code financing statements naming the Borrower
as debtor and all tax lien, judgment, and litigation searches for the
Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form UCC-1) duly
executed by the Borrower (naming the Lender as secured party and the
Borrower as debtor and in form acceptable for filing in all jurisdictions
that the Lender deems necessary or desirable to perfect the security
interests granted to it hereunder) and, if applicable, termination
statements or other releases duly filed in all jurisdictions that the
Lender deems necessary or desirable to perfect and protect the priority of
the security interests granted to it hereunder in the Equipment related to
such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the amount of
such Loan;
(iv) a Collateral Access Agreement duly executed by the lessor or
mortgagee, as the case may be, of each premises where the Equipment is
located;
(v) certificates of insurance required under Section 5.4 of this
Agreement together with loss payee endorsements for all such policies
naming the Lender as lender loss payee and as an additional insured;
(vi) a copy of the resolutions of the Board of Directors of the
Borrower (or a unanimous consent of directors in lieu thereof) authorizing
the execution, delivery, and
3
<PAGE>
performance of this Agreement, the other Loan Documents, and the
transactions contemplated hereby and thereby, attached to which
is a certificate of the Secretary or an Assistant Secretary of the
Borrower certifying (A) that the copy of the resolutions is true, complete,
and accurate, that such resolutions have not been amended or modified since
the date of such certification and are in full force and effect and (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party; and
(vii) such other agreements and instruments as the Lender deems
necessary in its sole and absolute discretion in connection with the
transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower after
due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or thereby or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses required to be paid
by it to the Lender as of such date.
(d) The security interests in the Equipment related to the initial Loan
granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens.
SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The obligation of
the Lender to make each Loan is subject to the satisfaction of the following
conditions precedent:
(a) the Lender shall have received the documents, agreements, and
instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan,
each in form and substance satisfactory to the Lender and its counsel and each
dated the date of such Loan or as of an earlier date acceptable to the Lender;
(b) the Lender shall have received a Schedule of the Equipment related to
such Loan, in form and substance satisfactory to the Lender and its counsel, and
the security interests in such Equipment related to such Loan granted in favor
of the Lender under this Agreement shall have been duly perfected and shall
constitute first priority liens;
(c) all representations and warranties contained in this Agreement and the
other Loan Documents shall be true and correct on and as of the date of such
Loan as if then made, other than representations and warranties that expressly
relate solely to an earlier date, in which case they shall have been true and
correct as of such earlier date;
(d) no Event of Default or event which with the giving of notice or the
passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request; and
(e) the Borrower shall be deemed to have hereby reaffirmed and ratified
all security interests, liens, and other encumbrances heretofore granted by the
Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The Borrower
(a) is duly organized, validly existing, and in good standing under the laws of
the State of its organization, (b) has the power and authority to own its
properties and assets and to transact the businesses in which it is presently,
or proposes to be, engaged, and (c) is duly qualified and authorized to do
business and is in good standing in every
4
<PAGE>
jurisdiction in which the failure to be so qualified could have a Material
Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform
its obligations under the Loan Documents, or (iii) the rights of the Lender
hereunder.
SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and to the best knowledge of the Borrower,
do not (a) violate any law or regulation, or any order or decree of any court or
governmental authority, (b) conflict with or result in a breach of, or
constitute a default under, any material indenture, mortgage, or deed of trust
or any material lease, agreement, or other instrument binding on the Borrower or
any of its properties, or (c) require the consent, authorization by, or approval
of or notice to or filing or registration with any governmental authority or
other Person. This Agreement is, and each of the other Loan Documents to which
the Borrower is or will be a party, when delivered hereunder or thereunder, will
be, the legal, valid, and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, or similar laws affecting creditors' rights
generally and by general principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and will
be Solvent upon the completion of all transactions contemplated to occur
hereunder (including, without limitation, the Loan to be made on the Effective
Date); the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral other than Permitted
Liens; and the Borrower is, or will be at the time additional Collateral is
acquired by it, the absolute owner of the Collateral with full right to pledge,
sell, consign, transfer, and create a security interest therein, free and clear
of any and all claims or liens in favor of any other Person other than Permitted
Liens.
SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments are outstanding
against the Borrower nor is there now pending or, to the best of the Borrower's
knowledge after diligent inquiry, threatened any litigation, contested claim, or
governmental proceeding by or against the Borrower except judgments and pending
or threatened litigation, contested claims, and governmental proceedings which
would not, in the aggregate, have a Material Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in default or has not
received a notice of default under any material contract, lease, or commitment
to which it is a party or by which it is bound. The Borrower knows of no
dispute regarding any contract, lease, or commitment which could have a Material
Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, each item of
the Collateral is located at the place of business specified in the applicable
Schedule.
SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default has occurred
and is continuing nor has any event occurred which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as permitted
herein, none of the Collateral is subject to contractual obligations that may
restrict or inhibit the Lender's rights or abilities to sell or dispose of the
Collateral or any part thereof after the occurrence of an Event of Default.
SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST. This
Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected first priority and exclusive security interest
in the Collateral, securing the payment of all the Obligations.
SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules set forth the
true and correct model number and serial number of each item of Equipment that
constitutes Collateral.
5
<PAGE>
SECTION 4.11. ACCURACY AND COMPLETENESS OF INFORMATION. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
SECTION 4.12. PRICE OF EQUIPMENT. The cost of each item of Equipment
does not exceed the fair and usual price for such type of equipment purchased in
like quantity and reflects all discounts, rebates and allowances for the
Equipment (including, without limitation, discounts for advertising, prompt
payment, testing, or other services) given to the Borrower by the manufacturer,
supplier, or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable in its judgment to the proper
conduct of its business unless the failure to do so could not reasonably be
expected to have a Material Adverse Effect on the Borrower, (c) continue in, and
limit its operations to, the same general lines of business as those presently
conducted by it, and (d) comply with all applicable laws and regulations of any
federal, state, or local governmental authority, except for such laws and
regulations the violations of which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in any
event within ten days after the Borrower learns of the following, the Borrower
will give written notice to the Lender of (a) any proceeding instituted or
threatened to be instituted by or against the Borrower in any federal, state,
local, or foreign court or before any commission or other regulatory body
(federal, state, local, or foreign) involving a sum, together with the sum
involved in all other similar proceedings, in excess of $100,000 in the
aggregate, (b) any contract that is terminated or amended and which has had or
could reasonably be expected to have a Material Adverse Effect on the Borrower,
(c) the occurrence of any Material Adverse Change with respect to the Borrower,
and (d) the occurrence of any Event of Default or event or condition which, with
notice or lapse of time or both, would constitute an Event of Default, together
with a statement of the action which the Borrower has taken or proposes to take
with respect thereto.
SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower will
maintain books and records pertaining to the Collateral in such detail, form,
and scope as the Lender shall require in its commercially reasonable
judgment. The Borrower agrees that the Lender or its agents may enter upon
the Borrower's premises at any time and from time to time during normal
business hours, and at any time upon the occurrence and continuance of an
Event of Default, for the purpose of inspecting the Collateral and any and
all records pertaining thereto. Notwithstanding the foregoing to the
contrary, Lender shall comply with all life, health and safety policies and
procedures of Borrower while on Borrower's premises. No inspection shall
disrupt Borrower's operations.
SECTION 5.4. INSURANCE. The Borrower will maintain insurance on the
Collateral under such policies of insurance, with such insurance companies, in
such amounts, and covering such risks as are at all times reasonably
satisfactory to the Lender. All such policies shall be made payable to the
Lender, in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as the Lender may
reasonably require to protect the Lender's interests in the Collateral and to
any payments to be made under such policies. Certificates of insurance policies
are to be delivered to the Lender, premium prepaid, with the loss payable
endorsement in the Lender's favor, and shall provide for not less than thirty
days' prior written notice to the Lender, of any alteration or cancellation of
coverage. If the Borrower fails to maintain such insurance, the
6
<PAGE>
Lender may arrange for (at the Borrower's expense and without any
responsibility on the Lender's part for) obtaining the insurance. Unless the
Lender shall otherwise agree with the Borrower in writing, the Lender shall
have the sole right, in the name of the Lender or the Borrower, to file
claims under any insurance policies, to receive and give acquittance for any
payments that may be payable thereunder, and to execute any endorsements,
receipts, releases, assignments, reassignments, or other documents that may
be necessary to effect the collection, compromise, or settlement of any
claims under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES ON
COLLATERAL. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY. The
Borrower will not (a) change the location of its chief executive office or
establish any place of business other than those specified herein or (b) move or
permit the movement of any item of Collateral from the location specified in the
applicable Schedule, except that the Borrower may change its chief executive
office and keep Collateral at other locations within the United States provided
that the Borrower has delivered to the Lender (i) prior written notice thereof
and (ii) duly executed financing statements and other agreements and instruments
(all in form and substance satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The Collateral
shall be operated by competent, qualified personnel in connection with the
Borrower's business purposes, for the purpose for which the Collateral was
designed and in accordance with applicable operating instructions, laws, and
government regulations, and the Borrower shall use every reasonable precaution
to prevent loss or damage to the Collateral from fire and other hazards. The
Collateral shall not be used or operated for personal, family, or household
purposes. The Borrower shall procure and maintain in effect all orders,
licenses, certificates, permits, approvals, and consents required by federal,
state, or local laws or by any governmental body, agency, or authority in
connection with the delivery, installation, use, and operation of the
Collateral. The Borrower shall keep all of the Equipment in a satisfactory
state of repair and satisfactory operating condition in accordance with industry
standards, and will make all repairs and replacements when and where necessary
and practical. The Borrower will not waste or destroy the Equipment or any part
thereof, and will not be negligent in the care or use thereof. Except in the
case of tenant improvements, the Equipment shall not be annexed or affixed to or
become part of any realty without the Lender's prior written consent.
SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly upon
request by the Lender, execute and deliver or use its best efforts to obtain any
document required by the Lender (including,
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without limitation, warehouseman or processor disclaimers, mortgagee waivers,
landlord disclaimers, or subordination agreements with respect to the
Obligations and the Collateral), give any notices, execute and file any
financing statements, mortgages, or other documents (all in form and
substance satisfactory to the Lender), mark any chattel paper, deliver any
chattel paper or instruments to the Lender, and take any other actions that
are necessary or, in the opinion of the Lender, reasonably desirable to
perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of
this Agreement. The Borrower hereby authorizes the Lender to file one or
more financing or continuation statements, and amendments thereto, relating
to all or any part of the Collateral without the signature of the Borrower
where permitted by law. A carbon, photographic, or other reproduction of
this Agreement or any financing statement covering the Collateral or any part
thereof shall be sufficient as a financing statement where permitted by law.
To the extent required under this Agreement, the Borrower will pay all costs
incurred in connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will not in
any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens which are
junior to the lien and security interest of the Lender, and the Borrower will
not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise
dispose of any of the Collateral. In the event the Collateral, or any part
thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in
violation of these provisions, the security interest of the Lender shall
continue in such Collateral or part thereof notwithstanding such sale, transfer,
assignment, exchange, or other disposition, and the Borrower will hold the
proceeds thereof in a separate account for the benefit of the Lender. Following
such a sale, the Borrower will transfer such proceeds to the Lender in kind.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The Borrower will
not enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the Borrower
(provided that if an Event of Default has occurred and is continuing the Lender
need not give any notice), the Lender shall have the right at any time to make
any payments and do any other acts the Lender may deem necessary to protect its
security interests in the Collateral, including, without limitation, the rights
to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien
which, in the reasonable judgment of the Lender, appears to be prior to or
superior to the security interests granted hereunder, and appear in, and defend
any action or proceeding purporting to affect its security interests in, or the
value of, any of the Collateral. The Borrower hereby agrees to reimburse the
Lender for all payments made and expenses incurred under this Agreement
including fees, expenses, and disbursements of attorneys and paralegals acting
for the Lender, including any of the foregoing payments under, or acts taken to
protect its security interests in, any of the Collateral, which amounts shall be
secured under this Agreement, and agrees it shall be bound by any payment made
or act taken by the Lender hereunder absent the Lender's gross negligence or
willful misconduct. The Lender shall have no obligation to make any of the
foregoing payments or perform any of the foregoing acts.
SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly (but
in no event later than three Business Days) after its receipt thereof, deliver
to the Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case come into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender and (b) deliver to the Lender as soon as available copies of any and all
press releases and other similar communications issued by the Borrower.
SECTION 5.14. SOLVENCY. The Borrower shall be and remain Solvent at
all times.
SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall not (a) amend
or modify its name, unless the Borrower delivers to the Lender thirty days prior
to any such proposed amendment or modification written notice of such amendment
or modification and within ten days before such amendment or
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modification delivers executed Uniform Commercial Code financing statements
(in form and substance satisfactory to the Lender) or (b) merge or
consolidate with any other entity, in each case without the Lender's prior
written consent which shall not be unreasonably withheld.
SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower shall take all
such further actions and execute all such further documents and instruments as
the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in
full of all Obligations, the Borrower shall deliver to the Lender the following
financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available, but
not later than 120 days after the end of each fiscal year of the Borrower and
its consolidated subsidiaries, the consolidated balance sheet, income statement,
and statements of cash flows and shareholders equity for the Borrower and its
consolidated subsidiaries (the "Financial Statements") for such year, reported
on by independent certified public accountants without an adverse qualification;
and
SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as available,
but not later than 60 days after the end of each of the first three fiscal
quarters in any fiscal year of the Borrower and its consolidated subsidiaries,
the Financial Statements for such fiscal quarter, together with a certification
duly executed by a responsible officer of the Borrower that such Financial
Statements have been prepared in accordance with GAAP and are fairly stated in
all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five days of when due any
amount required to be paid by the Borrower under or in connection with any Note
and this Agreement;
(b) any representation or warranty made or deemed made by the
Borrower under or in connection with any Loan Document or any Financial
Statement shall prove to have been false or incorrect in any material respect
when made;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14, or
5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan
Document (other than the other Events of Default specified in this Section 7)
and such failure remains unremedied for the earlier of fifteen days from (A) the
date on which the Lender has given the Borrower written notice of such failure
and (B) the date on which the Borrower knew of such failure;
(d) any provision of any Loan Document to which the Borrower is a
party shall for any reason cease to be valid and binding on the Borrower, or the
Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a general meeting of the Borrower's
creditors generally for purposes of compromising any of the Borrower's debts;
the compromise of bona fide disputes shall not be deemed to be compromises
hereunder;
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar proceedings
under any federal or state law and, in the case of any such involuntary
proceeding, such proceeding remains undismissed or unstayed for forty-five days
following the commencement thereof, or any action by the Borrower is taken
authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for
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any substantial property of the Borrower, or any action by the Borrower
authorizing any such proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $100,000 (other than the Obligations)
beyond the period of grace, if any, provided in the instrument or agreement
under which such indebtedness was created; or (ii) the observance or performance
of any other agreement or condition relating to any such indebtedness or
contained in any instrument or agreement relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such indebtedness
to cause, with the giving of notice if required, such indebtedness to become due
prior to its stated maturity; or (iii) any loan or other agreement under which
the Borrower has received financing from Transamerica Corporation or any of its
affiliates;
(i) the Borrower suffers or sustains a Material Adverse Change;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business Days;
(k) any judgment which has had or could reasonably be expected to
have a Material Adverse Effect on the Borrower and such judgment shall not be
stayed, vacated, bonded, or discharged within sixty days;
(l) any material covenant, agreement, or obligation, as determined
in the sole discretion of the Lender, made by the Borrower and contained in or
evidenced by any of the Loan Documents shall cease to be enforceable, or shall
be determined to be unenforceable, in accordance with its terms; the Borrower
shall deny or disaffirm the Obligations under any of the Loan Documents or any
liens granted in connection therewith; or any liens granted on any of the
Collateral in favor of the Lender shall be determined to be void, voidable, or
invalid, or shall not be given the priority contemplated by this Agreement; or
(m) there is a change, which change results from a single
transaction or series of related transactions, but not from the sale of newly
issued securities to investors, in more than 35% of the ownership of any equity
interests of the Borrower on the date hereof or more than 35% of such interests
become subject to any contractual, judicial, or statutory lien, charge, security
interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and be
continuing:
(a) The Lender may, without prejudice to any of its other rights
under any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 7(f) hereof, in which case all Obligations shall automatically
become immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender, during Borrower's normal business hours, may take
possession of the Collateral and, for that purpose may enter, with the aid and
assistance of any person or persons, any premises where the Collateral or any
part hereof is, or may be placed, and remove the same. The Lender hereby
acknowledges the use of hazardous materials at the premises where the Collateral
is located and hereby accepts complete responsibility and liability for any
personal injury, property damage, or damage to the environment resulting
directly from the Borrower within the premises and removing any of the
Collateral.
(c) The obligation of the Lender, if any, to make additional Loans
or financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any Loan
Document) or otherwise available to it, all the rights and remedies of a secured
party under the applicable Uniform Commercial Code (the "Code") whether or not
the Code applies to the affected Collateral and also may (i) require the
Borrower to, and the Borrower hereby agrees that it will at its
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expense and upon request of the Lender forthwith, assemble all or part of the
Collateral as directed by the Lender and make it available to the Lender at
a place to be designated by the Lender that is reasonably convenient to both
parties and (ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private
sale, at any of the Lender's offices or elsewhere, for cash, on credit, or
for future delivery, and upon such other terms as the Lender may deem
commercially reasonable. The Borrower agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to the Borrower of
the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Lender
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Lender may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which
it was so adjourned.
(e) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Lender, be held by the Lender as collateral for,
or then or at any time thereafter applied in whole or in part by the Lender
against, all or any part of the Obligations in such order as the Lender shall
elect. Any surplus of such cash or cash proceeds held by the Lender and
remaining after the full and final payment of all the Obligations shall be paid
over to the Borrower or to such other Person to which the Lender may be required
under applicable law, or directed by a court of competent jurisdiction, to make
payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. NOTICES. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to the Lender at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, and if to the Borrower, then to Trega
Biosciences, Inc., 9880 Campus Point Drive, San Diego, California 92121,
Attention: Acting Chief Financial Officer or such other address as shall be
designated by the Borrower or the Lender to the other party in accordance
herewith. All such notices and correspondence shall be effective when received.
SECTION 9.2. HEADINGS. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. Except in connection with transactions to
which Lender has consented, the Borrower shall not have the right to assign any
Note or this Agreement or any interest therein unless the Lender shall have
given the Borrower prior written consent and the Borrower and its assignee shall
have delivered assignment documentation in form and substance satisfactory to
the Lender in its sole discretion. The Lender may assign its rights and
delegate its obligations under any Note or this Agreement.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the essence in
each provision of this Agreement of which time is an element. All terms not
defined herein or in a Note shall have the meaning set forth in the applicable
Code, except where the context otherwise requires. To the extent a term or
provision of this Agreement conflicts with any Note, or any term or provision
thereof, and is not dealt with herein with more specificity, this Agreement
shall control with respect to the subject matter of such term or provision.
Acceptance of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant in determining the meaning of this Agreement
even though the accepting or acquiescing party had knowledge of the nature of
the performance and opportunity for objection.
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SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement shall
create a continuing security interest in the Collateral and shall (i) remain in
full force and effect until the indefeasible payment in full of the Obligations,
(ii) be binding upon the Borrower and its successors and assigns and
(iii) inure, together with the rights and remedies of the Lender hereunder, to
the benefit of the Lender and its successors, transferees, and assigns.
SECTION 9.7. REINSTATEMENT. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
SECTION 9.9. INDEMNIFICATION. The Borrower agrees to indemnify and
hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person.
SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement
may be executed in counterparts, each of which when so executed and delivered
shall be an original, but both of which shall together constitute one and the
same instrument. This Agreement and each of the other Loan Documents and any
notices given in connection herewith or therewith may be executed and delivered
by telecopier or other facsimile transmission all with the same force and effect
as if the same was a fully executed and delivered original manual counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in or obligation
under this Agreement or any Note or any other Loan Document shall be invalid,
illegal, or unenforceable in any jurisdiction, the validity, legality, and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender agree
that this Agreement, the Schedule hereto, and the Commitment Letter are the
complete and exclusive statement and agreement between the parties with respect
to the subject matter hereof, superseding all proposals and prior agreements,
oral or written, and all other communications between the parties with respect
to the subject matter hereof. Should there exist any inconsistency between the
terms of the Commitment Letter and this Agreement, the terms of this Agreement
shall prevail.
SECTION 9.14. SETOFF. In addition to and not in limitation of all
rights of offset that the Lender may have under Applicable Law, and whether or
not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the
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credit or the account of the Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH
RESPECT TO RIGHTS AND REMEDIES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement
to be duly executed and delivered by its proper and duly authorized officer as
of the date first set forth above.
TREGA BIOSCIENCES, INC.
By: /s/ Lawrence D. Muschek
-----------------------
Name: Lawrence D. Muschek
Title: President, Research & Development
Federal Tax ID: 51-0336233
Accepted as of the
23 day of December, 1998
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Gary P. Moro
----------------------
Name: Gary P. Moro
Title: Vice President
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June 30, 1998
Stephen Flaim, Ph.D
4455 Foxhollow Court
San Diego, CA 92130
Dear Dr. Flaim:
We are pleased to extend you an offer of employment with Trega Biosciences,
Inc. This letter shall serve to clarify the terms and conditions of the job
we are offering you.
We are offering you a position as Vice President, Biology reporting to Dr.
Larry Muschek. Your employment will begin on July 20, 1998 with an exempt
monthly salary of $14,166.67, annualized at $170,000.
In addition to your base compensation, you will be eligible to participate in
an attractive bonus award program. During your first year of employment, up
to a maximum of 50% of your annual salary will be awarded to you should you
successfully accomplish the criteria to be agreed upon between us. The amount
of the award will be determined by the President/CEO and the President,
Research & Development.
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 following 90 days
after your hire date. You will begin accruing vacation at a rate of 10 days
per year, with an additional day of vacation for every year of service, which
you will be eligible to take after six (6) months of employment with the
Company. Subject to the approval of the Compensation Committee, you will be
granted 70,000 stock options, which will vest in three (3) month periods over
four (4) years.
<PAGE>
Stephen Flaim, Ph.D.
June 30, 1998
page 2
You acknowledge that 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 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 that 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. Additionally,
on your first day of work please be prepared to provide the appropriate
documentation showing you are authorized to work in the United States.
You further agree that all disputes, claims or causes of action arising out
of or relating to this agreement or your employment relationship including
termination of that relationship, shall be submitted to binding arbitration,
except where the law specifically forbids the use of arbitration as a final
and binding remedy (See Exhibit A).
Dr. Flaim, we look forward to your joining our organization. In order to
confirm your agreement with and acceptance of these terms, please sign one
copy of this letter and return it to me. The other copy is for your records.
If there is any matter in this letter which you wish to discuss further,
please do not hesitate to speak to me.
Sincerely,
/s/ Lawrence D. Muschek
- ------------------------
Larry Muschek, Ph.D.
President, Research & Development
ACKNOWLEDGMENT
I agree to the terms and conditions of employment set forth in this letter.
/s/ Stephen F. Flaim 7/7/98
- -------------------- --------------------------
Stephen Flaim, Ph.D. Date
<PAGE>
LETTER OF AGREEMENT
PRESIDENT & CHIEF EXECUTIVE OFFICER
TREGA BIOSCIENCES, INC
November 6, 1998
Mr. Michael G. Grey
350 Geneva Crescent
Town of Mount Royal
Quebec H3R 2A9
Canada
Dear Mike,
This letter sets forth the basic terms and conditions of your employment with
Trega Biosciences, Inc. ("Trega"). These terms and conditions become effective
upon compliance by you with the Immigration Reform and Control Act which
pursuant to Federal Law requires you, on or before your third day of employment,
to present Trega with evidence of your lawful right to accept employment in the
United States. Your available opportunity to comply with this provision will
expire March 1, 1999. By signing this letter, you will be agreeing to these
terms. It is important that you understand clearly both what your benefits are
and what is expected of you by Trega.
1. SALARY. You will be paid a base salary of $300,000 ("Base Salary"), less
regular payroll deductions, (payable as $12,500 semi-monthly).
2. ELIGIBILITY FOR BONUS. You will be eligible for an annual bonus
compensation award of up to sixty percent (60%) of your annual Base Salary
contingent upon the Board of Directors' assessment of your annual performance,
achievement of business development objectives, achievement of pre-agreed
targets in company performance and other factors that are jointly determined.
These current bonus criteria will be determined upon signing of this Agreement.
These criteria may be changed from time to time by the Board of Directors. To be
eligible for a bonus you must perform at a level acceptable to the Board of
Directors and be on the Trega payroll when the bonus is paid. No pro-rata
payment will be made if you are not employed by Trega when the bonus is paid.
3. STOCK OPTIONS. You will be eligible to receive options to acquire up to
500,000 shares of Trega's Common Stock (the "Options"). The Options, which will
be granted under Trega's 1996 Stock Incentive Plan (the "Plan") and pursuant to
the forms of Stock Option Agreements used in connection with the Plan, will be
deemed granted as follows: (i) if you commence employment as a regular employee
of Trega (your "Start Date") on or prior to December 31, 1998, then an Option
with respect to 450,000 shares will be deemed granted as of your Start Date and
<PAGE>
Letter of Agreement
President & Chief Executive Officer
Trega Biosciences, Inc.
an Option with respect to 50,000 shares will be deemed granted as of February
1, 1999 IF you are still employed by Trega at that time; and (ii) if your
Start Date occurs after December 31, 1998, then an Option with respect to
450,000 shares will be deemed granted as of your Start Date and an Option
with respect to 50,000 shares will be deemed granted as of December 15, 1998.
In any event, (A) all Options will have an exercise price of $2.50 per
share, which was the last transaction price (or "Fair Market Value" as
defined in the Plan) for shares of Trega's Common Stock on the Nasdaq
National Market on the date of this letter, (B) no vesting will occur under
any Options until your Start Date and, if your Start Date does not occur on
or before March 1, 1999, Trega reserves the right to cancel the grant of all
Options as well as the balance of the arrangements contemplated by this
letter, (C) following your Start Date, your right to exercise the Options
will become exercisable in 16 installments at three-month intervals over a
48-month period (commencing three months after your Start Date with the first
installment consisting of 10% of the total number of shares, or 50,000
shares, and each successive installment consisting of 6% of the total number
of shares, or 30,000 shares), although the Options shall become fully vested
in the event of a "Change in Control" as defined in the Plan and you shall be
credited with 12 months' worth of vesting (or the balance of vesting under
the Options, if less) in the event of a termination without "cause" (as
contemplated by Section 13 below), and (D) in the event that the Fair Market
Value per share of Trega's Common Stock is less than or equal to $2.50 on
your Start Date, then as much of the Options as possible (pursuant to
applicable requirements) shall be incentive stock options deemed granted as
of such date (with the balance of the Options to take the form of one or more
non-qualified stock options). You may also become eligible for additional
stock option grants at the discretion of the Board of Directors and its
Compensation Committee. For your convenience of reference, a copy of the
Plan is attached hereto as Exhibit A.
4. FORGIVABLE LOAN. You will be eligible to receive a $150,000 loan from the
Company upon relocation to San Diego. The loan will be interest bearing at
4.44% and will be forgiven quarterly over a four-year period in equal amounts.
The loan shall be immediately forgiven in the event of a "Change in Control" (as
defined in Trega's 1996 Stock Incentive Plan). Nothing in this Agreement
(including this section) changes the at-will nature of your employment.
5. DUTIES. Your job title will be President & Chief Executive Officer. You
will be a member of Trega's Board of Directors. Your duties generally will
include responsibility for all business activities, as well as all scientific
activities. You may be assigned other duties as needed and your duties may
change from time to time on reasonable notice, based on the needs of Trega and
your skills, as determined by Trega. As an exempt employee, you are required to
exercise your specialized expertise, independent judgment and discretion to
provide high-quality services. You are required to follow office policies and
procedures adopted from time to time by Trega and to take such general direction
as you may be given from time to time by the Board of Directors. Trega reserves
the right to change these policies and procedures at any time. (Also see
Adjustments and Changes in Employment Status). You are required to devote your
full energies, efforts and abilities to your employment, unless Trega expressly
agrees otherwise.
6. COMPETITIVE ACTIVITY. You shall not during your employment directly or
indirectly own, manage, operate, control or participate in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director, or otherwise with, or have any financial interest in or aid
or assist anyone else in the conduct of a business which is in competition with
any
-2-
<PAGE>
Letter of Agreement
President & Chief Executive Officer
Trega Biosciences, Inc.
aspect of the business conducted by Trega (or any of the Company's
affiliates); PROVIDED, HOWEVER, that ownership of not more than one percent (1%)
of the equity securities of any publicly held company shall not constitute a
violation hereof. You shall not serve (i) as a director or officer of any
corporation, (ii) as a general partner of any partnership, or (iii) as a
consultant to any enterprise, regardless of whether such corporation,
partnership, or enterprise is profit motivated, a not-for-profit operation, or a
charity, without the express approval of the Board of Directors of Trega, which
approval shall not be unreasonably withheld. The Trega Board of Directors
agrees that you may continue to serve on the Board of Directors for Cortex and
serve as a consultant to BioChem Pharma provided that your involvement does not
conflict with your duties at Trega.
7. ADJUSTMENTS AND CHANGES IN EMPLOYMENT STATUS. You understand that the
Company reserves the right to make personnel decisions regarding your
employment, including but not limited to decisions regarding any promotion,
salary adjustment, transfer or disciplinary action, up to and including
termination (in accordance with paragraph 13 below), consistent with the needs
of the business.
8. PROPRIETARY INFORMATION AGREEMENT. You will be required to sign and abide
by the terms of the enclosed Proprietary Information and Dispute Resolution for
Employees Agreement, which is incorporated into this Agreement by reference as
Attachment B, and you may be required to execute further agreements to protect
Trega's trade secrets and its rights to intellectual property.
9. IMMIGRATION DOCUMENTATION. Please be advised that your employment is
contingent on your ability to prove your identity and authorization to work in
the U.S. for Trega. In that regard, you must comply with the Immigration and
Naturalization Service's ("INS") employment verification requirements. Trega
agrees to petition the INS on your behalf for any necessary immigration law
status required for your lawful employment in the United States. The Company
reserves the right to make all decisions regarding preparation of any and all
necessary documents. Trega will accept responsibility for all fees and costs
associated with any necessary process, including application for the Green Card.
10. REPRESENTATION AND WARRANTY OF EMPLOYEE. You represent and warrant to
Trega that the performance of your duties will not violate any agreements with
or trade secrets of any other person or entity.
11. EMPLOYEE BENEFITS. You will be eligible for three weeks paid vacation
each calendar year. Vacation will accrue on a pro-rata basis semi-monthly.
You will receive an additional vacation day for each year of service subject
to Trega's vacation policy. You will also be paid for sick leave and
holidays also subject to Trega's policies. You will be provided with health
insurance benefits, dental insurance benefits, life insurance and
supplemental life insurance, as provided in our benefit plans. You will be
eligible to participate in Trega's 401(k) retirement savings plan and Trega's
flexible spending account. For the first year, Trega will assume the annual
costs of your current portable, long-term disability insurance program in an
amount not to exceed $5,000 per year. These benefits may change from time to
time. You will be covered by workers' compensation insurance and State
Disability Insurance, as required by state law.
-3-
<PAGE>
Letter of Agreement
President & Chief Executive Officer
Trega Biosciences, Inc.
12. ADDITIONAL BENEFITS. You will be provided with the following additional
benefits: you will be reimbursed for reasonable relocation expenses for (i) the
move of your household goods from Quebec to California, including storage if
necessary; (ii) a pre-move house hunting trip; (iii) temporary living quarters
and temporary transportation; (iv) specific costs relating to the sale and
purchase of your primary residence as pre-approved by Trega; and (v) 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. Trega will
also reimburse you for accounting fees incurred as a result of your moving to
the United States. If you voluntarily resign from the Company within twelve
(12) months of your start date, you will be required to repay the Company for
the move of your household goods, the pre-move house hunting trip and the costs
paid by Trega regarding the sale and purchase of your primary residence.
13. TERMINATION AND SEVERANCE BENEFITS.
(a) Your employment is at-will. In other words, Trega and you each retain the
right to terminate this agreement with or without cause at any time. In the
event of a termination without "cause" (as hereinafter defined), you shall be
entitled to continuation of salary in paragraph 1 for a period of twelve (12)
months. Additionally, Trega will provide continuation of benefits through
COBRA. The severance pay will be paid in equal semi-monthly installments and
will be subject to regular payroll deductions. In order to receive these
severance benefits, you will be required to execute and deliver a release (a
sample of which is attached) of Trega, as well as its officers, directors and
employees, in substance and form reasonably satisfactory to Trega, from any and
all liability arising out of or related to the employment relationship or the
termination of your employment.
(b) In the event of termination of your employment for "cause," you shall not
be entitled to severance pay or any other benefits (other than accrued salary
and other accrued amounts). "Cause" for the purposes of this Agreement shall be
defined as (i) misappropriation of Company property; (ii) material act of
dishonesty, fraud, or the intentional falsification of any employment or Company
records; (iii) improper disclosure of the Company's confidential, business or
proprietary information by you; (iv) willful failure to perform, or gross
neglect, of your duties; (v) your conviction for a felony causing material harm
to the reputation and standing of the Company; (vi) willful violation of Company
policy; (vii) failure to protect Trega's trade secrets; (viii) willful
misconduct; or, (ix) material breach of any provision of this Agreement.
14. DISPUTE RESOLUTION PROCEDURE. You and Trega ("The Parties") agree that any
dispute arising out of or related to the employment relationship between them,
including the termination of that relationship and any allegations of unfair or
discriminatory treatment arising under state or federal law or otherwise, shall
be resolved by final and binding arbitration, except where the law specifically
forbids the use of arbitration as a final and binding remedy, pursuant to the
terms set forth in the Proprietary Information and Dispute Resolution for
Employees Agreement.
15. INTEGRATED AGREEMENT. Please note that this Agreement supersedes any prior
agreements, representations or promises of any kind, whether written, oral,
express or implied between the
-4-
<PAGE>
Letter of Agreement
President & Chief Executive Officer
Trega Biosciences, Inc.
parties hereto with respect to the subject matters herein. It constitutes
the full, complete and exclusive Agreement between you and Trega with respect
to the subject matters herein. This Agreement cannot be changed unless in
writing, signed by you and the then current Chairman of the Board.
16. SEVERABILITY. If any term of this Agreement is held to be invalid, void or
unenforceable, the remainder of this Agreement shall remain in full force and
effect and shall in no way be affected; and, the parties shall use their best
efforts to find an alternative way to achieve the same result.
-5-
<PAGE>
Letter of Agreement
President & Chief Executive Officer
Trega Biosciences, Inc.
In order to confirm your agreement with and acceptance of these terms, please
sign one copy of this letter and return it to me. The other copy is for your
records. If there is any matter in this letter which you wish to discuss
further, please do not hesitate to speak to me.
Very truly yours,
Trega Biosciences, Inc.
By: /s/ Robert S. Whitehead
- ------------------------------------------
Title: President & Chief Executive Officer
- -------------------------------------------
I agree to the terms of employment set forth in this Agreement.
/s/ Michael G. Grey 11/6/98
- ----------------------------------- ----------------------
Employee Date
-6-
<PAGE>
SECURED PROMISSORY NOTE
$150,000 January 8, 1999
FOR VALUE RECEIVED, the undersigned (the "Maker") hereby promises to pay on
or before January 8, 2003 to the order of Trega Biosciences, Inc. (the "Payee")
at its principal offices currently located at 9880 Campus Point Drive, San
Diego, California 92121, the principal amount of One Hundred Fifty Thousand
Dollars ($150,000), together with interest on the unpaid principal balance
thereof from the date hereof at the rate of Four and Forty Four One-Hundredth
Percent (4.44%) per annum simple interest, subject to the terms and conditions
hereinafter provided.
Payment of this Note shall be made in lawful money of the United States of
America at the Office of the Payee. Interest shall be payable quarterly with
the first interest payment due three months from the date hereof and additional
interest payment due on the same date of each three-month period thereafter
until this Note, including all interest and principal, is paid in full. Payment
of principal and accrued interest may be made at any time without penalty.
The Maker waives presentment, demand for payment, notice of dishonor,
notice of protest, and all other notices or demands in connection with delivery,
acceptance, performance, default, endorsement or guarantee of this Note.
The principal balance of this Note shall be forgiven to the extent
hereinafter provided. So long as Maker remains an employee of Payee pursuant to
the certain Letter of Agreement dated as of November 6, 1998, by and between
Maker and Payee ("Employment Agreement"), the amount of Nine Thousand Three
Hundred and Seventy Five Dollars ($9,375) of the unpaid principal balance shall
be forgiven each quarter commencing on the last day of a period ending three (3)
months from the date hereof and continuing quarterly on the last day of each
successive three-month period thereafter until either the loan is totally
forgiven or the total amount of the forgiveness and principal paid in lawful
money equals the original principal amount of this Note. In addition to the
foregoing, the entire amount of the unpaid principal balance shall be forgiven
upon a "Change in Control" as defined for the purposes of the Payee's 1996 Stock
Incentive Plan as the same is in effect on the date hereof.
This Note is a full-recourse note originally secured by a pledge of all
options and rights of Maker to acquire the Common Stock of the Payee (the
"COMMON STOCK"), however and whenever acquired, together with any shares of
Common Stock otherwise issuable to Maker upon the exercise of any such options
or pursuant to any such rights, all as more fully set forth in that certain
Security Agreement of even date herewith executed by Maker in favor of Payee and
which is on file with the Secretary of Payee; PROVIDED, HOWEVER, that if the
Common Stock is publicly traded on the New York Stock Exchange or quoted on the
Nasdaq National Market at the time such shares of Common Stock would otherwise
be issuable to Maker, then an amount of such shares representing the value of
such shares, if any, in excess of one hundred fifty percent (150%) of the then
outstanding principal balance of this Note shall be released to Maker at such
time (based upon the average of the last trading price of the Common Stock over
the ten trading day period immediately preceding the time such shares would
otherwise be issuable to Maker).
-1-
<PAGE>
The entire unpaid and unforgiven principal balance of this Note plus
accrued interest shall become due and payable ten (10) days from the date Maker
ceases to be an employee of Payee under the Employment Agreement and immediately
due and payable upon the occurrence of any one of the following events of
default:
1. Any principal or interest under this Note shall not be paid when due;
or
2. Maker files a petition in bankruptcy, makes a general assignment for
the benefit of creditors, or commits any act of bankruptcy; or
3. Any proceeding of an insolvency nature is commenced against the Maker
and such proceedings is not dismissed within thirty (30) days
thereafter; or
4. Any collateral which is securing this Note is attached, seized,
subjected to writ levied upon or comes within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors;
or
5. Any notice of lien, levy or assessment is filed or recorded with
respect to any collateral which is securing this Note by any federal,
state, county, local or other governmental agency unless Maker is
contesting in good faith, or for so long as Maker continues to so
contest, such notice.
The liability of Maker hereunder shall be unconditional and shall not be in
any manner affected by any indulgence whatsoever granted or consented to by the
Payee including, without limitation, any extension of time, renewal waiver or
other modification. Any failure of the Payee to exercise any right hereunder
shall not be construed as a waiver of the right to exercise the same or of any
other right at any time and from time to time. The Maker hereby irrevocably
submits to the jurisdiction of the state courts of the State of California for
the purpose of any suit, action or other proceeding arising out of this Note.
In the event this Note shall not be promptly paid when due, the Maker shall
pay all costs of enforcement and collection of the Note, including without
limitation reasonable attorney's fees, expenses and court costs.
Any provisions of this Note which may prove unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
This Note may not be assigned, transferred or pledged without the consent
of the Maker. In the event this Note is assigned, transferred or pledged, the
Maker hereby waives, as against such transferee, assignee or pledgee, any
defenses and counterclaims of every kind that the Maker may have against the
Payee.
-2-
<PAGE>
This note shall be governed by and construed in accordance with the laws
of the State of California as such laws are applied to contracts entered into
and to be performed entirely within California.
MAKER:
/s/ Michael G. Grey
---------------------
Michael G. Grey
APPROVED BY:
Written Consent by Compensation Committee on November 6, 1998.
-3-
<PAGE>
SECURED PROMISSORY NOTE
$120,000 February 1, 1999
FOR VALUE RECEIVED, the undersigned (the "Maker") hereby promises to pay
on or before February 1, 2001 to the order of Trega Biosciences, Inc., (the
"Payee") at its principal offices currently located at 9880 Campus Point
Drive, San Diego, California 92121, the principal amount of One Hundred
Twenty Thousand Dollars ($120,000), together with interest on the unpaid
principal balance thereof from the date hereof at the rate of four and
sixty-four one-hundredth percent (4.64%) per annum simple interest, subject
to the terms and conditions hereinafter provided.
Payment of this Note shall be made in lawful money of the United States of
America at the Office of the Payee. Principal and interest shall be payable in
full on or before February 1, 2001. Payment of principal and accrued interest
may be made at any time without penalty.
The Maker waives presentment, demand for payment, notice of dishonor,
notice of protest, and all other notices or demands in connection with delivery,
acceptance, performance, default, endorsement or guarantee of this Note.
This Note is a full-recourse note originally secured by a pledge of One
Hundred Twenty Thousand (120,000) shares of the Common Stock of the Payee (the
"Common Stock") owned by the Maker, all as more fully set forth in that certain
pledge as Security Agreement of even date herewith executed by Maker in favor of
Payee and which is on file with the Secretary of Payee.
The entire unpaid principal balance of this Note plus accrued interest
shall become due and payable six-months from the date Maker ceases to be an
employee of Payee and immediately due and payable upon the occurrence of any one
of the following events of default.
1. Any principal or interest under this Note shall not be paid when due;
or
2. Maker files a petition in bankruptcy, makes a general assignment for
the benefit of creditors, or commits any act of bankruptcy; or
3. Any proceeding of an insolvency nature is commenced against the Maker
and such proceedings is not dismissed within thirty (30) days
thereafter; or
4. Any collateral which is securing this Note is attached, seized,
subjected to writ levied upon or comes within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors;
or
5. Any notice of lien, levy or assessment is filed or recorded with
respect to any collateral which is securing this Note by any federal,
state, county, local or other governmental agency unless Maker is
contesting in good faith, or for so long as Maker continues to so
contest such notice.
The liability of Maker hereunder shall be unconditional and shall not be in
any manner affected by any indulgence whatsoever granted or consented to by the
Payee including, without limitation, any extension of time, renewal, waiver or
other modification. Any failure of the Payee to exercise any right hereunder
shall not be construed as a waiver of the right to exercise the same or of any
other right at any time and from time to time. The Maker hereby irrevocably
<PAGE>
submits to the jurisdiction of the state courts of the State of California
for the purpose of any suit, action or other proceeding arising out of this
Note.
In the event this Note shall not be promptly paid when due, the Maker shall
pay all costs of enforcement and collection of the Note, including without
limitation reasonable attorney's fees, expenses and court costs.
Any provisions of this Note which may prove unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
This Note may be assigned, transferred or pledged without the consent of
the Maker. In the event this Note is assigned, transferred or pledged, the
Maker hereby waives, as against such transferee, assignee or pledgee, any
defenses and counterclaims of every kind that the Maker may have against the
Payee.
This Note shall be governed by and construed in accordance with the laws of
the State of California as such laws are applied to contracts entered into and
to be performed entirely within California.
MAKER:
/s/ John E. Wehrli
---------------------
John E. Wehrli
Approved by:
/s/ Michael G. Grey
- --------------------------------
Michael G. Grey
President and Chief Executive Officer
2
<PAGE>
January 11, 1999
John Wehrli
1879 Springer Road #B
Mountain View, CA 94040
Dear John:
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 position as Senior Director, Legal Affairs reporting to
Michael Grey, President & Chief Executive Officer. Your employment will begin
Monday, February 1, 1999 with an exempt monthly salary of $12,500.(1) Trega
will also pay reasonable moving expenses incurred with the relocation of your
household goods to San Diego to include: 1) shipment of household goods and
one vehicle, 2) temporary housing in San Diego, CA for 30-60 days, 3) one-way
airfare from San Francisco to San Diego, CA. Trega will also extend a loan to
you in the amount of $120,000 which will be secured by vested Trega stock.
The loan will be offered at the lowest interest rate available based on the
signing date of this offer letter and will be due 24 months from signing.
Should your employment relationship with Trega end, you will be required to
repay the Company for the remaining balance plus accrued interest within six
(6) months. Furthermore, Trega will pay directly to Cooley Godward, the
reimbursement costs for your legal education, which we approximate to be
$13,000.
In addition to your base compensation, you will be eligible to participate in
an attractive bonus award program. Although the details of the Company
program have not been finalized be assured that you will receive a bonus
appropriate to your position and based on the company's financial
performance.
You will be eligible to participate in the Company's health-care benefit
plans on your date of hire and in the Company's 401 (k) Retirement Plan
during the first enrollment period following 90 days after your hire date.
You will begin accruing vacation at a rate of 10 days per year, with an
additional day of vacation for every year of service, which you will be
eligible to take after six (6) months of employment with the Company. Subject
to the approval of the Compensation Committee, you will be granted an option
to acquire 60,000 shares of stock. The option is subject to the terms of the
Option Agreement and the 1996 Stock Incentive Plan.
- --------
(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>
John Wehrli
January 11, 1999
page 2
You will not be required to sign an additional Confidentiality Agreement, as
the existing Agreement still applies.
You acknowledge and agree that in accordance with California law, your
employment with the Company is "at will" and that 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 further 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 bind remedy
(Exhibit B received with NaviCyte offer).
John, we look forward to your joining our organization. In order to confirm
your agreement with and acceptance of these terms, please sign one copy of this
letter and return it to me. The other copy is for your records. If there is
any matter in this letter which you wish to discuss further, please do not
hesitate to speak to me.
Sincerely,
/s/ Susan M. Hanan
- -------------------
Susan Hanan,
Vice President Organizational & Strategic Development
ACKNOWLEDGMENT
I agree to the terms and conditions of employment set forth in this letter.
/s/ John E. Wehrli 1/12/99
- ------------------------------ ---------------------------
John Wehrli Date
<PAGE>
December 16, 1998
Gerard Wills
903 El Dorado Drive
Escondido, CA 92025
Dear Gerard:
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 position as Chief Financial Officer reporting to Michael
Grey, President & CEO. Your employment will begin on January 11, 1999 with an
exempt monthly salary of $16,666.67.(1)
In addition to your base compensation, you will be eligible to participate in
an attractive bonus award program. During your first year of employment, up
to a maximum of 50% of your annual salary will be awarded to you should you
successfully accomplish the criteria to be determined upon the commencement
of your position.
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 following 90 days
after your hire date. You will begin accruing vacation at a rate of 15 days
per year, with an additional day of vacation for every year of service, which
you will be eligible to take after six (6) months of employment with the
Company. Subject to the approval of the Compensation Committee, you will be
granted an option to acquire 150,000 shares of stock. The option is subject
to the terms of the Option Agreement and the 1996 Stock Incentive Plan.
- ---------------------
(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>
Gerard Wills
December 16, 1998
page 2
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 that 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 further 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 bind
remedy (see Exhibit B).
Gerard, we look forward to your joining our organization. In order to
confirm your agreement with and acceptance of these terms, please sign one
copy of this letter and return it to me. The other copy is for your records.
If there is any matter in this letter which you wish to discuss further,
please do not hesitate to speak to me.
Sincerely,
/s/ Michael G. Grey
- ---------------------
Michael Grey,
President & Chief Executive Officer
ACKNOWLEDGMENT
I agree to the terms and conditions of employment set forth in this letter.
/s/ Gerard A. Wills 12/22/98
- ------------------- -------------------------
Gerard Wills Date
<PAGE>
[LETTERHEAD]
January 16, 1996
Michael J. Green
43 Meadow Run Drive
Skillman, NJ 08558
Dear Mike,
I'm pleased to offer you the position of Vice President, Chemistry at
Houghten Pharmaceuticals. In this position you'll report directly to me and
work in close coordination with Richard Houghten in his responsibilities as
Chief Technical Officer of HPI and President of the Torrey Pines Institute
for Molecular Studies. You will be responsible for all activities relating to
HPI combinatorial and medicinal chemistry, for the transition of resources
and personnel from TPIMS to HPI, for consultation and involvement in HPI's
internal discovery programs and for partnership and financing activities as
they relate to your areas of responsibility. You will be a company officer,
you will work closely with Richard, Ron, Barney, Terry, myself and the Board
of Directors and participate in all key company strategic decisions.
As a compensation package, we are offering you a starting salary of $165,000
and 65,000 Incentive Stock Options. The HPI stock options are exercisable at
$0.70 per share and vest over a four year period in three month increments.
You will be eligible for annual salary reviews and additional stock option
grants over time at the discretion of the Board of Directors and its
Compensation Committee. In addition to your base compensation, you will be
eligible for a bonus compensation award up to 30% of your salary contingent
upon the completion of corporate partnership(s) involving aspects of HPI's
molecular diversity technologies. The exact amount will be based on such
factors as value, quality and technical capabilities of the partner, the
extent to which HPI has access to those technical capabilities, the scope of
the agreement, size of guaranteed vs. milestone driven payments and other
factors that we can determine jointly.
In addition to your base salary, you will be eligible to participate in the
Company's employee benefit plans that include medical, prescription-drug,
dental, long-term disability and life insurance, and 401(k) retirement
savings and flexible spending accounts. You will begin to accrue vacation at
a rate of three weeks per year with an additional day for each year of
service. To facilitate your relocation to San Diego, the Company will
reimburse you for all your moving expenses including real estate fees, moving
expenses, temporary housing, transportation to and from San Diego and house
hunting visits (of course, within policy limits).
<PAGE>
MICHAEL GREEN EMPLOYMENT OFFER
JANUARY 16, 1996
PAGE #2
Upon your decision to join HPI, you will be required to sign 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.
According to California law, your employment with the Company is "at will".
Both you and the Company have the right to terminate your employment at any
time for any reason whatsoever. If any disputes, claims or causes of action
arise out of this agreement or your employment relationship with HPI, we
require that it be submitted to binding arbitration before the American
Arbitration Association according to the rules and procedures established by
the organization.
I'd like to reiterate that the entire management team at HPI is excited about
the prospect of working with you. We believe you'll make a tremendous
contribution to HPI, and we all feel that we will really enjoy working with
you.
As you are aware, we have a number of critical decisions in front of us. I'd
like to do whatever I can over the next several days to facilitate a quick
but informed decision on your part. Please do not hesitate to contact me
either at work (619-455-2545) or home (619-454-8118) should you have any
questions.
Sincerely yours,
/s/ Robert S. Whitehead
Robert S. Whitehead
President & Chief Executive Officer
<PAGE>
MICHAEL GREEN EMPLOYMENT OFFER
JANUARY 16, 1996
PAGE #3
ACKNOWLEDGMENT
If this letter accurately reflects your understanding of this employment
relationship and our entire agreement, please sign this letter and return it
to me as soon as possible.
/s/ Michael J. Green 1/19/96
- --------------------- -------------------
EMPLOYEE DATE
<PAGE>
Exhibit 21.1
Subsidiaries of Trega Biosciences, Inc.
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
ChromaXome Corp. Delaware
NaviCyte, Inc. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration
STatement (Form S-8) No. 333-17235) pertaining to the 1992 Stock Incentive
Plan; (ii) the Registration Statement (Form S-8 No. 333-17273) pertaining to
the 1995 Stock Incentive Plan; (iii) the Registration Statements (Form S-8
No. 333-2910, Form S-8 No. 333-4093 and Form S-8 No. 333-65323) pertaining to
the 1996 Stock Incentive Plan; (iv) the Registration Statements (Form S-8
No. 333-2908, and Form S-8 No. 333-65343) pertaining to the 1996 Employee
Stock Purchase Plan; and (v) the Registration Statement (Form S-8 No.
333-67833) pertaining to the NaviCyte, Inc. 1997 Stock Plan of Trega
biosciences, inc. of our report dated February 19, 1999, with respect to the
consolidated financial statements of Trega Biosciences, Inc. included in this
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG
San Diego, California
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT DECEMBER 31, 1998 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,775
<SECURITIES> 6,507
<RECEIVABLES> 199
<ALLOWANCES> 0
<INVENTORY> 37
<CURRENT-ASSETS> 17,040
<PP&E> 7,139
<DEPRECIATION> 3,016
<TOTAL-ASSETS> 29,535
<CURRENT-LIABILITIES> 8,983
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 17,622
<TOTAL-LIABILITY-AND-EQUITY> 29,535
<SALES> 21
<TOTAL-REVENUES> 10,790
<CGS> 7
<TOTAL-COSTS> 7
<OTHER-EXPENSES> 24,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> (12,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,801)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
