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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20954
COCENSYS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0538836
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
213 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
(714) 753-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the registrant, based upon the closing price of the Common Stock
reported on the Nasdaq National Market on February 28, 1997, was $93,171,921.
The number of shares of Common Stock outstanding as of February 28, 1997,
was 22,191,919.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement, to be filed not
later than 120 days after December 31, 1996 in connection with the registrant's
1997 Annual Meeting of Stockholders, is incorporated by reference into Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THOSE UNDER THE CAPTION,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
OVERVIEW
CoCensys, Inc. ("CoCensys" or the "Company") is a biopharmaceutical company
dedicated to the discovery, development, marketing and sales of small molecule
drugs to treat neurological and psychiatric disorders. The Company's product
discovery and development programs are focused on the exploration of novel
receptors and enzymes and their ligands and inhibitors through three technology
platforms: GABA receptor enhancers or Epalons; glutamate antagonists; and ICE-
like protease inhibitors.
The Company's lead Epalon compound, CCD 1042 (ganaxolone), an
anticonvulsant and anti-migraine compound, is in separate Phase II clinical
trials for pediatric epilepsy, adult epilepsy and migraine. ACEA 1021, the
Company's lead glutamate antagonist, is being developed for the treatment of
stroke and head injury and is nearing completion of its Phase I clinical
testing. Also, the Company anticipates that CCD 3693, its lead compound for
the treatment of insomnia, will enter Phase I trials in the second quarter of
1997.
The Company's Pharmaceutical Sales and Marketing Division includes a 60-
person sales force trained in detailing the psychiatry and neurology markets,
the targets for CoCensys' own products. Established in 1994, the sales
organization's objective is to generate net revenues to apply toward development
of the Company's products. Initially, the sales force co-promoted Anafranil
- -Registered Trademark- and Tofranil-Registered Trademark- for Novartis
(formerly Ciba-Geigy). That agreement ended December 31, 1996. It currently is
promoting to neurologists Parke-Davis' (a division of Warner-Lambert)
Cognex-Registered Trademark- for the treatment of Alzheimer's disease and
Somerset Pharmaceutical's Eldepryl-Registered Trademark- for the treatment of
Parkinson's disease. The Company is working to secure in-licensing or
additional co-promotion agreements for psychiatry and neurology products.
CoCensys' business strategy is to build a portfolio of products for brain
disorders, both through discovery and development of products utilizing the
technical expertise and creativity of its scientists and through the acquisition
of new product candidates. This strategy includes entering into development
agreements to obtain direct funding from co-development partners, establishing
marketing collaborations to generate near-term revenues and using the Company's
development expertise and its sales division to attract new products for
development and commercialization.
CoCensys was incorporated under the laws of California in February 1989 and
was reincorporated in Delaware in December 1992. The Company's main executive
offices are located at 213 Technology Drive, Irvine, California 92618, and its
telephone number is (714) 753-6100.
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BACKGROUND
THE HUMAN BRAIN
In the brain, chemical messengers called neurotransmitters carry signals
between nerve cells (neurons). The signals, which are received by cell surface
receptors, can be either excitatory or inhibitory. Excitatory signals increase
the electrical firing of neurons receiving the signals, while inhibitory signals
decrease firing. The proper functioning of the brain hinges on a delicate
balance between excitatory and inhibitory signals.
Each neurotransmitter has a specific receptor, and the Company is working
to design products that are highly specific to receptor and enzyme types. Many
of the current central nervous system ("CNS") drugs targeting the receptor for a
particular neurotransmitter also affect other receptors distributed throughout
the CNS. This lack of receptor specificity produces unwanted side effects such
as alcohol potentiation (increased alcohol toxicity), anxiety, sedation,
impaired memory and learning, delirium and hallucinations.
TECHNOLOGY AND PRODUCT DEVELOPMENT
As described below, the Company's product discovery and development
programs are focused on three technology platforms: GABA receptor enhancers
or Epalons; glutamate antagonists; and ICE-like protease inhibitors. CoCensys
currently has two compounds in clinical trials. Its lead epalon, CCD 1042 or
ganaxolone, is in separate Phase II trials for pediatric epilepsy, adult
epilepsy and migraine, and its lead glutamate antagonist, ACEA 1021, is
nearing completion of Phase I trials. There can be no assurance that the
Company's clinical trials will be completed, that they will demonstrate the
safety and efficacy of any products or that they will result in marketable
products.
GABA RECEPTOR ENHANCERS OR EPALONS
The Company's proprietary Epalon compounds are based on the discovery by
CoCensys scientists of a novel neuroreceptor site located on the type A of
the gamma-amino butyric acid ("GABA-A") receptor complex, and the molecules,
or ligands, that specifically interact with that receptor site. GABA
(gamma-amino butyric acid) is the predominant inhibitory neurotransmitter in
the brain. Numerous brain activities are affected by the degree to which GABA
opens the chloride channels that allow the calming of neurons. A decrease in
GABA activity allows neurons to remain excited for longer periods, which can
lead to anxiety and at the extreme, convulsions. A significant increase in
levels of GABA activity can result in sedation and sleep. GABA binds to
GABA-A receptor complexes to calm excited neurons. When a transmitting
neuron sends a signal, it also stimulates a nearby modulatory neuron, which
releases GABA across the space between the neurons to the stimulated neuron.
When GABA binds with its receptor, it opens a chloride channel in the
membrane of the stimulated neuron, admitting chloride ions that calm the
excited neuron. Thus, the GABA-A receptor complex acts as a gating mechanism
that permits the flow of chloride ions into the neuron, thereby inhibiting
neuronal activity. Research conducted by the Company and others indicates
that augmentation of the functions of the GABA-A receptor-gated chloride
channel may be beneficial in the treatment of disease states such as
epilepsy, migraine, anxiety and insomnia.
The Company's founders were among the first to demonstrate that an
endogenous (naturally occurring) class of related ligands (molecules that
interact specifically with receptors), called Epalons, modulates the activity of
GABA in opening the chloride channel at the GABA receptor complex. Studies
indicate that Epalons themselves have no direct activity on the chloride
channel. However, Epalons modulate the GABA receptor by enhancing the
ability of GABA-A to
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COCENSYS PRODUCTS IN DEVELOPMENT
<TABLE>
<CAPTION>
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PRODUCTS INDICATIONS STATUS COMMERCIALIZATION
RIGHTS
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<S> <C> <C> <C>
GABA-A RECEPTOR
ENHANCERS:
CCD 1042 Epilepsy, including complex Phase II clinical testing for CoCensys
(Anticonvulsant) partial seizures and infantile spasms and complex
infantile spasms partial seizures in adults
CCD 1042 Migraine Phase II clinical testing began CoCensys
(Anti-migraine) in March 1997
CCD 3693 Insomnia Pre-clinical CoCensys/G.D. Searle & Co.
(Sedative/Hypnotic)
Co 6-0549 Anxiety disorders Pre-clinical CoCensys
(Anxiolytic)
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GLUTAMATE
ANTAGONISTS:
ACEA 1021 Stroke Phase I clinical testing CoCensys/Novartis
Head injury Pre-clinical
SSNRAs Cerebral ischemia, Research CoCensys/Warner-Lambert
Parkinson's disease,
epilepsy
and chronic pain
AMPA Antagonists Neurodegenerative Research CoCensys
disorders
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ICE-LIKE PROTEASE INHIBITORS:
ICE-like Protease Neurodegenerative Research CoCensys
Inhibitors disorders
(Apoptosis)
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</TABLE>
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open the chloride channel. Thus, Epalons work only when GABA is present. In
animal models, this modulatory activity has been shown to be a natural function
of Epalons.
The Company's scientists have synthesized several hundred analogs of
naturally occurring Epalons and the Company has selected its development
candidates from this group of synthetic Epalons. The Company's Epalon
development programs target epilepsy, migraine, insomnia and anxiety. In the
United States, the drugs currently prescribed to treat these conditions exceeded
$2.7 billion in sales in 1996.
CCD 1042 OR GANAXOLONE is being developed for oral administration to treat
certain types of epilepsy, including complex partial seizures and infantile
spasm, and migraine. Infantile spasm is a severe form of infantile epilepsy
for which CCD 1042 was granted Orphan Drug designation by the United States
Food and Drug Administration (the "FDA"), in June 1994. In November 1993,
the Company filed an investigational new drug application ("IND") with the
FDA for the treatment of epilepsy and has completed Phase I trials of CCD
1042. The Company commenced Phase II trials at the end of 1994 with
pediatric epilepsy patients and at the end of 1996 for adult epilepsy
patients. Further, the Company filed an IND for migraine in January 1997 and
initiated a Phase II trial in migraine patients in March 1997.
CCD 1042 IN EPILEPSY. Epilepsy is a chronic brain disorder that affects
approximately 1 percent of the world population. In 1996, sales in the United
States of anticonvulsant drugs amounted to approximately $1.1 billion. Many
drugs used to treat epilepsy are administered in high doses and have the
potential for significant toxicity. In addition, these drugs also have
nonspecific interactions with receptors throughout the brain, resulting in
significant side effects, including sedation and adverse impacts on learning and
memory. Animal studies conducted by the Company, which included side-by-side
comparisons with existing anti-epileptic drugs, suggest that CCD 1042 has a
broad profile of anti-seizure activity and a favorable side-effect profile.
Based upon these studies, the Company believes that CCD 1042 may have
therapeutic potential in a variety of seizure types.
The Company has completed Phase I clinical trials of CCD 1042 in 163
healthy volunteers. These trials provided a preliminary indication of the
drug's safety, tolerability and pharmacokinetics. No significant adverse
effects were observed. A Phase II clinical trial has been completed in
France in pediatric patients with epilepsy refractory to current treatments.
The Company announced in November 1996 that the study showed a clinically
meaningful response in this difficult to treat patient population. Similar
Phase II pediatric trials are ongoing in France and the United States and, if
the results are favorable, the Company anticipates beginning a Phase III U.S.
trial in patients with infantile spasm by early 1998.
CoCensys also initiated a Phase II U.S. trial in adult epilepsy patients
at the end of 1996. The Company expects to announce results of the Phase II
trial and, if the results are favorable, initiate a Phase III trial by early
1998.
CCD 1042 IN MIGRAINE. Migraine, a severe and frequently debilitating
headache, is the most common neurological disorder. It is estimated that more
than 10 million people in the United States suffer some degree of recurrent
migraine headaches. In 1995, the worldwide market for migraine prescription
drugs was approximately $1.2 billion, and it is estimated that the market will
grow to over $4.0 billion by the year 2000.
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The underlying cause of migraine is poorly understood, but the pain has
long been believed to arise from the dilation of blood vessels in a layer of the
brain lining. Recent findings, however, suggest that the local inflammation
caused by substances released by nerve endings attached to those blood vessels
may exacerbate the pain. Most of the currently approved drugs as well as those
in development for migraine are targeted at regulating dilation of the blood
vessels in the brain lining. The Company believes CCD 1042 may play a major
role in decreasing the inflammation that follows the dilation of the blood
vessels and help relieve the pain.
In preclinical studies conducted by researchers at Massachusetts General
Hospital, a teaching hospital for the Harvard Medical School, naturally
occurring Epalons were shown to suppress the inflammation that can occur in the
brain lining. This inflammation is believed to be associated with the symptoms
of migraine. Moreover, these studies showed that CCD 1042 is potently effective
in the same animal model of migraine. Using preclinical and clinical data
generated on the compound through the epilepsy program, CoCensys filed an IND
for migraine in January 1997 and initiated a 250-patient, placebo-controlled
Phase II trial for this indication in March 1997.
CCD 3693 is being developed in conjunction with G.D. Searle & Co. ("Searle")
for the treatment of insomnia. CCD 3693 appears to have a therapeutic
profile superior to naturally occurring Epalons in animal models for
insomnia. The companies anticipate initiating Phase I clinical studies in
Europe in mid-1997 and, if the results are favorable, starting U.S. Phase II
trials by early 1998.
In 1996, sales in the United States of drugs to treat insomnia amounted to
over $400 million. Currently the prescription market for the treatment of
insomnia is largely served by Ambien-Registered Trademark-, which works on a
specific sub-type of the benzodiazepine receptor. Ambien is a "Schedule 4"
drug, meaning it may have limited potential to cause physical or psychological
dependence. Current hypnotic drugs may affect short-term memory, cause rebound
insomnia and have "day after" effects. Searle and CoCensys are working in
conjunction to develop CCD 3693 for insomnia and believe the compound, because
of its different mechanism of action, may have a more favorable side-effect
profile.
CO 6-0549 has been identified as the Company's lead Epalon compound for
pre-clinical development as a treatment for anxiety. Because of its highly
specific and natural mode of action, the Company believes that its class of
anxiolytic Epalons may prove to have a more favorable ratio between efficacy and
side effects in treating anxiety disorders than existing drug therapies.
Sales of drugs in the United States to treat anxiety disorders amounted to
over $600 million in 1996. This market is currently being served by a class of
drugs called benzodiazepines, such as Valium-Registered Trademark- and
Xanax-Registered Trademark-, and to a lesser extent, by drugs such as
BuSpar-Registered Trademark-, which works on the serotonin receptor.
Benzodiazepines cause several serious side effects, including sedation,
potentiation of alcohol toxicity, cognitive impairment and abuse potential.
BuSpar, while exhibiting fewer side effects than benzodiazepines, requires up to
several days of administration before producing a therapeutic effect.
In side-by-side animal model studies conducted by the Company, Co 6-0549
has been shown to use different receptors and to have pharmacologic profiles
that differ from the currently marketed
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anxiolytic drugs. The Company anticipates partnering the development and
commercialization of this program in 1997.
GLUTAMATE ANTAGONISTS
The Company's proprietary glutamate antagonist program includes three
classes of compounds. To date, two programs are targeted at the
N-methyl-D-aspartate ("NMDA") receptor complex and a third focuses on the
amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid ("AMPA") receptor.
Glutamate is the most abundant excitatory amino acid in the central nervous
system and is the principal excitatory neurotransmitter in the brain. Glutamate
triggers three major receptor complexes in the brain: NMDA, AMPA and Kainate.
Glutamate's effect on these receptors enables brain cells to direct cognition,
memory, movement and sensation. However, glutamate can over-stimulate neurons,
which can lead to neuronal death if not stopped. When over-stimulated neurons
die, they release more glutamate, triggering a cascade of similar reactions in
other neurons that may continue for hours or even days, thereby producing
significant brain damage in stroke patients or a worsening condition in
individuals with neurodegenerative disorders such as schizophrenia, epilepsy and
Alzheimer's disease.
The NMDA receptor has binding sites for a number of different agents,
including glutamate and glycine. When these neurotransmitters bind to the NMDA
receptor complex, a calcium ion channel is opened that permits calcium ions to
enter and over-stimulate the neuron. A number of compounds that block the
effect of glutamate on the NMDA receptor have been tested by others in animal
models of stroke and head trauma and have been found to be effective in
preventing the ischemic cascade, thereby limiting brain damage. However, some
of these drugs block the influx of calcium ions to the neuron by binding to the
phencyclidine ("PCP") binding site located on the interior of the ion channel
associated with the NMDA receptor. While this leads to effective nerve cell
protection, it also produces the psychotic side effects, such as hallucination
and agitation, associated with the drug PCP.
Like the NMDA receptor/ion channel complex, the AMPA receptor is also
associated with an ion channel. However, in contrast to NMDA receptors, the
AMPA receptor/ion channel complex is relatively less permeable to calcium.
Long-lasting over-activation of AMPA receptors by glutamate, such as is believed
to occur in chronic neurodegenerative diseases and in global brain ischemia
(e.g., after cardiac arrest), is believed to result in a slow over-stimulation
of the neurons by calcium, resulting in slowly progressing nerve cell
degeneration.
GLYSTASINS are compounds that target the glycine site on the NMDA receptor
complex. Research indicates that glycine acts as a modulator or co-transmitter
with glutamate on the NMDA receptor, so blocking its action would lessen the
effects of glutamate on neurons. CoCensys has synthesized a series of
proprietary compounds, called glystasins, that are strong antagonists of the
glycine receptor on the NMDA receptor complex.
ACEA 1021 IN STROKE AND HEAD INJURY. Cerebral ischemia is oxygen deprivation to
the brain that may occur when blood flow is interrupted by stroke or head
injury. No drugs that effectively address this market are commercially
available. There are approximately 500,000 strokes per year
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in the United States. It is estimated that costs associated with strokes
exceed $25 billion annually in healthcare expenses and lost productivity in
the United States.
The Company is developing its lead glystasin, ACEA 1021, jointly with
Novartis. The Company filed an IND in December 1994 for cerebral ischemia
resulting from stroke. CoCensys completed short-term infusion Phase I studies
in healthy volunteers and stroke patients in 1995 and 1996, respectively.
Results of these studies showed no evidence of serious side effects, including
PCP-like psychosis, agitation or adverse cardiovascular effects. The Company
currently is completing its safety testing.
SUBTYPE-SELECTIVE NMDA RECEPTOR ANTAGONISTS ("SSNRAs") are antagonist drugs that
selectively block only one of the NMDA receptor subtypes. Recent gene cloning
studies have identified at least four different NMDA receptor subtypes, each of
which has a distinct anatomical distribution in the brain. CoCensys has
discovered several novel classes of drugs that selectively target one subtype,
without producing an effect on other subtypes on which no such effect is
desired. In animal models, SSNRAs appear to be free of side effects seen with
other NMDA antagonists that block all four subtypes.
SSNRAs effectively cross the blood-brain barrier and have exhibited
efficacy in animal models of cerebral ischemia, Parkinson's Disease, epilepsy
and chronic pain. Unlike glystasins, some SSNRAs have been shown to have IN
VIVO efficacy after oral administration in an animal model of Parkinson's
disease, suggesting oral bioavailability in this class of compounds. The
Company believes SSNRAs are potential drug candidates for a variety of
neurological and psychiatric diseases, including cerebral ischemia, Parkinson's
disease, epilepsy and chronic pain and is working with its collaborative
partner, Warner-Lambert, to identify and develop SSNRA product candidates for a
broad range of CNS diseases.
AMPA RECEPTOR ANTAGONISTS prevent glutamate from activating the AMPA receptor
and are believed to prevent or slow calcium entry into neurons. Calcium entry
into neurons through AMPA receptors is believed to play a role in nerve cell
destruction in chronic neurodegenerative diseases. AMPA receptor antagonists
have shown neuroprotective efficacy in animal models of global cerebral ischemia
(such as may occur following cardiac arrest or near drowning), epilepsy and
pain. They also are believed to have potential as therapeutic agents in chronic
neurodegenerative diseases.
CoCensys scientists have discovered several different chemical classes of
novel AMPA receptor antagonists and are working to develop compounds through
this program that may prove useful in the treatment of diseases such as
Parkinson's disease, Alzheimer's disease, schizophrenia, Huntington's disease,
amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease) and other
neurodegenerative disorders. The Company anticipates partnering this program.
ICE-LIKE PROTEASE INHIBITORS
Cell death is a natural physiological process that occurs during embryonic
development as well as during remodeling of certain adult tissues. This natural
loss of cells, called apoptosis or programmed cell death, occurs by a discrete
series of molecular events. Apoptosis can also be triggered inappropriately in
many diseases (including stroke, heart disease and certain
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neurodegenerative disorders) and this pathological form of apoptosis is
thought to play an important role in the loss of cells that occurs in these
diseases.
There are a number of proteins that cause pathological apoptosis, but the
most important are the Interleukin-1-B Converting Enzyme ("ICE") proteases.
These enzymes are activated by inducers of apoptosis; they subsequently degrade
important cellular components, such as those that control cell shape or genetic
integrity, and their activity ultimately leads to the cell's demise. Inhibitors
of the ICE proteases are potent cytoprotective agents IN VITRO, a finding which
has established the central role these enzymes play in cell death. The ICE
proteases act at a proximal step in the "apoptotic cascade," so drugs that block
their activity can abort pathological apoptosis during the early phase of the
process. Because of these properties, the ICE proteases are considered to be an
important new class of targets for anti-apoptotic drugs.
CoCensys has an early stage discovery project focused on discovering novel
small molecule, non-peptide inhibitors of the ICE proteases. Such compounds may
have major advantages over the existing peptide-based ICE inhibitors, including
increased bioavailability, lower systemic toxicity and greater IN VIVO
stability.
SALES AND MARKETING
The Company's Pharmaceutical Sales and Marketing Division, established in
1994 to co-promote other companies' commercialized drugs, is one component of
the Company's strategy to generate non-equity funding. By focusing on the
neurologic and psychiatric markets, the sales organization is providing a
specialized, valuable service to pharmaceutical companies and is establishing a
presence in CoCensys' target markets. The division currently promotes Parke-
Davis' Cognex for the treatment of Alzheimer's disease and Somerset
Pharmaceuticals, Inc.'s ("Somerset") Eldepryl for the treatment of Parkinson's
disease. The Company is working to secure in-licensing or additional co-
promotion agreements for psychiatry and neurology products.
COLLABORATIVE ARRANGEMENTS
NOVARTIS
In May 1994, the Company entered into a collaboration with Novartis A.G.,
then Ciba-Giegy Limited, for the development and commercialization of ACEA 1021,
the Company's lead compound for the treatment of stroke and head injury, along
with its back-up compounds (the "Novartis R&D Agreement").
The Novartis R&D Agreement obligates the parties to share development costs
of ACEA 1021 for the U.S. market. The parties will co-promote ACEA 1021 in the
United States and share equally the profits generated, if any. Novartis will
have the exclusive right to develop and market the compound, at its own cost,
for markets outside the United States, subject to specified royalty payments to
the Company. The Company also will receive milestone payments upon the
occurrence of certain events in the course of the development of ACEA 1021 for
the U.S. and Japanese markets. Either party may terminate its participation
voluntarily, upon notice to the other party. In the event of a termination by
Novartis, the Company would regain all development and marketing rights, subject
to reimbursement to Novartis of its development costs out of proceeds
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from any sales of ACEA 1021. If CoCensys were to elect to terminate,
Novartis would be granted exclusive rights for the U.S. market, in addition
to its rights outside the United States, subject to a specified royalty
payment to CoCensys on worldwide sales. There can be no assurance that the
Company will have the substantial resources required to fulfill its
obligations under the Novartis R&D Agreement. If the Company is unable to
fulfill these obligations, it may forfeit rights thereunder. As part of the
collaboration, Novartis purchased $7.0 million of CoCensys Common Stock.
The Company also entered into a promotion agreement in May 1994 with an
U.S. affiliate of Novartis for the promotion of certain psychiatry drugs.
That agreement terminated December 31, 1996.
WARNER-LAMBERT
In October 1995, the Company entered into a relationship with
Warner-Lambert, and its Parke-Davis division, to develop and market therapeutic
drugs for the treatment of CNS disorders. This two-part arrangement consists of
the Warner Collaboration Agreement, for the worldwide development and
commercialization of SSNRAs and the Parke-Davis Promotion Agreement, pursuant to
which the Company promotes Parke-Davis' drug Cognex.
Under the Warner Collaboration Agreement, the parties are conducting a
research program directed toward the identification of SSNRAs as development
candidates. The parties are obligated to make specified contributions to global
development costs with respect to any development candidates and will co-promote
any approved products in the United States. Promotion costs of, and profits
from, any products arising under the Warner Collaboration Agreement will be
shared equally in the United States and Japan. In all other countries, Warner
will have the exclusive right, at its expense, to commercialize any products
arising under the Warner Collaboration Agreement and will pay CoCensys a royalty
on net sales of such products. Upon the achievement of certain clinical
development and regulatory milestones, Warner will make nonrefundable milestone
payments to CoCensys. Either party may terminate its participation voluntarily.
In the event of a termination by either party during the research period, the
terminating party would forfeit all rights and obligations to co-develop and
co-promote any compounds arising thereunder, subject to a specified royalty
payment to the terminating party, and would be precluded from conducting
additional research in the SSNRA field for a fixed period of time. After the
research period, each party may terminate on a product-by-product basis. In the
event of such termination, the terminating party would forfeit all rights and
obligations to co-develop and co-promote such product, subject to a specified
royalty payment to the terminating party. There can be no assurance that
CoCensys will have the substantial resources needed to fulfill its research,
development and commercialization obligations under the Warner Collaboration
Agreement. If CoCensys is unable to fulfill such obligations, it may be
required to terminate early under the Collaboration Agreement and forfeit its
rights thereunder.
Pursuant to the Warner Collaboration Agreement, Warner-Lambert purchased
$2.0 million of CoCensys common stock in October 1995 and an additional $2.0
million of CoCensys common stock in March 1997.
The original Parke-Davis Promotion Agreement entered into in October 1995
was replaced by a new agreement in January 1997. Under the revised Parke-Davis
Promotion Agreement, the Company realizes co-promotion revenues based upon the
number of prescriptions for Cognex
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written by certain targeted neurologists and other doctors during each
quarter, with a guaranteed specified minimum payment. The agreement provides
that funds equal to the specified minimum payment will be advanced to the
Company each quarter to cover training and operating expenses to be incurred
by the CoCensys sales force to promote Cognex. The agreement is scheduled to
terminate December 31, 1997. Either party has the right to terminate the
Promotion Agreement earlier, without cause.
SOMERSET PHARMACEUTICALS
In January 1996, the Company and Somerset entered into the Somerset
Promotion Agreement, pursuant to which the Company promotes Somerset's drug,
Eldepryl, to neurologists in the United States for the treatment of Parkinson's
disease. The initial term of the Somerset Promotion Agreement expires
December 31, 1997, subject to certain provisions for early termination and
renewal. Under the Somerset Promotion Agreement, CoCensys has the exclusive
right to detail Eldepryl to neurologists in the United States. During the term
of the Somerset Promotion Agreement, CoCensys is compensated based upon the
number of details undertaken for Eldepryl, new prescriptions written and sales.
Compensation to CoCensys is subject to adjustment in the event of generic
competition. In addition, such compensation is subject to review in the event
of governmental or other third-party actions that may materially affect it. To
finance a portion of its sales force to promote Eldepryl, CoCensys receives
quarterly advances from Somerset, which are repayable in full at the end of each
quarter. Compensation due CoCensys under the Somerset Promotion Agreement,
together with compensation derived from sales from non-competing products, if
any, will be the primary source of cash the Company intends to use to reimburse
Somerset. There can be no assurance that such compensation will be sufficient
to provide the necessary funds to enable the Company to reimburse Somerset. In
the event these sources of compensation are insufficient, all advances must be
repaid at the end of each quarter out of other cash reserves of the Company.
Failure by the Company to repay any advances could result in termination of the
Somerset Promotion Agreement by Somerset.
G.D. SEARLE & CO.
In May 1996, the Company entered into an agreement with Searle to
jointly develop and commercialize the Company's lead compound for the
treatment of insomnia along with its back-up compounds (the "Searle
Development and Commercialization Agreement"). Under the agreement, both
companies are obligated to pay a portion of the development costs of CCD 3693
and its back-up compounds for the U.S. market. In addition, the Company will
receive nonrefundable milestone payments upon the occurrence of certain
events in the development of the compound. The parties will co-promote in
the United States CCD 3693 or its back-up compound and share any profits,
proportionally. Searle has the exclusive right to develop, register and
market the compound in the rest of the world, subject to specified royalty
payments.
Pursuant to the agreement, Searle paid a $3.0 million license fee and
purchased 100,000 shares of the Company's Series B Convertible Preferred Stock
for $7.0 million. The preferred stock is convertible to common stock on May 17,
1998, or earlier at the Company's discretion. The number of shares issuable
upon conversion shall be equal to $7.0 million divided by the then current
common stock price (subject to certain minimum and maximum limits).
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MANUFACTURING
The Company is currently relying on third-party manufacturers to produce
its compounds for preclinical studies and clinical trials. The Company expects
to continue in the foreseeable future to rely on such third-party manufacturers
for adequate supply of products needed for subsequent clinical trials and,
ultimately, for commercial distribution. However, there can be no assurance
that the Company will be successful in arranging for adequate supplies of its
products on acceptable terms, or at all.
The Company believes that all of its compounds will be produced using
traditional pharmaceutical synthesis. The Company also believes that there is
currently adequate worldwide capacity for the production of its compounds and
that the Company will be able to establish commercially reasonable arrangements
for the long-term supply of its products for clinical trial purposes and for
commercialization, if such compounds receive required regulatory approvals.
Generally, the equipment required for the manufacture of the Company's compounds
is commercially available and is widely used in pharmaceutical industry
operations.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and in other countries. The Company's
policy is to file patent applications to protect technology, inventions, and
improvements that are important to the development of its business. The Company
also relies upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain its competitive position.
The Company files and prosecutes patent applications both on its own
behalf and in connection with technology licensed from others. CoCensys has
12 issued patents. Another 25 are pending, of which six have been allowed in
the United States. Certain of the pending, issued and allowed patents are
owned by the University of Southern California and the Rockefeller
University; the University of California; or the University of Oregon; and
have been exclusively licensed to CoCensys. In December 1996, CoCensys
received an exclusive license to a patent application filed by Massachusetts
General Hospital for the use of neuroactive steroids, including epalons, to
treat migraine. CoCensys has made related patent filings in selected foreign
countries, and intends to file additional domestic and foreign applications
as appropriate. The Company's issued and allowed patents relate to certain
aspects of the Company's Epalon and glutamate antagonist compounds. The
Company's patent applications include claims for processes, methods and
therapeutic uses, as well as composition of matter claims for compounds which
the Company believes are not naturally occurring or previously known. There
can be no assurance that the Company will develop additional products or
processes that are patentable, that patents will issue from any more of these
applications, or that claims allowed will be sufficient to protect the
Company's technology.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be denied or
significantly reduced before the patent is issued. Consequently, the Company
does not know whether any more of its applications will result in the issuance
of patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are
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maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it was the first to discover
subject matter covered by its patent applications or patents or that it was
the first to file patent applications for such inventions. Moreover, the
Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office or litigation to determine priority
of invention, which could result in substantial cost to the Company, even if
the eventual outcome is favorable to the Company. The Company is aware of a
patent application containing claims which, if covered by a valid, issued
patent, could block the use of the Company's glutamate receptor antagonists
as adjunct therapy in an indication for which the Company is currently
conducting research. The Company is also aware of a patent that has issued
that contains claims which may, if valid, block the Company from selling
certain compounds for one particular indication not currently being pursued
by the Company. In the event the Company proceeds with an interference or
interferences, there can be no assurance that the Company will be successful.
There can be no assurance that the Company's patents, if issued, would be
held valid and infringed by a court of competent jurisdiction. An adverse
outcome with regard to a third-party claim 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.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
this field which may conflict in certain respects with claims made under the
Company's applications. Such conflict could result in a significant reduction
of the coverage of the Company's patents, if issued. In addition, if patents
are issued to other companies which contain competitive or conflicting claims
and such claims are ultimately determined to be valid, the Company may be
required to obtain licenses to these patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance that the
Company will be able to obtain any such licenses on commercially favorable
terms, if at all. The Company's breach of an existing license or failure to
obtain a license to any technology that it may require to commercialize its
products may have a material adverse impact on the Company.
The Company also relies upon trade secret protection for its confidential
and proprietary information. Third parties may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, in which
case the Company may not be able to protect its trade secret rights.
The Company requires its employees, consultants, members of the Clinical
Advisory Boards, outside scientific collaborators and sponsored researchers and
other consultants and advisors to execute confidentiality agreements upon the
commencement of employment or consulting relationships with the Company. These
agreements provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with the
Company is to be kept confidential and not disclosed to third parties except in
specific circumstances. In the case of employees, the agreements provide that
all inventions conceived by the individual as a result of work performed for the
Company or relating to the Company's business shall be the exclusive property of
the Company. These agreements may not provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
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GOVERNMENT REGULATION
The Company's research, preclinical development and clinical trials, as
well as the manufacturing and marketing of its potential products, are subject
to extensive regulation by governmental authorities in the United States and
other countries. The Company currently is conducting clinical trials in the
United States and Europe. Clinical trials and the marketing and manufacturing
of the Company's potential products will be subject to the rigorous testing and
approval processes of the FDA and the independent processes of foreign
regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing and marketing of products. Furthermore, there can be
no assurance that any approvals will be granted on a timely basis. Data
obtained from preclinical and clinical trials are subject to varying
interpretations which can delay, limit or prevent FDA approval. Similar delays
may be encountered in foreign countries. Delays and costs in obtaining
regulatory approvals would adversely affect the marketing of products developed
by the Company and the Company's ability to receive product revenues or
royalties.
If regulatory approval of a drug is obtained, such approval may involve
limitations and restrictions on the drug's use. In addition, any marketed drug
and its manufacturer are subject to continual review and any discovery of
previously unrecognized problems with a product or manufacturer could result in
suspension or limitation of approvals or withdrawal of the product from the
market. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecution. Furthermore, additional government regulation may be established
that could prevent or delay regulatory approval of the Company's potential
products. To market its products abroad, the Company also must satisfy foreign
regulatory requirements, implemented by foreign health authorities, governing
human clinical trials and marketing approval. The foreign regulatory approval
process includes all of the risks associated with FDA approval set forth above.
There is no assurance that a foreign regulatory body will accept the data
developed by the Company for any of its products.
Under the Orphan Drug Act, the FDA may designate a product as an orphan
drug, or one that addresses a "rare disease or condition" affecting populations
of fewer than 200,000 individuals in the United States. An orphan drug may also
treat victims of a disease numbering more than 200,000 if the sponsor
establishes that it does not realistically anticipate its product sales will be
sufficient to recover its costs. If a product is designated an orphan drug,
then the sponsor is entitled to receive certain incentives to undertake the
development and marketing of the product. In addition, the sponsor that obtains
the first marketing approval for a designated orphan drug for a given rare
disease is eligible to receive marketing exclusivity for a period of seven
years. CCD 1042 has been granted orphan drug designation for the treatment of
infantile spasms, and, where appropriate, the Company may apply for orphan drug
designation for other indications and/or other drug products. There is no
assurance that CoCensys would be the first sponsor to obtain marketing approval
or that the FDA would grant orphan drug designation or marketing exclusivity for
any such indications or products.
The Company is not currently marketing or promoting any of its own drugs in
the United States or elsewhere. The Company has, however, entered into
collaborations with Novartis, Parke-Davis and Somerset for the promotion of
certain drugs manufactured by these companies. The Company concluded its
agreement to promote drugs for Novartis on December 31, 1996.
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Although the Company is not responsible for fulfilling regulatory
requirements with respect to approval or manufacturing of these drugs, the
Company is responsible for complying with FDA's regulations governing
labeling and promotional activities. Generally, labeling, advertising and
other promotional materials are prepared by the manufacturer, and the
manufacturer is responsible for regulatory compliance. Nevertheless, as a
distributor of the drugs, CoCensys could be liable for regulatory violations
if it distributes a drug in interstate commerce in the United States that is
misbranded or adulterated. In marketing its partners' products, CoCensys and
its employees are responsible for any oral or written representation that
CoCensys personnel may make or endorse which cause any such products to be
misbranded, even though CoCensys may be implementing a marketing strategy
developed for approval by its partners or distributing its partners'
promotional materials. The Company also would be subject to penalties for
adulteration or misbranding that results from acts or omissions by CoCensys
or its employees or agents. Moreover, even if CoCensys is not subject to
other penalties, adulterated or misbranded drugs in CoCensys' possession may
be seized and condemned, regardless of whether the Company is responsible for
the adulteration or misbranding. Such products may also be the subject of a
voluntary recall, and CoCensys could be enjoined from further distribution of
the products. All of these events could have a significant effect on
CoCensys' revenues from the sale of co-promotion products.
To market its products abroad, the Company also must satisfy foreign
regulatory requirements, implemented by foreign health authorities, governing
human clinical trials and marketing approval. Until recently, marketing
authorizations in Europe were applied for only at a national level. In order to
market a drug throughout the European Union ("EU"), it was necessary to submit
separate applications to each of the 15 EU medicines agencies. It is now
possible (and, in some cases, compulsory) for a manufacturer of biotechnology
products and certain high technology products simply to submit a single
application to a central EU agency-the European Medicines Evaluation Agency
("EMEA"). Approval by the EMEA will give the manufacturer access to the markets
of all EU member states. Manufacturers of medicinal products other than those
handled by the EMEA currently have the option of either continuing to file
individual applications in each of the EU member states or utilizing a "mutual
recognition" procedure. Under this procedure, which will become mandatory in
January 1998, application is made first to the medicines agency of any one
member state, after which the approval gained in that state is used as the basis
for a request to the other member states to recognize the first approval and
grant a parallel authorization on the strength of that initial approval.
Approvals in the other member states are to follow as a matter of course, unless
there is an objection on the grounds of a safety or efficacy problem. In the
event that such an objection is made, the issue is submitted to the EU's
Committee on Proprietary Medicinal Products ("CPMP") for resolution.
Notwithstanding these simplified procedures, the foreign regulatory approval
process includes all of the risks associated with FDA approval set forth above.
There is no assurance that the EMEA or the national regulatory agency in any
member state will accept the data developed by the Company for any of its drug
products and grant a marketing authorization.
In both domestic and foreign markets, sales of the Company's products, if
any, will depend, in part, on the availability of reimbursement from third-party
payers, such as government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's products
will be considered cost effective or that adequate third-party reimbursement
will be available to enable CoCensys to maintain price levels sufficient to
realize an appropriate return on its investment in product development. In
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certain foreign markets, the Company's products may be subject to governmentally
mandated prices. If adequate reimbursement is not provided by governments and
third-party payers for the Company's potential products or if adverse pricing is
mandated by foreign governments, the Company's business, financial condition and
results of operations would be materially adversely affected. Legislation and
regulations affecting the formula for pricing pharmaceuticals may change before
the Company's products are approved for marketing.
COMPETITION
Competition for therapeutic products that address brain disorders is
intense and expected to increase. The Company's most significant competitors
are fully integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical
companies. In addition, the Company faces competition from academic
institutions, governmental agencies, and other public and private research
organizations that conduct research, seek patent protection, and establish
collaborative arrangements for product and clinical development and marketing.
Furthermore, these companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and human clinical trials of new pharmaceutical products and obtaining
FDA approval for products. Furthermore, if the Company is permitted to commence
commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities.
Any product that the Company succeeds in developing and for which it gains
regulatory approval must then compete for market acceptance and market share.
For certain of the Company's potential products, an important competitive factor
will be the timing of market introduction. Accordingly, the Company expects
that important competitive factors will be the relative speed with which
companies can develop products, complete the clinical testing and approval
processes and supply commercial quantities of the product to the market. With
respect to clinical testing, competition may delay progress by limiting the
number of clinical investigators and patients available to test the Company's
potential products.
The Company competes with many other companies that currently have
extensive and well-funded marketing and sales operations. There can be no
assurance that the Company's marketing and sales efforts will compete
successfully against such other companies or that additional co-promotion
arrangements will be established.
In addition to the above factors, competition is based on product efficacy,
safety, the timing and scope of regulatory approvals, availability of supply,
marketing and sales capability, reimbursement coverage, price and patent
position.
HUMAN RESOURCES
As of December 31, 1996, the Company had 176 full-time employees, with 72
directly involved in sales and marketing, 78 directly involved in research and
development programs and 26
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providing general and administrative support. The research and development
staff includes 35 employees with doctoral degrees and nine medical doctors.
The Company believes its employee relations are good.
BUSINESS RISKS
THE COMPANY'S BUSINESS IS SUBJECT TO THE FOLLOWING RISKS IN ADDITION TO THOSE
DISCUSSED ABOVE AND ELSEWHERE IN THIS REPORT.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY. CoCensys is at an
early stage of development. All of its products are in research and
development, and no revenues have been generated from sales of its products.
The physiology of brain disorders is highly complex, and the causes of these
disorders are not fully known. All of the compounds currently under
development by the Company will require significant additional research and
development, preclinical testing and extensive clinical testing prior to
submission of any regulatory application for commercial use. There can be no
assurance that the Company's research or product development efforts will be
successfully completed, that the compounds currently under development will
be safe and efficacious, that required regulatory approvals can be obtained,
that products can be manufactured at acceptable cost and with appropriate
quality or that any approved products can be successfully marketed or will be
accepted by patients, health care providers and third-party payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TRIALS. Before obtaining
regulatory approvals for the commercial sale of any of its products under
development, the Company must demonstrate, through preclinical studies and
clinical trials, that the product is safe and efficacious for use in each
target indication. None of the Company's products has completed testing for
efficacy in humans and there can be no assurance that results of animal
testing will be replicated in human clinical trials. There can be no
assurance that the Company's clinical trials will be completed, that they
will demonstrate the safety and efficacy of any products or that they will
result in marketable products. There can be no assurance that the Company
will not encounter problems with clinical trials that will cause the Company
to delay or suspend clinical trials. The Company's lead compounds, and all of
the Company's products in research or development, 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 Company's products will ultimately obtain FDA or foreign
marketing approval for any indication or that an approved compound will be
capable of being produced in commercial quantities at a reasonable cost and
successfully marketed. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially
available for several years.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company's
operations to date have consumed substantial amounts of cash. The negative
cash flow from operations is expected to continue and to accelerate in the
foreseeable future. The development of the Company's products will continue
to require a commitment of substantial funds to conduct the research,
preclinical and clinical testing necessary to bring such products to market
and to establish manufacturing and expand marketing capabilities. The
Company's future capital requirements will depend on many
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factors, including the progress of the Company's research and development
programs, the level of co-promotion revenues, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the rate of technological advances,
determinations as to the commercial potential of the Company's products under
development, the status of competitive products, the expansion of sales and
marketing capabilities, the establishment of third-party manufacturing
arrangements and the establishment of additional collaborative relationships.
In addition, in the event the Company fails to achieve targeted sales of
products it co-promotes or may co-promote in the future or incurs greater
sales and marketing expenses than expected, it will experience further cash
shortfalls. The Company will need to raise substantial additional capital to
fund its operations, continue development of its products and bring products
to market. The Company intends to seek required additional funding through
collaborative arrangements and through public or private equity or debt
financings. There can be no assurance that additional financing will be
available on acceptable terms or at all.
COLLABORATIVE ARRANGEMENTS. The Company is party to collaborations with
four corporate partners, each collaboration consisting of either a research,
development and commercialization agreement (a "Collaboration Agreement"), a
promotion agreement, or both. The Company has entered into Collaboration
Agreements with Novartis for the development of ACEA 1021 for stroke and head
injury; Warner-Lambert for research and development of subtype-selective
NMDA receptor antagonists and Searle for the development of CCD 3693 for
insomnia. There can be no assurance that CoCensys will have the substantial
resources needed to fulfill its research, development and commercialization
obligations under the Collaboration Agreements. If CoCensys in unable to
fulfill such obligations, it may be required to terminate early under the
agreements and forfeit substantial rights thereunder.
The Collaboration Agreement with Searle provides that if Searle
terminates voluntarily, it will lose all development and marketing rights to
CCD 3693. However, if Searle were to terminate after the filing of an IND for
CCD 3693, the Company will be required to reimburse Searle for any
development costs borne by Searle out of proceeds from any sales of CCD 3693.
If CoCensys were to terminate, Searle would be granted exclusive worldwide
rights in CCD 3693, subject to a specified royalty payment to CoCensys.
Under its promotion agreements, CoCensys' sales force promotes
Parke-Davis' Cognex and Somerset's Eldepryl. The sales force requires a
substantial commitment of financial and management resources by the Company.
The promotion agreements provide for quarterly advances to the Company from
its partners to support the sales force, which, in the case of Somerset, must
be repaid the following quarter. Compensation to CoCensys from promotion
activities under the Somerset and Parke-Davis promotion agreements are the
primary source of cash the Company intends to use to meet these reimbursement
obligations. Although the amounts advanced under the Parke-Davis promotion
agreement are equal to the minimum payment the Company received for its
promotion efforts, there can be no assurance that compensation under the
Somerset promotion agreement will be sufficient to enable the Company to meet
its reimbursement obligations, in which event advances must be repaid out of
other cash reserves of the Company. Failure by the Company to repay any
advances could result in termination of the applicable promotion agreement.
A promotion agreement between the Company and Novartis concluded at the end
of 1996. There can be no assurance that the Company will be able to replace
the co-
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promotion revenues derived from this relationship with those from another
partner. In the event such replacement revenues are not available, the
Company's financial results could be adversely affected. The promotion
agreements with Parke-Davis and Somerset are scheduled to terminate at the
end of 1997, and there can be no assurance that these relationships will be
extended or that they will be replaced with co-promotion agreements of
equivalent value or at all.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company has
experienced significant operating losses since its inception. As of December
31, 1996, the Company had an accumulated deficit of $83.2 million. Prior to
1994, substantially all of the Company's revenues had been from interest
income. The Company anticipates funding certain of its development efforts
out of profits it may earn in the promotion of other companies' products.
However, in the event that the Company's sales targets are not achieved or
that its sales and marketing expenses are higher than anticipated, such
profits may not be available. In any event, the Company will incur
significant additional operating losses over the next several years. In
addition, if the Company is successful in moving compounds into large-scale
Phase II and Phase III clinical trials, it will incur substantial increases
in research and development expenses, which in turn may cause cumulative
losses to increase substantially.
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVALS. The production and
marketing of the Company's potential products and its ongoing research and
development activities are subject to extensive regulation by governmental
authorities in the United States and other countries. The Company currently
is conducting clinical trials in Europe and the United States. Prior to
marketing in the United States, any drug developed by the Company must
undergo rigorous preclinical (animal) and clinical (human) testing and an
extensive regulatory approval process implemented by the FDA under the United
States Food, Drug and Cosmetic Act. Satisfaction of such regulatory
requirements, which includes satisfying the FDA that the product is both safe
and effective, typically takes several years or more depending upon the type,
complexity and novelty of the product and requires the expenditure of
substantial resources. Clinical trials are rigorously regulated. There can be
no assurance that the Company will not encounter problems in clinical trials
that will cause the Company or the FDA to delay or suspend clinical trials.
If regulatory approval of a product is granted, such approval will be
limited to those disease states and conditions for which the product is
useful, as demonstrated through clinical studies. Furthermore, approval may
entail ongoing requirements for post-marketing studies. Even if such
regulatory approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections. The regulatory standards for manufacturing are currently being
applied stringently by the FDA. Discovery of previously unknown problems with
a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
The Company is also responsible for complying with the FDA's regulations
governing labeling and promotional activities with respect to its
co-promotion products and could be liable for regulatory violations if it
distributes a drug in interstate commerce that is misbranded or adulterated.
In order to market its products abroad, the Company also must comply with
foreign regulatory requirements, implemented by foreign health authorities,
governing the design and process includes all of the risks associated with
FDA approval set forth above, and may introduce additional requirements or
risks. There is no assurance that a foreign regulatory body will accept the
data developed by the Company for any of its products and approval by the FDA
does not ensure approval in other countries.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
success will depend, in part, on its ability to obtain patents, maintain
trade secrets and operate without infringing on the
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propriety rights of others, both in the United States and other countries.
No assurance can be given that patents will issue from any pending
applications, or that, if patents do issue, the claims allowed will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
In addition, the Company may be required to obtain licenses to patents or
other proprietary rights of others. No assurance can be given that any
required licenses can be obtained at a reasonable cost, if at all. If the
required licenses cannot be obtained, the Company could generate additional
costs as it attempts to design around such patents; find that the
development, manufacture or sale of products requiring such licenses is
foreclosed; or incur substantial costs in defending patent infringement
claims. The Company also protects its proprietary technology by
confidentiality agreements with its collaborative partners, employees and
consultants and reliance on trade secrets and know-how. There can be no
assurance that such confidentiality agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known or be independently discovered
by competitors.
DEPENDENCE ON FUTURE COLLABORATIONS; DEPENDENCE ON THIRD PARTIES. The
Company's strategy for the development, clinical testing, manufacturing and
commercialization of its products includes entering into various
collaborations with corporate partners, licensers, licensees and others.
There can be no assurance that the Company will be able to negotiate further
collaborative arrangements on acceptable terms, if at all, or that current or
future collaborative arrangements will be successful. To the extent that the
Company is not able to establish such arrangements, it would experience
increased capital requirements to undertake such activities at its own
expense. In addition, the Company may encounter significant delays in
introducing its products into certain markets or find that the development,
manufacture or sale of its products in such markets is adversely affected by
the absence of such collaborative agreements. To the extent the Company
enters into co-promotion or other licensing arrangements, revenues received
by the Company will depend upon the efforts of third parties, and there can
be no assurance that such parties will devote such efforts or that such
efforts will be successful.
LIMITED SALES AND MARKETING EXPERIENCE. The Company's sales and marketing
organization has only been in place since August 1, 1994. The Company markets
Cognex and Eldepryl directly and intends both to establish relationships with
one or more pharmaceutical companies to market other products and, subject to
successful product development and receipt of requisite regulatory approvals,
to market its own products. To market any products directly, the Company must
continue to develop, and expand, a marketing and sales force with technical
expertise and with supporting distribution capability. There can be no
assurance that the Company will be successful in maintaining and expanding
such a capability or in gaining market acceptance for any products.
COMPETITION; RAPID TECHNOLOGICAL CHANGE. CoCensys is engaged in business in
a rapidly changing field. Competition from fully integrated pharmaceutical
companies, including the Company's collaborative partners, and more
established biotechnology companies is expected to increase. Most of these
companies have significantly greater financial resources and expertise than
the Company in research and development, manufacturing, preclinical and
clinical testing, obtaining regulatory approvals, marketing and distribution.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical companies. Many
of these competitors have significant CNS products approved or in development
and operate large, well-funded CNS research and development programs.
Academic institutions, governmental agencies and other public and private
research organizations also conduct research, seek patent protection and
establish collaborative arrangements for product and clinical development and
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marketing. In addition, these companies and institutions compete with the
Company in recruiting and retaining highly qualified scientific and
management personnel. Further, CoCensys faces competition based on product
efficacy, safety, the timing and scope of regulatory approvals, availability
of supply, marketing and sales capability, reimbursement coverage, price and
patent position. The Company believes Cognex may face increasing competition,
as newer drugs to treat Alzheimer's disease become available. There can be
no assurance that the Company's competitors will not develop more effective
or more affordable products, or achieve earlier patent protection or product
commercialization than the Company.
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS. The Company is
highly dependent on the principal members of its scientific and management
staff, the loss of whose services might significantly delay the achievement
of development objectives. In addition, the Company relies on consultants and
advisors to assist the Company in formulating its research and development
strategy. Attracting and retaining qualified personnel, consultants and
advisors is critical to the Company's success. In order to pursue its product
development and marketing 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,
government regulation, manufacturing and marketing. Growth in product
development and marketing is also expected to require the addition of
management personnel and the development of additional expertise by existing
management personnel. The Company faces competition in hiring qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that
the Company will be able to attract and retain such individuals on acceptable
terms or at all.
LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS. The
Company has no manufacturing facilities for clinical or commercial production
of any compounds currently under development and relies on contract
manufacturers to produce its compounds for preclinical and clinical purposes
and intends to rely on contract manufacturers for commercial production. The
pharmaceutical products under development by the Company have never been
manufactured on a commercial scale and there can be no assurance that such
products can be manufactured in commercial quantities at an acceptable cost.
The Company intends to establish arrangements with contract manufacturers to
supply compounds for subsequent clinical trials as well the manufacture,
packaging, labeling and distribution of its products. If the Company is
unable to contract for sufficient supply of its compounds on acceptable
terms, the Company's preclinical and human clinical testing schedule would be
delayed, resulting in the delay of submission of products for regulatory
approval and initiation of new development programs, which would have a
material adverse effect on the Company. If the Company should encounter
delays or difficulties in establishing relationships with manufacturers to
produce, package and distribute its products, market introduction and
subsequent sales of such products would be adversely affected. Moreover,
contract manufacturers that the Company may use must adhere to current good
manufacturing practice regulations enforced by the FDA through its facilities
inspection program. If these facilities cannot pass a pre-approval plant
inspection, FDA pre-market approval of the products will be adversely
affected.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In both domestic and foreign
markets, sales of the Company's products, if any, will depend, in part, on
the availability of reimbursement from third-party payers, such as government
health administration authorities, private health insurers and other
organizations. Third-party payers are increasingly challenging the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of
20
<PAGE>
newly approved health care products. There can be no assurance that the
Company's products will be considered cost effective or that adequate
third-party reimbursement will be available to enable CoCensys to maintain
price levels sufficient to realize an appropriate return on its investment in
product development. In certain foreign markets, the Company's products may
be subject to governmentally mandated prices. If adequate reimbursement is
not provided by governments and third-party payers for the Company's
potential products or if adverse pricing is mandated by foreign governments,
the Company's business, financial condition and results of operations would
be materially adversely affected. Legislation and regulations affecting the
formula for pricing pharmaceuticals may change before the Company's products
are approved for marketing.
RISK OF PRODUCT LIABILITY; AVAILABILITY 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. Although
the Company currently has liability insurance covering its clinical trials
and co-promotion activities, there can be no assurance that such coverage
would be sufficient to cover all potential claims or that the Company will be
able to obtain and maintain such insurance for all of its clinical trials and
current and future co-promotion products. The Company will need to increase
such coverage in the event it commercializes any products under development.
There can be no assurance that the Company will be able to obtain or maintain
product liability insurance in the future on acceptable terms or with
adequate coverage against potential liabilities.
HAZARDOUS MATERIALS. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, 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. The
Company may incur substantial costs to comply with environmental regulations
if the Company develops manufacturing capacity.
UNCERTAINTY OF ORPHAN DRUG DESIGNATION. Under the Orphan Drug Act, the FDA
may designate a product as an orphan drug. An orphan drug is a drug intended
to treat a "rare disease or condition," which is a disease or condition that
affects populations of less than 200,000 individuals in the United States or,
if victims of a disease number more than 200,000, the sponsor establishes
that it does not realistically anticipate its product sales will be
sufficient to recover its costs. CCD 1042 has received orphan drug
designation for its use in treating infantile spasm. If a product is
designated an orphan drug, then the sponsor is entitled to receive certain
incentives to undertake the development and marketing of the product,
including limited tax credits and high-priority FDA review of a New Drug
Application ("NDA"). In addition, the sponsor that obtains the first
marketing approval for a designated orphan drug for a given rare disease is
eligible to receive marketing exclusivity for a period of seven years. There
may be multiple designations of an orphan drug for different rare diseases.
However, only the sponsor of the first approved NDA for a given drug for its
use in treating a given rare disease may receive marketing exclusivity. There
can be no assurance that the precise scope of protection that is currently
afforded by orphan drug designation will be available in the future or that
the current level of exclusivity and tax credits will remain in effect.
PRICE VOLATILITY. The securities markets have from time to time experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of particular companies. In addition, the market prices
of the common stock of many publicly traded biopharmaceutical
21
<PAGE>
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the
Company or its competitors, regulatory developments in both the United States
and foreign countries, public concern as to the safety of biotechnology
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant
impact on the market price of the Company's Common Stock. The Company's
products are in an early stage of development and face a high degree of
technological, regulatory and competitive risks. Drug discovery and
development are capital-intensive activities, and there can be no assurance
the Company will be able to raise the additional capital necessary to develop
and commercialize products. Human clinical trials require considerable time
and funding, and results from any stage of testing may not predict results of
later stages. In addition, if results of any clinical trial fail to meet the
Company's requirements, the study plan for such compound may be adjusted or
another compound may be substituted, either of which may result in delays in
future clinical studies. Unfavorable results of clinical trials could cause
cancellation of future clinical studies.
The Company has established relationships to manufacture the limited
quantities of its products required for human clinical trials. However, the
Company will need to finance and construct manufacturing facilities or find
other means of securing adequate production capacity before any product
approved for marketing may be launched. No assurance can be given that the
Company can successfully develop any of its products for marketing or that it
can successfully manufacture commercial quantities of any products that are
approved for marketing. Inherent in the fact that CoCensys is an early stage
biopharmaceutical company are a range of additional risks, including the
Company's history of losses, the risk of technological and commercial
competition, uncertainties associated with obtaining and enforcing patents
and protecting proprietary technology and the risk of regulatory change,
among others.
22
<PAGE>
ITEM 2. PROPERTIES
FACILITIES
The Company's administrative offices and research facilities currently
occupy approximately 43,000 square feet of leased space in Irvine, California.
The lease expires in 2002, subject to the Company's earlier right to terminate,
and contains provisions for one five-year renewal option.
The Company leases additional laboratory facilities in Irvine, California
under a twelve-month lease renewable automatically for successive twelve-month
terms, subject to either party's earlier right to terminate.
The Company also leases 8,200 square feet of office space in an adjacent
building in Irvine, California, for the corporate headquarters for sales
operations. This lease expires in 1999, subject to the Company's earlier right
to terminate, and contains a provision for one three-year renewal option.
The Company leases 6,100 square feet of office space for certain sales and
marketing activities in Livingston, New Jersey. This lease expires in 1999 and
contains a provision for one five-year renewal option.
ITEM 3. LEGAL PROCEEDINGS
CoCensys knows of no pending or threatened material litigation or
proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted to a vote of
the stockholders.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
A) MARKET INFORMATION
The Company's Common Stock, par value $ .001 per share, trades on
the Nasdaq National Market System under the symbol "COCN." The following
table presents quarterly information on the price range of the Company's
Common Stock. This information indicates the high and low sale prices
reported by the Nasdaq National Market System. These prices do not include
retail markups, markdowns or commissions.
HIGH LOW
--------- ----------
1996
First quarter $ 8.88 $ 6.38
Second quarter $ 9.88 $ 6.00
Third quarter $ 9.25 $ 5.75
Fourth quarter $ 7.50 $ 5.13
1995
First quarter $ 4.25 $ 2.75
Second quarter $ 5.38 $ 3.75
Third quarter $ 9.50 $ 4.75
Fourth quarter $ 9.00 $ 5.75
B) HOLDERS
As of February 28, 1997, there were 406 holders of record of the Company's
Common Stock.
C) DIVIDENDS
The Company has not paid any dividends since its inception and does not intend
to pay any dividends on its Common Stock in the foreseeable future.
D) RECENT SALES OF UNREGISTERED SECURITIES
On March 5, 1997, the Company issued and sold 324,465 shares of unregistered
Common Stock to Warner-Lambert for $2 million, pursuant to a stock purchase
agreement dated October 26, 1995. The issuance was exempt from registration
under section 4(2) of the Securities Act of 1933, as amended.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Co-promotion revenues
from corporate partners $ 9,085 $ 10,414 $ 7,402 $ - $ -
Co-development revenues
from corporate partners 6,073 1,970 - - -
------------ ------------ ------------ ------------ ------------
Total revenues 15,158 12,384 7,402 - -
Operating expenses:
Research and development 18,771 16,335 10,708 8,474 5,184
Marketing, general and administrative 16,040 14,710 8,534 2,252 1,272
Acquired research and development - - 14,879 - -
------------ ------------ ------------ ------------ ------------
Total operating expenses 34,811 31,045 34,121 10,726 6,456
------------ ------------ ------------ ------------ ------------
Operating loss (19,653) (18,661) (26,719) (10,726) (6,456)
------------ ------------ ------------ ------------ ------------
Interest income 1,304 717 373 735 269
Interest expense (139) (178) (240) (282) (80)
------------ ------------ ------------ ------------ ------------
Net loss $ (18,488) $ (18,122) $ (26,586) $ (10,273) $ (6,267)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss per share $ (0.85) $ (1.05) $ (2.33) $ (1.16) $ (0.88)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Share used in computing
net loss per share 21,782,982 17,288,066 11,405,525 8,890,113 7,152,784
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 17,999 $ 13,449 $ 8,924 $ 16,622 $ 6,035
Working capital 14,434 6,753 3,766 15,427 5,256
Total assets 22,051 18,201 15,216 20,990 9,814
Long-term obligations 324 406 696 969 1,298
Accumulated deficit (83,162) (64,674) (46,552) (19,966) (9,693)
Total stockholders' equity 16,947 10,644 8,547 18,397 7,359
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT.
OVERVIEW
Since its inception in February 1989, the Company has devoted
substantially all of its resources to the discovery and development of
neuropharmaceutical products for the treatment of disorders affecting the
brain. The Company has incurred losses since inception and expects losses to
continue for the foreseeable future, primarily due to the expansion of
programs for research and development. Operating results are expected to
fluctuate as a result of uncertainty in the timing and amount of expenses for
product development and in the timing and amount of revenues to be earned
from the achievement of research and development milestones, promotion of
partners' products and sales of Company products, if any. As of December 31,
1996, the Company's accumulated deficit was approximately $83.2 million.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES
In connection with the Company's promotion agreements, co-promotion
revenues of $9.1 million were realized for the year ended December 31, 1996,
compared to $10.4 million and $7.4 million in 1995 and 1994, respectively.
The decrease in 1996 was primarily related to the declining market for the
products under a promotion agreement with Novartis (formerly Ciba-Geigy).
This decrease was partially offset by the recognition in 1996 of $2.3 million
of revenues from Novartis related to 1994 and 1995 co-promotion activities.
The promotion agreement with Novartis was concluded on December 31, 1996, and
there will be no further co-promotion activity under the agreement. In
addition, in 1996 the Company realized co-promotion revenues from the
Parke-Davis Promotion Agreement which began in October 1995, and the Somerset
Promotion Agreement which began in January 1996.
In connection with its development agreements, the Company realized $6.1
million in co-development revenues for the year ended December 31, 1996,
compared to $2.0 million in 1995. The increase is primarily attributable to
the one-time license fee of $3.0 million received in 1996 pursuant to the
Searle Development and Commercialization Agreement. No co-development
revenues were realized prior to 1995.
26
<PAGE>
EXPENSES
Research and development expenses increased to $18.8 million in 1996,
compared to $16.3 million and $10.7 million in 1995 and 1994, respectively.
The increase each year resulted from the continuing progress of the Company's
products in clinical development, the discovery of new compounds, the
preclinical development of lead candidates and the activities needed to
support these programs.
Marketing, general and administrative expenses increased to $16.0
million in 1996, compared to $14.7 million in 1995 and $8.5 million in 1994.
The increase in 1996 is primarily attributable to one-time charges related to
termination agreements with certain former Company executives. The majority
of these charges were non-cash and resulted from the extension of certain
stock options. Increases from year to year also reflected higher
administrative staffing levels and related expenses required to support
increased research and development activities and the commencement of sales
operations in August 1994.
In 1994, the Company recorded a one-time, non-cash charge of $12.3
million for acquired research and development expenses relating to the
acquisition of Acea Pharmaceuticals, Inc. ("Acea"). An additional charge of
$2.6 million was incurred to expense amounts advanced to Acea prior to the
acquisition.
INTEREST INCOME AND EXPENSE
Interest income totaled $1.3 million in 1996, compared to $0.7 million
in 1995 and $0.4 million in 1994. The increases each year were due to higher
cash and short-term investment balances.
Interest expense decreased to $139,000 in 1996, compared to $178,000 in
1995 and $240,000 in 1994. The decrease in each period was attributable to
lower capital lease obligations used to finance equipment.
LIQUIDITY AND CAPITAL RESOURCES
From its inception in February 1989 through December 31, 1996, the
Company has financed its operations primarily through private and public
offerings of its equity securities, raising net proceeds of approximately
$82.8 million through sales of these securities. At December 31, 1996, the
Company's balances of cash, cash equivalents and short-term investments
totaled $18.0 million, compared to $13.4 million at December 31, 1995.
As of December 31, 1996, the Company had invested $5.8 million in
leasehold improvements, laboratory and computer equipment and office
furnishings and equipment. The Company has financed $2.8 million of these
capital additions through capital lease lines. In addition, the Company
leases its laboratory and office facilities under operating leases. While
additional equipment will be needed as the Company increases its research and
development activities, the Company has no material commitments for the
acquisition of property and equipment.
27
<PAGE>
Pursuant to the Novartis R&D Agreement, Novartis is obligated to pay
one-half of the development costs of ACEA 1021 for the United States market
and all incremental development costs for the rest of the world, along with
additional payments upon the achievement of certain milestones. These
payments are recognized by the Company as co-development revenues. Under this
agreement, Novartis also purchased $7.0 million of CoCensys Common Stock.
Repayment of amounts advanced will be secured by future milestone payments.
Pursuant to the Parke-Davis Promotion Agreement, the Company promotes
Parke-Davis' CNS drug, Cognex, to neurologists in the United States. Funds
are advanced to the Company quarterly to cover the training and operating
expenses incurred by the Company's sales force in promoting Cognex. The
Company is obligated to reimburse Parke-Davis for these advances. CoCensys
will recognize co-promotion revenues from its share of sales of Cognex above
certain base levels specified in the contract.
Pursuant to the Warner Collaboration Agreement, Warner-Lambert is also
obligated to make certain milestone payments for each compound selected for
development, as well as pay for its share of development costs. These
payments will be recognized by the Company as co-development revenues. Also
pursuant to this agreement, Warner-Lambert purchased $2.0 million of CoCensys
common stock in October 1995 and an additional $2.0 million of CoCensys
common stock in March 1997.
Pursuant to the Somerset Promotion Agreement, the Company promotes
Somerset's drug Eldepryl to neurologists in the United States. Funds are
advanced to the Company quarterly to cover a portion of the training and
operating expenses incurred by the Company's sales force in promoting
Eldepryl. The Company is obligated to reimburse Somerset for these advances.
CoCensys will recognize co-promotion revenues from compensation received from
Somerset, which is based upon the number of details undertaken, new
prescriptions written and sales.
Pursuant to the Searle Development and Commercialization Agreement, both
companies are obligated to pay a portion of the development costs of CCD 3693
and its back-up compounds for the U.S. market. The Company will receive
nonrefundable milestone payments upon the occurrence of certain events in the
development of the compound. In addition, Searle purchased 100,000 shares of
the Company's Series B Convertible Preferred Stock for $7.0 million.
CoCensys' operations to date have consumed substantial amounts of cash.
The negative cash flow from operations is expected to continue and will
likely increase over the foreseeable future, subject to the Company's ability
to mitigate such negative cash flows with revenues, if any, derived from the
sale of products from current and potential future marketing collaborations.
The Company anticipates that its existing capital resources, including
funding expected to be available through current partner collaborations
(including milestone payments and co-promotion revenues), will be adequate to
satisfy its capital needs for at least the next 12 months. There can be no
assurance that milestone-based payments or co-promotion revenues will be
sufficient to meet the Company's capital requirements. The Company will need
to obtain substantial additional funds to conduct the costly and
time-consuming research, preclinical development and clinical trials
necessary to bring its products to market. The Company intends to seek
additional funding through additional research and development collaborations
with suitable corporate partners, through additional marketing collaborations
to increase revenues generated from sales of products and/or through public
or private financing. There can be no assurance that additional financings or
suitable collaborations will be available on favorable terms, if at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself.
28
<PAGE>
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development programs,
the level of co-promotion revenues, the scope and results of preclinical
testing and clinical trials, the time and costs involved in obtaining
regulatory approvals, the rate of technological advances, determinations as
to the commercial potential of the Company's products under development, the
status of competitive products, the expansion of sales and marketing
capabilities, the establishment of third-party manufacturing arrangements and
the establishment of additional collaborative relationships.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company are
provided at the pages indicated in Item 14 (a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements with
the Company's accountants on any matter of accounting practice or financial
disclosure during the reporting periods.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the
Company appearing in the Proxy Statement for the Company's 1997 Annual
Meeting of Stockholders (the "Proxy Statement") under the captions "Election
of Directors" and "Compliance with Section 16(a) of the Securities Exchange
Act of 1934" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation appearing in the
Proxy Statement under the caption "Executive Compensation" is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the information in the Proxy Statement labeled "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section in the Proxy Statement labeled "Certain
Relationships and Related Transactions."
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a
separate section beginning on Page 38 of this report.
FINANCIAL STATEMENTS OF COCENSYS, INC.
Report of Independent Auditors 38
Balance Sheets as of December 31, 1996 and 1995 39
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994; and the period from
inception (February 15, 1989) to December 31, 1996 40
Statements of Stockholders' Equity for the period from
inception (February 15, 1989) to December 31, 1996 41
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994; and the period from
inception (February 15, 1989) to December 31, 1996 43
Notes to Financial Statements 44
Schedules are omitted as the required information is not present
or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in
the financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K dated December 15,
1996, describing its promotion agreement with Parke-Davis and its
license agreement with Massachusetts General Hospital.
31
<PAGE>
(c) EXHIBITS
Exhibit
Number Description
------- -----------
3(i).1 Amended and Restated Certificate of Incorporation of the
Company.
3(i).2 Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company.
3(i).3 Certificate of Powers, Designation, Preferences, Rights
and Limitations of Series B Convertible Preferred Stock
of the Company.
3(i).4 Certificate of Amendment of Amended and Restated
Certificate of Incorporation of the Company.
3(ii) (1) By-laws of the Company.
10.1 (1) Form of Indemnity Agreement entered into between the
Company and its directors and officers.
10.2 (13)+ Company's 1990 Stock Option Plan, as amended (the
"Option Plan").
10.3 (1) + Form of Incentive Stock Option Agreement under the
Option Plan.
10.4 (1) + Form of Non-qualified Stock Option Agreement under the
Option Plan.
10.5 (1) + Non-qualified Stock Option Agreement between the Company
and Timothy J. Rink, M.D., Sc.D., dated as of
September 13, 1991.
10.6 (6) + Company's 1992 Non-Employee Directors' Stock Option
Plan, as amended (the "Directors' Plan").
10.7 (1) + Form of Stock Option Agreement under the Directors'
Plan.
10.8 (1) Exclusive License Agreement among the Company, The
Rockefeller University and the University of Southern
California, dated as of August 28, 1990.
10.9 (1) Research Agreement between the Company and the
University of Southern California, dated as of
August 28, 1990, as amended.
10.10 (1) Sponsored Research Agreement between the Company and the
University of Dundee, dated as of January 1, 1992.
10.11 (1) Research Agreement between the Company and The Regents
of the University of California, on behalf of its Irvine
campus, dated as of March 2, 1992.
10.12 (1) Letter of Agreement between the Company and Ciba-Geigy
Limited, dated as of June 1, 1992.
10.13 (1) Research Agreement between the Company and The Regents
of the University of California, on behalf of its Irvine
campus, dated as of July 1, 1992.
10.14 (1) Option Agreement between the Company and Kelvin W. Gee,
Ph.D. dated as of August 14, 1992.
10.15 (12) Amendment No. 1 to Option Agreement between the Company
and Kelvin W. Gee, Ph.D., dated August 1, 1994.
10.16 (1) Services Agreement between the Company and Acea, dated
as of September 24, 1992.
32
<PAGE>
Exhibit
Number Description
------- -----------
10.17 (1) Multi-tenant Lease between the Company and The Irvine
Company, dated as of January 30, 1992.
10.18 (2) Second Amended and Restated Purchase Option Agreement,
dated as of December 13, 1993, between the Company and
Acea Pharmaceuticals, Inc., as amended.
10.19 (2) Common Stock Purchase Agreement, dated as of
December 13, 1993, between the Company and the persons
listed on the Schedule of Purchasers attached thereto.
10.20 (3)* Heads of Agreement, dated May 11, 1994, between the
Company and Ciba-Geigy Limited.
10.21 (4)* Promotion Agreement, dated May 11, 1994, between the
Company and Ciba-Geigy Corporation.
10.22 (5)* Research and Development Agreement, dated as of
December 23, 1994 (the "Development Agreement"), between
the Company and Ciba-Geigy Limited.
10.23 (5) Stock Purchase Agreement, dated as of December 23, 1994,
between the Company and Ciba-Geigy Limited. Included as
Exhibit C to the Development Agreement.
10.24 (5) Form of First Amendment to the Multi-tenant Lease
between the Company and the Irvine Company, dated
April 1, 1994.
10.25 (5) Form of Lease Agreement between the Company and
Livingston Corporate Park Associates, dated October 1,
1994.
10.26 (7) Common Stock and Warrant Purchase Agreement, dated
June 6, 1995, between the Company and each of the
purchasers listed on the Schedule of Purchasers attached
thereto.
10.27 (8) + Company's 1995 Employee Stock Purchase Plan.
10.28 (9)* Research, Development and Marketing Collaboration
Agreement between CoCensys, Inc., Acea Pharmaceuticals,
Inc. and Warner-Lambert Company, dated as of October 26,
1995.
10.29 (10) Stock Purchase Agreement, dated October 26, 1995,
between CoCensys, Inc. and Warner-Lambert Company.
10.30 (10) Letter Agreement, dated October 24, 1995, regarding
Amendments and Agreements Related to Promotion Agreement
between CoCensys, Inc. and Ciba-Geigy Corporation,
Pharmaceuticals Division.
10.31 (11)* Promotion Agreement between Somerset Pharmaceuticals,
Inc. and CoCensys, Inc., dated January 4, 1996.
10.32 (13) Form of Amendment to the Multi-tenant Lease between the
Company and The Irvine Company, dated as of February 9,
1996.
10.33 (14)* Development and Commercialization Agreement between the
Company and G.D. Searle & Co. dated May 17, 1996.
10.34 (14) Preferred Stock Purchase Agreement between the Company
and G.D. Searle & Co. dated May 17, 1996 (included as
Exhibit C to the Development and Commercialization
Agreement between the two parties).
33
<PAGE>
Exhibit
Number Description
------- -----------
10.35 + Transition and Consulting Agreement between the Company
and Daniel L. Korpolinski, dated as of November 1, 1996.
10.36 + Employment Agreement between the Company and Rick A.
Henson, dated as of October 13, 1996.
10.37 + Company's 1996 Equity Incentive Plan.
10.38 + Letter Agreement between F. Richard Nichol, Ph.D. and
the Company, dated as of January 20, 1997.
10.39 + Form of Incentive Stock Option Agreement under the 1996
Equity Incentive Plan.
10.40 + Form of Nonstatutory Stock Option Agreement under the
1996 Equity Incentive Plan.
10.41 (15)** Promotion Agreement between the Company and Parke-Davis,
dated as of January 1, 1997.
10.42 (15)** License Agreement between the Company and Massachusetts
General Hospital, dated as of December 15, 1996.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, file number 33-55522, or amendments thereto.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and the Company's Current Report
on Form 8-K filed July 15, 1994.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, as amended by Form 10-Q/A, for the quarter ended June 30, 1994.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-8, file number 33-97258.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-8, file number 33-92760.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 26, 1995.
34
<PAGE>
(10) Incorporated by reference to the Company's Registration Statement on
Form S-3, file number 33-80809.
(11) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 4, 1996.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K,
as amended by Form 10-K/A, for the year ended December 31, 1995.
(14) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, as amended by Form 10-Q/A, for the quarter ended June 30, 1996.
(15) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 15, 1996.
+ Compensatory plan.
* Confidential treatment granted.
** Confidential treatment requested.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COCENSYS, INC.
Date: March 31, 1997 By: /s/ F. Richard Nichol, Ph.D.
-------------------------------
(F. Richard Nichol, Ph.D.)
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Lowell E. Sears Chairman of the Board March 31, 1997
------------------------------
(Lowell E. Sears)
/s/ F. Richard Nichol, Ph.D. President and March 31, 1997
------------------------------ Chief Executive Officer
(F. Richard Nichol, Ph.D.) (PRINCIPAL EXECUTIVE OFFICER)
/s/ Peter E. Jansen Vice President and March 31, 1997
------------------------------ Chief Financial Officer
(Peter E. Jansen) (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ James C. Blair, Ph.D. Director March 31, 1997
------------------------------
(James C. Blair, Ph.D.)
/s/ Kelvin W. Gee, Ph.D. Director March 31, 1997
------------------------------
(Kelvin W. Gee, Ph.D.)
/s/ Robert G. McNeil, Ph.D. Director March 31, 1997
------------------------------
(Robert G. McNeil, Ph.D.)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES CONTINUED
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Alan C. Mendelson Director March 31, 1997
------------------------------
(Alan C. Mendelson)
/s/ Timothy J. Rink, M.D., Sc.D. Director March 31, 1997
------------------------------
(Timothy J. Rink, M.D., Sc.D.)
/s/ Eckard Weber, M.D. Director March 31, 1997
------------------------------
(Eckard Weber, M.D.)
</TABLE>
37
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
CoCensys, Inc.
We have audited the accompanying balance sheets of CoCensys, Inc. (a
development stage company) as of December 31, 1996 and 1995 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, and the period from
inception (February 15, 1989) to December 31, 1996. 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 financial position of CoCensys, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, and for the
period from inception (February 15, 1989) to December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
March 14, 1997
38
<PAGE>
COCENSYS, INC.
(A development stage company)
BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,050 $ 6,895
Short-term investments 16,949 6,554
Receivables from corporate partners 659 -
Other current assets 556 455
------------ ------------
TOTAL CURRENT ASSETS 19,214 13,904
Property and equipment, net 2,685 2,777
Notes receivable from officers 126 264
Deferred patent costs, net - 394
Deferred sales organization costs, net - 650
Other assets, net 26 212
------------ ------------
$ 22,051 $ 18,201
------------ ------------
------------ ------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,437 $ 880
Other accrued liabilities 2,556 2,418
Advances from corporate partners 446 3,144
Capital lease obligation - current portion 341 709
------------ ------------
TOTAL CURRENT LIABILITIES 4,780 7,151
Capital lease obligation, less current portion 284 357
Other liabilities 40 49
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized shares -- 5,000,000
Issued and outstanding shares - 100,000 at December 31, 1996
and none at December 31, 1995 7,000 -
Common stock, $.001 par value
Authorized shares -- 75,000,000
Issued and outstanding shares - 22,083,346 at December 31, 1996
and 19,395,341 at December 31, 1995 93,986 76,296
Deficit accumulated during the development stage (83,162) (64,674)
Deferred compensation (905) (956)
Unrealized gain (loss) on investments 28 (22)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,947 10,644
------------ ------------
$ 22,051 $ 18,201
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
39
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
YEAR ENDED DECEMBER 31, 1989) TO
----------------------------------------------------- DECEMBER 31,
1996 1995 1994 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Co-promotion revenues from corporate partners $ 9,085 $ 10,414 $ 7,402 $ 26,901
Co-development revenues from corporate partners 6,073 1,970 - 8,043
------------- ------------ ------------- -------------
Total revenues 15,158 12,384 7,402 34,944
------------- ------------ ------------- -------------
OPERATING EXPENSES
Research and development 18,771 16,335 10,708 62,223
Marketing, general and administrative 16,040 14,710 8,534 43,579
Acquired research and development - - 14,879 14,879
------------- ------------ ------------- -------------
Total operating expenses 34,811 31,045 34,121 120,681
------------- ------------ ------------- -------------
Operating loss (19,653) (18,661) (26,719) (85,737)
Interest income 1,304 717 373 3,555
Interest expense (139) (178) (240) (980)
------------- ------------ ------------- -------------
Net loss $ (18,488) $ (18,122) $ (26,586) $ (83,162)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Net loss per share $ (0.85) $ (1.05) $ (2.33)
------------- ------------ -------------
------------- ------------ -------------
Shares used in computing net loss per share 21,782,982 17,288,066 11,405,525
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes
40
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DEFICIT UNREALIZED
CONVERTIBLE ACCUMULATED GAIN/ TOTAL
PREFERRED STOCK COMMON STOCK DURING THE DEFERRED (LOSS) ON STOCK-
----------------------- ------------------ DEVELOPMENT COMPEN- INVEST- HOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE SATION MENTS EQUITY
------------- -------- -------- -------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash at $.005 per share - $ - 980,000 $ 5 $ - - $ - $ 5
Net loss - - - - (147) - - (147)
--------- ------- ------- ------- -------- -------- ----------- ---------
BALANCE AT DECEMBER 31, 1989 - - 980,000 5 (147) - - (142)
Issuance of Series A convertible
preferred stock upon conversion
of promissory note, net of
offering costs of $5 at $.25
per share 400,000 95 - - - - - 95
Issuance of common in exchange
for services at $.05 per share - - 6,668 - - - - -
Issuance of Series B convertible
preferred stock for $3,110
cash and conversion of $515 of
convertible promissory notes,
net of offering costs of $46 at
$1.50 per share 2,416,666 3,579 - - - - - 3,579
Issuance of warrants to purchase
30,100 shares of Series B
convertible preferred stock in
connection with a note payable - 8 - - - - - 8
Net loss - - - - (910) - - (910)
--------- ------- -------- ------ ------- -------- ----------- ---------
BALANCE AT DECEMBER 31, 1990 2,816,666 3,682 986,668 5 (1,057) - - 2,630
Issuance of common stock in
exchange for services at $.05
per share - - 3,332 - - - - -
Net loss - - - - (2,369) - - (2,369)
--------- ------- -------- ------ -------- -------- ----------- ---------
BALANCE AT DECEMBER 31, 1991 2,816,666 3,682 990,000 5 (3,426) - - 261
Issuance of Series C convertible
preferred stock for cash, net
of offering costs of $60 at
$5.00 per share 2,631,218 13,096 - - - - - 13,096
Issuance of Series C convertible
preferred stock in exchange
for services at $5.00 per share 3,332 17 - - - - - 17
Deferred compensation related to
the issuance of certain stock
options - - - 2,842 - (2,842) - -
Amortization of deferred
compensation - - - - - 152 152
Issuance of Series C convertible
preferred stock in exchange
for stock purchase option at
$5.00 per share 20,000 100 - - - - - 100
Net loss - - - - (6,267) - - (6,267)
--------- ------- -------- ------ ------- -------- ----------- ---------
BALANCE AT DECEMBER 31, 1992 5,471,216 16,895 990,000 2,847 (9,693) (2,690) - 7,359
Issuance of Series B convertible
preferred stock in exchange
for noncash exercise of
warrants 25,083 226 - - - - - 226
Conversion of convertible
preferred stock into common
stock at the close of the
initial public offering (5,496,299) (17,121) 5,496,299 17,121 - - - -
Issuance of common stock for
cash in initial public
offering at $9.00 per share,
net of offering costs and
underwriters' discount of
$2,193 - - 2,500,000 20,307 - - - 20,307
Issuance of common stock for
cash pursuant to option
exercises at $.05 to $.50
per share - - 116,798 18 - - - 18
Deferred compensation related
to the issuance and
termination of certain stock
options - - - 43 - (43) - -
Amortization of deferred
compensation - - - - - 760 - 760
Net loss - - - - (10,273) - - (10,273)
--------- ------- --------- ------ ------- -------- ----------- ---------
BALANCE AT DECEMBER 31, 1993 - - 9,103,097 40,336 (19,966) (1,973) - 18,397
</TABLE>
See accompanying notes
41
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DEFICIT UNREALIZED
CONVERTIBLE ACCUMULATED GAIN/ TOTAL
PREFERRED STOCK COMMON STOCK DURING THE DEFERRED (LOSS) ON STOCK-
----------------------- ------------------ DEVELOPMENT COMPEN- INVEST- HOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE SATION MENTS EQUITY
------------- -------- -------- -------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase of common stock by Acea
shareholders pursuant to
merger agreement at $4.56 and
$5.11 per share - - 415,368 2,002 - - - 2,002
Issuance of common stock for
cash pursuant to option
exercises at $.125 to $.50
per share - - 68,380 32 - - - 32
Acquisition of Acea in exchange
for common stock at $3.00 per
share - - 3,784,332 11,353 - - - 11,353
Exchange of Acea options and
warrants for equivalent
options and warrants - - - 592 - - - 592
Gift of common stock at $3.75
per share - - 20,000 75 - - - 75
Purchase of common stock by
corporate partner at $4.51
per share - - 443,214 2,000 - - - 2,000
Deferred compensation related
to the issuance and
termination of certain stock
options - - - 110 - (110) - -
Amortization of deferred
compensation - - - - - 707 - 707
Unrealized loss on investments - - - - - - (25) (25)
Net loss - - - - (26,586) - - (26,586)
------- -------- ---------- --------- ---------- ------- -------- ---------
BALANCE AT DECEMBER 31, 1994 - - 13,834,391 56,500 (46,552) (1,376) (25) 8,547
Purchase of common stock by
corporate partner at $3.48
per share - - 1,434,978 5,000 - - - 5,000
Issuance of common stock for
cash pursuant to option
exercises at $.05 to $5.21
per share - - 88,579 109 - - - 109
Deferred compensation related
to the issuance and
termination of certain stock
options - - - 619 - (619) - -
Issuance of common stock and
related warrants for cash at
$3.25 per share, net of cost
of $149 - - 3,707,693 11,901 - - - 11,901
Issuance of common stock to
employees, share price at
issuance of $7.375 - - 4,000 29 - - - 29
Purchase of common stock by
corporate partner at $7.00
per share, net of costs of $14 - - 285,970 1,986 - - - 1,986
Issuance of common stock
pursuant to the 1995 Employee
Stock Purchase Plan at $3.83
to $4.36 per share - - 39,730 152 - - - 152
Amortization of deferred
compensation - - - - - 1,039 - 1,039
Change in unrealized loss on
investments - - - - - - 3 3
Net loss - - - - (18,122) - - (18,122)
------- -------- ---------- --------- ---------- ------- -------- ---------
BALANCE AT DECEMBER 31, 1995 - - 19,395,341 76,296 (64,674) (956) (22) 10,644
Issuance of common stock for
cash at $6.50 per share, net
of costs of $1,162 - - 2,430,000 14,633 - - - 14,633
Issuance of Series B
convertible preferred stock
for cash to corporate partner 100,000 7,000 - - - - - 7,000
Issuance of common stock for
cash pursuant to option
exercises at $.1969 to $5.21
per share - - 138,762 194 - - - 194
Issuance and termination of
certain stock options - - - 2,363 - (629) - 1,734
Issuance of common stock to
employees, share price at
issuance of $6.625 to $8.75 - - 6,500 54 - - - 54
Issuance of common stock
pursuant to the 1995 Employee
Stock Purchase Plan at $3.83
to $7.12 per share - - 112,743 446 - - - 446
Amortization of deferred
compensation - - - - - 680 - 680
Change in unrealized gain on
investments - - - - - - 50 50
Net loss - - - - (18,488) - - (18,488)
------- -------- ---------- --------- ---------- ------- -------- ---------
BALANCE AT DECEMBER 31, 1996 100,000 $ 7,000 22,083,346 $ 93,986 $ (83,162) $ (905) $ 28 $ 16,947
------- -------- ---------- --------- ---------- ------- -------- ---------
------- -------- ---------- --------- ---------- ------- -------- ---------
</TABLE>
See accompanying notes
42
<PAGE>
COCENSYS, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
YEAR ENDED DECEMBER 31, 1989) TO
------------------------------------------- DECEMBER 31,
1996 1995 1994 1996
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(18,488) $(18,122) $(26,586) $(83,162)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,072 1,928 1,086 5,889
Amortization of deferred compensation 680 1,039 707 3,338
Issuance of stock, stock options and
warrants for services 1,788 29 75 1,917
Loss on sale of fixed assets - 26 - 26
Acquired research and development - - 12,279 12,279
Decrease (increase) in other current assets (101) (175) 77 (628)
Decrease (increase) in receivables from partners (659) 535 (535) (659)
Increase (decrease) in advances from partners (2,698) 1,244 1,900 446
Increase (decrease) in accounts payable and
other accrued liabilities 685 (174) 1,840 3,757
----------- ------- ------- ---------
NET CASH USED IN OPERATING ACTIVITIES (16,721) (13,670) (9,157) (56,797)
----------- ------- ------- ---------
INVESTING ACTIVITIES
Decrease (increase) in short-term investments (10,343) (4,569) 12,279 (16,922)
Purchase of property and equipment (812) (888) (528) (5,625)
Decrease (increase) in other assets and notes
receivable from officers 199 98 (99) (308)
Cash received on sale of fixed assets - 19 - 19
Increase in deferred sales organization costs - - (1,571) (1,571)
Increase in deferred patent cost - - (164) (904)
Acquisition of Acea, net of cash acquired - - (62) (62)
----------- ------- ------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,956) (5,340) 9,855 (25,373)
----------- ------- ------- ---------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 15,273 19,148 4,034 58,785
Net cash proceeds from issuance of preferred stock 7,000 - - 23,381
Proceeds from sales/leaseback of fixed assets and
notes payable 649 834 323 4,233
Payments on capital lease obligations and
notes payable (1,090) (1,016) (449) (3,179)
----------- ------- ------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,832 18,966 3,908 83,220
----------- ------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,845) (44) 4,606 1,050
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,895 6,939 2,333 -
----------- ------- ------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,050 $ 6,895 $ 6,939 $ 1,050
----------- ------- ------- ---------
----------- ------- ------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 139 $ 133 $ 150 $ 754
----------- ------- ------- ---------
----------- ------- ------- ---------
</TABLE>
See accompanying notes
43
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
CoCensys, Inc. ("CoCensys" or the "Company") was incorporated in 1989 for the
purpose of discovering, developing and commercializing novel products to
treat disorders of the brain. Since inception, the Company has devoted
substantially all of its resources to the discovery and development of such
products. The Company has not generated any revenues from the development of
its own products and has sustained continuing operating losses from its
development activities. Such losses could continue for several years.
In 1994, the Company established a sales and marketing organization to generate
revenues from the sale of products from other companies. The Company plans to
finance its future development activities through a combination of sales of
equity securities, payments from corporate partners and revenues from sales of
products from other companies. There can be no assurance that the Company will
be successful in these areas.
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 financial statements and accompanying
notes. Actual results could differ from those estimates. Significant
estimates made in preparing the financial statements include the
determination of co-promotion and co-development revenues, and the valuation
allowance for deferred tax assets.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
SHORT TERM INVESTMENTS
Investments having a maturity of more than three months and less than twelve
months are classified as short-term investments. Short-term investments
primarily consist of U.S. government obligations and commercial paper.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt & Equity
Securities." The Statement requires the Company's short-term investments be
carried at fair value, and also requires that unrealized
44
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT TERM INVESTMENTS (CONTINUED)
gains and losses on securities available-for-sale be reported net of tax as a
separate component of stockholders' equity. The unrealized gain on investments
relates to investments in U.S. government obligations.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following at
December 31, (in thousands):
1996 1995
-------- --------
Laboratory equipment $ 1,703 $ 1,474
Computer equipment 1,288 1,065
Office equipment 961 688
Leasehold improvements 1,847 1,759
-------- --------
5,799 4,986
Less accumulated depreciation (3,114) (2,209)
-------- --------
Net property and equipment $ 2,685 $ 2,777
-------- --------
-------- --------
The value of leased assets (treated as capital leases) at December 31, 1996,
was $2,710,000, net of accumulated amortization of $1,144,000.
Depreciation of property and equipment, including assets under capital lease
obligations, has been provided using the straight-line method over their
estimated useful lives as follows:
ESTIMATED USEFUL LIVES
----------------------
Laboratory equipment 5 years
Computer equipment 3 years
Office equipment 5 years
Leasehold improvements Lease term
REVENUE AND EXPENSE RECOGNITION
See Notes 3, 4, 5 and 6 for revenue recognition policies related to
co-promotion and co-development revenues from corporate partners. The
initial costs incurred in establishing the sales and marketing organization
were deferred until initiation of the Company's sales efforts on August 1,
1994. Such costs were amortized over the contract term of the Novartis
Promotion Agreement (through December 31, 1996).
45
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect would be
antidilutive.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". Implementation did not
have a material effect on the Company's results of operations or financial
position.
STOCK OPTION PLANS
Effective January 1, 1996, the Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") and accordingly,
is continuing to account for its stock-based compensation plans under
previous accounting standards. The adoption of SFAS No. 123 had no impact on
the Company's results of operations or financial position.
2. NOTES RECEIVABLE FROM OFFICERS
The Company advanced funds to certain officers in exchange for notes secured
by mortgages on real property. Interest on these notes accrues at 8.5%.
3. MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS A.G.
In May 1994, the Company entered into a marketing and development
collaboration with Novartis A.G. (formerly Ciba-Geigy Limited) for the
co-promotion by the Company of certain Novartis products and the development
and commercialization of ACEA 1021, a compound being developed by the
Company. This collaboration consists of the Novartis Promotion Agreement and
the Novartis Research and Development Agreement.
Pursuant to the Novartis Promotion Agreement, CoCensys established a sales
force to co-promote and market certain Novartis products in the United States
initially to psychiatrists. The agreement provided for the advance of funds
to the Company to cover a portion of the expenses incurred by the CoCensys
sales force in promoting the Novartis products. CoCensys realized
co-promotion revenues from its share of sales of Novartis products above
certain baseline levels specified in the contract. The Novartis Promotion
Agreement was terminated at the end of 1996.
46
<PAGE>
3. MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS A.G. (CONTINUED)
Under the Novartis Research and Development Agreement, each party is
obligated to pay one-half of the U.S. development costs of ACEA 1021. The
parties will co-promote ACEA 1021 in the United States and share equally the
profits generated, if any. Novartis will have the exclusive right to develop
and market the compound, at its own cost, for markets outside the United
States, subject to a specified royalty payment to the Company.
In connection with the Novartis Research and Development Agreement, Novartis
purchased $7.0 million of CoCensys common stock. In addition, the Company
will receive milestone payments upon the occurrence of certain events in the
course of the development of ACEA 1021 for the United States and Japanese
markets.
4. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY
In October 1995, the Company entered into a collaboration with Warner-Lambert
Company and its Parke-Davis division to develop and market therapeutic drugs
for the treatment of certain CNS disorders. This arrangement consists of the
Research, Development and Marketing Collaboration Agreement (the "Warner
Collaboration Agreement"), for the worldwide development and commercialization
of a new class of neurological and psychiatric drugs, termed subtype
selective NMDA receptor antagonists ("SSNRAs"), and the Parke-Davis Promotion
Agreement, pursuant to which the Company co-promotes Parke-Davis' CNS drug,
Cognex, to U.S. neurologists for the treatment of Alzheimer's disease.
Under the Parke-Davis Promotion Agreement, the Company realized co-promotion
revenues from its share of sales of Cognex above certain baseline levels
specified in the contract. The agreement provided for funds to be advanced
to the Company each quarter to cover training and operating expenses incurred
by the CoCensys sales force to promote Cognex. The original Parke-Davis
Promotion Agreement was entered into in October 1995 and terminated on
December 31, 1996, when a revised promotion agreement took effect. Under the
revised Parke-Davis Promotion Agreement, the Company realizes co-promotion
revenues based upon the number of prescriptions for Cognex written by certain
targeted neurologists and other doctors during each quarter, with a
guaranteed specified minimum payment. The agreement provides that funds equal
to the specified minimum payment will be advanced to the Company each quarter
to cover training and operating expenses to be incurred by the CoCensys sales
force to promote Cognex. The agreement is scheduled to terminate December
31, 1997. Either party has the right to terminate the Promotion Agreement
earlier, without cause.
Under the Warner Collaboration Agreement, both companies will share
technology and resources to develop SSNRA candidates. The parties are
obligated to make specified contributions to development costs with respect
to any development candidates. Promotion costs of, and profits from any
products developed under the agreement will be shared equally in the United
States and Japan. Warner-Lambert will have the exclusive right to develop
and market any product, at its own cost, for markets outside the United
States and Japan, subject to a specified royalty payment to the Company.
Upon achievement of certain clinical development and regulatory milestones,
Warner-Lambert is obligated to make certain milestone payments for each
development compound, as well as pay its specified portion of development
costs. Payments received under the Warner Collaboration Agreement will be
recognized as co-development revenues by the Company.
47
<PAGE>
4. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY
(CONTINUED)
Pursuant to the Warner Collaboration Agreement, Warner-Lambert purchased $2.0
million of CoCensys common stock in October 1995 and an additional $2.0
million of CoCensys common stock in March 1997.
5. PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS
In January 1996, the Company and Somerset Pharmaceuticals, Inc. ("Somerset")
entered into the Somerset Promotion Agreement, pursuant to which the Company
promotes Somerset's drug Eldepryl to neurologists in the United States for
the treatment of Parkinson's disease. The initial term of the Somerset
Promotion Agreement expires December 31, 1997, subject to certain provisions
for early termination and renewal. Under the Somerset Promotion Agreement,
CoCensys has the exclusive right to detail Eldepryl to neurologists in the
United States. During the term of the Somerset Promotion Agreement, CoCensys
is compensated based upon the number of details undertaken for Eldepryl, new
prescriptions written and sales. Compensation to CoCensys is subject to
adjustment in the event of generic competition. In addition, such
compensation is subject to review in the event of governmental or other
third-party actions that may materially affect it. To finance a portion of
its sales force to promote Eldepryl, CoCensys receives quarterly advances
from Somerset, which are repayable in full at the end of each quarter.
6. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH G.D. SEARLE & CO.
In May 1996, the Company entered into an agreement with G.D. Searle & Co.
("Searle") to co-develop and co-promote the Company's lead compound for the
treatment of insomnia along with its back-up compounds. Pursuant to the
agreement, Searle paid a $3.0 million license fee and purchased 100,000
shares of the Company's Series B Convertible Preferred Stock for $7.0
million. The license fee was recognized as co-development revenue in 1996.
The preferred stock is convertible to common stock on May 17, 1998, or
earlier at the Company's discretion. The number of shares issuable upon
conversion shall be equal to $7.0 million divided by the then current common
stock price (subject to certain minimum and maximum limits).
Under the agreement, both companies are obligated to pay a portion of the
development costs of the compound and its back-up compounds. In addition,
the Company will receive nonrefundable milestone payments upon the occurrence
of certain events in the development of the compound. The parties will
co-promote any products derived from the collaboration in the United States,
while Searle will have the right to develop, register and market the products
in the rest of the world, subject to specified royalty payments.
7. ACQUISITION OF ACEA
On June 30, 1994, the Company acquired all of the outstanding capital stock
of Acea in exchange for 3,784,332 shares of CoCensys common stock. In
addition, CoCensys issued 179,230 stock options and 31,982 warrants in
exchange for Acea stock options and warrants. The warrants are exercisable
at approximately $.04 per share and expire December 13, 1998. The
acquisition of Acea was accounted for as a purchase. The purchase price
consisted of $11,945,000 in common stock, options and warrants,
48
<PAGE>
7. ACQUISITION OF ACEA (CONTINUED)
exercise of a $100,000 Acea stock purchase option and $62,000 of direct
acquisition costs, net of $20,000 cash acquired. Acquired identifiable
tangible and intangible assets were valued at $420,000 and assumed
liabilities aggregated $570,000. It was determined that a substantial
portion of the purchase price related to the acquisition of Acea's incomplete
research and development drug programs that did not have alternative future
use, which resulted in a one-time, non-cash charge to earnings of $12.3
million. In addition, $2.6 million advanced to Acea prior to the acquisition
was charged to earnings in 1994. All inter-company accounts have been
eliminated.
The unaudited results of operations on a pro forma basis as though Acea had
been acquired as of the beginning of the Company's 1994 fiscal year are as
follows (in thousands, except per share amounts):
Revenues $ 7,402
----------
----------
Net loss $ (28,433)
----------
----------
Net loss per share $ (2.47)
----------
----------
8. LEASE COMMITMENTS
The Company leases office and research facilities and certain equipment under
operating leases and capital leases with varying terms extending through July
2002. Annual future minimum payments under operating and capital leases as
of December 31, 1996, are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
--------- -------
YEAR ENDING DECEMBER 31,
1997 $ 783 $ 385
1998 741 183
1999 586 68
2000 469 43
2001 515 13
Thereafter 249 -
--------- -------
Total minimum payments $ 3,343 692
---------
---------
Less amount representing interest (67)
-------
Present value of future minimum lease payments 625
Current portion (341)
-------
Long-term portion $ 284
-------
-------
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$1,082,000, $677,000 and $384,000, respectively.
9. COMMON STOCK
In June 1995, the Company completed a private financing with a small group of
investors, providing for the sale of 3.7 million shares of common stock at $3.25
per share and 1.5 million warrants for aggregate
49
<PAGE>
9. COMMON STOCK (CONTINUED)
net proceeds of approximately $11.9 million. Each warrant entitles the holder
to purchase one share of common stock at a pre-determined price ranging from
$3.90 per share to $4.40 per share during the five-year exercise period. As of
December 31, 1996, all warrants remain outstanding.
In January 1996, the Company completed a public offering of common stock,
obtaining net proceeds of $14.6 million through the sale of 2.4 million shares
at $6.50 per share.
The Company has reserved 9.4 million shares of common stock for issuance upon
conversion of preferred stock, exercise of options and warrants, and for
issuance under the 1995 Employee Stock Purchase Plan.
STOCKHOLDER RIGHTS PLAN
In April 1995, the Company adopted a Stockholder Rights Plan which provides for
the distribution of rights ("Rights") to holders of outstanding shares of common
stock. Pursuant to the plan, a portion of Convertible Preferred Stock was
designated as Junior Preferred Stock, of which 350,000 shares were reserved for
issuance upon exercise of the Rights. The Rights will become exercisable only
in the event, with certain exceptions, that an acquiring party accumulates or
announces an offer to acquire 20 percent or more of the Company's voting stock.
Each Right entitles the holder to buy one-hundredth of a share of Junior
Preferred Stock at a price of $25. In addition, upon the occurrence of certain
events, holders of Rights will be entitled to purchase either CoCensys' stock or
shares in an "acquiring entity" at half of market value. The Company will
generally be entitled to redeem the Rights at $.001 per right at any time until
the tenth day following acquisition of a 20 percent position in its voting
stock. The Rights expire in April 2005.
10. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under SFAS No.
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, for certain options the Company
recognizes as deferred compensation expense the excess of fair market value of
the common stock at the date of grant over the aggregate exercise price of such
options. This deferred compensation expense is amortized ratably over the
vesting period of each option. During the years ended December 31, 1996 and
1995, the Company recorded deferred compensation of $629,000 and $619,000,
respectively, in connection with the issuance and termination of certain stock
options.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company has accounted for
its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995 respectively: risk-free interest rates of 6.2%
and 5.9%, dividend yield of 0%, volatility factors of the expected market
price of the Company's common stock of 44.2% and a weighted-average expected
life of the option of 5.0 years.
50
<PAGE>
10. STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
--------- ---------
Net loss $ (19,745) $ (18,395)
--------- ---------
--------- ---------
Net loss per share $ (0.91) $ (1.06)
--------- ---------
--------- ---------
The results above are not likely to be representative of the effects of
applying SFAS No. 123 on reported net income or loss for future years as
these amounts reflect the expense for only one or two years of vesting.
A summary of the Company's stock option activity, including those issued outside
of plans, and related information is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE SHARES OPTION AGGREGATE AVERAGE
FOR OUT- PRICE EXERCISE EXERCISE
GRANT STANDING PER SHARE PRICE PRICE
--------------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 436 1,206 $.05 - $5.21 $ 1,337 $ 1.11
Authorized 60 - - -
Granted (510) 510 $.20 - $4.25 900 1.76
Exercised - (68) $.13 - $.50 (32) .47
Canceled and forfeited 47 (47) $.20 - $5.21 (199) 4.23
------ ------ -------
BALANCE, DECEMBER 31, 1994 33 1,601 $.05 - $5.21 2,006 1.25
Authorized 1,945 - - -
Granted (940) 940 $.50 - $8.13 5,258 5.59
Exercised - (89) $.05 - $5.21 (109) 1.22
Canceled and forfeited 43 (43) $.20 - $3.29 (92) 2.14
------ ------ -------
BALANCE, DECEMBER 31, 1995 1,081 2,409 $.05 - $8.13 7,063 2.93
Authorized 2,800 - - -
Granted (961) 961 $3.25 - $9.13 5,705 5.94
Exercised - (139) $.20 - $5.21 (194) 1.40
Canceled and forfeited 184 (184) $.20 - $5.21 (942) 5.12
------ ------ -------
BALANCE, DECEMBER 31, 1996 3,104 3,047 $.05 - $9.13 11,632 $ 3.82
------ ------ -------
------ ------ -------
</TABLE>
51
<PAGE>
10. STOCK OPTION PLANS (CONTINUED)
The weighted-average fair value of options granted was $3.25 and $2.81 during
1996 and 1995, respectively. The weighted-average remaining contract life was
6.8 years and 6.5 years for 1996 and 1995, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
RANGE WEIGHTED EXERCISE
OF NUMBER REMAINING AVERAGE NUMBER PRICE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE WEIGHTED-
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) AVERAGE
------------- -------------- ----------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ .05 to .50 939 4.4 $ .31 938 $ .31
1.50 to 1.69 20 7.5 1.50 13 1.51
2.31 to 2.87 150 7.2 2.54 91 2.54
3.00 to 3.93 581 7.7 3.42 221 3.34
4.25 to 4.63 43 7.9 4.43 17 4.43
5.00 to 5.88 322 8.1 5.52 86 5.06
6.00 to 6.80 336 9.2 6.57 50 6.58
7.00 to 7.75 499 7.1 7.08 85 7.02
8.00 to 8.88 81 9.2 8.33 5 8.18
9.00 to 9.13 76 6.8 3.86 - -
</TABLE>
Options to purchase approximately 1.5 million, 1.1 million and 0.8 million
shares of common stock were exercisable as of December 31, 1996, 1995 and 1994,
respectively.
1990 STOCK OPTION PLAN
Under the Company's 1990 Stock Option Plan, as amended, options granted to
purchase common stock of the Company may be either incentive stock options to
employees or nonqualified stock options to employees, directors or consultants,
at the discretion of the Board of Directors. The plan permits the Company to
grant incentive stock options at 100% of the fair value at the date of grant,
while nonqualified stock options may be granted at 50% of the fair value at the
grant date. Options granted to date generally vest at the rate of 25% of the
total shares upon the first anniversary of the vesting commencement date, and
2.08% of the total shares per month thereafter. Vesting begins on either the
grant date or, if different, on the vesting commencement date specified by the
Board of Directors. Such vesting is subject to continued employment with the
Company. The options expire ten years from the date of grant or 90 days from
termination, if sooner.
1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1992, the Company adopted the 1992 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), as amended, to provide for the automatic
grant of options to purchase shares of common stock to non-employee directors
of the Company. Each such director is granted an option to purchase 20,000
shares of common stock (40,000 shares for the Chairman of the Board). At the
beginning of each fiscal year, each non-employee director will be granted an
option to purchase an additional 4,000 shares of common stock (8,000 for the
Chairman). Vesting occurs in five equal annual installments from the date of
the grant for each year that the optionee remains a director. Vesting
52
<PAGE>
10. STOCK OPTION PLANS (CONTINUED)
1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN (CONTINUED)
accelerates upon certain changes in ownership of the Company. The exercise
price of options under the Directors' Plan must equal or exceed the fair
market value of the common stock on the date of the grant. Subject to
approval by the stockholders, the plan was amended subsequent to year-end to
increase the grant at the beginning of each fiscal year to each non-employee
director to 8,000 shares of common stock (12,000 for the Chairman).
1995 EMPLOYEE STOCK PURCHASE PLAN
In March 1995, the Company adopted the 1995 Employee Stock Purchase Plan and
reserved 350,000 shares of common stock for issuance thereunder. Under the
plan, employees purchased 112,743 and 39,730 shares of common stock in 1996
and 1995, respectively, at $3.83 to $7.12 per share.
1996 EQUITY INCENTIVE PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan to
provide for the issuance of stock options, restricted stock, stock bonuses
and stock appreciation rights to employees, directors or consultants, at the
discretion of the Board of Directors. The plan permits the Company to grant
incentive stock options at 100% of the fair value at the date of grant, while
nonqualified stock options may be granted at 85% of the fair value at the
grant date. Options granted will generally vest at the rate of 25% of the
total shares upon the first anniversary of the vesting commencement date, and
2.08% of the total shares per month thereafter. Vesting will begin on either
the grant date or, if different, on the vesting commencement date specified
by the Board of Directors. Such vesting will be subject to continued
employment with the Company. The options will expire ten years from the date
of grant or 90 days from termination, if sooner. The Company has reserved
2.8 million shares of common stock for issuance under this plan. As of
December 31, 1996, no options were issued or outstanding under the plan. The
plan is subject to stockholder approval.
OTHER OPTIONS AND WARRANTS
In September 1990, the Company granted to a director of the Company an option
to purchase 20,000 shares of common stock at $.05 per share, of any plans.
The option is fully vested and expires in September 2001, or three months
after termination as a director, if sooner.
In November 1995, the Company granted to an officer of the Company an option
to purchase 25,000 shares of common stock at $.50 per share, outside of any
plans. The option is fully vested and expires in November 2005.
In July 1992, the Company issued a warrant to purchase 42,000 shares of common
stock at $5.00 per share in connection with a capital lease agreement. The
warrant expires in July 2002.
53
<PAGE>
11. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Book/tax depreciation difference $ (115) $ -
Organization costs and patent amortization - (386)
--------- ---------
Total deferred tax liabilities (115) (386)
DEFERRED TAX ASSETS
Net operating loss carryovers 22,937 16,068
Research and development credit carryovers 3,612 3,223
Capitalized state research and development costs 4,005 2,530
Acea SRLY net operating loss carryover - 2,075
Other 158 253
--------- ---------
Total deferred tax assets 30,712 24,149
Valuation allowance for deferred tax assets (30,597) (23,763)
--------- ---------
Net deferred tax assets 115 386
--------- ---------
Net deferred taxes $ - $ -
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, the Company had operating loss carryovers of
approximately $53.2 million for federal income tax purposes. The federal
loss carryovers begin to expire in 2004. For federal and California income
tax purposes, the Company also had unused research and development credits of
approximately $2.3 million and $1.3 million respectively, which expire
beginning in 2004. The difference between the financial reporting and tax
loss carryforwards for California purposes is attributable to the
capitalization of research and development expenses and the 50% limitation on
loss carryforwards for California tax purposes.
The Tax Reform Act of 1986 includes provisions which significantly limit
potential use of net operating losses and tax credit carryovers in situations
where there is a change in ownership, as defined in Internal Revenue Service
Section 382, of more than 50% during a three-year period. Accordingly, if a
change in ownership occurs, the ultimate benefit realized from these
carryovers may be significantly reduced in total, and the amount that may be
utilized in any given year may be significantly limited. The limitation is
computed based upon the fair market value of the Company at the time of the
ownership change multiplied by the federal long-term tax-exempt borrowing
rate. California has enacted similar legislation. The Company has had stock
issuances and ownership changes have occurred. The first ownership change
occurred in 1990 with an annual limitation of approximately $400,000 on
accumulated net operating losses of approximately $800,000. Another
ownership change occurred as a result of the Acea acquisition in June 1994.
The annual limitation is approximately $2.4 million on accumulated net
operating losses of approximately $24.6 million.
54
<PAGE>
11. DEFERRED INCOME TAXES (CONTINUED)
In addition to the net operating losses discussed above, Acea had net
operating loss carryovers at June 30, 1994 of approximately $6.3 million and
$250,000 for federal and California income tax purposes, respectively,
resulting from operations before being acquired by the Company. As a result
of the acquisition, Acea experienced greater than 50% change in ownership.
Accordingly, under the provisions of the 1986 Tax Reform Act, the use of the
Acea net operating loss carryovers is limited to approximately $900,000 per
year. These carryovers begin to expire in 2007 for federal income tax
purposes and 1997 for California income tax purposes. The ultimate
realization of the benefits of these loss carryovers is dependent on future
profitable operations.
55
<PAGE>
Exhibit 3(i).1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COCENSYS, INC.
I.
The name of this corporation is CoCensys, Inc.
II.
The address of the registered office of the corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent,
and the name of the registered agent of the corporation in the State of Delaware
at such address is the Prentice Hall Corporation System.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is thirty-five
million (35,000,000) shares. Thirty million (30,000,000) shares shall be Common
Stock, each having a par value of one-tenth of One Cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of One Cent ($.001).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the Delaware General Corporation Law, to fix or alter from time to
time the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, including
without limitation the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and to establish from time to time the
number of shares constituting any such series and the designation thereof, or
any of them (a "Preferred Stock Designation"); and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
1.
<PAGE>
C. No share or shares of any series of Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued as part of such series, and the Board of Directors is authorized,
pursuant to Section 243 of the Delaware General Corporation law, to retire any
such share or shares. The retirement of any such share or shares shall not
reduce the total authorized number of shares of Preferred Stock.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by one or more resolutions adopted by the Board of Directors.
Following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), the directors shall be divided into three (3)
classes designated as Class I, Class II and Class III, respectively. Directors
shall be assigned to each class in accordance with a resolution or resolutions
adopted by the Board of Directors. At the first annual meeting of stockholders
following the closing of the Initial Public Offering, the term of office of the
Class I directors shall expire and Class I directors shall be elected for a full
term of three (3) years. At the second annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
closing of the Initial Public Offering, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three (3) years to succeed the directors of
the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the
then-outstanding shares of voting stock of the corporation entitled to vote
generally in the election of directors (the "Voting Stock") voting together as a
single class; or (ii) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of
2.
<PAGE>
Directors determines by resolution that any such newly created directorship
shall be filled by the stockholders, be filled only by the affirmative vote of
the directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
B. The Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock. In
furtherance and not in limitation of the power conferred by statute, the Board
of Directors is expressly authorized to adopt, amend, supplement or repeal the
Bylaws.
C. The directors of the corporation need not be elected by written ballot
unless the Bylaws so provide.
D. Following the closing of the Initial Public Offering, no action shall
be taken by the stockholders of the corporation except at an annual or special
meeting of stockholders called in accordance with the Bylaws and no action shall
be taken by the stockholders by written consent.
E. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
F. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock.
VI.
(1) A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
(2) The corporation is authorized to provide indemnification of agents (as
defined in Section 145 of the Delaware General Corporation Law) for breach of
duty to the corporation and its stockholders through bylaw provisions, through
agreements with the agents, and/or through
3.
<PAGE>
stockholder resolutions, or otherwise, in excess of the indemnification
otherwise permitted by Section 145 of the Delaware General Corporation Law,
subject to the limitations on such excess indemnification set forth in Section
102 of the Delaware General Corporation Law.
(3) Any repeal or modification of this Article VI by the stockholders of
the corporation shall not adversely affect any right or protection of a director
of the corporation existing at the time of such repeal or modification.
VII.
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required by law,
this Amended and Restated Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding
shares of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal Article V or Article IX.
VIII.
The corporation is to have perpetual existence.
IX.
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, except as provided in
Article VII of this Certificate, and all rights conferred upon the stockholders
herein are granted subject to this right.
4.
<PAGE>
Exhibit 3(i).2
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
COCENSYS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
COCENSYS, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the "Corporation"),
hereby certifies that the following resolution was adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at a meeting duly called and held on April 25, 1995:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Corporation in accordance with the
provisions of its Amended and Restated Certificate of Incorporation,
the Board of Directors hereby creates a series of Preferred Stock, par
value $.001 per share, of the Corporation and hereby states the
designation and number of shares, and fixes the relative rights,
preferences and limitations thereof (in addition to the provisions set
forth in the Restated Certificate of Incorporation of the Corporation,
which are applicable to the Preferred Stock of all classes and
series), as follows:
Series A Junior Participating Preferred Stock:
SECTION 1. DESIGNATION AND AMOUNT. Three Hundred Fifty Thousand
(350,000) shares of Preferred Stock, $.001 par value, are designated
"Series A Junior Participating Preferred Stock" with the rights,
preferences, privileges and restrictions
1.
<PAGE>
specified herein (the "Junior Preferred Stock"). Such number of
shares may be increased or decreased by resolution of the Board of
Directors; PROVIDED, that no decrease shall reduce the number of
shares of Junior Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants
or upon the conversion of any outstanding securities issued by the
Corporation convertible into Junior Preferred Stock.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Junior Preferred Stock with respect to dividends, the
holders of shares of Junior Preferred Stock, in preference to the
holders of Common Stock, par value $.001 per share (the "Common
Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Junior Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $l.00 or (b)
subject to the provision for adjustment hereinafter set forth, 100
times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise) declared on the Common
Stock since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date, since
the first issuance of any share or fraction of a share of Junior
Preferred Stock. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock)
into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Junior
Preferred
2.
<PAGE>
Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
the Junior Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Junior
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Junior Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends
on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of
holders of shares of Junior Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the
shares of Junior Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Junior
Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
3.
<PAGE>
SECTION 3. VOTING RIGHTS. The holders of shares of Junior
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Junior Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Junior Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Certificate of Determination of Preferences creating a series of
Preferred Stock or any similar stock, or by law, the holders of shares
of Junior Preferred Stock and the holders of shares of Common Stock
and any other capital stock of the Corporation having general voting
rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Junior Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Junior Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Junior Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
4.
<PAGE>
(I) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Junior Preferred Stock;
(II) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the
Junior Preferred Stock, except dividends paid ratably on the Junior
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(III) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Junior Preferred Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such junior stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding
up) to the Junior Preferred Stock; or
(IV) redeem or purchase or otherwise acquire for
consideration any shares of Junior Preferred Stock, or any shares of
stock ranking on a parity with the Junior Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Junior Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their
5.
<PAGE>
cancellation become authorized but unissued shares of Preferred Stock
and may be reissued as part of a new series of Preferred Stock subject
to the conditions and restrictions on issuance set forth herein, in
the Restated Certificate of Incorporation, or in any other Certificate
of Determination of Preferences creating a series of Preferred Stock
or any similar stock or as otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Junior Preferred Stock unless, prior
thereto, the holders of shares of Junior Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment, provided that the holders of shares of Junior
Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount to be distributed per share to
holders of shares of Common Stock, or (2) to the holders of shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Junior Preferred Stock, except
distributions made ratably on the Junior Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders
of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such
case the aggregate amount to which holders of shares of Junior
Preferred Stock were entitled immediately prior to such event under
the proviso in clause (1) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other
property, then in any such case each share of Junior Preferred Stock
shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or
6.
<PAGE>
any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such
case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Junior Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION. The shares of Junior Preferred Stock
shall not be redeemable.
SECTION 9. RANK. The Junior Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets,
junior to all series of any other class of the Corporation's Preferred
Stock.
SECTION 10. AMENDMENT. The Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner
which would materially alter or change the powers, preferences or
special rights of the Junior Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Junior Preferred Stock, voting
together as a single class.
7.
<PAGE>
IN WITNESS WHEREOF the undersigned have executed this certificate as of May
16, 1996.
/s/ Daniel L. Korpolinski
______________________________________
Daniel L. Korpolinski
President and Chief Executive Officer
/s/ Alan C. Mendelson
_______________________________________
Alan C. Mendelson
Secretary
8.
<PAGE>
Exhibit 3(i).3
CERTIFICATE OF POWERS, DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
COCENSYS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
COCENSYS, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the "Corporation"),
hereby certifies that the following resolution was adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at meetings duly called and held on February 27 and May 16,
1996:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Corporation in accordance with the
provisions of its Amended and Restated Certificate of Incorporation,
the Board of Directors hereby creates a series of Preferred Stock, par
value $.001 per share, of the Corporation and hereby states the
designation and number of shares, and fixes the relative rights,
preferences and limitations thereof (in addition to the provisions set
forth in the Restated Certificate of Incorporation of the Corporation,
which are applicable to the Preferred Stock of all classes and
series), as follows:
Series B Convertible Preferred Stock:
SECTION 3. DESIGNATION AND AMOUNT. One Hundred Thousand
(100,000) shares of Preferred Stock, $.001 par value, are designated
"Series B Convertible Preferred Stock" with the rights, preferences,
privileges and restrictions specified herein
1.
<PAGE>
(the "Series B Preferred Stock"). Subject to Section 7 hereof, such
number of shares may be increased or decreased by resolution of the
Board of Directors.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS. The holders of the Series
B Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available
therefor, dividends at the rate per share equal to any dividend
declared or paid per share to the Common Stock of the Corporation
("Common Stock"). The right to such dividends on the Series B
Preferred Stock shall be non-cumulative.
SECTION 3. VOTING RIGHTS. Except as set forth herein, or as
otherwise provided by law, holders of Series B Preferred Stock shall
have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
SECTION 4. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or
involuntary (a "Liquidation Event"), the holders of the Series B
Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock or Junior Preferred
Stock of the Corporation, an amount per share (as adjusted for any
combinations, consolidations, stock distributions or stock dividends
with respect to such shares) equal to the quotient of (a) $7,000,000
divided by (b) the number of Series B Preferred Stock issued and
outstanding as of the date of such Liquidation Event. If upon the
occurrence of such Liquidation Event, the assets and funds thus
distributed among the holders of the Series B Preferred Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed
among the holders of the Series B Preferred Stock in proportion to the
shares of Series B Preferred Stock then held by them.
SECTION 5. CONVERSION. Subject to the limitations set forth in
Subsection (C) below, the Series B Preferred Stock shall convert only
as follows:
(A) AUTOMATIC CONVERSION. The Series B Preferred Stock
outstanding on May 17, 1998 (the "Automatic Conversion
2.
<PAGE>
Date") shall automatically convert on such date, in whole and not
in part, into such number of fully paid and nonassessable shares of
Common Stock equal to the quotient of $7,000,000 divided by the
average closing price of the Corporation's Common Stock (as reported
in THE WALL STREET JOURNAL, WESTERN ADDITION) for a period of thirty
(30) trading days prior to the Automatic Conversion Date.
(B) CONVERSION AT CORPORATION'S OPTION. At any time prior to
the Automatic Conversion Date, the Corporation shall have the option,
in its sole discretion, to convert the Series B Preferred Stock, in
whole and not in part, into such number of fully paid and
nonassessable shares of Common Stock equal to the quotient of
$7,000,000 divided by the average closing price of the Corporation's
Common Stock (as reported in THE WALL STREET JOURNAL, WESTERN
ADDITION) for a period of thirty (30) trading days prior to date upon
which the Corporation issues notice to the holders of Series B
Preferred Stock of such optional conversion.
(C) LIMITATION ON CONVERTED SHARES. The number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock
shall not be fewer than the quotient of $7,000,000 divided by two
times the closing price of the Common Stock on May 17, 1996 (as
reported in the WALL STREET JOURNAL, WESTERN EDITION) (the "Market
Price"), nor greater than the quotient of $7,000,000 divided by
one-half of the Market Price.
(D) ADJUSTMENTS FOR COMBINATIONS OR SUBDIVISIONS OF COMMON
STOCK. In the event the Corporation at any time or from time to time
shall declare or pay any dividend on the Common Stock payable in
Common Stock or in any right to acquire Common Stock, or shall effect
a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise,
into a lesser number of shares of Common Stock, then the maximum and
minimum number of shares of Common Stock into which the Series B
Preferred Stock may be converted, shall be proportionately decreased
or increased, as appropriate.
(E) MECHANICS OF CONVERSION. Before any holder of Series B
Preferred Stock shall be entitled to receive shares of Common Stock,
he shall surrender the certificate or certificates thereof, duly
endorsed, at the office of the Corporation or of any transfer agent
for such stock, and shall state therein the name or
3.
<PAGE>
names in which he wishes the certificate or certificates for shares
of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder of Series B Preferred Stock, a certificate or certificates
for the number of shares of Common Stock to which he shall be
entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the Automatic
Conversion Date or the Optional Conversion Date, as appropriate,
and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on such
date.
(F) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series B Preferred
Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares
of the Series B Preferred Stock.
(G) FRACTIONAL SHARES. No fractional share shall be issued upon
the conversion of any share or shares of Series B Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of Series B Preferred Stock shall be aggregated for
purposes of determining whether the conversion would result in the
issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction
of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the closing price of the Common Stock
on the date of conversion, multiplied by such fraction.
(H) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any (i) reorganization of the capital stock of the
Corporation, (ii) consolidation or merger of the Corporation in which
the Corporation is not the surviving corporation, or (iii) sale of all
or substantially all of the Corporation's assets to another
corporation (each, an "Event") shall be effected in such a way that
holders of Common Stock shall be entitled to receive securities, cash
or other assets or property, the Automatic Conversion Date shall be
accelerated to the date immediately preceding such Event, or such
other date necessary to assure that any holder of Series B Preferred
Stock receives such shares of stock, securities or other
4.
<PAGE>
assets or property as may be issued or payable with respect to or in
exchange for shares of Common Stock.
SECTION 6. NO REDEMPTION. The shares of Series B Preferred Stock
shall not be redeemable.
SECTION 7. AMENDMENT. The Restated Certificate of Incorporation of
the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights
of the Series B Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series B Preferred Stock, voting together as a
single class.
5.
<PAGE>
IN WITNESS WHEREOF the undersigned have executed this certificate as of May
16, 1996.
/s/ Daniel L. Korpolinski
----------------------------------
Daniel L. Korpolinski
President and Chief Executive Officer
/s/ Alan C. Mendelson
----------------------------------
Alan C. Mendelson
Secretary
6.
<PAGE>
Exhibit 3(i).4
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COCENSYS, INC.
Daniel L. Korpolinski and Alan C. Mendelson hereby certify that:
FIRST: They are the duly elected and acting President and Secretary,
respectively, of CoCensys, Inc., a Delaware corporation.
SECOND: The name of this Corporation is COCENSYS, INC. (the "Corporation").
THIRD: The date on which the Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware is
February 5, 1993. A Certificate of Retirement of Series A, Series B and Series
C Preferred Stock was filed with the Secretary of State of the State of Delaware
on February 5, 1993. A Certificate of Designation of Series A Junior
Participating Preferred Stock was filed with the Secretary of State of the State
of Delaware on May 15, 1995. A Certificate of Powers, Designation, Preferences,
Rights and Limitations of Series B Convertible Preferred Stock was filed with
the Secretary of State of the State of Delaware on May 17, 1996.
FOURTH: The amendment to the Corporation's Amended and Restated Certificate
of Incorporation set forth below was duly adopted by the Board of Directors of
the Corporation, and approved by the Stockholders in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FIFTH: Article IV, Paragraph A of the Corporation's Certificate of
Incorporation is amended to read in its entirety as follows:
"IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is eighty million
(80,000,000) shares. Seventy-five million (75,000,000) shares shall be Common
Stock, each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001)."
1.
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Certificate of
Amendment of Amended and Restated Certificate of Incorporation this 12th day of
June, 1996 and hereby affirm and acknowledge under penalty of perjury that the
filing of this Certificate of Amendment of Amended and Restated Certificate of
Incorporation of CoCensys, Inc. is the act and deed of COCENSYS, INC.
COCENSYS, INC.
By: /s/ Daniel L. Korpolinski
______________________________________
Daniel L. Korpolinski, President and
Chief Executive Officer
ATTEST:
By: /s/ Alan C. Mendelson
____________________________________
Alan C. Mendelson,
Secretary
2.
<PAGE>
Exhibit 10.35
TRANSITION AND CONSULTING AGREEMENT
This TRANSITION AND CONSULTING AGREEMENT ("Agreement") is made and entered
into by and between DANIEL L. KORPOLINSKI ("Mr. Korpolinski") and COCENSYS, INC.
(the "Company"), as of the Effective Date provided for in paragraph sixteen (16)
herein.
W I T N E S S E T H
-------------------
WHEREAS, Mr. Korpolinski has tendered his resignation as President, Chief
Executive Officer and Director and all other positions he may hold with the
Company;
WHEREAS, the Company has accepted Mr. Korpolinski's resignation as
President, Chief Executive Officer and Director and wishes to provide
Mr. Korpolinski with certain benefits in consideration of his service to the
Company, Mr. Korpolinski's undertaking to develop the disease management
opportunity heretofore developed by the Company and the promises and covenants
of Mr. Korpolinski as contained herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. TRANSITION PERIOD. Mr. Korpolinski agrees to remain an employee of
the Company until December 31, 1996 ("Separation Date"), on which date he shall
cease to be an employee of the Company for all purposes. Mr. Korpolinski
already submitted to the Board of Directors his resignation as President, Chief
Executive Officer and a Director of the Company, effective October 30, 1996.
Between the Effective Date of this Agreement and the Separation Date
("Transition Period"), no office shall be provided on the Company premises for
Mr. Korpolinski's use. If Mr. Korpolinski reasonably requests that he have an
off-site office and secretarial support, the Company agrees to provide him
reasonable off-site office accommodations and shared secretarial support for the
six (6) month period commencing January 1, 1997, pursuant to terms to be
mutually agreed upon by Mr. Korpolinski and the Company.
2. ACCRUED SALARY AND PAID TIME OFF. During the Transition Period, Mr.
Korpolinski agrees to take all unused vacation time and paid time off accrued
prior to the Separation Date. To the extent that Mr. Korpolinski has accrued,
but unused, vacation time and paid time off remaining after the Separation Date,
he shall not be entitled to payment for such time.
3. CONSULTING AGREEMENT. Mr. Korpolinski shall serve as a consultant to
the Company under the terms specified below. The consulting relationship shall
commence on the Separation Date and continue for twenty-four (24) consecutive
months (the "Consulting Period"), unless terminated earlier as provided for
herein.
1.
<PAGE>
(A) CONSULTING SERVICES. Mr. Korpolinski agrees to make himself
available to the Company in any area of his expertise upon request by a duly
authorized representative of the Company. Mr. Korpolinski agrees to exercise
the highest degree of professionalism and utilize his expertise and creative
talents in performing these services. Mr. Korpolinski agrees to act as an
advisor to the Company and contribute to helping the Company build relationships
with key customers. Mr. Korpolinski also agrees to attend key strategic
meetings at the Company's request. The Company will make its facilities,
materials and other resources available to Mr. Korpolinski when necessary. Mr.
Korpolinski will perform the services necessary to achieve completion of the
tasks assigned to him by the Company in a timely and professional manner
consistent with industry standards.
(B) CONSULTING AVAILABILITY. Mr. Korpolinski agrees that during the
Consulting Period, he will make himself available to perform such consulting
services up to a maximum of ten (10) hours per month. Mr. Korpolinski will be
notified in a professional manner consistent with industry standards when his
services are required.
(C) CONSULTING FEE.
I. CONSULTING PAYMENTS. During the first eighteen (18)
months of the Consulting Period, Mr. Korpolinski shall receive eleven
thousand forty-one dollars and sixty-seven cents ($11,041.67) semi-monthly
("Consulting Payments"), subject to the following terms and conditions.
Except as provided in paragraph 3(g), if during the first eighteen (18)
months of the Consulting Period, Mr. Korpolinski accepts an offer of
employment from another employer, other than the disease management company
which Mr. Korpolinski presently anticipates forming, Mr. Korpolinski shall
not be entitled to any Consulting Payments from January 1, 1998 through June
30, 1998 except to the extent that his salary thereat is less than the
Consulting Payments, in which effect the Company shall pay the difference to
Mr. Korpolinski from January 1, 1998 through June 30, 1998. Mr. Korpolinski
agrees to notify a duly authorized officer of the Company, in writing,
immediately upon his acceptance of any such employment. For the remainder of
the Consulting Period, Mr. Korpolinski shall continue to make himself
available to the Company and the Company shall compensate Mr. Korpolinski for
Consulting Services used, if any, at a rate to be agreed upon by the Company
and Mr. Korpolinski. Cessation of Consulting Payments hereunder shall not be
deemed a termination of the Consulting Period unless such cessation occurs
pursuant to paragraph 3(g).
II. TAXES AND WITHHOLDING. As a consultant, the Company will
not withhold from the Consulting Payments any amount or make payments for taxes,
social security or other payroll deductions; make unemployment insurance or
disability insurance contributions; or obtain workers' compensation insurance on
Mr. Korpolinski's behalf. The Company will issue Mr. Korpolinski IRS Form 1099
with respect to his Consulting Payments. Mr. Korpolinski acknowledges that he
will be entirely responsible for complying with all applicable state and federal
laws governing self-employed individuals, including but not limited to
obligations to pay quarterly taxes, social security, disability and other
contributions based on the
2.
<PAGE>
fees paid to him under this Agreement. Mr. Korpolinski hereby indemnifies
and holds harmless the Company from any liability for any taxes,
contributions, penalties or interest.
III. CONSULTING EXPENSE REIMBURSEMENT. During the Consulting
Period, Mr. Korpolinski will submit monthly documented expense reimbursement
statements for expenses authorized by the Company in writing. The Company shall
reimburse his expenses pursuant to Company policy and regular business practice.
IV. CONSULTANT NOT AN EMPLOYEE. Mr. Korpolinski agrees that
during the Consulting Period it is the express intention of both Mr. Korpolinski
and the Company that he is an independent contractor and not an employee, agent,
joint venturer or partner of the Company. Mr. Korpolinski agrees not to hold
himself out as, or give any person or entity any reason to believe, that he is
an employee, agent, joint venturer or partner of the Company. Mr. Korpolinski
will not receive any employee benefits such as paid holidays, vacations, sick
leave or other such paid time off, or participate in Company-sponsored health
insurance or other employee benefit plans, other than as specified herein.
(D) LIMITATION ON AUTHORITY. Mr. Korpolinski shall have no
responsibilities or authority as a consultant to the Company other than as
provided for above. Mr. Korpolinski hereby agrees not to represent or purport
to represent the Company in any manner whatsoever to any third party unless
authorized by the Company, in writing, to do so.
(E) OTHER WORK ACTIVITIES. Throughout the Consulting Period, Mr.
Korpolinski will not obtain employment or perform work for Cambridge
NeuroScience, Inc. ("Competitive Activity"). Mr. Korpolinski acknowledges that
this provision is material to this Agreement, that it is fair, and that it will
not prevent him from obtaining other suitable employment. Mr. Korpolinski
agrees to notify the Company, in writing, at least ten (10) days prior to
engaging in any work for any business purpose.
(F) NONSOLICITATION/NONHIRE. Mr. Korpolinski agrees that, for
eighteen (18) months commencing on the Separation Date, he will not, either
directly or through others, (i) solicit or attempt to solicit any employee,
consultant, or independent contractor of the Company to terminate his or her
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or entity, or (ii) hire any
employee, consultant or independent contractor of the Company or have any
involvement in the hiring process of any third party (including but not limited
to recommending, recruiting, interviewing or participating in selection
deliberations) as to any employee, consultant or independent contractor of the
Company. The Company acknowledges that Mr. Korpolinski shall have the right to
request to the Company's Chairman of the Board or General Counsel that the
Company waive as to this provision as to certain employees. Such approval shall
not be unreasonably withheld by the Company.
3.
<PAGE>
(G) TERMINATION OF CONSULTING RELATIONSHIP.
In the event that Mr. Korpolinski is informed by the Company that
any work constitutes Competitive Activity and he subsequently engages in
Competitive Activity as defined in paragraph 3(e), the Company's obligation to
make Consulting Payments under paragraph 3(c) shall cease immediately, and the
Consulting Period shall end immediately.
In the event the Company terminates the Consulting Agreement for
cause, the Company's obligation to pay Consulting Fees and the vesting of stock
options set forth in paragraph 7 below shall cease immediately, and the
Consulting Period shall end immediately. For purposes of this paragraph,
"cause" shall mean: (i) indictment or conviction of any felony or of any crime
involving dishonesty; (ii) participation in any fraud or act of dishonesty
against the Company; (iii) breach of Mr. Korpolinski's duties to the Company,
including but not limited to unsatisfactory performance of job duties or
violations of Company policy; (iv) intentional damage to any property of the
Company; (v) conduct by Mr. Korpolinski which, in the good faith and reasonable
determination of the Board, demonstrates gross unfitness to serve; (vi) material
breach of Mr. Korpolinski's Proprietary Information and Inventions Agreement; or
(vii) material breach of any of the covenants in this Agreement. "Cause" shall
include any single instance of breach of Mr. Korpolinski's duties as a
consultant, gross violation of Company policy, or other serious misconduct.
4. BONUS. On or about January 2, 1997, the Company will pay Mr.
Korpolinski, as bonus for 1996, seventy-nine thousand five hundred dollars
($79,500), subject to standard deductions and withholdings. Mr. Korpolinski
acknowledges that he is entitled to no additional bonus payments.
5. HEALTH AND INSURANCE BENEFITS. To the extent permitted by the
Company's group health insurance plan and provided Mr. Korpolinski elects COBRA
coverage, the Company will continue Mr. Korpolinski's health insurance benefits
during the first eighteen (18) months of the Consulting Period; provided,
however, that the Company's obligation to continue such coverage shall cease
immediately if Mr. Korpolinski becomes eligible for other health insurance
benefits at the expense of a new employer or Mr. Korpolinski's Consulting
Agreement is terminated pursuant to paragraph 3(g). Mr. Korpolinski agrees to
notify a duly authorized officer of the Company, in writing, immediately upon
his acceptance of any such employment. Mr. Korpolinski will be provided with a
separate notice of his COBRA rights. The Company agrees to pay Mr.
Korpolinski's aggregate quarterly one thousand six hundred dollar ($1,600) life
insurance premium throughout the first eighteen (18) months of the Consulting
Period, unless Mr. Korpolinski becomes eligible for similar life insurance
benefits at the expense of a new employer or Mr. Korpolinski's Consulting
Agreement is terminated pursuant to paragraph 3(g).
6. RELOCATION BENEFITS. The Company agrees to reimburse Mr. Korpolinski
for his relocation expenses, if any, up to an amount equal to the lowest of
three (3) bids for
4.
<PAGE>
relocation of Mr. Korpolinski's furniture from two (2) sites (Corona del Mar
and furniture presently stored in Indianapolis, Indiana).
7. STOCK OPTIONS. The Company and Mr. Korpolinski acknowledge that the
Company granted Mr. Korpolinski, pursuant to the Company's 1990 Stock Option
Plan, options to purchase an aggregate of five hundred thousand (500,000) shares
of the Company's common stock ("Option Shares"). Both parties acknowledge that,
as of the Separation Date, Mr. Korpolinski has exercised the options as to none
of the Option Shares, is fully vested as to three hundred and sixteen thousand
four hundred and six (316,406) of the Option Shares and unvested as to one
hundred eighty three thousand five hundred and ninety three and eight-tenths
(183,593.8) of the Option Shares. A summary of Mr. Korpolinski's Option
Activity is attached hereto as Exhibit A. The Company agrees to recommend to
the Board of Directors amendment of all of Mr. Korpolinski's stock options to
(a) grant outright on January 2, 1997 to Mr. Korpolinski the unvested portion of
his Non-Qualified Stock Option, granted on June 15, 1995, in the amount of
twenty-one thousand ninety three and eight-tenths (21,093.8) Option Shares,
contingent upon Mr. Korpolinski's full and complete cooperation throughout the
Transition Period and his agreement to perform his obligations throughout the
Consulting Period ; (b) have the unvested portion of his Incentive Stock Option,
granted on December 12, 1995, in the amount of forty-two thousand thirteen
(42,013) Option Shares, continue to vest for twenty-four (24) continuous months
commencing on the Separation Date in accordance with the original terms of such
option; (c) have the unvested portion of his Non-Qualified Stock Option, granted
on December 12, 1995, in the amount of one hundred and twenty thousand four
hundred and eighty seven (120,487) Option Shares, continue to vest for
twenty-four (24) continuous months commencing on the Separation Date in
accordance with the original terms of such option; and (d) provide that all Mr.
Korpolinski's vested options may be exercised until October 31, 1999. Within 10
days of the Company's recommendation to the Board of Directors, Mr. Korpolinski
will be notified of the decision by the Board of Directors in writing by a duly
authorized officer of the Company. Mr. Korpolinski acknowledges that the
Company's outright grant of his Option Shares as set forth above, may be deemed
a taxable event and that Mr. Korpolinski has been advised by the Company to seek
tax advice in connection therewith. Mr. Korpolinski understands that, after
the amendment set forth above, any Incentive Stock Options (within the meaning
of Section 422 of the Internal Revenue Code) shall be nonstatutory stock
options. Mr. Korpolinski agrees that during the Consulting Period all his
shares of the Company's stock shall be subject to a lock-up in the event of a
public or private offering of the securities of the Company, during which
lock-up Mr. Korpolinski shall not sell or otherwise dispose of any securities of
the Company. Such lock-up period shall be equivalent in duration to the then
effective lock-up to which the Company's Board of Directors and executive
officers are subject and shall be subject to all directors and officers of the
Company agreeing to be so bound.
8. OTHER BENEFITS. Except as expressly provided herein, Mr. Korpolinski
acknowledges that he will not receive (nor is he entitled to) any additional
compensation, severance or benefits (including, but not limited to, disability
insurance).
5.
<PAGE>
9. EXPENSE REIMBURSEMENT. Within ten (10) business days after the
Separation Date, Mr. Korpolinski will submit his final documented expense
reimbursement statement reflecting all business expenses he incurred through the
Separation Date, if any, for which he seeks reimbursement. The Company shall
reimburse Mr. Korpolinski's expenses pursuant to Company policy and regular
business practice.
10. COMPANY PROPERTY. With the exception of the home computer provided by
the Company to Mr. Korpolinski, within ten (10) days after the Separation Date,
Mr. Korpolinski will return to the Company all Company documents (and all copies
thereof) and other Company property in his possession, or his control,
including, but not limited to, Company files, notes, drawings, records, business
plans and forecasts, financial information, specifications, computer-recorded
information, tangible property, credit cards, entry cards, identification badges
and keys; and, any materials of any kind which contain or embody any proprietary
or confidential material of the Company (and all reproductions thereof).
11. PROPRIETARY INFORMATION OBLIGATIONS. In consideration of the
compensation and benefits provided herein, Mr. Korpolinski agrees that he will
continue to be bound by the terms of his Proprietary Information and Inventions
Agreement ("Proprietary Information Agreement"), a copy of which is attached
hereto as Exhibit B.
12. EMPLOYMENT REFERENCES. The Company and Mr. Korpolinski agree to
direct all requests for employment references to Lowell E. Sears, James C. Blair
or Alan C. Mendelson, Director and Secretary. Mr. Korpolinski agrees that he
will execute the Nondisparagement Covenant attached hereto as Exhibit C upon
receipt of copies of the Nondisparagement Covenant executed by the Directors of
the Company. The Company agrees to release an official statement, attached
hereto as Exhibit D, regarding Mr. Korpolinski's separation from the Company.
13. CONFIDENTIALITY. The provisions of this Agreement shall be held in
strictest confidence by Mr. Korpolinski and the Company and shall not be
publicized or disclosed in any manner whatsoever. Notwithstanding the
prohibition in the preceding sentence: (a) Mr. Korpolinski may disclose this
Agreement, in confidence, to his immediate family; (b) the parties may disclose
this Agreement in confidence to their respective attorneys, accountants,
auditors, tax preparers, and financial advisors; (c) the Company may disclose
this Agreement as necessary to fulfill standard or legally required corporate
reporting or disclosure requirements; and (d) the parties may disclose this
Agreement insofar as such disclosure may be necessary to enforce its terms or as
otherwise required by law.
14. CONFIDENTIAL ARBITRATION. To ensure rapid and economical resolution
of any and all disputes which may arise in connection with this Agreement, Mr.
Korpolinski and the Company agree that any and all disputes, claims, causes of
action, in law or equity, arising from or relating to this Agreement or its
enforcement, performance, breach, or interpretation, shall be resolved by final
and binding confidential arbitration held in Orange County, California through
Judicial Arbitration & Mediation Services/Endispute, Inc. ("JAMS") under the
then existing
6.
<PAGE>
JAMS rules of Practice and Procedure. Any such arbitration shall be
conducted in the utmost secrecy. Nothing in this paragraph is intended to
prevent either Mr. Korpolinski or the Company from obtaining injunctive
relief in court to prevent irreparable harm pending the conclusion of such
arbitration.
15. RELEASE OF CLAIMS. Except as otherwise set forth in this Agreement,
Mr. Korpolinski hereby releases, acquits and forever discharges the Company, its
officers, directors, agents, attorneys, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages,
indemnities and obligations of every kind and nature, in law, equity, or
otherwise, known and unknown, suspected and unsuspected, disclosed and
undisclosed, arising out of or in any way related to agreements, events, acts or
conduct at any time prior to and including the execution date hereof, including
but not limited to: any and all such claims and demands directly or indirectly
arising out of or in any way connected with Mr. Korpolinski's employment with
the Company or the termination of that employment; claims or demands related to
salary, bonuses, commissions, stock, stock options, or any other ownership
interests in the Company, vacation pay, fringe benefits, expense reimbursements,
sabbatical benefits, severance benefits, or any other form of compensation;
claims pursuant to any federal, state, local law, statute or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as amended;
the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA");
the federal Americans with Disabilities Act of 1990; the California Fair
Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; fraud; defamation; harassment; emotional distress;
and breach of the implied covenant of good faith and fair dealing.
16. ADEA WAIVER. Mr. Korpolinski acknowledges that he is knowingly and
voluntarily waiving and releasing any rights he may have under the ADEA. He
also acknowledges that the consideration given for the waiver in the above
paragraph is in addition to anything of value to which he was already entitled.
He further acknowledges that he has been advised by this writing that: (a) his
waiver and release do not apply to any claims that may arise after he signs this
Agreement; (b) he has the right to consult with an attorney prior to executing
this Agreement; (c) he has twenty-one (21) days within which to consider this
Agreement (although he may choose to voluntarily execute this Agreement
earlier); (d) he has seven (7) days following the execution of this Agreement to
revoke the Agreement; (e) this Agreement shall not be effective until the date
upon which the revocation period has expired, which shall be the eighth day
after this Agreement is executed by Mr. Korpolinski, provided that the Company
has also signed the Agreement by that date ("Effective Date").
17. SECTION 1542 WAIVER. Mr. Korpolinski acknowledges that he has read
and understands Section 1542 of the Civil Code of the State of California which
reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
7.
<PAGE>
Mr. Korpolinski hereby expressly waives and relinquishes all rights and benefits
under that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release of unknown and unsuspected claims
granted in this Agreement.
18. ENTIRE AGREEMENT. This Agreement, including Exhibits A, B, C and D,
constitutes the complete, final and exclusive embodiment of the entire agreement
between Mr. Korpolinski and the Company with regard to the subject matter
hereof. It supersedes any and all employment agreements, including, without
limitation, paragraph 5(b) of Mr. Korpolinski's employment agreement, entered
into by and between Mr. Korpolinski and the Company. It is entered into without
reliance on any promise or representation, written or oral, other than those
expressly contained herein. It may not be modified except in a writing signed
by Mr. Korpolinski and a duly authorized officer of the Company. Each party has
carefully read this Agreement, has been afforded the opportunity to be advised
of its meaning and consequences by his or its respective attorneys, and signed
the same of his or its own free will.
19. SUCCESSORS AND ASSIGNS. This Agreement shall bind the heirs, personal
representatives, successors, assigns, executors, and administrators of each
party, and inure to the benefit of each party, its heirs, successors and
assigns.
20. WARRANTIES. Mr. Korpolinski warrants and represents that there are no
liens or claims of lien or assignments in law or equity or otherwise on or
against any of the claims or causes of action released herein, and, further,
that Mr. Korpolinski is fully entitled and duly authorized to give this complete
and final general release and discharge.
21. APPLICABLE LAW. This Agreement shall be deemed to have been entered
into and shall be construed and enforced in accordance with the laws of the
State of California as applied to contracts made and to be performed entirely
within California.
22. SEVERABILITY. If a court of competent jurisdiction determines that
any term or provision of this Agreement is invalid or unenforceable, in whole or
in part, then the remaining terms and provisions hereof shall be unimpaired.
Such court will have the authority to modify or replace the invalid or
unenforceable term or provision with a valid and enforceable term or provision
that most accurately represents the parties' intention with respect to the
invalid or unenforceable term or provision.
23. PARAGRAPH HEADINGS. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
24. COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, all of which together shall
constitute one and the same instrument.
8.
<PAGE>
IN WITNESS WHEREOF, the parties have duly authorized and caused this
Agreement to be executed as follows:
DANIEL L. KORPOLINSKI, COCENSYS, INC.,
an individual a corporation
/s/ Daniel L. Korpolinski By: /s/ Lowell E. Sears
__________________________ _______________________________
Daniel L. Korpolinski Lowell E. Sears
Chairman of the Board
Date: November 1, 1996 Date: November 1, 1996
9.
<PAGE>
EXHIBIT A
OPTION SUMMARY
<PAGE>
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
<TABLE>
<CAPTION>
OPTION HOLDER NAME GRANT SUBJECT TO EXPIRED OR
PLAN / NEXT VEST GRANT NO. TYPE DATE SHARES PRICE VESTED EXERCISED REPURCHASE CANCELLED
- -------------------------- --------- ----- -------- --------- -------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Korpolinski, Daniel L. (Tax ID:###-##-####) - Form 144
2611 Point Del Mar
Corona Del Mar, CA 92625
9 ISO 10/01/91 220,000.0 $0.125 220,000.0 0.0 0 0.0
1990 Plan / Fully Vested
24 ISO 10/20/92 80,000.0 $0.50 80,000.0 0.0 0 0.0
1990 Plan / Fully Vested
199 NQ 06/15/95 37,500.0 $3.875 16,406.3 0.0 0 0.0
1990 Plan / Next Vest: 781 - 11/01/96
269 ISO 12/12/95 42,813.0 $7.00 0.0 0.0 0 0.0
1990 Plan / Next Vest: 10,503 - 12/12/96
276 NQ 12/12/96 120,487.0 $7.00 0.0 0.0 0 0.0
1990 Plan / Next Vest: 30,171 - 12/12/96
--------- --------- --------- -------- --------- ----------
Totals for Korpolinski, Daniel L.: 500,000.0 ($2.700625) 316,406.3 0.0 0 0.0
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTION HOLDER NAME OUTSTANDING OUTSTANDING
PLAN / NEXT VEST OUTSTANDING UN-VESTED EXERCISABLE
- -------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Korpolinski, Daniel L. (Tax ID:DSS-32-2339) - Form 144
2611 Point Del Mar
Corona Del Mar, CA 92625
220,000.0 0.0 220,000
1990 Plan / Fully Vested
80,000.0 0.0 80,000
1990 Plan / Fully Vested
37,500.0 21,093.0 16,406
1990 Plan / Next Vest: 781 - 11/01/96
42,013.0 42,013.0 0
1990 Plan / Next Vest: 10,503 - 12/12/96
120,487.0 120,487.0 0
1990 Plan / Next Vest: 30,121 - 12/12/96
----------- ----------- -----------
Totals for Korpolinski, Daniel L.: 500,000.0 183,593.0 316,406
- -----------------------------------------------------------------------------------------
</TABLE>
If your employment is terminated, all un-vested shares as of the date of
termination are automatically cancelled. Numbers in braces [] represent
Weighted Average Price per Share.
)) Prices and Shares restated to account for the following Split in Common:
Date: 01/23/93 Ratio: 2 for 1 Cumulative Ratio: 2,000000000
<PAGE>
Page 2
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Mr. Daniel L. Korpolinski--------------------------------------------------------------------------------
2611 Point Del Mar
Corona Del Mar, CA 92625
Tax ID: ###-##-####
Form 14A
Hired 10/01/1991
- ------------------------------------- Grant Number 9 ---------------------------------------------
Type : ISO
Date : 10/01/1991
Plan : 1990 Stock Option Plan
Class: Common
Shares Price Dollar Amount Fair Market Value Dollar Amount @ FMV
220,000.00 $0.125 $27,500.00 N/A N/A
Vesting Based on: 1/48th per month from Vesting Commencement Date
Vesting Begins on: 09/30/1992
Period Shares Vesting Vesting in Last Date
Full Vest Over the Period Period Occurs to Exercise
---------- --------------- ------------- ------------
Waiting Period 09/30/1992 55,000.00 End of Period 09/30/2001
Period 1 09/30/1993 55,000.00 Monthly 09/30/2001
Period 2 09/30/1994 55,000.00 Monthly 09/30/2001
*Period 3 09/30/1995 55,000.00 Monthly 09/30/2001
Vested to date: 220,000
* Fully Vested
- ----------------------------------------- Exercises ------------------------------------------------
NONE
- ------------------------------------------ Terminations ---------------------------------------------
NONE
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------- Totals for Grant Number 9 as of 10/31/1996 ------------------------
<S> <C> <C> <C> <C>
Shares Dollars Dollars
Granted-------------------220,000 $ 27,500.00 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding---------------220,000 $ 27,500.00
Outstanding Un-Vested-----------0 $ 0.00
Outstanding Exercisable---220,000 $ 27,500.00 Last Date to Exercise: 09/30/2001
</TABLE>
<PAGE>
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
Mr. Daniel L. Korpolinski continued...
<TABLE>
<CAPTION>
- ------------------------------------ Grant Number 24 -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Type : ISO
Date : 10/20/1992
Plan : 1990 Stock Option Plan
Class: Common
Shares Price Dollar Amount Fair Market Value Dollar Amount @ FMV
80,000.00 $0.50 $40,000.00 N/A N/A
Vesting Based on: 1/48th per month from Vesting Commencement Date
Vesting Begins on: 10/20/1992
Period Shares Vesting Vesting in Last Date
Full Vest Over the Period Period Occurs to Exercise
---------- --------------- ------------- ------------
Waiting Period NONE
Period 1 10/20/1993 20,000.00 Monthly 10/19/2002
Period 2 10/20/1994 20,000.00 Monthly 10/19/2002
Period 3 10/20/1995 20,000.00 Monthly 10/19/2002
*Period 4 10/20/1996 20,000.00 Monthly 10/19/2002
Vested to date: 80,000
* Fully Vested
- ----------------------------------------- Exercises ------------------------------------------------
NONE
- ----------------------------------------- Terminations ---------------------------------------------
NONE
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------- Totals for Grant Number 24 as of 10/31/1996 ------------------------
<S> <C> <C> <C> <C>
Shares Dollars Dollars
Granted--------------------80,000 $ 40,000.00 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding----------------80,000 $ 40,000.00
Outstanding Un-Vested-----------0 $ 0.00
Outstanding Exercisable----80,000 $ 40,000.00 Last Date to Exercise: 10/19/2002
</TABLE>
<PAGE>
Page 3
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
Mr. Daniel L. Korpolinski continued...
<TABLE>
<CAPTION>
- ------------------------------------ Grant Number 199 -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Type : Non Qual
Date : 06/15/1995
Plan : 1990 Stock Option Plan
Class: Common
Shares Price Dollar Amount Fair Market Value Dollar Amount @ FMV
37,500.00 $3.875 $145,312.50 $4.625 $173,437.50
Vesting Based on: 25% 1year from vest date. 1/36 each month thereafter ("STD")
Vesting Begins on: 01/01/1995
Period Shares Vesting Vesting in Last Date
Full Vest Over the Period Period Occurs to Exercise
---------- --------------- ------------- ------------
Waiting Period 01/01/1996 0.00 End of Period 06/14/2005
Period 1 01/01/1996 9,375.00 End of Period 06/14/2005
*Period 2 01/01/1999 28,125.00 Monthly 06/14/2005
Vested to date: 16,406.25
* Next Vest: 781 Shares on 11/01/1996
- ----------------------------------------- Exercises ------------------------------------------------
NONE
- ----------------------------------------- Terminations ---------------------------------------------
NONE
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------- Totals for Grant Number 199 as of 10/31/1996------------------------
<S> <C> <C> <C> <C>
Shares Dollars Dollars
Granted--------------------37,500 $ 145,312.50 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding----------------37,500 $ 145,312.50
Outstanding Un-Vested------21,093.750 $ 81,738.28
Outstanding Exercisable----16,406 $ 63,573.25 Last Date to Exercise: 06/14/2005
- ------------------------------------ Grant Number 269 -----------------------------------------------
Type : ISO
Date : 12/12/1995
Plan : 1990 Stock Option Plan
Class: Common
Shares Price Dollar Amount Fair Market Value Dollar Amount @ FMV
42,013.00 $7.00 $294,091.00 $7.00 $294,091.00
</TABLE>
<PAGE>
Page 4
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
Grant Number 269 for Mr. Daniel L. Korpolinski continued...
Vesting Based on: 25% 1year from vest date. 1/36 each month thereafter ("STD")
Vesting Begins on: 12/12/1995
Period Shares Vesting Vesting in Last Date
Full Vest Over the Period Period Occurs to Exercise
---------- --------------- ------------- ------------
Waiting Period NONE
*Period 1 12/12/1996 10,503.25 End of Period 12/11/2005
Period 2 12/12/1999 31,509.75 Monthly 12/11/2005
Vested to date: 0
* Next Vest: 10.503 Shares on 12/12/1996
<TABLE>
<CAPTION>
- ----------------------------------------- Exercises ------------------------------------------------
NONE
- ----------------------------------------- Terminations ---------------------------------------------
NONE
- --------------------------------- Totals for Grant Number 269 as of 10/31/1996----------------------
<S> <C> <C> <C> <C>
Shares Dollars Dollars
Granted--------------------42,013 $ 294,091.00 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding----------------42,013 $ 294,091.00
Outstanding Un-Vested------42,013 $ 294,091.00
Outstanding Exercisable---------0 $ 0.00
- ------------------------------------ Grant Number 276 -----------------------------------------------
Type : Non Qual
Date : 12/12/1995
Plan : 1990 Stock Option Plan
Class: Common
Shares Price Dollar Amount Fair Market Value Dollar Amount @ FMV
120,487.00 $7.00 $843,409.00 $7.00 $843,409.00
</TABLE>
<PAGE>
Page 5
COCENSYS
OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI
ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
Grant Number 276 for Mr. Daniel L. Korpolinski continued...
Vesting Based on: 25% 1year from vest date. 1/36 each month thereafter ("STD")
Vesting Begins on: 12/12/1995
Period Shares Vesting Vesting in Last Date
Full Vest Over the Period Period Occurs to Exercise
---------- --------------- ------------- ------------
Waiting Period NONE
*Period 1 12/12/1996 30,121.75 End of Period 12/11/2005
Period 2 12/12/1999 90,366.25 Monthly 12/11/2005
Vested to date: 0
* Next Vest: 30.121 Shares on 12/12/1996
<TABLE>
<CAPTION>
- ----------------------------------------- Exercises ------------------------------------------------
NONE
- ----------------------------------------- Terminations ---------------------------------------------
NONE
- --------------------------------- Totals for Grant Number 276 as of 10/31/1996 ------------------------
<S> <C> <C> <C> <C>
Shares Dollars Dollars
Granted-------------------120,487 $ 843,409.00 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding---------------120,487 $ 843,409.00
Outstanding Un-Vested-----120,487 $ 843,409.00
Outstanding Exercisable---------0 $ 0.00
- --------------------------------- Totals for Mr. Daniel L. Korpolinski as of 10/31/996 ------------------------
Shares Dollars Dollars
Granted-------------------500,000 $ 1,350,312.50 Exercise Compensation---------$ 0.0
Exercised-----------------------0 $ 0.00 Exercise Taxes----------------$ 0.0
Expired (Vested)----------------0 $ 0.00
Cancelled (Un-Vested)-----------0 $ 0.00
- ---------------------------------------------------------
Outstanding---------------500,000 $ 1,350,312.50
Outstanding Un-Vested-----183,593.750 $ 1,219,238.28
Outstanding Exercisable---316,406 $ 131,073.25
</TABLE>
)) Prices and Shares restated to account for the following Split in Common:
Date: 01/23/1993 Ratio: 2 for 1 Cumulative Ratio: 2.000000000
<PAGE>
EXHIBIT B
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE>
[Logo] CoCensys
PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENT
As an employee of CoCensys, Inc., its subsidiary or its affiliate
(together, the "Company"), and as a condition of my employment by the Company
and in consideration of my employment, or continued employment by the Company
and the compensation now and hereafter paid to me, I agree to the following:
1. MAINTAINING CONFIDENTIAL INFORMATION.
(a) COMPANY INFORMATION. I agree at all times during the term of my
employment and thereafter to hold in strictest confidence, and not to use,
except for the benefit of the Company, or to disclose to any person, firm or
corporation, without the written authorization of the Board of Directors of
the Company, any trade secrets, confidential knowledge, data or other
proprietary information of the Company. By way of illustration and not
limitation, such proprietary information shall include tangible and
intangible information relating to antibodies and other biological materials,
cell lines, samples of assay components, media and/or cell lines and
procedures and formulations for producing any such assay components, media
and/or cell lines, formulations, products, processes, know-how, designs,
formulas, methods, developmental or experimental work, improvements,
discoveries, plans for research, new products, marketing and selling,
business plans, budgets and unpublished financial statements, licenses,
prices and costs, suppliers and customers, and information regarding the
skills and compensation of other employees of the Company.
(b) FORMER EMPLOYER INFORMATION. I agree that I will not, during my
employment with the Company, improperly use or disclose any proprietary
information or trade secrets of my former or concurrent employers or
companies, if any, and that I will not bring onto the premises of the Company
any unpublished documents or any property belonging to my former or
concurrent employers or companies unless consented to in writing by said
employers or companies.
(c) THIRD PARTY INFORMATION. I recognize that the Company has received
and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain
the confidentiality of such information and, in some cases, to use it only
for certain limited purposes. I agree that I owe the Company and such third
parties, both during the term of my employment and thereafter, a duty to
<PAGE>
hold all such confidential or proprietary information in the strictest
confidence and not to disclose it to any person, firm or corporation (except
in a manner that is consistent with the Company's agreement with the third
party) or use it for the benefit of anyone other than the Company or such
third party (consistent with the Company's agreement with the third party).
2. ASSIGNMENT OF INVENTIONS AND ORIGINAL WORKS.
(a) INVENTIONS AND ORIGINAL WORKS RETAINED BY ME. I have attached hereto
as Exhibit A a complete list of all inventions, original works of authorship,
developments, improvements, and trade secrets that I have, alone or jointly
with others, conceived, developed or reduced to practice or caused to be
conceived, developed or reduced to practice prior to the commencement of my
employment with the Company, that I consider to be my property or the
property of third parties and that I wish to have excluded from the scope of
this Agreement. If disclosure of an item on Exhibit A would cause me to
violate any prior confidentiality agreement, I understand that I am not to
list such in Exhibit A but am to inform the Company that all items have not
been listed for that reason. A space is provided on Exhibit A for such
purpose. If no list is attached, I represent that there are no such items.
(b) INVENTIONS AND ORIGINAL WORKS ASSIGNED TO THE COMPANY. I agree that
I will make prompt written disclosure to the Company, will hold trust for the
sole right and benefit of the Company, and hereby assign to the Company all
my right, title and interest in and to any ideas, inventions, compositions of
matter, original works of authorship, developments, improvements or trade
secrets which I may solely or jointly conceive or reduce to practice, or
cause to be conceived or reduced to practice, during the period of my
employment with the Company. I recognize that this Agreement does not require
assignment of any invention which qualifies fully for protection under
Section 2870 of the California Labor Code (hereinafter "Section 2870"), which
provides as follows:
(1) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(i) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(ii) Result from any work performed by the employee for the employer.
2
<PAGE>
(2) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from
being required to be assigned under subdivision (1), the provision is
against the public policy of this state and is unenforceable.
I acknowledge that all original works of authorship which are made
by me (solely or jointly with others) within the scope of my
employment and which are protectable by copyright are "works made
for hire," as that term is defined in the United States Copyright
Act (17 U.S.C., Section 101).
(c) INVENTIONS AND ORIGINAL WORKS ASSIGNED TO THE UNITED STATES. I agree
to assign to the United States government all my right, title and interest in
and to any and all inventions, original works of authorship, developments,
improvements or trade secrets whenever full title to same is required to be
in the United States by a contract between the Company and the United States
or any of its agencies.
(d) OBTAINING LETTERS PATENT, COPYRIGHT REGISTRATIONS AND OTHER
PROTECTIONS. I will assist the Company in every proper way to obtain and
enforce United States and foreign proprietary rights relating to any and all
inventions, original works or authorship, developments, improvements or trade
secrets of the Company in any and all countries. To that end I will execute,
verify and deliver such documents and perform such other acts (including
appearing as a witness) the Company may reasonably request for use in
applying for, obtaining, perfecting, evidencing, sustaining and enforcing
such proprietary rights and the assignment thereof. In addition, I will
execute, verify and deliver assignments of such proprietary rights to the
Company or its designee. My obligation to assist the Company with respect to
proprietary rights in any and all countries shall continue beyond the
termination of my employment, but the Company shall compensate me at a
reasonable rate after my termination for the time actually spent by me at the
Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable effort, to
secure my signature on any document needed in connection with the actions
specified in the preceding paragraph, I hereby irrevocably designate and
appoint the Company and its duly authorized officers and agents as my agent
and attorney in fact, to act for and in my behalf to execute, verify and file
any such documents and to do all other lawfully permitted acts to further the
purposes of the preceding paragraph with the same legal force and effect as
if executed by me. I hereby waive and quitclaim to the Company any and all
claims of any nature whatsoever which I now or may hereafter have for
infringement of any proprietary rights assigned to the Company.
(e) OBLIGATION TO KEEP THE COMPANY INFORMED. In addition to my
obligations under paragraph 2(b) above, during the period of my employment
and for one year after termination of my employment for any reason, I will
promptly disclose to the Company
3
<PAGE>
fully and in writing all patent applications filed by me or on my behalf. At
the time of each such disclosure, I will advise the Company in writing of any
inventions that I believe fully qualify for protection under Section 2870;
and I will at that time provide to the Company in writing all evidence
necessary to substantiate that belief. I understand that the Company will
keep in confidence and will not disclose to third parties without my consent
any proprietary information disclosed in writing to the Company pursuant to
this Agreement relating to inventions that qualify fully for protection
under the provisions of Section 2870. I will preserve the confidentiality of
any invention that does not qualify fully for protection under Section 2870.
I agree to keep and maintain adequate and current records (in the form of
notes, sketches, drawings and in any other form that may be required by the
Company) of all proprietary information developed by me and all inventions
made by me during the period of my employment at the Company, which records
shall be available to and remain the sole property of the Company at all
times.
3. NO CONFLICTING EMPLOYMENT; NO INDUCEMENT OF OTHER EMPLOYEES OR
SOLICITATION OF CUSTOMERS.
I agree that during the period of my employment by the Company I will
not, without the Company's express written consent, engage in any other
employment or business activity directly related to the business in which the
Company is now involved or becomes involved, nor will I engage in any other
activities which conflict with my obligations to the Company. For the period
of my employment by the Company and for one (1) year after the date of
termination of my employment by the Company I will not (i) induce any
employee of the Company to leave the employ of the Company or (ii) solicit
the business of any client or customer of the Company (other than on behalf
of the Company).
4. NO CONFLICTING OBLIGATIONS.
I represent that my performance of all the terms of this Agreement and
as an employee of the Company does not and will not breach any agreement to
keep in confidence information acquired by me in confidence or in trust prior
to my employment by the Company. I have not entered into, and I agree I will
not enter into, any agreement either written or oral in conflict herewith.
5. RETURN OF COMPANY DOCUMENTS.
When I leave the employ of the Company, I will deliver to the Company
(and will not keep in my possession, recreate or deliver to anyone else) any
and all devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints,
4
<PAGE>
sketches, materials, equipment, other documents or property, together with
all copies thereof (in whatever medium recorded) belonging to the Company,
its successors or assigns. I further agree that any property situated on the
Company's premises and owned by the Company, including disks and other
storage media, filing cabinets or other work areas, is subject to inspection
by Company personnel at any time with or without notice. Prior to leaving, I
will cooperate with the Company in completing and signing the Company's
termination statement for technical and management personnel.
6. NOTIFICATION OF NEW EMPLOYER.
In the event that I leave the employ of the Company, I hereby consent to
the notification of my new employer of my rights and obligations under this
Agreement.
7. LEGAL AND EQUITABLE REMEDIES.
Because my services are personal and unique and because I may have
access to and become acquainted with the proprietary information of the
Company, the Company shall have the right to enforce this Agreement and any
of its provisions by injunction, specific performance or other equitable
relief, without bond, without prejudice to any other rights and remedies that
the Company may have for a breach of this Agreement.
8. GENERAL PROVISIONS.
(a) NOT AN EMPLOYMENT CONTRACT. I agree and understand that nothing in
this Agreement shall confer any right with respect to continuation of
employment by the Company, nor shall it interfere in any way with my right or
the Company's right to terminate my employment at any time, with or without
cause.
(b) GOVERNING LAW: CONSENT TO PERSONAL JURISDICTION. This Agreement will
be governed by and construed according to the laws of the State of
California. I hereby expressly consent to the personal jurisdiction of the
state and federal courts located in California for any lawsuit filed there
against me by the Company arising from or relating to this Agreement.
(c) ENTIRE AGREEMENT. This Agreement sets forth the final, complete and
exclusive agreement and understanding between the Company and me relating to
the subject matter hereof and merges all prior discussions between us. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, will be effective unless in writing and signed by both
the Company and me. Any subsequent change or changes in my duties, salary or
compensation will not affect the validity or scope of this Agreement.
5
<PAGE>
(d) SEVERABILITY. If one or more of the provisions in this Agreement are
deemed unenforceable by law, then the remaining provisions will continue in
full force and effect.
(e) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my
heirs, executors, administrators and other legal representatives and will be
for the benefit of the Company, its successors and its assigns.
(f) SURVIVAL. The provisions of this Agreement shall survive the
termination of my employment and the assignment of this Agreement by the
Company to any successor in interest or other assignee.
(g) WAIVER. No waiver by the Company of any breach of this Agreement
shall be a waiver of any proceeding or succeeding breach. No waiver by the
Company of any right under this Agreement shall be construed as a waiver of
any other right. The Company shall not be required to give notice to enforce
strict adherence to all terms of this Agreement.
This Agreement shall be effective as of the first day of my employment
with the Company, namely: _________________________, 19___.
6
<PAGE>
I UNDERSTAND THAT THIS AGREEMENT AFFECTS MY RIGHTS TO INVENTIONS I
MAKE DURING MY EMPLOYMENT, AND RESTRICTS MY RIGHT TO DISCLOSE OR USE THE
COMPANY'S PROPRIETARY INFORMATION DURING OR SUBSEQUENT TO MY EMPLOYMENT.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT.
Dated: , 19 . -------------------------------
---------------------- -- Signature
-------------------------------
Name of Employee
-------------------------------
Address
-------------------------------
ACCEPTED AND AGREED TO:
COCENSYS,INC.
By:
-------------------------------
Authorized Signatory
7
<PAGE>
EXHIBIT A
COCENSYS,INC.
- -----------------------------
- -----------------------------
Gentlemen:
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by CoCensys, Inc. (the
"Company") that have been made or conceived or first reduced to practice by
me alone or jointly with others prior to my engagement by the Company:
/ / No inventions or improvements
/ / See below
--------------------------------------------------------------------
/ / Due to confidentiality agreements with a prior employer, I cannot
disclose certain inventions that would otherwise be included on the
above-described list
/ / Additional sheets attached
2. I propose to bring to my employment the following devices, materials
and documents of a former employer or other person to whom I have an
obligation of confidentiality that are not generally available to the public,
which materials and documents may be used in my employment pursuant to the
express written authorization of my former employer or such other person (a
copy of which is attached hereto):
/ / No inventions or improvements
/ / See below
-------------------------------------------------------------------
/ / Additional sheets attached
Date: , 19 Very truly yours,
----------------------- ---
-------------------------
Employee
8
<PAGE>
EXHIBIT C
NONDISPARAGEMENT COVENANT
<PAGE>
NONDISPARAGEMENT COVENANT
The undersigned hereby agree that neither will at any time disparage the
other in any manner likely to be harmful to the other, their business
reputation, or the personal or business reputation of the other's directors,
shareholders, agents and employees. The Company shall limit its
response to requests for information regarding Mr. Korpolinski to the
official statement (see Exhibit C to the Separation and Consulting Agreement).
Individual directors shall make no comment beyond the contents of the official
statement in response to requests for information regarding Mr. Korpolinski.
The undersigned acknowledge and understand that all requests for employment
references for Mr. Korpolinksi shall be referred to the individuals
designated in paragraph 12 of the Separation and Consulting Agreement to
respond to such inquiries. The undersigned acknowledge that each party shall
respond accurately and fully to any questions, inquiry, or request for
information made in connection with the separation agreement entered into by
and between Daniel L. Korpolinski and CoCensys, Inc. when required by legal
process or when necessary to fulfill standard or legally required corporate
reporting or disclosure requirements.
- ---------------------------------- ------------------------------------
Daniel L. Korpolinski
- ------------------- November 1, 1996
Date
<PAGE>
EXHIBIT D
OFFICIAL STATEMENT
<PAGE>
[Logo] COCENSYS [Letterhead]
CONTACT: Peter E. Jansen Christi Foster
Vice President, Chief Financial Officer Communications Director
(714) 753-6112
Eckard Weber, MD
Executive Vice President Research & Development
(714) 753-6100
David A.H. Lee, MD, PhD
Executive Vice President Research & Development
(714) 753-6100
FOR IMMEDIATE RELEASE
COCENSYS CEO KORPOLINSKI LEAVES TO LEAD SPIN-OFF VENTURE
IRVINE, California/PR Newswire/Oct. 30, 1996 - CoCensys, Inc. (Nasdaq: COCN)
announced today that it is participating in a new disease management venture.
To lead this venture, Daniel L. Korpolinski has stepped down as Chief
Executive Officer and a Board member of CoCensys, effective immediately.
Regarding the new venture, Lowell Sears, Chairman of the Board of CoCensys,
remarked, "Disease management represents a significant future business
opportunity in which the company has developed an asset base. Although not
core to the company's current efforts, it warrants pursuing. Dan has been a
champion and visionary for this concept and will now lead it as a dedicated
effort. He has made numerous contributions to the company over the past five
years and will be missed, but we look forward to the success of this venture."
"As health care in the United States changes, and as our population continues
to age, third-party payors are going to require greater efficiencies and
accountabilities, " Korpolinski said, "Our objective with this new venture is
to pull together the key players. By making existing technologies available
to patients, physicians, administrators and payors, we believe we can
streamline processes and improve care. But we need to act soon, and I'm
excited to have the opportunity to create this type of comprehensive disease
management company."
Pending the appointment of a new chief executive officer for CoCensys, the
company has formed an Office of the President that will report to the Board
of Directors and will be responsible for the day-to-day operations of the
company. The members of the Office of the President are David A. H. Lee,
M.D., Ph.D., Executive Vice President of Research & Development; Eckard
Weber, M.D., Senior Vice President of Drug Discovery; and Peter E. Jansen,
Vice President and Chief Financial Officer. Sears expressed confidence in
the Office of the President, remarking that "Under David's, Eckard's and
Peter's combined leadership, the company is well positioned to pursue
vigorously its pipeline of breakthrough therapeutic products for central
nervous system disorders."
-- More --
<PAGE>
In addition, the company announced the promotion of Rick Henson, Vice
President of Sales and Marketing, to President of CoCensys' newly formed
Sales and Marketing Division. Regarding Henson's appointment, Sears said,
"Rick has built a high caliber organization targeting the company's CNS
markets with co-promoted pharmaceutical products, and we look forward to his
team's continued contribution to CoCensys as he assumes this new position."
CoCensys is a biopharmaceutical company that discovers, develops and markets
products to treat neurological and psychiatric disorders. The company's
product development programs focus on two novel, proprietary classes of
compounds: Epslons, to treat epilepsy, anxiety and sleep disorders; and
excitatory amino acid (EAA) receptor antagonists to treat stroke, traumatic
brain injury, epilepsy and Parkinson's disease. Through its co-promotion
alliances with Parke-Davis, Somerset Pharmaceuticals and Ciba-Geigy, CoCensys
also markets several CNS products to neurologists and psychiatrists,
including Cognex-registration mark- for the treatment of Alzheimer's disease,
Eldepryl-registration mark- for Parkinson's disease, Anafranil-registration
mark- for obsessive compulsive disorder, and Tofranil-registration mark- and
Tofranil-PM-registration mark- for depression.
###
<PAGE>
October 30, 1996
Board of Directors of CoCensys, Inc.:
I hereby resign my position as President, Chief Executive Officer and as a
member of the Board of Directors of CoCensys, Inc., effective October 30,
1996.
Sincerely,
/s/ Daniel L. Korpolinski
Daniel L. Korpolinski
<PAGE>
Exhibit 10.36
COCENSYS, INC.
EMPLOYEE AGREEMENT
FOR
RICK A. HENSON
This Employment Agreement ("Agreement") is entered into as of the thirtieth
day of October, 1996, by and between Rick A. Henson ("Executive") and CoCensys,
Inc. (the "Company").
WHEREAS, the Company desires to continue to employ Executive to provide
personal services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his continued services; and
WHEREAS, Executive wishes to continue to be employed by the Company and
provide personal services to the Company in return for certain compensation and
benefits;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 Subject to terms set forth herein, the Company agrees to employ
Executive in the position of President, Sales and Marketing and Executive hereby
accepts such continued employment effective November 1, 1996 (the "Employment
Date"). During the term of his employment with the Company, Executive will
devote his best efforts and substantially all of his business time and attention
(except for vacation periods as set forth herein and reasonable periods of
illness or other incapacities permitted by the Company's general employment
policies) to the business of the Company.
1.2 Executive shall serve in an executive capacity and shall perform
such duties as are customarily associated with his then current title,
consistent with the Bylaws of the Company and as required by the Company's
President, Chief Executive Officer, or Board of Directors (the "Board").
1.3 As required by law, Executive's employment is subject to
satisfactory proof of his right to work in the United States.
1.4 The employment relationship between the parties shall also be
governed by the general employment policies and practices of the Company,
including those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement shall control.
1.
<PAGE>
2. COMPENSATION.
2.1 SALARY. Executive shall receive a twenty two percent (22%)
increase in his base salary. Pursuant to this increase, Executive shall receive
for services to be rendered hereunder an annualized base salary of one hundred
and ninety thousand ($190,000), payable on a semi-monthly basis.
2.2 BONUS. The Company agrees to increase Executive's bonus
percentage from twenty percent (20%) of his base salary to twenty five percent
(25%) of his base salary, based upon achieving MBO performance objectives or
such other mutually agreed upon performance objectives consistent with those in
place for other Company executives from time to time. The bonus shall be
payable in four (4) equal installments on the last day for each calendar quarter
during the term of this Agreement.
2.3 OPTION SHARES. The Company agrees to grant to Executive an
Incentive Stock Option to purchase fifty thousand (50,000) shares of the Common
Stock of CoCensys, Inc., approved by the Board on October 30, 1996. The
exercise price of this option will be the Fair Market Value of CoCensys, Inc.
Common Stock on October 30, 1996. The stock will vest according to the
following schedule:
The stock option will vest over four (4) years, commencing on the
Employment Date. Twenty-five percent (25%) of the option shares shall vest on
the date that is twelve (12) months from the Employment Date, with 1/48 vesting
per month for the remaining thirty-six (36) months.
2.4 COMPANY BENEFITS. Executive will be eligible for group medical
insurance and group dental insurance and will receive fifteen (15) days vacation
per year plus standard Company holidays. Executive will also be eligible to
participate in the Company's 401K plan after meeting eligibility requirements.
Annual performance reviews will be conducted each year on Executive's
anniversary and used as a basis for determining future salary levels. The
Company further agrees to continue to provide Executive with an automobile.
3. PROPRIETARY INFORMATION OBLIGATIONS.
3.1 AGREEMENT. Executive agrees to abide by the terms of his
Proprietary Information and Inventions Agreement entered into by and between
Executive and the Company
3.2 REMEDIES. Executive's duties under the Proprietary Information
and Inventions Agreement shall survive termination of his employment with the
Company. Executive acknowledges that a remedy at law for any breach or
threatened breach by him of the provisions of the Proprietary Information and
Inventions Agreement would be inadequate, and he therefore agrees that the
Company shall be entitled to injunctive relief in case of any such breach or
threatened breach.
2.
<PAGE>
4. OUTSIDE ACTIVITIES.
4.1 Except with the prior written consent of the Company's Board of
Directors, Executive will not during the term of this Agreement undertake or
engage in any other employment, occupation or business enterprise, other than
ones in which Executive is a passive investor. Executive may engage in civic
and not-for-profit activities so long as such activities do not materially
interfere with the performance of his duties hereunder.
4.2 Except as permitted by Section 4.3, during the term of his
employment by the Company, Executive agrees not to acquire, assume or
participate in, directly or indirectly, any position, investment or interest
known by him to be adverse or antagonistic to the Company, its business or
prospects, financial or otherwise.
4.3 During the term of his employment by the Company, except on
behalf of the Company, Executive will not directly or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever which were
known by him to compete directly with the Company, throughout the world, in any
line of business engaged in (or planned to be engaged in) by the Company;
provided, however, that anything above to the contrary notwithstanding, he may
own, as a passive investor, securities of any competitor corporation, so long as
his direct holdings in any one such corporation shall not in the aggregate
constitute more than 1% of the voting stock of such corporation.
5. TERMINATION OF EMPLOYMENT.
5.1 TERMINATION WITHOUT CAUSE.
(A) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause.
(B) In the event Executive's employment is terminated without
cause, the Company shall pay Executive severance ("Severance Payments") in the
form of continuation of his base salary in effect on the date Executive's
employment with the Company is terminated ("Separation Date") for a period of
twelve (12) consecutive months ("Severance Period"), except as provided herein.
If during the Severance Period, Executive accepts an offer of employment from
another employer for which his base salary is an amount greater than or equal to
his base salary in effect on the Separation Date, the Company's obligation to
make Severance Payments shall cease immediately. If during the Severance
Period, Executive accepts an offer of employment from another employer for which
his base salary is an amount less than his base salary in effect on the
Separation Date, the Company shall continue to make Severance Payments
throughout the Severance Period in an amount equal to the difference between
Executive's base salary in effect on the Separation Date and his base salary in
effect at his new employer. Notwithstanding
3.
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the foregoing, in no event shall Executive Severance Payments cease or be
reduced during the first six (6) months of the Severance Period.
(C) In the event that Executive's employment is terminated
without cause, and to the extent Executive elects COBRA benefits, the Company
will reimburse Executive for his COBRA payments during the Severance Period;
provided, however, that the Company's obligation to make such reimbursements
shall cease immediately if Executive becomes eligible for other health insurance
benefits at the expense of a new employer. Executive agrees to notify a duly
authorized officer of the Company, in writing, immediately upon his acceptance
of any such employment. At the appropriate time, Executive will be provided
with a separate notice of his COBRA rights.
(D) In the event that Executive's employment is terminated
without cause and to the extent permitted under the applicable stock option plan
or plans, all Executive's stock options outstanding on the date hereof and
granted hereafter shall either (i) continue to vest for twenty-four (24)
continuous months commencing on the Separation Date in accordance with the
original terms of such options or (ii) be accelerated so that all Executive's
unvested option shares shall be deemed vested as of the Separation Date. Under
either (i) or (ii) above, all of Executive's vested options may be exercised
until the earlier of (x) the date that is three (3) years after the Separation
Date or (y) the expiration dates of the options. Executive acknowledges that,
any extension of the period during which Executive may exercise his stock
options, shall cause any Incentive Stock Options (within the meaning of Section
422 of the Internal Revenue Code), to be nonstatutory stock options.
(E) In the event that Executive's employment is terminated
without cause, the Company agrees to forgive the two relocation loans, each in
the principal amount of seventy-five thousand dollars ($75,000), made to
Executive pursuant to his offer letter dated May 12, 1994.
5.2 TERMINATION FOR CAUSE.
(A) The Company shall have the right to terminate Executive's
employment with the Company at any time for cause.
(B) "Cause" for termination shall mean: (a) unsatisfactory
performance of Executive's duties which continues for thirty (30) days after
written notice; or (2) misconduct, including but not limited to: (i) conviction
of any felony or any crime involving moral turpitude or dishonesty, (ii)
participation in a fraud against the Company, (iii) willful breach of
Executive's duties to the Company, (iv) intentional damage to any Company
property, or (v) breach of Executive's Proprietary Information and Inventions
Agreement. Physical or mental disability shall not constitute cause.
(C) In the event Executive's employment is terminated at any
time with cause, he will not be entitled to severance pay, pay in lieu of notice
or any other such compensation.
4.
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5.3 VOLUNTARY OR MUTUAL TERMINATION.
(A) Executive may voluntarily terminate his employment with the
Company at any time, after which no further compensation will be paid to
Executive.
(B) In the event Executive voluntarily terminates his
employment, he will not be entitled to severance pay, pay in lieu of notice or
any other such compensation.
6. NONSOLICITATION. During Executive's employment by the Company and for
a period of one (1) year after the date of termination of his employment,
Executive agrees that the will not, without the written consent of a duly
authorized officer of the Company, directly or indirectly solicit, entice,
induce or encourage any employee of the Company to terminate his/her employment
with the Company in order to become an employee, consultant or independent
contractor for any other party.
7. GENERAL PROVISIONS.
7.1 NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by telex) or the third day after mailing by first class mail,
to the Company at its primary office location and to Executive at his address as
listed on the Company payroll.
7.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
7.3 WAIVER. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
7.4 COMPLETE AGREEMENT. This Agreement, including Executive's
Proprietary Information and Inventions Agreement and Stock Option Agreements,
contains the entire agreement between Executive and the Company and constitutes
the complete, final, and exclusive embodiment of Executive's agreement with
respect to the subject matter hereof. This Agreement is executed without
reliance upon any promise, warranty or representation, written or oral, by any
party or any representative of any party other than those expressly contained
herein and it supersedes any other such promises, warranties, or
representations, including without limitation Executive's offer letter of
May 12, 1994. This Agreement may not be amended or modified in any way, except
in a writing signed by both Executive and a duly authorized officer of the
Company.
5.
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Notwithstanding the foregoing, Executive's Proprietary Information and
Inventions Agreement shall remain in full force and effect according to its
original terms.
7.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
7.6 HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
7.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which shall not be withheld unreasonably.
7.8 DISPUTE RESOLUTION. All disputes arising from the
interpretation, breach, or enforcement of this Agreement (excluding disputes
arising from Executive's Proprietary Information and Inventions Agreement) which
cannot first be resolved by negotiations between the parties shall be submitted
to final and binding arbitration in accordance with the rules of the American
Arbitration Association then in effect. Both Executive and the Company
acknowledge that there may not be an adequate remedy at law if one party
breaches the provisions of this Agreement. Therefore, the arbitrators shall be
empowered to award any appropriate equitable relief including, without
limitation, specific performance and injunctive relief; and, if necessary to
avoid irreparable harm pending arbitration, such equitable relief may also be
sought in a court of law. The prevailing party shall be entitled to reasonable
attorneys' fees, costs, and necessary disbursements in addition to any other
relief to which it may be entitled.
7.9 CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law of the
State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
CoCensys, Inc.
By: /s/ Lowell E. Sears
___________________________________
Lowell E. Sears
Chairman of the Board
Date: October 13, 1996
_________________________________
6.
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Accepted and agreed this
13th day of October, 1996.
/s/ Rick A. Henson
____________________________
Rick A. Henson
7.
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Exhibit 10.37
COCENSYS, INC.
1996 EQUITY INCENTIVE PLAN
ADOPTED DECEMBER 16, 1996
APPROVED BY STOCKHOLDERS ______________, 199__
1. PURPOSES.
(A) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, and (v) Stock Appreciation Rights, all as defined
below.
(B) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(C) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (iii) Stock
Appreciation Rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and a separate certificate or certificates will be issued for
shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(A) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(B) "BOARD" means the Board of Directors of the Company.
(C) "CODE" means the Internal Revenue Code of 1986, as amended.
(D) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(E) "COMPANY" means CoCensys, Inc., a Delaware corporation.
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(F) "CONCURRENT STOCK APPRECIATION RIGHT" OR "CONCURRENT RIGHT" means a
right granted pursuant to subsection 8(b)(2) of the Plan.
(G) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(H) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(I) "DIRECTOR" means a member of the Board.
(J) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(K) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(L) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(M) If the Common Stock is listed on any established stock exchange, or
traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in Common Stock) on the last market trading day prior to] [the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(N) In the absence of such markets for the Common Stock, the Fair Market
Value shall be determined in good faith by the Board.
(O) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(P) "INDEPENDENT STOCK APPRECIATION RIGHT" means a right granted pursuant
to subsection 8(b)(3) of the Plan.
2.
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(Q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(R) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(S) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(T) "OPTION" means a stock option granted pursuant to the Plan.
(U) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(V) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan.
(W) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(X) "PLAN" means this 1996 Equity Incentive Plan.
(Y) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(Z) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(AA) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
3.
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(BB) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(CC) "TANDEM STOCK APPRECIATION RIGHT" OR "TANDEM RIGHT" means a right
granted pursuant to subsection 8(b)(1) of the Plan.
3. ADMINISTRATION.
(A) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(B) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, a Stock Appreciation Right, or a combination of the foregoing; the
provisions of each Stock Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive stock
pursuant to a Stock Award; whether a person shall be permitted to receive
stock upon exercise of an Independent Stock Appreciation Right; and the
number of shares with respect to which a Stock Award shall be granted to each
such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 14.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(C) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of one or more members of the Board. In the discretion
of the Board, a Committee may consist solely of two (2) or more Outside
Directors, in accordance with Code Section 162(m), or solely of two (2) or more
Non-Employee Directors, in accordance with Rule 16b-3. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board (and
references in this Plan to the Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time
4.
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to time by the Board. The Board may abolish the Committee at any time and
revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate two million eight hundred thousand (2,800,000)
shares of Common Stock. If any Stock Award shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full
(or vested in the case of Restricted Stock), the stock not acquired under such
Stock Award shall revert to and again become available for issuance under the
Plan. Shares subject to Stock Appreciation Rights exercised in accordance with
Section 8 of the Plan shall not be available for subsequent issuance under the
Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(A) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.
(B) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless THE EXERCISE PRICE OF SUCH OPTION IS AT LEAST ONE HUNDRED
TEN PERCENT (110%) OF THE FAIR MARKET VALUE of such stock at the date of grant
and the Option is not exercisable after the expiration of five (5) years from
the date of grant.
(C) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options and Stock
Appreciation Rights covering more than five hundred thousand (500,000) shares of
Common Stock in any calendar year.
6. OPTION PROVISIONS.
(A) Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(B) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
5.
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(C) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, and the exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Option may be granted
with an exercise price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or substitution for another
option in a manner satisfying the provisions of Section 424(a) of the Code.
(D) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company,
(B) according to a deferred payment or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other Common Stock
of the Company) with the person to whom the Option is granted or to whom the
Option is transferred pursuant to subsection 6(d), or (C) in any other form of
legal consideration that may be acceptable to the Board. In the case of any
deferred payment arrangement, interest shall be payable at least annually and
shall be charged at the minimum rate of interest necessary to avoid the
treatment as interest, under any applicable provisions of the Code, of any
amounts other than amounts stated to be interest under the deferred payment
arrangement.
(E) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option may be transferred
to the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order
satisfying the requirements of Rule 16b-3, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person or any
transferee pursuant to a domestic relations order. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(F) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem
6.
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appropriate. The provisions of this subsection 6(e) are subject to any
Option provisions governing the minimum number of shares as to which an
Option may be exercised.
(G) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option within such period of time designated by
the Board, which shall in no event be later than the expiration of the term of
the Option as set forth in the Option Agreement (the "Post-Termination Exercise
Period") and only to the extent that the Optionee was entitled to exercise the
Option on the date Optionee's Continuous Status as an Employee, Director or
Consultant terminates. In the case of an Incentive Stock Option, the Board shall
determine the Post-Termination Exercise Period at the time the Option is
granted, and the term of such Post-Termination Exercise Period shall in no event
exceed three (3) months from the date of termination. In addition, the Board
may at any time, with the consent of the Optionee, extend the Post-Termination
Exercise Period and provide for continued vesting; provided however, that any
extension of such period by the Board in excess of three (3) months from the
date of termination shall cause an Incentive Stock Option so extended to become
a Nonstatutory Stock Option, effective as of the date of Board action. If, at
the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified in the Option Agreement or as
otherwise determined above, the Option shall terminate, and the shares covered
by such Option shall revert to the Plan. Notwithstanding the foregoing, the
Board shall have the power to permit an Option to continue to vest during the
Post-Termination Exercise Period.
(H) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(I) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a three (3)-month period after the termination of, the Optionee's
Continuous Status as an Employee, Director or Consultant, the Option may be
exercised to the extent vested by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant to
subsection 6(d), but only within the period ending on the earlier of (i) the
date twelve (12)
7.
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months following the date of death (or such longer or shorter period
specified in the Option Agreement), or (ii) the expiration of the term of
such Option as set forth in the Option Agreement. If, at the time of death,
the Optionee was not entitled to exercise his or her entire Option, the
shares covered by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after death, the
Option is not exercised within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(J) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(K) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the
Board or Committee shall have the authority (but not an obligation) to
include as part of any Option Agreement a provision entitling the Optionee to
a further Option (a "Re-Load Option") in the event the Optionee exercises the
Option evidenced by the Option Agreement, in whole or in part, by
surrendering other shares of Common Stock in accordance with this Plan and
the terms and conditions of the Option Agreement. Any such Re-Load Option
(i) shall be for a number of shares equal to the number of shares surrendered
as part or all of the exercise price of such Option; (ii) shall have an
expiration date which is the same as the expiration date of the Option the
exercise of which gave rise to such Re-Load Option; and (iii) shall have an
exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load
Option which is an Incentive Stock Option and which is granted to a 10%
stockholder (as described in subsection 5(b)), shall have an exercise price
which is equal to one hundred ten percent (110%) of the Fair Market Value of
the stock subject to the Re-Load Option on the date of exercise of the
original Option and shall have a term which is no longer than five (5) years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board or Committee may designate at the time of the grant
of the original Option; PROVIDED, HOWEVER, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 12(d) of the Plan and in Section 422(d) of the
Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load
Option shall be subject to the availability of sufficient shares under
subsection 4(a) and shall be subject to such other terms and conditions as the
Board or Committee may determine which are not inconsistent with the express
provisions of the Plan regarding the terms of Options.
8.
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7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or Committee shall
deem appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
(A) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made. Notwithstanding the foregoing, the Board or
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company for its benefit.
(B) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16b-3, so long as stock
awarded under such agreement remains subject to the terms of the agreement.
(C) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or Committee in its discretion. Notwithstanding the foregoing, the Board
or Committee to which administration of the Plan has been delegated may award
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(D) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or Committee.
(E) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
9.
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8. STOCK APPRECIATION RIGHTS.
(A) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees, Directors and Consultants. To exercise any outstanding Stock
Appreciation Right, the holder must provide written notice of exercise to the
Company in compliance with the provisions of the Stock Award Agreement
evidencing such right. Except as provided in subsection 5(c), no limitation
shall exist on the aggregate amount of cash payments the Company may make under
the Plan in connection with the exercise of a Stock Appreciation Right.
(B) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights will be granted appurtenant to an Option, and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in
cash (or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the Option surrender) in an amount up to the
excess of (A) the Fair Market Value (on the date of the Option surrender) of
the number of shares of stock covered by that portion of the surrendered
Option in which the Optionee is vested over (B) the aggregate exercise price
payable for such vested shares.
(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will
be granted appurtenant to an Option and may apply to all or any portion of
the shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock
to which the Concurrent Right pertains. The appreciation distribution
payable on an exercised Concurrent Right shall be in cash (or, if so
provided, in an equivalent number of shares of stock based on Fair Market
Value on the date of the exercise of the Concurrent Right) in an amount equal
to such portion as shall be determined by the Board or Committee at the time
of the grant of the excess of (A) the aggregate Fair Market Value (on the
date of the exercise of the Concurrent Right) of the vested shares of stock
purchased under the underlying Option which have Concurrent Rights
appurtenant to them over (B) the aggregate exercise price paid for such
shares.
(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will
be granted independently of any Option and shall, except as specifically set
forth in this Section 8, be subject to the same terms and conditions
applicable to Nonstatutory Stock Options as set forth in Section 6. They
shall be denominated in share equivalents. The appreciation distribution
payable on the exercised Independent Right shall be not greater than an
amount equal to the excess of (A) the aggregate Fair Market Value (on the
date of the exercise of the Independent
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Right) of a number of shares of Company stock equal to the number of share
equivalents in which the holder is vested under such Independent Right, and with
respect to which the holder is exercising the Independent Right on such date,
over (B) the aggregate Fair Market Value (on the date of the grant of the
Independent Right) of such number of shares of Company stock. The appreciation
distribution payable on the exercised Independent Right shall be in cash or, if
so provided, in an equivalent number of shares of stock based on Fair Market
Value on the date of the exercise of the Independent Right.
9. CANCELLATION AND RE-GRANT OF OPTIONS.
(A) The Board or Committee shall have the authority to effect, at any time
and from time to time, (i) the repricing of any outstanding Options and/or any
Stock Appreciation Rights under the Plan and/or (ii) with the consent of any
adversely affected holders of Options and/or Stock Appreciation Rights, the
cancellation of any outstanding Options and/or any Stock Appreciation Rights
under the Plan and the grant in substitution therefor of new Options and/or
Stock Appreciation Rights under the Plan covering the same or different numbers
of shares of stock, but having an exercise price per share not less than:
eighty-five percent (85%) of the Fair Market Value for a Nonstatutory Stock
Option, one hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of an Incentive Stock Option held by a
10% stockholder (as described in subsection 5(b)), not less than one hundred ten
percent (110%) of the Fair Market Value per share of stock on the new grant
date. Notwithstanding the foregoing, the Board or Committee may grant an Option
and/or Stock Appreciation Right with an exercise price lower than that set forth
above if such Option and/or Stock Appreciation Right is granted as part of a
transaction to which section 424(a) of the Code applies.
(B) Shares subject to an Option or Stock Appreciation Right canceled under
this Section 9 shall continue to be counted against the maximum award of Options
and Stock Appreciation Rights permitted to be granted pursuant to the Plan. The
repricing of an Option and/or Stock Appreciation Right hereunder resulting in a
reduction of the exercise price, shall be deemed to be a cancellation of the
original Option and/or Stock Appreciation Right and the grant of a substitute
Option and/or Stock Appreciation Right; in the event of such repricing, both the
original and the substituted Options and Stock Appreciation Rights shall be
counted against the maximum awards of Options and Stock Appreciation Rights
permitted to be granted pursuant to the Plan, to the extent required by Section
162(m) of the Code.
10. COVENANTS OF THE COMPANY.
(A) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(B) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
11.
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reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such Stock Awards unless and until such authority is obtained.
11. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
12. MISCELLANEOUS.
(A) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(B) Neither an Employee, Director nor a Consultant nor any person to whom
a Stock Award is transferred in accordance with the Plan shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such person has satisfied
all requirements for exercise of the Stock Award pursuant to its terms.
(C) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Consultant or other holder of
Stock Awards any right to continue in the employ of the Company or any
Affiliate, or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-Laws.
(D) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(E) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred in accordance with the Plan,
as a condition of exercising or acquiring stock under any Stock Award, (1) to
give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising
12.
<PAGE>
the Stock Award; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Stock
Award for such person's own account and not with any present intention of
selling or otherwise distributing the stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if
(i) the issuance of the shares upon the exercise or acquisition of stock
under the Stock Award has been registered under a then currently effective
registration statement under the Securities Act, or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company,
place legends on stock certificates issued under the Plan as such counsel
deems necessary or appropriate in order to comply with applicable securities
laws, including, but not limited to, legends restricting the transfer of the
stock.
(F) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
13. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in the class(es) and number of shares and price
per share of stock subject to such outstanding Stock Awards. Such adjustments
shall be made by the Board or Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(B) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then to the extent permitted by applicable law: (i) any surviving
corporation (or an Affiliate
13.
<PAGE>
thereof shall assume any Stock Awards outstanding under the Plan or shall
substitute similar Stock Awards for those outstanding under the Plan, or (ii)
such Stock Awards shall continue in full force and effect. In the event any
surviving corporation (or an Affiliate) refuses to assume or continue such
Stock Awards, or to substitute similar Stock Awards for those outstanding
under the Plan, then, with respect to Stock Awards held by persons then
performing services as Employees, Directors or Consultants, the time during
which such Stock Awards may be exercised shall be accelerated and the Stock
Awards terminated if not exercised prior to such event.
14. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 13 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(B) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers.
(C) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(D) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(E) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board
14.
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or approved by the stockholders of the Company, whichever is earlier. No
Stock Awards may be granted under the Plan while the Plan is suspended or
after it is terminated.
(B) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
16. EFFECTIVE DATE OF PLAN.
This Plan shall become effective on the date of adoption by the Board, but
no Stock Awards granted under the Plan shall be exercised unless and until the
Plan has been approved by the stockholders of the Company, which approval shall
be within twelve (12) months before or after the date the Plan is adopted by the
Board.
15.
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[Logo] CoCensys [Letterhead]
LOWELL E. SEARS
Chairman of the Board
January 27, 1997
F. Richard Nichol, Ph.D.
14 Cypress Point Lane
Newport Beach, CA 92660
Telephone: (714) 753-5460
Dear Dick:
This ADDENDUM to the offer letter dated January 20, 1997 will confirm our
agreement in connection with your service as President and Chief Executive
Officer of CoCensys, Inc., that in the event of any termination of your
employment without cause, (a) the Company will continue payment of your base
salary then in effect for a period of six (6) months and (b) the vesting of
any CoCensys stock options held by you at such time that are not fully vested
will be accelerated, such that they will be exercisable at the time of such
termination to the extent they would have been exercisable six (6) months
thereafter in accordance with their normal vesting schedule.
Sincerely,
/s/ Lowell E. Sears
LOWELL E.SEARS
CHAIRMAN OF THE BOARD
CoCensys, INC.
ACCEPTED AND AGREED TO
THIS 28TH DAY OF JANUARY, 1997
/s/ F. Richard Nichol
- -------------------------------
F. RICHARD NICHOL, Ph.D.
<PAGE>
Exhibit 10.39
INCENTIVE STOCK OPTION
__________________________, Optionee:
CoCensys, Inc. (the "Company"), pursuant to its 1996 Equity Incentive
Plan (the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This
option is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's
employees (including officers), directors or consultants. Defined terms not
explicitly defined in this agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ____________________
(______).
2. VESTING. Subject to the limitations contained herein, [25%] of the
shares will vest (become exercisable) on ____________, 19__ and the remaining
shares will vest in [thirty-six (36)] equal monthly installments thereafter
until either (i) you cease to provide services to the Company for any reason,
or (ii) this option becomes fully vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(A) EXERCISE PRICE. The exercise price of this option is
_________________ ($____) per share, being not less than the fair market value
of the Common Stock on the date of grant of this option.
(B) METHOD OF PAYMENT. Payment of the exercise price per share is
due in full upon exercise of all or any part of each installment which has
accrued to you. You may elect, to the extent permitted by applicable
statutes and regulations, to make payment of the exercise price under one of
the following alternatives:
(I) Payment of the exercise price per share in cash
(including check) at the time of exercise;
(II) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
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(III) Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street
Journal, payment by delivery of already-owned shares of Common Stock, held
for the period required to avoid a charge to the Company's reported earnings,
and owned free and clear of any liens, claims, encumbrances or security
interests, which Common Stock shall be valued at its fair market value on the
date of exercise; or
(IV) Payment by a combination of the methods of payment
permitted by subparagraph 3(b)(i) through 3(b)(iii) above.
4. WHOLE SHARES. This option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, this option may not be exercised unless the shares
issuable upon exercise of this option are then registered under the
Securities Act or, if such shares are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the
registration requirements of the Securities Act.
6. TERM. The term of this option commences on ____________, 19__, the
date of grant, and expires on _________________ (the "Expiration Date"),
which date shall be no more than ten (10) years from date this option is
granted, unless this option expires sooner as set forth below or in the Plan.
In no event may this option be exercised on or after the Expiration Date.
This option shall terminate prior to the Expiration Date as follows: three
(3) months after the termination of your Continuous Status as an Employee,
Director or Consultant with the Company or an Affiliate of the Company unless
one of the following circumstances exists:
(A) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your disability. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months
following such termination of Continuous Status as an Employee, Director or
Consultant. You should be aware that if your disability is not considered a
permanent and total disability within the meaning of Section 422(c)(6) of the
Code, and you exercise this option more than three (3) months following the
date of your termination of employment, your exercise will be treated for tax
purposes as the exercise of a "nonstatutory stock option" instead of an
"incentive stock option."
(B) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your death or your death occurs within three (3)
months following your termination of Continuous Status as an Employee,
Director or Consultant for any other reason. This option will then expire on
the earlier of the Expiration Date set forth above or twelve (12) months
after your death.
(C) If during any part of such three (3)-month period you may not
exercise your option solely because of the condition set forth in paragraph 5
above, then your option will not expire until the earlier of the Expiration
Date set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous
Status as an Employee, Director or Consultant.
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<PAGE>
(D) If your exercise of the option within three (3) months after
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or with an Affiliate of the Company would result in
liability under Section 16(b) of the Securities Exchange Act of 1934, then
your option will expire on the earlier of (i) the Expiration Date set forth
above, (ii) the tenth (10th) day after the last date upon which exercise
would result in such liability or (iii) six (6) months and ten (10) days
after the termination of your Continuous Status as an Employee, Director or
Consultant with the Company or an Affiliate of the Company.
However, this option may be exercised following termination of
Continuous Status as an Employee, Director or Consultant only as to that
number of shares as to which it was exercisable on the date of termination of
Continuous Status as an Employee, Director or Consultant under the provisions
of paragraph 2 of this option.
In order to obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on
the date of grant of the option and ending on the day three (3) months before
the date of the option's exercise, you must be an employee of the Company or
an Affiliate of the Company, except in the event of your death or permanent
and total disability. The Company has provided for continued vesting or
extended exercisability of your option under certain circumstances for your
benefit, but cannot guarantee that your option will necessarily be treated as
an "incentive stock option" if you provide services to the Company or an
Affiliate of the Company as a consultant or exercise your option more than
three (3) months after the date your employment with the Company and all
Affiliates of the Company terminates.
7. EXERCISE.
(A) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require
pursuant to subsection 12(e) of the Plan.
(B) By exercising this option you agree that:
(I) as a precondition to the completion of any exercise
of this option, the Company may require you to enter an arrangement providing
for the payment by you to the Company of any tax withholding obligation of
the Company arising by reason of (1) the exercise of this option; (2) the
lapse of any substantial risk of forfeiture to which the shares are subject
at the time of exercise; or (3) the disposition of shares acquired upon such
exercise; and
(II) you will notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the shares of
the Common Stock issued upon exercise of this option that occurs within two
(2) years after the date of this option grant OR within one (1) year after
such shares of Common Stock are transferred upon exercise of this option.
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<PAGE>
8. TRANSFERABILITY. This option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your
life only by you. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, you may
designate a third party who, in the event of your death, shall thereafter be
entitled to exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the
Company, or of the Company to continue your employment with the Company. In
addition, nothing in this option shall obligate the Company or any Affiliate
of the Company, or their respective shareholders, Board of Directors,
officers or employees to continue any relationship which you might have as a
Director or Consultant for the Company or Affiliate of the Company.
10. NOTICES. Any notices provided for in this option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the
address specified below or at such other address as you hereafter designate
by written notice to the Company.
11. GOVERNING PLAN DOCUMENT. This option is subject to all the
provisions of the Plan, a copy of which is attached hereto and its provisions
are hereby made a part of this option, including without limitation the
provisions of Section 6 of the Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan.
In the event of any conflict between the provisions of this option and those
of the Plan, the provisions of the Plan shall control.
Dated the ____ day of __________________, 19__.
Very truly yours,
CoCensys, Inc.
By:_________________________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1996 Equity Incentive Plan
Notice of Exercise
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The undersigned:
(A) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with
respect to this option are set forth in the option and the Plan; and
(B) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of stock in the Company
and supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the
undersigned under stock option plans of the Company, and (ii) the following
agreements only:
NONE ___________________
(Initial)
OTHER ___________________
___________________
___________________
OPTIONEE______________________________________
Address: __________________________________
__________________________________
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<PAGE>
NOTICE OF EXERCISE
CoCensys, Inc.
______________________
______________________
Date of Exercise:__________________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option: Incentive
Stock option dated: _________________________
Number of shares as to
which option is exercised: _________________________
Certificates to be
issued in name of: _________________________
Total exercise price: $_________________________
Cash payment delivered
herewith: $_________________________
Value of ______ shares of
common stock delivered
herewith(1): $_________________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1996 Equity Incentive
Plan, (ii) to provide for the payment by me to you (in the manner designated
by you) of your withholding obligation, if any,
___________________________
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the
option, and must be owned free and clear of any liens, claims, encumbrances
or security interests. Certificates must be endorsed or accompanied by an
executed assignment separate from certificate.
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<PAGE>
relating to the exercise of this option, and (iii) to notify you in writing
within fifteen (15) days after the date of any disposition of any of the
shares of Common Stock issued upon exercise of this option that occurs within
two (2) years after the date of grant of this option OR within one (1) year
after such shares of Common Stock are issued upon exercise of this option.
Very truly yours,
__________________________________________
2
<PAGE>
Exhibit 10.40
NONSTATUTORY STOCK OPTION
____________________________, Optionee:
CoCensys, Inc. (the "Company"), pursuant to its 1996 Equity Incentive
Plan (the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This
option is NOT intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's
employees (including officers), directors or consultants. Defined terms not
explicitly defined in this agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ____________________
(______).
2. VESTING. Subject to the limitations contained herein, [25%] of the
shares will vest (become exercisable) on ____________, 19__ and the remaining
shares will vest in [thirty-six (36)] equal monthly installments thereafter
until either (i) you cease to provide services to the Company for any reason,
or (ii) this option becomes fully vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(A) EXERCISE PRICE. The exercise price of this option is
_________________ ($____) per share, being not less than eighty-five percent
(85%) of the fair market value of the Common Stock on the date of grant of
this option.
(B) METHOD OF PAYMENT. Payment of the exercise price per share is
due in full upon exercise of all or any part of each installment which has
accrued to you. You may elect, to the extent permitted by applicable
statutes and regulations, to make payment of the exercise price under one of
the following alternatives:
(I) Payment of the exercise price per share in cash
(including check) at the time of exercise;
(II) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
1
<PAGE>
(III) Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street
Journal, payment by delivery of already-owned shares of Common Stock, held
for the period required to avoid a charge to the Company's reported earnings,
and owned free and clear of any liens, claims, encumbrances or security
interests, which Common Stock shall be valued at its fair market value on the
date of exercise; or
(IV) Payment by a combination of the methods of payment
permitted by subparagraph 3(b)(i) through 3(b)(iii) above.
4. WHOLE SHARES. This option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, this option may not be exercised unless the shares
issuable upon exercise of this option are then registered under the
Securities Act or, if such shares are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the
registration requirements of the Securities Act.
6. TERM. The term of this option commences on ____________, 19__, the
date of grant, and expires on _________________ (the "Expiration Date"),
which date shall be no more than ten (10) years from date this option is
granted, unless this option expires sooner as set forth below or in the Plan.
In no event may this option be exercised on or after the Expiration Date.
This option shall terminate prior to the Expiration Date as follows: three
(3) months after the termination of your Continuous Status as an Employee,
Director or Consultant with the Company or an Affiliate of the Company unless
one of the following circumstances exists:
(A) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your disability. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months
following such termination of Continuous Status as an Employee, Director or
Consultant.
(B) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your death or your death occurs within three (3)
months following your termination of Continuous Status as an Employee,
Director or Consultant for any other reason. This option will then expire on
the earlier of the Expiration Date set forth above or twelve (12) months
after your death.
(C) If during any part of such three (3)-month period you may not
exercise your option solely because of the condition set forth in paragraph 5
above, then your option will not expire until the earlier of the Expiration
Date set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous
Status as an Employee, Director or Consultant.
2
<PAGE>
(D) If your exercise of the option within three (3) months
after termination of your Continuous Status as an Employee, Director or
Consultant with the Company or with an Affiliate of the Company would result
in liability under section 16(b) of the Securities Exchange Act of 1934, then
your option will expire on the earlier of (i) the Expiration Date set forth
above, (ii) the tenth (10th) day after the last date upon which exercise
would result in such liability or (iii) six (6) months and ten (10) days
after the termination of your Continuous Status as an Employee, Director or
Consultant with the Company or an Affiliate of the Company.
However, this option may be exercised following termination of
Continuous Status as an Employee, Director or Consultant only as to that
number of shares as to which it was exercisable on the date of termination of
Continuous Status as an Employee, Director or Consultant under the provisions
of paragraph 2 of this option.
7. EXERCISE.
(A) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require
pursuant to subsection 12(e) of the Plan.
(B) By exercising this option you agree that, as a precondition to
the completion of any exercise, the Company may require you to enter an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise
of this option; (2) the lapse of any substantial risk of forfeiture to which
the shares are subject at the time of exercise; or (3) the disposition of
shares acquired upon such exercise. You also agree that the exercise of this
option has not been completed and that the Company is under no obligation to
issue any shares of Common Stock to you until such an arrangement is
established or the Company's tax withholding obligations are satisfied, as
determined by the Company.
8. TRANSFERABILITY. This option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your
life only by you. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, you may
designate a third party who, in the event of your death, shall thereafter be
entitled to exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the
Company, or of the Company to continue your employment with the Company. In
addition, nothing in this option shall obligate the Company or any Affiliate
of the Company, or their respective shareholders, Board of Directors,
officers or employees to continue any relationship which you might have as a
Director or Consultant for the Company or Affiliate of the Company.
3
<PAGE>
10. NOTICES. Any notices provided for in this option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the
address specified below or at such other address as you hereafter designate
by written notice to the Company.
11. GOVERNING PLAN DOCUMENT. This option is subject to all the
provisions of the Plan, a copy of which is attached hereto and its provisions
are hereby made a part of this option, including without limitation the
provisions of Section 6 of the Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan.
In the event of any conflict between the provisions of this option and those
of the Plan, the provisions of the Plan shall control.
Dated the ____ day of __________________, 19__.
Very truly yours,
CoCensys, Inc.
By:________________________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1996 Equity Incentive Plan
Notice of Exercise
4
<PAGE>
The undersigned:
(A) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with
respect to this option are set forth in the option and the Plan; and
(B) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of stock in the Company
and supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the
undersigned under stock option plans of the Company, and (ii) the following
agreements only:
NONE _____________________
(Initial)
OTHER ______________________________________________
______________________________________________
______________________________________________
______________________________________________
OPTIONEE
Address: ________________________________
________________________________
5
<PAGE>
NOTICE OF EXERCISE
CoCensys, Inc.
______________________
______________________ Date of Exercise:__________________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option: Nonstatutory
Stock option dated: _________________
Number of shares as to
which option is exercised: _________________
Certificates to be
issued in name of: _________________
Total exercise price: $_________________
Cash payment delivered
herewith: $_________________
Value of ______ shares of
common stock delivered
herewith(1): $_________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1996 Equity incentive
Plan and (ii) to provide for the payment by me to you (in the manner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option.
Very truly yours,
_________________________________
_____________________
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the
option, and must be owned free and clear of any liens, claims, encumbrances
or security interests. Certificates must be endorsed or accompanied by an
executed assignment separate from certificate.
1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 Nos. 33-83050 and 33-97136) of CoCensys, Inc. and in the related
Prospectuses; and in the Registration Statements (Form S-8 Nos. 33-97260,
33-97528, 333-07855 and 333-21761) of CoCensys, Inc., of our report dated
March 14, 1997, with respect to the financial statements of CoCensys, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31,
1996.
ERNST & YOUNG LLP
Orange County, California
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,050
<SECURITIES> 16,949
<RECEIVABLES> 659
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,214
<PP&E> 5,799
<DEPRECIATION> 3,114
<TOTAL-ASSETS> 22,051
<CURRENT-LIABILITIES> 4,780
<BONDS> 284
0
7,000
<COMMON> 93,986
<OTHER-SE> (84,039)
<TOTAL-LIABILITY-AND-EQUITY> 22,051
<SALES> 0
<TOTAL-REVENUES> 15,158
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> (18,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,488)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
