-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJTx4TwHbQFiHiJSc5HEbO5538OnQtjoMm86O/dLqI0G1Yg6AqclOX8Fb3kdA2Mf Dmsie2S4jIBlW912454N/w== 0000912057-97-011052.txt : 19970401 0000912057-97-011052.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COCENSYS INC CENTRAL INDEX KEY: 0000895034 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330538836 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20954 FILM NUMBER: 97568745 BUSINESS ADDRESS: STREET 1: 213 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7147536100 MAIL ADDRESS: STREET 2: 213 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92718 10-K 1 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. 1 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 2 COCENSYS PRODUCTS IN DEVELOPMENT
- ------------------------------------------------------------------------------------------------------------------------------ PRODUCTS INDICATIONS STATUS COMMERCIALIZATION RIGHTS - ------------------------------------------------------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ ICE-LIKE PROTEASE INHIBITORS: ICE-like Protease Neurodegenerative Research CoCensys Inhibitors disorders (Apoptosis) - ------------------------------------------------------------------------------------------------------------------------------
3 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. 4 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 5 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 6 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 7 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 8 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 9 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). 10 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 11 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. 12 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. 13 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 14 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 15 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 16 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- 17 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 18 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 19 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 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 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 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 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 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ (In thousands, except share and per share data) 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 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ DECEMBER 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ (In thousands) 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
25 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 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 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 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 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 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 (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 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 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 (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 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.
Signature Title Date --------- ----- ----- /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.)
36
SIGNATURES CONTINUED Signature Title Date --------- ----- ----- /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.)
37 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 COCENSYS, INC. (A development stage company) BALANCE SHEETS (In thousands, except share and par value amounts)
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ 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 ------------ ------------ ------------ ------------
See accompanying notes 39 COCENSYS, INC. (A development stage company) STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
PERIOD FROM INCEPTION (FEBRUARY 15, YEAR ENDED DECEMBER 31, 1989) TO ----------------------------------------------------- DECEMBER 31, 1996 1995 1994 1996 ------------- ------------ ------------- ------------- 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 ------------- ------------ ------------- ------------- ------------ -------------
See accompanying notes 40 COCENSYS, INC. (A development stage company) STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
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 ------------- -------- -------- -------- ------------ ---------- ----------- -------- 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
See accompanying notes 41 COCENSYS, INC. (A development stage company) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (In thousands, except share and per share amounts)
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 ------------- -------- -------- -------- ------------ ---------- ----------- -------- 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 ------- -------- ---------- --------- ---------- ------- -------- --------- ------- -------- ---------- --------- ---------- ------- -------- ---------
See accompanying notes 42 COCENSYS, INC. (A development stage company) STATEMENTS OF CASH FLOWS (In thousands)
PERIOD FROM INCEPTION (FEBRUARY 15, YEAR ENDED DECEMBER 31, 1989) TO ------------------------------------------- DECEMBER 31, 1996 1995 1994 1996 ---------- ----------- ----------- ------------- 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 ----------- ------- ------- --------- ----------- ------- ------- ---------
See accompanying notes 43 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 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 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 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 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 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 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 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):
SHARES WEIGHTED- AVAILABLE SHARES OPTION AGGREGATE AVERAGE FOR OUT- PRICE EXERCISE EXERCISE GRANT STANDING PER SHARE PRICE PRICE --------------- -------- ------------ ---------- -------- 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 ------ ------ ------- ------ ------ -------
51 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:
RANGE WEIGHTED EXERCISE OF NUMBER REMAINING AVERAGE NUMBER PRICE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE WEIGHTED- PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) AVERAGE ------------- -------------- ----------- -------- -------------- --------- $ .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 - -
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 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 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):
1996 1995 --------- --------- 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 $ - $ - --------- --------- --------- ---------
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 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 $900,000 per year. These carryovers begin to expire in 2007 for federal income tax purposes and 1997 for California income tax purposes. The ultimate realization of the benefits of these loss carryovers is dependent on future profitable operations. 55 EX-3.I1 2 EXHIBIT 3(I).1 AMENDED AND RESTATED CERT. Exhibit 3(i).1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF COCENSYS, INC. I. The name of this corporation is CoCensys, Inc. II. The address of the registered office of the corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is the Prentice Hall Corporation System. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is thirty-five million (35,000,000) shares. Thirty million (30,000,000) shares shall be Common Stock, each having a par value of one-tenth of One Cent ($.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. 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. 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. 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. EX-3.I2 3 EXHIBIT 3(I).2 CERTIFICATE OF DESIGNATION 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. 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. 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. 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. (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. 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. 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. 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. EX-3.I3 4 EXHIBIT 3(I).3 CERTIFICATE OF POWERS 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. (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. 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. 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. 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. 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. EX-3.I4 5 EXHIBIT 3(I).4 CERTIFICATE OF AMENDMENT 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. 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. EX-10.35 6 EXHIBIT 10.35 TRANSITION AND CONSULTING AGRMT. 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. (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. 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. (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. 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. 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. 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. 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. 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. EXHIBIT A OPTION SUMMARY COCENSYS OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
OPTION HOLDER NAME GRANT SUBJECT TO EXPIRED OR PLAN / NEXT VEST GRANT NO. TYPE DATE SHARES PRICE VESTED EXERCISED REPURCHASE CANCELLED - -------------------------- --------- ----- -------- --------- -------- --------- ---------- ---------- ----------- 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 - ------------------------------------------------------------------------------------------------------------------------
OPTION HOLDER NAME OUTSTANDING OUTSTANDING PLAN / NEXT VEST OUTSTANDING UN-VESTED EXERCISABLE - -------------------------- ----------- ----------- ----------- 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 - -----------------------------------------------------------------------------------------
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 2 COCENSYS OPTIONEE ACTIVITY FOR MR. DANIEL L. KORPOLINSKI ALL TYPES - ALL PLANS, ALL GRANTS, AS OF THURSDAY, OCTOBER 31, 1996
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
- --------------------------------- Totals for Grant Number 9 as of 10/31/1996 ------------------------ 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
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...
- ------------------------------------ Grant Number 24 ----------------------------------------------- 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
- --------------------------------- Totals for Grant Number 24 as of 10/31/1996 ------------------------ 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
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...
- ------------------------------------ Grant Number 199 ----------------------------------------------- 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
- --------------------------------- Totals for Grant Number 199 as of 10/31/1996------------------------ 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
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
- ----------------------------------------- Exercises ------------------------------------------------ NONE - ----------------------------------------- Terminations --------------------------------------------- NONE - --------------------------------- Totals for Grant Number 269 as of 10/31/1996---------------------- 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
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
- ----------------------------------------- Exercises ------------------------------------------------ NONE - ----------------------------------------- Terminations --------------------------------------------- NONE - --------------------------------- Totals for Grant Number 276 as of 10/31/1996 ------------------------ 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
)) Prices and Shares restated to account for the following Split in Common: Date: 01/23/1993 Ratio: 2 for 1 Cumulative Ratio: 2.000000000 EXHIBIT B PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT [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 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 (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 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 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 (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 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 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 EXHIBIT C NONDISPARAGEMENT COVENANT 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 EXHIBIT D OFFICIAL STATEMENT [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 -- 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. ### 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 EX-10.36 7 EXHIBIT 10.36 EMPLOYMENT AGRMT. 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. 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. 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. 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. 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. 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. Accepted and agreed this 13th day of October, 1996. /s/ Rick A. Henson ____________________________ Rick A. Henson 7. EX-10.37 8 EXHIBIT 10.37 1996 EQUITY INCENTIVE PLAN 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. 1. (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. (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. (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. 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. (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. 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. 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. 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. 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 10. 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. 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. 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. 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. 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. EX-10.38 9 EXHIBIT 10.38 LETTER FROM LOWELL SEARS [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. EX-10.39 10 EXHIBIT 10.39 INCENTIVE STOCK OPTION PLAN 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; 1 (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. 2 (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. 3 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 4 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 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. 1 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 EX-10.40 11 EXHIBIT 10.40 NON-STATUTORY STOCK OPTION PLAN 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 (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 (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 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 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 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 EX-23.1 12 EXHIBIT 23.1 CONSENT OF INDEP. AUDITORS 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 EX-27 13 EXHIBIT 27 FDS
5 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. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,050 16,949 659 0 0 19,214 5,799 3,114 22,051 4,780 284 0 7,000 93,986 (84,039) 22,051 0 15,158 0 0 0 0 139 (18,488) 0 (18,488) 0 0 0 (18,488) (0.85) (0.85)
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