-----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, VIOYfYML9g4QbiioqafKpTeAHt+fQdCPYtf2SMHo6hbEPSB3XMcgvVbWa8BGtkp4 +nYB4cQVDyE9ChD9lDG2cg== 0001047469-98-011389.txt : 19980326 0001047469-98-011389.hdr.sgml : 19980326 ACCESSION NUMBER: 0001047469-98-011389 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 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-K405 SEC ACT: SEC FILE NUMBER: 000-20954 FILM NUMBER: 98572746 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-K405 1 10-K405 =============================================================================== 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, 1997 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 (I.R.S.EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 201 TECHNOLOGY DRIVE, IRVINE, CA 92618 ------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (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. /X/ 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 26, 1998, was $53,856,957. The number of shares of Common Stock outstanding as of February 26, 1998, was 22,892,143. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive proxy statement, to be filed not later than 120 days after December 31, 1997 in connection with the registrant's 1998 Annual Meeting of Stockholders, are 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 and development 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 their ligands and inhibitors through three technology platforms: specific GABAa receptor modulators named Epalons; glutamate receptor antagonists; and sodium channel blockers. CoCensys' business strategy is to build a portfolio of products for disorders of the central nervous system, both through discovery and development of products utilizing the technical expertise and creativity of its scientists and through the in-licensing of new technology and product candidates. This strategy includes developing the Company's technology and compounds to the maximum value-added point prior to entering into development agreements to obtain direct funding from co-development partners. BACKGROUND 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 selective for specific receptor 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 or throughout the body. 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: specific GABAa receptor modulators named Epalons; glutamate receptor antagonists; and sodium channel blockers. In January 1998, the Company announced plans to transfer rights to its technology platform relating to apoptosis (programmed cell death) to Cytovia, Inc. ("Cytovia") in exchange for equity ownership in and royalties and certain 1 future development rights from Cytovia. The following table sets forth the status of each of the Company's technologies. COCENSYS PRODUCTS IN DEVELOPMENT
PRODUCTS INDICATIONS STATUS COMMERCIALIZATION RIGHTS - ---------------- ----------------------- ------------------------------- ----------------- GABAA RECEPTOR MODULATORS: - ---------------- CCD 1042 - Migraine Completed Phase IIA clinical CoCensys Ganaxolone trials in 1997; beginning (Anti-migraine) evaluation of tablet form and Phase IIB trials in 1998 CCD 1042 - Epilepsy, including Completed Phase IIA trials for CoCensys Ganaxolone complex partial seizures infantile spasms and complex (Anticonvulsant) and infantile spasms partial seizures in adults CCD 3693 Insomnia Undergoing Phase I clinical CoCensys/ (Sedative/Hypnotic) trials G.D. Searle & Co. Co 2-6749 Anxiety disorders Pre-clinical development CoCensys/ (Anxiolytic) Wyeth-Ayerst - ------------------------------------------------------------------------------------------------------- GLUTAMATE RECEPTOR ANTAGONISTS: - ---------------- ACEA 1021 - Stroke Phase I trials completed CoCensys Licostinel SSNRAs Cerebral ischemia, Research CoCensys/ Parkinson's disease, Warner-Lambert epilepsy and chronic pain AMPA Antagonists Neurodegenerative Research CoCensys disorders - -------------------------------------------------------------------------------------------------------- SODIUM CHANNEL BLOCKERS: - ---------------- Co 102862 Neuropathic pain Pre-clinical development CoCensys APOPTOSIS INHIBITOR AND SCREENING TECHNOLOGY: - ----------------- Apoptosis Degenerative disorders; Research Cytovia, Inhibitors; a spin-off Apoptosis drug screening from CoCensys Screening Cells
2 GABA RECEPTOR ENHANCERS OR EPALONS The Company's proprietary Epalon compounds are based on the discovery by CoCensys' founding scientists of a novel neuroreceptor site located on the type A of the gamma-amino butyric acid ("GABAa") 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 GABAa receptor complexes to calm excited neurons. 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. Augmentation of the functions of the GABAa 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 GABAa receptor complex. Studies indicate that Epalons themselves have limited activity on the chloride channel. However, Epalons modulate the GABAa receptor by enhancing the ability of GABA to open the chloride channel. Thus, Epalons work only when GABA is present. The Company's scientists have synthesized over one thousand analogs of endogenous Epalons. The Company has selected its several development candidates from this group of synthetic Epalons. The Company's Epalon development programs target migraine, epilepsy, insomnia and anxiety. The Company is considering additional targets for Epalons, such as anesthesia. In the United States, the drugs currently prescribed to treat these conditions exceeded $1.8 billion in sales in 1996. CCD 1042 (GANAXOLONE). CCD 1042 is being developed for oral administration to treat migraine and certain types of epilepsy, including complex partial seizures and infantile spasm. In November 1993, the Company filed an investigational new drug applications ("IND") with the United States Food and Drug Administration (the "FDA") for the treatment of epilepsy. In June 1994, the FDA granted CCD 1042 Orphan Drug designation for infantile spasm, a severe form of infantile epilepsy. The Company completed Phase I clinical trials of CCD 1042 in 163 healthy volunteers, providing preliminary indications of the drug's safety, tolerability and pharmacokinetics; no significant adverse effects were observed. 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 FOR MIGRAINE. Migraine, a severe and frequently debilitating headache, is the most common neurological disorder. It is estimated that approximately 23 million people in the United States suffer some degree of recurrent migraine headaches. In 1996, the worldwide market for migraine prescription drugs was approximately $1.1 billion, and it is estimated that the market will grow to almost $4.0 billion by the year 2000. 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, 3 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. In pre-clinical studies conducted by researchers at Massachusetts General Hospital, a teaching hospital affiliated with 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 pre-clinical and clinical data generated on the compound through the epilepsy program, the Company initiated a Phase II trial for migraine in March 1997. In this trial, 252 pre-menopausal women between the ages of 18 and 55 were given oral doses of placebo or one of four dose levels of ganaxolone. Preliminary results from the trial, which were released in November 1997, showed that, although there was no significant difference among the treated and placebo groups overall, there was a substantial increase in response as a function of plasma drug level at two and four hours after the patients were dosed. In the trial, 14 of the 23 patients who achieved plasma drug levels of 80 ng/ml or more achieved pain relief in two hours, while an additional six patients (for a total of 20 out of 23) achieved pain relief in four hours. Importantly, no serious adverse events or cardiovascular side effects were reported in the trial. In 1998, the Company intends to initiate and complete a dose escalation study of its newly developed tablet formulation of CCD 1042, and then initiate a Phase IIB clinical trial in migraine sufferers using the tablet formulation. After the findings from these studies have been analyzed, the Company hopes to identify and enter into a collaboration agreement with a partner to fund further development of CCD 1042. CCD 1042 FOR EPILEPSY. Epilepsy is a chronic brain disorder that affects approximately 1 percent of the world population. In 1996, sales in the United States of drugs to treat epilepsy amounted to approximately $200 million. Many of these drugs 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 seizure types. The Company completed its first Phase II clinical trial in France in pediatric patients with epilepsy refractory to current treatments. In November 1996, the Company announced that the study showed a clinically meaningful response in this difficult to treat patient population. In 1997, the Company replicated those results in similar Phase II pediatric trials in France and the United States. In 1997, the Company also announced positive results from its Phase II U.S. trial in adult epilepsy patients, which commenced at the end of 1996. The trial included 52 epilepsy patients, ages 18 to 65, who had experienced such debilitating seizures that they were candidates for possible surgical treatment. Following their pre-surgical evaluations, while they were not taking any other anti-epileptic medications, the patients were given oral doses of either ganaxolone or a placebo for up to eight days or until a predefined seizure frequency or type caused them to drop out of the study. The patients who received placebo were twice as likely to experience an unacceptable frequency or 4 severity of seizures as those taking ganaxolone. There were two serious adverse events reported. Both of the events appeared to be related to withdrawal from the subjects' original drug regimen, and one of the events occurred in a patient who received placebo. Future development of CCD 1042 for epilepsy will be determined in conjunction with the Company's efforts to develop CCD 1042 for migraine and pursuant to any collaboration agreement that the Company enters into for development of CCD 1042. CCD 3693 FOR INSOMNIA. 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-, marketed by G.D. Searle & Co. ("Searle"), 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. The Company believes that because CCD 3693 has a different mechanism of action, it may have a better side-effect profile. In 1996, the Company entered into a collaboration agreement with Searle to develop CCD 3693 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 initiated Phase I clinical studies in Europe in 1997 and are collaborating on an active back-up program to identify additional compounds for the target indication. CO 2-6749 FOR ANXIETY. Sales of drugs in the United States to treat anxiety disorders amounted to over $400 million in 1996. This market is currently 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-. 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. 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. In May 1997, CoCensys licensed to American Home Products Corporation, through its Wyeth-Ayerst Laboratories Division, CoCensys' Epalon compound Co 2- 6749, along with its back-up compounds, for development as anxiolytics. The program currently is in the pre-clinical development stage. GLUTAMATE RECEPTOR ANTAGONISTS The Company's proprietary glutamate receptor 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. When over-stimulated neurons die, they 5 release more glutamate, triggering a spreading cascade of glutamate over-stimulation 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 both of these neurotransmitters bind to the NMDA receptor complex, a calcium ion channel is opened that permits calcium ions to enter and 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. 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 responds to glutamate binding by opening an ion channel. 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 block the glycine binding 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 glystasins that are strong antagonists of the glycine receptor on the NMDA receptor complex. ACEA 1021(LICOSTINEL) FOR STROKE. Cerebral ischemia is oxygen deprivation to the brain that may occur when blood flow is interrupted by stroke. There are approximately 700,000 strokes per year 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 drug market for this indication is under-served, with few effective therapies for treating stroke. The Company is developing its lead glystasin, ACEA 1021, for stroke suffers. 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 in 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. In 1997 the Company reported that preliminary results from additional safety trials involving long-term infusion showed crystals of ACEA 1021 in the urine of some subjects, a potentially dose-limiting side effect. However, the crystal formation occurred only in subjects with four times the blood plasma level of ACEA 1021 that was therapeutically effective in animals. Novartis Pharma A.G. (successor to Ciba-Geigy Ltd.) had entered into a collaboration agreement with the Company in 1994 to develop ACEA 1021. However, influenced by the results of the recent trials, Novartis ceased further participation in the development efforts in April 1997. The Company continues to study ACEA 1021 and is actively seeking a new development partner for the glystasin program. 6 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. In animal models, the Company's 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. 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. The Company has been working with its collaborative partner, Warner-Lambert Company ("Warner-Lambert"), since 1995 to identify and develop SSNRA product candidates for a broad range of CNS diseases; in October 1997, the Company and Warner-Lambert agreed to extend the collaborative research program through at least the end of 1999. 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 epilepsy, schizophrenia, amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease) and other neurodegenerative disorders. In October 1997, as part of the extension of the collaboration agreement between the Company and Warner-Lambert (for development of SSNRAs), the companies agreed to expand the collaboration to allow the companies to analyze and consider for collaborative development each company's AMPA modulator technologies. In January 1998, the parties agreed to narrow the focus of their collaboration agreement to its original scope of only the SSNRAs in exchange for payment by the Company of $1 million in common stock in 1999; accordingly, the Company's AMPA modulator technology remains available for partnership. SODIUM CHANNEL BLOCKERS Voltage-gated sodium channels ("VGSCs") are essential for the initiation and propagation of nerve impulses and therefore play a fundamental role in the normal function of the nervous system. Under conditions of abnormal neuronal firing, such as during an epileptic seizure or during spontaneous discharge from an injured sensory nerve fiber, VGSCs determine the threshold for neuronal activation and modulate the frequency and duration of repetitive neuronal firing. Drugs that selectively block the inactivated state of VGSCs (such as Lamictal-Registered Trademark- and Tegretol-Registered Trademark-) have therefore proven clinically effective in the treatment of epilepsy and 7 neuropathic pain (including pain resulting from inflammation or damage to peripheral nerve endings). In 1997, the Company licensed from The University of Saskatchewan, through its technology transfer company, University of Saskatchewan Technologies, Inc., rights to a class of novel, small molecule compounds that block the VGSCs. The compounds licensed include Co 102862, a structurally-novel VGSC blocker that is selective for the inactivated state of VGSCs. Co 102862 currently is undergoing pre-clinical development at the Company for the treatment of neuropathic pain and epilepsy. In pre-clinical animal models, Co 102862 demonstrates an anticonvulsant and side-effect profile superior to that of Lamictal-Registered Trademark- and Tegretol-Registered Trademark-. Both Lamictal-Registered Trademark- and Tegretol-Registered Trademark- paradoxically lower seizure threshold at high doses; however, Co 102862 does not. Co 102862 may find utility in the treatment of non-seizure related disorders such as neuropathic pain where effective doses are often greater than those that are used in epilepsy. In 1996, the U.S. market alone for pain drugs was close to $4 billion. APOPTOSIS INHIBITORS AND SCREENING CELLS Cell death can be a natural physiological process that occurs during embryonic development as well as during remodeling of certain adult tissues. This natural death of cells, called apoptosis or programmed cell death, occurs by a discrete series of molecular events. Apoptosis also can be triggered inappropriately in many diseases (including stroke, heart disease and certain neurodegenerative disorders). This pathological form of apoptosis is thought to play an important role in the loss of cells that occurs in these diseases. CoCensys discovered novel small molecules that may inhibit apoptosis. In addition, the Company discovered certain compounds that permeate living cells and fluoresce when apoptosis is triggered. Although promising for use in a variety of disorders, the Company determined that the technology was outside of CoCensys' focus on development of therapeutics for disorders of the central nervous system. Accordingly, in January 1998, the Company announced the formation of Cytovia, Inc., as a technology spin-off to commercialize the apoptosis inhibitor and screening cell technology. Cytovia will be led by Eckard Weber, M.D., former head of research and discovery for CoCensys and a current member of CoCensys' Board of Directors; in addition, eleven other CoCensys employees are joining Cytovia. CoCensys will retain an equity stake in Cytovia and a seat on Cytovia's Board of Directors (to be held initially by CoCensys' President and Chief Executive Officer, F. Richard Nichol, Ph.D.). In addition CoCensys will retain the right to enter into contracts on favorable terms with Cytovia to screen CoCensys' neuroscience- related therapeutic compounds and retained a right of first refusal for four years to develop for central nervous systems disorders any compound discovered by Cytovia. Dr. Weber remains on as a CoCensys Board member and will continue as a leader and advisor to CoCensys on selected scientific development projects. Cytovia currently is in negotiations to obtain venture financing to fund its initial operations. While there are no assurances that Cytovia will obtain such financing, Cytovia anticipates completing the financing by the end of the first quarter of 1998. SALES AND MARKETING In 1994, the Company established its Pharmaceutical Sales and Marketing Division to co-promote other companies' commercialized drugs as part of the Company's strategy to generate non- 8 equity funding. This Division focused on the neurological and psychiatric markets, in part to establish a presence in CoCensys' target markets in advance of CoCensys receiving FDA approval for marketing of any of its compounds. In October 1997, in an effort to better focus the Company's resources and energies on its core competency of discovering and developing therapies for brain and central nervous system disorders, the Company sold the Division to Watson Pharmaceuticals, Inc. The transaction included the sale of the Division's operating and other assets, assignment of co-promotion agreements (including the Company's Promotion Agreement with Somerset Pharmaceuticals for promotion of Eldepryl) and grant of the right to hire approximately 70 sales and marketing personnel employed by the Division. The transaction was valued at approximately $9 million (of which $8 million was paid at or near closing, with up to an additional $1 million due if Watson is able to hire and retain, as of specified dates, certain percentages of the employees of the Division). In the future, CoCensys has the potential opportunity, through collaborative relationships with Watson, to leverage the sales force and Watson's manufacturing capacity as CoCensys products come to market. The Company currently does not employ any sales personnel. COLLABORATIVE ARRANGEMENTS WARNER-LAMBERT In October 1995, the Company entered into a relationship with Warner-Lambert Company ("Warner-Lambert"), and its Parke-Davis division, to develop and market therapeutic drugs for the treatment of CNS disorders. This two-part arrangement consisted of the Warner Collaboration Agreement, for the worldwide development and commercialization of SSNRAs, and the Parke-Davis Promotion Agreement, pursuant to which the Company promoted Parke-Davis' drug for the treatment of Alzheimer's disease, Cognex-Registered Trademark-. The Parke-Davis Promotion Agreement was revised in January 1997 and terminated in June 1997. The Warner Collaboration Agreement was revised and extended in October 1997. Under the Warner Collaboration Agreement, the parties are conducting a research program directed toward the identification of SSNRAs as drug development candidates. The parties are obligated to devote the time of specified numbers of scientists under the research program and to fund specified activities. Warner is obligated to pay for all costs to develop any development candidates arising from the Agreement, subject to CoCensys' right to re-engage in the development by funding a percentage of the development costs. Warner is also obligated to pay for all costs to promote any product developed under the Warner Collaboration Agreement, subject to CoCensys' right to co-promote in the United States (including sharing of costs to promote) any product for which CoCensys re-engaged development rights. CoCensys will receive royalties on sales of any products developed under the Warner Collaboration Agreement, at rates based in part upon whether CoCensys co- developed and co-promoted such product. In addition, upon achievement of certain clinical development and regulatory milestones, Warner will make nonrefundable milestone payments to CoCensys. Either party may terminate its participation in the Warner Collaboration Agreement 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 9 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; in such case, CoCensys would be entitled to royalties on future product sales. As discussed above, as part of the extension of the Warner Collaboration Agreement in October 1997, the companies agreed to expand the collaboration to allow the companies to analyze and consider for collaborative development each company's AMPA modulator technologies. In January 1998, the parties agreed to return the focus of their collaboration agreement solely to SSNRAs. Each party retained all rights to its respective AMPA modulator technology. Pursuant to the Warner Collaboration Agreement, Warner-Lambert purchased $2 million of CoCensys common stock in October 1995 and $2 million of CoCensys common stock in March 1997. In addition, as part of the October 1997 extension of the Warner Collaboration Agreement, Warner-Lambert purchased 100,000 shares of the Company's Series D Convertible Preferred Stock for $7 million. The preferred stock is convertible to common stock on October 13, 2001, or earlier at the Company's discretion. The number of shares issuable upon conversion at the election of CoCensys will equal $7 million divided by the greater of the then current common stock price or the common stock price in effect at the time of the original issuance of the Preferred Stock; the number of shares issuable upon conversion on October 13, 2001 will equal $7 million divided by the then current common stock price (in each case subject to a limit on the maximum number of shares that may be issued). In addition, as part of removal of the AMPA modulator technology from the Warner Collaboration Agreement, the Company is obligated to issue to Warner-Lambert $1 million in CoCensys common stock in January 1999, based on the then current stock price. G.D. SEARLE & CO. In May 1996, the Company entered into an agreement with G.D. Searle & Co. ("Searle") to jointly develop and commercialize the Company's lead compound for the treatment of insomnia along with its back-up compounds. 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 million license fee and purchased 100,000 shares of the Company's Series B Convertible Preferred Stock for $7 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 will equal $7 million divided by the then current common stock price (subject to certain minimum and maximum limits). 10 WYETH-AYERST In May 1997, the Company entered into an agreement with American Home Products Corporation ("AHP"), through its Wyeth-Ayerst Laboratories Division ("Wyeth-Ayerst"), to develop and commercialize the Company's lead compound for the treatment of anxiety along with its back-up compounds. Under the agreement, Wyeth-Ayerst will fund all development of Co 2-6749, CoCensys' lead anxiolytic compound, and back-up compounds. In addition, Wyeth-Ayerst will support CoCensys' research to identify back-up compounds for up to three years at $3 million per year; however, if Co 2-6749 fails to meet certain criteria, and the back-up program fails to produce a back-up compound that meets other certain criteria, Wyeth-Ayerst has the right to terminate the back-up program and require CoCensys to reimburse to Wyeth-Ayerst a portion of the funds paid by Wyeth-Ayerst to CoCensys to fund the back-up program. Wyeth-Ayerst is obligated to pay to CoCensys certain nonrefundable milestone payments under the Wyeth-Ayerst Agreement upon the achievement of key development events and the outcome of product labeling. CoCensys has the right to co-promote in the United States Co 2-6749 or a replacement compound and share any profits proportionally. Wyeth-Ayerst has the exclusive right to develop, register and market the compound in the rest of the world, subject to specified royalty payments. In addition to an up front licensing fee of $5 million, AHP purchased 100,000 shares of the Company's Series C Convertible Preferred Stock for $5 million. The preferred stock is convertible to common stock at the election of AHP at any time after May 11, 1999. The number of shares issuable upon conversion will equal $5 million divided by a conversion price based, in part, on the then current common stock price, subject to certain minimum and maximum prices. MANUFACTURING The Company is currently relying on third-party manufacturers to produce its compounds for pre-clinical 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 11 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 19 issued patents with expiration dates ranging from June 9, 2009 to September 29, 2015; in addition, another 23 filed patents are pending. 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 (as amended December 1997), CoCensys received an exclusive license to a patent application filed by Massachusetts General Hospital for the use of GABA, receptor modulators, including neuroactive steroids (Epalons), to treat migraine. In June 1997, the Company licensed from The University of Saskatchewan, through its technology transfer company, University of Saskatchewan Technologies, Inc., rights to a class of novel, small molecule sodium channel blockers which the Company is developing to treat chronic pain and epilepsy. 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 receptor 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, and challenged, circumvented or invalidated after issuance. 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 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 12 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 the fields in which the Company conducts research and development, which patent applications and patents 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. GOVERNMENT REGULATION The Company's research, pre-clinical 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. The Company has received approvals in the past to conduct clinical trials for certain of its potential products and to manufacture the products for such trials. There can be no assurance that the Company will be able to obtain future 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 pre-clinical 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 13 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 recall and 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 for a drug for infantile spasms or that the FDA would grant orphan drug designation or marketing exclusivity for any future indications or products. The Company is not currently marketing or promoting any of its own drugs in the United States or elsewhere. At such time that the Company does market and promote drugs, the Company will be 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. In addition, as a distributor of 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 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. 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. To market its products abroad, the Company also must satisfy foreign regulatory requirements, implemented by foreign health authorities, governing human clinical trials and 14 marketing approval. Manufacturers of biotechnology products and certain high technology products must submit an 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 must utilize a "mutual recognition" procedure. Under this procedure, an 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. 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 payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors 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 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 payors 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 pre-clinical 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. 15 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. 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 February 27, 1998, the Company had 89 full-time employees and one part time employee, of which 58 are directly involved in research and development programs and 32 provide general and administrative support. The Company's staff includes 30 employees with doctoral degrees and three 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, including pre-clinical 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 payors. 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 pre-clinical 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 16 commercial use. For example, as discussed above, Novartis Pharma A.G. (successor to Ciba-Geigy Ltd.) had entered into a collaboration agreement with the Company in 1994 to develop ACEA 1021. However, influenced by the results of the recent trials, Novartis ceased further participation in the development efforts in April 1997. 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, pre-clinical 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 factors, including the progress of the Company's research and development programs, the scope and results of pre-clinical 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 establishment of sales and marketing capabilities, the establishment of third-party manufacturing arrangements and the establishment of additional collaborative relationships. Currently, the Company anticipates that its existing capital resources, including funding expected to be available through current partner collaborations, will be adequate to satisfy its capital needs for at least the next 12 months. 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 collaboration agreements with three corporate partners (each, a "Collaboration Agreement"). The Company has entered into Collaboration Agreements with Warner-Lambert for research and development of subtype-selective NMDA receptor antagonists, Searle for the development of CCD 3693 for insomnia and Wyeth-Ayerst for the development of Co 2-6749 for anxiety. 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 is 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. The Collaboration Agreement with Warner-Lambert allows either party to terminate voluntarily its participation in the collaboration. If either party terminates the Collaboration Agreement during the research period, the terminating party would forfeit all rights and obligations 17 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 which case 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. The Collaboration Agreement with Wyeth-Ayerst provides that if Co 2-6749 fails to meet certain criteria, and the back-up program fails to produce a back- up compound that meets other certain criteria, Wyeth-Ayerst has the right to terminate the back-up program and require CoCensys to reimburse to Wyeth-Ayerst a portion of the funds paid by Wyeth-Ayerst to CoCensys to fund the back-up program. HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company has experienced significant operating losses since its inception. As of December 31, 1997, the Company had an accumulated deficit of $99.0 million. 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. 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, licensors, 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. 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. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous pre- clinical (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 18 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 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 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 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. 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, pre-clinical 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 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. There can be no assurance that the Company's competitors will 19 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 pre-clinical 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 pre-clinical 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. LACK OF SALES AND MARKETING EXPERIENCE. The Company's sales and marketing organization was sold to Watson Pharmaceuticals in 1997. Accordingly, if the Company, in the future, is to market its own products (subject to successful development and receipt of regulatory approvals for such products), the Company must develop or acquire, and thereafter maintain and expand, a new sales and marketing organization with technical expertise and with supporting distribution capability. There can be no assurance that the Company will be successful developing or acquiring and, thereafter, maintaining and expanding such a capability or in gaining market acceptance for any products. 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 20 third-party payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors 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 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 payors 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 therapeutic products for humans. Although the Company currently has liability insurance covering its clinical trials, 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 future 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 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. 21 ITEM 2. PROPERTIES The Company's administrative offices and main research facilities are currently housed in two adjacent buildings occupying approximately 54,700/33,000 square feet of leased space in Irvine, California. The lease on these facilties expires in 2002, subject to the Company's earlier right to terminate, and contains provisions for one five-year renewal option and for rights of first refusal to expand to adjacent space similar in size to the Company's present facility. 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. 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 1997, no matters were submitted to a vote of the stockholders. 22 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 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. 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 1997 First quarter $ 7.88 $ 4.50 Second quarter $ 5.88 $ 2.69 Third quarter $ 6.25 $ 2.88 Fourth quarter $ 6.06 $ 2.94
B) HOLDERS As of February 26, 1998, there were 404 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 Pursuant to a Stock Purchase Agreement dated October 13, 1997, the Company issued and sold to Warner-Lambert (i) 14,286 shares of unregistered Series D Convertible Preferred Stock (the "Preferred Stock") for $1 million on October 14, 1997, and (ii) 85,714 shares of unregistered Series D Convertible Preferred Stock for $6 million on January 9, 1998. The Preferred Stock is automatically convertible into Common Stock on October 13, 2001, or earlier at the option of Warner-Lambert, at a price determined pursuant to a formula based on the market price of the Common Stock at the time of the conversion. The issuance was exempt from registration under section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. 23 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data. Certain reclassifications have been made to prior year data to conform to the 1997 presentation.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ----------- ---------- ---------- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Co-promotion revenues $ 3,264 $ 9,085 $ 10,414 $ 7,402 $ - Co-development revenues 8,650 6,073 1,970 - - ---------- ---------- ----------- ---------- ---------- Total revenues 11,914 15,158 12,384 7,402 - Operating expenses: Research and development 23,308 20,949 17,662 11,569 8,987 Marketing, general and administrative 9,975 13,862 13,383 7,673 1,739 Acquired research and development - - - 14,879 - ---------- ---------- ----------- ---------- ---------- Total operating expenses 33,283 34,811 31,045 34,121 10,726 ---------- ---------- ----------- ---------- ---------- Operating loss (21,369) (19,653) (18,661) (26,719) (10,726) ---------- ---------- ----------- ---------- ---------- Gain on disposition of sales force 4,728 - - - - Interest income 898 1,304 717 373 735 Interest expense (78) (139) (178) (240) (282) ---------- ---------- ----------- ---------- ---------- Net loss $(15,821) $ (18,488) $ (18,122) $ (26,586) $ (10,273) ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- Basic and diluted loss per share (1) $ (0.70) $ (0.85) $ (1.05) $ (2.33) $ (1.16) ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- Shares used in computing basic and diluted loss per share 22,574 21,783 17,288 11,406 8,890 ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ----------- ---------- ---------- (In thousands) BALANCE SHEET DATA: Cash, cash equivalents and investments $ 12,960 $ 17,999 $ 13,449 $ 8,924 $ 16,622 Working capital 8,374 14,434 6,753 3,766 15,427 Total assets 16,916 22,051 18,201 15,216 20,990 Long-term obligations 1,101 324 406 696 969 Accumulated deficit (98,983) (83,162) (64,674) (46,552) (19,966) Total stockholders' equity 10,831 16,947 10,644 8,547 18,397
(1) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS No. 128"). For further discussion of earnings per share and the impact of SFAS No. 128, see the Notes to Financial Statements. 24 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 pharmaceutical 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 and sales of Company products, if any. As of December 31, 1997, the Company's accumulated deficit was approximately $99.0 million. RESULTS OF OPERATIONS REVENUES The Company's revenues consist of co-development revenues and, through October 1997, co-promotion revenues. Co-promotion revenues arose from contractual agreements that call for the Company promote other pharmaceutical company's products in return for commissions. Co-development revenues arise from contractual agreements with large pharmaceutical companies pursuant to which the Company provides various commercialization or development rights relating to compounds or performs research activities in exchange for licensing fees, milestone payments or research funding. In October 1997, the Company sold its sales and marketing division to Watson Pharmaceuticals, Inc. ("Watson") and is no longer involved in co-promotional activities. In connection with the Company's co-promotion activities, revenues of $3.3 million were recognized for the year ended December 31, 1997, compared to $9.1 million and $10.4 million in 1996 and 1995, respectively. The decrease in 1997 resulted from the termination of the Novartis co-promotion agreement in December 1996, the loss of Cognex-Registered Trademark- co-promotion rights in June 1997 and the sale of the sales and marketing division in October 1997. The decrease in 1996 was primarily related to the declining market for the products under the Novartis Pharma A.G. co-promotion agreement. Going forward, co-promotion revenue will be limited to residual payments relating to activity prior to the disposition of the sales and marketing division. In connection with its co-development agreements, the Company recognized revenues of $8.6 million for the year ended December 31, 1997, compared to $6.1 million and $2.0 million in 1996 and 1995, respectively. The increase in 1997 is primarily partially attributable to the Development 25 and Commercialization Agreement entered into with the Wyeth-Ayerst Laboratories Division of American Home Products Corporation in May 1997, which provided for a one-time license fee of $5.0 million plus an additional $2.2 million during 1997 to fund research on a back-up compound in connection with the Company's anxiolytic program. In fiscal 1996, the Company recognized $3.6 million related to the G.D. Searle & Co. Development and Commercialization Agreement in connection with its insomnia program and $2.5 million related to Novartis Research and Development Agreement in connection with its compound to treat stroke and traumatic brain injury. Fiscal 1995 revenue is wholly attributable to the Novartis program. In April 1997, Novartis announced that it was terminating its Research and Development Agreement with the Company effective October 1997. No further revenue is expected from Novartis. EXPENSES Research and development expenses increased to $23.3 million in 1997, compared to $20.9 million and $17.7 million in 1996 and 1995, respectively. The increase in 1997 compared to 1996 is primarily due to increased expenditures for clinical and development activity associated with the Phase II ganaxolone (CCD 1042) trials in the treatment of migraine and epilepsy, partially offset by lower spending on licostinel (ACEA 1021). The increase in 1996 compared to 1995 was due to higher spending for Phase II clinical trials for licostinel in the treatment of stroke and traumatic brain injury and for pre-clinical development work on ganaxolone. Marketing, general and administrative expenses decreased to $10.0 million in 1997, compared to $13.9 million in 1996 and $13.4 million in 1995. The decrease in 1997 is due to the disposition of the sales and marketing division in October 1997. As a result of this transaction, the Company incurred only nine months of expense associated with the sales function in 1997 compared to twelve months of expense in fiscal years 1996 and 1995. GAIN ON DISPOSITION OF THE SALES DIVISION In October 1997, the Company recognized a gain of $4.7 million on the disposition of its sales and marketing division. INTEREST INCOME AND EXPENSE Interest income totaled $0.9 million in 1997, compared to $1.3 million in 1996 and $0.7 million in 1995. The level of interest income is directly related to the average level of investments held during each year. Interest expense decreased to $78,000 in 1997, compared to $139,000 in 1996 and $178,000 in 1995. The decrease in each period was attributable to lower average level of capital lease obligations used to finance equipment. LIQUIDITY AND CAPITAL RESOURCES From its inception in February 1989 through December 31, 1997, the Company has financed its operations primarily through private and public offerings of its equity securities, 26 raising net proceeds of approximately $90.6 million through sales of these securities. At December 31, 1997, the Company's balances of cash, cash equivalents and investments totaled $13.0 million, compared to $18.0 million at December 31, 1996. As of December 31, 1996, the Company had invested $7.1 million in leasehold improvements, laboratory and computer equipment and office furnishings and equipment. The Company has financed $3.5 million of these capital additions through capital lease lines. In addition, the Company leases its laboratory and office facilities under operating leases. While Aadditional 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. Pursuant to an agreement with Watson, in October 1997, the Company sold it sales and marketing division, related co-promotion agreements and certain other assets to Watson for $9.0 million in cash. Of this amount, $8.0 million was paid by Watson in October 1997 and $1.0 million is payable in installments over the next twelve months subject to the occurrence of specified events. Of the $8.0 million received to date, the Company netted approximately $5.4 million in cash after expenditures necessary to fulfill its obligations related to the Watson Agreement. These obligations included the acquisition of specified new drug approval, the purchase of leased assets, a portion of which were transferred to Watson, and payment of certain transaction and severance costs. Pursuant to the 1995 collaboration agreement with Warner-Lambert Company, as amended and extended in October 1997, Warner-Lambert is obligated to make certain milestone payments for each compound selected for development, as well as pay for its share of development costs. Under the terms of the 1995 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. Under the terms of the 1997 amendment, Warner-Lambert purchased 14,286 shares of the Company's Series D Convertible Preferred Stock for $1.0 million in October 1997 and an additional 85,714 shares of the same series for $6.0 million in January 1998. Pursuant to the May 1997 Development and Commercialization Agreement with Wyeth-Ayerst, Wyeth-Ayerst paid the Company a $5.0 million license fee and purchased 100,000 shares of the Company's Series C Convertible Preferred stock for $5.0 million. Furthermore, Wyeth-Ayerst is obligated to pay all development costs associated with Co 2-6749, as well as make milestone payments upon the occurrence of certain agreed upon events and pay the Company $3.0 million per year for up to three years to identify back-up compounds. Pursuant to the Development and Commercialization Agreement G.D. Searle & Co., 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 during 1996. 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, 27 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, will be adequate to satisfy its capital needs for at least the next 12 months. 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 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. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development programs, 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 establishment of third-party manufacturing arrangements and the establishment of additional collaborative relationships. IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions or engage in normal business activities. The Company has completed a preliminary assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. However, the majority of software used by the Company consists of commercially available, off-the-shelf programs that have already been modified, or are soon to be modified, by their manufacturers to handle the year 2000 correctly. As such, management believes that the year 2000 issue does not pose a significant problem for the Company and it is expected that this project will be completed not later than December 31, 1998 at a total cost of less than $50,000. The Company has incurred minimal costs to date. However, if such modifications and conversions are not made, or are not completed timely, the year 2000 issue could have a material impact on the operations of the Company. 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. 28 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 1998 Annual Meeting of Stockholders (the "Proxy Statement") under the captions "Election of Directors", "Management" 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." 29 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 37 Balance Sheets as of December 31, 1997 and 1996 38 Statements of Operations for the three years ended December 31, 1997, 1996 and 1995; and the period from inception (February 15, 1989) to December 31, 1997 39 Statements of Stockholders' Equity for the period from inception (February 15, 1989) to December 31, 1997 40 Statements of Cash Flows for the three years ended December 31, 1997, 1996 and 1995; and the period from inception (February 15, 1989) to December 31, 1997 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 October 8, 1997, in connection with the sale of its Sales and Marketing Division to Watson Pharmaceuticals. (C) EXHIBITS
EXHIBIT NUMBER NOTES 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.
30
EXHIBIT NUMBER NOTES DESCRIPTION 3(i).4 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company. 3(i).5 Certificate of Powers, Designation, Preferences, Rights and Limitations of Series C Convertible Preferred Stock of the Company. 3(i).6 Certificate of Powers, Designation, Preferences, Rights and Limitations of Series D Convertible Preferred Stock 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 (10)+ 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 (4) + 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) 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. 10.13 (1) Option Agreement between the Company and Kelvin W. Gee, Ph.D. dated as of August 14, 1992. 10.14 (9) Amendment No. 1 to Option Agreement between the Company and Kelvin W. Gee, Ph.D., dated August 1, 1994. 10.15 (1) Multi-tenant Lease between the Company and The Irvine Company, dated as of January 30, 1992. 10.16 (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.
31
EXHIBIT NUMBER NOTES DESCRIPTION 10.17 (3) Stock Purchase Agreement, dated as of December 23, 1994, between the Company and Ciba-Geigy Limited (included as Exhibit C to the Research and Development Agreement, dated as of December 23, 1994, between the Company and Ciba-Geigy Limited. 10.18 (3) Form of First Amendment to the Multi-tenant Lease between the Company and the Irvine Company, dated April 1, 1994. 10.19 (3) Form of Lease Agreement between the Company and Livingston Corporate Park Associates, dated October 1, 1994. 10.20 (5) 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. 10.21 (6) + Company's 1995 Employee Stock Purchase Plan. 10.22 (7) * Research, Development and Marketing Collaboration Agreement between CoCensys, Inc., Acea Pharmaceuticals, Inc. and Warner-Lambert Company, dated as of October 26, 1995. 10.23 (8) Stock Purchase Agreement, dated October 26, 1995, between CoCensys, Inc. and Warner-Lambert Company. 10.24 (10) Form of Amendment to the Multi-tenant Lease between the Company and The Irvine Company, dated as of February 9, 1996. 10.25 (11)* Development and Commercialization Agreement between the Company and G.D. Searle & Co. dated May 17, 1996. 10.26 (11) 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). 10.27 (15)+ Transition and Consulting Agreement between the Company and Daniel L. Korpolinski, dated as of November 1, 1996. 10.28 (15)+ Employment Agreement between the Company and Rick A. Henson, dated as of October 13, 1996. 10.29 (15)+ Company's 1996 Equity Incentive Plan. 10.30 (15)+ Letter Agreement between F. Richard Nichol, Ph.D. and the Company, dated as of January 20, 1997. 10.31 (15)+ Form of Incentive Stock Option Agreement under the 1996 Equity Incentive Plan. 10.32 (15)+ Form of Nonstatutory Stock Option Agreement under the 1996 Equity Incentive Plan. 10.33 (12)* Promotion Agreement between the Company and Parke-Davis, dated as of January 1, 1997. 10.34 (12)* License Agreement between the Company and Massachusetts General Hospital, dated as of December 15, 1996. 10.35 (13)* Asset Purchase Agreement between the Company and Watson Pharmaceuticals, dated October 8, 1997. 10.36 (14)* 1997 Promotion Agreement, effective April 7, 1997, between Somerset Pharmaceuticals, Inc. and the Company.
32
EXHIBIT NUMBER NOTES DESCRIPTION 10.37 (14)* Development and Commercialization Agreement (No. 1), dated May 12, 1997, between Wyeth-Ayerst Laboratories and the Company ("Wyeth-Ayerst Agreement No. 1"). EXHIBIT NUMBER NOTES DESCRIPTION 10.38 (14)* Development and Commercialization Agreement (No. 2), dated May 12, 1997, between Wyeth-Ayerst Laboratories and the Company. 10.39 (14) Preferred Stock Purchase Agreement, dated May 12, 1997, between American Home Products, Inc. and the Company (included as Exhibit F to Wyeth-Ayerst Agreement No. 1). 10.40 ** Amended and Restated Research, Development and Marketing Collaboration Agreement (II), dated as of October 13, 1997, between Warner-Lambert Company and the Company. 10.41 Series D Convertible Preferred Stock Purchase Agreement, dated October 13, 1997, between Warner-Lambert Company and the Company. 10.42 ** Amended and Restated License Agreement, dated December 16, 1997, between Massachusetts General Hospital and the Company. 23.1 Consent of Ernst & Young LLP. 27.1 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 Annual Report on Form 10-K for the year ended December 31, 1994. (4) Incorporated by reference to the Company's Registration Statement on Form S-8, file number 33-97258. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (6) Incorporated by reference to the Company's Registration Statement on Form S-8, file number 33-92760. 33 (7) Incorporated by reference to the Company's Current Report on Form 8-K dated October 26, 1995. (8) Incorporated by reference to the Company's Registration Statement on Form S-3, file number 33-80809. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (10) 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. (11) 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. (12) Incorporated by reference to the Company's Current Report on Form 8-K dated December 15, 1996. (13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (15) 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, 1996. + Compensatory plan. * Confidential treatment granted. ** Confidential treatment requested. 34 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 13, 1998 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 February 28, 1998 --------------------------- (Lowell E. Sears) /s/ F. Richard Nichol, Ph.D. President and March 13, 1998 --------------------------- Chief Executive Officer (F. Richard Nichol, Ph.D.) (PRINCIPAL EXECUTIVE OFFICER) /s/ Peter E. Jansen Vice President and March 8, 1998 --------------------------- Chief Financial Officer (Peter E. Jansen) (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ James C. Blair, Ph.D. Director March 11, 1998 --------------------------- (James C. Blair, Ph.D.) /s/ Kelvin Gee, Ph.D. Director March 11, 1998 --------------------------- (Kelvin W. Gee, Ph.D.) /s/ Robert G. McNeil, Ph.D. Director March 13, 1998 --------------------------- (Robert G. McNeil, Ph.D.)
35 SIGNATURES CONTINUED
SIGNATURE TITLE DATE /s/ Alan C. Mendelson Director March 2, 1998 --------------------------- (Alan C. Mendelson) /s/ Timothy J. Rink, M.D., Sc.D. Director March 2, 1998 --------------------------------- (Timothy J. Rink, M.D., Sc.D.) /s/ Eckard Weber, M.D. Director March 2, 1998 --------------------------------- (Eckard Weber, M.D.)
36 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, 1997 and 1996 and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, and the period from inception (February 15, 1989) to December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, and for the period from inception (February 15, 1989) to December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Orange County, California February 6, 1998 37
COCENSYS, INC. (A development stage company) BALANCE SHEETS (In thousands, except share and par value amounts) DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,410 $ 1,050 Short-term investments 9,050 16,949 Receivables from corporate partners 414 659 Other current assets 484 556 ------------ ------------ TOTAL CURRENT ASSETS 13,358 19,214 Property and equipment, net 2,823 2,685 Investments 500 - Notes receivable from officers 178 126 Other assets, net 57 26 ------------ ------------ $ 16,916 $ 22,051 ------------ ------------ ------------ ------------ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 866 $ 1,437 Accrued compensation and benefits 1,107 1,053 Due to corporate partners 747 446 Other accrued liabilities 1,911 1,503 Capital lease obligation - current portion 353 341 ------------ ------------ TOTAL CURRENT LIABILITIES 4,984 4,780 Capital lease obligation, less current portion 567 284 Other liabilities 534 40 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value Authorized shares -- 5,000,000 Issued and outstanding shares - 214,286 at December 31, 1997 and 100,000 at December 31, 1996 13,000 7,000 Common stock, $.001 par value Authorized shares -- 75,000,000 Issued and outstanding shares - 22,857,506 at December 31, 1997 and 22,083,346 at December 31, 1996 97,230 93,986 Deficit accumulated during the development stage (98,983) (83,162) Deferred compensation (430) (905) Unrealized gain on investments 14 28 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 10,831 16,947 ------------ ------------ $ 16,916 $ 22,051 ------------ ------------ ------------ ------------
See accompanying notes 38 COCENSYS, INC. (A development stage company) STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
PERIOD FROM INCEPTION (FEBRUARY 15, YEAR ENDED DECEMBER 31, 1989) TO ---------------------------------------- DECEMBER 31, 1997 1996 1995 1997 ----------- ----------- ----------- ----------- REVENUES Co-promotion revenues from corporate partners $ 3,264 $ 9,085 $ 10,414 $ 30,165 Co-development revenues from corporate partners 8,650 6,073 1,970 16,693 ----------- ----------- ----------- ----------- Total revenues 11,914 15,158 12,384 46,858 ----------- ----------- ----------- ----------- OPERATING EXPENSES Research and development 23,308 20,949 17,662 90,929 Marketing, general and administrative 9,975 13,862 13,383 48,156 Acquired research and development - - - 14,879 ----------- ----------- ----------- ----------- Total operating expenses 33,283 34,811 31,045 153,964 ----------- ----------- ----------- ----------- Operating loss (21,369) (19,653) (18,661) (107,106) Gain on disposition of sales force 4,728 - - 4,728 Interest income 898 1,304 717 4,453 Interest expense (78) (139) (178) (1,058) ----------- ----------- ----------- ----------- Net loss $ (15,821) $ (18,488) $ (18,122) $ (98,983) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic and diluted loss per share $ (0.70) $ (0.85) $ (1.05) ----------- ----------- ----------- ----------- ----------- ----------- Shares used in computing basic and diluted loss per share 22,574 21,783 17,288 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes 39 COCENSYS, INC. (A development stage company) STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
DEFICIT UNREALIZED ACCUMULATED GAIN/ TOTAL CONVERTIBLE DURING THE DEFERRED (LOSS) ON STOCK- PREFERRED STOCK COMMON 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 40 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 41 COCENSYS, INC. (A development stage company) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (In thousands, except share and per share amounts)
DEFICIT UNREALIZED ACCUMULATED GAIN/ TOTAL CONVERTIBLE DURING THE DEFERRED (LOSS) ON STOCK- PREFERRED STOCK COMMON STOCK DEVELOPMENT COMPEN- INVEST- HOLDERS' SHARES AMOUNT SHARES AMOUNT STAGE SATION MENTS EQUITY ------ ------ ------ ------ ----- ------ ----- ------ Issuance of Series C convertible preferred stock for cash to corporate partner 100,000 5,000 - - - - - 5,000 Issuance of Series D convertible preferred stock for cash to corporate partner 14,286 1,000 - - - - - 1,000 Issuance of common stock for cash at $6.16 per share to corporate partner - - 324,465 2,000 - - - 2,000 Issuance of common stock for services - - 23,322 8 - - - 8 Issuance of common stock for cash pursuant to option exercises at $.05 to $5.21 per share - - 315,300 202 - - - 202 Issuance and termination of certain stock options - - - 783 - 206 - 989 Issuance of common stock pursuant to the 1995 Employee Stock Purchase Plan at $2.66 to $2.87 per share - - 90,900 251 - - - 251 Issuance of common stock pursuant to noncash exercise of warrants - - 20,173 - - - - - Amortization of deferred compensation - - - - - 269 - 269 Change in unrealized gain on investments - - - - - - (14) (14) Net loss - - - - (15,821) - - (15,821) ------- -------- ---------- -------- ---------- -------- ----- -------- BALANCE AT DECEMBER 31, 1997 214,286 $ 13,000 22,857,506 $ 97,230 $ (98,983) $ (430) $ 14 $ 10,831 ------- -------- ---------- -------- ---------- -------- ----- -------- ------- -------- ---------- -------- ---------- -------- ----- --------
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, 1997 1996 1995 1997 ------------ ------------ ------------ ------------ OPERATING ACTIVITIES Net loss $ (15,821) $ (18,488) $ (18,122) $ (98,983) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 936 2,072 1,928 6,825 Amortization of deferred compensation 269 680 1,039 3,607 Issuance of stock, stock options and warrants for 419 1,788 29 2,336 services Loss on sale of fixed assets 74 - 26 100 Gain on disposition of sales division (4,728) - - (4,728) Acquired research and development - - - 12,279 Decrease (increase) in other current assets 72 (101) (175) (556) Decrease (increase) in receivables from partners 245 (659) 535 (414) Increase (decrease) in amounts due to partners 301 (2,698) 1,244 747 Increase (decrease) in accounts payable and other accrued liabilities (991) 685 (174) 2,766 ------------ ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (19,224) (16,721) (13,670) (76,021) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES Decrease (increase) in investments 7,886 (10,343) (4,569) (9,036) Purchase of property and equipment (1,475) (812) (888) (7,100) Decrease (increase) in other assets and notes receivable from officers (1,083) 199 98 (1,391) Cash received on sale of fixed assets 1 - 19 20 Cash received on disposition of sales division 8,000 - - 8,000 Purchase of investments (500) - - (500) Increase in deferred costs - - - (2,475) Acquisition of Acea, net of cash acquired - - - (62) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,829 (10,956) (5,340) (12,544) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES Net cash proceeds from issuance of common stock 2,460 15,273 19,148 61,245 Net cash proceeds from issuance of preferred stock 6,000 7,000 - 29,381 Proceeds from sales/leaseback of fixed assets and notes payable 1,002 649 834 5,235 Payments on capital lease obligations and notes payable (707) (1,090) (1,016) (3,886) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 8,755 21,832 18,966 91,975 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,360 (5,845) (44) 3,410 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,050 6,895 6,939 - ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,410 $ 1,050 $ 6,895 $ 3,410 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 66 $ 139 $ 133 $ 820 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes 43 COCENSYS, INC. (A development stage company) NOTES TO FINANCIAL STATEMENTS December 31, 1997 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. The Company plans to finance its future development activities through a combination of sales of equity securities and payments from corporate development partners. 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 EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments consist of debt securities classified as "available for sale" and have maturities greater than three months and less than twelve months from the date of acquisition. Investments classified as "available for sale" are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity. Investments consist, either directly or indirectly, of obligations of the United States government, or other Federal agencies. At December 31, 1997, the Company had $1,000,000 in an escrow account established to satisfy an obligation related to the purchase of certain drug marketing rights and new drug approvals (NDAs) in connection with the disposition of its sales and marketing division in October 1997. The obligation is payable in equal installments in October 1998 and October 1999. Accordingly, at December 31, 1997, of the amount held in escrow, $500,000 was classified as short-term investments and $500,000 as noncurrent investments. 44 PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists of the following at December 31, (in thousands):
1997 1996 -------- -------- Laboratory equipment $ 2,218 $ 1,703 Computer equipment 1,107 1,288 Office equipment 930 961 Leasehold improvements 2,105 1,847 -------- -------- 6,360 5,799 Less accumulated depreciation (3,537) (3,114) -------- -------- Net property and equipment $ 2,823 $ 2,685 -------- -------- -------- --------
The value of leased assets (treated as capital leases) at December 31, 1997, was $2,744,000, net of accumulated amortization of $1,522,000. Depreciation of property and equipment, including assets under capital lease obligations, has been provided using the straight-line method over the estimated useful lives of the assets which range from three to five years, except for leasehold improvements which are amortized over the lease term. REVENUE AND EXPENSE RECOGNITION See Notes 3, 4, 5, 6 and 7 for revenue recognition policies related to co-promotion and co-development revenues from corporate partners. Co-promotion revenue is a commission earned for marketing products of another company to a specified class of medical doctors. The amount of commission earned is, generally, a base fee with a bonus calculated by reference to an agreed upon measure of activity such as sales volume or prescriptions written. The Company recognizes revenue from co-promotion activities in the period in which the promotional services are provided. Co-development revenue is earned pursuant to agreements with other pharmaceutical companies to develop and commercialize CoCensys' compounds. Revenue is earned in the form of licensing fees, payment for the attainment of developmental milestones or funding for research. The Company recognizes co-development revenue in the period in which the underlying event occurs. LOSS PER SHARE In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. All per share amounts for all prior periods have been presented and, where appropriate, restated to conform to the SFAS No. 128 requirements. Both basic and diluted loss per share are 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 of diluted earnings per share as their effect would be antidilutive. 45 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. 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% per annum. RECLASSIFICATIONS Certain reclassifications have been made to prior year data to conform to the 1997 presentation. 2. DISPOSITION OF SALES AND MARKETING DIVISION On October 8, 1997, the Company entered into an Asset Purchase Agreement (the "Agreement") to sell its sales and marketing division (the "Division") to Watson Laboratories, Inc. ("Watson"), a wholly owned subsidiary of Watson Pharmaceuticals, Inc. Under the terms of the Agreement, Watson assumed the Division's co-promotion agreements, acquired certain of its operating assets and the right to hire approximately 70 employees of the Division. As consideration for these assets, the Company received $8.0 million from Watson, with up to $1.0 million more due to the Company if Watson is able to hire and retain, as of specified future dates, certain percentages of the employees from the Division. In order to satisfy certain provisions of the Agreement, the Company entered into, and transferred to Watson, agreements with two pharmaceutical companies for marketing rights and NDAs for two drugs with an aggregate cost of $2.0 million, of which the Company paid $1.0 million in October 1997. An additional $1.0 million is payable by the Company in future installments. Pursuant to the Agreement, $1.0 million of the $8.0 million in proceeds from the sale of the Division was deposited into an escrow account to satisfy the Company's future obligations related to the acquisition of these marketing rights and NDAs. 3. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH WYETH-AYERST LABORATORIES In May 1997, the Company entered into a development and commercialization agreement for Co 2-6749, its lead anxiolytic compound, with the Wyeth-Ayerst Laboratories Division ("Wyeth-Ayerst") of American Home Products Corporation ("AHP"). Under the terms of the agreement, Wyeth-Ayerst paid CoCensys a non-refundable $5.0 million licensing fee and AHP paid $5.0 million to purchase 100,000 shares of the Company's Series C Convertible Preferred Stock. Additionally, CoCensys will receive specified milestone payments dependent upon the achievement of key development events and $750,000 per quarter for up to three years to identify back-up compounds. However, if Co 2-6749 fails to meet certain criteria, and the back-up program fails to produce a back-up compound that meets other certain criteria, Wyeth-Ayerst has the right to terminate the back-up program and require CoCensys to reimburse a portion of the funds paid to fund the back-up program. Wyeth-Ayerst will be responsible for the costs associated with developing Co 2-6749. The Company and Wyeth-Ayerst will co-promote any resulting 46 product in certain market segments in the United States, while Wyeth-Ayerst will have rights to develop, register and market any drugs derived from the collaboration in the rest of the world, subject to royalty obligations to CoCensys. The preferred stock is convertible into common stock after May 12, 1999, into a number of shares of common stock equal to $5.0 million divided by the conversion price, which will be determined pursuant to a formula based partially on the market price of the common stock at the time of conversion (subject to certain minimum and maximum limits). 4. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY In October 1995, the Company entered into a collaboration with Warner-Lambert Company ("Warner-Lambert") and its Parke-Davis division to develop and market therapeutic drugs for the treatment of certain central nervous system disorders. This arrangement consists of the Research, Development and Marketing Collaboration Agreement (the "1995 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 the Parke-Davis Promotion Agreement, the Company co-promoted Parke-Davis' central nervous system drug, Cognex-Registered Trademark-, until June 1997 when Parke-Davis terminated the co-promotion agreement. In October 1997, the 1995 Wartner Collaboration Agreement was extended until October 1999. Under the 1995 Warner Collaboration Agreement, both companies 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. Warner-Lambert is obligated to pay its specified portion of the development costs and to make certain milestone payments, upon achievement of certain clinical development and regulatory milestones, for each development compound. Payments received under the 1995 Warner Collaboration Agreement are recognized as co-development revenues and payments made are recognized as expenses. Pursuant to the 1995 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. Pursuant to the 1997 extension of the Warner Collaboration Agreement, Warner-Lambert purchased 14,286 shares of the Company's Series C Convertible Preferred Stock for $1.0 million in October 1997 and an additional 85,714 shares of the same series of convertible preferred stock for $6.0 million in January 1998. As part of the extension of the Warner Collaboration Agreement in October 1997, the companies agreed to expand the collaboration to allow the companies to analyze and consider for collaborative development each company's AMPA modulator technologies. In January 1998, the parties agreed to return the focus of their collaboration agreement solely to SSNRAs. Each party retained all rights to its respective AMPA modulator technology. In addition, as part of removal of the AMPA modulator technology from the Warner Collaboration Agreement, the Company is obligated to issue to Warner-Lambert $1 million in CoCensys common stock in January 1999, based on the then current stock price. 47 5. 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 CCD 3693, 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 option. 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. 6. PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS, INC. In January 1996, the Company and Somerset Pharmaceuticals, Inc. ("Somerset") entered into the Somerset Promotion Agreement, pursuant to which the Company, through its Sales Division, promoted Somerset's drug Eldepryl-Registered Trademark- to neurologists in the United States for the treatment of Parkinson's disease. Effective January 1, 1997, the initial agreement was superseded by the 1997 Somerset Promotion Agreement. Under the 1997 Somerset Promotion Agreement, CoCensys had the exclusive right to detail Eldepryl to certain neurologists and other physicians in the United States and was compensated based upon the number of details undertaken and gross sales of Eldepryl. In October 1997 the Company sold its sales and marketing division, and all related co-promotion agreements, to Watson. 7. MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS PHARMA, A.G. In May 1994, the Company entered into a marketing and development collaboration with Novartis Pharma, 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 consisted 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 terminated at the end of 1996. In connection with the Novartis Research and Development Agreement, Novartis purchased $7.0 million of CoCensys common stock and agreed to make certain nonrefundable milestone payments in connection with specified events in the course of the development of ACEA 1021. In April 1997, Novartis advised 48 the Company that it would not continue the development of ACEA 1021, and the agreement terminated effective October 1997. The Company is seeking a new partner to develop ACEA 1021. There can be no assurance that the Company will be able to secure another partner to continue the development of this compound. 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, 1997, are as follows (in thousands):
OPERATING CAPITAL LEASES LEASES --------- ------- Year ending December 31, 1998 $ 968 $ 430 1999 861 325 2000 858 280 2001 852 29 2002 530 - --------- ------- Total minimum payments $ 4,069 1,064 -------- -------- Less amount representing interest (144) ------- Present value of future minimum payments 920 Current portion (353) ------- Long-term portion $ 567 ------- -------
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $1,040,000, $1,082,000, and $677,000, respectively. 9. COMMON STOCK The Company has reserved 11.1 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 (the "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 49 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 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, 1997 and 1996, the Company recorded deferred compensation of $579,000 and $629,000, 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 hashad 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 a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996 respectively: risk-free interest rates of 6.1% and 6.2%, 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 4.6 years and 5.0 years. 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 for 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, ---------------------------------------- 1997 1996 1995 --------- --------- --------- Net loss $(17,974) $(19,745) $(18,395) --------- --------- --------- --------- --------- --------- Net loss per share $ ($0.80) $ (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. 50 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, 1994 33 1,601 $0.05 -$5.21 2,006 $ 1.25 Authorized 1,945 - - - Granted (940) 940 $0.50 -$8.13 5,258 5.59 Exercised - (89) $0.05 -$5.21 (109) 1.22 Canceled and forfeited 43 (43) $0.20 -$3.29 (92) 2.14 -------- ------- ----- BALANCE, DECEMBER 31, 1995 1,081 2,409 $0.05 -$8.13 7,063 2.93 Authorized 2,800 - - - Granted (961) 961 $3.25 -$9.13 5,705 5.94 Exercised - (139) $0.20 -$5.21 (194) 1.40 Canceled and f Forfeited 184 ( 184) $0.20 -$5.21 (942) 5.12 -------- ------- ------ BALANCE, DECEMBER 31, 1996 3,104 3,047 $0.05 -$9.13 11,632 3.82 Granted (1,703) 1,703 $3.00 -$7.13 8,698 5.11 Exercised - (315) $0.05 -$5.21 (199) 0.63 Canceled and f Forfeited 174 ( 174) $2.50 -$8.38 (815) 4.68 -------- ------- ------ BALANCE, DECEMBER 31, 1997 1,575 4,261 $0.05 -$9.13 $19,316 $ 4.56 -------- ------- ------ -------- ------- ------
The weighted-average fair value of options granted was $3.06 and $3.25 during 1997 and 1996, respectively. The weighted-average remaining contract life was 7.3 years and 6.8 years for 1997 and 1996, respectively. The following table summarizes information about stock options outstanding at December 31, 1997:
RANGE WEIGHTED EXERCISE OF NUMBER REMAINING AVERAGE NUMBER PRICE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE WEIGHTED- PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) AVERAGE ------------- -------------- ----------- ------- -------------- --------- $0.05 to 0.50 650 3.5 $ 0.31 650 $ 0.31 1.50 to 3.93 1,279 8.5 3.34 457 3.11 4.00 to 9.13 2,332 7.6 6.43 746 6.52
As of December 31, 1996, oOptions to purchase approximately 1.9 million, 1.5 million and 1.1 million shares of common stock were exercisable as of December 31, 1997, 1996 and 1995, 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 statutory stock options may be granted at 50% of the fair value at the grant date. Options granted to date generally 51 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 8,000 shares of common stock (12,000 for the Chairman). Vesting on the initial grant occurs in five equal annual installments from the date of the grant for each year that the optionee remains a director. Annual grants vest in full one year from the date of grant. Vesting 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. 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. In June 1997, the Company, subject to stockholder approval, reserved an additional 200,000 shares for issuance under the plan. Pursuant to the provision of the plan, employees purchased 90,900, 112,743 and 39,730 shares of common stock in 1997, 1996 and 1995, respectively, at $2.66 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. 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, outside of any plans. The option is fully vested and expires in September 2001, or three months after termination as a director, if sooner. 52 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 connection with the June 1994 purchase of Acea Pharmaceuticals, Inc., the Company issued warrants to purchase 31,982 shares of common stock at $0.04 per share. The warrants expire on December 13, 1998. 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. As part of a private offering in June 1995 that included the sale of 3.7 million shares of common stock, the Company issued 1.5 million warrants. 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, 1997, approximately 1.4 million of these warrants were outstanding. 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):
1997 1996 ---------- ---------- DEFERRED TAX LIABILITIES Book/tax depreciation difference $ (161) $ (115) ---------- ---------- Total deferred tax liabilities (161) (115) DEFERRED TAX ASSETS Net operating loss carryovers 27,860 22,937 Research and development credit carryovers 4,822 3,612 Capitalized state research and development costs 5,376 4,005 Others 152 158 ---------- ---------- Total deferred tax assets 38,210 30,712 Valuation allowance for deferred tax assets (38,049) (30,597) ---------- ---------- Net deferred tax assets 161 115 ---------- ---------- Net deferred taxes $ - $ - ---------- ---------- ---------- ----------
At December 31, 1997, the Company had operating loss carryovers of approximately $82.0 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 $3.7 million and $1.2 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. 53 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. In addition to the net operating losses discussed above, Acea had net operating loss carryovers at June 30, 1994 of approximately $6.3 million for federal income tax purposes 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. The ultimate realization of the benefit of these loss carryovers is dependent on future profitable operations. 12. EMPLOYEE SAVINGS PLAN The Company has an employee savings plan which permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Service. During 1996, the Company began matching 50% of a participant's contribution up to a maximum participant contribution of 4% of eligible compensation. In connection with this matching contribution, the Company recognized expense of $176,000 and $51,000 in 1997 and 1996, respectively. 13. SUBSEQUENT EVENT On January 8, 1998, the Company announced plans to license certain non-core technology to a separate stand alone venture named Cytovia, Inc. ("Cytovia"). This new company will focus on the commercialization of patented drug screening technology, using living cells, in the area of apoptosis or programmed cell death. In exchange for transferring the rights to the underlying technology to Cytovia, CoCensys will receive approximately 55% of the initial outstanding common stock of Cytovia, will be entitled to receive certain royalties and will retain certain rights relating to the development of future therapeutic agents for central nervous system disorders. Except for a short term bridge loan to cover initial organization and start up costs, CoCensys is not expected to provide any additional funding to Cytovia. Management estimates that this bridge loan will not exceed $750,000. It is anticipated that Cytovia will secure venture funding during the first quarter of 1998 and that it will repay CoCensys in full for any funds that have been advanced. However, there can be no assurance that Cytovia will secure such funding or, in the absence of such funding, that Cytovia will be able to repay the Company. 54 EX-3.I1 2 EXHIBIT 3(I).1 Exhibit 3(i).1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF COCENSYS, INC. I. The name of this corporation is CoCensys, Inc. II. The address of the registered office of the corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is the Prentice Hall Corporation System. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is thirty-five million (35,000,000) shares. Thirty million (30,000,000) shares shall be Common Stock, each having a par value of one-tenth of One Cent ($.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 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 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 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-3.I5 6 EXHIBIT 3(I).5 CERTIFICATE OF POWERS, DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES C 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 a meeting duly called and held on April 29, 1997: 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 C Convertible Preferred Stock: SECTION 1. DESIGNATION AND AMOUNT. One Hundred Thousand (100,000) shares of Preferred Stock, $.001 par value, are designated "Series C Convertible Preferred Stock" with the rights, preferences, privileges and restrictions specified herein (the 1. "Series C Preferred Stock"). Such number of shares may be not increased or decreased without the consent of the holder. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. The holders of the Series C 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 C Preferred Stock shall be non-cumulative. SECTION 3. VOTING RIGHTS. Except as set forth herein, or as otherwise provided by law, holders of Series C 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 C 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) $5,000,000 divided by (b) the number of shares of Series C 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 C 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 C Preferred Stock in proportion to the shares of Series C Preferred Stock then held by them. SECTION 5. CONVERSION. Subject to the limitations set forth in Subsection (B) below, the Series C Preferred Stock shall convert only as follows: (A) CONVERSION AT HOLDER'S OPTION. At any time after May 11, 1999, the Series C Preferred Stock shall be convertible, in whole or in part, on a maximum of three occasions, at the 2. option of the holder, into such number of fully paid and nonassessable shares of Common Stock equal to the quotient of (a) the product of $50 and the number of shares of Series C Preferred Stock being converted, divided by (b) the Conversion Price. The "Conversion Price" shall be equal to the greater of: (i) $5.43 or (ii) the lesser of: (x) the Future Market Price x 0.80 or (y) $7.76; PROVIDED, HOWEVER, that if the Future Market Price is less than $3.88, the Conversion Price shall be $4.37. The "Future Market Price" set forth above shall be the average closing price of the Common Stock for the period commencing on the 23rd trading day prior to the date upon which the holder delivers notice to the Corporation of such conversion (each, a "Conversion Date") and ending on the third trading day prior to the Conversion Date, as reported in the WALL STREET JOURNAL, WESTERN EDITION. (B) 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 C Preferred Stock may be converted, shall be proportionately decreased or increased, as appropriate. (C) MECHANICS OF CONVERSION. Before any holder of Series C 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 C 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 on the Conversion Date, 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. (D) 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 C 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 C Preferred Stock. (E) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Series C Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of Series C 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. (F) 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 first Conversion Date shall be accelerated to the date immediately preceding such Event, or such other date necessary to assure that any holder of Series C Preferred Stock receives such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for shares of Common Stock. 4. SECTION 6. NO REDEMPTION. The shares of Series C 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 C 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 C Preferred Stock, voting together as a single class. 5. IN WITNESS WHEREOF the undersigned have executed this certificate as of May 12, 1997. /s/ F. Richard Nichol, Ph.D. -------------------------------------------- President and Chief Executive Officer /s/ Alan C. Mendelson -------------------------------------------- Secretary 6. EX-3.I6 7 EXHIBIT 3(I).6 CERTIFICATE OF POWERS, DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES D 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 by unanimous written consent on October 9, 1997: 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 D Convertible Preferred Stock: SECTION 1. DESIGNATION AND AMOUNT. One Hundred Thousand (100,000) shares of Preferred Stock, $.001 par value, are designated "Series D Convertible Preferred Stock" with the rights, preferences, privileges and restrictions specified herein (the "Series D Preferred Stock"). Subject to Section 7 hereof, such number of shares may be increased or decreased by resolution of the Board of Directors. 1. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. The holders of the Series D 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 D Preferred Stock shall be non-cumulative. SECTION 3. VOTING RIGHTS. Except as set forth herein, or as otherwise provided by law, holders of Series D 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 D 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, $70 (the "Original Issue Price") per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares) of Series D 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 D 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 D Preferred Stock in proportion to the shares of Series D Preferred Stock then held by them. SECTION 5. CONVERSION. Subject to the limitations set forth in Subsection (C) below, the Series D Preferred Stock shall convert only as follows: (A) AUTOMATIC CONVERSION. The Series D Preferred Stock outstanding on October 13, 2001 (the "Automatic Conversion 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 the aggregate Original Issue Price of such shares divided by the average of the closing prices of the Corporation's Common Stock 2. (as reported in The Wall Street Journal, Western Edition) for a period of thirty (30) Trading Days ending on the third Trading Day prior to the Automatic Conversion Date. A "Trading Day" shall mean any day on which shares of the Corporation's Common Stock have been traded on a national securities exchange, the Nasdaq Stock Market or otherwise, as reported in the Wall Street Journal, Western Edition. (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 D Preferred Stock, in whole or in part (and on no more than [four] occasions), into such number of fully paid and nonassessable shares of Common Stock equal to the aggregate Original Issue Price of such shares divided by the greater of (a) the average of the closing prices of the Corporation's Common Stock (as reported in The Wall Street Journal, Western Edition) for the 30 Trading Days during the period ending on the third Trading Day prior to the date of original issuance of such shares or (b) the average of the closing prices of the Corporation's Common Stock (as reported in The Wall Street Journal, Western Edition) for a period commencing thirty (30) Trading Days and ending on the third Trading Day prior to the date upon which the Corporation issues notice to the holders of Series D Preferred Stock of such optional conversion. (C) LIMITATION ON CONVERTED SHARES. The number of shares of Common Stock issuable upon conversion of the Series D Preferred Stock shall not be greater than 4,600,000. (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 D Preferred Stock may be converted, shall be proportionately decreased or increased, as appropriate. (E) MECHANICS OF CONVERSION. Before any holder of Series D Preferred Stock shall be entitled to receive shares of 3. 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 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 D 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 D 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 D Preferred Stock. (G) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Series D Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of Series D 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 4. shall be accelerated to the date immediately preceding such Event, or such other date necessary to assure that any holder of Series D Preferred Stock receives such shares of stock, securities or other 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 D 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 D 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 D Preferred Stock, voting together as a single class. IN WITNESS WHEREOF the undersigned have executed this certificate as of October 13, 1997. /s/ F. Richard Nichol, Ph.D. -------------------------------------- F. Richard Nichol, Ph.D. President and Chief Executive Officer /s/ Alan C. Mendelson -------------------------------------- Alan C. Mendelson Secretary 5. EX-10.40 8 EXHIBIT 10.40 CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. AMENDED AND RESTATED RESEARCH, DEVELOPMENT AND MARKETING COLLABORATION AGREEMENT THIS AMENDED AND RESTATED RESEARCH, DEVELOPMENT AND MARKETING COLLABORATION AGREEMENT ("Amendment") is made as of October, 1997, by and between CoCensys, Inc., a Delaware corporation ("CoCensys"), located at 201 Technology Drive, Irvine, California 92618, Acea Pharmaceuticals, Inc., a wholly owned subsidiary of CoCensys, Inc. ("Acea"), located at 201 Technology Drive, Irvine, California 92618, and Warner-Lambert Company, a Delaware corporation ("Warner"), located at 201 Tabor Road, Morris Plains, New Jersey 07950. As used in this Amendment, "CoCensys" shall include Acea. WITNESSETH: WHEREAS, CoCensys, Acea and Warner entered into that certain Research, Development and Marketing Agreement as of October 26, 1995 relating to a collaborative effort to discover and develop NMDA receptor subtype selective antagonists (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the original Agreement to expand the scope of the research and development efforts thereunder and to otherwise modify certain terms thereof. NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and conditions contained herein, CoCensys, Acea and Warner hereby agree that, effective as of the date hereof, that certain Research, Development and Marketing Collaboration Agreement among the parties, dated October 26, 1995 is hereby amended and restated as follows: SECTION 1. DEFINITIONS The following capitalized terms shall have the meanings indicated for purposes of this Amendment: 1.1. "AFFILIATE" shall mean any corporation, association, or other entity which directly or indirectly controls, is controlled by or is under common control with the party in question. As used in this definition of "Affiliate", the term "control" shall mean direct 1 or indirect beneficial ownership of more than 50% of the voting or income interest in such corporation or other business entity. 1.2. "AGREEMENT" shall mean the Original Agreement as amended and restated by this Amended and Restated Research, Development and Marketing Collaboration Agreement. 1.3. "AMPA ANTAGONIST" shall mean an AMPA-type glutamate receptor antagonist or a positive AMPA receptor modulator, the chemical structure of which does not match that described in part (a) of Schedule 1.3 which is attached hereto and incorporated herein by reference. 1.4 "BACKGROUND TECHNOLOGY" shall mean all technology, inventions, information, data, know-how, compounds (including compounds arising from research performed by CoCensys, Oregon, or UC pursuant to the Oregon/UC Agreements), and materials (whether or not patented or patentable) that (i) relate to the discovery, design, synthesis, delivery, development, testing, use, manufacture or sale of NRSSAs or AMPA Antagonists that; (ii) with respect to NRSSAs exist as of the Effective Date and with respect to AMPA Antagonists, exist as of the Restatement Date; and (iii) are owned or Controlled by a party hereto. Background Technology shall not include (i) any CoCensys Compounds or (ii) any compounds which have been identified as active in the Field and which were discovered, synthesized or developed by either party pursuant to the Screening Collaboration Agreement, which such compounds shall be considered "Collaboration Compounds." Background Technology also shall not include (i) any compound described in part (a) of Schedule 1.3 owned or Controlled by either Warner or by CoCensys or (ii) licostinel (ACEA-1021) or any backup compound candidates that are primarily glycine site antagonists of the NMDA receptor type of glutamate receptor, such compounds being identified by CoCensys or its licensees and including but not limited to the compounds covered by the patents listed in part (b) of Schedule 1.3. 1.5. "BULK PRODUCT" shall mean the active ingredient of any Product, in bulk form. 1.6. "CIBA COLLABORATION" shall mean that research and development collaboration regarding licostinel (Acea 1021), and certain back-up compounds therefore, conducted pursuant to that certain Research and Development Agreement by and between CoCensys, Acea, and Ciba-Geigy Limited, dated as of December 23, 1994. 1.7. "COCENSYS COMPOUNDS" shall mean those compounds identified by CoCensys prior to or following the term of the Screening Collaboration Agreement, but prior to the Effective Date, as showing activity in the Field, including, but not limited to, those compounds which are described in the patent application referenced on Schedule 1.7 hereto. CoCensys Compounds excludes any compound which has been identified by CoCensys (or its licensee) as a Development Candidate and which was not discovered or designated primarily as an NRSSA or an AMPA Antagonist. 2 1.8 "CO-DEVELOPMENT PERCENTAGE" shall have the meaning set forth in Section 5.3. 1.9 "COLLABORATION COMPOUND(S)" shall mean: (i) any compound identified, discovered, synthesized, or developed by either party during the Term of the Research Program and pursuant to the Research Program, including without limitation, a compound which constitutes a Non-Field Invention; or (ii) any compound which was identified as active in the Field, discovered, synthesized, or developed pursuant to research conducted by CoCensys or Warner pursuant to the Screening Collaboration Agreement; or (iii) any CoCensys Compound; or (iv) any compound which is an analog or derivative of any compound described in subsections (i), (ii), or (iii) of this definition of "Collaboration Compound" and which analog or derivative is identified, discovered, synthesized, or developed within 1 year after the end of the Term of the Research Program. Notwithstanding the foregoing, "Collaboration Compound" shall not include (x) any Development Candidate identified, discovered, synthesized, or developed by either party or (y) any compound identified, discovered, synthesized, or developed independently by a party either prior to or after the Effective Date as the result of research activities outside the Field (including any efforts conducted under the Ciba Collaboration), if such compound has no NRSSA or AMPA Antagonist activity or has only, or is later discovered to have only, Incidental NRSSA Activity or Incidental AMPA Activity. "Incidental NRSSA Activity" means NRSSA activity which is not a substantial contributor to the compound's pharmacological activity. "Incidental AMPA Activity" shall mean AMPA activity which is not a substantial contributor to the compound's pharmacological activity. 1.10. "COLLABORATION LEAD COMPOUND(S)" shall have the meaning set forth in Section 5.1. 1.11. "COLLABORATION PRODUCT(S)" shall mean any Collaboration Lead Compound(s) in development from and after the date of filing of an IND with respect to such Collaboration Lead Compound, through and including product registration and commercial sales. 1.12. "COLLABORATION TECHNOLOGY" shall mean all (a) Collaboration Compounds and information related thereto; (b) such technology, inventions, information, data, know-how, and materials (whether or not patented or patentable) that (i) a party hereto owns or Controls, (ii) relate to the Field, and (iii) are conceived, generated, or reduced to practice during the Term of the Research Program and pursuant 3 to the Research Program or pursuant to Preclinical Development or Development, including, without limitation, improvements on either party's Background Technology; and (c) all patents and trade secrets covering any of (a) or (b). 1.13. "CONTROL" shall mean possession of the ability to grant the licenses or sub-licenses as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. 1.14. "CO-PROMOTION COUNTRY" shall mean with respect to a Collaboration Lead Compound or Collaboration Product for which CoCensys has exercised the Re-engagement Option, the United States of America and its territories and possessions, including the Commonwealth of Puerto Rico. 1.15. "CO-PROMOTION EXPENSES" shall mean the following expenses incurred by a party or for its account with respect to a Collaboration Product which the parties are co-promoting pursuant to Section 7, to the extent allocable to the preparation for the commercial launch of a Collaboration Product in the Co-Promotion Country, or the marketing, promotion, and sales of a Collaboration Product subsequent to the receipt of Regulatory Approval in the Co-Promotion Country: (i) the Cost of Goods; and (ii) post-Regulatory Approval medical and clinical trial costs, costs of monitoring adverse drug reactions, costs of quality control complaints, and costs associated with maintenance of the Regulatory Approvals; and (iii) costs of distribution and shipping of the Collaboration Product to distributors and customers for the Collaboration Product; and (iv) direct costs, specifically allocable to the Collaboration Product, incurred for the sales (including cost of sales forces, specialty sales force, call reporting and other monitoring/tracking costs; and regional sales management and marketing management), advertising, promotion, and marketing of the Collaboration Product through any means (including advertisements, promotional literature, market research, symposia, exhibits, and direct mail); and (v) costs of product liability insurance and costs associated with the defense and settlement of product liability claims; and (vi) costs associated with the registration of the trademark used in connection with such Collaboration Product or any trademark infringement litigation; and (vii) any consideration payable to Third Parties for licenses required for the manufacture, importing, sale, marketing or use of the Collaboration Product to the extent set forth in Sections 4.5(a) and 6.4(c); and 4 (viii) expenses associated with recalls; and (ix) any other expenses on which the parties may mutually agree. Co-Promotion Expenses will not include general corporate overhead. 1.16. "CORE U.S. DOSSIER" shall have the meaning set forth in Section 5.3(c). 1.17. "COST OF GOODS" shall mean the cost of Bulk Products or Finished Products sold and shall be computed in accordance with United States Generally Accepted Accounting Standards. Cost of Goods shall include (i) in the case of manufacturing services provided by Warner, its Cost of Manufacture of such Finished Products, as well as the net cost or credit of any value-added taxes actually paid or utilized in respect of the Finished Products and (ii) in the case of Finished Products or Bulk Products acquired from Third Parties, payments made by either party to such Third Parties, as well as the net cost or credit of any value-added taxes actually paid or utilized in respect of the Finished Products or Bulk Products. 1.18. "COST OF MANUFACTURE" shall mean, with respect to any Bulk Product or Finished Product, the fully allocated cost of manufacturing such Product (in accordance with Good Manufacturing Practices), which includes the direct and indirect cost of any raw materials, packaging materials, and labor (including benefits) utilized in such manufacturing (including formulation, filling, finishing, labeling, and packaging, as applicable) plus an appropriate share of all factory overhead, both fixed and variable, allocated to the Product being manufactured, in accordance with the normal accounting practices for all other products manufactured in the applicable facility. 1.19. "DEVELOPMENT" shall mean the development of any Collaboration Product from and after the filing of an IND, through, and including product registration. 1.20. "DEVELOPMENT CANDIDATE" shall mean a compound which, in the case of NRSSA as of the Effective Date, and in the case of an AMPA Antagonist as of the Restatement Date, is undergoing Preclinical Development, including clinical development/scale-up, assay development, toxicology, pharmacokinetics, metabolism, and safety pharmacology outside the Field. 1.21. "DEVELOPMENT COSTS" shall mean all costs and expenses reasonably charged directly to Preclinical Development of any Collaboration Lead Compound or Development of the applicable Collaboration Product, including preclinical and clinical studies, pharmaceuticals development, manufacturing scale-up costs and validation, qualification and certification costs (and after the effective exercise of the Re-engagement Option shall be estimated in the Development Plan and Budget). Development Costs shall include: (i) the Costs of Goods for such Collaboration Product in Preclinical Development or Development as set forth in Section 9.1(d); and 5 (ii) direct and indirect labor (fringe benefits and overtime) at a rate to be negotiated by the parties prior to the commencement of any Preclinical Development; and (iii) direct costs for outside professional services, including, but not limited to, toxicology studies or clinical studies performed by Third Parties, all to the extent supported by invoices and actual payments; and (iv) direct charges (chemicals, lab supplies, animals and other direct charges) at actual cost plus an allocation for overhead of 25% (cost X 1.25). General corporate overhead shall be excluded from Development Costs. 1.22. "DEVELOPMENT PLAN AND BUDGET" shall have the meaning set forth in Section 5.3(c). 1.23. "DRUG APPROVAL APPLICATION" shall mean an application for Regulatory Approval required before commercial sale or use of a Collaboration Product as a drug in the Co-Promotion Country. 1.24. "EFFECTIVE DATE" shall mean October 26, 1995. 1.25. "EXECUTIVE COMMITTEE" shall have the meaning set forth in Section 3.1. 1.26. "FDA" shall mean the United States Food and Drug Administration. 1.27. "FIELD" shall mean research, drug discovery and development aimed at NRSSAs and AMPA Antagonists and all therapeutic benefits of NRSSAs and AMPA Antagonists, including, without limitation, the treatment of stroke, head trauma, pain, chronic neurodegenerative conditions, epilepsy, depression, anxiety, psychosis, substance abuse, and other neurological and psychiatric disorders. 1.28. "FINISHED PRODUCT" shall mean the finished pharmaceutical form, in any formulation, of a Product, packaged for sales to Third Parties. 1.29. "IND" shall mean an Investigational New Drug Application. 1.30. "INDEPENDENT LEAD COMPOUND(S)" shall have the meaning set forth in Section 5.3(j). 1.31. "INDEPENDENT PRODUCT(S)" shall have the meaning set forth in Section 5.3(j). 1.32. "INVENTION(S)" shall have the meaning set forth in Section 4.1(b). 1.33. "JOINT DEVELOPMENT COMMITTEE" or "JDC" shall have the meaning set forth in Section 3.3. 6 1.34. "MAA" shall mean a Marketing Approval Application filed with the European Medicines Evaluation Agency or the appropriate health authority in the applicable country in Europe. 1.35. "NDA" shall mean a New Drug Application. 1.36. "NET SALES" shall mean the gross amount actually received from non-affiliated customers for all Products sold, after deduction for the following items (i) trade, quantity, and cash discounts or rebates actually allowed and taken, and any other adjustments, including, without limitation, those granted on account of price adjustments, billing errors, rejected goods, damaged goods and recall returns in such amounts as are customary in the trade; (ii) credits, rebates, charge-back and prime vendor rebates, fees, reimbursements or similar payments granted or given to wholesalers and other distributors, buying groups, health care insurance carriers, pharmacy benefit management companies, health maintenance organizations or other institutions or health care organizations; (iii) any tax, tariff, customs duties, excise or other duties or other governmental charge (other than an income tax) levied on the sale, transportation or delivery of a Product and borne by the seller thereof; (iv) payments or rebates paid in connection with sales of Products to any governmental or regulatory authority in respect of any state or federal Medicare, Medicaid or similar programs; and (v) any charge for freight, insurance or other transportation costs. 1.37. "NON-FIELD INVENTIONS(S)" shall mean all technology, inventions, information, data, know-how, compounds and material (whether or not patentable) that a party hereto owns or Controls that are not useful or necessary for use in the Field, but that are conceived, generated, or reduced to practice (i) during the Term of the Research Program and pursuant to the Research Program or (ii) pursuant to Preclinical Development or Development. 1.38. "NRSSA" shall mean an antagonist with selectivity for a specific subtype of the NMDA type of glutamate receptor. 1.39. "OREGON" shall mean the University of Oregon, acting either alone or on behalf of the University of California, Irvine, as the case may be. 1.40. "OREGON LICENSE AGREEMENT" shall mean that certain License Agreement between Oregon (acting on its own behalf and on behalf of the University of California, Irvine) and Acea, dated September 29, 1992, as may be amended from time to time, and any successor agreements thereto. 1.41. "OREGON RESEARCH AGREEMENT" shall mean that certain Sponsored Research Agreement between Oregon and Acea, dated September 10, 1992, as may be amended from time to time, and any successor agreements thereto. 7 1.42. "OREGON/UC AGREEMENTS" shall mean, collectively, the Oregon License Agreement, the Oregon Research Agreement, the Oregon/UC Assignment Agreement, and the UC Research Agreement. 1.43. "OREGON/UC ASSIGNMENT AGREEMENT" shall mean that certain Agreement between Oregon and UC, dated September 23, 1992, as may be amended from time to time, and any successor agreements thereto. 1.44. "ORIGINAL WARNER COMPOUND" shall mean any compound which is as of the Restatement Date or thereafter, contained within Warner's internal compound library and is other than a compound which is identified and first synthesized during the Term of the Research Program pursuant to the Research Program. 1.45. "PATENT RIGHTS" shall mean, with respect to CoCensys or Warner, all United States and foreign patents (including all reissues, extensions, substitutions, confirmations, re-registrations, re-examinations, revalidations, and patents of addition) and patent applications (including, without limitation, all continuations, continuations-in-part, and divisions thereof) owned or Controlled by CoCensys or Warner, respectively, at any time during the Term of this Agreement relating to the design, synthesis, delivery, development, testing, use, manufacture, importation, offer for sale or sale of Independent Lead Compounds, Independent Products, Collaboration Compounds, Collaboration Lead Compounds, Collaboration Products, or other agents with activity in the Field. 1.46. "PRECLINICAL DEVELOPMENT" shall mean all activities (including, but not limited to, chemical development/scale-up, assay development, toxicology, pharmacokinetics, metabolism, and safety pharmacology), which may or may not be conducted pursuant to GMP/GLP, undertaken to develop a Collaboration Lead Compound which are prior to the effective exercise of the Re- engagement Option, determined by Warner (or after the effective exercise of the Re-engagement Option, determined by the Joint Development Committee) to be necessary or desirable to file an IND on such Collaboration Lead Compound, including the preparation and filing of an IND. 1.47. "PRECLINICAL DEVELOPMENT CRITERIA" shall have the meaning set forth in Section 5.1(a). 1.48. "PRODUCT" shall mean a Collaboration Product or Independent Product, as applicable, in final packaged form. 1.49. "PROJECT TEAM LEADER" shall have the meaning set forth in Section 3.3. 1.50. "RE-ENGAGEMENT OPTION" shall have the meaning set forth in Section 5.3. 1.51. "REGULATORY APPROVAL" shall mean all approvals (including pricing and reimbursement approvals), licenses, registrations, and authorizations of all national, supra-national, regional, state or local regulatory agencies, and departments and other 8 governmental entities, necessary for the manufacture, distribution, use or sale of a Collaboration Product in the Co-Promotion Country. 1.52. "REQUIRED SALES EFFORT" shall have the meaning set forth in Section 7.4. 1.53. "RESEARCH MANAGEMENT COMMITTEE" or "RMC" shall have the meaning set forth in Section 3.2. 1.54. "RESEARCH PLAN" shall have the meaning set forth in Section 2.1. 1.55. "RESEARCH PROGRAM" shall mean that program of research performed by the parties pursuant to Section 2. 1.56. "RESTATEMENT DATE" shall mean the latest date set forth on the signature page of this Agreement. 1.57. "SCIENTIFIC FTE" shall mean a full-time scientist (or in the case of less than a full-time, dedicated scientist, a full-time, equivalent scientist year), dedicated to research under the Research Program. 1.58. "SCREENING COLLABORATION AGREEMENT" shall mean that certain Screening Collaboration Agreement, dated July 25, 1994, by and between Warner and Acea. 1.59. "SECOND SOURCE" shall have the meaning set forth in Section 10.3. 1.60. "TERM OF CO-PROMOTION" for a Collaboration Product approved for sale in the Co-Promotion Country shall mean the period beginning upon the first commercial sale of such Collaboration Product in the Co-Promotion Country and ending on the later of (i) expiration of the last to expire Patent Right necessary to make, use, import, offer for sale and sell such Collaboration Product in the Co-Promotion Country, or (ii) 10 years from first commercial sale of such Collaboration Product in the Co-Promotion Country. 1.61. "TERM OF THIS AGREEMENT" shall mean the period from the Effective Date until, with respect to each Product, the expiration of the last profit sharing or royalty obligation owed by one party to the other with respect to such Product, or until this Agreement is otherwise terminated pursuant to its terms. 1.62. "TERM OF THE RESEARCH PROGRAM" shall have the meaning set forth in Section 2.4. 1.63. "THIRD PARTY" shall mean any party other than Warner or CoCensys or an Affiliate of either of them. 1.64. "TOTAL PROFIT" shall mean, on a country-by-country basis, Net Sales for each Collaboration Product less all Co-Promotion Expenses incurred by the parties for such Collaboration Product in the applicable country. 9 1.65. "UC" shall mean the Regents of the University of California. 1.66. "UC RESEARCH AGREEMENT" shall mean that certain Sponsored Research Agreement between UC and Acea, dated June 29, 1992, as may be amended from time to time, and any successor agreements thereto. SECTION 2. RESEARCH PROGRAM 2.1. UNDERTAKING AND SCOPE. The Research Management Committee will agree on and, in its discretion, modify the general direction of the Research Program to be performed under this Section 2. Correspondence and other material documenting such agreement and approved by the RMC are collectively referred to herein as the Research Plan. Initially, the Research Plan shall be as set forth on Schedule 2.1 which is attached hereto and incorporated herein by reference. Each party agrees to use its best efforts to perform the activities detailed in the Research Plan, in a professional and timely manner. Promptly after the Effective Date and, in the case of AMPA Antagonists, the Restatement Date, each party shall disclose to the other all Background Technology and Collaboration Technology then possessed by it relevant to the Field and necessary or helpful to perform the work described in the Research Plan. Notwithstanding the foregoing, Warner shall not be obligated to disclose to CoCensys the structure of any compound existing in the Warner Background Technology or Collaboration Technology until NRSSA or AMPA Antagonist activity is confirmed in such compound and CoCensys shall not be obligated to disclose to Warner the structure of any compound existing in the CoCensys Background Technology or Collaboration Technology until NRSSA or AMPA Antagonist activity is confirmed in such compound. Each party shall also provide to the other samples of compounds and biological materials that comprise its Background Technology or Collaboration Technology to the extent necessary for such other party to perform its obligations under the Research Plan and to the extent owned or Controlled by such party, provided, however, that neither party shall be obligated to unreasonably deplete its compound library. CoCensys acknowledges that, as of the Effective Date, it is in possession of certain [*], which were provided by a Third Party. CoCensys will use reasonable efforts to obtain permission from such Third Party to share such [*] with Warner. 2.2. PERSONNEL AND RESOURCES. Each party agrees to commit the personnel, facilities, expertise, and other resources necessary to perform its obligations under the Research Plan; provided, however, that neither party warrants that the Research Program shall achieve any of the research objectives contemplated by them. From the Restatement Date until December 31, 1997, Warner and CoCensys will each maintain at its cost a minimum of [*] Scientific FTEs. Thereafter, and continuing until the end of the Term of the Research Program, CoCensys shall maintain a minimum of [*] Scientific FTEs (who shall be CoCensys employees). Commencing on [*], Warner shall reimburse CoCensys for a minimum of [*] Scientific FTEs at a rate of [*] per Scientific FTE, per calendar year. Warner shall pay CoCensys such amounts in advance on a quarterly basis. The 10 *Confidential treatment requested scientific priorities and direction of such Scientific FTEs will be determined by the Research Management Committee, which may increase or decrease the minimum number of Scientific FTEs required to be maintained, provided, however, that in no event shall the minimum number of Scientific FTEs be set by the Research Management Committee at more than [*] or less than [*] during the first [*] following the Effective Date. The Scientific FTEs maintained by CoCensys may include, but shall not be limited to, scientists in the areas of molecular biology, pharmacology, neuropharmacology, and medicinal chemistry. The Scientific FTEs maintained by Warner may include, but shall not be limited to, scientists in the areas of molecular biology, biochemistry, biochemical pharmacology, neuropharmacology, behavioral pharmacology, medicinal chemistry, and computer-assisted drug design. CoCensys shall be permitted to contract with Oregon at CoCensys' cost, in the form of a sponsored research agreement, to assist it in performing those of its obligations under this Section 2 which CoCensys is required to perform prior to December 31, 1997, and the number of Scientific FTEs performing such services at Oregon shall be credited against the minimum number of Scientific FTEs required to be maintained by CoCensys hereunder prior to December 31, 1997. CoCensys represents and warrants that if CoCensys utilizes personnel or facilities of Oregon to perform any such work, it shall only do so pursuant to a written agreement between CoCensys and Oregon which shall contain terms and conditions consistent with the terms and conditions of this Agreement, including, without limitation, terms protecting Warner's rights in any Collaboration Technology arising from such performance. Warner shall have the right to review any such agreement prior to the execution thereof and such agreement shall not be signed until approved by the RMC. Warner shall review, and the RMC shall consider approval of, such agreement in an expeditious manner. 2.3. INFORMATION AND REPORTS CONCERNING COLLABORATION TECHNOLOGY. All Collaboration Technology made by either party will be promptly disclosed to the other, with significant discoveries or advances being communicated as soon as practical after such information is obtained or its significance is appreciated. The parties will exchange at least monthly verbal or written reports presenting a meaningful summary of their activities performed under this Agreement. In addition to the foregoing, each party shall promptly provide to the other the structures of all Collaboration Compounds and other biological materials prepared or developed by such party pursuant to the Research Program. 2.4. TERM OF THE RESEARCH PROGRAM. Work under the Research Plan will commence as of the Effective Date and, unless terminated earlier by either party pursuant to the terms of this Agreement or extended by mutual agreement of the parties, will terminate on the [*] anniversary of the Restatement Date, provided that the work may be extended for additional [*] terms upon the mutual written consent of the parties (as terminated, expired or extended, the "Term of the Research Program"). The Term of the Research Program may be terminated by either party upon 6 months prior written notice to the other party, provided, however, that the terminating party shall be obligated to 11 *Confidential treatment requested continue all Research Program studies ongoing at the time of such written notice until the effective date of such termination and shall provide the data arising therefrom to the non-terminating party. Upon early termination by a party of the Term of the Research Program pursuant to the preceding sentence, each party shall retain such ownership interest in the Collaboration Technology as it shall hold on the date of the termination; provided, however, that (i) the licenses granted to the non-terminating party under Section 2.5, Section 4.7, and Section 6 shall remain in full force and effect, but the terminating party shall forfeit all rights to co-develop and co-promote all Collaboration Compounds, (ii) the terminating party shall not conduct any further research in the Field for a period of [*] from the effective date of such early termination, and (iii) all licenses granted to such terminating party under this Agreement may be immediately terminated by the other party. Any Collaboration Compound pursued by the non-terminating party in such event shall be deemed an Independent Product and the non-terminating party shall pay to the terminating party a royalty on Net Sales of such Independent Product equal to [*]. 2.5. CROSS-LICENSES TO BACKGROUND TECHNOLOGY. Each party hereby grants and agrees to grant to the other a non-exclusive, royalty-free license to use and practice such party's Background Technology for research purposes in the Field until [*]. In addition, for each Collaboration Compound which enters Preclinical Development or Development, each party hereby grants and agrees to grant to the other a non-exclusive, royalty-free license to use and practice such party's Background Technology for the Preclinical Development or Development of such Collaboration Compound until termination of such Preclinical Development or Development. Notwithstanding the foregoing, the granting party may terminate such license granted by it immediately upon its termination of this Agreement for breach by the other party under Section 14.1, or upon the other party's early termination of the Research Program pursuant to Section 2.4. SECTION 3. COMMITTEES 3.1. EXECUTIVE COMMITTEE. (a) Promptly after the Effective Date, Warner and CoCensys will each appoint 3 representatives to a management committee (the "Executive Committee"). Chairmanship of the Executive Committee meetings will rotate between a CoCensys member and a Warner member based on which party is hosting the Executive Committee meeting. The Executive Committee will be charged with overseeing and managing the entire Collaboration, including the Research Management Committee, the Joint Development Committee, and the Marketing Committee. In addition, the role of the Executive Committee will be to: (1) coordinate the parties' activities hereunder; (2) resolve problems or settle disagreements that are unresolved by the RMC, the JDC, and the Marketing Committee unless otherwise indicated in this Agreement; (3) approve allocations of tasks and resources required to carry out the goals of the Collaboration; 12 *Confidential treatment requested (4) approve all plans and annual budgets for the various projects and programs within the Collaboration; (5) designate Collaboration Lead Compounds; (6) encourage and facilitate ongoing cooperation between the parties; (7) coordinate and monitor the payments and repayments to be made by and between the parties; and (8) perform such other functions as appropriate to further the purposes of this Agreement as determined by the parties. Any disputes or disagreements within the Executive Committee shall be resolved pursuant to Section 3.6. (b) The Executive Committee will meet every 6 months during the term of this Agreement and at such other times as a party may request, alternating between Ann Arbor, Michigan and Irvine, California and will otherwise communicate regularly by telephone, facsimile, and video conference. Each party recognizes the importance of the Executive Committee in the success of the Collaboration and will use diligent efforts to cause all of its representatives to such committee to attend all meetings of such committee. A party may change any of its appointments to the Executive Committee at any time upon giving written notice to the other party. 3.2. RESEARCH MANAGEMENT COMMITTEE. Promptly after the Effective Date, Warner and CoCensys will each appoint 3 representatives to a Research Management Committee (the "Research Management Committee" or "RMC"). CoCensys will appoint the chairman of the RMC for the initial 12 months. Thereafter, chairmanship will rotate between a Warner member and a CoCensys member every 12 months. The RMC will review, direct, and supervise all operational and scientific aspects of the Research Program. The duties of the Research Management Committee shall include determining the direction of the Research Plan, adding molecular targets, conducting biological and medicinal chemical studies, and proposing Collaboration Lead Compounds to the Executive Committee. The Research Management Committee will meet quarterly, or more frequently if mutually agreed, and will alternate sites of meetings between Irvine, California and Ann Arbor, Michigan and will otherwise communicate regularly by telephone, facsimile, and video conference. Each party recognizes the importance of the Research Management Committee in the success of the Collaboration and will use diligent efforts to cause all of its representatives to such committee to attend all meetings of such committee. A party may change any of its appointments to the Research Management Committee at any time upon giving written notice to the other party. Any disputes or disagreements within the RMC shall be resolved pursuant to Section 3.6. 3.3. JOINT DEVELOPMENT COMMITTEE. Within 30 days of the date CoCensys exercises the Re-engagement Option in accordance with Section 5.3 to co-develop a Collaboration Lead Compound, Warner shall appoint 4 representatives and CoCensys shall appoint 2 representatives to a Joint Development Committee (the "Joint Development Committee" or "JDC"). Such representatives will include individuals with expertise and responsibilities in the areas of preclinical development, clinical development, or regulatory affairs. The JDC will oversee all aspects of the Preclinical Development and Development of each Collaboration Lead Compound for which CoCensys has exercised the Re-engagement Option through the filing of an NDA or its 13 foreign equivalent on a Collaboration Product arising from such Collaboration Lead Compound. With respect to each Collaboration Lead Compound in Preclinical Development and each Collaboration Product in Development, the Executive Committee will, upon nomination from each party, select one Warner JDC representative as a "Project Team Leader" with respect to such Collaboration Lead Compound or Collaboration Product. The Project Team Leader will be responsible for overseeing the operational aspects of the Preclinical Development and the Development of the applicable Collaboration Lead Compound or Collaboration Product, as directed by the JDC, and will prepare and submit to the JDC issues and problems to be decided by the JDC. The JDC will meet on a quarterly basis, alternating between Ann Arbor, Michigan and Irvine, California and will otherwise communicate regularly by telephone, facsimile and video conference. Each party recognizes the importance of the Joint Development Committee in the success of the Collaboration and will use diligent efforts to cause all of its representatives to such committee to attend all meetings of such committee. A party may change any of its appointments to the Joint Development Committee at any time upon giving written notice to the other party. 3.4 MARKETING COMMITTEE. At such time as registration and marketing in the Co-Promotion Country for one or more Collaboration Products for which CoCensys has exercised the Re-engagement Option in accordance with Section 5.3 is anticipated, and in any event, no later than at the conclusion of Phase II clinical studies for any such Collaboration Product, Warner shall appoint 3 representatives and CoCensys shall appoint 1 representative to a marketing committee (the "Marketing Committee"). Such representatives will include individuals with expertise in sales, marketing , clinical trials, manufacturing or regulatory affairs. The Marketing Committee shall develop a marketing plan for each Collaboration Product in the Co-Promotion Country for which CoCensys has exercised the Re-engagement Option, shall oversee quality control of each such Collaboration Product as set forth in Section 9 and shall oversee operational aspects of marketing and sales in the Co-Promotion Country following launch of each such Collaboration Product, as further discussed in Section 7. The Marketing Committee will meet on a quarterly basis, alternating between Morris Plains, New Jersey and Irvine, California and will otherwise communicate regularly by telephone, facsimile and video conference. Each party recognizes the importance of the Marketing Committee in the success of the Collaboration and will use diligent efforts to cause all of its representatives to such committee to attend all meetings of such committee. A party may change any of its appointments to the Marketing Committee at any time upon giving written notice to the other party. 3.5. MEETINGS. All committees created hereunder may meet by telephone or video conference or in person at such times as are agreeable to the members of each such committee. Attendance at meetings shall be at the respective expense of the participating parties. Each committee created hereunder shall assure that agendas and minutes are prepared for each of its meetings. All actions taken and decisions made by the Executive Committee and the Research Management Committee shall be by unanimous agreement. All actions taken and decisions made by the Joint Development Committee and the 14 Marketing Committee shall be by majority vote. If personal attendance is not possible for valid reasons, voting by proxy is permissible. 3.6. DISPUTE RESOLUTION. Any disputes or disagreements arising in the RMC will be referred to the Executive Committee if the RMC is unable to resolve such dispute or disagreement within 30 days. In addition, any other disputes or disagreements between the parties arising hereunder will be referred to the Executive Committee. If the Executive Committee is unable to resolve, after 30 days, a dispute regarding any issue presented to it or arising in it, such dispute will be referred to the Chief Executive Officer of CoCensys and a senior officer of Warner's pharmaceutical business for good faith resolution, for a period of 90 days. If such dispute is not resolved by the end of such 90-day period, the parties shall be free to pursue any legal or equitable remedy available to them. SECTION 4. PATENTS, KNOW-HOW RIGHTS, AND INVENTIONS 4.1. OWNERSHIP OF TECHNOLOGY. (a) BACKGROUND TECHNOLOGY. Except as otherwise set forth herein, each party shall retain ownership or Control, as the case may be, over its Background Technology. The owner of any patentable Background Technology shall have the right, at its option and expense, to prepare, file and prosecute in its own name any patent applications with respect to such Background Technology and to maintain any patents issued. (b) COLLABORATION TECHNOLOGY. Except as otherwise set forth herein, ownership of Collaboration Technology (whether or not patentable) shall be determined in accordance with United States laws of inventorship. Subject to Section 4.2, the owner (the "Inventor") of any patentable Collaboration Technology (an "Invention") shall have the right, at its option and expense, to prepare, file, and prosecute in its own name any patent applications with respect to any Invention owned by it and to maintain any patents issued. In connection therewith, the non-Inventor party agrees to cooperate with the Inventor at the Inventor's expense in the preparation and prosecution of all such patent applications and in the maintenance of any patents issued. The obligations set forth in this Section 4.1(b) shall survive the expiration or termination of this Agreement. (c) NON-FIELD TECHNOLOGY. Warner shall own all Non-Field Inventions that constitute or claim the formulation, composition of matter or use of any compound supplied to CoCensys by Warner. CoCensys shall own all Non-Field Inventions that relate to any compound supplied to Warner by CoCensys. The parties will co-own all other Non-Field Inventions. The parties will cooperate in the joint filing of patent applications claiming Non-Field Inventions described in the preceding sentence. All compounds which are Non-Field Inventions shall be deemed Collaboration Compounds. 15 4.2. JOINT INVENTIONS. (a) Collaboration Technology jointly invented by CoCensys and Warner and Collaboration Technology derived from the screening of the Warner compound library or the CoCensys compound library using screening technology contributed by CoCensys will be jointly owned by CoCensys and Warner; however, subject to Section 4.2(b), Warner will have the rights and responsibilities of the "Inventor" as described in this Section 4 in respect of any such patentable, jointly owned Collaboration Technology and CoCensys shall have the rights and responsibilities of a non-Inventor therein. Warner shall use patent counsel reasonably acceptable to CoCensys [*] in connection with its preparation, filing, and prosecution of patent applications that claim patentable, jointly owned Collaboration Technology. If CoCensys exercises the Re-engagement Option, then with respect to a Collaboration Lead Compound or Collaboration Product claimed by any such patent and patent applications Warner shall, on a quarterly basis, notify CoCensys of the amount of all expenses incurred by Warner in connection with the preparation, filing and prosecution of such patents and patent applications in the Co-Promotion Country relating to such Collaboration Lead Compounds or Collaboration Products and provide CoCensys with an itemized accounting of such expenses and CoCensys shall promptly thereafter pay Warner a percentage of its out-of-pocket expenses for such preparation, filing, and prosecution in the Co-Promotion Country equal to the [*]. CoCensys shall further thereafter reimburse Warner for the [*] of such expenses thereafter incurred by Warner in connection with such patents and patent applications. All expenses in connection with the preparation, filing and prosecution in non-Co-Promotion Countries of patent applications that claim patentable, jointly owned Collaboration Technology shall be borne [*]. CoCensys may use patent counsel reasonably acceptable to Warner to review and provide comments with respect to the preparation, filing and prosecution of patent applications that claim patentable, jointly owned Collaboration Technology and [*] in connection therewith. As used in this Section 4.2(a), "out-of-pocket expenses" shall mean direct costs, excluding internal labor costs. (b) CoCensys shall have the sole right and responsibility to prepare, prosecute and maintain any patents or patent applications covering the composition of matter, use, manufacture, or formulation of the CoCensys Compounds and Warner shall not have the rights and responsibilities of the "Inventor" with respect to any such patents or patent applications. [*] in connection with the preparation, filing, and prosecution of patent applications that claim CoCensys Compounds. CoCensys shall, on a quarterly basis, notify Warner of the amount of such expenses in the Co-Promotion Country relating to any Collaboration Lead Compound or Collaboration Product for which CoCensys has exercised the Re-engagement Option and provide Warner with an itemized accounting of such expenses and Warner shall promptly thereafter pay CoCensys [*] of its out-of-pocket expenses for such preparation, filing, and prosecution in the Co-Promotion Country equal to [*]. All expenses in connection with the preparation, filing, and prosecution in non-Co-Promotion Countries of patent applications that claim *Confidential treatment requested 16 patentable CoCensys Compounds shall be borne [*]. As used in this Section 4.2(b), "out-of-pocket expenses" shall mean direct costs, excluding internal labor costs. 4.3. PROTECTION OF PATENT RIGHTS. (a) The Inventor shall prepare, prosecute, and maintain (and shall keep the other party currently informed of all steps to be taken in such preparation, prosecution and maintenance of) all of its Patent Rights which claim an Invention and at the other party's request, shall furnish the other party with copies of such Patent Rights and other related correspondence relating to such Invention to and from patent offices and permit the other party to offer its comments thereon before the Inventor makes a submission to a patent office which could materially affect the scope or validity of the patent coverage that may result. The non-Inventor party shall offer-its comments promptly. CoCensys and Warner shall each promptly notify the other of any infringement or unauthorized use of an Invention which comes to its attention. (b) If the Inventor fails to (i) fulfill its obligations under this Section 4 or (ii) protect against abandonment of a Patent Right which claims an Invention, the Inventor shall permit the non-Inventor party, at its option and expense, to undertake such obligations. The party not undertaking such actions shall fully cooperate with the other party and shall provide to the other party whatever assignments and other documents that may be needed in connection therewith. The party not undertaking such actions may require a suitable indemnity against all damages, costs and expenses and impose such other reasonable conditions as such party's advisors may require. If a party undertakes the obligations of "Inventor" under this Section 4 with respect to any Patent Rights of the other party under this Section 4.3(b), it shall prosecute and maintain the same vigorously at its own expense, and shall not abandon or compromise them or fail to exercise any rights of appeal without giving the other party the right to take over the prosecuting party's conduct, at such other party's own expense. (c) In the event CoCensys or Warner becomes aware of any actual or threatened infringement of any Patent Right of either party which claims an Invention or a Non-Field Invention, that party shall promptly notify the other and the Executive Committee shall promptly discuss how to proceed in connection with such actual or threatened infringement. If both parties participate in the conduct of a legal action pursuant to this Section 4.3(c), (i) if one party files, the actual costs and expenses of such action shall be [*] or (ii) if both parties file, the actual costs and expenses of such action shall be [*], based on the actual costs and expenses incurred by each party in connection with such action. Any remaining damages shall then be paid [*]. If one party alone conducts such legal action, [*]. If either party commences any actions or proceedings (legal or otherwise) pursuant to this Section 4.3(c), it shall prosecute the same vigorously at its expense and shall not abandon or compromise them or fail to exercise any rights of appeal without giving the other party the right to take over the prosecuting party's conduct at such other party's own expense. *Confidential treatment requested 17 4.4. OREGON'S PATENT RIGHTS. Warner acknowledges and understands that certain Collaboration Technology that is Controlled by CoCensys may be owned in whole or in part by Oregon (and licensed to CoCensys) and is therefore subject to the Oregon/UC Agreements. Warner further acknowledges that any rights granted under this Section 4 to Warner as Inventor are subject to Oregon's rights to prepare, prosecute, and maintain certain patents and patent applications pursuant to the Oregon/UC Agreements. 4.5. ALLEGATIONS OF INFRINGEMENT BY THIRD PARTIES. (a) If either party should be of the opinion that it or the other party cannot commercially reasonably make, import, use, market and/or sell a Collaboration Product without infringing a Third Party's patent or other intellectual property rights, it shall notify the other party. Both parties then shall seek an opinion of patent counsel acceptable to both parties. In the Co-Promotion Country, if such patent counsel concurs with the notifying party's opinion, the parties shall jointly or independently endeavor to secure a license from the Third Party on terms that are acceptable to both parties. In a non-Co-Promotion Country, if such patent counsel concurs with the notifying party's opinion, Warner shall endeavor to secure a license from the Third Party on terms that are acceptable to both parties. Any royalties payable by either party in the Co-Promotion Country under any such Third Party license shall be included as a Co-Promotion Expense in that country. [*] of any royalties payable by [*] in a non-Co-Promotion Country under any such Third Party license shall be deducted from royalty payments due to [*] pursuant to this Agreement with respect to such Collaboration Product in such country, provided, however, in no event shall royalties due CoCensys pursuant to this Agreement with respect to sales of any Collaboration Product in any non-Co-Promotion country be reduced by more than [*] of such Collaboration Product in such country. If in the opinion of such patent counsel the Third Party patent is invalid or will not be infringed by the manufacture, use, sale, or import of the Collaboration Product, the parties shall proceed in accordance with the terms of this Agreement, unless an action for infringement is brought against one or both parties. (b) If either party is sued for patent infringement of any Third Party patents or other intellectual property right arising out of the manufacture, use, sale, or importation of a Collaboration Product in a Co-Promotion Country, the parties shall promptly meet to discuss the course of action to be taken to resolve or defend any such infringement litigation. Each party shall provide the other with such assistance as is reasonably necessary and shall cooperate in the defense of any such action. Any costs and expenses of defending such action and any damages or other compensation imposed shall be included as a Co-Promotion Expense in the Co-Promotion Country in which such action arose. (c) Warner shall be solely responsible for the defense of any threatened or actual claims for Third Party patent infringement or other Third Party *Confidential treatment requested 18 intellectual property right arising out of the manufacture, use, sale or importation of a Collaboration Product other than in the Co-Promotion Country. Upon receiving notice of such actual or threatened claims, Warner shall promptly meet with CoCensys to discuss the course of action to be taken to resolve or defend any such infringement litigation. [*] of any costs and expenses of defending such action and any damages or other compensation imposed shall be deducted from [*] pursuant to this Agreement with respect to such Collaboration Product in such Non-Co-Promotion Country, provided, however, in no event shall [*] pursuant to this Agreement with respect to sales of any Collaboration Product in any non-Co-Promotion Country be reduced by more than [*] of such Collaboration Product in such country. (d) Notwithstanding the foregoing, each party will pay 100% of any costs and expenses and damages or other consideration resulting from a Third Party infringement action if it relates solely to allegations of infringement made against such party prior to the Effective Date. 4.6. INDEPENDENT EFFORTS. Except as expressly stated in Section 5.3(j), a party shall not, during the Term of the Research Program, conduct any activities independent of the Collaboration within the Field. Ownership rights to inventions that do not rely in material part on technology, data or knowledge contributed by the other party or derived under the Collaboration and that are made by the employees of CoCensys (but not of Warner) or by the employees of Warner (but not of CoCensys), as the case may be, whether or not made during the Term of this Agreement, shall reside solely in CoCensys or Warner, respectively, as the case may be. Neither party will claim or seek any ownership rights, licenses or royalties or other compensation with respect to such inventions of the other party. The applicable party shall have the right, at its option and expense, to prepare in its own name, file and prosecute any patent applications and to maintain any patents issued with respect to such inventions. In connection therewith, the other party agrees to cooperate with the filing party at the filing party's expense in the preparation and prosecution of all such patent applications covering such independent inventions to the extent that such party's cooperation is reasonably necessary therefor. This obligation shall survive the expiration or termination of this Agreement. 4.7. CROSS-LICENSES TO INVENTIONS AND OTHER COLLABORATION TECHNOLOGY. Each party hereby grants and agrees to grant to the other a perpetual, non-exclusive, royalty-free license to use such party's Inventions and other Collaboration Technology for research purposes only in the Field. SECTION 5. DEVELOPMENT PROGRAM 5.1. DESIGNATION OF COLLABORATION LEAD COMPOUND. (a) From time to time the RMC will propose, or either party may propose to the Executive Committee one or more Collaboration Compounds for further Preclinical Development. Such proposal will be in writing, accompanied by an outline of *Confidential treatment requested 19 proposed studies and activities through Phase I or IIa for each Collaboration Compound recommended. The Executive Committee will promptly determine whether such Collaboration Compound meets Warner's then current criteria for lead compound designation (the "Preclinical Development Criteria"). (b) If the Executive Committee determines that such Collaboration Compound meets the Preclinical Development Criteria, then thereafter, such Collaboration Compound shall be deemed to be a "Collaboration Lead Compound" and later a "Collaboration Product". Warner shall commence the Preclinical Development and Development of such Collaboration Lead Compound within [*] days of such determination by the Executive Committee, provided that Warner shall have the right, upon written notice to the Executive Committee, to decline to develop a Collaboration Lead Compound, in which case CoCensys will have the right to proceed independently with the development of such Collaboration Lead Compound according to Section 5.3(j). (c) If neither party desires to further develop a Collaboration Compound and so indicates to the Executive Committee, such Collaboration Compound shall be neither a Collaboration Lead Compound nor a compound which may be developed under Section 5.3(j) (except as provided below), and this Section 5.1(c) shall govern any future development of such discontinued Collaboration Compound (a "Discontinued Compound"). If at any time on or before the [*] of the date upon which the latter of the two parties hereto rejected such Collaboration Compound as a Collaboration Lead Compound pursuant to Section 5.l(b) (the "Rejection Date"), a party hereunder (the "Interested Party") decides it is interested in reinitiating development of such Discontinued Compound, it shall provide written notice to the other party of such interest and the reasons therefor, in sufficient detail as to allow the other party to make a reasoned judgment regarding the opportunities presented by such development (including, in the case of CoCensys, the Co-Development Percentage elected by CoCensys with respect to such Discontinued Compound). The other party will then have [*] to provide written notice to the Interested Party indicating whether it also is interested in the development of such Discontinued Compound. If the other party is Warner and Warner indicates it is interested in reinitiating Preclinical Development or Development of such Discontinued Compound, the parties will proceed with Preclinical Development or Development of such Discontinued Compound as a Collaboration Lead Compound for which CoCensys has exercised the Re-engagement Option pursuant to the terms of this Agreement. If the other party is Warner and Warner indicates it is not interested in reinitiating Preclinical Development or Development of such Discontinued Compound, CoCensys may proceed with development of such Discontinued Compound as an Independent Product and CoCensys shall be deemed to be the Independent Party, pursuant to Section 5.3(j). If the other party is CoCensys, and CoCensys indicates it is not interested in reinitiating Preclinical Development or Development or such Discontinued Compound, Warner shall proceed with Preclinical Development or Development of such Collaboration Lead Compound pursuant to the terms of this Agreement provided that CoCensys shall not be permitted to thereafter exercise the Re-engagement Option. At any time after the [*] of the Rejection Date, either party may, upon written notice to the other party, proceed with *Confidential treatment requested 20 development of a Discontinued Compound as an Independent Product and such party shall be deemed to be the Independent Party, pursuant to Section 5.3(j). (d) If a Collaboration Compound is not, at any time, presented to the Executive Committee pursuant to Section 5.l(a), such Collaboration Compound shall be neither a Collaboration Lead Compound nor a compound which may be developed under Section 5.3(j) (except as provided below), and this Section 5.l(d) shall govern any future development of such non-proposed Collaboration Compound (a "Non-Proposed Compound"). If at any time on or before the [*] of the date of termination or expiration of the Term of the Research Program, a party hereunder (the "Non-Proposed Compound Interested Party") decides it is interested in reinitiating development of such Non-Proposed Compound, it shall provide written notice to the other party of such interest and the reasons therefor, in sufficient detail as to allow the other party to make a reasoned judgment regarding the opportunities presented by such development. The other party will then have [*] to provide written notice to the Non-Proposed Compound Interested Party indicating whether it also is interested in the development of such Non-Proposed Compound. If the other party is Warner and Warner indicates it is interested in reinitiating Preclinical Development or Development of such Non-Proposed Compound, the parties will proceed with Preclinical Development or Development of such Non-Proposed Compound as a Collaboration Lead Compound for which CoCensys has exercised the Re-engagement Option pursuant to the terms of this Agreement. If the other party is Warner and Warner indicates it is not interested in reinitiating Preclinical Development or Development of such Non-Proposed Compound, CoCensys may proceed with development of such Non-Proposed Compound as an Independent Product and CoCensys shall be deemed to be the Independent Party, pursuant to Section 5.3(j). If the other party is CoCensys, and CoCensys indicates it is not interested in reinitiating Preclinical Development or Development or such Discontinued Compound, Warner shall proceed with Preclinical Development or Development of such Collaboration Lead Compound pursuant to the terms of this Agreement provided that CoCensys shall not be permitted to thereafter exercise the Re-engagement Option. At any time after the [*] of the date of termination or expiration of the Term of the Research Program, either party may, upon written notice to the other party, proceed with development of a Non-Proposed Compound as an Independent Product and such party shall be deemed to be the Independent Party, pursuant to Section 5.3(j). 5.2. DEVELOPMENT BY WARNER. Unless and until CoCensys exercises its Re-engagement Option pursuant to the terms of Section 5.3, Warner shall be solely responsible for the strategy and the conduct and funding of the Preclinical Development and Development with respect to any Collaboration Lead Compound or Collaboration Product. Until the end of Phase II meeting with the FDA for each Collaboration Lead Compound, Warner shall keep CoCensys fully informed of the status and progress of the Pre-Clinical Development and Development of such Collaboration Lead Compound. Upon receipt of written notice from CoCensys that it is considering exercising the Re-engagement Option with respect to any Collaboration Lead Compound or Collaboration Product, Warner shall provide CoCensys with the amount of Development Costs incurred *Confidential treatment requested 21 by Warner in the Preclinical Development or Development of such Collaboration Lead Compound or Collaboration Product and shall otherwise discuss with CoCensys the anticipated future Development Costs for such Collaboration Lead Compound or Collaboration Product. In the event that Warner determines to subcontract any of the Development to a Third Party, it shall notify CoCensys and CoCensys shall have the right to submit one or more proposals to Warner to perform such work. Warner shall in good faith consider any such proposals of CoCensys which are competitive with Third Party proposals for the same work, provided, however, that Warner shall be under no obligation to accept any such proposal. 5.3 JOINT DEVELOPMENT. At any time after the Executive Committee designates a Collaboration Lead Compound until the end of Phase II meeting with the FDA relating to such Collaboration Lead Compound, CoCensys shall have the right on a Collaboration Lead Compound-by-Collaboration Lead Compound basis to elect to co-develop and co-promote such Collaboration Lead Compound with Warner (such right is hereinafter referred to as the "Re-engagement Option"). CoCensys shall exercise such right by providing Warner with written notice of such election and indicating the percentage of Total Profit that CoCensys desires to obtain with respect to such Collaboration Lead Compound or Collaboration Product, which shall be between [*] (the "Co-Development Percentage"). Such election shall only be effective if such written notice is accompanied by [*] of the Development Costs incurred by Warner with respect to the applicable Collaboration Lead Compound or Collaboration Product prior to the effective date of such written notice, calculated according to the following table:
Date of Exercise of Percentage of the Re-engagement Option Co-Development Percentage - -------------------- -------------------------- [*] [*] [*] [*] [*] [*]
Upon exercise of the Re-engagement Option in accordance with this Section 5.3, the following provisions shall apply, following the date of such exercise, to the Preclinical Development and Development of the applicable Collaboration Lead Compound or Collaboration Product for which the Re-engagement Option was exercised as well as such other provisions of this Agreement which by their terms shall also so apply: (a) COSTS. The payment of the costs of conducting such Preclinical Development shall be as set forth in Section 5.3(d). Under no circumstances shall either *Confidential treatment requested 22 party conduct studies of the Collaboration Lead Compound except as permitted by the JDC. (b) COLLABORATIVE DEVELOPMENT OF COLLABORATION PRODUCT. The parties will each diligently collaborate in the Development of the Collaboration Products and use diligent efforts to develop and bring such Collaboration Product to the market as soon as reasonably practicable. The role of each party in the research and development process will be proposed by the Project Team Leader and approved by the JDC, with each party providing advisory and supporting services with respect to each phase of the process in which such party may not be actively or primarily involved. No clinical trials involving the Collaboration Product shall be commenced by or on behalf of either party without the prior approval of the JDC. Each party shall ensure that its Development tasks are carried out adhering to the highest ethical and safety standards. (c) DEVELOPMENT PLAN AND BUDGET. The Preclinical Development and Development of the Collaboration Product shall be governed by a specific and comprehensive development plan, a detailed short-term budget and a preliminary, estimated long-term budget forecast (the "Development Plan and Budget"). No later than the date on which an IND (or its foreign equivalent) is filed for the Collaboration Product, the JDC shall prepare for consideration and approval by the Executive Committee a Development Plan and Budget for such Collaboration Product. The Development Plan shall describe fully, to the extent practicable, the proposed program of development for such Collaboration Product, including formulation, process development, clinical studies and regulatory plans and other key elements of obtaining Regulatory Approval in the Co-Promotion Country. Without limiting the foregoing, the Development Plan and Budget shall, to the extent practicable, set forth those preclinical and clinical studies necessary or desirable for the filing of an NDA in the United States for the Collaboration Product, as determined by the JDC (the "Core U.S. Dossier"). In addition, the Development Plan shall provide a general overview of relevant plans and timelines for development of such Collaboration Product outside of the Co-Promotion Country. The budget for each development program shall include a detailed short-term budget covering all proposed Development Costs of the program expected during the subsequent 12 months (the "Short-Term Budget Period") of the Development process and a long-term budget forecast covering all proposed Development Costs of the program expected during the Development process subsequent to such Short-Term Budget Period through obtaining Regulatory Approval for commercial sale. Both parties recognize that each Development Plan and Budget are only projections and will be subject to frequent changes. Each such Development Plan and Budget shall be updated semi-annually by the JDC and submitted to the Executive Committee for review and approval not later than ninety (90) days prior to each January 1 and July 1 of each applicable calendar year. (d) FUNDING OF PRECLINICAL DEVELOPMENT AND DEVELOPMENT. The percentage of Development Costs of the Core U.S. Dossier which shall be borne by CoCensys shall equal [*]. The balance of Development Costs shall be borne by [*]. Warner shall have the right to use data from the Core U.S. Dossier for Development for *Confidential treatment requested 23 regulatory filings outside the Co-Promotion Country with no further compensation to CoCensys. [*] shall bear the cost of those studies within the scope of Development which are not part of the Core U.S. Dossier and which are targeted by Warner for obtaining regulatory approval outside the Co-Promotion Country. (e) DRUG APPROVAL APPLICATIONS. Consistent with the Development Plan and Budget and as directed by the Executive Committee, the parties will file Drug Approval Applications and attempt to obtain Regulatory Approvals in the Co-Promotion Country. Warner will own all IND's and NDAs for all Collaboration Compounds, including any supplements thereto. Warner will be responsible for all regulatory submissions including, without limitation, the assembly of suitable Drug Approval Applications. The parties will cooperate in the preparation of each Drug Approval Application and in obtaining Regulatory Approvals under this Section 5.3(e). Regulatory Approvals for Independent Products are not subject to this Section 5.3(e). (f) LINE EXTENSIONS. Warner and CoCensys may each prepare and submit to the Executive Committee for consideration, plans for development of line extensions and the conduct of clinical trials covering additional indications for Collaboration Products for sale in the Co-Promotion Country. Any such line extensions or additional trials will be subject to the approval and supervision of the JDC as part of the ongoing Development of such Collaboration Product. (g) REIMBURSEMENT. Each Party shall bear its own Development Costs incurred by it, subject to reimbursement as provided herein. Based on the Development Plan and Budget, on a quarter-by-quarter basis, a party shall invoice the other party for the other party's allocated percentage of the Development Costs incurred by the invoicing party and such other party shall pay such allocated percentage within 30 days of the end of such quarter. (h) COMPLIANCE. The parties will comply with cGLP, cGCP, and cGMP in the conduct of the Preclinical Development of any Collaboration Lead Compound or Development of any Collaboration Product for sale in the Co-Promotion Country. In addition, the parties agree to conduct such Preclinical Development and Development in compliance with applicable good laboratory, clinical or manufacturing practices of non-Co-Promotion Countries, provided, and only to the extent that, Warner notifies CoCensys of such non-Co-Promotion Country's practices and such practices are not in conflict with the Co-Promotion Country's cGLP, cGCP, or cGMP. Where such compliance with such identified non-Co-Promotion Countries practices results in any material additional Development Costs, Warner shall promptly reimburse CoCensys in full for such additional expenditures actually incurred by CoCensys. (i) TERMINATION OF PARTICIPATION IN COLLABORATIVE DEVELOPMENT. On a Collaboration Compound-by-Collaboration Compound basis, Warner and CoCensys may elect (upon [*] prior written notice) to terminate their participation in the Preclinical Development or Development of any Collaboration Lead Compound or Collaboration *Confidential treatment requested 24 Product for which CoCensys has exercised the Re-engagement Option and thereby terminate its responsibility for bearing further Development Costs for such Collaboration Compound, as specified herein, in which event the other party will have the right to proceed independently to develop such Collaboration Compound as an Independent Product, pursuant to Section 5.3(j). In the event a party gives notice of termination under this Section 5.3(i), the terminating party (i) will remain responsible for its share of Development Costs for such Collaboration Compound until the effective date of the termination, and (ii) will make its personnel, relevant data, and other resources available to the other party as necessary to effect an orderly transition of development responsibilities, with the costs of such personnel, relevant data, and resources to be borne by the other party after the effective date of the termination. The parties each recognize and agree that a party's termination of participation in Development in accordance with this Section 5.3(i) will not be considered a breach of its obligations under this Agreement. (j) INDEPENDENT DEVELOPMENT. (i) In the event (i) a party, pursuant to Section 5.l(b), (c), or (d) elects not to participate in and commit resources to conduct Preclinical Development or Development of a Collaboration Lead Compound or Collaboration Product or (ii) any party unilaterally terminates its participation in the collaborative Preclinical Development or Development pursuant to Section 5.3(i), or (iii) a party terminates its participation in the Research Programs pursuant to Section 2.4, then the party that made an affirmative election pursuant to Section 5.1(b), (c), or (d) or the non-terminating party if it desires to continue Development (in each case, the "Independent Party"), shall have the right to undertake the continued Preclinical Development and Development of such Collaboration Lead Compound or Collaboration Product (an "Independent Lead Compound" or "Independent Product") independently, at its sole cost, and under its sole direction. No party may utilize the services of the personnel committed to the Collaboration pursuant to Section 2.2 in performance of research or development of an Independent Lead Compound or Independent Product. (ii) The Independent Party will inform the other party of all material information in its research and development of each Independent Lead Compound or Independent Product and will allow such other party to comment on the direction of such research and development. The Independent Party will provide the other party a complete and accurate copy of the proposed filing, together with any additional information that the other party may request regarding the relevant Independent Lead Compound or Independent Product, at least 30 days prior to submitting such filing to the FDA or its foreign equivalent. (iii) In the event Warner elects to proceed as an Independent Party, CoCensys shall forfeit its rights to develop such Collaboration Compound (or Collaboration Product) and co-promote such Collaboration Product in the Co-Promotion Country, and Warner shall be entitled to develop and commercialize such Independent *Confidential treatment requested 25 Product at its sole discretion, alone or with another partner, subject to the payment to CoCensys of a royalty as set forth in Section 6.7. (iv) In the event CoCensys elects to proceed as an Independent Party, Warner shall forfeit its rights to develop such Collaboration Compound (or Collaboration Product) and market and sell such Collaboration Product worldwide, subject to Section 5.3(k), and CoCensys shall be entitled to develop and commercialize such Independent Product worldwide, at its sole discretion, alone or with another partner, subject to the payment to Warner of a royalty as set forth in Section 6.7. (k) WARNER'S RE-ENGAGEMENT OPTION. If CoCensys is the Independent Party, Warner may elect to resume Preclinical Development and Development of an Independent Lead Compound or Independent Product and regain its right to commercialize such Independent Lead Compound or Independent Product if it notifies CoCensys of such election, in writing, prior to the initiation of Phase III clinical trials for the registration of such Independent Lead Compound or Independent Product (the "Warner Re-engagement Notice"). In such event, such Independent Lead Compound or Independent Product shall immediately become a Collaboration Lead Compound or Collaboration Product, as the case may be, for all purposes under this Agreement and Warner shall regain the right to co-promote such Independent Product in the Co-Promotion Country and to market and sell the Independent Product exclusively in all countries other than the Co-Promotion Country. Promptly after Warner makes such election, Warner shall pay CoCensys the percentage calculated according to the following table of the costs of research and development of the Independent Lead Compound or Independent Product incurred by CoCensys subsequent to the date upon which it commenced independent development or research and prior to the date of the Warner Re-engagement Notice, which payment shall be made in four equal quarterly installments beginning on the first day of the calendar quarter following the date of the election of the non-Independent Party:
Date of Exercise of 100% less the Co-Development Re-engagement Option Percentage, multiplied by: - -------------------- ------------------------------ [*] [*] [*] [*] [*] [*]
*Confidential treatment requested 26 SECTION 6. LICENSES AND ROYALTIES 6.1. GRANT BY COCENSYS. Subject to the terms and conditions of this Agreement, CoCensys hereby grants and agrees to grant to Warner an exclusive, worldwide license under the Patent Rights, Background, Technology and Collaboration Technology owned or Controlled by CoCensys to the extent necessary to develop, make, have made, use, import, offer for sale, and sell (with the right to sublicense) any Collaboration Product. Such licenses with respect to a Collaboration Product are exclusive even as to CoCensys, except that CoCensys shall retain the right to conduct Preclinical Development and Development as set forth in Section 5, and to promote in the Co-Promotion Country as set forth in Section 7 to the limited extent necessary for CoCensys to exercise its rights thereunder. Warner may not sublicense any of its rights granted under this Section 6.1 to any Third Party without the prior written consent of CoCensys, not to be unreasonably withheld. 6.2. GRANT BY WARNER. Subject to the terms and conditions of this Agreement, Warner hereby grants and agrees to grant to CoCensys an exclusive (except as to Warner) license under the Patent Rights, Background Technology and Collaboration Technology owned or Controlled by Warner to the extent necessary for CoCensys to (a) participate in Preclinical Development and Development as set forth in Section 5, and (b) use and promote any Collaboration Product in the Co-Promotion Country pursuant to the terms of Section 7, once it has exercised the Re-engagement Option with respect to such Collaboration Product. CoCensys may not sublicense any of its rights granted under this Section 6.2 without the prior written consent of Warner, not to be unreasonably withheld. 6.3. INDEPENDENT PRODUCTS. Each of Warner and CoCensys hereby grants and agrees to grant to the other an exclusive, worldwide license under the Patent Rights, Background Technology and Collaboration Technology owned or Controlled by the granting party to the extent necessary to develop Independent Lead Compounds and make, have made, use, import, offer for sale and sell (with the right to sublicense) any Independent Product in the event the receiving party is designated the Independent Party with respect to such Independent Product (or Independent Lead Compound) pursuant to Section 5.3(j). Such licenses are exclusive even as to the granting party. Any such license with respect to an Independent Product or Independent Lead Compound shall terminate in the event such Independent Product or Independent Lead Compound becomes a Collaboration Lead Compound or Collaboration Product pursuant to the terms of Section 5.3(k). 6.4. THIRD PARTY TECHNOLOGY. (a) OREGON LICENSE. (i) Warner acknowledges and understands that the licenses granted by CoCensys under Sections 6.1 and 6.3 contemplate sublicenses of technology licensed from Oregon to Acea pursuant to the Oregon License Agreement and that these sublicenses to Warner are subject to the terms and conditions of the Oregon License *Confidential treatment requested 27 Agreement, including certain rights retained by Oregon and the United States government thereunder. Warner further acknowledges that in no event shall the license grants to Warner under this Agreement with respect to technology licensed to Acea pursuant to the Oregon License Agreement be construed as conferring upon Warner any greater rights than are conferred upon Acea or CoCensys by Oregon under the Oregon License Agreement. CoCensys shall have the right to negotiate or amend the terms of the Oregon License Agreement, without involvement of Warner, provided that (i) the benefits to Warner under any such renegotiated or amended license agreement shall not be less than those contained in the Oregon License Agreement in effect as of the Effective Date and (ii) CoCensys provides a draft copy of such renegotiated or amended license agreement (which draft, in CoCensys' sole discretion, may have any or all economic terms redacted) to Warner no later than 45 days prior to execution of such agreement. (ii) As between Warner and CoCensys, [*] of any royalties or other amounts paid to or due and owing Oregon or UC by CoCensys, as of or after the Effective Date, pursuant to the Oregon/UC Agreements shall be borne by [*]. (b) COVENANTS OF COCENSYS REGARDING OREGON/UC AGREEMENTS. (i) CoCensys hereby covenants and agrees with Warner as follows: (1) to perform its obligations, and use diligent efforts to cause Oregon or UC, as the case may be, to perform its obligations, under the Oregon/UC Agreements; (2) to notify Warner promptly in writing of any breach or notice given or received by CoCensys, Oregon or UC (to the extent CoCensys has knowledge thereof) under the Oregon/UC Agreements; (3) not to make any decisions, agreements or elections, or refuse or not make any decisions, agreements or elections, or take or refuse or not take any other action under the Oregon/UC Agreements or otherwise which might adversely affect CoCensys' rights under the Oregon/UC Agreements or Warner's rights or CoCensys' obligations under this Agreement; and (4) not to take or allow to be taken any action which could result in a breach of the Oregon/UC Agreements such that such breach adversely affects Warner's rights under this Agreement. (ii) In the event Warner incurs any damages, costs or other expenses as a result of a breach of any of the covenants set forth in Section 6.4(b)(i), CoCensys shall indemnify and hold harmless Warner and its Affiliates for any such damages, costs or expenses incurred. This obligation shall survive the expiration or termination of this Agreement. (c) OTHER THIRD PARTY TECHNOLOGY. During the term of this Agreement, if either party becomes aware of Third Party rights that may be desirable to license in order to manufacture, market, import, use or sell a Collaboration Product (other than rights granted under the Oregon/UC Agreements), it shall notify the other party and the Executive Committee will determine whether a license should be sought under such rights. If CoCensys has exercised the Re- engagement Option, and in the event that such acquired rights result in payments to a Third Party, [*] of such payments attributable to the manufacture, marketing, importation, use or sale of the applicable Collaboration Product in the Co-Promotion Country shall be included as a Co-Promotion Expense of the party making such payment in that country. In the event that such acquired rights result in payments to a Third Party, [*] of any such payments attributable to *Confidential treatment requested 28 the manufacture, marketing, importation, use or sale of such Collaboration Product in the non-Co-Promotion Country shall be deducted from royalty payments due to CoCensys pursuant to this Agreement with respect to such Collaboration Product in such country, provided, however, in no event shall royalties due CoCensys pursuant to this Agreement with respect to sales of such Collaboration Product in any non-Co-Promotion country be reduced by more than [*] of Net Sales of such Collaboration Product in such country. 6.5. USE OUTSIDE THE FIELD. Each party hereby covenants to the other that it will not practice the Patent Rights, Background Technology, or Collaboration Technology of the other party, except as explicitly permitted in this Agreement. 6.6. ROYALTIES PAYABLE BY WARNER. Except as set forth in Section 2.4, Warner will pay CoCensys a royalty equal to [*] of Warner's, its Affiliates' or sublicensees' Net Sales of Collaboration Products in the Non-Co-Promotion Countries, and a royalty calculated in accordance with the following table for Warner's, its Affiliates' or sublicensees' Net Sales of all Collaboration Products in the Co-Promotion Country for Collaboration Products for which CoCensys has not exercised the Re-engagement Option.
The primary active ingredient of the applicable Collaboration Product Royalty Percentage - ---------------------------- --------------------- [*] [*] [*] [*] [*] [*] of annual Net Sales less than or equal to [*] [*] of annual Net Sales greater than [*] but less than [*] [*] of annual Net Sales greater than [*] but less than or equal to [*] [*] of annual Net Sales in excess of [*]
*Confidential treatment requested 29 [*] shall be owed on Net Sales in the Co-Promotion Country on any Collaboration Products for which CoCensys has exercised the Re-engagement Option and not elected to terminate its Co-Promotion Rights under Section 7.3. Such royalties shall be payable until the expiration of the last to expire Patent Right owned or Controlled by either CoCensys or Warner and necessary to make, use, import for sale or sell such Collaboration Product in such country. In addition, the percentage of royalty payable in any calendar quarter with respect to Net Sales of each Collaboration Product shall be reduced by [*] of the number of percentage points (or fraction thereof) by which the Cost of Goods for such Collaboration Product [*] of Net Sales of such Collaboration Product in such quarter, provided that the royalty payable by Warner shall not be reduced below [*]. 6.7. ROYALTIES PAYABLE BY THE INDEPENDENT PARTY. The Independent Party will pay the other party a royalty equal to [*] of the Independent Party's, its Affiliates', or sublicensees' Net Sales of Independent Products. Such royalties shall be payable in respect of each country in which sales occur until the expiration of the last to expire Patent Right owned or Controlled by either CoCensys or Warner and necessary to make, use, import for sale or sell such Product in such country. 6.8. CURRENCY OF PAYMENT. All payments to be made under this Agreement shall be made in United States dollars in the United States to a bank account designated by the party to be paid. Royalties earned shall first be determined in the currency of the country in which they are earned and then converted to its equivalent in United States currency. The buying rates of exchange for the currencies involved into the currency of the United States quoted by Citibank (or its successor in interest) in New York, New York, at the close of business on the last business day of the quarterly period in which the royalties were earned shall be used to determine any such conversion. 6.9. PAYMENT AND REPORTING. The royalties due under Sections 6.6 or 6.7 shall be paid quarterly, within 3 months after the close of each calendar quarter, or earlier if practical (i.e., on or before the last day of each of the months of June, September, December, and March), immediately following each quarterly period in which such royalties are earned. With each such quarterly payment, the payor shall furnish the payee a royalty statement setting forth on a country-by-country basis the total revenues and the number of units of each royalty-bearing Product sold hereunder for the quarterly period for which the royalties are due, and the deductions applied in arriving at Net Sales. 6.10. TAXES WITHHELD. Any income or other tax that one party hereunder, its Affiliates or sublicensees is required to withhold (the "Withholding Party") and pay on behalf of the other party hereunder (the "Withheld Party") with respect to the royalties payable under this Agreement shall be deducted from and offset against said royalties prior to remittance to the Withheld Party; provided, however, that in regard to any tax so deducted, the Withholding Party shall give or cause to be given to the Withheld Party such assistance as may reasonably be necessary to enable the Withheld Party to claim *Confidential treatment requested 30 exemption therefrom or credit therefor, and in each case shall furnish the Withheld Party proper evidence of the taxes paid on its behalf. 6.11. COMPUTATION OF ROYALTIES. All sales of Products between the selling party and any of its Affiliates and sublicensees shall be disregarded for purposes of computing Net Sales and royalties under this Section 6, but in such instances royalties shall be payable only upon sales to unlicensed Third Parties. Nothing herein contained shall obligate either party to pay the other party more than one royalty on any unit of a Product. 6.12. LICENSES TO AFFILIATES AND SUBLICENSEES. Each party shall, at the other party's reasonable request, enter into license and/or royalty agreements directly with the other party's Affiliates and permitted sublicensees, in lieu of the license grant to or royalty obligation of the requesting party; provided such agreements would not decrease the amount of royalties which would be owed hereunder. Such agreements shall contain the same language as contained herein with appropriate changes in parties and territory, and this Agreement shall be amended as appropriate. No such license and/or royalty agreement will relieve Warner or CoCensys, as the case may be, of its obligations hereunder, and such party will guarantee the obligations of its Affiliate or sublicensee in any such agreement. Royalties received directly from one party's Affiliates and sublicensees shall be credited towards such party's royalty obligations under Section 6.6 or 6.7 hereof, as applicable. 6.13. RESTRICTIONS ON PAYMENTS. The obligation to pay royalties under this Agreement shall be waived and excused to the extent that statutes, laws, codes or government regulations in a particular country prevent such royalty payments by the seller of Products; provided, however, that if legally permissible, the seller of Products shall pay the royalties owed to the other party hereto by depositing such amounts in a bank account in such country that has been designated by the party owed such royalties. 6.14. RECORDS. Warner and CoCensys each shall keep accurate books and accounts of record in connection with the manufacture, use and/or sale by or for it of the Collaboration Products and Independent Products in sufficient detail to permit accurate determination of all figures necessary for verification of royalties, profits, milestone payments and other compensation required to be paid hereunder. Warner and CoCensys shall maintain such records for a period of 3 years after the end of the year in which they were generated. At such party's expense, a party, through a certified public accountant reasonably acceptable to the other party, shall have the right to access the books and records of the other party for the sole purpose of verifying such statements. Such access shall be conducted after reasonable prior written notice to the party during ordinary business hours and shall not be more frequent than once during each calendar year. SECTION 7. CO-PROMOTION OF COLLABORATION PRODUCTS 7.1. APPLICABILITY. The terms of this Section 7 shall only apply to Collaboration Products for which CoCensys has exercised the Re-engagement Option in *Confidential treatment requested 31 accordance with Section 5 and for which CoCensys has not subsequently terminated its participation in the development of such Collaboration Product. 7.2. CO-PROMOTION RIGHTS. Subject to Section 7.4, CoCensys and Warner shall each work diligently and use the same effort such party puts forth to promote other products of similar commercial value, to co-promote each Collaboration Product in the Co-Promotion Country during the Term of Co-Promotion pursuant to the terms and conditions hereof. The Marketing Committee shall oversee and implement all such commercialization activities, based on the principle of maximizing profits from sales of Collaboration Products in the Co-Promotion Country during the Term of Co-Promotion. 7.3. ELECTION OR REVOCATION OF CO-PROMOTION RIGHT. CoCensys may terminate early the Term of Co-Promotion with respect to a Collaboration Product being co-promoted by the parties in the Co-Promotion Country at any time following [*] prior written notice to Warner, in which case Warner shall have the exclusive right to promote, alone or with another party, in the Co-Promotion Country, and CoCensys shall receive a royalty of (a) [*] on Net Sales of such Collaboration Product in the Co-Promotion provided that CoCensys has provided its Required Sales Effort for no less that [*] consecutive months following the initial sale of the applicable Collaboration Product or (b) [*] on Net Sales of Collaboration Products where CoCensys has failed to so provide its Required Sales Effort. Warner may terminate early the Term of Co-Promotion with respect to a Collaboration Product being co-promoted by the parties in the Co-Promotion Country at any time following [*] months prior written notice to CoCensys, in which case, should CoCensys desire to continue promotion of such Collaboration Product, it shall be treated as an Independent Product being promoted by CoCensys, which CoCensys may promote alone or with another party, in the Co-Promotion Country, effective as of the date of termination, and Warner shall receive a royalty on Net Sales in the Co-Promotion Country pursuant to Section 6.7, except that such royalty shall equal [*] instead of [*] of Net Sales. In the event (a) of early termination of the Term of Co-Promotion by Warner in the Co-Promotion Country, or (b) Warner otherwise terminates the Development or promotion in the Co-Promotion Country of a Collaboration Product for which CoCensys has not exercised the Re-engagement Option, Warner shall (i) assign to CoCensys all NDAs (or foreign equivalents) for such Collaboration Product in such country, (ii) transfer to CoCensys any other relevant information which will enable CoCensys to promote such product as an Independent Product in such country, and (iii) continue to supply Finished Product to CoCensys pursuant to Section 9.7. In the event of early termination of the Term of Co-Promotion by CoCensys in the Co-Promotion Country, CoCensys shall transfer to Warner any other relevant information which will enable Warner to promote such product in such country. The Term of Co-Promotion with respect to any Collaboration Product in the Co-Promotion Country may not be reinstated after delivery of a notice of early termination thereof. 7.4. REQUIRED SALES EFFORT. Warner shall supply a percentage equal to [*] and CoCensys shall supply a percentage equal to [*] of the total promotional and marketing *Confidential treatment requested 32 effort (including details, if determined to be an appropriate sales activity) for each Collaboration Product being co-promoted by the parties in the Co-Promotion Country, as determined by the Marketing Committee. Each party's required promotional and marketing effort is hereinafter referred to as its "Required Sales Effort" and is subject to adjustment as set forth in this Section 7.4. The parties will mutually determine appropriate written standards for measuring and accounting procedures to confirm and document each party's performance of its Required Sales Effort, prior to the commencement of the Term of Co-Promotion for any Collaboration Product. In the event either party fails to meet its Required Sales Effort commitment in any calendar year with respect to a Collaboration Product in a Co-Promotion Country, the parties will meet to discuss the circumstances giving rise to such shortfall. If such shortfall was not caused by an event of force majeure, then the failing party's Share of Profit and Share of Loss (as defined under Section 7.15) shall be reduced for that calendar year and for all subsequent calendar quarters during the Term of Co-Promotion to [*], unless further readjusted in subsequent calendar years due to a failure of the other party to meet its Required Sales Effort. Notwithstanding any other provisions of this Agreement, if a party's Share of Profit and Share of Loss falls below [*] pursuant to this Section 7.4, the failing party shall instead receive a royalty equal to [*] of the other party's (or the other party's Affiliates' or sublicensees') Net Sales of Collaboration Products. Such royalties shall be payable until the expiration of the last to expire Patent Right owned or Controlled by either CoCensys or Warner and necessary to make, use or sell such Collaboration Product in such country. Nothing contained in this Section 7.4 shall be deemed to preclude either party from revoking its right to co-promote, pursuant to Section 7.3, at any time. The parties have provided in this Section 7.4 for the exclusive mechanisms to compensate for failure to provide the Required Sales Effort and any such failure shall not be deemed a breach of this Agreement. 7.5. MARKETING PLAN AND BUDGET. The co-promotion of each Collaboration Product will be governed by a marketing plan and budget (the "Marketing Plan and Budget"). Warner will be responsible for preparing and approving the Marketing Plan and Budget. The Marketing Plan and Budget will describe fully, to the extent practicable, the proposed plan for commercialization of the Collaboration Product in the Co-Promotion Country, including overall marketing strategy, anticipated marketing, sales and promotion efforts by each party, market and sales forecasts, pricing analysis and estimated launch date, as well as advertising and other promotional materials to be used in the co-promotion. The Marketing Plan will be prepared taking into consideration factors such as market conditions, regulatory factors and competition. The Budget will include all projected Co-Promotion Expenses for the Collaboration Product. The initial Marketing Plan and Budget shall be prepared and approved by Warner, after discussions with CoCensys, no later than 3 months after the first filing of an NDA (or its foreign equivalent) for a Collaboration Product in the Co-Promotion Country. 7.6. PROMOTIONAL AND ADVERTISING MATERIALS. The parties shall disseminate in the Co-Promotion Country only those promotional and advertising materials which have been provided or approved for use by Warner, the cost of which shall be a Co-Promotion *Confidential treatment requested 33 Expense of the party incurring such cost. All such materials shall be consistent with the relevant Marketing Plan and Budget approved by Warner and neither party shall make any claims or representations in respect of the applicable Collaboration Product that have not been approved by Warner. In all written or visual materials related to Collaboration Products co-promoted in the Co-Promotion Country which identify either of the parties, the parties will be presented and described to the medical communities (including, for example, the physician, pharmacy, governmental, reimbursement, and hospital sectors) as joining in the promotion of the Collaboration Product in such country. All such written and visual materials and all documentary information, promotional material, and oral presentations (where practical) regarding the promoting of the Collaboration Product being co-promoted in the Co-Promotion Country will state this arrangement and will display the Warner and CoCensys names and logos with equal prominence, as permitted by applicable law. 7.7. PRICING. The parties will discuss, and the Marketing Plan will include, the general operating guidelines and strategies for the pricing and discounting of Collaboration Products co-promoted in the Co-Promotion Country provided, however that Warner shall have absolute discretion as to pricing and discounting in countries in which the Collaboration Product is not co-promoted. If either party is selling, marketing or promoting a competing product in the Co-Promotion Country at such time, the scope of such discussions shall be adjusted accordingly. 7.8. NO DELEGATION. Each of the parties may use only its own employees or the employees of one or more of its Affiliates in the course of exercising its co-promotion rights under this Agreement. 7.9. RETURNS. Warner shall be responsible for handling all returns relating to Collaboration Products. Any Collaboration Product returned to CoCensys shall be shipped by CoCensys to the address designated by Warner with shipping costs authorized by Warner to be paid by Warner. 7.10. ORDERS. All customer orders for Collaboration Products shall be received and executed by Warner. CoCensys shall transmit any such orders that it receives to Warner no later than the following business day. 7.11. SAMPLES. accurate records as to the distribution of samples of Collaboration Products and comply with all applicable laws, rules and regulations dealing with the distribution of samples. 7.12. COMPLETION OF SALES. All sales of Collaboration Products will be completed, distributed, accounted for, billed and booked by Warner. 7.13. TRAINING. Consistent with the marketing plans established by Warner, but not less than 90 days prior to the commencement of the Term of Co-Promotion for each Collaboration Product, Warner shall provide reasonable access to its sales training staff and facilities for appropriate, initial training of the CoCensys sales force to the extent *Confidential treatment requested 34 CoCensys lacks such facilities and training staff. Such training shall be at CoCensys' expense and shall be a Co-Promotion Expense of CoCensys. Consistent with the marketing plans established by Warner, all other training costs shall be borne by the party incurring such cost and shall be a Co-Promotion Expense of such party. 7.14. EXCHANGE OF MARKETING INFORMATION. From time-to-time Warner will develop call lists, schedules, and other appropriate information for the purpose of determining the physicians and other persons involved in the drug purchase decision-making process to whom CoCensys and Warner, respectively, may detail each Collaboration Product. The parties agree to cooperate in finding an inexpensive and expeditious way to provide a call list and other information indicating the identity of those physicians and other persons involved in the decision-making process regarding the purchase of pharmaceuticals. Any expenses incurred in connection therewith shall be Co-Promotion Expenses of the party incurring such expense. If either party is selling, marketing, or promoting a competing product in the Co-Promotion Country at such time, the scope of such activities shall be adjusted accordingly. 7.15 DETERMINATION AND ALLOCATION OF TOTAL PROFIT. (a) If Total Profit for a Collaboration Product is positive, Net Sales in the Co-Promotion Country shall be allocated first to reimburse each party for its Co-Promotion Expenses for such Collaboration Product and then to pay each party its Share of Profit times such positive Total Profit. CoCensys' "Share of Profit" shall equal [*] and Warner's "Share of Profit" shall equal [*] unless adjusted pursuant to Section 7.4. (b) If Total Profit for a Collaboration Product is negative, Net Sales shall be allocated to partially reimburse the parties so that (w) the proportion of each party's share of the total unreimbursed Co-Promotion Expenses to the total amount of unreimbursed Co-Promotion Expenses for both parties is equal to (x) [*]. If (y) the Co-Promotion Expenses actually incurred by a party are less than (z) such party's Share of Loss times such negative Total Profit, such party shall pay the other party the difference between (z) and (y) at the time set forth in Section 7.16. Each party's "Share of Loss" shall equal its Share of Profit, unless adjusted pursuant to Section 7.4. 7.16. PAYMENT AND REPORTING. Within [*] after the close of each calendar quarter during the Term of Co-Promotion (i.e., on or before the last day of each of the [*]), or earlier if possible, CoCensys shall furnish to Warner a statement containing its Co-Promotion Expenses incurred in such calendar quarter for the Co-Promotion Country. Within [*] after the close of each calendar quarter during the Term of Co-Promotion (i.e., on or before the last day of [*]), or earlier if possible, Warner shall furnish to CoCensys a statement (the "P&L Statements") setting forth for each Co-Promotion Country, Net Sales of each Collaboration Product and all data on which the determination of Total Profit was calculated. Warner will submit any amount due to CoCensys pursuant to Section 7.15 (a) or 7.15 (b), as the case may be, with the P&L Statement. If CoCensys owes an amount to Warner pursuant to Section 7.15 (b), it shall make such payment *Confidential treatment requested 35 within 30 days of receipt of the P&L Statement. If the Term of Co-Promotion ends during an accounting quarter, the amounts due hereunder shall be calculated for such shortened calendar quarter. SECTION 8. TRADEMARKS. 8.1 TRADEMARKS IN THE CO-PROMOTION COUNTRY. The following provisions shall apply to each Collaboration Product for which CoCensys has exercised the Re-engagement Option pursuant to Section 5.3. (a) The parties, through the Marketing Committee, shall mutually agree upon the trademark or trademarks to be used for each Collaboration Product in the Co-Promotion Country (each a "Trademark") and shall take into consideration the marketing efforts of Warner with respect to such Collaboration Product in countries other than the Co-Promotion Country. Warner and CoCensys shall be joint owners of each Trademark in the Co-Promotion Country. In the Co-Promotion Country, each Trademark shall be used only in connection with the applicable Collaboration Product and shall not be used by either party on or in connection with any other product. The Marketing Committee shall assign responsibility to one or both parties for searching, clearing, filing, prosecuting, maintaining and all reasonable steps necessary in defending each Trademark. All costs associated with the aforesaid actions and all other necessary actions in connection with each Trademark, including, without limitation, obtaining, owning, maintaining, defending and enforcing such Trademark shall be deemed Co-Promotion Expenses of the party incurring such costs. (b) In the event any jurisdiction in the Co-Promotion Country does not recognize joint ownership of a trademark by separate corporate entities, Warner shall be the owner of each Trademark in such jurisdiction and CoCensys shall be the exclusive (except as to Warner) licensee of such Trademark in such jurisdiction, without payment of any additional consideration to Warner. (c) In the event there is a challenge to the validity of any Trademark, or enforceability against a third party infringer is at issue due to joint ownership of any Trademark (even if a Certificate of Registration has issued for such Trademark in accordance with the terms of this Agreement), the owner of such Trademark shall be deemed to be either Warner or CoCensys, as determined by the Marketing Committee, and nothing in the terms of this Agreement shall be deemed to be a desire by either party to nullify or disqualify the validity of such Trademark. (d) The Marketing Committee shall approve all trade dress, logos, slogans, designs and copyrights used on and in connection with any Collaboration Product in the Co-Promotion Country. Warner and CoCensys shall be joint owners of the trade dress, logos, slogans, designs and copyrights specifically developed for and used on and in connection with any Collaboration Product in the Co-Promotion Countries (the "Collaboration Product Logos and Copy"). Warner and CoCensys shall each retain sole *Confidential treatment requested 36 and exclusive ownership of their own respective and independently developed and pre-existing names, trade dress, logos, slogans, designs and copyrights regardless of whether such names, trade dress, logos, slogans, designs and copyrights are used on or in connection with any Collaboration Product. (e) Neither Warner nor CoCensys shall have the right to assign, transfer, license, sublicense, or otherwise encumber any Trademark or Collaboration Product Logos and Copy without the prior written consent of the other party. Neither party shall use, file for or obtain, in the Co-Promotion Country, a trademark registration for any trademark which is confusingly similar to any Trademark used or to be used in the Co-Promotion Country. At the expiration or termination of the Term of Co-Promotion in a Co-Promotion Country for any Collaboration Product, only one party shall be permitted to continue to use any Trademarks and Collaboration Product Logos and Copy used in the marketing and sale of such Collaboration Product. The party desiring to continue using such Trademarks and Collaboration Product Logos and Copy at the expiration or termination of the Term of Co-Promotion for any Collaboration Product shall compensate the other party, at a royalty rate equal to [*] of such party's, its Affiliates' or sublicensees' Net Sales of such Collaboration Product, for so long as such Collaboration Product is sold under such Trademarks or Collaboration Product Logos and Copy. In the event both parties desire to continue using such Trademarks and Collaboration Product Logos and Copy at the expiration or termination of the Term of Co-Promotion, the party willing to pay to the other party [*] shall be the only party permitted to continue using such Trademarks and Collaboration Product Logos and Copy. The party being compensated shall assign all of its right, title and interest in such Trademarks and Collaboration Product Logos and Copy in the Co-Promotion Country to the other party upon receipt of such compensation. No later than [*] after receipt of such compensation, all rights to use such Trademarks and Collaboration Product Logos and Copy by the compensated party shall cease. (f) Each party shall be responsible for maintaining the quality control in connection with its own manufacture of Bulk Products and Finished Products and shall maintain such quality control standards as are established by the Marketing Committee. To the extent Finished Products or Bulk Products are manufactured by a Third Party, the party or parties contracting with such Third Party shall provide in such contract that such Third Party will be held to the quality control standards established by the Marketing Committee. During the Term of Co-Promotion, the Marketing Committee shall approve all printed materials bearing each Trademark, including but not limited to business materials, printed materials, advertising materials, promotional materials, and any such other materials that may reference such Trademark. (g) In the event that Warner or CoCensys is charged with, or sued for, the violation of any third party trademark, or an administrative action is brought against either party in connection with any Trademark in any Co-Promotion Country, each party shall promptly notify the other and cooperate in the defense of any such charge, suit, or administrative proceeding as applicable. The Marketing Committee shall be responsible 37 *Confidential treatment requested for the management of such action. All costs and expenses of such action (including damage awards and settlement awards) shall be [*]. (h) In the event CoCensys or Warner becomes aware of any actual or threatened violation of any Trademark in the Co-Promotion Country, that party shall promptly notify the other and the Marketing Committee shall promptly discuss how to proceed in connection with such actual or threatened violation. Any expenses incurred in connection with a legal action or administrative action with respect to such actual or threatened violation shall be [*] and any damages awarded to either Warner or CoCensys shall be paid [*] and be deemed to be [*]. 8.2. TRADEMARKS IN COUNTRY OTHER THAN CO-PROMOTION COUNTRY. Warner shall select and own the trademark for marketing a Collaboration Product in countries other than those in which the parties are co-promoting, taking into consideration the Trademark selected for those countries in which the parties are co-promoting. All expenses for (i) registration of such trademark and (ii) bringing, maintaining, and prosecuting any action to protect or defend such trademark in such countries shall be borne by Warner. SECTION 9. SUPPLY OF PRODUCT The following provisions shall only apply to Collaboration Products for which CoCensys has exercised the Re-engagement Option pursuant to Section 5.3. 9.1. SUPPLY OF PRODUCT BY WARNER. (a) Subject to Section 9.2, Warner will manufacture or have manufactured the parties' requirements for clinical and commercial supplies of each Collaboration Product (Bulk Product and Finished Product). In fulfilling its manufacturing obligations hereunder, Warner will use at least the same level of effort that it employs for its other products of similar scientific and commercial promise. (b) Warner shall be responsible for establishing, subject to approval by the Executive Committee, the specifications, including any necessary documentation, certificates of analysis and test results, for the relevant Collaboration Product to be manufactured under this Section 9. Warner will promptly provide CoCensys with copies of all such specifications and other information and documentation if CoCensys has exercised its Re-engagement Option. In addition, Warner will provide CoCensys with notice of, and results and data from, all FDA audits relating to supply of Collaboration Products. (c) Where CoCensys takes delivery of Finished Product, CoCensys shall have the right to conduct quality assurance testing of Finished Product which Warner manufactures or has manufactured. The cost of such testing shall be a Development Cost or a Co-Promotion Expense, as the case may be. 38 *Confidential treatment requested (d) Warner's Cost of Goods (including qualification batches for FDA approval) for Collaboration Products actually used (and not sold) for all studies in the Core U.S. Dossier shall be included in Development Costs. 9.2. TERMS OF MANUFACTURE AND SUPPLY. (a) The Executive Committee shall establish procedures acceptable to both parties regarding forecasts of requirements of the Collaboration Products. (b) At all times during the Term of Co-Promotion, Warner shall maintain reasonable commercial inventories of Collaboration Products necessary to meet commercial supply requirements as determined by the Marketing Committee. (c) Warner shall be entitled to recover as a Co-Promotion Expense in the Co-Promotion Country, its Cost of Goods for Collaboration Products which the parties are co-promoting pursuant to Section 7, sold in the Co-Promotion Country which are (i) manufactured by it or (ii) purchased from a Third Party source. Warner shall, at the request and expense of CoCensys, permit an independent accountant to whom Warner has no reasonable objection, to have access to and to examine Warner's written records concerning its Cost of Goods, during normal business hours, but not more than once in any 12-month period, to verify the Cost of Goods. CoCensys shall keep in strict confidence all information learned in the course of such audit. 9.3. SUPPLY OBLIGATION UPON REVOCATION OF CO-PROMOTION RIGHT. If Warner terminates early the Term of Co-Promotion with respect to a Collaboration Product pursuant to Section 7.2 and CoCensys desires to continue promotion of such product as an Independent Product, and if Warner is supplying Finished Products, Warner shall continue to supply Finished Product to CoCensys until the earlier of (a) [*] following the end of the Term of Co-Promotion or (b) the date CoCensys obtains an alternative source for such Finished Product, with such Finished Product being supplied by Warner at a price and subject to additional terms and conditions to be negotiated between the parties. SECTION 10. REGULATORY MATTERS The following provisions shall only apply to Collaboration Products for which CoCensys has exercised the Re-engagement Option pursuant to Section 5.3. 10.1. SIDE EFFECTS AND ADVERSE EVENTS. Prior to and during the Term of Co-Promotion of a Collaboration Product which the parties are co-promoting pursuant to Section 7, each party shall promptly advise the other by telefax or overnight delivery service of any unexpected side effect, adverse reaction, or injury which has been brought to that party's attention at any place and which is alleged to have been caused by such Collaboration Product. The party which has filed the Drug Approval Application in the Co-Promotion Country or, if no Drug Approval Application has been filed, the party which has filed the IND in the Co-Promotion Country shall have all rights and 39 *Confidential treatment requested responsibilities to report such side effect, adverse reaction or injury to the appropriate regulatory authorities as required by applicable law. In non-Co-Promotion Countries, Warner shall have all rights and responsibilities to report such side effect, adverse reaction or injury to the appropriate regulatory authorities as required by applicable law. 10.2. COMMUNICATION WITH REGULATORY AGENCIES. Upon being contacted by the FDA in the Co-Promotion Country prior to or during the Term of Co-Promotion for any regulatory purpose pertaining to this Agreement or to a Collaboration Product which the parties are co-promoting pursuant to Section 7, CoCensys and Warner shall promptly, but always within 2 business days, notify and consult with one another and the party which has filed the Drug Approval Application in the Co-Promotion Country or, if no Drug Approval Application has been filed, the party which has filed the IND shall provide an appropriate response. Upon being contacted by any drug regulatory agency in any non-Co-Promotion Country prior to or during the Term of Co-Promotion for any regulatory purpose which is relevant to the development or commercialization of such Collaboration Product, Warner shall promptly, but always within 2 business days, notify CoCensys of the content of such contact. In non-Co-Promotion Countries, Warner shall have the sole right and responsibility to respond to any regulatory agency with respect to any Collaboration Product. 10.3. PRODUCT RECALL. In the event that Warner or CoCensys determines that an event, incident or circumstances has occurred which may result in the need for a recall or other removal of any Collaboration Product which the parties are co-promoting pursuant to Section 7 or any lot or lots thereof from the market in a Co-Promotion Country, it shall advise and consult with the other party with respect thereto. The holder of the NDA (or foreign equivalent) shall, in its sole discretion, have the right to order a recall or other removal after such consultations and the other party shall co-operate with such recall. [*]. Warner shall make all decisions with respect to recall of a Collaboration Product which the parties are co-promoting pursuant to Section 7 in a non-Co-Promotion Country, and Warner alone shall bear all costs associated therewith. SECTION 11. MILESTONES; EQUITY INVESTMENT 11.1. MILESTONES. (a) Warner shall pay CoCensys the following amounts with respect to each Collaboration Product to achieve each stated milestone (whether or not CoCensys has exercised its Re-engagement Option):
1. [*] .................................... [*] 2. [*] .................................... [*] 3. [*] .................................... [*] 4. [*] .................................... [*] 40 *Confidential treatment requested 5. [*] .................................... [*] 6. [*] .................................... [*] 7. [*] .................................... [*] 8. [*] .................................... [*] 9. [*] .................................... [*] 10. [*] .................................... [*] 11. [*] .................................... [*] 12. [*] .................................... [*] 13. [*] .................................... [*] 14. [*] .................................... [*]
(b) CoCensys acknowledges and agrees that [*] of the payment under milestone 2 and [*] of the payment under milestone 3 above shall be treated as prepaid royalties of Warner owed under Section 6.6. Warner may reduce each royalty payment due under Section 6.6 by up to [*] until the aggregate of all such reductions equals the total amount of prepaid royalties. 11.2. ACQUISITION OF COCENSYS COMMON STOCK. Simultaneously with the execution of the Amended and Restated Research, Development and Marketing Collaboration Agreement, the parties shall enter into a certain Stock Purchase Agreement pursuant to which Warner shall pay to CoCensys a total amount of $7,000,000 in consideration for shares of CoCensys Convertible Preferred Stock. Such purchase of Convertible Preferred Stock shall be divided into a payment of $1,000,000 upon execution of the Stock Purchase Agreement and $6,000,000 on January 9, 1998. SECTION 12. CONFIDENTIALITY 12.1. CONFIDENTIALITY. (a) Except as specifically permitted hereunder, each party hereby agrees to hold in confidence and not use on behalf of itself or others all Background Technology, and all other data, samples, technical and economic information (including the economic terms hereof), commercialization, clinical and research strategies, and know-how provided by the other party (the "Disclosing Party") during the Term of this Agreement and all Collaboration Technology and all other data, results and information developed pursuant to the Collaboration and solely owned by the Disclosing Party or 41 *Confidential treatment requested jointly owned by the parties (collectively the "Confidential Information"), except that the term "Confidential Information" shall not include: (1) information that is or becomes part of the public domain through no fault of the non-Disclosing Party or its Affiliates; and (2) information that is obtained after the date hereof by the non-Disclosing Party or one of its Affiliates from any Third Party which is lawfully in possession of such Confidential Information and not in violation of any contractual or legal obligation to the Disclosing Party with respect to such Confidential Information; and (3) information that is known to the non-Disclosing Party or one or more of its Affiliates prior to disclosure by the Disclosing Party, as evidenced by the non-Disclosing Party's written records; and (4) information that is necessary to be disclosed to any governmental authorities or pursuant to any regulatory filings, but only to the limited extent of such legally required disclosure; and (5) information which has been independently developed by the non-Disclosing Party without the aid or use of Confidential Information. (b) The obligations of this Section 12.1 shall survive the expiration or termination of this Agreement for a period of 3 years. 12.2. PERMITTED DISCLOSURES. Confidential Information may be disclosed to employees, agents, consultants, sublicensees or suppliers of the non-Disclosing Party or its Affiliates, but only to the extent required to accomplish the purposes of this Agreement and only if the non-Disclosing Party obtains prior agreement from its employees, agents, consultants, sublicensees, or suppliers to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that such employees, agents, consultants, sublicensees, or suppliers do not disclose or make any unauthorized use of the Confidential Information. Notwithstanding any other provision of this Agreement, each party may disclose the terms of this Agreement to lenders, investment bankers and other financial institutions of its choice solely for purposes of financing the business operations of such party either (i) upon the written consent of the other party or (ii) if the disclosing party obtains a signed confidentiality agreement with such financial institution with respect to such information, upon terms substantially similar to those contained in this Section 12. 12.3. PUBLICITY. All publicity, press releases, and other announcements relating to this Agreement or the transaction contemplated hereby shall be reviewed in advance by, and shall be subject to the approval of, both parties; provided, however, that either 42 party may (i) publicize the existence and general subject matter of this Agreement without the other party's approval and (ii) disclose the terms of this Agreement only to the extent required to comply with applicable securities laws and in the case of (ii), the non-disclosing party shall have the right to review and comment on such disclosure prior to its submission, where practicable. 12.4. PUBLICATION. The parties shall cooperate in appropriate publication of the results of research and development work performed pursuant to this Agreement, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, it is agreed that prior to any public disclosure of such results, the party proposing disclosure shall send the other party a copy of the information to be disclosed, and shall allow the other party 30 days from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing party which such party desires to maintain as a trade secret. If notification is not received during the 30-day period, the party proposing disclosure shall be free to proceed with the disclosure. If due to a valid business reason or a belief by the non-disclosing party that the disclosure contains subject matter for which a patentable invention should be sought, then prior to the expiration of the 30-day period, the non-disclosing party shall so notify the disclosing party, who shall then delay public disclosure of the information for an additional period of up to 6 months to permit the preparation and filing of a patent application on the subject matter to be disclosed or other action to be taken. The party proposing disclosure shall thereafter be free to publish or disclose the information. The determination of authorship for any paper shall be in accordance with accepted scientific practice. SECTION 13. REPRESENTATIONS AND WARRANTS 13.1. LEGAL AUTHORITY. Each party represents and warrants to the other that it has the legal power, authority and right to enter into this Agreement and to perform its respective obligations set forth herein. 13.2. NO CONFLICTS. Each party represents and warrants that as of the date of this Agreement it is not a party to any agreement or arrangement with any Third Party or under any obligation or restriction, including pursuant to its Certificate of Incorporation or By-Laws, which in any way limits or conflicts with its ability to fulfill any of its obligations under this Agreement. CoCensys further represents and warrants to Warner that it has delivered to Warner a complete copy of all written agreements between (a) Acea and Oregon, (b) Acea and UC ,and (c) CoCensys and Acea, relating to research being conducted by any such parties in the Field and no oral agreements or other arrangements exist between Acea and Oregon or Acea and UC which supersede any of the terms of any such written agreements. CoCensys further represents to Warner that there are no existing agreements between CoCensys, Inc. and Oregon relating to research or development in the Field. 43 13.3. OTHERS BOUND. Each party covenants that any contract it enters into with a Third Party performing services under this Agreement on behalf of such party will bind such Third Party to all of the relevant terms and conditions of this Agreement. 13.4. OREGON/UC AGREEMENTS. CoCensys represents and warrants that: (a) Subject only to the rights retained by Oregon or by UC or by the United States government pursuant to the provisions of the Oregon/UC Agreements, CoCensys is the sole owner and/or exclusive worldwide licensee free and clear of any and all charges, claims or encumbrances of any kind, except those present in the Oregon/UC Agreements, of the entire right, title and interest in and to all intellectual property rights (including, without limitation, all patent rights, inventions and discoveries) and all compounds which are subject to the terms of the Oregon/UC Agreements (collectively, the "Oregon/UC Agreement Rights"). (b) Other than Oregon, UC, and the United States government, no other person or organization presently has any effective option or license with respect to the manufacture, use, or sale of the CoCensys Compounds or any compounds arising under the Oregon/UC Agreement Rights. (c) By fax transmitted on September 27, 1995, as supplemented by fax transmitted on September 28, 1995, CoCensys has provided to Warner true and complete copies of the Oregon/UC Agreements, including all supplements thereto and modifications or amendments thereof. CoCensys is not, and to its best knowledge Oregon is not, in default under or in breach of the Oregon License Agreement or the Oregon Research Agreement or the Oregon/UC Assignment Agreement and such agreements are in full force and effect as of the date hereof. CoCensys is not, and to its best knowledge UC is not, in default under or in breach of the UC Research Agreement or the Oregon/UC Assignment Agreement and such agreements are in full force and effect as of the date hereof. 13.5. SURVIVAL. The foregoing representations and warranties shall survive the execution, delivery, and performance of this Agreement, notwithstanding any investigation by or on behalf of either party. 13.6. DISCLAIMER. Except as otherwise expressly stated herein, Warner hereby disclaims any warranty expressed or implied as to any Collaboration Product or Independent Product sold or placed in commerce by or on behalf of CoCensys. Except as otherwise expressly stated herein, CoCensys hereby disclaims any warranty expressed or implied as to any Collaboration Product or Independent Product sold or placed in commerce by or on behalf of Warner. 44 SECTION 14. TERMINATION 14.1. TERMINATION FOR BREACH. In the event of a material breach of the provisions of this Agreement, the breaching party shall have 60 days after receipt of written notice from the non-breaching party to cure such breach, or if cure cannot be reasonably effected within such 60-day period, to deliver to the other party a plan for curing such breach which is reasonably sufficient to effect a cure. (a) In the event of an uncured breach of a material obligation under the Research Program and during the Term of the Research Program, the non-breaching party may terminate the Term of the Research Program and each party shall retain such ownership interest in the Collaboration Technology as it shall hold on the date of the termination, provided, however, that (i) the licenses granted to the non-breaching party under Section 2.5, Section 4.7, and Section 6 shall remain in full force and effect but the breaching party shall forfeit all rights to develop and promote all Collaboration Compounds, Collaboration Lead Compounds and Collaboration Products, and any resulting products shall be deemed to be Independent Products of the non-terminating party, (ii) the breaching party shall not conduct any further research in the Field for a period of [*] from the effective date of such early termination, (iii) all licenses granted to such breaching party under this Agreement may be immediately terminated by the non-breaching party, and (iv) any royalties due the breaching party under this Agreement shall be reduced by [*]. (b) In the event of an uncured material breach by Warner of its obligations to pay any royalties due and owing with respect to a Collaboration Product pursuant to Section 6.6, or CoCensys' Share of Profit under Section 7.16(a), CoCensys may terminate the licenses it has granted to Warner pursuant to Section 6.1 in respect of such Collaboration Product whereupon, at CoCensys' request, Warner shall grant to CoCensys an exclusive (even as to Warner) worldwide license (with the right to sublicense) under the Patent Rights, Collaboration Technology, and Background Technology relating to such Product and owned or Controlled by Warner, to the extent necessary to make, use or sell such Product (i) in countries other than those in which the parties are co-promoting such Collaboration Product, if any, in the case of a failure to pay royalties and (ii) in the Co-Promotion Country in the case of failure to pay the Share of Profit, subject to payment of a [*] royalty to Warner on Net Sales of such Collaboration Product, and shall further assign to CoCensys all Regulatory Approvals (to the extent permitted by law) in such countries. (c) In the event of an uncured material breach of Section 6.7 by the Independent Party in respect of royalties owed thereunder on an Independent Product, the other party may terminate the licenses granted by it pursuant to Section 6.3 in respect of such Product, whereupon at the other party's request, the Independent Party shall grant it an exclusive (even as to such party), worldwide license (with the right to sublicense) under the Patent Rights, Collaboration Technology, and Background Technology relating to such Product and owned or Controlled by the Independent Party, to the extent 45 * Confidential treatment requested necessary to make, use and sell such Independent Product subject to payment of a [*] royalty to the breaching Independent Party and shall further assign to the other party all Regulatory Approvals (to the extent permitted by law) in such countries. (d) In the event of an uncured material breach of either party's obligations with respect to the Preclinical Development or Development of any Collaboration Compound, including, but not limited to, the payment of such party's share of Development Costs, the nonbreaching party shall have the right to terminate the license granted to the breaching party under Section 6.1, 6.2, or 6.3 with respect to such Collaboration Compound, and to declare such Collaboration Compound to be an Independent Lead Compound or Independent Product and such non-breaching party shall be deemed to be an Independent Party with respect to such Independent Lead Compound or Independent Product, and shall have such rights and obligations applicable to an Independent Party as set forth herein, provided, however, any royalties due the breaching party on sales of such Independent Product pursuant to Section 6.7 shall be reduced by [*]. 14.2. EFFECT OF BANKRUPTCY. If, during the Term of the Research Program, either party files a voluntary petition in bankruptcy, is adjudicated a bankrupt, makes a general assignment for the benefit of creditors, admits in writing that it is insolvent or fails to discharge within 15 days an involuntary petition in bankruptcy filed against it, then the Term of the Research Program and the entirety of this Agreement may be immediately terminated by the other party. 14.3. DETERMINATION OF CO-PROMOTION RIGHTS UPON CHANGE IN CONTROL. (a) In the event of a Change of Control (as defined below) of either party which results in the control of such party (the "Acquired Party") by a Pharmaceutical Company (as defined below), the Acquired Party promptly shall notify the other party (the "Non-Acquired Party") of such Change in Control and the Non-Acquired Party shall have the right, upon written notice to the Acquired Party (the "Notice of Intent"), [*] to be set forth in Section 14.3(b), provided that the Notice of Intent is received by the Acquired Party within 90 days after receipt of notice by the Non-Acquired Party of such Change in Control. (b) Within 30 days following receipt of the Notice of Intent, the parties shall jointly select a Third Party arbitrator (the "Third Party Arbitrator"), which shall be a Third Party with significant qualifications and experience in the pharmaceutical business. Within 60 days following receipt of the Notice of Intent, each party shall submit to the Third Party Arbitrator, and to the other party, [*]. Within 15 days following receipt of such information from both parties, the Third Party Arbitrator shall select [*] and shall notify the parties of its selection. In making its determination pursuant to the preceding sentence, the Third Party Arbitrator (i) shall select that submitted [*] to a hypothetical, independent Pharmaceutical Company and (ii) shall not take into account any unique 46 * Confidential treatment requested circumstances [*] which the Acquired Party has undergone its Change in Control. The [*] selected by the Third Party Arbitrator shall be deemed to be the [*]. (c) Within 15 days after determination of the [*], the Non-Acquired Party will notify the Acquired Party as to whether it wishes to purchase the Agreement Rights at [*]. If the Non-Acquired Party elects not to [*], the parties will continue to research, develop, and co-promote under this Agreement and the Non-Acquired Party will pay all costs for the Third Party Arbitrator. If the Non-Acquired Party elects to [*], the Non-Acquired Party shall pay to the Acquired Party [*] on the date upon which it makes such election and [*]. If the Non-Acquired Party elects to [*], and the date upon which it makes such election is [*], the Non-Acquired Party shall pay to the Acquired Party [*] on the date upon which it makes such election and [*] on or before each of the subsequent anniversaries of such date, until [*] has been paid, where [*], rounded up to the nearest whole number. If the Non-Acquired Party elects to [*], the parties will [*] all costs associated with the Third Party Arbitrator. Each party will bear [*] for submission to the Third Party Arbitrator pursuant to Section 14.3(b). (d) For purposes of this Section 14.3, "Change in Control" shall mean (1) a merger or consolidation in which a party hereto is not the surviving corporation; (2) a reverse merger in which a party hereto is the surviving corporation but the shares of such party's voting 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; or (3) if, after giving effect to any agreements among stockholders of a party hereto, any person holds and may vote in excess of [*] of such party's voting stock. (e) For purposes of this Section 14.3, "Pharmaceutical Company" shall mean any person, as such term is defined in Section 12 (d) of the United States Securities Exchange Act of 1934, as amended, which is engaged in the pharmaceutical business in terms of researching, developing, marketing, selling, or distributing pharmaceutical products for use in humans. 14.4. REMEDIES. In the event of any breach of any provision of this Agreement, in addition and remedies at law or equity to enforce this Agreement. 14.5. VOLUNTARY TERMINATION. Either party may terminate the Term of the Research Collaboration pursuant to Section 2.4. SECTION 15. GENERAL PROVISIONS 15.1. INDEMNIFICATION. Each of Warner and CoCensys agrees to indemnify and hold harmless the other party and its Affiliates and their respective employees, agents, officers, directors and permitted assigns (such party's "Indemnified Group") from and against any claims by a third party resulting in the award or payment of any judgments, expenses (including reasonable attorney's fees), damages and awards (collectively a "Claim") arising out of or resulting from (i) its negligence or misconduct, (ii) a breach of 47 * Confidential treatment requested any of its representations, warranties, or obligations hereunder or (iii) such party's research and development, manufacture, use, promotion, marketing, or sale of any Collaboration Compounds, except to the extent that such Claim arises out of or results from the negligence or misconduct of a party seeking to be indemnified and held harmless or the negligence or misconduct of a member of such party's Indemnified Group. A condition of this obligation is that, whenever a member of the Indemnified Group has information from which it may reasonably conclude an incident has occurred which could give rise to a Claim, such indemnified party shall immediately give notice to the indemnifying party of all pertinent data surrounding such incident and, in the event a Claim is made, all members of the Indemnified Group shall assist the indemnifying party and cooperate in the gathering of information with respect to the time, place and circumstances and in obtaining the names and addresses of any injured parties and available witnesses. No member of the Indemnified Group shall voluntarily make any payment or incur any expense in connection with any such Claim or suit without the prior written consent of the indemnifying party. The obligations set forth in this Section 15.1 shall survive the expiration or termination of this Agreement. 15.2. ASSIGNMENT. This Agreement shall not be assignable by either party, without the prior written consent of the other party, such consent not to be unreasonably withheld, except a party may, subject to Section 14.3, make such an assignment without the other party's consent to Affiliates or to a successor to substantially all of the pharmaceutical business of such party, whether in merger, sale of stock, sale of assets or other transaction. In no event will any assignment relieve the assigning party of its obligations hereunder. This Agreement shall be binding upon and, subject to the terms of the foregoing sentence, inure to the benefit of the panties' successors, legal representatives and assigns. 15.3. NON-WAIVER. The waiver by either of the parties of any breach of any provision hereof by the other party shall not be construed to be a waiver of any succeeding breach of such provision or a waiver of the provision itself. 15.4. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the laws of the State of New York other than those provisions governing conflicts of law. 15.5. PARTIAL INVALIDITY. If and to the extent that any court or tribunal of competent jurisdiction holds any of the terms or provisions of this Agreement, or the application thereof to any circumstances, to be invalid or unenforceable in a final nonappealable order, the parties shall use their best efforts to reform the portions of this Agreement declared invalid to realize the intent of the parties as fully as practical, and the remainder of this Agreement and the application of such invalid term or provision to circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each of the remaining terms and provisions of this Agreement shall remain valid and enforceable to the fullest extent of the law. 48 * Confidential treatment requested 15.6. NOTICE. Any notice to be given to a party under or in connection with this Agreement shall be in writing and shall be (i) personally delivered, (ii) delivered by a nationally recognized overnight courier, or (iii) delivered by certified mail, postage prepaid, return receipt requested to the party at the address set forth below for such party: To Warner: To CoCensys or Acea: Senior Vice President, Research President & CEO Parke-Davis Pharmaceutical Research CoCensys, Inc. Division of Warner-Lambert Company 201 Technology Drive 2800 Plymouth Road Irvine, California 92618 Ann Arbor, MI 48105 With a copy to: with a copy to: President, Parke-Davis, Alan Mendelson North America Cooley Godward Castro Warner-Lambert Company Huddleson & Tatum 201 Tabor Road Five Palo Alto Square Morris Plains, NJ 07950 Palo Alto, California 94306 and a copy to: Vice President and General Counsel Warner-Lambert Company 201 Tabor Road Morris Plains, NJ 07950 or to such other address as to which the party has given notice thereof. Such notices shall be deemed given upon receipt. 15.7. HEADINGS. The headings appearing herein have been inserted solely for the convenience of the parties hereto and shall not affect the construction, meaning or interpretation of this Agreement or any of its terms and conditions. 15.8. NO IMPLIED LICENSES OR WARRANTIES. No right or license under any patent application, issued patent, know-how, or other proprietary information is granted or shall be granted by implication. All such rights or licenses are or shall be granted only as expressly provided in the terms of this Agreement. Neither party warrants the success of any clinical or other studies undertaken by it. 15.9. FORCE MAJEURE. No failure or omission by the parties hereto in the performance of any obligation of this Agreement shall be deemed a breach of this Agreement nor shall it create any liability if the same shall arise from any cause or causes beyond the reasonable control of the affected party, including, but not limited to, the following, which for purposes of this Agreement shall be regarded as beyond the control 49 of the party in question: acts of nature; acts or omissions of any government; any rules, regulations, or orders issued by any governmental authority or by any officer, department, agency or instrumentality thereof; fire; storm; flood; earthquake; accident; war; rebellion; insurrection; riot; invasion; strikes; and labor lockouts; provided that the party so affected shall use its best efforts to avoid or remove such causes of nonperformance and shall continue performance hereunder with the utmost dispatch whenever such causes are removed. 15.10. SURVIVAL. The representations and warranties contained in this Agreement as well as those rights and obligations contained in the terms of this Agreement which by their intent or meaning have validity beyond the term of this Agreement shall survive the termination or expiration of this Agreement. 15.11. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding between the parties with respect to the subject matter contained herein and supersedes any and all prior agreements, understandings and arrangements whether oral or written between the parties relating to the subject matter hereof, except for the terms of Articles 4 and 5 of the Screening Collaboration Agreement. This Agreement will control in the event of any conflict between this Agreement and the Research Plan. 15.12. AMENDMENTS. No amendment, change, modification, or alteration of the terms and conditions of this Agreement shall be binding upon either party unless in writing and signed by the party to be charged. 15.13. INDEPENDENT CONTRACTORS. It is understood that both parties hereto are independent contractors and are engaged in the operation of their own respective businesses, and neither party hereto is to be considered the agent or partner of the other party for any purpose whatsoever. Neither party has any authority to enter into any contracts or assume any obligations for the other party or make any warranties or representations on behalf of the other party. 15.14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 50 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. COCENSYS, INC. WARNER-LAMBERT COMPANY By: /s/ By: /s/ ---------------------- ----------------------------- Name: Dr. Eckard Weber Name: Ronald M. Cresswell, Ph.D. ---------------------- --------------------------- Title: Senior Vice Title: Vice President and President, Research Chairman and Drug Discovery Parke-Davis Pharmaceutical Research a Warner-Lambert Company Date: October 13, 1997 Date: October 13, 1997 ---------------------- ----------------------------- ACEA PHARMACEUTICALS, INC. By: /s/ ---------------------- Name Dr. Eckard Weber ---------------------- Title: Senior Vice President, Research and Drug Discovery Date: October 13, 1997 ---------------------- 51 SCHEDULE 1.3 [*] 52 *Confidential treatment requested SCHEDULE 1.3(b) [*] 53 *Confidential treatment requested SCHEDULE 1.7 COCENSYS COMPOUNDS [*] 54 *Confidential treatment requested SCHEDULE 2.1 Parke-Davis/CoCensys Collaboration Research Plan - October, 1997 [*] 55 *Confidential treatment requested PROPOSED RESEARCH PLAN [*] 56 *Confidential treatment requested SUBTYPE SELECTIVE NMDA ANTAGONISTS Screening Strategy [*] 57 *Confidential treatment requested NON-COMPETITIVE AMPA ANTAGONISTS Preliminary Screening Strategy [*] 58 *Confidential treatment requested SCHEDULE 5.1 PRE-CLINICAL DEVELOPMENT CRITERIA [*] 59 *Confidential treatment requested EX-10.41 9 EXHIBIT 10.41 COCENSYS, INC. SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of October 13, 1997, by and between COCENSYS, INC., a Delaware corporation (the "Company"), and WARNER-LAMBERT COMPANY, a Delaware corporation ("Purchaser"). 1. PURCHASE AND SALE Subject to the terms and conditions hereof, and in reliance upon the representations, warranties and agreements contained herein, the Company hereby agrees to issue and sell to Purchaser, and Purchaser hereby agrees to purchase from the Company, the aggregate number of shares of the Company's Series D Convertible Preferred Stock (the "Preferred Stock") set forth in Subsections 1.1 and 1.4 hereof (the "Shares"). The terms of the Preferred Stock are set forth in the Certificate of Designation annexed hereto as Exhibit A (the "Certificate of Designation"). 1.1 INITIAL SHARES. On the First Closing Date (as defined below), the Company shall issue and sell to Purchaser, and Purchaser shall purchase from the Company for $1,000,000 (the "Initial Purchase Price"), 14,286 shares of Preferred Stock (the "Initial Shares"). 1.2 FIRST CLOSING DATE. The closing of the sale and purchase of the Initial Shares (the "First Closing") shall take place on October 14, 1997 (the "First Closing Date"). 1.3 DELIVERY. At the First Closing, the Company will deliver to Purchaser a certificate or certificates, in such denominations and registered in such names as Purchaser may designate by notice to the Company, representing the Initial Shares to be purchased by Purchaser from the Company, dated the First Closing Date, against payment of the Initial Purchase Price by wire transfer, a check made payable to the order of the Company, or any combination thereof. 1.4 ADDITIONAL SHARES. (a) On the Second Closing Date (as defined below), the Company shall issue and sell to Purchaser, and Purchaser shall purchase from the Company for $6,000,000 (the "Additional Purchase Price"), 85,714 shares of Preferred Stock (the "Additional Shares"). 1.5 SECOND CLOSING DATE. The closing of the sale and purchase of the Additional Shares (the "Second Closing") shall take place on January 9, 1998 (the "Second Closing Date"). 1.6 DELIVERY. At the Second Closing, the Company will deliver to Purchaser a certificate or certificates, in such denominations and registered in such name as Purchaser may designate by notice to the Company, representing the Additional Shares to be purchased by Purchaser from the Company, dated the Second Closing Date, against payment of the Additional Purchase Price by wire transfer, a check made payable to the order of the Company, or any combination of the above. 2. REGISTRATION RIGHTS. The Company hereby grants to Purchaser the registration rights set forth in this Section 2, with respect to the Registrable Securities (as hereinafter defined) owned by Purchaser. 2.1 DEFINITIONS. As used in this Section 2: (a) The term "Holder" or "Holders" shall mean (i) Purchaser and (ii) any other person holding or having the right to acquire Registrable Securities to whom these registration rights have been transferred pursuant to Subsection 2.7 hereof. (b) The terms "register," "registered," and "registration" refer to a registration effected by filing with the Securities and Exchange Commission (the "SEC") a registration statement (the "Registration Statement") in compliance with the Securities Act of 1933, as amended (the "1933 Act") and the declaration or ordering by the SEC of the effectiveness of such Registration Statement. (c) The term "Registrable Securities" means (i) the shares of Common Stock of the Company issued upon conversion of the Shares (the "Conversion Shares") in accordance with the Certificate of Designation and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange or in replacement of, the Conversion Shares; PROVIDED, HOWEVER, that Registrable Securities shall cease to be Registrable Securities when they may be sold pursuant to Rule 144 under the 1933 Act. In the event of any recapitalization by the Company, whether by stock split, reverse stock split, stock dividend or the like, the number of shares of Registrable Securities shall be proportionately increased or decreased. 2.2 REGISTRATION. (a) REGISTRATION. If at any time or from time to time the Company shall determine to register any of its securities for its own account, other than a registration relating solely to employee benefit plans or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and 2 (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 calendar days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in Subsection 2.2(b) below. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Subsection 2.2(a)(i). In such event the right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall, together with the Company and any other parties distributing their securities through such underwriting, enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Subsection 2.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities to be included in the registration and underwriting, or may exclude Registrable Securities entirely from such registration and underwriting subject to the terms of this paragraph. The Company shall so advise all holders of the Company's securities that would otherwise be registered and underwritten pursuant hereto, and the number of shares of such securities, including Registrable Securities, that may be included in the registration and underwriting shall be allocated in the following manner: shares, other than Registrable Securities and other securities carrying registration rights, requested to be included in such registration by stockholders shall be excluded and if a limitation on the number of shares is still required, the number of securities that may be included shall first be allocated among the holders of piggyback registration rights having priority over those set forth herein, if any, in proportion, as nearly as practicable, to the respective amounts of such securities held by such holders and then shall be allocated among the Holders and holders of securities having PARI PASSU registration rights, if any, in proportion, as nearly as possible, to the respective amounts of such securities held by each such holder, in each case at the time of filing the Registration Statement. In the event of any underwriter cutback, if any selling stockholder which is a Holder of Registrable Securities is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder", and any pro rata reduction with respect to such "selling Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling Holder", as defined in this sentence. No securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of the underwriting, it may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities so withdrawn shall also be withdrawn from registration. 3 2.3 EXPENSES OF REGISTRATION. All expenses incurred in connection with a registration effected pursuant to Subsection 2.2, including without limitation all registration, filing, and qualification fees (including blue sky fees and expenses), printing expenses, escrow fees, fees and disbursements of counsel for the Company and, if there are more than two (2) participating Holders, of one special counsel for the participating Holders, and expenses of any special audits incidental to or required by such registration (collectively, "Registration Expenses"), shall be borne by the Company; PROVIDED, HOWEVER, that the term Registration Expenses shall not include, and in no event will the Company be obligated to pay, stock transfer taxes or underwriters' discounts or commissions relating to Registrable Securities. 2.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its diligent best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or until the Holder or Holders have completed the distribution relating thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered 4 under the 1933 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 2, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 2, if such securities are being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent accountants of the Company, in form and substance as is customarily given by independent accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 2.5 INDEMNIFICATION. (a) The Company will, and does hereby undertake to, indemnify and hold harmless each Holder of Registrable Securities, each of such Holder's officers, directors, partners and agents, and each person controlling such Holder, with respect to any registration, qualification, or compliance effected pursuant to this Section 2, and each underwriter, if any, and each person who controls any underwriter, of the Registrable Securities held by or issuable to such Holder, against all claims, losses, damages, and liabilities (or actions in respect thereto) to which they may become subject under the 1933 Act, the Securities Exchange Act of 1934, as amended, (the "1934 Act"), or other federal or state law (including common law) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular, or other similar document (including any related Registration Statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any violation or alleged violation by the Company of any federal, state or common law rule or regulation applicable to the Company in connection with any such registration, qualification, or compliance, and will reimburse, as incurred, each such Holder, each such underwriter, and each such director, officer, partner, agent and controlling person, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action; provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense, arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an 5 instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in such registration, qualification, or compliance, indemnify the Company, each of its directors, and each officer who signs a Registration Statement in connection therewith, and each person controlling the Company, each underwriter, if any, and each person who controls any underwriter, of the Company's securities covered by such a Registration Statement, and each other Holder, each of such other Holder's officers, partners, directors and agents and each person controlling such other Holder, against all claims, losses, damages, and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, the Company, each such underwriter, each such other Holder, and each such director, officer, partner, and controlling person, for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) was made in such Registration Statement, prospectus, offering circular, or other document, in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. In no event will any Holder be required to enter into any agreement or undertaking in connection with any registration under this Section 2 providing for any indemnification or contribution obligations on the part of such Holder greater than such Holder's obligations under this Subsection 2.5. (c) Each party entitled to indemnification under this Subsection 2.5 (the "Indemnified Party") shall give notice to the party required to provide such indemnification (the "Indemnifying Party") of any claim as to which indemnification may be sought promptly after such Indemnified Party has actual knowledge thereof, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be subject to approval by the Indemnified Party (whose approval shall not be reasonably withheld) and the Indemnified Party may participate in such defense at the Indemnifying Party's expense if representation of such Indemnified Party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2, except to the extent that such failure to give notice shall materially adversely affect the Indemnifying Party in the defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent 6 of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff therein, to such Indemnified Party, of a release from all liability in respect to such claim or litigation. 2.6 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification, or compliance referred to in this Section 2. 2.7 TRANSFER OF REGISTRATION RIGHTS. The rights contained in this Section 2 to cause the Company to register the Registrable Securities, may be assigned or otherwise conveyed to any affiliate (as such term is defined in Rule 405 under the 1933 Act) of Purchaser who is a transferee or assignee of Registrable Securities, who shall be considered a "Holder" for purposes of this Section 2, provided that the Company is given written notice by Purchaser, at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. 2.8 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. 2.9 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the 1933 Act ("Rule 144") or any similar or analogous rule promulgated under the 1933 Act, as long as Registrable Securities are outstanding; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the 1933 Act and 1934 Act; (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the 1934 Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration or pursuant to a registration on Form S-3. 7 (d) Take all such action (including without limitation the furnishing of the information described in Rule 144(d)(4)) as may be necessary or helpful to facilitate a sale of Registrable Securities by a Holder to a "qualified institutional buyer," as such term is defined in Rule 144A of the 1933 Act. 2.10 "MARKET STAND-OFF" AGREEMENT. Purchaser hereby agrees that during the ninety (90)-day period following the effective date of a registration statement of the Company filed under the 1933 Act, it shall not, to the extent requested by the Company or any underwriter, sell or otherwise transfer or dispose of any Common Stock of the Company held by it at any time during such period (except Common Stock included in such registration); PROVIDED, HOWEVER, that: (a) Such agreement shall be applicable only to registration statements of the Company which cover Common Stock (or other securities) to be sold on its behalf to the public; (b) Such Agreement shall be applicable only if Purchaser holds at least one percent (1%) of the Common Stock of the Company then outstanding; and (c) All officers and directors of the Company enter into similar agreements. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restriction until the end of such period. The agreement of the Purchaser set forth in this Section 2.10 shall lapse three (3) years after the Second Closing provided that Purchaser is not at such time an affiliate of the Company (as defined in Rule 405 under the 1933 Act), in which case such restrictions shall lapse at such time as Purchaser ceases to be an affiliate. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as otherwise set forth on the Schedule of Exceptions which is attached hereto as Exhibit B and which shall contain section numbers specifically corresponding to the section numbers in this Agreement, the Company hereby represents and warrants to Purchaser as follows: 3.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power and authority to own and operate its properties and assets and to carry on its business as presently conducted and as proposed to be conducted. The Company is qualified as a foreign corporation to do business in each jurisdiction in the United States in which the ownership of its property or the conduct of its business requires such qualification, except where any statutory fines or penalties or any corporate disability imposed for the failure to 8 qualify would not materially or adversely affect the Company, its assets, financial condition or operations. 3.2 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations hereunder and thereunder, and for the authorization, issuance, sale and delivery of the Shares has been taken or will be taken prior to each of the First Closing and the Second Closing, respectively. This Agreement, when executed and delivered, shall constitute a valid and legally binding obligation of the Company in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. 3.3 VALIDITY OF SHARES AND CONVERSION SHARES. The sale of the Shares is not and will not be subject to any preemptive rights or rights of first refusal that have not been waived and, when issued, sold and delivered in compliance with the provisions of this Agreement and the Certificate of Designation, the Shares and the Conversion Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; PROVIDED, HOWEVER, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws and the Shares may be subject to additional restrictions on transfer, in each case as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.4 OFFERING. Assuming the accuracy of the representations and warranties of Purchaser contained in Section 4.3 hereof on the date hereof and on each of the First Closing Date and Second Closing Date, the offer, issue, and sale of the Initial Shares and the Additional Shares are and will be exempt from the registration and prospectus delivery requirements of the 1933 Act, and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit, or qualification requirements of all applicable state securities laws. 3.5 FULL DISCLOSURE. The Company has furnished to Purchaser the following documents, and the Company warrants that the information contained in such documents, as of their respective dates (or if amended, as of the date of such amendment), did not contain any untrue statement of a material fact, and did not omit to state any material fact necessary to make any statement, in light of the circumstances under which such statement was made, not misleading: (a) The Company's annual report on Form 10-K as amended by Form 10-K/A for the fiscal year ended December 31, 1996; the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1997; and the Company's Current Report on Form 8-K dated June 12, 1997. 9 (b) All other documents subsequently filed by the Company with the SEC pursuant to the reporting requirements of the 1934 Act. 3.6 VOTING ARRANGEMENTS. To the best of the Company's knowledge, there are no outstanding stockholder agreements, voting trusts, proxies or other arrangements or understandings among the stockholders of the Company relating to the voting of their respective shares. 3.7 NO CONFLICT; NO VIOLATION. The execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby will not (a) conflict with any provisions of the Amended and Restated Certificate of Incorporation or Bylaws of the Company, in each case as amended to date; (b) result in any violation of or default or loss of a benefit under, or permit the acceleration of any obligation under (in each case, upon the giving of notice, the passage of time, or both) any mortgage, indenture, lease, agreement or other instrument, permit, franchise, license, judgment, order, decree, law, ordinance, rule or regulation applicable to the Company or its properties. 3.8 CONSENTS AND APPROVALS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any governmental authority, required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the First Closing or the Second Closing, as applicable, except for notices required or permitted to be filed with certain state and federal securities commissions after the First Closing or the Second Closing, as the case may be; which notices will be filed on a timely basis. 3.9 ABSENCE OF CERTAIN DEVELOPMENTS. Since June 30, 1997, the Company has not (a) incurred or become subject to any material liabilities (absolute or contingent) except current liabilities incurred, and liabilities under contracts entered into, in the ordinary course of business, consistent with past practices; (b) mortgaged, pledged or subjected to lien, charge or any other encumbrance any of its assets, tangible or intangible; (c) sold, assigned or transferred any of its assets or canceled any debts or obligations except in the ordinary course of business, consistent with past practices; (d) suffered any extraordinary losses, or waived any rights of substantial value; (e) entered into any material transaction other than in the ordinary course of business, consistent with past practices; or (f) otherwise had any material change in its condition, financial or otherwise, except for changes in the ordinary course of business, consistent with past practices, none of which individually or in the aggregate has been materially adverse. 10 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. Purchaser hereby represents and warrants to the Company as follows: 4.1 LEGAL POWER. It has the requisite legal power to enter into this Agreement, to purchase the Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement. 4.2 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by it, and, upon due execution and delivery by the Company, this Agreement will be a valid and binding agreement of it. 4.3 INVESTMENT REPRESENTATIONS. (a) It is acquiring the Shares, and intends to acquire the Conversion Shares, for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the 1933 Act. (b) It understands that (i) the Shares have not been and, when issued, the Conversion Shares will not be, registered under the 1933 Act by reason of a specific exemption therefrom, that they must be held by it indefinitely, and that it must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the 1933 Act or is exempt from such registration; (ii) each certificate representing the Shares and the Conversion Shares will be endorsed with the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (A) PURSUANT TO SEC RULE 144 OR (B) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR (C) THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT." (iii) certificate representing the Shares also will be endorsed with the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR 11 HYPOTHECATED UNLESS THE TRANSFEREE IS AN AFFILIATE OF THE HOLDER WITHIN THE MEANING OF RULE 144 UNDER THE 1933 ACT; and (iv) the Company will instruct any transfer agent not to register the transfer of any of the Shares unless the conditions specified in the foregoing legend are satisfied. Purchaser shall have the right to demand removal of the foregoing legend with respect to any or all of the Shares if, in the opinion of counsel to the Company, removal of such legend is permitted by the rules and regulations of the SEC. (c) It has been furnished with such materials and has been given access to such information relating to the Company as it or its qualified representative has requested and it has been afforded the opportunity to ask questions regarding the Company and the Shares, all as it has found necessary to make an informed investment decision. (d) It is an "accredited investor" within the meaning of Regulation D under the 1933 Act. (e) It was not formed for the specific purpose of acquiring the Shares or the Conversion Shares offered hereunder. 5. CONDITIONS TO FIRST CLOSING. 5.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. Purchaser's obligation to purchase the Initial Shares at the First Closing is subject to the fulfillment, at or prior to the First Closing, of all of the following conditions, any of which may be waived by Purchaser: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects on the date of the First Closing with the same force and effect as if they had been made on and as of said date; the business and assets of the Company shall not have been adversely affected in any material way prior to the First Closing; and the Company shall have performed all obligations and conditions herein required to be performed by it on or prior to the First Closing. (b) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received from Cooley Godward LLP, counsel to the Company, an opinion letter substantially in the form attached hereto as Exhibit C, addressed to it, dated the date of the First Closing. (c) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the First Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in 12 substance and form to Purchaser and its special counsel, and Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (d) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Initial Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the First Closing. No stop order or other order enjoining the sale of the Initial Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of the First Closing, the sale and issuance of the Initial Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. (e) COMPLIANCE CERTIFICATE. The Company shall have delivered to Purchaser a Certificate, executed by the President of the Company, dated the date of the First Closing, certifying to the fulfillment of the conditions specified in subparagraphs (a) and (d) of this Subsection 5.1. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to issue and sell the Initial Shares at the First Closing is subject to the fulfillment to the Company's satisfaction, on or prior to the First Closing, of the following conditions, any of which may be waived by the Company: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct at the date of the First Closing, with the same force and effect as if they had been made on and as of said date. (b) PERFORMANCE OF OBLIGATIONS. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by it on or before the First Closing. (c) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Initial Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the First Closing. No stop order or other order enjoining the sale of the Initial Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the First Closing, the sale and issuance of the Initial Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. 13 6. CONDITIONS TO SECOND CLOSING. 6.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. Purchaser's obligation to purchase the Additional Shares at the Second Closing is subject to the fulfillment, at or prior to the Second Closing, of all of the following conditions, any of which may be waived by Purchaser: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects on the date of the Second Closing with the same force and effect as if they had been made on and as of said date; the business and assets of the Company shall not have been adversely affected in any material way prior to the Second Closing; and the Company shall have performed all obligations and conditions herein required to be performed by it on or prior to the Second Closing. (b) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received from Cooley Godward LLP, counsel to the Company, an opinion letter substantially in the form attached hereto as Exhibit C, addressed to it, dated the date of the Second Closing. (c) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Second Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to Purchaser and its special counsel, and Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (d) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Additional Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Second Closing. No stop order or other order enjoining the sale of the Additional Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of the Second Closing, the sale and issuance of the Additional Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. (e) COMPLIANCE CERTIFICATE. The Company shall have delivered to Purchaser a Certificate, executed by the President of the Company, dated the date of the Second Closing, certifying to the fulfillment of the conditions specified in subparagraphs (a) and (d) of this Subsection 6.1. 6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to issue and sell the Additional Shares at the Closing is subject to the fulfillment to the Company's satisfaction, on or prior to the Second Closing, of the following conditions, any of which may be waived by the Company: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct at the date of the Second Closing, with the same force and effect as if they had been made on and as of said date. (b) PERFORMANCE OF OBLIGATIONS. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by it on or before the Second Closing. (c) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Additional Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Second Closing. No stop order or other order enjoining the sale of the Additional Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Second Closing, the sale and issuance of the Additional Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. 7. COVENANT Each of the Company and Purchaser agree that, prior to any conversion of the Preferred Stock in accordance with the Certificate of Designation, it shall have observed, if applicable, the pre-merger notification and waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. 8. MISCELLANEOUS. 8.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 8.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder as of the date of such certificate or instrument. 15 8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.4 ENTIRE AGREEMENT. This Agreement, the Exhibits hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 8.5 SEPARABILITY. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.6 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of the Company and the holders of not less than a majority-in-interest of the aggregate of outstanding Initial Shares and Additional Shares. Any amendment or waiver effected in accordance with this paragraph shall be binding upon Purchaser, each future holder of the Initial Shares and the Additional Shares, and the Company. Upon the effectuation of each such amendment or waiver, the Company shall promptly give written notice thereof to the record holders of the Initial Shares and the Additional Shares who have not previously consented thereto in writing, if any. 8.7 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power, or remedy accruing to Purchaser or any subsequent holder of any Initial Shares or Additional Shares upon any breach, default or noncompliance of the Company under this Agreement, shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on Purchaser's part of any breach, default or noncompliance under this Agreement or any waiver on Purchaser's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies, either under this Agreement, by law, or otherwise afforded to Purchaser, shall be cumulative and not alternative. 16 8.8 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given (a) upon personal delivery, (b) on report of successful transmission by facsimile machine that automatically generates a printed diagnostic report, indicating whether transmission was completed successfully, at the conclusion of each transmission, (c) on the first business day after receipted delivery to a courier service which guarantees next business-day delivery, under circumstances in which such guaranty is applicable, or (d) on the earlier of delivery or five (5) business days after mailing by United States certified by mail, postage and fees prepaid, to the appropriate party at the address set forth below or to such other address as the part so notifies the other in writing: (a) if to the Company, to: COCENSYS, INC. 201 Technology Drive Irvine, CA 92718 Attention: President and Chief Executive Officer with a copy to: COOLEY GODWARD LLP 5 Palo Alto Square 4th Floor Palo Alto, CA 94306-2155 Attention: Alan C. Mendelson, Esq. (b) if to Purchaser, to: WARNER-LAMBERT COMPANY 201 Tabor Road Morris Plains, NJ 07950 Attention: Vice President and General Counsel Notwithstanding the foregoing, all notices and other communications to an address outside of the United States shall be sent by telecopy and confirmed in writing to be sent by first class mail. 8.9 FINDER'S FEES. (a) The Company (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold Purchaser harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm 17 (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its employees or representatives is responsible. (b) Purchaser (iii) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement, and (iv) hereby agrees to indemnify and to hold the Company harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which Purchaser or any of its employees or representatives are responsible. 8.10 FEES AND EXPENSES. The Company agrees to pay all fees, costs and expenses relating to this Agreement and the transactions contemplated hereby. If legal action is brought by, or on behalf of, Purchaser to enforce or interpret this Agreement, the prevailing party shall be entitled to recover its attorneys' fees and legal costs in connection therewith. 8.11 INFORMATION CONFIDENTIAL. Purchaser acknowledges that the information received by it pursuant hereto is confidential and for Purchaser's use only, and it will refrain from using such information or reproducing, disclosing, or disseminating such information to any other person (other than its employees, affiliates, agents, or partners having a need to know the contents of such information and its attorneys, in each case who agree to be bound by this Section 7.11), except in connection with the exercise of rights under this Agreement, unless such information is available to the public generally or it is required by a governmental body to disclose such information. 8.12 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. The foregoing Agreement is hereby executed as of the date first above written. COCENSYS, INC. WARNER-LAMBERT COMPANY 201 Technology Drive 201 Tabor Road Irvine, CA 92718 Morris Plains, NJ 07950 By: /s/ By: /s/ -------------------------------- ------------------------------------- F. Richard Nichol, Ph.D. Name: Ronald M. Cresswell, Ph.D. President and Chief Title: Vice President and Chairman, Executive Officer Parke-Davis Pharmaceutical Research Division, Warner-Lambert Company 18 EXHIBIT A CERTIFICATE OF DESIGNATION [filed separately] EXHIBIT B SCHEDULE OF EXCEPTIONS 3.9 On October 9, 1997, the Company sold its Pharmaceutical Sales and Marketing Division to Watson Laboratories, Inc., a wholly owned subsidiary of Watson Pharmaceuticals, Inc. The Company received $6 million upon the closing of the transaction, and may receive up to an additional $3 million, contingent upon the occurrence of certain events. EXHIBIT C FORM OF OPINION October __, 1997 Warner-Lambert Company 201 Tabor Road Morris Plains, NJ 07950 RE: SALE AND PURCHASE OF COCENSYS, INC. SERIES D CONVERTIBLE PREFERRED STOCK Gentlemen: We have acted as counsel for CoCensys, Inc., a Delaware corporation (the "Company"), in connection with the issuance and sale of ____________ shares of the Company's Series D Convertible Preferred Stock to Warner-Lambert Company, a Delaware corporation ("Purchaser"), pursuant to the terms of that certain Series D Convertible Preferred Stock Purchase Agreement, dated October __, 1997, by and between the Company and Purchaser (the "Agreement"). The shares of Series D Convertible Preferred Stock issued to Purchaser at the closing (the "Closing") are referred to herein as the "Shares". We are rendering this opinion pursuant to Section [5][6].1(b) of the Agreement. Except as otherwise defined herein, capitalized terms used but not defined herein have the respective meanings given to them in the Agreement. In connection with this opinion, we have examined and relied upon the representations and warranties as to factual matters contained in and made pursuant to the Agreement by the parties thereto and originals or copies certified to our satisfaction, of such records, documents, certificates, opinions, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. Where we render an opinion "to the best of our knowledge" or concerning an item "known to us" or our opinion otherwise refers to our knowledge, it is based solely upon (i) an inquiry of attorneys within this firm who perform legal services for the Company, (ii) receipt of a certificate executed by an officer of the Company covering such matters, and (iii) such other investigation, if any, that we specifically set forth herein. In rendering this opinion, we have assumed: the genuineness and authenticity of all signatures on original documents; the authenticity of all documents submitted to us as originals; the conformity to originals of all documents submitted to us as copies; the accuracy, completeness and authenticity of certificates of public officials; and the due authorization, execution and delivery of all documents where authorization, execution and delivery are prerequisites to the effectiveness of such documents (except the due authorization, execution and delivery of the Agreement by the Company). We have also assumed: that all individuals executing and delivering documents had the legal capacity to so execute and deliver; that you have received all documents you were to receive under the Agreement; that the Agreement is an obligation binding upon you; if you are a corporation or other entity, that you have filed any required California franchise or income tax returns and have paid any required California franchise or income taxes; and that there are no extrinsic agreements or understandings among the parties to the Agreement that would modify or interpret the terms of the Agreement or the respective rights or obligations of the parties thereunder. Our opinion is expressed only with respect to the federal laws of the United States of America and the laws of the State of California and the General Corporation Law of the State of Delaware. We express no opinion as to whether the laws of any particular jurisdiction apply, and no opinion to the extent that the laws of any jurisdiction other than those identified above are applicable to the subject matter hereof. We are not rendering any opinion as to compliance with (a) any antifraud law, rule or regulation relating to securities, or to the sale or issuance thereof or (b) federal antitrust laws. On the basis of the foregoing, in reliance thereon and with the foregoing qualifications, we are of the opinion that: 1. The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Delaware. 2. The Company has the requisite corporate power to own or lease its property and assets and to conduct its business as it is currently being conducted and, to the best of our knowledge, is qualified as a foreign corporation to do business in each jurisdiction in the United States in which the ownership of its property or the conduct of its business requires such qualification and where any statutory fines or penalties or any corporate disability imposed for the failure to qualify would materially or adversely affect the Company, its assets, financial condition or operations. 3. The Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as rights to indemnity under Section 3.5 of the Agreement may be limited by applicable laws and except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. 4. The Shares have been duly authorized and, upon issuance and delivery in accordance with the terms of the Agreement, will be validly issued, fully paid and nonassessable. 5. The issuance and sale of the Shares as contemplated by the Agreement does not violate any provision of the Company's Amended and Restated Certificate of Incorporation or Bylaws and does not violate or contravene (a) any governmental statute, rule or regulation applicable to the Company or (b) any order, writ, judgment, injunction, decree, determination or award which has been entered against the Company and of which we are aware, the violation or contravention of which would materially and adversely affect the Company, its assets, financial condition or operations. 6. All consents, approvals, authorizations, or orders of, and filings, registrations, and qualifications with any regulatory authority or governmental body in the United States required for the issuance and sale of the Shares as contemplated by the Agreement, have been made or obtained. 7. The issuance and sale of the Shares as contemplated by the Agreement is exempt from the registration requirements of the Securities Act of 1933, as amended. This opinion is intended solely for your benefit and is not to be made available to or be relied upon by any other person, firm, or entity without our prior written consent. Very truly yours, COOLEY GODWARD LLP By --------------------------------- EX-10.42 10 EXHIBIT 10.42 CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. AMENDED AND RESTATED LICENSE AGREEMENT THIS AMENDED AND RESTATED LICENSE AGREEMENT (the "AGREEMENT") is made and entered into on December 16, 1997, between THE GENERAL HOSPITAL CORPORATION, a not-for-profit corporation doing business as Massachusetts General Hospital, having a place of business at Fruit Street, Boston, Massachusetts 02114 ("GENERAL") and CoCensys, Inc. , a corporation having offices at 201 Technology Drive, Irvine, California 92618 ("COMPANY") and amends and restates that certain License Agreement between GENERAL and the COMPANY effective December 15, 1996 (the "EFFECTIVE DATE"). WHEREAS, under research programs funded by GENERAL and the U.S. Government, GENERAL through research conducted by Dr. Michael Moskowitz has developed an invention pertaining to a method for treating vascular headaches; WHEREAS, GENERAL has filed a U.S. Patent Application covering said invention and all Dr. Moskowitz's rights, title and interest in said application have been assigned to GENERAL; WHEREAS, GENERAL represents to the best of its knowledge and belief that it is the owner of all rights, title and interest in said patent application and has the right and ability to grant the license hereinafter described; WHEREAS, as a center for research and education, GENERAL is interested in licensing PATENT RIGHTS and thus benefiting the public and the GENERAL by facilitating the dissemination of the results of its research in the form of useful products, but is without capacity to commercially develop, manufacture, and distribute any such product; and WHEREAS, COMPANY having such capacity, desires to commercially develop, manufacture, use and distribute such products throughout the world; NOW THEREFORE, in consideration of the premises and of the faithful performance of the covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS 1.1 The term "ACCOUNTING PERIOD" shall mean each six month period ending June 30 and December 31. 1 1.2 The term "AFFILIATE" shall mean any corporation or other legal entity other than COMPANY in whatever country organized, controlling, controlled by or under common control with COMPANY. The term "control" means possession, direct or indirect, of the powers to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. The term "AFFILIATE" with respect to GENERAL shall mean any company controlling, controlled by, or under common control, directly or indirectly, with GENERAL. 1.3 The term "FIRST COMMERCIAL SALE" shall mean in each country the first sale by COMPANY, its AFFILIATES or SUBLICENSEES of any PRODUCT used or intended for use in the LICENSE FIELD. 1.4 The term "LICENSE FIELD" shall mean treatment of human or animal diseases using NEUROSTEROID PRODUCTS or other PRODUCTS. 1.4A The term "NEUROSTEROID PRODUCT" shall mean a PRODUCT containing a neuroactive steroid acting as a positive modulator of GABAA receptors. 1.4B The term "LICENSED INDICATION" shall mean the treatment of a human or animal disease, disorder, condition or indication using any article, device, composition, method or service, the manufacture, use, or sale of which, absent the licenses granted herein, would infringe a VALID CLAIM of any PATENT RIGHT. 1.5 The term "NET SALES PRICE" shall mean the GROSS SALES PRICE as defined in (c) below received by COMPANY or any of its AFFILIATES or SUBLICENSEES ("SELLERS") for the sale or distribution of any PRODUCT, less (to the extent appropriately documented) the amounts set forth in clause (a) below actually paid out by COMPANY, its AFFILIATE or SUBLICENSEE or credited against the amounts received by them from the sale or distribution of PRODUCT: (a) (i) credits and allowances for price adjustment, rejection, or return of PRODUCTS previously sold; (ii) rebates and cash discounts to purchasers allowed and taken; (iii) amounts for transportation, insurance, handling or shipping charges to purchasers; (iv) taxes, duties and other governmental charges levied on or measured by the sale of PRODUCTS, whether absorbed by COMPANY, its AFFILIATES or SUBLICENSEES or paid by the purchaser so long as COMPANY's, its AFFILIATES' or SUBLICENSEES' price is reduced thereby, but not franchise or income taxes of any kind whatsoever; 2 (b) For any sale by COMPANY, its AFFILIATES or SUBLICENSEES to the United States or its designee, in which the United States government, on the basis of its royalty-free license pursuant to 35 USC Sec. 202(c) to any of the PATENT RIGHTS, requires that the GROSS SALES PRICE be reduced by the amount of royalty owed GENERAL pursuant to paragraph 5.1, COMPANY, its AFFILIATES or SUBLICENSEES shall have the right, in determining NET SALES for purposes of payment of the royalty to GENERAL on such sales to the United States or its designee, to deduct from the invoiced price the amount of such royalty otherwise owed GENERAL as calculated using the deductions set forth in (a) above. (c) For any bone fide sale to a bona fide customer by COMPANY or any of its AFFILIATES or SUBLICENSEES, the GROSS SALES PRICE shall be the invoiced price of the PRODUCT. (d) If COMPANY or any of its AFFILIATES or SUBLICENSEES sell any PRODUCT in a bona fide sale as a component of a combination of active functional elements, the GROSS SALES PRICE of the PRODUCT shall be determined by multiplying the GROSS SALES PRICE of the combination by the fraction A over A + B, in which "A" is the GROSS SALES PRICE of the PRODUCT portion of the combination when sold separately during the ACCOUNTING PERIOD in the country in which the sale was made, and "B" is the gross sales price of the other active elements of the combination sold separately during said ACCOUNTING PERIOD in said country. In the event that no separate sale of either such PRODUCT or active elements of the combination is made during said ACCOUNTING PERIOD in said country, the GROSS SALES PRICE of the PRODUCT shall be determined by multiplying the gross sales price of such combination by the fraction C over C + D, in which "C" is the standard fully-absorbed cost of the PRODUCT portion of such combination, and "D" is the sum of the standard fully-absorbed costs of the other active elements component(s), such costs being arrived at using the standard accounting procedures of COMPANY which will be in accord with generally accepted accounting practices. (e) If a SELLER commercially uses or disposes of any PRODUCT by itself (as opposed to a use or disposition of the PRODUCT as a component of a combination of active functional elements) other than in a bona fide sale to a bona fide customer, the GROSS SALES PRICE hereunder shall be the price which would be then payable in an arm's length transaction. If a SELLER commercially uses or disposes of any PRODUCT as a component of a combination of active functional elements other than in a bona fide sale to a bona fide customer, the GROSS SALES PRICE of the PRODUCT shall be determined in accordance with paragraph (d) above, using as the GROSS SALES PRICE of the combination that price which would be then payable in an arm's length transaction. (f) Transfer of a PRODUCT within COMPANY or between COMPANY and an AFFILIATE or a PARTNERING SUBLICENSEE for sale by the transferee shall not be considered a sale, commercial use or disposition for the purpose of the foregoing paragraphs; in the case of such transfer the GROSS SALES PRICE shall be based on sale of the PRODUCT by the transferee. 3 1.5A The term "ANNUAL NET SALES" shall mean, for any PRODUCT, the sum of the NET SALES PRICE of all units of said PRODUCT sold in any calendar year ending December 31. 1.6 The term "PATENT RIGHT" shall mean the U.S. Patent Application Serial Number [*] by Dr. Moskowitz entitled "Method for Treating Vascular Headaches", or the equivalent of such application, including any division, continuation or any equivalent foreign patent application or Letters Patent or the equivalent thereof issuing thereon or reissue, reexamination or extension thereof. PATENT RIGHTS shall also include those claims in any continuation-in-part of the aforementioned patent application which claim an invention described or claimed in said patent application. 1.7 The term "PRODUCT" shall mean any article, device, composition, method or service, the manufacture, use, or sale of which, absent the licenses granted herein, would infringe a VALID CLAIM of any PATENT RIGHT. 1.8 The term "SUBLICENSEE" shall mean any non-AFFILIATE third party licensed by COMPANY or by an AFFILIATE to make, have made, use, sell, offer for sale or import any PRODUCT. 1.8A The term "PARTNERING SUBLICENSEE" shall mean any SUBLICENSEE with whom COMPANY has entered into a strategic partnership or other arrangement in which COMPANY and said SUBLICENSEE agree that PRODUCTS will be developed and/or sold by Co-development, wherein the term "Co-development" shall mean the sharing of research, development, marketing and/or manufacturing costs by COMPANY and a SUBLICENSEE in accordance with a predefined formula. 1.9 The term "VALID CLAIM" shall mean any claim of any PATENT RIGHT that has not been (i) finally rejected or (ii) declared invalid by a patent office or court of competent jurisdiction in any unappealed and unappealable decision. 2. LICENSE 2.1 GENERAL hereby grants COMPANY, to the extent not prohibited by existing contractual obligations to any other sponsor of research at GENERAL: (a) an exclusive, worldwide, royalty-bearing license in the LICENSE FIELD under GENERAL's rights in PATENT RIGHTS to make, have made, use, sell, offer for sale, and import PRODUCTS; 4 * Confidential treatment requested (b) to the extent an exclusive license is not available to COMPANY in a country, a non-exclusive, royalty-bearing license in the LICENSE FIELD under PATENT RIGHTS to make, have made, use, sell, offer for sale, and import PRODUCTS; (c) the right to sublicense PATENT RIGHTS exclusively licensed to COMPANY, provided that, if COMPANY's exclusive license in a country is converted to a nonexclusive license in accordance with paragraph 2.1(b), and COMPANY has a single PARTNERING SUBLICENSEE in said country, COMPANY shall retain the right to sublicense PATENT RIGHTS solely to said PARTNERING SUBLICENSEE in said country. All licenses pursuant to this paragraph 2.1 are subject to the rights, conditions and limitations imposed by U.S. law with respect to inventions made in the performance of federally funded research. The above licenses to sell PRODUCTS include the right to grant to the purchaser of products from COMPANY, its AFFILIATES, and SUBLICENSEES the right to use such purchased PRODUCTS in a method coming within the scope of the PATENT RIGHTS. 2.2 The granting of any license hereunder is subject to GENERAL's and GENERAL's AFFILIATES' right to make and to use the subject matter described and claimed in PATENT RIGHT for research and clinical purposes but not for Commercial Purposes, as hereinafter defined. For this paragraph, "Commercial Purposes" shall mean use of the subject matter described and claimed in PATENT RIGHT in any product, or for the purpose of producing a product, which is sold or otherwise commercially distributed. 2.3 It is understood that nothing herein shall be construed to grant COMPANY a license express or implied under any patent owned solely or jointly by GENERAL other than the PATENT RIGHTS expressly licensed hereunder. 3. DUE DILIGENCE OBLIGATIONS 3.1 COMPANY shall itself, or through its AFFILIATES or SUBLICENSEES, use its commercially reasonable efforts to develop and make commercially available PRODUCTS for commercial sales and distribution throughout the world in the LICENSE FIELD. Such efforts shall consist of achieving the following objectives within the time period designated below following the EFFECTIVE DATE: (a) GENERAL acknowledges that COMPANY represents that it is developing the drug ganaxolone for indications other than migraine headaches, and COMPANY therefore agrees that it will commence a Phase II clinical trial of a PRODUCT comprising ganaxolone ("GANAXOLONE PRODUCT") for a LICENSED INDICATION within twelve (12) months, and that it will thereafter diligently pursue clinical evaluations of a GANAXOLONE PRODUCT for a LICENSED INDICATION as long as a GANAXOLONE PRODUCT continues to show 5 * Confidential treatment requested clinical efficacy in accordance with commercially reasonable criteria for a LICENSED INDICATION; (b) within [*] of terminating diligent development of a GANAXOLONE PRODUCT for a LICENSED INDICATION in accordance with (a) above, complete all animal toxicity tests required in connection with securing U.S. Food and Drug Administration approval of clinical evaluations of a PRODUCT not comprising ganaxolone ("SECOND GENERATION PRODUCT"); (c) within [*] of completing the toxicity tests in accordance with (b) above; COMPANY and GENERAL shall meet to establish additional time-limited objectives for the development of a SECOND GENERATION PRODUCT. By way of example, such objectives shall include requirements for the following activities: (i) the initiation and diligent pursuit of clinical evaluations of a SECOND GENERATION PRODUCT under the Food, Drug and Cosmetic Act (21 USC 301-391); (ii) the filing of a New Drug Application or equivalent application for a SECOND GENERATION PRODUCT; (iii) the determination whether to manufacture a SECOND GENERATION PRODUCT for commercial sale; (iv) the introduction into the market of a SECOND GENERATION PRODUCT, in the United States and other major markets covered by the license; provided, however, that GENERAL shall not unreasonably withhold its consent to any revision in such time periods whenever requested in writing by COMPANY and supported by evidence of technical difficulties or delays in clinical studies or regulatory processes that the parties could not have reasonably avoided. Failure to achieve one or more of the above objectives within the above stated time periods or any of the objectives established in accordance with (c) above, or within any extension granted by GENERAL shall result in GENERAL having the right to cancel upon sixty (60) days notice any exclusive license granted hereunder or convert any exclusive license to a non-exclusive license. 3.2 At intervals no longer than every twelve (12) months, COMPANY shall report in writing to GENERAL on progress made toward the foregoing objectives. 4. FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHT 4.1 GENERAL shall be responsible for the preparation, filing, prosecution and maintenance of all patent applications and patents included in PATENT RIGHTS. As long as 6 * Confidential treatment requested COMPANY retains an exclusive license to PATENT RIGHTS, COMPANY shall reimburse GENERAL for all reasonable costs ("COSTS") incurred by GENERAL for the preparation, filing, prosecution and maintenance of all PATENT RIGHTS as follows: (a) Subject to paragraph 4.2, for all COSTS incurred by GENERAL from and after the EFFECTIVE DATE, COMPANY shall reimburse GENERAL within thirty (30) days of receipt of invoices from GENERAL; (b) For all COSTS incurred by GENERAL prior to the EFFECTIVE DATE, COMPANY shall reimburse GENERAL upon execution of this Agreement. In the event COMPANY's exclusive license is converted to a non-exclusive license in any country in accordance with paragraph 3.1, or an exclusive license is not available in any country as set forth in paragraph 2.1(b), and GENERAL grants a license in any such country under PATENT RIGHTS to one or more third parties (each a "THIRD PARTY LICENSEE"), COMPANY shall only be required to reimburse GENERAL for the CoCensys Pro Rata Percentage of those COSTS incurred by GENERAL with respect to PATENT RIGHTS in any country included in a license to a THIRD PARTY LICENSEE after the effective date of such license to a THIRD PARTY LICENSEE. The "COCENSYS PRO RATA PERCENTAGE" at any given point in time shall equal 1 divided by the number of licensees (i.e., COMPANY plus each THIRD PARTY LICENSEE) under the PATENT RIGHTS at such point in time. 4.2 With respect to any PATENT RIGHT, each document or a draft thereof pertaining to the filing, prosecution, or maintenance of such PATENT RIGHT, including but not limited to each patent application, office action, response to office action, request for terminal disclaimer, and request for reissue or reexamination of any patent issuing from such application shall be provided to COMPANY as follows. Documents received from any patent office or counsel's analysis thereof shall be provided promptly after receipt. For a document to be filed in any patent office, a draft of such document shall be provided sufficiently prior to its filing, to allow for review and comment by the other party. If as a result of the review of any such document, COMPANY shall elect not to pay or continue to pay the COSTS for such PATENT RIGHT, COMPANY shall so notify GENERAL within thirty (30) days of COMPANY's receipt of such document and COMPANY shall thereafter be relieved of the obligation to pay any additional COSTS regarding such PATENT RIGHT incurred after the receipt of such notice by GENERAL. Such U.S. or foreign patent application or patent shall thereupon cease to be a PATENT RIGHT hereunder and GENERAL shall be free to license its rights to that particular U.S. or foreign patent application or patent to any other party on any terms. 5. ROYALTIES 5.1 Beginning with the FIRST COMMERCIAL SALE in any country, on all sales of PRODUCTS to treat LICENSED INDICATIONS anywhere in the world by COMPANY, its 7 * Confidential treatment requested AFFILIATES or SUBLICENSEES, COMPANY shall pay GENERAL royalties in accordance with the following schedule, such undertaking and schedule having been agreed to for the purpose of reflecting and advancing the mutual convenience of the parties. (a) For each NEUROSTEROID PRODUCT sold by COMPANY or its AFFILIATES and SUBLICENSEES, [*] of the NET SALES PRICE for ANNUAL NET SALES of such NEUROSTEROID PRODUCT of [*] or less, and [*] of the NET SALES PRICE for the portion of ANNUAL NET SALES of such NEUROSTEROID PRODUCT that is greater than [*] so long as the NEUROSTEROID PRODUCT, its manufacture, use or sale is covered by a VALID CLAIM of any PATENT RIGHT licensed exclusively to COMPANY; and (b) For each NEUROSTEROID PRODUCT sold by COMPANY or its AFFILIATES and SUBLICENSEES, [*] of the NET SALES PRICE for ANNUAL NET SALES of such NEUROSTEROID PRODUCT of [*] or less, and [*] of the NET SALES PRICE for the portion of ANNUAL NET SALES of such NEUROSTEROID PRODUCT that is greater than [*] whenever the NEUROSTEROID PRODUCT, its manufacture, use or sale is covered by a VALID CLAIM of any PATENT RIGHT licensed non-exclusively to COMPANY in the country in question pursuant to either paragraph 2.1(b) or 3.1 hereunder; and (c) For each PRODUCT other than a NEUROSTEROID PRODUCT sold by COMPANY or its AFFILIATES, [*] of the NET SALES PRICE for ANNUAL NET SALES of such PRODUCT of [*] or less, and [*] of the NET SALES PRICE for the portion of ANNUAL NET SALES of such PRODUCT that is greater than [*] so long as such PRODUCT, its manufacture, use or sale is covered by a VALID CLAIM of any PATENT RIGHT licensed exclusively to COMPANY; and (d) For each PRODUCT other than a NEUROSTEROID PRODUCT sold by COMPANY or its AFFILIATES, [*] of the NET SALES PRICE for ANNUAL NET SALES of such PRODUCT of [*] or less, and [*] of the NET SALES PRICE for the portion of ANNUAL NET SALES of such PRODUCT that is greater than [*] whenever such PRODUCT, its manufacture, use or sale is covered by a VALID CLAIM of any PATENT RIGHT licensed non-exclusively to COMPANY in the country in question pursuant to either paragraph 2.1 (b) or 3.1 hereunder; and (e) For each PRODUCT other than a NEUROSTEROID PRODUCT sold by COMPANY's SUBLICENSEES, COMPANY shall retain [*] and pay GENERAL [*] of any royalty payment received by COMPANY from SUBLICENCEES for such sales. 5.2 (a) In the event that more than one royalty rate under paragraph 5.1 is applicable to a PRODUCT, the highest of the applicable royalties shall apply. 8 * Confidential treatment requested (b) Only one royalty under paragraph 5.1 shall be due and payable to GENERAL by COMPANY for any PRODUCT regardless of the number of PATENT RIGHTS covering such PRODUCT. 5.3 If any license granted pursuant to Article 2 shall be or become non-exclusive pursuant to either paragraph 2.1(b) or 3.1 hereunder and GENERAL shall license any PATENT RIGHT to another licensee for the purpose of making, using or selling PRODUCTS in the LICENSE FIELD and accept a royalty or royalties more favorable to such licensee than herein provided for COMPANY, GENERAL shall give written notice thereof to COMPANY and as of the effective date of such more favorable royalty or royalties, COMPANY's obligation hereunder to pay royalty or royalties to GENERAL shall be revised to the more favorable rate. 5.4 In addition to the royalties provided for above for NEUROSTEROID PRODUCTS, COMPANY shall pay GENERAL [*] of any and all non-royalty income received from its AFFILIATES and SUBLICENSEES in consideration for the sublicensing of any right or license granted to COMPANY for NEUROSTEROID PRODUCTS hereunder, including without limitation license fees and milestone payments, but not including amounts received by COMPANY (a) for capital stock of COMPANY, (b) in the form of a loan or advance, (c) as payment for research and development services performed or to be performed by COMPANY, (d) as milestone payments in consideration for past or future research and development expense in any sublicensing arrangement with a PARTNERING SUBLICENSEE wherein COMPANY is sharing research and development costs with the PARTNERING SUBLICENSEE and said milestone payments are solely reimbursements for COMPANY's research and development costs actually incurred, (e) as payment for manufacturing services in any sublicensing arrangement wherein COMPANY retains the right to manufacture PRODUCT which is then sold to a SUBLICENSEE provided that GENERAL receives the full royalty due for sales of PRODUCT by said SUBLICENSEE under paragraph 5.1 hereunder or (f) from a PARTNERING SUBLICENSEE as payment for marketing, sales or promotional activities which COMPANY or its AFFILIATE has agreed to undertake as part of Co-development. It is understood that this paragraph shall not apply to running royalties for PRODUCT sales received by COMPANY from its AFFILIATES AND SUBLICENSEES, provided GENERAL receives the royalties specified in paragraph 5.1 for such PRODUCT sales. 5.5 In addition to the payments provided for in paragraphs 5.1 and 5.4, COMPANY shall pay GENERAL the following amounts upon the first occurrence of each of the following events: [*] within five (5) business days of the EFFECTIVE DATE (and the parties acknowledge that the COMPANY has made and GENERAL has received such payment), which shall include the amount payable to GENERAL for past patent COSTS pursuant to paragraph 4.1(b); 9 * Confidential treatment requested [*] within thirty (30) days of the filing with the FDA of the first NDA, PMA or PMA Supplement, or comparable application with respect to the first PRODUCT to treat a LICENSED INDICATION for which such application is filed; and, [*] within thirty (30) days of the actual approval by the FDA of the first NDA, PMA or PMA Supplement, or comparable application with respect to the first PRODUCT to treat a LICENSED INDICATION so approved by the FDA. 5.6 In addition to the royalties and other payments provided for above, for each PRODUCT other than a NEUROSTEROID PRODUCT, COMPANY shall pay GENERAL [*] of any and all non-royalty income received from its AFFILIATES and SUBLICENSEES in consideration for the sublicensing of any right or license granted to COMPANY for PRODUCTS other than NEUROSTEROID PRODUCTS hereunder, but subject to the same exceptions and limitations described in paragraph 5.4. 5.7 (a) In the event that more than one non-royalty income rate under paragraph 5.4 or 5.6 is applicable to a PRODUCT or a collaboration agreement involving a third party, the highest of the applicable rates shall apply. (b) Only one non-royalty income rate under either paragraph 5.4 or 5.6 shall be due and payable to GENERAL by COMPANY for any PRODUCT or collaboration agreement involving a third party, regardless of the number of PATENT RIGHTS covering such PRODUCT(s) or collaboration agreement. 5.8 (a) In the event that the royalty paid to GENERAL is a significant factor in the return realized by COMPANY so as to diminish COMPANY's capability to respond to competitive pressures in the market, GENERAL agrees to consider a reasonable reduction in the royalty paid to GENERAL as to each such PRODUCT for the period during which such market condition exists. Factors determining the size of the reduction will include profit margin on PRODUCT and on analogous products, prices of competitive products, total prior sales by COMPANY, and COMPANY's expenditures in PRODUCT development. (b) With respect to the definition of "NET SALES PRICE" (as contained in Section 1.5) and the applicable rate of exchange for foreign currency conversion (as set forth in Section 6.2) under this Agreement, it is understood that COMPANY may enter into one or more agreements with SUBLICENSEES (each a "SUBLICENSE AGREEMENT") pursuant to which COMPANY will be compensated by a SUBLICENSEE based on net sales of PRODUCT and that, for sales outside the United States, a foreign exchange rate will be applied. When negotiating a SUBLICENSE AGREEMENT, COMPANY will use its best efforts to have such SUBLICENSE AGREEMENT contain (i) a definition of net sales of PRODUCT and (ii) foreign exchange provisions which are substantially equivalent to those contained in Sections 1.5 and 10 * Confidential treatment requested 6.2, respectively, of this Agreement. In the event, however, that COMPANY is unable to have its prospective SUBLICENSEE agree to provisions that are identical to the provisions of this Agreement, it shall so notify GENERAL and submit for GENERAL's review the proposed versions of such provisions in the proposed SUBLICENSE AGREEMENT. Within thirty (30) days of its receipt of such notice and proposed revisions, GENERAL shall either notify COMPANY of its acceptance of such proposed provisions or indicate its reasons for withholding approval. If the SUBLICENSE AGREEMENT includes such provisions that are acceptable to GENERAL, which acceptance shall not unreasonably be withheld, then for sales of PRODUCT made under such SUBLICENSE AGREEMENT, (i) the "NET SALES PRICE" in this Agreement shall be deemed amended to conform to the definition of net sales of PRODUCT contained in such SUBLICENSE AGREEMENT and (ii) the applicable foreign exchange rates provided for under this Agreement shall be the same as those provided for under the SUBLICENSE AGREEMENT. In the event that the SUBLICENSE AGREEMENT includes provisions that are not acceptable to GENERAL and COMPANY is unable to compensate GENERAL based on the NET SALES PRICE and foreign exchange provisions set forth herein, any conflict between the provisions of the SUBLICENSE AGREEMENT and the provisions of this Agreement shall be settled by the procedures of paragraph 10.9. 5.9 The payments due under this Agreement shall, if overdue, bear interest until payment at a per annum rate equal to one percent (1%) above the prime rate in effect at the Bank of Boston on the due date, not to exceed the maximum permitted by law. The payment of such interest shall not preclude GENERAL from exercising any other rights it may have as a consequence of the lateness of any payment. 6. REPORTS AND PAYMENTS 6.1 COMPANY shall keep, and shall cause each of its AFFILIATES and SUBLICENSEES, if any, to keep full and accurate books of accounts containing all particulars that may be necessary for the purpose of calculating all royalties payable to GENERAL. Such books of account shall be kept at their principal place of business and, with all necessary supporting data shall, during all reasonable times for the three (3) years next following the end of the calendar year to which each shall pertain, be open for inspection at reasonable times by GENERAL or its designee at GENERAL's expense for the purpose of verifying royalty statements or compliance with this Agreement. 6.2 In each year the amount of royalty due shall be calculated semiannually as of the end of each ACCOUNTING PERIOD and shall be paid semiannually within the sixty (60) days next following such date, every such payment to be supported by the accounting prescribed in paragraph 6.3 and to be made in United States currency. Whenever conversion from any foreign currency shall be required, such conversion shall be at the rate of exchange thereafter published in the Wall Street Journal for the business day closest to the end of the applicable ACCOUNTING PERIOD. 11 6.3 With each semiannual payment, COMPANY shall deliver to GENERAL a full and accurate accounting to include at least the following information: (a) Quantity of each PRODUCT(subdivided into (i) NEUROSTEROID PRODUCT and (ii) PRODUCT other than NEUROSTEROID PRODUCT) sold or leased (by country) by COMPANY, and its AFFILIATES or SUBLICENSEES; (b) Total billings for each PRODUCT (subdivided into (i) NEUROSTEROID PRODUCT and (ii) PRODUCT other than NEUROSTEROID PRODUCT)(by country, unless such information is not provided to COMPANY by a SUBLICENSEE, in which case COMPANY shall list total billings in as much detail as is available to COMPANY); (c) Quantities of each PRODUCT (subdivided into (i) NEUROSTEROID PRODUCT and (ii) PRODUCT other than NEUROSTEROID PRODUCT) used by COMPANY and its AFFILIATES or SUBLICENSEES; (d) Names and addresses of all SUBLICENSEES of COMPANY; and (e) Total royalties payable to GENERAL. 7. INFRINGEMENT 7.1 GENERAL will protect its PATENT RIGHTS from infringement and prosecute infringers when, in its sole judgement, such action may be reasonably necessary, proper and justified. 7.2 If COMPANY shall have supplied GENERAL with written evidence demonstrating to GENERAL's reasonable satisfaction prima facie infringement of a claim of a PATENT RIGHT by a third party, COMPANY may by notice request GENERAL to take steps to protect the PATENT RIGHT. GENERAL shall notify COMPANY within three (3) months of the receipt of such notice whether GENERAL intends to prosecute the alleged infringement. If GENERAL notifies COMPANY that it intends to so prosecute, GENERAL shall, within three (three) months of its notice to COMPANY either (i) cause infringement to terminate or (ii) initiate legal proceedings against the infringer. In the event GENERAL notifies COMPANY that GENERAL does not intend to prosecute said infringement COMPANY may, upon notice to GENERAL, initiate legal proceedings against the infringer at COMPANY's expense and in GENERAL's name if so required by law. No settlement, consent judgment or other voluntary final disposition of the suit which invalidates or restricts the claims of such PATENT RIGHTS may be entered into without the consent of GENERAL, which consent shall not be unreasonably withheld. COMPANY shall indemnify GENERAL against any order for payment that may be made against GENERAL in such proceedings. 12 7.3 In the event one party shall initiate or carry on legal proceedings to enforce any PATENT RIGHT against any alleged infringer, the other party shall fully cooperate with and supply all assistance reasonably requested by the party initiating or carrying on such proceedings. The party which institutes any suit to protect or enforce a PATENT RIGHT shall have sole control of that suit and shall bear the reasonable expenses (excluding legal fees) incurred by said other party in providing such assistance and cooperation as is requested pursuant to this paragraph. The party initiating or carrying on such legal proceedings shall keep the other party informed of the progress of such proceedings and said other party shall be entitled to counsel in such proceedings but at its own expense. Any award paid by third parties as the result of such proceedings (whether by way of settlement or otherwise) shall first be applied to reimbursement of the unreimbursed legal fees and expenses incurred by either party and then the remainder shall be divided between the parties as follows: (a) (i) If the amount is based on lost profits, COMPANY shall receive an amount equal to the damages the court determines COMPANY has suffered as a result of the infringement less the amount of any royalties that would have been due GENERAL on sales of PRODUCT lost by COMPANY as a result of the infringement had COMPANY made such sales; and (ii) GENERAL shall receive an amount equal to the royalties it would have received if such sales had been made by COMPANY; or (b) As to awards other than those based on lost profits, [*] to the party initiating such proceedings and [*] to the other party. 7.4 For the purpose of the proceedings referred to in this Article 7, the GENERAL and COMPANY shall permit the use of their names and shall execute such documents and carry out such other acts as may be necessary. The party initiating or carrying on such legal proceedings shall keep the other party informed of the progress of such proceedings and said other party shall be entitled to counsel in such proceedings but at its own expense, said expenses to be off-set against any damages received by the party bringing suit in accordance with the foregoing paragraph 7.3. 8. INDEMNIFICATION 8.1 (a) COMPANY shall indemnify, defend and hold harmless GENERAL and its trustees, officers, medical and professional staff, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss or expense (including reasonable attorney's fees and expenses of litigation) incurred by or imposed upon the Indemnitees or any one of them in connection with any claims, suits, actions, demands or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning any product, process or service made, used or sold pursuant to any right or license granted under this Agreement. 13 * Confidential treatment requested (b) COMPANY's indemnification under (a) above shall not apply to any liability, damage, loss or expense to the extent that it is directly attributable to the negligent activities, reckless misconduct or intentional misconduct of the Indemnitees. (c) COMPANY agrees, at its own expense to provide attorneys reasonably acceptable to the GENERAL to defend against any actions brought or filed against any party indemnified hereunder with respect to the subject of indemnity contained herein, whether or not such actions are rightfully brought. (d) This paragraph 8.1 shall survive expiration or termination of this Agreement. 8.2 (a) Beginning at such time as any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by COMPANY or by a SUBLICENSEE, AFFILIATE or agent of COMPANY, COMPANY shall, at its sole cost and expense, procure and maintain commercial general liability insurance in amounts not less than $2,000,000 per incident and $2,000,000 annual aggregate and naming the Indemnitees as additional insureds. Such commercial general liability insurance shall provide (i) product liability coverage and (ii) broad form contractual liability coverage for COMPANY's indemnification under paragraph 8.1 of this Agreement. If COMPANY elects to self-insure all or part of the limits described above (including deductibles or retentions which are in excess of $250,000 annual aggregate) such self-insurance program must be acceptable to the GENERAL and the Risk Management Foundation (GENERAL's current liability insurance carrier). The minimum amounts of insurance coverage required under this paragraph 8.2 shall not be construed to create a limit of COMPANY's liability with respect to its indemnification under paragraph 8.1 of this Agreement. (b) COMPANY shall provide GENERAL with written evidence of such insurance upon request of GENERAL. COMPANY shall provide GENERAL with written notice at least thirty (30) days prior to the cancellation, non-renewal or material change in such insurance; if COMPANY does not obtain replacement insurance providing comparable coverage prior to the expiration of such thirty (30) day period, GENERAL shall have the right to terminate this Agreement effective at the end of such thirty (30) day period without notice or any additional waiting periods. (c) COMPANY shall maintain such commercial general liability insurance beyond the expiration or termination of this Agreement during (i) the period that any such product, process, or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by COMPANY or by a licensee, affiliate or agent of COMPANY and (ii) a reasonable period after the period referred to in (c) (i) above which in no event shall be less than ten (10) years. (d) This paragraph 8.2 shall survive expiration or termination of this Agreement. 14 8.3 OTHER THAN WARRANTIES SET FORTH HEREIN, GENERAL MAKES NO WARRANTY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO ANY PATENT, TRADEMARK, SOFTWARE, TRADE SECRET, TANGIBLE RESEARCH PROPERTY, INFORMATION OR DATA LICENSED OR OTHERWISE PROVIDED TO COMPANY HEREUNDER AND HEREBY DISCLAIMS THE SAME. 9. TERMINATION 9.1 Unless otherwise terminated as provided for in this Agreement, the license to PATENT RIGHT granted hereunder will continue on a country by country basis: (i) for two (2) years after the date COMPANY, its AFFILIATES, or SUBLICENSEES shall last sell any PRODUCT in such country, it being understood that GENERAL shall have the right to terminate such license upon written notice in any country in the event that after the FIRST COMMERCIAL SALE of PRODUCT in such country there is a continuous two (2) year period in which no PRODUCT is sold in such country, provided such sale is not prevented by force majeure, government regulation or intervention, or institution of a law suit by any third party, or (ii) until the last to expire of any PATENT RIGHT, the claims of which but for this Agreement would be infringed by the manufacture, use or sale of any PRODUCT in the applicable country, whichever shall first occur. 9.2 If either party shall fail to faithfully perform any of its material obligations under this Agreement except the due diligence milestones specified in Article 3 herein, the nondefaulting party may give written notice of the default to the defaulting party. Unless such default is corrected within sixty (60) days after such notice, the notifying party may terminate this Agreement and the license hereunder upon sixty (60)days prior written notice, provided that only one such sixty (60)day grace period shall be available in any twelve (12) month period with respect to a default of any particular provision hereunder. Thereafter notice of default of said provision shall constitute termination. 9.3 In the event that any license granted to COMPANY under this Agreement is terminated, any sublicense under such license granted prior to termination of said license shall remain in full force and effect, provided that: (i) the SUBLICENSEE is not then in breach of its sublicense agreement; 15 (ii) the SUBLICENSEE agrees to be bound to GENERAL as the licensor under the terms and conditions of this sublicense agreement, as modified by the provisions of this paragraph 9.3; (iii) the SUBLICENSEE, at GENERAL's written request, assumes in a signed writing the same obligations to GENERAL as those assumed by COMPANY under Articles 8 and 10 hereof; (iv) GENERAL shall have the right to receive any payments payable to COMPANY under such sublicense agreement to the extent they are reasonably and equitably attributable to such SUBLICENSEE's right under such sublicense to use and exploit PATENT RIGHTS; (v) the SUBLICENSEE agrees to be bound by the due diligence obligations of COMPANY pursuant to paragraph 3.1 hereof (whether set by the parties or by arbitration) in the field and territory of the sublicense; (vi) GENERAL has the right to terminate such sublicense upon thirty (30)days prior written notice to COMPANY and such SUBLICENSEE in the event of any material breach of the obligation to make the payments described in clause (iv) of this paragraph 9.3, unless such breach is cured prior to the expiration of such thirty (30) day period, and shall further have the right to terminate such sublicense in the event of SUBLICENSEE's failure to meet its due diligence obligations pursuant to clause (v) hereof; (vii) GENERAL shall not assume, and shall not be responsible to such SUBLICENSEE for, any representations, warranties or obligations of COMPANY to such SUBLICENSEE, other than to permit such SUBLICENSEE to exercise any rights to PATENT RIGHTS that are granted under such sublicense agreement consistent with the terms of this AGREEMENT. 9.4 Upon termination of any license granted hereunder COMPANY shall pay GENERAL all royalties due or accrued on (i) the sale of PRODUCT up to and including the date of termination and (ii) for twelve (12) months following the date of termination, the sale of PRODUCT manufactured prior to the termination date. 10. MISCELLANEOUS 10.1 This Amended and Restated Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof, and supersedes and replaces all prior agreements, understandings, writings, and discussions between the parties relating to said subject matter, specifically including that certain License Agreement between GENERAL and the COMPANY effective December 15, 1996. 16 10.2 In order to facilitate implementation of this Agreement, GENERAL and COMPANY are designating the following individuals to act on their behalf with respect to this Agreement for the matter indicated below: (a) with respect to all royalty payments, any correspondence pertaining to any PATENT RIGHT, or any notice of the use of GENERAL's name, for GENERAL, the Director, Office of Technology Affairs, and for COMPANY the President and CEO; provided that correspondence relating to the billing of patent costs shall be copied to, for GENERAL, the Business Manager, Office of Technology Affairs; and for COMPANY, the Chief Financial Officer. (b) any amendment of or waiver under this Agreement, any written notice including progress reports or other communication pertaining to the Agreement: for GENERAL, the Director, Office of Technology Affairs; and for COMPANY, the President and CEO. (c) the above designations may be superseded from time to time by alternative designations made by: for GENERAL, the President or the Senior Vice President for Research and Technology Affairs; and for COMPANY, the President and CEO. 10.3 This Agreement may be amended and any of its terms or conditions may be waived only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect its rights at a later time to enforce the same. No waiver by either party of any condition shall be deemed as a further or continuing waiver of such condition or term or of any other condition or term. 10.4 This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. 10.5 Any delays in or failures of performance by either party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to: Acts of God; acts, regulations or laws of any government; strikes or their concerted acts of worker; fires; floods; explosions; riots; wars; rebellion; and sabotage. Any time for performance hereunder shall be extended by the actual time of delay caused by such occurrence. 10.6 Neither party shall use the name of the other party or of any staff member, officer, employee or student of the other party or any adaptation thereof in any advertising, promotional or sales literature, publicity or in any document employed to obtain funds or financing without the prior written approval of the party or individual whose name is to be used. For GENERAL, such approval shall be obtained from the Director of Public Affairs. Notwithstanding the foregoing, GENERAL hereby consents to COMPANY's use of the following statement regarding the existence of this license agreement in connection with any disclosure or filing by COMPANY 17 pursuant to the rules and regulations of the Securities and Exchange Commission or in any press release required by the same: "CoCensys, Inc. has entered into an exclusive license agreement with The General Hospital Corporation, doing business as Massachusetts General Hospital, for certain patents and patent applications pertaining to the use of neurosteroid drugs and other GABA modulators in the treatment of vascular headaches" In addition, COMPANY shall be permitted to disclose the name of GENERAL to the extent required by federal, state or local law or regulation, including without limitation federal and state securities laws. 10.7 This Agreement shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Massachusetts. 10.8 This Agreement shall not be assignable by GENERAL without COMPANY's written consent except for the right to receive royalties or other payments payable herein. COMPANY may at its own discretion and without approval by GENERAL transfer its interest or any part thereof under this Agreement to a wholly-owned subsidiary or any assignee or purchaser of the portion of its business associated with the manufacture and sale of PRODUCT. In the event of any such transfer, the transferee shall assume and be bound by the provisions of this Agreement. Otherwise this Agreement shall be assignable by COMPANY only with the consent in writing of GENERAL. 10.9 For any and all claims, disputes, or controversies arising under, out of, or in connection with this Agreement, except issues relating to the validity, construction or effect of any PATENT RIGHT, which the parties shall be unable to resolve within sixty (60) days, the party raising such dispute shall promptly advise the other party of such claim, dispute, or controversy in a writing which describes in reasonable detail the nature of such dispute. By not later than five (5) business days after the recipient has received such notice of dispute, each party shall have selected for itself a representative who shall have the authority to bind such party and shall additionally have advised the other party in writing of the name and title of such representative. By not later than ten (10) business days after the date of such notice of dispute, such representatives shall agree upon a third party which is in the business of providing Alternative Dispute Resolution (ADR) services (hereinafter, "ADR Provider") and shall schedule a date with such ADR Provider to engage in ADR. Thereafter, the representatives of the parties shall engage in good faith in an ADR process under the auspices of the selected ADR Provider. If within the aforesaid thirty (30) business days after the date of the notice of dispute the representatives of the parties have not been able to agree upon an ADR Provider and schedule a date to engage in ADR, or if they have not been able to resolve the dispute within thirty (30) business days after the termination of ADR, the parties shall have the right to pursue any other remedies legally available to resolve such dispute. Notwithstanding the foregoing, nothing in this 18 Paragraph 10.9 shall be construed to waive any rights or timely performance of any obligations existing under this Agreement. 10.10 If any provision(s) of this Agreement are or become invalid, are ruled illegal by any court of competent jurisdiction or are deemed unenforceable under then current applicable law from time to time in effect during the term hereof, it is the intention of the parties that the remainder of this agreement shall not be effected thereby. It is further the intention of the parties that in lieu of each such provision which is invalid, illegal or unenforceable, there be substituted or added as part of this Agreement a provision which shall be as similar as possible in economic and business objectives as intended by the parties to such invalid, illegal or enforceable provision, but shall be valid, legal and enforceable. 10.11 GENERAL represents that, to the best of its knowledge, it is the owner of all rights, title and interest in PATENT RIGHTS, and it has no obligations to other sponsors of research at GENERAL that would prevent GENERAL from granting COMPANY the licenses granted hereunder. 19 THE PARTIES have duly executed this Agreement as of the date first shown above written. COMPANY THE GENERAL HOSPITAL CORPORATION BY: /s/ F. Richard Nichol, Ph.D. BY: /s/ David J. Glass ------------------------------- ---------------------------------- TITLE: President and CEO TITLE: Associate Director for Patents, --------------------------- Office of Technology Affairs DATE: December 16, 1997 DATE: December 15, 1997 ---------------------------- ------------------------------- 20 EX-23.1 11 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Forms S-3 No. 33-83050 and 33-97136) of CoCensys, Inc. and in the related Prospectuses; and in the Registration Statements (Forms S-8 Nos. 33-97260, 33-97528, 333-07855, 333-21761 and 333-31013) of CoCensys, Inc., of our report dated February 6, 1998, with respect to the financial statements of CoCensys, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Orange County, California March 20, 1998 EX-27.1 12 EXHIBIT 27.1
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,410 9,050 414 0 0 13,358 6,360 3,537 16,916 4,984 567 0 13,000 97,230 (98,983) 16,916 0 11,914 0 0 0 0 78 (15,821) 0 (15,821) 0 0 0 (15,821) (0.70) (0.70)
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