-----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, N9Q5q4/Bf8p1yFRWGyPz2SMDS7NJIqcVP7byDq17OG2nZH1+QjvpdqCQvHNaSRoM l37klVc0g22sQLXiN3nehQ== 0001047469-98-020572.txt : 19980518 0001047469-98-020572.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020572 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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-Q SEC ACT: SEC FILE NUMBER: 000-20954 FILM NUMBER: 98623319 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from -------- to -------- Commission File Number 0-20954 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 OFFICES, INCLUDING ZIP CODE) (949) 753-6100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $.001 PAR VALUE 22,972,700 (CLASS OF COMMON STOCK) (OUTSTANDING AT MAY 8, 1998) COCENSYS, INC. TABLE OF CONTENTS PAGE NUMBER PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Balance Sheets as of March 31, 1998 and December 31, 1997 3 Condensed Statements of Operations for the three-month periods ended March 31, 1998 and 1997 and the period from inception (February 15, 1989) through March 31, 1998 4 Condensed Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1997 and the period from inception (February 15, 1989) through March 31, 1998 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 11 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16 SIGNATURES 17 2 COCENSYS, INC. (A development stage company) CONDENSED BALANCE SHEETS (In thousands, except share and par value amounts)
MARCH 31, DECEMBER 31, 1998 1997 -------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,208 $ 3,410 Short-term investments 12,724 9,050 Receivables from corporate partners 65 414 Other current assets 549 484 -------- -------- TOTAL CURRENT ASSETS 14,546 13,358 Property and equipment, net 2,822 2,823 Investments 500 500 Other assets, net 217 235 -------- -------- $ 18,085 $ 16,916 -------- -------- -------- -------- LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 407 $ 866 Other accrued liabilities 966 1,911 Accrued compensation and benefits 558 1,107 Deferred revenue 1,725 - Due to corporate partners 1,699 747 Capital lease obligation -- current portion 411 353 -------- -------- TOTAL CURRENT LIABILITIES 5,766 4,984 Capital lease obligation, less current portion 493 567 Other liabilities 532 534 Commitments and contingencies Stockholders' equity: Preferred stock -- $.001 par value, 5,000,000 shares authorized; 300,000 shares issued and outstanding at March 31, 1998 and 214,286 at December 31, 1997 16,566 13,000 Common stock -- $.001 par value, 75,000,000 shares authorized; 22,934,825 shares issued and outstanding at March 31, 1998 and 22,857,506 at December 31, 1997 97,441 97,230 Deficit accumulated during the development stage (102,310) (98,983) Deferred compensation (386) (430) Accumulated comprehensive income (17) 14 -------- -------- TOTAL STOCKHOLDERS' EQUITY 11,294 10,831 -------- -------- $ 18,085 $ 16,916 -------- -------- -------- --------
See accompanying notes. 3 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
PERIOD FROM INCEPTION (FEBRUARY 15, THREE MONTHS ENDED 1989) TO MARCH 31, MARCH 31, 1998 1997 1998 ------- -------- ------------- REVENUES Co-promotion revenues from corporate partners $ 540 $ 1,123 $ 30,705 Co-development revenues from corporate partners 596 702 17,289 ------- -------- ---------- Total revenues 1,136 1,825 47,994 ------- -------- ---------- OPERATING EXPENSES Research and development 3,359 5,432 94,288 Marketing, general and administrative 1,148 2,679 49,304 Acquired research and development and advances to Acea - - 14,879 ------- -------- ---------- Total operating expenses 4,507 8,111 158,471 ------- -------- ---------- OPERATING LOSS (3,371) (6,286) (110,477) Gain on disposition of sales division - - 4,728 Interest income 202 219 4,655 Interest expense (24) (14) (1,082) ------- -------- ---------- NET LOSS (3,193) (6,081) (102,176) Dividends on preferred stock 134 - 134 ------- -------- ---------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,327) $ (6,081) $ (102,310) ------- -------- ---------- ------- -------- ---------- Basic and fully-diluted loss per common share $ (0.15) $ (0.27) ------- -------- ------- -------- Shares used in computing net loss per share 22,891 22,251 ------- -------- ------- --------
See accompanying notes. 4 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
PERIOD FROM INCEPTION (FEBRUARY 15, THREE MONTHS ENDED 1989) TO MARCH 31, MARCH 31, 1998 1997 1998 ------ ----- -------------- OPERATING ACTIVITIES Net loss $ (3,193) $ (6,081) $ (102,176) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 212 267 7,037 Amortization of deferred compensation 42 74 3,649 Issuance of stock and warrants for services 185 - 2,521 Loss on sale of fixed assets - - 100 Gain on disposition of sales force - - (4,728) Acquired research and development - - 12,279 Decrease (increase) in other current assets (60) 114 (616) Decrease (increase) in receivable from corporate partner 349 27 (65) Increase (decrease) in advances from corporate partners 952 (347) 1,699 Increase (decrease) in accounts payable and other accrued liabilities (284) (665) 2,482 ------- ------ ---------- NET CASH USED IN OPERATING ACTIVITIES (1,797) (6,611) (77,818) ------- ------ ---------- INVESTING ACTIVITIES Decrease (increase) in short-term investments (3,700) 5,830 (12,736) Purchase of property and equipment (211) (238) (7,311) Increase in other assets and notes receivable from officers 18 (77) (1,373) Cash received on sale of fixed assets - - 20 Cash received on disposition of sales division - - 8,000 Purchase of investments - - (500) Increase in deferred costs - - (2,475) Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62) ------- ------ ---------- NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES (3,893) 5,515 (16,437) ------- ------ ---------- FINANCING ACTIVITIES Net cash proceeds from issuance of common stock 25 2,115 61,270 Net cash proceeds from issuance of preferred stock 3,429 - 32,810 Proceeds from sale/leaseback of fixed assets and notes payable 106 334 5,341 Payments on capital lease obligations and notes payable (72) (208) (3,958) ------- ------ ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3,488 2,241 95,463 ------- ------ ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,202) 1,145 1,208 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,410 1,050 - ------- ------ ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,208 $ 2,195 $ 1,208 ------- ------ ---------- ------- ------ ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 24 $ 14 $ 844 ------- ------ ---------- ------- ------ ----------
See accompanying notes. 5 COCENSYS, INC. (A development stage company) MARCH 31, 1998 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim financial information for the three-month periods ended March 31, 1998 and 1997 is unaudited but includes all adjustments (consisting only of normal recurring entries) which the Company's management believes to be necessary for the fair presentation of the financial position, results of operations and cash flows for the periods presented. The accompanying interim financial statements should be read in conjunction with the financial statements and related notes included in the Company's 1997 Annual Report on Form 10-K for the year ended December 31, 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. Interim results of operations for the three-month period ended March 31, 1998, are not necessarily indicative of operating results to be expected for the full year. REVENUE AND EXPENSE RECOGNITION See Notes 2, 3, 4, 5 and 6 for revenue recognition policies related to co-promotion and co-development revenues from corporate partners. NET LOSS PER SHARE In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 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 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, warrants and convertible securities are excluded from the computation of diluted earnings per share, as their effect would be antidilutive. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires unrealized 6 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS gains and losses on available-for-sale securities, which prior to adoption were reported separately on shareholders' equity, to be included in other comprehensive income. Prior financial statements have been restated to conform to the requirements of SFAS 130. The components of comprehensive loss are as follows (in thousands):
PERIOD FROM INCEPTION (FEBRUARY 15, THREE MONTHS ENDED 1989) TO MARCH 31, MARCH 31, 1998 1997 1998 ------ ------ ------------- Net loss $ (3,193) $ (6,081) $ (102,176) Unrealized gain (loss) on investments (31) (40) (17) -------- -------- ----------- Comprehensive loss $ (3,224) $ (6,121) $ (102,193) -------- -------- ----------- -------- -------- -----------
The components of accumulated comprehensive gain (loss) are as follows (in thousands):
MARCH 31, DECEMBER 31, 1998 1997 -------- ------------- Unrealized gain (loss) on investments (17) 14 -------- --------- Accumulated comprehensive gain (loss) $ (17) $ 14 -------- --------- -------- ---------
PENDING ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 131 In June 1998, the Financial Accounting Standards Board will issue Financial Accounting Standards No. 131, "Disclosures about Segments of and Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards for the way that public business enterprises report information about segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements effective with filing of the Annual Report on Form 10-K for the year ended December 31, 1998. Management has not completed its review of SFAS 131, but does not expect that it will have an impact on the Company's results of operations, financial position or cash flows. 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, 7 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS Watson assumed the Division's co-promotion agreements, acquired certain of its operating assets and obtained the right to hire approximately 70 employees of the Division. As consideration for these assets, the Company received $8.0 million from Watson in October 1997 with up to $1.0 million more due to the Company if Watson retains, as of specified future dates, certain percentages of the employees from the Division. Pursuant to this contingency arrangement, in April 1998, Watson paid CoCensys $750,000. An additional $250,000 is due to CoCensys in October 1998 if certain retention percentages are met at that time. 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 them for a portion of the back-up funding. Accordingly, a portion of the back-up program funding has been recorded as deferred revenue and will be recognized as revenue when Co 2-6749 or a back-up compound meets applicable criteria for acceptance by Wyeth-Ayerst. Wyeth-Ayerst is responsible for the costs associated with developing Co 2-6749. The Company and Wyeth-Ayerst will co-promote any resulting 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, at a conversion price based on the market price of the common stock at that time (subject to certain minimum and maximum limits). 8 COCENSYS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 4. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY In October 1995, the Company entered into 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 addition, in October 1997, the 1995 Warner Collaboration Agreement was mended and extended until at least October 1999 (the "amended Warner Collaboration Agreement"). Under the amended Warner Collaboration Agreement, both companies share technology and resources to develop SSNRA candidates. 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. Payments received under the amended 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. In October 1997, in connection with the amended Warner Collaboration Agreement, Warner-Lambert purchased convertible preferred stock form the Company with a face value of $7.0 million. Warner-Lambert paid the Company $1.0 million of the $7.0 million total in October 1997 and $6.0 million in January 1998. The Company allocated $1.6 million to be recognized as co-development revenue during fiscal 1998, $4.4 million as preferred stock and $1.0 million as a liability (payable in common stock) due to Warner Lambert in January 1999. The preferred stock accrues a non-cash dividend at twelve percent per annum until its mandatory conversion date in October 2001 and is convertible at the price of the common stock at the time of conversion (subject to a limit on the maximum number of shares that may be issued). The Company may elect to force conversion at an earlier date at a price equal to the greater of the then current price or the price when issued. 9 COCENSYS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 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 into common stock on May 17, 1998, at a conversion price of not less than $4.375 per share. 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 and share any profits proportionally, 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. In March 1998, the Company received and recognized a $540,000 bonus for 1997 sales of Eldepryl. The Company does not expect to receive any more payments pursuant to the Somerset agreement. 7. CYTOVIA LICENSING AGREEMENT In January 1998, the Company licensed certain non-core technology to Cytovia, Inc., a new company that will focus on the commercialization of patented drug screening technology, using living cells, in the area of apoptosis or programmed cell death. In exchange, CoCensys received 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. During the first quarter, CoCensys advanced funds and provided certain administrative services to Cytovia during Cytovia's initial start-up period. Cytovia received venture funding in March 1998 and is now refunding to CoCensys the advanced funds. CoCensys' interest in Cytovia is less than 20 percent and is accounted for on a cost basis. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 BELOW AND IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K. OVERVIEW CoCensys, Inc. is a biopharmaceutical company dedicated to the discovery, development, marketing and sales of small molecule drugs to treat neurological and psychiatric disorders. The Company's product discovery and development programs are focused on the exploration of novel receptors and enzymes and their ligands and inhibitors through three technology platforms: GABAA receptor modulators named Epalons; glutamate receptor antagonists; and sodium channel blockers. Since its inception in February 1989, the Company has devoted substantially all of its resources to the discovery and development of neuropharmaceutical products for the treatment of disorders affecting the central nervous system. 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 revenues to be earned from achievement of research and development milestones, and uncertainty in the timing and amount of expenses for product development, including clinical trials. As of March 31, 1998, the Company's accumulated deficit was approximately $102.3 million. RESULTS OF OPERATIONS The Company recognized $540,000 in co-promotion revenues for the three-month period ended March 31, 1998, compared to $1.1 million during the same period in fiscal 1997. The 1998 co-promotion revenue is attributable to a bonus for fiscal 1997 activity that was received and recognized in March 1998. 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. The Company recognized $596,000 in co-development revenues for the three-month period ended March 31, 1998 compared to $702,000 for the same period of 1997. In the first quarter of 1998, co-development revenues were associated with the SSNRA (subtype-selective NMDA receptor antagonists) program with Warner-Lambert. In 1997, co-development revenues related to the ongoing CCD 3693 program for insomnia with G.D. Searle and the licostinel (ACEA 1021) program for stroke and traumatic brain injury with Novartis, which was terminated in April 1997. Research and development expenses decreased to $3.4 million for the three-month period ended March 31, 1998, from $5.4 million in the first quarter of the prior year. Of this $2.0 million decrease, approximately $700,000 relates to cost savings from internal restructuring during the prior year and $1.3 million reflects a lower level of external clinical activity in the current period. In the first quarter of 1997, the Company had ongoing clinical trials of licostinel (ACEA 1021) in the 11 treatment of stroke and of ganaxolone (CCD 1042) in the treatment of migraine and epilepsy. While there were no large clinical trials underway during the first quarter of 1998, the Company expects to commence a major Phase IIb clinical trial of ganaxolone in the treatment of migraine during the second quarter of 1998. Marketing, general and administrative expense decreased to $1.1 million in the first quarter of 1998 from $2.7 million in the first quarter of 1997, primarily as a result of selling the sales and marketing division. Results for the first quarter of 1998 exclude the cost of the sales and marketing division. Interest income was $202,000 for the three-month period ended March 31, 1998 compared to $219,000 for the same quarter in 1997. The decrease was due to lower cash and short-term investment balances in the first quarter of the current year when compared to the same quarter a year earlier. LIQUIDITY AND CAPITAL RESOURCES From its inception in February 1989 through March 31, 1998, the Company has financed its operations primarily through private and public offerings of its equity securities, raising net proceeds of approximately $94.1 million through sales of securities. At March 31, 1998, the Company's balances of cash, cash equivalents and investments totaled $14.4 million, compared to $13.0 million at December 31, 1997. As of March 31, 1998, the Company had invested $7.3 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 additional equipment will be needed as the Company increases its research and development activities, the Company has no material commitments for the acquisition of property and equipment. 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 $8.0 million in cash with an additional $1.0 million due to CoCensys contingent upon the occurrence of specified events. Of this contingent amount, Watson paid the Company $750,000 was in April 1998 with the balance due in October 1998 subject to the occurrence of specified events. 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 preferred stock with a face value of $7.0 million, of which Warner-Lambert paid the Company $1.0 million in October 1997 and $6.0 million in January 1998. Of this $7.0 million in total proceeds, the Company has allocated $1.6 million to be recognized as co-development revenue during fiscal 1998, $4.4 million as preferred stock and $1.0 million as a liability (payable in common stock) due to Warner Lambert in January 12 1999. The preferred stock accrues a non-cash dividend at 12 percent per annum until its mandatory conversion date in October 2001. 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. 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 them for a portion of the back-up funding. 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. This preferred stock will convert to common stock on May 15, 1998. CoCensys' operations to date have consumed substantial amounts of cash. The negative cash flow from operations is expected to continue and will likely increase over the foreseeable future, subject to the Company's ability to mitigate such negative cash flows with revenues, if any, derived from the sale of products from current and potential future marketing collaborations. The Company anticipates that its existing capital resources, including funding expected to be available through current partner collaborations, 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. 13 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 and hardware so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. However, the majority of software and hardware used by the Company consists of commercially available, off-the-shelf programs and equipment 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. ADDITIONAL RISKS In addition to those discussed above, the Company is subject to the following risks: The Company's products are in an early stage of development and face a high degree of technological, regulatory and competitive risks. Drug discovery and development are capital intensive activities, and there can be no assurance the Company will be able to raise the additional capital necessary to develop and commercialize products. The Company's strategy for the development, clinical testing 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 the current collaborative efforts will be successful. Human clinical trials require considerable time and funding, and results from any stage of testing may not predict results of later stages. In addition, if results of any clinical trial fail to meet the Company's requirements, the study plan for such compound may be adjusted or another compound may be substituted, either of which may result in delays in future clinical studies. Unfavorable clinical trials could result in cancellation of future clinical studies. Inherent in the fact that CoCensys is an early stage biopharmaceutical company are a range of additional risks, including those associated with obtaining and enforcing patents and protecting proprietary technology and the risk of regulatory change, among others. 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. 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 due to various external factors, including but not limited to, 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 14 potential results relating to products under development, regulatory developments in both the United States and foreign countries and public concern as to the safety of biotechnology products. 15 COCENSYS, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 * CoCensys, Inc. Executive Officers' Severance Benefit Plan 10.2 ** Agreement dated January 8, 1998, between CoCensys, Inc. and Warner-Lambert Company 10.3 * CoCensys, Inc. Executive Officers' Change of Control Severance Plan 27 Financial Data Schedule * Compensatory Plan. ** Confidential treatment requested with the SEC over portions of this Exhibit. (b) No reports on Form 8-K were filed during the quarter ended March 31, 1998. 16 COCENSYS, INC. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. CoCensys, Inc. Date: May 12, 1998 By: /s/ F. Richard Nichol, Ph.D. ------------- ------------------------------ F. Richard Nichol, Ph.D. President and Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER) Date: May 12, 1998 By: /s/ Peter E. Jansen -------------- -------------------------------- Peter E. Jansen Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) EX-10.1 2 EXHIBIT 10-1 COCENSYS, INC. EXHIBIT 10.1 EXECUTIVE OFFICERS' SEVERANCE BENEFIT PLAN SECTION 1. INTRODUCTION. The CoCensys, Inc. Executive Officers' Severance Benefit Plan (the "Plan") was established effective March 26, 1998. The purpose of the Plan is to provide for the payment of severance benefits to certain eligible employees of CoCensys, Inc. (the "Company") whose employment with the Company is involuntarily or constructively terminated. This Plan shall supersede any severance benefit plan, policy or practice previously maintained by the Company. Notwithstanding the foregoing, this Plan shall not supersede the CoCensys, Inc. Executive Officers' Change of Control Severance Plan. This Plan document is also the Summary Plan Description for the Plan. SECTION 2. ELIGIBILITY FOR BENEFITS. (a) GENERAL RULES. Subject to the requirements set forth in this Section, the Company will grant severance benefits under the Plan to Eligible Employees. (i) "ELIGIBLE EMPLOYEES" shall include the President, the Chief Executive Officer, any Vice President and the General Counsel of the Company. An Eligible Employee shall be entitled to the payment of severance benefits under the Plan in the event that such Eligible Employee's employment with the Company is involuntarily terminated without "Cause" (as defined below) or the Eligible Employee voluntarily leaves on account of a "Constructive Termination" (as defined below). The Company shall make a reasonable good faith determination as to whether such an event has occurred; provided, however, that with respect to the Chief Executive Officer, such determination shall be made by a majority of the Board of Directors. It shall be presumed that an Eligible Employee has not left the Company on account of a Constructive Termination if that Employee voluntarily leaves the Company more than sixty (60) days after the later of (A) the occurrence of an event giving rise to a claim of Constructive Termination or (B) receipt of notice of such event. (1) As used herein "Cause" shall mean: (A) an intentional act that materially injures the Company; (B) the intentional refusal or failure to follow the lawful and reasonable directions of the Board of Directors or the directions of any individual to whom the Eligible Employee reports; (C) the willful and habitual neglect of duties; or (D) the conviction of a felony involving moral turpitude which is reasonably likely to inflict or has inflicted material injury on the Company; PROVIDED that the Eligible Employee did not cure such misconduct within thirty (30) days following receipt of written notice of such misconduct from the Company. (2) As used herein "Constructive Termination" shall mean: (A) the assignment of duties and responsibilities which result in a diminution of position or function (but not merely a change in title or reporting relationships); (B) the reduction in base salary by more than ten percent (10%); (C) a material reduction in the Eligible Employee's package of 1. incentives and benefits in the aggregate; (D) the relocation of the Eligible Employee's principal office by more than thirty (30) miles, unless approved by the Eligible Employee; (E) the material breach of this Plan or any other material agreement between the Eligible Employee and the Company regarding the terms and conditions of employment; or (F) the failure of any acquiring or surviving corporation to assume the responsibilities of the Company under this Plan or under any other material agreement between the Eligible Employee and the Company regarding the terms and conditions of employment. (ii) In order to be eligible to receive benefits under the Plan, an Eligible Employee must remain on the job until his or her date of termination as scheduled by the Company. (iii) In order to be eligible to receive benefits under the Plan, an Eligible Employee must execute a general waiver and release on a form provided by the Company. (b) EXCEPTIONS. An employee who otherwise is an Eligible Employee will not receive benefits under this Plan in any of the following circumstances: (i) The employee has executed an individually negotiated employment contract or agreement with the Company relating to severance benefits that is in effect on his or her termination date. Such employee's severance benefit, if any, shall be governed by the terms of such individually negotiated employment contract or agreement, subject to Section 6(c) of this Plan. (ii) The employee is involuntarily terminated for Cause. (iii) The employee voluntarily terminates employment with the Company not on account of a Constructive Termination. Voluntary terminations include, but are not limited to, resignation, retirement, or failure to return from a leave of absence on the scheduled date, so long as such event is not on account of a Constructive Termination. (iv) The employee voluntarily terminates employment with the Company in order to accept employment with another entity that is wholly or partly owned (directly or indirectly) by the Company or the parent or other affiliate of the Company. (v) The employee has qualified to receive benefits under the CoCensys, Inc. Executive Officers' Change of Control Severance Plan. SECTION 3. AMOUNT OF BENEFIT. Severance benefits payable under the Plan are as follows: (a) Eligible Employees whose employment is involuntarily terminated without Cause or is voluntarily terminated on account of a Constructive Termination as described in Section 2 of this Plan will receive the following benefits: 2. (i) "Pay" (as defined below) for the number of months set forth below (the "Pay Continuation Period"):
Time with Company Pay Eligible Employee (i.e., "vesting service") Continuation Period - ----------------------------- -------------------------- -------------------- Chief Executive Officer/President Less than 6 months 0 months 6 to 12 months 6 months more than 12 months 12 months Vice President/General Counsel Less than 6 months 0 months 6 to 12 months 3 months more than 12 months 6 months
(ii) Payment of a "Target Bonus" (as defined below) pro rated for the actual period of employment (which does not include any of the Pay Continuation Period) with the Company during the year in which employment is terminated. (b) For purposes of calculating Plan benefits: (i) "Pay" shall mean the Eligible Employee's base pay (excluding overtime, bonuses, draws, commissions, and other forms of additional compensation), at the rate in effect during the last regularly scheduled payroll period immediately preceding the Eligible Employee's termination date and (ii) "Target Bonus" shall mean the Eligible Employee's target bonus for the year in which the Eligible Employee's employment with the Company is terminated without Cause or upon a Constructive Termination, in the amount approved by the Compensation Committee of the Board of Directors. (c) Unless otherwise approved by the Board of Directors or an authorized Committee of the Board of Directors, the terms and conditions of any options to acquire Company stock, including without limitation the vesting, exercisability and termination of such options, held by the Eligible Employee on the termination date shall be determined solely in accordance with the Eligible Employee's stock option agreements and the Company stock option plans pursuant to which such stock options were granted. (d) Notwithstanding any other provision of this Plan to the contrary, any benefits payable to an Eligible Employee under this Plan shall be offset, to the maximum extent permitted by law, by any severance benefits payable by the Company to such individual under any other arrangement covering the individual. SECTION 4. TIME OF PAYMENT AND FORM OF BENEFIT. The Company reserves the right to determine whether the severance benefits under the Plan will be paid in a single sum or in installments and to choose the timing of such payments, provided, however, that all payments under this Plan will be completed within a period of time following an Eligible Employee's termination date not exceeding the Pay Continuation Period. If a terminating employee is indebted to the Company at his or her termination date, the Company reserves the right to offset any severance payments under the Plan by the amount of 3. such indebtedness. In no event shall payment of any Plan benefit be made prior to the Eligible Employee's termination date. SECTION 5. REEMPLOYMENT. Severance payments received under Section 3(a) of the Plan will cease in the event of an Eligible Employee's reemployment by the Company or any affiliate of the Company. SECTION 6. MISCELLANEOUS. (a) EXCLUSIVE DISCRETION. The Plan Administrator shall have the exclusive discretion and authority to establish rules, forms, and procedures for the administration of the Plan, and to construe and interpret the Plan and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, including, but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan. The rules, interpretations, computations and other actions of the Plan Administrator shall be binding and conclusive on all persons. (b) AMENDMENT OR TERMINATION. The Company also reserves the right to amend or discontinue this Plan or the benefits provided hereunder at any time; provided, however, that no such amendment or termination shall affect the right to any unpaid benefit of any Eligible Employee whose termination date has occurred prior to amendment or termination of the Plan. Any action amending or terminating the Plan shall be adopted by the Board of Directors of the Company or the Compensation Committee of the Board, and written notice of such amendment or termination shall be provided promptly to all Eligible Employees. (c) OTHER SEVERANCE ARRANGEMENTS. The Company reserves the right to make other arrangements regarding severance benefits in special circumstances. The foregoing notwithstanding, in no event shall any individual receive from the Company any severance benefit greater than the benefit provided under Section 3, unless such individual executes, as a condition upon the receipt of such additional benefit, a waiver and release of any and all claims that such individual may have against the Company, on the form provided by the Company. SECTION 7. CONTINUATION OF EMPLOYMENT BENEFITS. (a) COBRA CONTINUATION. Each Eligible Employee who is enrolled in a health or dental plan sponsored by the Company may be eligible to continue coverage under such health or dental plan (or to convert to an individual policy), at the time of the Eligible Employee's termination of employment under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The Company will notify the individual of any such right to continue health coverage at the time of termination. The Company will continue to pay its share of the Eligible Employee's health insurance premiums during the Pay Continuation Period as long as the Eligible Employee elects to continue coverage under COBRA and timely pays the Eligible Employee's portion of the premiums. If and when the Eligible Employee becomes eligible for another group benefits plan through another employer, COBRA coverage through the Company will terminate (the "COBRA Period"). No provision of this Plan will affect the continuation 4. coverage rules under COBRA, except that the Company's payment of any applicable insurance premiums during the COBRA Period will be credited as payment by the Eligible Employee for purposes of the Eligible Employee's payment required under COBRA. Therefore, the period during which an Eligible Employee must elect to continue the Company's group medical or dental coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Eligible Employee, and all other rights and obligations of the Eligible Employee under COBRA (except the obligation to pay insurance premiums that the Company pays during the COBRA Period) will be applied in the same manner that such rules would apply in the absence of this Plan. At the conclusion of the COBRA Period, the Eligible Employee will be responsible for the entire payment of premiums required under COBRA for the duration of the COBRA period. For purposes of this Section 7(a), applicable premiums that will be paid by the Company during the Pay Continuation Period shall not include any amounts payable by the Eligible Employee under the Company's Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of the Eligible Employee. (b) OTHER EMPLOYEE BENEFITS. All non-health benefits (such as life insurance and disability coverage) terminate as of the employee's termination date (except to the extent that any conversion privilege is available thereunder). SECTION 8. NO IMPLIED EMPLOYMENT CONTRACT. The Plan shall not be deemed (i) to give any employee or other person any right to be retained in the employ of the Company nor (ii) to interfere with the right of the Company to discharge any employee or other person at any time and for any reason, which right is hereby reserved. SECTION 9. LEGAL CONSTRUCTION. This Plan is intended to be governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent not preempted by ERISA, the laws of the State of California. SECTION 10. CLAIMS, INQUIRIES AND APPEALS. (a) APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing. The Plan Administrator is: Vice President, Human Resources CoCensys, Inc. 201 Technology Drive Irvine, California 92618 5. (b) DENIAL OF CLAIMS. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must notify the applicant, in writing, of the denial of the application, and of the applicant's right to review the denial. The written notice of denial will be set forth in a manner designed to be understood by the employee, and will include specific reasons for the denial, specific references to the Plan provision upon which the denial is based, a description of any additional material or information necessary for the applicant to perfect the claim along with an explanation as to why such information is necessary and an explanation of the Plan's claim procedure. This written notice will be given to the employee within 90 days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional 90 days for processing the application. If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial 90-day period. This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the application. If written notice of denial of the application for benefits is not furnished within the specified time, the application shall be deemed to be denied. The applicant will then be permitted to appeal the denial in accordance with the Review Procedure described below. (c) REQUEST FOR A REVIEW. Any person (or that person's authorized representative) for whom an application for benefits is denied (or deemed denied), in whole or in part, may appeal the denial by submitting a written request for a review to the Plan Administrator within 60 days after the application is denied (or deemed denied). The Plan Administrator will give the applicant (or his or her representative) an opportunity to review pertinent documents in preparing a request for a review. A request for a review shall be in writing and shall be addressed to: Vice President, Human Resources CoCensys, Inc. 201 Technology Drive Irvine, California 92618 A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent. The Plan Administrator may require the applicant to submit additional facts, documents or other material as it may find necessary or appropriate in making its review. (d) DECISION ON REVIEW. The Plan Administrator will act on each request for review within 60 days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional 60 days), for processing the request for a review. If an extension for review is required, written notice of the extension will be furnished to the applicant within the initial 60-day period. The Plan Administrator will give prompt, written notice of its decision to the applicant. In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice will outline, in a manner calculated to be 6. understood by the applicant, the specific reasons for the decision and the specific Plan provisions upon which the decision is based. If written notice of the Plan Administrator's decision is not given to the applicant within the time prescribed in this Section 10(d), the application will be deemed denied on review. (e) RULES AND PROCEDURES. The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out its responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial (or deemed denial) of benefits to do so at the applicant's own expense. (f) EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan may be brought until the claimant has (i) submitted a written application for benefits in accordance with the procedures described by Section 10(a) above, (ii) been notified by the Plan Administrator that the application is denied (or the application is deemed denied due to the Plan Administrator's failure to act on it within the established time period), (iii) filed a written request for a review of the application in accordance with the appeal procedure described in Section 10(c) above and (iv) been notified in writing that the Plan Administrator has denied the appeal (or the appeal is deemed to be denied due to the Plan Administrator's failure to take any action on the claim within the time prescribed by Section 10(d) above). SECTION 11. BASIS OF PAYMENTS TO AND FROM PLAN. The Company shall pay all benefits under the Plan. The Plan shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. SECTION 12. OTHER PLAN INFORMATION. (a) EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer Identification Number assigned to the Company (which is the "Plan Sponsor" as that term is used in ERISA) by the Internal Revenue Service is 330538836. The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the instructions of the Internal Revenue Service is 503. (b) ENDING DATE FOR PLAN'S FISCAL YEAR. The date of the end of the fiscal year for the purpose of maintaining the Plan's records is December 31. (c) AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service of legal process with respect to the Plan is the General Counsel, CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. (d) PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" of the Plan is CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. The "Plan Administrator" of the Plan is the Vice President, Human Resources, CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. The Plan Sponsor and Plan Administrator's telephone number is (949) 753-6100. The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan. 7. SECTION 13. STATEMENT OF ERISA RIGHTS. Participants in this Plan (which is a welfare benefit plan sponsored by CoCensys, Inc.) are entitled to certain rights and protections under ERISA. If you are an Eligible Employee, you are considered a participant in the Plan and, under ERISA, you are entitled to: (a) Examine, without charge, at the Plan Administrator's office and at other specified locations, such as work sites, all Plan documents and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports; (b) Obtain copies of all Plan documents and Plan information upon written request to the Plan Administrator. The Administrator may make a reasonable charge for the copies; (c) Receive a summary of the Plan's annual financial report, in the case of a plan that is required to file an annual financial report with the Department of Labor. (Generally, all pension plans and welfare plans with 100 or more participants must file these annual reports.) In addition to creating rights for Plan participants, ERISA imposes duties upon the people responsible for the operation of the employee benefit plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA. If your claim for a Plan benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that the Plan fiduciaries misuse the Plan's money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about your rights under ERISA, you should contact the nearest area office of the U.S. Labor - Management Services Administration, Department of Labor. 8. SECTION 14. EXECUTION. To record the adoption of the Plan as set forth herein, effective as of March 26, 1998, CoCensys, Inc. has caused its duly authorized officer to execute the same on May 13, 1998. COCENSYS, INC. By: /s/ F. Richard Nichol, Ph.D. ----------------------------------------- Title: President and Chief Executive Officer ----------------------------------------- 9. EX-10.2 3 EXHIBIT 10-2 EXHIBIT 10.2 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. AGREEMENT THIS AGREEMENT (the "Agreement") is made this 8th day of January, 1998, by and between CoCensys, Inc., a Delaware corporation ("CoCensys"), 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. RECITALS a. The parties entered into that certain amended and restated Research, Development and Marketing Collaboration Agreement dated October 13, 1997, (the "Collaboration Agreement"), pursuant to which the parties determined to collaborate in efforts to develop and discover NMDA receptor sub-type selective antagonists and AMPA-type glutamate receptor antagonists. b. The parties have determined that a collaboration in the area of AMPA antagonists would not be beneficial to the parties at this point in time and desire to amend the Collaboration Agreement to terminate the AMPA collaboration and add certain key man provisions. NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and conditions contained herein, CoCensys and Warner hereby agree as follows: All capitalized terms used herein shall have the meanings given to them in the Collaboration Agreement. 1. The Collaboration Agreement is hereby amended to add the following as a new Section 14.6: "14.6 Key Personnel. CoCensys shall use its best efforts to ensure that [*] oversees the Research Program on behalf of CoCensys and that [*] devotes no less than [*] of his time in also overseeing [*] and CoCensys' efforts relating to the Research Program. In the event that on or before the end of the term of the Research Program, (A) [*] (i) is physically and mentally capable of overseeing CoCensys' work under the Research Plan but (ii) for any reason fails to oversee such work, or (B) [*] (y) is physically and mentally capable of devoting [*] of his time to overseeing CoCensys' work under the research plan but (z) for any reason fails to 1 * Confidential treatment requested devote such time to such work, then in the case of either (A) or (B), CoCensys shall immediately notify Warner thereof and CoCensys will have up to [*] after such failure by either [*] to hire a replacement for [*], as the case may be (the "Search Period"). By notice delivered to CoCensys during the [*] period after the end of the Search Period, Warner may voluntarily terminate the Term of the Research Program, effective [*] after the end of the Search Period, if in its reasonable scientific opinion or for other reasonable commercial concerns relating to the conduct of the Research Program it does not approve of the replacement for [*] hired by CoCensys, then the Term of the Research Program shall end [*] following the end of the Search Period. Termination of the Research Program pursuant to the previous sentence shall be deemed an ordinary termination of the Term of the Research Program under the first sentence of Section 2.4 and shall not be deemed early termination upon the election of a party under the second sentence of Section 2.4 or termination for breach under Section 14.1. Warner will be required to make any research funding payments that are required under Section 2.2 that come due on or before the effective date of such termination, and CoCensys will continue to be obligated to perform its duties under the Research Program during the Term of the Research Program. Warner agrees that during the Term of the Research Program it shall not solicit for employment or employ [*], or otherwise interfere with the employment by CoCensys of [*] with the intent of ending such employment." 2. The parties shall in good faith negotiate an amendment to the Collaboration Agreement pursuant to which that portion of the Research Program devoted to AMPA antagonists will be terminated. As of the date of this Agreement, the parties shall no longer be obligated to perform any work under the Research Program or exchange any further research results related to AMPA antagonists. 3. Section 2.2 of the Collaboration Agreement shall be amended to provide that commencing [*], CoCensys shall only be obligated to provide a minimum of [*]Scientific FTEs, to be funded by Warner at a rate of [*] per Scientific FTE per calendar year. Section 2.2 shall further be amended to provide that in the event Warner determines that the number of Scientific FTEs for [*] must be increased, up to a maximum of [*], Warner shall notify CoCensys by [*], and CoCensys shall be obligated to provide such FTEs, to be funded by Warner, at the reimbursement rates set forth above. Under all circumstances, Warner shall be obligated to fund a minimum of [*] Scientific FTEs commencing [*]. 4. CoCensys hereby agrees that on January 9, 1999, CoCensys shall issue to Warner such number of shares of common stock of CoCensys which shall equal $1,000,000.00 divided by the "Average Trading Price". The "Average Trading Price" shall be the average of the closing prices of CoCensys common stock (as reported in THE WALL STREET JOURNAL, western edition) for the thirty (30) "Trading Days" prior to January 9, 1999. The term "Trading Day" shall mean any day on which shares of CoCensys' 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. Subject to circumstances beyond CoCensys' reasonable control, CoCensys shall cause such shares to 2 * Confidential treatment requested be immediately tradable on any securities exchange on which CoCensys' shares are then traded (whether by registration or exemption). 5. The parties further agree that they shall execute such other documents and instruments as may be necessary to effectuate the transactions contemplated herein. 6. Except as otherwise set forth herein or as subsequently agreed to by the parties in the good faith negotiations discussed herein, the terms of the amended and restated Research, Development and Marketing Collaboration Agreement shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date further set forth above. COCENSYS, INC. WARNER-LAMBERT COMPANY By: /s/ F. Richard Nichol, Ph.D. By: /s/ Prof. Ronald M. Cresswell, Ph.D. ----------------------------- -------------------------------------- Title: President and CEO Title: Vice President and Chairman, --------------------------- Parke-Davis Pharmaceutical Research, Warner-Lambert Company ---------------------------------- 3 * Confidential treatment requested EX-10.3 4 EXHIBIT 10-3 COCENSYS, INC. EXHIBIT 10.3 EXECUTIVE OFFICERS' CHANGE OF CONTROL SEVERANCE PLAN INTRODUCTION The CoCensys, Inc. Executive Officers' Change of Control Severance Plan was adopted by the Board of Directors (the "Board") of CoCensys, Inc., a Delaware corporation (the "Company"), on December 16, 1997. The Plan is intended to provide Executive Officers who are Participants in the Plan and whose employment terminates during the period beginning three (3) months prior to a Change of Control and ending fifteen (15) months following a Change of Control with the Severance Benefits specified herein. This Plan document is also the Summary Plan Description for the Plan. Certain capitalized terms used in the Plan are defined in Article 9. ARTICLE 1 -- ESTABLISHMENT OF THE PLAN As of the Effective Date, the Company hereby establishes a severance plan to be known as the "Executive Officers' Change of Control Severance Plan" (the "Plan"), as set forth herein. The benefits provided by the Plan shall be available to all Participants. ARTICLE 2 -- ELIGIBILITY 2.1 PARTICIPATION. Each Executive Officer whom the Board or the Compensation Committee of the Board shall from time to time designate as such shall be a participant in the Plan (a "Participant"). Any employee holding the title of President, Chief Executive Officer, Vice President, or General Counsel shall be considered to be an Executive Officer for purposes of eligibility under the Plan without further action by the Board or the Compensation Committee of the Board. 2.2 DURATION OF PARTICIPATION. A Participant shall cease to be a Participant in the Plan when such Participant ceases to be a designated Executive Officer; PROVIDED, HOWEVER, that if such Participant is then entitled to payment of Severance Benefits, such Participant shall remain a Participant in the Plan until the full amount of the Severance Benefits has been paid to such Participant. ARTICLE 3 -- SEVERANCE BENEFITS 3.1 RIGHT TO SEVERANCE BENEFITS. A Participant shall be entitled to receive the benefits from the Company set forth in Section 3.2 (the "Severance Benefits") if, within the period beginning three (3) months prior to a Change of Control and ending fifteen (15) months following a Change of Control (the "Coverage Period"), the Participant's employment by the Company: 1. (a) shall be involuntarily terminated by the Company without Cause; or (b) shall be voluntarily terminated by the Participant on account of an event constituting Constructive Termination. 3.2 DETERMINATION OF SEVERANCE BENEFITS. If, after a Change of Control, any Participant has a right to receive Severance Benefits pursuant to Section 3.1 above, Severance Benefits shall be determined as follows: (a) The Participant shall receive a Severance Payment for the number of months set forth below ( the "Severance Payment Period"):
Participant Severance Payment Period ----------- ------------------------ Chief Executive Officer/President 24 months Vice President/General Counsel 12 months
(b) The Participant shall receive a Target Bonus through the end of the Severance Payment Period. Therefore, if the Participant's Severance Payment Period is twelve (12) months, then the Participant shall receive an amount equal to his or her Target Bonus, and if the Severance Payment Period is twenty four (24) months, then the Participant shall receive an amount equal to twice his or her Target Bonus. (c) The unvested portion of any stock options issued under the Option Plans and held by the Participant on the Date of Termination shall be fully vested and exercisable as of the later of: (i) the date of the Change of Control or (ii) the Date of Termination. Such options shall remain exercisable until the earlier of (i) the expiration of the original full term of the option or (ii) two (2) years following the expiration of the Severance Payment Period. (d) Each Participant who is enrolled in a health or dental plan sponsored by the Company may be eligible to continue coverage under such health or dental plan (or to convert to an individual policy), at the time of the Participant's termination of employment under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The Company will notify the individual of any such right to continue health coverage at the time of termination. The Company will continue to pay its share of the Participant's health insurance premiums until the earliest of: (i) eighteen (18) months after the Date of Termination, (ii) such time as the Participant becomes eligible to participate in another employer's health insurance plan, or (iii) the termination of the Severance Payment Period; PROVIDED THAT the Participant elects to continue coverage under COBRA and timely pays the Participant's portion of the premiums (the "COBRA Period"). No provision of this Plan will affect the continuation coverage rules under COBRA, except that the Company's payment of any applicable insurance premiums during the COBRA Period will be credited as payment by the Participant for purposes of the Participant's payment required under COBRA. Therefore, the period during which an Participant must elect to continue the Company's group medical or dental coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Participant, and all other rights and obligations of the Participant under COBRA (except the 2. obligation to pay insurance premiums that the Company pays during the COBRA Period) will be applied in the same manner that such rules would apply in the absence of this Plan. At the conclusion of the COBRA Period, the Participant will be responsible for the entire payment of premiums required under COBRA for the duration of the COBRA period. For purposes of this Section 3.2(d), applicable premiums that will be paid by the Company during the Severance Payment Period shall not include any amounts payable by the Participant under the Company's Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of the Participant. 3.3 TIME OF SEVERANCE PAYMENT. The Company reserves the right to determine whether the Severance Benefits under the Plan will be paid in a single sum or in installments and to choose the timing of such payments, provided, however, that all payments under this Plan will be completed within a period of time following a Participant's Date of Termination not exceeding the Severance Payment Period. Notwithstanding the foregoing, the Participant's Target Bonus payment under Section 3.2(b) shall be paid as follows: (i) in a lump sum no later than thirty (30) days following the Date of Termination if the Participant's Severance Payment Period is twelve (12) months, or (ii) in two equal installments, with the first installment no later than thirty (30) days following the Date of Termination and the second installment no later than thirteen (13) months following the Date of Termination, if the Participant's Severance Payment Period is twenty four (24) months. If a terminating employee is indebted to the Company at his or her Date of Termination, the Company reserves the right to offset any Severance Benefits under the Plan by the amount of such indebtedness. In no event shall payment of any Plan benefit be made prior to the Participant's Date of Termination. 3.4 NO MITIGATION. The Participant shall not be required to mitigate the amount of the Severance Benefits by seeking other employment or otherwise, and, subject to Section 3.2(d), any amount earned by the Participant as the result of employment by another employer after the Date of Termination shall not reduce the amount of the Severance Benefit. 3.5 MAXIMUM BENEFIT OFFSETS AND WITHHOLDING. In the event of a Change of Control, (i) the Severance Benefits are in lieu of any other benefit provided under any other group severance plan of the Company and (ii) Severance Benefits shall be reduced by the amount of any payment to which the Participant is entitled under any individual severance agreement then in effect between the Participant and the Company. In addition, the Company shall withhold appropriate federal, state, local and foreign income and employment taxes from any payments hereunder. 3.6 NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Participant on account of Constructive Termination shall be communicated by Notice of Termination to the other party hereto given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, if to the Participant, then to the Participant at the Participant's address as set forth in the Company's records, and, if to the Company, to CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. Any notices given pursuant to this Section 3.6 shall be effective on the earlier of the date on which such notice is actually received by the 3. addressee or the date that is three days after such notice is sent by the addressor. For purposes of the Plan, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in the Plan relied upon and (ii) if the Date of Termination, as defined below, is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Company or the Participant to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or of Constructive Termination shall not waive any right of the Company or of the Participant, respectively, hereunder or preclude the Company or the Participant, respectively, from asserting such fact or circumstance in enforcing its, his or her rights hereunder. 3.7 DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; PROVIDED, HOWEVER, that (i) if the Participant's employment is terminated by the Company other than by reason of death or Disability, or for Cause, the Date of Termination shall be the date on which the Company notifies the Participant of such termination and (ii) if the Participant's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death or determination of Disability pursuant to Section 9.5, as the case may be. 3.8 SPECIAL EXCEPTION. No benefit shall be payable hereunder solely because a Participant's employment terminates because the Company or a subsidiary, a division or other operating assets thereof is sold after a Change of Control if: (a) The purchaser is contractually obligated to offer the Participant a comparable or better job without relocation; and (b) The purchaser is contractually obligated to maintain a plan at least equivalent to this Plan. 3.9 CERTAIN REDUCTION OF PAYMENTS. (a) Anything in the Plan to the contrary notwithstanding, in the event that any payment, distribution or other benefit provided by the Company to or for the benefit of a Participant (whether paid or payable or provided or to be provided pursuant to the terms of the Plan or otherwise) (a "Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code and (ii) but for this Section 3.9, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, in accordance with this Section 3.9, such Payments shall be reduced to the maximum amount that would result in no portion of the Payments being subject to the Excise Tax, but only if and to the extent that such a reduction would result in the Participant's receipt of Payments that are greater than the net amount the Participant would receive (after application of the Excise Tax) if no reduction is made. The amount of required reduction, if any, shall be the smallest amount so that the Participant's net proceeds with respect to the Payments (after taking into account payment of any Excise Tax and all federal, state and local income, employment or other taxes) shall be maximized. If, notwithstanding any reduction described in this Section 3.9 (or in the absence of any such reduction), the IRS determines that a Payment is subject to the Excise Tax (or subject to a 4. different amount of the Excise Tax than determined by the Company or the Participant), then Section 3.9(c) shall apply. If the Excise Tax is not eliminated pursuant to this Section 3.9, the Participant shall pay the Excise Tax. (b) All determinations required to be made under this Section 3.9 shall be made by the Company's independent auditors. Such auditors shall provide detailed supporting calculations both to the Company and the Participant. Any such reasonable determination by the Company's independent auditors shall be binding upon the Company and the Participant. The Participant shall determine which and how much of the Payments, including without limitation any option acceleration benefits provide under this Plan or any option ("Option Benefits"), as the case may be, shall be eliminated or reduced consistent with the requirements of this Section 3.9, provided that, if the Participant does not make such determination within ten business days of the receipt of the calculations made by the Company's independent auditors, the Company shall elect which and how much of the Option Benefits or other Payments, as the case may be, shall be eliminated or reduced consistent with the requirements of this Section 3.9 and in the following order: payments of the Target Bonus under Section 3.2(b), Severance Payments under Section 3.2(a), and option acceleration as described in Section 3.2(c), and then the Company shall notify the Participant promptly of such election. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of the Participant such amounts as are then due to the Participant under the Plan. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Company's independent auditors hereunder, it is possible that Option Benefits or other Payments, as the case may be, will have been made by the Company which should not have been made ("Overpayment") or that additional Option Benefits or other Payments, as the case may be, which will not have been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Company's independent auditors, based upon the assertion of a deficiency by the IRS against the Participant or the Company which the Company's independent auditors believe has a high probability of success, determine that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Participant shall be treated for all purposes as a loan AB INITIO to the Participant which the Participant shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; PROVIDED, HOWEVER, that no such loan shall be deemed to have been made and no amount shall be payable by the Participant to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Participant is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Company's independent auditors, based upon controlling precedent or other substantial authority, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. ARTICLE 4 -- PAYMENTS TO AND FROM THE PLAN The benefits under the Plan shall be paid from the general funds of the Company, and the Participants shall be no more than unsecured general creditors of the Company. ARTICLE 5 -- OTHER RIGHTS AND BENEFITS NOT AFFECTED 5.1 NONEXCLUSIVITY. Nothing in the Plan shall prevent or limit any Participant's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which a Participant may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as any Participant may have under any stock option or other agreements with the Company; PROVIDED, HOWEVER, that in accordance with Section 3.5, in the event of a Change of Control, the Severance Payments hereunder shall be in lieu of any other severance payments to which any Participant may otherwise be entitled, including without limitation, under any employment contract or severance plan. Except as otherwise expressly provided herein, amounts which are vested benefits or which a Participant is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 5.2 EMPLOYMENT STATUS. The Plan does not constitute a contract of employment or impose on any Participant or the Company any obligation to retain any Participant as an employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. ARTICLE 6 -- SUCCESSOR TO COMPANY The Plan shall be binding upon any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, and any such successor or assignee shall be required to perform the Company's obligations under the Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in the Plan, shall mean the Company as hereinafter defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of the Plan. ARTICLE 7 -- NON-ALIENATION OF BENEFITS No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. ARTICLE 8 -- LEGAL CONSTRUCTION AND ARBITRATION 8.1 APPLICABLE LAW. This Plan is intended to be governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent not preempted by ERISA, the laws of the State of California. 6. 8.2 ARBITRATION. Any and all disputes or controversies, whether of law or fact of any nature whatsoever, arising from or respecting the application of the Plan to any Participant shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association, or by any other arbitration body mutually agreed upon by the parties. Pre-arbitration discovery shall be permitted at the request of either party to a dispute under appropriate protection for proprietary and confidential business information. The arbitrators shall be selected as follows: the Company and the Participant who is a party to the dispute shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to disqualify any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Irvine, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case, all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree, in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no use of such information except for the purposes of the arbitration, until such information shall become generally known. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary injunction, or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered and enforced in any court having jurisdiction over the parties. Reasonable notice of the time and place of arbitration shall be given to persons other than the parties, if such notice is required by law, in which case such persons or their authorized representatives shall have the right to attend or participate in the arbitration hearing in such manner as the law shall require. If any action is necessary to enforce or interpret the application of the Plan to a Participant, the prevailing party shall be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which that party may be entitled. ARTICLE 9 -- DEFINITIONS For purposes of the Plan, the following terms shall have the meanings set forth below. 9.1 "CAUSE" shall mean: (a) an intentional act that materially injures the Company; (b) the intentional refusal or failure to follow the lawful and reasonable directions of the Board of Directors or the directions of any individual to whom the Participant reports; (c) the willful and habitual neglect of duties; or (d) the conviction of a felony involving moral turpitude which is reasonably likely to inflict or has inflicted material injury on the Company; PROVIDED that the 7. Participant did not cure such misconduct within thirty (30) days following receipt of written notice of such misconduct from the Company. 9.2 "CHANGE OF CONTROL" shall be deemed to have occurred at any of the following times: (a) Upon the adoption by the stockholders of the Company of a plan of dissolution, liquidation, or sale or distribution of substantially all of the assets or operations of the Company; (b) Upon stockholder approval of a reorganization, merger, consolidation or other combination of the Company with one or more corporations as a result of which the Company will not be a surviving corporation and the stockholders of the Company immediately prior to the transaction will own beneficially less than sixty percent (60%) of the then outstanding shares of the equity securities of the controlling entity immediately following consummation of the transaction; (c) Upon stockholder approval of a reorganization, merger, consolidation or other combination of the Company with one or more corporations as a result of which the Company will be a surviving corporation, but pursuant to which a person (as defined in Section 3(a)(9) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or group of persons will acquire the beneficial ownership of forty percent (40%) or more of the equity securities of the Company immediately following consummation; or (d) At such time that, in connection with a tender offer or exchange offer for any shares of the Company's outstanding common stock (or securities convertible into common stock) or other sale of any such securities by stockholders of the Company, a person or group of persons owns beneficially thirty-three percent (33%) or more of the outstanding common stock of the Company. For purposes of this Section 9.2, a "person" shall exclude (i) the Company, (ii) any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or (iv) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company prior to the consummation of the transaction. 9.3 "COMPANY" means CoCensys, Inc., a Delaware corporation, and any successor as provided in Article 6 hereof. 9.4 "DATE OF TERMINATION" has the meaning set forth in Section 3.7. 9.5 "DISABILITY" means permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. 9.6 "EFFECTIVE DATE" shall mean January 1, 1998. 8. 9.7 "EXECUTIVE OFFICER" means the Chief Executive Officer, the President, any Vice President and the General Counsel of the Company. 9.8 "CONSTRUCTIVE TERMINATION" means (i) the assignment of duties and responsibilities which result in a diminution of position or function (but not merely a change in title or reporting relationships); (ii) the reduction in base salary by more than ten percent (10%); (iii) a material reduction in the Eligible Employee's package of incentives and benefits in the aggregate; (iv) the relocation of the Eligible Employee's principal office by more than thirty (30) miles, unless approved by the Eligible Employee; (v) the material breach of this Plan or any other material agreement between the Eligible Employee and the Company regarding the terms and conditions of employment; or (vi) the failure of any acquiring or surviving corporation to assume the responsibilities of the Company under this Plan or under any other material agreement between the Eligible Employee and the Company regarding the terms and conditions of employment. 9.9 "NOTICE OF TERMINATION" has the meaning set forth in Section 3.6. 9.10 "OPTION PLANS" shall mean those Plans adopted by the Company by which an Executive Officer has been or may be granted a stock option to acquire the Company's common stock or other equity securities, as well as any employee stock option plan adopted subsequent to the date hereof and prior to a Change of Control (and any plans succeeding thereto). 9.11 "PARTICIPANT" has the meaning set forth in Section 2.1. 9.12 "PERSON" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. 9.13 "PLAN" has the meaning set forth in Article 1. 9.14 "SEVERANCE BENEFITS" has the meaning set forth in Section 3.1. 9.15 "SEVERANCE PAYMENT" shall mean the Participant's base pay (excluding overtime, bonuses, draws, commissions, and other forms of additional compensation), at the rate in effect during the last regularly scheduled payroll period immediately preceding the Date of Termination. 9.16 "TARGET BONUS" shall mean the greater of: (i) the Participant's target bonus for the year in which the Date of Termination occurs, as approved by the Compensation Committee of the Board of Directors or (ii) the average of the annual bonuses actually paid to the Participant over the two years immediately preceding the Date of Termination (or if less, the period of time the Participant has provided services to the Company). ARTICLE 10 -- MISCELLANEOUS 10.1 SEVERABILITY. If any term, provision, covenant or restriction of the Plan is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the 9. remainder of the terms, provisions, covenants and restrictions of the Plan shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 10.2 CONSTRUCTION OF PLAN. Any gender, where appearing in the Plan, shall be deemed to include the other gender, the singular shall include the plural, and the plural shall include the singular, unless the context otherwise requires. Descriptive headings of the several Articles of the Plan are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. In the event of a conflict between the text of the Plan and any summary, description or other information regarding the Plan, the text of the Plan shall control. 10.3 AMENDMENT OR TERMINATION. The Company, by resolution of the Company's Board of Directors or the Compensation Committee of the Board, may amend or terminate this Plan with respect to any Participant or all Participants at any time except during the Coverage Period. ARTICLE 11 -- CLAIMS, INQUIRIES AND APPEALS 11.1 APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing. The Plan Administrator is: Vice President, Human Resources CoCensys, Inc. 201 Technology Drive Irvine, California 92618 11.2 DENIAL OF CLAIMS. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must notify the applicant, in writing, of the denial of the application, and of the applicant's right to review the denial. The written notice of denial will be set forth in a manner designed to be understood by the employee, and will include specific reasons for the denial, specific references to the Plan provision upon which the denial is based, a description of any additional material or information necessary for the applicant to perfect the claim along with an explanation as to why such information is necessary and an explanation of the Plan's claim procedure. This written notice will be given to the employee within 90 days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional 90 days for processing the application. If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial 90-day period. This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the application. If written notice of denial of the application for benefits is not furnished within the 10. specified time, the application shall be deemed to be denied. The applicant will then be permitted to appeal the denial in accordance with the Review Procedure described below. 11.3 REQUEST FOR A REVIEW. Any person (or that person's authorized representative) for whom an application for benefits is denied (or deemed denied), in whole or in part, may appeal the denial by submitting a written request for a review to the Plan Administrator within 60 days after the application is denied (or deemed denied). The Plan Administrator will give the applicant (or his or her representative) an opportunity to review pertinent documents in preparing a request for a review. A request for a review shall be in writing and shall be addressed to: Vice President, Human Resources CoCensys, Inc. 201 Technology Drive Irvine, California 92618 A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent. The Plan Administrator may require the applicant to submit additional facts, documents or other material as it may find necessary or appropriate in making its review. 11.4 DECISION ON REVIEW. The Plan Administrator will act on each request for review within 60 days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional 60 days), for processing the request for a review. If an extension for review is required, written notice of the extension will be furnished to the applicant within the initial 60-day period. The Plan Administrator will give prompt, written notice of its decision to the applicant. In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice will outline, in a manner calculated to be understood by the applicant, the specific reasons for the decision and the specific Plan provisions upon which the decision is based. If written notice of the Plan Administrator's decision is not given to the applicant within the time prescribed in this Section 11.4, the application will be deemed denied on review. 11.5 RULES AND PROCEDURES. The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out its responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial (or deemed denial) of benefits to do so at the applicant's own expense. 11.6 EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan may be brought until the claimant has (i) submitted a written application for benefits in accordance with the procedures described by Section 11.1 above, (ii) been notified by the Plan Administrator that the application is denied (or the application is deemed denied due to the Plan Administrator's failure to act on it within the established time period), (iii) filed a written request for a review of the application in accordance with the appeal procedure described in Section 11.3 above and (iv) been notified in writing that the Plan Administrator has denied the appeal (or the appeal is 11. deemed to be denied due to the Plan Administrator's failure to take any action on the claim within the time prescribed by Section 11.4 above). ARTICLE 12 -- OTHER PLAN INFORMATION 12.1 EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer Identification Number assigned to the Company (which is the "Plan Sponsor" as that term is used in ERISA) by the Internal Revenue Service is 330538836. The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the instructions of the Internal Revenue Service is 504. 12.2 ENDING DATE FOR PLAN'S FISCAL YEAR. The date of the end of the fiscal year for the purpose of maintaining the Plan's records is December 31. 12.3 AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service of legal process with respect to the Plan is the General Counsel, CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. 12.4 PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" of the Plan is CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. The "Plan Administrator" of the Plan is the Vice President, Human Resources, CoCensys, Inc., 201 Technology Drive, Irvine, California 92618. The Plan Sponsor and Plan Administrator's telephone number is (949) 753-6100. The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan. ARTICLE 13 -- STATEMENT OF ERISA RIGHTS 13.1 Participants in this Plan (which is a welfare benefit plan sponsored by CoCensys, Inc.) are entitled to certain rights and protections under ERISA. If you are a Participant, you are considered a participant in the Plan and, under ERISA, you are entitled to: (a) Examine, without charge, at the Plan Administrator's office and at other specified locations, such as work sites, all Plan documents and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports; (b) Obtain copies of all Plan documents and Plan information upon written request to the Plan Administrator. The Administrator may make a reasonable charge for the copies; (c) Receive a summary of the Plan's annual financial report, in the case of a plan that is required to file an annual financial report with the Department of Labor. (Generally, all pension plans and welfare plans with 100 or more participants must file these annual reports.) (d) In addition to creating rights for Plan participants, ERISA imposes duties upon the people responsible for the operation of the employee benefit plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. 12. (e) No one, including your employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA. If your claim for a Plan benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. (f) Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that the Plan fiduciaries misuse the Plan's money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. 13.2 If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about your rights under ERISA, you should contact the nearest area office of the U.S. Labor - Management Services Administration, Department of Labor. ARTICLE 14 -- EXECUTION Having been adopted by its Board on December 16, 1997, the Plan has been executed by a duly authorized officer on May 13th, 1998. COCENSYS, INC. By: F. Richard Nichol, Ph.D. ------------------------------------------- Title: President and Chief Executive Officer ---------------------------------------- 13. EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1,208 13,224 65 0 0 14,546 6,570 (3,748) 18,085 5,766 493 16,566 0 97,441 (102,310) 18,085 0 1,136 0 0 0 0 24 (3,193) 0 (3,193) 0 0 0 (3,193) (0.15) (0.15)
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