-----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, QpUMyJkir36HslsjB3Mi9hSD3Qoz8m84hiCLDsgX0UmiLO0IeSjJhSXACM14cwa0 bVcVxxooAtoz36087+PV/Q== 0001047469-98-039503.txt : 19981110 0001047469-98-039503.hdr.sgml : 19981110 ACCESSION NUMBER: 0001047469-98-039503 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 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: 98740082 BUSINESS ADDRESS: STREET 1: 201 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497536100 MAIL ADDRESS: STREET 1: 201 TECHNOLOGY DRIVE STREET 2: 201 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92618 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 30, 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 27,231,157 (CLASS OF COMMON STOCK) (OUTSTANDING AT NOVEMBER 5, 1998) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COCENSYS, INC. (A development stage company) TABLE OF CONTENTS
PAGE NUMBER PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Balance Sheets as of September 30, 1998 and December 31, 1997 3 Condensed Statements of Operations for the three and nine-month periods ended September 30, 1998 and 1997 and the period from inception (February 15, 1989) through September 30, 1998 4 Condensed Statements of Cash Flows for the nine-month periods ended September 30, 1998 and 1997 and the period from inception (February 15, 1989) through September 30, 1998 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18 SIGNATURES 19
2 COCENSYS, INC. (A development stage company) CONDENSED BALANCE SHEETS (In thousands, except share and par value amounts)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,246 $ 3,410 Short-term investments 10,827 9,050 Receivables from corporate partners 14 414 Other current assets 348 484 --------- -------- TOTAL CURRENT ASSETS 15,435 13,358 Property and equipment, net 2,596 2,823 Investments 500 500 Other assets, net 150 235 --------- -------- $ 18,681 $ 16,916 --------- -------- --------- -------- LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 383 $ 866 Other accrued liabilities 1,045 1,911 Accrued compensation and benefits 837 1,107 Deferred revenue 2,575 -- Due to corporate partners 1,498 747 Capital lease obligation - current portion 334 353 --------- -------- TOTAL CURRENT LIABILITIES 6,672 4,984 Capital lease obligation, less current portion 359 567 Other liabilities 528 534 Commitments and contingencies Stockholders' equity: Preferred stock - $.001 par value, 5,000,000 shares authorized; 207,095 shares issued and outstanding at September 30, 1998 and 214,286 at December 31, 1997 16,664 13,000 Common stock - $.001 par value, 75,000,000 shares authorized; 25,709,758 shares issued and outstanding at September 30, 1998 and 22,857,506 at December 31, 1997 106,667 97,230 Deficit accumulated during the development stage (112,117) (98,983) Deferred compensation (174) (430) Accumulated comprehensive income 82 14 --------- -------- TOTAL STOCKHOLDERS' EQUITY 11,122 10,831 --------- -------- $ 18,681 $ 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 THREE MONTHS ENDED NINE MONTHS ENDED (FEBRUARY 15, SEPTEMBER 30, SEPTEMBER 30, 1989) TO ------------------- ----------------- SEPTEMBER 30, 1998 1997 1998 1997 1998 -------- -------- -------- -------- --------- REVENUES Co-promotion revenues from corporate partners $ - $ 861 $ 540 $ 3,169 $ 30,705 Co-development revenues from corporate partners 325 951 1,346 7,900 18,039 -------- -------- -------- -------- --------- Total revenues 325 1,812 1,886 11,069 48,744 -------- -------- -------- -------- --------- OPERATING EXPENSES Research and development 4,380 5,781 11,801 17,198 102,730 Marketing, general and administrative 1,017 2,855 3,049 8,358 51,205 Acquired research and development -- -- -- -- 14,879 -------- -------- -------- -------- --------- Total operating expenses 5,397 8,636 14,850 25,556 168,814 -------- -------- -------- -------- --------- OPERATING LOSS (5,072) (6,824) (12,964) (14,487) (120,070) Gain on disposition of sales division -- -- 750 -- 5,478 Interest income 261 230 695 638 5,148 Interest expense (20) (16) (64) (67) (1,122) -------- -------- -------- -------- --------- NET LOSS (4,831) (6,610) (11,583) (13,916) (110,566) Dividends on preferred stock 1,060 -- 1,551 -- 1,551 -------- -------- -------- -------- --------- Net loss attributable to common shareholders $ (5,891) $ (6,610) $(13,134) $(13,916) $(112,117) -------- -------- -------- -------- --------- -------- -------- -------- -------- --------- Net loss per share $ (0.24) $ (0.29) $ (0.55) $ (0.62) -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing net loss per share 24,717 22,707 23,791 22,497 -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes. 4 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
PERIOD FROM INCEPTION NINE MONTHS ENDED (FEBRUARY 15, SEPTEMBER 30, 1989) TO ------------------- SEPTEMBER 30, 1998 1997 1998 -------- -------- --------- OPERATING ACTIVITIES Net loss $(11,583) $(13,916) $(110,566) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 681 776 7,506 Amortization of deferred compensation 255 203 3,862 Issuance of stock and warrants for services 74 55 2,410 Loss on sale of fixed assets -- 65 100 Gain on disposition of sales force (750) -- (5,478) Acquired research and development -- -- 12,279 Decrease (increase) in other current assets 136 157 (420) Decrease (increase) in receivable from corporate partner 400 589 (14) Increase (decrease) in advances from corporate partners 751 (446) 1,498 Increase in deferred revenue 2,575 -- 2,575 Increase (decrease) in accounts payable and other accrued liabilities (1,624) (1,204) 1,142 -------- -------- --------- NET CASH USED IN OPERATING ACTIVITIES (9,085) (13,721) (85,106) -------- -------- --------- INVESTING ACTIVITIES Decrease (increase) in short-term investments (1,709) 9,092 (10,745) Purchase of property and equipment (454) (931) (7,554) Decrease (increase) in other assets and notes receivable from officers 85 (159) (1,306) Cash received on disposition of sales division 750 -- 8,750 Cash received on sale of fixed assets -- 1 20 Increase in deferred costs -- -- (2,475) Purchase of investments -- -- (500) Acquisition of Acea Pharmaceuticals, net of cash acquired -- -- (62) -------- -------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,328) 8,003 (13,872) -------- -------- --------- FINANCING ACTIVITIES Net cash proceeds from issuance of common stock 156 2,329 61,401 Net cash proceeds from issuance of preferred stock 11,320 5,000 40,701 Proceeds from sale/leaseback of fixed assets and notes payable 163 529 5,398 Payments on capital lease obligations and notes payable (390) (677) (4,276) -------- -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 11,249 7,181 103,224 -------- -------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 836 1,463 4,246 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,410 1,050 -- -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,246 $ 2,513 $ 4,246 -------- -------- --------- -------- -------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 65 $ 55 $ 885 -------- -------- --------- -------- -------- ---------
See accompanying notes. 5 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION CoCensys, Inc. ("CoCensys" or the "Company") is a biopharmaceutical company dedicated to the discovery and development of small molecule drugs to treat neurological and psychiatric disorders. The interim financial information for the three and nine-month periods ended September 30, 1998 and 1997 is unaudited but includes all adjustments (consisting only of normal recurring entries) that 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 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- and nine-month periods ended September 30, 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. 6 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 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 gains and losses on available-for-sale securities, which prior to adoption were reported separately on stockholders' 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 THREE MONTHS ENDED NINE MONTHS ENDED (FEBRUARY 15, SEPTEMBER 30, SEPTEMBER 30, 1989) TO ------------------- ----------------- SEPTEMBER 30, 1998 1997 1998 1997 1998 -------- -------- -------- -------- --------- Net loss $ (5,891) $ (6,610) $ (13,134) $ (13,916) $ (112,117) Unrealized gain on investments 99 9 81 23 82 --------- ---------- ---------- ---------- ----------- Comprehensive loss $ (5,792) $ (6,601) $ (13,053) $ (13,893) $ (112,035) --------- ---------- ---------- ---------- ----------- --------- ---------- ---------- ---------- -----------
PENDING ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 131 In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standards No. 131, "Disclosures about Segments of an 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 7 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS On October 8, 1997, the Company entered into an Asset Purchase Agreement (the "Agreement") to sell its sales and marketing division (the "Division") to Watson Laboratories, Inc. ("Watson"), a wholly owned subsidiary of Watson Pharmaceuticals, Inc. Under the terms of the Agreement, Watson assumed the Division's co-promotion agreements, acquired certain of its operating assets and 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 retained, as of specified future dates, certain percentages of the employees from the Division. Pursuant to this contingency arrangement, Watson paid CoCensys $750,000 in April 1998 and $250,000 in October 1998. 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 this total, the Company paid $1.0 million in October 1997. Additionally, $1.0 million of the $8.0 million of proceeds from the sale of the Division was placed into an escrow account to satisfy the future obligations related to these acquisitions. In October 1998, $500,000 of the funds held in escrow was disbursed. 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 amended 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 from 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 an imputed non-cash dividend at 12 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. In May 1998, the Series B Convertible Preferred Stock converted, in accordance with its terms, into 1.6 million shares of common stock at a conversion price of $4.375 per share. In July 1998, Searle notified CoCensys that it had decided not to participate further in the development of the Company's proprietary compounds for the treatment of insomnia. CoCensys intends to continue research and development of its compounds to treat insomnia and will consider seeking a new partner for the program in the future. 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 and marketing 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 shares of 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. As of September 30, 1998, CoCensys' interest in Cytovia was less than twenty percent and is accounted for on a cost basis. 10 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 8. PRIVATE PLACEMENT OF PREFERRED STOCK In June 1998, the Company raised $8.0 million through the private placement of convertible preferred stock. The preferred stock is convertible into common stock on June 8, 2001, or earlier at the holder's option at a price based on the value of the common stock, subject to a maximum price of $3.93 per share. The terms of the private placement included the issuance of warrants to purchase 350,000 shares of common stock at $4.50 per share, with additional warrants to be issued for 100,000 shares of common stock if investors hold a specified amount of preferred stock for at least five months following purchase. The preferred stock carries an annual dividend of 7.5 percent of the face value of the outstanding shares, subject to reductions in the dividend rate if the market price of Company's common stock increases to certain levels. Dividends are payable quarterly in cash or, at the election of the Company, by adding the amount of the dividend to the conversion value of the preferred stock. Additionally, $390,000 of the $8.0 million in proceeds was allocated to the warrants and $890,000 was allocated to a beneficial conversion feature that allows investors to convert at 90% of the market price of the common stock after 122 days. These two allocated amounts have been credited to additional paid in capital and will be treated as issuance discounts. Accordingly, the $390,000 and $890,000 will be amortized over three years and 122 days, respectively, in the form of additional noncash preferred dividends. 9. SUBSEQUENT EVENT On October 16, 1998, the Company announced results from its Phase II clinical trial using a tablet formulation of ganaxolone for acute migraine. While the patients receiving ganaxolone reported pain relief at a rate in excess of those receiving placebo, the difference was not statistically significant. The Company did achieve statistically significant results in pain relief at two hours in a subset of forty-five female patients who were dosed with ganaxolone or placebo within five days following start of menses. Based on the results of the trial, the Company intends to seek a collaboration partner to develop ganaxolone for migraine prophylaxis as well as for epilepsy, for which the drug has shown promising results in previous clinical trials. The Company also will seek a collaboration partner to develop backup compounds to ganaxolone for acute migraine therapy. 11 COCENSYS, INC. (A development stage company) 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 and development of small molecule drugs to treat neurological and psychiatric disorders. The Company's product discovery and development programs are focused on the exploration of novel receptors and enzymes and their ligands and inhibitors through three technology platforms: GABA 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 September 30, 1998, the Company's accumulated deficit was approximately $112.1 million. RESULTS OF OPERATIONS The Company recognized no co-promotion revenues for the three-month period ended September 30, 1998, and $540,000 for the nine-month period ended September 30, 1998, compared to $861,000 and $3.2 million during the same periods in fiscal 1997. 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 1998 co-promotion revenue is attributable to a bonus for fiscal 1997 activity that was received and recognized in March 1998. The Company recognized $325,000 and $1.3 million in co-development revenues for the three and nine-month periods ended September 30, 1998, respectively, compared to $951,000 and $7.9 million for the same periods in 1997. In 1998, co-development revenues are primarily associated with the SSNRA (subtype-selective NMDA receptor antagonists) program with Warner-Lambert. In the second quarter of 1997, the Company recognized $5.8 million related to an agreement with Wyeth-Ayerst to co-develop the Company's anxiolytic compound. 12 COCENSYS, INC. (A development stage company) Research and development expenses decreased to $4.4 and $11.8 million for the three and nine-month periods ended September 30, 1998, respectively, from $5.8 and $17.2 million in the comparable periods of the prior year. The decreases in expenses in the current year are attributable to a lower level of external clinical activity relative to a year earlier and cost savings that resulted from last year's organizational restructuring. In the first nine months of 1997, the Company had ongoing clinical trials for epilepsy, migraine and stroke. In the first nine months of 1998, the Company's clinical efforts were mainly focused on a clinical trial of ganaxolone in the treatment of migraine and preclinical development of the Company's sodium channel blocker. The narrower focus in the current year resulted in lower overall research and development expenses. Marketing, general and administrative expense decreased to $1.0 and $3.0 million in the three and nine-month periods ended September 30, 1998, respectively, from $2.9 and $8.4 million in the comparable periods of the prior year. Results for the first nine months of 1997 include the costs of the sales and marketing division, which was sold in October 1997. Gain on disposition of sales division was $750,000 for the nine-month period ended September 30, 1998. In April 1998, Watson paid the Company the first of two contingent payments based on Watson's ability to retain members of the sales and marketing division. The final payment of $250,000 was made in October 1998 and will be recognized in the fourth quarter. Interest income was $261,000 and $695,000 for the three- and nine-month periods ended September 30, 1998, respectively, compared to $230,000 and $638,000 for the same periods in fiscal 1997. The increase is due to higher average cash and investment balances in the current year when compared to the same periods a year earlier. Preferred dividends were $1.1 million and $1.6 million for the three and nine-month periods ended September 30, 1998, respectively, while there were no dividends in the comparable periods of the prior fiscal year. Preferred dividends arise from the amortization of discounts from the face value of outstanding preferred stock and do not involve the payment of cash. Certain of the discounts relating to the June 1998 sale of preferred stock will be fully amortized as of October 8, 1998; accordingly, the Company anticipates that the amount of preferred dividends will decrease in future periods. LIQUIDITY AND CAPITAL RESOURCES From its inception in February 1989 through September 30, 1998, the Company has financed its operations primarily through private and public offerings of its equity securities, raising net proceeds of approximately $102.0 million. At September 30, 1998, the Company's balances of cash, cash equivalents and investments totaled $15.6 million, compared to $13.0 million at December 31, 1997. Since its inception in February 1989 through September 30, 1998, the Company had invested $7.6 million in leasehold improvements, laboratory and computer equipment and office furnishings and equipment. The Company has financed $3.6 million of these capital additions through capital lease lines. In addition, the Company leases its laboratory and office facilities under operating leases. 13 COCENSYS, INC. (A development stage company) 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. On June 8, 1998, the Company issued 8,000 shares of Series E Convertible Preferred Stock with a stated value of $1,000 per share for an aggregate of $8 million in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. See Note 8 of the Notes to Condensed Financial Statements "Private Placement of Preferred Stock," above. 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 in April 1998 and $250,000 in October 1998. 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 1999. The preferred stock accrues an imputed 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 Company's Development and Commercialization Agreement with G.D. Searle & Co., both companies were obligated to pay a portion of the development costs of CCD 3693 and its back-up compounds for the U.S. market. In addition, Searle purchased 100,000 shares of the Company's Series B Convertible Preferred Stock for $7.0 million during 1996. In May 1998, the preferred stock converted, in accordance with its terms, into 1.6 million shares of common stock at a conversion price of $4.375 per share. In July 1998, Searle notified CoCensys that it had decided not to participate further in the development of the Company's proprietary compounds for the 14 COCENSYS, INC. (A development stage company) treatment of insomnia. CoCensys intends to continue research and development of its compounds to treat insomnia and will consider seeking a new partner for the program in the future. 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 license fees and milestone payments from research and development collaborations for its proprietary products and additional sales of equity. The Company anticipates that its existing capital resources, including funding expected to be available through current partner collaborations and additional research and development collaborations that will be sought by the Company, will be adequate to satisfy its capital needs for at least the next 12 months. The Company will need to obtain substantial additional funds to conduct the costly and time-consuming research, preclinical development and clinical trials necessary to bring its products to market. The Company intends to seek additional funding through additional research and development collaborations with suitable corporate partners and/or through public or private financing. There can be no assurance that additional financings or suitable collaborations will be available on favorable terms, if at all. Insufficient funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the rate of technological advances, determinations as to the commercial potential of the Company's products under development, the status of competitive products, the establishment of third-party manufacturing arrangements and the establishment of additional collaborative relationships. IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions or engage in normal business activities. The Company has completed a preliminary assessment and will have to modify or replace portions of its software 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 15 COCENSYS, INC. (A development stage company) 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 continued or 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 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. As of November 5, 1998, 6,455 shares of the Series E Convertible Preferred Stock ("Series E Stock") were issued and outstanding. Each share of the Series E Stock is convertible into such number of shares of common stock as is determined by dividing the stated value ($1,000) of the share of Series E Stock (as such value is increased by dividends based on the number of days the Series E Stock is held) by the then current conversion price (which is determined by reference to the then current market price). If converted on November 5, 1998, the Series E Stock would have been convertible into approximately 12 million shares of common stock, but this number of shares could prove to be significantly greater in the event of a decrease in the market price of the common stock which could cause substantial dilution of the Company's common stock. 16 COCENSYS, INC. (A development stage company) In order to comply with the rules of the Nasdaq Stock Market, the Company is required to obtain the approval of the holders of a majority of its common stock (not including shares of common stock issued as a dividend on or upon conversion of the Series E Stock) prior to issuing shares of common stock as a dividend on or upon conversion of Series E Stock in excess of an aggregate of 4,932,948 shares. If such approval is not obtained, the Company would be required to redeem the then-outstanding Series E Stock for cash in an amount equal to 110% of the aggregate conversion price then in effect. The occurrence of certain other events, including certain bankruptcy events or delisting of the common stock, also require redemption of the Series E Stock. Redemption of the Series E Stock could significantly deplete the Company's cash reserves and materially adversely affect its operations and financial condition. The Company's common stock is traded on the Nasdaq National Market. In order to maintain its listing of the Nasdaq National Market, the Company must maintain net tangible assets, market capitalization and public float at specified levels, and generally must maintain a minimum bid price of $1.00 per share. The low bid price for the Company's shares has recently included bids below $1.00 per share. The Nasdaq SmallCap Market also requires a minimum bid price of $1.00 per share. If the Company is unable to maintain continued listing of the common stock on either of these markets, its securities could trade on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." If this occurs, a stockholder will find it more difficult to dispose of the securities or to obtain accurate quotations as to the price of the securities. In addition, the common stock could become subject to the "penny stock" regulations promulgated under the Exchange Act, which impose additional restrictions on broker-dealers who trade in such stock and could severely limit the liquidity of the Company's securities. Failure to maintain listing on the Nasdaq National Market or Nasdaq SmallCap Market also would constitute an event requiring redemption of the Series E Stock. 17 COCENSYS, INC. (A development stage company) PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 1998 Non-Officer Equity Incentive Plan and Form of Agreements ** 27 Financial Data Schedule **
- ---------- ** Filed with EDGAR version only. (b) Reports on Form 8-K The Company filed a Form 8-K on August 5, 1998, reporting under Item 5 that G.D. Searle & Co. decided not to participate further in the development of CCD 3693, CoCensys' lead compound for the treatment of insomnia. The Company filed a Form 8-K on October 23, 1998, reporting under Item 5 the results of its Phase II clinical trial of ganaxolone for acute migraine. 18 COCENSYS, INC. (A development stage company) 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: November 5, 1998 By: /s/ F. Richard Nichol, Ph.D. ---------------------- ---------------------------------- F. Richard Nichol, Ph.D. President and Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER) Date: November 5, 1998 By: /s/ Robert R. Holmen ---------------------- ---------------------------------- Robert R. Holmen Acting Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 19 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 COCENSYS, INC. 1998 NON-OFFICER EQUITY INCENTIVE PLAN ADOPTED BY THE BOARD OF DIRECTORS EFFECTIVE SEPTEMBER 16, 1998 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Consultants may be given an opportunity to benefit from increases in value of the common stock of the Company ("Common Stock") through the granting of (i) Nonstatutory Stock Options, (ii) stock bonuses and (iii) rights to purchase restricted stock, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Consultants, to secure and retain the services of new Employees and Consultants and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board, be either (i) Nonstatutory Stock Options granted pursuant to Section 6 hereof, or (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof. All Options shall be in such form as issued pursuant to Section 6. 2. DEFINITIONS. (a) "AFFILIATE" means a corporation or other organization or person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company, as defined in Rule 144 of the Securities Act. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE"" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means CoCensys, Inc., a Delaware corporation. (f) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include a Director. (g) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the service relationship of a person, whether as an Employee or a Consultant, is not interrupted or terminated. The Board or the Committee, in that party's sole discretion, may determine whether Continuous Status as an Employee or Consultant shall be considered interrupted in the case of: 1 (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. (h) "DIRECTOR" means a member of the Board. (i) "DISABILITY" means that an individual is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted for a sufficiently long period of time for the individual to be eligible under the Company's policy of long-term disability insurance. (j) "EMPLOYEE" means any person employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a Director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock of the Company determined as follows: (1) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the Fair Market Value of a Share shall be the closing sales price for such Share (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable. (2) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an incentive stock option pursuant to Section 422 of the Code and the regulations promulgated thereunder. (n) "OFFICER" means an Employee of the Company who holds the position of vice president or a more senior position or is an "executive officer" of the Company as defined in Section 16 of the Exchange Act. (0) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (p) "OPTION AGREEMENT" means a written agreement between the Company and an Option Holder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (q) "OPTION HOLDER" means a person to whom an Option is granted pursuant to the Plan. (r) "PLAN" means this CoCensys, Inc. 1998 Non-Officer Equity Incentive Plan. 2 (s) "SHARE" means a share of Common Stock of the Company. (t) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus and any right to purchase restricted stock. (u) "SECURITIES ACT" means the Securities Act of 1933, as amended. (v) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Option, a stock bonus, a right to purchase restricted stock, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Shares pursuant to a Stock Award and the number of Shares with respect to which a Stock Award shall be granted to each such person. (2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or a Stock Award as provided in Section 12. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee or committees ("Committee") of one or more members of the Board. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 11 relating to adjustments upon changes in the Common Stock, the Shares that may be issued pursuant to Stock Awards shall not exceed in the aggregate two million (2,000,000) Shares. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of restricted stock), the Shares not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (b) The Shares subject to the Plan may be unissued Shares or reacquired Shares bought on the market or otherwise. 5. ELIGIBILITY. Stock Awards may be granted only to Employees or Consultants who are not, at the time of such grants, either (i) Directors or (ii) Officers. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted or such longer or shorter term as may be provided in the Option Agreement. (b) PRICE. The exercise price of each Option shall be as determined by the Board and shall be set forth in the Option Agreement. (c) CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of (i) cash or check, (ii) promissory note (except that payment of the Share's "par value", as defined in the Delaware General Corporation Law, shall not be made by deferred payment), (iii) other Shares having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised, including by delivering to the Company an attestation of ownership of owned and unencumbered Shares in a form approved by the Company, (iv) payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of the Shares, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds, (v) any combination of such methods of payment or (vi) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. In the case of any deferred payment arrangement, interest shall be charged at the minimum rate of 4 interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Option may be transferred to the extent provided in the Option Agreement; provided that if the Option Agreement does not expressly permit the transfer of an Option, the Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Option Holder, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of Shares subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the Shares allotted to that period, and may be exercised with respect to some or all of the Shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of Shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. (1) If an Option Holder's Continuous Status as an Employee or Consultant terminates (other than upon the Option Holder's death or disability), the Option Holder may exercise his or her Option within such period of time designated by the Board, which shall in no event be later than the expiration of the term of the Option as set forth in the Option Agreement (the "Post-Termination Exercise Period") and only to the extent that the Option Holder was entitled to exercise the Option on the date the Option Holder's Continuous Status as an Employee or Consultant terminates. The Board may at any time extend the Post-Termination Exercise Period and provide for continued vesting during such extended period. If, as of the date of termination, the Option Holder is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Option Holder does not exercise his or her Option within the time specified in the Option Agreement or as otherwise determined above, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the foregoing, the Board shall have the power to permit an Option to vest, in whole or in part, during the Post-Termination Exercise Period. (2) An Option Holder's Option Agreement may also provide that if the exercise of the Option following the termination of the Option Holder's Continuous Status as an Employee or Consultant (other than upon the Option Holder's death or disability) would be prohibited at any time solely because the issuance of Shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the 5 expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Option Holder's Continuous Status as an Employee or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTION HOLDER. If an Option Holder's Continuous Status as an Employee or Consultant terminates as a result of the Option Holder's Disability, the Option Holder may exercise his or her Option (to the extent that the Option Holder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Option Holder is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Option Holder does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTION HOLDER. In the event of the death of an Option Holder during, or within a period specified in the Option Agreement after the termination of, the Option Holder's Continuous Status as an Employee or Consultant, the Option may be exercised (to the extent the Option Holder was entitled to exercise the Option as of the date of death) by the Option Holder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance, but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Option Holder was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Option Holder may elect at any time while an Employee or Consultant to exercise the Option as to any part or all of the Shares subject to the Option prior to the full vesting of the Option. Any unvested Shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. (j) RE-LOAD OPTIONS. (1) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Option Holder to a further Option (a "Re-Load Option") if the Option Holder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other Shares in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of Shares equal to the number of Shares surrendered as part or all of the exercise price of 6 such Option, (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Shares subject to the Re-Load Option on the date of exercise of the original Option. (2) There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient Shares under subsection 4(a) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such agreement. Notwithstanding the foregoing, the Board may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution so long as stock awarded under such agreement remains subject to the terms of any restrictive covenant (such as a repurchase option or reacquisition option) in favor of the Company. (c) CONSIDERATION. The purchase price of Shares acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash or by check at the time of purchase, (ii) at the discretion of the Board, according to a deferred payment documented by use of a promissory note or other arrangement with the person to whom the Shares are sold on such terms approved by the Board, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment, or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion. Notwithstanding the foregoing, the Board may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares sold or awarded under the Plan may, but need not, be subject to a repurchase option or reacquisition option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT. If a Participant's Continuous Status as an Employee or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the Shares held by that person which have not 7 vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. CANCELLATION AND RE-GRANT OF OPTIONS. The Board shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of any adversely affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of Shares. 9. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of Shares required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares under Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any Shares issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Stock Awards unless and until such authority is obtained. 10. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Stock Awards shall constitute general funds of the Company. 11. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which all or any part of a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) No Employee, Consultant or any person to whom a Stock Award is transferred in accordance with the Plan shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any Shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate or to continue serving as a Consultant or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, or the right to terminate the 8 relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate. (d) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred in accordance with the Plan, as a condition of exercising or acquiring Shares under any Stock Award, (i) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks associated with the Stock Award, and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the Shares subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the Shares. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the Shares upon the exercise or acquisition of Shares under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Shares. (e) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Shares under a Stock Award by any of the following means or by a combination of such means: (i) tendering a cash payment, (ii) authorizing the Company to withhold Shares from the Shares otherwise issuable to the participant as a result of the exercise or acquisition of Shares under the Stock Award or (iii) delivering to the Company owned and unencumbered Shares, including by delivering to the Company an attestation of ownership of owned and unencumbered Shares in a form approved by the Company. 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the Shares subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of Shares, exchange of Shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of Shares subject to the Plan pursuant to subsection 4(a), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of Shares and price per Share subject to such outstanding Stock Awards. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) 9 (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company, (2) a merger or consolidation in which the Company is not the surviving corporation, (3) a reverse merger in which the Company is the surviving corporation but Shares outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation (or an Affiliate thereof) shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. If any surviving corporation (or Affiliate) refuses to assume such Stock Awards, or to substitute similar Stock Awards for those outstanding under the Plan, then with respect to Stock Awards held by persons then performing services as Employees or Consultants, the time during which such Stock Awards may be exercised shall be accelerated to allow the Option Holders a reasonable amount of time to exercise all Shares covered by such Stock Award and the Stock Awards terminated if not exercised during such time. 13. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. (b) The Board, in its sole discretion, may submit the Plan and/or any amendment to the Plan for stockholder approval. (c) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (d) The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 14. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate when all Shares reserved for issuance under the Plan have been issued and all such issued Shares are no longer subject to a repurchase option or a reacquisition option in favor of the Company. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted. 15. EFFECTIVE DATE OF PLAN. The Plan shall become effective on September 16, 1998. 10 NONSTATUTORY STOCK OPTION 1998 NON-OFFICER EQUITY INCENTIVE PLAN __________________________, Optionholder: CoCensys, Inc. (the "Company"), pursuant to its 1998 Non-Officer Equity Incentive Plan (the "Plan"), has granted to you, the optionholder named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is NOT intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees or consultants. Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is ____________________ (______). 2. VESTING. Subject to the limitations contained herein, [25%] of the shares will vest (become exercisable) on ____________, ____ and the remaining [_____________] shares will vest in [thirty-six (36)] equal monthly installments thereafter until either (i) you cease to provide services to the Company for any reason, or (ii) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is _________________ ($____) per share, being not less than eighty-five percent (85%) of the fair market value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; 11 (iii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; or (iv) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(i) through 3(b)(iii) above. 4. WHOLE SHARES. This option may only be exercised for whole shares. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 6. TERM. The term of this option commences on ____________, ____, the date of grant, and expires on _________________ (the "Expiration Date"), which date shall be no more than ten (10) years from date this option is granted, unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date as follows: three (3) months after the termination of your Continuous Status as an Employee or Consultant with the Company or an Affiliate of the Company unless one of the following circumstances exists: (a) Your termination of Continuous Status as an Employee or Consultant is due to your disability. This option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee or Consultant. (b) Your termination of Continuous Status as an Employee or Consultant is due to your death or your death occurs within three (3) months following your termination of Continuous Status as an Employee or Consultant for any other reason. This option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months after your death. (c) If during any part of such three (3)-month period you may not exercise your option solely because of the condition set forth in paragraph 5 above, then your option will not expire until the earlier of the Expiration Date set forth above or until this option shall have been exercisable for an aggregate period of three (3) months after your termination of Continuous Status as an Employee or Consultant. (d) If your exercise of the option within three (3) months after termination of your Continuous Status as an Employee or Consultant with the Company or with an Affiliate of the Company would result in liability under section 16(b) of the Securities Exchange Act of 1934, then your option will expire on the earlier of (i) the Expiration Date set forth above, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six 12 (6) months and ten (10) days after the termination of your Continuous Status as an Employee or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee or Consultant under the provisions of paragraph 2 of this option. 7. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subsection 11(d) of the Plan. (b) By exercising this option you agree that, as a precondition to the completion of any exercise, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise. You also agree that the exercise of this option has not been completed and that the Company is under no obligation to issue any shares of Common Stock to you until such an arrangement is established or the Company's tax withholding obligations are satisfied, as determined by the Company. 8. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 9. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or officers or employees to continue any relationship which you might have as a Consultant for the Company or Affiliate of the Company. 10. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, 13 and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated , . -------------------- -------- Very truly yours, COCENSYS, INC. Signed: ----------------------------- Duly authorized on behalf of the Board of Directors ACKNOWLEDGEMENT AND AGREEMENT The undersigned optionholder: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned option holder and the Company and its Affiliates regarding the acquisition of stock in the Company under this option and supersedes and terminates all prior oral and written agreements on that subject. ------------------------------------ OPTIONHOLDER Address: ---------------------------- ------------------------------------ 14 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,246 10,827 14 0 0 15,435 6,813 (4,216) 18,681 6,672 359 0 16,664 106,667 (112,209) 18,681 0 1,886 0 0 0 0 (64) (11,583) 0 (11,583) 0 0 0 (11,583) (.55) (.55)
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