-----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, T47WFrMuGGxTWYGpdpkvEWyWRnbkgYNSXyYgYDENAYjMNbkpzHsoDT2a2gxoq2g3 NqmVxlt5Yae8USGdXp+n5w== /in/edgar/work/0000912057-00-049991/0000912057-00-049991.txt : 20001115 0000912057-00-049991.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049991 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREGA BIOSCIENCES INC CENTRAL INDEX KEY: 0000887920 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 510336233 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27972 FILM NUMBER: 767364 BUSINESS ADDRESS: STREET 1: 9880 CAMPUS POINT DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194106500 MAIL ADDRESS: STREET 1: 9880 CAMPUS POINT DRIVE CITY: SANSAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: HOUGHTEN PHARMACEUTICALS INC DATE OF NAME CHANGE: 19960215 10-Q 1 a2030825z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 2000 OR [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission File Number: 0-27972 TREGA BIOSCIENCES, INC. ------------------------------------------------------- (Exact Name of Registrant as Specified in its charter) DELAWARE 51-0336233 ------------------------------- ----------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9880 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121 (858) 410-6500 (Address, including zip code, and telephone, including area code, of registrant's principal executive offices) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding At September 30, 2000 ------------------------------ --------------------------------- Common Stock, $0.001 par value 23,371,349
TREGA BIOSCIENCES, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited): Consolidated Balance Sheets at September 30, 2000 and December 31, 1999........... 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and 1999....................................................... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999....................................................... 5 Notes to Consolidated Financial Statements........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 16 PART II. OTHER INFORMATION Item 6. Exhibits......................................................................... 17 SIGNATURE................................................................................. 18
2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Trega Biosciences, Inc. Consolidated Balance Sheets (in thousands, except share data)
September 30, December 31, 2000 1999 --------------- --------------- ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 2,238 $ 5,393 Short-term investments 3,602 1,041 Accounts receivable and other current assets 3,888 2,541 --------------- --------------- Total current assets 9,728 8,975 Property and equipment, net 4,647 4,179 Investment in affiliate, net of amortization 1,844 2,581 Other assets 6,616 6,926 --------------- --------------- $ 22,835 $ 22,661 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,386 $ 696 Accrued compensation and other accrued liabilities 2,140 2,867 Line of credit 1,500 1,500 Current portion of debt obligations 1,643 1,272 Deferred revenue 1,197 1,820 --------------- --------------- Total current liabilities 7,866 8,155 Long-term debt obligations, net of current portion 2,727 2,484 Deferred rent and long-term deposits 783 512 Stockholders' equity: Common stock, $.001 par value Authorized shares - 40,000,000 Issued and outstanding shares -23,371,349 and 19,101,437 at September 30, 2000 and December 31, 1999, respectively 23 19 Additional paid-in capital 100,333 89,067 Common stock issuable 16 16 Deferred compensation (247) (489) Accumulated deficit (88,666) (77,103) --------------- --------------- Total stockholders' equity 11,459 11,510 --------------- --------------- $ 22,835 $ 22,661 =============== ===============
Note: The balance sheet at December 31, 1999, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 Trega Biosciences, Inc. Consolidated Statements of Operations (in thousands, except net loss per share)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------- ------------ ------------- (Unaudited) (Unaudited) Revenues: Compound revenues $ 2,504 $ 2,822 $ 4,814 $ 4,383 Related party contract research 825 825 2,475 2,475 Contract research and license fees 74 277 708 1,658 Net sales 7 76 50 265 ------------ ------------- ------------ ------------- 3,410 4,000 8,047 8,781 Costs and expenses: Cost of sales 29 83 136 242 Research and development 5,036 4,593 13,635 13,534 Selling, general and administrative 2,271 1,682 6,568 5,187 ------------ ------------- ------------ ------------- 7,336 6,358 20,339 18,963 ------------ ------------- ------------ ------------- Loss from operations before equity in losses of affiliate (3,926) (2,358) (12,292) (10,182) Equity in losses of affiliate (111) (16) (451) (16) ------------ ------------- ------------ ------------- Loss from operations (4,037) (2,374) (12,743) (10,198) Other income: Interest income (expense), net (78) 32 180 174 Gain on sale of ChromaXome - - 1,000 1,513 ------------ ------------- ------------ ------------- Net loss $ (4,115) $ (2,342) $ (11,563) $ (8,511) ============ ============= ============ ============= Basic and diluted net loss per share $ (0.18) $ (0.13) $ (0.53) $ (0.47) ============ ============= ============ ============= Shares used in computing basic and diluted net loss per share 23,337 18,537 21,986 18,150 ============ ============= ============ =============
See accompanying notes. 4 Trega Biosciences, Inc. Consolidated Statements of Cash Flows (in thousands)
Nine months ended September 30, ----------------------------------- 2000 1999 ---------------- ---------------- (Unaudited) OPERATING ACTIVITIES Net loss $ (11,563) $ (8,511) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization 1,846 1,565 Amortization of note receivable discount - (126) Amortization of deferred compensation 541 454 Equity in losses of affiliate 451 16 Loss on disposal of assets - 2 Gain on sale of CXC (1,000) (1,513) Changes in operating assets and liabilities, net of effects from the transfer of assets from sale of CXC in 1999: Accounts receivable and other current assets (1,347) (1,517) Accounts payable 690 (91) Accrued compensation and other accrued liabilities (726) 232 Deferred rent and long-term deposits 271 222 Deferred revenue (623) (2,024) ---------------- ---------------- Net cash flows (used in) operating activities (11,460) (11,291) INVESTING ACTIVITIES Purchase of short-term investments (6,110) (6,134) Maturities of short-term investments 3,550 7,497 Purchase of property and equipment (1,498) (1,117) Investment in affiliate - (1,000) Net proceeds from sale of CXC 1,000 1,705 Other assets (221) 903 ---------------- ---------------- Net cash (used in) provided by investing activities (3,279) 1,854 FINANCING ACTIVITIES Principal payments under debt obligations (1,220) (1,017) Issuance of equipment notes and notes payable 1,833 1,942 Issuance of common stock 10,971 80 ---------------- ---------------- Net cash provided by financing activities 11,584 1,005 ---------------- ---------------- Net (decrease) in cash and cash equivalents (3,155) (8,432) Cash and cash equivalents at beginning of period 5,393 9,755 ---------------- ---------------- Cash and cash equivalents at end of period $ 2,238 $ 1,323 ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest $ 396 $ 239 ================ ================ SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES Deferred compensation $ 210 $ 1,500 ================ ================
See accompanying notes. 5 Trega Biosciences, Inc. Notes to Consolidated Financial Statements September 30, 2000 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Trega Biosciences, Inc. (the "Company"), have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For more complete information, these financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1999, which were included in the Company's Form 10-K filed with the Securities and Exchange Commission. 2. SIGNIFICANT ACCOUNTING POLICIES Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates. Net Loss Per Share Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share" requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during the period, while diluted earnings per share also gives effect to all potential diluted common shares outstanding during the period such as those underlying outstanding options, warrants and convertible securities and contingently issuable shares. However, all common shares, outstanding options, warrants and convertible securities and contingently issuable shares have been excluded from the calculation of diluted earnings per share, as their inclusion would be anti-dilutive. Comprehensive Income (Loss) Statement of Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments and unrealized gains and losses on investments, are required to be reported, net of their related tax effect, to arrive at comprehensive income. For the three and nine months ended September 30, 2000 and 1999, comprehensive loss is the same as net loss. 3. DEBT LINE OF CREDIT In August 1999, the Company entered into a line of credit in the amount of $1.5 million that provided funds to be used primarily for working capital purposes. The line of credit, which is secured by the general assets of the Company, bears interest at prime plus .75% (10.25% at September 30, 2000) per annum and is for a term of one year. The line of credit contains covenants relating to cash flow coverage and minimum cash balances. As of September 30, 2000, the Company is in compliance with all debt covenants. In August 1999, the entire line of credit of $1.5 million was accessed and $1.5 million remains outstanding at September 30, 2000. In connection with the receipt of the line of credit, the Company issued a warrant to the lender to purchase up to 20,000 shares of the Company's common stock at $1.75 per share. The warrant expires on August 5, 2004. In July and August 2000, the Company entered into agreements that together extended the term of the line of credit to October 20, 2000. In November 2000, the Company entered into an agreement to extend the term of the line of credit an additional 12 months. Under this extension, the Company was required to place a $1.5 million time certificate of deposit (the current outstanding balance under the line) with the 6 lender as collateral. LONG-TERM DEBT In March 2000, the Company obtained an equipment financing line in the amount of $600,000, of which the Company had accessed approximately $578,000 by September 30, 2000. The loan, which is secured by certain of the Company's equipment, bears interest of 13.337% per annum and is to be repaid monthly over a four-year term. In addition, the Company obtained an additional equipment financing line of $1.4 million in April 2000, of which the Company had accessed approximately $1.1 million by September 30, 2000. The loan, which is secured by certain of the Company's equipment, bears interest of 14.423% per annum and is to be repaid monthly over a four-year term. In connection with certain equipment financing lines, the Company must meet certain financial covenants pertaining to the amount of its cash and marketable securities to be maintained during the terms of the financing lines. Due to certain covenant violations, the Company has provided required security deposits and therefore has fulfilled its obligations related to the covenants. The security deposits in the amount of $490,000 are included in the other assets line item in the consolidated balance sheet. 4. COMMON STOCK During the three and nine months ended September 30, 2000, the Company issued 72,513 and 603,244 shares of common stock, respectively, upon the exercise of options and warrants and as a result of participation in the Company's employee stock purchase plan, which shares are included in common stock outstanding at September 30, 2000. In April 2000, the Company sold 3.7 million newly issued shares of its common stock to selected institutional and other accredited investors for net cash proceeds of approximately $10.1 million ("the Equity Financing"). In addition, the Company agreed to grant a warrant to the placement agent for the Equity Financing to purchase up to 220,000 additional shares of common stock at an exercise price of $5.375 per share. 5. LOAN TO AFFILIATE In June 2000, the Company made a short term secured loan of $250,000 to ChemNavigator.com, Inc., an affiliate of the Company. All unpaid principal together with all accrued but unpaid interest was received by the Company in August 2000. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL," "EXPECT," "BELIEVE," "ESTIMATE," "PLAN," "INTEND," "ANTICIPATE" AND SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES (INCLUDING THOSE SET FORTH BELOW IN THE SECTION OF THIS ITEM 2 OF THIS QUARTERLY REPORT ON FORM 10-Q UNDER THE CAPTION "RISK FACTORS" AND IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN OUR EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED. OVERVIEW We primarily develop and market products designed to assist pharmaceutical and biotechnology companies in the identification of drug candidates and to accelerate the traditional drug discovery process. These products include our proprietary IDiscovery-TM- technologies, comprised of our Chem.Folio-Registered Trademark- chemical compounds and our iDEA-TM- predictive ADME simulation system. We also conduct an internal drug discovery program in the areas of obesity, diabetes and syndrome X, a syndrome associated with obesity and diabetes, involving the human body's resistance to insulin. The Opportunity Traditional drug discovery involves several sequential steps, creating a time-consuming process with a high attrition rate. In order to discover a drug, scientists first must identify targets in the human body. Targets are biological molecules that cause medical conditions or diseases. Most drugs work by binding to a target and changing the target's function or activity. Thus, after selecting a target, scientists then must identify those chemical compounds that change the target's function. These compounds are known as "hits." Scientists often identify hits by first acquiring hundreds of thousands of chemical compounds. This large quantity of compounds, otherwise known as a compound library, may be generated by a technology called combinatory chemistry. Combinatorial chemistry permits the rapid creation of hundreds of thousands of chemical compounds through automated techniques. Prior to the advent of combinatorial chemistry, chemists had to create new compounds one at a time. The generated compounds are then tested, or screened, against the selected target. Such screening may identify hundreds of hits. Then, in a series of labor intensive and time consuming steps, scientists determine how the human body absorbs, distributes, metabolizes and excretes these hits and whether they are toxic. The pharmaceutical industry refers to these characteristics as ADMET (absorption, distribution, metabolism, excretion and toxicity). Scientists then chemically modify the hits to identify those with the appropriate activity and ADMET characteristics for potentially safe and effective use in humans. This entire process of determination and modification is called "lead optimization" and results in the identification of drug candidates. Traditionally, lead optimization involves the use of animal models, which is slow and inefficient and poorly predicts successful human drug candidates. It takes approximately three to five years for scientists to complete this initial phase of drug discovery. A drug candidate then undergoes preclinical development and three phases of human clinical development before receiving marketing approval from the U.S. Food and Drug Administration. The entire process from target selection to FDA approval of a drug typically ranges from 12-16 years, and the failure rate is high. Our Solution We believe that our IDiscovery-TM- technologies increase the likelihood of clinical success by identifying those hits with essential drug-like characteristics at the early stages of the drug discovery process. Therefore, we believe our products and services will improve the probability of success and result in a shorter drug discovery process. 8 CHEM.FOLIO-Registered Trademark- COMPOUNDS LIBRARIES AND SERVICES. These include: - off-the-shelf chemical compounds available for immediate screening against a selected target, and rapid manufacture of closely related compounds, or analogues, if requested by a customer; - chemical compounds made to a customer's specifications; - information that will enable a customer to make additional quantities of the chemical compounds; and - information on the solubility, or the ability of the compound to dissolve, and cytotoxity, the toxic effect of the compound on cells, of the Chem.Folio-Registered Trademark- compounds. We believe that the information provided to our customers will help them determine whether the compounds would be appropriate drug candidates at a much earlier stage of the drug development process than under traditional methods of discovery. In addition to a direct sales effort, we offer our compounds over the Internet through an electronic commerce company, ChemNavigator.com, Inc. and through screening companies, including EVOTEC BioSystems AG. iDEA-TM- PREDICTIVE ADME SIMULATION SYSTEM. The iDEA-TM- predictive ADME simulation system is a family of computer simulation programs. We commercially launched one predictive model, the iDEA-TM- absorption module, designed to predict the absorption characteristics of chemical compounds in humans. We based the development of this absorption module on human clinical data provided by a consortium of major pharmaceutical companies. In addition, we are developing other models to predict the other ADMET characteristics and offer our predictive models over the Internet. We believe that our iDEA-TM- predictive ADME simulation system will reduce the time and effort required in the lead optimization process by reducing or eliminating the traditional drug discovery process' reliance on animal testing. Internal Drug Discovery We discovered a group of chemical compounds that appear to influence the production and activity of particular cytokines, or proteins that act as messengers between cells, through interaction with melanocortin receptors, which are protein molecules that bind to hormones called melanocortins produced by the pituitary gland. We completed a Phase II clinical trial of one of these compounds, HP-228, in the treatment of post-operative pain in hip and knee replacements. In the past, we conducted a number of internal drug discovery programs in this area with collaborators, including Ono Pharmaceuticals, Co., Ltd. On February 11, 2000, we announced that we will only conduct internal drug discovery programs if collaborators are available to fully fund them. Currently, we are carrying out a collaborative program, fully funded by Novartis Pharma AG, in the area of diabetes, obesity and syndrome X, the research phase of which will end in May 2001. Additionally, we have been seeking collaborators for our HP-228 compound and our compounds for the treatment of sexual dysfunction. RESULTS OF OPERATIONS The timing and amounts of revenues from our IDiscovery-TM-technologies, if any, may be subject to significant fluctuations and therefore our results of operations for any period may not be comparable to the results of operations for any other period and may not be indicative of future operating results. We will be required to conduct significant research and development during the next several years for the development of our predictive models and through the middle of next year to fulfill our obligations to Novartis. We have been unprofitable since our inception and, while we previously set as an objective reaching positive quarterly cash flow by the end of 2000, this goal will not be met. While our expenses have been within our expectations, revenues related to the sale of Chem.Folio-Registered Trademark- libraries and iDEA-TM- predictive simulation system have not met our expectations. We are unable to predict when, if ever, we will become profitable or give assurances as to when our positive cash flow objective will be met. As of September 30, 2000, our accumulated deficit was approximately $88.7 million. Third Quarter 2000 Compared With Third Quarter 1999 We recorded revenues of approximately $3.4 million for the three months ended September 30, 2000 compared with approximately $4.0 million for the same period in 1999. Revenues decreased approximately $590,000, or 15%, from the same quarter in the prior year. This decrease was due primarily to a $318,000 decrease in revenues from the sale of our Chem.Folio-Registered Trademark- combinatorial libraries. Additionally, revenue for the three months ended September 30, 1999 included one-time payments from members of the consortium of companies with whom we collaborated for the development of the initial version of the iDEA-TM- predictive simulation system for absorption. 9 As of September 30, 2000, our financial statements reflect a liability for deferred revenue in the amount of approximately $1.2 million. This amount primarily represents the advance payments received under our research collaboration with Novartis Pharma AG which will be recognized when the correlative services are performed, and payments under our iDEA-TM- absorption module license agreements which will be recognized over the license agreement terms. The cost of sales of $29,000 in the third quarter of 2000 was related primarily to revenues from the sale of our Chem.Folio-Registered Trademark- combinatorial libraries, Caco-2 cells, and royalty costs associated with certain license fee revenues, compared to the cost of sales in the third quarter of 1999 of $83,000, which was related primarily to diffusion chamber sales. The diffusion chamber business was sold in the fourth quarter of 1999. Our research and development expenses total approximately $5.0 million and $4.6 million for the three months ended September 30, 2000 and 1999, respectively. This increase of approximately 10% was related primarily to the continued development of our iDEA-TM- predictive ADME simulation system, including software licenses purchased to support our enterprise version. Additionally, expenses related to our Chem.Folio-Registered Trademark-combinatorial library business increased primarily due to the cost of manufacturing compounds to fulfill our contract with a single customer. These increases in expenses were partially offset by a decrease in research carried out to support internal drug discovery programs. Our selling, general and administrative expenses total approximately $2.3 million and $1.7 million for the three months ended September 30, 2000 and 1999, respectively. The increase of approximately 35% was due primarily to salaries, benefits and travel expenses related to the expansion of our sales and marketing organization to support the distribution of our products and services. In addition, we recognized increased non-cash amortization expenses during the quarter ended September 30, 2000, as a result of an investment in ChemNavigator.com, Inc. in August 1999. Our interest income decreased to approximately $64,000 for the quarter ended September 30, 2000, compared to $114,000 for the same quarter in 1999. The decrease was a result of lower short-term investment balances in the quarter ended September 30, 2000. Interest expense for the three months ended September 30, 2000 and 1999 was approximately $142,000 and $82,000, respectively. The increase in interest expense resulted from obligations related to a line of credit entered into in August 1999 and additional equipment financing accessed in the quarter ended September 30, 2000. Nine Months Ended September 30, 2000 Compared With Nine Months Ended September 30, 1999 We recorded revenues of approximately $8.0 million for the nine months ended September 30, 2000 compared with approximately $8.8 million for the same period in 1999. Revenues decreased approximately $734,000, or 8%, from the same period in the prior year. This decrease was due primarily to a decrease in revenues from research conducted under collaborative research agreements due to the completion of certain of those agreements. Additionally, revenues decreased as a result of the sale of our diffusion chamber business in the fourth quarter of 1999. These decreases in revenues were partially offset by an increase in revenues from sales of our Chem.Folio-Registered Trademark- combinatorial libraries in the nine months ended September 30, 2000 compared with the same period in 1999. The cost of sales of $136,000 in the nine months ended September 30, 2000 was related primarily to revenues from sales of our Chem.Folio-Registered Trademark- combinatorial libraries, Caco-2 cells to a lesser extent, and royalty costs associated with certain license fee revenues, compared to the cost of sales in the nine months ended September 30, 1999 of $242,000, which was related primarily to diffusion chamber sales. The diffusion chamber business was sold in the fourth quarter of 1999. Our research and development expenses total approximately $13.6 million and $13.5 million for the nine months ended September 30, 2000 and 1999, respectively. The increase of approximately 1% resulted primarily from continued development of our iDEA-TM- predictive ADME simulation system and increased activity in our Chem.Folio-Registered Trademark- combinatorial libraries business, substantially offset by a decrease in expenses from research carried out to support internal drug discovery programs. Our selling, general and administrative expenses total approximately $6.6 million and $5.2 million for the nine months ended September 30, 2000 and 1999, respectively. The increase of approximately 27%, was due primarily to increases in salaries, benefits and travel associated with the commencement of efforts in June 1999 to establish a sales and marketing organization to support the distribution of our products and services. In addition, we recognized increased non-cash amortization expenses during the nine months ended September 30, 2000 as a result of an investment in ChemNavigator.com, Inc. in August 1999. 10 Our interest income increased to approximately $587,000 for the nine months ended September 30, 2000, compared to $415,000 for the same period in 1999. The increase was due primarily from the receipt of interest on the promissory notes of TerraGen Discovery Inc. which were issued in conjunction with the March 1999 sale of substantially all of the assets of ChromaXome Corp., a wholly owned subsidiary of Trega. The outstanding principal balance along with all accrued interest was received in April 2000. Interest expense for the nine months ended September 30, 2000 and 1999 was approximately $407,000 and $241,000, respectively. The increase in interest expense resulted from obligations related to a line of credit entered into in August 1999 and additional equipment financing accessed in the nine months ended September 30, 2000. We recorded gains of approximately $1.0 million and $1.5 million in the nine months ended September 30, 2000 and 1999, respectively, in connection with the sale of the assets of ChromaXome Corp. LIQUIDITY AND CAPITAL RESOURCES Since our inception through September 30, 2000, we have financed our activities primarily from public and private sales of equity, funding from collaborations with corporate partners, sales derived from shipments of combinatorial libraries or individual compounds, sales of custom peptides and combinatorial peptide libraries (through our former subsidiary, Multiple Peptide Systems, Inc.), sales of our businesses believed to be no longer strategic to us and interest income. At September 30, 2000, we had cash, cash equivalents and short-term investments aggregating $5.8 million compared to $6.4 million on December 31, 1999. We have invested a significant portion of our excess funds in cash equivalents and short-term investments primarily of highly-rated debt instruments of financial institutions and corporations. (See "Item 3 - Qualitative and Quantitative Disclosure About Market Risk" below.) We intend to fund a significant portion of our business with revenues derived from our IDiscovery-TM- technologies that include Chem.Folio-Registered Trademark- combinatorial libraries and services and the iDEA-TM- predictive ADME simulation system. The timing and amounts of revenues from our IDiscovery-TM- technologies, if any, may be subject to significant fluctuations and therefore our results of operations for any period may not be comparable to the results of operations for any other period and may not be indicative of future operating results. For example, in September 1998, we entered into a $7.5 million agreement with a single customer to supply compounds over a two-year period. This agreement was substantially completed in September 2000. To date, we have not been able to offset this anticipated loss of revenues and may not be able to sell a sufficient number of compounds to replace these revenues in the near future. We have been unprofitable since our inception and we are unable to predict when, if ever, we will become profitable. In April 2000, we sold approximately 3.7 million newly issued shares of our common stock to selected institutional and other accredited investors for approximately $10.1 million in net proceeds. Additionally, in the nine month period ended September 30, 2000, we received approximately $1.0 million in connection with the sale of the assets of ChromaXome, approximately $1.8 million from the issuance of equipment notes and notes payable, and $863,000 from the issuance of the our common stock upon the exercise of options and warrants and as a result of participation in our employee stock purchase plan. During the nine months ended September 30, 2000, cash used to fund operating activities was approximately $11.5 million. In addition, we purchased $1.5 million of property and equipment as well as made $1.2 million in principal payments under debt obligations. The amounts invested in property and equipment were funded, in part, by equipment financing lines. (See "Note 3 to our Consolidated Financial Statements".) In August 1999, we entered into a line of credit in the amount of $1.5 million that provides funds to be used primarily for working capital purposes. The line of credit, which is secured by our general assets, bears interest at prime plus .75% (10.25% at September 30, 2000) per annum and is for a term of one year. The line of credit contains covenants relating to cash flow coverage and minimum cash balances. As of September 30, 2000, we are in compliance with all debt covenants. In August 1999, the entire line of credit of $1.5 million was accessed and $1.5 million remains outstanding at September 30, 2000. In connection with the receipt of the line of credit, we issued a warrant to the lender to purchase up to 20,000 shares of our common stock at $1.75 per share. The warrant expires on August 5, 2004. In July and August 2000, we entered into agreements that together extended the term of the line of credit to October 20, 2000. In November 2000, we entered into an agreement to extend the term of the line of credit an additional 12 months. Under this extension, we were required to place a $1.5 million time certificate of deposit (the current outstanding balance under the line) with the lender as collateral. In March 2000, we obtained an equipment financing line of $600,000, of which we had accessed approximately $578,000 by September 30, 2000. The loan, which is secured by certain equipment, bears interest of 13.337% per annum and is to be repaid monthly over a four-year term. In addition, we obtained an additional equipment financing line of $1.4 million in April 2000. We 11 have accessed approximately $1.1 million through September 30, 2000. The loan, which is secured by certain of our equipment, bears interest of 14.423% per annum and is to be repaid monthly over a four-year term. In connection with certain other equipment financing lines, we must meet certain financial covenants pertaining to the amount of our cash and marketable securities to be maintained during the terms of the financing. Due to certain covenant violations, in November 1999, we provided required security deposits in the amount of $490,000 and therefore have fulfilled our obligations related to the covenants. The security deposits are included in the other assets line item in the consolidated balance sheet. During 1998, we moved into a combined research and development facility and corporate headquarters in San Diego, California. The ten-year lease covering the facility requires annual rent payments of approximately $2.0 million and is subject to a 3.5% annual escalation clause. Effective July 2000, we entered into an agreement to sublease approximately 23% of the facility for a term of five years. In accordance with the sublease agreement, we will receive monthly rent payments from the subtenant totaling approximately 23% of our required annual rent payments. In June 1999, we signed a Mutual Release with Dura Pharmaceuticals ("Dura") which terminates a research agreement entered into in February 1996, other than in certain limited regards. Under the original research agreement, we were committed to fund $6 million over four years in a drug discovery and development collaboration using Dura's proprietary drug delivery technology and our compounds (such as HP 228). As of March 31, 2000, our obligation under the Mutual Release with Dura had been paid. We intend to use our financial resources primarily to fund research and development relating to our Chem.Folio-Registered Trademark- combinatorial chemistry library inventories and our iDEA-TM- predictive ADME simulation system. The amounts actually expended for each purpose may vary significantly from time to time as well as with respect to each other. As of September 30, 2000, we estimate that our current gross quarterly cash outlay for operations is approximately $5.8 million. Assuming our cash outlay declines when our existing research and development collaboration expires (at the end of May 2001), and including estimated debt payments of $1.8 million, we will need total capital of approximately $23.9 million over the next twelve months. Assuming a level of Chem.Folio-Registered Trademark- compound library revenues for the next twelve months that is comparable to Chem.Folio-Registered Trademark- compound library revenues for the twelve months ended September 30, 2000 ($7.9 million), we anticipate that our existing capital resources, funding under an existing research and development collaboration, the potential sale of nonessential assets, and our currently available property and equipment financing and line of credit, will be sufficient to fund approximately $19.5 million of our current and planned operations through the next twelve months. We believe that product licenses of our iDEA-TM- predictive ADME simulation system over the next year will provide a portion of this remaining needed capital while the balance is expected to come from additional financing. However, this level of anticipated revenues may not be achieved as we may not be able to offset the loss of revenues due to the impending completion of a compound supply agreement with a single customer which contributed $7.5 million to revenues over its two year term. Additionally, the remaining capital needed in excess of that provided by product revenues may not be available on terms acceptable to us, or at all. If we cannot raise more money we may have to reduce our capital expenditures, scale back our development of new products, delay, or curtail operations significantly. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. We intend to consider the acquisition or licensing of technologies that will add value to our IDiscovery-TM- technologies. We anticipate that we will be required to raise additional capital over a period of several years in order to acquire such complementary technologies. Such capital may be raised through additional public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, whether through the generation of revenue, the sale of assets, or resulting from raising additional capital, we may be required to delay, reduce the scope of, or eliminate certain of our activities, which could have a material adverse effect on us. In June 2000, our Stockholders approved a 2.5 million increase in the number of shares reserved for issuance under our 1996 Stock Incentive Plan. RISK FACTORS WE WISH TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS (INCLUDING THOSE NOTED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND OUR REGISTRATION STATEMENT ON FORM S-3), IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT, OUR ACTUAL CONSOLIDATED RESULTS AND COULD CAUSE OUR ACTUAL CONSOLIDATED RESULTS FOR FUTURE 12 PERIODS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. WE EXPECT TO CONTINUE TO INCUR LOSSES AND MAY NEVER ACHIEVE PROFITABILITY, WHICH MAY HARM OUR FUTURE OPERATING PERFORMANCE AND CAUSE OUR STOCK PRICE TO DECLINE. We have experienced significant operating losses since our inception in 1991. For the years ended December 31, 1999, 1998 and 1997, we had net losses of approximately $8.7 million, $12.8 million and $9.4 million, respectively. As of September 30, 2000, we had an accumulated deficit of approximately $88.7 million. Throughout 2000, we intend to continue to spend additional amounts on developing, marketing and selling our IDiscovery-TM- products and services. These amounts include investments in marketing our iDEA-TM- absorption module, developing additional iDEA-TM- modules, expanding our Chem.Folio-Registered Trademark- chemical compound inventory, acquiring and licensing complementary technologies and expanding our use of the Internet and intranet to market and disseminate our products and services. If revenues do not correspondingly increase, our operating results and financial condition could be negatively affected. Should we continue to incur net losses in future periods, we may not be able to increase or continue our investment in the development of our products and services under our present plans. Although we previously set an objective to reach positive quarterly cash flow by the end of 2000, this goal will not be met, and we may never obtain sufficient revenues to achieve profitability. If we do achieve profitability, we may not sustain or increase profitability in the future. This in turn may cause our stock price to decline. OUR OPERATING RESULTS ARE UNPREDICTABLE, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE AND RESULT IN LOSSES TO OUR INVESTORS. Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors. Some of the factors that could cause our operating results to fluctuate include: - changes in the demand for our IDiscovery-TM- products and services; - the introduction of competitive products or services; - the nature, pricing and timing of other products and services provided to our customers; - acquisition, licensing and other costs related to the expansion of our operations; - changes in the research and development budgets of our customers and collaborators; and - payments of milestones, license fees or royalty payments under the terms of our external alliances or future collaborations. Moreover, the nature of our revenues underwent a significant shift due to the change in our strategic focus. For example, in the nine months ended September 30, 2000, revenues from our compound libraries accounted for approximately 60% of our total revenues as compared to only 50% in the comparable period in 1999. In the nine months ended September 30, 2000, revenues from research conducted under collaborative research agreements accounted for only 40% of our total revenues versus 47% in the comparable period in 1999. As a result of these changes, we believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price will likely fall, possibly by a significant amount. WE WILL NEED TO RAISE ADDITIONAL CAPITAL THAT MAY BE UNAVAILABLE, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND STOCK PRICE. We will need to raise more money to continue the research and development necessary to bring our products to market and to establish or expand manufacturing and marketing capabilities. Additionally, we intend to consider acquisitions and licensing of technologies that will add value to our IDiscovery-TM- technologies, although our financial resources may materially inhibit or preclude us from doing so. We may seek additional funds through public and private stock offerings, arrangements with corporate partners, borrowings under lease lines of credit or other sources. The amount of money needed will depend on many factors, including among others: 13 - expenses in connection with the development of our IDiscovery-TM- technologies or other products or services; - expenses in connection with maintaining our intellectual property, including preparing, filing, and prosecuting patent claims and enforcing patents; - our current and potential collaborative relationships; and - the need to increase research and development spending to keep up with competing technologies and market developments. As of September 30, 2000, we estimate that our current gross quarterly cash outlay for operations is approximately $5.8 million. Assuming our cash outlay declines when our existing research and development collaboration expires (at the end of May 2001), and including estimated debt payments of $1.8 million, we will need total capital of approximately $23.9 million over the next twelve months. Assuming a level of Chem.Folio-Registered Trademark- compound library revenues for the next twelve months that is comparable to Chem.Folio-Registered Trademark- compound library revenues for the twelve months ended September 30, 2000 ($7.9 million), we anticipate that our existing capital resources, funding under an existing research and development collaboration, the potential sale of nonessential assets, and our currently available property and equipment financing and line of credit, will be sufficient to fund approximately $19.5 million of our current and planned operations through the next twelve months. We believe that product licenses of our iDEA-TM- predictive ADME simulation system over the next year will provide a portion of this remaining needed capital while the balance is expected to come from additional financing. However, this level of anticipated revenues may not be achieved as we may not be able to offset the loss of revenues due to the impending completion of a compound supply agreement with a single customer which contributed $7.5 million to revenues over its two year term. Additionally, the remaining capital needed in excess of that provided by product revenues may not be available on terms acceptable to us, or at all. If we cannot raise more money we may have to reduce our capital expenditures, scale back our development of new products, delay, or curtail operations significantly. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. OUR NEW BUSINESS STRATEGY OF FOCUSING ON OUR IDISCOVERY-TM- TECHNOLOGIES AND UNPREDICTABLE FUTURE REVENUES MAKES EVALUATION OF OUR BUSINESS AND PROSPECTS DIFFICULT. Our new business strategy of focusing on IDiscovery-TM- technologies, that we believe will allow oUR customers to identify drug candidates more efficiently, is unproven. Because of this strategic shift in focus, we cannot accurately predict our future revenues. We currently have limited customers for our first module of the iDEA-TM- predictive ADME simulation system, the absorption module. We generated only limited revenues OF approximately $4.8 million for the nine months ended September 30, 2000 from our Chem.Folio-Registered Trademark- compound customers. In addition, we still depend in part on revenues received from a collaborator, Novartis, for one of our internal drug discovery programs. Our success will depend in large part upon: - the performance of our IDiscovery-TM- technologies in accelerating the drug discovery process; - the acceptance of our IDiscovery-TM- technologies by our customers; - our ability to enter into collaboration, licensing and other agreements for IDiscovery-TM- technologies ON favorable terms; and - our ability to generate revenues with existing and potential collaborators in our internal drug discovery programs. Moreover, we have limited experience marketing our iDEA-TM- absorption module, which we launched in December 1999. Additionally, the sales cycle of such module is unknown. Furthermore, the plans for our future predictive modules, such as a metabolism module, are unproven, and we cannot be sure that we will ever develop these products or that any product that we develop will be commercially successful. As a result of these factors, it is difficult to predict our future revenues and evaluate our business prospects. OUR IDISCOVERY-TM- TECHNOLOGIES AND PRODUCTS MAY NOT BE COMMERCIALLY VIABLE OR SUCCESSFUL, WHICH COULD CAUSE US TO GENERATE INSUFFICIENT REVENUES TO BECOME PROFITABLE. Our ability to succeed depends upon the acceptance by potential customers of our IDiscovery-TM- technologies, in place of more traditional methods, as effective tools in the discovery of new drugs. Drug discovery methods based upon our IDiscovery-TM- 14 technologies may not lead to the discovery or development of commercial pharmaceutical products. Moreover, we have not yet completed or commenced most of our iDEA-TM- predictive ADME simulation system development program. These technology programs may not be developed, employed or commercialized successfully, work efficiently or otherwise enhance our ability to engage in the acceleration of the drug discovery process. Some of the factors that will determine the demand for our IDiscovery-TM- technologies include: - the efficacy of our iDEA-TM- modules; - the development of iDEA-TM- modules in addition to the absorption module; and - the novelty and diversity of our Chem.Folio-Registered Trademark- libraries. In order for us to achieve our business objectives, we must convince these companies that our iDEA-TM- modules and compound libraries will reduce both the cost and length of the drug discovery process. If we cannot convince companies in the pharmaceutical industry of the effectiveness of our IDiscovery-TM- technologies, we may BE unable to keep our existing customers or attract additional customers on acceptable terms or develop a sustainable, profitable business. IF WE FAIL TO SECURE NEW COLLABORATORS, OR LOSE OUR EXISTING COLLABORATORS, OR IF OUR COLLABORATORS DO NOT APPLY ADEQUATE RESOURCES TO THEIR COLLABORATIONS WITH US, OUR PRODUCT DEVELOPMENT ACTIVITIES AND OUR POTENTIAL FOR PROFITABILITY MAY SUFFER. While our reliance on collaborators to date has been limited, our current strategy for the utilization and development of our IDiscovery-TM- technologies and internal drug discovery programs requires us to enter into contractual arrangements with corporate collaborators, licensors, licensees and others. In fact, we intend to proceed with our internal drug discovery programs only if collaborators are available to fully fund such programs. There may only be a limited number of pharmaceutical or biotechnology companies that would potentially collaborate with us. Thus, we may not be successful in negotiating additional commercially and scientifically sound collaborations. We currently have material arrangements with the following third parties: EVOTECH Biosystems AG, ChemNavigator.com, Inc., Novartis Pharma AG and The Scripps Clinic and Research Foundation. To date, we have relied on collaborators such as Novartis to fund our internal drug discovery programs in the area of melanocortin receptors. In addition, we license from Scripps the Tea Bag technology, which is a key production technique used in our compound business. Our success depends in part upon the performance by these collaborators under these arrangements. We will have little or no control over the resources that any collaborator may devote to its collaboration with us. If any collaborator breaches or terminates its agreement with us to develop an IDiscovery-TM- product OR service, or fails to conduct its collaborative activities in a timely manner, the commercialization of our products could be delayed or prevented completely. In the case of our internal drug discovery programs, the failure to conduct a collaborative program in a timely manner would prevent us from receiving potential milestones and royalties. Furthermore, our collaborators may resist sharing revenue derived from the successful commercialization of a drug through royalty payments, or others may have competing claims to all or a portion of such revenue. Disputes may arise with our collaborators over ownership rights to intellectual property, know-how or technologies developed with our collaborators. Our arrangements with our collaborators involving our Chem.Folio-Registered Trademark- chemical compounds may require us to provide identical or similar chemical compounds, or chemical compound technologies or information to multiple parties. Disputes may arise between collaborators as to proprietary rights to particular compounds in our libraries. If disputes arise, our existing customers could stop using our chemical compounds; we could lose existing and potential customers; we could have difficulty in attracting future collaborators to assist with our product development efforts; and we could incur litigation costs, which would affect our financial position. WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL, AND THE LOSS OF THEIR SERVICES WOULD AFFECT OUR ABILITY TO ACHIEVE OUR OBJECTIVES. Our products and services are highly technical. Our key personnel must have specialized training or advanced degrees in order to develop and refine these products and services. There is a shortage of qualified scientific, management and software development personnel who possess the technical background necessary to adequately understand and improve our products and services. We compete for these personnel with other pharmaceutical and biotechnology companies, software firms, academic institutions and government entities. If we are unable to attract and retain scientific and management personnel with the appropriate 15 credentials and experience, our products and services could become noncompetitive and obsolete. Our product development, operations and marketing efforts would be delayed or curtailed if we lose the services of any of these people. Further development of our products, including our iDEA-TM- predictive models and Chem.Folio-Registered Trademark- compound libraries, requires us to hire additional qualified scientific personnel to perform research and development, as well as personnel with software development expertise. If we are unable to continue to attract, train and retain these personnel, we may be unable to expand our business. BECAUSE OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES, OUR REVENUES MAY FLUCTUATE SUBSTANTIALLY DUE TO REDUCTIONS AND DELAYS IN RESEARCH AND DEVELOPMENT EXPENDITURES. We expect to derive revenues primarily from products and services provided to the pharmaceutical and biotechnology industries. Accordingly, our success will depend in large part upon the success of the companies within those industries and their demand for our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by companies in those industries. These reductions and delays may result from factors such as: - changes in economic conditions; - consolidation in the pharmaceutical and biotechnology industries; - changes in the regulatory environment affecting health care and health care providers; - pricing pressures; - market-driven pressures on companies to consolidate and reduce costs; and - other factors affecting research and development spending. We have no control over these factors. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to changes in interest rates primarily from our long-term debt arrangements and, secondarily, our investments in certain available for sale securities. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Description ----------- ----------- 10.1 Sublease Agreement dated July 25, 2000 between Trega and Neurovir Therapeutics, Inc. 10.2 Loan Extension Agreement dated August 18, 2000 between Trega and Imperial Bank 10.3 First Amendment to Promissory Note and Credit Agreement dated November 13, 2000 between Trega and Imperial Bank 27.1 Financial Data Schedule
(b) Reports on Form 8-K On August 3, 2000, the Company filed a report on Form 8-K relating to the financial information for Trega Biosciences, Inc. for the quarter ended June 30, 2000 and forward-looking statements relating to the second half of 2000 as presented in a press release of August 3, 2000. 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Trega Biosciences, Inc. Date: November 14, 2000 /s/ Michael G. Grey -------------------- Michael G. Grey President and Chief Executive Officer (Principal Executive Officer) /s/ Gerard A. Wills --------------------- Gerard A. Wills Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 18 EX-10.1 2 a2030825zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 SUBLEASE AGREEMENT This SUBLEASE AGREEMENT ("Sublease") is made and entered into as of the 25th day of July, 2000 by and between TREGA BIOSCIENCES, INC., a Delaware corporation ("Sublandlord") and NEUROVIR THERAPEUTICS, INC., a Delaware corporation ("Subtenant"). WHEREAS, AID ASSOCIATION FOR LUTHERANS, a Wisconsin corporation, as landlord ("Landlord"), and SUBLANDLORD, as tenant ("Tenant"), entered into a lease dated September 24, 1997 ("Master Lease") whereby Landlord leased to Tenant those certain premises ("Master Premises") consisting of the entire building (and containing 71,510 rentable square feet) located at 9880 Campus Point Drive, San Diego, California 92121 (the "Building"), as more particularly described in the Master Lease, upon the terms and conditions contained therein. All capitalized terms used herein shall have the same meaning ascribed to them in the Master Lease unless otherwise defined herein. A true, correct and complete copy of the Master Lease is attached hereto as Exhibit "A" and made a part hereof. WHEREAS, Sublandlord and Subtenant are desirous of entering into a sublease of that portion of the Master Premises shown cross-hatched in black on the demising plan annexed hereto as Exhibit "B" and made a part hereof ("Sublease Premises") on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually covenant and agree as follows: 1. DEMISE. Sublandlord hereby subleases and demises to Subtenant and Subtenant hereby hires and subleases from Sublandlord the Sublease Premises agreed to contain 16,723 rentable square feet upon and subject to the terms, covenants and conditions hereinafter set forth. 2. LEASE TERM. (a) LEASE TERM. The term of this Sublease ("Term") shall be for five (5) years commencing on the earlier of (i) July 25, 2000, or (ii) the date upon which Subtenant, or any person occupying any of the Sublease Premises with Subtenant's permission, commences business operations from the Sublease Premises ("Sublease Commencement Date") and ending, unless sooner terminated as provided herein, on the last day of the month in which the fifth (5th) anniversary of the Sublease Commencement Date occurs ("Sublease Expiration Date"); provided, however, in no event shall the Sublease Commencement Date occur prior to the receipt of Landlord's consent in accordance with Section 16 below. (b) OPTION TO EXTEND. (i) OPTION. Tenant shall have one (1) option to extend the Sublease Term (the "Renewal Option"), on all the provisions contained in this Sublease except as 1 Exhibit 10.1 to the Base Rental, subject to the terms herein. The Renewal Option shall be for an additional thirty (30) month period ("Option Term") after the expiration of the initial Sublease Term. If Subtenant elects to exercise the Renewal Option, such Renewal Option shall be exercised by Subtenant giving written notice of its irrevocable exercise of the Renewal Option (the "Option Notice") to Sublandlord at least nine (9) months, but not more than twelve (12) months, before the expiration of the initial Sublease Term. If such Option Notice is not sent during such three (3) month period, such Renewal Option shall be null and void and in no event shall Subtenant have any right to extend the initial Sublease Term or renew the Sublease beyond the initial Sublease Term as provided herein. Subtenant agrees that time is of the essence of this provision. (ii) OPTION PERSONAL. The Renewal Option is personal to Subtenant and may not be exercised, voluntarily or involuntarily, by any person or entity other than Subtenant or an affiliate of Subtenant ("Affiliate"). For purposes hereof, an Affiliate shall include an entity which controls, is controlled by or is in common control with Subtenant, or an entity with which Subtenant is merged or to which Subtenant sells substantially all of its assets. Under no circumstances whatsoever shall the assignee under a complete or partial assignment of the Sublease (other than an Affiliate), or a sub-subtenant under a sub-sublease of the Sublease Premises, have any right to exercise the Renewal Option granted herein. The Renewal Option is not assignable, voluntarily or involuntarily, separate and apart from the Sublease. If the Sublease or Subtenant's right to possession of the Sublease Premises shall terminate in any manner, or if Subtenant shall have assigned the sublease or sub-sublet more than twenty percent (20%) of the Sublease Premises on or prior to the expiration of the initial Sublease Term to other than an Affiliate, then immediately upon such termination, assignment or sub-sublease, the Renewal Option herein granted shall simultaneously terminate and become null and void and neither Subtenant, nor any assignee or sub-sublessee, shall have the right to extend the Sublease Term beyond the initial Sublease Term pursuant to the terms of the Renewal Option. (iii) EFFECT OF DEFAULT ON RENEWAL OPTION. At Sublandlord's election, Subtenant shall have no right to exercise the Renewal Option and extend the Sublease Term beyond the initial Sublease Term, as appropriate, pursuant to the terms herein if, at the time Subtenant delivers Subtenant's Option Notice or any time prior to the expiration of the initial Sublease Term, a default has occurred and is continuing after applicable notice and grace period under any of the provisions of the Sublease. (iv) BASE RENTAL DURING THE OPTION TERM. All Rent payable during the Option Term shall be payable in the same manner and under the same terms and conditions as Rent is paid during the initial Sublease Term. Subtenant shall pay to Sublandlord, as Base Rental for the Sublease Premises during the Option Term, the Fair Market Rental Rate (as hereinafter defined). "Fair Market Rental Rate" shall mean the rate being charged to new subtenants in the Building as of the expiration of the initial Sublease Term (or if necessary, because no such new 2 Exhibit 10.1 subtenants exist, in other comparable buildings in the San Diego submarket area ("Comparable Buildings")), for space of equivalent quality, size and location in the Building or Comparable Buildings, as appropriate (or adjusting the rental rate as appropriate for differences therein), but disregarding any so-called "concessions" then being offered to prospective new subtenants in the Building or Comparable Buildings. Sublandlord shall determine the Fair Market Rental Rate by using its good faith judgment. Sublandlord shall use its best efforts to provide written notice of such amount within thirty (30) days after Subtenant sends the Option Notice to Sublandlord exercising the Renewal Option. Subtenant shall have fifteen (15) business days (the "Subtenant's Review Period") after receipt of Sublandlord's notice of the Fair Market Rental Rate within which to accept such rental or to reasonably object thereto in writing. In the event Subtenant objects, Sublandlord and Subtenant shall attempt to agree upon such Fair Market Rental Rate, using their best good faith efforts. If Sublandlord and Subtenant fail to reach agreement within ten (10) business days following Subtenant's Review Period (the "Outside Agreement Date"), then each party shall place in a separate sealed envelope their final proposal as to Fair Market Rental Rate and such determination shall be submitted to arbitration in accordance with subsections (A) through (E) below. Failure of Subtenant to so elect in writing within Subtenant's Review Period shall conclusively be deemed its approval of the Fair Market Rental Rate determined by Sublandlord. In the event that Sublandlord fails to timely generate the initial written notice of Sublandlord's opinion of the Fair Market Rental Rate which triggers the negotiation period of this provision, then Subtenant may commence such negotiations by providing the initial notice, in which event Sublandlord shall have fifteen (15) days ("Sublandlord's Review Period") after receipt of Subtenant's notice of the proposed Fair Market Rental Rate within which to accept such rental. In the event Sublandlord does not affirmatively in writing consent to Subtenant's proposed Fair Market Rental Rate, such proposed rental shall be deemed rejected and Sublandlord and Subtenant shall attempt in good faith to agree upon such Fair Market Rental Rate, using their best good faith efforts. If Sublandlord and Subtenant fail to reach agreement within fifteen (15) days following Sublandlord's Review Period (which shall be, in such event, the "Outside Agreement Date" in lieu of the above definition of such date), then each party shall place in a separate sealed envelope their final proposal as to Fair Market Rental Rate and such determination shall be submitted to arbitration in accordance with subsections (A) through (E) below. (A) Sublandlord and Subtenant shall meet with each other within five (5) business days of the Outside Agreement Date and exchange the sealed envelopes and then open such envelopes in each other's presence. If Sublandlord and Subtenant do not mutually agree upon the Fair Market Rental Rate within one (1) business day of the exchange and opening of envelopes, then, within ten (10) business days of the exchange and opening of envelopes Sublandlord and Subtenant shall agree upon and jointly appoint a single arbitrator who shall by profession be a real estate broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of comparable commercial properties in the vicinity of the Building. Neither Sublandlord nor Subtenant shall consult with such broker as to his or her opinion as to Fair Market 3 Exhibit 10.1 Rental Rate prior to the appointment. The determination of the arbitrator shall be limited solely to the issue of whether Sublandlord's or Subtenant's submitted Fair Market Rental Rate for the Sublease Premises is the closer to the actual Fair Market Rental Rate for the Sublease Premises as determined by the arbitrator, taking into account the requirements of this Section regarding same. Such arbitrator may hold such hearings and require such briefs as the arbitrator, in his or her sole discretion, determines is necessary. (B) The arbitrator shall, within thirty (30) days of his or her appointment, reach a decision as to whether the parties shall use Sublandlord's or Subtenant's submitted Fair Market Rental Rate, and shall notify Sublandlord and Subtenant thereof. (C) The decision of the arbitrator shall be binding upon Sublandlord and Subtenant. (D) If Sublandlord and Subtenant fail to agree upon and appoint an arbitrator, then the appointment of the arbitrator shall be made by the Presiding Judge of the San Diego Superior Court, or, if he or she refuses to act, by any judge having jurisdiction over the parties. (E) The cost of arbitration shall be paid by Sublandlord and Subtenant equally. (v) DOCUMENTATION. Sublandlord and Subtenant shall execute and deliver appropriate documentation to evidence any renewal of the Sublease pursuant to the Renewal Option and the terms and conditions of the Sublease during the Option Term. 3. USE. The Sublease Premises shall be used and occupied by Subtenant for the uses permitted under and in compliance with Section 10 of the Master Lease and for no other purpose. 4. SUBRENTAL. (a) BASE RENTAL. Beginning with the Sublease Commencement Date and thereafter during the Term of this Sublease and ending on the Sublease Expiration Date, Subtenant shall pay to Sublandlord the following monthly installments of base rent ("Base Rental"): Year 1 $31,940.93 per month/$383,291.16 per annum (calculated at the rate of $1.91 per rentable square foot per month) Year 2 $44,148.72 per month/$529,784.64 per annum (calculated at the rate of $2.64 per rentable square foot per month)
4 Exhibit 10.1 Year 3 $45,653.79 per month/$547,845.48 per annum (calculated at the rate of $2.73 per rentable square foot per month) Year 4 $47,326.09 per month/$567,913.08 per annum (calculated at the rate of $2.83 per rentable square foot per month) Year 5 $48,831.16 per month/$585,973.92 per annum (calculated at the rate of $2.92 per rentable square foot per month)
The first monthly installment of Base Rental shall be paid by Subtenant upon the execution of this Sublease. Base Rental and additional rent (including without limitation, late fees) shall hereinafter be collectively referred to as "Rent." (b) PRORATIONS. If the Sublease Commencement Date is not the first (1st) day of a month, or if the Sublease Expiration Date is not the last day of a month, a prorated installment of monthly Base Rental based on a thirty (30) day month shall be paid for the fractional month during which the Term commenced or terminated. (c) ADDITIONAL RENT. Beginning with the Sublease Commencement Date and continuing to the Sublease Expiration Date, Subtenant shall pay to Sublandlord as additional rent for this subletting all special or after-hours cleaning, heating, ventilating, air-conditioning, elevator and other Building charges incurred at the request of Subtenant. (d) OPERATING EXPENSES. Beginning with the Sublease Commencement Date and thereafter during the Term of this Sublease, Subtenant shall pay to Sublandlord as additional rent for this subletting twenty-three and 39/100ths percent (23.39%) ("Subtenant's Share") of the amount that Sublandlord, as Tenant, has to pay Landlord, as Tenant's Pro Rata Share of Building Operating Expenses and Tenant's Pro Rata Share of Project Operating Expenses pursuant to Sections 5.2 and 7 of the Master Lease (including, without limitation, any and all costs incurred by Landlord with respect to the internal facility support and maintenance); provided, however, in no event shall Subtenant's Share of Building Operating Expenses and Project Operating Expenses increase by more than 3.5% per year on a compounded and cumulative basis per annum. Subtenant's Share is a percentage which reflects the ratio of the rentable square feet in the Sublease Premises to the rentable square feet in the Master Premises. Current estimate of Building Operating Expenses and Project Operating Expenses for the first twelve (12) months of the Sublease Term is $.21 per rentable square foot per month. (e) PAYMENT OF RENT. Payment of Rent Except as otherwise specifically provided in this Sublease, Rent shall be payable in lawful money without demand, and without offset, counterclaim, or setoff in monthly installments, in advance, on the first day of each and every month during the Term of this Sublease. All of said Rent is to be paid to Sublandlord at its office at the address set forth in Section 13 herein, or at such other place or to such agent and at such place as Sublandlord may designate by notice to Subtenant. Any additional rent payable on account of items which are not payable monthly by Sublandlord to Landlord under the Master 5 Exhibit 10.1 Lease is to be paid to Sublandlord as and when such items are payable by Sublandlord to Landlord under the Master Lease unless a different time for payment is elsewhere stated herein. Sublandlord shall provide Subtenant with copies of any statements or invoices received by Sublandlord from Landlord pursuant to the terms of the Master Lease with respect to which Subtenant shall be responsible for payment in whole or in part, as herein provided. 5. SECURITY DEPOSIT. Concurrently with the execution of this Sublease, Subtenant shall deposit with Sublandlord the sum of Ninety-Nine Thousand Eight Hundred Thirty-Six and 31/100 Dollars ($99,836.31) ("Deposit"), which shall be held by Sublandlord as security for the full and faithful performance by Subtenant of its covenants and obligations under this Sublease. The Deposit is not an advance Rent deposit, an advance payment of any other kind, or a measure of Sublandlord's damage in case of Subtenant's default. If Subtenant defaults in the full and timely performance of any or all of Subtenant's covenants and obligations set forth in this Sublease, then Sublandlord may, from time to time, without waiving any other remedy available to Sublandlord, use the Deposit, or any portion of it, to the extent necessary to cure or remedy the default or to compensate Sublandlord for all or a part of the damages sustained by Sublandlord resulting from Subtenant's default. Subtenant shall immediately pay to Sublandlord within five (5) days following receipt of demand, the amount so applied in order to restore the Deposit to its original amount, and Subtenant's failure to immediately do so shall constitute a default under this Sublease. If Subtenant is not in default with respect to the covenants and obligations set forth in this Sublease at the expiration or earlier termination of the Sublease, Sublandlord shall return the Deposit to Subtenant promptly after the expiration or earlier termination of this Sublease. Sublandlord's obligations with respect to the Deposit are those of a debtor and not a trustee. Sublandlord shall not be required to maintain the Deposit separate and apart from Sublandlord's general or other funds and Sublandlord may commingle the Deposit with any of Sublandlord's general or other funds. Subtenant shall not at any time be entitled to interest on the Deposit. 6. SIGNAGE. Subtenant is granted the right, at or about the inception of the Term of this Sublease, to install a monument signage, lobby signage and one directional sign identifying Subtenant, subject to Landlord's and Sublandlord's prior written approval, which approval shall not be unreasonably withheld, delayed or conditioned. Except for the foregoing, Subtenant shall have no right to maintain Subtenant identification signs in any other location in, on, or about the Sublease Premises. The size, design, color and other physical aspects of all such permitted signs shall also be subject to Landlord's and Sublandlord's prior written approval, which approval shall not be unreasonably withheld, delayed or conditioned and shall also be subject to any covenants, conditions or restrictions encumbering the Sublease Premises and any applicable municipal or other governmental permits and approvals. The cost of all such signs, including the installation, maintenance and removal thereof, shall be at Subtenant's sole cost and expense. If Subtenant fails to maintain its signs within a reasonable period of time after receipt of notice from Sublandlord, or if Subtenant fails to remove same upon the expiration or earlier termination of this Sublease and repair any damage caused by such removal, Sublandlord may do so at Subtenant's expense and Subtenant shall reimburse Sublandlord for all actual costs incurred by Sublandlord to effect such removal. 6 Exhibit 10.1 7. PARKING. Subtenant shall have the right, during the Term of this Sublease, to non-exclusive access to and use of the parking facilities within the Project as set forth in Section 14.2 of the Master Lease. All such parking privileges shall be subject to the terms and conditions set forth in the Master Lease. 8. INCORPORATION OF TERMS OF MASTER LEASE. (a) This Sublease is subject and subordinate to the Master Lease. Subject to the modifications set forth in this Sublease, the terms of the Master Lease are incorporated herein by reference, and shall, as between Sublandlord and Subtenant (as if they were Landlord and Tenant, respectively, under the Master Lease) constitute the terms of this Sublease except to the extent that they are inapplicable to, inconsistent with, or modified by, the terms of this Sublease. In the event of any inconsistencies between the terms and provisions of the Master Lease and the terms and provisions of this Sublease, the terms and provisions of this Sublease shall govern. Subtenant acknowledges that it has reviewed the Master Lease and is familiar with the terms and conditions thereof. (b) For the purposes of incorporation herein, the terms of the Master Lease are subject to the following additional modifications: (i) In all provisions of the Master Lease (under the terms thereof and without regard to modifications thereof for purposes of incorporation into this Sublease) requiring the approval or consent of Landlord, Subtenant shall be required to obtain the approval or consent of both Sublandlord and Landlord; provided, however, that in any instance in which the approval or consent of Landlord may not be unreasonably withheld, conditioned or delayed, the same limitation shall apply to the approval or consent of Sublandlord. (ii) In all provisions of the Master Lease requiring Tenant to submit, exhibit to, supply or provide Landlord with evidence, certificates, or any other matter or thing, Subtenant shall be required to submit, exhibit to, supply or provide, as the case may be, the same to both Landlord and Sublandlord. In any such instance, Sublandlord shall determine if such evidence, certificate or other matter or thing shall be satisfactory. (iii) Sublandlord shall have no obligation to restore or rebuild any portion of the Sublease Premises after any destruction or taking by eminent domain. (c) The following provisions of the Master Lease are specifically excluded: Sections 2, 4, 5.1, 6, 8, 9.1, 9.5, 11, 24, 38, 40, Exhibit B and Exhibit C. (d) Sublandlord shall not modify or amend the Master Lease in any way which would materially adversely affect Subtenant's use of, access to or quiet enjoyment of the Sublease Premises, or which would materially increase Subtenant's obligations, or materially diminish Subtenant's rights, under the Sublease without Subtenant's consent, which consent Subtenant may withhold in its sole and absolute discretion. 7 Exhibit 10.1 9. SUBTENANT'S OBLIGATIONS. Subtenant covenants and agrees that all obligations of Sublandlord under the Master Lease shall be done or performed by Subtenant with respect to the Sublease Premises, except as otherwise provided by this Sublease, and Subtenant's obligations shall run to Sublandlord and Landlord as Sublandlord may reasonably determine to be appropriate or be required by the respective interests of Sublandlord and Landlord. Subtenant agrees to indemnify Sublandlord, and hold it harmless, from and against any and all claims, damages, losses, expenses and liabilities (including reasonable attorneys' fees) incurred as a result of the non-performance, non-observance or non-payment of any of Sublandlord's obligations under the Master Lease which, as a result of this Sublease, became an obligation of Subtenant. If Subtenant makes any payment to Sublandlord pursuant to this indemnity, Subtenant shall be subrogated to the rights of Sublandlord concerning said payment. Subtenant shall not do, nor permit to be done, any act or thing which is, or with notice or the passage of time would be, a default under this Sublease or the Master Lease. 10. SUBLANDLORD'S OBLIGATIONS. Sublandlord agrees that Subtenant shall be entitled to receive all services and repairs to be provided by Landlord to Sublandlord under the Master Lease. Subtenant shall not, under any circumstances, seek nor require Sublandlord to perform any of such services, nor shall Subtenant make any claim upon Sublandlord for any damages which may arise by reason of Landlord's default under the Master Lease, unless Sublandlord shall have failed to comply with the provisions hereof. Any condition resulting from a default by Landlord shall not constitute as between Sublandlord and Subtenant an eviction, actual or constructive, of Subtenant and no such default shall excuse Subtenant from the performance or observance of any of its obligations to be performed or observed under this Sublease, or entitle Subtenant to receive any reduction in or abatement of the Rent provided for in this Sublease, unless Sublandlord's performance or observance is so excused or Sublandlord is entitled to such a reduction or abatement. In furtherance of the foregoing, Subtenant does hereby waive any cause of action and any right to bring any action against Sublandlord by reason of any act or omission of Landlord under the Master Lease. Sublandlord covenants and agrees with Subtenant that Sublandlord will pay all fixed rent and additional rent payable by Sublandlord pursuant to the Master Lease to the extent that failure to perform the same would adversely affect Subtenant's use or occupancy of the Sublease Premises. Sublandlord further covenants and agrees with Subtenant that Sublandlord shall perform its other obligations under the Master Lease (except with respect to the Sublease Premise which shall become the obligation of Subtenant pursuant to the terms and conditions of this Sublease), remedy any default by Sublandlord under the Master Lease and enforce its rights under the Master Lease. In the event Sublandlord is prevented from performing any of its obligations under this Sublease by a breach by Landlord of a term of the Master Lease, then Sublandlord's sole obligation in regard to its obligation under this Sublease shall be to use reasonable efforts in diligently pursuing the correction or cure by Landlord of Landlord's breach. 11. DEFAULT BY SUBTENANT. In the event Subtenant shall be in default of any covenant of, or shall fail to honor any obligation under this Sublease, in each case after applicable notice and grace period as set forth in the Master Lease, Sublandlord shall have available to it against Subtenant all of the remedies available (a) to Landlord under the Master Lease in the event of a similar default on the part of Sublandlord thereunder or (b) at law. 8 Exhibit 10.1 12. QUIET ENJOYMENT. So long as Subtenant pays all of the Rent due hereunder and performs all of Subtenant's other obligations hereunder, Sublandlord shall not do anything or permit anything to be done to affect Subtenant's right to peaceably and quietly have, hold and enjoy the Sublease Premises. 13. NOTICES. Anything contained in any provision of this Sublease to the contrary notwithstanding, Subtenant agrees, with respect to the Sublease Premises, to remedy any default in this Sublease or the Master Lease which is Subtenant's obligation to cure, within the period allowed to Sublandlord under the Master Lease, even if such time period is shorter than the period otherwise allowed therein due to the fact that notice of default from Sublandlord to Subtenant is given after the corresponding notice of default from Landlord to Sublandlord. Sublandlord agrees to forward to Subtenant, not later than one (1) day after receipt thereof by Sublandlord, a copy of each notice of default received by Sublandlord in its capacity as Tenant under the Master Lease. Subtenant agrees to forward to Sublandlord, promptly upon receipt thereof, copies of any notices received by Subtenant from Landlord or from any governmental authorities. All notices, demands and requests shall be in writing and shall be sent either by hand delivery or by a nationally recognized overnight courier service (e.g., Federal Express), in either case return receipt requested, to the address of the appropriate party. Notices, demands and requests so sent shall be deemed given when the same are received. Notices to Sublandlord shall be sent to the attention of: 9880 Campus Point Drive San Diego, California 92121 Attn: Mr. Jerry Wills with a copy to: Pillsbury Madison & Sutro LLP 725 South Figueroa Street, Suite 1100 Los Angeles, California 90017 Attn: Jackie Park, Esq. Notices to Subtenant shall be sent to the attention of: 9880 Campus Point Drive San Diego, California 92121 Attn: Mr. Jeffrey Ostrove, Ph.D. with a copy to: Mintz, Levin One Financial Center Boston, MA 02111 Attn: Lewis J. Geffen, Esq. 14. BROKER. Sublandlord and Subtenant represent and warrant to each other that, with the exception of Irving Hughes ("Broker"), no brokers were involved in connection with the negotiation or consummation of this Sublease. Sublandlord agrees to pay the commission of the 9 Exhibit 10.1 Broker pursuant to a separate agreement. Each party agrees to indemnify the other, and hold it harmless, from and against any and all claims, damages, losses, expenses and liabilities (including reasonable attorneys' fees) incurred by said party as a result of a breach of this representation and warranty by the other party. 15. CONDITION OF PREMISES. (a) IMPROVEMENTS. Pursuant to the full execution of this Sublease by the parties hereto and the receipt of Landlord's consent to this Sublease, Sublandlord shall at its sole cost and expense make the following improvements to the Sublease Premises (collectively, "Improvements"). (i) Demise the Sublease Premises from the remainder of the Master Premises; (ii) Install a card reader security system; and (iii) Construct a server room to house Subtenant's equipment. (b) SUBSTANTIAL COMPLETION OF IMPROVEMENTS. Sublandlord shall deliver the Sublease Premises to Subtenant with the Improvements "substantially complete," and otherwise in conformance with all applicable laws, rules, regulations and codes affecting the Sublease Premises and all underlying covenants, conditions and restrictions to which the Sublease Premises are subject, including without limitation the provisions of Section 16 of the Master Lease. The term "substantially complete" shall mean that Sublandlord has completed the Improvements, notwithstanding the fact that minor details of construction, mechanical adjustments or decoration which do not materially interfere with Subtenant's use of the Sublease Premises remain to be performed (items normally referred to as "punch-list" items). The "punch-list" items shall be completed by Sublandlord within thirty (30) days following the date such items on the "punch-list" have been agreed to by Sublandlord and Subtenant. The Sublease Premises shall be deemed to be "substantially complete" even though Subtenant's furniture, telephones, telecopier, computers, and other business machines or equipment have not been installed, the purchase and installation of which shall be Subtenant's sole responsibility. (c) WARRANTIES. Sublandlord shall assign to Subtenant (or otherwise enforce all warranties received from, or rights against, all contractors and subcontractors involved in the Improvements. (d) EARLY ENTRY. Subtenant may enter into the Sublease Premises upon receipt of Sublandlord's consent, for the purpose of installing furniture, special flooring or carpeting, trade fixtures, telephones, computers, photocopy equipment, and other business equipment. Such early entry will not advance the Sublease Commencement Date, provided (a) Subtenant does not commence business operations from any part of the Premises, and (b) Subtenant's early entry does not interfere with, or delay, the completion of the Improvements. If Subtenant is allowed early entry, Sublandlord shall not be responsible for, and Subtenant is required to obtain insurance covering, any loss, including theft, damage or destruction to any work or material installed or stored by Subtenant or Sublandlord, or any contractor or individual involved in the completion of the Improvements, or for any injury to Subtenant or Subtenant's employees, 10 Exhibit 10.1 agents, contractors, licensees, directors, officer, partners, trustees, visitors or invitees or to any other person. Sublandlord shall have the right to post the appropriate notices of non-responsibility and to require Subtenant to provide Sublandlord with evidence that Subtenant has fulfilled its obligation to provide insurance pursuant to this Sublease. Subtenant acknowledges that it is not authorized to make or do any alterations or improvements in or to the Sublease Premises except as permitted by the provisions of this Sublease and the Master Lease and that it must deliver the Sublease Premises to Sublandlord on the Sublease Expiration Date in the condition required by the Master Lease. 16. CONSENT OF LANDLORD. Section 24 of the Master Lease requires Sublandlord to obtain the written consent of Landlord to this Sublease. Sublandlord shall solicit Landlord's consent to this Sublease promptly following the execution and delivery of this Sublease by Sublandlord and Subtenant, at Sublandlord's sole cost and expense. In the event Landlord's written consent to this Sublease has not been obtained within forty-five (45) days after the execution hereof, then this Sublease may be terminated by either party hereto upon notice to the other, and upon such termination neither party hereto shall have any further rights against or obligations to the other party hereto. 17. TERMINATION OF THE LEASE. If for any reason the term of the Master Lease shall terminate prior to the Sublease Expiration Date, this Sublease shall automatically be terminated and Sublandlord shall not be liable to Subtenant by reason thereof unless said termination shall have been caused by the default of Sublandlord under the Master Lease, and said Sublandlord default was not as a result of a Subtenant default hereunder. 18. RIGHT OF FIRST REFUSAL. (a) RIGHT OF FIRST REFUSAL. During the initial Sublease Term as it may be extended, Subtenant shall have a right of first refusal to sublease any space in the Building that Sublandlord elects to sublease during the Sublease Term (the "Expansion Space") on the terms and conditions contained herein. Subtenant shall lease the Expansion Space in its "then as-is" condition on the terms and conditions stated in the Offer (as defined below). (b) EXERCISE OF RIGHT OF FIRST REFUSAL. Sublandlord shall give notice to Subtenant of the material terms and conditions of any offer received by Sublandlord (which offer is acceptable to Sublandlord) from any bona fide third party ("Offeror") to lease the Expansion Space, including, without limiting the generality of the details of said notice, the base rent, term, and security deposit. A copy of the offer shall be attached to the notice (collectively, the "Offer"). Subtenant shall thereupon have fifteen (15) business days in which to irrevocably notify Sublandlord of its intent to lease the entire Expansion Space which is the subject of the Offer on the terms and conditions contained in the Offer ("Subtenant's Right of First Refusal Exercise Notice"). If Subtenant's Right of First Refusal Exercise Notice indicates Subtenant's irrevocable intent to lease the entire Expansion Space which is the subject of the Offer, Sublandlord and Subtenant shall execute and deliver appropriate documentation to evidence Subtenant's lease of 11 Exhibit 10.1 such Expansion Space subject to the terms and conditions contained in the Offer and, to the extent not inconsistent with the terms and conditions specified in the Offer, on the terms and conditions contained in this Sublease. The foregoing right of first refusal shall apply only with respect to the entire Expansion Space, and may not be exercised with respect to only a portion thereof, unless only a portion shall first become available (in which case, the foregoing expansion right shall apply to such portions, as the same becomes legally available to sublease). Failure of Subtenant to deliver Subtenant's Right of First Refusal Exercise Notice to Sublandlord in the time period set forth above shall constitute Subtenant's intent not to lease the Expansion Space which is subject to the Offer on the terms and conditions contained in the Offer. If Subtenant rejects the Offer or fails to notify Sublandlord as provided above, Sublandlord may then lease the Expansion Space which is subject to the Offer pursuant to the Material Terms and Conditions (as hereinafter defined) of the Offer or Material Terms and Conditions more favorable to Sublandlord. If any of the Material Terms or Conditions as stated in the Offer are changed and made materially less favorable to the Sublandlord prior to the lease of such Expansion Space to the Offeror or any third party, Sublandlord shall repeat the right of first refusal procedure set forth above, setting forth all modified terms. "Material Terms or Conditions" shall mean rent, additional rent, term of lease, tenant improvement allowance, options and other material financial terms. In the event any such Expansion Space is not leased to any other party within 180 days after notice thereof was given to Subtenant, the provisions of this Section 18 shall again be applicable to such Expansion Space. (c) DELIVERY OF EXPANSION SPACE. If Subtenant shall exercise the right of first refusal granted herein, Sublandlord does not guarantee that the Expansion Space will be available on the commencement date for the sublease thereof, if the then existing occupants of the Expansion Space shall holdover, or for any other reason beyond Sublandlord's reasonable control. In such event, Rent with respect to the Expansion Space shall be abated until Sublandlord legally delivers the same to Subtenant, as Subtenant's sole recourse. Notwithstanding the foregoing, if Sublandlord does not deliver the Expansion Space to Subtenant within one hundred eighty (180) days after the date the Expansion Space was to be delivered to Subtenant, Subtenant shall have the right, at Subtenant's sole option, to elect to terminate the lease of the Expansion Space by delivery to Landlord of a notice (the "Termination Notice"), which termination shall be effective upon receipt of the Termination Notice by Sublandlord. (d) DEFAULT. Subtenant's exercise of the right of first refusal shall not operate to cure any default by Subtenant of any of the terms or provisions of the Sublease, nor to extinguish or impair any rights or remedies of Sublandlord arising by virtue of such default. The right to sublease the Expansion Space shall, at Sublandlord's election, be null and void if Subtenant is in default under the Sublease, after applicable notice and grace period, at the date Sublandlord would otherwise notify Subtenant of the availability of the Expansion Space or at any time thereafter and prior to commencement of the sublease for the Expansion Space. (e) PERSONAL. If the Sublease or Subtenant's right to possession of the Sublease Premises shall terminate in any manner whatsoever before Subtenant shall have exercised the right herein provided, or if Subtenant shall have assigned the Sublease or sub- 12 Exhibit 10.1 sublet more than twenty percent (20%) of the Sublease Premises to other than an Affiliate, then immediately upon such termination, assignment or sub-sublease, the right to sublease the Expansion Space herein granted shall simultaneously terminate and become null and void. Such right is personal to Subtenant, and under no circumstances whatsoever shall the assignee under a complete or partial assignment of the Sublease, or a sub-subtenant under a sub-sublease of the Sublease Premises, have any right to exercise the expansion right granted herein. Subtenant agrees that time is of the essence of this provision. (f) DOCUMENTATION. After Subtenant validly exercises the right of first refusal set forth herein, the parties hereto shall execute an amendment to the Sublease adding the Expansion Space, or a new sublease for the Expansion Space, or such other documentation as Sublandlord shall require in order to confirm the addition of the Expansion Space to the Sublease Premises; provided, however, that a valid exercise of the right of first refusal contained herein shall be fully effective, whether or not such confirmatory documentation is executed by the parties hereto. 19. MAINTENANCE. (a) MAINTENANCE OF PREMISES. Subject to Landlord's repair and maintenance obligations set forth in Section 17 of the Master Lease, Sublandlord shall maintain the Sublease Premises in accordance with the terms and conditions of the Master Lease. (b) HAZARDOUS MATERIALS. Sublandlord shall, at its sole cost and expense and prior to Subtenant's move-in into the Sublease Premises, conduct a Base Line Phase I Environmental Assessment ("Baseline Study"), a copy of which shall be provided to Subtenant. Subtenant shall, at its sole cost and expense and prior to vacating the Sublease Premises, also conduct a Base Line Study, a copy of which shall be provided to Sublandlord. If the Subtenant's Baseline Study reveals contamination not revealed in the Baseline Study conducted by Sublandlord, Subtenant shall be solely responsible for and shall defend, indemnify and hold Sublandlord, its agents, contractors and employees harmless from and against any and all claims, costs and liabilities (including attorneys' fees), charges and disbursements arising out of or in connection with any removal and/or clean up of Hazardous Materials and any restoration and materials required hereunder to return the Sublease Premises and any other property of whatever nature to their condition existing prior to the time of any such contamination. Subtenant shall use the Sublease Premises in accordance with the terms and conditions of the Master Lease, including, without limitation, Section 38 with respect to Hazardous Materials. Sublandlord and Subtenant shall each indemnify, defend and hold the other party harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, attorneys' fees) which arise during or after the Sublease Term as a result of either party's use of Hazardous Materials in violation of the terms and conditions of the Master Lease. 20. ENTIRE AGREEMENT. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Sublease and this Sublease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Sublandlord to Subtenant with 13 Exhibit 10.1 respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Sublease. This Sublease, and the exhibits and schedules attached hereto, contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Sublease Premises and shall be considered to be the only agreements between the parties hereto and their representatives and agents. None of the terms, covenants, conditions or provisions of this Sublease can be modified, deleted or added to except in writing signed by the parties hereto. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. There are no other representations or warranties between the parties, and all reliance with respect to representations is based totally upon the representations and agreements contained in this Sublease. This Sublease may be executed in any number of counterparts which together shall constitute the Sublease. IN WITNESS WHEREOF, the parties have entered into this Sublease as of the date first written above. SUBLANDLORD: TREGA BIOSCIENCES, INC., a Delaware corporation By: /s/ Gerard Wills --------------------------- Its: CFO --------------------------- SUBTENANT: NEUROVIR THERAPEUTICS, INC., a Delaware corporation By: /s/ Jeffrey Ostrove --------------------------- Its: COO --------------------------- 14 Exhibit 10.1 EXHIBIT "A" COPY OF MASTER LEASE [*TO BE ATTACHED*] 15 Exhibit 10.1 EXHIBIT "B" DEMISING PLAN [*TO BE ATTACHED*] 16 EX-10.2 3 a2030825zex-10_2.txt EXHIBIT 10.2 Exhibit 10.2 Date: August 18, 2000 Mr. Michael Grey, President/CEO Mr. Gerard A. Wills, V.P. Finance/CFO TREGA BIOSCIENCES, INC. 9880 Campus Point Drive San Diego, CA 92121 Re: LOAN EXTENSION Borrower Name: 9880 Loan Number/Note Number: 00738000063-3 Note Number: 0003 Dear Borrower: Imperial Bank has approved an extension of the above-referenced credit facility to October 20, 2000 from its current maturity as evidenced by that certain note/agreement dated August 6, 1999 as may be or have been modified from time to time. Except as modified and extended hereby, the existing loan documentation as amended concerning your obligation remains in full force and effect. Very truly yours, Christopher J. Woolley, SVP/Reg.Mgr. Emerging Growth Division ACKNOWLEDGED AND ACCEPTED ON . ---------------------- By: --------------------------- Michael Grey, President/CEO By: --------------------------- Gerard A. Wills, V.P. Finance/CFO EX-10.3 4 a2030825zex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 FIRST AMENDMENT TO PROMISSORY NOTE AND CREDIT AGREEMENT This First Amendment to Promissory Note and Credit Agreement is entered into as of November 13, 2000 (this "Amendment"), by and between IMPERIAL BANK, a California banking corporation ("Bank") and TREGA BIOSCIENCES, INC., a Delaware corporation ("Borrower"). RECITALS WHEREAS, Borrower and Bank are parties to that certain Promissory Note dated August 6, 1999 ("Note") and Credit Agreement dated as of August 6, 1999, (as amended, restated, modified, supplemented or revised from time to time, the "Agreement"); and WHEREAS, each of the parties to this Amendment desire to amend the Note and Agreement in accordance herewith. AGREEMENT NOW, THEREFORE, the parties agree as follows: A. AMENDMENTS TO THE CREDIT AGREEMENT. 1. The Revolving Line of Credit Maturity Date, as referenced in Section 1.01 (a) of the Agreement is hereby amended to read as "October 19, 2001." 2. Section 1.05 of the Agreement is hereby amended to read in its entirety as follows: "1.05 COLLATERAL. Borrower shall grant or cause to be granted to Bank a time certificate of deposit (the "TCD") in the amount of One Million Five Hundred Thousand Dollars ($1,500,000) as security or otherwise as security for all of Borrower's obligations to Bank, all as may be subject to Section 5.3 herein. TCD shall be released once Borrower has provided Bank with alternative collateral documentation satisfactory to Bank." C. Amendment to the Note. 1. The second paragraph of the Note, entitled "PAYMENT" is hereby amended as follows: "The date of August 4, 2000 shall be replaced by the date of October 19, 2001." D. EFFECT OF AMENDMENT, REPRESENTATIONS AND WARRANTIES. 1. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement. 2. Borrower represents and warrants that the Representations and Warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing; provided, however, Bank has acknowledged the existence of the financing statement filed by Lease Management Services on Borrower's equipment. E. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a.) this Amendment, duly executed by Borrower; (b.) a non-refundable documentation fee of Seven Hundred Fifty Dollars ($750.00), plus any Bank Expenses incurred through the date of this Amendment; (c.) Corporate Resolutions to Borrow; and (d.) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. F. MISCELLANEOUS PROVISIONS. 1. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. 2. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first above written. TREGA BIOSCIENCES, INC., IMPERIAL BANK, a Delaware corporation a California banking corporation By: By: --------------------------- --------------------------- Michael Grey Title: President/CEO Title: By: ------------------------- -------------------------- Edward C.Y. Yip Title: Secretary EX-27.1 5 a2030825zex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2000 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000887920 TREGA BIOSCIENCES, INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1 2,238 3,602 3,076 0 0 9,728 9,695 5,048 22,835 7,866 0 0 0 23 11,436 22,835 50 8,047 136 20,339 451 0 407 (11,563) 0 (11,563) 0 0 0 (11,563) (.53) (.53)
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