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As filed with the Securities and Exchange Commission on March 16, 2006
Registration No. 333-131050
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
TARGACEPT, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 2834 | 56-2020050 | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
200 East First Street, Suite 300
Winston-Salem, North Carolina 27101
(336) 480-2100
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
J. Donald deBethizy
Chief Executive Officer
Targacept, Inc.
200 East First Street, Suite 300
Winston-Salem, North Carolina 27101
(336) 480-2100
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| Jonathan L. Kravetz, Esq. Megan N. Gates, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 (617) 542-6000 |
Jeffrey C. Howland, Esq. Womble Carlyle Sandridge & Rice, PLLC One West Fourth Street Winston-Salem, North Carolina 27101 (336) 721-3516 |
Peter A. Zorn, Esq. Targacept, Inc. 200 East First Street, Suite 300 Winston-Salem, North Carolina 27101 (336) 480-2115 |
David E. Redlick, Esq. Stuart R. Nayman, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 399 Park Avenue New York, New York 10022 (212) 230-8800 |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ¨
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to be Registered |
Amount to be Registered(1) |
Proposed Maximum Offering Price Per Share(2) |
Proposed Maximum Aggregate Offering Price(2) |
Amount of Registration Fee(3) | |||||||
| Common Stock, par value $.001 per share |
5,750,000 | $ | 13.00 | $ | 74,750,000 | $ | 7,999 | ||||
| (1) | Includes 750,000 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any. |
| (2) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. |
| (3) | Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. Pursuant to Rule 457(p) under the Securities Act, the registration fee of $7,999 is offset by aggregate registration fees of $11,774 previously paid by the registrant with respect to its Registration Statement on Form S-1 (No. 333-115538) initially filed with the Securities and Exchange Commission on May 14, 2004 and subsequently withdrawn. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated March 16, 2006
5,000,000 Shares
Common Stock
This is the initial public offering of Targacept, Inc. We are offering 5,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. We have applied to list our common stock on the NASDAQ National Market under the symbol “TRGT.”
Investing in our common stock involves risk. See “ Risk Factors” beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
| Price to Public |
Underwriting Discounts and Commissions |
Proceeds to Targacept | ||||
| Per Share |
$ | $ | $ | |||
| Total |
$ | $ | $ |
We have granted the underwriters the right to purchase up to 750,000 additional shares of common stock to cover over-allotments.
| Deutsche Bank Securities | Pacific Growth Equities, LLC |
| CIBC World Markets | Lazard Capital Markets |
The date of this prospectus is , 2006
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The following summary highlights information appearing elsewhere in this prospectus. It may not contain all of the information that is important to you in deciding whether to invest in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes appearing at the end of this prospectus, before making an investment decision.
Targacept, Inc.
We are a biopharmaceutical company engaged in the design, discovery and development of a new class of drugs to treat multiple diseases and disorders of the central nervous system by selectively targeting neuronal nicotinic receptors, or NNRs. NNRs are found on nerve cells throughout the nervous system and serve as key regulators of nervous system activity. Our product candidates are designed to selectively target specific NNR subtypes to promote positive medical effects and limit adverse side effects.
We are developing our most advanced product candidates as treatments for target indications in three therapeutic areas: cognitive impairment, depression and anxiety, and pain. Within these areas, we have three product candidates in clinical development and two preclinical product candidates.
Cognitive Impairment
TC-1734. Our lead product candidate is a novel small molecule that we refer to as TC-1734. In December 2005, we entered into a collaborative research and license agreement with AstraZeneca AB for the development and worldwide commercialization of TC-1734 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment such as attention deficit hyperactivity disorder, commonly referred to as ADHD, age associated memory impairment, commonly referred to as AAMI, and mild cognitive impairment, commonly referred to as MCI. In March 2006, we completed a Phase II clinical trial of TC-1734 in AAMI designed to further assess the effects of TC-1734 on cognition in a cognitively impaired older adult population. We previously completed two other Phase II clinical trials of TC-1734, one in AAMI and one in MCI. We expect AstraZeneca to initiate two Phase II clinical trials of TC-1734 in the first half of 2007, one in mild to moderate Alzheimer’s disease and one in cognitive deficits in schizophrenia.
Depression/Anxiety
Mecamylamine hydrochloride and TC-5214. Mecamylamine hydrochloride is the active ingredient in Inversine, which is our only product approved by the U.S. Food and Drug Administration for marketing. Inversine is approved for the management of moderately severe to severe essential hypertension, a high blood pressure disorder. However, we believe that Inversine is prescribed predominantly for the treatment of neuropsychiatric disorders, including Tourette’s syndrome, autism and bipolar disorder. We are currently conducting a Phase II clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to
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citalopram hydrobromide, a commonly prescribed anti-depressant marketed as Celexa. We expect the results of this trial to be available in the fourth quarter of 2006.
TC-5214, one of the molecular components of mecamylamine hydrochloride, is a separate preclinical product candidate. If the results of our ongoing Phase II clinical trial of mecamylamine hydrochloride are favorable, we may accelerate the development of TC-5214 as an add-on therapy for depression in lieu of further advancement of mecamylamine hydrochloride. We do not expect to pursue the clinical development of both mecamylamine hydrochloride and TC-5214 for depression.
TC-2216. TC-2216 is a novel small molecule that we are developing as an oral treatment for depression and anxiety disorders. TC-2216 is currently a preclinical product candidate. We are currently conducting additional preclinical safety studies necessary to support the filing of an investigational new drug application, or IND, for clinical trials of TC-2216. We plan to file an IND for TC-2216 in the second half of 2006. We are also evaluating TC-2216 as a potential product candidate for smoking cessation or obesity instead of or in addition to depression and anxiety disorders.
Pain
TC-2696. TC-2696 is a novel small molecule that we are developing as a treatment for acute post-operative pain. Depending on clinical trial results, available resources and other considerations, we may pursue development of TC-2696 for other classes of pain in addition to or instead of acute post-operative pain. In 2004, we completed a Phase I clinical trial of TC-2696 that we conducted in France. We are currently conducting a separate Phase I clinical trial in France to further assess the safety and tolerability profile of TC-2696. We expect the full results of this trial to be available in the third quarter of 2006. We have not submitted an IND for clinical trials of TC-2696 in the United States.
Under our agreement with AstraZeneca relating to TC-1734, we and AstraZeneca have initiated a preclinical research collaboration designed to discover and develop additional compounds that, like TC-1734, act on the NNR known as a4ß2. AstraZeneca is responsible for funding the research collaboration, which has an initial term of four years and can be extended by mutual agreement. In addition to our a4ß2 research collaboration with AstraZeneca, we have a preclinical program focused on identifying and developing compounds that selectively target another NNR, known as a7, which we believe may have application in the treatment of conditions such as schizophrenia, cognitive impairment and inflammation. We have selected a lead compound that we refer to as TC-5619 that acts selectively on the a7 NNR. We are currently conducting additional preclinical studies to support the planned filing in 2007 of an IND for clinical trials of TC-5619. We have additional preclinical programs in areas in which we believe drugs that target specific NNR subtypes can be exploited for medical benefit, such as smoking cessation and obesity.
We develop product candidates using our proprietary databases and computer-based molecular design technologies, which we refer to collectively as Pentad. Pentad enables us to efficiently identify, prioritize, characterize and optimize novel compounds. We used Pentad to design or optimize TC-1734, TC-2696, TC-2216 and TC-5619.
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Strategic Collaboration with AstraZeneca AB
Our agreement with AstraZeneca relating to TC-1734 became effective in January 2006. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment to us of $20 million if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006. Under the agreement, we are eligible to receive other payments of up to $249 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, and royalties on future product sales. If TC-1734 is developed under the agreement for indications other than Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, we would also be eligible to receive payments contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for those indications. In addition, if the agreement continues in effect following AstraZeneca’s completion of the additional safety and product characterization studies, we would be entitled to receive a minimum of $23.7 million in aggregate research fees over the four-year term of the a4ß2 research collaboration. Based on the current budget for the research collaboration, we expect to receive approximately $26.4 million in aggregate research fees under the agreement. However, if AstraZeneca terminates our collaboration agreement on or before April 20, 2007 based on the results of the safety and product characterization studies and all other available information with respect to TC-1734, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration while it conducted the studies. In that event, we would also be required to pay AstraZeneca $5 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10 million initial fee that AstraZeneca has paid us.
AstraZeneca is responsible for the commercialization of TC-1734 and any compounds that arise out of the research collaboration that it elects to advance. We have the option to co-promote TC-1734 and any other compounds that are selected for advancement arising out of the research collaboration in the United States to specified classes of specialist physicians.
Our NNR Focus
We trace our scientific lineage to a research program initiated by R.J. Reynolds Tobacco Company in 1982 to study the activity and effects of nicotine, a compound that interacts non-selectively with all nicotinic receptors. There is a significant amount of published clinical data relating to nicotine, including studies in which individuals with Alzheimer’s disease and other conditions marked by cognitive impairment showed therapeutic improvement when treated with a nicotine patch. We have used this clinical data, together with our deep understanding of the biological characteristics and functions of NNRs that we have built over more than 20 years, to validate NNRs as potential targets for drug activity. We have also developed an expertise in designing compounds of low molecular weight, referred to as small molecules, that can selectively interact with specific NNR subtypes, with the objective of eliciting a desired medical effect and limiting side effects such as those typically seen with nicotine. We have built an extensive patent estate covering the structure or therapeutic use of small molecules designed to regulate the central nervous system by selectively affecting specific NNR subtypes.
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Our Business Strategy
Our goal is to become a leader in the discovery, development and commercialization of novel drugs that selectively target NNRs in order to treat diseases and disorders where there is significant medical need and commercial potential. To achieve this goal, we are pursuing the following strategies:
| • | Develop and commercialize drugs that selectively target specific NNR subtypes. |
| • | Collaborate selectively to develop and commercialize product candidates. |
| • | Remain at the forefront of the commercialization of NNR research. |
| • | Identify and prioritize indications in which drugs that selectively target specific NNR subtypes can be exploited for medical benefit. |
| • | Build a specialized sales and marketing organization. |
Risks Associated with Our Business
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary.
We have a limited operating history and have incurred substantial net losses since our incorporation in 1997. We expect to continue to incur substantial losses for the foreseeable future. Inversine is the only product that we have available for commercial sale, and it generates limited revenues. All of our other product candidates are undergoing clinical trials or are in early stages of development, and failure is common and can occur at any stage of development. In particular, we discontinued development of two product candidates because they failed to meet defined clinical endpoints in Phase II clinical trials that we completed in 2004. We had been developing one of these product candidates as a treatment for ADHD and the other as a treatment for ulcerative colitis. In addition, we believe that the recommendation from an independent statistician, based on an interim analysis of available data from our ongoing Phase II clinical trial of mecamylamine hydrochloride as an add-on therapy for depression, to significantly increase the number of patients in the trial suggests that, when full data from the trial are available, the result on the primary efficacy endpoint for the trial may not be statistically significant. If the primary efficacy endpoint for the trial is not statistically significant, we may not conduct any further development of mecamylamine hydrochloride or TC-5214 for depression. None of our product candidates, other than Inversine, has received regulatory approval for marketing and sale. Our ability to generate product revenue in the future will depend heavily on the successful development and commercialization of our product candidates. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient sales revenue to achieve and then sustain profitability.
The successful development and commercialization of our lead product candidate, TC-1734, will depend substantially on our recently established collaboration with AstraZeneca. AstraZeneca can terminate our collaboration agreement if it determines in its sole discretion on or before April 20, 2007 not to proceed with the further development of TC-1734 based on the results of the safety and product characterization studies that AstraZeneca will conduct at its expense for TC-1734 and all other available information with respect to TC-1734. In that event, we would have the financial obligations to AstraZeneca described above under “—Strategic Collaboration with AstraZeneca AB.” In addition, we have the right to offer to AstraZeneca any compound that acts on any NNR other than the a4ß2 NNR that we may in the future seek to
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exploit for Alzheimer’s disease, cognitive deficits in schizophrenia, other conditions marked by cognitive impairment or schizophrenia. However, if we do not offer the compound to AstraZeneca, we are generally not permitted to develop or commercialize the compound for any of these indications. As a result, our ability to work in these indications outside the collaboration is substantially limited during the term of the collaboration. Furthermore, the number of compounds that we are permitted to offer to AstraZeneca is limited under the agreement. We have also granted AstraZeneca rights of first negotiation for the development and commercialization of compounds for depression, anxiety and bipolar disorder.
Company History
Our history traces back to 1982 when R.J. Reynolds Tobacco Company initiated a program to study the activity and effects of nicotine in the body. We were incorporated in Delaware in 1997 as a wholly owned subsidiary of RJR and became an independent company in August 2000. Our executive offices are located at 200 East First Street, Suite 300, Winston-Salem, North Carolina 27101, and our telephone number is (336) 480-2100. Our web site is located at www.targacept.com. Information contained on our web site is not incorporated by reference into, and does not form any part of, this prospectus. We have included our website address in this document as an inactive textual reference only. Our trademarks include Targacept® and Inversine®. Other service marks, trademarks and trade names appearing in this prospectus are the property of their respective owners. Unless the context requires otherwise, references in this prospectus to the “company,” “we,” “us,” and “our” refer to Targacept, Inc.
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The Offering
| Common stock offered by Targacept |
5,000,000 shares |
| Common stock to be outstanding after this offering |
19,104,838 shares |
| Over-allotment option |
750,000 shares |
| Use of proceeds |
To fund clinical trials, preclinical testing and other research and development activities, general and administrative expenses, working capital needs and other general corporate purposes. See “Use of Proceeds.” |
| Risk factors |
You should read the “Risk Factors” section of this prospectus for a discussion of the factors to consider carefully before deciding to invest in shares of our common stock. |
| Proposed NASDAQ National Market symbol |
TRGT |
The number of shares of our common stock that will be outstanding immediately after this offering is based on 272,823 shares of common stock outstanding as of February 28, 2006 and an additional 13,832,015 shares of common stock issuable upon the conversion of all outstanding shares of our series A, series B and series C convertible preferred stock concurrently with the completion of this offering.
The number of shares of our common stock that will be outstanding immediately after this offering excludes:
| • | 1,631,110 shares of common stock issuable upon the exercise of options outstanding as of February 28, 2006, at a weighted average exercise price of $2.91 per share, of which options to purchase 975,545 shares were exercisable; |
| • | 30,968 shares of common stock reserved for future grant under our 2000 equity incentive plan as of February 28, 2006; and |
| • | 2,700,000 shares of common stock that will become reserved for future grant under our 2006 stock incentive plan concurrently with the completion of this offering. |
Unless otherwise indicated, all information in this prospectus assumes:
| • | no exercise by the underwriters of their over-allotment option to purchase up to 750,000 shares of our common stock; |
| • | the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering; and |
| • | no exercise of an outstanding warrant exercisable for 215,054 shares of common stock at an exercise price of $14.63 per share that will expire if not exercised concurrently with the completion of this offering. |
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Summary Financial Data
The following tables summarize our financial data. You should read the following summary financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information included in this prospectus.
The pro forma net loss attributable to common stockholders per share information is computed using the weighted average number of common shares outstanding, after giving pro forma effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering, as if the conversion had occurred at the dates of the original issuances.
| Year ended December 31, |
||||||||||||
| 2003 |
2004 |
2005 |
||||||||||
| (in thousands, except share and per share data) |
||||||||||||
| Statement of Operations Data: |
||||||||||||
| Net revenue |
$ | 2,458 | $ | 3,738 | $ | 1,180 | ||||||
| Operating expenses: |
||||||||||||
| Research and development |
18,179 | 22,771 | 24,252 | |||||||||
| General and administrative . |
3,600 | 5,163 | 6,388 | |||||||||
| Cost of product sales |
743 | 198 | 481 | |||||||||
| Total operating expenses |
22,522 | 28,132 | 31,121 | |||||||||
| Loss from operations |
(20,064 | ) | (24,394 | ) | (29,941 | ) | ||||||
| Interest and dividend income |
791 | 505 | 1,174 | |||||||||
| Interest expense . |
(122 | ) | (132 | ) | (225 | ) | ||||||
| Loss on disposal of fixed assets |
— | (4 | ) | — | ||||||||
| Net loss . |
(19,395 | ) | (24,025 | ) | (28,992 | ) | ||||||
| Preferred stock accretion |
(8,341 | ) | (8,744 | ) | (11,238 | ) | ||||||
| Net loss attributable to common stockholders . |
$ | (27,736 | ) | $ | (32,769 | ) | $ | (40,230 | ) | |||
| Basic and diluted net loss per share applicable to common stockholders. |
$ | (254.33 | ) | $ | (149.48 | ) | $ | (153.54 | ) | |||
| Shares used to compute basic and diluted net loss per share |
109,053 | 219,213 | 262,013 | |||||||||
| Pro forma basic and diluted net loss per share applicable to common stockholders (unaudited) |
$ | (2.06 | ) | |||||||||
| Shares used to compute pro forma basic and diluted net loss per share (unaudited) |
14,068,182 | |||||||||||
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The pro forma balance sheet information gives effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering. The pro forma as adjusted balance sheet information gives further effect to our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us.
| As of December 31, 2005 |
||||||||||||
| Actual |
Pro forma |
Pro forma as adjusted |
||||||||||
| (unaudited) | ||||||||||||
| (in thousands) | ||||||||||||
| Balance Sheet Data: |
||||||||||||
| Cash and cash equivalents |
$ | 24,851 | $ | 24,851 | $ | 79,690 | ||||||
| Working capital |
20,531 | 20,531 | 75,271 | |||||||||
| Total assets |
28,001 | 28,001 | 82,741 | |||||||||
| Long-term debt, net of current portion |
1,409 | 1,409 | 1,409 | |||||||||
| Redeemable convertible preferred stock |
183,628 | — | — | |||||||||
| Accumulated deficit |
(164,671 | ) | (128,173 | ) | (127,945 | ) | ||||||
| Total stockholders’ equity (deficit) |
(162,481 | ) | 21,147 | 75,887 | ||||||||
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Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus before deciding to invest in our common stock. If any of these risks actually occurs, our business, business prospects, financial condition, results of operations or cash flows would likely suffer, maybe materially. This could cause the trading price of our common stock to decline, and you could lose part or all of your investment.
Risks Related to Our Financial Results and Need for Additional Financing
We have incurred losses since our inception and anticipate that we will continue to incur substantial losses for the foreseeable future. We may never achieve or sustain profitability.
We were incorporated in 1997 and operated as a wholly owned subsidiary of R.J. Reynolds Tobacco Company until August 2000. We have a limited operating history and have incurred substantial net losses since our inception. As of December 31, 2005, we had an accumulated deficit of $164.7 million. Our net loss was $19.4 million for the year ended December 31, 2003, $24.0 million for the year ended December 31, 2004 and $29.0 million for the year ended December 31, 2005. Our losses have resulted principally from costs incurred in connection with our research and development activities, including clinical trials, and from general and administrative expenses associated with our operations. We expect to continue to incur substantial losses for the foreseeable future. We expect our research and development expenses to increase substantially following the completion of this offering as we expand our clinical trial activity and as our product candidates advance through the development cycle. We also expect our general and administrative expenses to increase substantially as we expand our infrastructure. As a result, we will need to generate significant revenues to pay these expenses and achieve profitability.
Inversine is our only current source of product revenue. We acquired the rights to Inversine in August 2002. Sales of Inversine generated revenues of only $815,000 for the year ended December 31, 2003, $767,000 for the year ended December 31, 2004 and $681,000 for the year ended December 31, 2005. Inversine is approved in the United States for the management of moderately severe to severe essential hypertension, a high blood pressure disorder. However, we believe that the substantial majority of Inversine sales are derived from prescriptions written by a very limited number of physicians for the treatment of neuropsychiatric disorders, including Tourette’s syndrome, autism and bipolar disorder, in children and adolescents. If any of these physicians were to change their prescribing habits, Inversine sales would suffer. We do not expect that sales of Inversine will increase substantially in the future.
If we are unable to develop and commercialize any of our product candidates, if development is delayed or if sales revenue from any product candidate that receives marketing approval is insufficient, we may never become profitable. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
We will require substantial additional financing and our failure to obtain additional funding when needed could force us to delay, reduce or eliminate our product development programs or commercialization efforts.
We will require substantial future capital in order to continue to conduct the research and development and clinical and regulatory activities necessary to bring our product candidates to
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market and to establish marketing and sales capabilities. Our future capital requirements will depend on many factors, including:
| • | the scope, progress, results and cost of preclinical development and laboratory testing and clinical trials; |
| • | the costs, timing and outcomes of regulatory reviews; |
| • | the number and characteristics of product candidates that we pursue; |
| • | the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; |
| • | the costs of establishing sales and marketing functions and of establishing arrangements for manufacturing; |
| • | the rate of technological advancements for the indications that we target; |
| • | our ability to establish strategic collaborations and licensing or other arrangements on terms favorable to us; |
| • | the costs to satisfy our obligations under existing and potential future collaborations; |
| • | the timing, receipt and amount of milestone and other payments from AstraZeneca and potential future collaborators; |
| • | the timing, receipt and amount of sales or royalties, if any, from our potential products; and |
| • | the extent and scope of our general and administrative expenses. |
In addition, we may seek additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.
Our current operating plan provides for us to continue, either alone or with a collaborator, to advance our product candidates through the development process. It is also our objective to continue to invest in our preclinical programs and to file at least one investigational new drug application, or IND, or foreign equivalent each year beginning in 2006. Our net cash used in operating activities for 2005 was $26.2 million, or approximately $2.2 million per month.
We do not expect our existing capital resources and the net proceeds from this offering to be sufficient to enable us to fund the completion of the development of any of our product candidates. We expect that our existing capital resources and the net proceeds from this offering will enable us to maintain currently planned operations through mid-2008. However, our operating plan may change as a result of many factors, including those described above, and we may need additional funds sooner than planned to meet operational needs and capital requirements for product development and commercialization.
We currently have no credit facility or committed sources of capital other than from AstraZeneca for research and development expenses under our collaboration agreement, which
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we could be required to refund. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may:
| • | terminate or delay clinical trials for one or more of our product candidates; |
| • | delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates; or |
| • | curtail significant drug development programs that are designed to identify new product candidates. |
If AstraZeneca does not proceed with a Phase II clinical trial of TC-1734 and terminates our collaboration agreement, we may need additional capital sooner than planned.
Our collaboration agreement with AstraZeneca provides for AstraZeneca to conduct additional safety and product characterization studies of TC-1734 before deciding whether to proceed with planned Phase II clinical trials to evaluate the efficacy of TC-1734 in mild to moderate Alzheimer’s disease and cognitive deficits in schizophrenia. Upon completion of any or all of the safety and product characterization studies, AstraZeneca has the right to terminate our agreement. In that event, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration that we and AstraZeneca have initiated under the agreement while AstraZeneca conducted the studies. We would also be required to pay AstraZeneca $5 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10 million initial fee that AstraZeneca has paid us. If AstraZeneca terminates our agreement, we may need additional capital sooner than planned.
The safety and product characterization studies to be conducted by AstraZeneca consist of:
| • | in vitro studies to assess whether TC-1734, when administered at a therapeutically relevant dose, activates a particular protein that can activate an enzyme known as CYP1A1 that is considered by some scientists to increase susceptibility to cancer; |
| • | a clinical trial to characterize the cardiovascular effects of various doses of TC-1734 in persons who break down and eliminate, or metabolize, TC-1734 at varying rates; |
| • | a single-dose study in dogs to further assess TC-1734’s cardiovascular effects; and |
| • | small clinical trials to evaluate the interaction and combined effects of TC-1734 with paroxetine, a known inhibitor of a key enzyme involved in TC-1734’s primary metabolic pathway, and with multiple commonly prescribed treatments for schizophrenia. |
In a study in rats conducted by a former collaborator of ours, TC-1734 was found to activate the enzyme CYP1A1, but at a dose substantially higher than the doses at which we and AstraZeneca plan to pursue development of TC-1734 for Alzheimer’s disease and cognitive deficits in schizophrenia. If AstraZeneca determines that TC-1734 also activates CYP1A1 in humans at a therapeutically relevant dose, AstraZeneca may terminate our agreement.
In addition, the study design for the single-dose cardiovascular study of TC-1734 in dogs that we expect AstraZeneca to conduct is substantially similar to a study previously conducted by a former collaborator of ours as part of the preclinical evaluation of TC-1734 in which cardiovascular effects were observed. However, we believe that the cardiovascular effects observed in the prior study were not related to TC-1734, but resulted from the presence of a substance that was used to facilitate the administration and delivery of TC-1734 and that is now known to cause cardiovascular effects in dogs. We do not expect that AstraZeneca will use that substance in its study. We did not observe cardiovascular effects in subsequent studies that we
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conducted in dogs in which we administered TC-1734 over 90 days and 180 days. If the results of the single-dose study in dogs that we expect AstraZeneca to conduct are not favorable, AstraZeneca may terminate our agreement.
Risks Related to the Development and Regulatory Approval of Our Product Candidates
Our success depends substantially on our most advanced product candidates, which are still under development. If we are unable to bring any or all of these product candidates to market, or experience significant delays in doing so, our ability to generate product revenue and our likelihood of success will be harmed.
We and AstraZeneca have agreed to develop TC-1734 for Alzheimer’s disease and cognitive deficits in schizophrenia. However, TC-1734 has not yet been evaluated in any clinical trial in patients suffering from Alzheimer’s disease or cognitive deficits in schizophrenia. In March 2006, we independently completed a Phase II clinical trial of TC-1734 in age associated memory impairment, commonly referred to as AAMI, designed to further assess the effects of TC-1734 on cognition in a cognitively impaired older adult population. Our ability to generate product revenue in the future will depend heavily on the successful development and commercialization of TC-1734.
Inversine is our only approved product and generates limited revenues. We are currently conducting a Phase II clinical trial of mecamylamine hydrochloride, the active ingredient in Inversine, as an add-on therapy for depression.
Mecamylamine hydrochloride is our only product candidate in an ongoing Phase II clinical trial. We have completed a Phase I single rising dose clinical trial for TC-2696, our product candidate for the treatment of pain and are currently conducting a Phase I multiple rising dose clinical trial for TC-2696. In a single rising dose clinical trial, each subject in a dose group receives a dosage of the drug being evaluated only one time, with subjects in each subsequent dose group receiving a pre-determined higher dosage than subjects in the preceding dose group. In a multiple rising dose clinical trial, each subject in a dose group receives a dosage of the drug being evaluated multiple times, with subjects in each subsequent dose group receiving a pre-determined higher dosage than subjects in the preceding dose group. Our other product candidates are in various stages of preclinical development.
Any of our product candidates could be unsuccessful if it:
| • | does not demonstrate acceptable safety and efficacy in preclinical studies or clinical trials or otherwise does not meet applicable regulatory standards for approval; |
| • | does not offer therapeutic or other improvements over existing or future drugs used to treat the same conditions; |
| • | is not capable of being produced in commercial quantities at acceptable costs; or |
| • | is not accepted in the medical community and by third-party payors. |
We do not expect any of our current product candidates to be commercially available for at least the next several years, if at all. If we are unable to make our product candidates commercially available, we will not generate substantial product revenues and we will not be successful.
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If safety studies conducted by AstraZeneca demonstrate that TC-1734 is not safe for individuals that metabolize the drug slowly or when the primary means by which the body metabolizes TC-1734 is blocked, AstraZeneca could cease development of TC-1734 and terminate its agreement with us. Poor results from these safety studies or termination of our agreement with AstraZeneca would make it more difficult for us to advance development and obtain the regulatory approvals required to market and sell TC-1734.
Metabolism of a drug refers to a process in which a drug is broken down and then eliminated from the body. The means by which the body metabolizes a drug is referred to as the metabolic pathway. Due to genetic differences, individuals can metabolize drugs through the same metabolic pathway at different rates. For any particular metabolic pathway, an individual can be a poor, intermediate or extensive metabolizer. Drugs that are metabolized through a particular metabolic pathway may remain in the body at higher concentrations and for longer periods of time in people who are poor metabolizers than in people who are intermediate or extensive metabolizers through that metabolic pathway. As a result, a drug that is determined to be safe when metabolized efficiently by an extensive metabolizer may not be safe or may not be as safe when metabolized inefficiently by a poor metabolizer.
As discussed in greater detail above under “—Risks Related to Our Financial Results and Need for Additional Financing,” our agreement with AstraZeneca provides for AstraZeneca to conduct additional safety and product characterization studies of TC-1734 before deciding whether to proceed with further development of TC-1734. In particular, our agreement with AstraZeneca provides that AstraZeneca will assess the safety of TC-1734 in both extensive metabolizers and poor metabolizers, as well as in combination with another drug that may block TC-1734’s primary metabolic pathway. We expect AstraZeneca to conduct a clinical trial to characterize the cardiovascular effects of TC-1734 at doses of up to 200mg in both extensive metabolizers and poor metabolizers. The highest dose at which we have assessed the safety of TC-1734 in persons over the age of 65 is 150mg, in the first Phase II clinical trial in AAMI that we conducted. In that trial, three out of eight subjects treated with 150mg of TC-1734 while fasting experienced side effects such as headache, lightheadedness, dizziness and vomiting and dropped out of the trial. However, in a Phase I clinical trial of TC-1734 that we conducted, TC-1734 was well tolerated at a dose of up to 320mg in young adults. We also expect AstraZeneca to conduct a small clinical trial to characterize the cardiovascular effects of TC-1734 when administered in combination with paroxetine, a known inhibitor of a key enzyme involved in TC-1734’s primary metabolic pathway.
If the safety studies to be conducted by AstraZeneca demonstrate that TC-1734 is not safe in poor metabolizers or is not safe when the primary metabolic pathway for TC-1734 is blocked, AstraZeneca could decide not to conduct a Phase II clinical trial of TC-1734 and terminate its agreement with us. If AstraZeneca terminates our agreement, it would delay our development of TC-1734. In addition, poor results from these studies would make it more likely that we would not receive the regulatory approvals required to market and sell TC-1734. Even if we were to receive the required regulatory approvals, the regulatory authorities could limit the patient population for which TC-1734 is approved to those who are extensive or intermediate metabolizers through TC-1734’s primary metabolic pathway. If regulatory authorities limit the patient population for which TC-1734 is approved in this manner, it would have an adverse effect on TC-1734’s commercial potential.
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If the combination of TC-1734 administered together with other drugs that are commonly prescribed for schizophrenia is not considered to be safe, the commercial potential of TC-1734 would be adversely affected.
A drug that is generally safe when taken alone may not be safe or may not be as safe when taken together with other drugs. We expect AstraZeneca to conduct a small clinical trial of TC-1734 administered together with multiple commonly prescribed treatments for schizophrenia in healthy volunteers to evaluate the interaction of the drugs and the combined effects on metabolism and safety. If the interaction of TC-1734 and any or all of the commonly prescribed treatments for schizophrenia adversely affects the metabolism of TC-1734 such that TC-1734 and any of those treatments are determined to be unsafe together, it could limit TC-1734’s commercial potential as a treatment for cognitive deficits in schizophrenia. Moreover, AstraZeneca could decide not to advance TC-1734 as a treatment for cognitive deficits in schizophrenia, which would limit TC-1734’s overall commercial potential. Furthermore, if the interaction of TC-1734 with any of these commonly prescribed treatments adversely affects the metabolism of TC-1734, AstraZeneca could decide not to conduct any Phase II clinical trials of TC-1734 and terminate its agreement with us. If AstraZeneca terminates our agreement, it would delay our development of TC-1734.
If we do not obtain the regulatory approvals required to market and sell our product candidates, our ability to generate product revenue will be materially impaired and our business will not be successful.
The preclinical laboratory testing, development, manufacturing and clinical trials of product candidates that we develop, whether independently or in collaboration with a third party, as well as their distribution, sale and marketing, are regulated by the FDA and other federal, state and local governmental authorities in the United States and by similar agencies in other countries. We must receive regulatory approval of each product candidate before we can market and sell it. We have only limited experience in pursuing regulatory approvals. Securing FDA approval requires the submission of extensive preclinical and clinical data and information about the chemistry and manufacture of, and control procedures for, each potential product. In addition, the supporting information submitted to the FDA must establish the safety and efficacy of the product candidate for each indicated use. The marketing approval process takes many years, requires the expenditure of substantial resources, is subject to delays and can vary substantially based upon the type, complexity and novelty of the product candidates involved. In addition to the time and expense involved, the process is uncertain and we may never receive the required regulatory approvals. In addition, the FDA, the U.S. Congress and foreign regulatory authorities may from time to time change approval policies or adopt new laws or regulations, either of which could prevent or delay our receipt of required approvals. Even if we receive regulatory approval to market a particular product candidate, the approval will be subject to limitations on the indicated uses for which it may be marketed and may not permit labeling claims that are necessary or desirable for its promotion.
According to the FDA, a Phase I clinical trial program typically takes several months to complete, a Phase II clinical trial program typically takes several months to two years to complete and a Phase III clinical trial program typically takes one to four years to complete. Industry sources report that the preparation and submission of a new drug application, or NDA, which is required for regulatory approval in the United States, generally takes six months to one year to complete after completion of a pivotal clinical trial. Industry sources also report that approximately 10% to 15% of all NDAs accepted for filing by the FDA are not approved and that FDA approval, if granted, usually takes approximately one year after submission, although it may take longer if additional information is required by the FDA. In addition, the Pharmaceutical Research and Manufacturers of America reports that only one out of five product candidates that enter clinical trials will ultimately be approved by the FDA for commercial sale.
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The FDA may delay, limit or deny approval of any of our product candidates for many reasons. For example:
| • | clinical trial results may indicate that the product candidate is not safe or effective; |
| • | the FDA may interpret our clinical trial results to indicate that the product candidate is not safe or effective, even if we interpret the results differently; or |
| • | the FDA may deem the processes and facilities that we, our collaborative partners or our third-party manufacturers propose to use in connection with the manufacture of the product candidate to be unacceptable. |
In particular, because drugs that target NNRs are a new class of drugs, the FDA and other applicable regulatory authorities may require more preclinical or clinical data for our product candidates or more time to evaluate that data than we currently anticipate. If we obtain the requisite regulatory approval for a particular product candidate, the approval may not extend to all indications for which we have sought approval, which could limit the use of the product and adversely impact our potential revenues.
Even if the FDA approves a product candidate for marketing and sale in the United States, applicable regulatory authorities in other countries may not approve the product candidate or may subject their approval to conditions such as additional product testing or otherwise cause delays. The regulatory approval process varies among countries, but generally includes all of the risks associated with obtaining FDA approval. In addition, many countries require a separate review process prior to marketing to determine whether their respective national health insurance schemes will pay for newly approved products, as well as the price that may be charged for a product. This process will cause delays in the marketing of any of our product candidates that receives marketing approval and could adversely impact our revenues and results of operations.
If clinical trials for our product candidates are not successful, we will not obtain the regulatory approvals required to market and sell them.
To obtain the requisite regulatory approvals to market and sell any of our product candidates, we must demonstrate, through extensive preclinical studies and clinical trials, that the product candidate is safe and effective in humans. The number of clinical trials required to obtain approval varies depending on the particular product candidate, the disease or condition for which it is in development and the regulations applicable to it. Preclinical studies and clinical trials are lengthy and expensive, difficult to design and implement and subject to a historically high rate of failure. The development of each of our product candidates involves significant risks at each stage of testing. A failure of one or more of our clinical trials could occur at any stage of testing. In 2004, we completed Phase II clinical trials for product candidates that we had been developing for attention deficit hyperactivity disorder and ulcerative colitis. Because we determined that these product candidates failed to meet defined endpoints of the Phase II clinical trials, we discontinued the development of these product candidates. If we experience similar difficulties or failures in our ongoing or future clinical trials, or if we are not able to design our clinical trials with clear criteria to determine the efficacy of our product candidates, our product candidates may never be approved for sale or become commercially available.
We may not be able to obtain authority or approval from the FDA, other applicable regulatory authorities or the institutional review boards at our intended investigational sites to commence or complete our clinical trials. Before a clinical trial may commence in the United States, we must submit an IND containing preclinical studies, chemistry, manufacturing, control and other information and a study protocol to the FDA. If the FDA does not object within 30 days
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after submission of the IND, then the trial may commence. If commenced, we, the FDA, other applicable regulatory authorities or institutional review boards may delay, suspend or terminate clinical trials of a product candidate at any time if, among other reasons, we or they believe the subjects or patients participating in the clinical trials are being exposed to unacceptable health risks or for other reasons.
If we do not prove in clinical trials that our product candidates are safe and effective, we will not obtain marketing approvals from the FDA and other applicable regulatory authorities. In particular, one or more of our product candidates may not exhibit the expected medical benefits in humans, may cause harmful side effects or may have other unexpected characteristics that preclude regulatory approval for any or all indications of use or limit commercial use if approved. For example, in the 100mg dose group of our Phase I multiple rising dose trial of TC-2696, our product candidate for pain, we suspended further dosing after two of three volunteers discontinued participation in the trial due to dizziness, nausea and, in one case, vomiting. Both of these volunteers had received a single dose of TC-2696 prior to discontinuing participation in the trial. We did not see comparable effects at 100mg in our completed single rising dose trial of TC-2696. Based on in vitro metabolism studies of TC-2696 that we subsequently conducted, we currently believe that the different effects of 100mg in our single rising dose trial and our multiple rising dose trial may be due to genetic differences in the primary metabolic pathway of TC-2696. We have not yet determined definitively the dose range in which positive medical effects, if any, are achieved with TC-2696. If following further evaluation we determine that the different effects observed are in fact due to the primary metabolic pathway of TC-2696, that TC-2696 is not safe in poor metabolizers or is not safe when the primary metabolic pathway for TC-2696 is blocked and that 100mg of TC-2696 is within the dose range in which positive medical effects are achieved with TC-2696, we may not receive the regulatory approvals required to market and sell TC-2696. Even if we do receive the required regulatory approvals, the regulatory authorities may limit the patient population for which TC-2696 is approved to those who are extensive or intermediate metabolizers through TC-2696’s primary metabolic pathway.
We engaged an independent statistician to conduct an interim analysis and to make a recommendation as to whether it would be advisable to increase the number of patients in our ongoing Phase II clinical trial of mecamylamine hydrochloride as an add-on therapy for depression. The independent statistician reviewed available data from the first 105 patients who completed the trial. In March 2006, the independent statistician recommended that we increase the number of patients by 607 patients per dose group based on his interim analysis of data relating to the primary efficacy endpoint of the trial. This recommendation is consistent with a prior recommendation from the same independent statistician based on available data from the first 50 patients who had completed the trial. We believe that the recommendation from the independent statistician suggests that, when data from all subjects who complete the trial become available, the result on the primary efficacy endpoint for the trial may not be statistically significant. If the primary efficacy endpoint for the trial is not statistically significant, we may not conduct any further development of mecamylamine hydrochloride or TC-5214 for depression. If we do conduct further development of mecamylamine hydrochloride or TC-5214 for depression, the results of future clinical trials may not provide sufficient evidence that either product candidate is effective in treating depression. If we are unable to demonstrate in clinical trials that mecamylamine hydrochloride or TC-5214 is effective in treating depression, we will not receive the regulatory approvals required to market and sell either product candidate for depression.
We and AstraZeneca have agreed to develop TC-1734 as a treatment for Alzheimer’s disease and for cognitive deficits in schizophrenia. We and AstraZeneca may also in the future
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develop TC-1734 as a treatment for AAMI. AAMI is a condition that is characterized by gradual memory loss or other cognitive impairment that generally occurs with normal aging. Because AAMI accompanies normal aging, is not a disease state and does not prevent a person from functioning on a daily basis, the FDA or foreign regulatory authorities may require that we establish that TC-1734 meets a higher threshold of safety than the FDA or foreign regulatory authorities would require for diseases and more severe disorders. If we or AstraZeneca is unable to demonstrate that TC-1734 meets this higher safety threshold, the FDA or foreign regulatory authorities may not grant approval to market TC-1734 for the treatment of AAMI.
Our research and preclinical programs and product candidates target diseases or disorders that are not well understood. For example, there is only limited scientific understanding of the causes of Alzheimer’s disease, AAMI, schizophrenia, including cognitive deficits in schizophrenia, and depression and anxiety. In addition, there are no approved drugs that target NNRs to treat these diseases, and there is only limited scientific understanding of the relationships between these diseases and the neurological pathways targeted by our product candidates and research and preclinical programs. These uncertainties increase the risk that one or more of our clinical trials will not be successful.
If positive results of our completed clinical trials of TC-1734 in AAMI and MCI are not replicated in future clinical trials in Alzheimer’s disease, cognitive deficits in schizophrenia or other indications, we and AstraZeneca will not obtain the regulatory approvals required to market and sell TC-1734.
Positive findings in preclinical studies of a product candidate may not be predictive of similar results in clinical trials in humans. In addition, positive results in early clinical trials of a product candidate may not be replicated in later clinical trials. In particular, we completed a Phase II clinical trial of TC-1734 in AAMI in March 2006. We previously completed two other Phase II clinical trials of TC-1734, one in AAMI and one in mild cognitive impairment, commonly referred to as MCI. In those trials, TC-1734 demonstrated positive effects on cognition. However, our findings in those trials on cognition may not be replicated in future clinical trials of TC-1734 in Alzheimer’s disease, cognitive deficits in schizophrenia or other indications that involve a large number of subjects and a long duration of dosing. In addition, although TC-1734 demonstrated positive effects on cognition at some dose levels with respect to some measures of cognition tested in the first Phase II clinical trial in AAMI that we conducted, TC-1734 did not demonstrate positive effects as to all measures at all dose levels and placebo showed superior effects to TC-1734 as to some measures at some dose levels in that trial.
Like most drugs, the active component of TC-1734 must be combined with an inactive component to form a powder, known as a salt, that is suitable for commercialization as a pharmaceutical product. We have developed a salt form of TC-1734 that is different from the salt form of TC-1734 that we used in our completed trials. We anticipate that we or AstraZeneca will use the alternate salt form of TC-1734 in the planned Phase II trials in mild to moderate Alzheimer’s disease and cognitive deficits in schizophrenia and in future clinical trials of TC-1734. The results of our completed clinical trials of TC-1734 in the initial salt form may not be replicated in future clinical trials of TC-1734 in the alternate salt form.
In our completed clinical trials of TC-1734 in AAMI and MCI, we used a battery of tests developed by CDR Ltd. to assess each subject’s cognitive function. However, if we or AstraZeneca use an additional or a different test battery for any future AAMI or MCI trials, there would be a greater risk that the results of our completed Phase I and Phase II clinical trials of TC-1734 will not be replicated in those future clinical trials and that the future trials will not provide a sufficient basis for further development or regulatory approval.
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If we and AstraZeneca do not have success in clinical trials of TC-1734 for Alzheimer’s disease or cognitive deficits in schizophrenia, we and AstraZeneca will not obtain the regulatory approvals required to market TC-1734 for Alzheimer’s disease or cognitive deficits in schizophrenia notwithstanding positive results in clinical trials of TC-1734 in other indications.
We and AstraZeneca have agreed to develop TC-1734 for Alzheimer’s disease and cognitive deficits in schizophrenia. We and AstraZeneca may in the future also seek to develop TC-1734 for other conditions marked by various degrees of cognitive impairment, such as ADHD, AAMI or MCI. Successful results in clinical trials of TC-1734 in a condition marked by one degree of cognitive impairment may not be predictive of successful results in clinical trials of TC-1734 in a condition marked by more severe cognitive impairment or in cognitive impairment resulting from a different condition. Neither we nor AstraZeneca has conducted any clinical trial of TC-1734 in Alzheimer’s disease or cognitive deficits in schizophrenia. The findings in any of our completed Phase II trials of TC-1734 in AAMI or MCI may not be predictive of the effect of TC-1734 in Alzheimer’s disease or cognitive deficits in schizophrenia.
The CDR test battery that we have used in our clinical trials of TC-1734 is different from the Alzheimer’s Disease Assessment Scale-cognitive subscale, or ADAS-Cog, the test battery that is most often used to assess the efficacy of drugs for Alzheimer’s disease. ADAS-Cog is designed to measure improvement in persons who are severely impaired and is generally less sensitive than the CDR test battery in measuring improvement in persons who are less impaired. We and AstraZeneca plan to use ADAS-Cog, and not the CDR test battery, as the primary endpoint in our clinical trials of TC-1734 in Alzheimer’s disease. The findings in our completed trials as to the effect of TC-1734 on various aspects of cognition as measured by the CDR test battery may not be predictive of the effect of TC-1734 on cognition as measured by ADAS-Cog. If future clinical trials of TC-1734 in Alzheimer’s disease are not successful, we and AstraZeneca will not obtain the regulatory approvals required to market TC-1734 for Alzheimer’s disease.
If clinical trials for our product candidates are prolonged or delayed, we would be unable to commercialize our product candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any revenues from potential product sales.
We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or any regulatory authority to delay or suspend those clinical trials or delay the analysis of data derived from them. A number of events, including any of the following, could delay the completion of our ongoing and planned clinical trials and negatively impact our ability to obtain regulatory approval for, and to market and sell, a particular product candidate:
| • | conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials; |
| • | delays in recruiting and enrolling patients or volunteers into clinical trials; |
| • | delays in obtaining, or our inability to obtain, required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials; |
| • | insufficient supply or deficient quality of our product candidates or other materials necessary to conduct our clinical trials; |
| • | lower than anticipated retention rate of subjects and patients in clinical trials; |
| • | negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional clinical study; |
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| • | serious and unexpected drug-related side effects experienced by subjects and patients in clinical trials; or |
| • | failure of our third-party contractors to comply with regulatory requirements or otherwise meet their contractual obligations to us in a timely manner. |
Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment can result in increased costs and longer development times. We previously experienced delays in patient enrollment for our Phase II clinical trial of TC-1734 in persons with MCI. In that trial, we limited the eligible patient population to persons whose condition was sufficiently severe to qualify for a diagnosis of MCI, but not severe enough to qualify for a diagnosis of dementia. Similarly, we expect that the eligible patient population for the Phase II clinical trial of TC-1734 for mild to moderate Alzheimer’s disease to be conducted by AstraZeneca will be limited to Alzheimer’s disease patients for whom the disease has not yet progressed to the severe stage. As a result of these inclusion limits, there could be delays in recruitment for this trial similar to those that we experienced in our MCI trial. In addition, this trial would require some of the Alzheimer’s disease patients to be assigned randomly into a dosing group that would receive placebo instead of TC-1734. Those patients would not receive any medication for the duration of the trial. As a result, Alzheimer’s disease patients or their caregivers may be unwilling or unable to give informed consent to participate in the trial, which would result in delays in patient enrollment. The failure to enroll patients in a clinical trial could delay the completion of the clinical trial beyond our current expectations. In addition, the FDA could require us and AstraZeneca to conduct clinical trials with a larger number of subjects than we have projected for any of our product candidates. We and AstraZeneca may not be able to enroll a sufficient number of patients in a timely or cost-effective manner. Furthermore, enrolled patients may drop out of clinical trials, which could impair the validity or statistical significance of those clinical trials.
Prior to commencing clinical trials in the United States, we must submit an IND to the FDA and the IND must become effective. We conducted our completed Phase I clinical trial for our product candidate TC-2696 outside the United States and we are conducting our ongoing Phase I multiple rising dose clinical trial of TC-2696 outside the United States. We have not submitted an IND to enable us to conduct clinical trials of TC-2696 in the United States.
We do not know whether our clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Delays in our clinical trials will result in increased development costs for our product candidates. In addition, if our clinical trials are delayed, our competitors may be able to bring products to market before we do and the commercial viability of our product candidates could be limited.
If we are unable to successfully develop and manufacture a salt form of TC-2696 acceptable for use as a pharmaceutical product, clinical development may be delayed and we will not be able to commercialize TC-2696.
In our completed Phase I single rising dose trial of TC-2696 and in our ongoing Phase I multiple rising dose trial of TC-2696, we used a particular salt form of TC-2696 that we refer to as the hemigalactarate salt. We do not expect that the hemigalactarate salt form of TC-2696 will ultimately be viable for marketing as a pharmaceutical product because it accumulates moisture. If the results of our ongoing Phase I multiple rising dose clinical trial of TC-2696 are favorable, we plan to conduct additional work to develop a salt form of this product candidate that is acceptable for use as a pharmaceutical product. If we are unable to develop a pharmaceutically acceptable salt form of TC-2696, we may have to terminate or substantially delay development of this product candidate.
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If the FDA or foreign regulatory authorities do not consider AAMI or MCI to be a clinical indication appropriate for the approval of a drug, we and AstraZeneca will not receive the regulatory approvals required to market and sell TC-1734 for AAMI or MCI.
We and AstraZeneca have agreed to develop TC-1734 for Alzheimer’s disease and cognitive deficits in schizophrenia. In addition, we and AstraZeneca may in the future pursue development of TC-1734 for other conditions, such as one or both of AAMI and MCI. Neither the FDA nor, to our knowledge, any foreign regulatory authority has approved a drug indicated for use in the treatment of AAMI or MCI. Furthermore, neither AAMI nor MCI is listed in the Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, or DSM-IV, the manual published by the American Psychiatric Association to establish diagnostic criteria. We do not know if the FDA or any foreign regulatory authority will be willing to recognize AAMI or MCI as a distinct clinical condition, or in the FDA’s terminology, a clinical entity, for which approval of a drug is possible. If neither the FDA nor any foreign regulatory authority recognizes AAMI or MCI as a clinical entity, we and AstraZeneca will not obtain the regulatory approval required to market TC-1734 for AAMI or MCI even if our clinical trials show that TC-1734 is safe and provides a medical benefit for the persons treated.
When the FDA assesses whether a proposed clinical entity justifies labeling, it generally requires that the existence of the clinical entity be broadly accepted by medical experts in the relevant clinical discipline and that the clinical entity can be defined in practice. This means that the clinical entity must be able to be diagnosed using valid and reliable criteria that are widely accepted by those medical experts. The FDA imposes these requirements to assure that both the population for whom a drug is intended and the effects of the drug in that population can be adequately described in labeling for the drug. The FDA has informed us that it believes it is questionable whether AAMI satisfies these criteria. In three letters that we have received from the FDA in connection with the protocol submission for the Phase II trial of TC-1734 for the treatment of AAMI that we completed in March 2006 and subsequent protocol amendment submissions, the FDA informed us that, in its view, because varying methodologies and criteria have historically been used by medical experts to define AAMI, the requisite consensus in the medical community has not been established. The FDA also informed us that it is not clear that our Phase II clinical trial design and efficacy endpoints are appropriate for measuring the clinical effect of TC-1734 in AAMI. In particular, the FDA characterized it as unclear whether the power of attention factor of the CDR test battery, which we used as one of our co-primary endpoints for that AAMI trial, is an appropriate outcome measure to use for assessing the effect of a drug on AAMI, in which the only claimed deficit is an impairment of memory. In addition, the FDA indicated that we would need to demonstrate statistically significant improvement on a global measure of overall cognitive improvement to show that the effects of TC-1734 in AAMI are clinically meaningful. We do not have, and we do not believe that AstraZeneca has, any current plan to pursue the development of TC-1734 for the treatment of AAMI beyond the Phase II clinical trial that we completed in March 2006. However, if in the future we and AstraZeneca pursue the development of TC-1734 for the treatment of AAMI and are unable to establish to the satisfaction of the FDA or foreign regulatory authorities that AAMI can be identified using criteria that are accepted in the medical community, that both the deficit in cognitive performance associated with the condition and its subsequent improvement can be measured and that the improvement is clinically meaningful, we and AstraZeneca will not obtain the regulatory approval required to market TC-1734 for AAMI.
Our product candidates will remain subject to ongoing regulatory review even if they receive marketing approval. If we fail to comply with continuing regulations, we could lose these approvals and the sale of our products could be suspended.
Even if we receive regulatory approval to market a particular product candidate, the approval could be conditioned on us conducting additional costly post-approval studies or could
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limit the indicated uses included in our labeling. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, the manufacturer of the product and its facilities will continue to be subject to FDA review and periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will remain subject to extensive regulatory requirements. We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements.
If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities or previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:
| • | restrictions on the products, manufacturers or manufacturing processes; |
| • | warning letters; |
| • | civil or criminal penalties; |
| • | fines; |
| • | injunctions; |
| • | product seizures or detentions; |
| • | import bans; |
| • | voluntary or mandatory product recalls and publicity requirements; |
| • | suspension or withdrawal of regulatory approvals; |
| • | total or partial suspension of production; and |
| • | refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications. |
Because we have a number of compounds and are considering a variety of target indications, we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we must focus on research programs and product candidates for the specific indications that we believe are the most promising. As a result, we may forego or delay pursuit of opportunities with other product candidates or other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Through 2004, we spent managerial and financial resources on clinical trials for two product candidates that we have ceased developing. We may in the future spend our resources on other research programs and product candidates for specific indications that ultimately do not yield any commercially viable products. Furthermore, if we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights.
We may not be successful in our efforts to identify or discover additional product candidates.
A key element of our strategy is to develop and commercialize drugs that selectively target specific NNR subtypes. We seek to do so through our understanding of the role of specific NNRs in the nervous system, our scientific expertise and the use of Pentad.
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Other than TC-1734, TC-2696 and mecamylamine hydrochloride, all of our product candidates are at a preclinical stage. A significant portion of the research that we are conducting involves new and unproven compounds. Research programs to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:
| • | the research methodology used may not be successful in identifying potential product candidates; or |
| • | potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be effective products. |
If we are unable to develop suitable product candidates through internal research programs, we will not be able to increase our revenues in future periods, which could result in significant harm to our financial position and adversely impact our stock price. Any additional product candidates that we are able to develop through our internal research programs will require the commitment of substantial time and financial resources for further preclinical research and clinical development.
Risks Related to Our Dependence on Third Parties
The successful development and commercialization of our lead product candidate, TC-1734, depends substantially on our recently established collaboration with AstraZeneca. If AstraZeneca is unable to further develop or commercialize TC-1734, or experiences significant delays in doing so, our business will be materially harmed.
In December 2005, we entered into our collaborative research and license agreement with AstraZeneca for the development and worldwide commercialization of TC-1734 for the treatment of Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other indications marked by cognitive impairment. We do not have a history of working together with AstraZeneca and cannot predict the success of the collaboration. The collaboration involves a complex allocation of rights, provides for milestone payments to us based on the achievement of specified development, regulatory and first commercial sale milestones and provides us with royalty-based revenue if TC-1734 or another product candidate is successfully commercialized. AstraZeneca has decision-making authority for most matters in our collaboration. AstraZeneca is also generally responsible for conducting and funding substantially all future development and regulatory approval activities for TC-1734 and will have significant control over the conduct and timing of development efforts with respect to TC-1734. Although we have had discussions with AstraZeneca regarding its current plans and intentions, AstraZeneca may change its development plans for TC-1734. We have little control over the amount and timing of resources that AstraZeneca devotes to the development of TC-1734. If AstraZeneca fails to devote sufficient financial and other resources to the development plan for TC-1734, the development and potential commercialization of TC-1734 would be delayed. This would result in a delay in milestone payments and, if regulatory approval to market and sell TC-1734 is obtained, royalties that we could receive on commercial sales.
If we lose AstraZeneca as a collaborator in the development or commercialization of TC-1734 at any time, it would materially harm our business.
Our agreement with AstraZeneca provides for AstraZeneca to conduct additional safety and product characterization studies of TC-1734 before deciding whether to proceed with planned Phase II clinical trials to evaluate the efficacy of TC-1734 in mild to moderate Alzheimer’s disease and cognitive deficits in schizophrenia. AstraZeneca can terminate our collaboration agreement if it determines in its sole discretion on or before April 20, 2007 not to proceed with
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the further development of TC-1734 based on the results of the studies and all other available information with respect to TC-1734.
In addition, in January 2006, we and AstraZeneca initiated preclinical research under our agreement that is designed to identify and develop additional compounds that act on the a4ß2 NNR and enhance cognitive function. The agreement provides for a four-year research term. AstraZeneca will have the right to terminate the a4ß2 research collaboration upon at least six months notice effective three years after the research term begins. AstraZeneca will have the right to terminate the agreement upon 90 days notice after the earlier of the end of the research term or four years after the research term begins.
If AstraZeneca terminates our agreement at any time, whether on the basis of any of the safety and product characterization studies of TC-1734 or for any other reason, it would delay our development of TC-1734 and materially harm our business and could accelerate our need for additional capital. In particular, we would have to fund the clinical development and commercialization of TC-1734 on our own, seek another collaborator or licensee for clinical development and commercialization or abandon the development and commercialization of TC-1734.
We will depend on collaborations with third parties for the development and commercialization of some of our product candidates. If these collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.
In addition to our collaboration with AstraZeneca, we intend to selectively enter into collaboration agreements with leading pharmaceutical and biotechnology companies where our potential collaborator has particular therapeutic expertise in a target indication or where the target indication represents a large, primary care market. We will have limited control over the amount and timing of resources that our collaborators dedicate to the development of our licensed product candidates. Our ability to generate revenues from our collaborators will depend on our collaborators’ abilities to establish the safety and efficacy of our product candidates, to obtain regulatory approvals and to achieve market acceptance.
Strategic collaborations involving our product candidates, including our collaboration with AstraZeneca, pose the following risks to us:
| • | collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; |
| • | collaborators may not pursue further development and commercialization of our product candidates or may elect not to continue or renew research and development programs based on preclinical or clinical trial results, changes in their strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities; |
| • | collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; |
| • | collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive; |
| • | a collaborator with marketing and distribution rights to one or more products may not commit enough resources to their marketing and distribution; |
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| • | collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; |
| • | disputes may arise between us and the collaborators that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and |
| • | collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development of the applicable product candidates. |
Collaboration agreements may not lead to development of product candidates in the most efficient manner or at all. For example, a collaborative research and development agreement that we entered into with Aventis Pharma SA for the development of our compounds for the treatment or prevention of Alzheimer’s disease terminated effective January 2, 2005. None of our compounds were advanced into clinical development under the agreement.
In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development program could be delayed, diminished or terminated.
If we do not establish additional collaborations, we may have to alter our development plans.
Our drug development programs and potential commercialization of our product candidates will require substantial additional cash to fund expenses. Our strategy includes selectively collaborating with leading pharmaceutical and biotechnology companies to assist us in furthering development and potential commercialization of some of our product candidates. We intend to do so especially for target indications in which our potential collaborator has particular therapeutic expertise or that involve a large, primary care market that must be served by large sales and marketing organizations.
We are entitled to offer to AstraZeneca the right to develop and commercialize any compound that acts on any NNR other than the a4ß2 NNR that we may in the future seek to exploit for Alzheimer’s disease, cognitive deficits in schizophrenia, other conditions marked by cognitive impairment or schizophrenia. However, if we do not offer the compound to AstraZeneca, we are generally not permitted to develop or commercialize the compound for any of these indications. As a result, our ability to seek additional collaborations for these indications is substantially limited during the term of our collaboration with AstraZeneca. We have also granted AstraZeneca rights of first negotiation for the development and commercialization of compounds for depression, anxiety and bipolar disorder.
We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.
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If our contract manufacturers fail to devote sufficient resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed or there may be a shortage of commercial supply.
Our product candidates require precise, high quality manufacturing. We have limited internal manufacturing capability. We have historically manufactured our product candidates only in small quantities for preclinical testing and have contracted with third parties to manufacture, in collaboration with us, our product candidates for clinical trials and, in the case of Inversine, for commercial sale. If any of our product candidates is approved by the FDA or by foreign regulatory authorities for marketing and sale, it will need to be manufactured in substantially larger, commercial quantities. Our experience in the manufacture of drugs in commercial quantities is limited to our contractual arrangements with third parties to manufacture Inversine and its active ingredient.
We currently rely on various third-party contract manufacturers, including Siegfried Ltd., for our product candidates and we intend to continue to rely on third-party manufacturers to supply, store and distribute our product candidates for our clinical trials and to manufacture commercial supplies of any product candidate that is approved for sale. Our reliance on third-party manufacturers will expose us to risks that could delay or prevent the initiation or completion of our clinical trials, the submission of applications for regulatory approvals, the approval of our products by the FDA or the commercialization of our products or result in higher costs or lost product revenues. In particular, contract manufacturers:
| • | could encounter difficulties in achieving volume production, quality control and quality assurance and suffer shortages of qualified personnel, which could result in their inability to manufacture sufficient quantities of drugs to meet our clinical schedules or to commercialize our product candidates; |
| • | could terminate or choose not to renew the manufacturing agreement, based on their own business priorities, at a time that is costly or inconvenient for us; |
| • | could fail to establish and follow FDA-mandated current good manufacturing practices, or cGMPs, required for FDA approval of our product candidates or fail to document their adherence to cGMPs, either of which could lead to significant delays in the availability of material for clinical study and delay or prevent filing or approval of marketing applications for our product candidates; and |
| • | could breach, or fail to perform as agreed under, the manufacturing agreement. |
We expect to rely initially on a single contract manufacturer for each of our product candidates. Currently, we have separate arrangements with third-party manufacturers, each of which is a sole supplier to us, for mecamylamine hydrochloride, the active ingredient of Inversine, and for the finished tablets of Inversine. Changing these or any manufacturer that we subsequently engage for a particular product or product candidate may be difficult, as the number of potential manufacturers is limited and we will have to compete with third parties for access to those manufacturing facilities. cGMP manufacturing processes and procedures typically must be reviewed and approved by the FDA and changing manufacturers may require re-validation of any new facility for cGMP compliance, which would likely be costly and time-consuming. We may not be able to engage replacement manufacturers on acceptable terms quickly or at all. In addition, our contract manufacturers located in foreign countries may be subject to import limitations or bans. As a result, if any of our contract manufacturers is unable, for whatever reason, to supply the contracted amounts of Inversine or any other product that we successfully bring to market, a shortage would result which would have a negative impact on our revenues.
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Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the United States Drug Enforcement Agency and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. While we are obligated to audit the performance of third-party contractors, we do not have control over our third-party manufacturers’ compliance with these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant pre-market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.
If third parties on which we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our product candidates.
We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our product candidates. We depend on independent clinical investigators and, in some cases, contract research organizations and other third-party service providers to conduct the clinical trials of our product candidates and expect to continue to do so. We rely heavily on these parties for successful execution of our clinical trials, but we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the respective trial plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates or result in enforcement action against us.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property effectively, our competitors may develop and market similar products and the value of our technology and our ability to compete would be damaged.
Our continued success depends significantly on our ability to obtain and maintain meaningful intellectual property protection for our product candidates, technology and know-how. We generally seek to protect our compounds and technologies by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology that is important to the development of our business. We file patent applications directed to our product candidates in an effort to establish intellectual property positions regarding new chemical entities and uses in the treatment of disease.
The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective patent claims and enforcing claims that are granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Moreover, our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated, rendered unenforceable or circumvented, any of which could limit our ability to stop competitors from marketing related products. In addition, the rights granted under any issued
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patents may not provide us with competitive advantages against competitors with similar compounds or technologies. Furthermore, our competitors may independently develop similar technologies in a manner that does not infringe our patents or other intellectual property.
Although we own or otherwise have rights to a number of patents, these patents may not effectively exclude competitors from engaging in activities that compete with us. Furthermore, the issuance of a patent is not conclusive as to its validity or enforceability, and third parties may challenge the validity or enforceability of our patents. Because patent applications in the United States and many foreign countries are confidential for a period of time after filing, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in our issued U.S. patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in the foreign patents or patent applications. It is possible that a competitor may successfully challenge our patents or that challenges will result in the elimination or narrowing of patent claims and, therefore, reduce our patent protection.
Because of the extensive time required for development, testing and regulatory review of a new drug, it is possible that any related patent may expire before any of our product candidates can be commercialized or remain in force for only a short period following commercialization. In either case, this would reduce any advantages of the patent. The patent laws of various foreign countries in which we intend to compete may not protect our intellectual property to the same extent as the laws of the United States. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
If we are unable to protect the confidentiality of our proprietary information and know-how, the commercial value of our technology and product candidates could be reduced.
In addition to patents, we rely on protection of trade secrets, know-how and confidential and proprietary information to maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we generally enter into confidentiality agreements with our employees, consultants, contractors and collaborative partners upon the commencement of our relationship with them. These agreements typically require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. Even if obtained, these agreements may not provide meaningful protection for our trade secrets or other proprietary information or an adequate remedy in the event of their unauthorized use or disclosure. The loss or exposure of our trade secrets or other proprietary information could impair our competitive position.
We also typically enter into agreements with employees that provide inventions conceived by them in the course of rendering services to us are our exclusive property and, where appropriate, we enter into similar agreements with consultants and contractors. To the extent that our employees, consultants or contractors use technology or know-how owned by others in their work for us, disputes may arise as to the rights in related inventions.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We are a party to various license agreements. In particular, we license patent rights for a method of use of our product candidate for pain, TC-2696, and two of our product candidates for depression, mecamylamine hydrochloride and one of its molecular components, TC-5214. We
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may enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.
Our patent protection for mecamylamine hydrochloride and TC-5214 is, and our patent protection for any other particular compound may be, limited to a specific method of use or indication. If a third party were to obtain approval of mecamylamine hydrochloride, TC-5214 or other particular compound for use in another indication, we could be subject to competition arising from off-label use.
Although we generally seek the broadest patent protection available for our proprietary compounds, we may not be able to obtain patent protection for the actual composition of any particular compound and may be limited to protecting a new method of use for the compound or otherwise restricted in our ability to prevent others from exploiting the compound. For example, we currently rely on method of use patent coverage in the United States for mecamylamine hydrochloride and TC-5214. Although we are pursuing patent protection for the composition of TC-5214 as a pharmaceutical product, the likelihood that we will obtain that patent protection is uncertain. If we are unable to obtain patent protection for the actual composition of any compound that we seek to develop and commercialize and must rely on method of use patent coverage, we would likely be unable to prevent others from manufacturing or marketing that compound for any use that is not protected by our patent rights. We are aware of one company, Athenagen Inc., that has announced plans to initiate a clinical trial of mecamylamine hydrochloride as a treatment for age-related macular degeneration, a condition characterized by degeneration of the retina in the eye. If a third party were to receive marketing approval for mecamylamine hydrochloride, TC-5214 or any other compound for which we rely on method of use patent coverage for another use, physicians could nevertheless prescribe it for indications that are not described in the product’s labeling or approved by the FDA or other regulatory authorities. Even if we have patent protection for the prescribed indication, as a practical matter, we would have little recourse as a result of this off-label use. In that event, our revenues from the commercialization of the compound would likely be adversely affected.
If the development of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide infringes the intellectual property of a third party, we may be required to pay license fees or cease our development activities, which could significantly harm our business.
We are currently conducting a Phase II clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide, a commonly prescribed anti-depressant. We are aware of a patent application that has been filed internationally that, if issued as a patent, could be infringed by our continued development and commercialization of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide. We believe that, even if this patent application issues as a patent, the development or commercialization of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide by the patent holder or any other third party would infringe our intellectual property rights. However, if this patent application issues as a patent, we could be required to obtain a license if we continue to develop and commercialize mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide. We may not be able to obtain a license on acceptable terms, or at all. If we are unable to obtain a license on acceptable terms, we may be required to cease further development or commercialization of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide, which could significantly harm our business.
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We may be involved in lawsuits to protect or enforce our patents that could be expensive and time-consuming.
We may initiate patent litigation against third parties to protect or enforce our patent rights and we may be similarly sued by third parties. We may also become subject to interference or opposition proceedings conducted in the patent and trademark offices of various countries to determine our entitlement to patents. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings, if necessary, would be costly and divert our technical and management personnel from conducting our business. Moreover, we may not prevail in any of these suits. An adverse determination of any litigation or proceeding could put our patents at risk of being invalidated or narrowly interpreted and our patent applications at risk of not being issued and could prevent us from protecting our rights, particularly in countries where the laws may not protect such rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that disclosure of some of our confidential information could be compelled and the information compromised. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments that, if perceived as negative by securities analysts or investors, could have a substantial adverse effect on the trading price of our common stock.
Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our development and commercialization efforts.
Our success depends in part on avoiding the infringement of other parties’ patents and proprietary rights. Patents may issue from patent applications of which we are unaware, and avoiding patent infringement may be difficult. We may infringe or it may be alleged that we infringe third-party patents. If a third party were to file a patent infringement suit against us, we could be forced to stop or delay research, development, manufacturing or sales of any infringing product in the country or countries covered by the patent infringed, unless we can obtain a license from the patent holder. Any necessary license may not be available on acceptable terms or at all, particularly if the third party is developing or marketing a product competitive with the infringing product. Even if we are able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.
We also may be required to pay substantial damages to the patent holder in the event of an infringement. These damages could in some circumstances be triple the actual damages the patent holder incurs. If we have supplied infringing products to third parties for marketing or have licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses they may sustain themselves as a result.
Any successful infringement action brought against us may also adversely affect marketing of the infringing product in other markets not covered by the infringement action, as well as our marketing of other products based on similar technology. Furthermore, we may suffer adverse consequences from a successful infringement action against us even if the action is subsequently reversed on appeal, nullified through another action or resolved by settlement with the patent holder. The damages or other remedies awarded, if any, may be significant. As a result, any infringement action against us would likely delay the regulatory approval process, harm our competitive position, be very costly and require significant time and attention of our key management and technical personnel.
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Risks Related to Commercialization
Even if approved for marketing, our product candidates may not gain market acceptance and may fail to generate significant revenues.
The commercial success of any of our product candidates for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third-party payors as clinically useful, cost-effective and safe. Many of the product candidates that we are developing are based upon technologies or methods of treatment that are relatively new and unproven. As a result, it may be more difficult for us to achieve market acceptance of our products.
The degree of market acceptance of any drug depends on a number of factors, such as:
| • | its demonstration of efficacy and safety in clinical trials; |
| • | its superior efficacy as compared to alternative treatment methods and its side effect profile; |
| • | its cost-effectiveness and the availability of insurance or other third-party reimbursement; |
| • | its convenience and ease of administration; |
| • | the timing of its market entry relative to competitive treatments; |
| • | the extent and success of marketing and sales efforts; and |
| • | the product labeling or product insert required by the FDA or regulatory authorities in other countries. |
In addition, perceptions about the relationship or similarity between our product candidates and nicotine could limit their market potential. Our product candidates derive their medical effects by interacting with NNRs. Nicotine, which can have significantly negative health effects, also interacts with NNRs. Accordingly, our product candidates may be perceived by some to be nicotine or to be closely related to nicotine, particularly in light of the shared derivative names, “nicotine” and neuronal “nicotinic” receptors, and the fact that our company was launched originally as a research group within, and then as a subsidiary of, R.J. Reynolds Tobacco Company. This potential perception could result in a reluctance by patients to take, or by physicians to prescribe, any of our product candidates that receives marketing approval, which would affect our revenues.
We currently have limited sales, marketing and distribution experience and no internal sales or distribution capabilities. If we are unable to enter into collaborations or other arrangements with third parties to market and sell our product candidates or to develop our own internal marketing capability, we may not be successful in commercializing our products.
We currently have limited sales, marketing and distribution experience. Our experience is limited to a contractual arrangement with a third party to distribute Inversine, which we acquired in 2002 and which generates only limited sales. We currently have no internal sales or distribution capabilities. Although we intend to build an internal sales force and expand our marketing capabilities in areas where specialists heavily influence our target markets, such as neurology and psychiatry, we also intend to seek to further augment our sales, marketing and distribution capabilities through arrangements with third parties. In particular, our strategy includes selectively entering into collaborations and other strategic alliances with respect to product candidates for disease indications with sales and distribution characteristics requiring a
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large sales force. There are risks involved with establishing our own sales force and marketing and distribution capabilities, as well as in entering into arrangements with third parties to perform these services. Developing our own sales force will be expensive and time-consuming and could delay any product launch. We may not be successful in entering into arrangements with third parties on terms that are favorable to us or at all. Also, we would have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell, market or distribute our products effectively. If we do not establish sales and distribution capabilities successfully, either on our own or in collaboration with third parties, we may not successfully commercialize our products.
Unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives applicable to our product candidates could limit our potential product revenue.
The regulations governing drug pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed and, in many of these countries, the pricing review period begins only after approval is granted. In some countries, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. Although we monitor these regulations, our product candidates are currently in the development stage and we will not be able to assess the impact of price regulations for at least several years. As a result, we may obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay the commercial launch of the product and may negatively impact the revenues we are able to derive from sales in that country.
Successful commercialization of our products will also depend in part on the extent to which coverage and adequate payment for our products will be available from government health administration authorities, private health insurers and other third-party payors. If we succeed in bringing a product candidate to the market, it may not be considered cost-effective and reimbursement to the patient may not be available or sufficient to allow us to sell it at a satisfactory price. Because our product candidates are in the development stage, we are unable at this time to determine their cost-effectiveness. We may need to conduct expensive studies in order to demonstrate cost-effectiveness. Moreover, third-party payors frequently require that drug companies provide them with predetermined discounts from list prices and are increasingly challenging the prices charged for medical products. Because our product candidates are in the development stage, we do not know the level of reimbursement, if any, we will receive for any products that we are able to successfully develop. If the reimbursement for any of our product candidates is inadequate in light of our development and other costs, our ability to achieve profitability could be affected.
We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed and adopted in recent years. For example, the U.S. Congress has enacted a limited prescription drug benefit for Medicare recipients as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. While the program established by this statute may increase demand for any products that we are able to successfully develop, if we participate in this program, our prices will be negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than prices we might otherwise obtain. If successfully developed, TC-1734, our product candidate for Alzheimer’s disease, cognitive deficits in schizophrenia and other conditions marked by cognitive impairment, could be particularly
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affected by this law because Alzheimer’s disease is a disease that affects the elderly. Non-Medicare third-party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries. In addition, ongoing initiatives in the United States have and will continue to increase pressure on drug pricing. The announcement or adoption of any such initiative could have an adverse effect on potential revenues from any product candidate that we may successfully develop.
If our competitors develop and market drugs that are less expensive, more effective or safer than ours, if they develop and market products faster than we do, or if they have better sales and marketing capabilities than we do, any products we are able to commercialize may not generate initial or ongoing revenues.
The development and commercialization of new drugs is highly competitive. Our business is characterized by extensive research efforts and rapid developments. We expect intense competition in our target markets as new products and advanced technologies become available. Our competitors include large pharmaceutical, biotechnology and other companies and research institutions, many of which have greater financial, technical and other resources and personnel and more experience in research, clinical development, regulatory and drug commercialization than we have. Our competitors may:
| • | develop products that are more effective, safer, more convenient or less costly than our product candidates; |
| • | obtain FDA or other regulatory approval for their products more rapidly than we do; |
| • | adapt more quickly to new technologies and scientific advances; |
| • | initiate or withstand substantial price competition more successfully than we can; |
| • | have greater success in recruiting skilled scientific workers from the limited pool of available talent; |
| • | obtain more effective intellectual property protection than we have; |
| • | negotiate third-party licensing and collaboration arrangements more effectively than we do; and |
| • | take advantage of acquisition or other opportunities more readily than we do. |
Competitive products may render our product candidates obsolete or noncompetitive before we can recover our development or commercialization expenses.
We also face substantial competition from therapies designed to target NNRs. We believe that several prominent pharmaceutical companies have product candidates that target NNRs in development, including Pfizer, with a compound for which it has filed an NDA for smoking cessation, Sanofi-Aventis, with a compound that has completed a Phase II clinical trial for smoking cessation, and Abbott Laboratories, with one compound in Phase I for pain and another in Phase II for Alzheimer’s disease, ADHD and schizophrenia. We expect that we will face increased competition in the future if therapies that target NNRs are further validated and companies initiate or expand programs focused on NNRs, whether independently or by collaboration or acquisition.
Any products that we are able to successfully develop and commercialize in the future could be subject to competition from lower priced generic drugs. The manufacturer of a generic product could challenge our patents as invalid or not infringed and subject us to expensive
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litigation. We do not know if we would prevail in litigation and succeed in keeping the generic product out of the market until our patent protection expires.
If we successfully develop and obtain approval for our product candidates, we will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective or more affordable products, or obtain more effective patent protection, than we do. Accordingly, our competitors may commercialize products more rapidly or effectively than we do.
If approved, our product candidates will compete for a share of the existing market with numerous approved products. There is currently no approved product for cognitive deficits in schizophrenia. We believe that the primary competitive products for use in indications that we are currently targeting include:
| • | for mild to moderate Alzheimer’s disease, acetylcholinesterase inhibitors such as Aricept from Pfizer/Eisai, Reminyl from Johnson & Johnson and Exelon from Novartis and for moderate to severe Alzheimer’s disease, Namenda from Forest Laboratories, which acts by regulating the neurotransmitter glutamate; |
| • | for pain, non-steroidal anti-inflammatory drugs such as Celebrex from Pfizer and opioids such as OxyContin from Purdue Pharma; |
| • | for depression, selective serotonin reuptake inhibitors such as Prozac from Eli Lilly, Paxil from GlaxoSmithKline, Zoloft from Pfizer, Celexa and Lexapro from Forest Laboratories and the dual uptake inhibitor Effexor from Wyeth; |
| • | for schizophrenia, anti-psychotics such as Seroquel from AstraZeneca, Zyprexa from Eli Lilly, Risperdal from Johnson & Johnson, Geodon from Pfizer and Abilify from Bristol-Myers Squibb; and |
| • | for smoking cessation, Zyban from GlaxoSmithKline. |
We may have substantial exposure to product liability claims and may not have adequate insurance to pay them.
We face an inherent business risk of exposure to product liability claims if the use of our products is alleged to have resulted in harm to others. This risk exists for product candidates in clinical trials, whether or not the product candidate is subsequently approved for commercial sale, as well as for products in commercial distribution. Any product liability claim arising in the future against us or any third party that we have agreed to indemnify, regardless of its merit or eventual adjudication, could be costly and significantly divert management’s attention from conducting our business or adversely affect our reputation and the demand for our products.
We have secured product liability insurance coverage with limits of $8 million per occurrence and $8 million in the aggregate. Our current insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may incur. We intend to expand our coverage with respect to any products for which we obtain marketing approval. However, additional insurance may not be available to cover our potential liabilities fully or may be prohibitively expensive. In addition, some potential product liability claims may be excluded from coverage under the terms of the policy. Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or impede the commercialization of our product candidates.
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Our business activities involve hazardous materials, which could subject us to significant liability.
Our research and development activities involve, and any future manufacturing processes that we conduct may involve, the use of hazardous materials, including hazardous chemicals and radioactive materials. Accordingly, we are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. We incur significant costs to comply with these laws and regulations. Moreover, despite precautionary procedures that we implement, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages. We do not carry insurance against the risk of contamination or injury from hazardous materials.
If our promotional activities fail to comply with the regulations and guidelines of the FDA and other applicable regulatory authorities, we may be subject to warnings or enforcement actions that could harm our business.
Physicians may prescribe drugs for uses that are not described in the product’s labeling or for uses that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications on the subject of off-label use. Companies cannot actively promote approved drugs for off-label uses but, in some countries outside of the European Union, they may under specified conditions disseminate articles published in peer-reviewed journals that discuss off-label uses of approved products to physicians. To the extent allowed, we may in the future disseminate peer-reviewed articles on our products to physicians. We do not currently promote Inversine for off-label use in the treatment of any neuropsychiatric disorder. However, if we undertake any promotional activities in the future for Inversine or any other product candidate that we are able to commercialize and our activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities.
Risks Related to Employees and Managing Growth
If we lose our key personnel or are unable to attract and retain additional skilled personnel, we may be unable to successfully develop and commercialize our product candidates or effectively compete in our industry.
Our performance depends substantially on the performance of our senior management and key scientific, technical and managerial personnel, including our Chief Executive Officer and President, J. Donald deBethizy, and our Vice President, Clinical Development and Regulatory Affairs, Geoffrey C. Dunbar. Our executive officers, including these individuals, can terminate their employment agreements with us at any time. The loss of the services of any of our executive officers may significantly delay or prevent the achievement of product research and development and other business objectives. We maintain key man life insurance policies on Dr. deBethizy and Dr. Dunbar, among other executive officers. We also rely on consultants and advisors to assist us in formulating our research and development strategy. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have other commitments, including consulting or advisory contracts with other organizations, that may affect their ability to contribute to us.
Our ability to operate successfully and manage our potential future growth will depend on our ability to identify, recruit and retain additional qualified scientific, technical, financial and
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managerial personnel. There is currently a shortage of skilled executives in our industry, and we face intense competition for such personnel. We may not be able to continue to attract and retain personnel with the advanced qualifications necessary for the growth of our business.
We may encounter difficulties in managing our growth, which could increase our losses.
We expect the number of our employees and the scope of our operations to grow following the completion of this offering. Continued growth may place a significant strain on our managerial, operational and financial resources, in particular as we expand our focus beyond drug discovery and development to commercialization. To manage our anticipated growth, we must continue to implement and improve our managerial, operational and financial systems and controls and reporting processes and procedures, to expand our facilities and to continue to recruit and train additional qualified personnel. We may not be able to manage our growth effectively. Moreover, we may discover deficiencies in existing systems and controls that could expose us to an increased risk of incurring financial or accounting irregularities or fraud.
Risks Related to Our Common Stock and this Offering
The market price of our common stock may be highly volatile. You may not be able to resell your shares at or above the initial public offering price.
There has been no public market for our common stock prior to this offering, and it is possible that no active trading market for our common stock will develop or continue following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiation with representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Please see “Underwriters” for more information regarding our arrangements with the underwriters and the factors to be considered in setting the initial public offering price.
We expect that the trading price of our common stock is likely to be highly volatile in response to factors that are beyond our control. The stock market in general has previously experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of your shares.
If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of your investment.
The offering price of our common stock will be substantially higher than the net tangible book value per share of our existing capital stock as of December 31, 2005. As a result, based on an assumed initial public offering price of $12.00 per share, purchasers of our common stock in this offering will incur immediate and substantial dilution of $8.05 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price, and will incur $0.08 additional dilution if outstanding stock options and warrants with exercise prices below the public offering price are exercised. See “Dilution” for a more detailed discussion of the dilution new investors will incur in this offering.
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If our operating results fluctuate significantly, our stock price may decline and result in losses to you.
Our operating results are likely to fluctuate significantly from quarter to quarter and year to year. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include:
| • | our inability, or the inability of AstraZeneca or any of our potential future collaborators, to successfully complete preclinical studies and clinical trials in a timely manner or at all, resulting in a delay in receiving, or a failure to receive, the required regulatory approvals to commercialize our product candidates; |
| • | the timing of regulatory approvals or other regulatory actions; |
| • | general and industry-specific economic conditions that may affect the research and development expenditures of AstraZeneca or any of our potential future collaborators; |
| • | the timing of receipt of milestone payments from AstraZeneca or any of our potential future collaborators; and |
| • | the expiration or termination of agreements with AstraZeneca or any of our potential future collaborators or the execution of new agreements. |
Due to fluctuations in our operating results, a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors and our stock price could decline.
If our existing stockholders sell a substantial number of shares of our common stock in the public market, our stock price may decline.
Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price to decline. Such sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After this offering, we will have 19,104,838 shares of common stock outstanding based on the number of shares outstanding as of February 28, 2006. If there are more shares of our common stock offered for sale than buyers are willing to purchase, the market price of our common stock may decline to a market price at which buyers are willing to purchase the offered shares and sellers remain willing to sell the shares. The number of shares of our common stock available for sale in the public market is limited by restrictions under federal securities laws and under lock-up agreements that substantially all of our current stockholders have entered into with the underwriters. Except in limited circumstances, these lock-up agreements restrict our stockholders from selling or otherwise disposing of their shares for a period of 180 days after the date of this prospectus, subject to a possible extension, without the prior written consent of Deutsche Bank Securities Inc. on behalf of the underwriters. However, Deutsche Bank Securities may, in its sole discretion, release all or any portion of the common stock from the restrictions of the lock-up agreements. Deutsche Bank Securities does not have any pre-established conditions to waiving the terms of the lock-up agreements. Any determination to release any shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold and the timing, purpose and terms of the proposed sale.
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Additionally, of the 1,631,110 shares of our common stock that may be issued upon the exercise of options outstanding as of February 28, 2006, approximately 1,199,029 shares will be vested and eligible for sale 180 days after the date of this prospectus. For a further description of the eligibility of shares for sale into the public market following the offering, see “Shares Eligible for Future Sale.” In the future, we may issue additional shares to our employees, directors or consultants, in connection with corporate alliances or acquisitions or to raise capital. Accordingly, sales of a substantial number of shares of our common stock in the public market could occur at any time.
Management may invest or spend the proceeds of this offering in ways in which you may not agree or in ways that may not yield a favorable return to our stockholders.
Management will retain broad discretion over the use of the net proceeds from this offering. Stockholders may not agree with such uses, and our use of the proceeds may not yield a significant return or any return at all for our stockholders. We intend to use the proceeds from this offering for research and development and other general corporate purposes. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use.
Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
Following the completion of this offering, our executive officers, directors and their affiliates will beneficially own or control approximately 38.3% of the outstanding shares of our common stock. Accordingly, our current executive officers, directors and their affiliates will have substantial control over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions, as well as our management and affairs. The concentration of ownership may also delay or prevent a change of control of us at a premium price if these stockholders oppose it, even if it would benefit our other stockholders.
Provisions of our charter, bylaws and Delaware law may make an acquisition of us or a change in our management more difficult.
Provisions of our certificate of incorporation and bylaws that will be in effect upon the completion of this offering could discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:
| • | allow the authorized number of directors to be changed only by resolution of our board of directors; |
| • | establish a classified board of directors, providing that not all members of the board be elected at one time; |
| • | authorize our board of directors to issue without stockholder approval blank check preferred stock that, if issued, could operate as a “poison pill” to dilute the stock |
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| ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors; |
| • | require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent; |
| • | establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings; |
| • | limit who may call stockholder meetings; and |
| • | require the approval of the holders of 66 2/3% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our certificate of incorporation and bylaws. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including the following:
| • | the success of our collaboration with AstraZeneca; |
| • | the size and growth potential of the potential markets for our product candidates and our ability to serve those markets; |
| • | the rate and degree of market acceptance of our product candidates; |
| • | our plans to research, develop and commercialize our product candidates; |
| • | the success of our clinical trials; |
| • | the success of non-clinical studies conducted to further characterize our clinical stage product candidates; |
| • | our ability to obtain and maintain regulatory approval for our product candidates; |
| • | our use of the proceeds from this offering; |
| • | the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing, and our ability to obtain additional financing; |
| • | our ability to attract and to establish collaborations with pharmaceutical and biotechnology companies with development, regulatory and commercialization expertise; |
| • | our ability to obtain and maintain intellectual property protection for our product candidates; |
| • | the successful development of our marketing capabilities; |
| • | the success of competing therapies that are or become available; and |
| • | the performance of third-party manufacturers with which we contract to provide a supply of our product candidates. |
In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 do not protect any forward-looking statements that we make in connection with this offering.
You should read this prospectus completely. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. We may not update these forward-looking statements even though our situation may change in the future. We qualify all the forward-looking statements contained in this prospectus by the foregoing cautionary statements.
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We estimate that our net proceeds from the sale of 5,000,000 shares of our common stock in this offering will be approximately $54.7 million, or approximately $63.1 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) our net proceeds from this offering by approximately $4.7 million, or approximately $5.3 million if the underwriters exercise their over-allotment option in full, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
We currently estimate that we will use these net proceeds as follows:
| • | approximately $10 million to complete our ongoing Phase I clinical trial, to conduct Phase II clinical trials and to conduct formulation activities for TC-2696, our product candidate for acute post-operative pain; |
| • | approximately $9 million to conduct the additional preclinical safety studies necessary to support an IND for clinical trials, to conduct Phase I and Phase II clinical trials of TC-2216, our product candidate for depression and anxiety disorders; |
| • | approximately $6 million to conduct the additional preclinical safety studies necessary to support an IND for clinical trials and, unless licensed by us to AstraZeneca under the terms of our collaboration agreement, to conduct Phase I clinical trials of TC-5619; |
| • | approximately $4 million to fund preclinical testing and other research and development activities in one or more of the areas of smoking cessation, obesity and inflammation; |
| • | approximately $2 million to complete our ongoing Phase II clinical trial of mecamylamine hydrochloride as an add-on therapy for depression; and |
| • | the remainder to fund general and administrative expenses, other research and development expenses, working capital needs and other general corporate purposes. |
We may also use a portion of the net proceeds for the potential acquisition of, or investment in, technologies, products or companies that complement our business, although we have no current understandings, commitments or agreements to do so.
The amounts and timing of our actual expenditures may vary significantly depending upon numerous factors, including the progress and status of our development and commercialization efforts, the amount of proceeds actually raised in this offering, the amount of cash generated through our existing strategic collaboration with AstraZeneca, any additional strategic collaborations into which we may enter and sales of Inversine, and our operating costs and capital expenditures. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. We may change the allocation of use of these proceeds as a result of contingencies such as the progress and results of our clinical trials and other research and development activities, product development timelines and the status of our intellectual property position, a decision by us to conduct a Phase III clinical trial of mecamylamine hydrochloride or to accelerate the development of TC-5214 as an add-on therapy for depression in lieu of further advancement of mecamylamine hydrochloride, any decision by us to offer TC-5619 or any other compound to AstraZeneca and by AstraZeneca to license the compound under the terms of our collaboration agreement, the establishment of collaborations, the results of our commercialization efforts, our manufacturing requirements and regulatory or competitive
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developments. In particular, if AstraZeneca terminates our collaboration agreement following the completion of the additional safety and product characterization studies of TC-1734 that AstraZeneca will conduct and we choose to fund the clinical development of TC-1734 on our own, we would need to use a substantial portion of the net proceeds of this offering for that purpose or seek additional funds from external sources.
Under our collaboration agreement, AstraZeneca will assume substantially all development costs for TC-1734. As a result, we do not expect to use any of the net proceeds of this offering in the development of TC-1734. We do not expect our existing capital resources and the net proceeds from this offering to be sufficient to enable us to fund the completion of the development of any of our other product candidates. We expect that the net proceeds from this offering will be sufficient to enable us to: complete our ongoing Phase II clinical trial of mecamylamine hydrochloride; conduct the additional preclinical safety studies necessary to support an IND for clinical trials, conduct Phase I and Phase II clinical trials of TC-2216; complete our ongoing Phase I clinical trial and conduct Phase II clinical trials of TC-2696; and conduct the additional preclinical safety studies necessary to support an IND for clinical trials and conduct Phase I clinical trials of TC-5619. It is possible that we will not make the progress that we expect because the actual costs and timing of drug development, particularly clinical trials, are highly uncertain, are subject to substantial risk and often change depending on the target indication, the particular development strategy and the results of earlier clinical trials. It is also possible that we will not make the progress that we expect because we change the allocation of use of the net proceeds of this offering as a result of contingencies, including any termination of our collaboration agreement by AstraZeneca or any of the other contingencies described in the preceding paragraph. As a result, we may need to raise additional funds from external sources to make the development progress described in this paragraph.
Until the funds are used as described above, we intend to invest the net proceeds from this offering in short-term interest-bearing, investment grade securities.
We have never declared or paid cash dividends on any of our shares of capital stock. We currently intend to retain future earnings, if any, to finance the expansion and growth of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
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The following table sets forth our capitalization at December 31, 2005:
| • | on an actual basis; |
| • | on a pro forma basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering; and |
| • | on a pro forma as adjusted basis to give further effect to our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. |
You should read this table together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information included in this prospectus.
| As of December 31, 2005 |
||||||||||||
| Actual |
Pro Forma |
Pro Forma As Adjusted |
||||||||||
| (in thousands, except share and per share data) |
||||||||||||
| Total long-term obligations |
$ | 2,193 | $ | 2,193 | $ | 2,193 | ||||||
| Redeemable convertible preferred stock, $0.001 par value; 93,309,532 shares authorized, 88,505,565 shares issued and outstanding actual; no shares authorized, issued or outstanding pro forma and pro forma as adjusted |
183,628 | — | — | |||||||||
| Stockholders’ equity (deficit): |
||||||||||||
| Common stock, $0.001 par value; 16,666,666 shares authorized actual and pro forma; 100,000,000 shares authorized pro forma as adjusted; 270,427 issued and outstanding actual; 14,102,442 shares issued and outstanding pro forma; 19,102,442 shares issued and outstanding pro forma as adjusted |
— | 14 | 19 | |||||||||
| Preferred stock, $0.001 par value; no shares authorized, issued or outstanding actual and pro forma; 5,000,000 shares authorized and no shares issued and outstanding pro forma as adjusted |
— | — | — | |||||||||
| Capital in excess of par value (1) |
1,975 | 149,092 | 203,813 | |||||||||
| Common stock warrants |
214 | 214 | — | |||||||||
| Accumulated deficit |
(164,670 | ) | (128,173 | ) | (127,945 | ) | ||||||
| Total stockholders’ equity (deficit) (1) |
(162,481 | ) | 21,147 | 75,887 | ||||||||
| Total capitalization (1) |
$ | 23,340 | $ | 23,340 | $ | 78,080 | ||||||
| (1) | A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) each of capital in excess of par value, total stockholders’ equity (deficit) and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same |
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| and after deducting estimated underwriting discounts and commissions. The pro forma information discussed above is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. |
The table above does not include:
| • | 1,610,009 shares of common stock issuable upon exercise of options outstanding as of December 31, 2005, at a weighted average exercise price of $2.88 per share, of which options to purchase 979,784 shares were exercisable; and |
| • | 54,465 shares of common stock reserved for future grant under our 2000 equity incentive plan as of December 31, 2005. |
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If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value of our common stock immediately after completion of this offering.
The historical net tangible book value of our common stock as of December 31, 2005 was approximately $(163.0) million, or approximately $(602.73) per share, based on 270,427 shares of common stock outstanding as of December 31, 2005. Historical net tangible book value per share represents our total tangible assets less total liabilities divided by the actual number of shares of our common stock outstanding.
As of December 31, 2005, the pro forma net tangible book value of our common stock was approximately $20.6 million, or approximately $1.46 per share. Pro forma net tangible book value per share represents our total tangible assets less total liabilities divided by the pro forma number of shares of our common stock outstanding, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering.
Assuming the sale of the 5,000,000 shares of our common stock offered by this prospectus at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of December 31, 2005 would have been $75.4 million, or $3.95 per share. This represents an immediate increase in pro forma net tangible book value of $2.49 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $8.05 per share to new investors purchasing in this offering at the initial public offering price. The following table illustrates this dilution on a per share basis:
| Assumed initial public offering price per share |
$ | 12.00 | |||||
| Historical net tangible book value per share |
$ | (602.73 | ) | ||||
| Increase attributable to the conversion of convertible preferred stock |
604.19 | ||||||
| Pro forma net tangible book value per share before this offering |
1.46 | ||||||
| Increase per share attributable to new investors |
2.49 | ||||||
| Pro forma net tangible book value per share after this offering |
3.95 | ||||||
| Dilution per share to new investors |
$ | 8.05 | |||||
A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) our pro forma net tangible book value per share after this offering by approximately $0.24 and dilution per share to new investors by approximately $0.76, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
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The following table summarizes, on a pro forma basis as of December 31, 2005, the total number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors purchasing shares in this offering at an assumed initial public offering price of $12.00 per share, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.
| Shares Purchased |
Total Consideration |
Average Price per Share | ||||||||||||
| Number |
Percent |
Amount |
Percent |
|||||||||||
| Existing stockholders |
14,102,442 | 73.8 | % | $ | 149,092,000 | 71.3 | % | $ | 10.57 | |||||
| New investors |
5,000,000 | 26.2 | 60,000,000 | 28.7 | 12.00 | |||||||||
| Total |
19,102,442 | 100.0 | % | $ | 209,092,000 | 100.0 | % | |||||||
A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) the total consideration paid by new investors by $5.0 million and increase (decrease) the percent of total consideration paid by new investors by approximately 1.7%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
The share data in the table above is based on shares outstanding as of December 31, 2005, counting as outstanding 13,832,015 shares of common stock underlying all outstanding convertible preferred stock.
The share data in the table above excludes:
| • | 1,610,009 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2005, at a weighted average exercise price of $2.88 per share, of which options to purchase 979,784 shares were exercisable; |
| • | 54,465 shares of common stock reserved for future grant under our 2000 equity incentive plan as of December 31, 2005; and |
| • | 215,054 shares of common stock subject to an outstanding warrant with an exercise price of $14.63 per share that will expire if not exercised concurrently with the completion of this offering. |
If the underwriters exercise their over-allotment in full, the following will occur:
| • | the number of shares of our common stock held by existing stockholders would decrease to approximately 71% of the total number of shares of our common stock outstanding after this offering; and |
| • | the number of shares of our common stock held by new investors would increase to 5,750,000 shares, or approximately 29% of the total number of our common stock outstanding after this offering. |
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You should read the following selected financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial data included in this prospectus.
We have derived the statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 from our audited financial statements included in this prospectus. We have derived the statement of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 from our audited financial statements not included in this prospectus. We became an independent company in August 2000, prior to which we were a wholly owned subsidiary of R.J. Reynolds Tobacco Company. Our historical results for any prior period are not necessarily indicative of the results to be expected for any future period.
The pro forma net loss attributable to common stockholders per share information is computed using the weighted average number of common shares outstanding, after giving pro forma effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering, as if the conversion had occurred at the date of the original issuance.
| Year ended December 31, |
||||||||||||||||||||
| 2001 |
2002 |
2003 |
2004 |
2005 |
||||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||
| Net revenue |
$ | 1,703 | $ | 2,286 | $ | 2,458 | $ | 3,738 | $ | 1,180 | ||||||||||
| Operating expenses: |
||||||||||||||||||||
| Research and development |
8,152 | 16,244 | 18,179 | 22,771 | 24,252 | |||||||||||||||
| General and administrative |
2,302 | 4,135 | 3,600 | 5,163 | 6,388 | |||||||||||||||
| Cost of product sales |
— | 244 | 743 | 198 | 481 | |||||||||||||||
| Purchased in-process research and development |
— | 2,666 | — | — | — | |||||||||||||||
| Total operating expenses |
10,454 | 23,289 | 22,522 | 28,132 | 31,121 | |||||||||||||||
| Loss from operations |
(8,751 | ) | (21,003 | ) | (20,064 | ) | (24,394 | ) | (29,941 | ) | ||||||||||
| Interest and dividend income |
1,449 | 88 | 791 | 505 | 1,174 | |||||||||||||||
| Interest expense |
— | (103 | ) | (122 | ) | (132 | ) | (225 | ) | |||||||||||
| Loss on disposal of fixed assets |
— | (54 | ) | — | (4 | ) | — | |||||||||||||
| Net loss |
(7,302 | ) | (21,072 | ) | (19,395 | ) | (24,025 | ) | (28,992 | ) | ||||||||||
| Preferred stock accretion |
(3,808 | ) | (4,173 | ) | (8,341 | ) | (8,744 | ) | (11,238 | ) | ||||||||||
| Net loss attributable to common stockholders |
$ | (11,110 | ) | $ | (25,245 | ) | $ | (27,736 | ) | $ | (32,769 | ) | $ | (40,230 | ) | |||||
| Basic and diluted net loss per share applicable to common stockholders |
$ | (200.97 | ) | $ | (339.63 | ) | $ | (254.33 | ) | $ | (149.48 | ) | $ | (153.54 | ) | |||||
| Shares used to compute basic and diluted net loss per share |
55,283 | 74,332 | 109,053 | 219,213 | 262,013 | |||||||||||||||
| Pro forma basic and diluted net loss per share applicable to common stockholders (unaudited) |
$ | (2.06 | ) | |||||||||||||||||
| Shares used to compute pro forma basic and diluted net loss per share (unaudited) |
14,068,182 | |||||||||||||||||||
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| As of December 31, |
||||||||||||||||||||
| 2001 |
2002 |
2003 |
2004 |
2005 |
||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||
| Cash, cash equivalents and short-term investments |
$ | 21,180 | $ | 49,361 | $ | 42,977 | $ | 53,075 | $ | 24,851 | ||||||||||
| Working capital |
20,371 | 46,685 | 40,526 | 50,079 | 20,531 | |||||||||||||||
| Total assets |
24,396 | 54,379 | 47,390 | 58,204 | 28,001 | |||||||||||||||
| Long-term debt, net of current portion |
— | 2,088 | 1,462 | 3,443 | 1,409 | |||||||||||||||
| Redeemable convertible preferred stock |
58,365 | 108,026 | 130,134 | 171,778 | 183,628 | |||||||||||||||
| Accumulated deficit |
(38,691 | ) | (63,936 | ) | (91,672 | ) | (124,441 | ) | (164,671 | ) | ||||||||||
| Total stockholders’ equity (deficit) |
(38,268 | ) | (63,335 | ) | (90,796 | ) | (122,966 | ) | (162,481 | ) | ||||||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company engaged in the design, discovery and development of a new class of drugs to treat multiple diseases and disorders of the central nervous system by selectively targeting a class of receptors known as neuronal nicotinic receptors, or NNRs. We are developing our most advanced product candidates as treatments for target indications in three therapeutic areas: cognitive impairment, depression and anxiety, and pain. Within these areas, we have three product candidates in clinical development and two preclinical product candidates. Our lead product candidate is a novel small molecule that we refer to as TC-1734. In December 2005, we entered into a collaborative research and license agreement with AstraZeneca AB for the development and worldwide commercialization of TC-1734 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment such as attention deficit hyperactivity disorder, commonly referred to as ADHD, age associated memory impairment, commonly referred to as AAMI, and mild cognitive impairment, commonly referred to as MCI. In March 2006, we completed a Phase II clinical trial of TC-1734 in AAMI that we conducted at our own expense to further assess the effects of TC-1734 on cognition in a cognitively impaired older adult population. Mecamylamine hydrochloride, our product candidate currently in a Phase II clinical trial as an add-on therapy for depression, is the active ingredient in Inversine, our product approved in the United States for moderately severe to severe essential hypertension.
We trace our scientific lineage to a research program initiated by R.J. Reynolds Tobacco Company in 1982 to study the activity and effects of nicotine in the body and the function of nicotinic receptors. We were incorporated in Delaware in 1997 as a wholly owned subsidiary of RJR. In August 2000, we became an independent company when we issued shares of our series B convertible preferred stock to outside investors.
We have devoted substantially all of our resources to the discovery and development of our product candidates and technologies, including the design, conduct and management of preclinical and clinical studies and related manufacturing, regulatory and clinical affairs, and intellectual property prosecution. Through 1998, we received all of our funding from RJR. At the end of 1998, we entered into a collaboration agreement with the predecessor company to Aventis Pharma SA. Aventis Pharma SA is now controlled by Sanofi-Aventis. We received an upfront license fee and research support payments under this agreement which, together with a modest amount of additional financial support from RJR, funded our activities through August 2000. Since August 2000, we have funded our operations primarily through the private placement of equity securities and, to a much lesser extent, through payments we received from our collaborators, equipment and building lease incentive financing, sales of our product Inversine and government grants.
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We have never been profitable. As of December 31, 2005, we had an accumulated deficit of $164.7 million. We expect to continue to incur substantial losses for the foreseeable future. We expect our research and development expenses to increase substantially following the completion of this offering as we expand our clinical trial activity, as our product candidates advance through the development cycle and as we invest in additional product opportunities and research programs. We also expect our general and administrative expenses to increase substantially due to costs associated with being a public company. Clinical trials and preclinical studies are time-consuming, expensive and may never yield a product that will generate revenue. A substantial portion of our revenue for the next several years will depend on the conduct of research and the successful achievement of milestone events in the development of TC-1734 under our agreement with AstraZeneca. Our revenue may vary substantially from quarter to quarter and year to year. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicative of our future performance.
We currently have one FDA approved product, Inversine. We acquired rights to Inversine in August 2002. Inversine is approved for the management of moderately severe to severe essential hypertension, a high blood pressure disorder with an unknown cause. However, we believe that Inversine is prescribed predominantly for the treatment of neuropsychiatric disorders, including Tourette’s syndrome, autism and bipolar disorder, in children and adolescents. Sales of Inversine generated revenue of $767,000 for the year ended December 31, 2004 and $681,000 for the year ended December 31, 2005.
Our agreement with AstraZeneca relating to TC-1734 became effective in January 2006. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment to us of $20 million if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006. We are eligible to receive other payments of up to $249 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, and royalties on future product sales. If TC-1734 is developed under the agreement for indications other than Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, we would also be eligible to receive payments contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for those indications. Under the terms of a sponsored research agreement and a subsequent license agreement between us and the University of Kentucky Research Foundation, or UKRF, we are required to pay to UKRF a low single digit percentage of any of these payments, including royalties, that we receive from AstraZeneca.
If AstraZeneca decides to initiate a Phase II clinical trial of TC-1734 following the completion of the additional safety and product characterization studies, we would be entitled under the agreement to receive a minimum of approximately $23.7 million in aggregate research fees over the four-year term of an a4ß2 research collaboration that we and AstraZeneca have initiated under the agreement. Based on the current budget for the research collaboration, we expect to receive approximately $26.4 million in aggregate research fees under the agreement. However, AstraZeneca can terminate our agreement if it determines in its sole discretion on or before April 20, 2007 not to proceed with the further development of TC-1734 based on the results of the additional safety and product characterization studies and all other available information with respect to TC-1734. In that event, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration while AstraZeneca conducted the studies. We would also be required to pay to AstraZeneca an
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additional $5 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10 million initial fee that AstraZeneca has paid us.
We previously entered into two collaboration agreements with Aventis. One of those collaboration agreements with Aventis terminated effective January 2, 2005. The research term for the other collaboration agreement with Aventis expired on December 31, 2004. As of December 31, 2005, we had received a total of $8.0 million in upfront license fees and payments for research and development services under the two agreements. We will not receive any additional amounts under the agreements.
In December 2004, we entered into a development agreement with The Stanley Medical Research Institute relating to the development of one of our compounds for the treatment of cognitive deficits in schizophrenia. Upon effectiveness of the agreement, The Stanley Medical Research Institute paid us $1.3 million in return for our issuance of a convertible promissory note in an equal principal amount. In August 2005, we repaid the promissory note in full. We and The Stanley Medical Research Institute terminated the development agreement in December 2005 in anticipation of our collaboration agreement with AstraZeneca.
In January 2001, we entered into a collaboration agreement with Dr. Falk Pharma GmbH covering the development and commercialization of one of our compounds for the treatment of ulcerative colitis and other gastrointestinal and liver diseases. Upon effectiveness of the collaboration agreement, Dr. Falk Pharma paid us a $1.0 million upfront license fee and purchased $1.0 million of our common stock. We and Dr. Falk Pharma shared the development costs for the lead compound subject to the collaboration agreement. We and Dr. Falk Pharma discontinued the development of the lead compound in the fourth quarter of 2004 and have terminated this agreement.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.
While our significant accounting policies are more fully described in Note 2 to our financial statements included at the end of this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Revenue Recognition
Our collaboration agreements contain multiple elements, including upfront fees, research fees for ongoing research and development, payments associated with achieving development, regulatory and commercialization milestones and royalties to be paid based on specified
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percentages of net product sales or net profits, if any. We consider a variety of factors in determining the appropriate method of revenue recognition under these arrangements such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with a particular element of an agreement.
We recognize research fee revenue from research services performed under our collaboration agreements as research is performed and related expenses are incurred. We defer upfront fees and amortize them over the estimated research and development period. All revenue to date under collaboration agreements, or under government grants, is non-refundable. We recognize revenue based on the achievement of development and regulatory milestones that carry substantive performance risk upon achievement of the milestone event. As of December 31, 2005, we have not received payment of any milestone-based revenues. We record product sales revenues when goods are shipped, at which point title has passed, and we establish an allowance for estimated returns at that time.
We are eligible to receive future research fees, license fees and milestone payments under our collaboration agreement with AstraZeneca. The amount of research fees, license fees and milestone payments will depend on the extent of our research activities and the timing and achievement of development, regulatory and first commercial sale milestone events. AstraZeneca paid us an initial fee of $10 million in February 2006. Based on the agreement terms, we allocated $5 million of the initial fee to the a4ß2 research collaboration, which we expect to recognize as revenue over the four-year term of the research collaboration. We deferred recognition of the remaining $5 million of the initial fee, which we allocated to the TC-1734 license grants, until AstraZeneca makes a determination whether to conduct Phase II clinical development of TC-1734 following the completion of additional safety and product characterization studies to be conducted by AstraZeneca. If AstraZeneca decides to conduct a Phase II clinical trial of TC-1734 following the completion of the safety and product characterization studies, we would recognize the deferred $5 million of the initial fee as revenue over the expected development period for TC-1734. We expect to recognize any revenue based on the achievement of milestones under the collaboration agreement upon achievement of the milestone event, if we determine that the revenue satisfies the revenue recognition requirements of generally accepted accounting principles and Securities and Exchange Commission Staff Accounting Bulletin, or SAB 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition (replacement of SAB 101). SAB 101 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed and determinable; and collectibility is reasonably assured. We will record research fees that we receive from AstraZeneca while it is conducting the safety and product characterization studies on TC-1734 as deferred revenue. If the agreement continues in effect following the completion of the additional safety and product characterization studies to be conducted by AstraZeneca, we will recognize all research fees previously recorded as deferred revenue and recognize future research fee revenues as the research is performed and related expenses are incurred.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates
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of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. To date, we have not adjusted our estimate at any particular balance sheet date in any material amount. Examples of estimated accrued expenses include:
| • | fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials; |
| • | fees paid to investigative sites in connection with clinical trials; |
| • | fees paid to contract manufacturers in connection with the production of clinical trial materials and Inversine; and |
| • | professional service fees. |
We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.
Stock-Based Compensation
Effective January 1, 2005, we adopted Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, or SFAS 123R. Under SFAS 123R, we recognize the grant-date fair value of stock options and other stock-based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. We currently use the Black-Scholes formula to estimate grant-date fair value and expect to continue to use this valuation model in the future. We have adopted SFAS 123R using the modified-prospective-transition method, which requires us to record compensation expense for the non-vested portion of previously issued awards that were outstanding at January 1, 2005, and any awards issued or modified after January 1, 2005. We recorded stock-based compensation expense related to stock options granted to employees and directors of $690,000 in 2005. As of December 31, 2005, we had $989,000 in total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which we expect to recognize over a weighted average period of 3.3 years.
The fair value of our common stock underlying stock options and other stock-based compensation granted to employees and non-employee directors has historically been determined by our board of directors based upon information available as of the grant dates. We engaged an independent valuation firm in January 2006 to perform a retrospective analysis to determine the deemed fair market value of our common stock as of March 31, 2005 for accounting purposes in light of the potential initial public offering of our common stock. This retrospective analysis relied on income-based and market-based valuation methodologies. The independent valuation firm determined the fair market value of our common stock as of March 31, 2005 to be $1.60 per share.
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For all periods prior to January 1, 2005, we accounted for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and related interpretations, or APB 25. Under APB 25, we recognized compensation expense for stock options granted to employees and non-employee directors only if the exercise price was below the fair market value of the underlying common stock on the date of grant. We recognized this compensation expense over the vesting periods of the shares purchasable upon exercise of options. We recorded deferred stock-based compensation related to stock options granted to employees and directors of $65,000 in 2003 and $51,000 in 2004. We amortized our deferred stock-based compensation on a straight-line basis over the related option vesting periods, which range from immediate vesting to four years.
As required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, our financial statement footnotes disclose on a pro forma basis the amount of compensation expense that we would have recorded for periods prior to January 1, 2005, had we applied the fair value option methodology described in SFAS 123. Had we recorded all of our stock-based compensation using the SFAS 123 fair value methodology, our compensation expense would have been approximately $866,000 greater and our diluted net loss per share attributable to common stockholders would have been approximately $3.96 greater in 2004. For more information, you should refer to Note 2 to our financial statements included at the end of this prospectus.
Financial Operations Overview
Revenue
Inversine is our only approved product generating revenue. Sales of Inversine generated revenue of $815,000 for the year ended December 31, 2003, $767,000 for the year ended December 31, 2004 and $681,000 for the year ended December 31, 2005. We have an exclusive distribution agreement with Cord Logistics, Inc., a Cardinal Health company, for the distribution of Inversine. We do not have or use a sales force or actively promote Inversine. Accordingly, we do not anticipate any significant increase in Inversine sales. If any of the very limited number of physicians that most often prescribe Inversine were to cease to do so, revenue generated by Inversine sales would likely be substantially less. We have no other commercial products for sale and do not anticipate that we will have any other commercial products for sale for at least the next several years.
Our collaboration agreement with AstraZeneca became effective in January 2006. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment to us of $20 million if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of the additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006. We are eligible to receive other payments of up to $249 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, and royalties on future product sales. If TC-1734 is developed under the agreement for indications other than Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, we would also be eligible to receive payments contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for those indications. Under the terms of a sponsored research agreement and a subsequent license agreement between us and UKRF, we are required to pay to UKRF a low single digit percentage of any of these amounts that we may receive from AstraZeneca. If AstraZeneca terminates our agreement
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upon completion of any or all of the safety and product characterization studies, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration while it conducted the studies. In that event, we would also be required to pay AstraZeneca an additional $5 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10 million initial fee that AstraZeneca has paid us.
Upon effectiveness of our collaboration agreement, we and AstraZeneca initiated preclinical research designed to discover and develop additional compounds that, like TC-1734, act on the a4ß2 NNR. During the period that AstraZeneca is conducting the safety and product characterization studies, AstraZeneca has agreed to pay us research fees equal to 50% of our research expenses. If our agreement with AstraZeneca continues in effect following the completion of the safety and product characterization studies, AstraZeneca has agreed to pay us the remaining 50% of our research expenses incurred while those studies were conducted and thereafter research fees equal to 100% of our research expenses in the collaboration, subject to specified limits. In that event, we would be entitled to receive a minimum of $23.7 million in aggregate research fees over the four-year term of the a4ß2 research collaboration. Based on the current budget for the research collaboration, we expect to receive approximately $26.4 million in aggregate research fees under the agreement. The research fees that AstraZeneca has agreed to pay us are based on a negotiated rate designed to approximate our personnel costs to conduct the research.
Other revenue has consisted primarily of amounts earned for providing research and development services under our two collaboration agreements with Aventis and non-refundable upfront license fees that we received in connection with our first agreement with Aventis and our collaboration agreement with Dr. Falk Pharma. We received research support payments from Aventis of $1.3 million for the year ended December 31, 2003 and $338,000 for the year ended December 31, 2004. We did not receive any research support payments from Aventis in 2005. The research term of our continuing agreement with Aventis ended in December 2004. We will not receive additional research support payments from Aventis under the agreement.
In 2003, we were awarded a cooperative agreement from the National Institute of Standards and Technology through its Advanced Technology Program. The terms of the agreement provide for us to receive up to $1.9 million over a three-year period to help fund the development of sophisticated new computer simulation software designed to more accurately predict biological and toxicological effects of drugs. The agreement provides for reimbursement of costs that we incur to perform specified work that is designed to meet the objectives of the agreement. We recognize grant revenue as we perform the work and incur reimbursable costs. Funding for awards under this program is subject to the availability of funds as determined annually in the federal appropriations process.
Research and Development Expense
Since our inception, we have focused our activities on our drug discovery and development programs. We expense research and development expenses as they are incurred. Research and development expenses represented approximately 81% of our total operating expenses for each of the years ended December 31, 2003 and 2004 and 78% of our total operating expenses for the year ended December 31, 2005.
Research and development expense includes expenses associated with:
| • | the employment of personnel involved in our drug discovery and development activities; |
| • | research and development facilities and equipment; |
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| • | the screening, identification and optimization of product candidates; |
| • | the development and enhancement of Pentad; |
| • | formulation and process synthesis; |
| • | production of clinical materials, including fees paid to contract manufacturers; |
| • | preclinical animal studies, including the costs to engage third-party research organizations; |
| • | clinical trials, including fees paid to contract research organizations to monitor and oversee some of our trials; |
| • | quality assurance activities; |
| • | compliance with FDA regulatory requirements; |
| • | consulting, license and sponsored research fees paid to third parties; |
| • | depreciation of capital assets used to develop our products; and |
| • | stock options or other stock-based compensation granted to personnel in research and development functions. |
We use our employee and infrastructure resources across several projects. Consistent with our focus on the development of a class of drugs with potential uses in multiple indications, many of our costs are not attributable to a specifically identified project. Instead, these costs are directed to broadly applicable research efforts. Accordingly, we do not account for internal research and development costs on a project-by-project basis. As a result, we cannot state precisely the total costs incurred for each of our clinical and preclinical projects on a project-by-project basis.
The following table shows, for the periods presented, total payments that we made to third parties for preclinical study support, clinical supplies and clinical trial services for TC-1734, mecamylamine hydrochloride, TC-2216 and TC-2696:
| Year ended December 31, | |||||||||
| Product Candidate |
2003 |
2004 |
2005 | ||||||
| (in thousands) | |||||||||
| TC-1734 |
$ | 3,557 | $ | 4,135 | $ | 6,713 | |||
| Mecamylamine hydrochloride |
— | — | 1,067 | ||||||
| TC-2216 |
— | — | 903 | ||||||
| TC-2696 |
893 | 1,145 | 879 | ||||||
| $ | 4,450 | $ | 5,280 | $ | 9,562 | ||||
At the end of 2004, we discontinued the development of two product candidates following the completion of Phase II clinical trials. We made total payments to third parties of $2.1 million for the year ended December 31, 2003, $4.3 million for the year ended December 31, 2004 and $83,000 for the year ended December 31, 2005 in connection with these discontinued programs.
Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. We test compounds in numerous preclinical studies for safety, toxicology and efficacy. We then conduct clinical trials for those product candidates that we determine to be the most promising. If we do not establish a collaboration covering the development of a particular product candidate, we fund these trials
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ourselves. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some product candidates in order to focus our resources on more promising product candidates. Completion of clinical trials by us or our collaborators may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:
| • | the number of patients who participate in the trials; |
| • | the number of sites included in the trials; |
| • | the length of time required to enroll trial participants; |
| • | the duration of patient follow-up; |
| • | the costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions; |
| • | the efficacy and safety profile of the product candidate; and |
| • | the costs and timing of, and the ability to secure, regulatory approvals. |
We have not received FDA or foreign regulatory marketing approval for any of our product candidates that are in development. In order to achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our or our collaborators’ clinical data establishes the safety and efficacy of the product candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of some of our product candidates. In situations in which third parties have control over the preclinical development or clinical trial process for a product candidate, the estimated completion date is largely under control of that third party and not under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.
As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenues from the commercialization and sale of any of our development stage product candidates.
General and Administrative Expense
General and administrative expense consists principally of salaries and other related costs for personnel in executive, finance, accounting, business development and human resource functions. Other general and administrative expenses include expenses associated with stock options and other stock-based compensation granted to personnel in those functions, facility costs not otherwise included in research and development expense, patent related costs, and professional fees for consulting, legal and accounting services.
Cost of Product Sales
Cost of product sales are those costs related directly to the sale of Inversine and are principally comprised of cost of goods sold, FDA product license fees, distribution expenses, product royalty obligations and product liability insurance.
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Interest and Dividend Income
Interest and dividend income consists of interest and dividends earned on our cash, cash equivalents and short-term investments.
Interest Expense
Interest expense consists of interest incurred to finance equipment, office furniture and fixtures.
Income Taxes
We have incurred net operating losses since our incorporation in 1997 and consequently have not paid federal, state or foreign income taxes in any period. We had net operating loss carryforwards of approximately $98.3 million for each of federal and state income tax purposes as of December 31, 2005. We also had $2.1 million in research and development federal income tax credits as of December 31, 2005. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. As a result of a series of stock issuances, we had such an ownership change on November 30, 2002 and we could experience additional ownership changes as a result of this offering or in the future. When an ownership change, as defined by Section 382, occurs, an annual limitation is imposed on a company’s use of net operating loss and credit carryforwards attributable to periods before the change. For financial reporting purposes, we have recorded a valuation allowance to fully offset the deferred tax asset related to these carryforwards because realization of the benefit was uncertain.
Results of Operations
Years ended December 31, 2005 and December 31, 2004
Revenue
Revenue decreased by $2.6 million, or 68%, to $1.2 million for the year ended December 31, 2005, from $3.7 million for 2004. The decrease was primarily attributable to our recognition in 2004 of $1.9 million in license fee revenue. Because we concluded our research obligations under our collaboration agreements with both Aventis and Dr. Falk Pharma in the fourth quarter of 2004, we recognized the remaining unamortized deferred upfront license fee balance at that time and recognized no license fee revenue for 2005. The decrease in revenue for 2005 was also attributable in part to the conclusion at the end of 2004 of our research activities under our collaboration agreement with Aventis, from which we derived $338,000 in research fees in 2004 and no research fee revenue in 2005.
In future periods, we are eligible to receive research fees, license fees and milestone payments under our collaboration agreement with AstraZeneca. The amount of research fees, license fees and milestone fees will depend on the extent of our research activities and the timing and achievement of development, regulatory and first commercial sale milestone events.
Grant revenue decreased to $499,000 in 2005, from $717,000 for 2004. The grant revenue in both periods resulted from work performed under a cooperative agreement awarded to us in the third quarter of 2003 by the National Institute of Standards and Technology through its Advanced Technology Program to fund the development of sophisticated molecular simulation software. The award was structured to provide a greater amount of funding in 2004 to enable us
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to purchase hardware and software required to carry out the cooperative agreement activities. The term of the award expires September 30, 2006. As of December 31, 2005, we were eligible to receive up to an additional $710,000 of funding under the award. In addition, we are a named subcontractor under a grant awarded by the National Cooperative Drug Discovery Group, a National Institutes of Health program, to a university to fund the characterization of specified neuronal nicotinic receptor subtypes as potential targets in the development of therapies for smoking cessation. We have applied to receive a permit from the Office of Laboratory Animal Welfare. If we receive the permit, we expect to receive approximately $1.0 million over five years in connection with this grant, beginning in 2006.
Net sales of Inversine decreased by $85,000 to $681,000 for the year ended December 31, 2005, from $767,000 for 2004. This decrease resulted from a reduction in the volume of sales of Inversine. We believe that the substantial majority of Inversine sales are derived from prescriptions written by a very limited number of physicians. If any of these physicians were to change their prescribing habits, it would likely cause sales of Inversine to decrease. We do not promote sales of Inversine.
Research and Development Expense
Research and development expense increased by $1.5 million, or 7%, to $24.3 million for the year ended December 31, 2005, from $22.8 million for 2004. The increase was principally attributable to an increase of $2.6 million in expenses related to the clinical development, formulation and manufacturing of TC-1734, an increase of $1.1 million in clinical development expenses for mecamylamine hydrochloride, an increase of $608,000 in expenses related to the preclinical development of TC-2216 and other preclinical programs and an increase of $1.7 million in salaries and infrastructure costs for 2005 as compared to 2004. The increase in research and development salaries and infrastructure costs includes $458,000 of non-cash stock-based employee compensation charges attributable to our adoption of SFAS 123R as of January 1, 2005. There were no stock-based employee compensation charges included in our research and development expense for 2004. These increases were partially offset by a decrease in external costs resulting from our discontinuation in the fourth quarter of 2004 of clinical programs for two of our product candidates. One of these candidates, which was in development for the treatment of ADHD, resulted in a decrease in external costs of $2.3 million for 2005 as compared to 2004. The other product candidate, which was in development for the treatment of ulcerative colitis, resulted in a decrease in external costs of $1.9 million for 2005 as compared to 2004.
For the year ended December 31, 2005, we estimate that approximately 28% of our total research and development expenses were payments made to third parties in connection with our development of TC-1734, 4% were payments made to third parties in connection with our development of mecamylamine hydrochloride, 7% were payments made to third parties in connection with our development of TC-2216 and 4% were payments made to third parties in connection with our development of TC-2696. We spent the remaining 57% of our total research and development expenses on salaries, benefits and infrastructure costs associated with our internal research and development capabilities, including clinical programs, preclinical programs and research efforts, and on payments to third parties in connection with preclinical programs.
We expect to continue to incur substantial research and development expenses for the foreseeable future. We anticipate that these expenses will increase substantially as we continue to advance our clinical stage product candidates through the development process, to advance additional product candidates into clinical trials, to invest in promising product opportunities in
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our research programs and to grow our research and development organization and infrastructure. Because we have licensed TC-1734 to AstraZeneca and AstraZeneca will assume substantially all future development costs for TC-1734, we expect generally to focus our future research and development efforts on our other clinical stage product candidates and preclinical programs.
General and Administrative Expense
General and administrative expense increased by $1.2 million, or 24%, to $6.4 million for the year ended December 31, 2005, from $5.2 million for 2004. This increase resulted primarily from the recognition of $1.6 million in 2005 for expenses incurred in connection with a public offering that we terminated in the first quarter of 2005. We did not incur any similar expenses in 2004. We also incurred an additional $182,000 in non-cash stock-based compensation charges in 2005 attributable to our adoption of SFAS 123R as of January 1, 2005. These increases were partially offset by lower infrastructure and personnel costs for our general and administrative activities, along with lower professional fees and travel costs in connection with business development pursuits in 2005 as compared to 2004. We expect that general and administrative expense will increase in 2006 and subsequent years due to increased payroll, expanded infrastructure and increased consulting, legal, accounting and investor relations expenses associated with being a public company.
Cost of Product Sales
Cost of product sales increased by $282,000 to $481,000 for the year ended December 31, 2005, from $198,000 for 2004. Cost of product sales for each of 2005 and 2004 reflects our costs related to sales of Inversine, net of the amount of FDA product and establishment fees refunded to us in that year. Product and establishment fees for marketed products are assessed by the FDA each year and paid by companies in the year in which they are assessed. We have historically requested a waiver of the FDA fees that we have paid for Inversine. If a waiver is granted, the FDA fees are refunded, typically in the year following the year in which they are paid. Our requests for waivers of the FDA fees for 2002 and 2003 were granted in 2004, resulting in a refund to us in 2004 of $505,000 in 2002 and 2003 fees. Our request for a waiver of the FDA fees for 2004 was granted in 2005, resulting in a refund to us in 2005 of $304,000 in 2004 fees. The lower cost of product sales for 2004 resulted primarily from the refund in 2004 of the FDA fees for both 2003 and 2002 as compared to the refund in 2005 of the FDA fees for only 2004. We have again petitioned the FDA for a waiver of the product and establishment fees that were assessed by the FDA and paid by us in 2005 and plan to petition again in future years. In previous years, the award that we received from the National Institute of Standards and Technology through its Advanced Technology Program to fund the development of sophisticated molecular simulation software was significant in supporting our waiver requests. Our funding under the award concludes in the third quarter of 2006, and there is no assurance that our pending or future fee waiver requests will be allowed.
Interest and Dividend Income
Interest and dividend income increased by $669,000 to $1.2 million for the year ended December 31, 2005, from $505,000 for 2004. The increase was attributable to substantially higher short-term interest rates and higher average levels of cash and short-term investments during 2005 resulting from the issuance and sale of shares of our convertible preferred stock on December 6, 2004 for net proceeds of $32.9 million.
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Interest Expense
Interest expense increased by $92,000 to $225,000 for the year ended December 31, 2005, from $133,000 for 2004. This increase is attributable to higher indebtedness under a credit facility used to finance capital equipment purchases, primarily laboratory equipment. The higher indebtedness resulted from our borrowing an additional $973,000 under this facility in December 2004.
Years ended December 31, 2004 and December 31, 2003
Revenue
Revenue increased by $1.3 million, or 52%, to $3.7 million for the year ended December 31, 2004, from $2.5 million for 2003. The increase resulted principally from the acceleration in recognition of $1.6 million of deferred license fee revenue and an increase in grant revenue of $646,000, partially offset by a decrease in research fee revenue of $965,000.
The acceleration in recognition of $1.6 million of deferred license fee revenue represented the remaining unamortized balance of upfront payments that we received when we entered into collaboration agreements with Aventis and Dr. Falk Pharma and were amortizing over the period of our expected research obligations under the agreements. In the fourth quarter of 2004, we concluded our research obligations under our collaboration agreement with Aventis and our collaboration agreement with Dr. Falk Pharma.
Grant revenue increased by $646,000 to $717,000 for 2004 as a result of a full year of work performed under a cooperative agreement awarded to us in the third quarter of 2003 by the National Institute of Standards and Technology through its Advanced Technology Program to fund the development of sophisticated molecular simulation software.
Research fee revenue decreased to $338,000 in 2004, from $1.3 million in 2003. The decrease of $965,000 resulted from less activity in 2004 under our collaboration agreement with Aventis relating to Aventis compounds as we completed the research requested by Aventis. The research term of that collaboration agreement with Aventis expired on December 31, 2004.
Net sales of Inversine decreased by $48,000 to $767,000 for the year ended December 31, 2004, from $815,000 for 2003. This decrease resulted from a reduction in the volume of sales of Inversine. We do not promote sales of Inversine.
Research and Development Expense
Research and development expense increased by $4.6 million, or 25%, to $22.8 million for the year ended December 31, 2004, from $18.2 million for 2003. The increase was primarily attributable to the costs associated with having four product candidates in clinical trials for most of 2004, compared to only two product candidates in clinical trials for most of 2003.
For the year ended December 31, 2004, we estimate that approximately 18% of our total research and development expenses were payments made to third parties in connection with our development of TC-1734, 5% were payments made to third parties in connection with our development of TC-2696 and 19% were made to third parties in connection with the two discontinued clinical development programs. We spent the remaining 58% of our total research and development expenses on salaries, benefits, and infrastructure costs associated with our internal research and development capabilities, including clinical programs, preclinical
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programs and research efforts, and on payments to third parties in connection with preclinical programs.
General and Administrative Expense
General and administrative expense increased by $1.6 million, or 43%, to $5.2 million for the year ended December 31, 2004, from $3.6 million for 2003. This increase resulted from our investment in development of the administrative infrastructure necessary to enable us to expand our operations, to support our development efforts and to fulfill the additional reporting and regulatory requirements applicable to a public company. The increase was principally attributable to increased expenses of $705,000 related to expansion of our business development staff and an increase in spending on business development pursuits, $431,000 of additional patent related expenses and increases in our legal and other professional fees.
Cost of Product Sales
Cost of product sales decreased by $545,000 to $198,000 for the year ended December 31, 2004, from $743,000 for 2003. All of these costs related to sales of Inversine. The decrease in cost of product sales resulted from a successful outcome in 2004 of our request for a waiver of FDA product and establishment fees that had been assessed by FDA in 2003 and 2002. In July 2004, the FDA informed us that our fee waiver request had been granted in full. We had accrued the costs for these FDA fees in our financial statements since our acquisition of Inversine in August 2002, as there was no assurance that our fee waiver request would be granted.
Interest and Dividend Income
Interest and dividend income decreased by $286,000 to $505,000 for the year ended December 31, 2004, from $791,000 for 2003. The decrease was primarily attributable to lower levels of cash and short-term investments.
Interest Expense
Interest expense increased to $133,000 for the year ended December 31, 2004, from $123,000 in 2003.
Liquidity and Capital Resources
Sources of Liquidity
Since we became an independent company in 2000, we have financed our operations and internal growth primarily through private placements of convertible preferred stock. As of December 31, 2005, we had derived aggregate net proceeds of $121.8 million from these private placements. We have received additional funding from upfront license fees and payments for research and development services under collaboration agreements, equipment and building lease incentive financing, government grants and interest income. As of December 31, 2005, we had received $9.9 million under collaboration agreements that were terminated or under which we had ceased conducting research as of the end of 2004.
In December 2005, we entered into a collaboration agreement with AstraZeneca relating to TC-1734. In January 2006, the agreement became effective and we began conducting research for which we are eligible to receive research fees. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment to us of $20.0
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million if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006.
If AstraZeneca terminates our agreement upon completion of any or all the additional safety and product characterization studies, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration that we and AstraZeneca have initiated under the agreement while AstraZeneca conducted the studies. In addition, we would be required to pay AstraZeneca an additional $5.0 million as compensation for assigning to us the data and any intellectual property generated in the studies.
On December 31, 2004, we received loan proceeds of $1.3 million from The Stanley Medical Research Institute in connection with a development agreement relating to the development of one of our compounds for the treatment of the cognitive deficits in schizophrenia. In August 2005, we repaid the loan in full in anticipation of entering into our strategic collaboration agreement with AstraZeneca. We and The Stanley Medical Research Institute terminated the development agreement in December 2005 in anticipation of our collaboration agreement with AstraZeneca.
We began generating revenues from product sales of Inversine in December 2002. To date, the net contribution from Inversine sales has not been a significant source of cash and we do not expect it to be a significant source in the future.
Our cash, cash equivalents and short-term investments were $43.0 million as of December 31, 2003, $53.1 million as of December 31, 2004 and $24.9 million as of December 31, 2005.
Cash Flows
Net cash used for operating activities was $26.2 million for the year ended December 31, 2005, primarily reflecting our net loss of $29.0 million partially offset by a decrease of $999,000 in prepaid expenses primarily attributable to our recognition of payments made in 2004 in connection with a public offering that we terminated in the first quarter of 2005, $803,000 in depreciation and amortization expense and $690,000 in stock-based employee compensation expense. Net cash used for operating activities was $25.0 million for the year ended December 31, 2004. Net cash used for operating activities for 2004 consisted primarily of a net loss of $24.0 million, which included acceleration of recognition of deferred license fee revenue of $1.6 million representing the unamortized portion of the upfront payments that we received when we entered into collaboration agreements with Aventis and Dr. Falk Pharma. Net cash used for operating activities was $19.3 million for the year ended December 31, 2003, primarily reflecting a net loss occurring for this period of $19.4 million.
Net cash used in investing activities was $250,000 for the year ended December 31, 2005, $622,000 for the year ended December 31, 2004 and $545,000 for the year ended December 31, 2003. These amounts exclude cash flows from the purchase and sale of investments and were primarily to purchase equipment for use in expanding our internal research and development activities.
Net cash used in financing activities was $1.7 million for the year ended December 31, 2005 and consisted principally of the repayment of a $1.3 million convertible promissory note to The Stanley Medical Research Institute and $1.1 million in principal repayments on an equipment
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financing loan facility, partially offset by $612,000 in proceeds from the issuance of shares of our series C convertible preferred stock in May 2005. Net cash provided by financing activities was $35.9 million for the year ended December 31, 2004 and consisted principally of $32.9 million in net proceeds from the issuance of shares of our series C convertible preferred stock in December 2004, $2.0 million received under an equipment financing loan facility and $1.3 million received from The Stanley Medical Research Institute in return for our issuance of a convertible promissory note in an equal principal amount, partially offset by $731,000 of principal repayments on equipment financing. As of December 31, 2004, we did not have any borrowing facility or line of credit. Net cash provided by financing activities for the year ended December 31, 2003 was $13.4 million and consisted principally of net proceeds of $13.8 million from the issuance of shares of our series C convertible preferred stock and proceeds of $239,000 received in connection with the purchase of our common stock upon the exercise of stock options, partially offset by $637,000 of principal repayments on equipment financing.
In May 2002, we borrowed $2.5 million from R.J. Reynolds Tobacco Holdings, Inc. to finance equipment and other fixed assets that we had previously purchased. The borrowing bears a fixed interest rate of 6.6%, is payable in 48 equal monthly installments and matures in May 2006. In January 2004, we amended the terms of our loan facility to permit us to borrow up to an additional $2.0 million in 2004 in up to three separate borrowings. Each borrowing would bear a fixed interest rate equal to a theoretical four-year U.S. Treasury Rate on the disbursement date plus 3.5%, be payable in 48 equal monthly installments and be secured by specified tangible fixed assets determined sufficient by the lender at the time of disbursement. We borrowed $1.0 million in April 2004 and $973,000 in December 2004 under the amended loan facility to finance equipment. The April 2004 borrowing bears a fixed interest rate of 5.87%, is payable in 48 equal monthly installments and matures in April 2008. The December 2004 borrowing bears a fixed interest rate of 6.89%, is payable in 48 monthly installments and matures in January 2009. All borrowings under the loan facility are secured by specified tangible fixed assets. As of December 31, 2005, the outstanding principal balance under the loan facility was $1.7 million. We are currently in discussions with R.J. Reynolds regarding a potential amendment to the terms of the loan facility to provide up to $2.0 million in new borrowing capacity to finance equipment.
On December 6, 2004, we sold 27,272,728 shares of convertible preferred stock to 11 of our existing stockholders for net proceeds of $32.9 million. On May 13, 2005, we sold an additional 496,132 shares of convertible preferred stock to another of our existing stockholders for net proceeds of $612,000. On December 15, 2004, we entered into a development agreement with The Stanley Medical Research Institute, a nonprofit organization that supports the research and development of treatments for schizophrenia. In connection with this agreement, we issued a $1.3 million convertible promissory note to The Stanley Medical Research Institute. In August 2005, we repaid the promissory note in full. We and The Stanley Medical Research Institute terminated the development agreement in December 2005 in anticipation of our collaboration agreement with AstraZeneca.
Funding Requirements
We have incurred significant losses since our inception. As of December 31, 2005, we had an accumulated deficit of $164.7 million. We expect to continue to incur substantial operating losses for the foreseeable future. Our future capital requirements are difficult to forecast and will depend on many factors, including:
| • | the scope, progress, results and cost of preclinical development and laboratory testing and clinical trials; |
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| • | the timing, receipt and amount of milestone and other payments from AstraZeneca and potential future collaborators; |
| • | the costs, timing and outcome of regulatory review; |
| • | the number and characteristics of product candidates that we pursue; |
| • | the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; |
| • | the costs of establishing sales and marketing functions and of establishing arrangements for manufacturing; |
| • | the rate of technological advancements for the indications that we target; |
| • | our ability to establish strategic collaborations and licensing or other arrangements on terms favorable to us; |
| • | the costs to satisfy our obligations under existing and potential future collaborations; |
| • | the timing, receipt and amount of sales or royalties, if any, from our potential products; and |
| • | the extent and scope of our general and administrative expenses. |
We anticipate that implementing our strategy will require substantial increases in our capital expenditures and other capital commitments as we expand our clinical trial activity, as our product candidates advance through the development cycle, and as we invest in additional product opportunities and research programs and expand our infrastructure. Because we have licensed TC-1734 to AstraZeneca and AstraZeneca will assume substantially all development costs for TC-1734, we expect generally to focus our future research and development efforts on our other clinical stage product candidates and preclinical programs. We do not expect our existing capital resources and the net proceeds from this offering to be sufficient to enable us to fund the completion of the development of any of our other product candidates. We expect that our existing capital resources, together with the net proceeds from this offering, will be sufficient to fund our operations through mid-2008. However, our operating plan may change as a result of many factors, including those described above. In particular, our operating plan may change if AstraZeneca decides not to proceed with the further development of TC-1734 following its completion of any or all of the safety and product characterization studies that it will conduct and terminates our agreement. In that event, we would be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration while it conducted the studies. We would also be required to pay to AstraZeneca an additional $5.0 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10.0 million initial fee that AstraZeneca has paid us. We may need additional funds sooner than planned to meet operational needs and capital requirements for product development.
We do not expect to generate sufficient cash from our operations to sustain our business for the foreseeable future. We expect our continuing operating losses to result in increases in our cash required to fund operations over the next several quarters and years. To the extent our capital resources are insufficient to meet future capital requirements, we will need to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts, or
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obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently. Additionally, any future equity funding may dilute the ownership of our equity investors.
We cannot estimate the completion dates and costs of our current internal research and development programs due to inherent uncertainties in outcomes of clinical trials and regulatory approvals of our product candidates. We cannot be certain that we will be able to successfully complete our research and development projects or successfully find collaboration or distribution partners for our product candidates. Our failure to complete our research and development projects could have a material adverse effect on our financial position or results of operations.
To date, inflation has not had a material effect on our business.
Contractual Obligations
The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2005:
| Payments Due by Period | |||||||||||||||
| Contractual Obligations |
Total |
Less Than 1 Year |
1-3 Years |
3-5 Years |
More Than 5 Years | ||||||||||
| (in thousands) | |||||||||||||||
| Long-term debt obligations |
$ | 2,193,297 | $ | 783,895 | $ | 1,048,883 | $ | 224,479 | $ | 136,040 | |||||
| Operating lease obligations |
2,328,374 | 1,470,552 | 857,822 | — | — | ||||||||||
| Other contractual obligations |
3,013,958 | 3,006,939 | 7,019 | — | — | ||||||||||
| Total contractual obligations |
$ | 7,535,629 | $ | 5,261,386 | $ | 1,913,724 | $ | 224,479 | $ | 136,040 | |||||
The amounts of other contractual obligations reflected in the above table include obligations to purchase product candidate material contingent on the delivery of the material and to compensate clinical investigators and clinical trial sites contingent on the performance of services in connection with clinical trials. The amount of other contractual obligations for 2006 reflected in the above table also includes annual maintenance fees or other fixed payments required under our technology license agreements. Our technology license agreements are generally terminable by us on short notice. As a result, the annual maintenance fees or other fixed payments under those agreements are not included in other contractual obligations in the above table after 2006. The amounts of other contractual obligations for all periods reflected in the above table exclude contingent royalty payments that we may be required to pay under our technology license agreements and other contingent payments that we may become required to make under our technology license agreements upon achievement of specified development, regulatory or commercial milestones.
Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and short-term investments in a variety of securities of high credit quality. As of December 31, 2005, we had cash and cash equivalents of $24.9 million consisting of cash deposited in a highly rated financial institution in the United States. A portion of our investments may be subject to interest
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rate risk and could fall in value if market interest rates increase. However, because our investments are short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.
We contract for the conduct of some of our clinical trials and other research and development and manufacturing activities with contract research organizations, investigational sites and manufacturers in Europe and India. We may be subject to exposure to fluctuations in foreign exchange rates in connection with these agreements. We do not hedge our foreign currency exposures. We have not used derivative financial instruments for speculation or trading purposes.
Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board issued Statement No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, or SFAS 154. SFAS 154 requires retrospective application to prior periods’ financial statements for all voluntary changes in accounting principle, unless impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS 154 will have no immediate impact on our financial statements, though it would impact our presentation of future voluntary accounting changes if such changes occur.
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Overview
We are a biopharmaceutical company engaged in the design, discovery and development of a new class of drugs to treat multiple diseases and disorders of the central nervous system by selectively targeting neuronal nicotinic receptors, or NNRs. NNRs are found on nerve cells throughout the nervous system and serve as key regulators of nervous system activity. We trace our scientific lineage to a research program initiated by R.J. Reynolds Tobacco Company in 1982 to study the activity and effects of nicotine, a compound that interacts non-selectively with all nicotinic receptors. Since that time, we have developed a deep understanding of the biological characteristics and functions of NNRs and have learned that compounds that interact with NNRs have the potential to achieve positive medical effects by modulating their activity. We have built an extensive patent estate covering the structure or therapeutic use of small molecules designed to regulate the central nervous system by selectively affecting specific NNR subtypes.
We are developing our most advanced product candidates as treatments for target indications in three therapeutic areas: cognitive impairment, depression and anxiety, and pain. Within these areas, we have three product candidates in clinical development and two preclinical product candidates.
Cognitive Impairment
TC-1734. Our lead product candidate is a novel small molecule that we refer to as TC-1734. In December 2005, we entered into a collaborative research and license agreement with AstraZeneca AB for the development and worldwide commercialization of TC-1734 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment such as attention deficit hyperactivity disorder, commonly referred to as ADHD, age associated memory impairment, commonly referred to as AAMI, and mild cognitive impairment, commonly referred to as MCI. In March 2006, we completed a Phase II clinical trial of TC-1734 in AAMI designed to further assess the effects of TC-1734 on cognition in a cognitively impaired older adult population. We previously completed two other clinical trials of TC-1734, one in AAMI and one in MCI. We expect AstraZeneca to initiate two Phase II clinical trials of TC-1734 in the first half of 2007, one in mild to moderate Alzheimer’s disease and one in cognitive deficits in schizophrenia.
Our agreement with AstraZeneca relating to TC-1734 became effective in January 2006. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment to us of $20 million if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006. Under the agreement, we are eligible to receive other payments of up to $249 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, and royalties on future product sales. If TC-1734 is developed under the agreement for indications other than Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, we would also be eligible to receive payments contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for those indications. AstraZeneca is responsible for the commercialization of TC-1734 and any compounds that arise out of the a4ß2 research collaboration described below that it
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elects to advance. We have the option to co-promote TC-1734 and any other compounds that are selected for advancement arising out of the research collaboration in the United States to specified classes of specialist physicians.
Depression/Anxiety
Mecamylamine hydrochloride and TC-5214. Mecamylamine hydrochloride is the active ingredient in Inversine, which is our only product approved by the U.S. Food and Drug Administration, or FDA, for marketing. Inversine is approved for the management of moderately severe to severe essential hypertension, a high blood pressure disorder. However, we believe that Inversine is prescribed predominantly for the treatment of neuropsychiatric disorders, including Tourette’s syndrome, autism and bipolar disorder. We are currently conducting a Phase II clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide, a commonly prescribed anti-depressant. We expect the results of this trial to be available in the fourth quarter of 2006.
TC-5214, one of the molecular components of mecamylamine hydrochloride, is a separate preclinical product candidate. If the results of our ongoing Phase II clinical trial of mecamylamine hydrochloride are favorable, we may accelerate the development of TC-5214 as an add-on therapy for depression in lieu of further advancement of mecamylamine hydrochloride. We do not expect to pursue the clinical development of both mecamylamine hydrochloride and TC-5214 for depression.
TC-2216. TC-2216 is a novel small molecule that we are developing as an oral treatment for depression and anxiety disorders. TC-2216 is currently a preclinical product candidate. We are currently conducting additional preclinical safety studies necessary to support the filing of an investigational new drug application, or IND, for clinical trials of TC-2216. We plan to file an IND for TC-2216 in the second half of 2006. We are also evaluating TC-2216 as a potential product candidate for smoking cessation or obesity instead of or in addition to depression and anxiety disorders.
Pain
TC-2696. TC-2696 is a novel small molecule that we are developing as a treatment for acute post-operative pain. Depending on clinical trial results, available resources and other considerations, we may pursue development of TC-2696 for other classes of pain in addition to or instead of acute post-operative pain. In 2004, we completed a Phase I single rising dose clinical trial of TC-2696 that we conducted in France. We are currently conducting a Phase I multiple rising dose clinical trial in France to further assess the safety and tolerability profile of TC-2696. We expect the full results of this trial to be available in the third quarter of 2006. We have not submitted an IND for clinical trials of TC-2696 in the United States.
In a single rising dose clinical trial, each subject in a dose group receives a dosage of the drug being evaluated only one time, with subjects in each subsequent dose group receiving a pre-determined higher dosage than subjects in the preceding dose group. In a multiple rising dose clinical trial, each subject in a dose group receives a dosage of the drug being evaluated multiple times, with subjects in each subsequent dose group receiving a pre-determined higher dosage than subjects in the preceding dose group.
Under our agreement with AstraZeneca relating to TC-1734, we and AstraZeneca have initiated a preclinical research collaboration designed to discover and develop additional compounds that, like TC-1734, act on the a4ß2 NNR. AstraZeneca is responsible for funding the research collaboration, which has an initial term of four years and can be extended by mutual
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agreement. In addition to our a4ß2 research collaboration with AstraZeneca, we have a preclinical program focused on identifying and developing compounds that selectively target the a7 NNR, which we believe may have application in the treatment of conditions such as schizophrenia, cognitive impairment and inflammation. We have selected a lead compound that we refer to as TC-5619 that acts selectively on the a7 NNR. We are currently conducting additional preclinical studies necessary to support the planned filing in 2007 of an IND for clinical trials of TC-5619. We have additional preclinical programs in areas in which we believe drugs that target specific NNR subtypes can be exploited for medical benefit, such as smoking cessation and obesity.
We develop product candidates using our proprietary databases and computer-based molecular design technologies, which we refer to collectively as Pentad. Pentad relies on extensive biological data for a library of diverse compounds that we have developed and gathered over more than 20 years. Pentad enables us to efficiently identify, prioritize, characterize and optimize novel compounds designed to selectively target specific NNR subtypes in an effort to achieve desired medical results and limit adverse side effects. We used Pentad to design or optimize TC-1734, TC-2696, TC-2216 and TC-5619.
Role of NNRs in the Nervous System
The human nervous system is a massive communications network that sends and receives information throughout the body via billions of specialized nerve cells known as neurons. Neurons continually gather information about the body’s internal and external environment and send signals to the brain. These signals pass from one neuron to another across a gap between a communicating neuron and a receiving neuron known as a synapse. Electrical impulses of a communicating neuron are converted into chemicals called neurotransmitters that are released by the communicating neuron and bind to specialized proteins known as receptors located across the synapse on the receiving neuron to enable the signal to continue. The major neurotransmitters in the brain are dopamine, serotonin, norepinephrine, glutamate, gamma-aminobutyric acid, or GABA, and acetylcholine.
NNRs are a class of receptors found in the nervous system that play a critical role in modulating the release of neurotransmitters to regulate nervous system activity. When the neurotransmitter acetylcholine is released from a nearby neuron, called an interneuron, and binds to an NNR on a communicating neuron, the flow of neurotransmitters from the communicating neuron to a receiving neuron is adjusted by the NNR. This action, known as neuromodulation, results in a greater release of neurotransmitters across the synapse when the nervous system is understimulated and a lesser release of neurotransmitters across the synapse when the nervous system is overstimulated. As neuromodulators, NNRs serve as the nervous system’s self-adjusting “volume knob.”
The nervous system will not operate properly if the relative levels of key neurotransmitters in the brain are not maintained in a normal balance. A disruption in this balance can cause many common nervous system diseases and disorders. We believe that compounds that target NNRs to trigger their activity can be used to treat these diseases and disorders.
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The following diagrams illustrate the role of NNRs in neuromodulation. In the illustration on the left, the release of a limited amount of acetylcholine from the interneuron causes the NNRs to release a limited amount of neurotransmitters across the synapse. In the illustration on the right, the release of more acetylcholine from the interneuron causes the NNRs to release a greater amount of neurotransmitters.
NNRs are comprised of five protein subunits that are arranged like staves of a barrel around a central pore. Each different combination of five subunits represents an NNR subtype. There are several subtypes, each of which is identified by Greek letters. Scientific evidence has established that individual NNR subtypes have particular functions in the body that are relevant to a number of debilitating diseases and disorders, as set forth below.
| NNR Subtype |
Primary Functions Impacted |
Diseases or Disorders Potentially Implicated | ||
| a4ß2 |
cognition; pain perception |
Alzheimer’s disease; cognitive deficits in schizophrenia; AAMI; MCI; ADHD | ||
| acute, chronic and neuropathic pain | ||||
| a7 |
sensory gating; cognition; inflammation |
schizophrenia; cognitive impairment | ||
| a6ß3 |
motor control |
Parkinson’s disease | ||
Our scientists and their former colleagues at R.J. Reynolds Tobacco Company have played a prominent role in the growth of knowledge about NNRs, as well as the effects of compounds that mimic the action of acetylcholine and interact with different NNR subtypes. For example, we believe that nicotine’s well-documented abilities to enhance attention, learning and memory result primarily from its interaction with the a4ß2 NNR and the a7 NNR in the brain. Many published studies evaluating the effects of nicotine in humans and animals, as well as published studies showing the prevalence of diseases such as Alzheimer’s disease and Parkinson’s disease in non-smokers as compared to smokers, suggest the therapeutic effects of compounds such as nicotine that interact with NNRs. However, despite their positive effects, these
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compounds have historically not been desirable as therapies because they have not been sufficiently selective. This means that these compounds interact not only with NNRs, but also with nicotinic receptors in the muscles and in groups of nerve cells known as ganglia that are associated with adverse effects such as increased heart rate, high blood pressure, irregular heartbeat, nausea, vomiting and a dangerous slowing of breathing known as respiratory depression.
Based on our years of focus on NNRs and the expertise we have built over that time, we are developing product candidates that are designed to interact selectively with specific NNR subtypes to promote positive medical effects and limit adverse side effects.
Our Business Strategy
Our goal is to become a leader in the discovery, development and commercialization of novel drugs that selectively target NNRs in order to treat diseases and disorders where there is significant medical need and commercial potential. To achieve this goal, we are pursuing the following strategies:
| • | Develop and commercialize drugs that selectively target specific NNR subtypes. Based on our understanding of the role of NNRs in the nervous system, we believe that drugs designed to selectively target specific NNR subtypes can have positive medical effects with limited or no adverse side effects. We use our scientific expertise and Pentad to identify compounds that selectively target specific NNR subtypes as potential treatments for diseases and disorders of the central nervous system. |
| • | Collaborate selectively to develop and commercialize product candidates. In December 2005, we entered into a collaborative research and license agreement with AstraZeneca for the development and worldwide commercialization of TC-1734 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment. Under the agreement, we and AstraZeneca have initiated a preclinical research collaboration designed to discover and develop additional compounds that, like TC-1734, act on the a4ß2 NNR. We intend to selectively enter into additional collaboration agreements with leading pharmaceutical and biotechnology companies to assist us in furthering the development of our product candidates. In particular, we intend to enter into these third-party arrangements for target indications in which our potential collaborator has particular expertise or that involve a large, primary care market that must be served by large sales and marketing organizations. In entering into these collaboration agreements, our goal will be to maintain co-promotion or co-commercialization rights in the United States and, in some cases, other markets. Under our collaboration agreement with AstraZeneca, we have the option to co-promote TC-1734 and any compounds that are selected for advancement arising out of the research collaboration under the agreement in the United States to specified classes of specialist physicians. |
| • | Remain at the forefront of the commercialization of NNR research. We have established ourselves as a leader in NNR research over the last 20 years. Our scientists and their former colleagues at RJR have published more than 150 NNR-related articles in leading scientific journals and more than 200 abstracts. Our leadership position in this area is also reflected in our extensive patent estate that includes 82 issued or pending United States patents and patent applications and numerous foreign counterparts. We intend to continue to invest significant resources to build upon our NNR expertise and to expand our intellectual property portfolio. We augment our own research by collaborating with commercial and academic institutions that seek access to our proprietary knowledge and compounds. |
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| • | Identify and prioritize indications in which drugs that selectively target specific NNR subtypes can be exploited for medical benefit. We have identified numerous indications in which NNRs have been implicated and for which we believe that drugs that selectively target specific NNR subtypes can provide a medical benefit. We prioritize our product development opportunities in an effort to sustain our product pipeline for indications in which there is a significant medical need and commercial potential. |
| • | Build a specialized sales and marketing organization. We intend to build an internal sales and marketing organization for target indications in which specialists heavily influence the market, particularly neurology and psychiatry. We believe that we can effectively serve these markets with a specialized sales force, enabling us to retain greater value from our product candidates that receive marketing approval than if we relied on a third party’s sales force. |
Opportunities in Our Target Indications
Because NNRs are so widespread in the body, we believe that there are a number of areas in which compounds that target NNRs could provide a therapeutic benefit, including:
| • | diseases and disorders of the central nervous system, commonly referred to as the CNS; |
| • | smoking cessation; |
| • | obesity; and |
| • | inflammation. |
Our primary product development focus is on diseases and disorders of the CNS, which represent a major segment of the global healthcare environment. Espicom Business Intelligence, a provider of business information for the pharmaceutical and other industries, estimates the total worldwide CNS pharmaceutical market was $65 billion in 2004. Three of the top ten selling drugs in the world in 2004, Eli Lilly’s Zyprexa, Pfizer’s Zoloft and Wyeth’s Effexor, treat diseases and disorders of the CNS. However, despite their commercial success, many current CNS drugs are only moderately effective or are accompanied by significant side effects or other drawbacks. Accordingly, we believe that substantial opportunities exist for new therapies that address CNS diseases and disorders. We are currently conducting a Phase II clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide. We are also currently conducting a Phase I multiple rising dose clinical trial of TC-2696, our product candidate for pain. We expect AstraZeneca to initiate Phase II clinical trials of TC-1734 in Alzheimer’s disease and cognitive deficits in schizophrenia in the first half of 2007.
Alzheimer’s Disease
Alzheimer’s disease, the most common form of dementia, is a debilitating brain disorder for which there is no cure. The disease progresses in stages from mild to moderate to severe and gradually destroys a person’s memory and ability to learn, reason, make judgments, communicate and carry out daily activities. Mild Alzheimer’s disease is characterized by mild forgetfulness and difficulty acquiring basic information and communicating. Patients generally exhibit the symptoms of mild Alzheimer’s disease for two to four years before progressing to the moderate stage. Moderate Alzheimer’s disease is characterized by forgetfulness, failure to recognize friends and family, disorientation regarding time and place and personality changes. Patients generally exhibit the symptoms of moderate Alzheimer’s disease for up to ten years
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before progressing to the severe stage. Severe Alzheimer’s disease is characterized by difficulty performing simple tasks and activities associated with daily living. Patients with severe Alzheimer’s disease require continuous care and generally do not survive for more than three years.
The Business Insights Healthcare Report titled The CNS Market Outlook to 2010 estimates that Alzheimer’s disease affects approximately 13.7 million people in the world’s seven major pharmaceutical markets, which are the United States, France, Germany, Italy, Spain, the United Kingdom and Japan, including approximately 4.5 million people in the United States. That report notes that studies of the causes, distribution and control of disease indicate that an estimated 5% of persons over age 65 and an estimated 24% of persons over age 85 suffer from the disease. Espicom Business Intelligence estimates that the worldwide market for Alzheimer’s disease therapies was approximately $3.0 billion in 2004.
The treatment of Alzheimer’s disease is currently dominated by a class of drugs called acetylcholinesterase inhibitors, which includes Aricept, Reminyl and Exelon. The treatment most recently approved by the FDA is Namenda, which has a different mechanism of action than acetylcholinesterase inhibitors and is the only product approved for the treatment of moderate to severe Alzheimer’s disease. We believe that acetylcholinesterase inhibitors have limitations in that only about 25% of Alzheimer’s disease patients who take them show symptomatic improvement and that they have not been demonstrated to substantially delay the progressive deterioration and death of cells in the brain that can lead to more severe impairment and debilitation.
Cognitive Deficits in Schizophrenia
Schizophrenia is a chronic, severe and disabling form of psychosis. The disease is characterized by symptoms such as delusions, hallucinations, the inability to disregard familiar stimuli, sometimes referred to as sensory gating, disorganized speech, grossly disorganized or catatonic behavior and prolonged loss of emotion, feeling, volition or drive. In addition, schizophrenia is often marked by impairment in cognitive functions, such as attention, vigilance, memory, and reasoning, that plays a primary role in the inability of schizophrenic patients to function normally.
The Business Insights Healthcare Report estimates that schizophrenia affects approximately 8.3 million people in the world’s seven major pharmaceutical markets, including approximately 3.7 million people in the United States. Scientists have estimated that up to 75% of schizophrenic patients are cognitively impaired.
Traditional treatments for schizophrenia are not effective to treat cognitive deficits in schizophrenia. While it has been reported that more recently developed treatments for schizophrenia, known as atypical anti-psychotics, may have some effect on cognitive impairment, it has also been reported that there is little evidence that the effect is lasting and leads to an improvement in daily functioning. Also, atypical anti-psychotics may cause agranulocytosis, an acute disease characterized by significant loss of white blood cells that prevent infection, as well as agitation, anxiety, muscle tremor, drowsiness, dizziness, headache, insomnia, weight gain and diabetes. There are currently no products approved for the treatment of cognitive deficits in schizophrenia.
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AAMI
The term age associated memory impairment, or AAMI, describes a common condition characterized by gradual memory loss or other cognitive impairment that generally occurs with normal aging. A person who is at least 50 years of age and scores at least one standard deviation below the mean established for young adults on a standardized memory test without evidence of dementia, neurological illness or other medical cause may be classified with AAMI. AAMI is not currently listed in Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, or DSM-IV, the manual published by the American Psychiatric Association to establish diagnostic criteria. However, DSM-IV does list the term “age related cognitive decline,” which is often used by the medical community interchangeably with AAMI, as an “objectively identified decline in cognitive functioning consequent to the aging process that is within normal limits given the person’s age.” Although estimates of the prevalence of AAMI in the elderly vary greatly because of varying methodologies and definitions of AAMI, one published study indicates that AAMI may affect as many as 38% of people over age 65. Based on a 2000 report of the Federal Interagency Forum on Aging-Related Statistics, this represents over 13 million people in the United States alone. The Federal Interagency Forum report projects that the number of people in the United States age 65 or older will double by 2030. There are currently no products approved for the treatment of AAMI.
Depression/Anxiety
Depression is a severe psychiatric mood disorder. It is characterized by a wide range of symptoms that cause significant impairment in daily functioning, such as persistent despondence, loss of interest in normal activities, changes in appetite, difficulty in sleeping, agitation, apathy or feelings of guilt. The most common forms of depression are major depressive disorder and dysthymia, which is less severe.
Anxiety disorders are generally characterized by symptoms of unfounded chronic, exaggerated worry and tension. There are several different types of anxiety disorders, including panic disorder, obsessive-compulsive disorder, post-traumatic stress disorder, social phobia and generalized anxiety disorder. People diagnosed with depression are also often diagnosed with an anxiety disorder.
The Business Insights Healthcare Report estimates that depression affects approximately 80 million people in the seven major pharmaceutical markets, including approximately 44 million people in the United States. According to the National Institute of Mental Health, anxiety disorders affect approximately 19 million people in the United States. Wood Mackenzie estimates that the worldwide market for anti-depressants was approximately $16.9 billion in 2004.
Depression is thought to be associated with the disruption and imbalance in the brain of the neurotransmitters dopamine, norepinephrine and serotonin. Anxiety disorders are similarly thought to be associated with the disruption and imbalance in the brain of these same neurotransmitters, as well as acetylcholine. Medications currently used to treat depression, such as selective serotonin reuptake inhibitors, or SSRIs, dual uptake inhibitors, and tricyclics, are designed to increase the levels of one or more of those neurotransmitters. However, these drugs may take two to four weeks to be effective, if at all, and may cause side effects like nausea, increased sweating, fatigue and sexual dysfunction that are experienced before any benefit. Moreover, experts have estimated that approximately 70% of patients with depression do not achieve remission with SSRIs. Medications other than anti-depressants often used to treat anxiety disorders include benzodiazepines and azapirones. Azapirones may not be
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immediately effective. Prolonged use of a benzodiazepine can result in a tolerance to the drug, ultimately making it ineffective. Benzodiazepines may also increase falls, and cause confusion and memory problems in the elderly.
Pain
Pain occurs when base nerve endings known as pain receptors are activated and a pain signal is transmitted through the nervous system to the brain. There are two general categories of pain, nociceptive and neuropathic. With nociceptive pain, the pain signal starts with damage to tissue and is typically accompanied by inflammation. With neuropathic pain, the pain signal results from inflammation of the peripheral nerves or other injury to the nervous system itself. A common form of neuropathic pain is sciatica, which is characterized by compression of the sciatic nerve resulting in leg and back pain. Neuropathic pain also arises from diabetes, cancer and exposure to chemotherapy or radiation. Both nociceptive and neuropathic pain can be either acute or chronic.
According to the Business Insights Healthcare Report, the worldwide market for pain therapies was approximately $13.9 billion in 2004. That report estimates that approximately 115 million people in the world’s seven major pharmaceutical markets suffer annually from acute nociceptive pain following a surgical procedure. That report also estimates that 43 million people in the world’s seven major pharmaceutical markets suffer annually from some form of neuropathic pain.
There is no single product available to treat all types of pain, and we believe that there are limitations to the existing treatments for each individual type of pain. Acute pain is typically treated with a class of drugs known as opioids. Prolonged use of opioids, however, may result in a tolerance to the drug, ultimately making it ineffective. In addition, the use of opioids may result in addiction and abuse. As a result, physicians are often reluctant to prescribe opioids for an extended period of time or at all. Chronic pain is most often treated with a class of drugs known as non-steroidal anti-inflammatory drugs. These drugs are often not sufficiently effective. In a nationwide survey of over 1,000 adults conducted in the United States in August 2003, only 58% of chronic pain sufferers rated their prescription medications as very or somewhat effective. No class of drugs, including opioids and non-steroidal anti-inflammatory drugs, has demonstrated consistent effectiveness in treating neuropathic pain.
Our Product Development Pipeline
We are developing our most advanced product candidates as treatments for target indications in three therapeutic areas: cognitive impairment, depression and anxiety, and pain. Within these areas, we have three product candidates in clinical development and two preclinical product candidates. In addition to these product candidates, we have preclinical programs in areas in which we believe that NNRs can be exploited for medical benefit. Mecamylamine hydrochloride, our product candidate currently in a Phase II clinical trial as an add-on therapy for depression, is approved in the United States as Inversine for the management of moderately severe to severe essential hypertension. Except for Inversine for the management of hypertension, neither the FDA nor any foreign regulatory authority has approved any of our product candidates for marketing.
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The following table summarizes our product development pipeline.
| Area of Therapeutic Focus |
Product Candidate |
Target Indication |
Status of |
Commercial Rights | ||||
| Cognitive Impairment | TC-1734 | Alzheimer’s disease | Phase II trial in MCI complete; initiation of Phase II trial in mild to moderate Alzheimer’s disease expected in the first half of 2007 | AstraZeneca | ||||
| Cognitive deficits in schizophrenia | Initiation of Phase II trial in cognitive deficits in schizophrenia expected in the first half of 2007 | AstraZeneca | ||||||
| AAMI | Two Phase II trials complete | AstraZeneca | ||||||
| Depression/Anxiety | Mecamylamine hydrochloride | Depression | Phase II trial ongoing; results expected in the fourth quarter of 2006 | Targacept | ||||
| TC-5214 | Depression | Preclinical | Targacept | |||||
| TC-2216 | Depression and anxiety disorders | Preclinical | Targacept | |||||
| Pain | TC-2696 | Acute post-operative pain |
Initial Phase I trial complete; separate Phase I trial ongoing; full results expected in the third quarter of 2006 | Targacept | ||||
We conducted our Phase II clinical trial of TC-1734 that we completed in March 2006 in the United States. We previously conducted two other Phase II clinical trials of TC-1734 in the United Kingdom. We are currently conducting our Phase I clinical trial of TC-2696 in France. We also conducted our previous Phase I clinical trial of TC-2696 in France and have not submitted an IND for clinical trials of TC-2696 in the United States. We are currently conducting our Phase II clinical trial of mecamylamine hydrochloride in the United States and India.
Under our collaboration agreement with AstraZeneca, we expect AstraZeneca to initiate additional safety and product characterization studies to generate further data with respect to TC-1734 in the first quarter of 2006 before deciding whether to proceed with the planned Phase II clinical trials of TC-1734 in Alzheimer’s disease and cognitive deficits in schizophrenia. We expect AstraZeneca to complete these safety and product characterization studies within approximately 12 to 15 months from January 2006.
In addition to our product candidates described above, we have a preclinical product candidate that we refer to as TC-5619 that acts selectively on the a7 NNR. We may offer to AstraZeneca the right to develop and commercialize TC-5619 as a treatment for any or all of schizophrenia and various conditions marked by cognitive impairment under the terms of our collaboration agreement. If we do not offer this right to AstraZeneca, we may pursue the development and commercialization of TC-5619 for other indications, such as inflammation.
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Cognitive Impairment
We are developing TC-1734 in collaboration with AstraZeneca as an oral treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment, such as ADHD, AAMI and MCI.
TC-1734
TC-1734 is a novel small molecule. In March 2006, we completed a Phase II clinical trial of TC-1734 in 168 persons with AAMI. In 2004, we completed a Phase II clinical trial of TC-1734 in 70 persons with AAMI and a Phase II clinical trial of TC-1734 in 36 persons with MCI, a condition marked by cognitive impairment that is more severe than AAMI but less severe than Alzheimer’s disease. We had previously evaluated TC-1734 in 84 healthy volunteers in four Phase I clinical trials.
While the exact causes of Alzheimer’s disease, AAMI and MCI are unknown, the aging process is generally accompanied by a decline of cognitive function linked to a progressive deterioration and death of cells in the brain. This is known as neurodegeneration. If neurodegeneration reaches a more advanced stage, such as in Alzheimer’s disease, a person becomes debilitated and unable to care for himself or herself. In addition, published third-party studies have shown that patients with Alzheimer’s disease have deficient levels of acetylcholine and other key neurotransmitters in the brain. We believe that these neurotransmitter levels are also deficient, perhaps to a lesser degree, in persons with schizophrenia, AAMI and MCI.
Published third-party studies have shown a reduced number of a4ß2 NNRs in persons with dementia, suggesting the involvement of a4ß2 in cognition. In our preclinical animal studies, TC-1734 triggered activity of a4ß2, enhanced the release of acetylcholine, enhanced memory and showed meaningful separation between the doses at which positive effects on memory and side effects were first seen. In two preclinical in vitro studies that we conducted, TC-1734 protected neuronal cells from deterioration and death, a process known as neuroprotection. Based on these results and published studies that link neuroprotection to exposure to nicotine, a non-selective activator of all NNRs with particularly strong activity at a4ß2, we believe that TC-1734 has the potential to prevent or delay neurodegeneration.
In other published third-party studies, nicotine administered by injection or by patch improved attention and learning in Alzheimer’s disease patients. In addition, studies have shown that Alzheimer’s disease is more prevalent in non-smokers than in smokers. We believe that these studies suggest the potential of drugs that target NNRs to treat Alzheimer’s disease.
In addition to Alzheimer’s disease and cognitive deficits in schizophrenia, we and AstraZeneca plan to evaluate potential additional clinical development of TC-1734 for other indications such as ADHD, AAMI and MCI.
Clinical Development of TC-1734
Phase II Clinical Trial Completed in 2006. In March 2006, we completed a double blind, placebo controlled Phase II clinical trial of TC-1734 in AAMI. The trial was designed to provide additional evidence as to whether TC-1734 improves cognitive performance in cognitively impaired older adults. We conducted the trial at 16 sites in the United States. We recruited 193 subjects between the ages of 50 and 80, who were classified with AAMI, to participate in the trial.
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The trial design provided for three dose groups, 25mg of TC-1734, 50mg of TC-1734 and placebo. Each group was dosed once daily for 16 weeks. Subjects in the 50mg dose group received 25mg for the first two weeks of dosing, 37.5mg for the next two weeks of dosing and 50mg for the remaining 12 weeks of dosing. Of the 193 subjects enrolled in the trial, 59 were randomly assigned to the 25mg dose group, 68 were randomly assigned to the 50mg dose group and 66 were randomly assigned to the placebo group. Of these, 53 subjects in the 25mg dose group, 57 subjects in the 50mg dose group and 58 subjects in the placebo group completed the trial.
Each subject was assessed using a computer-based test battery developed by CDR Ltd. to test cognitive function. We tested each subject at various time points prior to the first day of the 16-week dosing period to establish baseline. We tested subjects again at eight weeks and on the last day of the 16-week dosing period. The CDR test battery includes measures of attention, speed of cognitive processes and memory that assess the ability to react to stimuli, recognize words and pictures and recall words. These measures are then used to make composite assessments on the following five factors:
| • | power of attention, which assesses the intensity of concentration; |
| • | continuity of attention, which assesses the ability to sustain concentration; |
| • | working memory, or short-term memory, which assesses the ability to retain for a short period of time information that has not been previously learned; |
| • | episodic memory, or long-term memory, which assesses the ability to store, hold for an extended period of time and retrieve information of an episodic nature, such as an event, name, object, scene or appointment; and |
| • | speed of memory, which assesses the time it takes to recall an item from memory. |
We also used the CDR test battery in the Phase II clinical trials of TC-1734 in AAMI and MCI that we completed in 2004 and in our Phase I clinical trials of TC-1734. We selected the CDR test battery because of its comprehensive measures and because CDR’s extensive database of test results in unimpaired persons enables assessment of clinical relevance. CDR has indicated that its battery has been used to assess cognitive performance in over 500 clinical trials worldwide.
Primary Endpoints
There were three co-primary efficacy endpoints for the trial:
| • | power of attention – change from baseline on the power of attention factor of the CDR test battery at the end of the 16-week dosing period, as compared to placebo; |
| • | episodic memory – change from baseline on the episodic memory factor of the CDR test battery at the end of the 16-week dosing period, as compared to placebo; and |
| • | subject global impression – a seven-point overall cognitive improvement scale in which each subject rates himself or herself on attention, memory and speed of thinking, at the end of the 16-week dosing period, as compared to placebo. |
We used the power of attention factor because it appeared to be the most sensitive CDR test factor in measuring improvement in cognitive performance in our previously completed Phase II clinical trial in AAMI. We used the episodic memory factor because we believe it is particularly applicable to Alzheimer’s disease. Scientists have suggested that episodic memory is the earliest deficit that an Alzheimer’s disease patient suffers. We used the subject global
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impression scale as a measure of overall cognitive improvement to assess whether the effects of TC-1734 on aspects of cognition in a cognitively impaired older adult population are clinically meaningful.
The CDR test data are presented in this prospectus on a per protocol basis. This means that, for each trial, only data from subjects who complied with at least 80% of the dosing schedule and who completed the cognitive test battery assessments on the first and last day of the dosing period are included in the efficacy analysis. The data are presented on this basis because we believe that including partial data from subjects who did not satisfy the compliance criteria would require the interpolation of a substantial amount of unavailable data and prevent an appropriate statistical analysis of the results of the trial as designed.
Subjects receiving TC-1734 in the 50mg dose group showed improvement as compared to subjects dosed with placebo on all three co-primary efficacy endpoints. These results were statistically significant. Subjects receiving TC-1734 in the 25mg dose group showed improvement as compared to subjects dosed with placebo on the power of attention endpoint. This result was statistically significant.
A clinical trial result is statistically significant if it is unlikely to have occurred by chance. The statistical significance of clinical trial results is determined by a widely used statistical method that establishes the p-value of the results. Under this method, a p-value of 0.05 or less represents statistical significance. If a p-value is above 0.05, the result is not statistically significant, or NS. The p-values for the primary endpoints for the TC-1734 dose groups are set forth below.
| Primary Endpoint |
25mg TC-1734 |
50mg TC-1734 | ||
| CDR – Power of Attention |
0.023 | 0.010 | ||
| CDR – Episodic Memory |
NS | 0.030 | ||
| Subject Global Impression |
NS | 0.008 |
We believe that the achievement of statistically significant results in favor of TC-1734 on all three co-primary endpoints in the 50mg dose group of this trial suggests that TC-1734 enhances cognitive function in a cognitively impaired older adult population and supports further clinical development of TC-1734. In particular, we believe that the achievement of a statistically significant result in favor of TC-1734 on the subject global impression endpoint in the 50mg dose group suggests that the effects on cognition are clinically meaningful. However, the results that we observed in this Phase II trial in AAMI may not be replicated in any future clinical trials of TC-1734 that we or AstraZeneca conduct in Alzheimer’s disease, cognitive deficits in schizophrenia, AAMI or any other indication.
Secondary Endpoints
We used a number of secondary endpoints for this trial, including improvement as compared to placebo at the end of the 16-week dosing period on the following factors:
| • | the memory, attention and speed of thinking improvement components of the subject global impression scale, which we refer to as SGI subscores; and |
| • | the remaining three factors of the CDR test battery – continuity of attention, working memory and speed of memory. |
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Subjects receiving 25mg or 50mg doses of TC-1734 showed improvement as compared to subjects dosed with placebo in several of these measures. In particular, subjects in the 50mg dose group showed improvement on all three components of the subject global impression scale, and each of these results was statistically significant. The p-values for these secondary endpoints for the TC-1734 dose groups are set forth below.
| Secondary Endpoint |
25mg TC-1734 |
50mg TC-1734 | ||
| SGI Subscore – Attention |
NS | 0.010 | ||
| SGI Subscore – Memory |
NS | 0.022 | ||
| SGI Subscore – Speed of Thinking |
NS | 0.020 | ||
| CDR – Continuity of Attention |
0.012 | NS | ||
| CDR – Working Memory |
NS | 0.003 | ||
| CDR – Speed of Memory |
0.001 | 0.003 |
Tolerability
TC-1734 was generally well tolerated in this trial as compared to placebo. We reported two serious adverse events experienced by subjects dosed with TC-1734. One of these subjects was diagnosed with lung cancer after being assigned to a dose group. The principal investigator for the trial site for this subject described the event as not related to TC-1734. The other subject was diagnosed with a myocardial infarction, commonly known as a heart attack, after being dosed for approximately 12 weeks. The principal investigator for the trial site for this subject described the event as possibly related to TC-1734. Because of the age range of the subject population for this trial, the types of the two serious adverse events that we observed were not unexpected.
There were no clinically significant differences among the two TC-1734 dose groups and the placebo group in the incidence of adverse events. The adverse events that we observed included dizziness, headaches, diarrhea, back pain, head colds, upper respiratory tract infections, nausea and joint pain. The most frequently observed adverse event was dizziness. However, the number of subjects in the placebo group who experienced dizziness was substantially the same as the number of subjects who experienced dizziness in the group dosed with 50mg of TC-1734 and greater than the number of subjects who experienced dizziness in the group dosed with 25mg of TC-1734.
Previous Phase II Clinical Trials. In 2004, we completed two double blind, placebo controlled Phase II clinical trials of TC-1734. One trial evaluated 70 persons at least 60 years of age classified with AAMI and the other trial evaluated 36 persons at least 60 years of age classified with MCI. We conducted the trials at multiple sites in the United Kingdom under clinical trial exemptions, the United Kingdom equivalent to an IND. The primary objective of each trial was to assess the safety and tolerability of TC-1734 in elderly subjects compared to placebo. Secondary objectives of each trial were to assess the efficacy of TC-1734 in improving cognitive function and changes in mood state. We did not observe any clinically significant effect on mood state in either trial.
In the AAMI trial, the subjects were divided into four dose groups, 50mg, 100mg, 125mg and 150mg. In the MCI trial, the subjects were divided into two dose groups, 50mg and 100mg. In both trials, each subject was initially dosed either with the applicable dose of TC-1734 or a placebo daily over a three-week period. Then, after a two-week period without being dosed, each subject was changed to be dosed with either a placebo or TC-1734, as the case may be, daily for another three-week period. We anticipated that the two-week period without dosing would allow each subject to return to a pre-treatment state prior to the beginning of the second three-week dosing period and eliminate any carryover effect of the treatment in the first dosing period on a
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subject’s performance in the second dosing period. Each subject took TC-1734 or a placebo before eating on the day of dosing. During the trials, routine safety measures were recorded and pharmacokinetic assessments were made for each subject. In addition, subjects were assessed for changes in cognitive function before dosing and at one, two and four hours after dosing on the first day of the three-week dosing period and then again on the last day of the dosing period. Subjects were also assessed for mood state on the first and last day of the three-week dosing period. The trials were double blind, meaning that neither the subjects nor the clinical investigators knew during the trials which subjects were receiving TC-1734 and which were receiving the placebo.
In the 50mg, 100mg and 125mg arms of the AAMI trial, TC-1734 was well tolerated, with no serious adverse events reported. In the 150mg dose group, three out of eight subjects treated with TC-1734 experienced side effects such as headache, lightheadedness, dizziness and vomiting and dropped out of the trial. Because of these side effects, we ceased dosing new subjects at 150mg.
We used the CDR test battery in both the AAMI and MCI trials to test for changes in cognitive function. The CDR test data from both trials are presented in this prospectus on a per protocol basis. The data are presented on this basis because we believe that including partial data from subjects who did not satisfy the compliance criteria would require the interpolation of a substantial amount of unavailable data and prevent an appropriate statistical analysis of the results of the trial as designed. On this basis, the AAMI data includes 20 subjects in the 50mg dose group, 20 subjects in the 100mg dose group, 19 subjects in the 125mg dose group and five subjects in the 150mg dose group. In some cases, dosing in the first three-week dosing period may have had an effect on performance on one or more factors in the cognitive test battery in the second three-week dosing period. This is referred to as treatment-by-period interaction and is identified by a statistical analysis of a dose group’s performance on a particular test factor in the first dosing period versus the dose group’s performance on that test factor in the second dosing period. In instances in which our statistical analysis indicated that a treatment-by-period interaction might have occurred for a particular dose group and a particular test factor, we have included in the results described in this prospectus only the first dosing period for that dose group for that test factor. The effect of including only the first dosing period in the results described in this prospectus for a particular dose group and a particular test factor is to reduce, by 50%, both the number of evaluated subjects in that dose group for that test factor that were dosed with TC-1734 and the number of subjects in that dose group for that test factor that were dosed with placebo. Where this occurred, because the number of evaluated subjects was substantially smaller, the improvement in the performance of subjects dosed with TC-1734 as compared to the performance of subjects dosed with placebo required to achieve statistical significance in favor of TC-1734 was greater than it would have been if there had been no treatment-by-period interaction and data from both dosing periods for that dose group and that test factor had been included in the results.
Compared to subjects who received placebo, subjects who received TC-1734 in the 50mg dose group showed improvements on four of the five factors: power of attention; continuity of attention; episodic memory; and speed of memory. These results were statistically significant. In the 50mg dose group, the result on the power of attention factor had a p-value of 0.001. In addition, the result on the continuity of attention factor had a p-value of 0.001, the result on the episodic memory factor had a p-value of 0.019, and the result on the speed of memory factor had a p-value of 0.010, in each case including only the first dosing period due to treatment-by-period interaction. Subjects in the 50mg dose group who received placebo performed better than subjects who received TC-1734 on the working memory factor. This result was not statistically significant.
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The positive effects that we observed in the 50mg dose group were less pronounced in the other dose groups. In the 100mg dose group, we observed improvement in subjects who received TC-1734 only on the episodic memory factor. The result was statistically significant with a p-value of 0.022. Subjects in the 100mg dose group who received placebo performed better than subjects who received TC-1734 on the speed of memory factor at one of the time points evaluated and the result was statistically significant. In the 125mg dose group, we observed improvements in subjects who received TC-1734 on two of the factors at one of the time points evaluated, in each case including only the first dosing period due to treatment-by-period interaction. The result on the working memory factor, with a p-value of 0.034, was statistically significant. We observed a strong trend in favor of TC-1734, but not statistical significance, on the episodic memory factor, with a p-value of 0.080. The result on the speed of memory factor includes only the first dosing period due to treatment-by-period interaction. Subjects in the 125mg dose group who received placebo performed better than subjects who received TC-1734 on the speed of memory factor and the result was statistically significant. In the 150mg dose group, we observed improvement on four of the factors for the five subjects who completed the trial and received TC-1734. The results on the continuity of attention factor, with a p-value of 0.049, and the speed of memory factor, with a p-value of 0.018, were statistically significant. We observed a strong trend in favor of TC-1734, but not statistical significance, on the power of attention factor at one of the time points evaluated, with a p-value of 0.081, and on the working memory factor, with a p-value of 0.094. The results of the AAMI trial suggest that TC-1734 is well tolerated at a dose range of up to 125mg, that 150mg is the maximum tolerated dose of TC-1734 for this trial design and that the compound had positive effects on at least one aspect of cognition assessed by the CDR test battery at each tolerated dose tested.
To generate additional data related to the tolerability of TC-1734, we also tested eight elderly persons classified with AAMI at a dose of 150mg, after having eaten, using the same trial design. This enabled us to assess the impact of food on the tolerability of TC-1734 by comparing it in subjects dosed at 150mg who had eaten and in subjects dosed at 150mg who had not eaten. On a per protocol basis, we evaluated six subjects dosed at 150mg who had eaten. As we expected, the results indicated that the 150mg dose of TC-1734 was better tolerated in subjects who had eaten than in subjects who had not eaten. We observed no serious adverse events. In this dose group, we observed improvement in subjects who received TC-1734 on the continuity of attention factor at one of the time points evaluated, and the result was statistically significant with a p-value of 0.028. We also observed improvement in subjects who received TC-1734 on the speed of memory factor, including only the first dosing period due to treatment-by-period interaction. The result on the speed of memory factor was statistically significant, with a p-value of 0.0460. In addition, we observed a strong trend in favor of TC-1734, but not statistical significance, in this dose group on the episodic memory factor, with a p-value of 0.100.
As in the AAMI trial, TC-1734 was well tolerated in the MCI trial, with only one serious adverse event reported. A subject who had a history of an abnormally slow heart rate lost consciousness and was hospitalized approximately one-and-one-half weeks following the end of the dosing phase of the trial. We do not believe that this adverse event was related to TC-1734. In the 100mg dose group of the trial, subjects who received TC-1734 showed improvement on the episodic memory factor, and the result was statistically significant with a p-value of 0.044. We also observed a strong trend in favor of TC-1734, but not statistical significance, in this dose group on the working memory factor, with a p-value of 0.070, and on the speed of memory factor at one of the time points evaluated, with a p-value of 0.100. The result on the speed of memory factor includes only the first dosing period due to treatment-by-period interaction. Subjects in the 50mg dose group of the trial who received TC-1734 did not show improvement. Subjects who received placebo performed better than subjects who received TC-1734 on the working memory and speed of memory factors and those results were statistically significant.
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The result on the speed of memory factor includes only the first dosing period due to treatment-by-period interaction.
Phase I Clinical Trials. We have completed four Phase I clinical trials of TC-1734 in 84 healthy volunteers in which the compound was well tolerated. The results of these trials are summarized below.
| • | In a single rising dose trial with eight dose groups each comprised of six volunteers between the ages of 21 and 45, the compound was well tolerated in doses of up to 320mg. We also observed an acceleration in brainwaves thought to be associated with positive effects on attention, suggesting that the compound had reached the brain. |
| • | In a multiple rising dose trial with four dose groups each comprised of six volunteers between the ages of 18 and 43, 50mg, 100mg and 200mg doses of TC-1734 or placebo were administered over a 10-day period. We observed a dose-dependent positive effect on attention at the end of the trial measured by the ability of the volunteers to focus on a particular task to the exclusion of other tasks. |
| • | In another trial, six volunteers between the ages of 64 and 73 were given a single 80mg dose to assess the compound’s pharmacokinetics, which refers to a drug’s absorption, distribution and metabolism in, and excretion from, the body. We observed positive effects on memory and learning, including improved episodic memory based on word recall and picture recognition assessments. These effects lasted up to 48 hours after a single oral dose. |
| • | In a food interaction trial, six volunteers between the ages of 22 and 45 were administered an 80mg dose with or without having eaten and the compound was well tolerated. |
Plans for Future Development in Alzheimer’s Disease. We believe that the effects that we observed in our completed Phase II clinical trials of TC-1734 indicate that TC-1734 has the potential to be an effective treatment for Alzheimer’s disease. Our belief is based in part on the results of our Phase II clinical trial of TC-1734 in persons with MCI and the suspected relationship between MCI and Alzheimer’s disease. Researchers have estimated that between 10% and 15% of persons with MCI are diagnosed with Alzheimer’s disease each year. In addition, 80% of persons with MCI who participated in a third-party study were diagnosed with Alzheimer’s disease within six years of being diagnosed with MCI. These data suggest that there may be a disease progression from MCI to Alzheimer’s disease. Moreover, scientists have suggested that episodic memory is the earliest deficit that an Alzheimer’s disease patient suffers. Published third-party studies have shown that tests that assess episodic memory best distinguish persons with Alzheimer’s disease from unimpaired elderly persons. As described above, we observed positive effects on the episodic memory factor in some of the dose groups in our previous Phase II clinical trials of TC-1734 in AAMI and MCI.
We expect AstraZeneca to initiate a double blind, placebo controlled Phase II clinical trial of TC-1734 for the treatment of mild to moderate Alzheimer’s disease in the first half of 2007. The planned trial design includes several TC-1734 dose groups and a group to be dosed with a marketed treatment for Alzheimer’s disease, with a number of patients that AstraZeneca expects to be adequate to detect a statistically significant response on the trial’s outcome measures. The existing development plan for TC-1734 specifies that the trial will include approximately 790 patients with mild to moderate Alzheimer’s disease. We expect that patients will be randomly assigned to a dose group of 25mg, 50mg or 100mg of TC-1734, to a dose group of donepezil, a
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commonly prescribed treatment for mild to moderate Alzheimer’s disease, or to placebo. The planned co-primary outcome measures of the trial are the Alzheimer’s Disease Assessment Scale-cognitive subscale, or ADAS-Cog, the measure most often used to assess the efficacy of drugs for Alzheimer’s disease, and a clinician interview-based impression of change, or CIBIC, scale. We anticipate that a cognitive test battery would also be included in the trial as a secondary measure. The planned trial design for the Phase II clinical trial of TC-1734 in mild to moderate Alzheimer’s disease may change based on the results of the safety and product characterization studies of TC-1734 that AstraZeneca will conduct prior to deciding to initiate a Phase II clinical trial of TC-1734 or other factors. Changes to the trial design could relate to the number of subjects, dose groups, endpoints or any other details of the planned trial. AstraZeneca has significant control over trial design, as well as the conduct and timing of development efforts with respect to TC-1734.
Plans for Future Development in Cognitive Deficits in Schizophrenia. We believe that TC-1734 also has the potential to be an effective treatment for cognitive deficits in schizophrenia. In a 2004 survey of 46 neuroscientists and neuropharmacologists conducted in connection with a National Institute of Mental Health initiative known as Measurement and Treatment Research to Improve Cognition in Schizophrenia, or MATRICS, designed to support the development of pharmacological agents for improving the cognitive deficits in schizophrenia, deficits in attention and vigilance were identified most often as the most important cognitive deficit in schizophrenia. As described above, we observed positive effects on attention in two of the dose groups in our completed Phase II clinical trial of TC-1734 in AAMI.
We expect AstraZeneca to initiate a double blind, placebo controlled Phase II clinical trial of TC-1734 as a therapy for the treatment of cognitive deficits in schizophrenia together with an approved therapy for the psychosis symptoms of schizophrenia in the first half of 2007. The planned trial design includes several TC-1734 dose groups, with a number of patients that AstraZeneca expects to be adequate to detect a statistically significant response on the trial’s outcome measures. In particular, we expect that TC-1734 will be administered together with one or more representative marketed drugs from the drug class known as atypical anti-psychotics. We expect the trial to include between 400 and 600 patients with schizophrenia and that patients will be randomly assigned to a dose group of 25mg, 50mg or 100mg of TC-1734, or placebo. The planned primary outcome measure of the trial is a cognitive test battery that we expect MATRICS to identify. We anticipate that a number of other cognitive scales would be included in the trial as secondary measures. The planned trial design for the Phase II clinical trial of TC-1734 in cognitive deficits in schizophrenia may change based on the results of the safety and product characterization studies of TC-1734 that AstraZeneca will conduct prior to deciding to initiate a Phase II clinical trial of TC-1734 or other factors. Changes to the trial design could relate to the number of subjects, dose groups, endpoints or any other details of the planned trial. AstraZeneca has significant control over trial design, as well as the conduct and timing of development efforts with respect to TC-1734.
Plans for Future Development in AAMI. We do not have, and we do not believe that AstraZeneca has, any current plan to pursue development of TC-1734 for the treatment of AAMI beyond the Phase II clinical trial that we completed in March 2006. However, AstraZeneca has agreed that it may pursue additional development and commercialization of TC-1734 for the treatment of AAMI at such time it determines in the future that a favorable regulatory environment exists for the introduction of products for the treatment of AAMI to the market. We believe that the results of our completed Phase II clinical trials of TC-1734 in AAMI and MCI and the neuroprotective effect that we observed in preclinical in vitro studies of TC-1734 suggest the potential of TC-1734 as an early treatment for progressive cognitive impairment.
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In three letters that we have received from the FDA in connection with the protocol for the Phase II trial of TC-1734 for the treatment of AAMI that we completed in March 2006 and subsequent protocol amendment submissions, the FDA informed us that it believes it is questionable whether AAMI satisfies the criteria necessary for AAMI to be recognized as a distinct clinical condition. The FDA also informed us that it is not clear that our Phase II clinical trial design and efficacy endpoints are appropriate for measuring the clinical effect of TC-1734 in AAMI. In particular, the FDA characterized it as unclear whether the power of attention factor of the CDR test battery is an appropriate outcome measure to use for assessing the effect of a drug on AAMI, in which the only claimed deficit is an impairment of memory. We have not had any discussions with the FDA regarding whether AAMI is a clinical entity for which approval of a drug is possible. Even if the FDA were ultimately to be unwilling to recognize AAMI as a distinct clinical condition, we believe that our recently completed Phase II AAMI trial could benefit us and AstraZeneca in our efforts to gain marketing approval of TC-1734 for Alzheimer’s disease because it further established the safety profile of TC-1734 and further demonstrated its cognitive effects in an expanded number of cognitively impaired older adults.
Other TC-1734 Development Studies. In our completed clinical trials of TC-1734 and in our ongoing Phase II clinical trial of TC-1734 in AAMI, we used and are using a particular salt form of TC-1734 that we refer to as the 112 salt. We have developed an alternate salt form of TC-1734 that we refer to as the 226 salt that we and AstraZeneca may use in future clinical trials of TC-1734 and as the commercial form. We believe that the 226 salt will cost less to make than the 112 salt. We also believe that the 226 salt will be more soluble than the 112 salt. In the fourth quarter of 2005, we completed a bioavailability study in which a single dose of the 112 salt and a single dose of the 226 salt were administered to 12 healthy volunteers. Bioavailability studies are typically designed to assess the extent to which a drug is absorbed into the blood. In this study, we determined that levels of TC-1734 observed in the blood following administration of the two salts were substantially equivalent.
In addition, our agreement with AstraZeneca provides for AstraZeneca to conduct safety and product characterization studies at its expense to generate further data with respect to TC-1734 before deciding whether to proceed with the planned Phase II clinical trials of TC-1734 in mild to moderate Alzheimer’s disease and cognitive deficits in schizophrenia. These studies consist of:
| • | in vitro studies to assess whether TC-1734, when administered at a therapeutically-relevant dose, activates a particular protein that can activate an enzyme known as CYP1A1 that is considered by some scientists to increase susceptibility to cancer; |
| • | a clinical trial to characterize the cardiovascular effects of various doses of TC-1734 in persons who break down and eliminate, or metabolize, TC-1734 at varying rates; |
| • | a single-dose study in dogs to further assess TC-1734’s cardiovascular effects; and |
| • | small clinical trials to evaluate the interaction and combined effects of TC-1734 with paroxetine, a known inhibitor of a key enzyme involved in TC-1734’s primary metabolic pathway, and with multiple commonly prescribed treatments for schizophrenia. |
The drug interaction trials are designed to determine whether the metabolism or safety of TC-1734 or any of these commonly prescribed treatments is adversely affected when administered with the other drug. A drug that is generally safe when taken alone may be not be safe or may not be as safe when taken together with other drugs.
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Depression/Anxiety
We are currently conducting a clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide. In addition, we have two preclinical product candidates for depression, TC-5214, which is one of the molecular components of mecamylamine hydrochloride, and TC-2216, which we are developing for either or both of depression and anxiety disorders. We are also evaluating TC-2216 as a potential product candidate for smoking cessation or obesity instead of or in addition to depression and anxiety disorders.
Mecamylamine hydrochloride and TC-5214
Mecamylamine hydrochloride is the active ingredient in Inversine, which is currently our only approved product. Inversine is approved in the United States for the management of moderately severe to severe essential hypertension. We believe that Inversine is prescribed predominantly for the treatment of neuropsychiatric disorders, including Tourette’s syndrome, autism and bipolar disorder, in children and adolescents at a lower dose than is used for hypertension. Inversine has been approved for marketing since the 1950s. We acquired marketing rights to the product in August 2002 from Layton Bioscience, Inc., which had previously acquired the rights from Merck & Co., Inc. In connection with our acquisition, we assumed Layton’s obligations under the agreement pursuant to which Layton acquired the rights from Merck. Pursuant to that agreement, we pay Merck an amount each year based on annual sales of Inversine, subject to a specified annual maximum. Our annual payment obligation to Merck expires in 2008.
Preliminary results of a clinical trial conducted by researchers at Yale University and reported in 2004 showed that mecamylamine hydrochloride had anti-depressant effects in patients who were not fully responding to various commonly prescribed anti-depressants when used as an add-on therapy to the anti-depressant as compared to when patients were treated with the anti-depressant and a placebo. In addition, in a third-party preclinical study published in 2004, rats lacking the ß2 NNR subunit did not respond to a known anti-depressant. We believe that this study suggests a correlation between abnormal ß2 activity and depression. We also believe that mecamylamine hydrochloride may act to normalize the activity of ß2.
Based in part on these results, we are currently conducting a clinical trial of mecamylamine hydrochloride for depression as an add-on therapy to citalopram hydrobromide, a commonly prescribed anti-depressant marketed as Celexa. We are conducting the trial at one site in the United States and nine sites in India. The trial design provides for two phases. In the first phase, patients with a diagnosis of depression are administered 20mg to 40mg doses of citalopram hydrobromide over six weeks and evaluated based on improvement on the Hamilton Rating Scale, an accepted rating scale for depression, to determine whether they are responding favorably. We enrolled 349 patients into the first phase of the trial. Patients who do not respond favorably or do not respond in full are enrolled into the second phase of the trial. The second phase is double blind and placebo controlled and is designed to include approximately 160 evaluable patients. As of March 7, 2006, we have enrolled 172 patients into the second phase of the trial. In the second phase, patients are randomly assigned into dose groups of mecamylamine hydrochloride or placebo, in each case together with the established dose of citalopram hydrobromide, over eight weeks. Each patient that is assigned to receive mecamylamine hydrochloride is administered a 5mg dose daily for the first two weeks of the trial. Based on the investigating physician’s assessment of tolerability and therapeutic response, the physician can elect to increase the dose to 7.5mg for the next two weeks or to maintain the dose at 5mg. Following the second two-week period, the investigating physician can again elect
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to increase the dose to 10mg for the remaining four weeks or to maintain the existing dose. The primary efficacy endpoint of the trial is improvement on the Hamilton Rating Scale as compared to placebo. We are also using several other rating scales as secondary measures.
As of March 7, 2006, two serious adverse events were reported in connection with the second phase of this trial. Because the trial is double blind, we do not yet know whether the patients who experienced these events were dosed with mecamylamine hydrochloride and citalopram or with placebo and citalopram. One of these patients was hospitalized due to nausea, weakness and vertigo, or dizziness and disorientation, after being dosed for approximately six weeks. While hospitalized, the patient experienced low blood pressure, abnormal heart contractions and a slow heart rate. The other patient experienced increased blood pressure, dizziness and lightheadedness after being dosed for approximately three weeks. This patient’s blood pressure returned to normal levels after being administered blood pressure medication. The principal investigators for the trial sites for the subjects who experienced these events described the events as possibly related to mecamylamine hydrochloride. We believe that the two reported serious adverse events are independent and unrelated to each other.
The design for this trial is adaptive, which means that interim analyses are permitted to be undertaken at prescribed intervals, and with limited effect on the statistical power of the trial, to assess whether the number of patients included in the trial is adequate to achieve statistical significance in the trial’s outcome measures. We engaged an independent statistician to conduct an interim analysis and to make a recommendation as to whether it would be advisable to increase the number of patients in the trial. The independent statistician reviewed available data from the first 105 patients who completed the trial. In March 2006, the independent statistician recommended that we increase the number of patients by 607 patients per dose group based on his interim analysis of data relating to the primary efficacy endpoint of the trial. This recommendation is consistent with a prior recommendation from the same independent statistician based on available data from the first 50 patients who had completed the trial. We do not expect that we will implement the independent statistician’s recommendation to increase the number of patients and plan to complete the trial as designed.
We believe that the recommendation from the independent statistician suggests a modest trend in favor of mecamylamine hydrochloride on the primary efficacy endpoint for the trial. However, we also believe that the recommendation from the independent statistician suggests that, when data from all subjects who complete the trial become available, the result on the primary efficacy endpoint for the trial may not be statistically significant. We expect the results of the trial to be available in the fourth quarter of 2006.
TC-5214 is one of the enantiomers of mecamylamine hydrochloride. Enantiomers are chemical substances that are mirror images of each other and have the same chemical but potentially different biological properties. TC-5214 is a preclinical product candidate. We have licensed from the University of South Florida Research Foundation rights under a pending patent application that, if issued, would provide us with coverage for the composition of TC-5214 for use as a pharmaceutical. TC-5214 has shown anti-depressant effects in several preclinical rodent models.
If the results of our ongoing Phase II trial of mecamylamine hydrochloride are favorable, we may accelerate the development of TC-5214 as an add-on therapy for depression in lieu of further development of mecamylamine hydrochloride. We do not expect to pursue the clinical development of both mecamylamine hydrochloride and TC-5214 for depression.
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TC-2216
TC-2216 is a novel small molecule that we are developing as an oral treatment for depression and anxiety disorders. Depression and anxiety disorders often occur together, and anti-depressants are often also used to treat anxiety disorders. TC-2216 showed greater potency in our preclinical studies than, and anti-depressant effects comparable to, selective serotonin reuptake inhibitors and tricyclics, which are commonly used treatments for depression. In other preclinical studies that we conducted, TC-2216 showed anxiety-relieving effects. In addition, in our preclinical in vitro studies, we found TC-2216 to act on the a4ß2 NNR to modulate the release of neurotransmitters that are involved in mood and to avoid interaction with nicotinic receptors in the muscles and ganglia that are associated with side effects. We are currently conducting additional preclinical safety studies necessary to support the filing of an IND for clinical trials of TC-2216. We plan to file an IND for TC-2216 in the second half of 2006. Based on our preclinical findings that TC-2216 modulates the release of dopamine and reduces weight gain and published animal studies that have linked nicotine’s addictive effects to the release of dopamine, we are also evaluating TC-2216 as a potential product candidate for smoking cessation or obesity instead of or in addition to depression and anxiety disorders.
A number of reported studies in humans and animals have linked nicotine to improvements in symptoms of depression. In one of these studies, nicotine administered via patch produced short-term improvements in symptoms in patients with depression based on a significant reduction in scores on the Hamilton Rating Scale after the second day. Because many current anti-depressants do not take effect for two to four weeks, the rapid onset of action of nicotine suggests a potentially significant advantage for drugs that target NNRs to treat depression.
Pain
We are developing TC-2696 for acute post-operative pain. Depending on clinical trial results, available resources and other considerations, we may pursue development of TC-2696 for other classes of pain in addition to or instead of acute post-operative pain.
TC-2696
TC-2696 is a novel small molecule that we are developing as a treatment for acute post-operative pain. We have completed a Phase I clinical trial of TC-2696. TC-2696 demonstrated pain-relieving effects in models of acute, chronic and inflammatory nociceptive pain and of neuropathic pain with comparable or higher potency in preclinical animal models than morphine or indomethacin, the generally accepted standards of comparison. In these studies, the compound was rapidly absorbed and demonstrated an acceptable toxicology profile.
In our preclinical in vitro studies of TC-2696, we found the compound to be a potent activator of the a4ß2 NNR and to avoid interaction with nicotinic receptors in the muscles and ganglia that are associated with side effects. Published studies conducted by third parties have shown that compounds that activate a4ß2 have pain-relieving effects in animals. We believe these effects are caused in part by the activation of NNRs that are abundant in CNS pathways to block the transmission of pain signals to the brain. In contrast, opioids act through a different mechanism of action. In our preclinical animal studies, TC-2696 did not result in tolerance following repeated administration. This suggests a potential advantage of TC-2696 compared to existing treatments for acute post-operative pain.
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Clinical Development of TC-2696
Completed Phase I Clinical Trial. In 2004, we completed a placebo controlled Phase I single rising dose clinical trial of TC-2696 conducted to determine its safety and tolerability profile in healthy volunteers. The trial was conducted in France with 44 healthy volunteers divided into dose groups of 2mg, 5mg, 10mg, 20mg, 50mg, 100mg, 150mg and 200mg. In the trial, TC-2696 was well tolerated at doses of up to 150mg. At 150mg, we observed mild to moderate dizziness and lightheadedness. At 200mg, we observed nausea, vomiting and elevated blood pressure and heart rate.
We included a surrogate measure in our Phase I clinical trial of TC-2696 to provide an indication of the potential efficacy of this product candidate as a treatment for pain. The surrogate measure involved the use of a metal probe, which emitted increasing amounts of heat. We used the surrogate measure to assess pain threshold, which was indicated by the temperature of the metal probe at which subjects first reported feeling pain, and pain tolerance, which was indicated by subjects reporting the temperatures of the metal probe as bearable or not bearable. We also assessed pain relief, which was indicated by subjects making subjective estimations of the degree of pain on the day of assessment as compared to the first day of the trial. Using this surrogate measure, we observed a drug effect on at least one of the assessments at one or more time intervals in each of the 5mg, 10mg, 50mg and 150mg dose groups.
Ongoing Phase I Clinical Trial. We are currently conducting a Phase I multiple rising dose clinical trial to further assess the safety and tolerability profile of TC-2696. The trial design provides for 24 healthy volunteers to be randomized into three dose groups, 25mg, 50mg and 100mg. In each dose group, six subjects receive TC-2696 and two subjects receive placebo twice per day for ten days. We have completed the dosing phase of the trial for both the 25mg and 50mg dose groups. TC-2696 was generally well tolerated in both of these dose groups. All of the volunteers in the 25mg dose group and all but two of the volunteers in the 50mg dose group completed the trial. Of the two volunteers in the 50mg dose group who did not complete the trial, one discontinued participation due to elevated heart rate and dizziness and the other discontinued participation due to anguish and malaise. Because we replaced one of these two discontinued volunteers, seven total subjects in the 50mg dose group completed the trial. In the 100mg dose group, we suspended further dosing after two of three volunteers discontinued participation in the trial due to dizziness, nausea and, in one case, vomiting. Both of these volunteers had received a single dose of TC-2696 prior to discontinuing participation in the trial. We did not see comparable effects at 100mg in our completed single rising dose trial of TC-2696. Based on in vitro metabolism studies of TC-2696 that we subsequently conducted, we currently believe that the different effects of 100mg in our single rising dose trial and our multiple rising dose trial may be due to the primary metabolic pathway of TC-2696 and genetic differences with respect to that pathway. We are currently exploring potential causes of the different effects and plan to evaluate whether to continue dosing at 100mg following the completion of our analysis. If we complete the 100mg dose group of the trial, we plan to consider expanding the trial to include a 150mg dose group. We expect that, if we complete the 100mg dose group or add a 150mg dose group for this trial, we will include only subjects who are efficient metabolizers through the primary metabolic pathway of TC-2696.
In addition to assessing safety and tolerability, we are also using the same surrogate measure that we used in our completed Phase I single rising dose trial of TC-2696 in this Phase I multiple rising dose trial to provide an indication of the potential efficacy of this product candidate as a treatment for pain. We have received results on the surrogate measure from the 25mg and 50mg dose groups. In both dose groups, we observed a strong trend in favor of
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TC-2696, but not statistical significance, in pain relief on all days assessed. Subjects dosed with TC-2696 consistently reported a greater reduction in the degree of pain felt on the day of assessment versus the first day of the trial, as compared to subjects dosed with placebo. We did not observe a drug effect in our assessments of pain threshold and pain tolerance.
We expect the full results of this trial to be available in the third quarter of 2006. If the results are favorable, we plan to initiate a Phase II clinical trial of TC-2696 in molar extraction patients in the fourth quarter of 2006.
Discontinued Clinical Development
In December 2004, we discontinued clinical development of two compounds that were not designed using our Pentad drug discovery technology. We elected to discontinue development of our compound TC-5231, which we had been developing as a treatment for attention deficit hyperactivity disorder, after we determined that, while well tolerated in the trial population of children and adolescents between the ages of 6 and 17, it failed to meet defined efficacy endpoints in a Phase II clinical trial. TC-5231 is a low-dose reformulation of mecamylamine hydrochloride, the active ingredient in our product Inversine.
We and Dr. Falk Pharma elected to discontinue development of our compound TC-2403, which we had been developing in collaboration with Dr. Falk Pharma in an enema formulation as a treatment for ulcerative colitis, after we determined that it failed to meet defined efficacy endpoints in a Phase II clinical trial. Pursuant to the terms of a collaboration agreement that we entered into with Dr. Falk Pharma, we shared the development costs of TC-2403 evenly with Dr. Falk Pharma.
Our Preclinical Research Programs
We focus our preclinical research efforts in areas in which we believe NNRs can be exploited for medical benefit and on indications for which we believe we can efficiently develop marketable product candidates. In selecting our target indications, we have considered a number of factors, including:
| • | the availability of preclinical or clinical data that suggest the relevance of NNRs to the indication; |
| • | the size of the potential market opportunity for the indication; |
| • | the projected development time required for a product candidate for the indication to reach the market; |
| • | input received from scientific and medical experts in the indication at meetings that we convene; and |
| • | the existence of well-defined clinical endpoints to assess the efficacy of a product candidate in the treatment of the indication. |
Based on our consideration of these factors, we currently have a preclinical research collaboration under our agreement with AstraZeneca to discover and develop additional compounds that act on the a4ß2 NNR. We also have a preclinical research program focused on identifying and developing compounds that selectively target the a7 NNR and other preclinical research programs in smoking cessation and obesity, in addition to our preclinical product candidates for depression. Our current research objective is to file at least one IND or foreign equivalent each year beginning in 2006.
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a7
A number of published studies have indicated an association between the a7 NNR and schizophrenia. Schizophrenia is a chronic, severe and disabling form of psychosis. In a 2004 survey of 46 cognitive neuroscientists and neuropharmacologists conducted in connection with the MATRICS initiative, a7 was selected more often than any other target as the target of most interest in the development of treatments for cognitive deficits in schizophrenia. Other published studies have suggested an association between the a7 NNR and cognitive function. Accordingly, we believe that the compounds that act selectively on the a7 NNR, or that act selectively on both the a7 and a4ß2 NNRs, may be useful in treating either or both of schizophrenia and cognitive impairment. We also believe that compounds that act on the a7 NNR may be exploited to treat inflammation.
We have selected a lead compound that we refer to as TC-5619 that acts selectively on the a7 NNR. We are currently conducting additional preclinical studies necessary to support the planned filing in 2007 of an IND for clinical trials of TC-5619. If we seek to exploit TC-5619 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia, other conditions marked by cognitive impairment or schizophrenia, we have the right prior to filing an IND to offer to AstraZeneca the right to develop and commercialize TC-5619 under the terms of the agreement. If we do not offer TC-5619 to AstraZeneca, we are generally not permitted to develop or commercialize TC-5619 for any of these indications. However, we would be permitted to pursue the development and commercialization of TC-5619 for other indications.
Smoking Cessation
Due primarily to nicotine’s addictive effects, it is very difficult to quit smoking. Published animal studies have linked nicotine’s addictive effects to the release of dopamine in regions in the brain involved in feelings of reward and pleasure. Although the specific NNR implicated in the regulation of dopamine is not fully characterized, several reported studies suggest that the a6, a4 and ß4 NNRs may be involved. These studies have shown that selectively blocking a6, a4 or ß4 reduced the rewarding effects of nicotine in mice. Other studies have shown that mice deficient in the ß2 NNR failed to respond to nicotine and had reduced activity in the brain regions associated with reward and pleasure. We are evaluating a number of compounds, including TC-2216, in a variety of animal models of smoking cessation and nicotine dependence for advancement in our smoking cessation program.
Obesity
A number of published studies have demonstrated that non-smokers generally weigh significantly more than smokers, and nicotine is believed to be responsible. These studies have also shown that smokers gain weight when they stop smoking. Moreover, reported studies with animals have shown that food intake and body weight gain are reduced following repeated administration of nicotine and that the effects are reversed when the nicotine administration is stopped.
As part of our evaluation of our compounds for other indications, we also assess each compound for a preliminary signal of its ability to induce weight loss. We are collecting this data and plan to conduct additional preclinical evaluation of the most promising compounds for obesity.
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Our Drug Discovery Technologies—Pentad
We use proprietary databases and computer-based molecular design technologies to identify promising product candidates. We refer to these technologies collectively as Pentad.
We designed Pentad to predict the likelihood that novel compounds will interact with various NNRs, the degree of the interaction and the potential of these compounds to be developed as drugs based on projected pharmacokinetic profiles. Pentad consists of sophisticated computer- based simulation methodologies and extensive biological data from a library of diverse compounds that we have developed and gathered over more than 20 years. To date, we have applied Pentad specifically in the discovery and optimization of NNR-targeted therapeutics, but we believe it has application to a wide range of targets.
Pentad’s virtual screening enables us to more rapidly identify clinically-viable compounds than we believe could be achieved using traditional laboratory synthesis and screening methods. This allows us to reduce drug development time by focusing our resources on compounds that we believe have a greater likelihood of clinical success. We used Pentad to design or optimize TC-1734, TC-2696, TC-2216 and TC-5619.
Our use of Pentad to design new classes of compounds selective for the a7 NNR is an example of its capabilities. We conducted virtual screening of nearly 11,000 compounds and, based on the results, synthesized 115 of them. In preclinical tests, 43 of the synthesized compounds were highly selective to the a7 NNR, showed a low degree of binding to NNRs involved in side effects, were bioavailable and passed the blood-brain barrier. We identified the 43 compounds in only six months and are currently evaluating many of these compounds, including TC-5619.
Strategic Collaborations
AstraZeneca AB
In December 2005, we entered into a collaborative research and license agreement with AstraZeneca AB under which we granted AstraZeneca exclusive development and worldwide commercialization rights to TC-1734 as a treatment for specified indications. The agreement became effective in January 2006. Under the agreement, AstraZeneca has agreed to pursue development and commercialization of TC-1734 as a treatment for Alzheimer’s disease and cognitive deficits in schizophrenia. AstraZeneca has also agreed to pursue development and commercialization of TC-1734 as a treatment for ADHD if TC-1734 achieves the primary efficacy endpoints in a Phase II clinical trial for Alzheimer’s disease or cognitive deficits in schizophrenia or a Phase III clinical trial of TC-1734 is otherwise initiated for Alzheimer’s disease or cognitive deficits in schizophrenia. In addition, AstraZeneca can develop and commercialize TC-1734 for AAMI, MCI, any other indication that is deemed a cognitive disorder under the agreement and schizophrenia. We and AstraZeneca have also initiated a preclinical research collaboration under the agreement.
Payment Terms. AstraZeneca paid us an initial fee of $10 million in February 2006. AstraZeneca has agreed to make an additional payment of $20 million to us if it decides to conduct a Phase II clinical trial of TC-1734 following the completion of additional safety and product characterization studies that AstraZeneca will conduct at its expense to generate further data with respect to TC-1734. These studies are described in greater detail under “—Cognitive Impairment—Clinical Development of TC-1734—Other TC-1734 Development Studies.” We are
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eligible to receive other payments of up to $249 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734 for Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, and stepped double-digit royalties on future TC-1734 product sales. If TC-1734 is developed under the agreement for an indication in addition to Alzheimer’s disease, cognitive deficits in schizophrenia and ADHD, we would also be eligible to receive payments of up to $52 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for TC-1734, for each such indication. Under the terms of a sponsored research agreement and subsequent license agreement, we are required to pay the University of Kentucky Research Foundation a low single digit percentage of any of these payments, including royalties, that we receive from AstraZeneca relating to TC-1734.
AstraZeneca’s obligation to pay royalties to us for each compound subject to the collaboration expires on a country-by-country basis on the later of expiration of our patent rights that provide exclusivity for that compound in that country or twelve years after the first commercial sale in that country of either that compound or any related compound that meets specified criteria. If AstraZeneca obtains a patent covering the composition of a compound that is derived within a specified period from a compound that is subject to the collaboration, the term of AstraZeneca’s patent would also be taken into account in determining the term of AstraZeneca’s obligation to pay royalties to us for that derived compound. The U.S. patent rights to TC-1734 expire between 2016 and 2018. We also have a pending U.S. patent application that, if issued, would expire in 2025. The corresponding foreign patent rights expire between 2017 and 2019. We also have foreign patent applications that, if issued, would expire between 2017 and 2025. Royalty rates are subject to reduction under the agreement in specified circumstances, including in any country if the licensed compound is no longer subject to adequate patent protection in that country or if AstraZeneca licenses patent rights from any third party under circumstances in which the product that we license to AstraZeneca might infringe the third party’s patent rights.
Research Collaboration. The agreement provides for a research collaboration under which we and AstraZeneca will conduct research designed to discover and develop additional compounds that, like TC-1734, act on the a4ß2 NNR. AstraZeneca has the right to exclusively license a specified number of these compounds, together with metabolites of these compounds and derivatives and other compounds related to these compounds that meet specified criteria for the same indications for which AstraZeneca has development and commercialization rights for TC-1734. Under the agreement, we are eligible to receive additional payments of up to $145 million, contingent upon the achievement of development, regulatory and first commercial sale milestones for each compound discovered and developed as part of the research collaboration, and stepped royalties on future product sales. The initial term of the research collaboration is four years and can be extended by mutual agreement. AstraZeneca can terminate the research collaboration upon at least six months notice effective three years after the research term begins.
Research Fees. While AstraZeneca is conducting the additional safety and product characterization studies on TC-1734, AstraZeneca has agreed to pay us research fees equal to 50% of our research expenses in the collaboration, subject to a specified limit. If our agreement with AstraZeneca continues in effect following the completion of the safety and product characterization studies, AstraZeneca has agreed to pay us additional research fees equal to the remaining 50% of our research expenses incurred while those studies were conducted and thereafter additional research fees equal to 100% of our research expenses in the collaboration, subject to specified limits. In that event, we would be entitled to receive a minimum of
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$23.7 million in aggregate research fees over the four-year term of the research collaboration. Based on the current budget for the research collaboration, we expect to receive approximately $26.4 million in aggregate research fees under the agreement.
Development and Commercialization Costs. AstraZeneca is responsible for the clinical development and commercialization of TC-1734 and any compounds that arise out of the research collaboration that it elects to advance and has agreed to assume substantially all development costs, except for costs that we incurred in connection with our Phase II clinical trial of TC-1734 in AAMI that we completed in March 2006. We have the option to co-promote TC-1734 and any compounds that are selected for advancement arising out of the research collaboration in the United States to specified classes of specialist physicians. If we exercise our co-promotion option, AstraZeneca is required to provide training to our sales force and compensate us for our detailing efforts following regulatory approval.
Exclusivity Rights and Restrictions. Neither we nor AstraZeneca are permitted outside of the collaboration to develop or commercialize compounds that act on the a4ß2 NNR and meet pre-defined criteria for Alzheimer’s disease, cognitive deficits in schizophrenia, other conditions marked by cognitive impairment, schizophrenia or any indication for which AstraZeneca has development and commercialization rights under the agreement. This restriction on AstraZeneca lapses 30 months after the end of the research term. This restriction on us will lapse if AstraZeneca commences clinical development outside of the collaboration for a compound that acts on the a4ß2 NNR and meets pre-defined criteria.
We are entitled to offer to AstraZeneca the right to develop and commercialize any compound that acts on any NNR other than a4ß2 for any indication for which AstraZeneca has development and commercialization rights under the agreement. If we do not offer this right to AstraZeneca for a compound that acts on any NNR other than the a4ß2 NNR, we are generally not permitted to develop or commercialize the compound for any indication for which AstraZeneca has development and commercialization rights under the agreement. If we offer a compound to AstraZeneca, AstraZeneca could license the compound from us, together with metabolites of the compound and derivatives and other compounds related to the compound that meet specified criteria, under terms specified in the agreement. Alternatively, AstraZeneca could negotiate a development plan with us pursuant to which we would conduct development intended to provide a pre-defined indication of efficacy. AstraZeneca could license the compound from us after we complete the additional development. For each compound licensed by AstraZeneca through this process, we are eligible to receive payments of up to $266 million, contingent upon the achievement of development, regulatory and first commercial sale milestones, as well as stepped royalties on future product sales. If AstraZeneca elects not to license the compound, we are permitted to develop and commercialize the compound for any indication, except that, if we had offered the compound to AstraZeneca for schizophrenia, we will not be able to develop or commercialize the compound for any cognitive disorder. The agreement limits the number of compounds that we are permitted to offer to AstraZeneca through this process. We are generally not permitted to develop or commercialize compounds that act on any NNR for any indication for which AstraZeneca has development and commercialization rights under the agreement except through this process.
We are also entitled to offer to AstraZeneca the right to develop and commercialize (1) any compound for which AstraZeneca has development and commercialization rights for specified indications under the agreement or (2) any other compound that meets pre-defined criteria for cognitive activity, is in the same chemical family and acts on the same NNR or NNRs as any compound for which AstraZeneca has development and commercialization rights for specified
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indications under the agreement for any indication for which AstraZeneca does not have development and commercialization rights under the agreement. If we do not offer this right to AstraZeneca, we are not permitted to develop or commercialize the compound.
If AstraZeneca commences clinical development outside of the collaboration of a compound that acts on any NNR other than the a7 NNR and meets other pre-defined criteria, the restriction on our right to develop and commercialize compounds that act on any NNR, other than the a4ß2 NNR, for any indication for which AstraZeneca has development and commercialization rights under the agreement will lapse.
If, in the future, we seek a strategic collaborator to develop or commercialize compounds for depression, anxiety or bipolar disorder, AstraZeneca has a right of first negotiation with us. If we and AstraZeneca do not agree on terms on which we would collaborate for these indications, for the following three years we would only be permitted to enter into a collaboration for those indications on more favorable terms than the terms offered by AstraZeneca.
Termination. AstraZeneca can terminate the agreement if it determines in its sole discretion on or before April 20, 2007 not to proceed with the further development of TC-1734 based on the results of the additional safety and product characterization studies that it conducts and all other factors relevant to TC-1734. In that event, we will be required to reimburse AstraZeneca for the amount of all research fees that it paid to us under the a4ß2 research collaboration while it conducted those studies. We would also be required to pay AstraZeneca an additional $5 million as compensation for assigning to us the data and any intellectual property generated in the studies, but we would not be required to refund the $10 million initial fee that AstraZeneca has paid us. AstraZeneca can also terminate the agreement without cause upon 90 days notice given any time after the earlier of the end of the research term and four years after the research term begins. We can terminate the agreement within 30 days after the end of the period in which AstraZeneca can terminate the agreement based on its determination not to proceed with the further development of TC-1734 if AstraZeneca has not notified us that it has decided to conduct a Phase II clinical trial of TC-1734. Either we or AstraZeneca can terminate the agreement in the event of the bankruptcy or uncured material breach of the other party. However, if a breach by AstraZeneca is limited to any specific compound or specified key market, we can terminate the agreement only with respect to that compound or key market. If a competitor of AstraZeneca acquires control of us, AstraZeneca can terminate the agreement or specified provisions of the agreement, including our right to participate on the committee overseeing development under the agreement and our co-promotion rights.
Aventis Pharma SA
In January 2002, we entered into a collaborative research, development and commercialization agreement with Aventis relating to the development and commercialization of Aventis compounds for Alzheimer’s disease and other CNS disorders. The research term of the agreement expired in December 2004. No Aventis compounds were advanced into clinical development during the research term or within six months after expiration of the research term. As a result, we are not eligible to receive any further payments under the agreement.
There are two series of compounds that Aventis initially selected for advancement under the agreement, but ultimately elected not to develop under the agreement. Under the terms of the agreement, these Aventis compounds are available to us for in-licensing for use in
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indications other than the treatment or prevention of CNS disorders or for use in specified CNS indications if Aventis is not developing its own product for those indications, subject to our making milestone and royalty payments to Aventis. Our right to in-license these compounds expires on June 30, 2007. We do not currently expect to exercise our in-licensing rights.
In addition, in January 2002, we had also entered into an amended and restated collaborative research and license agreement with Aventis for the development and commercialization of specified Targacept compounds, including TC-1734, for the treatment or prevention of Alzheimer’s disease. This agreement terminated effective January 2, 2005. While the agreement was in effect, both we and Aventis were restricted from developing or commercializing compounds with specified activity at the a4ß2 or a7 NNRs for Alzheimer’s disease, except under either the agreement or our other collaboration agreement with Aventis described above.
The Stanley Medical Research Institute
On December 15, 2004, we entered into a development agreement for one of our compounds with The Stanley Medical Research Institute, or SMRI, a nonprofit organization that supports research and development of treatments for schizophrenia. We and The Stanley Medical Research Institute terminated the development agreement in December 2005 in anticipation of our collaboration agreement with AstraZeneca.
Patents and Proprietary Rights
We actively seek to protect the proprietary technology that we consider important to our business, including chemical species, compositions and forms, their methods of use and processes for their manufacture, as well as modified forms of naturally-expressed receptors, in the United States and other key pharmaceutical markets. We also rely upon trade secrets and contracts to protect our proprietary information.
As of February 28, 2006, our patent estate includes 58 patents issued in the United States and 19 patent applications pending in the United States, including five U.S. patent applications that have been allowed but have not yet issued, and numerous issued patents and pending patent applications in countries other than the United States. Our issued patents and pending patent applications in the United States include composition of matter coverage on a number of different structural families of compounds. The actual protection afforded by a patent varies from country to country and depends upon many factors, including the type of patent, the scope of its coverage and the availability of legal remedies in a particular country.
Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. In the United States, The United States Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, permits a patent extension term of up to five years as compensation for patent term lost during the FDA regulatory review process. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension, and the extension must be applied for prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves applications for patent term extension. We expect to consider applying for patent
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term extensions for some of our current patents, to add patent life beyond the expiration date, depending on the expected length of clinical trials and other factors involved in the filing of a new drug application.
We consider the following United States patents that we own or license to be most important to the protection of our most advanced product candidates.
| Area of Therapeutic Focus |
Product Candidate |
Patent Scope |
Patent Expiration | |||
| Cognitive Impairment | TC-1734 | Composition of matter for TC-1734 | June 2018 | |||
| Composition of matter for a family of compounds that includes TC-1734 | April 2016 | |||||
| Methods of use of a family of compounds that includes TC-1734 for treatment and prevention of CNS disorders | February 2017 | |||||
| Depression/Anxiety | Mecamylamine hydrochloride |
Methods of use of mecamylamine for nicotine-responsive psychiatric disorders, including depression | September 2017 | |||
| TC-5214 | Methods of use of S-mecamylamine for neuropsychiatric disorders, including depression | December 2019 | ||||
| TC-2216 | Composition of matter for a family of compounds that includes TC-2216 | June 2023 | ||||
| Pain | TC-2696 | Composition of matter for TC-2696 (allowed) | June 2018 | |||
| Composition of matter for a family of compounds that includes TC-2696 | April 2016 | |||||
| Method of use of a family of compounds that includes TC-2696 for eliciting an analgesic effect | August 2017 |
We also have an issued patent in the United States covering composition of matter for a family of compounds that includes TC-5619, our preclinical product candidate that acts selectively on the a7 NNR. This patent expires in August 2019.
In addition to these patents and patent applications, we have later-expiring patents relating to some of these product candidates that cover a particular form or composition, use as part of combination therapy or method of preparation or use. These patents could provide additional or a longer period of protection. We also have patent applications pending that seek equivalent or substantially comparable protection for our product candidates in key international markets.
License Agreements
We are parties to four license agreements that are important to our business.
University of South Florida Research Foundation
Pursuant to a license agreement with the University of South Florida Research Foundation, or USFRF, we hold an exclusive worldwide license to patents and patent applications owned by USFRF for use in the development and commercialization of mecamylamine hydrochloride and other specified compounds. The licensed patents and patent applications include an issued patent covering methods of use for the treatment of depression, ADHD, Tourette’s syndrome and nicotine-responsive neuropsychiatric disorders and pending patent applications covering the pharmaceutical composition of the molecular components of mecamylamine hydrochloride. Under the agreement, we are obligated to pay to USFRF:
| • | an annual license fee until a new drug application or its equivalent is filed to cover the use of a product subject to the license to treat a neuropsychiatric disorder; |
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| • | an annual fee to maintain our rights of first refusal to acquire rights to the licensed patents and patent applications beyond the scope of our current license; |
| • | royalties on net sales of products subject to the license or a percentage of royalties received from a sublicensee; |
| • | aggregate payments of up to $200,000 based on the achievement of specified regulatory milestones; and |
| • | a percentage of other amounts that we receive from a sublicensee. |
The aggregate annual license fees are creditable, up to a specified amount per year, against future royalties.
We are required to use commercially reasonable efforts to develop or to market and sell a product covered by the agreement. In particular, we are required to spend a specified minimum amount on research and development of products covered by the agreement each year until we receive marketing approval for a covered product. If USFRF believes that we are not meeting our diligence obligation, it is entitled to terminate the agreement following a cure period. If we do not agree with USFRF’s determination, we can submit the matter to binding arbitration. In addition, if we have not received marketing approval of a product covered by the agreement on or before December 31, 2012, USFRF can make our license nonexclusive.
We may terminate the agreement at any time. If not earlier terminated, the agreement will terminate upon expiration of the last to expire of the licensed patent rights.
Virginia Commonwealth University Intellectual Property Foundation
Pursuant to a license agreement with Virginia Commonwealth University Intellectual Property Foundation, or VCUIPF, we hold a non-exclusive worldwide license to patents covering a method of use of a family of compounds that includes TC-2696 for eliciting an analgesic effect. Under the agreement, we are obligated to pay to VCUIPF:
| • | an annual license fee and an additional annual fee to maintain the right at any time to convert the license into an exclusive license for an additional fee; |
| • | royalties on net sales of products subject to the license or a percentage of amounts received from a sublicensee; and |
| • | aggregate payments of up to $900,000 based on the achievement of specified development and regulatory milestones. |
We are required to use reasonable efforts to bring one or more products covered by the agreement to market. We may terminate the agreement at any time with 90 days notice. If the agreement is not earlier terminated, our obligation to pay royalties under the agreement will terminate upon expiration of the licensed patent rights.
Wake Forest University Health Sciences
Pursuant to a license agreement with Wake Forest University Health Sciences, or WFUHS, we hold an exclusive worldwide license to patents covering a method of use of a family of compounds that includes TC- 2696 for the treatment of chronic or female-specific pain. Under the agreement, we paid WFUHS a non-refundable upfront license fee of $25,000 and are obligated to pay to WFUHS:
| • | royalties on net sales of products subject to the license or, if less, a percentage of amounts received from a sublicensee; |
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| • | aggregate payments of up to $878,000 per product subject to the license based on the achievement of specified development and regulatory milestones; and |
| • | a percentage of other amounts that we receive from a sublicensee. |
| • | a percentage of other amounts that we receive from a sublicensee. |
We are required to use commercially reasonable efforts to pursue the development of at least one product covered by the agreement and to bring at least one such product to market. We may terminate the agreement at any time with 60 days notice. If not earlier terminated, the agreement will terminate upon expiration of the last to expire of the licensed patent rights.
University of Kentucky Research Foundation
Pursuant to a sponsored research agreement, the University of Kentucky Research Foundation, or UKRF, agreed to assign to R.J. Reynolds Tobacco Company UKRF’s rights to inventions that resulted in patents related to TC-1734, TC-2696 and other earlier-stage compounds in our portfolio. These patents were subsequently assigned by RJR to us in August 2000. Under the sponsored research agreement and a subsequent license agreement with UKRF, we are obligated to pay royalties to UKRF based on amounts received from any licensee of these patents, including AstraZeneca. In addition, under the license agreement, RJR paid UKRF an upfront license fee of $20,000.
Trade Secrets
In addition to patents, we rely upon unpatented trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. For example, we maintain Pentad as an unpatented trade secret. We seek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners, collaborators, employees and consultants and invention assignment agreements with our employees. We also have confidentiality agreements or invention assignment agreements with some of our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Sales and Marketing
We currently have limited sales and distribution capabilities and limited experience in marketing and selling pharmaceutical products. Our current strategy is to selectively enter into collaboration agreements with third parties for target indications in which our potential collaborator has particular expertise or that involve a large, primary care market that must be served by large sales and marketing organizations. In entering into these collaboration agreements, our goal will be to maintain co-promotion or co-commercialization rights in the United States and, in some cases, other markets. In order to implement our strategy successfully, we must develop a specialized sales and marketing organization with sufficient technical expertise. Our product currently available in the market, Inversine, is distributed by Cord Logistics, Inc., a Cardinal Health company, pursuant to an exclusive distribution
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agreement. Our agreement with Cord Logistics is terminable by either party at the end of each contract year upon 90 days prior notice or at any time upon 180 days notice. We paid Cord Logistics approximately $150,000 in each of 2004 and 2005.
Manufacturing
All of our product candidates are compounds of low molecular weight, commonly referred to as small molecules. We have selected these compounds in part for their ease of synthesis and the low cost of their starting materials. All of our current product candidates are manufactured in a simple synthetic process from readily available starting materials. We expect to continue to develop drug candidates that can be produced cost-effectively by third-party contract manufacturers.
We are able to manufacture the quantities of our product candidates necessary for relatively short preclinical toxicology studies ourselves. We believe that this allows us to accelerate the drug development process by not having to rely on a third party for all of our manufacturing needs. However, we do rely and expect to continue to rely on a number of contract manufacturers to produce enough of our product candidates for use in more lengthy preclinical research. We also depend on these contract manufacturers to manufacture our product candidates in accordance with current good manufacturing practices, or cGMP, for use in clinical trials. We will ultimately depend on contract manufacturers for the manufacture of our products for commercial sale, as well as for process development. Contract manufacturers are subject to extensive governmental regulation.
Third parties currently manufacture Inversine and its active ingredient for us. Also, we have entered into a development and production agreement with Siegfried Ltd. Under this agreement, Siegfried has agreed to provide us with process development services and clinical trial material at specified rates for product candidates that we elect to introduce into the agreement. We have also agreed, following marketing approval or anticipated marketing approval of any product candidate for which Siegfried performs services under the agreement, to negotiate for a separate multi-year commercial supply agreement with Siegfried for a substantial percentage of our contracted supply needs for that product candidate, except in limited circumstances. Either we or Siegfried can terminate the agreement at any time on 12 months notice or immediately in the event of an uncured material breach by the other party.
Competition
Our industry is subject to rapid and intense technological change. We face, and will continue to face, worldwide competition from biotechnology, biopharmaceutical and pharmaceutical companies, research institutions, government agencies and academic institutions. Many of these competitors are established in the CNS field and are developing and commercializing pharmaceutical products that would compete with our product candidates that are approved for marketing. Many of our competitors and potential competitors have more resources than we do and have already successfully developed and marketed drugs. Mergers and acquisitions in the pharmaceutical industry may result in even greater resources being concentrated in our competitors.
We also face substantial competition from therapies designed to target NNRs. We are aware of several prominent pharmaceutical companies with product candidates designed to target NNRs in development, including Pfizer, with an NNR-targeted compound for which it has filed an NDA for smoking cessation, Sanofi-Aventis, with an NNR-targeted compound that has completed a Phase II clinical trial for smoking cessation, and Abbott Laboratories, with an
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NNR-targeted compound in Phase II for Alzheimer’s disease, ADHD and schizophrenia and a second NNR-targeted compound in Phase I for pain. In addition, we believe that other companies have active NNR-based research programs, including, Merck & Co., AstraZeneca, Eli Lilly, Memory Pharmaceuticals, Critical Therapeutics and NeuroSearch A/S. We expect to face increased competition in the future if NNR-targeted therapeutics are further validated and if companies initiate or grow NNR-based programs or otherwise enter the CNS market.
In addition, there are several pharmaceutical companies in the United States and globally that currently market and sell drugs for indications that we are targeting. There is currently no approved product either for cognitive deficits in schizophrenia or AAMI. We believe that the primary competitive products for use in indications that we are currently targeting include:
| • | for mild to moderate Alzheimer’s disease, acetylcholinesterase inhibitors such as Aricept from Pfizer/Eisai, Reminyl from Johnson & Johnson and Exelon from Novartis and for moderate to severe Alzheimer’s disease, Namenda from Forest Laboratories, which acts by regulating the neurotransmitter glutamate; |
| • | for pain, non-steroidal anti-inflammatory drugs such as Celebrex from Pfizer and opioids such as OxyContin from Purdue Pharma; |
| • | for depression, selective serotonin reuptake inhibitors such as Prozac from Eli Lilly, Paxil/Seroxar from GlaxoSmithKline, Zoloft from Pfizer, Celexa from Forest Laboratories and Lexapro from Forest Laboratories and the dual uptake inhibitor Effexor from Wyeth; |
| • | for schizophrenia, anti-psychotics such as Seroquel from AstraZeneca, Zyprexa from Eli Lilly, Risperdal from Johnson & Johnson, Geodon from Pfizer and Abilify from Bristol-Myers Squibb; and |
| • | for smoking cessation, Zyban from GlaxoSmithKline. |
Many of these products have well-known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved widespread acceptance among physicians and patients. Furthermore, pharmaceutical and biotechnology companies are currently developing additional treatments for the indications that we are targeting that may be approved for marketing and sale prior to any approval of our product candidates.
We expect to compete based upon, among other things, the efficacy of our products and favorable side effect profiles. Our ability to compete successfully will depend on our continued ability to attract and retain skilled and experienced scientific, clinical development and executive personnel, to identify and develop viable product candidates and to exploit these products and compounds commercially before others are able to develop competitive products. In addition, our ability to compete may be affected by insurers and other third-party payors encouraging the use of generic products. This may have the effect of making branded products less attractive from a cost perspective to buyers.
Government Regulation
Drug Regulation in the United States
The research, preclinical and clinical testing, manufacture and marketing of drug products are extensively regulated by the FDA and other governmental authorities in the United States. The Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations regulate the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of drug products.
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The steps ordinarily required before a new drug may be marketed in the United States include:
| • | preclinical laboratory tests, preclinical studies in animals and formulation studies; |
| • | the submission of an IND to the FDA, or comparable documents to regulatory bodies in foreign countries in which clinical trials are to be held, which must become effective before clinical trials may begin; |
| • | adequate and well-controlled clinical trials to establish the safety and efficacy in humans of the drug for each indication; |
| • | the submission of a new drug application, or NDA, to the FDA using the Common Technical Document, a format for non-clinical, clinical and quality data acceptable to regulatory authorities in the United States, European Union and Japan; and |
| • | FDA review and approval of the NDA before any commercial sale or shipment of the drug. |
Preclinical tests typically include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to evaluate toxicity and metabolism. Preclinical tests are regulated by the FDA under its good laboratory practice regulations. The results of preclinical tests are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of an IND before clinical testing in humans may begin. If the FDA has not advised otherwise within this 30-day period, the proposed trial may begin. If the FDA has comments or questions, they must be resolved to the satisfaction of the FDA before the trial can begin. In addition, the FDA may halt proposed or ongoing clinical trials at any time, in which event the trial cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. The IND application process may be extremely costly and substantially delay development of product candidates. Moreover, positive results in preclinical tests do not ensure positive results in clinical trials.
Clinical trials involve the administration of the drug to healthy volunteers or patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in compliance with federal regulations and requirements and under established protocols. These protocols detail the objectives of the clinical trial, the parameters to be used in monitoring safety, the efficacy criteria to be evaluated and the analyses to be relied on. The study protocol and informed consent information for patients in clinical trials must also be approved by an institutional review board at each institution where the clinical trials are conducted.
Clinical evaluation involves a time-consuming and costly process, ordinarily involving the following three phases:
| • | Phase I clinical trials are typically conducted with a small number of healthy human volunteers as subjects to determine an early safety and tolerability profile, including side effects associated with increasing doses, a maximum tolerated dose and pharmacokinetics. |
| • | Phase II clinical trials are typically well-controlled and conducted with groups of patients afflicted with the disease or condition for which the investigational drug is being tested in order to determine, among other things, potential efficacy preliminarily, and an expanded safety profile that identifies short term side effects and risks. |
| • | Phase III clinical trials are typically large-scale, geographically diverse, adequate and well-controlled and conducted with patients afflicted with a target disease or condition after obtaining preliminary evidence suggesting effectiveness. Phase III clinical trials are intended to collect additional data on effectiveness and safety necessary to evaluate the overall risk-benefit profile of the drug and provide an adequate basis for labeling. |
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The FDA, the study sponsor and the institutional review boards reviewing each clinical trial site closely monitor the progress of each of the three phases of clinical trials that are conducted in the United States. They may change or terminate the testing based upon the data accumulated to that point and their assessment of the relative risks and benefits to the patient.
Upon successful completion of Phase III trials, a company may submit an NDA including the results of preclinical studies and clinical trials and data relating to the product candidate’s chemistry, pharmacology, manufacture, safety and effectiveness to the FDA in order to obtain approval to market the product in the United States. This submission is expensive, both in terms of studies and analyses required to generate and compile the requisite data and the significant user fees required for NDA submission.
The FDA has 60 days from its receipt of an NDA to determine if it will accept the filing for a substantive review. The FDA may refuse the filing, which would result in the loss of 25% of the application user fee. If the FDA accepts the filing, it begins an in-depth review. Under current performance goals, the FDA has either six or ten months to review and act on the NDA, depending upon whether the review is classified by the FDA as priority or standard. The FDA often extends the review timeline by requesting additional information or clarification. The FDA may refer issues to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by any recommendation of an advisory committee.
If the FDA’s evaluation of the NDA and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in many cases, an approvable letter followed by an approval letter. An approvable letter usually contains a number of conditions that must be met in order to secure final approval. If the FDA decides that the conditions have been met, it will issue an approval letter. An approval letter makes a drug available for physicians to prescribe in the United States, but authorizes commercial marketing of the drug only for specific indications. After a drug has been approved for a particular indication, other trials and studies may be conducted to explore its use for treatment of new indications. The drug may not be labeled or promoted for a new indication without a supplemental NDA approval by the FDA.
The FDA may also refuse to approve an NDA, or may issue a not approvable letter. A not approvable letter outlines the deficiencies in the submission and often requires additional testing or information. Even if the applicant completes the additional testing and submits additional information, the FDA may ultimately decide that the application does not satisfy the regulatory criteria for approval.
Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years. The actual time required may vary substantially based upon the type, complexity and novelty of the product or target disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and require costly procedures. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.
Even if a drug receives regulatory approval, the FDA may require post-marketing studies, sometimes referred to as Phase IV studies, to monitor the effects of approved drugs and may limit further marketing based on the results of these post-marketing studies. Moreover, the FDA may impose restrictions on the drug or withdraw its approval if a company does not stay in compliance with pre- and post-market regulatory standards or if problems relating to safety or
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effectiveness of the drug occur after it reaches the marketplace. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals.
Once an NDA is approved, the product it covers becomes a listed drug that can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that is therapeutically equivalent to a marketed drug. This means, among other things, that it has the same active ingredients in the same strengths and dosage form as the listed drug, is labeled for the same conditions of use and has been demonstrated to be bioequivalent to the listed drug, unless specified differences are approved pursuant to a suitability petition. There is generally no requirement, other than the requirement for evidence of bioequivalence, for an ANDA applicant to conduct or submit results of preclinical tests or clinical trials to establish the safety or efficacy of its drug product. Drugs approved in this way are commonly referred to as generic equivalents to the listed drug, are listed as such by the FDA and can typically be substituted by pharmacists under prescriptions written for the original listed drug.
Federal law provides for a period of three years of exclusivity following approval of a drug that contains previously approved active ingredients but is approved in a new dosage, dosage form or route of administration, or for a new use if new clinical trials were required to support the approval. During this three-year exclusivity period, the FDA cannot grant approval of an ANDA for a generic version of the listed drug. However, the FDA can approve generic equivalents of that listed drug based on other listed drugs with the same active ingredient, such as a generic that is the same in every way but its indication for use, and thus the value of this exclusivity may be limited. Federal law also provides a period of five years of exclusivity following approval of a drug that does not contain any previously approved active ingredients. During the five-year exclusivity period, no ANDA for a generic version of the listed drug can be submitted unless the submission accompanies a challenge to a listed patent, in which case the submission may be made four years following the original product approval.
In addition, applicants submitting an ANDA for a drug that has listed patents are required to make one of four certifications regarding each listed patent, which may include certifying that one or more listed patents are invalid or not infringed. If an applicant certifies invalidity or non-infringement, it is required to provide notice of its filing to the new drug application sponsor and the patent holder. If the patent holder then initiates a suit for patent infringement against the ANDA applicant within 45 days of receipt of the notice, the FDA cannot grant effective approval of the ANDA until either 30 months has passed or there has been a court decision holding that the patents in question are invalid or not infringed. The first of the ANDA applicants submitting substantially complete applications certifying that listed patents for a particular product are invalid or not infringed may qualify for an exclusivity period of 180 days, which runs from the date the generic product is first marketed. Until any effective 180-day exclusivity expires, the FDA cannot grant effective approval of subsequently submitted ANDAs.
The manufacturers of approved drugs and their manufacturing facilities are subject to continuous review and periodic inspections by the FDA and must comply with the FDA’s current good manufacturing process, or cGMP, regulations. A manufacturer will be subject to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or recall of a product, if it does not comply with the FDA’s rules. We intend to contract with third parties to manufacture our products, and our ability to control their compliance with FDA requirements will be limited.
We must also notify the FDA of any change in an approved product beyond variations already allowed in the approval. Changes to the product, its labeling or its manufacturing could
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require prior FDA approval and may require further clinical investigations to support the change. Such approvals may be expensive and time-consuming, and if not approved, the product will not be allowed to be marketed as modified.
The FDA also administers a number of complex regulations and policies regarding advertising, promotion and labeling of marketed pharmaceuticals. These regulations and policies include requirements that affect direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Failure to abide by the FDA’s regulations can result in penalties, including the issuance of a warning letter mandating the correction of deviations from FDA standards or the publication of corrective advertising, as well as civil and criminal investigations and prosecutions.
From time to time, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, the FDA regulations and guidance are often revised or reinterpreted in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of these changes, if any, may be.
Fast Track Designation
Congress enacted the Food and Drug Administration Modernization Act of 1997, or FDAMA, in part, to ensure the timely availability of safe and effective drugs, biologics and medical devices by expediting the FDA review process for some new products. FDAMA establishes a statutory program for the approval of a so-called fast track product, defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for that condition. Under the fast track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast track product at any time during clinical development of the product. Fast track designation provides for an expedited review of a product, which is intended to accelerate FDA approval. Although we have not yet requested fast track designation for any of our product candidates, we may seek fast track designation in the future. We will never be sure that we will obtain fast track designation. We cannot predict the ultimate impact, if any, of the fast track process on the timing or likelihood of FDA approval of any of our potential products.
Drug Regulation Outside the United States
In addition to U.S. regulations, we are subject to a variety of foreign regulations governing clinical trials and potential commercial sales and distribution of our products and product candidates. Even if we obtain FDA approval for a product, we must obtain approval of a product by the regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems, we may submit marketing authorizations either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this latter procedure, the holder of a national marketing authorization may submit an application
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to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
Third-Party Reimbursement
In the United States, European Union and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the patient from third-party payors, such as government health administrative authorities, managed care providers and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services and examining their cost-effectiveness. For example, the European Union generally provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement. It is possible that none of our product candidates that receive marketing approval will be considered cost-effective or that reimbursement to patients will not be sufficient to allow us to maintain price levels that enable us to realize a satisfactory return on our investment in product development.
Price Controls
In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement governmental pricing control on pharmaceutical products. In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union generally provides options for its member states to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. We do not know whether any country that has price controls will allow favorable pricing arrangements for any of our product candidates.
Employees
As of February 28, 2006, we had 75 full-time employees, 34 of whom are Ph.D.s, M.D.s or both, and four part-time employees. Our management believes that relations with our employees are good. None of our employees is represented under a collective bargaining agreement.
Property and Facilities
We lease approximately 40,000 square feet of laboratory and office space located in the Piedmont Triad Research Park in Winston-Salem, North Carolina. We have rights exercisable until March 31, 2006 to lease additional space in this facility. The term of our lease expires August 1, 2007, and we have a renewal option for an additional five-year term. If we elect to renew the lease, we will have rights to lease additional space in this facility during the renewal term. The current monthly payment under our lease is approximately $123,000. We believe that our leased facilities, together with our rights to lease additional space, are adequate to satisfy our current needs.
Legal Proceedings
We are not currently a party to any material legal proceedings.
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Executive Officers and Directors
The name, age and position of our executive officers and directors as of February 28, 2006 are as follows:
| Name |
Age |
Position | ||
| Mark Skaletsky (1) (2) |
57 | Chairman of the Board of Directors | ||
| J. Donald deBethizy, Ph.D. |
55 | Chief Executive Officer, President and Director | ||
| Merouane Bencherif, M.D., Ph.D. |
51 | Vice President, Preclinical Research | ||
| Jeffrey P. Brennan |
48 | Vice President, Business and Commercial Development | ||
| William S. Caldwell, Ph.D. |
52 | Vice President, Drug Discovery and Development | ||
| Geoffrey C. Dunbar, M.D. |
58 | Vice President, Clinical Development and Regulatory Affairs | ||
| Alan A. Musso |
44 | Vice President, Chief Financial Officer, Treasurer and Secretary | ||
| Peter A. Zorn |
35 | Vice President, Legal Affairs, General Counsel and Assistant Secretary | ||
| M. James Barrett, Ph.D. (1) |
63 | Director | ||
| Charles A. Blixt (2) (3) |
54 | Director | ||
| Errol B. De Souza, Ph.D. (2) (3) |
52 | Director | ||
| Ann F. Hanham, Ph.D. |
53 | Director | ||
| Elaine V. Jones, Ph.D. (1) (2) |
51 | Director | ||
| John P. Richard (3) |
48 | Director |
| (1) | Member of the Compensation Committee. |
| (2) | Member of the Governance and Nominating Committee. |
| (3) | Member of the Audit Committee. |
Mark Skaletsky has been a member of our board of directors since February 2001 and has been our Chairman since January 2002. Since March 2001, he has been the chairman and chief executive officer of Trine Pharmaceuticals, Inc., formerly Essential Therapeutics, Inc., a privately held drug discovery and development company. From May 1993 to January 2001, Mr. Skaletsky was the president and chief executive officer of GelTex Pharmaceuticals, Inc., a publicly traded pharmaceutical company. Mr. Skaletsky is a member of the boards of directors of Alkermes, Inc., ImmunoGen, Inc. and Advanced Magnetics, Inc., each of which is a publicly traded company. Essential Therapeutics and its wholly owned subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code in May 2003. The plan of reorganization for Essential Therapeutics became effective in October 2003 by order of the United States Bankruptcy Court for the District of Delaware, and Essential Therapeutics was renamed Trine Pharmaceuticals, Inc. in November 2003.
J. Donald deBethizy, Ph.D. has been our Chief Executive Officer and a member of our board of directors since August 2000. Dr. deBethizy has been our President since March 1997. From March 1985 to March 1997, Dr. deBethizy worked for R.J. Reynolds Tobacco Company in various capacities, most recently as vice president of product evaluation, research and development. Dr. deBethizy has been an adjunct professor in the Department of Physiology and Pharmacology at Wake Forest University School of Medicine since October 1991 and has been an adjunct professor of toxicology in the Integrated Toxicology Program at Duke University since May 1988.
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Merouane Bencherif, M.D., Ph.D. has been our Vice President, Preclinical Research since August 2002. He was our Vice President, Biological Sciences from August 2000 to August 2002 and our Senior Manager and Director of Pharmacology and Clinical Sciences from February 1999 to August 2000. From July 1993 to February 1999, Dr. Bencherif worked for R.J. Reynolds Tobacco Company’s Research and Development (Pharmacology) Department in various capacities as a scientist, most recently as a master scientist from March 1998 to February 1999. Dr. Bencherif was an adjunct assistant professor from March 1996 to March 2002 and, since March 2002, has been an associate professor in the Department of Physiology and Pharmacology at Wake Forest University School of Medicine.
Jeffrey P. Brennan has been our Vice President, Business and Commercial Development since September 2003. From September 2000 to May 2003, Mr. Brennan was vice president, commercial development at Sanofi-Synthélabo Inc., a publicly traded global pharmaceutical company based in Paris, France. From November 1996 to September 2000, Mr. Brennan served as vice president, business development at Sanofi-Synthélabo.
William S. Caldwell, Ph.D. has been our Vice President, Drug Discovery and Development since August 2000. From January 1999 to August 2000, Dr. Caldwell was our Director, Chemistry and Operations.
Geoffrey C. Dunbar, M.D. has been our Vice President, Clinical Development and Regulatory Affairs since June 2001. From January 1997 to June 2001, Dr. Dunbar was vice president, clinical development—neurosciences at Bristol-Myers Squibb Company, a publicly traded global pharmaceutical company.
Alan A. Musso has been our Vice President, Chief Financial Officer, Treasurer and Secretary since February 2002. From February 2001 to February 2002, Mr. Musso was vice president and chief financial officer of Osiris Therapeutics, Inc., a privately held biotechnology company. From April 1997 to February 2001, Mr. Musso was the chief financial officer for Cato Research & Cato Holding Company, a privately held global contract research organization. Mr. Musso also was the chief financial officer of Vascular Genetics, Inc., a privately held gene therapy company, from October 1997 to February 2000. In addition, Mr. Musso was employed by Pfizer Inc., a publicly traded global pharmaceutical company, from April 1989 to December 1994, first as a senior auditor and then as a general accounting manager for one of Pfizer’s manufacturing facilities. Mr. Musso is a certified public accountant and a certified management accountant.
Peter A. Zorn has been our Vice President, Legal Affairs, General Counsel and Assistant Secretary since January 2006. He was our Corporate Counsel and Assistant Secretary from May 2003 to January 2006. From January 1998 to May 2003, Mr. Zorn practiced with the law firm Womble Carlyle Sandridge & Rice, PLLC.
M. James Barrett, Ph.D. has been a member of our board of directors since December 2002. Since September 2001, Dr. Barrett has been a general partner of New Enterprise Associates, a venture capital firm that focuses on the medical and life sciences and information technology industries. From 1997 to 2001, he was chairman and chief executive officer of Sensors for Medicine and Science, Inc., a privately held company that he founded and which develops optical chemical sensing technologies. He continues to serve as its chairman and is a member of the boards of directors of the publicly traded companies MedImmune, Inc., Pharmion Corporation and Inhibitex, Inc.
Charles A. Blixt has been a member of our board of directors since August 2000. Since January 1998, he has been executive vice president and general counsel of R.J. Reynolds
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Tobacco Company. Since June 1999, he has held positions of increasing responsibility with R.J. Reynolds Tobacco Holdings, Inc. and is currently president and a director. R.J. Reynolds Tobacco Holdings, Inc. is the parent company of R.J. Reynolds Tobacco Company. Since August 2004, he has been executive vice president, general counsel and assistant secretary of Reynolds American Inc.
Errol B. De Souza, Ph.D. has been a member of our board of directors since January 2004. Since March 2003, he has been president, chief executive officer and a director of Archemix Corporation, a privately held biotechnology company. From September 2002 to March 2003, he was president, chief executive officer and a director of Synaptic Pharmaceutical Corporation, a publicly traded biopharmaceutical company that was acquired by H. Lundbeck A/S in March 2003. From December 1999 to September 2002, he was senior vice president and site head of U.S. drug innovation & approval (research and development) of Aventis Pharma SA, a pharmaceutical company formed by the merger of Hoechst Marion Roussel and Rhone-Poulenc Rorer Inc. From September 1998 until December 1999, Dr. De Souza was senior vice president and global head, lead generation of Hoechst Marion Roussel. In 1992, Dr. De Souza co-founded Neurocrine Biosciences, Inc., a publicly traded biopharmaceutical company. Dr. De Souza is a member of the boards of directors of IDEXX Laboratories, Inc. and Palatin Technologies, Inc., each of which is a publicly traded company.
Ann F. Hanham, Ph.D. has been a member of our board of directors since September 2005. Ms. Hanham has been with Burrill & Company LLC, a merchant bank, since February 2000. Since January 2004, she has been a managing director, from January 2001 to January 2004, she was a director and from February 2000 to January 2001, she was an associate at Burrill & Company LLC.
Elaine V. Jones, Ph.D. has been a member of our board of directors since August 2000. Since August 2003, she has been a general partner of EuclidSR Associates, L.P., which is the general partner of EuclidSR Partners, L.P., a venture capital fund that focuses on life sciences and information technology companies. Dr. Jones was an investment manager from June 1999 to September 2001, and was a vice president from September 2001 to August 2003, for S.R. One, Limited, a venture capital subsidiary of SmithKline Beecham.
John P. Richard has been a member of our board of directors since November 2002. In June 2005, he became a partner of Georgia Venture Partners, a biotechnology venture capital firm. In addition, since April 1999, he has been an independent biotechnology consultant. He also has been Senior Business Advisor to GPC Biotech AG, a drug discovery and development company based in Munich, Germany and traded on the Frankfurt Stock Exchange, since April 1999. Prior to April 1999, Mr. Richard served as executive vice president, business development of SEQUUS Pharmaceuticals, Inc., a publicly traded biotechnology company that became a wholly owned subsidiary of ALZA Corporation in March 1999. Mr. Richard is a member of the board of directors of Altus Pharmaceuticals Inc., a publicly traded company.
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Board Composition
Our board of directors consists of eight members, each of whom was elected in accordance with the terms of a stockholders agreement that will terminate upon the completion of this offering. With the exception of Dr. deBethizy, all of our directors are “independent directors” within the meaning of NASDAQ regulations. There are no family relationships among any of our directors or executive officers.
Following the completion of this offering, our board of directors will consist of eight members divided into three classes:
| • | Class I, for a term expiring at the first annual meeting of stockholders following the completion of this offering; |
| • | Class II, for a term expiring at the second annual meeting of stockholders following the completion of this offering; and |
| • | Class III, for a term expiring at the third annual meeting of stockholders following the completion of this offering. |
At each annual meeting of stockholders after the initial classification, or at a special meeting in lieu of an annual meeting, a class of directors will be elected to serve for a three-year term to succeed the directors of the same class whose terms are then expiring. Our Class I directors will be Elaine V. Jones and Charles A. Blixt. Our Class II directors will be M. James Barrett, John P. Richard and J. Donald deBethizy. Our Class III directors will be Ann F. Hanham, Errol B. De Souza and Mark Skaletsky.
Board Committees
Audit Committee
The members of our audit committee are Messrs. Blixt, De Souza and Richard. Mr. Blixt chairs the committee. The audit committee assists the board of directors in its oversight of our accounting, financial reporting and internal control functions. Specific responsibilities of our audit committee include:
| • | oversight of the audits of our financial statements and our internal control over financial reporting; |
| • | monitoring the performance of our independent auditors, including determining whether to engage or dismiss the independent auditors and to assess the independent auditors’ qualifications and independence; |
| • | oversight of our compliance with legal and regulatory requirements, including approval of related party transactions and establishment of procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters; and |
| • | preparing the report required to be included in our annual proxy statement in accordance with Securities and Exchange Commission rules and regulations. |
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Compensation Committee
The members of our compensation committee are Mr. Skaletsky and Drs. Barrett and Jones. Mr. Skaletsky chairs the committee. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. Specific responsibilities of our compensation committee include:
| • | establishing and periodically reviewing our compensation philosophy and the adequacy of compensation plans and programs for our executive officers and other employees; |
| • | establishing compensation arrangements and incentive goals for our executive officers and administering compensation plans; |
| • | reviewing the performance of our executive officers and awarding incentive compensation and adjusting compensation arrangements as appropriate based upon performance; and |
| • | preparing the report on executive compensation for inclusion in our annual proxy statement in accordance with Securities and Exchange Commission rules and regulations. |
Governance and Nominating Committee
The members of our governance and nominating committee are Messrs. Skaletsky and Blixt and Drs. De Souza and Jones. Mr. Skaletsky chairs the committee. Specific responsibilities of our governance and nominating committee include:
| • | identifying individuals qualified to serve as directors, recommending to our board of directors nominees for election at our annual meetings of stockholders and recommending to our board of directors individuals to fill vacancies on the board; |
| • | making recommendations to the board of directors concerning the criteria for board membership and the size, composition and compensation of the board of directors and its committees; |
| • | assisting the board of directors in establishing and maintaining effective corporate governance practices and procedures; and |
| • | conducting an annual review of the effectiveness of the board of directors and its committees. |
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or our compensation committee. None of the members of our compensation committee has ever been our employee.
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Director Compensation
In the past, each of our directors who is not our employee, or his or her designee, has received a nonqualified stock option to purchase 3,333 shares of our common stock upon his or her initial election to our board of directors. Additionally, upon each non-employee director’s annual reelection, he or she, or his or her designee, has been granted a nonqualified stock option to purchase 1,000 shares of common stock. However, our chairman received a nonqualified stock option to purchase 4,666 shares upon his or her initial election and a nonqualified stock option to purchase 1,666 shares upon his or her annual reelection. Each of these options:
| • | has a ten-year term; |
| • | has an exercise price of $0.08 per share; and |
| • | vests one year after the date of grant if the director attended at least 75% of the regular board meetings held during that year. |
In lieu of any such nonqualified stock option, each non-employee director could elect to receive a restricted stock award for the same number of shares of stock at a purchase price of $0.08 per share. Each non-employee director who is not affiliated with one of our investors or a group of our investors has received, in addition to the equity compensation described above, cash compensation in the amount of $15,000 per year as an annual retainer, except that the chairman of the board has received an annual cash retainer of $25,000. Each director is reimbursed for expenses incurred in connection with his or her attendance at meetings of the board of directors and its committees. We have not historically paid any additional compensation for service on any committees of the board of directors.
In December 2005, we amended stock options to purchase 6,000 shares of our common stock that had been granted to our directors who are not our employees, or their designees, in order to address taxation issues that arise due to recently enacted Internal Revenue Code Section 409A and related guidance. As amended, the affected stock options are not exercisable after March 15, 2007.
We have adopted a new director compensation program that will become effective concurrently with the completion of this offering. Each non-employee director will receive an annual cash retainer of $20,000 payable in quarterly installments. Each member of a committee of the board will receive an additional annual cash retainer of $2,500, the chairman of our audit committee will receive an additional annual cash retainer of $7,500 and the chairman of each of our compensation and governance and nominating committees will each receive an additional annual cash retainer of $2,500. Each non-employee director also will receive a nonqualified stock option to purchase 25,000 shares of common stock upon initial election as a director and a nonqualified stock option to purchase 7,500 shares of common stock upon annual reelection. The chairman of the board will receive a nonqualified stock option to purchase 10,000 shares of common stock upon initial election as chairman, in addition to the option to purchase 25,000 shares of common stock upon initial election as a director, and a nonqualified stock option to purchase 12,500 shares of common stock upon annual reelection. For more information, please see “Management—Stock Option and Other Compensation Plans—2006 Stock Incentive Plan.”
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Executive Compensation
The following table sets forth information for the periods indicated regarding compensation awarded to, earned by or paid to our chief executive officer and our five other most highly compensated executive officers who were serving as executive officers as of December 31, 2005. We refer to these officers in this prospectus as our named executive officers.
Summary Compensation Table
| Annual Compensation |
Long-Term Compensation |
|||||||||||||||
| Name and Principal Position |
Year |
Salary |
Bonus |
Shares Underlying Options (#) |
All Other Compensation |
|||||||||||
| J. Donald deBethizy, Ph.D. President and Chief Executive Officer |
2005 2004 2003 |
$ |
310,000 283,250 275,000 |
|
$ |
105,400 90,640 66,000 |
174,000 — 262,578 |
(2) |
$ |
14,000 13,000 12,000 |
(1) (1) (1) | |||||
| Merouane Bencherif, M.D., Ph.D. Vice President, Preclinical Research |
2005 2004 2003 |
|
200,000 170,000 161,000 |
|
|
51,000 40,800 38,640 |
50,000 — 78,083 |
(2) |
|
12,092 12,518 11,485 |
(1) (1) (1) | |||||
| Jeffrey P. Brennan (3) Vice President, Business and Commercial Development |
2005 2004 2003 |
|
234,000 225,000 75,000 |
|
|
59,670 54,000 13,500 |
40,000 — 22,533 |
(2) |
|
14,000 111,748 4,500 |
(1) (4) (1) | |||||
| William S. Caldwell, Ph.D. Vice President, Drug Discovery and Development |
2005 2004 2003 |
|
193,752 170,000 161,750 |
|
|
49,407 40,800 29,115 |
42,000 — 71,251 |
(2) |
|
12,073 11,947 11,314 |
(1) (1) (1) | |||||
| Geoffrey C. Dunbar, M.D. Vice President, Clinical Development and Regulatory Affairs |
2005 2004 2003 |
|
264,316 254,150 246,750 |
|
|
67,401 60,996 44,415 |
54,000 — 89,119 |
(2) |
|
14,000 13,000 12,000 |
(1) (1) (1) | |||||
| Alan A. Musso Vice President, Chief Financial Officer, Treasurer and Secretary |
2005 2004 2003 |
|
205,000 190,000 181,731 |
(5) |
|
52,275 45,600 32,400 |
48,000 — 71,156 |
(2) |
|
14,000 13,000 12,000 |
(1) (1) (1) | |||||
| (1) | Consists of our contributions under the Targacept Retirement Savings Plan, our 401(k) plan. |
| (2) | A portion of these options reflects grants made on January 26, 2004 under our 2000 equity incentive plan in lieu of a cash bonus for fiscal year 2003. |
| (3) | Mr. Brennan joined us in September 2003. |
| (4) | Consists of $12,190 of contributions under our 401(k) plan and reimbursement of $99,558 in relocation expenses. |
| (5) | Salary amount includes compensation of $1,731 in lieu of accrued vacation. |
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Stock Options
The following table sets forth information regarding grants of stock options to purchase shares of our common stock to our named executive officers during the year ended December 31, 2005.
The potential realizable values set forth in the following table are calculated based on the term of the option at the time of grant and reflect gains that could be achieved for the options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are required by the Securities and Exchange Commission and do not represent our estimate or projection of our future stock price performance. Actual gains, if any, on stock option exercises depend on the future performance of the common stock and the date on which the options are exercised.
Option Grants in Last Fiscal Year
| Name |
Number of Securities Underlying Options Granted |
Percentage of Total Options Granted to Employees in |
Exercise Price Per Share |
Expiration Date |
Potential Realizable Price Appreciation for | |||||||||||
| 5% |
10% | |||||||||||||||
| J. Donald deBethizy, Ph.D. |
174,000 | 26.9 | % | $ | 1.75 | 3/29/2015 | $ | 3,097,200 | $ | 5,110,380 | ||||||
| Merouane Bencherif, M.D., Ph.D. |
50,000 | 7.7 | 1.75 | 3/29/2015 | 890,000 | 1,468,500 | ||||||||||
| Jeffrey P. Brennan |
40,000 | 6.2 | 1.75 | 3/29/2015 | 712,000 | 1,174,800 | ||||||||||
| William S. Caldwell, Ph.D. |
42,000 | 6.5 | 1.75 | 3/29/2015 | 747,600 | 1,233,540 | ||||||||||
| Geoffrey C. Dunbar, M.D. |
54,000 | 8.4 | 1.75 | 3/29/2015 | 961,200 | 1,585,980 | ||||||||||
| Alan A. Musso |
48,000 | 7.4 | 1.75 | 3/29/2015 | 854,400 | 1,409,760 | ||||||||||
| (1) | The dollar amounts under these columns are the result of rates set by the Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, in the price of the underlying common stock. The potential realizable values at 5% and 10% appreciation are calculated using an assumed initial public offering price of $12.00 per share and assuming that the market price appreciates from this price at the indicated rate for the entire term of each option and that each option is exercised at the exercise price and sold on the last day of its term at the assumed appreciated price. |
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Option Exercises and Year-End Option Values
The following table sets forth information regarding the number of shares of our common stock issued upon option exercises by our named executive officers during the year ended December 31, 2005 and the value realized by our named executive officers. The table also sets forth information regarding the number and value of unexercised stock options held by our named executive officers as of December 31, 2005. There was no public trading market for our common stock as of December 31, 2005. Accordingly, as permitted by the rules of the Securities and Exchange Commission, we have calculated the value of the unexercised in-the-money options at fiscal year end by determining the difference between the exercise price per share and an assumed fair market value of our common stock as of December 31, 2005 equal to an assumed initial offering price of $12.00 per share.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
| Number of Shares Acquired on Exercise |
Value Realized |
Number of Securities Underlying Unexercised Options Held at December 31, 2005 |
Value of Unexercised In-the-Money Options at December 31, 2005 | ||||||||||||
| Name |
Exercisable |
Unexercisable |
Exercisable |
Unexercisable | |||||||||||
| J. Donald deBethizy, Ph.D. |
— | — | 242,293 | 183,698 | $ | 2,033,149 | $ | 1,882,905 | |||||||
| Merouane Bencherif, M.D., Ph.D. |
— | — | 102,772 | 52,470 | 848,166 | 537,818 | |||||||||
| Jeffrey P. Brennan |
— | — | 32,755 | 29,778 | 292,380 | 305,225 | |||||||||
| William S. Caldwell, Ph.D. |
— | — | 96,063 | 44,363 | 785,048 | 454,721 | |||||||||
| Geoffrey C. Dunbar, M.D. |
— | — | 89,599 | 56,147 | 730,100 | 575,507 | |||||||||
| Alan A. Musso |
399 | $ | 1,728 | 88,777 | 49,579 | 720,407 | 508,185 | ||||||||
Employment Agreements
We have entered into employment agreements with each of our named executive officers. Each employment agreement continues until terminated by either party to the agreement, with the exception of Mr. Brennan’s employment agreement, which is set to expire on December 31, 2007.
Under the terms of these employment agreements, Dr. deBethizy is employed as our Chief Executive Officer and President at a minimum annual base salary of $225,000; Dr. Dunbar is employed as our Vice President, Clinical Development and Regulatory Affairs at a minimum annual base salary of $246,750; Mr. Brennan is employed as our Vice President, Business and Commercial Development at a minimum annual base salary of $225,000; Mr. Musso is employed as our Vice President and Chief Financial Officer at a minimum annual base salary of $180,000; Dr. Bencherif is employed as our Vice President, Preclinical Research at a minimum annual base salary of $135,000; and Dr. Caldwell is employed as our Vice President, Drug Discovery and Development at a minimum annual base salary of $135,000. For 2006, the base salary of Dr. deBethizy is $335,000; the base salary of Dr. Dunbar is $269,602; the base salary of Mr. Brennan is $245,700; the base salary of Mr. Musso is $220,375; the base salary of Dr. Bencherif is $208,000; and the base salary of Dr. Caldwell is $208,000.
The employment agreements provide that the annual base salaries of each of the named executive officers will be reviewed and are subject to increase in accordance with our policies and procedures, and in addition, will be increased annually as necessary to be consistent with the median base salaries of employees in similar positions at comparable companies as described in the then current Radford Biotechnology Compensation Report.
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In addition to annual base salary, each named executive officer is eligible to receive awards under our 2000 equity incentive plan and earn an annual bonus equal to a percentage of his annual base salary. The employment agreements provide that Dr. deBethizy is eligible to earn an annual bonus of up to 35% of his annual base salary; each of Dr. Dunbar and Mr. Brennan is eligible to earn an annual bonus of up to 30% of his annual base salary; and each of Mr. Musso and Drs. Bencherif and Caldwell is eligible to earn an annual bonus of up to 25% of his annual base salary. In 2001, our board of directors increased the annual bonus for Dr. deBethizy to up to 40% of his annual base salary. In 2002, our board of directors increased the annual bonus for each of Drs. Bencherif and Caldwell to up to 30% of his annual base salary and in 2003 increased the annual bonus for Mr. Musso to up to 30% of his annual base salary. For 2006, Dr. deBethizy is also eligible to earn up to an additional 30% of his base salary, and each of Drs. Bencherif, Caldwell and Dunbar and Messrs. Musso and Brennan is also eligible to earn up to an additional 22.5% of his base salary, if in 2006 AstraZeneca elects to conduct a Phase II trial of TC-1734 following completion of additional safety and product characterization studies that AstraZeneca will conduct. Our board of directors or compensation committee, in their discretion, may increase the annual bonus for each named executive officer beyond these percentages.
Under the terms of the employment agreements, the named executive officers cannot disclose any of our proprietary information during the periods of their employment. In addition, the employment agreements prohibit the named executive officers from soliciting, on behalf of themselves or any entity other than us, any of our customers or clients for the period of employment and nine months following termination of employment, and in the case of Dr. deBethizy, one year following termination. Furthermore, any inventions, discoveries, improvements and developments made by the named executive officers during their employment with us become and remain our property.
If a named executive officer’s employment terminates for any reason, the named executive officer is entitled to receive a lump sum equal to any base salary, bonus and other compensation earned and due but not paid through the effective date of termination. In addition, if we terminate a named executive officer’s employment other than for just cause or a named executive officer terminates his employment for good reason, in each case as that term is defined in his agreement, he is entitled to receive:
| • | severance, payable monthly, equal to his then current base salary for twelve months in the case of Dr. deBethizy and nine months for all other named executive officers, following termination or, if shorter, until he secures other employment; |
| • | acceleration of unvested options to purchase capital stock or restricted stock—Dr. deBethizy is entitled to twelve months acceleration, Mr. Brennan is entitled to nine months acceleration and all other named executive officers are entitled to six months acceleration; |
| • | continuation of the health and life insurance benefits coverage provided to him as of the date of termination for the period during which he receives severance; and |
| • | up to $10,000 in outplacement counseling services. |
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Stock Option and Other Compensation Plans
2000 Equity Incentive Plan
We maintain a 2000 equity incentive plan, which we refer to as our 2000 plan, that our board of directors and stockholders have approved. As of February 28, 2006, an aggregate of 1,878,888 shares of common stock had been authorized for issuance under our 2000 plan, of which options to purchase an aggregate of 1,631,110 shares of common stock were outstanding at a weighted average exercise price of $2.91 per share, 14,665 shares of common stock were issued and outstanding in the form of restricted stock and 30,968 shares of common stock were available for future grant. Upon completion of this offering, 35,143 shares of common stock subject to unvested options outstanding as of February 28, 2006 will immediately vest.
Our 2000 plan provides for the grant of a variety of stock-based awards, including incentive stock options, nonqualified stock options, stock appreciation rights, performance awards, bonus stock and restricted stock, to our employees, directors, independent contractors, consultants and advisors.
Administration of the Plan. Our 2000 plan is administered by the compensation committee of our board of directors, which, among other things, determines the terms and recipients of grants under the 2000 plan.
Options. Recipients of stock options under our 2000 plan have the right to purchase a stated number of shares of common stock at a stated exercise price, subject to any other terms and conditions that may be stated in connection with the option grant. We may grant options at an exercise price equal to, less than or greater than the fair market value of our common stock on the date of grant, except that we may not grant incentive stock options at an option price less than 100% of the fair market value of our common stock on the date of grant (or 110% of the fair market value for incentive stock options granted to optionees holding more than 10% of the voting power of all shares of our capital stock). Grant recipients may pay the exercise price of stock options by various methods permitted under our 2000 plan. Unless modified with respect to any particular grant:
| • | an employee who is terminated for any reason other than death, disability or cause will have 90 days to exercise options vested as of the termination date; |
| • | an employee who terminates due to death or disability will have one year, or until the end of the respective option periods, if sooner, to exercise options that are vested as of the termination date; |
| • | an employee who is terminated for cause will forfeit all options immediately upon termination; and |
| • | non-employee optionees who are terminated will have 90 days, or until the end of the respective option periods, if sooner, to exercise options that are vested as of the termination date unless service terminates for cause, in which case the options terminate immediately. |
Stock Awards. We may grant stock awards to participants subject to certain restrictions or no restrictions. Until they are vested and earned, unless an individual award agreement provides otherwise, grantees will not have the right to vote shares of restricted stock or the right to receive dividends or other distributions paid on such shares. If a grantee’s employment or other service terminates during the restriction period or if any other conditions are not met, the restricted stock still subject to restrictions will terminate, unless an individual award agreement provides otherwise, and the shares must be immediately returned to us.
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Significant Transactions. If:
| • | any entity or person acquires 50% or more of our outstanding common stock or, if such person owned shares as of August 22, 2000, 67% of our outstanding common stock; or |
| • | our stockholders approve a sale or disposition of all or substantially all of our assets or a merger or consolidation in which we would not be the surviving or continuing corporation or which would result in the conversion of our common stock into cash, securities or other property (other than a merger or consolidation in which holders of common stock immediately prior to the merger or consolidation have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before), |
all awards outstanding under our 2000 plan would become immediately vested and exercisable unless, in the case of a merger, consolidation, share exchange or asset sale or disposition, the board of directors or compensation committee determines that outstanding awards will not become immediately vested and exercisable because steps have been taken, such as the assumption of the awards or substitution of substantially equivalent awards by the other party, as it deems equitable to protect the rights of participants in our 2000 plan. Upon completion of this offering, all awards outstanding under our 2000 plan granted prior to August 20, 2003 will become immediately vested and exercisable.
Termination and Amendment. We may grant awards under our 2000 plan until August 21, 2010, unless our 2000 plan is terminated prior to that date. The board of directors may amend or terminate our 2000 plan at any time, subject to the rights of holders of outstanding awards and subject to any requirements under Section 409A of the Internal Revenue Code. Our 2006 stock incentive plan, which we refer to as our 2006 plan, is intended to serve as the successor equity incentive program to our 2000 plan. However, our board of directors may not amend our 2000 plan without stockholder approval if stockholder approval is required under applicable law, rule or regulation.
Certain Tax Matters. Upon completion of this offering, we expect that the 2000 plan will be amended and restated to address the effect of recently-enacted Section 409A of the Internal Revenue Code. For a discussion of the general scope of these amendments, see “2006 Stock Incentive Plan—Internal Revenue Code Section 409A Requirements,” below. For a discussion of the general tax consequences of awards granted under the 2000 plan, see the comparable discussion of similar awards granted under the 2006 plan under “2006 Stock Incentive Plan—General Federal Income Tax Consequences,” below.
Option Repricing. On April 7, 2005, in order to promote a closer identification of the interests of our employees with those of us and our stockholders, our board of directors authorized the amendment of each existing employee stock option agreement in order to reduce the exercise price per share with respect to all employee stock options that were outstanding but not yet exercisable as of March 31, 2005. The exercise price per share with respect to each such portion that was not yet exercisable as of March 31, 2005, constituting in the aggregate 354,672 underlying shares of our common stock, was repriced to $1.75 per share. Prior to the repricing, the weighted average exercise price per share with respect to the portions that were not yet exercisable as of March 31, 2005 was $5.13. Prior to the repricing, no outstanding option held by our employees had an exercise price of less than $1.75 per share. All other terms and conditions governing the portions that were not yet exercisable as of March 31, 2005, including the vesting schedules, remain unchanged from the terms and conditions set forth in the original agreements. The affected options are required to be accounted for as a modification of an award under SFAS 123R. The fair market value was calculated immediately
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prior to the modification and immediately after the modification to determine the incremental fair market value. This incremental value and the fair market value of unvested options that were modified will be expensed as compensation on a quarterly basis, until the date that the option is exercised or forfeited or expires unexercised.
2006 Stock Incentive Plan
Introduction. Our 2006 plan is intended to serve as the successor equity incentive program to our 2000 plan. Our 2006 plan will become effective on the day prior to the date that the underwriting agreement for this offering is signed. At that time, all of the shares reserved for grant under our 2000 plan will instead become reserved for grant under our 2006 plan.
Subject to adjustments as provided in our 2006 plan, the maximum number of shares that we may issue pursuant to awards granted under our 2006 plan may not exceed the sum of (i) 2,700,000 shares, plus (ii) up to 54,465 shares of common stock remaining available for issuance as of the effective date under our 2000 plan, plus (iii) up to 1,610,009 shares subject to any award granted under our 2000 plan that is forfeited, cancelled, terminated, expires or lapses for any reason without the issuance of shares pursuant to the award. The maximum number of shares of common stock that we may issue under our 2006 plan pursuant to the grant of incentive stock options is 4,364,474 or, if less, the maximum number of shares issuable under the 2006 plan. In addition, (i) we may not grant to any participant options and stock appreciation rights, or SARs, that are not related to an option for more than 500,000 shares of common stock in any calendar year; (ii) we may not grant to any participant awards for more than 500,000 shares of common stock in any calendar year; and (iii) participants may not be paid more than $1,000,000 with respect to any cash-settled award granted in any calendar year, subject to adjustments as provided in our 2006 plan. For purposes of these restrictions, we will treat an option and related SAR as a single award. The following will not be included in calculating the share limitations set forth above: (i) dividends, including dividends paid in shares of common stock, or dividend equivalents paid in cash in connection with outstanding awards; (ii) awards which by their terms are settled in cash rather than the issuance of shares; (iii) any shares subject to an award under our 2006 plan that is forfeited, cancelled, terminated, expires or lapses for any reason and shares subject to an award that are repurchased or reacquired by us; and (iv) any shares a participant surrenders or we withhold to pay the option or purchase price for an award or use to satisfy any tax withholding requirement in connection with the exercise, vesting or earning of an award if, in accordance with the terms of our 2006 plan, a participant pays such option or purchase price or satisfies such tax withholding by either tendering previously owned shares or having us withhold shares.
We may adjust the number of shares reserved for issuance under our 2006 plan and the terms of awards in the event of an adjustment in our capital stock structure or one of our affiliates due to a merger, stock split, stock dividend or similar event.
Purpose and Eligibility. The purpose of our 2006 plan is to encourage and enable selected employees and our directors and independent contractors to acquire or increase their holdings of common stock and other proprietary interests in us in order to promote a closer identification of their interests with those of us and our stockholders, thereby further stimulating their efforts to enhance our efficiency, soundness, profitability, growth and stockholder value. The purpose will be carried out by the granting of awards to selected participants. We may grant awards under our 2006 plan which include incentive stock options and nonqualified stock options; SARs; restricted awards in the form of restricted stock awards and restricted stock units; performance awards in the form of performance shares and performance units; phantom stock
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awards; director options in the form of initial options and annual options; and dividend equivalent awards. We discuss the material terms of each type of award below.
Administration; Amendment and Termination. Our board of directors, or upon its delegation, the compensation committee of our board of directors, will administer our 2006 plan. In this discussion, we refer to our board of directors and the compensation committee collectively as the administrator. Under the terms of our 2006 plan, the administrator has full and final authority to take any action with respect to our 2006 plan, including, without limitation, the authority to: (i) determine all matters relating to awards, including selection of individuals to be granted awards, the types of awards, the number of shares, if any, of common stock subject to an award, and the terms, conditions, restrictions and limitations of an award; (ii) prescribe the form or forms of agreements evidencing awards granted under our 2006 plan; (iii) establish, amend and rescind rules and regulations for the administration of our 2006 plan; and (iv) construe and interpret our 2006 plan, awards and award agreements made under the 2006 plan, interpret rules and regulations for administering the 2006 plan and make all other determinations deemed necessary or advisable for administering the 2006 plan.
In certain circumstances and subject to certain terms and conditions, the administrator may delegate to one or more of our officers the authority to grant awards, and to make any or all of the determinations reserved for the administrator in our 2006 plan with respect to such awards.
Our board of directors may amend, alter or terminate our 2006 plan at any time, subject to the following: (i) stockholder approval is required of any amendment if such approval is required by applicable law, rule or regulation; and (ii) except for anti-dilution adjustments made under our 2006 plan, the option price for any outstanding option or base price of any outstanding SAR may not be decreased after the date of grant, nor may any participant surrender any outstanding option or SAR to us as consideration for the grant of a new option or SAR with a lower option or base price than the original option or SAR, as the case may be, without stockholder approval of any such action. Our board of directors may also amend, alter or terminate any award, although participant consent is generally required if such action would materially and adversely affect the participant’s rights with respect to the award.
The administrator has the authority to amend the 2006 plan and any award, without participant consent and, except where required by applicable law, rule or regulation, without stockholder approval, in order to comply with applicable laws, rules or regulations or changes to such laws, rules or regulations. In addition, the administrator has the authority to make adjustments to awards upon the occurrence of certain unusual or nonrecurring events, if the administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under our 2006 plan or necessary or appropriate to comply with applicable laws, rules or regulations. The administrator may (subject to any requirements imposed by Section 409A of the Internal Revenue Code) cause any award or any portion of an award granted under our 2006 plan to be cancelled in consideration of an alternative award or cash payment of an equivalent cash value, as determined by the administrator, made to the holder of the cancelled award. The administrator also may determine, in its discretion, that a participant’s rights, payments and/or benefits with respect to an award, including but not limited to any shares issued or issuable and/or cash paid or payable with respect to an award, will be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an award. Subject to the requirements of Internal Revenue Code Section 409A, the administrator also may, in its sole discretion, modify or extend the terms and conditions for exercise, vesting or earning of an award and/or accelerate the date that any award which was not otherwise exercisable, vested or
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earned may become exercisable, vested or earned, in whole or in part, without any obligation to accelerate such date with respect to any other award. In addition, the administrator may terminate any award and distribute benefits to participants subject to the requirements of the 2006 plan and Internal Revenue Code Section 409A.
Options. Our 2006 plan authorizes the grant of both incentive stock options and nonqualified stock options, both of which are exercisable for shares of common stock, although incentive stock options may only be granted to our employees. The administrator will determine the option price at which a participant may exercise an option, and the option price must be:
| • | with respect to incentive stock options, no less than 100% of the fair market value per share of our common stock on the date of grant, or 110% of the fair market value with respect to incentive stock options granted to an employee who owns stock representing more than 10% of the total voting power of all classes of our stock or stock of our parent or subsidiary corporation, if any; |
| • | with respect to nonqualified stock options, no less than 85% of the fair market value per share of our common stock on the date of grant; and |
| • | not less than the par value per share of our common stock. |
The administrator may authorize the grant of substitute or assumed options of an acquired entity with an option price of less than the fair market value on the grant date if the options are assumed or substituted in accordance with Section 424(a) of the Internal Revenue Code and if the assumed or substituted options were granted with an option price at least equal to fair market value on the original grant date or otherwise comply with Internal Revenue Code Section 409A.
Unless an individual award agreement provides otherwise, a participant may pay the option price in the form of cash or cash equivalent; in addition, where the administrator and applicable laws, rules and regulations permit, a participant may also make payment:
| • | by delivery of shares of common stock the participant has owned for such time period, if any, that the administrator determines, if otherwise acceptable to the administrator; |
| • | by shares of common stock withheld upon exercise; |
| • | with respect only to purchase upon exercise of an option after a public market for the common stock exists, by delivery of written notice of exercise to us and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to us the amount of sale or loan proceeds to pay the option price; |
| • | by such other payment methods as the administrator may approve and which are acceptable under applicable law; or |
| • | by any combination of these methods. |
At the time of option grant, the administrator will determine the term and conditions of an option and the period or periods during which a participant may exercise an option and the option term for each option (which, in the case of incentive stock options, may not exceed 10 years, or five years with respect to an employee who owns stock and who possesses more than 10% of the total combined voting power of all classes of our stock or stock of our parent or subsidiary corporation, if any). Options are also subject to certain restrictions on exercise if the participant terminates employment or service. The administrator has authority to establish other terms and conditions related to options.
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Director Options. Each non-employee director who is first elected or appointed to our board of directors after the public offering date will receive an initial option to purchase 25,000 shares of common stock on the fifth business day after such director is first elected or appointed to our board of directors. A non-employee director who is first elected or appointed as chairman of the board also will receive an initial option for 10,000 shares. In addition, we will grant to each non-employee director, on an annual basis commencing with the 2006 annual meeting of stockholders, a director option to purchase 7,500 shares of common stock or, in the case of the chairman of the board, a director option to purchase 12,500 shares. This annual option will be granted to a director upon his or her reelection to the board on the fifth business day after the applicable annual or other stockholders meeting, provided that such director continues to serve as a member of our board of directors as of such grant date. Director options will be designated as nonqualified options. The option price at which a director may exercise a director option will be 100% of the fair market value per share of the common stock on the date the option is granted. Each initial option will vest and become exercisable on the first anniversary of the date of grant with respect to one-third of the shares subject to the option. Each initial option will vest with respect to the remaining two-thirds of the shares subject to the option on a pro rata quarterly basis over the next two years, so that the option will be vested in full as of the third anniversary of the date of grant, if the director continues in service during such period. Each annual option will vest in full on the first anniversary of the date of grant if the director is in service on that date. The option period of a director option is 10 years. Director options are also subject to certain restrictions on exercise if the director’s service on our board of directors terminates. The administrator also has authority to establish other terms and conditions related to director options.
Stock Appreciation Rights. Under the terms of our 2006 plan, we may grant SARs to the holder of an option with respect to all or a portion of the shares of common stock subject to the option or we may grant SARs separately. The holder of an SAR may receive consideration paid either (i) in cash; (ii) shares of common stock valued at fair market value on the date of the SAR exercise; or (iii) a combination of cash and shares of common stock, as the administrator determines. Upon exercise of an SAR, a participant is entitled to receive from us consideration in an amount determined by multiplying:
| • | the difference between the fair market value of a share of common stock on the date of exercise of the SAR over the base price of the SAR by |
| • | the number of shares of common stock with respect to which the SAR is being exercised. |
Notwithstanding the foregoing, the administrator may limit the amount payable in its discretion. The base price may be no less than 100% of the fair market value per share of the common stock on the date the SAR is granted. To the extent required by Internal Revenue Code Section 409A, SARs will be structured in a manner designed to be exempt from, or to comply with, the requirements of Internal Revenue Code Section 409A.
SARs are exercisable according to the terms established by the administrator and stated in the applicable award agreement. Upon the exercise of an SAR granted to the holder of an option, the related option is deemed to be cancelled to the extent of the number of shares as to which the holder of an option exercises the SAR. No participant may exercise an SAR more than 10 years after it was granted, or such shorter period as may apply to related options. Each award agreement will set forth the extent to which the holder of an SAR will have the right to exercise an SAR following termination of the holder’s employment or service with us.
Restricted Awards. Subject to the limitations of our 2006 plan, the administrator may in its sole discretion grant restricted awards to such individuals in such numbers, upon such terms
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and at such times as the administrator shall determine. Restricted awards may be in the form of restricted stock awards and/or restricted stock units that are subject to certain conditions, which conditions must be met in order for the restricted award to vest and be earned, in whole or in part, and no longer subject to forfeiture. Restricted stock awards may be payable in shares of common stock. Restricted stock units may be payable in cash or shares of common stock, or partly in cash and partly in shares of common stock, in accordance with the terms of our 2006 plan and the discretion of the administrator.
The administrator has authority to determine the nature, length and starting date of the period during which a participant may earn a restricted award and will determine the conditions that must be met in order for a restricted award to be granted or to vest or be earned. These conditions may include:
| • | payment of a stipulated purchase price; |
| • | attainment of performance objectives; |
| • | continued service or employment for a certain period of time or a combination of attainment of performance objectives and continued service; |
| • | retirement; |
| • | displacement; |
| • | disability; |
| • | death; or |
| • | any combination of such conditions. |
However, restricted awards that vest based solely on continued service or the passage of time will be subject to a minimum restriction period of one year, except in the case of restricted awards assumed or substituted in connection with mergers or other business transactions, restricted awards granted in connection with recruitment or hiring of a participant and/or restricted awards granted under an incentive compensation or bonus program.
In the case of restricted awards based upon performance criteria, or a combination of performance criteria and continued service, the administrator will determine the performance measures applicable to such restricted awards, which performance measures may be based upon such corporate, business unit or division and/or individual performance factors and criteria as the administrator in its discretion may deem appropriate; provided, however, that such performance factors will be limited to the specific performance measures listed below.
Subject to the terms of the 2006 plan and the requirements of Internal Revenue Code Section 409A, the administrator has authority to determine whether and to what degree restricted awards have vested and been earned and are payable. The administrator also may, subject to Internal Revenue Code Section 409A, accelerate the date that any restricted award will be deemed vested or earned, without any obligation to accelerate such date with respect to other restricted awards. If a participant’s employment or service is terminated for any reason and all or any part of a restricted award has not vested or been earned pursuant to the terms of our 2006 plan and the individual award, the participant will forfeit the award unless the administrator determines otherwise.
Performance Awards. Subject to the limitations of our 2006 plan, the administrator may in its discretion grant performance awards to such eligible individuals upon such terms and conditions and at such times as the administrator shall determine. Performance awards may be
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in the form of performance shares and/or performance units. An award of a performance share is a grant of a right to receive shares of our common stock, the cash value thereof or a combination thereof in the administrator’s discretion, which is contingent upon the achievement of performance or other objectives during a specified period and which has a value on the date of grant equal to the fair market value of a share of our common stock. An award of a performance unit is a grant of a right to receive shares of our common stock or a designated dollar value amount of common stock that is contingent upon the achievement of performance or other objectives during a specified period, and that has an initial value determined in a dollar amount established by the administrator at the time of grant.
Subject to the terms of the 2006 plan and the requirements of Internal Revenue Code Section 409A, the administrator has the authority to determine the nature, length and starting date of the period during which a participant may earn a performance award and will determine the conditions that must be met in order for a performance award to be granted or to vest or be earned. These conditions may include specific performance objectives, continued service or employment for a certain period of time, or a combination of such conditions. In the case of performance awards based on performance criteria, the administrator will determine the performance measures applicable to such awards, which performance measures may be based upon such corporate, business unit or division and/or individual performance factors and criteria as the administrator in its discretion may deem appropriate; provided, however, that such performance factors will be limited to the specific performance measures listed below.
The administrator has authority to determine whether and to what degree performance awards have been earned and are payable. The administrator also may, subject to Internal Revenue Code Section 409A, accelerate the date that any performance award will be deemed to be earned in whole or in part, without any obligation to accelerate such date with respect to other performance awards. If a participant’s employment or service is terminated for any reason and all or part of a performance award has not been earned pursuant to the terms of our 2006 plan and the individual award agreement, the participant will forfeit the award unless the administrator determines otherwise.
Phantom Stock Awards. Subject to the limitations of our 2006 plan, the administrator may in its discretion grant phantom stock awards to such eligible individuals in such numbers, upon such terms and at such times as the administrator shall determine. An award of phantom stock is an award of a number of hypothetical share units with respect to shares of our common stock, with a value per unit based on the fair market value of a share of common stock.
Subject to the terms of the 2006 plan and the requirements of Internal Revenue Code Section 409A, the administrator has the authority to determine whether and to what degree phantom stock awards have vested and are payable. Upon vesting of all or part of a phantom stock award and satisfaction of other terms and conditions that the administrator determines, the holder of a phantom stock award will be entitled to a payment of an amount equal to the fair market value of one share of our common stock with respect to each such phantom stock unit that has vested and is payable. We may make payment in cash, shares of common stock, or a combination of cash and stock, as determined by the administrator. The administrator may determine the forms and terms of payment of phantom stock awards in accordance with our 2006 plan. If a participant’s employment or service is terminated for any reason and all or any part of a phantom stock award has not vested and become payable pursuant to the terms of our 2006 plan and the individual award, the participant will forfeit the award unless the administrator determines otherwise.
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Dividend and Dividend Equivalents. The administrator may provide that awards granted under our 2006 plan earn dividends or dividend equivalents. We may pay such dividends or dividend equivalents currently or credit such dividends or dividend equivalents to a participant’s account, subject to any requirements under Internal Revenue Code Section 409A and such restrictions and conditions as the administrator may establish with respect to the crediting of an account, including reinvestment in additional shares of common stock or share equivalents.
Change in Control. Upon a change in control as defined in our 2006 plan, and unless Internal Revenue Code Section 409A requires otherwise, our 2006 plan provides that the administrator shall have the sole discretion to determine the effect, if any, on awards granted under the 2006 plan, including the vesting, earning and/or exercisability of the award. The administrator’s discretion includes the discretion to determine that an award shall vest, be earned or become exercisable in whole or in part, shall be assumed or substituted for another award, shall be cancelled without the payment of consideration, shall be cancelled in exchange for a cash payment or other consideration, or that other actions or no actions shall be taken with respect to the award. The administrator also has discretion to determine that acceleration shall be subject to both a change of control and termination of employment or service.
Transferability. Incentive stock options are not transferable other than by will or the laws of intestate succession or, in the administrator’s discretion, as may otherwise be permitted in accordance with Treasury Regulation Section 1.421-1(b)(2) or successor provisions. Nonqualified stock options, director options and SARs are not transferable other than by will or the laws of intestate succession, except as permitted by the administrator in a manner consistent with the registration provisions of the Securities Act. Restricted awards, performance awards and phantom stock awards are not generally transferable, including by sale, assignment, pledge or hypothecation, other than by will or the laws of intestate succession, and participants may not sell, transfer, assign, pledge or otherwise encumber shares subject to such awards until the restriction period and/or performance period has expired and until all conditions to vesting and/or earning the award have been met.
General Federal Income Tax Consequences. Under current federal laws, in general, recipients of awards and grants of nonqualified stock options, SARs, restricted stock, dividend equivalents, performance awards and stock payments under our 2006 plan are taxable under the Internal Revenue Code upon their actual or constructive receipt of common stock or cash with respect to such awards or grants and, subject to Section 162(m) of the Internal Revenue Code and certain reporting requirements, we will be entitled to an income tax deduction with respect to the amounts taxable as ordinary income to such recipients. Under Sections 421 and 422 of the Internal Revenue Code, recipients of incentive stock options are generally not taxed on their receipt of common stock upon their exercises of incentive stock options if the option stock is held for specified minimum holding periods and, in such event, we would not be entitled to income tax deductions with respect to such exercises. If Internal Revenue Code Section 409A is deemed to apply to the 2006 plan or any award, and the 2006 plan and award do not, when considered together, satisfy the requirements of Section 409A during a taxable year, the participant will have ordinary income on the amount of all deferrals subject to Section 409A in the year of non-compliance to the extent that the award is not subject to a substantial risk of forfeiture. The participant will be subject to an additional tax of 20 percent on all amounts includible in income and may also be subject to interest charges under Section 409A. Subject to Section 162(m) of the Internal Revenue Code and certain reporting requirements, we will be entitled to an income tax deduction with respect to the amount of compensation includible as income to the participant.
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Internal Revenue Code Section 409A Requirements. The 2006 plan is intended to comply with Section 409A of the Internal Revenue Code. To the extent that Section 409A is deemed to apply to the 2006 plan or any award, the 2006 plan and all such awards will, to the extent practicable, be construed in accordance with Section 409A. Section 409A imposes certain requirements on compensation that is deemed under Section 409A to involve deferred compensation. The 2006 plan imposes certain conditions upon awards that may be subject to Section 409A. These include (but are not limited to) the following:
| • | Deferrals of shares issuable pursuant to options, SARs settled in shares, restricted awards or other awards otherwise exempt from Section 409A in a manner that would cause Section 409A to apply are not permitted unless such deferrals are otherwise in compliance with Section 409A. |
| • | Awards that are deemed to involve the deferral of compensation under Section 409A are subject to additional restrictions (if and to the extent required under Section 409A): |
| — | Distributions may not be made earlier than upon the occurrence of one or more of the following: (i) separation from service; (ii) disability; (iii) death; (iv) a specified time or fixed schedule; (v) a change in control (as defined under Section 409A); or (vi) an unforeseeable emergency. |
| — | Distributions to certain “specified employees” (as defined in Section 409A of the Internal Revenue Code) due to separation from service may not be made for six months after termination (or, if earlier, upon death). |
| — | Acceleration of the time or schedule of payments due to awards subject to Section 409A is not permitted, unless permitted by the administrator and Section 409A. |
| — | Distributions generally must be made within two and one-half months after the year in which an award is no longer subject to a substantial risk of forfeiture (unless otherwise permitted under the 2006 plan or by Section 409A). |
| — | Deferral elections must generally be made (if at all) in the year before the year in which services for an award are performed (subject to certain exceptions permitted under the 2006 plan or Section 409A). Additional restrictions apply to changes to deferral elections. |
Performance-Based Compensation—Section 162(m) Requirements. Our 2006 plan is structured to comply with the requirements imposed by Section 162(m) of the Internal Revenue Code and related regulations in order to preserve, to the extent practicable, our tax deduction for awards made under our 2006 plan to covered employees. Section 162(m) of the Internal Revenue Code generally denies an employer a deduction for compensation paid to covered employees, who are generally the named executive officers, of a publicly held corporation in excess of $1,000,000 unless the compensation is exempt from the $1,000,000 limitation because it is performance-based compensation.
In order to qualify as performance-based compensation, we must pay the compensation under our 2006 plan to covered employees under pre-established objective performance goals that a committee comprised of outside directors determines and certifies. In addition to other requirements for the performance-based exception (and subject to certain exceptions), Section 162(m) generally requires that companies disclose to stockholders, and stockholders approve, the material terms or changes in material terms of the performance goals under which compensation is to be paid. Material terms include the individuals eligible to receive compensation, a description of the business criteria on which the performance goals are based, and either the maximum amount of the compensation to be paid or the formula used to calculate the amount of compensation if the performance goals are met.
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As proposed, our 2006 plan limits the maximum amount of awards that we may grant to any employee. In particular, (i) we may not grant to any participant options and SARs that are not related to an option for more than 500,000 shares of common stock in any calendar year; (ii) we may not grant to any participant awards for more than 500,000 shares of common stock in any calendar year; and (iii) we may not pay to any participant more than $1,000,000 in cash with respect to awards granted in any single calendar year. Further, with respect to performance-based restricted awards and performance awards, and in some cases, certain other types of awards, payable to covered employees that are intended to be eligible for the compensation limitation exception available under Section 162(m) and related regulations, our 2006 plan limits performance measures to one or more of the following: cash flow, return on equity, return on assets, earnings per share, achievement of clinical development or regulatory milestones, operations expense efficiency milestones, consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization), net income, operating income, book value per share, return on investment, return on capital, improvements in capital structure, expense management, profitability of an identifiable business unit or product, maintenance or improvement of profit margins, stock price or total stockholder return, market share, revenues or sales, costs, working capital, economic wealth created, strategic business criteria, efficiency ratios, achievement of division, group, function or corporate financial, strategic or operational goals and comparisons with stock market indices or performances of metrics of peer companies.
To the extent that Section 162(m) of the Internal Revenue Code is applicable, the administrator will, within the time and in the manner prescribed by Section 162(m) of the Internal Revenue Code and related regulations, define in an objective fashion the manner of calculating the performance measures it selects to use for participants during any specific performance period. We may adjust or modify such performance factors due to extraordinary items, transactions, events or developments, or in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting us or our financial statements, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles or business conditions, in each case as the administrator may determine.
Targacept Retirement Savings Plan—401(k) Plan
Our employees are eligible to participate in our 401(k) plan. Under our 401(k) plan, eligible employees may elect to make a salary reduction contribution up to the statutorily prescribed annual limit. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code, so that the contributions by our employees will be deductible when made and income earned on 401(k) plan contributions will not be taxable to our employees until withdrawals are made. We match the contributions of our eligible employees at up to a maximum of 6% of an eligible employee’s salary.
Limitation of Liability and Indemnification
Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law. Under that statute, a director’s liability for monetary damages to us or our stockholders may not be limited with respect to:
| • | a breach of the director’s duty of loyalty to us or our stockholders; |
| • | an act or omission not in good faith or involving intentional misconduct or a knowing violation of law; |
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| • | an improper distribution to stockholders; or |
| • | a transaction from which the director derived an improper personal benefit. |
Our bylaws provide that we will indemnify and hold harmless any person who is made or threatened to be made a party to any matter because he or she is or was our director or officer or was serving as a director, officer or trustee of another entity, employee benefit plan or enterprise at our request to the fullest extent permitted by the Delaware General Corporation Law. Prior to the completion of this offering, we plan to enter into agreements to indemnify our directors and officers. These agreements, among other things, will indemnify our directors and officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person’s services as our director or officer, any of our subsidiaries from time to time or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. Currently, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We currently maintain directors’ and officers’ liability insurance for each of our directors and officers.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2003, we have engaged in the following transactions with our directors and executive officers and holders of more than 5% of our voting securities and affiliates of our directors, executive officers and 5% stockholders.
Stock Issuances
Issuances of Series C Convertible Preferred Stock
On March 14, 2003, we issued and sold an aggregate of 11,404,958 shares of our series C convertible preferred stock at a purchase price per share of $1.21 for an aggregate purchase price of approximately $13.8 million. The following table sets forth the number of shares of series C convertible preferred stock sold to our 5% stockholders and their affiliates on March 14, 2003.
| Name |
Number of Shares of Series C |
Aggregate Purchase Price | |||
| Entities affiliated with Oxford Bioscience Partners |
6,198,347 | $ | 7,500,000 | ||
These shares of our series C convertible preferred stock will convert into an aggregate of 892,857 shares of our common stock concurrently with the completion of this offering.
On December 6, 2004 and May 13, 2005, we issued and sold an aggregate of 27,768,860 additional shares of our series C convertible preferred stock at a purchase price per share of $1.21 for an aggregate purchase price of approximately $33.6 million. The following table sets forth the aggregate number of shares of series C convertible preferred stock sold to our 5% stockholders and their affiliates on December 6, 2004 and May 13, 2005.
| Name |
Number of Shares of Series C Preferred Stock |
Aggregate Purchase Price | |||
| New Enterprise Associates 10, Limited Partnership |
7,851,240 | $ | 9,500,000 | ||
| Nomura Phase4 Ventures L.P. |
6,570,248 | 7,950,000 | |||
| EuclidSR Partners, L.P. |
3,471,074 | 4,200,000 | |||
| Burrill Biotechnology Capital Fund, L.P. |
1,487,603 | 1,800,000 | |||
| Entities affiliated with Advent Private Equity Fund II |
1,033,058 | 1,250,000 | |||
| R.J. Reynolds Tobacco Holdings, Inc. |
1,652,893 | 2,000,000 | |||
These shares of our series C convertible preferred stock will convert into an aggregate of 3,178,571 shares of our common stock concurrently with the completion of this offering.
Dr. Barrett, one of our directors, is a general partner of NEA Partners 10, Limited Partnership, the general partner of New Enterprise Associates 10, Limited Partnership, which is an affiliate of New Enterprise Associates.
Registration Rights
Pursuant to the terms of an investor rights agreement that we entered into with the holders of our series A, series B and series C convertible preferred stock on November 26, 2002, we granted registration rights to these holders. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.”
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Loan Agreement with R.J. Reynolds Tobacco Holdings, Inc.
In May 2002, we borrowed $2.5 million from R.J. Reynolds Tobacco Holdings, Inc. to finance equipment and other fixed assets that we had previously purchased. The borrowing bears a fixed interest rate of 6.6%, is payable in 48 equal monthly installments and matures in May 2006. In January 2004, we amended the terms of our loan facility to permit us to borrow up to an additional $2.0 million in 2004 in up to three separate borrowings. Each borrowing would bear a fixed interest rate equal to a theoretical four-year U.S. Treasury Rate on the disbursement date plus 3.5%, be payable in 48 equal monthly installments and be secured by specified tangible fixed assets that the lender determined to be sufficient at the time of disbursement. We borrowed $1.0 million in April 2004 and $973,000 in December 2004 under the amended loan facility to finance equipment. The April 2004 borrowing bears a fixed interest rate of 5.9%, is payable in 48 equal monthly installments and matures in April 2008. The December 2004 borrowing bears a fixed interest rate of 6.9%, is payable in 48 equal monthly installments and matures in January 2009. All borrowings under the loan facility are secured by specified tangible fixed assets. We believe that the terms of the loan facility are no less favorable than those that we could have obtained from an unaffiliated third party. As of March 1, 2006, the outstanding principal balance under the loan facility was $1.4 million. We are currently in discussions with R.J. Reynolds regarding a potential amendment to the terms of the loan facility to provide up to $2.0 million in new borrowing capacity to finance equipment.
Payments to R.J. Reynolds Tobacco Company
Prior to December 31, 2003, we used the services of an R.J. Reynolds Tobacco Company employee for toxicology studies and purchased materials used for research and development and copy and printing services through R.J. Reynolds Tobacco Company. We paid $201,000 for these services during 2003. During 2004 and 2005, we continued to use only the copy and printing services. We paid $79,000 in 2004 and $71,000 in 2005 for these services.
Director Compensation
For information regarding stock options or restricted stock granted to our non-employee directors or their designees, see “Management—Director Compensation.”
Executive Compensation and Employment Agreements
For information regarding the compensation of our named executive officers, see “Management—Executive Compensation” and “—Stock Options.” For information regarding employment agreements with our named executive officers, see “Management—Employment Agreements.”
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The following table sets forth information regarding the beneficial ownership of our common stock as of February 28, 2006 and on an as adjusted basis to reflect the sale of the common stock offered in this offering by:
| • | each of our directors; |
| • | each of our named executive officers; |
| • | each person known by us to beneficially own 5% or more of our common stock; and |
| • | all of our directors and executive officers as a group. |
The number of shares of common stock beneficially owned by each stockholder is determined under rules issued by the Securities and Exchange Commission and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares that an individual or entity has the right to acquire beneficial ownership of within 60 days of February 28, 2006 through the exercise of any warrant, stock option or other right. Unless otherwise indicated, the address of all listed stockholders is c/o Targacept, Inc., 200 East First Street, Suite 300, Winston-Salem, North Carolina 27101. Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
| Number of Beneficially |
Percentage of Shares Beneficially Owned (1) |
|||||||
| Name and Address of Beneficial Owner |
Before Offering |
After Offering |
||||||
| 5% Stockholders Entities affiliated with New Enterprise Associates (2) 1119 St. Paul Street Baltimore, Maryland 21202 |
2,921,999 | 20.7 | % | 15.3 | % | |||
| Entities affiliated with EuclidSR Partners, L.P. (3) 45 Rockefeller Plaza, Suite 3240 New York, New York 10111 |
1,887,161 | 13.4 | % | 9.9 | % | |||
| Entities affiliated with Nomura Phase4 Ventures Limited (4) Nomura House 1 St. Martin’s-le-Grand London EC1A 4NP England |
2,136,904 | 15.2 | % | 11.2 | % | |||
| Entities affiliated with Oxford Bioscience Partners (5) 222 Berkeley Street, Suite 1650 Boston, Massachusetts 02116 |
892,856 | 6.3 | % | 4.7 | % | |||
| R.J. Reynolds Tobacco Holdings, Inc. (6) 401 North Main Street Winston-Salem, North Carolina 27102 |
1,129,481 | 7.9 | % | 5.8 | % | |||
| Entities affiliated with Burrill & Company LLC (7) One Embarcadero Center, Suite 2700 San Francisco, California 94111 |
784,395 | 5.6 | % | 4.1 | % | |||
| Entities affiliated with Advent Private Equity Fund II (8) 25 Buckingham Gate London SW1E 6LD England |
712,586 | 5.1 | % | 3.7 | % | |||
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| Number of Beneficially |
Percentage of Shares Beneficially Owned (1) | |||||
| Name and Address of Beneficial Owner |
Before Offering |
After Offering | ||||
| Executive Officers and Directors |
||||||
| J. Donald deBethizy, Ph.D. (9) |
361,513 | 2.5% | 1.9% | |||
| Merouane Bencherif, M.D., Ph.D. (10) |
118,788 | * | * | |||
| Jeffrey P. Brennan (11) |
36,088 | * | * | |||
| William S. Caldwell, Ph.D. (12) |
111,207 | * | * | |||
| Geoffrey C. Dunbar, M.D. (13) |
120,865 | * | * | |||
| Alan A. Musso (14) |
100,802 | * | * | |||
| Mark Skaletsky |
11,332 | * | * | |||
| M. James Barrett, Ph.D. (15) |
2,921,999 | 20.7% | 15.3% | |||
| Charles A. Blixt (16) |
1,129,481 | 7.9% | 5.8% | |||
| Errol B. De Souza, Ph.D. (17) |
4,333 | * | * | |||
| Ann F. Hanham (18) |
778,062 | 5.5% | 4.1% | |||
| Elaine V. Jones, Ph.D. (19) |
1,887,161 | 13.4% | 9.9% | |||
| John P. Richard (20) |
5,333 | * | * | |||
| All executive officers and directors as a group (14 persons) (21) |
7,623,965 | 50.5% | 38.3% | |||
| * | Indicates less than one percent. |
| (1) | Our calculation of the percentage of shares of common stock beneficially owned before this offering is based on 14,104,838 shares of our common stock and common stock equivalents outstanding as of February 28, 2006, assuming conversion of all outstanding shares of our series A, series B and series C convertible preferred stock. Our calculation of the percentage of shares beneficially owned after this offering is based on 19,104,838 shares of common stock to be outstanding after this offering, including the shares that we are selling in this offering. |
| (2) | Includes 2,913,512 shares owned of record by New Enterprise Associates 10, Limited Partnership, for which voting and investment power is shared by M. James Barrett, Peter J. Barris, C. Richard Kramlich, Peter T. Morris, Charles W. Newhall, III, Mark W. Perry, Scott D. Sandell and Eugene A. Trainor, III, each of whom is a general partner of NEA Partners 10, Limited Partnership, the general partner of New Enterprise Associates 10, Limited Partnership; 3,154 shares owned of record by NEA Ventures 2002, Limited Partnership, for which voting and investment power is held by its general partner, Pamela J. Clark; and 1,000 shares owned of record by, and 4,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by, NEA Development Corp., for which voting and investment power is shared by Charles W. Newhall, III, Mark W. Perry, Peter J. Barris, C. Richard Kramlich and Peter T. Morris through their ownership of New Enterprise Associates, LLC. New Enterprise Associates, LLC is the sole owner of NEA Development Corp. Dr. Barrett, one of our directors, and each of the other general partners of NEA Partners 10, Limited Partnership and NEA Ventures 2002, Limited Partnership disclaims beneficial ownership of the shares held by each of the aforementioned entities except to the extent of his or her pecuniary interest therein. |
| (3) | Includes 1,510,080 shares owned of record by, and 5,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by, EuclidSR Partners, L.P., for which voting and investment power is shared by Elaine V. Jones, Graham D.S. Anderson, Barbara J. Dalton, Milton J. Pappas, Stephen K. Reidy and Raymond J. Whitaker, each of whom are general partners of EuclidSR Associates, L.P., the general partner of EuclidSR Partners, L.P.; and 371,748 shares owned of record by EuclidSR Biotechnology Partners, L.P., for which voting and investment power is shared by Elaine V. Jones, Graham D.S. Anderson, Barbara J. Dalton, Milton J. Pappas, Stephen K. Reidy and Raymond J. Whitaker, each of whom are general partners of EuclidSR Biotechnology Associates, L.P., the general partner of EuclidSR Biotechnology Partners, L.P. Dr. Jones, one of our directors, and each of the other general partners of EuclidSR Associates, L.P. and EuclidSR Biotechnology Associates, L.P. disclaims beneficial ownership of the shares held by each of the aforementioned entities except to the extent of his or her pecuniary interest therein. |
| (4) | Includes 1,190,476 shares owned of record by Nomura International plc and 946,428 shares owned of record by Nomura Phase4 Ventures L.P. Nomura Phase4 Ventures Limited, as appointee of Nomura International plc and as manager of Nomura Phase4 Ventures L.P., has voting and investment power over the shares held by Nomura International plc and Nomura Phase4 Ventures L.P. Mr. Yoshiki Hashimoto, the Head of Merchant Banking, Nomura International plc, and Dr. Denise Pollard-Knight, the Head of Nomura Phase4 Ventures, are the only two members of the board of directors of Nomura Phase4 Ventures Limited and both of them, acting together, exercise the voting and investment power of Nomura Phase4 Ventures Limited. Mr. Hashimoto exercises these powers in his capacity as director of Nomura Phase4 Ventures Limited and as Head of Merchant Banking, Nomura International plc. Mr. Hashimoto and Dr. Pollard-Knight disclaim beneficial ownership of these shares. |
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| (5) | Includes 883,987 shares owned of record by Oxford Bioscience Partners IV L.P. and 8,869 shares owned of record by mRNA Fund II L.P., for which voting and investment power is shared by Alan G. Walton, Jonathan J. Fleming, Jeffrey T. Barnes, Mark P. Carthy and Michael Lytton, each of whom are general partners of OBP Management IV L.P., the sole general partner of Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P. Each of Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P. disclaim beneficial ownership of any shares held of record by the other. Each of the general partners of OBP Management IV L.P. disclaims beneficial ownership of the shares held by each of the aforementioned entities except to the extent of his pecuniary interest therein. |
| (6) | Includes 5,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 and 215,054 shares issuable upon the exercise of an outstanding warrant, assuming that the warrant is exercised in full for cash. Voting and investment power is held by Charles A. Blixt, president of R.J. Reynolds Tobacco Holdings, Inc. and one of our directors. Mr. Blixt disclaims beneficial ownership of these shares. |
| (7) | Includes 778,062 shares owned of record by Burrill Biotechnology Capital Fund, L.P., for which voting and investment power is shared by G. Steven Burrill, John H. Kim, Roger E. Wyse and Ann F. Hanham, members of Burrill & Company (Biotechnology GP), LLC, the general partner of Burrill Biotechnology Capital Fund, L.P.; and 1,000 shares owned of record by, and 5,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by, Burrill & Company LLC, for which voting and investment power is held by G. Steven Burrill, the chief executive officer of Burrill & Company LLC. Ms. Hanham, one of our directors, and each of the other members of Burrill & Company (Biotechnology GP), LLC disclaims beneficial ownership of the shares held by Burrill Biotechnology Capital Fund, L.P. except to the extent of his or her pecuniary interest therein. |
| (8) | Includes 260,685 shares owned of record by Advent Private Equity Fund II ‘A’ Limited Partnership; 158,989 shares owned of record by Advent Private Equity Fund II ‘B’ Limited Partnership; 236,694 shares owned of record by Advent Private Equity Fund II ‘C’ Limited Partnership; and 56,218 shares owned of record by Advent Private Equity Fund II ‘D’ Limited Partnership. Voting and investment power over the shares held by each of the partnerships constituting Advent Private Equity Fund II is exercised by Advent Venture Partners LLP in its role as manager. The partners of Advent Venture Partners LLP are Sir David James Scott Cooksey (chairman), Jeryl Christine Andrew, Peter Anthony Baines, Jerry Christopher Benjamin, David Cheesman, Leslie Ian Gabb, Mohammed Shahzad Ahmed Malik, Patrick Pak-tin Lee, Martin Alexander McNair, William Harold Neil Pearce and Nicholas James Teasdale. Each partner disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
| (9) | Includes 267,678 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (10) | Includes 111,053 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (11) | Consists of 36,088 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (12) | Includes 103,472 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (13) | Includes 98,263 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (14) | Includes 98,003 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (15) | Includes 2,913,512 shares owned of record by New Enterprise Associates 10, Limited Partnership, for which voting and investment power is shared by M. James Barrett, Peter J. Barris, C. Richard Kramlich, Peter T. Morris, Charles W. Newhall, III, Mark W. Perry, Scott D. Sandell and Eugene A. Trainor, III, each of whom is a general partner of NEA Partners 10, Limited Partnership, the general partner of New Enterprise Associates 10, Limited Partnership; 3,154 shares owned of record by NEA Ventures 2002, Limited Partnership, for which voting and investment power is held by its general partner, Pamela J. Clark; and 1,000 shares owned of record by, and 4,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by, NEA Development Corp., for which voting and investment power is shared by Charles W. Newhall, III, Mark W. Perry, Peter J. Barris, C. Richard Kramlich and Peter T. Morris through their ownership of New Enterprise Associates, LLC. New Enterprise Associates, LLC is the sole owner of NEA Development Corp. Dr. Barrett, one of our directors, and each of the other general partners of NEA Partners 10, Limited Partnership and NEA Ventures 2002, Limited Partnership disclaims beneficial ownership of the shares held by each of the aforementioned entities except to the extent of his or her pecuniary interest therein. |
| (16) | Includes 5,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by R.J. Reynolds Tobacco Holdings, Inc. and 215,054 shares issuable upon the exercise of an outstanding warrant held by R.J. Reynolds Tobacco Holdings, Inc., assuming that the warrant is exercised in full for cash. Voting and investment power is held by Mr. Blixt, president of R.J. Reynolds Tobacco Holdings, Inc. Mr. Blixt disclaims beneficial ownership of these shares. |
| (17) | Includes 3,333 shares of common stock issuable upon exercise of stock options exercisable within sixty days of February 28, 2006. |
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| (18) | Includes 778,062 shares owned of record by Burrill Biotechnology Capital Fund, L.P., for which voting and investment power is shared by G. Steven Burrill, John H. Kim, Roger E. Wyse and Ann F. Hanham, members of Burrill & Company (Biotechnology GP), LLC, the general partner of Burrill Biotechnology Capital Fund, L.P. Ms. Hanham, one of our directors, and each of the other members of Burrill & Company (Biotechnology GP), LLC disclaims beneficial ownership of the shares held by Burrill Biotechnology Capital Fund, L.P. except to the extent of his or her pecuniary interest therein. |
| (19) | Includes 1,510,080 shares owned of record by, and 5,333 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 held by, EuclidSR Partners, L.P., for which voting and investment power is shared by Elaine V. Jones, Graham D.S. Anderson, Barbara J. Dalton, Milton J. Pappas, Stephen K. Reidy and Raymond J. Whitaker, each of whom are general partners of EuclidSR Associates, L.P., the general partner of EuclidSR Partners, L.P.; and 371,748 shares owned of record by EuclidSR Biotechnology Partners, L.P., for which voting and investment power is shared by Elaine V. Jones, Graham D.S. Anderson, Barbara J. Dalton, Milton J. Pappas, Stephen K. Reidy and Raymond J. Whitaker, each of whom are general partners of EuclidSR Biotechnology Associates, L.P., the general partner of EuclidSR Biotechnology Partners, L.P. Dr. Jones, one of our directors, and each of the other general partners of EuclidSR Associates, L.P. and EuclidSR Biotechnology Associates, L.P. disclaims beneficial ownership of the shares held by each of the aforementioned entities except to the extent of his or her pecuniary interest therein. |
| (20) | Includes 1,000 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006. |
| (21) | Includes 770,890 shares of common stock issuable upon exercise of stock options exercisable within 60 days of February 28, 2006 and 215,054 shares issuable upon the exercise of an outstanding warrant, assuming that the warrant is exercised in full for cash. |
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The following description of our capital stock and provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to the certificate of incorporation and the bylaws that will be in effect upon completion of this offering. Copies of these documents have been filed with the Securities and Exchange Commission as exhibits to our registration statement of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur concurrently with the completion of this offering.
Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share.
As of February 28, 2006, we had outstanding:
| • | 272,823 shares of common stock held by 62 stockholders of record; |
| • | 5,000,000 shares of series A convertible preferred stock; |
| • | 6,567,567 shares of series B convertible preferred stock; and |
| • | 76,937,998 shares of series C convertible preferred stock. |
As of February 28, 2006, we also had outstanding a warrant to purchase 215,054 shares of common stock at an exercise price of $14.63 per share.
All of our outstanding shares of preferred stock will convert into 13,832,015 shares of common stock concurrently with the completion of this offering. Also, the warrant will be cancelled if it is not exercised prior to the completion of this offering. If the warrant is exercised in full for cash, we would issue 215,054 shares of common stock and receive cash proceeds of approximately $3.1 million.
Common Stock
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors, and there are no cumulative voting rights. Subject to preferences that may be applicable to any shares of preferred stock that may become outstanding from time to time, holders of common stock are entitled to receive, ratably, dividends declared from time to time by our board of directors, if any, out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any shares of preferred stock then outstanding. Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Upon completion of this offering, our board of directors will be authorized, without stockholder approval, to issue up to an aggregate of 5,000,000 shares of preferred stock in one
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or more series and to fix the rights, preferences, designation and powers granted to or imposed upon the preferred stock, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences. We cannot state with certainty the actual effects of the issuance of any shares of preferred stock upon the rights of holders of common stock until the board of directors determines the specific rights of the holders of the preferred stock. Some of these effects might potentially include:
| • | restricting the declaration or payment of dividends on the common stock; |
| • | diluting the voting power of the common stock; |
| • | impairing the liquidation rights of the common stock; and |
| • | delaying or preventing a change in control of us. |
We do not currently have any plans to issue any shares of preferred stock following this offering.
Options
As of February 28, 2006, options to purchase 1,631,110 shares of common stock at a weighted average exercise price of $2.91 per share were outstanding.
Registration Rights
After this offering, holders of approximately 14,043,078 shares of our common stock will have the right to require us to register the sales of their shares under the Securities Act, under the terms of an agreement between us and the holders of these securities. Subject to limitations specified in this agreement, these registration rights include the following:
Demand Registration Rights. Beginning six months after the completion of this offering, subject to specified limitations, two separate constituencies of the holders of registrable securities may require that we register part of these securities for sale under the Securities Act. Each constituency may make one such demand.
Incidental Registration Rights. If we register any of our common stock under the Securities Act, solely for cash, either for our own account or for the account of other security holders, the holders of shares of registrable securities are entitled to notice of the registration and to include their shares of common stock in the registration. These rights have been waived for this offering.
Form S-3 Registration Rights. If we become eligible to file registration statements on Form S-3, holders of registrable securities can require us to register their registrable securities on Form S-3 if the total gross proceeds to be received by them together would be at least $1.0 million.
Limitations and Expenses. With specified exceptions, a holder’s right to include shares in a registration statement is subject to the right of the underwriters to limit the number of shares included in the offering. We are generally required to pay all expenses of registration, including the fees and expenses of one legal counsel to the registering security holders up to a prescribed maximum amount, but excluding underwriters’ discounts and commissions.
Anti-Takeover Provisions
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover statute. Subject to certain exceptions, Section 203 prohibits a publicly held Delaware
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corporation from engaging in a business combination with an interested stockholder for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A business combination includes, among other things, a merger or consolidation involving us and the interested stockholder and the sale of more than 10% of our assets. In general, an interested stockholder is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by that entity or person.
Certain provisions of our certificate of incorporation and bylaws that will be in effect upon completion of this offering could make the acquisition of us through a tender offer, proxy contest or other means, or the removal of incumbent officers and directors, more difficult. These provisions may discourage certain types of coercive takeover practices and takeover bids and encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of retaining the ability to negotiate with a proponent of an unfriendly or unsolicited proposal outweigh the potential disadvantages of discouraging such a proposal. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in our control.
In particular, our certificate of incorporation or bylaws that will be in effect upon completion of this offering provide for the following:
Staggered Board of Directors and Number of Directors. Our board of directors is divided into three classes of the same or nearly the same number of directors serving staggered three-year terms, which means that only one class of directors may be elected at a particular stockholders meeting. Also, the authorized number of directors comprising our board of directors may only be changed by resolution of our board of directors. As a result, the replacement of incumbent directors may be more difficult and third parties may be discouraged from seeking to circumvent the anti-takeover provisions of our certificate of incorporation and bylaws by replacing our incumbent directors.
Limitations on Calling Special Meetings of Stockholders. Under Delaware law, a special meeting of stockholders may be called by the board of directors or by any other person authorized to do so in the certificate of incorporation or the bylaws. Our certificate of incorporation and bylaws do not permit our stockholders to call a special meeting. As a result, a stockholder could not force stockholder consideration of a proposal over the opposition of the board of directors by calling a special meeting. The restriction on the ability of stockholders to call a special meeting means that a proposal to replace the board of directors also could be delayed until the next annual meeting.
Advance Notice Procedures. Our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. At an annual meeting, stockholders may consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors. Stockholders may also consider a proposal or nomination by a person who was a stockholder of record on the record date for the meeting and on the date that notice of the proposal or nomination was given, who is entitled to vote at the meeting and who has given to our secretary timely written notice, in proper form, of his or her intention to bring that business before the meeting. The bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
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Prohibition of Stockholder Action by Written Consent. Delaware law provides that, unless prohibited by the certificate of incorporation, stockholders may execute an action by written consent in lieu of a stockholder meeting. Our certificate of incorporation prohibits stockholder action by written consent, which may lengthen the amount of time required to take stockholder actions because actions by written consent are not subject to the minimum notice requirement of a stockholders meeting. The prohibition of stockholder action by written consent may deter hostile takeover attempts because a holder that controlled a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a stockholders meeting and would have to obtain the consent of a majority of our board of directors, our chairman of the board, our chief executive officer or our president to call a stockholders meeting and satisfy the applicable notice periods.
Undesignated Preferred Stock. Our board of directors is authorized to issue up to 5,000,000 shares of our preferred stock in one or more series and to fix the rights, preferences, designation and powers granted to or imposed upon the preferred stock, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences. The existence of this ability could discourage an attempt to take control of us through a merger, tender offer, proxy contest or other means.
With the exception of the provision relating to the issuance of preferred stock, which can be amended with the approval of a majority of the outstanding shares of stock entitled to vote, none of these provisions can be amended without the approval of at least two-thirds of our outstanding shares of stock entitled to vote. In addition, the affirmative vote of two-thirds of our outstanding shares of stock entitled to vote is required to amend provisions of our certificate of incorporation or bylaws relating to exculpation and indemnification of directors and officers, the number, election, qualification, term of office, resignation or removal of directors and the filling of director vacancies.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.
NASDAQ National Market
We have applied to list our common stock on the NASDAQ National Market under the symbol “TRGT.”
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock and we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market following this offering, or the anticipation of those sales, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital by the sale of our equity securities.
Upon completion of this offering, we will have outstanding 19,104,838 shares of common stock, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 13,832,015 shares of common stock concurrently with the completion of this offering.
All of the 5,000,000 shares sold in this offering will be freely tradable without restriction unless purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining 14,104,838 shares of common stock to be outstanding after this offering are “restricted securities” under Rule 144. Substantially all of these restricted securities will be subject to the 180-day lock-up period described below. Immediately after the 180-day lock-up period, 4,605,997 shares will be freely tradable under Rule 144(k) or Rule 701(g)(3) under the Securities Act and 9,498,841 shares will be eligible for resale under Rule 144 or Rule 701(g)(3), subject to volume limitations.
Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. These rules are summarized below.
Rule 144
In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| • | 1% of the number of shares of common stock then outstanding, which will equal approximately 191,048 shares immediately after the completion of this offering; or |
| • | the average weekly trading volume of the common stock on the NASDAQ National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
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Rule 144(k)
Subject to the lock-up agreements described below, shares of our common stock eligible for sale under Rule 144(k) may be sold immediately after the completion of this offering. In general, under Rule 144(k), a person may sell shares of common stock acquired from us immediately after the completion of this offering, without regard to manner of sale, notice, availability of public information or volume, if:
| • | the person is not our affiliate and has not been our affiliate at any time during the three months preceding the sale; and |
| • | the person has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate. |
Rule 701
In general, under Rule 701, any of our employees, consultants or advisors who purchased shares from us in connection with a qualified compensatory benefit plan or other written compensation contract is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with various restrictions, including the holding period, contained in Rule 144.
Lock-up Agreements
The holders of substantially all of our currently outstanding stock have agreed that, without the prior written consent of Deutsche Bank Securities Inc. on behalf of the underwriters and subject to the exceptions described in the section entitled “Underwriters” in this prospectus they will not, during the period ending 180 days after the date of this prospectus, subject to a possible extension:
| • | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock; or |
| • | enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock, |
whether any transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise. Deutsche Bank Securities does not have any pre-established conditions to waiving the terms of the lock-up agreements. Any determination to release any shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold and the timing, purpose and terms of the proposed sale.
The lock-up agreements also provide that, if we issue an earnings release or if material news or a material event relating to our company occurs during the last 17 days of the 180-day restricted period or if prior to the expiration of the 180-day restricted period we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restricted period will continue for the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
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Stock Options
After the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of the shares of common stock subject to issuance upon exercise of outstanding options granted under, or reserved for future issuance under, our 2000 plan and our 2006 plan. Shares of common stock issued under the Form S-8 upon exercise of options will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and subject to the contractual restrictions described above. As of February 28, 2006, options to purchase 1,631,110 shares of common stock were outstanding under our 2000 plan with a weighted average exercise price of $2.91 per share, of which approximately 975,545 were vested and exercisable with a weighted average exercise price of $3.61 per share and an additional 30,968 shares were reserved for issuance under our 2000 plan. Upon completion of this offering, those shares reserved under our 2000 plan plus an additional 2,700,000 shares of common stock will become reserved for issuance under our 2006 plan.
Registration Rights
Upon completion of this offering, the holders of approximately 14,043,078 shares of our common stock will be entitled to registration rights. Registration of the sale of these shares upon exercise of these rights would make them freely tradable without restriction under the Securities Act. For more information regarding these registration rights, see “Description of Capital Stock—Registration Rights.”
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Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for which Deutsche Bank Securities Inc., Pacific Growth Equities, LLC, CIBC World Markets Corp. and Lazard Capital Markets LLC are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:
| Underwriters |
Number of Shares | |
| Deutsche Bank Securities Inc. |
||
| Pacific Growth Equities, LLC |
||
| CIBC World Markets Corp. |
||
| Lazard Capital Markets LLC |
||
| Total |
5,000,000 | |
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of specified legal matters by their counsel and to other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. No underwriter may allow, and no dealer may reallow, any concession to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 750,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters’ option is exercised in full, the total price to the public would be $ , the total underwriters’ discounts and commissions would be $ and the total proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them.
We and all of our directors and officers and holders of substantially all of our currently outstanding stock have agreed that, without the prior written consent of Deutsche Bank Securities on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus:
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| • | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock; or |
| • | enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock, |
whether any transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.
The 180-day restricted period described in the preceding paragraph will be extended if:
| • | during the last 17 days of the 180-day restricted period we issue an earnings release or material news or a material event relating to our company occurs; or |
| • | prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, |
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
These restrictions do not apply to:
| • | the sale of shares to the underwriters; |
| • | the issuance by us of shares of our common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; |
| • | the issuance by us of shares or options to purchase shares of our common stock pursuant to our 2000 plan or our 2006 plan, provided that the recipient of the shares agrees to be subject to the restrictions described above; |
| • | transactions by any person other than us relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; |
| • | transfers of shares as a gift or charitable contribution, or by will or intestacy; |
| • | transfers of shares to any trust the sole beneficiaries of which are the transferee or a member of the immediate family of the transferee; or |
| • | transfers to certain entities or persons affiliated with the stockholder; |
provided that in the case of each of the last three transactions, each donee, distributee, transferee and recipient agrees to be subject to the restrictions described in the immediately preceding paragraph, no filing under Section 16 of the Securities Exchange Act of 1934, as amended, is required in connection with these transactions, other than a filing on a Form 5 made after the expiration of the 180-day period, and no transaction includes a disposition for value.
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The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of our common stock.
| Paid by Targacept | ||||||
| No Exercise |
Full Exercise | |||||
| Per share |
$ | $ | ||||
| Total |
$ | $ | ||||
In addition, we estimate that the expenses of this offering payable by us, other than underwriting discounts and commissions, will be $ .
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. In addition, to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in this offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions or to stabilize the price of the common stock. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time.
We have applied to list our common stock on the NASDAQ National Market under the symbol “TRGT.”
We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
Directed Share Program
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 150,000 shares offered by this prospectus to directors, officers, employees and other individuals associated with us and members of their respective families and friends through a directed share program. The number of shares of our common stock available for sale to the general public in the offering will be reduced to the extent these persons purchase these reserved shares. Any reserved shares not purchased by these persons will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.
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Pricing of the Offering
Prior to the offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives. Among the factors to be considered in determining the initial public offering price of the shares will be our future prospects and those of our industry in general, our sales, earnings and other financial operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.
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Certain legal matters with respect to the validity of the shares of common stock offered hereby will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts and by Womble Carlyle Sandridge & Rice, PLLC, Winston-Salem, North Carolina. Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York, has acted as counsel for the underwriters in connection with certain legal matters related to this offering.
Ernst & Young LLP, independent registered public accounting firm, have audited our financial statements as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement. You should refer to the registration statement for additional information regarding us and the shares of our common stock to be sold in this offering. Whenever we reference any contract, agreement or other document in this prospectus, the reference is not necessarily complete and you should refer to the exhibits to the registration statement for the actual contract, agreement or other document. In each instance, reference is made to such exhibits and each such statement is qualified in all respects by such reference. In addition, when this offering is completed, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission.
You can read the registration statement and our future filings with the Securities and Exchange Commission over the Internet at the Securities and Exchange Commission’s website at http://www.sec.gov. You may also read and copy any document that we file with the Securities and Exchange Commission at its public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
You may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Such reports, proxy and information statements and other information may also be inspected at the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. 20006.
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INDEX TO THE FINANCIAL STATEMENTS
| F-2 | ||
| F-3 | ||
| F-4 | ||
| Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) |
F-5 | |
| F-7 | ||
| F-8 | ||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Targacept, Inc.
We have audited the accompanying balance sheets of Targacept, Inc. as of December 31, 2004 and 2005, and the related statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Targacept, Inc. at December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 2 and 11 to the financial statements, effective January 1, 2005, the Company adopted the fair value method of accounting provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment.
/s/ ERNST & YOUNG LLP
Greensboro, North Carolina
February 10, 2006
F-2
Table of Contents
BALANCE SHEETS
| December 31, |
||||||||
| 2004 |
2005 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 53,075,348 | $ | 24,851,302 | ||||
| Research fees and accounts receivable |
484,565 | 118,163 | ||||||
| Inventories |
102,640 | 41,940 | ||||||
| Prepaid expenses |
1,727,836 | 729,241 | ||||||
| Total current assets |
55,390,389 | 25,740,646 | ||||||
| Property and equipment, net |
2,262,698 | 1,747,524 | ||||||
| Intangible assets, net of accumulated amortization of $91,263 and $129,027 at December 31, 2004 and 2005, respectively |
550,737 | 512,973 | ||||||
| Total assets |
$ | 58,203,824 | $ | 28,001,143 | ||||
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 1,854,138 | $ | 1,173,545 | ||||
| Accrued expenses |
1,940,836 | 2,849,747 | ||||||
| Current portion of long-term debt |
1,113,350 | 783,895 | ||||||
| Current portion of deferred rent incentive |
402,647 | 402,647 | ||||||
| Total current liabilities |
5,310,971 | 5,209,834 | ||||||
| Long-term debt, net of current portion |
3,443,297 | 1,409,402 | ||||||
| Deferred rent incentive, net of current portion |
637,524 | 234,877 | ||||||
| Total liabilities |
9,391,792 | 6,854,113 | ||||||
| Commitments |
||||||||
| Redeemable convertible preferred stock: |
||||||||
| Series A, $0.001 par value, 5,000,000 shares authorized, issued and outstanding, aggregate liquidation preference of $30,166,741 and $31,836,985 at December 31, 2004, and 2005, respectively, or $4.65 per share plus accreted redemption value |
30,166,741 | 31,836,985 | ||||||
| Series B, $0.001 par value, 6,567,567 shares authorized, issued and outstanding, aggregate liquidation preference of $39,622,161 and $41,759,905 at December 31, 2004, and 2005, respectively, or $4.65 per share, plus accreted redemption value |
39,622,161 | 41,759,905 | ||||||
| Series C, $0.001 par value, 76,441,866 and 81,741,965 shares authorized at December 31, 2004 and 2005, 76,441,866 and 76,937,998 shares issued and outstanding at December 31, 2004, and 2005, respectively, aggregate liquidation preference of $101,988,994 and $110,031,263 at December 31, 2004, and 2005, respectively, or $1.21 per share, plus accreted redemption value |
101,988,994 | 110,031,263 | ||||||
| Total redeemable convertible preferred stock |
171,777,896 | 183,628,153 | ||||||
| Stockholders’ equity (deficit): |
||||||||
| Common stock, $0.001 par value, 16,666,666 shares authorized at December 31, 2004, and 2005, 256,816 and 270,427 shares issued and outstanding at December 31, 2004, and 2005, respectively |
257 | 270 | ||||||
| Capital in excess of par value |
1,261,178 | 1,975,405 | ||||||
| Common stock warrants |
213,710 | 213,710 | ||||||
| Accumulated deficit |
(124,441,009 | ) | (164,670,508 | ) | ||||
| Total stockholders’ equity (deficit) |
(122,965,864 | ) | (162,481,123 | ) | ||||
| Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) |
$ | 58,203,824 | $ | 28,001,143 | ||||
See accompanying notes
F-3
Table of Contents
STATEMENTS OF OPERATIONS
| Year ended December 31, |
||||||||||||
| 2003 |
2004 |
2005 |
||||||||||
| Revenue: |
||||||||||||
| Research fee revenue |
$ | 1,302,500 | $ | 337,500 | $ | — | ||||||
| License fee revenue |
269,532 | 1,917,224 | — | |||||||||
| Product sales |
814,724 | 766,583 | 681,285 | |||||||||
| Grant revenue |
71,529 | 717,067 | 498,632 | |||||||||
| Net revenue |
2,458,285 | 3,738,374 | 1,179,917 | |||||||||
| Operating expenses: |
||||||||||||
| Research and development ($0, $0 and $457,670 stock-based compensation in 2003, 2004 and 2005, respectively) |
18,179,542 | 22,770,881 | 24,251,463 | |||||||||
| General and administrative ($65,325, $50,623 and $232,784 stock-based compensation in 2003, 2004 and 2005, respectively) |
3,599,673 | 5,162,474 | 6,388,437 | |||||||||
| Cost of product sales |
742,941 | 198,446 | 480,933 | |||||||||
| Total operating expenses |
22,522,156 | 28,131,801 | 31,120,833 | |||||||||
| Loss from operations |
(20,063,871 | ) | (24,393,427 | ) | (29,940,916 | ) | ||||||
| Other income (expense): |
||||||||||||
| Interest and dividend income |
791,339 | 504,986 | 1,174,398 | |||||||||
| Interest expense |
(122,789 | ) | (132,749 | ) | (225,005 | ) | ||||||
| Loss on disposal of fixed assets |
— | (4,199 | ) | — | ||||||||
| Total other income (expense) |
668,550 | 368,038 | 949,393 | |||||||||
| Net loss |
(19,395,321 | ) | (24,025,389 | ) | (28,991,523 | ) | ||||||
| Preferred stock accretion |
(8,340,628 | ) | (8,743,559 | ) | (11,237,976 | ) | ||||||
| Net loss attributable to common stockholders |
$ | (27,735,949 | ) | $ | (32,768,948 | ) | $ | (40,229,499 | ) | |||
| Basic and diluted net loss attributable to common stockholders per share |
$ | (254.33 | ) | $ | (149.48 | ) | $ | (153.54 | ) | |||
| Weighted average common shares outstanding—basic and diluted |
109,053 | 219,213 | 262,013 | |||||||||
| Unaudited pro forma basic and diluted net loss per share attributable to common stockholders assuming conversion of preferred stock and conversion of convertible debt |
$ | (2.06 | ) | |||||||||
| Unaudited pro forma weighted average shares outstanding—basic and diluted |
14,068,182 | |||||||||||
See accompanying notes
F-4
Table of Contents
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
| Redeemable Convertible Preferred Stock |
Common Stock |
Capital in Excess of Par Value |
Common Stock Warrants |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Deficit |
|||||||||||||||||||||||||||
| Series A |
Series B |
Series C |
Shares |
Amount |
|||||||||||||||||||||||||||||
| Balances at December 31, 2002 |
$ | 26,826,253 | $ | 35,346,675 | $ | 45,853,329 | 83,278 | $ | 83 | $ | 387,396 | $ | 213,710 | $ | (63,936,112 | ) | $ | — | $ | (63,334,923 | ) | ||||||||||||
| Stock issuance costs |
— | — | (32,548 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of 11,404,958 shares of Series C redeemable convertible preferred stock at $1.21 per share |
— | — | 13,800,000 | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Issuance of 61,092 shares of common stock at $0.001 per share par value, related to exercise of stock options |
— | — | — | 61,092 | 61 | 304,218 | — | — | — | 304,279 | |||||||||||||||||||||||
| Accreted redemption value for common stock warrants attached to Series A redeemable convertible preferred stock |
42,744 | — | — | — | — | — | — | (42,744 | ) | — | (42,744 | ) | |||||||||||||||||||||
| Accreted redemption value for Series A, Series B, and Series C redeemable convertible preferred stock |
1,627,500 | 2,137,744 | 4,532,640 | — | — | — | — | (8,297,884 | ) | — | (8,297,884 | ) | |||||||||||||||||||||
| Net change in unrealized holding loss on available-for-sale securities |
— | — | — | — | — | — | — | — | (29,282 | ) | (29,282 | ) | |||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (19,395,321 | ) | — | (19,395,321 | ) | |||||||||||||||||||||
| Comprehensive loss |
(19,424,603 | ) | |||||||||||||||||||||||||||||||
| Balances at December 31, 2003 |
28,496,497 | 37,484,419 | 64,153,421 | 144,370 | 144 | 691,614 | 213,710 | (91,672,061 | ) | (29,282 | ) | (90,795,875 | ) | ||||||||||||||||||||
| Stock issuance costs |
— | — | (100,000 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of 27,272,728 shares of Series C redeemable convertible preferred stock at $1.21 per share |
— | — | 33,000,000 | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Issuance of 112,446 shares of common stock at $0.001 per share par value, related to exercise of stock options |
— | — | — | 112,446 | 113 | 569,564 | — | — | — | 569,677 | |||||||||||||||||||||||
| Accreted redemption value for common stock warrants attached to Series A redeemable convertible preferred stock |
42,744 | — | — | — | — | — | — | (42,744 | ) | — | (42,744 | ) | |||||||||||||||||||||
| Accreted redemption value for Series A, Series B, and Series C redeemable convertible preferred stock |
1,627,500 | 2,137,742 | 4,935,573 | — | — | — | — | (8,700,815 | ) | — | (8,700,815 | ) | |||||||||||||||||||||
| Net change in unrealized holding loss on available-for-sale securities |
— | — | — | — | — | — | — | — | 29,282 | 29,282 | |||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (24,025,389 | ) | — | (24,025,389 | ) | |||||||||||||||||||||
| Comprehensive loss |
(23,996,107 | ) | |||||||||||||||||||||||||||||||
| Balances at December 31, 2004 |
$ | 30,166,741 | $ | 39,622,161 | $ | 101,988,994 | 256,816 | $ | 257 | $ | 1,261,178 | $ | 213,710 | $ | (124,441,009 | ) | $ | — | $ | (122,965,864 | ) | ||||||||||||
See accompanying notes
F-5
Table of Contents
TARGACEPT, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)—(CONTINUED)
| Redeemable Convertible Preferred Stock |
Common Stock |
Capital in Excess of Par Value |
Common Stock Warrants |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Deficit |
|||||||||||||||||||||||||
| Series A |
Series B |
Series C |
Shares |
Amount |
|||||||||||||||||||||||||||
| Balances as of December 31, 2004 (carried forward) |
$ | 30,166,741 | $ | 39,622,161 | $ | 101,988,994 | 256,816 | $ | 257 | $ | 1,261,178 | $ | 213,710 | $ | (124,441,009 | ) | $ | — | $ | (122,965,864 | ) | ||||||||||
| Issuance of 496,132 shares of Series C redeemable convertible preferred stock at $1.21 per share |
— | — | 612,281 | — | — | — | — | — | — | — | |||||||||||||||||||||
| Issuance of 13,611 shares of common stock at $0.001 per share par value, related to exercise of stock options |
— | — | — | 13,611 | 13 | 23,773 | — | — | — | 23,786 | |||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | 690,454 | — | — | — | 690,454 | |||||||||||||||||||||
| Accreted redemption value for common stock warrants attached to Series A redeemable convertible preferred stock |
42,744 | — | — | — | — | — | — | (42,744 | ) | — | (42,744 | ) | |||||||||||||||||||
| Accreted redemption value for Series A, Series B, and Series C redeemable convertible preferred stock |
1,627,500 | 2,137,744 | 7,429,988 | — | — | — | — | (11,195,232 | ) | — | (11,195,232 | ) | |||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (28,991,523 | ) | — | (28,991,523 | ) | |||||||||||||||||||
| Comprehensive loss |
(28,991,523 | ) | |||||||||||||||||||||||||||||
| Balances at December 31, 2005 |
$ | 31,836,985 | $ | 41,759,905 | $ | 110,031,263 | 270,427 | $ | 270 | $ | 1,975,405 | $ | 213,710 | ($ | 164,670,508 | ) | $ | — | ($ | 162,481,123 | ) | ||||||||||
See accompanying notes
F-6
Table of Contents
STATEMENTS OF CASH FLOWS
| Year ended December 31, |
||||||||||||
| 2003 |
2004 |
2005 |
||||||||||
| Operating activities |
||||||||||||
| Net loss |
$ | (19,395,321 | ) | $ | (24,025,389 | ) | $ | (28,991,523 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| Depreciation and amortization |
672,927 | 766,335 | 803,185 | |||||||||
| Loss on disposal of equipment |
— | 4,199 | — | |||||||||
| Non-cash compensation expense |
65,325 | 50,623 | 690,454 | |||||||||
| Recognition of deferred rent incentive |
(402,647 | ) | (402,647 | ) | (402,647 | ) | ||||||
| Realized loss on sale of investments |
20,978 | 87,948 | — | |||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Research fees and accounts receivable |
517,030 | 334,053 | 366,402 | |||||||||
| Inventories |
51,016 | 15,880 | 60,700 | |||||||||
| Prepaid expenses |
(205,054 | ) | (1,091,627 | ) | 998,595 | |||||||
| Accounts payable and accrued expenses |
(326,451 | ) | 1,141,221 | 228,318 | ||||||||
| Deferred license fee revenue |
(269,532 | ) | (1,917,224 | ) | — | |||||||
| Net cash used in operating activities |
(19,271,729 | ) | (25,036,628 | ) | (26,246,516 | ) | ||||||
| Investment activities |
||||||||||||
| Purchase of investments |
(84,796,103 | ) | (6,191,930 | ) | (25,500,000 | ) | ||||||
| Proceeds from sale of investments |
58,500,000 | 37,379,107 | 25,500,000 | |||||||||
| Purchase of property and equipment |
(545,254 | ) | (660,624 | ) | (250,247 | ) | ||||||
| Proceeds from sale of property and equipment |
— | 38,191 | — | |||||||||
| Net cash (used in) provided by investing activities |
(26,841,357 | ) | 30,564,744 | (250,247 | ) | |||||||
| Financing activities |
||||||||||||
| Proceeds from borrowing of long-term debt |
— | 3,250,000 | — | |||||||||
| Principal payments on long-term debt |
(637,483 | ) | (730,979 | ) | (2,363,350 | ) | ||||||
| Proceeds from issuance of redeemable convertible preferred stock, net of transaction costs |
13,767,452 | 32,900,000 | 612,281 | |||||||||
| Proceeds from issuance of common stock |
238,954 | 519,054 | 23,786 | |||||||||
| Net cash provided by (used in) financing activities |
13,368,923 | 35,938,075 | (1,727,283 | ) | ||||||||
| Net (decrease) increase in cash and cash equivalents |
(32,744,163 | ) | 41,466,191 | (28,224,046 | ) | |||||||
| Cash and cash equivalents at beginning of period |
44,353,320 | 11,609,157 | 53,075,348 | |||||||||
| Cash and cash equivalents at end of period |
$ | 11,609,157 | $ | 53,075,348 | $ | 24,851,302 | ||||||
See accompanying notes
F-7
Table of Contents
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
| 1. | The Company and Nature of Operations |
Targacept, Inc., a Delaware corporation (the Company), was formed on March 7, 1997. The Company is a biopharmaceutical company engaged in the design, discovery and development of a new class of drugs to treat multiple diseases and disorders by selectively targeting a class of receptors known as neuronal nicotinic receptors, or NNRs. Its facilities are located in Winston-Salem, North Carolina.
The accompanying financial statements have been prepared on a going concern basis. The Company has incurred operating losses since its inception and expects to incur substantial additional losses for the foreseeable future. As a result, the Company will require substantial additional funds and plans to seek collaborative agreements, research funding, and private or public equity or debt financing to meet such needs. If such funds are not available, management may need to reassess its plans. Even if the Company does not have an immediate need for additional cash, it may seek access to the private or public equity markets if and when conditions are favorable. There is no assurance that such additional funds will be available for the Company to finance its operations on acceptable terms, if at all.
| 2. | Summary of Significant Accounting Policies |
Cash and Cash Equivalents
The Company considers cash equivalents to be those investments, which are highly liquid, readily convertible to cash, and which mature within three months from the date of purchase.
Investments
In accordance with the Company’s investment policy, surplus cash is invested with high quality financial institutions in money market accounts, certificates of deposit, and certain other high credit quality financial investments including Government National Mortgage Association and other mortgage-backed securities, Student Loan Auction Rate Securities, United States Government debt and other asset-backed securities with AAA credit ratings. The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All marketable securities entered into during 2004 and 2005 were classified as available-for-sale. Interest and dividend income on investments, as well as realized gains and losses, are included in “Interest and dividend income.” There were no unrealized holding gains or losses at December 31, 2004 or 2005. The cost of securities sold is based on the specific identification method.
Research Fees and Accounts Receivable
Substantially all of the Company’s research fees and accounts receivable are related to the collaborative research and license agreements discussed in Note 14 and trade sales of Inversine, the Company’s sole approved product. All of the Company’s trade accounts receivable are due from customers located within the United States. The Company makes judgments with respect to the collectability of trade accounts receivable based on historical experience and current economic trends. Actual collections could differ from those estimates.
F-8
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
During 2003, 2004 and 2005, the Company recognized revenues of $1,572,000, $2,255,000 and $0, respectively, or 64%, 60% and 0% of net revenues, respectively, from two collaborative research and license agreements discussed in Note 14.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average method.
Property and Equipment and Intangible Assets
Property and equipment consists primarily of lab equipment, office furniture and fixtures and leasehold improvements and is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to ten years. Lab equipment is typically depreciated over 3-5 years, office furniture and fixtures are typically depreciated over 5-10 years, and leasehold improvements are amortized over the life of the applicable lease.
Intangible assets consist of patents acquired from Layton Bioscience, Inc. The intangible assets are being amortized to research and development expense on a straight-line basis over the remaining useful life of the patents, or a period of 17 years from the date of acquisition.
The Company assesses the net realizable value of its long-lived assets and evaluates such assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. An impairment, if recognized, would be based on the excess of the carrying value of the impaired asset over its fair value. Through December 31, 2005, there has been no such impairment in the Company’s long-lived assets.
Patents
The Company capitalizes the costs of patents purchased from external sources. The Company expenses all other patent-related costs.
Research and Development Expense
Research and development costs are expensed as incurred and include related salaries of, and stock-based compensation for, personnel involved in research and development activities, contractor fees, administrative expenses and allocations of research-related overhead costs. Administrative expenses and research-related overhead costs included in research and development consist of allocations of facility and equipment lease charges, depreciation and amortization of assets, and insurance, legal and supply costs that are directly related to research and development activities.
The Company directly reduces research and development expenses for amounts reimbursed pursuant to cost-sharing agreements. During 2003, 2004 and 2005, research and development expenses were reduced by $131,000, $23,000 and $0, respectively, for costs reimbursed primarily by Dr. Falk Pharma, GmbH under the terms of the collaboration agreement described in Note 14.
F-9
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
Clinical Trials Accruals
The Company records accruals based on estimates of the services received, efforts expended and amounts owed pursuant to contracts with numerous clinical trial centers and contract research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials are recognized based on the Company’s estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.
Transaction Charges
In the first quarter of 2005, the Company recognized general and administrative expense of $1,635,000 for expenses incurred in connection with a terminated public offering, including $1,146,000 in prepaid expenses at December 31, 2004. As of December 31, 2005, the Company had $99,000 of IPO charges in prepaid expenses.
Deferred Rent Incentive
In August 2002, the Company received $2,013,000 as an incentive to lease its current office space. The incentive is being recognized monthly over the life of the lease on a straight-line basis as a reduction to the lease expense in general and administrative expenses. The Company recognized $403,000 of the incentive during each of 2003, 2004 and 2005.
Redeemable Convertible Preferred Stock
The carrying value of redeemable convertible preferred stock is increased by periodic accretions so that the carrying amount will equal the redemption amount at the earliest redemption date. These increases are affected through charges to accumulated deficit.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and redeemable convertible preferred stock are considered to be representative of their respective fair values. The fair value of long-term debt was $4,504,000 and $2,162,000 at December 31, 2004 and 2005, respectively, as compared to the book value of $4,557,000 and $2,193,000 at December 31, 2004 and 2005, respectively. The difference between fair value and book value was attributable to the benefit of the interest grace period on the Company’s loan from the City of Winston-Salem. The Company estimates the fair value of long-term debt using discounted cash flows based on its incremental borrowing rates for similar debt.
F-10
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of cash and short-term investments. The Company places its cash and cash equivalents with high-credit quality financial institutions. The Company has established guidelines for investment of its excess cash designed to emphasize safety, liquidity and preservation of capital. At December 31, 2004 and 2005, the Company had deposits with a high credit quality major financial institution in excess of federally insured limits of approximately $53,000,000 and $24,800,000, respectively.
Revenue Recognition
The Company uses revenue recognition criteria in Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104, Revenue Recognition (replacement of SAB 101). The Company considers a variety of factors in determining the appropriate method of revenue recognition under its collaboration agreements, such as whether the elements of the agreement are separable, whether there are determinable fair values and whether there is a unique earnings process associated with a particular element of an agreement. Research fee revenues are earned and recognized as research is performed and related expenses are incurred. License fees for access to the Company’s intellectual property are recognized ratably over the contracted period in accordance with the provisions of the contract. Amounts received in advance of performance are recorded as deferred revenue and amortized in the statement of operations into revenue over the estimated life of the research and development period. Revenues based on the achievement of development and regulatory milestones that carry substantive performance risk are only recognized upon achievement of the milestone event. Product sales revenues are recorded when goods are shipped, at which point title has passed. Revenues from grants are recognized as the Company performs the work and incurs reimbursable costs in accordance with the objectives of the award.
Shipping and Handling Costs
During 2003, 2004 and 2005, $173,000, $174,000 and $175,000, respectively, of shipping and handling costs were included in cost of product sales.
Income Taxes
The liability method is used in accounting for income taxes as required by Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. Currently there is no provision for income taxes, as the Company has incurred net losses to date.
Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires components of other comprehensive loss, including unrealized gains and losses on available-for-sale securities, to be included as part of total comprehensive loss. The components of comprehensive loss are included in the statements of redeemable convertible preferred stock and stockholders’ equity (deficit).
Net Loss Per Share Attributable to Common Stockholders
The Company computes net loss per share attributable to common stockholders in accordance with SFAS No. 128, Earnings Per Share (SFAS 128). Under the provisions of SFAS 128, basic net loss per share attributable to common stockholders (Basic EPS) is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share attributable to common stockholders (Diluted EPS) is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options and shares issuable upon the exercise of warrants. For the periods presented, Diluted EPS is identical to Basic EPS because common share equivalents are excluded from the calculation, as their effect is antidilutive.
Unaudited Pro Forma Stockholders’ Equity and Pro Forma Net Loss Per Share
The Company’s Board of Directors has authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public in an initial public offering (the IPO). If the IPO is closed at a price per share of at least $11.00 and gross proceeds to the Company are not less than $50,000,000, all of the redeemable convertible preferred stock outstanding at the time of the IPO will automatically convert into 13,832,015 shares of common stock. Unaudited pro forma basic and diluted net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the conversion of outstanding redeemable convertible preferred stock into shares of the Company’s common stock effective upon the completion of the Company’s planned IPO as if such conversion had occurred at January 1, 2005, or the date of issuance, if later.
F-12
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
The following table sets forth the computation of Basic EPS and Diluted EPS:
| Year ended December 31, |
||||||||||||
| 2003 |
2004 |
2005 |
||||||||||
| Historical |
||||||||||||
| Numerator: |
||||||||||||
| Net loss attributable to common stockholders |
$ | (27,735,949 | ) | $ | (32,768,948 | ) | $ | (40,229,499 | ) | |||
| Denominator: |
||||||||||||
| Weighted average common shares outstanding |
109,053 | 219,213 | 262,013 | |||||||||
| Basic and diluted net loss per share attributable to common stockholders |
$ | (254.33 | ) | $ | (149.48 | ) | $ | (153.54 | ) | |||
| Unaudited pro forma |
||||||||||||
| Numerator: |
||||||||||||
| Net loss attributable to common stockholders |
$ | (28,991,523 | ) | |||||||||
| Denominator: |
||||||||||||
| Shares used above |
262,013 | |||||||||||
| Pro forma adjustment to reflect assumed conversion of preferred stock, on a weighted average basis |
13,806,169 | |||||||||||
| Shares used to compute pro forma basic and diluted net loss per share attributable to common stockholders |
14,068,182 | |||||||||||
| Unaudited pro forma basic and diluted net loss per share attributable to common stockholders |
$ | (2.06 | ) | |||||||||
The Company has excluded all outstanding stock options and warrants from the calculation of net loss per share attributable to common stockholders because such securities are antidilutive for all periods presented. Had the Company been in a net income position, these securities may have been included in the calculation. These potentially dilutive securities consist of the following on a weighted average basis:
| Year ended December 31, | ||||||
| 2003 |
2004 |
2005 | ||||
| Outstanding common stock options |
613,503 | 1,010,716 | 1,466,715 | |||
| Redeemable convertible preferred stock |
9,373,431 | 10,111,066 | 13,806,169 | |||
| Outstanding warrants |
215,054 | 215,054 | 215,054 | |||
| Total |
10,201,988 | 11,336,836 | 15,487,938 | |||
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
Stock-Based Compensation
The Company has an equity incentive plan, which is described more fully in Note 11. Prior to January 1, 2005, the Company accounted for the plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123). No stock-based employee compensation cost was recognized in the Statement of Operations for the years ended December 31, 2004 as all options granted under the plan to employees had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
Effective January 1, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2005 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of, January, 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123; (b) compensation cost for all stock-based payments granted subsequent to January 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and (c) compensation cost for awards modified on April 7, 2005, based on the modification provisions in accordance with SFAS 123R. Results for prior periods have not been restated.
As a result of adopting SFAS 123R effective January 1, 2005, the Company’s net loss for the year ended December 31, 2005, is $645,000 higher than if it had continued to account for stock-based compensation under APB Opinion 25.
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under pre-existing literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options and the tax deductions for the Company at those times), no amount of operating cash flows have been recognized in prior periods for such excess tax deductions because of net operating losses generated since inception.
F-14
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 2. | Summary of Significant Accounting Policies (continued) |
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s equity incentive plan in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option pricing formula and amortized to expense over the options’ vesting periods.
| Year Ended December 31 |
||||||||
| 2003 |
2004 |
|||||||
| Net loss attributable to common stockholders, as reported |
$ | (27,735,949 | ) | $ | (32,768,948 | ) | ||
| Add: stock-based employee compensation expense included in reported net income, net of related tax effects of $0 |
65,325 | 50,623 | ||||||
| Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(515,405 | ) | (916,988 | ) | ||||
| Pro forma net loss |
$ | (28,186,029 | ) | $ | (33,635,313 | ) | ||
| Net loss per share: |
||||||||
| Basic and diluted, as reported |
$ | (254.33 | ) | $ | (149.48 | ) | ||
| Basic and diluted, pro forma |
$ | (258.46 | ) | $ | (153.44 | ) | ||
Recent Accounting Pronouncements
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of ABP Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS 154 requires retrospective application to prior periods’ financial statements for all voluntary changes in accounting principle, unless impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS 154 will have no immediate impact on our consolidated financial statements, although it would impact our presentation of future voluntary accounting changes, should such changes occur.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on net loss.
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 3. | Inventories |
Inventories consisted of the following:
| December 31, | ||||||
| 2004 |
2005 | |||||
| Raw materials |
$ | 53,388 | $ | 6,400 | ||
| Finished goods |
49,252 | 35,540 | ||||
| $ | 102,640 | $ | 41,940 | |||
| 4. | Property and equipment |
Property and equipment consists of the following:
| December 31, | ||||||
| 2004 |
2005 | |||||
| Lab equipment |
$ | 4,795,050 | $ | 5,006,167 | ||
| Office furniture and fixtures |
1,438,329 | 1,474,655 | ||||
| Leasehold improvements |
138,790 | 138,790 | ||||
| 6,372,169 | 6,619,612 | |||||
| Less: accumulated depreciation |
4,109,471 | 4,872,088 | ||||
| Property and equipment, net |
$ | 2,262,698 | $ | 1,747,524 | ||
The Company recorded approximately $635,000, $729,000 and $765,000 of depreciation expense during 2003, 2004 and 2005, respectively.
| 5. | Intangible Assets |
Intangible assets consist of the following:
| December 31, |
||||||||
| 2004 |
2005 |
|||||||
| Patents |
$ | 642,000 | $ | 642,000 | ||||
| Less: accumulated amortization |
(91,263 | ) | (129,027 | ) | ||||
| Total |
$ | 550,737 | $ | 512,973 | ||||
The Company recognized amortization expense of approximately $38,000 per year in 2003, 2004 and 2005. Based on the Company’s current intangible assets, the Company expects to recognize $38,000 of amortization expense in each of the next five years.
| 6. | Accrued Expenses |
Accrued expenses consists of the following:
| December 31, | ||||||
| 2004 |
2005 | |||||
| Clinical trials costs |
$ | 965,407 | $ | 1,688,277 | ||
| Employee compensation |
850,503 | 1.045.967 | ||||
| Other |
124,926 | 115,503 | ||||
| $ | 1,940,836 | $ | 2,849,747 | |||
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 7. | Long-term debt |
During 2002, the Company entered into agreements to borrow $500,000 from the City of Winston-Salem and $2,500,000 from R.J. Reynolds Tobacco Company (RJRT). The note payable to the City of Winston-Salem matures on April 19, 2012, is non-interest bearing until April 2007 and, thereafter, bears interest between 5% and 7% depending on the gross revenues of the Company until maturity. No payments are due on the City of Winston-Salem note until the 5-year anniversary of the loan. At that time the Company will initiate monthly repayments of $9,000 over the five-year period until maturity, at which time any remaining principal and interest is then due. The note payable to RJRT accrues interest at 6.6%, and is repayable in monthly payments of $59,403 through the maturity date of May 1, 2006. In January 2004, the Company amended the note agreement with RJRT to allow additional borrowings for up to a total of $2,000,000. The Company was advanced an additional tranche on April 1, 2004 in the amount of $1,027,000. This additional tranche accrues interest at 5.87% and is repayable in monthly payments of $24,000 through the maturity date of April 1, 2008. The Company was advanced the final tranche on December 23, 2004 in the amount of $973,000. This tranche accrues interest at 6.89% and is repayable in monthly payments of $23,000 through the maturity date of January 1, 2009. The Company paid approximately $135,000, $133,000 and $146,000 for interest under the RJRT note during 2003, 2004 and 2005, respectively.
The notes with RJRT are secured by equipment owned by the Company with a book value of approximately $1,488,000, net of accumulated depreciation, at December 31, 2005.
On December 15, 2004, the Company entered into a development agreement with The Stanley Medical Research Institute (SMRI). In connection with the agreement, SMRI paid the Company $1,250,000 in return for the issuance by the Company of a convertible promissory note in an equal principal amount. The note bore interest at 10% per annum. The note’s principal balance plus accrued interest of $84,000 was paid in full on August 18, 2005 and the development agreement with SMRI was terminated in December 2005.
Maturities of long-term debt are as follows at December 31, 2005:
| 2006 |
$ | 783,895 | |
| 2007 |
593,070 | ||
| 2008 |
455,813 | ||
| 2009 |
121,297 | ||
| 2010 |
103,182 | ||
| Thereafter |
136,040 | ||
| $ | 2,193,297 | ||
| 8. | Redeemable Preferred Stock |
In August 2000, the Company issued 5,000,000 shares of its Series A redeemable convertible preferred stock (the Series A) to RJRT, and completed a private placement of 6,537,634 of its Series B redeemable convertible preferred stock (the Series B) generating cash of $29,073,000, net of offering costs.
In January 2001, the Company issued 29,933 shares of Series B to three consultants in partial payment of consulting fees owed by the Company.
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 8. | Redeemable Preferred Stock (continued) |
In November 2002, the Company completed a private placement of 37,764,180 shares of its Series C redeemable convertible preferred stock (the Series C) and received cash of $45,488,000, net of offering costs.
In March 2003, the Company completed a private placement of an additional 11,404,958 shares of Series C and received cash of $13,767,000, net of offering costs.
In December 2004, the Company completed a private placement of an additional 27,272,728 shares of Series C and received cash of $32,900,000 net of offering costs.
In May 2005, the Company completed a private placement of an additional 496,132 shares of Series C and received cash of $612,000, net of offering costs.
The following is a summary of the rights, preferences and terms of the Company’s outstanding series of redeemable convertible preferred stock:
Conversion
Each share of Series A, Series B and Series C is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into fully paid and nonassessable shares of the Company’s common stock. As of December 31, 2005, conversion of the Series A, Series B and Series C would result in the issuance of 666,667, 2,082,623 and 11,082,725 shares of common stock, respectively. Future sales of equity at prices below the respective conversion prices could result in adjustments to the number of shares of common stock into which each series of preferred stock is convertible.
Automatic conversion of the Series A, Series B and Series C into fully paid and nonassessable shares of common stock, without the payment of additional consideration by the holders thereof, would occur immediately upon the closing of the sale of the Company’s common stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933 in which (i) the price per share equals or exceeds $11.00 (subject to certain adjustments) or such lesser amount as is approved by the holders of (a) a majority of then outstanding shares of Series A and Series B, considered together as a single class on an as-converted basis, and (b) at least sixty-five percent (65%) of the then outstanding shares of Series C, and (ii) the gross proceeds to the Company are not less than $50,000,000 or such lesser amount as is approved by the holders of (a) a majority of then outstanding shares of Series A and Series B, considered together as a single class on an as-converted basis, and (b) at least sixty-five percent (65%) of the then outstanding shares of Series C. The accrued but unpaid cumulative dividend on the Series C shall, if not yet declared, be forfeited upon conversion of the Series C.
Dividends
Dividends accrue daily on each share of Series C on a cumulative basis at the rate of 8% per annum and are recorded as an increase to Series C and an increase to accumulated deficit. Cumulative dividends may be declared and paid at any time and shall be payable upon
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 8. | Redeemable Preferred Stock (continued) |
liquidation or redemption. At December 31, 2004 and 2005, cumulative accrued dividends on the Series C stock totaled $9,834,000 and $17,264,000, respectively.
Dividends on the Series A, Series B and Series C are payable when and if declared by the Company’s Board of Directors. No dividend may be paid on the common stock without the approval of the holders of a majority of the then outstanding shares of Series A and Series B, considered together on an as-converted basis, and the holders of 65% of the Series C. No dividend may be declared or paid on either the Series A or the Series B unless, simultaneously with such declaration or payment, the same dividend per share is declared or paid on both the Series A and the Series B, as well as the Series C, and any unpaid cumulative dividends on the Series C are declared and paid in full.
Voting
Each holder of the Series A, Series B and Series C is entitled to the number of votes equal to the number of shares of common stock into which such holder’s shares are convertible on the applicable record date. In addition, certain actions by the Company require the approval of one or more of (i) the holders of a majority of the outstanding shares of Series A, (ii) the holders of at least two-thirds of the outstanding shares of Series B, (iii) the holders of a majority of the outstanding shares of Series A and Series B, considered together on an as-converted basis, and/or (iv) the holders of at least 65% of the outstanding shares of Series C.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series C shares have preference and are entitled to receive an amount per share equal to the greater of (i) their initial purchase price per share plus any accrued or declared and unpaid dividends on such share or (ii) the amount per share of Series C that such holders would receive if all of the Series A, Series B and Series C were converted to common stock immediately prior to such liquidation, dissolution or winding up.
Next, the holders of Series A and Series B are entitled to receive, on a pari passu basis, an amount equal to their initial purchase price per share plus any declared and unpaid dividends on such shares. Any assets of the Company remaining after the payments specified above shall be distributed on a pari passu basis among the holders of common stock and, on an as-converted to common stock basis, Series A, Series B and Series C. Unless the holders of a prescribed number of shares of Series A, Series B and/or Series C otherwise elect, certain fundamental transactions involving the Company shall be treated as a liquidation for the Series A, Series B and/or Series C, as the case may be.
Mandatory Redemption
At any time after November 26, 2008, upon demand by the holders of at least 65% of the outstanding shares of Series C, all of the outstanding shares of Series C shall be redeemed in cash in an amount per share equal to the initial purchase price per share (subject to certain adjustments) plus any accrued or declared and unpaid dividends on such shares.
At any time after the later of August 22, 2005 or the date on which no shares of Series C are outstanding, a number of outstanding shares of Series A or Series B elected upon demand by
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 8. | Redeemable Preferred Stock (continued) |
the holders of a majority of the outstanding shares of Series A (in the case of Series A) or a majority of the outstanding shares of Series B (in the case of Series B) shall be redeemed in an amount per share equal to $4.65 (subject to certain adjustments) plus (i) any previously declared but unpaid dividends on such share and (ii) an amount equal to $0.081375 per share (subject to certain adjustments) multiplied by the number of complete three-month periods that have elapsed from the date such share was originally issued to the redemption date. The Company may satisfy its redemption obligation with respect to the Series A and/or the Series B in cash or by paying a portion in cash and issuing a promissory note that meets certain prescribed conditions for the remaining amount.
| 9. | Stockholders’ Equity (Deficit) |
On March 14, 2003, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 11,333,333 and preferred stock to 60,736,705 and issued 11,404,958 shares of Series C.
On December 6, 2004, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 16,666,666 and preferred stock to 93,309,532 and issued 27,272,728 shares of Series C.
On February 2, 2005, the Company’s Board of Directors adopted, and on February 2, 2005 the stockholders approved, a one-for-7.5 share reverse stock split of the Company’s common stock effective as of February 3, 2005. All common stock and per common share amounts for all periods presented in the accompanying financial statements have been restated to reflect the effect of this reverse common stock split.
In conjunction with the issuance of Series A, the Company issued a warrant to purchase 215,054 shares of the Company’s common stock at an original exercise price of $34.88 per share (subject to certain adjustments). In connection with the Company’s issuance of Series C and price adjustment provisions of the warrant, the conversion price of the warrant was adjusted to $14.63. The warrant is exercisable only upon the earlier of an initial public offering or a change in control. The fair value of the warrant is a direct cost of obtaining capital. As such, the fair value has been recorded in stockholders’ equity, with the offset recorded as a decrease in the redemption value of the Series A. The Company will accrete to the redemption value of the Series A at the earliest date of redemption, or until November 2008, through an increase in redemption value to Series A and an increase to retained deficit. The fair value of the warrant to purchase 215,054 shares of the Company’s common stock was estimated at the grant date to be $213,710 or $0.99 per share. The Company considered the anti-dilution features, the contingencies surrounding the limited opportunities for exercise, and the warrant’s priorities over common stock options in relation to the fair value of the Company’s common stock at the date of issuance when estimating the fair value of the warrant.
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TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 9. | Stockholders’ Equity (Deficit) (continued) |
At December 31, 2004 and 2005, the Company had reserved shares of common stock for future issuance as follows:
| December 31, | ||||
| 2004 |
2005 | |||
| Convertible preferred stock |
13,760,548 | 13,832,015 | ||
| Warrant |
215,054 | 215,054 | ||
| Options |
1,028,086 | 1,664,474 | ||
| 15,003,688 | 15,711,543 | |||
| 10. | Income Taxes |
There is no income tax provision (benefit) for federal or state income taxes as the Company has incurred operating losses since inception.
The Company’s effective tax rate differs from the federal income tax rate for the following reasons:
| Year Ended December 31, |
|||||||||
| 2003 |
2004 |
2005 |
|||||||
| Expected federal income tax benefit at statutory rate |
(34 | )% | (34 | )% | (34 | )% | |||
| Increase (decrease) resulting from: |
|||||||||
| Research and development credits |
(6 | ) | (3 | ) | (3 | ) | |||
| State income tax expense, net of federal benefit |
(5 | ) | (5 | ) | (4 | ) | |||
| Net operating loss and credit limitations |
3 | — | — | ||||||
| Change in valuation allowance |
41 | 42 | 41 | ||||||
| Other |
1 | — | — | ||||||
| — | % | — | % | — | % | ||||
At December 31, 2003, 2004 and 2005, the Company had net operating loss carryforwards for federal income tax purposes of approximately $45,606,000, $70,866,000 and $98,333,000, respectively, and for state income tax purposes of approximately $45,627,000, $70,887,000 and $98,349,000, respectively, and research and development federal income tax credits of approximately $638,000, $1,357,000 and $2,131,000, respectively. The federal net operating loss carryforwards begin to expire in 2020. State net operating loss carryforwards begin to expire in 2015. The research and development tax credits begin to expire in 2021.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. As a result of a series of stock issuances, the Company had such an ownership change on November 30, 2002. Consequently, an annual limitation is imposed on the Company’s use of net operating loss and credit carryforwards attributable to periods before the change.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 10. | Income Taxes (continued) |
for income tax purposes. The Company’s net deferred tax assets relate primarily to its net operating loss carryforwards. A valuation allowance has been recognized to offset the deferred tax assets related primarily to its net operating loss carryforward. If and when recognized, the tax benefit for those items will be reflected in current operations of the period in which the benefit is recorded as a reduction of income tax expense. The utilization of the loss carryforwards to reduce future income taxes will depend on the Company’s ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards. For the years ended December 31, 2003, 2004 and 2005, the valuation allowance increased approximately $8,050,000, $9,600,000 and $11,750,000, respectively.
Significant components of the Company’s deferred tax assets (liabilities) are as follows:
| December 31, |
||||||||
| 2004 |
2005 |
|||||||
| Deferred tax assets: |
||||||||
| Net operating loss carryforward |
$ | 24,787,121 | $ | 35,299,808 | ||||
| Research and development tax credit |
1,357,135 | 2,130,640 | ||||||
| Patents |
577,974 | 914,069 | ||||||
| Stock based compensation |
— | 88,129 | ||||||
| Total gross deferred tax assets |
26,722,230 | 38,432,646 | ||||||
| Valuation allowance |
(26,599,098 | ) | (38,347,057 | ) | ||||
| Net deferred tax asset |
123,132 | 85,589 | ||||||
| Deferred tax liabilities: |
||||||||
| Equipment and other |
(123,132 | ) | (85,589 | ) | ||||
| Net deferred tax asset |
$ | — | $ | — | ||||
| 11. | Equity Incentive Plan |
On August 22, 2000, the Company established an equity incentive plan (the Plan) and authorized the issuance of up to 268,168 shares under the Plan to attract and retain employees, directors and certain independent contractors, consultants and advisors and to allow them to participate in the growth of the Company. During 2001, the number of shares authorized for issuance under the Plan was increased to 348,168. In conjunction with the November 2002 Series C financing, the Company authorized the issuance of an additional 400,000 shares, increasing the number of authorized shares to 748,168. Upon the issuance of the additional Series C shares in March 2003, the number of authorized shares was increased to 1,228,888. In March 2005, the number of authorized shares was increased to 1,878,888. Awards may be made to participants under the Plan in the form of incentive and nonqualified stock options, restricted stock, stock appreciation rights, stock awards, and performance awards. Eligible participants under the Plan include employees, directors and certain independent contractors, consultants or advisors of the Company or a related corporation. The vesting periods for awards made under the Plan are determined at the discretion of the Plan administrator and range from 0 to 5 years. Awards made under the Plan have 10-year contractual terms or, in some cases, shorter terms designed to comply with Section 409A of the Internal Revenue Code. The exercise price of incentive options granted under the Plan may not be less than 100% of the fair market value of the common stock on the date of grant, as determined by the Plan administrator.
F-22
Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 11. | Equity Incentive Plan (continued) |
On April 7, 2005 the Company’s Board of Directors authorized an amendment to each stock option agreement held by current employees that changed the exercise price per share for each unvested portion as of March 31, 2005 to $1.75. As of March 31, 2005, there were 354,672 shares issued to 75 employees subject to the unvested portions of employee options ranging from an original option price of $5.10 to $5.63 that were affected by the amendments. Each affected option is required to be accounted for as a modification of an award under SFAS 123R. The fair market value was calculated immediately prior to the modification and immediately after the modification to determine the incremental fair market value. This incremental value of $147,000 and the fair market value of each modified option will be expensed as compensation on a quarterly basis, until the date that the option is exercised or forfeited or expires unexercised.
The Company uses the Black-Scholes-Merton formula to estimate the fair value of its stock-based payments. The volatility assumption used in the Black-Scholes-Merton formula is based on the calculated historical volatility of twelve benchmark biotechnology companies that have been identified as comparable public entities. The expected term of options granted is derived from the simplified method allowable under SEC Staff Accounting Bulletin No. 107. Under this approach, the expected term would be the mid-point between the weighted average of vesting period and the contractual term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following table illustrates the weighted-average assumptions for the Black-Scholes-Merton model used in determining the fair value of options granted to employees:
| Year Ended December 31, | ||||
| 2004 |
2005 | |||
| Dividend yield |
— | — | ||
| Risk-free interest rate |
3.0% | 4.1% | ||
| Volatility |
0.8 | 0.7 | ||
| Expected life |
4 years | 6.25-6.5 years | ||
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 11. | Equity Incentive Plan (continued) |
A summary of option activity under the Plan and changes during the periods are presented below:
| Options Granted |
Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value | ||||||||
| Outstanding at January 1, 2003 |
307,548 | $ | 4.43 | ||||||||
| Granted |
799,479 | 5.03 | |||||||||
| Forfeited |
(4,797 | ) | 1.95 | ||||||||
| Exercised |
(61,092 | ) | 3.90 | ||||||||
| Outstanding at December 31, 2003 |
1,041,138 | 4.88 | |||||||||
| Granted |
65,200 | 5.33 | |||||||||
| Forfeited |
(6,066 | ) | 21.53 | ||||||||
| Exercised |
(112,472 | ) | 4.73 | ||||||||
| Outstanding at December 31, 2004 |
987,800 | 4.88 | |||||||||
| Granted |
653,743 | 1.76 | |||||||||
| Forfeited |
(17,923 | ) | 5.00 | ||||||||
| Exercised |
(13,611 | ) | 1.75 | ||||||||
| Outstanding at December 31, 2005 |
1,610,009 | $ | 2.88 | 8.0 | $ | 46,764 | |||||
| Vested and exercisable at December 31, 2005 |
979,784 | $ | 3.61 | 7.6 | $ | 37,614 | |||||
The weighted average grant date fair value for an option granted during 2003, 2004 and 2005 was $3.08, $5.33 and $1.20, respectively. The total intrinsic value of options exercised during the year ended December 31, 2005 was $13,047.
A summary of the status of the Company’s non-vested shares as of December 31, 2005, and changes during year ended December 31, 2005, is presented below:
| Non-vested Options |
Options Granted |
Weighted- Average Grant- Date Fair Value |
|||||
| Non-vested at January 1, 2005 |
401,148 | $ | 3.00 | ||||
| Granted |
653,743 | 1.20 | |||||
| Vested |
(418,913 | ) | 2.93 | ||||
| Forfeited |
(5,753 | ) | 3.06 | ||||
| Non-vested at December 31, 2005 |
630,225 | 1.18 | (a) | ||||
| (a) | Reflects the April 7, 2005 amendment that decreased the weighted average fair value of 354,672 shares subject to unvested options from $3.08 to $1.02 per option. |
As of December 31, 2005, there was $989,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of shares vested during the twelve months ended December 31, 2005 was $1,016,000.
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 11. | Equity Incentive Plan (continued) |
During 2004, the Company granted options to purchase 10,333 shares of common stock at an exercise price of $0.08, below the fair value of $5.63 per share of common stock. During 2005, the Company granted options to purchase 6,000 shares of common stock at an exercise price of $0.08, below the fair value of $1.75 per share of common stock. The fair value of these shares was recorded as compensation expense in the amounts of $51,000 and $46,000 during the twelve months ended December 31, 2004 and 2005, respectively.
| 12. | Leases |
On March 1, 2002, the Company entered into an agreement with Wake Forest University to lease an office and research facility in Winston-Salem, North Carolina with an initial term that extends through July 31, 2007. The lease contains a renewal option for up to one additional five-year term, with a lease rate similar to the original agreement. In December 2004, the Company amended the terms of the lease to include 1,000 square feet and an option on additional space in this facility. The lease amendment increased annual rent by $15,000 per year and included a $37,000 hold fee in the first year. Rent expense incurred by the Company under this lease was approximately $1,456,000, $1,456,000 and $1,500,000 for the years ended December 31, 2003, 2004 and 2005, respectively. Rent expense is offset by the monthly recognition of the deferred rent incentive discussed in Note 2. At December 31, 2005, the Company has the following future minimum lease payments in relation to this lease:
| 2006 |
$ | 1,470,552 | |
| 2007 |
857,822 | ||
| 2008 and thereafter |
— | ||
| $ | 2,328,374 | ||
| 13. | Retirement Savings Plan |
The Company has a 401(k) retirement plan that covers substantially all of its employees. This plan provides for the Company to make 100% matching contributions up to a maximum of 6% of employees’ eligible compensation. The Company contributed approximately $298,000, $368,000 and $412,000 to the plan for the years ended December 31, 2003, 2004 and 2005, respectively.
| 14. | Collaborative Research and License Agreements |
Aventis Pharma
In December 1998, the Company entered into a collaborative research and license agreement with Aventis Pharma whereby the Company and Aventis agreed to collaborate on the discovery, development and commercialization of nicotinic agonists for use in prevention of certain human diseases. Under the agreement, as restated in January 2002, Aventis was granted a license under certain patent rights and knowledge to develop, manufacture and commercialize certain compounds. The agreement provided for the payment of research fees on a “fee for service” basis for development work that the Company agreed to perform. For the years ended December 31, 2003, 2004 and 2005, these fees were approximately $1,303,000, $338,000 and $0, respectively. The Company was entitled to receive milestone payments under the contract at
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 14. | Collaborative Research and License Agreements (continued) |
specified dates during the development period. The Company did not receive milestone payments under the agreement during 2003, 2004 or 2005. In addition, Aventis agreed to make royalty payments based on net sales of products developed and sold. In general, either party could terminate the agreement in the event of a material breach by the other party, including a material breach of research obligations or the issuance of third-party patent rights to a competitor. Additionally, Aventis could terminate the agreement without cause by providing the Company with 30 days, written notice at any time after the research term, in which case all rights to the product candidate would revert to the Company. All royalty and other payment obligations of the parties survive any termination of the agreement.
During 1999, the Company received a one-time non-refundable license fee payment of $2,000,000 to enter into this agreement. During 2003 and 2004, the product candidate subject to the agreement had not completed the research and clinical development process. Accordingly, the Company has deferred recognition of the license fee and was amortizing it over the expected term of the research and development period. On December 3, 2004, Aventis provided the Company with 30 days advance written notice of Aventis’ plans to terminate the collaborative research and license agreement. The agreement was terminated effective January 2, 2005 and was within the provisions of termination clauses of the agreement. As a result of the termination of the agreement, the Company recognized the remaining deferred revenue of $825,000 related to the agreement during the fourth quarter of 2004, as there were no further responsibilities or duties to be performed under the agreement as of December 31, 2004.
On January 21, 2002, the Company entered into a second collaborative research and license agreement with Aventis to discover and develop drugs, derived from the Aventis library of compounds for the treatment of Alzheimer’s disease and other disorders of the central nervous system. The second agreement was structured similarly to the first agreement. The research term of the agreement expired in December 2004. The Company was eligible to receive milestone payments and royalties from Aventis for any compounds that are selected for further development within six months after the expiration of the research term.
Dr. Falk Pharma
On January 26, 2001, the Company entered into a collaborative research development and license agreement with Dr. Falk Pharma GmbH, a German corporation, pursuant to which the parties agreed to collaborate to research, develop and commercialize nicotinic therapeutics for use in the prevention or treatment of ulcerative colitis and other gastrointestinal and liver diseases. Upon execution of the agreement, Dr. Falk Pharma paid the Company a $1,000,000 upfront license fee and purchased 14,815 shares of the Company’s common stock for $1,000,000. The Company deferred recognition of the upfront license fee payment and was amortizing it over the expected term of the research and development period. To account for the $1,000,000 in proceeds for the common stock, the Company used the estimated fair value of the common stock to value the shares issued to arrive at a total equity value of $76,000, with the remaining proceeds of $924,000 allocated to deferred revenue. This deferred revenue was also being amortized over the expected term of the research and development period.
The Company and Dr. Falk Pharma mutually agreed to discontinue the development of the lead compound subject to the collaboration agreement, resulting in the recognition of the
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 14. | Collaborative Research and License Agreements (continued) |
remaining deferred revenue of $890,000 during the fourth quarter of 2004, and terminated the collaboration agreement in November 2005. The Company recognized $170,000 and $1,017,000 of deferred revenue under this agreement during 2003 and 2004, respectively.
Stanley Medical Research Institute
On December 15, 2004, the Company entered into a development agreement with The Stanley Medical Research Institute (SMRI). In connection with the agreement, SMRI paid the Company $1,250,000 in return for the issuance by the Company of a convertible promissory note in an equal principal amount. The note bore interest at 10% per annum. In August 2005, the Company re-paid the promissory note in full. The Company and SMRI terminated the development agreement in December 2005.
AstraZeneca AB
In December 2005, the Company entered into a collaborative research and license agreement with AstraZeneca AB under which the Company granted AstraZeneca exclusive development and worldwide commercialization rights to the Company’s product candidate known as TC-1734 as a treatment for Alzheimer’s disease, cognitive deficits in schizophrenia and potentially other conditions marked by cognitive impairment such as attention deficit hyperactivity disorder, age associated memory impairment and mild cognitive impairment. The collaboration agreement also provides for a multi-year preclinical research collaboration to be conducted by the Company and AstraZeneca.
The Company is eligible to receive future research fees, license fees and milestone payments under its collaboration agreement with AstraZeneca. The amount of research fees, license fees and milestone payments will depend on the extent of the Company’s research activities and the timing and achievement of development, regulatory and first commercial sale milestone events. AstraZeneca paid the Company an initial fee of $10 million in February 2006. Based on the collaboration agreement terms, the Company allocated $5 million of the initial fee to the research collaboration, which the Company expects to recognize as revenue over the four-year term of the research collaboration. The Company deferred recognition of the remaining $5 million of the initial fee, which was allocated to the TC-1734 license grants, until AstraZeneca makes a determination whether to conduct Phase II clinical development of TC-1734 following the completion of additional safety and product characterization studies to be conducted by AstraZeneca. If AstraZeneca decides to conduct a Phase II clinical trial of TC-1734 following the completion of the safety and product characterization studies, the Company would recognize the deferred $5 million of the initial fee as revenue over the expected development period for TC-1734. The Company expects to recognize any revenue based on the achievement of milestones under the collaboration agreement upon achievement of the milestone event, if the Company determines that the revenue satisfies the revenue recognition requirements of SEC Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition Financial Statements, as amended by SAB No. 104. SAB No. 101 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed and determinable; and collectability is reasonably assured. The Company will record research fees that the Company receives from
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 14. | Collaborative Research and License Agreements (continued) |
AstraZeneca while it is conducting the safety and product characterization studies on TC-1734 as deferred revenue. The Company expects to receive approximately $2.5 million (unaudited) in research fees from AstraZeneca while AstraZeneca is conducting the safety and product characterization studies of TC-1734. If the agreement continues in effect following the completion of the additional safety and product characterization studies to be conducted by AstraZeneca, the Company will recognize all research fees previously recorded as deferred revenue and recognize future research fee revenues as the research is performed and related expenses are incurred. In that event, the Company would be entitled to receive at least an additional $21.2 million (unaudited) in research fees. Based on the current research budget, the Company would expect to receive an additional $23.9 million (unaudited) in research fees.
If AstraZeneca terminates the collaboration agreement upon completion of any or all of the additional safety and product characterization studies, the Company would be required to reimburse AstraZeneca for the amount of all research fees that it paid to the Company under the research collaboration under the agreement while AstraZeneca conducted the studies. In addition, the Company would be required to pay AstraZeneca an additional $5 million as compensation for assigning to it the data and any intellectual property generated in the studies. In that event, upon final termination by AstraZeneca in accordance with the terms of the Agreement, the Company would reduce deferred revenue by $5 million.
The Company’s collaboration agreement with AstraZeneca became effective on January 20, 2006. AstraZeneca paid the Company an initial fee of $10 million in February 2006.
| 15. | Related Party Transactions |
RJRT is the holder of 5,000,000 shares of Series A redeemable preferred stock convertible to 666,667 shares of common stock, 1,652,893 shares of Series C redeemable preferred stock convertible to 238,095 shares of common stock, a warrant to purchase 215,054 shares of common stock, 3,333 shares of common stock, and options to purchase 5,230 shares of common stock. The Company has entered into the following transactions and agreements with RJRT in the ordinary course of business.
During 2002, the Company entered into an agreement to borrow $2,500,000 from RJRT accruing interest at 6.6%. The note is repayable in monthly installments of $59,000 through the maturity date of May 1, 2006. In January 2004, the Company amended the note agreement with RJRT to allow for up to three additional tranches to be advanced to the Company for up to a total of $2,000,000. Each of the additional tranches will accrue interest at the 4-year U.S. Treasury rate plus 3.5% determined as at the day the additional tranche is advanced and will be repayable in 48 equal monthly installments. The Company was advanced an additional tranche on April 1, 2004 in the amount of $1,027,000. This additional tranche accrues interest at 5.87% and is repayable in monthly payments of $24,000 through the maturity date of April 1, 2008.
The Company was advanced the final tranche on December 23, 2004 in the amount of $973,000. This tranche accrues interest at 6.89% and is repayable in monthly payments of $23,000 through the maturity date of January 1, 2009. Under this related party note payable, the Company paid RJRT $772,000, $846,000 and $1,259,000 during 2003, 2004 and 2005, respectively.
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Table of Contents
TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 15. | Related Party Transactions (continued) |
The notes are secured by equipment owned by the Company with a book value of approximately $1,488,000 net of accumulated depreciation, at December 31, 2005.
A member of the Company’s board of directors serves as an officer of RJRT. Equity compensation for such director’s service has been made, at the director’s request, directly to RJRT. The numbers of shares subject to stock options granted to RJRT during the years ended December 31, 2003, 2004 and 2005 in connection with the director’s services are 1,000 shares per year. In connection with the issuance of the stock options, the Company recognized compensation expense of $2,512, $4,247 and $4,656 during 2003, 2004 and 2005, respectively.
Prior to December 31, 2003, the Company used the services of a RJRT employee for toxicology studies and purchased materials used for research and development and copy and print services through RJRT. The Company paid RJRT $201,000 for these services during 2003. During 2004 and 2005 the Company continued to use copy and print services totaling $79,000 and $71,000, respectively.
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TARGACEPT, INC.
NOTES TO FINANCIAL STATEMENTS—(CONTINUED)
| 16. | Selected Quarterly Financial Data (unaudited) |
| 2004 Quarter |
||||||||||||||||
| First |
Second |
Third |
Fourth |
|||||||||||||
| Net revenue |
$ | 496,939 | $ | 528,026 | $ | 555,583 | $ | 2,157,826 | ||||||||
| Gross profit on product sales |
6,060 | 494,780 | 55,697 | 11,600 | ||||||||||||
| Operating loss |
(6,843,593 | ) | (6,485,006 | ) | (6,664,381 | ) | (4,400,447 | ) | ||||||||
| Net loss |
(6,637,935 | ) | (6,481,318 | ) | (6,617,687 | ) | (4,288,449 | ) | ||||||||
| Net loss attributable to common stockholders |
(8,779,826 | ) | (8,623,208 | ) | (8,759,577 | ) | (6,606,337 | ) | ||||||||
| Basic and diluted net loss per share attributable to common stockholders(1) |
$ | (59.18 | ) | $ | (38.76 | ) | $ | (34.94 | ) | $ | (25.95 | ) | ||||
| Weighted average common shares outstanding—basic and diluted |
148,345 | 222,504 | 250,710 | 254,556 | ||||||||||||
| 2005 Quarter |
||||||||||||||||
| First |
Second |
Third |
Fourth |
|||||||||||||
| Net revenue |
$ | 303,233 | $ | 299,646 | $ | 338,310 | $ | 238,728 | ||||||||
| Gross profit (loss) on product sales |
157,518 | 62,477 | 39,768 | (59,411 | ) | |||||||||||
| Operating loss(2) |
(7,656,423 | ) | (8,339,228 | ) | (7,170,082 | ) | (6,775,183 | ) | ||||||||
| Net loss |
(7,437,771 | ) | (8,105,493 | ) | (6,920,200 | ) | (6,528,059 | ) | ||||||||
| Net loss attributable to common stockholders |
(10,239,660 | ) | (10,913,785 | ) | (9,734,099 | ) | (9,341,955 | ) | ||||||||
| Basic and diluted net loss per share attributable to common stockholders(1) |
$ | (39.51 | ) | $ | (41.95 | ) | $ | (37.28 | ) | $ | (35.29 | ) | ||||
| Weighted average common shares outstanding—basic and diluted |
259,173 | 260,140 | 261,094 | 264,739 | ||||||||||||
Diluted EPS is identical to Basic EPS since common stock equivalent shares are excluded from the calculation, as their effect is anti-dilutive.
| (1) | Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts do not add to the annual amount because of differences in the weighted average common shares outstanding during each period principally due to the effect of the Company’s issuing shares of its common stock during the year. |
| (2) | Net loss for the first quarter of 2005 includes $1,635,000 of expenses incurred in connection with a public offering that was terminated. |
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| F-1 |
Until , 2006 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
5,000,000 Shares
Common Stock
Deutsche Bank Securities
Pacific Growth Equities, LLC
CIBC World Markets
Lazard Capital Markets
Prospectus
, 2006
Table of Contents
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the offering, all of which will be borne by us. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASDAQ National Market listing fee and the NASD filing fee.
| Securities and Exchange Commission registration fee |
$ | 7,999 | |
| NASDAQ National Market listing fee |
100,000 | ||
| NASD filing fee |
7,975 | ||
| Blue sky fees and expenses |
5,000 | ||
| Accounting fees and expenses |
300,000 | ||
| Legal fees and expenses |
285,000 | ||
| Transfer agent and registrar fees and expenses |
3,500 | ||
| Printing and engraving expenses |
300,000 | ||
| Miscellaneous |
50,526 | ||
| Total |
$ | 1,060,000 | |
Item 14. Indemnification of Directors and Officers.
Our Third Amended and Restated Certificate of Incorporation, as amended and in effect as of the date of this registration statement, and our Fourth Amended and Restated Certificate of Incorporation to be in effect upon completion of this offering (as may be in effect from time to time, the Certificate) provide that, except to the extent prohibited by the Delaware General Corporation Law, as amended (the DGCL), our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty while serving as our directors. Under the DGCL, our directors have a fiduciary duty to us that is not eliminated by this provision of the Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions that are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect our directors’ responsibilities under any other laws, such as federal securities laws or state or federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors and officers against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors or officers of the corporation, if they acted in good faith, in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe that their conduct was unlawful. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation’s bylaws, any agreement, a vote of stockholders or otherwise. The Certificate provides that, to the fullest extent permitted by Section 145 of the DGCL, we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that
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such person is or was a director or officer of us, or is or was serving at our request as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. At present, there is no pending litigation or proceeding involving any director or officer as to which indemnification will be required or permitted under the Certificate and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
Section 145 of the DGCL also empowers a corporation to purchase insurance for its officers and directors for such liabilities. We maintain liability insurance for our officers and directors.
Item 15. Recent Sales of Unregistered Securities.
Set forth below is information regarding shares of common stock and preferred stock issued, and options and warrants granted, by us since January 1, 2003. Also included is the consideration, if any, received by us for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.
(a) Issuance of Securities
1. On March 14, 2003, we issued and sold an aggregate of 11,404,958 shares of our series C convertible preferred stock at a purchase price per share of $1.21 to investors affiliated with JAFCO G-9(A) Venture Capital Investment Limited Partnership, Rock Castle Ventures, Cogene Biotech Ventures Five, Bison Capital, LLC and Oxford Bioscience Partners IV L.P. for an aggregate purchase price of approximately $13.8 million. These shares will convert into common stock at the rate of approximately 0.144 shares of common stock for each share of series C convertible preferred stock concurrently with the completion of this offering.
2. On December 6, 2004, we issued and sold an aggregate of 27,272,728 shares of our series C convertible preferred stock at a purchase price per share of $1.21 to New Enterprise Associates 10, Limited Partnership, EuclidSR Partners, L.P., Burrill Biotechnology Capital Fund, L.P., R.J. Reynolds Tobacco Holdings, Inc., Nomura Phase4Ventures LP and investors affiliated with CDIB Bioscience Ventures I, Inc., Genavent Fund, FCPR SGAM AI Biotechnology Fund, FCPR CDC-Innovation 2000, Advent Private Equity Fund II and JAFCO G-9(A) Venture Capital Investment Limited Partnership for an aggregate purchase price of approximately $33.0 million. These shares will convert into common stock at the rate of approximately 0.144 shares of common stock for each share of series C convertible preferred stock concurrently with the completion of this offering.
3. On December 15, 2004, we issued a $1.25 million convertible promissory note to The Stanley Medical Research Institute. In August 2005, we repaid the note in full.
4. On May 13, 2005, we issued and sold an aggregate of 496,132 shares of our series C convertible preferred stock at a purchase price per share of $1.21 to Cogene Biotech Ventures, L.P. for an aggregate purchase price of approximately $600,320. These shares will convert into common stock at the rate of approximately 0.144 shares of common stock for each share of series C convertible preferred stock concurrently with the completion of this offering.
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5. In December 2005, upon the exercise of stock options at an exercise price per share of $0.08 per share, we issued and sold an aggregate of 5,999 shares of common stock to NEA Development Corp., EuclidSR Partners, L.P., EuclidSR Biotechnology Partners, L.P., Burrill & Company LLC, R.J. Reynolds Tobacco Holdings, Inc., John P. Richard and Errol B. De Souza.
6. From January 1, 2003 to February 28, 2006, we granted:
| • | options to purchase an aggregate of 1,522,751 shares of common stock at exercise prices ranging from $0.08 to $5.63 per share under our 2000 Equity Incentive Plan, as amended, with a weighted average exercise price of $3.26 per share, to employees, directors and individual consultants; |
| • | restricted stock awards for an aggregate of 8,331 shares of common stock at a purchase price of $0.08 per share under our 2000 Equity Incentive Plan, as amended; and |
| • | options to purchase an aggregate of 13,999 shares of common stock at an exercise price of $0.08 per share to non-individual consultants under our 2000 Equity Incentive Plan, as amended. |
The weighted average exercise price of all options to purchase shares of common stock granted since January 1, 2003 and outstanding on February 28, 2006 is $2.91 per share. As of February 28, 2006, there were 62 holders of record of shares of our common stock.
(b) No underwriters were involved in the foregoing sales of securities. The securities described in paragraphs (a)(1), (2), (3) and (4), and a portion of the securities described in paragraphs (5) and (6) of this Item 15 were issued to a combination of foreign and U.S. investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Sections 3(a)(9) or 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relative to sales by an issuer not involving any public offering, or in reliance upon Regulation S promulgated under the Securities Act, to the extent an exemption from such registration was required. All purchasers of shares of our convertible preferred stock described in paragraphs (a)(1), (2), (3) and (4), and the purchasers of a portion of the securities described in paragraphs (5) and (6) of this Item 15 represented to us in connection with their purchase that they were accredited investors and were acquiring the shares for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock described in this Item 15 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
The restricted stock and a portion of the stock options and the common stock issuable upon the exercise of such options described in paragraphs (5) and (6) of this Item 15 were issued pursuant to written compensatory benefit plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
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Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
| Exhibit No. |
Description | |
| 1.1 | Form of Underwriting Agreement. | |
| 3.1(a)** | Third Amended and Restated Certificate of Incorporation of the Company, as amended. | |
| 3.1(b) | Form of Fourth Amended and Restated Certificate of Incorporation of the Company, to be effective upon completion of this offering. | |
| 3.2(a)** | Amended and Restated Bylaws of the Company. | |
| 3.2(b) | Form of Bylaws of the Company, to be effective upon completion of this offering. | |
| 4.1 | Specimen common stock certificate. | |
| 4.2(a)** | Third Amended and Restated Investor Rights Agreement, dated May 12, 2004, by and among the Company and certain stockholders of the Company. | |
| 4.2(b)** | Amendment No. 1, dated December 6, 2004, to Third Amended and Restated Investor Rights Agreement, dated May 12, 2004. | |
| 4.2(c)* | Amendment No. 2, dated , 2006, to Third Amended and Restated Investor Rights Agreement, dated May 12, 2004. | |
| 4.3** | Warrant to Purchase Common Stock, dated August 22, 2000, granted to R.J. Reynolds Tobacco Company and subsequently assigned to R.J. Reynolds Tobacco Holdings, Inc. | |
| 5.1 | Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |
| 10.1 | Form of Indemnification Agreement between the Company and each of its directors and officers. | |
| 10.2(a)** | Lease Agreement, dated as of August 1, 2002, by and between the Company and Wake Forest University Health Sciences. | |
| 10.2(b)** | First Lease Amendment to Lease Agreement, dated as of August 1, 2002, by and between the Company and Wake Forest University Health Sciences. | |
| 10.3** | Loan Agreement, dated as of April 19, 2002, between the Company and the City of Winston-Salem. | |
| 10.4** | Amended and Restated Note and Security Agreement, dated January 30, 2004, issued by the Company in favor of R.J. Reynolds Tobacco Holdings, Inc. | |
| 10.5# | Amended and Restated Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.5(a)** | Form of Incentive Stock Option Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.5(b)** | Form of Nonemployee Director Nonqualified Stock Option Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.5(c)** | Form of Restricted Stock Award Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.6 | Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(a) | Form of Incentive Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
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| Exhibit No. |
Description | |
| 10.6(b) | Form of Nonqualified Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(c) | Form of Nonemployee Director Nonqualified Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(d) | Form of Restricted Stock Award Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.7** | Employment Agreement, dated as of August 22, 2000, by and between the Company and J. Donald deBethizy. | |
| 10.8** | Employment Agreement, dated as of August 22, 2000, by and between the Company and Merouane Bencherif. | |
| 10.9** | Employment Agreement, dated as of August 22, 2000, by and between the Company and William S. Caldwell. | |
| 10.10** | Employment Agreement, dated as of April 24, 2001, by and between the Company and Geoffrey Dunbar. | |
| 10.11** | Employment Agreement, dated as of February 8, 2002, by and between the Company and Alan Musso. | |
| 10.12** | Employment Agreement, dated as of September 1, 2003, by and between the Company and Jeffrey P. Brennan. | |
| 10.13(a)**+ | Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.13(b)**+ | Amended and Restated Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.13(c)** | Letter Agreement, dated March 18, 2003, amending the Amended and Restated Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA and the Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.14** | Asset Purchase Agreement, dated as of June 28, 2002, by and between the Company and Layton Bioscience, Inc. | |
| 10.15**+ | Asset Purchase and Trademark Assignment Agreement, dated March 19, 1998, by and between the Company (as assignee of Layton Bioscience, Inc.) and Merck & Co., Inc. | |
| 10.16**+ | Amended and Restated License Agreement, dated as of March 9, 2004, by and between the Company and the University of South Florida Research Foundation, Inc. | |
| 10.17(a)**+ | License Agreement, dated October 6, 1997, by and between the Company (as assignee of R.J. Reynolds Tobacco Company) and Virginia Commonwealth University Intellectual Property Foundation. | |
| 10.17(b)**+ | Amendment to License Agreement, dated February 11, 2004, to the License Agreement, dated October 6, 1997, by and between the Company (as assignee of R.J. Reynolds Tobacco Company) and Virginia Commonwealth University Intellectual Property Foundation. | |
| 10.18(a)**+ | License Agreement, dated May 26, 1999, by and between the Company and the University of Kentucky Research Foundation. | |
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| Exhibit No. |
Description | |
| 10.18(b)**++ | Amendment No. 1, dated August 16, 2005, to License Agreement, dated May 26, 1999, by and between the Company and the University of Kentucky Research Foundation. | |
| 10.19**+ | License Agreement, dated as of August 12, 2002, between the Company and Wake Forest University Health Sciences. | |
| 10.20**+ | Development and Production Agreement for Active Pharmaceutical Ingredients, dated as of February 1, 2004, by and between the Company and Siegfried Ltd. | |
| 10.21**++ | Collaborative Research and License Agreement, dated as of December 27, 2005, by and between the Company and AstraZeneca AB. | |
| 23.1 | Consent of Ernst & Young LLP. | |
| 23.2 | Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included in Exhibit 5.1). | |
| 24.1** | Power of Attorney (included on signature page). | |
| * | To be filed by amendment. |
| ** | Previously filed. |
| + | Confidential treatment has been granted with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended. |
| ++ | Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended. |
| # | Replaces Exhibit 10.5(a) filed with the Company’s Registration Statement on Form S-1 dated January 17, 2006. |
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(b) Financial Statement Schedules.
All information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the financial statements or is not required under the related instructions or is inapplicable, and therefore has been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described herein, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 3 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winston-Salem, State of North Carolina, on March 16, 2006.
| TARGACEPT, INC. | ||
| By: |
/s/ J. DONALD DEBETHIZY | |
| J. Donald deBethizy Chief Executive Officer and President | ||
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the registration statement has been signed by the following persons in the capacities indicated on March 16, 2006.
| /S/ J. DONALD DEBETHIZY |
/S/ ALAN A. MUSSO | |||||
| Name: | J. Donald deBethizy | Name: | Alan A. Musso | |||
| Title: | Chief Executive Officer, President and Director (Principal Executive Officer) |
Title: | Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
| * |
* | |||||
| Name: | Mark Skaletsky | Name: | M. James Barrett | |||
| Title: | Chairman of the Board of Directors | Title: | Director | |||
| * |
* | |||||
| Name: | Charles A. Blixt | Name: | Errol B. De Souza | |||
| Title: | Director | Title: | Director | |||
| * |
* | |||||
| Name: | Ann F. Hanham | Name: | Elaine V. Jones | |||
| Title: | Director | Title: | Director | |||
| * |
||||||
| Name: | John P. Richard | |||||
| Title: | Director | |||||
| *By: |
/s/ J. DONALD DEBETHIZY | |
| J. Donald deBethizy Attorney-in-fact | ||
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EXHIBIT INDEX
| Exhibit No. |
Description | |
| 1.1 | Form of Underwriting Agreement. | |
| 3.1(a)** | Third Amended and Restated Certificate of Incorporation of the Company, as amended. | |
| 3.1(b) | Form of Fourth Amended and Restated Certificate of Incorporation of the Company, to be effective upon completion of this offering. | |
| 3.2(a)** | Amended and Restated Bylaws of the Company, as amended. | |
| 3.2(b) | Form of Bylaws of the Company, to be effective upon completion of this offering. | |
| 4.1 | Specimen common stock certificate. | |
| 4.2(a)** | Third Amended and Restated Investor Rights Agreement, dated May 12, 2004, by and among the Company and certain stockholders of the Company. | |
| 4.2(b)** | Amendment No. 1, dated December 6, 2004, to Third Amended and Restated Investor Rights Agreement, dated May 12, 2004. | |
| 4.2(c)* | Amendment No. 2, dated , 2006, to Third Amended and Restated Investor Rights Agreement, dated May 12, 2004. | |
| 4.3** | Warrant to Purchase Common Stock, dated August 22, 2000, granted to R.J. Reynolds Tobacco Company and subsequently assigned to R.J. Reynolds Tobacco Holdings, Inc. | |
| 5.1 | Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |
| 10.1 | Form of Indemnification Agreement between the Company and each of its directors and officers. | |
| 10.2(a)** | Lease Agreement, dated as of August 1, 2002, by and between the Company and Wake Forest University Health Sciences. | |
| 10.2(b)** | First Lease Amendment to Lease Agreement, dated as of August 1, 2002, by and between the Company and Wake Forest University Health Sciences. | |
| 10.3** | Loan Agreement, dated as of April 19, 2002, between the Company and the City of Winston-Salem. | |
| 10.4** | Amended and Restated Note and Security Agreement, dated January 30, 2004, issued by the Company in favor of R.J. Reynolds Tobacco Holdings, Inc. | |
| 10.5# | Amended and Restated Targacept, Inc. 2000 Equity Incentive Plan, as amended. | |
| 10.5(a)** | Form of Incentive Stock Option Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.5(b)** | Form of Nonemployee Director Nonqualified Stock Option Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.5(c)** | Form of Restricted Stock Award Agreement under Targacept, Inc. 2000 Equity Incentive Plan. | |
| 10.6 | Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(a) | Form of Incentive Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(b) | Form of Nonqualified Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
| 10.6(c) | Form of Nonemployee Director Nonqualified Stock Option Agreement under Targacept, Inc. 2006 Stock Incentive Plan. | |
Table of Contents
| Exhibit No. |
Description | |
| 10.6(d) | Form of Restricted Stock Award Agreement under Targacept, Inc. 2006 Stock Incentive Plan | |
| 10.7** | Employment Agreement, dated as of August 22, 2000, by and between the Company and J. Donald deBethizy. | |
| 10.8** | Employment Agreement, dated as of August 22, 2000, by and between the Company and Merouane Bencherif. | |
| 10.9** | Employment Agreement, dated as of August 22, 2000, by and between the Company and William S. Caldwell. | |
| 10.10** | Employment Agreement, dated as of April 24, 2001, by and between the Company and Geoffrey Dunbar. | |
| 10.11** | Employment Agreement, dated as of February 8, 2002, by and between the Company and Alan Musso. | |
| 10.12** | Employment Agreement, dated as of September 1, 2003, by and between the Company and Jeffrey P. Brennan. | |
| 10.13(a)**+ | Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.13(b)**+ | Amended and Restated Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.13(c)** | Letter Agreement, dated March 18, 2003, amending the Amended and Restated Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA and the Collaborative Research and License Agreement, dated as of January 21, 2002, by and between the Company and Aventis Pharma SA. | |
| 10.14** | Asset Purchase Agreement, dated as of June 28, 2002, by and between the Company and Layton Bioscience, Inc. | |
| 10.15**+ | Asset Purchase and Trademark Assignment Agreement, dated March 19, 1998, by and between the Company (as assignee of Layton Bioscience, Inc.) and Merck & Co., Inc. | |
| 10.16**+ | Amended and Restated License Agreement, dated as of March 9, 2004, by and between the Company and the University of South Florida Research Foundation, Inc. | |
| 10.17(a)**+ | License Agreement, dated October 6, 1997, by and between the Company (as assignee of R.J. Reynolds Tobacco Company) and Virginia Commonwealth University Intellectual Property Foundation. | |
| 10.17(b)**+ | Amendment to License Agreement, dated February 11, 2004, to the License Agreement, dated October 6, 1997, by and between the Company (as assignee of R.J. Reynolds Tobacco Company) and Virginia Commonwealth University Intellectual Property Foundation. | |
| 10.18(a)**+ | License Agreement, dated May 26, 1999, by and between the Company and the University of Kentucky Research Foundation. | |
| 10.18(b)**++ | Amendment No. 1, dated August 16, 2005, to License Agreement, dated May 26, 1999, by and between the Company and the University of Kentucky Research Foundation. | |
| 10.19**+ | License Agreement, dated as of August 12, 2002, between the Company and Wake Forest University Health Sciences. | |
Table of Contents
| Exhibit No. |
Description | |
| 10.20**+ | Development and Production Agreement for Active Pharmaceutical Ingredients, dated as of February 1, 2004, by and between the Company and Siegfried Ltd. | |
| 10.21**++ | Collaborative Research and License Agreement, dated as of December 27, 2005, by and between the Company and AstraZeneca AB. | |
| 23.1 | Consent of Ernst & Young LLP. | |
| 23.2 | Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included in Exhibit 5.1). | |
| 24.1** | Power of Attorney (included on signature page). | |
| * | To be filed by amendment. |
| ** | Previously filed. |
| + | Confidential treatment has been granted with respect to certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended. |
| ++ | Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended. |
| # | Replaces Exhibit 10.5(a) filed with the Company’s Registration Statement on Form S-1 dated January 17, 2006. |
EXHIBIT 1.1
_________ Shares
TARGACEPT, INC.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
UNDERWRITING AGREEMENT
_______________, 2006
_______________, 2006
Deutsche Bank Securities Inc.
Pacific Growth Equities, LLC
CIBC World Markets Corp.
Lazard Capital Markets LLC
| c/o | Deutsche Bank Securities Inc. |
60 Wall Street
New York, NY 10005
Ladies and Gentlemen:
Targacept, Inc., a Delaware corporation (the “Company”), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the “Underwriters”) _________ shares of its common stock, par value $0.001 per share (the “Firm Shares”). The Company also proposes to issue and sell to the several Underwriters not more than an additional _______ shares of its common stock, par value $0.001 per share (the “Additional Shares”), if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the “Shares.” The shares of common stock, par value $0.001 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the “Common Stock.”
The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-131050), including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the “Securities Act”), is hereinafter referred to as the “Registration Statement”; the prospectus in the form first used to confirm sales of Shares (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the “Prospectus.” If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), then any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462 Registration Statement.
For purposes of this Agreement, the terms set forth below have the respective meanings ascribed to them as follows:
“Free writing prospectus” has the meaning set forth in Rule 405 under the Securities Act.
“Applicable Time” means ______, New York City time, on the date of this Agreement or such other time as agreed to in writing by the Company and you.
“Statutory Prospectus” as of any time means the preliminary prospectus relating to the Shares that is included in the Registration Statement immediately prior to the earlier of that time and the time the Registration Statement becomes effective.
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, relating to the Shares in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) under the Securities Act.
“General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is identified on Schedule II to this Agreement, including any pricing information orally communicated by the Underwriters to prospective purchasers prior to confirming sales and identified on Schedule II.
“Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not a General Use Free Writing Prospectus.
“General Disclosure Package” means each General Use Free Writing Prospectus issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together.
As used herein, the terms “Registration Statement,” “preliminary prospectus,” “General Disclosure Package” and “Prospectus” shall include the documents, if any, incorporated by reference therein.
Deutsche Bank Securities Inc. (“DBSI”) has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to the Company’s directors, officers, employees and business associates and other parties related to the Company (collectively, “Participants”), as set forth in the Prospectus under the heading “Underwriters” (the “Directed Share Program”). The Shares to be sold by DBSI and its affiliates pursuant to the Directed Share Program are referred to hereinafter as the “Directed Shares.” Any Directed Shares not confirmed for purchase by any Participant by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus.
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1. Representations and Warranties. The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Company, threatened by the Commission; no order preventing or suspending the use of any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus relating to the offering of the Shares is in effect, and no proceedings for such purpose or pursuant to Section 8A of the Securities Act are pending before, or to the knowledge of the Company, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement when it became effective complied, and the Prospectus complies, and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (iii) the General Disclosure Package, as of the Applicable Time, did not contain and, as of the Closing Date, as then amended or supplemented by the Company, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iv) each individual Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package, as of the Applicable Time, did not contain and, as of the Closing Date, as then amended or supplemented by the Company, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the General Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing, including by email, by such Underwriter (or on behalf of such Underwriter by counsel) through you expressly for use therein, it being understood and agreed that the only such information is that described in Section 12 hereof.
(c) Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Shares or until any earlier date that the Company notified or notifies you that it has
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determined that it is necessary to amend or supplement the General Disclosure Package in accordance with Section 6(e) hereof, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement or the Prospectus.
(d) The Company has not, directly or indirectly, distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the preliminary prospectus included in the Registration Statement prior to the time it becomes effective, the Prospectus and other materials, if any, permitted under the Securities Act and consistent with Section 6(c) hereof. The Company will comply with the filing requirements under Rule 433(d) under the Securities Act with respect to each Issuer Free Writing Prospectus. The Company has satisfied or will satisfy the conditions in Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show.
(e) At the time of filing the Registration Statement and as of the date hereof (with such date being used as the determination date), the Company was not and is not an “ineligible issuer” (as defined in Rule 405 under the Securities Act, without taking into account any determination by the Commission pursuant to Rule 405 under the Securities Act that it is not necessary that the Company be considered an ineligible issuer), including, without limitation, for purposes of Rules 164 and 433 under the Securities Act with respect to the offering of the Shares as contemplated by the Registration Statement.
(f) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the General Disclosure Package and the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company.
(g) The Company has no subsidiaries.
(h) This Agreement has been duly authorized, executed and delivered by the Company.
(i) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(j) The shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and
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non-assessable. No person is entitled to preemptive or similar rights to acquire any securities of the Company, except rights that are not triggered by the issuance of the Shares and that terminate upon the Closing Date (as defined herein). There are no outstanding securities convertible into or exchangeable for, or warrants, rights or options to purchase from the Company, or obligations of the Company to issue, any shares of its Common Stock or any other class of shares of capital stock of the Company, except as set forth in the General Disclosure Package and the Prospectus.
(k) The Shares have been duly authorized and, when issued, delivered and paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.
(l) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene (i) any provision of applicable law, (ii) the certificate of incorporation or bylaws of the Company, in each case as amended and in effect as of the date hereof, (iii) any agreement or other instrument binding upon the Company that is material to the Company, or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, except, with respect to clauses (i), (iii) and (iv), for such contraventions which would not, singly or in the aggregate, result in a material adverse effect on the Company. No consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except (i) such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares, (ii) where the failure to obtain such would not have a material adverse effect on the power or ability of the Company to perform its obligations under this Agreement, or (iii) as may be required by the rules and regulations of the National Association of Securities Dealers, Inc. (the “NASD”).
(m) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the General Disclosure Package.
(n) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described, and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.
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(o) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
(p) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an “investment company” as such term is defined in the Investment Company Act of 1940, as amended.
(q) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company.
(r) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company.
(s) Except as described in the General Disclosure Package and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company. No person has the right to require the Company to include any securities of the Company with the Shares registered pursuant to the Registration Statement, except for such rights as have been waived.
(t) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the General Disclosure Package and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, other than ordinary and customary dividends; and
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(iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company, except in each case as described in each of the Registration Statement, the General Disclosure Package and the Prospectus, respectively.
(u) The Company does not own any real property. The Company has good and marketable title to all tangible personal property owned by it that is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects, except such as are described in the General Disclosure Package and the Prospectus or such as do not materially affect the value of such property and do not interfere in any material respect with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere in any material respect with the use made and proposed to be made of such property and buildings by the Company, in each case except as described in the General Disclosure Package and the Prospectus.
(v) The Company owns or has valid, binding and enforceable licenses or other rights to the patents and patent applications, copyrights, trademarks, service marks, trade names, service names and trade secrets reasonably necessary or used in any material respect to conduct the business of the Company in the manner described in the General Disclosure Package and the Prospectus (collectively, the “Company Intellectual Property”), except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity; the Company is not obligated to pay a royalty, grant a license, or provide other consideration to any third party in connection with the Company Intellectual Property other than as disclosed in the Registration Statement (including the exhibits thereto); except as disclosed in the General Disclosure Package and the Prospectus, (i) the Company has not received any written notice of infringement or conflict with asserted rights of others with respect to any Company Intellectual Property, (ii) the discoveries, inventions, products or processes of the Company referred to in the General Disclosure Package and the Prospectus do not, to the knowledge of the Company, infringe, interfere or conflict with any right or patent claim of any third party, and (iii) no third party has any ownership right in or to any Company Intellectual Property that is owned by the Company, other than any co-owner of any patent constituting Company Intellectual Property who is listed on the records of the United States Patent and Trademark Office (the “PTO”) and any co-owner of any patent application constituting Company Intellectual Property who is named in such patent application, and, to the knowledge of the Company, no third party has any ownership right in or to any Company Intellectual Property that is licensed to the Company, other than any licensor of the Company of such Company Intellectual Property.
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(w) All patent applications owned by the Company and filed with the PTO or any foreign or international patent authority (the “Company Patent Applications”) have been duly and properly filed; the Company has complied with its duty of candor and disclosure to the PTO for the Company Patent Applications; the Company is not aware of any facts required to be disclosed to the PTO that were not disclosed to the PTO and which would preclude the grant of a patent for the Company Patent Applications; and the Company has no knowledge of any facts which would preclude it from having clear title to the Company Patent Applications that have been identified by the Company as being exclusively owned by the Company.
(x) No material labor dispute with the employees of the Company exists, except as described in the General Disclosure Package and the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company.
(y) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the Company believes are adequate for the conduct of its business at its current stage of development as described in the General Disclosure Package and the Prospectus and the value of its properties and as are customary in the business in which it is currently engaged; the Company has not been refused any insurance coverage sought or applied for; and the Company believes that it will be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the Company, except as described in the General Disclosure Package and the Prospectus.
(z) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business as currently conducted, except where the lack of any such certificate, authorization or permit would not have a material adverse effect on the Company, including without limitation all such certificates, authorizations and permits required by the United States Food and Drug Administration (the “FDA”) or any other federal, state or foreign agencies or bodies engaged in the regulation of pharmaceuticals or biohazardous materials, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company, except as described in the General Disclosure Package and the Prospectus.
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(aa) The studies, tests and preclinical and clinical trials conducted by or on behalf of the Company that are described in the Registration Statement, the General Disclosure Package and the Prospectus were and, if still pending, are, to the Company’s knowledge, being conducted in all material respects in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional and scientific standards for products or product candidates comparable to those being developed by the Company; the descriptions of the results of such studies, tests and trials contained in the Registration Statement, the General Disclosure Package and the Prospectus do not contain any misstatement of a material fact or omit to state a material fact necessary to make such statements not misleading; there have been no studies, tests or trials conducted by or on behalf of the Company not described in the Registration Statement, the General Disclosure Package and the Prospectus the results of which reasonably call into question the results of the studies, tests and trials described in the Registration Statement, the General Disclosure Package or the Prospectus; and the Company has not received any notices or correspondence from the FDA or any foreign, state or local governmental body exercising comparable authority or any Institutional Review Board or comparable authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of the Company which termination, suspension or material modification would reasonably be expected to have a material adverse effect on the Company.
(bb) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and the Company is otherwise in compliance in all material respects with all effective provisions of the Sarbanes-Oxley Act of 2002 and any related rules and regulations promulgated by the Commission which are applicable to the Company and with which the Company is currently required to comply.
(cc) The financial statements of the Company (together with the related notes thereto) included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the financial position and results of the operations of the Company as of the respective dates indicated and for the respective periods specified; and such financial statements (together with the related notes thereto) have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved except as otherwise stated therein. The summary and selected financial
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data included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial information included in the Registration Statement, the General Disclosure Package and the Prospectus. There are no financial statements (historical or pro forma) that are required to be included in the Registration Statement, the General Disclosure Package or the Prospectus that are not included as required.
(dd) Each material contract, agreement and license to which the Company is bound is valid, binding, enforceable, and in full force and effect against the Company, and to the knowledge of the Company, each other party thereto, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity. Neither the Company nor, to the Company’s knowledge, any other party is in breach or default in any material respect with respect to any such contract, agreement and license, and, to the Company’s knowledge, no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under any such contract, agreement or license. No party has repudiated any material provision of any such contract, agreement or license.
(ee) The statistical, industry-related and market-related data included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate.
(ff) The Registration Statement, the General Disclosure Package and the Prospectus and any preliminary prospectus comply, and any amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus, the General Disclosure Package or any preliminary prospectus, as amended or supplemented, if applicable, were or will be distributed in connection with the Directed Share Program.
(gg) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered.
(hh) The Company has not offered, or caused DBSI or its affiliates to offer, Shares to any person pursuant to the Directed Share Program with the intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer’s or supplier’s level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products.
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2. Agreements to Sell and Purchase. The Company hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective numbers of Firm Shares set forth in Schedule I hereto opposite its name at $______ a share (the “Purchase Price”).
On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have the right to purchase, severally and not jointly, up to _______ Additional Shares at the Purchase Price. You may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice of each election to exercise the option not later than 30 days after the date of this Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least two business days after the written notice is given and may not be earlier than the closing date for the Firm Shares nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to be purchased (an “Option Closing Date”), each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of DBSI on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, (ii) file with the Commission any registration statement under the Securities Act relating to any additional shares of its Common Stock or securities convertible into or exchangeable or exercisable for any shares of its Common Stock, other than a Registration Statement on Form S-8 (or any successor form) relating to the Company’s 2000 Equity Incentive Plan or 2006 Stock Incentive Plan or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of Common Stock or such other securities, in cash or
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otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof as described in or as contemplated by the Prospectus, or (C) the grant of options to purchase shares of Common Stock, or of restricted shares of Common Stock, pursuant to the Company’s 2005 Stock Incentive Plan, provided that, prior to the grant of any such stock option or restricted shares of Common Stock, the Company shall cause the recipients of such grants to execute and deliver to DBSI “lock-up” agreements, each substantially in the form of Exhibit A hereto. Notwithstanding the foregoing, if (i) during the last 17 days of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs or (ii) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period, then the restrictions imposed by this paragraph shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event, in each case unless DBSI on behalf of the Underwriters waives, in writing, such extension.
3. Terms of Public Offering. The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Shares are to be offered to the public initially at $______ a share (the “Public Offering Price”) and to certain dealers selected by you at a price that represents a concession not in excess of $______ a share under the Public Offering Price.
4. Payment and Delivery. Payment for the Firm Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on _________, 2006, or at such other time on the same or such other date, not later than _________, 2006, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the “Closing Date.”
Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the corresponding notice described in Section 2 or at such other time on the same or on such other date, in any event not later than _________, 2006, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the “Option Closing Date.”
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The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you on the Closing Date or an Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor.
5. Conditions to the Underwriters’ Obligations. The obligations of the Company to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than _____ (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company’s securities by any “nationally recognized statistical rating organization,” as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the General Disclosure Package that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the General Disclosure Package.
(b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company on behalf of the Company, to the effect set forth in Section 5(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied in all material respects with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date.
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The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., outside corporate counsel for the Company, dated the Closing Date, to the effect that:
(i) the Company is validly existing as a corporation in good standing under the laws of the State of Delaware, and has the corporate power and authority to own its property and to conduct its business as described in the General Disclosure Package and the Prospectus;
(ii) the Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable;
(iii) this Agreement has been duly authorized, executed and delivered by the Company;
(iv) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not (A) conflict with or constitute a breach of the certificate of incorporation or bylaws of the Company or any agreement that has been filed as an exhibit to the Registration Statement, or (B) violate any United States federal or Massachusetts or New York state law, rule or regulation that in such counsel’s experience is normally applicable in transactions of the type contemplated by this Agreement, the Delaware General Corporation Law, or any judgment, order or decree of any governmental authority, agency or court specifically naming the Company of which such counsel is aware;
(v) except as may be required under the Securities Act and the rules and regulations of the Commission thereunder and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations of the Commission thereunder, no consent, approval, authorization or order of, or qualification with, any United States federal or Massachusetts or New York state governmental authority or agency is required for the issuance, sale and delivery of the Shares by the Company to the Underwriters pursuant to this Agreement or the performance by the Company of its other obligations under this Agreement;
(vi) the information in the General Disclosure Package and the Prospectus under the captions “Prospectus Summary – Targacept, Inc.” (only with respect to the seventh paragraph thereof); “Prospectus Summary – Targacept, Inc. – Strategic Collaboration with AstraZeneca
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AB”; “Risk Factors – Risks Related to Our Dependence on Third Parties – The successful development and commercialization of our lead product candidate, TC-1734, depends substantially on our recently established collaboration with AstraZeneca. If AstraZeneca is unable to further develop or commercialize TC-1734, or experiences significant delays in doing so, our business will be materially harmed.”; “Risk Factors – Risks Related to Our Dependence on Third Parties – If AstraZeneca were to terminate our collaboration agreement, or if we otherwise lose AstraZeneca as a collaborator in the development or commercialization of TC-1734, it would materially harm our business.”; “Risk Factors – Risks Related to Our Dependence on Third Parties – We will depend on collaborations with third parties for the development and commercialization of some of our product candidates. If these collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.”; “Risk Factors – Risks Related to Our Common Stock and this Offering – Provisions of our charter, bylaws and Delaware law may make an acquisition of us or a change in our management more difficult.”; “Business – Overview (only with respect to the seventh and eighth paragraphs thereof); “Business – Our Product Development Pipeline – Depression/Anxiety – Mecamylamine Hydrochloride” (only with respect to the fifth, sixth, seventh and eight sentences of the first paragraph thereof); “Business – Strategic Collaborations”; “Business – License Agreements”; and “Underwriters” (only with respect to the description of this Agreement), insofar as it constitutes statements of matters of law or legal conclusions or summarizes the terms of agreements, is correct in all material respects; and
(vii) the Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an “investment company” as such term is defined in the Investment Company Act of 1940, as amended.
In rendering such opinion, such counsel may rely (1) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the state laws of Massachusetts or New York or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the
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Underwriters are justified in relying upon such opinion of other counsel, and (2) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials.
In addition to the opinions provided above, such counsel shall confirm to you as follows:
In the course of acting as counsel for the Company in connection with the preparation of the Registration Statement, the General Disclosure Package and the Prospectus, such counsel has participated in conferences with officers and other representatives of the Company, representatives of and counsel for the Underwriters and representatives of the independent public accountants for the Company, during which the contents of the Registration Statement, the General Disclosure Package and the Prospectus were discussed. While the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that such counsel is not passing upon statements contained in the Registration Statement, the General Disclosure Package or the Prospectus (except to the extent expressly set forth in paragraph (vi) above), subject to the foregoing and based on such participation and discussions:
(A) the Registration Statement, at the time it became effective, and the Prospectus, as of the date thereof (except for financial statements, including the notes and schedules thereto, and other financial, statistical and accounting data and information included therein or omitted therefrom, as to which such counsel need express no view) appear on their face to be appropriately responsive in all material respects to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder;
(B) no facts have come to such counsel’s attention that have caused such counsel to believe that (i) the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except as set forth in the parenthetical in clause (A) above), (ii) the General Disclosure Package, as of the Applicable Time or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except as set forth in the parenthetical in clause (A) above), or (ii) the Prospectus, as of its date or as of the Closing Date, contained or contains an untrue statement of a material
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fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except as set forth in the parenthetical in clause (A) above); and
(C) such counsel is not aware of any contract or other document of a character required by the Securities Act and the applicable rules thereunder to be filed as an exhibit to the Registration that is not so filed.
(d) The Underwriters shall have received on the Closing Date an opinion of Womble Carlyle Sandridge & Rice, PLLC, outside corporate counsel for the Company, dated the Closing Date, to the effect that:
(i) the Company is a corporation in existence and in good standing under the laws of the State of Delaware; and the Company has the corporate power to carry on its business as described in the General Disclosure Package and the Prospectus and is qualified to transact business as a foreign corporation in the State of North Carolina;
(ii) the Company’s authorized capital stock as of December 31, 2005 and as of the Closing Date are as set forth in the General Disclosure Package and the Prospectus under the caption “Capitalization”;
(iii) the outstanding shares of capital stock of the Company prior to the issuance of the Shares have been duly authorized by all necessary corporate action on the part of the Company and are validly issued, fully paid and nonassessable;
(iv) the issuance of the Shares will not be subject to any preemptive or similar rights created under the laws of the State of Delaware or under any contract or agreement of which such counsel is aware;
(v) to such counsel’s knowledge (a) except as described in the General Disclosure Package and the Prospectus, there are no contracts, agreements or understandings between the Company and any other person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company and (b) no person has the right to require the Company to include any securities of the Company with the Shares registered pursuant to the Registration Statement, except for such rights as have been waived;
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(vi) the information in the General Disclosure Package and the Prospectus under “Description of Capital Stock” and the information in Items 14 and 15 of the Registration Statement, to the extent that it constitutes statements of matters of law, summaries of legal matters, the Company’s certificate of incorporation and bylaws, the terms of agreements or legal proceedings, or legal conclusions, has been reviewed by such counsel and is correct in all material respects; and
(vii) to such counsel’s knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court or governmental agency or body, now pending or threatened, against the Company, required to be disclosed in the Registration Statement, the General Disclosure Package or the Prospectus that has not been disclosed in a manner that is correct in all material respects.
In addition to the opinions provided above, such counsel shall confirm to you as follows:
In the course of such counsel’s assistance in the preparation of the Registration Statement, the General Disclosure Package and the Prospectus, it has participated in conferences with officers and other representatives of the Company, the Underwriters, counsel to the Underwriters and representatives of the independent public accountants of the Company, at which conferences the contents of the Registration Statement, the General Disclosure Package and the Prospectus were discussed. Although such counsel does not pass upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package or the Prospectus and has not independently verified the accuracy, completeness or fairness of such statements except to the extent expressly provided above, on the basis of the foregoing and the information that was disclosed to such counsel:
(A) no facts came to such counsel’s attention that led it to believe that the Registration Statement, at the time it became effective (but after giving effect to changes incorporated pursuant to Rule 430A under the Securities Act), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading (except for the financial statements, including the notes and schedules thereto and the auditor’s report thereon, and any other information of a financial, numerical, statistical or accounting nature set forth or referred to in the Registration Statement or any exhibits thereto, as to which such counsel expresses no view);
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(B) no facts have come to such counsel’s attention that led it to believe that the General Disclosure Package, as of the Applicable Time or as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except for the financial statements, including the notes and schedules thereto and the auditor’s report thereon, and any other information of a financial, numerical, statistical or accounting nature set forth or referred to in the General Disclosure Package, as to which such counsel expresses no view); and
(C) no facts have come to such counsel’s attention that led it to believe that the Prospectus, as of its date or as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except for the financial statements, including the notes and schedules thereto and the auditor’s report thereon, and any other information of a financial, numerical, statistical or accounting nature set forth or referred to in the Prospectus, as to which such counsel expresses no view).
(e) The Underwriters shall have received on the Closing Date an opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., special FDA counsel for the Company, dated the Closing Date, to the effect that:
(i) such counsel is familiar with the United States Federal Food, Drug, and Cosmetic Act (the “FDC Act”) and related regulations as applied generally to drugs of the nature under development and clinical testing by the Company and has reviewed the portions of the Registration Statement, the General Disclosure Package and the Prospectus under the captions “Risk Factors – Risks Related to the Development and Regulatory Approval of Our Product Candidates” (with the exception of “Risk Factors – Risks Related to the Development and Regulatory Approval of Our Product Candidates – Because we have a number of compounds and are considering a variety of target indications, we may expend our limited resources to pursue a particular candidate or indication and fail to capitalize on candidates or indications that may be more profitable or for which there is a greater likelihood of success.” and “Risk Factors – Risks Related to the Development and Regulatory Approval of Our Product Candidates – We may not be successful in our efforts to identify or discover additional product candidates.”); “Risk Factors – Risks Related to Our Dependence on Third Parties – If our contract
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manufacturers fail to devote sufficient resources to our concerns, of if their performance is substandard, our clinical trials and product introductions may be delayed or there may be a shortage of commercial supply.”; “Risk Factors – Risks Related to Commercialization – If our promotional activities fail to comply with the regulations and guidelines of the FDA and other applicable regulatory authorities, we may be subject to warnings or enforcement actions that could harm our business.”; “Business – Government Regulation – Drug Regulation in the United States”; and “Business – Government Regulation – Fast Track Designation” (collectively, the “U.S. Regulatory Portion”); and
(ii) the information in the U.S. Regulatory Portion, insofar as it purports to describe or summarize applicable provisions of the FDC Act and other laws administered by the FDA and the regulations promulgated thereunder, is correct in all material respects.
In addition to the opinions provided above, such counsel shall confirm to you as follows:
Such counsel has participated in conferences with representatives of the Company, during which the contents of the U.S. Regulatory Portion were discussed. While the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that such counsel is not passing upon statements contained in the U.S. Regulatory Portion (except to the extent expressly set forth in paragraph (ii) above), subject to the foregoing and based on such participation and discussions, no facts have come to such counsel’s attention that have caused such counsel to believe that (A) the U.S. Regulatory Portion of the Registration Statement, at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (B) the U.S. Regulatory Portion of the General Disclosure Package, as of the Applicable Time or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (C) the U.S. Regulatory Portion of the Prospectus, as of the date of the Prospectus or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
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(f) The Underwriters shall have received on the Closing Date an opinion of Womble Carlyle Sandridge & Rice, PLLC, special intellectual property counsel to the Company, dated the Closing Date, to the effect that:
(i) to such counsel’s knowledge, the Company owns, possesses or has adequate rights to use the Company Intellectual Property reasonably necessary to carry on the business of the Company as described in the General Disclosure Package and the Prospectus;
(ii) other than as described in the General Disclosure Package and the Prospectus, to such counsel’s knowledge, the Company has not received any written notice of interference or opposition, or infringement of or conflict with, and such counsel has no knowledge of any infringement of or conflict with, asserted rights of others with respect to any Company Intellectual Property;
(iii) other than as described in the General Disclosure Package and the Prospectus, to such counsel’s knowledge, the discoveries, inventions, products or processes of the Company referred to in the General Disclosure Package and the Prospectus that are material to the business of the Company as described in the General Disclosure Package and the Prospectus do not infringe, interfere or conflict with any right or patent claim of any third party;
(iv) other than as described in the General Disclosure Package and the Prospectus, to such counsel’s knowledge, no third party has any ownership right in or to any Company Intellectual Property, other than any licensor of the Company of such Company Intellectual Property;
(v) to the knowledge of such counsel, (A) the Company’s patents are valid and enforceable and are entitled to a statutory presumption of validity and of ownership by the assignee, (B) there are no asserted or unasserted claims of any third party relating to the scope or ownership of any of the Company’s patents, other than of the licensor of any such patent, (C) there are no liens which have been filed against any of the Company’s patents, (D) there are no material defects of form in the preparation or filing of the Company’s patent applications that are material to the business of the Company as described in the General Disclosure Package and the Prospectus, (E) the Company’s patent applications that are material to the business of the Company as described in the General Disclosure Package and the Prospectus are being diligently prosecuted, and (F) the Company is listed on the records of the PTO or appropriate foreign patent offices as
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the sole assignee of record of the patents and patent applications owned by the Company;
(vi) to the knowledge of such counsel, all material references required to be disclosed were disclosed to the PTO during the prosecution of the Company’s patents and the Company’s patent applications and no misrepresentation was made to, or material fact required to be disclosed was withheld from, the PTO during such prosecution;
(vii) such counsel has no reason to believe that any of the Company’s trademark applications filed with the PTO will not eventuate in registered trademarks, or that any trademark registrations previously issued or issued in respect of any such applications will not afford the Company reasonable trademark protection relative to the subject matter thereof; and to the knowledge of such counsel, the Company takes reasonable security measures to protect any trade secrets that are not incorporated into patent filings;
(viii) the trademarks INVERSINE (Stylized) (U.S. Reg. No. 626,116), and TARGACEPT (Stylized) (U.S. Reg. No. 2,469,655) have been registered in the PTO; and
(ix) the information in the Registration Statement, the General Disclosure Package and the Prospectus under the captions “Risk Factors – Risks Related to Our Intellectual Property”; “Business – Patents and Proprietary Rights”; and “Business – Trade Secrets” (the “IP Portion”), insofar as it constitutes statements of matters of law, summaries of legal matters, documents to which the Company is a party or legal proceedings, has been reviewed by such counsel and is correct in all material respects.
In addition to the opinions provided above, such counsel shall confirm to you as follows:
In the course of its assistance in the preparation of the IP Portion, such counsel has participated in conferences with officers and other representatives of the Company, the Underwriters, counsel to the Company and counsel to the Underwriters at which the contents of the IP Portion were discussed, and although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements in the IP Portion and has not verified the same except to the extent provided above, on the basis of the foregoing and the information that was disclosed to such counsel (relying as to materiality to the extent such counsel deems appropriate upon the officers of the Company), no facts have come to the attention
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of such counsel to lead it to believe that (A) the IP Portion of the Registration Statement included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (B) the IP Portion of the General Disclosure Package, as of the Applicable Time or as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (C) the IP Portion of the Prospectus, as of the date of the Prospectus or as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(g) The Underwriters shall have received on the Closing Date an opinion of Wilmer Cutler Pickering Hale and Dorr LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 5(c)(ii), 5(c)(iii), 5(c)(vi) (but only as to the statements in the Prospectus under “Underwriters”), 5(c)(A), 5(c)(B) and 5(d)(vi) (but only as to the statements in the General Disclosure Package and the Prospectus under “Description of Capital Stock”) above.
With respect to Section 5(g) (with respect to matters in Section 5(c)(A) and Section 5(c)(B)) above, such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement, the General Disclosure Package and the Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified.
The opinions of the counsel to the Company described in Sections 5(c), (d), (e) and (f) above shall be rendered to the Underwriters at the request of the Company and shall so state therein.
(h) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young LLP, an independent registered public accounting firm with respect to the Company, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus; provided that the letter delivered on the Closing Date shall use a “cut-off date” not earlier than the date hereof.
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(i) The “lock-up” agreements, each substantially in the form of Exhibit A hereto, between you and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares to be sold on such Option Closing Date and other matters related to the issuance of such Additional Shares.
6. Covenants of the Company. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, at or prior to the Closing Date, five signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, during the period mentioned in Section 6(e) or 6(f) below, as many copies of the General Disclosure Package, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement, the General Disclosure Package or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) (i) Not to make any offer relating to the Shares that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a free writing prospectus required to be filed by the Company with the Commission under Rule 433 under the Securities Act unless you shall have approved its use in writing prior to first use (each, a “Permitted Free Writing Prospectus”) (provided that your prior written consent shall be deemed to have been given in respect of each Issuer Free Writing Prospectus identified on Schedule II hereto), (ii) to treat each Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus, (iii) to comply with the requirements of Rules 164 and 433 under the Securities Act applicable to any Issuer Free Writing Prospectus, including the requirements relating to timely filing with the Commission (except with respect to the use of an electronic road show, as contemplated by the last sentence of this Section 6(c)), legending and
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record keeping and (iv) not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of such Underwriter that such Underwriter otherwise would not have been required to file thereunder. The Company will satisfy the conditions in Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show.
(d) To prepare a final term sheet (the “Final Term Sheet”) reflecting the final terms of the Shares, in form and substance satisfactory to you, and to file such Final Term Sheet as an Issuer Free Writing Prospectus pursuant to Rule 433 under the Securities Act prior to the close of business on the date that is two business days after the date hereof, to furnish to you a copy of any such Final Term Sheet a reasonable amount of time prior to such proposed filing and not to use or file any such proposed Final Term Sheet to which you reasonably object.
(e) If the General Disclosure Package is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary, in the judgment of the Company or in your reasonable opinion, to amend or supplement the General Disclosure Package in order to make the statements therein, in the light of the circumstances then existing, not misleading, or if any event shall occur or condition exist as a result of which the General Disclosure Package conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the General Disclosure Package to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the General Disclosure Package so that the statements in the General Disclosure Package as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser, be misleading or so that the General Disclosure Package, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the General Disclosure Package, as amended or supplemented, will comply with applicable law.
(f) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to
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amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. The costs of complying with this Section 6(c) shall be borne by the Company with respect to any amendment or supplement required during the nine-month period after the date the Registration Statement becomes effective and by the Underwriters thereafter.
(g) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(h) To make generally available to the Company’s security holders and to you as soon as practicable an earning statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the date of this Agreement that shall satisfy the provisions of Section 11(a) of the Securities Act as provided in Rule 158 of the rules and regulations of the Commission thereunder.
(i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company’s counsel and the Company’s accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the General Disclosure Package, the Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with
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the qualification of the Shares for offer and sale under state securities laws as provided in Section 6(g) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the NASD, (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to quotation of the Shares on the NASDAQ National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the preparation or dissemination of any electronic roadshow, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (ix) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program, (x) all expenses incurred in connection with any offer and sale of the Shares outside of the United States, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with offers and sales of the Shares outside of the United States, (xi) the costs and expenses (including without limitation any damages or other amounts payable in connection with legal or contractual liability) associated with the reforming of any contracts for sale of the Shares made by the Underwriters caused by a breach of the representation in Section 1(b)(iii) or (iv) and (xii) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 8 entitled “Indemnity and Contribution,” Section 9 entitled “Directed Share Program Indemnification,” and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them, their road show and travel expenses and any advertising expenses connected with any offers they may make.
(j) To comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program.
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7. Covenant of the Underwriters. Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
8. Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the General Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing, including by email, by such Underwriter (or on behalf of such Underwriter by counsel or through you) expressly for use therein, it being understood and agreed that the only such information is that described in Section 12 hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing, including by email, by such Underwriter (or on behalf of such Underwriter by counsel or through you) expressly for use in the Registration Statement, any preliminary prospectus, the General Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus or any amendment or supplement thereto, it being understood and agreed that the only such information is that described in Section 12 hereof.
(c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be
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sought pursuant to Section 8(a) or 8(b), such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by DBSI, in the case of parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement (other than reimbursement for fees and expenses that the indemnifying party is contesting in good faith). No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in Section 8(a) or 7(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party
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under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters’ respective obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this
30
Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.
9. Directed Share Program Indemnification.
(a) The Company agrees to indemnify and hold harmless DBSI and its affiliates and each person, if any, who controls DBSI or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (“DBSI Entities”), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant has agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of the DBSI Entities.
(b) In case any proceeding (including any governmental investigation) shall be instituted involving any DBSI Entity in respect of which indemnity may be sought pursuant to Section 9(a), the DBSI Entity seeking indemnity shall promptly notify the Company in writing and the Company, upon request of the DBSI Entity, shall retain counsel reasonably satisfactory to the DBSI Entity to represent the DBSI Entity and any others the Company may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any DBSI Entity shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such DBSI Entity unless (i) the Company shall have agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the DBSI Entity and representation of both parties by the same counsel would be inappropriate due
31
to actual or potential differing interests between them. The Company shall not, in respect of the legal expenses of the DBSI Entities in connection with any proceeding or related proceedings with respect to which indemnification is requested under Section 9 hereof, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all DBSI Entities. Any such firm for the DBSI Entities shall be designated in writing by DBSI. The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the DBSI Entities from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time a DBSI Entity shall have requested the Company to reimburse it for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Company agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by the Company of the aforesaid request and (ii) the Company shall not have reimbursed the DBSI Entity in accordance with such request prior to the date of such settlement (other than reimbursement for fees and expenses that the indemnifying party is contesting in good faith). The Company shall not, without the prior written consent of DBSI, effect any settlement of any pending or threatened proceeding in respect of which any DBSI Entity is or could have been a party and indemnity could have been sought hereunder by such DBSI Entity, unless such settlement includes an unconditional release of the DBSI Entities from all liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 9(a) is unavailable to a DBSI Entity or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then the Company, in lieu of indemnifying the DBSI Entity thereunder, shall contribute to the amount paid or payable by the DBSI Entity as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the DBSI Entities on the other hand from the offering of the Directed Shares or (ii) if the allocation provided by clause 9(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(c)(i) above but also the relative fault of the Company on the one hand and of the DBSI Entities on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and of the DBSI Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the DBSI Entities for the Directed Shares, bear to the aggregate Public Offering Price of the Shares. If the loss, claim, damage or liability is caused by an
32
untrue or alleged untrue statement of a material fact, the relative fault of the Company on the one hand and the DBSI Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged omission relates to information supplied by the Company or by the DBSI Entities and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(d) The Company and the DBSI Entities agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the DBSI Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(c). The amount paid or payable by the DBSI Entities as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by the DBSI Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no DBSI Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were offered to the public exceeds the amount of any damages that such DBSI Entity has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any DBSI Entity at law or in equity.
The indemnity and contribution provisions contained in this Section 9 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any DBSI Entity or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Directed Shares.
10. Termination. The Underwriters may terminate this Agreement by notice given by you to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in
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your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the General Disclosure Package or the Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you and the Company for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the General Disclosure Package, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
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If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, in each case, other than due to or arising out of one or more of the events described in clauses (i), (iii), (iv) or (v) of Section 10, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.
12. Information Provided by Underwriters. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in the Registration Statement, any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus consists of the information set forth in the second and third sentences under the caption “Shares Eligible for Future Sale—Lock-up Agreements” and the third, fifth and tenth paragraphs under the caption “Underwriters” in the Prospectus.
13. Entire Agreement.
(a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Company and the Underwriters with respect to the preparation of any preliminary prospectus, the General Disclosure Package, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.
(b) The Company acknowledges and agrees that (i) each Underwriter, in providing investment banking services to the Company in connection with the offering of the Shares, including in acting pursuant to the terms of this Agreement, has acted and is acting at arm’s length as an independent contractor and not as a fiduciary, (ii) the Company does not intend such Underwriter to act in any capacity other than independent contractor, including as a fiduciary or in any other position of higher trust and (iii) the Underwriters may have interests that differ from those of the Company. The Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Shares.
14. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, shall be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Deutsche Bank Securities Inc., 60 Wall Street, 4th Floor, New York, New York 10005, Attention: Syndicate Manager, with a copy to Deutsche Bank Securities Inc., 60 Wall Street, New York, New York 10005, Attention: General Counsel; if to the Company, to Targacept,
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Inc., 200 East First Street, Suite 300, Winston-Salem, North Carolina 27101, Attention: Alan A. Musso, Chief Financial Officer, with a copy to Targacept, Inc., 200 East First Street, Suite 300, Winston-Salem, North Carolina 27101, Attention: Peter A. Zorn, Esq.
15. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.
17. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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Very truly yours,
TARGACEPT, INC.
By:
Name:
Title:
Accepted as of the date hereof
Deutsche Bank Securities Inc.
Pacific Growth Equities, LLC
CIBC World Markets Corp.
Lazard Capital Markets LLC
Acting severally on behalf of themselves and
the several Underwriters named in
Schedule I hereto.
| By: | Deutsche Bank Securities Inc. |
| By: |
Name:
Title:
| By: |
Name:
Title:
37
SCHEDULE I
| Underwriter | Number of Firm Shares To Be Purchased | |
| Deutsche Bank Securities Inc. |
||
| Pacific Growth Equities, LLC |
||
| CIBC World Markets Corp. |
||
| Lazard Capital Markets LLC |
||
| Total: |
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SCHEDULE II
Issuer Free Writing Prospectus(es)
[Each free writing prospectus filed by the Company under Rule 433(d) under the Securities Act.]
Orally Communicated Pricing Information
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EXHIBIT A
FORM OF LOCK-UP LETTER
_____________, 2005
Deutsche Bank Securities Inc.
Pacific Growth Equities, LLC
CIBC World Markets Corp.
Lazard Capital Markets LLC
c/o Deutsche Bank Securities Inc.
60 Wall Street
New York, NY 10005
Ladies and Gentlemen:
The undersigned understands that Deutsche Bank Securities Inc. (“Deutsche Bank Securities”) proposes to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Targacept, Inc., a Delaware corporation (the “Company”), providing for the initial public offering (the “Public Offering”) by the several underwriters, including Deutsche Bank Securities (the “Underwriters”), of shares (the “Shares”) of the Common Stock, par value $0.001 per share, of the Company (the “Common Stock”).
To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Deutsche Bank Securities on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the “Prospectus”), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares to the Underwriters pursuant to the Underwriting Agreement, (b) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Public Offering, (c) bona fide gifts of shares of Common Stock, (d) the transfer or disposition of shares of Common Stock in a transaction not involving a disposition for value to any trust for the direct or indirect benefit of the undersigned or a member of the “immediate family” of the undersigned, (e) the transfer or disposition of shares of Common Stock by will or intestate succession to the legal representative or a member of the “immediate family” of the undersigned, (f) if the undersigned is a partnership or limited
40
liability company, the distribution of shares of Common Stock to partners or members of the undersigned or to the estate of any deceased partner or member of the undersigned, (g) if the undersigned is a corporation, the transfer of shares of Common Stock in a transaction not involving a public distribution or public offering to any majority owned subsidiary of the undersigned, any holder of at least 50% of the outstanding voting power of the undersigned or any entity under common control with the undersigned or (h) if the undersigned is a trust, the distribution of shares of Common Stock to any beneficiary of the undersigned; provided, however, that in the case of any gift, transfer, disposition or distribution otherwise permitted by clause (c), (d), (e), (f), (g) or (h), (i) each donee, transferee or distributee shall execute and deliver to Deutsche Bank Securities a letter substantially in the form hereof agreeing to be bound by the terms hereof and (ii) neither the undersigned nor any other party to the applicable transaction shall be required to file, or voluntarily file, a report under Section 16(a) of the Securities Exchange Act of 1934, as amended, other than a filing on Form 5 made after the expiration of the 180-day restricted period. For purposes hereof, the term “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin.
In addition, the undersigned agrees that, without the prior written consent of Deutsche Bank Securities on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s share of Common Stock except in compliance with the foregoing restrictions.
If:
(1) during the last 17 days of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or
(2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period,
the restrictions imposed by this Lock-Up Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
The undersigned understands that the Company and the Underwriters are relying upon this Lock-Up Agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns. Notwithstanding the foregoing, this Lock-Up Agreement shall terminate automatically (1) on June 30, 2006 in the event that the Public Offering has not occurred by such date; or (2) if the Underwriting Agreement has not been executed and the Company informs the Underwriters in writing that it is terminating the Public Offering.
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This Lock-Up Agreement shall replace and supercede any prior lock-up agreement that the undersigned previously executed in connection with an initial public offering of the Common Stock of the Company.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters.
Very truly yours,
__________________________________________
(Name)
__________________________________________
(Address)
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EXHIBIT 3.1(b)
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TARGACEPT, INC.
Pursuant to Section 242 and Section 245 of the General Corporation Law of Delaware (the “DGCL”), the undersigned corporation hereby submits the following for the purpose of amending and restating its Certificate of Incorporation, as amended, and does hereby certify as follows.
1. The name of the corporation is Targacept, Inc. The corporation’s original Certificate of Incorporation was filed on March 7, 1997.
2. The corporation’s Certificate of Incorporation is hereby amended and restated in its entirety as set forth in the text of the Fourth Amended and Restated Certificate of Incorporation attached hereto as Exhibit A.
3. This Fourth Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 245(c), 242 and 228 of the DGCL and will be effective upon filing.
IN WITNESS WHEREOF, said Targacept, Inc. has caused this Fourth Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer, this day of 2006.
TARGACEPT, INC.
By:
J. Donald deBethizy
President and Chief Executive Officer
EXHIBIT A
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TARGACEPT, INC.
FIRST: The name of the corporation (hereinafter called the “corporation”) is Targacept, Inc.
SECOND: The address, including street, number, city and county of the registered office of the corporation in the State of Delaware, is 2711 Centreville Road, Suite 400, City of Wilmington 19808, County of New Castle; and the name of the registered agent of the corporation in the State of Delaware at such address is Corporation Service Company.
THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as the same now exists or may hereafter be amended.
FOURTH:
| 1. | The total number of shares that the corporation is authorized to issue is One Hundred Five Million (105,000,000), of which: (1) One Hundred Million (100,000,000) shares shall be designated as Common Stock, $0.001 par value per share (“Common Stock”); and (2) Five Million (5,000,000) shares shall be designated as Preferred Stock, $0.001 par value per share (“Preferred Stock”). |
| 2. | The board of directors of the corporation (the “Board”) is authorized, subject to any limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number or shares of such series then outstanding, and to fix the designation, powers, preferences, relative, participating optional or other special rights, and any qualifications, limitations and restrictions of the shares of each such series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. |
| 3. | Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the corporation for a vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment (including any certificate of designation relating to any series of Preferred Stock) to this certificate of incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this certificate of |
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incorporation (including any certificate of designation relating to any series of Preferred Stock).
FIFTH: The corporation is to have perpetual existence.
SIXTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, it is further provided:
| 1. | The business and the conduct of the affairs of the corporation shall be managed by or under the direction of the Board. |
| 2. | Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of stockholders of the corporation and may not be effected by any written consent by such stockholders. |
| 3. | Special meetings of stockholders of the corporation may be called only by the Chairman of the Board, the Chief Executive Officer, the President or the Board acting pursuant to a resolution adopted by a majority of the Whole Board and any power of stockholders to call a special meeting of stockholders is specifically denied. Only such business as shall have been stated in the notice of a special meeting of stockholders shall be considered at such special meeting. For purposes of this certificate of incorporation, the “Whole Board” shall mean the total number of directors then fixed in accordance with this certificate of incorporation, whether or not there are any vacancies. |
SEVENTH:
| 1. | Subject to any rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors shall be fixed from time to time exclusively by the Board. The directors, other than those who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the corporation’s first annual meeting of stockholders following the initial classification of the Board upon the effectiveness of this certificate of incorporation, with the term of office of the second class to expire at the corporation’s second annual meeting of stockholders following the initial classification of the Board upon the effectiveness of this certificate of incorporation and with the term of office of the third class to expire at the corporation’s third annual meeting of stockholders following the initial classification of the Board upon the effectiveness of this certificate of incorporation, and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election and with each director to hold office until |
3
his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified or until his or her death, retirement, resignation or removal.
| 2. | Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board resulting from death, retirement, resignation, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director, and not by the stockholders. In the event of any increase or decrease in the authorized number of directors, (a) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term or his or her prior death, retirement, resignation or removal and (b) the newly created or eliminated directorships resulting from such increase or decrease shall if reasonably possible be apportioned by the Board among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the Board, the remaining directors, except as otherwise provided by law or this certificate of incorporation, may exercise the powers of the full Board until the vacancy is filled. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. |
| 3. | No election of directors need be by written ballot unless the Bylaws of the corporation so provide. |
| 4. | No stockholder will be permitted to cumulate votes at any election of directors. |
| 5. | Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. |
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| 6. | Subject to the rights of the holders of any series of Preferred Stock then outstanding and except as otherwise provided in this certificate of incorporation or required by law, any director, or all of the directors, may be removed from the Board with or without cause, but only by the affirmative vote of the holders of at least 66 2/3% of the aggregate voting power of the then-outstanding shares of capital stock of the corporation entitled to vote in the election of directors, voting together as a single class. |
EIGHTH: The power to adopt, amend or repeal the Bylaws of the corporation may be exercised by the Board. The stockholders shall also have the power to adopt, amend or repeal the Bylaws; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or this certificate of incorporation, the affirmative vote of the holders of at least 66 2/3% of the aggregate voting power of the then-outstanding voting shares of voting stock entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal all or any portion of Sections 13 or 14 of Article II, Section 2 of Article III, Article VIII and Section 6 of Article IX of the Bylaws.
NINTH: A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the General Corporation Law of Delaware, or (d) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of Delaware as so amended. Neither any amendment, repeal or modification of this article nor the adoption of any provision of this certificate of incorporation or the Bylaws of the corporation inconsistent with this article shall adversely affect any right or protection of a director of the corporation existing at the time of such amendment, repeal, modification or adoption.
TENTH: The corporation shall, to the fullest extent permitted by the provisions of Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any person who is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which such persons may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors, and administrators of such a person. In addition, the corporation may, to the extent
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authorized from time to time by the Board, grant indemnification rights to other employees or agents of the corporation or other persons serving the corporation and such rights may be equivalent to, or greater or less than, those indemnification rights of directors and officers set forth in this article or the Bylaws. Neither any amendment, repeal or modification of this article nor the adoption of any provision of this certificate of incorporation or the Bylaws of the corporation inconsistent with this article shall adversely affect any right or protection of a director or officer of the corporation existing at the time of such amendment, repeal, modification or adoption.
ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered or repealed and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws; provided, however, that, notwithstanding any other provision of this certificate of incorporation, or any provision of law that might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this corporation required by law or by this certificate of incorporation, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then-outstanding shares of voting stock entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal Article SIXTH, Article SEVENTH, Article EIGHTH, Article NINTH, Article TENTH or this Article ELEVENTH. All rights conferred upon stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH.
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EXHIBIT 3.2(b)
BYLAWS
OF
TARGACEPT, INC.
(as amended and restated March 15, 2006,
effective upon completion of Targacept’s initial public offering)
BYLAWS
OF
TARGACEPT, INC.
ARTICLE I
Offices
Section 1. Principal and Registered Offices. The principal office of the Corporation shall be located at such place as the Board of Directors (the “Board”) may specify from time to time. The registered office of the Corporation shall be located at such place as set forth in the Corporation’s Certificate of Incorporation, as may be amended or restated and in effect from time to time (the “Charter”).
Section 2. Other Offices. The Corporation may have offices at such other places, either within or without the State of Delaware, as the Board may from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meeting. Meetings of stockholders shall be held at the principal office of the Corporation or at such other place or places, either within or without the State of Delaware, as shall be designated in the notice of the meeting.
Section 2. Annual Meetings. The annual meeting of stockholders shall be held on the date and at the time fixed, from time to time, by the Board.
Section 3. Special Meetings. Except as otherwise provided in the Charter, and subject to the rights of holders of any series of preferred stock then outstanding, special meetings of the stockholders for any purpose or purposes may be called only by the Chairman of the Board, the Chief Executive Officer, the President or by the Board acting pursuant to a resolution adopted by a majority of the Whole Board. For purposes of these Bylaws, the “Whole Board” shall mean the total number of directors then fixed in accordance with the Charter, whether or not there are any vacancies. Only such business as shall have been stated in the notice of a special meeting of stockholders shall be considered at such special meeting.
Section 4. Cancellation of Meetings. Any previously scheduled meeting of stockholders may be postponed, and, unless the Charter provides otherwise, any special meeting of the stockholders may be cancelled by resolution duly adopted by a majority of the directors then in office upon public notice given prior to the date previously scheduled for such meeting of stockholders.
Section 5. Notice of Meetings. Written or printed notice shall be given not less than ten (10) or more than sixty (60) days before the date of the meeting, to each
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stockholder of record entitled to vote at the meeting by delivering a written notice thereof to such stockholder personally or by depositing such notice in the United States mail, postage prepaid, directed to such stockholder at his last address as it appears on the stock records of the Corporation. The notice shall state the time and place of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting (if authorized by the Board in its sole discretion pursuant to the Delaware General Corporation Law, as may be amended from time to time the “DGCL”) and, in the case of a special meeting, briefly describing the purpose or purposes of the meeting. It shall be the primary responsibility of the Secretary to give the notice, but notice may be given by or at the direction of the President or other person or persons calling the meeting. Notice of any adjourned meeting of the stockholders shall not be required to be given, except where expressly required by law.
Whenever notice is required to be given under any provision of the DGCL, the Charter or these Bylaws to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given.
Whenever notice is required to be given under any provision of the DGCL, the Charter or these Bylaws to any stockholder to whom (a) notice of two (2) consecutive annual meetings or (b) all, and at least two (2) payments (if sent by first-class mail) of dividends or interest on securities during a twelve (12) month period, have been mailed addressed to such person at such person’s address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any actions or meeting taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the Corporation a written notice setting forth such person’s then current address, the requirement that notice be given to such person shall be reinstated. The exception to the requirement that notice be given set forth in clause (a) above shall not be applicable to any notice returned as undeliverable if the notice was given by electronic transmission.
Section 6. Waiver of Notice. Whenever notice is required to be given under any provision of the DGCL, the Charter or these Bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice, or any waiver by electronic transmission, unless so required by the Charter.
Section 7. Proxies. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy may be granted in writing or otherwise as
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permitted under Section 212(c) or any other provision of the DGCL. A duly executed proxy shall be irrevocable if it so states and it is coupled with an interest sufficient in law to support an irrevocable power.
Section 8. Quorum. Except as otherwise required by any provision of the DGCL or the Charter, the holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of stockholders. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting, shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called. When a quorum is once present to organize a meeting, the stockholders present may continue to do business at the meeting or at any adjournment thereof notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
Section 9. Voting of Shares. Each outstanding share of capital stock of the Corporation shall, subject to Article II, Section 11, be entitled to one vote on each matter submitted to a vote at a meeting of the stockholders, except as otherwise provided in the Charter. In all matters other than the election of directors, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders on that matter, unless the vote of a greater number is required by law, the Charter, or these Bylaws. Directors shall be elected by a plurality of the votes of the shares of capital stock present in person or represented by proxy at the meeting and entitled to vote on the election of directors.
Section 10. Action Without Meeting. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders.
Section 11. Record Date. The Board may fix, in advance, a date as the record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock, or in order to make a determination of stockholders for the purpose of any other lawful action. Such date, in any case, shall be not more than sixty (60) days, and in case of a meeting of stockholders not less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. If the Board does not so fix a record date, the record date for: (i) determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.
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Section 12. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock records, either directly or through a transfer agent appointed by the Board, to prepare and make, at least ten (10) days before every stockholders meeting, a complete list of stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The Corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least ten (10) days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting; or (ii) during ordinary business hours at the principal place of business of the Corporation. The list shall be produced and kept at the time and place of the meeting during the whole time thereof and shall be subject to the inspection of any stockholder who may be present. The stock records of the Corporation shall be the only evidence of who are the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such meeting.
Section 13. Proposals by Stockholders at Annual Meeting. At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (i) specified in the notice of meeting (or any supplement thereto) given in accordance with these Bylaws; (ii) properly brought before the meeting by or at the direction of the Board; or (iii) properly brought before the meeting by a stockholder that (A) is a stockholder of record on the date of the giving of notice provided for in this Article II, Section 13 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (B) complies with the notice procedures set forth in this Article II, Section 13. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely and unless waived by formal action of the Board, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not fewer than sixty (60) and not more than ninety (90) calendar days in advance of the date that is the one year anniversary of the notice date in the Corporation’s proxy statement for the previous year’s annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been advanced by more than thirty (30) days or delayed by more than sixty (60) days from the one year anniversary of the previous year’s annual meeting of stockholders, notice by a stockholder to be timely must be so received not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the tenth (10th) day following the day notice of the date of the meeting was first mailed or public disclosure of the date of the meeting was first made (via press release reported by a national news service or via a filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), whichever occurs first; provided that public announcement of an adjournment of an annual meeting shall not commence a new time period for the giving of such notice by a stockholder.
To be properly brought before an annual meeting, a stockholder’s notice must set forth (in addition to any information required by applicable law) : (1) a description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (2) the name and address, as they appear on the Corporation’s
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books, of the stockholder proposing such business and the beneficial owner, if any, on whose behalf such proposal is made; (3) the class and number of shares of the Corporation which are beneficially owned by the stockholder and the beneficial owner on whose behalf the proposal is made; (4) any material interest, direct or indirect, of the stockholder and such beneficial owner in such business; and (5) a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to present the proposal.
Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Article II, Section 13. The officer presiding at such annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 13 and that such business shall not be transacted.
In addition to the foregoing provisions of this Article II, Section 13, a stockholder shall also comply with all applicable requirements of the Exchange Act, the rules and regulations thereunder and the DGCL with respect to matters set forth in this Article II, Section 13. Nothing in this Section 13 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 14. Nominations by Stockholders at Annual Meeting. Only persons who are nominated in accordance with the procedures set forth in this Article II, Section 14 shall be eligible for election as directors, except as otherwise may be provided in the Charter with respect to the right of holders of any series of preferred stock then outstanding. Nominations of persons for election to the Board may be made at a meeting of stockholders by or at the direction of the Board (or any committee thereof) or by any stockholder of the Corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Article II, Section 14. Any such nomination by a stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation in accordance with the provisions of Article II, Section 13. For such nomination to be properly made, such stockholder’s notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the Corporation that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder (or the beneficial owner, if any, on whose behalf such nomination is made) and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including without limitation such person’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving notice, the information required to be provided pursuant to Article II, Section 13. At the request of the Board, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in the stockholder’s notice of nomination that pertains to the nominee. No stockholder nominee shall be eligible for
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election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Article II, Section 14. The officer presiding at such annual meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws and that the defective nomination shall be disregarded.
In addition to the foregoing provisions of this Article II, Section 14, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Article II, Section 14. Nothing in this Section 14 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 15. Conduct of Meetings. Meetings of stockholders shall be presided over by the Chairman of the Board or, in the absence thereof, (i) such person as the Chairman of the Board shall appoint or, in the absence thereof or in the event that the Chairman of the Board shall fail to make such appointment, (ii) any officer of the Corporation appointed by the Board. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the officer presiding at the meeting appoints.
The Corporation shall, in advance of any meeting of stockholders, appoint one (1) or more inspector(s) to act at the meeting of stockholders and make a written report thereof. The Board may designate one (1) or more persons as alternate inspector(s) to replace any inspector who fails to act. If no inspector or alternate has been appointed or is able to act at a meeting of stockholders, the officer presiding at the meeting shall appoint one (1) or more inspector(s) to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) or alternate(s) shall have the duties prescribed pursuant to Section 231 of the DGCL or other applicable law.
The Board shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, if any, the officer presiding at the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all acts as, in his or her judgment, are necessary, appropriate or convenient for the proper conduct of the meeting, including without limitation establishing an agenda or order of business of the meeting, rules or regulations to maintain order and the safety of those present, limitations on the time allotted for questions or comments, restrictions on entry to the meeting after the time fixed for commencement thereof and the fixing of the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting (and shall announce such at the meeting). Unless and to the extent determined by the Board or the officer presiding at any meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.
Section 16. Notice by Electronic Transmission. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Charter or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to which the notice is given. Any such consent shall be revocable by the
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stockholder by written notice to the Corporation and shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation, the transfer agent or other person responsible for the giving of notice; provided, however, the failure to treat such inability as a revocation shall not invalidate any meeting or other action. This Article II, Section 16 shall not apply to those situations in which notice by electronic transmission is not permitted in accordance with Section 232 of the DGCL.
Notice given pursuant to the preceding paragraph shall be deemed given if by (i) facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice, (ii) electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice, (iii) a posting on an electronic network together with a separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice and (iv) any other form of electronic transmission, when directed to the stockholder.
For purposes of these Bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
ARTICLE III
Board of Directors
Section 1. General Powers. The business and affairs of the Corporation shall be managed by the Board, except as otherwise provided by law, the Charter or these Bylaws.
Section 2. Number, Term and Qualification. The Board shall consist of not less than three or more than thirteen members as fixed from time to time in accordance with the terms of the Charter. Each director shall hold office until the expiration of the term for which elected and until his or her successor is elected and qualified or until his or her earlier death, resignation, retirement or removal. No reduction in the number of directors shall have the effect of removing any director before such director’s term of office expires. Directors need not be residents of the State of Delaware or stockholders of the Corporation.
Section 3. Removal. Except as otherwise provided in the Charter or required by law, directors may be removed from office with or without cause only by a vote of stockholders who hold at least 66 2/3% of the aggregate voting power of the then-outstanding shares of capital stock of the Corporation entitled to vote on the election of directors. If any directors are so removed, new directors may be elected at the same meeting.
Section 4. Resignation. Any director of the Corporation may resign at any time by giving notice in writing or by electronic transmission to the Chairman of the Board or the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified therein. The acceptance of such resignation shall not be necessary to make it effective.
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Section 5. Vacancies. Except as may otherwise be provided in the Charter or required by law, any newly created directorship resulting from any increase in the authorized number of directors and any vacancy in the Board resulting from death, resignation, retirement, removal or other cause shall, unless otherwise provided by resolution of the Board, be filled only by a majority vote of the directors then in office, whether or not less than a quorum, and each director so chosen shall hold office until expiration of the term for which elected and until his or her successor is elected and qualified or until his or her earlier death, resignation, retirement or removal.
Section 6. Compensation. The Board shall have the authority to fix the compensation of directors for service in such capacity and may provide for the payment or reimbursement of expenses incurred by the directors in connection with such service. Any director may serve the Corporation in any other capacity and receive compensation therefor.
ARTICLE IV
Meetings of Directors
Section 1. Annual and Regular Meetings. The annual meeting of the Board for the purpose of electing officers and transacting such other business as may be brought before the meeting shall be held immediately following, and at the same location as, the annual meeting of the stockholders, and no notice of such annual meeting shall be required; provided that the Board may fix another time and place for such annual meeting in which case it shall provide notice in the manner provided herein for special meetings. Regular meetings of the Board may be held without notice at such time and place as shall from time to time be determined by the Board.
Section 2. Special Meetings. Special meetings of the Board may be called by or at the request of the Chairman of the Board, the Chief Executive Officer, the President or a majority of the directors then in office. Such meetings may be held at the time and place designated in the notice of the meeting.
Section 3. Notice of Special Meetings. The Secretary or other person or persons calling a meeting for which notice is required shall give notice of each special meeting of the Board to each director personally, by telephone or by mail, electronic transmission, overnight mail, courier service or telegram, postage or charges prepaid, at his or her address as shown on the records of the Corporation. If the notice is: (i) given by telephone, electronic transmission, facsimile or hand delivery, it shall be deemed adequate if given at least twelve (12) hours prior to the time set for the meeting; (ii) mailed, it shall be deemed adequate if deposited in the United States mail at least four (4) calendar days before the date of the meeting; (iii) delivered by overnight mail, courier service or telegram, it shall be deemed adequate when delivered to the overnight mail or courier service company or telegraph company at least forty-eight (48) hours before such meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. Whenever notice is required to be given under any provision of the DGCL, the Charter or
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these Bylaws, a written waiver thereof, signed by the director entitled to notice, or a waiver by electronic transmission by the director entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when the director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice, or any waiver by electronic transmission, unless so required by the Charter or these Bylaws.
Section 4. Quorum. A majority of the directors then in office shall constitute a quorum for the transaction of business at a meeting of the Board. Any regular or special meeting may be adjourned from time to time by a majority of those present, whether or not a quorum.
Section 5. Manner of Acting. Except as otherwise provided by law, the Charter or these Bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.
Section 6. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members thereof consent thereto in writing or by electronic transmission and the writing(s) or electronic transmission(s) are filed with the minutes of proceedings of the Board or committee. Such unanimous written consent shall have the same force and effect as a unanimous vote at a meeting and may be stated as such in any articles, certificates or documents filed with the Secretary of State of Delaware, or any other state wherein the Corporation may do business.
Section 7. Meeting by Use of Conference Telephone. Any one or more directors or members of a committee may participate in a meeting of the Board or any of its committees by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall be deemed presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE V
Committees
Section 1. Designation of Committees. The Board may, by resolution passed by a majority of the directors then in office, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee to replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in these Bylaws or in a resolution of the Board, shall have and may exercise all the lawfully delegable powers and authority of the Board in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board.
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Section 2. Executive Committee. There may be an Executive Committee of not more than three directors designated by resolution passed by a majority of the directors then in office. Such committee may meet at stated times, or on notice to all by any of their own number. During intervals between meetings of the Board, the Executive Committee shall have and may exercise the powers of the Board in the management of the business and affairs of the Corporation, except that the Executive Committee shall not have authority to authorize or approve, or to recommend to the stockholders, the following matters:
(a) Any action or matter required by law to be submitted to the stockholders for their approval.
(b) The designation of an Executive Committee or any other committee having power to exercise any of the authority of the Board in the management of the Corporation or the filling of vacancies in the Board or in such committee.
(c) The fixing of compensation of the directors for serving on the Board or on such committee.
(d) The amendment or repeal of any bylaw or the adoption of any new bylaw.
(e) The amendment or repeal of any resolution of the Board that by its terms shall not be so amendable or repealable.
Vacancies in the membership of the Executive Committee shall be filled by a majority of the directors then in office.
Section 3. Minutes. Each committee shall keep minutes of its proceedings and shall report thereon to the Board when required by the Board.
Section 4. Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article IV applicable to meetings and actions of the Board, with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board and its members; provided, however, that the time of regular and special meetings of committees may also be called by the Board and that the Board may adopt rules for any committee not inconsistent with the provisions of these Bylaws.
ARTICLE VI
Officers
Section 1. Titles. The officers of the Corporation shall be elected by the Board and shall consist of a President, a Secretary and a Treasurer. The Board may also elect a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief Financial Officer, one or more Vice Presidents, a Controller, one or more Assistant Secretaries, one or more Assistant Treasurers, one or more Assistant Controllers and such
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other officers as may be elected in accordance with Section 3 of this Article VI. Except as otherwise provided in these Bylaws, officers shall have the authority and perform the duties as from time to time may be prescribed by the Board or the officer electing such officer in accordance with Section 3 of this Article VI. Any two or more offices may be held by the same individual, but no officer may act in more than one capacity where action of two or more officers is required.
Section 2. Election and Term. The officers of the Corporation shall be elected by the Board at the regular meeting of the Board held each year immediately following the annual meeting of the stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her death, resignation, retirement or removal.
Section 3. Subordinate Officers. The Board may elect, or empower the Chief Executive Officer or the President to elect, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board or the Chief Executive Officer or President may from time to time determine.
Section 4. Removal, Resignation and Vacancy. Any officer may be removed, with or without cause, by the Board, but removal shall be without prejudice to any contract rights of the officer removed. Election of an officer shall not of itself create contract rights. Any officer may resign at any time by giving written notice to the Corporation, effective as of the date of receipt of that notice or at any later time specified in that notice. Unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to any rights of the Corporation under any contract to which the officer is a party. Any vacancy among the officers may be filled by the Board or otherwise in accordance with Section 3 of this Article VI.
Section 5. Chairman of the Board. The Chairman of the Board, if such officer is elected, shall preside at meetings of the Board and of stockholders and shall have such other authority and perform such other duties as the Board shall designate or as may be prescribed by these Bylaws. The Vice Chairman of the Board, if such officer is elected, shall fulfill the duties of the Chairman of the Board in his or her absence.
Section 6. Chief Executive Officer. The Chief Executive Officer, if such officer is elected, shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation, shall report directly to the Board and shall have such other powers and perform such other duties as the Board shall designate or as may be provided by applicable law or prescribed by these Bylaws.
Section 7. President. In the absence or inability or refusal to act of the Chief Executive Officer, the President shall have all of the powers and duties of the Chief Executive Officer. The President shall have such other powers and duties as the Board or the Chief Executive Officer shall designate or as may be provided by applicable law or prescribed by these Bylaws.
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Section 8. Vice Presidents. In the absence or inability or refusal to act of the President, the Vice President(s), if any are elected, in order of their rank as fixed by the Board or, if not ranked, a Vice President designated by the Board, shall have all of the powers and duties of the President. Each Vice President shall have such other powers and duties as the Board, the Chief Executive Officer or the President shall designate or as may be provided by applicable law or prescribed by these Bylaws.
Section 9. Chief Financial Officer. The Chief Financial Officer, if such officer is elected, shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital and retained earnings. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board or the Chief Executive Officer, disburse the funds of the Corporation as may be ordered by the Board, render to the Board and the Chief Executive Officer, upon request, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the Corporation, and have such other powers and duties as the Board or the Chief Executive Officer shall designate or as may be provided by applicable law or prescribed by these Bylaws.
Section 10. Treasurer. In the absence or inability or refusal to act of the Chief Financial Officer, the Treasurer shall have all of the powers and duties of the Chief Financial Officer. The Treasurer shall have such other powers and duties as the Board, the Chief Executive Officer or the Chief Financial Officer shall designate or as may be provided by applicable law or prescribed by these Bylaws.
Section 11. Assistant Treasurers. In the absence or inability or refusal to act of the Treasurer, the Assistant Treasurer(s), if any are elected, in the order determined by the Board (or if there be no such determination, then in the order of their election), shall have the powers and duties of the Treasurer. The Assistant Treasurer(s) shall have such other powers and duties as the Board or the Treasurer shall designate or as prescribed by these Bylaws.
Section 12. Controller and Assistant Controllers. The Controller shall have charge of the accounting affairs of the Corporation and shall have such other powers and duties as the Board or the Chief Executive Officer shall designate. In the absence or inability or refusal to act of the Controller, the Assistant Controller(s), if any, in the order determined by the Board (or if there be no such determination, then in the order of their election), shall have the powers and perform the duties of the Controller. The Assistant Controllers shall have such other powers and duties as the Board or the Controller shall designate.
Section 13. Secretary. The Secretary shall keep or cause to be kept accurate records of the acts and proceedings of all meetings of stockholders and of the Board and of all committees of the Board and shall give or cause to be given all notices required by law and by these Bylaws. The Secretary shall have general charge of the corporate books and records and of the corporate seal and shall affix the corporate seal to any lawfully executed instrument requiring it. The Secretary shall have general charge of the stock transfer books of the Corporation and shall keep at the principal office of the Corporation (or at the office of the Corporation’s transfer agent or registrar) a record of stockholders,
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showing the name and address of each stockholder and the number and class of the shares held by each. The Secretary shall have such other powers and duties as the Board or the Chief Executive Officer shall designate or as may be provided by applicable law or prescribed by these Bylaws.
Section 14. Assistant Secretaries. In the absence or inability or refusal to act of the Secretary, the Assistant Secretary(ies), if any, in the order determined by the Board (or if there be no such determination, then in the order of their election), shall have the powers and duties of the Secretary. The Assistant Secretaries shall have such other powers and perform such other duties as the Board or the Secretary shall designate or as prescribed by these Bylaws.
Section 15. Voting of Stock. Unless otherwise ordered by the Board, either the Chief Executive Officer or the President shall have full power and authority on behalf of the Corporation to attend, act and vote at meetings of the stockholders of any Corporation in which this Corporation may hold stock and, at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner, the Corporation possesses. The Board may by resolution from time to time confer such power and authority upon any other person or persons.
ARTICLE VII
Capital Stock
Section 1. Certificates. Certificates for shares of the capital stock of the Corporation shall be in such form not inconsistent with the Charter as shall be approved by the Board. The certificates shall be consecutively numbered or otherwise identified. The name and address of the persons to whom they are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the Corporation. Each certificate shall be signed by the Chairman of the Board, Chief Executive Officer, President or any Vice President and by the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer; provided, that where a certificate is signed by a transfer agent or assistant transfer agent of the Corporation, the signatures of such officers of the Corporation upon the certificate may be by facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Each certificate shall be sealed with the seal of the Corporation or a facsimile thereof. The Board may provide by resolution that some or all of any or all classes or series of its stock shall be uncertificated shares, provided that any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed as set forth above.
Section 2. Transfer of Shares. Transfer of shares shall be made on the stock transfer books of the Corporation only upon surrender of the certificate for the shares sought to be transferred by the record holder or by a duly authorized agent, transferee or legal
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representative to the Corporation or its transfer agent, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer. All certificates surrendered for transfer shall be cancelled before new certificates for the transferred shares shall be issued.
Section 3. Transfer Agent and Registrar. The Board may appoint one or more transfer agents and one or more registrars of transfers and may require all stock certificates to be signed or countersigned by the transfer agent and registered by the registrar of transfers.
Section 4. Regulations. The Board shall have power and authority to make rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of capital stock of the Corporation.
Section 5. Lost Certificates. The Corporation may issue a new certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit from the person explaining the loss or destruction. The Corporation may require the claimant to give the Corporation a bond in a sum as it may direct to indemnify the Corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed or with respect to the issuance of such new certificate.
ARTICLE VIII
INDEMNIFICATION
Section 1. Right to Indemnification in Proceedings other than those by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”) (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the fullest extent permitted by the DGCL, as the same exists or as may be amended (but, in the case of any amendment, only to the extent such amendment permits broader indemnification rights than such law permitted the Corporation provided prior to such amendment). Such indemnification shall, unless otherwise provided when authorized or ratified, continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee’s heirs, executors and administrators; provided that, except as provided in Section 3 of this Article VIII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses (including attorneys’ fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter, an “advancement of expenses”); provided, however, that if the DGCL so requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or
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officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined that such indemnitee is not entitled to be indemnified by the Corporation under this Section or otherwise (hereinafter an “undertaking”).
Section 2. Right to Indemnification in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit to the fullest extent permitted by the DGCL, as the same exists or as may be amended (but, in the case of any amendment, only to the extent such amendment permits broader indemnification rights than such law permitted the Corporation provided prior to such amendment).
Section 3 Right of Indemnitee to Bring Suit. If a claim under Section 1 or Section 2 of this Article VIII is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the DGCL in order to empower the Corporation to indemnify him or her. Neither the failure of the Corporation (including, without limitation, its independent legal counsel, its stockholders or the Board) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including, without limitation, its independent legal counsel, its stockholders or the Board) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses hereunder or otherwise shall be on the Corporation.
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Section 4. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Charter, any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL or otherwise.
Section 5. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII.
Section 6. Certain Definitions. For purposes of this Article VIII, references to: (i) “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (ii) “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and (iii) “serving at the request of the Corporation” shall include any service as a director or officer of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries.
Section 7. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board, provide rights to indemnification and the advancement of expenses to any employee or agent of the Corporation, to any other person serving the Corporation or to any person who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and such rights may be equivalent to, or greater or less than, the rights conferred in this Article VIII to directors and officers of the Corporation.
Section 8. Severability. If any provision or provisions of this Article VIII shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the
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validity, legality and enforceability of the remaining provisions of this Article VIII (including, without limitation, each portion of any Section of this Article VIII containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Article VIII (including, without limitation, each such portion of any Section of this Article VIII containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
ARTICLE IX
General Provisions
Section 1. Dividends. The Board may from time to time declare, and the Corporation may pay, dividends out of its earned surplus on its outstanding shares in the manner and upon the terms and conditions provided by law.
Section 2. Seal. The seal of the Corporation shall have inscribed thereon the name of the Corporation and “Delaware” around the perimeter, and the words “Corporate Seal” in the center and may be adopted or altered by or at the direction of the Board. The Corporation may use the seal by causing it or a facsimile thereof to be impressed, affixed or reproduced.
Section 3. Depositories and Checks. All funds of the Corporation shall be deposited in the name of the Corporation in such bank, banks, or other financial institutions as the Board or officers designated by the Board may from time to time designate and shall be drawn out on checks, drafts or other orders signed on behalf of the Corporation by such person or persons as the Board may from time to time designate.
Section 4. Bond. The Board may by resolution require any or all officers, agents and employees of the Corporation to give bond to the Corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the Board.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be the period ending on December 31 of each year or such other period as the Board shall from time to time determine.
Section 6. Amendments. Except as otherwise provided herein, these Bylaws may be amended or repealed and new Bylaws may be adopted at any annual meeting or at any special meeting of stockholders called for the purpose of considering such action by the affirmative vote of the holders of at least a majority of the aggregate voting power of the then-outstanding shares of capital stock of the Corporation, voting together as a single class; provided that the affirmative vote of the holders of at least 66 2/3% of the aggregate voting power of the then-outstanding shares of capital stock of the Corporation, voting together as a single class, shall be required to adopt, amend or repeal all or any portion of Section 13 or 14 of Article II, Section 2 of Article III, Article VIII and Section 6 of Article IX of these Bylaws.
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These Bylaws may also be amended or repealed and new Bylaws may be adopted by the Board acting pursuant to Article IV, but the stockholders of the Corporation may adopt, amend or repeal any bylaw whether adopted by the Board or otherwise.
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Exhibit 4.1
| AMERICAN BANK NOTE COMPANY | PRODUCTION COORDINATOR: TODD DEROSSETT 931-490-1720 |
|||||||
| 711 ARMSTRONG LANE | PROOF OF JANUARY 18, 2005 | |||||||
| COLUMBIA, TENNESSEE 38401 | TARGACEPT, INC. | |||||||
| (931) 388-3003 | TSB 18440 FC | |||||||
| SALES: J. NAPOLITANO 212-269-0339X14 | Operator: Ron | |||||||
| / ETHER 13 / LIVE JOBS /T /TARGACEPT 18440 FC | New |
PLEASE INITIAL THE APPROPRIATE SELECTION FOR THIS PROOF:
OK AS IS OK WITH CHANGES MAKE CHANGES AND SEND ANOTHER PROOF
Colors Selected for Printing: Logo is FOR POSITION ONLY; LOW RESOLUTION: NOT SUITABLE FOR PRINTING. Intaglio prints in SC-3 Dark Green.
COLOR: This proof was printed from a digital file or art work on a graphics quality, color laser printer. It is a good representation of the color as it will appear on the final product. However, it is not an exact color rendition, and the final printed product may appear slightly different from the proof due to the difference between the dyes and printing ink.
NUMBER T [TARGACEPT LOGO] SHARES
$.001 PAR VALUE NON-ASSESSABLE
TARGACEPT, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 87611R 30 6
THIS CERTIFIES that
is the registered holder of
SHARES OF
TARGACEPT, INC.
Common Stock transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
CERTIFICATE OF STOCK
Dated: /s/ Alan A. Musso
Alan A. Musso
Chief Financial Officer and Secretary
TARGACEPT, INC. CORPORATE SEAL 1997 DELAWARE X
/s/ J. Donald deBethizy
J. Donald deBethizy
Chief Executive Officer and President
Countersigned and Registered
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, N.Y.) Transfer Agent and Registrar
Authorized Signatures
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
| TEN COM |
– as tenants in common | UNIF GIFT MIN ACT – | __________Custodian__________ | |||||||
| TEN ENT |
– as tenants by the entireties | (Cust) | (Minor) | |||||||
| JT TEN |
– as joint tenants with right of survivorship and not as tenants in common |
under Uniform Gifts to Minors Act of (State) | ||||||||
Additional abbreviations may also be used though not in the above list.
| For Value Received, hereby sell, assign and transfer unto | ||||
|
| ||||
| (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) | ||||
|
| ||||
|
| ||||
| PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE | ||||
|
Shares
of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint | ||||
|
Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. | ||||
Dated
| NOTICE: | SIGNATURE MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A BANK, BROKER OR ANY OTHER ELIGIBLE GUARANTOR INSTITUTION THAT IS AUTHORIZED TO DO SO UNDER THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM (STAMP) UNDER RULES PROMULGATED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION |
| AMERICAN BANK NOTE COMPANY | PRODUCTION COORDINATOR: TODD DEROSSETT 931-490-1720 |
|||||||
| 711 ARMSTRONG LANE | PROOF OF JANUARY 18, 2005 | |||||||
| COLUMBIA, TENNESSEE 38401 | TARGACEPT, INC. | |||||||
| (931) 388-3003 | TSB 18440 BK | |||||||
| SALES: J. NAPOLITANO 212-269-0339X14 | Operator: Ron | |||||||
| / ETHER 13 / LIVE JOBS / T /TARGACEPT 18440 BK | New |
PLEASE INITIAL THE APPROPRIATE SELECTION FOR THIS PROOF: OK AS IS OK WITH CHANGES MAKE CHANGES AND SEND ANOTHER PROOF
Exhibit 5.1
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Telephone: 617/542-6000
Fax: 617/542-2241
www.mintz.com
March 16, 2006
Targacept, Inc.
200 East First Street
Suite 300
Winston-Salem, NC 27101
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration Statement on Form S-1, Registration No. 333-131050 (the “Registration Statement”), filed by Targacept, Inc., a Delaware corporation (the “Company”), with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), with respect to an aggregate of 5,750,000 shares (the “Shares”) of its common stock, $0.01 par value per share (the “Common Stock”), including 750,000 shares subject to an underwriters’ over-allotment option.
The Shares are to be sold by the Company pursuant to a purchase agreement (the “Purchase Agreement”) to be entered into between the Company and the several underwriters to be named therein for whom Deutsche Bank Securities Inc., Pacific Growth Equities, LLC, CIBC World Markets Corp. and Lazard Capital Markets LLC are acting as representatives. The form of the Underwriting Agreement has been filed as Exhibit 1.1 to the Registration Statement.
In connection with this opinion, we have examined the Company’s Certificate of Incorporation and Bylaws, each as amended to date; the form of Purchase Agreement; the minutes of all pertinent meetings of directors and stockholders of the Company relating to the Registration Statement, and the transactions contemplated thereby; such other records of the corporate proceedings of the Company and other documents as we deemed relevant for the purposes of rendering the opinions in this letter; and the Registration Statement and the exhibits thereto filed with the Commission.
In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, photostatic or facsimile copies and the authenticity of the originals of such copies.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Targacept, Inc.
March 16, 2006
Page 2
Based upon the foregoing, and subject to the limitations set forth below, we are of the opinion that the Shares, when issued by the Company and delivered by the Company against payment therefor as contemplated by the Purchase Agreement, will be duly and validly issued, fully paid and non-assessable shares of the Common Stock.
Our opinion is limited to the General Corporation Law of the State of Delaware (including the applicable provisions of the Delaware Constitution and the reported judicial decisions interpreting such laws) and the United States Federal Laws, and we express no opinion with respect to the laws of any other jurisdiction. No opinion is expressed herein with respect to the qualification of the Shares under the securities or blue sky laws of any state or any foreign jurisdiction.
Please note that we are opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein after the Registration Statement has been declared effective by the Commission.
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of this Firm’s name therein and in the related prospectus under the caption “Legal Matters.” In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the “Agreement”) is made and entered into as of , 2006 between Targacept, Inc., a Delaware corporation (the “Company”), and , a director, officer or member of the executive committee of the Company (“Indemnitee”).
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company (the “Board”) has adopted bylaws (the “Bylaws”) providing for or permitting the indemnification of officers, directors and employees of the Company to the fullest extent permitted by the Delaware General Corporation Law, as amended (the “DGCL”); and
WHEREAS, the Bylaws and the DGCL, by their nonexclusive nature, permit agreements between the Company and its officers, directors and employees with respect to indemnification; and
WHEREAS, in order to induce Indemnitee to continue to serve as a director, officer or member of the executive (management) committee of the Company, the Company has agreed to enter into this agreement with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee’s continued service as a director, officer or member of the executive committee of the Company after the date hereof, the parties agree as follows:
1. Definitions. For purposes of this Agreement:
(a) “Change of Control” means:
(i) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided that, notwithstanding the foregoing, none of the following acquisitions shall constitute a Change of Control: (1) an acquisition directly from the Company or from other stockholders that (x) was approved in advance by the Board and (y) would not constitute a Change of Control under Section 1(a)(iii); (2) an acquisition by the Company; (3) an acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by, or under common control with, the Company; or (4) an acquisition by an entity with respect to which the criteria set forth in Section 1(a)(iii)(A), (B) and (C) are met; or
(ii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”); provided that, notwithstanding the foregoing, a Business Combination shall not constitute a Change of Control if: (A) the individuals and entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of the then outstanding shares of common stock and of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of directors of the resulting, continuing or surviving entity in such Business Combination (including, if applicable, an entity that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportion as existed immediately prior to such Business Combination; (B) no Person (excluding the resulting, continuing or surviving entity in such Business Combination or any employee benefit plan (or related trust) of such resulting, continuing or surviving entity) beneficially owns, directly or indirectly, twenty percent (20%) or more of the then outstanding shares of common stock or of the combined voting power of the then outstanding voting securities of the resulting, continuing or surviving entity in such Business Combination, except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of the resulting, continuing or surviving entity in such Business Combination are members of the Board at the time of the execution of the definitive agreement providing for such Business Combination or of its authorization and approval by the Board; or
(iii) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
(b) “Company Position” means the status of a person as a present or former director, officer, employee or agent of the Company or any other Enterprise.
(c) “Disinterested Director” means a director of the Company who is not and was not a party to the matter in respect of which indemnification or advancement of Expenses is sought by Indemnitee.
(d) “Enterprise” shall mean the Company or any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise for which Indemnitee serves, or did serve, at the request of the Company as a director, officer, employee or agent.
(e) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(f) “Expenses” shall include all judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement, reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of a type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating in, or being or preparing to be a witness in a Proceeding.
(g) “Independent Counsel” means a law firm, a partner or member of a law firm or an independent practitioner who (i) is experienced in matters of corporate law and (ii) would not, under the applicable standards of professional conduct then prevailing, have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s rights under this Agreement.
(h) “Person” means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act).
(i) “Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding in which Indemnitee was, is or will be involved as a party or otherwise, whether brought by or in the right of the Company or otherwise, whether
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civil, criminal, administrative or investigative, whether pending before or after the date of this Agreement and whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement, but specifically excluding an action initiated by an Indemnitee pursuant to Section 8 to enforce his rights under this Agreement.
2. Indemnity of Indemnitee. The Company hereby agrees to indemnify and hold harmless Indemnitee to the fullest extent permitted by the provisions of the DGCL, as may be amended from time to time. Without limiting the generality of the foregoing:
(a) Proceedings Other Than Proceedings by or in the Right of the Company. If Indemnitee was, is or is threatened to be made a party to, or a participant in, any Proceeding (other than a Proceeding by or in the right of the Company) by reason of his Company Position, the Company shall indemnify him against all Expenses actually and reasonably incurred by him, or on his behalf, in connection with such Proceeding (including, without limitation, any claim, issue or matter included therein) if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) Proceedings by or in the Right of the Company. If Indemnitee was, is or is threatened to be made a party to, or a participant in, any Proceeding by or in the right of the Company by reason of his Company Position, the Company shall indemnify him against all Expenses actually and reasonably incurred by him, or on his behalf, in connection with the defense or settlement of such Proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company; provided, however, if required by applicable law, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.
(c) Indemnification for Expenses of a Party who is Wholly or Partially Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Company Position, a party to, and is successful in defending (on the merits or otherwise), any Proceeding, the Company shall indemnify him to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him, or on his behalf, in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section 2(c) and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
3. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 2, the Company shall indemnify and hold harmless Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf if, by reason of his Company Position, he was, is or is threatened to be made, a party to, or participant in, any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement, other than those specified in Section 12, shall be that the Company shall not be obligated to make any
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payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 7 and 8) to be unlawful under Delaware law.
4. Contribution in the Event of Joint Liability.
(a) Whether or not the indemnification provided in Sections 2 and 3 is available, in respect of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such Proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.
(b) Without diminishing or impairing the obligations of the Company set forth in Section 4(a), if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expenses actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such Proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent required by law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such Expenses, as well as any other equitable considerations which are required to be considered under applicable law. The relative fault of the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such Proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their respective actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.
(c) The Company shall fully indemnify and hold harmless Indemnitee from any claims of contribution that may be brought by any one or more officers, directors or employees of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.
5. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Company Position, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
6. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred in connection with any Proceeding by or on behalf of Indemnitee by reason of his Company Position within twenty (20) calendar days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding; provided that: (i) no determination has been made that the facts then known would preclude indemnification pursuant to the terms of this Agreement; and (ii) Indemnitee (A) affirms in such written request that he acted in
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good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Company (and, in the case of a criminal Proceeding, that he had no reasonable cause to believe his conduct was unlawful), (B) undertakes in such written request to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified against such Expenses and (C) provides appropriate supporting documentation for the Expenses for which he is seeking indemnification. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 6 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby expressly agrees to reimburse the Company) within thirty (30) days of such determination for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (and as to which all rights of appeal therefrom have been exhausted or lapsed).
7. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the DGCL and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification under this Agreement (including, without limitation, the advancement of Expenses and contribution by the Company), Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 7(a), a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made: (i) by Independent Counsel, if requested by Indemnitee with its written request for indemnification; or (ii) if no request is made by the Indemnitee for a determination by Independent Counsel, (A) by the Board (or the Board of Directors of the resulting, continuing or surviving entity following a Change of Control), by a majority vote of a quorum consisting of Disinterested Directors, (B) if such a quorum is not obtainable or if such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board (or the Board of Directors of the resulting, continuing or surviving entity following a Change of Control), a copy of which shall be delivered to the Indemnitee, or (C) if a quorum of Disinterested Directors so directs, by the stockholders of the Company.
(c) In the event the determination of entitlement to indemnification or advancement of Expenses is to be made by Independent Counsel at the request of the Indemnitee, the Independent Counsel shall be selected by the Board, unless there shall have occurred, within two (2) years prior to the date of the commencement of the Proceeding with respect to which indemnification or advancement of Expenses is claimed, a Change of Control, in which case the Independent Counsel shall be selected by the Indemnitee, unless the Indemnitee shall request that such selection be made
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by the Board. Indemnitee or the Company, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the criteria of “Independent Counsel” as defined in Section 1, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 7(a), no Independent Counsel shall have been selected without objection, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 7(b). The Company shall pay any and all reasonable fees and expenses incurred by such Independent Counsel in connection with acting pursuant to Section 7(b), and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c), regardless of the manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to rebut this presumption shall have the burden of proof.
(e) Indemnitee shall be deemed to have acted in good faith if his action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers or other employees of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. The parties acknowledge and agree that the foregoing does not represent an exclusive list of the means by which Indemnitee may be deemed to have acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company. In addition, the knowledge or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
(f) If the person, persons or entity empowered or selected under Section 7 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement, in light of the context in which it was made, not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that (A) such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation or information relating thereto and (B) the foregoing provisions of this Section 7(f) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 7(b) and (1)
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within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made at such meeting, or (2) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made at such meeting.
(g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure, available to Indemnitee without undue effort or expense and reasonably necessary to such determination. Any Independent Counsel, member of the Board or stockholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any Proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such Proceeding with or without payment of money or other consideration), it shall be presumed that Indemnitee has been successful on the merits or otherwise in such Proceeding. Anyone seeking to rebut this presumption shall have the burden of proof.
8. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to Section 7 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6, (iii) no determination of entitlement to indemnification is made pursuant to Section 7(b) within ninety (90) days after receipt by the Company of the written request for indemnification, or (iv) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 7, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Indemnitee shall commence such proceeding seeking an adjudication within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 8(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.
(b) In the event that a determination shall have been made pursuant to Section 7(b) that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section 7(b).
(c) If a determination shall have been made pursuant to Section 7(b) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any
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judicial proceeding commenced pursuant to this Section 8, absent a prohibition of such indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 8, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on his behalf, in advance (but subject to the same conditions as are set forth in Section 6 with regard to the advancement of Expenses), any and all expenses (of the types described in the definition of Expenses in Section 1) actually and reasonably incurred by him in connection with such judicial adjudication.
(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.
9. Nonexclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company (as may be amended or restated from time to time), the Bylaws, any agreement, a vote of stockholders, a resolution of directors or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Company Position prior to such amendment, alteration or repeal. To the extent that a change in the DGCL, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under this Agreement, it is the intent of the parties that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other Enterprise, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies.
(c) Except as provided in the last sentence of this Section 9(c), in the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers and take all action reasonably necessary to secure such rights, including execution of such documents as are reasonably necessary to enable the Company to bring suit to enforce such rights. Notwithstanding the foregoing, no right of recovery of Indemnitee pursuant to any (i) director liability insurance policy that covers Indemnitee and is purchased separately by Indemnitee, by any fund or other entity of which Indemnitee is a partner, member or stockholder or that employs Indemnitee or by any of their respective affiliates or (ii) indemnification from any fund or other entity of which Indemnitee is a partner, member or stockholder or that employs Indemnitee or from any of its affiliates shall be subject to subrogation under this Section 9(c).
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(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such amount under any insurance policy, contract, agreement or otherwise.
10. Mutual Acknowledgment. The Company and Indemnitee acknowledge that, in certain instances, Federal law or applicable public policy (pursuant to the immediately following sentence) may prohibit the Company from indemnifying its directors, officers, employees, controlling persons, fiduciaries or other agents or affiliates under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s rights under public policy to indemnify Indemnitee.
11. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director, officer or member of the executive committee of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of any other Enterprise) and shall continue thereafter if and while Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 8) by reason of his Company Position, whether or not he is acting or serving in any such capacity at the time of initiation of the Proceeding, while the Proceeding is pending or at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.
12. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify the Indemnitee in respect of any intentional malfeasance by the Indemnitee or any act undertaken by the Indemnitee where the Indemnitee did not in good faith believe the Indemnitee was acting in the best interests of the Company, or for any other acts, omissions or transactions from which the Indemnitee may not be relieved of liability under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or advance Expenses to Indemnitee with respect to any Proceeding initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to a Proceeding to establish or enforce a right to indemnity under any agreement or insurance policy or under the Company’s certificate of incorporation or Bylaws now or hereafter in effect relating to indemnification, (ii) in specific cases if the Board has approved the initiation or bringing of such Proceeding, or (iii) as otherwise required under Section 145 of the DGCL, regardless of whether such Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee with respect to any (i) Proceeding instituted by Indemnitee as contemplated by Section 12(b)(i) or (ii) proceeding instituted by Indemnitee under Section 8 to enforce its rights under this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or
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(d) Claims Under Section 16(b). To indemnify Indemnitee for any Expenses and disgorgement of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute.
13. Enforcement.
(a) The Company expressly (i) confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as a director, officer or member of the executive committee of the Company and (ii) acknowledges that Indemnitee is relying upon this Agreement in serving as a director, officer or member of the executive committee of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
14. Severability. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable law. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.
15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both parties. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter that may be subject to indemnification hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.
17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and received by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below Indemnitee’s signature hereto.
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(b) If to the Company, to:
Targacept, Inc.
200 East First Street, Suite 300
Winston-Salem, NC 27101-4165
Attention: Chief Financial Officer
or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
18. Counterparts. This Agreement may be executed in two counterparts, each of which shall for all purposes be deemed to be an original and both of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
20. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the principles of conflicts of laws thereof.
21. Gender. Use of the masculine pronoun herein shall be deemed to include also the corresponding feminine pronoun.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.
COMPANY:
TARGACEPT, INC.
By:
Name:
Title:
INDEMNITEE:
Name:
Address:
11
EXHIBIT 10.5
2000 EQUITY INCENTIVE PLAN
OF
TARGACEPT, INC.
(As Amended and Restated Through March 15, 2006)
2000 EQUITY INCENTIVE PLAN
OF
TARGACEPT, INC.
(As Amended and Restated Through March 15, 2006)
1. Purpose
The purpose of the 2000 Equity Incentive Plan of Targacept, Inc., as amended and restated through March 15, 2006 (the “Plan”), is to encourage and enable selected employees, directors, independent contractors, consultants and advisors of Targacept, Inc. (the “Corporation”) and related corporations to acquire or to increase their holdings of common stock of the Corporation, $0.001 par value per share (the “Common Stock”), and other proprietary interests in the Corporation in order to promote a closer identification of their interests with those of the Corporation and its stockholders, thereby further stimulating their efforts to enhance the efficiency, soundness, profitability, growth and stockholder value of the Corporation. This purpose will be carried out through the granting of benefits (collectively referred to herein as “Awards”) to selected participants, including the granting of incentive stock options (“Incentive Options”) intended to qualify under Section 422 of the Code, nonqualified stock options (“Nonqualified Options”), stock appreciation rights (“SARs”), stock awards in the form of bonus stock (“Bonus Stock”) and restricted stock awards (“Restricted Stock Awards”), and performance awards in the form of performance shares (“Performance Shares”) and performance units (“Performance Units”). Incentive Options and Nonqualified Options shall be referred to herein collectively as “Options.” Bonus Stock and Restricted Stock Awards shall be referred to herein collectively as “Stock Awards.” Performance Shares and Performance Units shall be referred to herein collectively as “Performance Awards.”
2. Administration of the Plan
(a) The Plan shall be administered by the Board of Directors of the Corporation (the “Board”) unless the Board, in its sole discretion, delegates all or part of its administrative authority with respect to the Plan to a committee of the Board (the “Committee”). For purposes herein, the Board, and, upon its delegation of the administrative responsibilities for the Plan to the Committee, the Committee, shall be referred to as the “Administrator.” In the event that the Corporation shall become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Committee shall be comprised solely of two or more “non-employee directors,” as said term is defined in Rule 16b-3 under the Exchange Act, unless the Board determines that such committee composition is not necessary or advisable. Further, in the event that the Corporation becomes subject to the requirements of Section 162(m) of the Code, the Committee shall, unless the Board determines otherwise, be comprised solely of two or more “outside directors,” as such term is defined under Section 162(m) or the regulations thereunder, or otherwise in accordance with Section 162(m) and such regulations.
(b) Any action of the Administrator with respect to the Plan may be taken by a written instrument signed by all of the members of the Board or Committee, as appropriate, and any such action so taken by written consent shall be as fully effective as if it had been taken by a majority of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Administrator shall have full and sole authority in its discretion to take any action with respect to the Plan including, without limitation, the authority (i) to determine all matters relating to Awards, including selection of individuals to be granted Awards, the types of Awards, the number of shares of the Common Stock, if any, subject to an Award, and all terms, conditions, restrictions and limitations of an Award and shares of Common Stock subject to an Award; (ii) to prescribe the form or forms of the agreements (as defined in Section 11)
evidencing any Awards granted under the Plan; (iii) to establish, amend and rescind rules and regulations for the administration of the Plan; and (iv) to construe and interpret the Plan and agreements evidencing Awards granted under the Plan, to establish and interpret rules and regulations for administering the Plan and to make all other determinations deemed necessary or advisable for administering the Plan. Except to the extent otherwise required under Code Section 409A, the Administrator shall also have authority, in its sole discretion, to accelerate the date that any Award which was not otherwise exercisable or vested shall become exercisable or vested in whole or in part without any obligation to accelerate such date with respect to any other Award granted to any recipient. In addition, the Administrator shall have the authority and discretion to establish terms and conditions of Awards as the Administrator determines to be necessary or appropriate to conform to the applicable requirements or practices of jurisdictions outside of the United States. All determinations of the Administrator with respect to the Plan will be final and binding on the Corporation and all persons having or claiming an interest in any Award granted under the Plan. No member of the Board or Committee, as applicable, shall be liable while acting as Administrator for any action or determination made in good faith with respect to the Plan or any Award or agreement.
(c) Notwithstanding the other provisions of Section 2, the Administrator may delegate to the Chief Executive Officer or President of the Corporation the authority to grant Awards, and to make any or all of the determinations reserved for the Administrator in the Plan and summarized in Section 2(b) with respect to such Awards, to eligible individuals; provided, however, that, such delegation shall be subject to applicable law and any terms or conditions established by the Administrator and, to the extent required by Section 16 of the Exchange Act or Section 162(m) of the Code, the individual, at the time of said grant or other determination, (i) is not deemed to be an officer or director of the Corporation within the meaning of Section 16 of the Exchange Act; and (ii) is not deemed to be a covered employee (as defined in Section 21(b)). To the extent that the Administrator has delegated authority to grant Awards pursuant to this Section 2(c) to the Chief Executive Officer or President, references to the Administrator shall include references to such person, subject, however, to the requirements of the Plan, Rule 16b-3 and other applicable law.
3. Effective Date
The effective date of the Plan shall be August 22, 2000 (the “Effective Date”). The Plan was amended effective December 18, 2001, May 15, 2002, November 26, 2002, August 20, 2003, and March 16, 2005, and further amended and restated on March 15, 2006. If and to the extent required under Code section 409A, amendments contained in the Plan, as amended and restated on March 15, 2006, shall be effective as of January 1, 2005. Awards may be granted under the Plan on and after the Effective Date, but no Awards will be granted after August 21, 2010.
4. Shares of Stock Subject to the Plan; Award Limitations
(a) Subject to adjustment as provided in Section 4(c), the maximum number of shares of Common Stock that may be issued pursuant to Awards shall not exceed 1,878,888 shares (adjusted to reflect February 2005 reverse stock split). To the extent required pursuant to Section 162(m) of the Code, during any 12-month period, (i) no Participant may receive shares of Common Stock pursuant to the grant of awards under the Plan for more than 600,000 shares of Common Stock, and (ii) no Participant may receive awards under the Plan payable in cash having an aggregate dollar value in excess of $600,000, subject to adjustment as provided in Section 4(c) herein. Shares issued and delivered under the Plan shall be authorized but unissued shares of the Corporation, treasury shares, or shares purchased on the open market or by private purchase.
(b) The Corporation hereby reserves sufficient authorized shares of Common Stock to meet the grant of Awards hereunder. Any shares subject to an Award that is subsequently forfeited, expires or
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is terminated may again be the subject of an Award granted under the Plan. To the extent that any shares of Common Stock subject to an Award are not delivered to a Participant (or his beneficiary) because the Award is forfeited, canceled, settled in cash, or used to satisfy applicable tax withholding obligations, such shares shall not be deemed to have been issued for purposes of determining the maximum number of shares of Common Stock available for issuance under the Plan. If the purchase price of an Award granted under the Plan is satisfied by tendering or withholding shares of Common Stock, only the number of shares issued net of the shares of Common Stock tendered or withheld shall be deemed issued for purposes of determining the maximum number of shares of Common Stock available for issuance under the Plan.
(c) If there is any change in the shares of Common Stock because of a reorganization, recapitalization, merger, consolidation, stock dividend, stock split, reverse stock split, subdivision, combination, reclassification or other change in the capital stock structure of the Corporation or a related corporation affecting the Common Stock, the number of shares of Common Stock reserved for issuance under the Plan shall be correspondingly adjusted, and the Administrator shall make such adjustments to Awards or to any provisions of this Plan as the Administrator deems equitable to prevent dilution or enlargement of Awards.
5. Eligibility
An Award may be granted only to a person* who satisfies the following eligibility requirements on the date the Award is granted:
(a) The person is either (i) an employee of the Corporation or a related entity, (ii) a director of the Corporation or a related entity, or (iii) an independent contractor, consultant or advisor (collectively, “independent contractors”) providing bona fide services to the Corporation or a related entity not in connection with the offer and sale of securities in a capital raising transaction. For this purpose, an individual shall be considered to be an “employee” only if there exists between the individual and the Corporation or a related entity the legal and bona fide relationship of employer and employee (subject to Code Section 409A); provided, however, that with respect to Incentive Options, “employee” means any person who is considered an employee of the Corporation or any parent corporation or subsidiary corporation for purposes of Treas. Reg. Section 1.421-1(h) (or any successor provision related thereto).
(b) With respect to the grant of Incentive Options, the person is an individual employee who does not own, immediately before the time that the Incentive Option is granted, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation. Notwithstanding the foregoing, an individual who owns more than ten percent of the total combined voting power of the Corporation may be granted an Incentive Option if the option price (as determined pursuant to Section 6(b)), is at least 110% of the fair market value of the Common Stock (as defined in Section 6(b)(ii)), and the option period (as defined in Section 6(c)(i)) does not exceed five years. For this purpose, an individual will be deemed to own stock that is attributable to him under Section 424(d) of the Code.
(c) The person, being otherwise eligible under this Section 5, is selected by the Administrator as a person to whom or to which an Award shall be granted (a “Participant”).
*Each reference in the Plan to “individual” or “individuals,” when used to refer to a Participant(s) or a potential Participant(s) in the Plan (other than references contained in Section 5, which are addressed above), shall be deemed to be a reference to “person” or ”persons.”
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6. Options
(a) Grant of Options: Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Options to such eligible individuals in such numbers, upon such terms and at such times as the Administrator shall determine. Both Incentive Options and Nonqualified Options may be granted under the Plan; provided, however, that Incentive Options may only be granted to employees of the Corporation or a related corporation. To the extent that an Option is designated as an Incentive Option but does not qualify as such under Section 422 of the Code, the Option (or portion thereof) shall be treated as a Nonqualified Option.
(b) Option Price: The price per share at which an Option may be exercised (the “option price”) shall be established by the Administrator at the time the Option is granted and shall be set forth in the terms of the agreement evidencing the grant of the Option; provided that, (i) in no event shall the option price be less than the par value per share of the Common Stock; and (ii) in the case of an Incentive Option, the option price shall be no less than 100% of the fair market value per share of the Common Stock on the date the Option is granted. In addition, the following rules shall apply:
(i) An Incentive Option shall be considered to be granted on the date that the Administrator acts to grant the Option, or on any later date specified by the Administrator as the effective date of the Option. A Nonqualified Option shall be considered to be granted on the date the Administrator acts to grant the Option or any other date specified by the Administrator as the date of grant of the Option.
(ii) For the purposes of the Plan, the “fair market value” per share of the Common Stock shall be determined in good faith by the Administrator and, except as may otherwise be determined by the Administrator, fair market value shall be determined in accordance with the following provisions: (A) if the shares of Common Stock are listed for trading on the New York Stock Exchange or the American Stock Exchange, the fair market value shall be the closing sales price of the shares on the New York Stock Exchange or the American Stock Exchange (as applicable) on the date immediately preceding the date the Option is granted, or, if there is no transaction on such date, then on the trading date nearest preceding the date the Option is granted for which closing price information is available, and, provided further, if the shares are quoted on the Nasdaq National Market or the NASDAQ SmallCap Market of the Nasdaq Stock Market, the fair market value shall be the closing sales price for such stock (or the average of closing bid and asked prices, if no sales were reported) as quoted on such system on the date immediately preceding the date the Option is granted for which such information is available; or (B) if the shares of Common Stock are not listed or reported in any of the foregoing, then the fair market value shall be determined by the Administrator based on such valuation measures or other factors as it deems appropriate (provided, however, that, (i) with respect to the grant of Incentive Options, the fair market value shall be determined by the Administrator in accordance with the applicable provisions of Section 20.2031-2 of the Federal Estate Tax Regulations, or in any other manner consistent with the Code Section 422; and (ii) to the extent, if any, required by Code Section 409A, fair market value shall be determined in accordance with Section 409A.
(iii) In no event shall there first become exercisable by an employee in any one calendar year Incentive Options granted by the Corporation or any related corporation with respect to shares having an aggregate fair market value (determined at the time an Incentive Option is granted) greater than $100,000; provided that, if such limit is exceeded, then the first $100,000 of shares to become exercisable in such calendar year will be Incentive Options and the Options (or portion thereof) for shares with a value in excess of $100,000 that first became exercisable in that calendar year will be Nonqualified Options. In the event the Code or the
4
regulations promulgated thereunder are amended after the effective date of this Plan to provide for a different limit on the fair market value of shares permitted to be subject to Incentive Options, then such different limit shall be automatically incorporated herein and will apply to any Incentive Option granted after the date of such amendment.
(c) Option Period and Limitations on the Right to Exercise Options
(i) The term of an Option (the “option period”) shall be determined by the Administrator at the time the Option is granted. With respect to Incentive Options, such period shall not extend more than ten years from the date on which the Option is granted (unless otherwise limited by Section 5(b)). Any Option or portion thereof not exercised before expiration of the option period shall terminate. The period or periods during which an Option may be exercised and other terms and conditions to exercise shall be determined by the Administrator.
(ii) An Option may be exercised by giving written notice to the Corporation at such place as the Administrator or its designee shall direct. Such notice shall specify the number of shares to be purchased pursuant to an Option and the aggregate purchase price to be paid therefor, and shall be accompanied by the payment of such purchase price. Unless an individual option agreement provides otherwise, such payment may be in the form of cash or check, and, where expressly approved by the Administrator, payment may also be made:
(A) By delivery (by either actual delivery or attestation) of shares of Common Stock (valued at the date of exercise at their fair market value by the Administrator by applying the provisions of Section 6(b)(ii)) that have been owned by the Participant for more than six months (or such other time period as may be stated in the award agreement) and are otherwise acceptable to the Administrator;
(B) By withholding shares of Common Stock (valued at the date of exercise at their fair market value by the Administrator by applying the provisions of Section 6(b)(ii)) otherwise issuable upon exercise of the Option;
(C) With respect only to purchases upon exercise of an Option after a public market for the Common Stock exists, by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price; or
(D) By any combination of the foregoing.
For the purposes herein, a “public market” for the Common Stock shall be deemed to exist (i) upon consummation of a firm commitment underwritten public offering of the Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) if the Administrator otherwise determines that there is an established public market for the Common Stock.
(iii) Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), no Option granted to a Participant who was an employee at the time of grant shall be exercised unless the Participant is, at the time of exercise, an employee as described in Section 5(a), and has been an employee continuously since the date the Option was granted, subject to the following:
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(A) An Option shall not be affected by any change in the terms, conditions or status of the Participant’s employment, provided that the Participant continues to be an employee of the Corporation or a related corporation (other than as provided under Code Section 409A).
(B) The employment relationship of a Participant shall be treated as continuing intact for any period that the Participant is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed ninety days, or, if longer, as long as the Participant’s right to re-employment is guaranteed either by statute or by contract. The employment relationship of a Participant shall also be treated as continuing intact while the Participant is not in active service because of disability. For purposes of the Plan, except as may be otherwise required or permitted under Code Section 409A, “disability” shall have the meaning ascribed to the term in any stockholders agreement, employment agreement, consulting agreement or other similar agreement, if any, to which the Participant is a party, or if no such agreement applies, “disability” shall mean the inability of the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months. The Administrator shall determine whether a Participant is disabled within the meaning of this paragraph, and, if applicable, the date of a Participant’s termination of employment of service for any reason (the “termination date”).
(C) Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), if the employment of a Participant is terminated because of disability within the meaning of subparagraph (B), or if the Participant dies while he is an employee or dies within ninety (90) days after the termination of his employment because of disability, the Option may be exercised only to the extent exercisable on the date of the Participant’s termination date, except that, subject to any requirements under Code Section 409A, the Administrator may in its discretion accelerate the date for exercising all or any part of the Option which was not otherwise exercisable on the termination date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (X) the close of the period of one year next succeeding the termination date or such other time period as may be specified in the applicable agreement; or (Y) the close of the option period. In the event of the Participant’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(D) Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), if the employment of the Participant is terminated for any reason other than disability (as defined in subparagraph (B)), death or for “cause,” his Option may be exercised to the extent exercisable on the Participant’s termination date, except that, subject to any requirements under Code Section 409A, the Administrator may in its discretion accelerate the date for exercising all or any part of the Option which was not otherwise exercisable on the date of such termination of employment. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (X) the close of the period of ninety (90) days next succeeding the termination date or such other time period as may be specified in the applicable agreement; or (Y) the close of the option period. If the Participant dies following such termination of employment and prior to the earlier of the dates specified
6
in (X) or (Y) of this subparagraph (D), the Participant shall be treated as having died while employed under subparagraph (C) immediately preceding (treating for this purpose the Participant’s date of termination of employment as the termination date). In the event of the Participant’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(E) Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), if the employment of the Participant is terminated for “cause,” his Option shall lapse and no longer be exercisable as of the effective time of his termination of employment, as determined by the Administrator. For purposes of the Plan, (X) the Participant’s termination shall be for “cause” if such termination results from the Participant’s termination for “cause” under his employment, consulting or other agreement with the Corporation or a related corporation, if any; or (Y) if the Participant has not entered into any such employment, consulting or other agreement, then the Participant’s termination shall be for “cause” if termination results due to the Participant’s (i) dishonesty or conviction of a crime; (ii) failure to perform his duties for the Corporation or a related corporation to the satisfaction of the Corporation; or (iii) engaging in conduct that could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best interest of the Corporation. The determination of “cause” shall be made by the Administrator and its determination shall be final and conclusive.
(F) Notwithstanding the foregoing, the Administrator shall have authority, in its discretion, to extend the period during which an Option may be exercised or modify the other terms and conditions of exercise, or both, provided that (i) such extension or modification is otherwise in compliance with Code Section 409A and (ii) in the event that any such extension or modification shall cause an Incentive Option to be designated as a Nonqualified Option, no such extension or modification shall be made without the written consent of the Participant.
(iv) Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), an Option granted to a Participant who was a non-employee director or an independent contractor of the Corporation or a related corporation at the time of grant (and who does not thereafter become an employee, in which case he shall be subject to the provisions of Section 6(c)(iii)) may be exercised only to the extent exercisable on the date of the Participant’s termination of service to the Corporation or a related corporation (unless the termination was for cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (X) the close of the period of ninety (90) days next succeeding the termination date or such other time period as may be specified in the applicable agreement; or (Y) the close of the option period. If the services of such a Participant are terminated for cause (as defined in Section 6(c)(iii)(E)), his Option shall lapse and no longer be exercisable as of the effective time of his termination of services, as determined by the Administrator. Notwithstanding the foregoing, the Administrator may in its discretion (subject to any requirements under Code Section 409A) accelerate the date for exercising all or any part of an Option which was not otherwise exercisable on the termination date, extend the period during which an Option may be exercised, modify the other terms and conditions of exercise, or any combination of the foregoing.
(v) A Participant or his legal representatives, legatees or distributees shall not be deemed to be the holder of any shares subject to an Option and shall not have any rights as a
7
stockholder unless and until certificates for such shares are delivered to him or them under the Plan.
(vi) A certificate or certificates for shares of Common Stock acquired upon exercise of an Option shall be issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) as soon as practicable following receipt of notice of exercise and payment of the purchase price.
(d) Nontransferability of Options
(i) Incentive Options shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession or, in the Administrator’s discretion, as may otherwise be permitted in accordance with Treasury Regulation Section 1.421-1(b)(2) or any successor provision thereto. Nonqualified Options shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in its sole discretion in a manner consistent with the registration provisions of the Securities Act. An Option shall be exercisable during the Participant’s lifetime only by him, his guardian or legal representative or the transferee in any transfer permitted by this Section 6(d)(i). The designation of a beneficiary does not constitute a transfer.
(ii) If a Participant is subject to Section 16 of the Exchange Act, shares of Common Stock acquired upon exercise of an Option may not, without the consent of the Administrator, be disposed of by the Participant until the expiration of six months after the date the Option was granted.
7. Stock Appreciation Rights
(a) Grant of SARs: Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant SARs to such eligible individuals, in such numbers, upon such terms and at such times as the Administrator shall determine. SARs may be granted to an optionee of an Option (hereinafter called a “Related Option”) with respect to all or a portion of the shares of Common Stock subject to the Related Option (a “Tandem SAR”) or may be granted separately to an eligible key employee (a “Freestanding SAR”). Subject to the limitations of the Plan, SARs shall be exercisable in whole or in part upon such terms and conditions as are provided in the agreement relating to the grant of the SAR.
(b) Tandem SARs: A Tandem SAR may be granted either concurrently with the grant of the Related Option or (if the Related Option is a Nonqualified Option) at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such Related Option. The base price of a Tandem SAR shall be equal to the option price of the related Tandem Option; provided, however, that Tandem SARs must be granted in accordance with Code Section 409A. Tandem SARs shall be exercisable only at the time and to the extent that the Related Option is exercisable (and may be subject to such additional limitations on exercisability as the Administrator may provide in the agreement), and in no event after the complete termination or full exercise of the Related Option. For purposes of determining the number of shares of Common Stock that remain subject to such Related Option and for purposes of determining the number of shares of Common Stock in respect of which other Awards may be granted, upon the exercise of Tandem SARs, the Related Option shall be considered to have been surrendered to the extent of the number of shares of Common Stock with respect to which such Tandem SARs are exercised. Upon the exercise or termination of the Related Option, the Tandem SARs with respect thereto shall be canceled automatically to the extent of the number of shares of Common Stock
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with respect to which the Related Option was so exercised or terminated. Subject to the limitations of the Plan, upon the exercise of a Tandem SAR, the Participant shall be entitled to receive from the Corporation, for each share of Common Stock with respect to which the Tandem SAR is being exercised, consideration equal in value to the excess of the fair market value of a share of Common Stock on the date of exercise over the Related Option price per share; provided, that the Administrator may, in any agreement granting Tandem SARs, establish a maximum value payable for such SARs.
(c) Freestanding SARs: Unless an individual agreement provides otherwise, the base price of a Freestanding SAR shall be not less than 100% of the fair market value of the Common Stock (as determined in accordance with Section 6(b)(ii)) on the date of grant of the Freestanding SAR. Subject to the limitations of the Plan, upon the exercise of a Freestanding SAR, the Participant shall be entitled to receive from the Corporation, for each share of Common Stock with respect to which the Freestanding SAR is being exercised, consideration equal in value to the excess of the fair market value of a share of Common Stock on the date of exercise over the base price per share of such Freestanding SAR; provided, that the Administrator may, in any agreement granting Freestanding SARs, establish a maximum value payable for such SARs.
(d) Exercise of SARs:
(i) Subject to the terms of the Plan, SARs shall be exercisable in whole or in part upon such terms and conditions as are provided in the agreement relating to the grant of the SAR. The period during which an SAR may be exercisable shall not exceed ten years from the date of grant or, in the case of Tandem SARs, such shorter option period as may apply to the Related Option. Any SAR or portion thereof not exercised before expiration of the period stated in the agreement relating to the grant of the SAR shall terminate.
(ii) SARs may be exercised by giving written notice to the Corporation at such place as the Administrator shall direct. The date of exercise of the SAR shall mean the date on which the Corporation shall have received notice from the Participant of the exercise of such SAR.
(iii) No SAR may be exercised unless the Participant is, at the time of exercise, an eligible Participant, as described in Section 5, and has been a Participant continuously since the date the SAR was granted, subject to the provisions of Sections 6(c)(iii) and (iv).
(e) Consideration: The consideration to be received upon the exercise of the SAR by the Participant shall be paid in cash, shares of Common Stock (valued at fair market value on the date of exercise of such SAR in accordance with Section 6(b)(ii)) or a combination of cash and shares of Common Stock, as elected by the Administrator, subject to the terms of the Plan and the applicable agreement. SARs shall be structured in a manner designed to be exempt from, or to comply with, the requirements of Code Section 409A. Subject to the foregoing, the Corporation’s obligation arising upon the exercise of the SAR may be paid currently or on a deferred basis with such interest or earnings equivalent (if any) as the Administrator may determine. A certificate or certificates for shares of Common Stock acquired upon exercise of an SAR for shares shall be issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) as soon as practicable following receipt of notice of exercise. No fractional shares of Common Stock will be issuable upon exercise of the SAR and, unless otherwise provided in the applicable agreement, the Participant will receive cash in lieu of fractional shares.
(f) Limitations: The applicable SAR agreement shall contain such terms, conditions and limitations consistent with the Plan as may be specified by the Administrator. Unless otherwise so
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provided in the applicable agreement or the Plan, any such terms, conditions or limitations relating to a Tandem SAR shall not restrict the exercisability of the Related Option.
(g) Nontransferability:
(i) SARs shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession (except to the extent, if any, that a Related Option is a Nonqualified Option and is transferable pursuant to Section 6(d)). The designation of a beneficiary does not constitute a transfer. SARs may be exercised during the Participant’s lifetime only by him or by his guardian or legal representative.
(ii) If the Participant is subject to Section 16 of the Exchange Act, shares of Common Stock acquired upon exercise of an SAR may not, without the consent of the Administrator, be disposed of by the Participant until the expiration of six months after the date the SAR was granted.
8. Stock Awards
(a) Grant and Vesting of Stock Awards: Subject to the terms of the Plan, the Administrator may in its sole and absolute discretion grant Stock Awards to such eligible individuals, for such numbers of shares, upon such terms and at such times as the Administrator shall determine. Stock Awards shall be payable in shares of Common Stock. The Administrator may grant Stock Awards in the form of shares of Bonus Stock that vest immediately upon grant and that are not subject to any forfeiture conditions. The Administrator also may grant Stock Awards in the form of Restricted Stock Awards that are subject to certain conditions, which conditions must be met in order for the Stock Award to vest and be earned (in whole or in part) and no longer subject to forfeiture. Such conditions may include but are not limited to continued service for a certain period of time, attainment of performance objectives, retirement, displacement, disability, death, or a combination of these factors. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based on such corporate, business unit and/or individual performance factors and criteria as the Administrator in its sole discretion may deem appropriate, which factors may include but are not limited to cash flow, return on equity, return on assets, total return to stockholders, earnings per share, clinical development milestones, operations expense efficiency milestones or any combination of the foregoing. The Administrator also shall (subject to any restrictions imposed under Code Section 409A) determine the nature, length and starting date, if any, during which a Stock Award may vest (the “restriction period”). The Administrator shall have sole authority (subject to any restrictions imposed under Code Section 409A) to determine whether and to what degree Stock Awards have vested and been earned and to establish and interpret the terms and conditions of Stock Awards and the provisions herein. The Administrator shall also have authority, in its sole discretion (subject to any restrictions imposed under Code Section 409A), to accelerate the date that any Award which was not otherwise vested shall become vested in whole or in part without any obligation to accelerate such date with respect to any other Award granted to any recipient.
(b) Forfeiture of Stock Awards: Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), if the employment or service of a Participant shall terminate for any reason and all or part of a Stock Award has not vested pursuant to the terms of the Plan and related agreement, such Award, to the extent not then vested, shall be forfeited immediately upon such termination and the Participant shall have no further rights with respect thereto.
(c) Dividend and Voting Rights; Share Certificates: Unless an individual agreement provides otherwise, (i) a Participant shall have no dividend rights, voting rights, or other rights as a stockholder with respect to shares subject to a Stock Award that has not yet vested and been earned; (ii) a
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certificate or certificates for shares of Common Stock subject to a Stock Award shall be issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) as soon as practicable after the shares subject to the Award shall be earned and vested; and (iii) no certificate shall be issued hereunder in the name of the Participant (or his beneficiary) except to the extent the shares represented thereby have been earned and vested. Notwithstanding the foregoing, if the individual agreement provides that the shares subject to a Stock Award shall be issued prior to the vesting of the Award, the Corporation shall have the right to retain custody of the certificates evidencing the shares subject to the Stock Award and to require the Participant to deliver to the Corporation a stock power, endorsed in blank, with respect to such Award.
(d) Nontransferability:
(i) Stock Awards that have not vested and been earned shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in its sole discretion in a manner consistent with the registration provisions of the Securities Act. The recipient of a Stock Award shall not sell, transfer, assign, pledge or otherwise encumber shares subject to the Award until the restriction period has expired and until all conditions to vesting have been met. The transfer of shares subject to a Stock Award following vesting of the Award may be subject to such restrictions on transfer as may be imposed pursuant to Section 17 or pursuant to other restrictions established by the Corporation.
(ii) If a recipient of a Stock Award is subject to Section 16 of the Exchange Act, shares of Common Stock subject to such Award may not, without the consent of the Administrator, be sold or otherwise disposed of within six months following the date of grant of such Award.
9. Performance Awards
(a) Grant and Earning of Performance Awards: Subject to the terms of the Plan, Performance Awards in the form of either Performance Shares or Performance Units, or a combination thereof, may be granted to Participants upon such terms and at such times as shall be determined by the Administrator. An award of Performance Shares is a grant of a right to receive shares of Common Stock or the cash value thereof (or a combination thereof) which is contingent upon the achievement of performance or other objectives during a specified period. An award of Performance Units is a grant of a right to receive a designated dollar value amount of Common Stock which is contingent upon the achievement of performance or other objectives during a specified period. Subject to Section 4(a), above, the Administrator shall have complete discretion in determining the number of Performance Units or Performance Shares granted to each Participant. The Administrator shall determine the nature, length and starting date of the period during which a Performance Award may be earned (the “performance period”), and shall determine the conditions which must be met in order for a Performance Award to be granted or to vest or be earned (in whole or in part), which conditions may include but are not limited to specified performance objectives, completion of the performance period, or a combination of such conditions. The Administrator shall determine the performance objectives to be used in valuing Performance Awards and shall (subject to the requirements of Code Section 409A) determine the extent, if any, to which such Awards have been earned and are payable. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based on such corporate, business unit and/or individual performance factors and criteria as the Administrator in its sole discretion may deem appropriate, which factors may include but are not limited to cash flow, return on equity, return on assets, total return to stockholders, earnings per share, clinical development milestones, operations expense efficiency milestones or any combination of the foregoing. The Administrator shall have sole authority to
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interpret the terms and conditions of Performance Awards and the provisions herein and to determine the form and terms of payment of Performance Awards. The Administrator, in its sole and absolute discretion, may (subject to any restrictions imposed under Code Section 409A) accelerate the date that any Performance Award granted to a Participant shall be deemed to be earned in whole or in part, without any obligation to accelerate such date with respect to other Awards.
(b) Form of Payment: Payment of the amount to which a Participant shall be entitled upon earning a Performance Award shall be made in cash, shares of Common Stock, or a combination of cash and shares of Common Stock, as determined by the Administrator in its sole discretion. Payment may be made in a lump sum or installments on such terms as may be established by the Administrator.
(c) Forfeiture of Performance Awards: Unless an individual agreement provides otherwise (subject to any requirements under Code Section 409A), if the employment or service of a Participant shall terminate for any reason and the Participant has not earned all or part of a Performance Award pursuant to the terms of the Plan and related agreement, such Award, to the extent not then earned, shall be forfeited immediately upon such termination and the Participant shall have no further rights with respect thereto.
(d) Dividend and Voting Rights; Share Certificates: Unless an individual agreement provides otherwise, (i) a Participant shall have no dividend rights, voting rights, or other rights as a stockholder with respect to shares, if any, subject to a Performance Award that has not yet been earned; (ii) a certificate or certificates for shares of Common Stock, if any, subject to a Performance Award shall be issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) as soon as practicable after the Award has been earned; and (iii) no certificate shall be issued hereunder in the name of the Participant (or his beneficiary) except to the extent that the Award has been earned.
(e) Nontransferability:
(i) Performance Awards which have not been earned shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession. The recipient of a Performance Award shall not sell, transfer, assign, pledge or otherwise encumber any shares subject to the Award until the performance period has expired and until the conditions to earning the Award have been met. The transfer of shares subject to a Performance Award following vesting of the Award may be subject to such restrictions on transfer as may be imposed pursuant to Section 17 or pursuant to other restrictions established by the Corporation.
(ii) If a recipient of a Performance Award is subject to Section 16 of the Exchange Act, shares of Common Stock, if any, subject to such Award may not, without the consent of the Administrator, be sold or otherwise disposed of within six months following the date of grant of such Award.
10. Withholding
Prior to the delivery of any certificate for shares or any other benefit conferred under the Plan, the Corporation shall require any recipient of an Award to pay to the Corporation in cash the amount of any local, state, federal or foreign withholding tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of such recipient. Notwithstanding the foregoing, the Administrator may, in its sole discretion, permit the recipient to satisfy such obligation in whole or in part, and any other local, state, federal or foreign income tax
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obligations relating to such an Award, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the shares to which the recipient is entitled. The number of shares to be withheld shall have a fair market value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
11. Agreement
The grant of any Award under the Plan shall be evidenced by the execution of an agreement (the “agreement”) between the Corporation and the Participant. Such agreement shall state terms, conditions and restrictions applicable to the Award and any may state such other terms, conditions and restrictions, including but not limited to terms, conditions and restrictions applicable to shares subject to an Award, as may be established by the Administrator.
12. Code Section 162(m) Performance-Based Compensation Compliance
To the extent that Section 162(m) of the Code is applicable, the Administrator shall have discretion to determine the extent, if any, that Awards conferred under the Plan to covered employees, as such term is defined in Section 21(b), are intended to comply with the qualified performance-based compensation exception to employer compensation deductions set forth in Section 162(m) of the Code.
13. Section 16(b) Compliance
To the extent that any Participants in the Plan are subject to Section 16(b) of the Exchange Act, it is the general intention of the Corporation that transactions under the Plan shall comply with Rule 16b-3 under the Exchange Act and the Plan shall be construed in favor of the Plan transactions meeting the requirements of Rule 16b-3 or any successor rules thereto. If any Plan provision is later found not to be in compliance with Section 16 of the Exchange Act, the provisions shall be deemed null and void. Notwithstanding anything in the Plan to the contrary, the Administrator, in its sole and absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other participants.
14. No Right or Obligation of Continued Employment or Service
Nothing contained in the Plan shall confer upon a Participant the right to continue in the employment or service of the Corporation or a related corporation as an employee, director or independent contractor or interfere in any way with the right of the Corporation or a related corporation to terminate the Participant’s employment or service at any time. Except as otherwise provided in the Plan or a related agreement, (i) all rights of a Participant with respect to that portion of his Award which has not yet been exercised, vested or earned shall terminate upon termination of employment or service of the Participant with the Corporation or a related corporation, and (ii) Awards granted under the Plan to a Participant shall not be affected by any change in the duties or position of the Participant, as long as such individual remains an employee of or in service to the Corporation or a related corporation.
15. Unfunded Plan; Not a Retirement Plan
(a) Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Corporation or any related corporation including, without limitation, any specific funds, assets or other property which the Corporation or any related corporation,
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in their discretion, may set aside in anticipation of a liability under the Plan. A participant shall have only a contractual right to the Common Stock or amounts, if any, distributable or payable under the Plan, unsecured by any assets of the Corporation or any related corporation. Nothing contained in the Plan shall constitute a guarantee that the assets of such corporations shall be sufficient to pay any benefits to any person.
(b) In no event shall any amounts accrued, distributable or payable under the Plan be treated as compensation for the purpose of determining the amount of contributions or benefits to which any person shall be entitled under any retirement plan sponsored by the Corporation or a related corporation that is intended to be a qualified plan within the meaning of Section 401(a) of the Code.
16. Amendment and Termination of the Plan and Awards
(a) The Plan and any Award granted pursuant to the Plan may be amended or terminated at any time by the Board of Directors of the Corporation; provided, that (i) amendment or termination of an Award shall not, without the consent of the recipient of an Award, adversely affect the rights of the recipient with respect to an outstanding Award, and (ii) approval of an amendment to the Plan by the stockholders of the Corporation shall only be required in the event stockholder approval of any such amendment is required by applicable law, rule or regulation.
(b) Notwithstanding (a) herein, if an Award so provides, the Administrator shall have unilateral authority to amend the Plan or any Award without the consent of the Participant (and without stockholder approval, unless such approval is required by applicable law, rule or regulation) to the extent necessary to comply with applicable laws, rules or regulations or changes to applicable laws, rules or regulations (including but not limited to Code Section 422, Code Section 409A and federal securities laws).
17. Restrictions on Shares; Corporation’s Right of Repurchase
(a) The Administrator may impose such restrictions on Awards and any shares representing Awards hereunder as it may deem advisable, including without limitation restrictions under the Securities Act, under the requirements of any stock exchange or similar organization and under any blue sky, state or foreign securities laws applicable to such shares. Notwithstanding any other Plan provision to the contrary, the Corporation shall not be obligated to issue or deliver shares of Common Stock under the Plan or make any other distribution of benefits under the Plan, or take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation will be under no obligation to register shares of Common Stock with the Securities and Exchange Commission or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, foreign securities laws, stock exchange or similar organization, and the Corporation will have no liability for any inability or failure to do so. The Corporation may cause a restrictive legend to be placed on any certificate issued pursuant to an Award hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
(b) As a condition to the issuance and delivery of Common Stock hereunder, or the grant of any benefit pursuant to the terms of the Plan, and unless an individual agreement provides otherwise, the Corporation may require a Participant or other person to become a party to a stockholders agreement (including but not limited to that certain Stockholders Agreement dated as of August 22, 2000, by and among Targacept, Inc. and its stockholders, as it may be amended), buy-sell agreement, redemption agreement, repurchase agreement or other agreement between the Corporation and stockholders of the
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Corporation or among stockholders of the Corporation or such other agreements imposing such restrictions as may be required by the Corporation.
18. Significant Transactions
Notwithstanding any other provision of the Plan to the contrary, and unless an individual agreement provides otherwise or unless otherwise required under Code Section 409A, in the event of a Significant Transaction (as defined in Section 18(d)):
(a) All Options and SARs outstanding as of the date of such Significant Transaction of shall become fully exercisable, whether or not then otherwise exercisable;
(b) Any restrictions including but not limited to the restriction period or performance period applicable to any Stock Award or Performance Award shall be deemed to have expired, and such Awards shall become fully vested, earned and payable to the fullest extent of the original grant of the applicable Award; and
(c) Notwithstanding the foregoing, in the event of a merger, share exchange, sale or disposal of substantially all of the assets of the Corporation, reorganization or other business combination affecting the Corporation or a related corporation, the Administrator may, in its sole and absolute discretion, determine that any or all Awards granted pursuant to the Plan shall not vest, be earned or become exercisable on an accelerated basis, if the Corporation or the surviving or acquiring corporation, as the case may be, shall have taken such action, including but not limited to the assumption of Awards granted under the Plan or the grant of substitute awards (in either case, with substantially similar or equivalent terms as Awards granted under the Plan), as in the opinion of the Administrator is equitable or appropriate to protect the rights and interests of participants under the Plan. For the purposes herein, if the Committee is acting as the Administrator, the Committee authorized to make the determinations provided for in this Section 18(c) shall be appointed by the Board of Directors, two-thirds of the members of which shall have been directors of the Corporation prior to the sale, merger, share exchange, reorganization or other business combinations affecting the Corporation or a related corporation.
(d) For the purposes herein, a “Significant Transaction” shall be deemed to have occurred upon the occurrence of any of the following:
(i) The closing of a firm commitment underwritten public offering of the Corporation’s Common Stock pursuant to an effective registration statement under the Securities Act (except that the foregoing shall not constitute a “Significant Transaction” with respect to Awards granted on and after August 20, 2003);
(ii) The date any entity or person that (A) does not beneficially own Common Stock as of the effective date of the Plan and does not have any affiliate that beneficially owns Common Stock as of the effective date of the Plan shall have become the beneficial owner of, or shall have obtained voting control over, fifty percent (50%) or more of the outstanding Common Stock of the Corporation or (B) beneficially owns Common Stock as of the effective date of the Plan or has one or more affiliates that beneficially own Common Stock as of the effective date of the Plan, together with its affiliates, shall have become the beneficial owner of, or shall have obtained voting control over, sixty-seven percent (67%) or more of the outstanding Common Stock of the Corporation; or
(iii) The date the stockholders of the Corporation approve a definitive agreement (X) to merge or consolidate the Corporation with or into another corporation, in which the
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Corporation is not the continuing or surviving corporation or pursuant to which any shares of Common Stock of the Corporation would be converted into cash, securities or other property of another corporation, other than a merger or consolidation of the Corporation in which holders of Common Stock immediately prior to the merger or consolidation have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger as immediately before, or (Y) to sell or otherwise dispose of all or substantially all the assets of the Corporation.
(For the purposes herein, the term “person” shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, other than the Corporation, a subsidiary of the Corporation or any employee benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, the term “affiliate” shall have the meaning given the term in Rule 12b-2 under the Exchange Act and the term “beneficial owner” shall have the meaning given the term in Rule 13d-3 under the Exchange Act.)
19. Applicable Law
The Plan shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions of any state.
20. Stockholder Approval
The initial adoption of the Plan was subject to approval by the stockholders of the Corporation, which approval was received within twelve (12) months of the effective date of the Plan. Any Awards granted prior to such stockholder approval were conditioned upon and effective only upon approval of the Plan by such stockholders on or before such date.
21. Certain Definitions
For purposes of the Plan, the following terms shall have the meaning indicated unless otherwise provided herein:
(a) “Code” shall mean the Internal Revenue Code of 1986, as amended. Any reference herein to a specific Code section shall be deemed to include all related regulations or other guidance with respect to such Code section.
(b) “Covered employee” shall have the meaning given the term in Section 162(m) of the Code or the regulations thereunder.
(c) “Parent” or “parent corporation” shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation if each corporation other than the Corporation owns stock possessing 50% or more of the total combined voting power of all classes of stock in another corporation in the chain.
(d) “Predecessor” or “predecessor corporation” means a corporation which was a party to a transaction described in Section 424(a) of the Code (or which would be so described if a substitution or assumption under that Section had occurred) with the Corporation, or a corporation which is a parent or subsidiary of the Corporation, or a predecessor of any such corporation.
(e) “Related corporation” means any parent, subsidiary or predecessor of the Corporation.
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(f) “Subsidiary” or “subsidiary corporation” means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each corporation other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in another corporation in the chain.
22. Code Section 409A Compliance
(a) General: Notwithstanding any other provision in the Plan or an Award to the contrary, if and to the extent that Section 409A of the Code is deemed to apply to the Plan or any Award granted under the Plan, it is the general intention of the Corporation that the Plan and all such Awards shall, to the extent practicable, comply with Code Section 409A, and the Plan and any such Award shall, to the extent practicable, be construed in accordance therewith. Deferrals pursuant to an Award otherwise exempt from Code Section 409A in a manner that would cause Code Section 409A to apply shall not be permitted unless such deferrals are otherwise in compliance with Section 409A. Without in any way limiting the effect of the foregoing, in the event that Code Section 409A requires that any special terms, provisions or conditions be included in the Plan or any Award, then such terms, provisions and conditions shall, to the extent practicable, be deemed to be made a part of the Plan or Award, as applicable. Further, in the event that the Plan or any Award shall be deemed not to comply with Code Section 409A, then neither the Corporation, the Board, the Committee nor its or their designees or agents shall be liable to any Participant or other person for actions, decisions or determinations made in good faith.
(b) Specific Terms Applicable to Awards Subject to Code Section 409A: Without limiting the effect of Section 22(a), above, and notwithstanding any other provision in the Plan to the contrary, the following provisions shall, to the extent required under Code Section 409A, apply with respect to Awards deemed to involve the deferral of compensation under Code Section 409A:
(i) Distributions: Distributions may be made with respect to Awards subject to Code Section 409A not earlier than upon the occurrence of one or more of the following events: (A) separation from service; (B) disability; (C) death; (D) a specified time or pursuant to a fixed schedule; (E) a change in the ownership or effective control of the Corporation, or in the ownership of a substantial portion of the assets of the Corporation; or (F) the occurrence of an unforeseeable emergency. Each of the preceding distribution events shall be defined and interpreted in accordance with Code Section 409A.
(ii) Specified Employees: With respect to Participants who are “specified employees” (as defined in Code Section 409A), a distribution due to separation from service may not be made before the date that is six months after the date of separation from service (or, if earlier, the date of death of the Participant), except as may be otherwise permitted pursuant to Code Section 409A. To the extent that a Participant is subject to this Section and a distribution is to be paid in installments, through an annuity, or in some other manner where payment will be periodic, the Participant shall be paid, during the seventh month following separation from service, the aggregate amount of payments he would have received but for the application of this Section; all remaining payments shall be made in their ordinary course.
(iii) No Acceleration: Unless permissible under Code Section 409A, acceleration of the time or schedule of any payment under the Plan is prohibited, except that, to the extent permitted by the Administrator and to the extent such exceptions do not violate Code Section 409A, the following accelerations may be permitted in an Award:
(A) As necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B));
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(B) As necessary to comply with a certificate of divestiture (as defined in Code Section 1043(b)(2));
(C) To pay the Federal Insurance Contributions Act tax imposed under Code Sections 3101 and 3121(v)(2) on amounts deferred under the Plan (the “FICA Amount”), including the income tax at source on wages imposed under Code Section 3401 on the FICA Amount, and to pay the additional income tax at source on wages attributable to additional Code Section 3401 wages and taxes;
(D) To pay any portion of an Award that is required to be included in income as a result of a violation of Code Section 409A; and
(E) To pay an Award not greater than $10,000, provided that (X) such payment occurs on or before the later of December 31 of the calendar year in which occurs the Participant’s termination of employment or the 15th day of the third month following the Participant’s termination of employment and (Y) all Awards granted the Participant are (or have previously been) terminated on or before the date of payment.
(iv) Short-Term Deferrals: Except to the extent otherwise required or permitted under Code Section 409A (and unless an individual agreement or other instrument provides otherwise), distributions pursuant to Awards otherwise subject to Code Section 409A must be made no later than the later of (A) the date that is 2-1/2 months from the end of the Participant’s first taxable year in which the Award is no longer subject to a substantial risk of forfeiture; or (B) the date that is 2-1/2 months from the end of the Corporation’s first taxable year in which the Award is no longer subject to a substantial risk of forfeiture.
(v) Deferral Elections:
(A) In the sole discretion of the Administrator, a Participant may be permitted to make an election as to the time and form of any distribution from an Award, provided that, except as specified in (B) and (C) below, such election is made not later than the close of the taxable year preceding the taxable year in which the services for which the Award is granted are to be performed, or at such other time or times as may be permitted under Code Section 409A. Notwithstanding the foregoing, a Participant may cancel a deferral election upon (X) a hardship distribution pursuant to Code Section 401(k), related regulations or other guidance, or (Y) upon application for a distribution under section 22(b)(i)(F) (unforeseeable emergency).
(B) In the case of the first year in which the Participant becomes eligible to participate in the Plan, the election described in (A) may be made with respect to services to be performed subsequent to the election within 30 days after the date the Participant becomes eligible to participate in the Plan.
(C) In the case of any performance-based compensation (as that term is defined in Code Section 409A), where such compensation is based on services performed over a period of at least 12 months, the election described in (A) may be made no later than six months before the end of the performance period.
(D) In the case of any Award subject to a substantial risk of forfeiture (as defined in Code Section 409A), the election described in (A) may be made within 30 days of the date the Participant first obtains a legally binding right to the Award,
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provided that the Award requires the Participant to perform at least 12 months of service after such election is made.
(vi) Changes to Elections: To the extent that the Administrator, in its sole discretion, permits a subsequent election to delay a payment or change the form of payment that has been specified under (A), (B) or (C) above, the following provisions shall apply:
(A) Such election may not take effect until 12 months after the date on which the election is made;
(B) Where the payment is to be made for reasons other than death, disability or unforeseeable emergency, as those terms are defined in Section 22(b)(i), above, the first payment with respect to which such election is made must be deferred for a period of not less than five years from the date such payment would otherwise have been made; and
(C) Any election related to a payment based upon a specified time or pursuant to a fixed schedule, as such terms are defined in Section 22(b)(i), above, may not be made less than 12 months prior to the date of the first scheduled payment hereunder.
Notwithstanding anything else in this Section 22(b)(vi) to the contrary and consistent with Code Section 409A, the Administrator may elect, or may allow the Participant to elect, on or before December 31, 2006, the time or form of payment of amounts subject to Code Section 409A, provided that any such election occurring in 2006 shall apply only to amounts that are not otherwise payable in 2006 and does not cause an amount to be paid in 2006 that would not otherwise be payable in that year.
(vii) Delay of Time of Payment: Notwithstanding Section 22(b)(i), above, the payment of any Award shall be delayed for the following reasons:
(A) Where the Corporation reasonably anticipates that any deduction provided to it by payment of the Award to the Participant will be limited or eliminated by Code Section 162(m); in such a case, payment will be made as of the earlier of when the Administrator reasonably anticipates that the Corporation’s deduction under Code Section 162(m) will not be so limited or the calendar year in which the Participant separates from service;
(B) Where the Corporation reasonably anticipates the payment of the Award will violate a term of a loan arrangement or any other similar contractual provision and the violation will cause material harm to the Corporation; in such a case, payment will be made at the earliest date at which the Administrator reasonably anticipates that payment will not cause such a violation; and
(C) Where the Corporation reasonably anticipates that payment of the Award will violate federal securities laws or other applicable laws; in such a case, payment will be made at the earliest date when the Administrator reasonably anticipates that payment will not cause such a violation.
(viii) Termination of Awards Subject to Code Section 409A: As permitted by the Administrator in its sole discretion, and in accordance with Code Section 409A, the Corporation
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may terminate an Award that is subject to Code Section 409A and distribute benefits to Participants.
(ix) Dividends and Dividend Equivalents: Any dividends or dividend equivalent rights related to an Award shall be structured in a manner so as to avoid causing the Award to be subject to Code Section 409A or shall otherwise be structured so that the Award and dividends or dividend equivalents are in compliance with Code Section 409A.
IN WITNESS WHEREOF, this 2000 Equity Incentive Plan of Targacept, Inc., as amended and restated through March 15, 2006, is, by the authority of the Board of Directors of the Corporation, executed in behalf of the Corporation, effective the day of , 2006.
TARGACEPT, INC.
By:
Donald J. deBethizy, President
ATTEST:
_____________________________________________
Secretary
[Corporate Seal]
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Exhibit 10.6
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
1. Definitions
In addition to other terms defined herein, the following terms shall have the meanings given below:
(a) Administrator means the Board, and, upon its delegation of all or part of its authority to administer the Plan to the Committee, the Committee.
(b) Affiliate means any Parent or Subsidiary of the Corporation, and also includes any other business entity which is controlled by, under common control with or controls the Corporation; provided, however, that the term “Affiliate” shall be construed in a manner in accordance with the registration provisions of applicable federal securities laws and as permitted under Code Section 409A.
(c) Annual Option means an Option granted on an annual basis to a Nonemployee Director of the Corporation as provided in Section 8.
(d) Award means, individually or collectively, a grant under the Plan of an Option (including an Incentive Option, Nonqualified Option or a Director Option); a Stock Appreciation Right (including a Related SAR or a Freestanding SAR); a Restricted Award (including a Restricted Stock Award or a Restricted Unit Award); a Performance Award (including a Performance Share Award or a Performance Unit Award); a Phantom Stock Award; a Dividend Equivalent Award; or any other award granted under the Plan.
(e) Award Agreement means an agreement (which may be in written or electronic form, in the Administrator’s discretion, and which includes any amendment or supplement thereto) between the Corporation and a Participant specifying the terms, conditions and restrictions of an Award granted to the Participant. An Agreement may also state such other terms, conditions and restrictions, including but not limited to terms, conditions and restrictions applicable to shares or any other benefit underlying an Award, as may be established by the Administrator.
(f) Board or Board of Directors means the Board of Directors of the Corporation.
(g) Cause shall mean, unless the Administrator determines otherwise, a Participant’s termination of employment or service resulting from the Participant’s (i) termination for “cause” as defined under the Participant’s employment, consulting or other agreement with the Corporation or an Affiliate, if any, or (ii) if the Participant has not entered into any such employment, consulting or other agreement (or if any such agreement does not address the effect of a “cause” termination), then the Participant’s termination shall be for “Cause” if termination results due to the Participant’s (A) dishonesty; (B) refusal to perform his duties for the Corporation; (C) engaging in fraudulent conduct; or (D) engaging in any conduct that could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best interest of the Corporation. The determination of “Cause” shall be made by the Administrator and its determination shall be final and conclusive.
(h) Change in Control:
(i) General: Except as may be otherwise provided in an individual Award Agreement or as may be otherwise required in order to comply with Code Section 409A, a Change in Control shall be deemed to have occurred on the earliest of the following dates:
(A) The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, thirty percent (30%) or more of the outstanding Common Stock of the Corporation;
(B) The date the stockholders of the Corporation approve a definitive agreement (X) to merge or consolidate the Corporation with or into another corporation or other business entity (each, a “corporation”), in which the Corporation is not the continuing or surviving corporation or pursuant to which any shares of Common Stock of the Corporation would be converted into cash, securities or other property of another corporation, other than a merger or consolidation of the Corporation in which the holders of Common Stock immediately prior to the merger or consolidation continue to own at least 50% of Common Stock, or if the Corporation is not the surviving corporation, the common stock (or other voting securities) of the surviving corporation immediately after the merger as immediately before; provided, however, that if consummation of such merger or consolidation is subject to the approval of federal, state or other regulatory authorities, then, unless the Administrator determines otherwise, a “Change in Control” shall not be deemed to occur until the later of the date of stockholder approval of such merger or consolidation or the date of final regulatory approval of such merger or consolidation; or (Y) to sell or otherwise dispose of all or substantially all the assets of the Corporation; or
(C) The date there shall have been a change in a majority of the Board of Directors of the Corporation within a 12-month period unless the nomination for election by the Corporation’s stockholders of each new Director was approved by the vote of two-thirds of the members of the Board (or a committee of the Board, if nominations are approved by a Board committee rather than the Board) then still in office who were in office at the beginning of the 12-month period.
(For the purposes herein, the term “person” shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, other than the Corporation, a subsidiary of the Corporation or any employee benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, and the term “beneficial owner” shall have the meaning given the term in Rule 13d-3 under the Exchange Act.)
(D) The Administrator shall have full and final authority, in its discretion, to determine whether a Change in Control of the Corporation has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto.
(ii) Definition Applicable to Awards subject to Code Section 409A: Notwithstanding the preceding provisions of Section 1(h)(i), in the event that any Awards granted under the Plan are deemed to be deferred compensation subject to the provisions of Code Section 409A, then distributions related to such Awards may be permitted, in the Administrator’s discretion, upon the
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occurrence of one or more of the following events (as they are defined and interpreted under Code Section 409A): (A) a change in the ownership of the Corporation, (B) a change in effective control of the Corporation, or (C) a change in the ownership of a substantial portion of the assets of the Corporation.
(i) Code means the Internal Revenue Code of 1986, as amended. Any reference herein to a specific Code section shall be deemed to include all related regulations or other guidance with respect to such Code section.
(j) Committee means the Compensation Committee of the Board appointed to administer the Plan.
(k) Common Stock means the common stock of Targacept, Inc., $0.001 par value.
(l) Corporation means Targacept, Inc., a Delaware corporation, together with any successor thereto.
(m) Covered Employee shall have the meaning given the term in Section 162(m) of the Code.
(n) Director means a member of the Board or of the board of directors of an Affiliate.
(o) Director Option means an Option granted to a Nonemployee Director of the Corporation as provided in Section 8. Director Options may be Initial Options or Annual Options as provided in Section 8.
(p) Disability shall, except as may be otherwise determined by the Administrator or required or permitted under Code Section 409A, have the meaning given in any employment agreement, consulting agreement or other similar agreement, if any, to which a Participant is a party, or, if there is no such agreement (or if any such agreement does not address the effect of termination due to disability), “Disability” shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months. The Administrator shall have discretion to determine if a termination due to Disability has occurred.
(q) Displacement shall, as applied to any Participant, be as defined in any employment agreement, consulting agreement or other similar agreement, if any, to which the Participant is a party, or, if there is no such agreement (or if any such agreement does not address the effect of a termination due to displacement), “Displacement” shall mean the termination of the Participant’s employment or service due to the elimination of the Participant’s job or position without fault on the part of the Participant (as determined by the Administrator).
(r) Dividend Equivalent Award means a right granted to a Participant pursuant to Section 13 to receive the equivalent value (in cash or shares of Common Stock) of dividends paid on Common Stock.
(s) Effective Date means the effective date of the Plan, as provided in Section 4.
(t) Employee means any person who is an employee of the Corporation or any Affiliate (including entities which become Affiliates after the Effective Date of the Plan). For this purpose, an individual shall be considered to be an Employee only if there exists between the individual and the
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Corporation or an Affiliate the legal and bona fide relationship of employer and employee (subject to any requirements imposed under Code Section 409A); provided, however, that, with respect to Incentive Options, “Employee” means any person who is considered an employee of the Corporation or any Parent or Subsidiary for purposes of Treas. Reg. Section 1.421-1(h) (or any successor provision related thereto).
(u) Exchange Act means the Securities Exchange Act of 1934, as amended.
(v) Fair Market Value per share of the Common Stock shall be established in good faith by the Administrator and, unless otherwise determined by the Administrator, the Fair Market Value shall be determined in accordance with the following provisions: (A) if the shares of Common Stock are listed for trading on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, the Fair Market Value shall be the closing sales price per share of the shares on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market (as applicable) on the date immediately preceding the date an Option is granted or other determination is made (such date of determination being referred to herein as a “valuation date”), or, if there is no transaction on such date, then on the trading date nearest preceding the valuation date for which closing price information is available, and, provided further, if the shares are not listed for trading on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, the Fair Market Value shall be the average between the highest bid and lowest asked prices for such stock on the date immediately or nearest preceding the valuation date as reported on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service; or (B) if the shares of Common Stock are not listed or reported in any of the foregoing, then the Fair Market Value shall be determined by the Administrator based on such valuation measures or other factors as it deems appropriate. Notwithstanding the foregoing, (i) with respect to the grant of Incentive Options, the Fair Market Value shall be determined by the Administrator in accordance with the applicable provisions of Section 20.2031-2 of the Federal Estate Tax Regulations, or in any other manner consistent with the Code Section 422; and (ii) Fair Market Value shall be determined in accordance with Section 409A to the extent required.
(w) Freestanding SAR means an SAR that is granted without relation to an Option, as provided in Section 9.
(x) Incentive Option means an Option that is designated by the Administrator as an Incentive Option pursuant to Section 7 and intended to meet the requirements of incentive stock options under Code Section 422.
(y) Independent Contractor means an independent contractor, consultant or advisor providing services to the Corporation or an Affiliate.
(z) Initial Option means an Option granted to a Nonemployee Director of the Corporation upon initial election or appointment to the Board, as provided in Section 8.
(aa) Nonemployee Director means a Director of the Board who is not an Employee of the Corporation or an Affiliate and who is eligible to receive a Director Option pursuant to Section 8.
(bb) Nonqualified Option means an Option granted under Section 7 or Section 8 that is not intended to qualify as an incentive stock option under Code Section 422.
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(cc) Option means a stock option granted under Section 7 or Section 8 that entitles the holder to purchase from the Corporation a stated number of shares of Common Stock at the price set forth in an Award Agreement.
(dd) Option Period means the term of an Option, as provided in Section 7(d) and Section 8(f).
(ee) Option Price means the price at which an Option may be exercised, as provided in Section 7(b) and Section 8(e).
(ff) Parent means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
(gg) Participant means an individual employed by, or providing services to, the Corporation or an Affiliate who satisfies the requirements of Section 6 and is selected by the Administrator to receive an Award under the Plan.
(hh) Performance Award means a Performance Share Award and/or a Performance Unit Award, as provided in Section 11.
(ii) Performance Measures mean one or more performance factors which may be established by the Administrator with respect to an Award. Performance factors may be based on such corporate, business unit or division and/or individual performance factors and criteria as the Administrator in its discretion may deem appropriate; provided, however, that, such performance factors shall be limited to one or more of the following (as determined by the Administrator in its discretion): (i) cash flow; (ii) return on equity; (iii) return on assets; (iv) earnings per share; (v) achievement of clinical development or regulatory milestones; (vi) operations expense efficiency milestones; (vii) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (viii) net income; (ix) operating income; (x) book value per share; (xi) return on investment; (xii) return on capital; (xiii) improvements in capital structure; (xiv) expense management; (xv) profitability of an identifiable business unit or product; (xvi) maintenance or improvement of profit margins; (xvii) stock price or total stockholder return; (xviii) market share; (xix) revenues or sales; (xx) costs; (xxi) working capital; (xxii) economic wealth created; (xxiii) strategic business criteria; (xxiv) efficiency ratio(s); (xxv) achievement of division, group, function or corporate financial, strategic or operational goals; and (xxvi) comparisons with stock market indices or performances of metrics of peer companies. To the extent that Section 162(m) of the Code is applicable, the Administrator shall, within the time and in the manner prescribed by Section 162(m) of the Code, define in an objective fashion the manner of calculating the Performance Measures it selects to use for Participants during any specific performance period. Such performance factors may be adjusted or modified due to extraordinary items, transactions, events or developments, or in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Corporation or the financial statements of the Corporation, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles or business conditions, in each case as determined by the Administrator.
(jj) Performance Share means an Award granted under Section 11, in an amount determined by the Administrator and specified in an Award Agreement, stated with reference to a specified number of shares of Common Stock, that entitles the holder to receive shares of Common Stock, a cash payment or a combination of Common Stock and cash (as determined by the Administrator), subject to the terms of the Plan and the terms and conditions established by the Administrator.
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(kk) Performance Unit means an Award granted under Section 11, in an amount determined by the Administrator and specified in an Award Agreement, that entitles the holder to receive Shares of Common Stock, a cash payment or a combination of Common Stock and cash (as determined by the Administrator), subject to the terms of the Plan and the terms and conditions established by the Administrator.
(ll) Phantom Stock Award means an Award granted under Section 12, entitling a Participant to a payment in cash, shares of Common Stock or a combination of cash and Common Stock (as determined by the Administrator), following the completion of the applicable vesting period and compliance with the terms of the Plan and other terms and conditions established by the Administrator. The unit value of a Phantom Stock Award shall be based on the Fair Market Value of a share of Common Stock.
(mm) Plan means the Targacept, Inc. 2006 Stock Incentive Plan, as it may be hereafter amended and/or restated.
(nn) Prior Plan or Prior Plans means the 2000 Equity Incentive Plan of Targacept, Inc., as amended, and any other employee stock incentive plan maintained by the Corporation prior to the Effective Date of the Plan.
(oo) Public Offering Date means the date on which the Underwriting Agreement between the Corporation and the managing underwriters of the Corporation’s initial public offering of its Common Stock is executed and delivered.
(pp) Related SAR means an SAR granted under Section 9 that is granted in relation to a particular Option and that can be exercised only upon the surrender to the Corporation, unexercised, of that portion of the Option to which the SAR relates.
(qq) Restricted Award means a Restricted Stock Award and/or a Restricted Stock Unit Award, as provided in Section 10.
(rr) Restricted Stock Award means shares of Common Stock awarded to a Participant under Section 10. Shares of Common Stock subject to a Restricted Stock Award shall cease to be restricted when, in accordance with the terms of the Plan and the terms and conditions established by the Administrator, the shares vest and become transferable and free of substantial risks of forfeiture.
(ss) Restricted Stock Unit means a Restricted Award granted to a Participant pursuant to Section 10 which is settled (i) by the delivery of one share of Common Stock for each Restricted Stock Unit, (ii) in cash in an amount equal to the Fair Market Value of one share of Common Stock for each Restricted Stock Unit, or (iii) in a combination of cash and Shares equal to the Fair Market Value of one share of Common Stock for each Restricted Stock Unit, as determined by the Administrator. A Restricted Stock Unit Award represents the promise of the Corporation to deliver shares, cash or a combination thereof, as applicable, at the end of the Restriction Period, subject to compliance with the terms of the Plan and the terms and conditions established by the Administrator.
(tt) Retirement shall, as applied to any Participant, be as defined in any employment agreement, consulting agreement or other similar agreement, if any, to which the Participant is a party, or, if there is no such agreement (or if any such agreement does address the effect of termination due to retirement), “Retirement” shall mean retirement in accordance with the retirement policies and
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procedures established by the Corporation, as determined by the Administrator and, where applicable, in accordance with Code Section 409A.
(uu) SAR means a stock appreciation right granted under Section 9 entitling the Participant to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the excess of the Fair Market Value on the date of exercise over the SAR base price, subject to the terms of the Plan and any other terms and conditions established by the Administrator. References to “SARs” include both Related SARs and Freestanding SARs, unless the context requires otherwise.
(vv) Securities Act means the Securities Act of 1933, as amended.
(ww) Subsidiary means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.
(xx) Termination Date means the date of termination of a Participant’s employment or service for any reason, as determined by the Administrator in its discretion.
2. Purpose
The purpose of the Plan is to encourage and enable selected Employees, Directors and Independent Contractors of the Corporation and its Affiliates to acquire or to increase their holdings of Common Stock of the Corporation and other proprietary interests in the Corporation in order to promote a closer identification of their interests with those of the Corporation and its stockholders, thereby further stimulating their efforts to enhance the efficiency, soundness, profitability, growth and stockholder value of the Corporation. This purpose will be carried out through the granting of Awards to selected Employees, Independent Contractors and Directors, including the granting to selected Participants of Options in the form of Incentive Stock Options and Nonqualified Options; SARs in the form of Related SARs and Freestanding SARs; Restricted Awards in the form of Restricted Stock Awards and Restricted Stock Units; Performance Awards in the form of Performance Shares and Performance Units; Phantom Stock Awards; Director Options in the form of Initial Options and Annual Options; and/or Dividend Equivalent Awards.
3. Administration of the Plan
(a) The Plan shall be administered by the Board of Directors of the Corporation or, upon its delegation, by the Committee. Unless the Board determines otherwise, the Committee shall be comprised solely of two or more “non-employee directors,” as such term is defined in Rule 16b-3 under the Exchange Act, or as may otherwise be permitted under Rule 16b-3. Further, to the extent required by Section 162(m) of the Code, the Plan shall be administered by a committee comprised of two or more “outside directors” (as such term is defined in Section 162(m)) or as may otherwise be permitted under Section 162(m). For the purposes of the Plan, the term “Administrator” shall refer to the Board and, upon its delegation to the Committee of all or part of its authority to administer the Plan, to the Committee. Notwithstanding the foregoing, the Board shall have sole authority to grant discretionary Awards (that is, Awards other than Director Options) to Directors who are not employees of the Corporation or its Affiliates.
(b) Subject to the provisions of the Plan, the Administrator shall have full and final authority in its discretion to take any action with respect to the Plan including, without limitation, the authority (i) to determine all matters relating to Awards, including selection of individuals to be granted Awards, the types of Awards, the number of shares of the Common Stock, if any, subject to an Award, and all terms,
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conditions, restrictions and limitations of an Award; (ii) to prescribe the form or forms of Award Agreements evidencing any Awards granted under the Plan; (iii) to establish, amend and rescind rules and regulations for the administration of the Plan; and (iv) to construe and interpret the Plan, Awards and Award Agreements made under the Plan, to interpret rules and regulations for administering the Plan and to make all other determinations deemed necessary or advisable for administering the Plan. Except to the extent otherwise required under Code Section 409A, (i) the Administrator shall have the authority, in its sole discretion, to accelerate the date that any Award which was not otherwise exercisable, vested or earned shall become exercisable, vested or earned in whole or in part without any obligation to accelerate such date with respect to any other Award granted to any recipient; and (ii) the Administrator also may in its sole discretion modify or extend the terms and conditions for exercise, vesting or earning of an Award. The Administrator may determine that a Participant’s rights, payments and/or benefits with respect to an Award (including but not limited to any shares issued or issuable and/or cash paid or payable with respect to an Award) shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, violation of policies of the Corporation or an Affiliate, breach of non-solicitation, noncompetition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is determined by the Administrator to be detrimental to the business or reputation of the Corporation or any Affiliate. In addition, the Administrator shall have the authority and discretion to establish terms and conditions of Awards (including but not limited to the establishment of subplans) as the Administrator determines to be necessary or appropriate to conform to the applicable requirements or practices of jurisdictions outside of the United States. In addition to action by meeting in accordance with applicable laws, any action of the Administrator with respect to the Plan may be taken by a written instrument signed by all of the members of the Board or Committee, as appropriate, and any such action so taken by written consent shall be as fully effective as if it had been taken by a majority of the members at a meeting duly held and called. No member of the Board or Committee, as applicable, shall be liable while acting as Administrator for any action or determination made in good faith with respect to the Plan, an Award or an Award Agreement. The members of the Board or Committee, as applicable, shall be entitled to indemnification and reimbursement in the manner provided in the Corporation’s certificate of incorporation and bylaws and/or under applicable law.
(c) Notwithstanding the other provisions of Section 3, the Administrator may delegate to one or more officers of the Corporation the authority to grant Awards, and to make any or all of the determinations reserved for the Administrator in the Plan and summarized in Section 3(b) with respect to such Awards (subject to any restrictions imposed by applicable laws, rules and regulations and such terms and conditions as may be established by the Administrator); provided, however, that, to the extent required by Section 16 of the Exchange Act or Section 162(m) of the Code, the Participant, at the time of said grant or other determination, (i) is not deemed to be an officer or director of the Corporation within the meaning of Section 16 of the Exchange Act; and (ii) is not deemed to be a Covered Employee as defined under Section 162(m) of the Code. To the extent that the Administrator has delegated authority to grant Awards pursuant to this Section 3(c) to one or more officers of the Corporation, references to the Administrator shall include references to such officer or officers, subject, however, to the requirements of the Plan, Rule 16b-3, Section 162(m) of the Code and other applicable laws, rules and regulations.
4. Effective Date
The Effective Date of the Plan shall be the day prior to the Public Offering Date. Awards may be granted under the Plan on and after the Effective Date, but not after the date that is the tenth anniversary less one day after the Effective Date. Awards that are outstanding at the end of the Plan term
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(or such earlier termination date as may be established by the Board pursuant to Section 15(a)) shall continue in accordance with their terms, unless otherwise provided in the Plan or an Award Agreement.
5. Shares of Stock Subject to the Plan; Award Limitations
(a) Shares of Stock Subject to the Plan: Subject to adjustments as provided in Section 5(d), the aggregate number of shares of Common Stock that may be issued pursuant to Awards granted under the Plan shall not exceed the sum of (i) 2,700,000 shares, plus (ii) no more than 30,968 shares of Common Stock remaining available for issuance as of the Effective Date of the Plan under any Prior Plan, plus (iii) no more than 1,631,110 shares of Common Stock if and to the extent that any of such shares are subject to an award granted under a Prior Plan, which award is forfeited, cancelled, terminated, expires or lapses for any reason without the issuance of shares pursuant to the award. Shares delivered under the Plan shall be authorized but unissued shares, treasury shares or shares purchased on the open market or by private purchase. The Corporation hereby reserves sufficient authorized shares of Common Stock to meet the grant of Awards hereunder.
(b) Award Limitations: Notwithstanding any provision in the Plan to the contrary, the following limitations shall apply to Awards granted under the Plan, in each case subject to adjustments pursuant to Section 5(d):
(i) The maximum number of shares of Common Stock that may be issued under the Plan pursuant to the grant of Incentive Options shall not exceed 4,362,078 shares, or such lesser number of shares as may be available under the Plan pursuant to Section 5(a) herein;
(ii) In any calendar year, no Participant may be granted Options and SARs that are not related to an Option for more than 500,000 shares of Common Stock;
(iii) No Participant may be granted Awards in any calendar year for more than 500,000 shares of Common Stock; and
(iv) No Participant may be paid more than $1,000,000 with respect to any cash-settled award or awards which were granted during any single calendar year.
(For purposes of Section 5(b)(ii) and (iii), an Option and Related SAR shall be treated as a single Award.)
(c) Shares Not Subject to Limitations: The following will not be applied to the share limitations of Section 5(a) above: (i) dividends, including dividends paid in shares, or dividend equivalents paid in cash in connection with outstanding Awards; (ii) Awards which by their terms are settled in cash rather than the issuance of shares; (iii) any shares subject to an Award under the Plan which Award is forfeited, cancelled, terminated, expires or lapses for any reason or any shares subject to an Award which shares are repurchased or reacquired by the Corporation; and (iv) any shares surrendered by a Participant or withheld by the Corporation to pay the Option Price or purchase price for an Award or shares or used to satisfy any tax withholding requirement in connection with the exercise, vesting or earning of an Award if, in accordance with the terms of the Plan, a Participant pays such Option Price or purchase price or satisfies such tax withholding by either tendering previously owned shares or having the Corporation withhold shares.
(d) Adjustments: If there is any change in the outstanding shares of Common Stock because of a merger, consolidation or reorganization involving the Corporation or an Affiliate, or if the Board of
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Directors of the Corporation declares a stock dividend, stock split distributable in shares of Common Stock, reverse stock split, combination or reclassification of the Common Stock, or if there is a similar change in the capital stock structure of the Corporation or an Affiliate affecting the Common Stock, the number of shares of Common Stock reserved for issuance under the Plan shall be correspondingly adjusted, and the Administrator shall make such adjustments to Awards and to any provisions of this Plan as the Administrator deems equitable to prevent dilution or enlargement of Awards or as may be otherwise advisable.
6. Eligibility
An Award may be granted only to an individual who satisfies all of the following eligibility requirements on the date the Award is granted:
(a) The individual is either (i) an Employee, (ii) a Director, or (iii) an Independent Contractor.
(b) With respect to the grant of Incentive Options, the individual is otherwise eligible to participate under Section 6, is an Employee of the Corporation or a Parent or Subsidiary and does not own, immediately before the time that the Incentive Option is granted, stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or a Parent or Subsidiary. Notwithstanding the foregoing, an Employee who owns more than 10% of the total combined voting power of the Corporation or a Parent or Subsidiary may be granted an Incentive Option if the Option Price is at least 110% of the Fair Market Value of the Common Stock, and the Option Period does not exceed five years. For this purpose, an individual will be deemed to own stock which is attributable to him under Section 424(d) of the Code.
(c) With respect to the grant of substitute awards or assumption of awards in connection with a merger, consolidation, acquisition, reorganization or similar business combination involving the Corporation or an Affiliate, the recipient is otherwise eligible to receive the Award and the terms of the award are consistent with the Plan and applicable laws, rules and regulations (including, to the extent necessary, the federal securities laws registration provisions and Section 424(a) of the Code).
(d) The individual, being otherwise eligible under this Section 6, is selected by the Administrator as an individual to whom an Award shall be granted (as defined above, a “Participant”).
7. Options
(a) Grant of Options: Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Options to such eligible individuals in such numbers, subject to such terms and conditions, and at such times as the Administrator shall determine. Both Incentive Options and Nonqualified Options may be granted under the Plan, as determined by the Administrator; provided, however, that Incentive Options may only be granted to Employees of the Corporation or a Parent or Subsidiary. To the extent that an Option is designated as an Incentive Option but does not qualify as such under Section 422 of the Code, the Option (or portion thereof) shall be treated as a Nonqualified Option. An Option may be granted with or without a Related SAR.
(b) Option Price: The Option Price shall be established by the Administrator and stated in the Award Agreement evidencing the grant of the Option; provided, that (i) the Option Price of an Incentive Option shall be no less than 100% of the Fair Market Value per share of the Common Stock as determined on the date the Option is granted (or 110% of the Fair Market Value with respect to Incentive
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Options granted to an Employee who owns stock possessing more than 10% of the total voting power of all classes of stock of the Corporation or a Parent or Subsidiary, as provided in Section 6(b)); (ii) the Option Price of a Nonqualified Option shall be no less than 85% of the Fair Market Value per share of the Common Stock on the date the Option is granted; and (iii) in no event shall the Option Price per share of any Option be less than the par value per share of the Common Stock. Notwithstanding the foregoing, the Administrator may in its discretion authorize the grant of substitute or assumed options of an acquired entity with an Option Price not equal to at least 100% of the Fair Market Value of the stock on the date of grant, if the option price of any such assumed or substituted option was at least equal to 100% of the fair market value of the underlying stock on the original date of grant and if the terms of such assumed or substituted options otherwise comply with Code Section 409A.
(c) Date of Grant: An Incentive Option shall be considered to be granted on the date that the Administrator acts to grant the Option, or on any later date specified by the Administrator as the effective date of the Option. A Nonqualified Option shall be considered to be granted on the date the Administrator acts to grant the Option or any other date specified by the Administrator as the date of grant of the Option.
(d) Option Period and Limitations on the Right to Exercise Options:
(i) The Option Period shall be determined by the Administrator at the time the Option is granted and shall be stated in the Award Agreement. With respect to Incentive Options, the Option Period shall not extend more than 10 years from the date on which the Option is granted (or five years with respect to Incentive Options granted to an Employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or a Parent or Subsidiary, as provided in Section 6(b)). Any Option or portion thereof not exercised before expiration of the Option Period shall terminate. The period or periods during which, and conditions pursuant to which, an Option may become exercisable shall be determined by the Administrator in its discretion, subject to the terms of the Plan.
(ii) An Option may be exercised by giving written notice to the Corporation in form acceptable to the Administrator at such place and subject to such conditions as may be established by the Administrator or its designee. Such notice shall specify the number of shares to be purchased pursuant to an Option and the aggregate purchase price to be paid therefor and shall be accompanied by payment of such purchase price. The total number of shares that may be acquired upon exercise of an Option shall be rounded down to the nearest whole share. Unless an Award Agreement provides otherwise, such payment shall be in the form of cash or cash equivalent; provided that, where permitted by the Administrator and applicable laws, rules and regulations (and subject to such terms and conditions as may be established by the Administrator), payment may also be made:
(A) By delivery (by either actual delivery or attestation) of shares of Common Stock owned by the Participant for such time period, if any, as may be determined by the Administrator and otherwise acceptable to the Administrator;
(B) By shares of Common Stock withheld upon exercise;
(C) With respect only to purchases upon exercise of an Option after a public market for the Common Stock exists, by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable
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instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price;
(D) By such other payment methods as may be approved by the Administrator and which are acceptable under applicable law; or
(E) By any combination of the foregoing methods.
Shares tendered or withheld in payment on the exercise of an Option shall be valued at their Fair Market Value on the date of exercise. For the purposes of the Plan, a “public market” for the Common Stock shall be deemed to exist (i) upon consummation of a firm commitment underwritten public offering of the Common Stock pursuant to an effective registration statement under the Securities Act, or (ii) if the Administrator otherwise determines that there is an established public market for the Common Stock.
(iii) Unless the Administrator determines otherwise, no Option granted to a Participant who was an Employee at the time of grant shall be exercised unless the Participant is, at the time of exercise, an Employee as described in Section 6(a), and has been an Employee continuously since the date the Option was granted, subject to the following:
(A) The employment relationship of a Participant shall be treated as continuing intact for any period that the Participant is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed 90 days, or, if longer, as long as the Participant’s right to reemployment is guaranteed either by statute or by contract. The employment relationship of a Participant shall also be treated as continuing intact while the Participant is not in active service because of Disability. The Administrator shall have sole authority to determine whether a Participant is disabled and, if applicable, the Participant’s Termination Date.
(B) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of a Participant is terminated because of Disability or death, the Option may be exercised only to the extent exercisable on the Participant’s Termination Date, except that the Administrator may in its sole discretion (subject to any requirements imposed under Code Section 409A) accelerate the date for exercising all or any part of the Option which was not otherwise exercisable on the Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (X) the close of the one-year period following the Termination Date (or such other period stated in the Award Agreement); or (Y) the close of the Option Period. In the event of the Participant’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(C) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A, if the employment of the Participant is terminated for any reason other than Disability, death or for “Cause,” his Option may be exercised to the extent exercisable on his Termination Date, except that the Administrator may in its sole discretion (subject to any requirements imposed under Code Section 409A accelerate the date for exercising all or any part of the Option which was not otherwise exercisable on the Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable:
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(X) the close of the period of three months next succeeding the Termination Date (or such other period stated in the Award Agreement); or (Y) the close of the Option Period. If the Participant dies following such termination of employment and prior to the earlier of the dates specified in (X) or (Y) of this subparagraph (C), the Participant shall be treated as having died while employed under subparagraph (B) (treating for this purpose the Participant’s date of termination of employment as the Termination Date). In the event of the Participant’s death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(D) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated for “Cause,” his Option shall lapse and no longer be exercisable as of his Termination Date, as determined by the Administrator.
(E) Notwithstanding the foregoing, the Administrator may, in its sole discretion (subject to any requirements imposed under Code Section 409A), accelerate the date for exercising all or any part of an Option which was not otherwise exercisable on the Termination Date, extend the period during which an Option may be exercised, modify the terms and conditions to exercise, or any combination of the foregoing.
(iv) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), an Option granted to a Participant who was a Director but who was not an Employee at the time of grant may be exercised only to the extent exercisable on the Participant’s Termination Date (unless the termination was for Cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (X) the close of the period of six months next succeeding the Termination Date (or such other period stated in the Award Agreement); or (Y) the close of the Option Period. If the services of a Participant are terminated for Cause, his Option shall lapse and no longer be exercisable as of his Termination Date, as determined by the Administrator. Notwithstanding the foregoing, the Administrator may in its sole discretion (subject to any requirements imposed under Code Section 409A), accelerate the date for exercising all or any part of an Option which was not otherwise exercisable on the Termination Date, extend the period during which an Option may be exercised, modify the other terms and conditions to exercise, or any combination of the foregoing.
(v) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), an Option granted to a Participant who was an Independent Contractor at the time of grant (and who does not thereafter become an Employee, in which case he shall be subject to the provisions of Section 7(d)(iii)) may be exercised only to the extent exercisable on the Participant’s Termination Date (unless the termination was for Cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (X) the close of the period of three months next succeeding the Termination Date (or such other period stated in the Award Agreement); or (Y) the close of the Option Period. If the services of a Participant are terminated for Cause, his Option shall lapse and no longer be exercisable as of his Termination Date, as determined by the Administrator. Notwithstanding the foregoing, the Administrator may in its sole discretion (subject to any requirements imposed under Code Section 409A), accelerate the date for exercising all or any part of an Option which was not otherwise exercisable on the Termination Date, extend the period during which an Option may be exercised, modify the other terms and conditions to exercise, or any combination of the foregoing.
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(e) Notice of Disposition: If shares of Common Stock acquired upon exercise of an Incentive Option are disposed of within two years following the date of grant or one year following the transfer of such shares to a Participant upon exercise, the Participant shall, promptly following such disposition, notify the Corporation in writing of the date and terms of such disposition and provide such other information regarding the disposition as the Administrator may reasonably require.
(f) Limitation on Incentive Options: In no event shall there first become exercisable by an Employee in any one calendar year Incentive Options granted by the Corporation or any Parent or Subsidiary with respect to shares having an aggregate Fair Market Value (determined at the time an Incentive Option is granted) greater than $100,000. To the extent that any Incentive Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered a Nonqualified Option.
(g) Nontransferability: Incentive Options shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession or, in the Administrator’s discretion, as may otherwise be permitted in accordance with Treas. Reg. Section 1.421-1(b)(2) or any successor provision thereto. Nonqualified Options shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in a manner consistent with the registration provisions of the Securities Act. An Option shall be exercisable during the Participant’s lifetime only by him, by his guardian or legal representative or by a transferee in a transfer permitted by this Section 7(g). The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
8. Director Options
(a) General: Each Nonemployee Director who is otherwise eligible under this Section 8 shall be granted a Director Option or Director Options as provided in Section 8. Director Options shall be designated as Nonqualified Options. Director Options shall be subject to the other terms and conditions of the Plan except as otherwise provided in Section 8.
(b) Eligibility: A Director Option may be granted only to an individual who is a Nonemployee Director of the Corporation on the date the Director Option is granted. A Nonemployee Director may also be eligible for other Awards (including but not limited to Options granted pursuant to Section 7), subject to the terms of the Plan and the Administrator’s discretion.
(c) Grant of Initial Options Upon Initial Election or Appointment to the Board: Each Nonemployee Director who is first elected or appointed to the Board after the Public Offering Date shall receive an Initial Option to purchase 25,000 shares of Common Stock. The date of grant of such an Initial Option shall be the fifth business day after the date of the annual meeting of stockholders as to those Nonemployee Directors who are first elected at an annual meeting of stockholders and the fifth business day after the date of election or appointment to the Board as to those Nonemployee Directors who are first elected or appointed to the Board other than at an annual meeting of stockholders. In addition, a Nonemployee Director who serves as chairman of the Board shall also receive an Initial Option for 10,000 shares when first elected or appointed as chairman. The date of grant of such Initial Option shall be the fifth business day after the date on which the Director is first elected or appointed as chairman of the Board.
(d) Grant of Annual Options: Each Nonemployee Director also shall be granted, on an annual basis commencing with the 2007 annual meeting of stockholders, a Director Option to purchase 7,500 shares of Common Stock (or, a Director Option for 12,500 shares, in the case of the chairman of
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the Board), provided that the Nonemployee Director continues to serve as a member of the Board as of the date of grant. The date of grant of such an Annual Option shall be the fifth business day after the date of the annual or other stockholders meeting at which directors are elected. For the avoidance of doubt, a Nonemployee Director elected for the first time to the Board at an annual meeting of stockholders shall only receive an Initial Option in connection with such election, and shall not receive an Annual Option on the fifth business day following such meeting as well.
(e) Option Price: The price per share of Common Stock at which a Director Option may be exercised shall be 100% of the Fair Market Value per share of the Common Stock on the date the Option is granted.
(f) Option Period and Limitations on the Right to Exercise Options:
(i) The Option Period of a Director Option shall be 10 years from the date of grant. Initial Options shall become exercisable as provided in Section 8(f)(i)(A), and Annual Options shall become exercisable as provided in Section 8(f)(i)(B). To the extent that all or part of an Option becomes exercisable but is not exercised, such Option shall accumulate and be exercisable by the Director in whole or in part at any time before the expiration of the Option Period. The total number of shares that may be acquired upon the exercise of an Initial Option or Annual Option shall be rounded down to the nearest whole share. Any Director Option or portion thereof not exercised before expiration of the Option Period shall terminate.
(A) Initial Options. An Initial Option shall vest and become exercisable with respect to one-third of the shares subject to the Option on the first anniversary of the date of grant, provided that the Nonemployee Director remains in service on such anniversary date. An Initial Option shall vest and become exercisable with respect to the remaining two-thirds of the shares subject to the Option in pro rata quarterly installments over the second and third years following the date of grant so that an Initial Option will be vested and exercisable in full on the third anniversary of the date of grant, provided that the Nonemployee Director remains in service as a Director during such periods.
(B) Annual Options. An Annual Option granted shall vest and become exercisable on the first anniversary of the date of grant, provided that the Nonemployee Director remains in service as a Director on such anniversary date.
(ii) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), a Director Option granted to a Nonemployee Director at the time of grant may be exercised only to the extent exercisable on the Nonemployee Director’s Termination Date (unless the termination was for Cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (X) the close of the period of six months next succeeding the Termination Date (or such other period stated in the Award Agreement); or (Y) the close of the Option Period. If the services of a Nonemployee Director are terminated for Cause, his Director Option shall lapse and no longer be exercisable as of his Termination Date, as determined by the Administrator.
(iii) A Director Option shall be exercised by giving written notice to the Administrator or its designee at such time and place as the Administrator shall direct. Such notice shall specify the number of shares to be purchased pursuant to the Director Option and the aggregate purchase price to be paid therefor, and shall be accompanied by the payment of such purchase price. Payment shall be made in accordance with Section 7(d)(ii).
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(g) Nontransferability: A Director Option shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in a manner consistent with the registration provisions of the Securities Act. Except as may be permitted by the preceding sentence, a Director Option shall be exercisable during the Nonemployee Director’s lifetime only by him or by his guardian or legal representative. The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
9. Stock Appreciation Rights
(a) Grant of SARs: Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant SARs to such eligible individuals, in such numbers, upon such terms and at such times as the Administrator shall determine. SARs may be granted to the holder of an Option (a “Related Option”) with respect to all or a portion of the shares of Common Stock subject to the Related Option (a “Related SAR”) or may be granted separately to an eligible individual (a “Freestanding SAR”). The base price per share of an SAR shall be no less than 100% of the Fair Market Value per share of the Common Stock on the date the SAR is granted. Notwithstanding the foregoing, the Administrator may in its discretion authorize the grant of substitute or assumed SARs of an acquired entity with a base price per share not equal to at least 100% of the Fair Market Value of the stock on the date of grant, if the base price of any such assumed or substituted SAR was at least equal to 100% of the fair market value of the underlying stock on the original date of grant and if the terms of such assumed or substituted SAR otherwise comply with Code Section 409A.
(b) Related SARs: A Related SAR may be granted either concurrently with the grant of the Related Option or (if the Related Option is a Nonqualified Option) at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such Related Option; provided, however, that Related SARs must be granted in accordance with Code Section 409A. The base price of a Related SAR shall be equal to the Option Price of the Related Option. Related SARs shall be exercisable only at the time and to the extent that the Related Option is exercisable (and may be subject to such additional limitations on exercisability as the Administrator may provide in the agreement), and in no event after the complete termination or full exercise of the Related Option. Notwithstanding the foregoing, a Related SAR that is related to an Incentive Option may be exercised only to the extent that the Related Option is exercisable and only when the Fair Market Value exceeds the Option Price of the Related Option. Upon the exercise of a Related SAR granted in connection with a Related Option, the Option shall be canceled to the extent of the number of shares as to which the SAR is exercised, and upon the exercise of a Related Option, the Related SAR shall be canceled to the extent of the number of shares as to which the Related Option is exercised or surrendered.
(c) Freestanding SARs: An SAR may be granted without relationship to an Option (as defined above, a “Freestanding SAR”) and, in such case, will be exercisable upon such terms and subject to such conditions as may be determined by the Administrator, subject to the terms of the Plan.
(d) Exercise of SARs:
(i) Subject to the terms of the Plan, SARs shall be exercisable in whole or in part upon such terms and conditions as may be established by the Administrator and stated in the applicable Award Agreement. The period during which an SAR may be exercisable shall not exceed 10 years from the date of grant or, in the case of Related SARs, such shorter Option Period as may apply to the Related Option. Any SAR or portion thereof not exercised before expiration of the period established by the Administrator shall terminate.
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(ii) SARs may be exercised by giving written notice to the Corporation in form acceptable to the Administrator at such place and subject to such terms and conditions as may be established by the Administrator or its designee. Unless the Administrator determines otherwise, the date of exercise of an SAR shall mean the date on which the Corporation shall have received proper notice from the Participant of the exercise of such SAR.
(iii) Each Participant’s Award Agreement shall set forth the extent to which the Participant shall have the right to exercise an SAR following termination of the Participant’s employment or service with the Corporation. Such provisions shall be determined in the sole discretion of the Administrator, need not be uniform among all SARs issued pursuant to this Section 9, and may reflect distinctions based on the reasons for termination of employment. Notwithstanding the foregoing, unless the Administrator determines otherwise, no SAR may be exercised unless the Participant is, at the time of exercise, an eligible Participant, as described in Section 6, and has been a Participant continuously since the date the SAR was granted, subject to the provisions of Sections 7(d)(iii), (iv) and (v).
(e) Payment Upon Exercise: Subject to the limitations of the Plan, upon the exercise of an SAR, a Participant shall be entitled to receive payment from the Corporation in an amount determined by multiplying (i) the difference between the Fair Market Value of a share of Common Stock on the date of exercise of the SAR over the base price of the SAR by (ii) the number of shares of Common Stock with respect to which the SAR is being exercised. Notwithstanding the foregoing, the Administrator in its discretion may limit in any manner the amount payable with respect to an SAR. The consideration payable upon exercise of an SAR shall be paid in cash, shares of Common Stock (valued at Fair Market Value on the date of exercise of the SAR) or a combination of cash and shares of Common Stock, as determined by the Administrator. Notwithstanding the foregoing, an SAR shall be structured in a manner designed to be exempt from, or to comply with, the requirements of Code Section 409A.
(f) Nontransferability: Unless the Administrator determines otherwise, (i) SARs shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, and (ii) SARs may be exercised during the Participant’s lifetime only by him or by his guardian or legal representative. The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
10. Restricted Awards
(a) Grant of Restricted Awards: Subject to the limitations of the Plan, the Administrator may in its sole and absolute discretion grant Restricted Awards to such individuals in such numbers, upon such terms and at such times as the Administrator shall determine. Such Restricted Awards may be in the form of Restricted Stock Awards and/or Restricted Stock Units that are subject to certain conditions, which conditions must be met in order for the Restricted Award to vest and be earned (in whole or in part) and no longer subject to forfeiture. Restricted Stock Awards shall be payable in shares of Common Stock. Restricted Stock Units shall be payable in cash or shares of Common Stock, or partly in cash and partly in shares of Common Stock, in accordance with the terms of the Plan and the discretion of the Administrator. The Administrator shall determine the nature, length and starting date of the period, if any, during which a Restricted Award may be earned (the “Restriction Period”), and shall determine the conditions which must be met in order for a Restricted Award to be granted or to vest or be earned (in whole or in part), which conditions may include, but are not limited to, payment of a stipulated purchase price, attainment of performance objectives, continued service or employment for a certain period of time (or a combination of attainment of performance objectives and continued service), Retirement, Displacement, Disability, death, or any combination of such conditions. Notwithstanding the
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foregoing, Restricted Awards that vest based solely on continued service or the passage of time shall be subject to a minimum Restriction Period of one year (except in the case of (i) Restricted Awards assumed or substituted in connection with mergers, acquisitions or other business transactions, (ii) Restricted Awards granted in connection with the recruitment or hiring of a Participant, and/or (iii) Restricted Awards granted pursuant to any incentive compensation or bonus program established by the Corporation). In the case of Restricted Awards based upon performance criteria, or a combination of performance criteria and continued service, the Administrator shall determine the Performance Measures applicable to such Restricted Awards (subject to Section 1(ii)).
(b) Vesting of Restricted Awards: Subject to the terms of the Plan and Code Section 409A, the Administrator shall have sole authority to determine whether and to what degree Restricted Awards have vested and been earned and are payable and to establish and interpret the terms and conditions of Restricted Awards. The Administrator may (subject to any restrictions imposed under Code Section 409A) accelerate the date that any Restricted Award granted to a Participant shall be deemed to be vested or earned in whole or in part, without any obligation to accelerate such date with respect to other Restricted Awards granted to any Participant.
(c) Forfeiture of Restricted Awards: Unless the Administrator determines otherwise, if the employment or service of a Participant shall be terminated for any reason and all or any part of a Restricted Award has not vested or been earned pursuant to the terms of the Plan and the individual Award, such Award, to the extent not then vested or earned, shall be forfeited immediately upon such termination and the Participant shall have no further rights with respect thereto.
(d) Dividend and Voting Rights; Share Certificates: The Administrator shall have sole discretion to determine whether a Participant shall have dividend rights, voting rights or other rights as a stockholder with respect to shares subject to a Restricted Award which has not yet vested or been earned. If the Administrator so determines, a certificate or certificates for shares of Common Stock subject to a Restricted Award may be issued in the name of the Participant as soon as practicable after the Award has been granted; provided, however, that, notwithstanding the foregoing, the Administrator shall have the right to retain custody of certificates evidencing the shares subject to a Restricted Award and to require the Participant to deliver to the Corporation a stock power, endorsed in blank, with respect to such Award, until such time as the Restricted Award vests (or is forfeited) and is no longer subject to a substantial risk of forfeiture.
(e) Nontransferability: Unless the Administrator determines otherwise, Restricted Awards that have not vested shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, and the recipient of a Restricted Award shall not sell, transfer, assign, pledge or otherwise encumber shares subject to the Award until the Restriction Period has expired and until all conditions to vesting have been met. The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
11. Performance Awards
(a) Grant of Performance Awards: Subject to the terms of the Plan, the Administrator may in its discretion grant Performance Awards to such eligible individuals upon such terms and conditions and at such times as the Administrator shall determine. Performance Awards may be in the form of Performance Shares and/or Performance Units. An Award of a Performance Share is a grant of a right to receive shares of Common Stock, the cash value thereof, or a combination thereof (in the Administrator’s discretion), which is contingent upon the achievement of performance or other objectives during a specified period and which has a value on the date of grant equal to the Fair Market Value of a share of
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Common Stock. An Award of a Performance Unit is a grant of a right to receive shares of Common Stock or a designated dollar value amount of Common Stock which is contingent upon the achievement of performance or other objectives during a specified period, and which has an initial value determined in a dollar amount established by the Administrator at the time of grant. Subject to Section 5(b), the Administrator shall have complete discretion in determining the number of Performance Units and/or Performance Shares granted to any Participant. The Administrator shall determine the nature, length and starting date of the period during which a Performance Award may be earned (the “Performance Period”), and shall determine the conditions which must be met in order for a Performance Award to be granted or to vest or be earned (in whole or in part), which conditions may include but are not limited to specified performance objectives, continued service or employment for a certain period of time, or a combination of such conditions. Subject to Section 1(ii), the Administrator shall determine the Performance Measures to be used in valuing Performance Awards.
(b) Earning of Performance Awards: Subject to the terms of the Plan and the requirements of Code Section 409A, the Administrator shall have sole authority to determine whether and to what degree Performance Awards have been earned and are payable and to interpret the terms and conditions of Performance Awards and the provisions of Section 11. The Administrator, in its sole and absolute discretion, may (subject to any restrictions imposed under Code Section 409A) accelerate the date that any Performance Award granted to a Participant shall be deemed to be earned in whole or in part, without any obligation to accelerate such date with respect to other Awards granted to any Participant.
(c) Form of Payment: Payment of the amount to which a Participant shall be entitled upon earning a Performance Award shall be made in cash, shares of Common Stock, or a combination of cash and shares of Common Stock, as determined by the Administrator in its sole discretion. Payment may be made in a lump sum or in installments upon such terms as may be established by the Administrator.
(d) Forfeiture of Performance Awards: Unless the Administrator determines otherwise (subject to any restrictions imposed under Code Section 409A), if the employment or service of a Participant shall terminate for any reason and the Participant has not earned all or part of a Performance Award pursuant to the terms of the Plan and individual Award, such Award, to the extent not then earned, shall be forfeited immediately upon such termination and the Participant shall have no further rights with respect thereto.
(e) Nontransferability: Unless the Administrator determines otherwise, Performance Awards that have not been earned shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, and the recipient of a Performance Award shall not sell, transfer, assign, pledge or otherwise encumber any shares subject to the Award until the Performance Period has expired and until the conditions to earning the Award have been met. The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
12. Phantom Stock Awards
(a) Grant of Phantom Stock Awards: Subject to the terms of the Plan, the Administrator may in its discretion grant Phantom Stock Awards to such eligible individuals, in such numbers, upon such terms and at such times as the Administrator shall determine. A Phantom Stock Award is an Award to a Participant of a number of hypothetical share units with respect to shares of Common Stock, with a value per unit based on the Fair Market Value of a share of Common Stock.
(b) Vesting of Phantom Stock Awards: Subject to the terms of the Plan and the requirements of Code Section 409A, the Administrator shall have sole authority to determine whether and to what
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degree Phantom Stock Awards have vested and are payable and to interpret the terms and conditions of Phantom Stock Awards.
(c) Forfeiture of Phantom Stock Awards: Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment or service of a Participant shall be terminated for any reason and all or any part of a Phantom Stock Award has not vested and become payable pursuant to the terms of the Plan and the individual Award, such Award, to the extent not then vested or earned, shall be forfeited immediately upon such termination and the Participant shall have no further rights with respect thereto.
(d) Payment of Phantom Stock Awards: Upon vesting of all or a part of a Phantom Stock Award and satisfaction of such other terms and conditions as may be established by the Administrator, the Participant shall be entitled to a payment of an amount equal to the Fair Market Value of one share of Common Stock with respect to each such Phantom Stock unit which has vested and is payable. Payment may be made, in the discretion of the Administrator, in cash or in shares of Common Stock valued at their Fair Market Value on the applicable vesting date or dates (or other date or dates determined by the Administrator), or in a combination thereof. The Administrator may, however, establish a limitation on the amount payable in respect of each share of Phantom Stock. Payment may be made in a lump sum or upon such terms as may be established by the Administrator.
(e) Nontransferability: Unless the Administrator determines otherwise, (i) Phantom Stock Awards that have not vested shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, (ii) Phantom Stock Awards may be exercised during the Participant’s lifetime only by him or by his guardian or legal representative, and (iii) shares of Common Stock (if any) subject to a Phantom Stock Award may not be sold, transferred, assigned, pledged or otherwise encumbered until the Phantom Stock Award has vested and all other conditions established by the Administrator have been met. The designation of a beneficiary in accordance with Section 19(g) does not constitute a transfer.
13. Dividends and Dividend Equivalents
The Administrator may, in its sole discretion, provide that Awards granted under the Plan earn dividends or dividend equivalents. Such dividends or dividend equivalents may be paid currently or may be credited to a Participant’s account. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Administrator may establish, including reinvestment in additional shares of Common Stock or share equivalents. Notwithstanding the other provisions herein, any dividends or dividend equivalent rights related to an Award shall be structured in a manner so as to avoid causing the Award to be subject to Code Section 409A or shall otherwise be structured so that the Award and dividends or dividend equivalents are in compliance with Code Section 409A.
14. No Right or Obligation of Continued Employment or Service
Neither the Plan, the grant of an Award nor any other action related to the Plan shall confer upon the Participant any right to continue in the service of the Corporation or an Affiliate as an Employee, Director or Independent Contractor or to interfere in any way with the right of the Corporation or an Affiliate to terminate the Participant’s employment or service at any time.
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15. Amendment and Termination of the Plan
(a) Amendment and Termination of Plan: The Plan may be amended, altered and/or terminated at any time by the Board; provided, that (i) approval of an amendment to the Plan by the stockholders of the Corporation shall be required to the extent, if any, that stockholder approval of such amendment is required by applicable law, rule or regulation; and (ii) except for adjustments made pursuant to Section 5(d), the Option Price for any outstanding Option or base price of any outstanding SAR may not be decreased after the date of grant, nor may any outstanding Option or SAR be surrendered to the Corporation as consideration for the grant of a new Option or SAR with a lower Option Price or base price than the original Option or SAR, as the case may be, without stockholder approval of any such action.
(b) Amendment of Awards: The Administrator may amend, alter or terminate any Award granted under the Plan, prospectively or retroactively, but such amendment, alteration or termination of an Award shall not, without the consent of the recipient of an outstanding Award, materially adversely affect the rights of the recipient with respect to the Award.
(c) Unilateral Authority of Administrator to Modify Plan and Awards: Notwithstanding Section 15(a) and Section 15(b) herein, the following provisions shall apply:
(i) The Administrator shall have unilateral authority to amend the Plan and any Award (without Participant consent and without stockholder approval, unless such stockholder approval is required by applicable laws, rules or regulations) to the extent necessary to comply with applicable laws, rules or regulations or changes to applicable laws, rules or regulations (including but not limited to Code Section 409A, Code Section 422 and federal securities laws).
(ii) The Administrator shall have unilateral authority to make adjustments to the terms and conditions of Awards in recognition of unusual or nonrecurring events affecting the Corporation or any Affiliate, or the financial statements of the Corporation or any Affiliate, or of changes in accounting principles, if the Administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or necessary or appropriate to comply with applicable accounting principles.
(d) Cash Settlement: Notwithstanding any provision of the Plan, an Award or an Award Agreement to the contrary, the Administrator may (subject to any requirements imposed under Code Section 409A) cause any Award (or portion thereof) granted under the Plan to be canceled in consideration of an alternative award or cash payment of an equivalent cash value, as determined by the Administrator in its sole discretion, made to the holder of such canceled Award.
16. Restrictions on Awards and Shares
The Corporation may impose such restrictions on Awards, shares and any other benefits underlying Awards hereunder as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such securities. Notwithstanding any other Plan provision to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock under the Plan, make any other distribution of benefits under the Plan, or take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may
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cause a restrictive legend to be placed on any certificate issued pursuant to an Award hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
17. Change in Control
The Administrator shall (subject to any requirements imposed under Code Section 409A) have sole discretion to determine the effect, if any, on an Award, including but not limited to the vesting, earning and/or exercisability of an Award, in the event of a Change in Control. Without limiting the effect of the foregoing, in the event of a Change in Control, the Administrator’s discretion shall include, but shall not be limited to, the discretion to determine that an Award shall vest, be earned or become exercisable in whole or in part, shall be assumed or substituted for another award, shall be cancelled without the payment of consideration, shall be cancelled in exchange for a cash payment or other consideration, and/or that other actions (or no action) shall be taken with respect to the Award. The Administrator also has discretion to determine that acceleration or any other effect of a Change in Control on an Award shall be subject to both the occurrence of a Change in Control event and termination of employment or service of the Participant. Any such determination of the Administrator may be, but shall not be required to be, stated in an individual Award Agreement.
18. Compliance with Code Section 409A
(a) General: Notwithstanding any other provision in the Plan or an Award to the contrary, if and to the extent that Section 409A of the Code is deemed to apply to the Plan or any Award granted under the Plan, it is the general intention of the Corporation that the Plan and all such Awards shall, to the extent practicable, comply with Code Section 409A, and the Plan and any such Award shall, to the extent practicable, be construed in accordance therewith. Deferrals pursuant to an Option, an SAR, a Restricted Award or any other Award otherwise exempt from Code Section 409A in a manner that would cause Code Section 409A to apply shall not be permitted unless such deferrals are in compliance with Code Section 409A. Without in any way limiting the effect of the foregoing, in the event that Code Section 409A requires that any special terms, provisions or conditions be included in the Plan or any Award, then such terms, provisions and conditions shall, to the extent practicable, be deemed to be made a part of the Plan or Award, as applicable. Further, in the event that the Plan or any Award shall be deemed not to comply with Code Section 409A, then neither the Corporation, the Administrator nor its or their designees or agents shall be liable to any Participant or other person for actions, decisions or determinations made in good faith.
(b) Specific Terms Applicable to Awards Subject to Code Section 409A: Without limiting the effect of Section 18(a), above, and notwithstanding any other provision in the Plan to the contrary, the following provisions shall, to the extent required under Code Section 409A, apply with respect to Awards deemed to involve the deferral of compensation under Code Section 409A:
(i) Distributions: Distributions may be made with respect to Awards subject to Code Section 409A not earlier than upon the occurrence of one or more of the following events: (A) separation from service; (B) disability; (C) death; (D) a specified time or pursuant to a fixed schedule; (E) a change in the ownership or effective control of the Corporation, or in the ownership of a substantial portion of the assets of the Corporation; or (F) the occurrence of an unforeseeable emergency. Each of the preceding distribution events shall be defined and interpreted in accordance with Code Section 409A.
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(ii) Specified Employees: With respect to Participants who are “specified employees” (as defined in Code Section 409A), a distribution due to separation from service may not be made before the date that is six months after the date of separation from service (or, if earlier, the date of death of the Participant), except as may be otherwise permitted pursuant to Code Section 409A. To the extent that a Participant is subject to this section and a distribution is to be paid in installments, through an annuity, or in some other manner where payment will be periodic, the Participant shall be paid, during the seventh month following separation from service, the aggregate amount of payments he would have received but for the application of this section; all remaining payments shall be made in their ordinary course.
(iii) No Acceleration: Unless permissible under Code Section 409A, acceleration of the time or schedule of any payment under the Plan is prohibited, except that, to the extent permitted by the Administrator and to the extent such exceptions do not violate Code Section 409A, the following accelerations may be permitted in an Award:
(A) As necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B));
(B) As necessary to comply with a certificate of divestiture (as defined in Code Section 1043(b)(2));
(C) To pay the Federal Insurance Contributions Act tax imposed under Code Sections 3101 and 3121(v)(2) on amounts deferred under the Plan (the “FICA Amount”), including the income tax at source on wages imposed under Code Section 3401 on the FICA Amount, and to pay the additional income tax at source of wages attributable to additional Code Section 3401 wages and taxes;
(D) To pay any portion of an Award that is required to be included in income as a result of a violation of Code Section 409A; and
(E) To pay an Award not greater than $10,000, provided that (X) such payment occurs on or before the later of December 31 of the calendar year in which occurs the Participant’s termination of employment or the 15th day of the third month following the Participant’s termination of employment and (Y) all Awards granted the Participant are (or have previously been) terminated on or before the date of payment.
(iv) Short-Term Deferrals: Except to the extent otherwise required or permitted under Code Section 409A (and unless an individual Award Agreement or other instrument provides otherwise), distributions pursuant to Awards otherwise subject to Code Section 409A must be made no later than the later of (A) the date that is 2-1/2 months from the end of the Participant’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture; or (B) the date that is 2-1/2 months from the end of the Corporation’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture.
(v) Deferral Elections:
(A) In the sole discretion of the Administrator, a Participant may be permitted to make an election as to the time or form of any distribution from an Award, provided that, except as specified in (B) and (C) below, such election is made and becomes irrevocable not later than the close of the taxable year preceding the taxable
23
year in which the services for which the Award is granted are to be performed, or at such other time or times as may be permitted under Code Section 409A. Notwithstanding the foregoing, a Participant may cancel a deferral election upon (X) a hardship distribution pursuant to Code Section 401(k), or (Y) upon application for a distribution under section 18(b)(i)(F) (unforeseeable emergency).
(B) In the case of the first year in which the Participant becomes eligible to participate in the Plan, the election described in (A) may be made with respect to services to be performed subsequent to the election within 30 days after the date the Participant becomes eligible to participate in the Plan.
(C) In the case of any performance-based compensation (as that term is defined in Code Section 409A), where such compensation is based on services performed over a period of at least 12 months, the election described in (A) may be made no later than six months before the end of the period.
(D) In the case of any Award subject to a substantial risk of forfeiture (as defined in Code Section 409A), the election described in (A) may be made within 30 days of the date the Participant first obtains a legally binding right to the Award, provided that the Award requires the Participant to perform at least 12 months of service after such election is made.
(vi) Changes to Elections: To the extent that the Administrator, in its sole discretion, permits a subsequent election to delay a payment or change the form of payment that has been specified under (A), (B) or (C) above, the following provisions shall apply:
(A) Such election may not take effect until 12 months after the date on which the election is made;
(B) Where the payment is to be made for reasons other than death, disability or unforeseeable emergency, as those terms are defined in Section 18(b)(i), above, the first payment with respect to which such election is made must be deferred for a period of not less than five years from the date such payment would otherwise have been made; and
(C) Any election related to a payment based upon a specified term or pursuant to a fixed schedule, as such terms are defined in Section 18(b)(i), above, may not be made less than 12 months prior to the date of the first scheduled payment hereunder.
Notwithstanding anything else in this Section 18(b)(vi) to the contrary and consistent with Code Section 409A, the Administrator may elect, or may allow the Participant to elect, on or before December 31, 2006, the time or form of payment of amounts subject to Code Section 409A, provided that any such election occurring in 2006 shall apply only to amounts that are not otherwise payable in 2006 and does not cause an amount to be paid in 2006 that would not otherwise be payable in that year.
(vii) Delay of Time of Payment. Notwithstanding section 18(b)(i), above, the payment of any Award shall be delayed for the following reasons:
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(A) Where the Corporation reasonably anticipates that any deduction provided to it by payment of the Award to the Participant will be limited or eliminated by Code Section 162(m); in such a case, payment will be made as of the earlier of when the Administrator reasonably anticipates that the Corporation’s deduction under Code Section 162(m) will not be so limited or the calendar year in which the Participant separates from service;
(B) Where the Corporation reasonably anticipates the payment of the Award will violate a term of a loan arrangement or any other similar contractual provision and the violation will cause material harm to the Corporation; in such a case, payment will be made at the earliest date at which the Administrator reasonably anticipates that payment will not cause such a violation; and
(C) Where the Corporation reasonably anticipates that payment of the Award will violate federal securities laws or other applicable laws; in such a case, payment will be made at the earliest date when the Administrator reasonably anticipates that payment will not cause such a violation.
(viii) Termination of Awards Subject to Code Section 409A. As permitted by the Administrator in its sole discretion, and in accordance with Code Section 409A, the Corporation may terminate an Award that is subject to Code Section 409A and distribute benefits to Participants.
19. General Provisions
(a) Stockholder Rights: Except as otherwise determined by the Administrator (and subject to the provisions of Section 10(d) regarding Restricted Awards), a Participant and his legal representative, legatees or distributees shall not be deemed to be the holder of any shares subject to an Award and shall not have any rights of a stockholder unless and until certificates for such shares have been issued and delivered to him or them under the Plan. A certificate or certificates for shares of Common Stock acquired upon exercise of an Option or SAR shall be promptly issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) as soon as practicable following receipt of notice of exercise and, with respect to Options, payment of the Option Price (except as may otherwise be determined by the Corporation in the event of payment of the Option Price pursuant to Section 7(d)(ii)(C)). Except as otherwise provided in Section 10(d) regarding Restricted Awards, a certificate for any shares of Common Stock issuable pursuant to a Restricted Award, Performance Award or Phantom Stock Award shall be promptly issued in the name of the Participant (or his beneficiary) and distributed to the Participant (or his beneficiary) after the Award (or portion thereof) has vested or been earned. In no event will the issuance of certificates pursuant to the exercise of Options, settlement of SARs in shares of Common Stock, vesting of Restricted Awards or vesting of other Awards otherwise exempt from Code Section 409A be delayed in a manner that would cause the Award to be construed to involve the deferral of compensation under Code Section 409A unless such deferral is in compliance with Code Section 409A.
(b) Withholding: The Corporation shall withhold all required local, state, federal, foreign and other taxes and any other amount required to be withheld by any governmental authority or law from any amount payable in cash with respect to an Award. Prior to the delivery or transfer of any certificate for shares or any other benefit conferred under the Plan, the Corporation shall require any recipient of an Award to pay to the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account
25
of such recipient. Notwithstanding the foregoing, the Administrator may establish procedures to permit a recipient to satisfy such obligation in whole or in part, and any local, state, federal, foreign or other income tax obligations relating to such an Award, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the shares to which the recipient is entitled. The number of shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
(c) Section 16(b) Compliance: To the extent that any Participants in the Plan are subject to Section 16(b) of the Exchange Act, it is the general intention of the Corporation that transactions under the Plan shall comply with Rule 16b-3 under the Exchange Act and that the Plan shall be construed in favor of such Plan transactions meeting the requirements of Rule 16b-3 or any successor rules thereto. Notwithstanding anything in the Plan to the contrary, the Administrator, in its sole and absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants.
(d) Code Section 162(m) Performance-Based Compensation. To the extent to which Section 162(m) of the Code is applicable, the Corporation intends that compensation paid under the Plan to Covered Employees will, to the extent practicable, constitute “qualified performance-based compensation” within the meaning of Section 162(m), unless otherwise determined by the Administrator. Accordingly, Awards granted to Covered Employees which are intended to qualify for the performance-based exception under Code Section 162(m) shall be deemed to include any such additional terms, conditions, limitations and provisions as are necessary to comply with the performance-based compensation exemption of Section 162(m), unless the Administrator, in its discretion, determines otherwise.
(e) Unfunded Plan; No Effect on Other Plans:
(i) The Plan shall be unfunded, and the Corporation shall not be required to create a trust or segregate any assets that may at any time be represented by Awards under the Plan. The Plan shall not establish any fiduciary relationship between the Corporation and any Participant or other person. Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Corporation or any Affiliate, including, without limitation, any specific funds, assets or other property which the Corporation or any Affiliate, in their discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the Common Stock or other amounts, if any, payable under the Plan, unsecured by any assets of the Corporation or any Affiliate. Nothing contained in the Plan shall constitute a guarantee that the assets of such entities shall be sufficient to pay any benefits to any person.
(ii) The amount of any compensation deemed to be received by a Participant pursuant to an Award shall not constitute compensation with respect to which any other employee benefits of such Participant are determined, including, without limitation, benefits under any bonus, pension, profit sharing, life insurance or salary continuation plan, except as otherwise specifically provided by the terms of such plan or as may be determined by the Administrator.
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(iii) The adoption of the Plan shall not affect any other stock incentive or other compensation plans in effect for the Corporation or any Affiliate, nor shall the Plan preclude the Corporation from establishing any other forms of stock incentive or other compensation for employees or service providers of the Corporation or any Affiliate.
(f) Applicable Law: The Plan shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States.
(g) Beneficiary Designation: The Administrator may permit a Participant to designate in writing a person or persons as beneficiary, which beneficiary shall be entitled to receive settlement of Awards (if any) to which the Participant is otherwise entitled in the event of death. In the absence of such designation by a Participant, and in the event of the Participant’s death, the estate of the Participant shall be treated as beneficiary for purposes of the Plan, unless the Administrator determines otherwise. The Administrator shall have sole discretion to approve and interpret the form or forms of such beneficiary designation. A beneficiary, legal guardian, legal representative or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent that the Plan and/or Award Agreement provide otherwise, and to any additional restrictions deemed necessary or appropriate by the Administrator.
(h) Gender and Number: Except where otherwise indicated by the context, words in any gender shall include any other gender, words in the singular shall include the plural and words in the plural shall include the singular.
(i) Severability: If any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
(j) Rules of Construction: Headings are given to the sections of this Plan solely as a convenience to facilitate reference. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law.
(k) Successors and Assigns: The Plan shall be binding upon the Corporation, its successors and assigns, and Participants, their executors, administrators and permitted transferees and beneficiaries.
(l) Right of Offset: Notwithstanding any other provision of the Plan or an Award Agreement, the Corporation may reduce the amount of any payment or benefit otherwise payable to or on behalf of a Participant by the amount of any obligation of the Participant to the Corporation that is or becomes due and payable.
(m) Effect of Changes in Status: Unless otherwise provided in an Award Agreement, determined by the Administrator or required by Code Section 409A, an Award shall not be affected by any change in the terms, conditions or status of the Participant’s employment or service, provided that the Participant continues to be in the employ of, or in service to, the Corporation or an Affiliate. Without limiting the foregoing, the Administrator has sole discretion to determine, subject to Code Section 409A, at the time of grant of an Award or at any time thereafter, the effect, if any, on Awards granted to a Participant if the Participant’s status as an Employee, Director or Independent Contractor changes, including but not limited to a change from full-time to part-time, or vice versa, or if other similar changes in the nature or scope of the Participant’s employment or service occur.
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(n) Fractional Shares: Except as otherwise provided by the Plan or the Administrator, (i) the total number of shares issuable pursuant to the exercise, vesting or earning of an Award shall be rounded under general rounding principles to the nearest whole share (except where rounding down is required in order to preserve intended tax treatment or otherwise required by applicable law, rule or regulation), (ii) no fractional shares shall be issued, and (iii) no consideration shall be paid for any such fractional shares.
IN WITNESS WHEREOF, this Targacept, Inc. 2006 Stock Incentive Plan, is, by the authority of the Board of Directors of the Corporation, executed in behalf of the Corporation, effective the ____ day of _______________, 2006.
TARGACEPT, INC.
By:
Name:
Title:
ATTEST:
______________________________________
Secretary
[Corporate Seal]
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EXHIBIT 10.6(a)
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Incentive Stock Option Agreement
(Employees)
THIS AGREEMENT (together with Schedule A, attached hereto, the “Agreement”), effective as of the date specified as the “Grant Date” on Schedule A attached hereto, between TARGACEPT, INC., a Delaware corporation (the “Corporation”), and the individual identified on Schedule A attached hereto, an Employee of the Corporation or an Affiliate (the “Participant”);
R E C I T A L S :
In furtherance of the purposes of the Targacept, Inc. 2006 Stock Incentive Plan, as it may be hereafter amended (the “Plan”), the Corporation and the Participant hereby agree as follows:
1. Incorporation of Plan. The rights and duties of the Corporation and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are incorporated herein by reference. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.
2. Grant of Option; Term of Option. The Corporation hereby grants to the Participant pursuant to the Plan, as a matter of separate inducement and agreement in connection with his or her employment or service to the Corporation, and not in lieu of any salary or other compensation for his or her services, the right and Option (the “Option”) to purchase all or any part of such aggregate number of shares (the “Shares”) of common stock of the Corporation (the “Common Stock”) at a purchase price (the “Option Price”) as specified on Schedule A, attached hereto, and subject to such other terms and conditions as may be stated herein or in the Plan or on Schedule A. The Participant expressly acknowledges that the terms of Schedule A shall be incorporated herein by reference and shall constitute part of this Agreement. The Corporation and the Participant further acknowledge and agree that the signatures of the Corporation and the Participant on the Grant Notice contained in Schedule A shall constitute their acceptance of all of the terms of this Agreement and their agreement to be bound by the terms of this Agreement. The Option (or any portion thereof) shall be designated as an Incentive Option, as stated on Schedule A. To the extent that the Option or any portion thereof is designated as an Incentive Option and such Option does not qualify as an Incentive Option, the Option or portion thereof shall be treated as a Nonqualified Option. Except as otherwise provided in the Plan or this Agreement, this Option will expire if not exercised in full by the Expiration Date specified on Schedule A.
3. Exercise of Option. Subject to the terms of the Plan and this Agreement, the Option shall become exercisable on the date or dates, and subject to such conditions, as are set forth on Schedule A attached hereto. To the extent that an Option which is exercisable is not exercised, such Option shall accumulate and be exercisable by the Participant in whole or in part at any time prior to expiration of the Option, subject to the terms of the Plan and this Agreement. The Participant expressly acknowledges that the Option may vest and be exercisable only upon such terms and conditions as are provided in this Agreement and the Plan. Upon the exercise of an Option in whole or in part and payment of the Option Price in accordance with the provisions of the Plan and this Agreement, the Corporation shall, as soon thereafter as practicable, deliver to the Participant a certificate or certificates for the Shares purchased. Payment of the Option Price may be made (i) in cash or by cash equivalent; and, where permitted by
applicable law, payment may also be made (ii) by delivery (by either actual delivery or attestation) of shares of Common Stock owned by the Participant (subject to such terms and conditions, if any, as may be determined by the Administrator); (iii) by shares of Common Stock withheld upon exercise but only if and to the extent that payment by such method does not result in variable accounting or other accounting consequences deemed unacceptable to the Corporation; (iv) in the event that a Public Market (as defined in the Plan) for the Common Stock exists, by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price; (v) by such other payment methods as may be approved by the Administrator and which are acceptable under applicable law; or (vi) by any combination of the foregoing methods. Shares delivered or withheld in payment of the Option Price shall be valued at their Fair Market Value on the date of exercise, determined in accordance with the terms of the Plan.
4. No Right of Employment or Service; Forfeiture of Option. Neither the Plan, this Agreement nor any other action related to the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or an Affiliate or interfere with the right of the Corporation or an Affiliate to terminate the Participant’s employment or service at any time. Except as otherwise expressly provided in the Plan or this Agreement or as determined by the Administrator, all rights of the Participant with respect to the Option shall terminate upon termination of the employment of the Participant with the Corporation or an Affiliate.
5. Termination of Employment. Unless the Administrator determines otherwise, the Option shall not be exercised unless the Participant is, at the time of exercise, an Employee and has been an Employee continuously since the date the Option was granted, subject to the following:
(a) The employment relationship of the Participant shall be treated as continuing intact for any period that the Participant is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed 90 days, or, if longer, as long as the Participant’s right to reemployment is guaranteed either by statute or by contract. The employment relationship of the Participant shall also be treated as continuing intact while the Participant is not in active service because of Disability. The Administrator shall have sole authority to determine whether the Participant is disabled and, if applicable, the Participant’s Termination Date.
(b) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated because of Disability or death, the Option may be exercised only to the extent vested and exercisable on the Participant’s Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable (X) the close of the period of one year next succeeding the Termination Date; or (Y) the close of the Option Period. In the event of the Participant’s death, the Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(c) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated for any reason other than Disability, death or for Cause, the Option may be exercised to the extent vested and exercisable on his or her Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (X) the close of the period of three months next succeeding the Termination Date; or (Y) the close of the Option period. If the Participant dies following such termination of employment and prior to the date specified in (X) of this subparagraph (c), the Participant shall be treated as having died while employed under
2
subparagraph (b) immediately preceding (treating for this purpose the Participant’s date of termination of employment as the Termination Date). In the event of the Participant’s death, the Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(d) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated for Cause, the Option shall lapse and no longer be exercisable as of his or her Termination Date, as determined by the Administrator.
6. Notice of Disposition. To the extent that this Option is designated as an Incentive Option, if Shares of Common Stock acquired upon exercise of the Option are disposed of within two years following the date of grant or one year following the transfer of such Shares to the Participant upon exercise, the Participant shall, promptly following such disposition, notify the Corporation in writing of the date and terms of such disposition and provide such other information regarding the disposition as the Administrator may reasonably require.
7. Limitation on Incentive Options. In no event shall there first become exercisable by the Participant in any one calendar year Incentive Options granted by the Corporation or any Parent or Subsidiary with respect to shares having an aggregate Fair Market Value (determined at the time an Incentive Option is granted) greater than $100,000. To the extent that any Incentive Options are first exercisable by the Participant in excess of such limitation, the excess shall be considered a Nonqualified Option.
8. Nontransferability of Option. To the extent that this Option is designated as an Incentive Option, the Option shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws or intestate succession, or, in the Administrator’s discretion, as may otherwise be permitted in accordance with Section 422 of the Code and related regulations. To the extent that this Option is treated as a Nonqualified Option, the Option shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in a manner consistent with the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”). Except as may be permitted by the preceding, the Option shall be exercisable during the Participant’s lifetime only by him or her or by his or her guardian or legal representative. The designation of a beneficiary in accordance with the Plan does not constitute a transfer.
9. Superseding Agreement; Binding Effect. This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Option or any related rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend any existing confidentiality agreement, nonsolicitation agreement, noncompetition agreement, employment agreement or any other similar agreement between the Participant and the Corporation, including, but not limited to, any restrictive covenants contained in such agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns.
10. Governing Law. Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of Delaware, without regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States.
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11. Amendment and Termination; Waiver. Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Plan and this Agreement (without Participant consent) to the extent necessary to comply with applicable law or changes to applicable law (including but in no way limited to Code Section 409A, Code Section 422 and federal securities laws).
12. No Rights as Stockholder. The Participant and his or her legal representatives, legatees and distributees shall not be deemed to be the holder of any Shares subject to the Option and shall not have any rights of a stockholder unless and until certificates for such Shares have been issued and delivered to him or her or them.
13. Withholding; Tax Matters.
(a) The Participant acknowledges that the Corporation shall require the Participant to pay the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Participant, and the Participant agrees, as a condition to the grant of the Option and delivery of the Shares or any other benefit, to satisfy such obligations. Notwithstanding the foregoing, the Corporation may establish procedures to permit the Participant to satisfy such obligations in whole or in part, and any other local, state, federal, foreign or other income tax obligations relating to the Option, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the Shares to which the Participant is entitled. The number of Shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
(b) The Participant acknowledges that the Corporation has made no warranties or representations to the Participant with respect to the tax consequences (including, but not limited to, income tax consequences) related to the transactions contemplated by this Agreement, and the Participant is in no manner relying on the Corporation or its representatives for an assessment of such tax consequences. The Participant acknowledges that there may be adverse tax consequences upon acquisition or disposition of the Shares subject to the Option and that the Participant should consult a tax advisor prior to such exercise or disposition. The Participant acknowledges that he or she has been advised that he or she should consult with his own attorney, accountant, and/or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Participant also acknowledges that the Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Participant.
14. Administration. The authority to construe and interpret this Agreement and the Plan, and to administer all aspects of the Plan, shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and binding.
15. Notices. Except as may be otherwise provided by the Plan or determined by the Administrator, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage
4
paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated on Schedule A (or such other address as may be designated by the Participant in a manner acceptable to the Administrator), or, if to the Corporation, at the Corporation’s principal office, attention Chief Financial Officer, Targacept, Inc. Notice may also be provided by electronic submission, if and to the extent permitted by the Administrator.
16. Severability. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
17. Restrictions on Option and Shares. The Corporation may impose such restrictions on the Option and the Shares or other benefits underlying the Option as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such Option or Shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, to make any other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate for Shares issued pursuant to the exercise of the Option in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
18. Effect of Changes in Status. Unless the Administrator, in its sole discretion, determines otherwise (or unless required by Code Section 409A), the Option shall not be affected by any change in the terms, conditions or status of the Participant’s employment, provided that the Participant continues to be in the employ of the Corporation or an Affiliate. Without limiting the foregoing, the Administrator has sole discretion to determine, subject to Code Section 409A, at the time of grant of the Option or at any time thereafter, the effect, if any, on the Option if the Participant’s status as an Employee changes, including but not limited to a change from full-time to part-time, or vice versa, or if other similar changes in the nature or scope of the Participant’s employment occur.
19. Right of Offset. Notwithstanding any other provision of the Plan or the Agreement, the Corporation may reduce the amount of any payment otherwise payable to or on behalf of the Participant by the amount of any obligation of the Participant to the Corporation that is or becomes due and payable and the Participant shall be deemed to have consented to such reduction.
20. Counterparts; Further Instruments. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
[Signatures of the Corporation and the Participant follow on Schedule A/Grant Notice.]
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TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Incentive Stock Option Agreement
(Employees)
Schedule A/Grant Notice
1. Pursuant to the terms and conditions of the Corporation’s 2006 Stock Incentive Plan (the “Plan”), you (the “Participant”) have been granted an option (the “Option”) to purchase ________ shares (the “Shares”) of our Common Stock as outlined below.
| Name of Participant: |
|||
| Address: |
|||
| Grant Date: |
, 20 | ||
| Number of Shares Subject to Option: |
|||
| Option Price: |
$ | ||
| Type of Option: |
Incentive Stock Option | ||
| Expiration Date (Last day of Option Period): |
, 20 | ||
| Vesting Schedule/Conditions: |
|||
2. By my signature below, I, the Participant, hereby acknowledge receipt of this Grant Notice and the Option Agreement (the “Agreement”) dated __________ ___, 200__, between the Participant and Targacept, Inc. (the “Corporation”) which is attached to this Grant Notice. I understand that the Grant Notice and other provisions of Schedule A herein are incorporated by reference into the Agreement and constitute a part of the Agreement. By my signature below, I further agree to be bound by the terms of the Plan and the Agreement, including but not limited to the terms of this Grant Notice and the other provisions of Schedule A contained herein. The Corporation reserves the right to treat the Option and the Agreement as cancelled, void and of no effect if the Participant fails to return a signed copy of the Grant Notice within 30 days of grant date stated above.
| Signature: |
|
Date: |
| |||||
| Agreed to by:
TARGACEPT, INC. | ||||||||||
| By: |
| |||||||||
| J. Donald deBethizy President & CEO | ||||||||||
| Attest: |
| Alan A. Musso Vice President, Chief Financial Officer & Secretary |
Note: If there are any discrepancies in the name or address shown above, please make the appropriate corrections on this form. Please retain a copy of the Agreement, including this Grant Notice, for your files.
EXHIBIT 10.6(b)
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Nonqualified Stock Option Agreement
(Employees)
THIS AGREEMENT (together with Schedule A, attached hereto, the “Agreement”), effective as of the date specified as the “Grant Date” on Schedule A attached hereto, between TARGACEPT, INC., a Delaware corporation (the “Corporation”), and the individual identified on Schedule A attached hereto, an Employee of the Corporation or an Affiliate (the “Participant”);
R E C I T A L S :
In furtherance of the purposes of the Targacept, Inc. 2006 Stock Incentive Plan, as it may be hereafter amended (the “Plan”), the Corporation and the Participant hereby agree as follows:
1. Incorporation of Plan. The rights and duties of the Corporation and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are incorporated herein by reference. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.
2. Grant of Option; Term of Option. The Corporation hereby grants to the Participant pursuant to the Plan, as a matter of separate inducement and agreement in connection with his or her employment or service to the Corporation, and not in lieu of any salary or other compensation for his or her services, the right and Option (the “Option”) to purchase all or any part of such aggregate number of shares (the “Shares”) of common stock of the Corporation (the “Common Stock”) at a purchase price (the “Option Price”) as specified on Schedule A, attached hereto, and subject to such other terms and conditions as may be stated herein or in the Plan or on Schedule A. The Participant expressly acknowledges that the terms of Schedule A shall be incorporated herein by reference and shall constitute part of this Agreement. The Corporation and the Participant further acknowledge and agree that the signatures of the Corporation and the Participant on the Grant Notice contained in Schedule A shall constitute their acceptance of all of the terms of this Agreement and their agreement to be bound by the terms of this Agreement. The Option (or any portion thereof) shall be designated as a Nonqualified Option, as stated on Schedule A. Except as otherwise provided in the Plan or this Agreement, this Option will expire if not exercised in full by the Expiration Date specified on Schedule A.
3. Exercise of Option. Subject to the terms of the Plan and this Agreement, the Option shall become exercisable on the date or dates, and subject to such conditions, as are set forth on Schedule A attached hereto. To the extent that an Option which is exercisable is not exercised, such Option shall accumulate and be exercisable by the Participant in whole or in part at any time prior to expiration of the Option, subject to the terms of the Plan and this Agreement. The Participant expressly acknowledges that the Option may vest and be exercisable only upon such terms and conditions as are provided in this Agreement and the Plan. Upon the exercise of an Option in whole or in part and payment of the Option Price in accordance with the provisions of the Plan and this Agreement, the Corporation shall, as soon thereafter as practicable, deliver to the Participant a certificate or certificates for the Shares purchased. Payment of the Option Price may be made (i) in cash or by cash equivalent; and, where permitted by applicable law, payment may also be made (ii) by delivery (by either actual delivery or attestation) of shares of Common Stock owned by the Participant (subject to such terms and conditions, if any, as may be determined by the Administrator); (iii) by shares of Common Stock withheld upon exercise but only if and to the extent that
payment by such method does not result in variable accounting or other accounting consequences deemed unacceptable to the Corporation; (iv) in the event that a Public Market (as defined in the Plan) for the Common Stock exists, by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price; (v) by such other payment methods as may be approved by the Administrator and which are acceptable under applicable law; or (vi) by any combination of the foregoing methods. Shares delivered or withheld in payment of the Option Price shall be valued at their Fair Market Value on the date of exercise, determined in accordance with the terms of the Plan.
4. No Right of Employment or Service; Forfeiture of Option. Neither the Plan, this Agreement nor any other action related to the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or an Affiliate or interfere with the right of the Corporation or an Affiliate to terminate the Participant’s employment or service at any time. Except as otherwise expressly provided in the Plan or this Agreement or as determined by the Administrator, all rights of the Participant with respect to the Option shall terminate upon termination of the employment of the Participant with the Corporation or an Affiliate.
5. Termination of Employment. Unless the Administrator determines otherwise, the Option shall not be exercised unless the Participant is, at the time of exercise, an Employee and has been an Employee continuously since the date the Option was granted, subject to the following:
(a) The employment relationship of the Participant shall be treated as continuing intact for any period that the Participant is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed 90 days, or, if longer, as long as the Participant’s right to reemployment is guaranteed either by statute or by contract. The employment relationship of the Participant shall also be treated as continuing intact while the Participant is not in active service because of Disability. The Administrator shall have sole authority to determine whether the Participant is disabled and, if applicable, the Participant’s Termination Date.
(b) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated because of Disability or death, the Option may be exercised only to the extent vested and exercisable on the Participant’s Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable (X) the close of the period of one year next succeeding the Termination Date; or (Y) the close of the Option Period. In the event of the Participant’s death, the Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(c) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated for any reason other than Disability, death or for Cause, the Option may be exercised to the extent vested and exercisable on his or her Termination Date. The Option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (X) the close of the period of three months next succeeding the Termination Date; or (Y) the close of the Option period. If the Participant dies following such termination of employment and prior to the date specified in (X) of this subparagraph (c), the Participant shall be treated as having died while employed under subparagraph (b) immediately preceding (treating for this purpose the Participant’s date of termination of employment as the Termination Date). In the event of the Participant’s death, the Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession.
(d) Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), if the employment of the Participant is terminated for Cause, the
2
Option shall lapse and no longer be exercisable as of his or her Termination Date, as determined by the Administrator.
6. Nontransferability of Option. The Option shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in a manner consistent with the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”). Except as may be permitted by the preceding sentence, the Option shall be exercisable during the Participant’s lifetime only by him or her or by his or her guardian or legal representative. The designation of a beneficiary in accordance with the Plan does not constitute a transfer.
7. Superseding Agreement; Binding Effect. This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Option or any related rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend any existing confidentiality agreement, nonsolicitation agreement, noncompetition agreement, employment agreement or any other similar agreement between the Participant and the Corporation, including, but not limited to, any restrictive covenants contained in such agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns.
8. Governing Law. Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of Delaware, without regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States.
9. Amendment and Termination; Waiver. Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Plan and this Agreement (without Participant consent) to the extent necessary to comply with applicable law or changes to applicable law (including but in no way limited to Code Section 409A, Code Section 422 and federal securities laws).
10. No Rights as Stockholder. The Participant and his or her legal representatives, legatees and distributees shall not be deemed to be the holder of any Shares subject to the Option and shall not have any rights of a stockholder unless and until certificates for such Shares have been issued and delivered to him or her or them.
11. Withholding; Tax Matters.
(a) The Participant acknowledges that the Corporation shall require the Participant to pay the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Participant, and the Participant agrees, as a condition to the grant of the Option and delivery of the Shares or any other benefit, to satisfy such obligations. Notwithstanding the foregoing, the Corporation may establish procedures to permit the Participant to satisfy such obligations in whole or in part, and any other local, state, federal, foreign or other income tax obligations relating to the Option, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the Shares to which the Participant is entitled. The number of Shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
3
(b) The Participant acknowledges that the Corporation has made no warranties or representations to the Participant with respect to the tax consequences (including, but not limited to, income tax consequences) related to the transactions contemplated by this Agreement, and the Participant is in no manner relying on the Corporation or its representatives for an assessment of such tax consequences. The Participant acknowledges that there may be adverse tax consequences upon acquisition or disposition of the Shares subject to the Option and that the Participant should consult a tax advisor prior to such exercise or disposition. The Participant acknowledges that he or she has been advised that he or she should consult with his own attorney, accountant, and/or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Participant also acknowledges that the Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Participant.
12. Administration. The authority to construe and interpret this Agreement and the Plan, and to administer all aspects of the Plan, shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and binding.
13. Notices. Except as may be otherwise provided by the Plan or determined by the Administrator, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated on Schedule A (or such other address as may be designated by the Participant in a manner acceptable to the Administrator), or, if to the Corporation, at the Corporation’s principal office, attention Chief Financial Officer, Targacept, Inc. Notice may also be provided by electronic submission, if and to the extent permitted by the Administrator.
14. Severability. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
15. Restrictions on Option and Shares. The Corporation may impose such restrictions on the Option and the Shares or other benefits underlying the Option as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such Option or Shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, to make any other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate for Shares issued pursuant to the exercise of the Option in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
16. Effect of Changes in Status. Unless the Administrator, in its sole discretion, determines otherwise (or unless required by Code Section 409A), the Option shall not be affected by any change in the terms, conditions or status of the Participant’s employment, provided that the Participant continues to be in the employ of the Corporation or an Affiliate. Without limiting the foregoing, the Administrator has sole discretion to determine, subject to Code Section 409A, at the time of grant of the Option or at any time thereafter, the effect, if any, on the Option if the Participant’s status as an Employee changes, including but not limited to a change from full-time to part-time, or vice versa, or if other similar changes in the nature or scope of the Participant’s employment occur.
4
17. Right of Offset. Notwithstanding any other provision of the Plan or the Agreement, the Corporation may reduce the amount of any payment otherwise payable to or on behalf of the Participant by the amount of any obligation of the Participant to the Corporation that is or becomes due and payable and the Participant shall be deemed to have consented to such reduction.
18. Counterparts; Further Instruments. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
[Signatures of the Corporation and the Participant follow on Schedule A/Grant Notice.]
5
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Nonqualified Stock Option Agreement
(Employees)
Schedule A/Grant Notice
1. Pursuant to the terms and conditions of the Corporation’s 2006 Stock Incentive Plan (the “Plan”), you (the “Participant”) have been granted an option (the “Option”) to purchase ________ shares (the “Shares”) of our Common Stock as outlined below.
| Name of Participant: |
|||
| Address: |
|||
| Grant Date: |
, 20 | ||
| Number of Shares Subject to Option: |
|||
| Option Price: |
$ | ||
| Type of Option: |
Nonqualified Stock Option | ||
| Expiration Date (Last day of Option Period): |
, 20 | ||
| Vesting Schedule/Conditions: |
|||
2. By my signature below, I, the Participant, hereby acknowledge receipt of this Grant Notice and the Option Agreement (the “Agreement”) dated __________ ___, 200__, between the Participant and Targacept, Inc. (the “Corporation”) which is attached to this Grant Notice. I understand that the Grant Notice and other provisions of Schedule A herein are incorporated by reference into the Agreement and constitute a part of the Agreement. By my signature below, I further agree to be bound by the terms of the Plan and the Agreement, including but not limited to the terms of this Grant Notice and the other provisions of Schedule A contained herein. The Corporation reserves the right to treat the Option and the Agreement as cancelled, void and of no effect if the Participant fails to return a signed copy of the Grant Notice within 30 days of grant date stated above.
| Signature: |
|
Date: |
| |||||
| Agreed to by:
TARGACEPT, INC. | ||||||||||
| By: |
| |||||||||
| J. Donald deBethizy President & CEO | ||||||||||
| Attest: |
| Alan A. Musso Vice President, Chief Financial Officer & Secretary |
Note: If there are any discrepancies in the name or address shown above, please make the appropriate corrections on this form. Please retain a copy of the Agreement, including this Grant Notice, for your files.
EXHIBIT 10.6(c)
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Nonqualified Stock Option Agreement
(Nonemployee Directors)
THIS AGREEMENT (together with Schedule A, attached hereto, the “Agreement”), effective as of the date specified as the “Grant Date” on Schedule A attached hereto, between TARGACEPT, INC., a Delaware corporation (the “Corporation”), and the individual identified on Schedule A attached hereto, a Nonemployee Director of the Corporation or an Affiliate (the “Participant”);
R E C I T A L S :
In furtherance of the purposes of the Targacept, Inc. 2006 Stock Incentive Plan, as it may be hereafter amended (the “Plan”), the Corporation and the Participant hereby agree as follows:
1. Incorporation of Plan. The rights and duties of the Corporation and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are incorporated herein by reference. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.
2. Grant of Option; Term of Option. The Corporation hereby grants to the Participant pursuant to the Plan, as a matter of separate inducement and agreement in connection with his or her service to the Corporation, and not in lieu of any salary or other compensation for his or her services, the right and Option (the “Option”) to purchase all or any part of such aggregate number of shares (the “Shares”) of common stock of the Corporation (the “Common Stock”) at a purchase price (the “Option Price”) as specified on Schedule A, attached hereto, and subject to such other terms and conditions as may be stated herein or in the Plan or on Schedule A. The Participant expressly acknowledges that the terms of Schedule A shall be incorporated herein by reference and shall constitute part of this Agreement. The Corporation and the Participant further acknowledge and agree that the signatures of the Corporation and the Participant on the Grant Notice contained in Schedule A shall constitute their acceptance of all of the terms of this Agreement and their agreement to be bound by the terms of this Agreement. The Option shall be designated as a Nonqualified Option, as stated on Schedule A. Except as otherwise provided in the Plan or this Agreement, this Option will expire if not exercised in full by the Expiration Date specified on Schedule A.
3. Exercise of Option. Subject to the terms of the Plan and this Agreement, the Option shall become exercisable on the date or dates, and subject to such conditions, as are set forth on Schedule A attached hereto. To the extent that an Option which is exercisable is not exercised, such Option shall accumulate and be exercisable by the Participant in whole or in part at any time prior to expiration of the Option, subject to the terms of the Plan and this Agreement. The Participant expressly acknowledges that the Option may vest and be exercisable only upon such terms and conditions as are provided in this Agreement and the Plan. Upon the exercise of an Option in whole or in part and payment of the Option Price in accordance with the provisions of the Plan and this Agreement, the Corporation shall, as soon thereafter as practicable, deliver to the Participant a certificate or certificates for the Shares purchased. Payment of the Option Price may be made (i) in cash or by cash equivalent; and, where permitted by applicable law, payment may also be made (ii) by delivery (by either actual delivery or attestation) of shares of Common Stock owned by the Participant (subject to such terms and conditions, if any, as may be determined by the Administrator); (iii) by shares of Common Stock withheld upon exercise but only if and to the extent that payment by such method does not result in variable accounting or other accounting consequences deemed unacceptable to the Corporation; (iv) in the event that a Public Market (as defined in the Plan) for the
Common Stock exists, by delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price; (v) by such other payment methods as may be approved by the Administrator and which are acceptable under applicable law; or (vi) by any combination of the foregoing methods. Shares delivered or withheld in payment of the Option Price shall be valued at their Fair Market Value on the date of exercise, determined in accordance with the terms of the Plan.
4. No Right of Employment or Service; Forfeiture of Option. Neither the Plan, this Agreement nor any other action related to the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or an Affiliate or interfere with the right of the Corporation or an Affiliate to terminate the Participant’s employment or service at any time. Except as otherwise expressly provided in the Plan or this Agreement or as determined by the Administrator, all rights of the Participant with respect to the Option shall terminate upon termination of the employment of the Participant with the Corporation or an Affiliate.
5. Termination of Service. Unless the Administrator determines otherwise (subject to any requirements imposed under Code Section 409A), the Option may be exercised only to the extent vested and exercisable on the Participant’s Termination Date (unless the termination was for Cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (a) the close of the period of six months next succeeding the Termination Date; or (b) the close of the Option Period. If the services of a Participant are terminated for Cause, his or her Option shall lapse and no longer be exercisable as of his or her Termination Date, as determined by the Administrator.
6. Nontransferability of Option. The Option shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in a manner consistent with the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”). Except as may be permitted by the preceding sentence, the Option shall be exercisable during the Participant’s lifetime only by him or her or by his or her guardian or legal representative. The designation of a beneficiary in accordance with the Plan does not constitute a transfer.
7. Superseding Agreement; Binding Effect. This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Option or any related rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend any existing confidentiality agreement, nonsolicitation agreement, noncompetition agreement, employment agreement or any other similar agreement between the Participant and the Corporation, including, but not limited to, any restrictive covenants contained in such agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns.
8. Governing Law. Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of Delaware, without regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States.
9. Amendment and Termination; Waiver. Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Plan and this Agreement (without Participant consent) to the extent necessary to comply with applicable law or changes to applicable law (including but in no way limited to Code Section 409A, Code Section 422 and federal securities laws).
2
10. No Rights as Stockholder. The Participant and his or her legal representatives, legatees and distributees shall not be deemed to be the holder of any Shares subject to the Option and shall not have any rights of a stockholder unless and until certificates for such Shares have been issued and delivered to him or her or them.
11. Withholding; Tax Matters.
(a) The Participant acknowledges that the Corporation shall require the Participant to pay the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Participant, and the Participant agrees, as a condition to the grant of the Option and delivery of the Shares or any other benefit, to satisfy such obligations. Notwithstanding the foregoing, the Corporation may establish procedures to permit the Participant to satisfy such obligations in whole or in part, and any other local, state, federal, foreign or other income tax obligations relating to the Option, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the Shares to which the Participant is entitled. The number of Shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
(b) The Participant acknowledges that the Corporation has made no warranties or representations to the Participant with respect to the tax consequences (including, but not limited to, income tax consequences) related to the transactions contemplated by this Agreement, and the Participant is in no manner relying on the Corporation or its representatives for an assessment of such tax consequences. The Participant acknowledges that there may be adverse tax consequences upon acquisition or disposition of the Shares subject to the Option and that the Participant should consult a tax advisor prior to such exercise or disposition. The Participant acknowledges that he or she has been advised that he or she should consult with his own attorney, accountant, and/or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Participant also acknowledges that the Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Participant.
12. Administration. The authority to construe and interpret this Agreement and the Plan, and to administer all aspects of the Plan, shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and binding.
13. Notices. Except as may be otherwise provided by the Plan or determined by the Administrator, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated on Schedule A (or such other address as may be designated by the Participant in a manner acceptable to the Administrator), or, if to the Corporation, at the Corporation’s principal office, attention Chief Financial Officer, Targacept, Inc. Notice may also be provided by electronic submission, if and to the extent permitted by the Administrator.
14. Severability. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
3
15. Restrictions on Option and Shares. The Corporation may impose such restrictions on the Option and the Shares or other benefits underlying the Option as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such Option or Shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, to make any other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate for Shares issued pursuant to the exercise of the Option in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
16. Effect of Changes in Status. Unless the Administrator, in its sole discretion, determines otherwise (or unless required by Code Section 409A), the Option shall not be affected by any change in the terms, conditions or status of the Participant’s service, provided that the Participant continues to be in the service to the Corporation or an Affiliate. Without limiting the foregoing, the Administrator has sole discretion to determine, subject to Code Section 409A, at the time of grant of the Option or at any time thereafter, the effect, if any, on the Option if the Participant’s status as a Director changes.
17. Right of Offset. Notwithstanding any other provision of the Plan or the Agreement, the Corporation may reduce the amount of any payment otherwise payable to or on behalf of the Participant by the amount of any obligation of the Participant to the Corporation that is or becomes due and payable and the Participant shall be deemed to have consented to such reduction.
18. Counterparts; Further Instruments. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
[Signatures of the Corporation and the Participant follow on Schedule A/Grant Notice.]
4
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Nonqualified Stock Option Agreement
(Nonemployee Directors)
Schedule A/Grant Notice
1. Pursuant to the terms and conditions of the Corporation’s 2006 Stock Incentive Plan (the “Plan”), you (the “Participant”) have been granted an option (the “Option”) to purchase ________ shares (the “Shares”) of our Common Stock as outlined below.
| Name of Participant: |
|||
| Address: |
|||
| Grant Date: |
, 20 | ||
| Number of Shares Subject to Option: |
|||
| Option Price: |
$ | ||
| Type of Option: |
Nonqualified Stock Option | ||
| Expiration Date (Last day of Option Period): |
, 20 | ||
| Vesting Schedule/Conditions: |
|||
2. By my signature below, I, the Participant, hereby acknowledge receipt of this Grant Notice and the Option Agreement (the “Agreement”) dated __________ ___, 200__, between the Participant and Targacept, Inc. (the “Corporation”) which is attached to this Grant Notice. I understand that the Grant Notice and other provisions of Schedule A herein are incorporated by reference into the Agreement and constitute a part of the Agreement. By my signature below, I further agree to be bound by the terms of the Plan and the Agreement, including but not limited to the terms of this Grant Notice and the other provisions of Schedule A contained herein. The Corporation reserves the right to treat the Option and the Agreement as cancelled, void and of no effect if the Participant fails to return a signed copy of the Grant Notice within 30 days of grant date stated above.
| Signature: |
|
Date: |
| |||||
| Agreed to by:
TARGACEPT, INC. | ||||||||||
| By: |
| |||||||||
| J. Donald deBethizy President & CEO | ||||||||||
| Attest: |
| Alan A. Musso Vice President, Chief Financial Officer & Secretary |
Note: If there are any discrepancies in the name or address shown above, please make the appropriate corrections on this form. Please retain a copy of the Agreement, including this Grant Notice, for your files.
5
EXHIBIT 10.6(d)
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Restricted Stock Award Agreement
THIS AGREEMENT (together with Schedule A, attached hereto, the “Agreement”), made the day of , (as defined below, the “Grant Date”), between TARGACEPT, INC. a Delaware corporation (the “Corporation”), and , an Employee of, or individual in service to, the Corporation or an Affiliate (the “Participant”);
R E C I T A L S :
In furtherance of the purposes of the Targacept, Inc. 2006 Stock Incentive Plan, as it may be hereafter amended (the “Plan”), the Corporation and the Participant hereby agree as follows:
1. Incorporation of Plan. The rights and duties of the Corporation and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are incorporated herein by reference. In the event of any conflict between the provisions in the Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth with the Plan.
2. Terms of Award. The following terms used in this Agreement shall have the meanings set forth in this Section 2:
| (a) | The “Participant” is . |
| (b) | The “Grant Date” is . |
| (c) | The “Restriction Period” is the period beginning on the Grant Date and ending on such date or dates and satisfaction of such conditions as described in Schedule A, which is attached hereto and expressly made a part of this Agreement. |
| (d) | The number of shares of Common Stock subject to the Restricted Stock Award granted under this Agreement shall be shares (the “Shares”). |
3. Grant of Restricted Stock Award. Subject to the terms of this Agreement and the Plan, the Corporation hereby grants the Participant a Restricted Stock Award (the “Award”) for that number of Shares of Common Stock as is set forth in Section 2.
4. Vesting and Earning of Award.
| (a) | Subject to the terms of the Plan and Code Section 409A, the Award shall be deemed vested and earned upon such date or dates, and subject to such conditions, as are described in this Agreement, including but not limited to the terms of Schedule A, attached hereto. |
| (b) | The Administrator has sole authority to determine whether and to what degree the Award has vested and been earned and is payable and to interpret the terms and conditions of this Agreement and the Plan. |
5. Forfeiture of Award. Except as may be otherwise provided in the Plan, in the event that the employment or service of the Participant is terminated for any reason and the Participant has not yet earned all or part of the Award pursuant to Section 4 and Schedule A herein, then the Award, to the extent not earned as of the Participant’s Termination Date, shall be forfeited immediately upon such termination, and the Participant shall have no further rights with respect to the Award or the Shares underlying that portion of the Award that has not yet been earned and vested. The Participant expressly acknowledges and agrees that the termination of his or her employment or service shall result in forfeiture of the Award and the Shares to the extent the Award has not been earned and vested as of his or her Termination Date.
6. Settlement of Award. The Award shall be payable in whole shares of Common Stock.
7. No Right of Employment or Service; Forfeiture of Award. Neither the Plan, this Agreement nor any other action related to the Plan shall confer upon the Participant any right to continue in the employment or service of the Corporation or an Affiliate or interfere with the right of the Corporation or an Affiliate to terminate the Participant’s employment or service at any time. Except as otherwise expressly provided in the Plan or this Agreement or as determined by the Administrator, all rights of the Participant with respect to the Award shall terminate upon termination of the employment of the Participant with the Corporation or an Affiliate.
8. Nontransferability of Award and Shares. The Award shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession. The designation of a beneficiary does not constitute a transfer. The Participant shall not sell, transfer, assign, pledge or otherwise encumber the Shares subject to the Award (except as provided in Section 12 herein) until the Restriction Period has expired and all conditions to vesting and transfer have been met.
9. Superseding Agreement; Binding Effect. This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Award or any related rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend any existing confidentiality agreement, nonsolicitation agreement, noncompetition agreement, employment agreement or any other similar agreement between the Participant and the Corporation, including, but not limited to, any restrictive covenants contained in such agreements. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, next-of-kin, successors and assigns.
10. Governing Law. Except as otherwise provided in the Plan or herein, this Agreement shall be construed and enforced according to the laws of the State of Delaware, without regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States.
11. Amendment and Termination; Waiver. Subject to the terms of the Plan, this Agreement may be modified or amended only by the written agreement of the parties hereto. The waiver by the Corporation of a breach of any provision of the Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Plan and this Agreement (without Participant consent) to the extent necessary to comply with applicable law or changes to applicable law (including but in no way limited to Code Section 409A, Code Section 422 and federal securities laws).
12. Certificates for Shares; Rights as Stockholder. The Participant and his or her legal representatives, legatees or distributees shall not be deemed to be the holder of any shares subject to the Award and shall not have any rights of a stockholder unless and until certificates for such shares have been issued to him or her or them. A certificate or certificates for Shares subject to the Award shall be
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issued in the name of the Participant as soon as practicable after the Award has been granted. Notwithstanding the foregoing, the Administrator may require that (a) the Participant deliver the certificate(s) for the Shares to the Administrator or its designee to be held in escrow until the Award vests (in which case the Shares will be released to the Participant) or is forfeited (in which case the Shares shall be returned to the Corporation); and/or (b) the Participant deliver to the Corporation a stock power or similar instrument, endorsed in blank, relating to the Shares subject to the Award which are subject to forfeiture. Except as otherwise provided in the Plan or the Agreement, the Participant will have all voting, dividend and other rights of a stockholder with respect to the Shares following issuance of the certificate or certificates for the Shares; provided, however, that if any cash or non-cash dividends are declared and paid by the Corporation with respect to any such Shares, such dividends shall be subject to the same vesting schedule, forfeiture terms and other restrictions as are applicable to the Shares upon which such dividends are paid.
13. Withholding; Tax Matters.
(a) The Participant acknowledges that the Corporation shall require the Participant to pay the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Participant, and the Participant agrees, as a condition to the grant of the Award and delivery of the Shares or any other benefit, to satisfy such obligations. Notwithstanding the foregoing, the Corporation may establish procedures to permit the Participant to satisfy such obligations in whole or in part, and any other local, state, federal, foreign or other income tax obligations relating to the Award, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the Shares to which the Participant is entitled. The number of Shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election procedures established by the Administrator.
(b) The Participant acknowledges that the Corporation has made no warranties or representations to the Participant with respect to the tax consequences (including, but not limited to, income tax consequences) related to the transactions contemplated by this Agreement, and the Participant is in no manner relying on the Corporation or its representatives for an assessment of such tax consequences. The Participant acknowledges that there may be adverse tax consequences upon acquisition or disposition of the Shares subject to the Award and that the Participant should consult a tax advisor prior to such exercise or disposition. The Participant acknowledges that he or she has been advised that he or she should consult with his own attorney, accountant, and/or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Participant also acknowledges that the Corporation has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Participant.
14. Administration. The authority to construe and interpret this Agreement and the Plan, and to administer all aspects of the Plan, shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and binding.
15. Notices. Except as may be otherwise provided by the Plan or determined by the Administrator, any written notices provided for in this Agreement or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage
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paid first class mail. Notices sent by mail shall be deemed received three business days after mailed but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Corporation’s records (or at such other address as may be designated by the Participant in a manner acceptable to the Administrator), or if to the Corporation, at the Corporation’s principal office, attention Chief Financial Officer, Targacept, Inc. Notice may also be provided by electronic submission, if and to the extent permitted by the Administrator.
16. Severability. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
17. Restrictions on Award and Shares. The Corporation may impose such restrictions on the Award and the Shares or other benefits underlying the Award as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such Award or Shares. Notwithstanding any other provision in the Plan or the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, to make any other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend or legends (including but in no way limited to any legends which may be necessary or appropriate pursuant to Section 12 herein) to be placed on any certificate issued pursuant to the Award in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
18. Effect of Changes in Status. Unless the Administrator, in its sole discretion, determines otherwise (or unless required by Code Section 409A), the Award shall not be affected by any change in the terms, conditions or status of the Participant’s employment or service, provided that the Participant continues to be in the employ of, or in service to, the Corporation or an Affiliate. Without limiting the foregoing, the Administrator has sole discretion to determine, subject to Code Section 409A, at the time of grant of the Award or at any time thereafter, the effect, if any, on the Award if the Participant’s status as an Employee, Director or Independent Contractor changes, including but not limited to a change from full-time to part-time, or vice versa, or if other similar changes in the nature or scope of the Participant’s employment or service occur.
19. Right of Offset. Notwithstanding any other provision of the Plan or the Agreement, the Corporation may reduce the amount of any payment otherwise payable to or on behalf of the Participant by the amount of any obligation of the Participant to the Corporation that is or becomes due and payable and the Participant shall be deemed to have consented to such reduction.
20. Counterparts; Further Instruments. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been executed in behalf of the Corporation and by the Participant on the day and year first above written.
TARGACEPT, INC.
By:
J. Donald deBethizy
President & CEO
Attest:
_______________________________________
Alan A. Musso
Vice President, Chief Financial Officer & Secretary
[Corporate Seal]
PARTICIPANT
(SEAL)
Printed Name:
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[Attach applicable Schedule A]
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Restricted Stock Award Agreement
SCHEDULE A
PERFORMANCE MEASURES
| 1. | Purpose. The purpose of this Schedule A is to set forth the Performance Measures that will be applied to determine the amount of the Award to be made under the terms of the attached Restricted Stock Award Agreement (the “Agreement”). This Schedule A is incorporated into and forms a part of the Agreement. |
| 2. | Revision of Performance Measures. The Performance Measures set forth in this Schedule A may be modified by the Administrator in accordance with the Plan during, and after the end of, the Restriction Period to reflect significant events that occur during the Restriction Period. |
| 3. | Performance Goals. The Performance Goals shall be as follows: |
[Insert Schedule]
| 4. | Amount of Award. The amount distributable to the Participant under the Agreement shall be determined in accordance with the following schedule: |
[Insert Schedule]
[Insert applicable Schedule A]
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Restricted Stock Award Agreement
SCHEDULE A
SERVICE MEASURES
Grant Date: , .
Number of Shares Subject to Award: shares.
Restriction Period: The Shares subject to the Award shall vest and be earned, as provided below, subject to the terms and conditions as may be imposed by the Plan and the Agreement:
Date of Vesting Percentage of Shares Vested
[Insert Schedule]
[Insert applicable Schedule A]
TARGACEPT, INC.
2006 STOCK INCENTIVE PLAN
Restricted Stock Award Agreement
SCHEDULE A
COMBINATION OF PERFORMANCE AND SERVICE MEASURES
A. Performance Measures
| 1. | Purpose. The purpose of this portion of Schedule A is to set forth the Performance Measures that will be applied to determine the amount of the Award to be made under the terms of the attached Restricted Stock Award Agreement (the “Agreement”). This Schedule A is incorporated into and forms a part of the Agreement. |
| 2. | Revision of Performance Measures. The Performance Measures set forth in this Schedule A may be modified by the Administrator in accordance with the Plan during, and after the end of, the Restriction Period to reflect significant events that occur during the Restriction Period. |
| 3. | Performance Goals. The Performance Goals shall be as follows: |
[Insert Schedule]
| 4. | Amount of Award. The amount distributable to the Participant under the Agreement shall be determined in accordance with the following schedule: |
[Insert Schedule]
B. Service Measures
Grant Date: , .
Number of Shares Subject to Award: shares.
Restriction Period: The Shares subject to the Award shall vest and be earned, as provided below, subject to the terms and conditions as may be imposed by the Plan and the Agreement:
Date of Vesting Percentage of Shares Vested
[Insert Schedule]
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption “Experts” and to the use of our report dated February 10, 2006, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-131050) and related Prospectus of Targacept, Inc. dated March 16, 2006.
/s/ Ernst & Young LLP
Greensboro, North Carolina
March 15, 2006