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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number 0-27264
GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(Exact name of registrant as specified in its charter)
DELAWARE 33-0687976
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
10835 ALTMAN ROW, SUITE 150, SAN DIEGO, CA, 92121
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 450-5949
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form-K. [_]
The Company's revenues for the fiscal year ended December 31, 1999 were
$118,000.
The number of shares of the Common Stock of the registrant outstanding as
of March 27, 2000, was 21,288,222. The number of shares of Common Stock held by
nonaffiliates on such date was approximately 12,326,000 with an estimated value
of $89,733,000, based on the closing price of the Company's Common Stock on the
over-the-counter bulletin board on March 27, 2000.
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GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT-STAGE ENTERPRISE)
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PAGE NO.
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PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 11
Item 3. Legal Proceedings...................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.................................... 11
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters....................................................... 12
Item 6. Selected Financial Data................................................................ 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................................. 15
Item 8. Financial Statements and Supplementary Data............................................ 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 21
Item 11. Executive Compensation................................................................. 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................. 28
Item 13. Certain Relationships and Related Transactions......................................... 30
PART IV
Item 14. Exhibits and Financial Statement Schedules, and
Reports on Form 8-K................................................................... 34
</TABLE>
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PART I
ITEM 1. BUSINESS
GenStar Therapeutics Corporation changed its name from UroGen Corp. in March
2000. GenStar is focused on the development of innovative gene therapy products
for the treatment of hemophilia, cancer and other genetic disorders.
GenStar's gene delivery systems are derived from a type of cold virus termed an
adenovirus that we believe provides superior gene transfer efficiency and
expression compared to other gene therapy approaches. The gene transfer system
has been engineered to remove the original adenovirus genes which are then
replaced with therapeutic genes. These genetically engineered therapeutic
viruses contain less than 3% of the original adenovirus. We believe that removal
of unwanted adenoviral genes permits increased gene transfer capacity with a
higher level of gene expression and improved safety compared to standard gene
transfer systems. Because these therapeutic viruses are engineered to minimize
the presence of adenoviral gene parts, they are termed "Mini-Ad" viruses. These
Mini-Ad viruses retain the ability to infect cells and the efficient gene
transfer characteristics of the original adenoviruses. We believe our gene
transfer and expression systems will advance the capabilities of gene therapy
for disease management, providing what we believe to be efficient gene transfer
and long term gene expression desired for clinical applications.
The initial focus of our research and development efforts will be the generation
of products for the treatment of hemophilia and prostate cancer. Two gene
therapy products are under development: 1) Factor VIII Mini-Ad Vector for the
treatment of hemophilia; 2) Complementary Oncolytic Interleukin-3 (IL-3)
Adenoviral Vectors for the treatment of prostate cancer. The Factor VIII Mini-Ad
Vector for hemophilia is expected to provide a greater duration of active Factor
VIII function, which is the protein that prevents the chronic bleeding and joint
damage characteristic of this disorder. The IL-3 Adenoviral product is comprised
of a mixture of two adenoviruses which complement each other resulting in viral
replication and propagation only in target tissues, leading to tumor cell
destruction, radiation sensitization and anti-tumor immune responses for the
treatment of prostate cancer.
RESEARCH AND DEVELOPMENT
The Mini-Ad System
- ------------------
The Mini-Ad system is an adenoviral gene delivery system. The system is derived
from a type of cold virus called an adenovirus. The adenovirus has been
engineered to remove the original virus genes that are replaced with therapeutic
genes. These genetically engineered viruses contain less than 3% of the original
adenovirus. We believe that the removal of the majority of the unwanted
adenoviral genes permits increased ability to transfer the therapeutic genes and
permits a high level of expression of the therapeutic genes.
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Factor VIII Mini-Ad Vector For Hemophilia A/Liver Directed Gene Therapy
- -----------------------------------------------------------------------
Hemophilia is a bleeding disorder caused by abnormalities in the gene that
produces the protein controlling blood clotting, which is called Factor VIII.
Factor VIII is normally produced in the liver. The ease of delivery and affinity
of adenoviruses for the liver makes adenoviral-based therapies a logical
delivery system to deliver Factor VIII genes. Intravenous injection of
adenoviruses results in delivery of the virus to liver cells. The first Mini-Ad
product under development is for the delivery of the Factor VIII gene for the
treatment of hemophilia A. As the liver is one of the major organs for natural
Factor VIII production, the virus has been engineered to increase Factor VIII
production in this organ. In studies which have been performed on normal and
hemophiliac mice, intravenous injection of this Mini-Ad vector resulted in
Factor VIII concentrations that are twenty to thirty times the level necessary
to prevent bleeding.
Our Developmental Collaboration Agreement with Baxter Healthcare Corporation
provides for Baxter to fund the development of the Factor VIII Mini-Ad product
until we treat the first patient in the Phase I clinical trial, at which time
Baxter is required to make a milestone payment of $2 million to maintain their
distribution rights. Baxter will receive Series C Preferred Stock for the $2
million milestone payment. Baxter is required to make additional milestone
payments if we begin Phase III clinical trials and if we obtain FDA approval on
the Factor VIII product (see "Certain Relationships and Related Transactions").
We believe that there may be additional product opportunities for this liver
directed gene delivery technology. Diseases resulting from abnormal function or
biochemistry of the liver are among the leading causes of sickness and death.
There are several common genetic liver diseases for which effective gene therapy
to replace defective genes would replace current conventional therapies, which
are either cumbersome or not very effective.
Tumor Killing IL-3 Viral Vector for Prostate Cancer
Cancer of the prostate gland is the most common cancer among men. It currently
occurs in approximately one in six men and has an annual incidence in the United
States of 187,000 new cases. Our tumor killing IL-3 gene delivery vector has
demonstrated intrinsic anti-tumor killing activity in animal models. In
addition, we believe the product will result in expression of the IL-3 gene,
which sensitizes tumors to the effects of radiation, providing improved
treatment of disease within the prostate, and simultaneously generating
anti-tumor immunity capable of destroying cancerous lesions. We believe that a
significant advantage of our tumor killing IL-3 viral vector product may be its
ability to have anti-tumor activity, while sensitizing tumors to the effects of
standard cancer therapies. These multiple modes of action may have benefits in
the treatment of prostate cancer and other tumors. Successful treatment of
prostate cancer requires complete eradication of tumors within the prostate and
the elimination of undetected tumor cells, which have migrated from the prostate
in approximately fifty percent of patients at the time of initial diagnosis. Our
first tumor killing IL-3 viral vector product is designed to be injected into
tumors and administered in combination with radiation for the treatment of
prostate cancer.
The tumor killing IL-3 viral product is comprised of a mixture of two
adenoviruses that complement each other to permit viral replication that kills
tumor cells. In this system, one virus contains certain viral genes that are
only active in prostate cells (the controlled vector), and the second virus
contains the remainder of the viral genes necessary for the virus to replicate
(the supplemental vector). The viruses complement each other, resulting in viral
replication and propagation in tumor tissues leading to tumor cell killing.
Adenoviruses kill the cells in which they replicate. Importantly, we believe the
controlled virus can be engineered to carry and express additional therapeutic
genes such as IL-3.
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Preliminary studies with vectors incorporating a prostate specific antigen (PSA)
promoter have cured prostate tumors in animal models following injection into
tumors.
Our viruses may be further engineered to express therapeutic genes that can
enhance anti-tumor immunity. We have demonstrated that IL-3 gene therapy
sensitizes tumors to the effects of radiation and stimulates anti-tumor immune
responses capable of eradicating tumor cells. In animal tumor models, the
combination of IL-3 gene therapy with radiotherapy was synergistic resulting in
enhanced efficacy of local radiotherapy and generating anti-tumor immunity. We
used IL-3 gene transfer into mouse tumors as a model in these studies. The
tumors injected with IL-3 were more sensitive than unmodified tumors to
irradiation, and after radiation therapy they developed anti-tumor immune
responses. In this study, radiation caused unmodified tumors to regress only
temporarily, and then began progressing again after 10 days. In contrast, IL-3
gene modified tumors continued to regress after irradiation and complete tumor
remission was achieved. These cured mice developed immunity to unmodified tumors
and were resistant to injection with unmodified tumor cells three months later
in five out of five animals tested. The dose of tumor cells studied caused
tumors in one hundred percent of non-immunized animals.
We believe our multiple-activity tumor killing, radiation sensitizing, and
immune therapy approach is well suited for the treatment of prostate cancer,
which requires elimination of tumors both within the prostate and at distant
sites where the tumor has spread.
Approximately 79% of GenStar's employees are engaged in research and
development. During the years ended December 31, 1999, 1998 and 1997, we spent
approximately $2,711,000, $1,916,000 (excluding the non-cash write-off of
acquired in-process technology) and $346,000, respectively, for research and
development.
MANUFACTURING
We are currently in the process of developing a manufacturing facility
to produce materials for clinical trials for our hemophilia product. We have
retained consultants with experience in designing, construction and completing
validation for manufacturing operations which comply with the FDA's Good
Manufacturing Practices regulations. We have entered into a facility lease for
the manufacturing operations. We completed construction and validation of the
manufacturing facility in January 2000.
We have not yet determined whether we will establish relationships with third
party manufacturers or establish expanded facilities for future manufacturing
needs. Commercial-scale manufacturing will require significant improvements in
our current manufacturing techniques, as well as rigorous process controls.
Companies often encounter manufacturing difficulties during the course of
implementing processes for commercial manufacturing, including:
. problems involving production yields;
. quality control and assurance; and
. shortages of qualified personnel.
Manufacturing facilities will be required to be registered with the FDA
and will be subject to inspections confirming compliance with the FDA's Good
Manufacturing Practices regulations. We cannot be sure that we will be able to
produce clinical or commercial quantities of our potential products in
compliance with applicable regulations or at an acceptable cost.
If we decide to establish relationships with third parties to manufacture our
potential products, we will be dependent on these third parties, which may
adversely affect our profit margins and our ability to develop and commercialize
products on a timely and competitive basis. Further, manufacturing or quality
control
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problems may arise and third party manufacturers may not be able to maintain the
necessary governmental licenses and approvals to continue manufacturing our
potential products. If we fail to establish relationships with third parties for
our manufacturing requirements on commercially acceptable terms, we would be
required to develop our own manufacturing facility, which would require a
significant amount of time and financial resources.
PATENTS AND LICENSES
We believe that patent and trade secret protection is important to our business
and that our future will depend, in part, on our ability to maintain our
technology licenses, protect our own trade secrets, secure additional patents
and operate without infringing the proprietary rights of others. GenStar
currently holds exclusive rights to one issued United States patent, which
expires in 2010, and several other pending patent applications that relate to
genetic therapies and molecular diagnostics.
We have filed a series of United States and foreign patent applications for the
Mini-Ad and Tumor Killing Vector systems. These applications cover all fields of
use for the Mini-Ad system. We have obtained from the Immune Response
Corporation exclusive world-wide rights to a patent application covering the use
of cytokines like IL-3 used in combination with radiation for enhancing the
effects of radiation and stimulating anti-tumor immunity in the treatment of
certain cancers.
The pharmaceutical and biotechnology fields are characterized by a large number
of patent filings. A substantial number of patents have already been issued to
other pharmaceutical and biotechnology companies. Research has been conducted
for many years in the gene therapy field by pharmaceutical and biotechnology
companies and other organizations. Competitors may have filed applications for
or have been issued patents and may obtain additional patents and proprietary
rights related to products or processes competitive with or similar to ours.
Patent applications are maintained in secrecy for a period after filing.
Publication of discoveries in the scientific or patent literature tends to lag
behind actual discoveries and the filing of related patent applications. We may
not be aware of all of the patents potentially adverse to GenStar's interest
that may have been issued to other companies, research or academic institutions,
or others. No assurances can be given that these patents do not contain claims
relating to GenStar's technology.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in pharmaceutical and biotechnology patents. If patents have been or are
issued to others containing preclusive or conflicting claims, and these claims
are ultimately determined to be valid, we may be required to obtain licenses to
one or more of these patents or to develop or obtain alternative technology. We
believe that our current and proposed activities do not infringe on any patents
that would be determined to be valid. We cannot assure you that patents do not
exist in the United States or in other countries or that patents will not be
issued to third parties that contain preclusive or conflicting claims with
respect to any of GenStar's technologies. Commercialization of GenStar's
proposed products may require licensing and/or cross-licensing of one or more
patents with other organizations in the field. We cannot assure you that the
licenses that might be required for GenStar's processes or products would be
available on commercially acceptable terms, if at all.
GenStar's breach of an existing license or failure to obtain a license to
technology required to commercialize its product candidates may have a material
adverse effect on our business, financial condition and results of operations.
Litigation, which could result in substantial cost, may also be necessary to
enforce any patents issued to GenStar or to determine the scope and validity of
third-party proprietary rights. If our competitors prepare and file patent
applications in the United States that claim technology also claimed by us, we
may have to participate in interference proceedings declared by the United
Stated Patent and Trademark Office to determine the priority of invention, which
could result in substantial cost, even if the eventual outcome is favorable to
us. An adverse outcome could subject GenStar to significant liabilities to
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third parties and require us to license disputed rights from third parties or to
cease using our technology.
GenStar also relies on trade secrets to protect our technology, especially where
patent protection is not believed to be appropriate or obtainable. We protect
our proprietary technology and processes, in part, by confidentiality agreements
with our employees, consultants and collaborators. We cannot assure you that
these agreements will not be breached, that we would have adequate remedies for
any breach, or that GenStar's trade secrets or those of its collaborators or
contractors will not otherwise become known or be discovered independently by
competitors.
Patents issued and patent applications filed internationally relating to gene
therapy are numerous and we cannot assure you that current and potential
competitors or other third parties have not filed or received or will not file
or receive applications in the future for, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be used
by GenStar.
Additionally, there is certain subject matter which is patentable in
the United States but not generally patentable outside of the United States.
Differences in what constitutes patentable subject matter in various countries
may limit the protection we can obtain on some of our inventions outside of the
United States.
For example, methods of treating humans are not patentable in many countries
outside of the United States. These and-or other issues may prevent GenStar from
obtaining patent protection outside of the United States which would have a
material adverse effect on our business, financial condition and results of
operations.
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GOVERNMENT REGULATION
The production and marketing of our proposed products and our research and
development activities are subject to regulation for safety, effectiveness and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous FDA regulations.
The Federal Food, Drug, and Cosmetic Act, as amended, the regulations
promulgated thereunder, and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, advertising and promotion of our products.
Product development and approval within this regulatory framework take a number
of years and involve the expenditure of substantial resources.
The steps required before our proposed products may be marketed in the United
States include:
. preclinical laboratory tests, in vivo preclinical studies and formulation
studies,
. the submission to the FDA of an Initial New Drug application for human
clinical testing, which must become effective before human clinical trials
commence,
. adequate and well-controlled human clinical trials to establish the safety
and effectiveness of the drug,
. the submission to the FDA of a Product License Application (for a biologic)
or a New Drug Application (for a drug), and
. the FDA approval of the Product License Application or New Drug Application
prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product and indication, each
domestic manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices for both drugs and devices. To supply products for use in the United
States, foreign manufacturing establishments, including third party facilities,
must comply with the FDA's Good Manufacturing Practices and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies in
countries under reciprocal agreements with the FDA. In addition to FDA
regulation, we are also subject to a variety of additional governmental
regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Energy Reorganization Act
of 1974, the Resource Conservation and Recovery Act and other current and future
federal, state and local regulations.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
preclinical safety tests must be conducted by laboratories that comply with FDA
Good Laboratory Practices regulations. The results of the preclinical tests are
submitted to the FDA as part of an Initial New Drug application and are reviewed
by the FDA prior to the commencement of human clinical trials. There can be no
assurance that submission of an Initial New Drug application will result in FDA
authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new drug to
healthy volunteers or to patients, under the supervision of qualified principal
investigators. Clinical trials must be conducted in accordance with the FDA's
Good Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA for clearance as part of
the Initial New Drug application. Further, each clinical trial must be conducted
under the auspices of an independent Institutional Review Board at the
institution at which the trial will be conducted. The Institutional Review Board
will consider, among other things, ethical factors, the safety of human
subjects, informed consent and the possible liability of the institution.
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Clinical trials are typically conducted in three sequential phases, but the
phases often overlap. In Phase I, the initial introduction of the drug into
healthy subjects or patients, the drug is tested for safety (adverse effects),
dosage tolerance, absorption, distribution, metabolism, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to:
. determine the effectiveness of the drug for specific, targeted indications,
. determine dosage tolerance and optional dosage and
. identify possible adverse effects and safety risks.
When a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
further evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
Phase I, Phase II or Phase III testing may not be completed within any specific
time period, if at all, with respect to any of our products. Furthermore, we or
the FDA may suspend clinical trials at any time if it is believed that the
patients are being exposed to an unacceptable health risk.
Among other things, the results of the preclinical and clinical studies, along
with manufacturing information, are submitted to the FDA in the form of a
Product License Application or a New Drug Application for approval of the
marketing and commercial shipment of the drug. Upon accepting a company's
marketing approval applications, the FDA generally convenes an Advisory
Committee to review clinical trial results and make a non-binding recommendation
concerning the drug's approval. After considering the Advisory Committee
recommendation and other information, the FDA may or may not issue an approval
letter. This letter sets out the specific terms and conditions that the company
must satisfy in order to receive final approval to market. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny a Product License Application or a New Drug Application if
applicable regulatory criteria are not satisfied, require additional testing or
information, or require postmarketing testing and surveillance to monitor the
safety of the company's products if they do not view the Product License
Application or the New Drug Application as containing adequate evidence of the
safety and effectiveness of the drug. Notwithstanding the submission of data,
the FDA may ultimately decide that the application does not satisfy regulatory
criteria for approval. Moreover, if regulatory approval is granted, such
approval will entail limitations on the indicated uses for which it may be
marketed. Finally, approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
Under the Orphan Drug Act, the FDA may designate drug products as orphan drugs
if there is no reasonable expectation of recovery of the costs of research and
development from sales in the United States or if these drugs are intended to
treat a rare disease or condition, which is defined as a disease or condition
that affects less than 200,000 persons in the United States. If certain
conditions are met, designation as an orphan drug confers upon the sponsor
marketing exclusivity for seven years following FDA approval of the product,
meaning that the FDA cannot approve another version of the same product for the
same use during the seven-year period. The market exclusivity provision does
not, however, prevent the FDA from approving a different orphan drug for the
same use or the same orphan drug for a different use. We believe that some of
our potential products may qualify for orphan drug designation. Our potential
products may not ultimately receive orphan drug designation, or the benefits
currently provided by an orphan drug designation may be amended or eliminated.
The Orphan Drug Act has been controversial, and many legislative proposals have
from time to time been introduced in Congress to modify various aspects of the
Orphan Drug Act, particularly the market exclusivity provisions. New legislation
may be introduced in the future that may adversely impact the availability or
attractiveness of orphan drug status for any of our potential products.
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Among the conditions for FDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance. The
FDA stringently applies regulatory standards for manufacturing.
Both of our potential products are in preclinical testing. We anticipate that it
will take between five to ten years for both of our potential products to
complete clinical trials and, if the trials are successful, be approved by the
FDA.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive. Any
product candidate developed by GenStar would compete with existing drugs and
therapies and with others under development. There are many pharmaceutical
companies, biotechnology companies, public and private universities and research
organizations actively engaged in research and development of products for the
treatment of hemophilia and prostate cancer. Many of these organizations have
financial, technical, manufacturing and marketing resources which are greater
than ours. If a competing company develops or acquires rights to a more
efficient, more effective, or safer competitive therapy for treatment of the
same diseases we have targeted, or one which offers significantly lower costs of
treatment, our business, financial condition and results of operations could be
materially adversely affected. We believe that the most significant competitive
factor in the gene therapy field is the effectiveness and safety of a product
due to the relatively early stage of the industry.
We believe that our product development programs will be subject to significant
competition from companies using alternative technologies, as well as to
increasing competition from companies that develop and apply technologies
similar to ours. Other companies may succeed in developing products earlier than
we do, obtaining approvals for these products from the FDA more rapidly than we
do or developing products that are safer and more effective than those under
development or proposed to be developed by us. We cannot assure you that
research and development by others will not render our technology or potential
products obsolete or non-competitive or result in treatments superior to any
therapy developed by us, or that any therapy developed by GenStar will be
preferred to any existing or newly developed technologies.
MARKETING AND SALES
We entered into a Distribution Agreement with Baxter in July 1998. Under the
Distribution Agreement, Baxter has the exclusive, worldwide right to market,
sell and distribute all products which are developed under the Development
Collaboration Agreement with Baxter. It is anticipated that Baxter will fund the
development of the hemophilia product and have distribution rights for all
hemophilia products. Under the terms of the agreement, GenStar receives a
percentage of the revenues generated by Baxter.
We have no internal sales force and currently plan to enter into additional
corporate partnership arrangements under which a corporate partner would fund
development of our cancer product and/or other potential products and would have
distribution rights for the product funded. See "Risk Factors" for a further
discussion of the risks associated with distribution agreements.
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EMPLOYEES
At December 31, 1999, GenStar had 22 employees, including 18 in research and
development and 4 in finance and administration. Our continued success will
depend in large measure on our ability to attract and retain highly skilled
employees who are in great demand. None of our employees are represented by a
labor union and we believe that our relations with the employees are generally
good.
ITEM 2. PROPERTIES
GenStar leases approximately 4,800 square feet of office and laboratory space in
San Diego, California. The term of the lease expires in May 2000. We have signed
a letter of intent to enter into a lease for approximately 22,000 square feet of
office and laboratory space through 2005. Additionally, we lease approximately
8,600 square feet of office and laboratory space for our manufacturing
operations in San Diego, California. The term of the lease expires in August
2004. We believe our existing and proposed facilities will be sufficient to meet
our anticipated operating needs for at least the next two years.
ITEM 3. LEGAL PROCEEDINGS
GenStar is not a party to any material litigation or legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GenStar Common Stock is traded on the over-the-counter market on the electronic
bulletin board under the symbol "UROG". The initial Common Stock of GenStar was
distributed to the public as a dividend to holders of Medstone International,
Inc. Common Stock. Each stockholder of Medstone received, as of February 9,
1996, one share of UroGen Common Stock for every one share of Medstone Common
Stock held on the record date for the distribution, December 31, 1995. Upon
completion of the distribution, there were 5,616,528 shares of GenStar Common
Stock outstanding, all of which are now freely tradable. As of December 31,
1999, there are also options outstanding to purchase 3,276,183 shares of Common
Stock, warrants to purchase 2,329,166 shares of Common Stock and Series A
Preferred Stock convertible into 5,830,000 shares of Common Stock. Additionally,
there are 2,298,000 shares of Series B Preferred Stock which are convertible
into Common Stock at the fair value at the date of conversion.
The following table shows for the periods indicated the high and low closing
prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED December 31, 1999
First Quarter $0.40 $0.31
Second Quarter $0.33 $0.25
Third Quarter $0.33 $0.13
Fourth quarter $0.60 $0.25
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter (through March 27, 2000) $19.00 $0.66
</TABLE>
We had approximately 900 stockholders of record as of March 27, 2000.
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Item 6. SELECTED FINANCIAL DATA
The following selected historical financial data of GenStar Therapeutics
Corporation (formerly UroGen Corp., and the UroGen division of Medstone,
UroGen's predecessor), reflect GenStar's operating results as a stand-alone
entity during 1996, 1997, 1998 and 1999, and GenStar's historical operation as a
division of Medstone for the prior periods. The financial data as of December
31, 1998 and 1999 and for each of the years in the three-year period ended
December 31, 1999 have been derived from the audited financial statements of the
Company, included elsewhere in this annual report. The financial data for all
other periods and dates have been derived from audited financial statements of
GenStar or of the UroGen division of Medstone which are not included in this
annual report. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, related notes and other financial
information included in this annual report.
<TABLE>
<CAPTION>
Period from
July 1,
1991
(inception)
Year Ended December 31, to
---------------------------------------------------------- December
1999 1998 1997 1996 1995 31, 1999
-------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues..................................... $ 118 $ 192 $ 194 $ - $ - $ 959
Costs and expenses:.............................. ------- ------- ------ ------- ------- --------
Cost of sales................................. - - - - - 822
Research and development...................... 2,711 1,916 346 348 75 8,146
General and administrative.................... 817 487 151 174 - 2,164
Write-off of acquired in-process
Technology.................................. - 5,455 - - - 5,455
------- ------- ------ ------- ------- --------
Total costs and expenses.................... 3,528 7,858 497 522 75 16,587
------- ------- ------ ------- ------- --------
Income from operations........................ (3,410) (7,666) (303) (522) (75) (15,628)
Other income (expense).......................... (72) - - 64 - (8)
Interest expense................................ (360) (306) - - - (666)
Interest income................................. 24 10 4 14 - 52
------- ------- ------ ------- ------- --------
Net loss........................................ $(3,818) $(7,962) $ (299) $ (444) $ (75) $(16,250)
======= ======= ====== ======= ======= ========
Net loss per share................................ $ (0.35) $ (1.00) $(0.04) $ (0.07) N/A
======= ======= ====== =======
Weighted average shares outstanding............... 10,763 7,997 7,311 5,980 N/A
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)................... $ 448 $(1,274) $ 6 $235 $ 1
Total assets................................ 1,827 1,098 78 253 163
Long-term debt, net of current portion...... 1,970 1,274 - - -
Shareholders' equity (deficit) ............. (905) (1,934) 9 237 163
</TABLE>
DIVIDEND POLICY
We have never paid any cash dividends on our common stock to date. We
currently anticipate that we will retain all future earnings, if any, to fund
the development and growth of our business and do not anticipate paying any cash
dividends for at least the next five years, if ever.
13
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The statements that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
anticipated in these forward-looking statements.
OVERVIEW
GenStar commenced operations as a stand-alone entity in January 1996 and has
been in the development stage since inception. Our original mission was to
develop products to treat diseases in urology, with a particular interest in
prostate cancer. We had licensed technology that uses the IL-3 gene to treat
several types of cancer, but did not have technology to deliver the gene. On
July 8, 1998, we entered into an agreement with Baxter Healthcare Corporation in
which we acquired the exclusive rights to gene delivery technologies and
laboratory equipment. The gene delivery technology will be used to enhance our
existing technology and to develop products to deliver other genes. We believe
that the gene delivery technology provides a higher level of expression of the
gene being delivered compared to other gene therapy approaches. Prior to our
license of the technology, Baxter had been developing this technology for the
treatment of hemophilia and cancer and has continued to fund the development of
our Factor VIII product for hemophilia. See "Certain Relationships and Related
Transactions-Baxter Agreements".
In exchange for the exclusive license to the gene delivery technology and
equipment, we issued 1,841,219 shares of common stock and 5,830 shares of Series
A Preferred Stock to Baxter. The assets acquired from Baxter were valued based
on the fair market value of our common stock on the date of the agreement. We
obtained an appraisal of the value of the equipment acquired. Based upon the
very early stage of development of the technology, the value of the technology
was charged to acquired in-process technology.
Our current activities consist of the development of the gene transfer system in
our Factor VIII Mini-Ad product for hemophilia and our tumor killing IL-3 viral
vector product for prostate cancer. We anticipate defining additional uses for
our vector technology and potentially acquiring other technologies. We expect to
incur increasing research and development expenditures as we focus our efforts
on further development of these products. We expect no significant revenues and
to incur significant operating losses for at least the next five years.
RESULTS OF OPERATIONS
Revenues
GenStar has generated revenues to date of $959,000 from contract research
agreements and grants. Total revenues for the years ended December 31, 1997,
1998 and 1999 were $194,000, $192,000, and $118,000, respectively. We anticipate
seeking additional research agreements and grants to help fund research and
development efforts; however, we do not expect that contract research will
result in significant revenues in the future. We do not anticipate revenues from
products for at least five years. Product revenues are contingent on the success
of our clinical trials.
14
<PAGE>
Research and development and acquired in-process technology
Research and development expenses and acquired in-process technology charges
during the years ended December 31, 1997, 1998 and 1999 were $346,000,
$7,371,000 and $2,711,000, respectively. Research and development expenses
during 1997 and through June 30, 1998 consisted primarily of payments to
consultants who were performing research and to fees related to technology
licenses and patent applications. Following consummation of the Baxter
transaction on July 8, 1998, research and development costs were expanded to
include the costs of the hemophilia and cancer programs acquired from Baxter,
but which were continued at Baxter until the employees and tangible assets
involved were moved to our facilities in October 1998. Additionally, the
technology acquired from Baxter valued at $5,455,505 was charged to acquired in-
process technology in 1998 due to the early stage of development. We estimate
that it will take five years and approximately $30 million to complete the
Factor VIII product and obtain regulatory approvals, if we are able to obtain
approvals.
We anticipate increasing research and development expenditures in the future as
we conduct preclinical and clinical testing necessary to bring our products to
market and to establish manufacturing and marketing capabilities. We have
recently completed the process of developing a facility to manufacture the
materials for Phase I and Phase II clinical trials for our hemophilia product.
We estimate that the costs to develop the facility and manufacture materials for
Phase I clinical trials will be approximately $4.4 million dollars, which will
be funded by Baxter under the developmental collaboration agreement. We are
unable to estimate the costs to develop manufacturing facilities for Phase III
clinical trials and for commercial quantities of our potential products and the
costs to develop marketing capabilities, because we have not determined whether
we will build these capabilities within the company or enter into collaborative
arrangement with others to perform these functions.
General and administrative expenses
General and administrative expenses during the years ended December 31, 1997,
1998 and 1999 were $151,000, $488,000 and $817,000, respectively. General and
administrative expenses include the costs of our administrative personnel and
consultants, office lease expenses and other overhead costs, including legal and
accounting costs. General and administrative expenses have increased related to
the increased level of operations, and we expect general and administrative
expenses to continue to increase to support our increasing research and
development activities.
Interest income and expense
Interest income during the three years ended December 31, 1999 of $4,000,
$10,000 and $24,000, respectively, is a result of investment of excess cash in
money market accounts. Interest expense for the three years ended December 31,
1999 was none, $306,000 and $360,000, respectively. Interest expense in 1998 was
comprised of $266,000 of amortization of the discount on convertible notes
payable and $40,000 related to the 8% interest rate on the notes. Interest
expense in 1999 was comprised of $309,000 of amortization of the discount on
convertible notes payable, $25,000 related to the 8% interest rate on the notes
and $26,000 related to interest on the capital lease line.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $643,000 and $3,812,000 during the
years ended December 31, 1998 and 1999, respectively. Net cash used by operating
activities consists primarily of GenStar's net loss increased by non-cash
expenses, such as the write-off of in-process technology acquired with stock in
and expenses paid via advances from Baxter. Net cash used by investing
activities of $63,000 and $170,000
15
<PAGE>
during 1998 and 1999, respectively, consists of the purchase of furniture and
equipment. Net cash provided by financing activities of $947,000 during 1998
consists of proceeds from notes payable of $1,030,000 offset by expenses paid to
raise capital. Net cash provided by financing activities of $4,589,000 in 1999
consists primarily of $4,178,000 paid by Baxter under the credit agreement for
development of the hemophilia product and $400,000 in proceeds from notes
payable.
GenStar's future capital requirements will depend on many factors, including
scientific progress in our research and development programs, our ability to
establish collaborative arrangements with others for drug development, progress
with preclinical and clinical trials, the time and costs involved in obtaining
regulatory approvals and effective commercialization activities. Medstone funded
all of GenStar's operations from July 1, 1991, our inception, through and ending
with a $500,000 capital contribution of cash on February 9, 1996. In July 1998,
we completed an offering of 8% Convertible Subordinated Notes due June 30, 1999,
which raised $1,030,000, and which was converted to common stock on June 22,
1999. In April 1999, we completed another offering of Convertible Subordinated
Notes due March 31, 2000, which raised $400,000, and which was converted to
common stock on June 22, 1999. In January 2000, we raised $8.3 million from the
sale of common stock and warrants for common stock. In February 2000, we raised
an additional $17 million from the sale of common stock. GenStar has incurred
net losses of $16,250,000 since its inception through December 31, 1999, and has
never been profitable during its existence. We expect to incur significant
additional operating losses over the next several years as our research and
development efforts expand. Our ability to achieve profitability depends upon
our ability, alone or with others, to successfully complete development of
products, obtain required regulatory approvals and manufacture and market
products. We may not be successful and we may never attain significant revenues
or profitability. Our operations to date have consumed substantial amounts of
cash. The negative cash flow from operations is expected to continue and to
accelerate for at least the next four years. The development of our products
will require a commitment of substantial funds to conduct the costly and time-
consuming research, preclinical and clinical testing necessary to bring our
products to market and to establish manufacturing and marketing capabilities.
Under the terms of our Developmental Collaboration Agreement and Credit
Agreements with Baxter (See "Certain Relationships and Related Transactions -
Baxter Agreements"), Baxter is required to provide funding for development of
the hemophilia product until we commence a Phase I clinical trial, at which time
a milestone payment of $2,000,000 is due from Baxter. The funding under the
Developmental Collaboration Agreement provided by Baxter is in the form of a
note payable, which can be converted to Series B Preferred Stock at our option
on December 31 of each year of the agreement. The $2,000,000 milestone payment
is in the form of a purchase of Series C Preferred Stock.
We anticipate our existing capital resources, including funds received from
Baxter under the Developmental Collaboration Agreement, will enable us to
maintain our current and planned operations for at least the next two years. We
will need to raise substantial additional capital to fund future operations. We
intend to seek additional funding either through collaborative arrangements or
through public or private equity or debt financings. Additional financing may
not be available on acceptable terms or at all. If adequate funds are not
available, we may be required to delay or reduce the scope of our operations or
to obtain funds through arrangements with collaborative partners or others that
may require us to relinquish rights we may otherwise have.
TECHNOLOGY LICENSES
GenStar entered into a license agreement with The Immune Response Corporation in
March 1997, which was subsequently amended in January 1999 whereby we licensed
from IRC tumor radiosensitization gene therapy technology. Under the IRC
License, GenStar is obligated to make a milestone payment to IRC of $200,000
upon the approval by the Food and Drug Administration or the governing health
authority of any other country of GenStar's first product related to the
technology licensed from IRC. This fee can be offset against future royalty
payments. GenStar is obligated to pay royalties on its net sales revenue and a
16
<PAGE>
percentage of all revenues received from sublicenses relating to the licensed
technology. Additionally, GenStar agreed in the January 1999 amendment to
reimburse IRC for past patent expenses relating to the licensed technology in
the amount of $59,400 which was paid in February 2000.
In September 1996, GenStar entered into a license agreement with the Regents of
the University of California to license rights to patents in the field of
diagnosis of cancer using very sensitive molecular biology techniques that
detect the presence of cancer cells. We are required to pay an annual license
maintenance fee of $10,000 until we start selling licensed product. We are also
required to pay milestone fees of $25,000 upon filing an Investigative Device
Exemption Application on a licensed product or method with the Food and Drug
Administration and $50,000 upon marketing approval of a licensed product or
method by the FDA. GenStar must also pay royalties to the UC Regents on its net
sales revenues of licensed products or royalties from sublicenses. A minimum
annual royalty of $50,000 is payable beginning with the year of first commercial
sale of licensed product, but no later than the fifth year of the agreement. The
minimum annual royalty may be credited against revenue-based royalties due for
the year in which the annual minimum payment was made.
YEAR 2000 COMPLIANCE
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our readiness planning. As a result of
those efforts, we experienced no disruptions in mission critical information
technology and non-information technology systems and believe that those systems
successfully responded to the Year 2000 date change. We expensed approximately
$11,000 during 1999 in connection with remediating systems. We are not aware of
any material problems resulting from Year 2000 issues, either with our internal
systems or the products and services of third parties. We will continue to
monitor our mission critical applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
17
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At December 31, 1999, our cash and cash equivalents were invested in liquid
checking and money market accounts, and will not change significantly in value
if interest rates change. Accordingly, an immediate 10% change in interest rates
would not have a material impact on our financial condition or results of
operations.
We do not conduct business with foreign entities, and do not have any foreign
exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE ITEM 14. "Exhibits, Financial Statement Schedules, and Reports On 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the directors and executive officers of GenStar, their ages as of
December 31, 1999 and certain information about them are set forth below:
<TABLE>
<CAPTION>
NAME OF DIRECTORS
AND EXECUTIVE OFFICERS AGE PRINCIPAL OCCUPATION
---------------------- --- --------------------
<S> <C> <C>
Paul D. Quadros 53 Chairman of the Board of Directors
Robert E. Sobol, M.D. 47 President, Chief Executive Officer and
Director
Wei-Wei Zhang. M.D, PhD 42 Senior Vice President, Chief
Scientific Officer and Director
William C. Raschke, PhD 53 Vice President
Carin D. Sandvik 36 Controller, Chief Accounting Officer
and Corporate Secretary
Peter F. Bernardoni 40 Director
Ivor Royston, M.D. 54 Director
Victor W. Schmitt 51 Director
</TABLE>
PAUL D. QUADROS has been Chairman of the Board and our Chief Financial
Officer since August 1998. Prior to that Mr. Quadros had been the President and
Chief Executive Officer since April 1997 and prior to that was the Chairman of
the Board, Chief Financial Officer and Secretary since our formation in June
1995. Mr.Quadros was, from January 1985 an officer and from April 1986 a general
partner of Technology Funding, a venture capital management organization. From
1986 through 1994, Mr. Quadros was a member of Technology Funding's Commitments
Committee, serving as its chairman from 1987 to 1990. During his affiliation
with Technology Funding he also served as Director of Research and Director of
Equity Investments. From 1990 to 1994 Mr. Quadros was chairman of Technology
Funding's Medical Investment Committee and was involved in managing Technology
Funding's healthcare portfolio. Mr. Quadros currently serves as a director of
several private companies and one public company, Cardiac Science, Inc.
Prior to joining Technology Funding in 1985, Mr. Quadros was Executive Vice
President of Amreal Securities Corp., an affiliate of Home Federal Savings and
Loan. Before joining Amreal in April 1984, Mr. Quadros was a Senior Vice
President of Public Storage, Inc., a national real estate developer. Prior to
joining Public Storage in 1981, Mr. Quadros was Assistant Treasurer of The Times
Mirror Company, where he served for seven years in several corporate finance
positions. Mr. Quadros began his career as a securities analyst and
institutional portfolio manager. Mr. Quadros has a B.A. in Finance from
California State University at Fullerton and an M.B.A. from the UCLA Graduate
School of Management.
ROBERT E. SOBOL, M.D has been President and Chief Executive Officer since
August 1998. Prior to that Dr. Sobol was the Executive Vice President and Chief
Operating Officer since July 1996. Dr. Sobol was previously the Director of
Clinical Science at Sidney Kimmel Cancer Center, which is affiliated with Sharp
HealthCare, one of the largest healthcare providers in San Diego. Dr. Sobol has
developed clinical applications of immuno therapy and gene therapy for the
treatment of cancer and is a founder of several
19
<PAGE>
successful biotechnology ventures. He was a founder and Vice President of IDEC
Pharmaceuticals Corporation, a publicly traded company developing monoclonal
antibody based treatments for cancer and autoimmune disorders. He was also a
founder of GeneSys Therapeutics, a gene therapy company which merged with
publicly traded Somatix Therapy Corporation and subsequently with Cell GeneSys
Incorporated. Dr. Sobol led the research team which was the first to treat a
brain tumor patient with cytokine gene therapy. He is also the principal
investigator for one of the first gene therapy protocols approved for the
treatment of colon carcinoma. Dr. Sobol is the Editor of the journal Cancer Gene
Therapy.
Dr. Sobol received a B.A. in Philosophy from Boston University and an M.D. from
The Chicago Medical School. He subsequently trained at the University of
Southern California Medical Center and at the University of California, San
Diego. He is Board Certified in Internal Medicine and Medical Oncology.
WEI-WEI ZHANG, M.D., PH.D. joined GenStar as Senior Vice President, Chief
Scientific Officer and Director in October 1998. Dr. Zhang has sixteen years of
biomedical research experience including nine years of research management
experience. He was formerly the Director of Molecular Biology in the Gene
Therapy Unit of Baxter Healthcare Corporation since March 1995. Dr. Zhang
established the Department of Molecular Biology at Baxter and initiated a
comprehensive program for the Mini-Ad vector system for in vivo gene therapy.
Dr. Zhang has significant technical expertise in vector technology, particularly
with adenoviral vectors and their application in gene therapy of cancer and
hemophilia. Prior to joining Baxter, Dr. Zhang was an Assistant Professor in the
Department of Thoracic and Cardiovascular Surgery at the University of Texas MD
Anderson Cancer Center, where he was a member of the team that developed
adenovirus-mediated tumor suppressor gene therapy of cancer (Adp53) from lab to
clinic.
Dr. Zhang received his M.D. from the Zhejiang Medical University in China and
received a Ph.D. in molecular biology, recombinant DNA, and protein chemistry
from The University of Alabama. Dr. Zhang had postdoctoral training in gene
manipulation and transfer technologies at the Baylor College of Medicine.
WILLIAM C. RASCHKE, PH.D has been Vice President since August 1998 and devotes
his efforts to both scientific and corporate development projects. He was
previously Director of Research since September 1996. Dr. Raschke also holds the
positions of Member and Director of Molecular Immunology of the Sidney Kimmel
Cancer Center (formerly the San Diego Regional Cancer Center), positions he has
held since coming to the Center in 1994. Since March 1997, he has also served as
the Acting Scientific Director of the Center. Dr. Raschke has previously held
positions at SIBIA, Inc. from 1988 to 1994 where he was Senior Research Fellow,
The Salk Institute from 1988 to 1994, and 1975 to 1981 with various staff
appointments and the La Jolla Cancer Research Foundation (now the Burnham
Institute) from 1981 to 1988 as Associate Scientific Director and Staff
Scientist.
Dr. Raschke has served as a reviewer for the National Institute of Health with
two four-year terms on the Experimental Immunology Study Section, the American
Cancer Society and The National Science Foundation, as well as international
funding agencies. He also reviews manuscripts for various immunology and cancer
journals.
Dr. Raschke received a B.S. in Chemistry from the University of Texas, Austin
and a Ph.D. in Biochemistry from the University of California, Berkley. He
conducted post graduate training at the Salk Institute in Developmental Biology
and Immunology.
CARIN D. SANDVIK has served as Controller, Chief Accounting Officer and
Corporate Secretary since joining GenStar in October 1998. Prior to joining
UroGen, Ms. Sandvik was a Senior Manager in the Technology Industry Group at
Pricewaterhouse Coopers LLP (formerly Price Waterhouse LLP), where she
20
<PAGE>
had served in various positions for twelve years. Ms. Sandvik received a B.A. in
Business Administration with an emphasis in Accounting from the University of
San Diego.
PETER F. BERNARDONI is a Partner of Technology Funding. Mr. Bernardoni joined
Technology Funding as an Investment Officer in 1988, was elected as a Vice
President in 1992 and a Partner in 1994. Mr. Bernardoni has served as a member
of Technology Funding's Commitments Committee since 1994 and as Chairman of
Technology Funding's Medical Investment Committee since 1994. Prior to joining
Technology Funding, Mr. Bernardoni was employed for six years by IBM and served
in several capacities including Design Engineer and as a manager for large scale
information systems in major pharmaceutical and hospital accounts.
Mr. Bernardoni has served as a Director for several private and two public
companies, Poly Medical Industrial and Circadian. He currently serves on the
Board of Endocare, Inc., Avalon Imaging and Reflection Technology, and is
Chairman of Portable Energy Products. Mr. Bernardoni has a B.S.M.E. from Santa
Clara University and an M.S.M.E. from Stanford University.
IVOR ROYSTON, M.D. was the Chairman of the Board from April 1997 until August
1998. Prior to that, he served as President and Chief Executive Officer. He has
served as a Director since our formation in June 1995. Dr. Royston was appointed
by the President of United States to the National Cancer Advisory Board during
1996.
Dr. Royston is the President and Chief Executive Officer of Sidney Kimmel Cancer
Center (formerly the San Diego Regional Cancer Center), a position he has held
since founding the Center in 1990. He is also a General Partner of Forward
Ventures, a life science venture capital firm. From 1977 to 1993, Dr. Royston
held various positions in academic medicine at the University of California, San
Diego (UCSD) School of Medicine. Dr. Royston also served as Director, Clinical
Immunology Program at the UCSD Cancer Center and Chief of Oncology at the San
Diego VA Medical Center.
Dr. Royston was a founder and Director of Hybritech, Inc., GeneSys Therapeutics
Corporation and IDEC Pharmaceuticals, Inc. He has served on the Board of
Directors of various companies, including Unisyn Technologies, Inc., Medstone
International Inc., Sequana Therapeutics, Inc., Corixa, Inc., CombiChem, Inc.
IDEC Pharmaceuticals and GenQuest, Inc. He currently is a member of the Board of
Directors of the Sidney Kimmel Cancer Center.
Dr. Royston received a B.A. in Human Biology from Johns Hopkins University and
an M.D. from the Johns Hopkins School of Medicine. He later trained in internal
medicine and oncology at Stanford University and is board certified in both
Internal Medicine and Medical Oncology.
VICTOR W. SCHMITT is President, Venture Management, Baxter Healthcare
Corporation. He has held this position since 1994 and is responsible for the
creation and management of Baxter's interests in development-stage biotech
companies. Prior to his current assignment, he held the operating position of
President, Baxter Biotech Europe. He has also served as Vice President, Business
Development and Finance for Baxter's Blood Therapy Group.
Mr. Schmitt joined Baxter from a sixteen-year career with the American Red Cross
Blood Services. At the Red Cross Blood Services, Mr. Schmitt held positions in
marketing and operations. At the time of his departure, he was Vice President,
Blood Services with responsibility for the organization's national blood
services program.
21
<PAGE>
Mr. Schmitt holds a B.S. from the University of Virginia and an M.B.A. from the
University of Maryland. He serves on the Board of Directors of a number of
development-stage biotech companies.
SCIENTIFIC ADVISORY BOARD
GenStar plans to establish a Scientific Advisory Board to give guidance to our
scientific and technology strategies. The members of the Scientific Advisory
Board will advise and consult with our management on an informal basis from time
to time on scientific and technology strategies of the technical matters in
their respective areas of expertise. Members of the Scientific Advisory Board
may perform consulting services for UroGen, for which they may receive cash or
other compensation.
COMPENSATION OF DIRECTORS
Cash Compensation
GenStar does not compensate its Directors for their services as such. However,
Directors are reimbursed for their out-of-pocket expenses in attending Board
meetings.
1995 Directors' Option Plan
Non-employee directors also receive stock options under the Company's 1995
Directors' Option Plan (the "Directors' Plan"). The Directors' Plan was adopted
and approved by the shareholders of the Company in 1995 and amended in 2000 to
provide automatic, nondiscretionary grants of options to non-employee directors
of the Company. A total of 550,000 shares of Common Stock have been reserved for
issuance under the Directors' Plan. The Directors' Plan provides that each non-
employee director is automatically granted an option to purchase 45,000 shares
of GenStar Therapeutics Corporation Common Stock upon his or her initial
election or appointment as an non-employee director (Initial Options).
Subsequently, each non-employee director who has served for at least six months
will be granted an additional option to purchase 15,000 shares of GenStar
Therapeutics Corporation Common Stock on December 31 or each year so long as he
or she remains an non-employee director (Subsequent Options). The exercise price
of the options granted to non-employee directors must be the fair market value
of GenStar Common Stock on the date of grant. Options granted to non-employee
directors have ten-year terms, subject to an non-employee director's continued
service as a director. Initial Options vest over three years at a rate of 33.3%
per year, subsequent options vest one year from the grant date. As of December
31, 1999, options to purchase 50,000 shares of Common Stock to non-employee
directors has been granted under the Directors' Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16") requires GenStar's executive
officers, directors and beneficial owners of more than 10% of GenStar Common
Stock to file reports of ownership and changes in ownership of Common Stock of
the Company with the Securities and Exchange Commission, and to furnish us with
copies of all Section 16(a) forms they file. Based solely on GenStar's review of
the copies of such forms received by it, or written representations from certain
reporting persons that no Form 5's were required for those persons, four
reporting persons filed late Section 16 filings during 1999.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth information for the annual and long-term compensation
of the Chief Executive Officer and all executive officers who received cash
compensation greater than $100,000 during the three years ended December 31,
1999 for services to GenStar in all capacities during the three years ended
December 31, 1999. No other corporate officer received cash compensation in
excess of $100,000 during the three years ended December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Restricted Securities All Other
-------------------
Fiscal Salary Bonus Stock Underlying Compensation
Name and Principal Position Period ($) ($) Award ($) Options (#) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Quadros (1)..................... 1999 $120,000 - - 81,903 $13,951(7)
Chairman of the Board 1998 $ 95,000 - - - $ 4,188(4)
1997 $ 60,000 - - - -
Robert E. Sobol, M.D (2)................ 1999 $200,000 - - 627,141 $30,927(8)
President and Chief Executive Officer 1998 $162,917 - - - $10,562(5)
1997 $143,379 - - - -
Wei-Wei Zhang (3) 1999 $160,000 $30,000 - 781,713 $81,712(9)
Sr. Vice President and 1998 $ 40,000 - - - $ 3,052(6)
Chief Scientific Officer 1997 - - - - -
</TABLE>
(1) Mr. Quadros served as the President and CEO from April 1997 to August
1998.
(2) Dr. Sobol served as the Executive Vice President and Chief Operating
Officer from July 1996 to August 1998.
(3) Dr. Zhang joined GenStar in October 1998. His annual salary is $160,000.
(4) Includes $2,800 and $1,388 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively.
(5) Includes $4,667 and $5,895 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively.
(6) Includes $1,867 and $1,185 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively.
(7) Includes $8,400 and $5,551 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively.
(8) Includes $11,200 and $19,727 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively.
(9) Includes $11,200 and $14,178 in Company contributions to 401k Plan and
Deferred Compensation Plan, respectively and $56,334 paid for relocation.
23
<PAGE>
There were no options to purchase the Company's Common Stock exercised in the
year ended December 31, 1999.
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1999 and the options held by each of the Named
Executive Officers:
<TABLE>
<CAPTION>
Number of Percentage Number of
Securities of Total Securities Value of
Underlying Options Underlying Unexercised
Options Granted to Exercise Unexercised In-the-Money
Granted Employees Price Expiration Options at Options at
Name and Principal Position In 1999 In 1999 ($/Share) Date 12/31/99 12/31/99
<S> <C> <C> <C> <C> <C> <C>
Paul D. Quadros
Chairman of the Board 81,903 2.7% $0.32 03/23/09 81,903 $ 22,933
Robert E. Sobol
President & CEO 627,141 20.9% $0.32 03/23/09 627,141 $175,599
Wei-Wei Zhang
Sr. VP and CSO 781,713 26.0% $0.32 03/23/09 781,713 $218,880
</TABLE>
Employment Agreement
In April 1997, Paul D. Quadros entered into an employment agreement with GenStar
which provides for a monthly base salary of $10,000 and health insurance and
other benefits as GenStar customarily provides to its employees. If Mr. Quadros
is terminated by GenStar without cause, Mr. Quadros is entitled to receive his
base salary and benefits for six months from the date of termination, and one-
half of his base salary and benefits for months six through twelve after
termination. Mr. Quadros is required to give GenStar sixty days written advance
notice of his intent to resign.
24
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of GenStar Common Stock owned by (i) the holders of more than 5% of
the GenStar Common Stock, (ii) each Director of the Company, (iii) each
Executive Officer listed under the heading "Executive Compensation" and (iv) all
Directors and Executive Officers of the Company as a group. The information
provided below is based on the record ownership and total outstanding shares of
GenStar Therapeutics Corporation Common Stock at December 31, 1999, and includes
GenStar Common Stock shares issuable upon exercise of stock options and warrants
granted to Officers, Directors and key employees of the Company. See "Executive
Compensation."
<TABLE>
<CAPTION>
Shares Beneficially Approximate
Name of person or Identity of Group Owned(1) Percent Owned
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Victor W. Schmitt 1,841,219(2) 15.2%
One Baxter Parkway
Deerfield, Illinois 60015
Baxter Healthcare Corporation 1,841,219(2) 15.2%
One Baxter Parkway
Deerfield, Illinois 60015
Ivor Royston 1,024,963(3) 8.4%
10835 Altman Row, Suite 150
San Diego, California 92121
Paul D. Quadros 561,680(4) 4.6%
10835 Altman Row, Suite 150
San Diego, California 92121
Robert E. Sobol 651,035(5) 5.2%
10835 Altman Row, Suite 150
San Diego, California 92121
Peter Bernardoni 760,032(6)(7) 6.1%
200 Alameda de las Pulgas
San Mateo, California 94402
Technology Funding 730,032(6) 5.9%
200 Alameda de las Pulgas
San Mateo, California 94402
Wei-Wei Zhang 276,857(8) 2.2%
10835 Altman Row, Suite 150
San Diego, CA 92121
All Executive Officers and Directors as 5,827,045 42.7%
a group (8 persons)
</TABLE>
- -----------------------------------
(1) All such shares were held of record with sole voting and investment power,
subject to applicable community property laws, by the named individual
and/or by his wife, except as indicated in the following footnotes.
(2) Excludes 5,830 shares of non-voting Series A Preferred Stock convertible
subsequent to July 8, 2001 into 5,830,000 shares of Common Stock held by
Baxter Healthcare Corporation. Excludes 2,998 shares of non-voting Series B
Preferred Stock convertible upon certain milesones at the then current
market price. Baxter Healthcare Corporation and Mr. Victor W. Schmitt are
entitled to exercise voting and investment power with respect to all shares
owned by Baxter Healthcare Corporation, and therefore, are deemed to be
beneficial owner of such shares.
25
<PAGE>
(3) Includes 108,333 shares issuable upon exercise of presently outstanding
warrants and 5,000 shares issuable upon the exercise of vested options.
(4) Includes 58,333 shares issuable upon exercise of presently outstanding
warrants and 29,007 shares issuable upon the exercise of option vesting
within 60 days.
(5) Includes 225,000 shares issuable upon exercise of presently outstanding
warrants and 222,112 shares issuable upon exercise of options vesting
within 60 days.
(6) Includes 291,667 shares issuable upon exercise of presently outstanding
warrants held by Technology Funding Venture Partners IV, an Aggressive
Growth Fund, L.P. Technology Funding, Inc. and Technology Funding Ltd.
(together "Technology Funding"), of which Peter Bernardoni is an officer
and a partner, are the managing general partners of Technology Funding
Venture Partners IV, an Aggressive Growth Fund, L.P. Technology Funding and
Mr. Bernardoni are entitled to exercise voting and investment power with
respect to all shares owned by Technology Funding Venture Partners IV, an
Aggressive Growth Fund, L.P. and therefore are deemed to be beneficial
owner of such shares.
(7) Includes 30,000 shares issuable upon exercise of presently outstanding and
currently exercisable stock options.
(8) Includes 276,857 shares issuable upon the exercise of options vesting
within 60 days.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BAXTER AGREEMENTS
- -----------------
In July 1998, GenStar executed various agreements with Baxter Healthcare
Corporation pursuant to which we acquired certain rights and assets from Baxter.
Under the terms of the agreements, GenStar obtained the rights to Baxter's
adenoviral-based gene transfer technologies and certain equipment in exchange
for 5,830 shares of non-voting convertible Series A Preferred Stock and
1,841,219 shares of Common Stock. The shares issued to acquire the gene transfer
technologies were valued at $5,455,505 based on the fair value of the stock on
the date of issuance and the purchase price was charged to acquired in-process
technology due to the early stage of development of the technology. The value of
the stock issued for fixed assets was $343,937 based upon the fair value of
those assets.
Baxter will provide funding to GenStar for continued research and
development of this technology as it relates to the treatment of hemophilia
under the Developmental Collaboration Agreement. Baxter will provide funding
through the date on which the treatment of the first patient in a Phase I
clinical trial begins. This development funding is provided under a Credit
Agreement. The balance outstanding under the Credit Agreement as of December 31,
1999 was $1,876,000. Under the terms of the Credit Agreement, the amounts
outstanding under the Credit Agreement are due and payable on December 31 of
each year during the term of the agreement. At GenStar's option, the amounts may
be paid by issuing to Baxter the number of shares of Series B Preferred Stock
determined by dividing the outstanding amount under the Credit Agreement by one
thousand. The balance has been presented as a non-current liability on the
accompanying balance sheet due to the conversion feature and because we intend
to convert the debt rather than repay it with cash. Amounts outstanding under
the Credit Agreement do not accrue interest unless GenStar is in default, in
which case the amount due bears interest at prime plus 4%.
GenStar entered into a Distribution Agreement with Baxter under which
Baxter will have an exclusive, worldwide right to market, sell and distribute
all products which may be developed under the Developmental Collaboration
Agreement. The term of the Distribution Agreement is the longer of ten years
from the date of regulatory approval of the first product or the expiration of
the last to expire of any related patents issued on or before ten years from the
date of regulatory approval.
GenStar, Baxter and certain founding shareholders entered into the Investor
Rights Agreement under which the shares held by these entities are subject to
certain restrictions on transferability of the shares until July 8, 2003 and
have certain registration rights. Additionally, under this agreement, Baxter has
the right to purchase up to twenty percent of any new securities issued and has
the obligation to purchase Series C Preferred Stock at a price of $1,000 per
share upon our achievement of the following milestones:
. $2,000,000 upon treatment of the first patient in a Phase I clinical trial
for a product developed under the Developmental Collaboration Agreement,
. $5,000,000 upon commencement of Phase III clinical trials of a product
developed under the Developmental Collaboration Agreement, and
. $10,000,000 upon approval by the Food and Drug Administration of a product
developed under the Developmental Collaboration Agreement.
MEDSTONE AGREEMENTS
-------------------
GenStar was incorporated as UroGen Corp. on June 30, 1995 as a wholly-owned
subsidiary of Medstone International, Inc. GenStar was formed from the medical
biology and small molecule pharmaceuticals
27
<PAGE>
divisions of Medstone, which were started in 1991. From 1991 until the
distribution of UroGen Corp. common stock on February 9, 1996, GenStar relied
upon Medstone for financial support. GenStar also relied on Medstone for
assistance with personnel management and financial administration. Upon
completion of the Distribution, GenStar began to operate independently from
Medstone.
SIDNEY KIMMEL CANCER CENTER
Sidney Kimmel Cancer Center originally owned 339,000 shares of GenStar Common
Stock and Dr. Royston is Chief Executive Officer of SKCC. GenStar has entered
into the following transactions with SKCC:
In June 1996, GenStar and SKCC entered into an affiliation agreement with a
three year term. Under the affiliation agreement, SKCC agreed to provide the
following services:
. to allow Dr. Royston to serve as GenStar's Chief Executive Officer and devote
part time executive services to GenStar;
. to lease approximately 100 square feet of office space in SKCC's facility;
. to allow GenStar to consult and confer with scientific staff of SKCC; and
. to make available clerical support for up to ten hours per week at a
compensation rate of $10.00 per hour.
In exchange GenStar agreed to make the following payments:
. cash consideration of $3,000 per month;
. conveyance of certain equipment with a book value of approximately $42,000;
and
. 339,000 shares of GenStar Therapeutics Corporation Common Stock.
The affiliation agreement was amended in May 1997 to reduce the monthly
cash consideration to $1,000 due to Dr. Royston's resignation as Chief Executive
Officer of GenStar.
In September 1997, the affiliation agreement was terminated and GenStar signed a
sublease agreement with SKCC for use of approximately 500 square feet of office
and laboratory space on a month to month basis. The monthly rent for the space
was $1,065.
In August 1998, GenStar and SKCC entered into a new sublease agreement for
approximately 4,800 square feet of office and laboratory space. The monthly
lease payment is approximately $14,800 plus our share of facility expenses. The
lease expires in May 2000.
In November 1997, GenStar entered into a license agreement with Dr. Daniel
Mercola and SKCC under which GenStar obtained an exclusive right to certain
technology. GenStar is obligated to pay royalties on its net sales revenues and
a percentage of revenues from sublicenses relating the technology. GenStar
terminated this license agreement in 1999.
In February 2000, GenStar entered into a letter of intent to lease approximately
22,000 square feet of office and laboratory space for a five year term.
28
<PAGE>
OTHER TRANSACTIONS
In August 1997, GenStar issued warrants to purchase 200,000 shares of
Common Stock to Dr. Sobol. These warrants are exercisable at $0.05 per share
(the fair market value of the Common Stock on the date of grant) and expire on
July 31, 2001. The warrant was exercised in February 2000.
In July 1998, we received $1,030,000 representing proceeds from the sale of
unsecured convertible notes payable which bore interest at 8% per annum and were
due on June 30, 1999, unless previously converted. The notes were convertible,
at the option of the holder, into common stock at $1.00 per share, and
automatically converted into 1,030,000 shares of Common Stock on June 22, 1999
upon filing of a registration statement to register the resale of the underlying
shares. In addition, each note holder received a warrant to purchase a number of
shares of Common Stock of GenStar equal to one share for each $2.00 of principal
under the purchased note. The warrants are exercisable for seven years from
issuance and have an exercise price of $0.74 per share. The warrants were valued
at an aggregate value of $305,910 and recorded to interest expense. The
following GenStar officers and directors participated in this transactions: Mr.
Quadros, Dr. Sobol, Dr. Raschke and Dr. Royston each purchased notes for $50,000
and received a warrant for 25,000 shares of Common Stock.
In April 1999, we received $400,000 representing proceeds from the sale of
unsecured convertible notes payable which bear interest at 8% per annum and are
due on March 31, 2000, unless previously converted. The notes were convertible,
at the option of the holder, into common stock at $0.30 per share, and
automatically converted into 1,333,333 shares of Common Stock on June 22, 1999
upon filing of a registration statement to register the resale of the underlying
shares. In addition, each note holder received a warrant to purchase a number of
shares of Common Stock of GenStar equal to one share for each $0.30 of principal
under the purchased note. The warrants are exercisable for seven years from
issuance and have an exercise price of $0.30 per share. The warrants were valued
at an aggregate value of $266,661 and recorded to interest expense. The
following GenStar officers and directors participated in this transactions:
. Mr. Quadros purchased notes for $10,000 and received a warrant for 33,333
shares of Common Stock.
. Dr. Raschke purchased notes for $40,000 and received warrants for 133,333
shares of Common Stock.
. Ms. Sandvik purchased notes for $5,000 and received warrants for 16,667 shares
of Common Stock.
. Dr. Royston purchased notes for $25,000 and received a warrant for 83,333
shares of Common Stock.
. Dr. Raschke and his spouse also received a Finder's Fee for amounts raised in
this offering of $9,250 in cash and warrants for 30,833 shares of common stock
exerciseable at $0.30 per share for seven years.
In January 2000, we completed an offering of 6,362,801 shares of common
stock and warrants to purchase 1,773,899 shares of common stock for $8.3
million. Victor W. Schmitt, a director of the company, purchased 33,113 shares
of common stock and a warrant exercisable for 16,556 shares of common stock at
an aggregate purchase price of $25,000.
29
<PAGE>
PART IV
ITEM. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
PAGE
1. Historical Financial Statements
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets at December 31, 1999 and 1998 33
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997 and the period
from July 1, 1991 (inception) to December 31, 1999 34
Consolidated Statement of Stockholders'/Equity (Deficit)
for the period from July 1, 1991 (inception) to
December 31, 1999 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 and the period
from July 1, 1991 (inception) to December 31, 1999 36
Notes to Consolidated Financial Statements 37
2. Schedules to Financial Statements
All schedules are omitted because they are not applicable or the required
information is include in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Exhibit No. DESCRIPTION
2.1 Distribution Agreement between the Company and Medstone
International Inc. (1)
2.2 Asset Purchase Agreement, dated as of February 28, 1998,
between UroGen and Baxter Healthcare Corporation (2)
2.3 Amendment to Asset Purchase Agreement, dated as of May 27,
1998, between UroGen and Baxter. (2)
2.4 Distribution Agreement, dated July 8, 1998, between
UroGen and Baxter. (2)
2.5 Investor Rights Agreement, dated July 8, 1998, between
UroGen and Baxter. (2)
2.6 Developmental Collaboration Agreement, dated July 8, 1998
between UroGen and Baxter. (2)
2.7 Credit Agreement, dated July 8, 1998, between UroGen and
Baxter. (2)
2.8 Technology License Agreement, dated July 8, 1998, between
UroGen and Baxter. (2)
3.1 Certificate of Amendment of the Restated Certificate of
Incorporation
3.2 Bylaws of the Company (1)
30
<PAGE>
4.1 Certificate of Designation of Preferences and Rights of
Series A Preferred Stock of UroGen. (2)
4.2 Certificate of Designation of Preferences and Rights of
Series B Preferred Stock of UroGen. (2)
4.3 Certificate of Designation of Preferences and Rights of
Series C Preferred Stock of UroGen. (2)
10.1 Contribution Agreement between the Company and Medstone
International, Inc. dated October 31, 1995 (1)
10.2 Form of Indemnification Agreement (1)
10.3 UroGen Corp. 1995 Stock Plan (1)
10.4 UroGen Corp. 1995 Director Option Plan (1)
10.5 License Agreement, dated March 5, 1997, between UroGen and
The Immune Response Corporation. (3)
10.6 Amendment to License Agreement, dated January 29, 1999,
between UroGen and The Immune Response Corporation. (3)
10.7 License Agreement, dated November 5, 1997, by and
among UroGen, Sidney Kimmel Cancer Center and Daniel A.
Mercola, M.D., Ph.D. (3)
10.8 License Agreement, dated September 20, 1996 between
UroGen and The Regents of the University of California. (3)
10.9 Form of Note and Warrant Purchase Agreement, dated July 8,
1998 between UroGen and various investors. (3)
10.10 Warrant Certificate, dated July 31, 1997, between UroGen and
Robert E. Sobol. (3)
10.11 Distribution Agreement, dated July 8, 1998, by and among
UroGen and Baxter. (2)
10.12 Investor Rights Agreement, dated July 8, 1998, between
UroGen and Baxter. (2)
10.13 Developmental Collaboration Agreement, dated July 8, 1998
between UroGen and Baxter. (2)
10.14 Credit Agreement, dated July 8, 1998, between UroGen and
Baxter. (2)
10.15 Technology License Agreement, dated July 8, 1998, between
UroGen and Baxter. (2)
10.16 Form of Note and Warrant Purchase Agreement, dated April 28,
1999 between UroGen and various investors. (4)
10.17 UroGen Corp. 1999 Stock Plan (4)
10.18 Form of Common Stock and Warrant Purchase Agreement dated
January 21, 2000 between UroGen and various investors. (4)
10.19 Form of Common Stock Purchase Agreement dated January 21,
2000 between UroGen and various investors. (4)
10.20 Form of Common Stock Purchase Agreement dated February 17,
2000 between UroGen and various investors.
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
__________________________________________
(1) Previously filed with the Company's Application for Registration on Form
10-SB dated February 9, 1996.
(2) Previously filed with the Company's current Report on Form 8-K dated
February 9, 1996.
(3) Previously filed with the Company's Annual Report on Form 10-KSB dated
May 24, 1999.
(4) Previously filed with the Company Registration Statement on Form SB-2 dated
February 10, 2000.
31
<PAGE>
Report of Independent Auditors
The Board of Directors
GenStar Therapeutics Corporation
(formerly UroGen Corp.)
We have audited the accompanying consolidated balance sheets of GenStar
Therapeutics Corporation (a development stage enterprise) as of December 31,
1999 and 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999 and the period from July 1, 1991 (inception) to December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GenStar Therapeutics
Corporation (a development stage enterprise) at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 and the period from July 1, 1991
(inception) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
March 8, 2000
32
<PAGE>
GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(Formerly UroGen Corp.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 921,994 $ 314,983
Accounts receivable 114,208 -
Accounts receivable from related party - 348,718
Other current assets 9,461 20,173
---------- -----------
Total current assets 1,045,663 683,874
Property and equipment, net 569,121 383,826
Investments underlying deferred compensation 134,308 28,987
Other assets 77,821 1,065
---------- -----------
$1,826,913 $ 1,097,752
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 399,485 $ 392,461
Amounts due to stockholder - 315,000
Accrued employee benefits 73,915 200,716
Other accrued liabilities 81,856 58,280
Current portion of capital lease obligation 42,696 -
Notes payable - 991,761
------------ -----------
Total current liabilities 597,952 1,958,218
Capital lease obligation, net of current portion 51,314 -
Deferred compensation 206,962 28,987
Advance from related party 1,876,003 1,044,275
Commitments
Stockholders' equity (deficit):
Preferred Stock - $0.01 par value, 5,000,000
shares authorized:
Series A Preferred Stock, 5,830 and 5,830
issued and outstanding 58 58
Series B Preferred Stock, 2,998 and none
issued and outstanding 30 -
Common Stock - $0.001 par value, 40,000,000
shares authorized; 12,104,101 and 9,378,538
issued and outstanding 12,104 9,379
Additional paid-in capital 11,606,880 6,782,920
Note receivable from stockholder - (20,522)
Deficit accumulated during development stage (12,524,390) (8,705,563)
------------ -----------
Total stockholders' equity (deficit) (905,318) (1,933,728)
------------ -----------
$ 1,826,913 $ 1,097,752
============ ===========
</TABLE>
See accompanying notes.
33
<PAGE>
GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(Formerly UroGen Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 1, 1991
(inception) to
For the Year Ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 117,867 $ 192,300 $ 193,500 $ 959,247
Costs and expenses:
Cost of sales - - - 821,878
Research and development 2,710,921 1,915,548 345,592 8,145,589
Write-off of acquired
In-process technology - 5,455,505 - 5,455,505
General and administrative 817,111 487,501 151,315 2,164,064
------------- ------------- ---------- ------------
Total costs and expenses 3,528,032 7,858,554 496,907 16,587,036
------------- ------------- ---------- ------------
Loss from operations (3,410,165) (7,666,254) (303,407) (15,627,789)
Other income (expense) (71,749) 300 - (7,673)
Interest expense (360,417) (306,106) - (666,523)
Interest income 23,504 9,672 4,230 51,802
------------- ------------- ---------- ------------
Net loss $ (3,818,827) $ (7,962,388) $ (299,177) $(16,250,183)
============= ============= ========== ============
Basic and diluted loss
per share $ (0.35) $ (1.00) $ (0.04)
============= ============= ==========
Number of shares used in the
Computation of basic and
diluted loss per share 10,762,787 7,997,319 7,311,573
============= ============= ==========
</TABLE>
See accompanying notes.
34
<PAGE>
GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(Formerly UroGen Corp.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'/EQUITY (DEFICIT)
For the period July 1, 1991 (inception) to December 31, 1999
<TABLE>
<CAPTION>
Deficit
Note Accumulated
Preferred Stock Common Stock Additional Receivable During
Number of Number of Paid-in From Development
Shares Amount Shares Amount Capital Stockholder Stage
<S> <C> <C> <C> <C> <C> <C> <C>
Advances and contributions from
Medstone July 1, 1991 to December 31,
1996 - - - - - - -
Distribution of stock dividend and
net assets February 9, 1996 - - 5,616,528 $ 5,617 $657,465 - -
Distribution of Common Stock for
Services at $0.05 per share - - 363,000 363 17,787 - -
Net loss July 1, 1991 to
December 31, 1996 - - - - - - $ (443,998)
------ ----- ---------- --------- ---------- -------- ------------
Balance at December 31, 1996 - - 5,979,528 5,980 675,252 - (443,998)
Issuance of Common Stock for cash
upon Exercise of options at $0.05
per share - - 1,410,000 1,410 69,090 - -
Issuance of Common Stock for cash and
note receivable at $0.05 per share - - 147,791 148 7,242 (7,242) -
Net loss - - - - - - (299,177)
------- ------ ----------- --------- ----------- --------- ------------
Balance at December 31, 1997 - - 7,537,319 7,538 751,584 (7,242) (743,175)
Issuance of Preferred and Common
Stock for equipment and acquired
in-process technology at $0.63
and $630 per share, respectively,
net of issuance costs of $83,366 5,830 $ 58 1,841,219 1,841 5,714,176 - -
Issuance of warrants for
Common Stock valued at
$0.59 per share - - - - 305,910 - -
Interest and other related to note
receivable from stockholder - - - - 11,250 (13,280) -
Net loss
- - - - - - (7,962,388)
------- ------ ----------- --------- ----------- --------- ------------
Balance at December 31, 1998 5,830 58 9,378,538 9,379 6,782,920 (20,522) (8,705,563)
------- ------ ----------- --------- ----------- --------- ------------
Issuance of Preferred Stock from
conversion of advance from
related party at $1,000 per share 2,998 30 - - 2,997,970 - -
Issuance of Common Stock upon
conversion of Notes payable plus
accrued interest at $1.00 and
$0.30 per share - - 2,460,811 2,461 1,509,958 - -
Payment of note receivable - - - - - 20,522 -
Issuance of Common Stock for cash upon
exercise of options at $0.05 per share - - 36,319 36 1,475 - -
Issuance of warrants valued at $0.18
and $0.20 per share - - - - 311,667 - -
Issuance of Common Stock for cash upon
exercise of warrants at $.001 - - 218,433 218 - - -
per share
Issuance of Common Stock for
services at $0.29 per share - - 10,000 10 2,890 - -
Continued on next page
Net loss - - - - - - (3,818,827)
------- ------ ----------- --------- ----------- --------- ------------
Balance at December 31, 1999 8,828 $ 88 12,104,101 $ 12,104 $11,606,880 $ - $(12,524,390)
======= ====== =========== ========= =========== ========= ============
<CAPTION>
Advances Divisional
From Accumulated
Medstone Deficit Total
<S> <C> <C> <C>
Advances and contributions from
Medstone July 1, 1991 to December 31,
1996 $ 4,388,875 - $ 4,388,875
Distribution of stock dividend and
net assets February 9, 1996 (4,388,875) $ 3,725,793 -
Distribution of Common Stock for
Services at $0.05 per share - - 18,150
Net loss July 1, 1991 to
December 31, 1996 - (3,725,793) (4,169,791)
------------- ------------ ------------
Balance at December 31, 1996 - - 237,234
Issuance of Common Stock for cash upon
Exercise of options at $0.05
per share - - 70,500
Issuance of Common Stock for cash and
note receivable at $0.05 per share - - 148
Net loss - - (299,177)
------------- ------------ ------------
Balance at December 31, 1997 - - 8,705
Issuance of Preferred and Common
Stock for equipment and acquired
in-process technology at $0.63
and $630, respectively, net of issuance
costs of $83,366 - - 5,716,075
Issuance of warrants for
Common Stock valued at
$0.59 per share - - 305,910
Interest and other related to note
receivable from stockholder - - (2,030)
Net loss - - (7,962,388)
------------- ------------ ------------
Balance at December 31, 1998 - - (1,933,728)
Issuance of Preferred Stock from
conversion of advance from
related party at $1,000 per share - - 2,998,000
Issuance of Common Stock upon
conversion of Notes payable plus
accrued interest at $1.00 and
$0.30 per share - - 1,512,419
Payment of note receivable - - 20,522
Issuance of Common Stock for cash upon
exercise of options at $0.05 per share - - 1,511
Issuance of warrants valued at $0.18
and $0.20 per share - - 311,667
Issuance of Common Stock for cash upon
exercise of warrants at $.001 per share - - 218
Issuance of Common Stock for
services at $0.29 per share - - 2,900
Net loss - - (3,818,827)
============ ============ ============
Balance at December 31, 1999 $ - $ - $ (905,318)
============ ============ ============
</TABLE>
See accompanying notes.
35
<PAGE>
GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(Formerly UroGen Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 1, 1991
(inception) to
For the Year Ended December 31, December 31,
1999 1998 1997 1999
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,818,827) $ (7,962,388) $ (299,177) $(16,250,183)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write-off of in-process technology acquired with stock - 5,455,505 - 5,455,505
Expenses paid via advances from related party - 695,557 - 695,557
Depreciation and amortization 130,525 25,715 828 650,852
Distribution of common stock for services 2,900 - - 21,050
Accrued interest paid through issuance of Common Stock 40,245 - - 40,245
Non-cash outside service cost - - - 106,000
Gain (loss) on disposal of property and equipment - - - (81,807)
Amortization of debt discount 308,656 265,640 - 574,296
Change in operating assets and liabilities:
Accounts receivable (114,208) - - -
Other current assets 10,712 (20,173) - (123,669)
Other assets (182,077) (28,987) (1,065) (212,129)
Accounts payable 7,024 323,637 53,364 399,485
Amounts due to stockholder (315,000) 315,000 - -
Other current liabilities (60,529) 258,996 - 198,467
Deferred compensation 177,975 28,987 - 206,962
------------ ------------ ----------- ------------
Net cash used in operating activities (3,812,604) (642,511) (246,050) (8,319,369)
------------ ------------ ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (169,919) (63,493) (500) (748,918)
------------ ------------ ----------- ------------
Net cash used in investing activities (169,919) (63,493) (500) (748,918)
------------ ------------ ----------- ------------
Cash flows from financing activities:
Advances from related party 4,178,446 - - 4,178,446
Repayment of note receivable from stockholder 20,000 - - 20,000
Proceeds from notes payable 400,000 1,030,000 - 1,430,000
Repayment of capital lease (10,641) - - (10,641)
Stock issuance costs - (83,366) - (83,366)
Proceeds from issuance of common stock upon exercise
of options and warrants 1,729 - 70,500 72,229
Proceeds from sale of Common Stock - - 148 148
Net advances from Medstone - - - 3,883,465
Capital contribution by Medstone - - - 500,000
------------ ------------ ----------- ------------
Net cash provided by financing activities 4,589,534 946,634 70,648 9,990,281
------------ ------------ ----------- ------------
Net increase (decrease) in cash and equivalents 607,011 240,630 (175,902) 921,994
Cash and equivalents, beginning of period 314,983 74,353 250,255 -
------------ ------------ ----------- ------------
Cash and equivalents, end of period $ 921,994 $ 314,983 $ 74,353 $ 921,994
============ ============ =========== ============
</TABLE>
See Note 12 for supplemental cash flow information.
See accompanying notes.
36
<PAGE>
GENSTAR THERAPEUTICS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
(Formerly UroGen Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
GenStar Therapeutics Corporation (the "Company") is a biotechnology company
dedicated to the development of innovative gene therapy products for the
treatment of hemophilia, cancer and other genetic disorders.
The Company was incorporated as UroGen Corp. in Delaware on June 30, 1995, as a
wholly-owned subsidiary of Medstone International, Inc. On December 29, 1995,
Medstone declared a dividend of all of the stock of UroGen Corp. to be
distributed to all Medstone stockholders.
In March 2000, the Company's name was legally changed to GenStar Therapeutics
Corporation.
Basis of Presentation
The consolidated financial statements include the accounts of GenStar
Therapeutic Corporation and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is computed
using the straight-line method over the useful lives of the assets, estimated at
three to five years.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants to employees in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants to employees.
Net Loss Per Share
Net loss per share is computed on the basis of the weighted average number of
common shares outstanding during the periods presented. Loss per share assuming
dilution is computed on the basis of the weighted-average number of common
shares outstanding and the dilutive effect of all common stock equivalents and
convertible securities. Net loss per share assuming dilution for the years ended
December 31, 1999, 1998 and 1997 is equal to net loss per share due to the fact
that the effect of common stock equivalents outstanding during the periods,
including stock options, warrants and convertible debt, are antidilutive.
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, which requires that provision be made for taxes currently due
and for the expected future tax effects of temporary differences between book
and tax bases of assets and liabilities.
37
<PAGE>
Research and Development
Research and development costs are expensed as incurred.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. Comprehensive income (loss) was not different than net
income (loss) in 1997, 1998 or 1999.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which will be
effective January 1, 2001. The statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The adoption of this statement is not expected to have a
significant effect on the financial position or results of operations of the
Company.
2. ACQUISITION OF TECHNOLOGY AND RELATED AGREEMENTS
In July 1998, the Company executed various agreements with Baxter Healthcare
Corporation pursuant to which the Company acquired certain rights and assets
from Baxter. Under the terms of the agreements, the Company obtained the rights
to Baxter's adenoviral-based gene transfer technologies and certain equipment in
exchange for 5,830 shares of non-voting convertible Series A Preferred Stock and
1,841,219 shares of Common Stock of the Company. The shares issued to acquire
the gene transfer technologies were valued at $5,455,505 based upon a discounted
cash flow analysis with a discount rate of 50%, estimated research and
development costs for six years and product revenues commencing in year seven,
after the assumed completion of clinical trials and product approval by the FDA.
The value of the technology was charged to acquired in-process technology
because technological feasibility had not been achieved nor had alternative
future uses of the technology been identified. The value of the stock issued for
property and equipment was $343,937 based upon the fair value of those assets.
Baxter will provide funding to the Company for continued research and
development of this technology as it relates to the treatment of hemophilia
under the Developmental Collaboration Agreement. Baxter will provide such
funding through the date on which the treatment of the first patient in a Phase
I clinical trial begins. This development funding is provided under a Credit
Agreement. The balance outstanding under the Credit Agreement as of December 31,
1999 was $1,876,003. Amounts outstanding under the Credit Agreement are due and
payable on December 31 of each year during the term of the agreement. At the
Company's option, the amounts may be paid by issuing to Baxter the number of
shares of Series B Preferred Stock determined by dividing the outstanding amount
under the Credit Agreement by one thousand. The balance has been presented as a
non-current liability on the accompanying balance sheet due to the Company's
conversion right and because the Company intends to convert the debt rather than
repay it with cash. Amounts outstanding under the Credit Agreement do not accrue
interest unless the Company is in default, in which case the amount due bears
interest at prime plus 4%.
The Company entered into a Distribution Agreement with Baxter whereby Baxter
will have an exclusive, worldwide right to market, sell and distribute all
products which may be developed under the Developmental Collaboration Agreement.
The term of the Distribution Agreement is the longer of ten years from the date
of regulatory approval of the first product or the expiration of the last to
expire of any related patents issued on or before ten years from the date of
regulatory approval.
The Company, Baxter and certain founding shareholders (the "Founders") entered
into the Investor Rights Agreement under which the shares held by these entities
are subject to certain restrictions on transferability of the shares until July
8, 2003 and have certain registration rights. Additionally, under this
agreement, Baxter has the right to purchase up to
38
<PAGE>
twenty percent of any new securities issued and has the obligation to purchase
Series C Preferred Stock at a price of $1,000 per share upon the Company's
achievement of the following milestones: (i) $2,000,000 upon treatment of the
first patient in a Phase I clinical trial for a product developed under the
Developmental Collaboration Agreement; (ii) $5,000,000 upon commencement of
Phase III clinical trials of a product developed under the Developmental
Collaboration Agreement; and (iii) $10,000,000 upon approval by the Food and
Drug Administration of a product developed under the Developmental Collaboration
Agreement.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Equipment $ 465,803 $ 372,276
Equipment under capital lease 145,900 -
Furniture and fixtures 26,674 16,063
Leasehold improvements 88,112 22,330
------------- -------------
726,489 410,669
Accumulated depreciation 157,368 26,843
------------- -------------
$ 569,121 $ 383,826
============= =============
</TABLE>
4. CAPITAL LEASE OBLIGATION
During 1999, the Company entered into capital lease agreement under which up to
$250,000 in equipment may be leased. As of December 31, 1999, the Company had
equipment acquired under capital leases of $145,900 with related accumulated
depreciation of $10,730. In addition, the Company issued a warrant for 250,000
shares of Common Stock to the lessor (Note 6).
Future minimum lease payments under this capital lease obligation at December
31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 59,532
2001 59,532
2002 52,256
---------
Total minimum obligations 171,320
Interest 36,060
---------
Present value of minimum lease obligations 135,260
Discount related to warrant valuation (41,250)
Current portion (42,696)
---------
Long-term lease obligations at December 31, 1999 $ 51,314
=========
</TABLE>
5. NOTES PAYABLE
In July 1998 and April 1999, the Company received $1,030,000 and $400,000,
respectively, representing proceeds from the sale of unsecured convertible notes
payable, which bore interest at 8% per annum and were due on June 30, 1999 and
April 30, 2000, respectively, unless previously converted. These notes were
converted into an aggregate of 2,460,811 shares of common stock on June 22, 1999
upon filing of a registration statement to register the resale of underlying
shares.
In addition, each note holder in the July 1998 financing received a warrant to
purchase a number of shares of common stock of the Company equal to one share
for each $2.00 of principal under the purchased note. Each note holder in the
April 1999 financing received a warrant to purchase the same number of shares of
common stock as his or her notes converted into. The warrants are exercisable
for seven years from issuance and have an exercise price of $0.74 and
39
<PAGE>
$0.30 per share, respectively. The fair value of the warrants was amortized to
interest expense through the expected date of conversion of the notes.
Amortization during the years ended December 31, 1999 and 1998 was $304,906 and
$265,640, respectively.
6. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock $0.01 par
value. As of December 31, 1999, 40,000, 10,000 and 17,000 shares were designated
Series A, Series B, and Series C, respectively.
As of December 31, 1999, there were 5,830 shares of Series A Preferred Stock
outstanding. Holders of the Series A Preferred Stock are not entitled to receive
dividends, have a liquidation preference amount of ten dollars ($10.00) per
share and have no voting rights. The Series A Preferred Stock is convertible to
Common Stock on a 1,000 to 1 basis; provided, however, that no shares are
convertible prior to July 8, 2001.
As of December 31, 1999, there were 2,998 shares of Series B Preferred Stock
issued and outstanding. The Company anticipates that Series B Preferred Stock
will be issued only to Baxter in payment for amounts funded by Baxter under the
Credit Agreement. Holders of the Series B Preferred Stock are not entitled to
receive dividends, have a liquidation preference amount of one thousand dollars
($1,000.00) per share prior to any distribution to holders of Series A Preferred
Stock and holders of Common Stock and have no voting rights, except for a vote
as to whether the Company may issue additional Series B Preferred Stock. The
Series B Preferred Stock may be converted into Common Stock or into Series A
Preferred Stock at the option of the holder, and converts automatically to
Common Stock upon the earlier of (i) the first business day following the
treatment of the first patient under an Initial New Drug Application for a
Collaboration Product (as defined) commences in a Phase I Clinical Trial (the
"IND Milestone Date"), (ii) the date five years after the last advance of funds
by Baxter under the Credit Agreement between Baxter and the Company through and
including the IND Milestone Date and (iii) automatic conversion pursuant to the
terms of the Credit Agreement. The Series B Preferred Stock is convertible into
Common Stock in an amount equal to (a) the quotient of (i) the Liquidation Value
(adjusted for recapitalizations), divided by (ii) one hundred and ten percent
(110%) of the per share Fair Market Value of the Company's Common Stock (as
defined), multiplied by (b) the number of shares of Series B Preferred
converted. The Series B Preferred Stock is convertible into Series A Preferred
on a one for one basis. The "Liquidation Value" is initially $1,000 per share of
Series B Preferred.
As of December 31, 1999, there were no shares of Series C Preferred Stock issued
and outstanding. The Company anticipates that Series C Preferred Stock will be
sold only to Baxter upon GenStar meeting certain specified milestones (the
"Series C Milestones"). Holders of the Series C Preferred Stock are not entitled
to receive dividends, have a liquidation preference amount of one thousand
dollars ($1,000.00) per share prior to any distribution to holders of Series A
Preferred Stock and to holders of Common Stock and have no voting rights, except
as to the issuance of additional Series C Preferred Stock. Each share of Series
C Preferred may be converted into Common Stock or to Series A Preferred Stock at
the option of the holder, and converts automatically to Common Stock upon the
earlier of (i) the first business day following the approval by the FDA of the
right to market, sell or distribute any product using the Mini-Ad Vector
Technology for treatment of blood clotting disorders in humans relating to
Hemophilia A, which product has been developed pursuant to the Developmental
Collaboration Agreement between Baxter and the Company and (ii) the date seven
years after the achievement of the most recently achieved Series C Milestone.
The Series C Preferred Stock is convertible into Common Stock in an amount equal
to (a) the quotient of (i) the Liquidation Value (adjusted for
Recapitalizations), divided by (ii) one hundred and ten percent (110%) of the
per share Fair Market Value of the Company's Common Stock (as defined),
multiplied by (b) the number of shares of Series C Preferred converted. The
Series C Preferred Stock is convertible into Series A Preferred on a one for one
basis.
Common Stock
The Company is authorized to issue 40,000,000 shares of Common Stock, $0.001 par
value. As of December 31, 1999, there were 12,104,101 shares issued and
outstanding.
In March 1997, the Company entered into a License Agreement with The Immune
Response Corporation (the IRC License), a public biotechnology company. The
Company obtained an exclusive license to use certain patented
40
<PAGE>
technologies to develop and commercialize products based upon the licensed
patent rights. The IRC License requires the Company to pay future cash royalties
to the licensor based upon net sales. In connection with this agreement, the
Company entered into a Stock and Warrant Purchase Agreement with IRC whereby the
Company issued 147,791 shares of Common Stock at $.05 per share, the fair value
of the shares on the date of issuance as determined by the Board of Directors,
for total proceeds of $7,390. See the description of the Immune Response
Corporation warrant below.
Warrants
In September 1999, the Company issued a warrant to purchase 250,000 shares to a
leasing company related to a lease line for capital equipment (Note 4). The
warrant is exercisable for seven years at an exercise price of $0.30 per share.
The warrant was valued at $45,000 and is being amortized to interest expense
over the term of the lease.
Holders of the convertible notes payable also hold warrants to purchase 515,000
and 1,364,166 shares of Common Stock at an exercise price of $0.74 per share and
$0.30 per share, respectively (Note 4).
In 1997 the Company issued warrants to purchase 200,000 shares of Common Stock
to an officer of the Company. These warrants are exercisable at $.05 per share
and expire on July 31, 2001.
The Company granted to IRC a warrant to purchase additional shares in the
Company to maintain a fully-diluted ownership percentage of two percent (2%) or
increase its ownership percentage up to three percent (3%). Such warrant rights
are exercisable at prices ranging from $.03 to $.04 per share. The warrant was
exercised in May 1999.
Stock Options
The 1995 Director Option Plan (the "Director Plan") was adopted by the Board and
approved by the stockholders in 1995 and amended in February 2000 to provide
automatic, nondiscretionary grants of options to non-employee directors of the
Company. A total of 550,000 shares of Common Stock have been reserved for
issuance under the Director Plan. The Director Plan provides that each non-
employee director is automatically granted an option to purchase 45,000 shares
of GenStar Common Stock upon his or her initial election or appointment as a
non-employee director. Subsequently, each non-employee director who has served
for at least six months will be granted an additional option to purchase 15,000
shares of GenStar Common Stock on December 31 of each year so long as he or she
remains a non-employee director. The exercise price of options granted to non-
employee directors must be the fair market value of GenStar Common Stock on the
date of grant.
Options granted to non-employee directors have a ten-year term, subject to a
non-employee director's continued service as a director. The initial options
granted to non-employee directors vest over three years at the rate of one-third
per year and the annual options vest one year from the date of grant. As of
December 31, 1999, options to purchase 50,000 shares of Common Stock had been
granted under The Director Option Plan and options to purchase 35,000 shares
were vested.
The 1995 Stock Plan, which was adopted by the Board of Directors (the "Board")
and authorized by the Stockholders in 1995, authorizes the Board or one or
more committees which the Board may appoint from among its members (the
"Committee"), to grant options and rights to purchase Common Stock to officers,
employees, consultants and certain advisors to the Company. Options granted
under the 1995 Stock Plan may be either "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonstatutory stock options, as determined by the Board or the Committee. The
1995 Stock Plan initially reserved 1,850,000 shares for issuance under the Plan,
to be increased the first day of each year by the number of shares equal to two
percent of the Company's total outstanding common shares. Options granted
pursuant to the 1995 Stock Plan above have exercise periods of ten years and
vest over one to four years.
The 1999 Stock Plan, which was adopted by the Board in 1999 and approved by the
Stockholders in February 2000, authorizes the Board or the Committee, to grant
options and rights to purchase Common Stock to officers, key employees,
consultants and certain advisors to the Company. Options granted under the 1999
Stock Plan may be either incentive stock options, or nonstatutory stock options,
41
<PAGE>
as determined by the Board or the Committee. The 1999 Stock Plan initially
reserved 4,000,000 shares for issuance under the Plan to be increased the first
day of each year by the number of shares equal to two percent of the Company's
total outstanding common shares. Options granted pursuant to the 1999 Stock Plan
have exercise periods of ten years and generally vest over four years.
42
<PAGE>
The following table summarizes the activity of the Company's stock options:
<TABLE>
<CAPTION>
Employee Director Weighted
Stock Stock Average
Options Options Exercise Price
<S> <C> <C> <C>
Balance at December 31, 1996 1,410,000 15,000 $0.05
Granted 350,000 5,000 $0.05
Exercised (1,410,000) - $0.05
Canceled - - -
Expired - - -
------------- ------------
Balance at December 31, 1997 350,000 20,000 $0.05
Granted - 15,000 $0.33
Exercised - - -
Canceled - - -
Expired - - -
------------- ------------
Balance at December 31, 1998 350,000 35,000 $0.06
Granted 3,021,183 15,000 $0.30
Exercised (30,217) - $0.05
Canceled (114,783) - $0.15
Expired - - -
------------- ------------
Balance at December 31, 1999 3,226,183 50,000 $0.29
============= ============
</TABLE>
43
<PAGE>
Options outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Weighted Average Exercise Price
Exercise Options Contractual Life Exercise Options of Options
Price Outstanding in Years Price Exercisable Exercisable
----- ----------- -------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.05 305,000 7.23 $0.05 280,736 $0.05
$0.20 210,000 9.50 $0.20 5,868 $0.20
$0.32 - $0.33 2,446,183 9.25 $0.32 772,225 $0.32
$0.60 15,000 10.00 $0.60 - -
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee and director stock options and warrants, because,
as discussed below, the alternative fair value accounting provided for under
SFAS 123, "Accounting for Stock-based Compensation," requires use of option
valuation models that were not developed for use in valuing employee and
director stock options and warrants. Under APB 25, when the exercise price of
the Company's employee stock options equals the market price or fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997: a risk-free interest rate of 6%, a dividend yield of 0%, a
volatility factor of the expected market price of the Company's common stock of
70%, 65%, and 50%, respectively, and an expected life of the option of two to
five years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $ (3,846,000) $ (7,964,000) $ (307,000)
Pro forma net loss per share $ (0.36) $ (1.00) $ (0.04)
</TABLE>
The pro forma results above for 1999, 1998 and 1997 are not likely to be
representative of the effects of applying SFAS 123 on reported net income or
loss for future years as these amounts reflect the expense for less than four
years of vesting.
The following Common Stock is reserved for future issuance at December 31, 1999:
<TABLE>
<S> <C>
Stock option:
Granted and outstanding 3,276,183
Reserved for future grants 2,330,432
Warrants 2,329,166
Series A Preferred Stock 5,830,000
----------
13,765,781
==========
</TABLE>
The number of shares of Common Stock into which Series B Preferred Stock will be
converted will not be known until the date of conversion because the conversion
factor is based on fair value at the date of conversion.
7. INCOME TAXES
Prior to the distribution of GenStar Common Stock by Medstone, income taxes had
been allocated to the Company on a "separate return" basis whereby such amounts
were determined as if the Company were a separate taxable entity. However, the
Company's net operating losses and research and development credits incurred
through December 31, 1995 were included in the consolidated tax returns of
Medstone and were fully utilized. As a result, the Company's available net
operating losses and research and development credits to offset future taxable
income are limited to amounts incurred subsequent to 1995. The Company has
established a valuation allowance to fully offset its deferred tax assets in
accordance with Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Accordingly, no benefit for the Company's
deferred tax assets has been recognized, as its realization is uncertain.
44
<PAGE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Loss carryforwards $ 2,949,000 $ 1,284,000
Research and development credit carryforwards 358,000 99,000
Capitalized research and development 2,001,000 2,149,000
Other, net 8,000 63,000
-------------- -------------
Total deferred tax assets 5,316,000 3,595,000
Valuation allowance (5,316,000) (3,595,000)
-------------- -------------
Net deferred tax assets $ - $ -
============== =============
</TABLE>
As of December 31, 1999, the Company has Federal and state net operating loss
carryforwards of approximately $7,220,000 and $7,339,000, respectively, which
will begin to expire in 2011 and 2001, respectively, unless previously utilized.
The company has Federal and state research and development credit carryforwards
of approximately $265,000 and $143,000, respectively, which will begin to expire
in 2011 unless previously utilized.
Under Internal Revenue Code Sections 382 and 383, the Company's use of its net
operating loss and tax credit carryforwards could be limited in the event of
certain cumulative changes in the Company's stock ownership.
8. REVENUES
For the year ended December 31, 1999 all revenue was from a research grant. For
the year ended December 31, 1998, $143,500 of the revenues was from a research
agreement, and $48,800 was from a research grant.
9. RELATED PARTY BALANCES AND TRANSACTIONS
During 1996, the Company issued 339,000 shares of Common Stock valued at $.05
per share and transferred property and equipment with a book value of $42,224 to
a research organization, which is also a stockholder, in connection with the
execution of an Affiliation Agreement and for services rendered. Additionally,
during 1999, 1998 and 1997, the Company paid the research organization $308,972,
$115,493 and $53,741, respectively, for rent, license fees and services (Note
10).
During 1998 and 1997, the Company paid four stockholders/officers a total of
$81,250 and $222,379, respectively, for consulting services.
10. COMMITMENTS
Facilities
The Company entered into a sublease agreement with an affiliated research
organization under which the Company leases approximately 4,800 square feet of
office and laboratory space through May 2000. Additionally, the Company leases
approximately 8,600 square feet of office and laboratory space for our
manufacturing facility. This lease expires in August 2004, with two options to
extend the lease for an additional three years. Additionally, the Company has
entered into a letter of intent with the affiliated research organization for
approximately 22,000 square feet of office and laboratory space beginning in
September 2000. For the years ended December 31, 1999, 1998 and 1997, rent
expense was approximately $303,000, $93,000 and $36,000, respectively.
45
<PAGE>
Future minimum lease payments under these leases as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 282,734
2001 227,944
2002 234,240
2003 240,716
2004 163,416
------------
Total $ 1,149,050
============
</TABLE>
Licenses
The Company entered into the IRC License in March 1997, which was amended in
January 1999. Under the IRC License, the Company is obligated to make a
milestone payment to Immune Response Corporation of $200,000 upon the approval
by the Food and Drug Administration or the governing health authority of any
other country of its first product related to the licensed technology. This fee
can be offset against future royalty payments. The Company is obligated to pay
royalties on its net sales revenue and a percentage of all revenues received
from sublicenses relating to the tumor radiosensitization gene therapy
technology. Additionally, the Company agreed in the January 1999 amendment to
reimburse IRC for past patent expenses relating to the licensed technology in
the amount of $59,400 which was paid in February 2000.
In September 1996, the Company entered into a license agreement with the Regents
of the University of California to license rights to certain patents and
continuing applications thereof in the field of diagnosis of metastases by
nucleic acid amplification. The Company is required to pay an annual license
maintenance fee of $10,000 until the Company is selling licensed product. The
Company is also required to pay milestone fees of $25,000 upon filing an Initial
New Drug Application on a licensed product or method with the Food and Drug
Administration and $50,000 upon marketing approval of a licensed product or
method by the FDA. The Company will pay royalties on its net sales revenues of
licensed products or methods. A minimum annual royalty of $50,000 is payable
beginning with the year of first commercial sale of licensed product, but no
later than the fifth year of the agreement. The minimum annual royalty will be
credited against earned royalty due for the year in which the annual minimum
payment was made.
11. PROFIT SHARING PLAN AND DEFERRED COMPENSATION PLAN
In 1998, the Company established a savings plan which covers all employees
working more than 1,000 hours per year which has been established pursuant to
the provisions of Section 401(k) of the Internal Revenue Code. Contributions to
the plan are discretionary and vest over a four-year period. Employer
contributions during the years ended December 31, 1999 and 1998 were $105,064
and $13,960.
In 1998, the Company established a deferred compensation plan. Certain employees
are allowed to defer up to 25% of their salaries under this plan. Additionally,
the Company allows employees 25% of their salaries for employee benefits and
employer payroll taxes. A portion of the employer allocation for employee
benefits may be allocated to the deferred compensation plan. During the years
ended December 31, 1999 and 1998, the Company's contributions to the deferred
compensation plans were $71,488 and $11,105, respectively. Employer
contributions vest over a four-year period. The liability for the deferred
compensation plan is funded by the purchase of life insurance policies.
46
<PAGE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, convertible Notes Payable and accrued interest in the amount of
$1,512,419 converted into 2,460,811 shares of Common Stock. Additionally,
amounts due Baxter under the credit agreement of $2,998,000 were converted into
2,998 shares of Series B Preferred Stock.
During 1999, the Company acquired equipment valued at $145,900 under capital
lease agreements. A warrant for 250,000 shares related to the capital lease was
valued at $45,000.
As more fully described in Note 2, in 1998 the Company acquired certain
technology and equipment in exchange for 5,830 shares of Series A Preferred
Stock and 1,841,219 shares of Common Stock of the Company valued at $5,799,442.
The equipment acquired was valued at $343,937 based on an appraisal.
During the third quarter of 1998, a portion of the Company's operations were
located at Baxter's facility. The costs incurred for such operations of $695,557
were reimbursed to Baxter via the Credit Agreement (Note 2).
Cash paid for income taxes was $2,465, $800 and $800 for years ended December
31, 1999, 1998 and 1997. There was no cash paid for interest during the three
years ended December 31, 1999.
13. SUBSEQUENT EVENTS
In January and February 2000, the Company raised $25.3 million from the sale of
8,362,801 shares of Common Stock and warrants for an additional 1,773,899 shares
of Common Stock. The warrants are exercisable through January 20, 2005 and have
an exercise price of $0.75 per share.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GENSTAR THERAPEUTICS CORPORATION
--------------------------------
A Delaware Corporation
Date: March 30, 2000
/s/ PAUL D. QUADROS
-----------------------------
Paul D. Quadros
Chairman and
Chief Financial Officer
/s/ ROBERT E. SOBOL
-----------------------------
Robert E. Sobol
President and
Chief Executive Officer
/s/ CARIN D. SANDVIK
-----------------------------
Carin D. Sandvik
Controller
Chief Accounting Officer
(Principal accounting officer)
/s/ PETER F. BERNARDONI
-----------------------------
Peter F. Bernardoni
Director
/s/ IVOR ROYSTON
-----------------------------
Ivor Royston
Director
/s/ VICTOR W. SCHMITT
-----------------------------
Victor W. Schmitt
Director
/s/ WEI-WEI ZHANG
-----------------------------
Wei-Wei Zhang
Director
48
<PAGE>
Exhibit 3.1
CERTIFICATE OF AMENDMENT OF
OF
THE RESTATED CERTIFICATE OF INCORPORATION
OF
UROGEN CORP.
The undersigned certify that:
1. They are the President and Corporate Secretary, respectively, of Urogen
Corp., a Delaware corporation (the "Corporation").
2. Article I of the Restated Certificate of the Corporation is hereby
amended to read in its entirety as follows:
ARTICLE I
---------
"The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
"GenStar Therapeutics Corporation"
3. The foregoing amendment to the Restated Certificate of Incorporation
has been duly approved by the board of directors.
4. The foregoing amendment to the Restated Certificate of Incorporation
has been duly approved by the required vote of stockholders in accordance with
Sections 228 and 242 of the Delaware General Corporation Law.
The undersigned further declare under penalty of perjury under the laws of
the State of Delaware that the matters set forth in this certificate are true
and correct of their own knowledge.
DATE: March 21, 2000
/s/ ROBERT E. SOBOL
____________________________________________
Robert E. Sobol, President
/s/ CARIN D. SANDVIK
____________________________________________
Carin D. Sandvik, Corporate Secretary
<PAGE>
Exhibit 10.20
UROGEN CORP.
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
February 22, 2000 by and among UroGen Corp., a Delaware corporation (the
"Company"), with its principal office at 10835 Altman Row, Suite 150, San Diego,
California 92121 and the investors whose names appear on the Schedule of
Investors attached hereto as Exhibit A (the "Investors").
---------
ARTICLE I
Purchase of Common Stock
1.1 Common Stock. Subject to the terms and conditions hereof, the Company
------------
will issue and sell to each Investor, and each Investor will each purchase from
the Company, severally, the number of shares (the "Shares") of the Company's
Common Stock (the "Common Stock") set forth opposite such Investor's name on the
Schedule of Investors, at a purchase price of $8.50 per Share. The maximum
aggregate number of Shares issuable hereunder is 2,000,000 Shares.
1.2 Purchase Price. The purchase price payable by each Investor for
--------------
the Shares to be purchased hereunder (the "Purchase Price") shall be equal to
the number of Shares to be purchased by that Investor multiplied by $8.50, as
set forth opposite such Investor's name on the Schedule of Purchasers.
1.3 Obligations of Investors. The obligations of the Investors hereunder
------------------------
are several and not joint.
ARTICLE II
Closing and Delivery
2.1 Place and Date of Closing. The initial closing of the transactions
-------------------------
provided for herein (the "Closing") will be held at the offices of Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 at
9:00 a.m. on February 23, 2000 (the "Closing Date") or at such other time and
place as the parties shall mutually agree.
2.2 Subsequent Closings. The Company may, at its option, schedule
-------------------
additional closings (the "Additional Closings") after the first Closing has been
completed on such date or dates as the Company may determine, but not later than
February 29, 2000. The date of each Additional Closing is hereinafter referred
to as an "Additional Closing Date." The first Closing and each Additional
Closing are sometimes referred to herein individually as a "Closing," and the
first Closing Date and each Additional Closing Date are sometimes referred to
herein individually as a "Closing Date." At each Additional Closing, the Company
shall prepare a
<PAGE>
revised Schedule of Investors to include any additional Investors, and each such
additional Investor shall execute a signature page to this Agreement.
2.3 Delivery. At the Closing, the Company will deliver to each Investor
--------
a certificate representing the number of Shares set forth opposite such
Investor's name on the Schedule of Investors. Each Investor shall deliver to the
Company the Purchase Price set forth opposite such Investor's name on the
Schedule of Investors by check or by wire transfer.
ARTICLE III
Representations and Warranties of the Company
The Company hereby represents and warrants to each Investor as
follows:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized and validly existing under, and by virtue of, the laws of the State of
Delaware and is in good standing under such laws. The Company has the requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted and as proposed to be conducted.
3.2 Corporate Power. The Company will have at the Closing all requisite
---------------
legal and corporate power to execute and deliver this Agreement, to issue the
Common Stock and to carry out and perform its obligations under the terms of
this Agreement.
3.3 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders that is necessary for the
authorization, execution and delivery of this Agreement by the Company, for the
performance of the Company's obligations hereunder, and for the authorization,
issuance and delivery of the Common Stock, has been taken or will be taken prior
to the Closing. This Agreement, when executed and delivered, shall constitute
the legal and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, subject to judicial
principles respecting election of remedies or limiting the availability of
specific performance, injunctive relief, and other equitable remedies, and
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect generally relating to or affecting creditors' rights.
3.4 Capitalization.
--------------
(a) As of February 22, 2000, the authorized capital stock of the
Company consisted of 40,000,000 shares of Common Stock, of which 18,958,927
shares were issued and outstanding; and 5,000,000 shares of preferred stock
("Preferred Stock"), of which 40,000 shares have been designated Series A
Preferred Stock, of which 5,830 shares were issued and outstanding; 10,000
shares have been designated Series B Preferred Stock, of which 2,998 shares were
issued and outstanding; and 17,000 shares have been designated Series C
Preferred Stock, of which no shares were issued or outstanding. The Series A
Preferred Stock converts to Common Stock on a 1,000-to-1 basis. The Series B and
C Preferred Stock convert to Common
-2-
<PAGE>
Stock based upon the fair market value of the Common Stock at the date of
conversion. All issued and outstanding shares of Common Stock and Preferred
Stock have been duly authorized and validly issued, and are fully paid and non-
assessable. The Company has agreed to repay certain indebtedness to Baxter
Healthcare Corporation, under a Credit Agreement dated July 8, 1998, in shares
of Series B Preferred Stock. As of February 22, 2000, the amount of such
indebtedness was $1,876,003, which will convert into 1,876 shares of Series B
Preferred Stock. In addition, Baxter is obligated to purchase shares of Series C
Preferred Stock upon the Company's achievement of certain milestones.
(b) As of February 22, 2000, the Company had reserved 5,656,832
shares of Common Stock for issuance to employees, officers, directors and
consultants of the Company, as may be determined by the Company's Board of
Directors from time to time under the Company's 1995 Stock Plan, as amended, and
1999 Stock Plan (the "Option Plans"). As of February 22, 2000, options to
purchase 3,076,842 shares of Common Stock were outstanding. As of February 22,
2000, there were no outstanding rights, options, warrants, preemptive rights,
conversion rights, rights of first refusal or similar rights or agreements, oral
or written, for the purchase or acquisition from the Company of any shares of
its capital stock or any other securities, except for outstanding options under
the Option Plans and the following warrants: (i) in July 1998, in connection
with the issuance of convertible debt, the Company issued warrants, expiring in
July 2005, to purchase 452,500 shares of Common Stock at $0.74 per share; (ii)
in April 1999, in connection with the issuance of additional convertible debt,
the Company issued warrants, expiring in April 2006, to purchase 1,247,500
shares of Common Stock at $0.30 per share; (iii) in October 1999, in connection
with a capital lease line, the Company issued warrants, expiring in October
2006, to purchase 250,000 shares of Common Stock at $0.30 per share; (iv) in
January 2000, in connection with the issuance of Common Stock, the Company
issued warrants to purchase 2,133,899 shares of Common Stock. The warrants
expire five years from date of issuance and are exercisable at $0.75 per share;
(vi) in connection with a guaranty provided by Baxter, the Company has proposed
to issue warrants to Baxter, expiring in January 2005, to purchase 100,000
shares of Common Stock at $2.00 per share.
(c) Validity of Securities; Reservation of Shares. The Shares, when
---------------------------------------------
issued, sold and delivered in accordance with the terms of this Agreement, will
be duly authorized, validly issued, fully paid and nonassessable and will be
free and clear of any liens or encumbrances; provided, however, that the Shares
-------- -------
may be subject to restrictions on transfer to the extent provided herein or
under state and/or federal securities laws. Based in part upon the
representations of the Investors in this Agreement, the offer, sale and issuance
of the Shares will be in compliance with all applicable federal and state
securities laws.
3.5 Governmental Consent, etc. No consent, approval or authorization
--------------------------
of or designation, declaration or filing with any state or federal governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement or the offer, sale or issuance of the
Shares, or the consummation of any other transaction contemplated hereby
(excluding Article VI hereof), except the qualification (or the taking of such
action as may be necessary to secure an exemption from qualification, if
available), under the California Corporate Securities Law and other applicable
blue sky laws, of the offer and sale of
-3-
<PAGE>
the Shares, which qualification, if required, will be accomplished in a timely
manner prior to or promptly upon completion of the Closing.
3.6 SEC Documents; Parent Financial Statements. The Company has
------------------------------------------
furnished or made available to the Investors true and complete copies of all
reports or registration statements filed by it with the U.S. Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933 (the
"Securities Act") or the Securities Exchange Act of 1934 (the "Exchange Act")
since January 1, 1999, all in the form so filed (all of the foregoing being
collectively referred to as the "SEC Documents"), which are all the documents
(other than preliminary materials) that the Company was required to file with
the SEC since such date. As of their respective filing dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and none of the SEC Documents 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 made therein,
in light of the circumstances in which they were made, not misleading, except to
the extent corrected by a document subsequently filed with the SEC. The
financial statements of the Company, including the notes thereto, included in
the SEC Documents (the "Financial Statements") comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles consistently applied
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) and present fairly the
consolidated financial position of the Company at the dates thereof and the
consolidated results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal recurring adjustments).
There has been no change in the Company's accounting policies except as
described in the notes to the Financial Statements.
3.7 No Material Adverse Change. Since the date of the balance sheet
--------------------------
included in the Company's most recently filed report on Form 10-QSB or Form
10-KSB, the Company has conducted its business in the ordinary course and there
has not occurred: (a) any material adverse change in the financial condition,
liabilities, assets or business of the Company; (b) any amendment or change in
the Certificate of Incorporation or Bylaws of the Company; or (c) any damage to,
destruction or loss of any assets of the Company (whether or not covered by
insurance) that materially and adversely affects the financial condition or
business of the Company.
3.8 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which the Company has received any notice of
assertion against the Company, which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions contemplated
by this Agreement.
-4-
<PAGE>
ARTICLE IV
Representations and Warranties of the Investors
Each Investor represents and warrants to the Company, as of the Closing
Date, as follows:
4.1 Authorization. All action on the part of the Investor for the
-------------
authorization, execution, delivery and performance by the Investor of this
Agreement has been taken, and this Agreement constitutes a valid and binding
obligation of the Investor, enforceable in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, or similar
laws relating to or affecting the enforcement of creditors' rights.
4.2 Experience/Risk. The Investor is experienced in evaluating and
---------------
investing in new companies such as the Company. The Investor is a sophisticated
investor with such knowledge and experience in financial and business matters so
as to be capable of evaluating the merits and risks of a prospective investment
in the Securities and of bearing the economic risks of such investment.
4.3 Investment. The Investor is acquiring the Shares for investment
----------
for its own account and not with a view to, or for resale in connection with,
any distribution. The Investor understands that the Shares to be acquired have
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act that depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
4.4 Restricted Securities. The Investor acknowledges that the Shares
---------------------
must be held indefinitely unless subsequently registered under the Securities
Act or unless an exemption from such registration is available. The Investor is
aware of the provisions of Rule 144 promulgated under the Securities Act, which
permits limited resale of securities purchased in a private placement subject to
the satisfaction of certain conditions, including, in case the Investor has held
the Shares for less than two years or is an affiliate of the Company, among
other things: the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the Shares to be sold, the sale being through a "broker's
transaction" or in transactions directly with a "market maker," and the number
of Shares being sold during any three-month period not exceeding specified
limitations.
4.5 Limited Public Market. The Investor understands that only an
---------------------
extremely limited public market now exists for the Common Stock, and that a
public market for the Common Stock may not develop or be sustained sufficiently
to permit the resale of the Shares.
4.6 Access to Data. The Investor has had an opportunity to discuss
--------------
the Company's business, management and financial affairs with the Company's
management. The Investor understands that such discussions, as well as the
written information issued by the Company, were intended to describe the aspects
of the Company's business and prospects which it believes to be material but
were not necessarily a thorough or exhaustive description.
-5-
<PAGE>
4.7 Accredited Investor Status. The Investor currently does and will
--------------------------
as of the Closing Date qualify as an "accredited investor" within the meaning of
Regulation D (17 C.F.R. (S) 230.501) of the rules and regulations promulgated
under the Securities Act.
4.8 Government Consents. No consent, approval or authorization of or
-------------------
designation, declaration or filing with any state, federal or foreign
governmental authority on the part of the Investor is required in connection
with the valid execution and delivery of this Agreement by the Investor and the
consummation by the Investor of the transactions contemplated hereby.
4.9 Legends. Each certificate representing the Shares shall be endorsed
-------
with the following legend (in addition to any legend required under applicable
state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION, UNLESS SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENT OF SAID ACT. COPIES OF THE AGREEMENT
COVERING THE ACQUISITION OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE CORPORATION.
The Company need not record, and may instruct its transfer agent not to record,
a transfer of Shares, unless the conditions specified in the foregoing legend
are satisfied.
ARTICLE V
Transfer Restrictions; Rights as Stockholder
5.1 Restrictions on Transfer. Each Investor acknowledges that the Shares
------------------------
may not be transferred or assigned in whole or in part without (i) the prior
written consent of the Company and (ii) compliance with applicable federal and
state securities laws; provided, however, that the Securities may be transferred
-------- -------
without the prior written consent of the Company in the following transactions:
(a) A transfer of Shares in whole by a holder who is a natural person
during such holder's lifetime or on death by will or intestacy to such holder's
immediate family or to any custodian or trustee for the account of such holder
or such holder's immediate family. As used herein, "immediate family" shall mean
spouse, lineal descendant, father, mother, brother, or sister of the holder.
-6-
<PAGE>
(b) A transfer of Shares in whole to the Company or to any
stockholder of the Company.
(c) A transfer of Shares in whole or in part to a person who, at the
time of such transfer, is, or is an affiliate of, an officer or director of the
Company.
(d) A transfer of Shares in whole but not in part pursuant to and in
accordance with the terms of any merger, consolidation, reclassification of
shares or capital reorganization of a corporate stockholder or pursuant to a
sale of all or substantially all of the stock or assets of a corporate
stockholder.
(e) A transfer of Shares in accordance with Rule 144 under the
Securities Act.
(f) A transfer of Shares by a holder which is a limited or general
partnership to any of its partners or former partners.
(g) A transfer of Shares which is registered under the Securities
Act.
ARTICLE VI
Registration Rights
6.1 Registrable Securities. The Shares shall be deemed "Registrable
----------------------
Securities," and the holders of such shares (the "Holders") shall be entitled to
registration rights with respect thereto as set forth in this Article VI.
6.2 Registration. The Company shall use commercially reasonable efforts
------------
to cause the Registrable Securities held by each Holder to be registered under
the Securities Act so as to permit the resale thereof, and in connection
therewith shall use all commercially reasonable efforts to prepare and file with
the Securities and Exchange Commission (the "SEC") on or before 90 days after
the date hereof, and shall use commercially reasonable efforts to cause to
become effective as soon as practicable thereafter, a registration statement
under the Securities Act covering the Registrable Securities; provided, however,
-------- -------
that each Holder shall provide all such information and materials to the Company
and take all such action as may be required in order to permit the Company to
comply with all applicable requirements of the SEC and to obtain any desired
acceleration of the effective date of such registration statement. Such
provision of information and materials is a condition precedent to the
obligations of the Company to such Holder pursuant to this Article VI. The
Company shall not be required to effect more than one (1) registration under
this Article VI.
6.3 Company Obligations. The Company shall (i) keep the registration
-------------------
statement filed in accordance with Section 6.2 hereof effective until the
earlier of (A) two years after the registration statement has been declared
effective by the SEC or (B) such time as no Holders shall own any Shares; (ii)
forthwith prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to comply with the provisions of the Securities Act with respect to
the sale or
-7-
<PAGE>
other disposition of all securities proposed to be registered in such
registration statement; (iii) furnish to each Holder such number of copies of
any prospectus (including any preliminary prospectus and any amended or
supplemented prospectus) in conformity with the requirements of the Securities
Act, and such other documents, as each Holder may reasonably request in order to
effect the offering and sale of the shares of the Registrable Securities to be
offered and sold, but only while the Company shall be required under the
provisions hereof to cause the registration statement to remain current; (iv)
provide a CUSIP number, transfer agent and registrar for all Registrable
Securities; and (v) use its commercially reasonable efforts to register or
qualify the shares of the Registrable Securities covered by such registration
statement under the securities or blue sky laws of such jurisdictions as each
Holder shall reasonably request (provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such jurisdiction where
it has not been qualified). The Company agrees to pay to each Holder an amount
equal to $0.001 per Share held by such Holder for each day that the Company has
failed to have filed a registration statement as required by Section 6.2 hereof
beyond 90 days after the date hereof.
6.4 Underwriting. If the distribution of the Registrable Securities
------------
covered by a registration pursuant to this Article VI is to be effected by means
of a firm commitment underwriting, the right of any Holder to include
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
(a) The Company (together with all Holders proposing to distribute
their securities through such underwriting) shall enter into an underwriting
agreement in customary form with a managing underwriter of nationally recognized
standing selected for such underwriting by the Company but subject to the
approval of a majority in interest of the Holders, which approval shall not
unreasonably be withheld. Notwithstanding any other provision of this Article
VI, if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, then the underwriters may
limit the number of shares of Registrable Securities that may be included in the
registration and underwriting, provided that no shares other than Registrable
Securities are included in such registration and underwriting. The shares so
limited shall be allocated among Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such registration. If
any Holder disapproves of the terms of the underwriting, such Holder may elect
to withdraw therefrom by written notice to the Company and the managing
underwriter. The Registrable Securities so withdrawn from such underwriting
shall also be withdrawn from registration; provided, however, that if by the
-------- -------
withdrawal of such Registrable Securities a greater number of Registrable
Securities held by other Holders may be included in such registration (up to the
maximum of any limitation imposed by the underwriters), then the Company shall
offer to all Holders who have included Registrable Securities in the
registration the right to include additional Registrable Securities in the same
proportion used in determining the underwriter limitation as set forth above.
-8-
<PAGE>
(b) If the managing underwriter has not limited the number of
Registrable Securities to be underwritten in any registration requested pursuant
to Section 6.2, the Company may include securities for its own account or for
the account of others in such registration if the managing underwriter so agrees
and if the number of Registrable Securities held by Holders which would
otherwise have been included in such registration and underwriting will not
thereby be limited. The inclusion of such shares shall be on the same terms as
for the Registrable Securities, subject to the following sentence. In the event
that the managing underwriter excludes some of the securities to be registered
pursuant to Section 6.2, the securities to be sold for the account of the
Company and any other holders shall be excluded in their entirety prior to the
exclusion of any Registrable Securities.
6.5 Selling Procedures. Any sale of Registrable Securities pursuant to
------------------
the registration statement filed in accordance with Section 6.2 hereof shall be
subject to the following conditions and procedures:
(a) Updating the Prospectus. If the distribution of the Registrable
-----------------------
Securities covered by a registration pursuant to this Article VI is not to be
effected by means of a firm commitment underwriting, and if the Company informs
the selling Holders that the registration statement or final prospectus then on
file with the SEC is not current or otherwise does not comply with the
Securities Act, the Company shall use commercially reasonable efforts to provide
to the selling Holders a current prospectus that complies with the Securities
Act on or before the date of the intended sale of the Registrable Securities;
provided, however, that no more than once during any one hundred eighty-day
- -------- -------
period (the "Information Delay Period"), the Company shall have the right to
delay the preparation of a current prospectus that complies with the Securities
Act for up to forty-five (45) days, if the Board of Directors of the Company,
acting in good faith, determines that there exists material nonpublic
information about the Company which the Board does not wish to disclose in a
registration statement (due to the fact that such disclosure may not be in the
best interests of the Company's stockholders), which information would otherwise
be required by the Securities Act to be disclosed in the registration statement
to be filed pursuant to Section 6.2 above;
(b) General. Notwithstanding the foregoing, the Company shall notify
-------
each Holder (A) of any request by the SEC or any other federal or state
governmental authority during the period of effectiveness of the registration
statement for amendments or supplements to the registration statement or related
prospectus or for additional information relating to the registration statement,
(B) of the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, (C) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, or (D) of the happening of any event which makes
any statement made in the registration statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or which requires the making of any changes in the
registration statement or prospectus so that, in the case of the registration
statement, it will not contain an untrue statement of a material fact or omit to
state a
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<PAGE>
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the prospectus, it will not
contain an untrue statement of a material fact or omit 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. In such event, the
Company may suspend use of the prospectus on written notice to each Holder, in
which case each Holder shall not dispose of Registrable Securities covered by
the registration statement or prospectus until copies of a supplemented or
amended prospectus are distributed to the Holders or until the Holders are
advised in writing by the Company that the use of the applicable prospectus may
be resumed. The Company shall use its commercially reasonable efforts to ensure
that the use of the prospectus may be resumed as soon as practicable. The
Company shall use its commercially reasonable efforts to obtain the withdrawal
of any order suspending the effectiveness of the registration statement, or the
lifting of any suspension of the qualification (or exemption from qualification)
of any of the securities for sale in any jurisdiction. The Company shall, upon
the occurrence of any event contemplated by clause (D), forthwith prepare a
supplement or post-effective amendment to the registration statement or a
supplement to the related prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter delivered
to the purchasers of the Registrable Securities being sold thereunder, such
prospectus will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6.6 Expenses. The Company shall reimburse, in an amount not to exceed
--------
$25,000, the out-of-pocket expenses of the Holders incurred, other than
underwriting or selling discounts and commissions, in connection with the
registration of Registrable Securities pursuant to this Article VI including,
without limitation, all SEC, National Association of Securities Dealers, Inc.
and blue sky registration and filing fees, printing expenses, transfer agents'
and registrars' fees, and the reasonable fees and disbursements of the Company's
outside counsel and the Company's independent accountants.
6.7 Indemnification.
---------------
(a) In connection with any registration pursuant to this Article VI,
the Company will indemnify each Holder, each of its officers and directors and
partners, and each person controlling such Holder within the meaning of Section
15 of the Securities Act, with respect to which registration has been effected
pursuant to this Agreement, against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of the Securities Act, the Exchange Act, state
securities laws or any rule or regulation promulgated under such laws applicable
to the Company in connection with any such registration, and the Company will
reimburse each such Holder, each of its officers and
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<PAGE>
directors, and each person controlling such Holder, for any legal and any other
expenses reasonably incurred, as such expenses are incurred, in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon information furnished to the Company by such
Holder or controlling person, provided, however, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a preliminary prospectus on file with the Commission at the time the
registration statement becomes effective or the amended prospectus is filed with
the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity
agreement shall not inure to the benefit of any Holder, if a copy of the Final
Prospectus was not furnished to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act,
and if the Final Prospectus would have cured the defect giving rise to the loss,
liability, claim or damage .
(b) Each Holder will indemnify the Company, each of its directors and
officers, other holders of the Company's securities covered by such registration
statement, each person who controls the Company within the meaning of Section 15
of the Securities Act, and each other such Holder, each of its officers and
directors and each person controlling such other Holder within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Holder of the Securities Act, the Exchange
Act, state securities laws or any rule or regulation promulgated under such laws
applicable to the Holder, and will reimburse the Company, such other Holders,
such directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred, as such expenses are incurred, in
connection with investigating or defending any such claim, loss, damage,
liability or action, to the extent that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance
information furnished to the Company by such Holder.
(c) Each party entitled to indemnification under this Section 6.7 (an
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action,
and provided
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<PAGE>
further that the Indemnifying Party shall not assume the defense for matters as
to which there is a conflict of interest or there are separate and different
defenses; provided, that the Indemnifying Party shall remain liable for
reasonable legal expenses of one counsel for the Indemnified Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party (whose consent shall not be
unreasonably withheld), consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
(d) Notwithstanding the foregoing, to the extent that provisions
relating to indemnification and contribution contained in an underwriting
agreement entered into in connection with an underwritten public offering
pursuant to Section 6.4 are in conflict with the foregoing provisions, the
provisions in such underwriting agreement shall control.
ARTICLE VII
Additional Covenants of the Investors
7.1 Voting. Until such time as an Investor holds securities of the
------
Company representing less than 5% of the total outstanding voting stock of the
Company, such Investor shall: (i) take such all action necessary or appropriate
such that all voting stock owned by such Investor and its affiliates are voted
(in person or by proxy) (A) for the nominees to the Company's Board of Directors
nominated and recommended to the Company's stockholders by the Company
management, and (B) on all other matters to be voted on by the Company's
stockholders, in such manner as is recommended by the Company's management to
the stockholders; and (ii) be present, in person or by proxy, at all duly held
meetings of the stockholders of the Company so that all voting stock held by
such Investor may be counted for purposes of determining the presence of a
quorum at such meetings.
7.2 Voting Trusts. Except as consented to by the Company in writing, no
-------------
Investor shall deposit any voting stock of the Company owned by it in a voting
trust or subject any such stock to any similar arrangement or agreement with
respect to the voting of such stock.
7.3 Solicitation of Proxies. Without the Company's prior written consent,
-----------------------
no Investor shall solicit proxies with respect to any voting stock of the
Company, nor become a "participant" in any "election contest" as such terms are
used in Rule 14a-11 of Regulation 14A under the Exchange Act relating to the
election of directors of the Company.
7.4 Acts in Concert with Others. Except as permitted in writing by the
---------------------------
Company, no Investor shall join any group or otherwise act in concert with any
third person for the purpose of acquiring, holding or disposing of voting stock
of the Company.
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<PAGE>
ARTICLE VIII
Miscellaneous
8.1 Waivers and Amendments. With the written consent of the holders of a
----------------------
majority of the Shares, the obligations of the Company and the rights of the
holders of Shares under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its board of directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that (i) all persons affected by such waiver or supplemental
- -------- -------
agreement are treated in the same manner, unless the record or beneficial
holders of all Shares consent to such amendment or supplemental agreement, and
(ii) no such waiver or supplemental agreement shall reduce the above percentage
of holders of Shares which is required to consent to any waiver or supplemental
agreement, without the consent of the record or beneficial holders of all
Shares. Upon the effectuation of each such waiver, consent, agreement, amendment
or modification the Company shall promptly give written notice thereof to the
record holders of Shares who have not previously consented thereto in writing.
Neither this Agreement nor any provisions hereof may be changed, waived,
discharged or terminated orally, but only by a signed statement in writing.
8.2 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
8.3 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive the execution and delivery of this Agreement and the
sale of the Shares.
8.4 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
8.5 Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
8.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
8.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
-----------------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY
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<PAGE>
SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS
OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
8.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
8.9 Delays or Omissions. It is agreed that no delay or omission to
-------------------
exercise any right, power or remedy accruing to the Investor, upon any breach or
default of the Company under this Agreement, shall impair any such right, power
or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character by the Investor of any breach or default under this
Agreement, or any waiver by the Investor of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in writing and that all remedies, either under this
Agreement, or by law or otherwise afforded to the Investor, shall be cumulative
and not alternative.
8.10 Notices. Any notice or report required in this Agreement or permitted
-------
to be given shall be given by depositing the same in the United States mail,
postage prepaid and addressed to the parties as follows: (i) if to the Company,
to the attention of the President at the Company's principal address set forth
on the first page hereof, with a copy to Herbert P. Fockler, Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, and (ii) if
to an Investor, to such Investor at such Investor's address as set forth on the
Schedule of Investors.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[This space intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Common Stock Purchase
Agreement to be duly executed and delivered as of the date first written above.
THE COMPANY: UROGEN CORP.
By: /s/ ROBERT E. SOBOL, M.D.
-----------------------------------------
Robert E. Sobol, M.D.
President and Chief Executive Officer
THE INVESTORS: INVESTOR
By:
-----------------------------------------
Name: ((FirstName)) ((LastName))
------------------------------------
Title:
------------------------------------
[Signature Page to Common Stock Purchase Agreement]
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
Name and Address of Investor Aggregate Number of Shares
Purchase Price of Common Stock
((FirstName)) ((LastName))
((Address1)) ((investment))
((City)), ((State)) ((PostalCode))
TOTAL $
-A1-
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-20239) of our repot dated March 8, 2000, with respect to the
Financial Statements of GenStar Therapeutics Corporation (formerly Urogen Corp.)
included in the Annual Report (Form 10-KSB) for the year ended December 31,
1999.
ERNST & YOUNG LLP
San Diego, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE
PERIODS ENDED DECEMBER 31, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 921,994 314,983
<SECURITIES> 0 0
<RECEIVABLES> 114,208 348,718
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,045,663 683,874
<PP&E> 726,489 410,669
<DEPRECIATION> 157,368 26,843
<TOTAL-ASSETS> 1,826,913 1,097,752
<CURRENT-LIABILITIES> 597,952 1,958,218
<BONDS> 0 0
0 0
88 58
<COMMON> 12,104 9,379
<OTHER-SE> (917,510) (1,943,165)
<TOTAL-LIABILITY-AND-EQUITY> 1,826,913 1,097,752
<SALES> 0 0
<TOTAL-REVENUES> 117,867 192,300
<CGS> 0 0
<TOTAL-COSTS> 3,528,032 7,858,554
<OTHER-EXPENSES> 71,749 (300)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 360,417 306,106
<INCOME-PRETAX> (3,818,827) (7,962,388)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,818,827) (7,962,388)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,818,827) (7,962,388)
<EPS-BASIC> (0.35) (1.00)
<EPS-DILUTED> 0 0
</TABLE>
