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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number 000-24505
COLLATERAL THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0661290
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
11622 El Camino Real, San Diego, California 92130
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 858-794-3400
Indicate by a check 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
filing requirements for the past 90 days.
Yes X No
--------- ---------
As of October 15, 1999, Registrant had 12,915,653 shares of its common stock
outstanding.
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COLLATERAL THERAPEUTICS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 1
Statements of Operations 2
Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
COLLATERAL THERAPEUTICS, INC.
BALANCE SHEETS
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<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,015,597 $ 14,041,777
Short-term investments 13,127,330 1,219,385
Prepaid expenses 309,632 393,415
Other current assets 987,538 126,433
------------ ------------
Total current assets 42,440,097 15,781,010
Restricted cash-noncurrent 72,600 72,600
Property and equipment, net 3,218,823 3,413,127
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Total Assets $ 45,731,520 $ 19,266,737
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 426,519 $ 858,819
Accrued expenses 1,407,200 787,917
Notes payable to a related party, including accrued interest 650,118 624,385
Note payable to bank 222,222 222,222
Deferred revenue 236,831 164,232
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Total current liabilities 2,942,890 2,657,575
Note payable to bank 574,074 722,222
Stockholders' equity:
Common Stock, par value $.001; 40,000,000 shares authorized;
12,915,653 and 10,521,903 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 12,916 10,522
Additional paid-in-capital 55,444,063 24,124,429
Deferred compensation (517,422) (986,062)
Note receivable secured by common stock (176,250) (165,000)
Accumulated other comprehensive income (loss) 13,547 (4,487)
Accumulated deficit (12,562,298) (7,092,462)
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Total stockholders' equity 42,214,556 15,886,940
------------ ------------
Total Liabilities and Stockholders' Equity $ 45,731,520 $ 19,266,737
------------ ------------
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</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
1
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COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ------------ ------------- -------------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C>
Revenues under collaborative
research and development
agreement with a related party $ 1,677,324 $ 1,531,420 $ 5,320,381 $ 3,749,781
Expenses:
Research and development 2,381,783 2,028,175 7,434,461 5,219,395
General and administrative 1,257,677 848,392 3,964,089 2,368,205
----------- ----------- ----------- -----------
Total operating expenses 3,639,460 2,876,567 11,398,550 7,587,600
----------- ----------- ----------- -----------
Loss from operations (1,962,136) (1,345,147) (6,078,169) (3,837,819)
Interest income 392,688 229,640 696,429 408,352
Interest expense (28,366) (22,787) (88,096) (43,473)
----------- ----------- ----------- -----------
Net loss $(1,597,814) $(1,138,294) $(5,469,836) $(3,472,940)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share (basic and diluted) $ (0.14) $ (0.11) $ (0.50) $ (0.49)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares used in
computing net loss per share
(basic and diluted) $11,778,210 $10,377,121 $11,045,927 $ 7,143,832
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
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COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,469,836) $ (3,472,940)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 644,973 229,273
Amortization of deferred compensation 446,349 855,609
Changes in operating assets and liabilities:
Milestone receivable from a related party - 2,000,000
Prepaid expenses and other current assets (777,322) (218,095)
Accounts payable and accrued expenses 212,716 1,069,848
Deferred revenue 72,599 688,889
Restricted cash - (72,600)
Other 10,330 (11,250)
------------ ------------
Net cash provided by (used for) operating activities (4,860,191) 1,068,734
------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (12,872,492) -
Purchases of property and equipment (450,668) (2,356,936)
Proceeds from maturities of short-term investments 961,000 -
------------ ------------
Net cash used for investing activities (12,362,160) (2,356,936)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 31,344,319 12,995,834
Payments on note payable to bank (148,148) -
Proceeds from note payable to bank - 400,000
------------ ------------
Net cash provided by financing activities 31,196,171 13,395,834
------------ ------------
Net increase in cash and cash equivalents 13,973,820 12,107,632
Cash and cash equivalents at beginning of period 14,041,777 5,605,361
------------ ------------
Cash and cash equivalents at end of period $ 28,015,597 $ 17,712,993
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Collateral is focused on the discovery, development and
commercialization of non-surgical gene therapy products for the treatment of
cardiovascular diseases, including coronary artery disease, peripheral
vascular disease, congestive heart failure and heart attack. We intend to
focus on research and development of products while leveraging our technology
through the establishment of product development, manufacturing and marketing
collaborations with select pharmaceutical and biotechnology companies. We
were incorporated in California on April 3, 1995 and reincorporated in
Delaware on May 28, 1998.
INTERIM FINANCIAL STATEMENTS
The balance sheet as of September 30, 1999, the statements of
operations for the three and nine months ended September 30, 1999 and 1998
and the statements of cash flows for the nine months ended September 30, 1999
and 1998 are unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Interim results are not necessarily
indicative of the results to be expected for the full year. As these are
condensed financial statements, you should also read the financial statements
and footnotes contained in our latest Form 10-K.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
2. COMPREHENSIVE LOSS
Total comprehensive loss was $1,581,010 and $5,451,802 for the
three and nine months ended September 30, 1999 and $1,138,294 and $3,472,940
for the three and nine months September 30, 1998.
3. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding.
4. PRIVATE PLACEMENT
In August 1999, we completed a private placement of equity
securities and issued 2,150,000 shares of common stock for $15.75 per share
to selected institutional and accredited investors. The total proceeds of
this offering, net of offering costs, were approximately $31.2 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED IN ITEM 1. OF THIS QUARTERLY REPORT ON
FORM 10-Q AND THE AUDITED FINANCIAL STATEMENTS AND RELATED NOTES AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998. SEE "RISKS FACTORS" FOR A DISCUSSION OF FACTORS KNOWN TO US
THAT COULD CAUSE REPORTED FINANCIAL INFORMATION NOT TO BE NECESSARILY INDICATIVE
OF FUTURE RESULTS. WE ARE NOT OBLIGATED TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS AND CIRCUMSTANCES
ARISING AFTER THE DATE THIS REPORT IS FILED.
OVERVIEW
Collateral is focused on the discovery, development and
commercialization of non-surgical gene therapy products for the treatment of
cardiovascular diseases, including coronary artery disease, peripheral
vascular disease, congestive heart failure and heart attack. Our initial
non-surgical gene therapy products are designed to promote and enhance
angiogenesis, a natural biological process that results in the growth of
additional blood vessels which can carry blood flow to oxygen-deprived
tissues. We intend to focus on research and development of products, while
leveraging our technology through the establishment of product development,
manufacturing and marketing collaborations with select pharmaceutical and
biotechnology companies.
In May 1996, we entered into a strategic collaboration with
Schering AG, covering gene therapy products for the promotion and enhancement
of angiogenesis. Schering AG has made equity investments in Collateral in
connection with this collaboration agreement and provides on-going funding
for certain research and development activities. Since inception, we have
also conducted research in the area of non-surgical cardiovascular gene
therapy that is not funded by our collaboration with Schering AG.
Accordingly, our operating expenses have exceeded revenues each year. Losses
have resulted principally from costs incurred in research and development
activities related to our efforts to develop our technologies in the area of
non-surgical cardiovascular gene therapy and from administrative costs
required to support our efforts, to the extent our costs were not covered by
the Schering AG collaboration. We expect our expenses and losses to trend
upward as we expand our research and development efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Our collaborative revenue was $1.7 million and $1.5 million for the
three months ended September 30, 1999 and 1998, respectively. All revenue
was derived from our research and development agreement with Schering AG.
The increase in revenue was due to increased costs reimbursable to us under
this agreement associated with accelerated research and development
activities.
Research and development expenses for the three months ended
September 30, 1999 were $2.4 million compared to $2.0 million for the three
months ended September 30, 1998. Higher research and development expenses
were primarily due to increased use of outside
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research institutions and consultants and increased expenses associated with
additional personnel.
General and administrative expenses were $1.3 million for the three
months ended September 30, 1999 compared to $0.8 million for the three months
ended September 30, 1998. This increase is attributable to additional
personnel to support our expanded research efforts and higher costs
associated with our new corporate facilities.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Our collaborative revenue was $5.3 million and $3.7 million for the
nine months ended September 30, 1999 and 1998, respectively. All revenue was
derived from our research and development agreement with Schering AG. The
increase in revenue was due to increased costs reimbursable to us under this
agreement associated with accelerated research and development activities.
Research and development expenses for the nine months ended
September 30, 1999 rose to $7.4 million from $5.2 million for the nine months
ended September 30, 1998. Higher research and development expenses were
primarily due to increased expenses associated with additional personnel,
increased expenses for operations of our new preclinical research center and
increased use of outside research institutions and consultants. We expect
research and development costs to continue to grow as we accelerate the
development of our potential products.
General and administrative expenses were $4.0 million for the nine
months ended September 30, 1999 compared to $2.4 million for the nine months
ended September 30, 1998. General and administrative expenses rose primarily
due to added personnel to support our expanded research efforts, increased
costs for investor relations materials and our new corporate facilities, and
higher costs associated with being a public company.
Interest income increased to $0.7 million for the nine months ended
September 30, 1999, compared to $0.4 million for the corresponding 1998
period. This increase was primarily due to higher average cash and investment
balances as a result of the private placement completed in August 1999.
LIQUIDITY AND CAPITAL RESOURCES
In August 1999, we completed a private placement of equity
securities and issued 2,150,000 shares of common stock for $15.75 per share
to selected institutional and accredited investors. The total proceeds of
this offering, net of offering costs, were approximately $31.2 million.
Pursuant to the terms of this offering, a registration statement covering the
resale of these shares was declared effective by the SEC on September 29,
1999.
From inception through September 30, 1999, we have primarily
financed our operations through the private and public offering of our equity
securities and collaborative research and development revenues from Schering
AG. We have raised $13.0 million in net proceeds from our initial public
offering of 2.2 million shares of our common stock, $31.2 million in net
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proceeds from a private placement of equity securities in August 1999 and an
aggregate net proceeds of $8.9 million from other private sales of equity
securities.
Collateral had a bank loan of $0.8 million as of September 30,
1999. We are making monthly principal payments of $18,500 plus interest on
the bank loan. These payments extend through April 2003. The loan bears
interest at prime plus 1.25% (9.5% at September 30, 1999) and is secured by
certain equipment and furniture. The loan is subject to certain covenants
including minimum working capital levels and the requirement that we must
obtain the lender's consent for certain additional indebtedness. Collateral
has loans totaling $500,000 from Schering AG. The loans consist of two
promissory notes issued in 1995 to fund operations. The notes bear interest
at 1% below the prime rate (7.25% at September 30, 1999). The notes are
secured by our assets, except for equipment and furniture pledged on a first
priority basis under our bank loan. Principal and interest on these notes
total $0.7 million and are due and payable upon demand.
At September 30, 1999, cash, cash equivalents and short-term
investments were $41.1 million compared to $15.3 million at December 31,
1998. This increase in cash, cash equivalents and short-term investments
was due to the $31.2 million we raised in a private placement completed in
August 1999. This increase was offset by research and development expenses
and general and administrative expenses not funded under our collaboration
with Schering AG. We generally invest excess cash in high credit quality
debt instruments of corporations and financial institutions. Working capital
increased by $26.4 million to $39.5 million for the nine months ended
September 30, 1999. This increase is primarily attributable to the $31.2
million net proceeds from our private placement offset by cash of $4.9
million used for operating activities.
We have entered into certain technology license agreements related
to our portfolio covering methods of gene therapy, therapeutic genes, and
gene delivery vectors. To retain certain licensing rights under these
cancelable agreements, we anticipate that we may be required to make
aggregate payments of approximately $0.8 million through 2000.
Our core technologies are focused on the development of
non-surgical cardiovascular gene therapy products that promote angiogenesis,
enhance myocardial adrenergic signaling or promote heart muscle regeneration.
We have in-licensed certain technology covering proprietary methods of gene
therapy and a portfolio of therapeutic genes for use with our methods of gene
therapy. We have currently designated one gene, fibroblast growth factor-4,
licensed from New York University, for use in the development of two
angiogenic gene therapy products: (1) GENERX-TM-, a non-surgical angiogenic
gene therapy product as a treatment for patients with stable exertional
angina due to coronary artery disease, and (2) GENVASCOR-TM-, a non-surgical
angiogenic gene therapy treatment for patients with peripheral vascular
disease. These are the only angiogenic gene therapy products currently in
development by us for which a specific gene has been designated. Upon any
successful commercialization of these two angiogenic gene therapy products
using this designated gene, the total financial milestone obligations,
licensing fees and other related amounts payable by us under license
agreements with New York University, covering the use of the fibroblast
growth factor-4 gene, and the University of California, covering certain
technology relating to methods of gene therapy, could total up to $5.1
million. This amount includes $1.3 million which we have paid through
September 30, 1999. In addition, upon any successful commercialization of
these products, we would be required to make, under the license agreements,
royalty payments on worldwide net
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sales of products that utilize this gene. However, we may, in our sole
discretion, change the designated gene at any time.
In addition to GENERX-TM- and GENVASCOR-TM-, we have two other
non-surgical angiogenic gene therapy products, GENEVX-TM- and GENECOR-TM-,
which are progressing through our pre-clinical research. The angiogenic
genes to be designated by us for use in development of GENEVX-TM- and
GENECOR-TM- will not be finalized until we have progressed further in our
evaluation process. We are also developing a gene therapy product,
CORGENIC-TM-, based on our myocardial adrenergic signaling technology. Based
on our current agreements covering in-licensed technology, if our
non-surgical cardiovascular gene therapy products are successfully
commercialized, our total financial obligations pursuant to licensing
agreements with respect to all five of our products which are currently
beyond the research stage could range from between $7.3 million to $8.8
million, of which $3.1 million has been paid through September 30, 1999. Our
financial obligations will vary depending on the selections of therapeutic
genes for use in our angiogenic gene therapy products. However, these
amounts could be significantly increased or decreased depending on the
outcome of our research and commercialization activities pursuant to the
collaboration with Schering AG and/or the outcome of our internally-funded
research. In addition, we would be required to pay a royalty on worldwide
net sales of products that utilize in-licensed technology. The information
set forth above with respect to potential fees payable by us for in-licensed
technology involves many variables and is subject to a high degree of
potential variation. We may also be required to obtain license rights to
other methods of gene therapy, therapeutic genes and/or vectors based on our
product development and commercialization requirements.
To date, all revenue received by us has been from our collaboration
with Schering AG, and we expect that substantially all revenue for the next
several years will continue to come from this and other potential
collaborations. Under the Schering agreement, we may receive: (1) research
and development funding for an initial product, which amount may be adjusted
to support research and development for additional products within the field
of angiogenic gene therapy, (2) milestone payments for the initial product
and for each new product based on our achievement of milestones pertaining to
certain regulatory filings and the development and commercialization of
products; and (3) royalty payments based on worldwide net sales of each
product and an additional royalty based on worldwide net sales and the
product's cost of goods, up to a maximum specified royalty rate. We may not
be able to establish additional collaborations on acceptable terms, if at
all, or assure that current or future collaborations will be successful and
provide adequate funding to meet our needs. Schering AG currently reimburses
us for research and development expenses related to certain angiogenic gene
therapy products and for certain related administrative expenses. We expect
to incur increases in operating expenses over the next two years as we
accelerate our research and development activities consistent with product
development programs and other collaborations into which we may enter.
Increases in operating expenses will include, but are not limited to,
increased personnel, research institutions and consultants costs, rent,
supplies and other costs resulting from operating our new facilities. To the
extent these costs are incurred in fields other than angiogenic gene therapy
or are otherwise not reimbursable under the current arrangement with Schering
AG, we intend to use proceeds from the public offering completed in July
1998, the private placement in August 1999 and future debt or equity
financings to cover such expenses.
Based on our business strategy, the development of non-surgical
cardiovascular gene therapy products will require our continued commitment of
substantial resources to conduct
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research, preclinical studies and clinical trials, and to augment quality
control, regulatory and administrative capabilities. Our future capital
requirements will depend on many factors, including the pace of scientific
progress in our research and development programs, the magnitude of these
programs, the scope and results of preclinical testing and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, competing technological and market developments, our dependence on
third parties for activities related to the development and commercialization
of our potential products (including our need to establish additional
collaborations and potential changes to our existing collaboration with
Schering AG), the cost of third-party manufacturing arrangements and the
effectiveness of our product commercialization activities. We believe that
our available cash and anticipated sources of funding including Schering AG,
together with the net proceeds of the public offering and the private
placement, will be adequate to satisfy our anticipated capital requirements
through 2000. We expect that we will seek any additional capital needed to
fund our operations through new collaborations, the extension of our existing
collaboration, or through public or private equity or debt financings. We
may not be able to obtain additional financing on acceptable terms if at all.
Any inability to obtain additional financing could have a material adverse
effect on us. In addition, so long as certain debt remains outstanding, we
must obtain creditors' consents for certain additional indebtedness.
IMPACT OF THE YEAR 2000 OR Y2K
The Y2K issue refers to the inability of date-sensitive computer
chips, software and systems to accept other than two-digit entries in the
date field. As a result, in the Year 2000, many systems could mistake "00"
for 1900 or any other incorrect year, resulting in system failures or
miscalculations. These failures or miscalculations could disrupt operations,
including manufacturing, the processing of transactions and other normal
business activities. This is a significant issue for most, if not all
companies. The ramifications cannot be predicted with any degree of
certainty. Our failures or the failures of any of our collaborators',
clinical trial sites', suppliers' or any other third parties' computers
systems could have a material adverse impact on our operations.
STATE OF READINESS. We recognize the need to minimize the
potential adverse impact of Y2K issues on our operations. We have developed
a three-phase program for Y2K systems compliance. The first phase is to
assess our key systems for Y2K readiness. This phase includes assessing the
impact of third parties whose systems may not be Y2K compliant. The second
phase involves the testing of key systems for Y2K deficiencies. The final
phase involves the development of contingency plans for unresolved Y2K
deficiencies, such as our suppliers and service providers failing to
adequately address their Y2K problems.
ASSESSMENT. Since we are a relatively new company, the majority of
our information technology and non-information technology systems were
acquired during 1998. We have purchased only well-known hardware and
software believed to be Y2K compliant. We do not develop or customize any key
software. To further confirm the readiness of critical systems, we obtained
documentation from hardware and software manufacturers. This documentation
indicated that all such systems were Y2K compliant. Our main systems do not
interface directly with those of third parties. We have contacted and will
continue to contact key suppliers of goods and services to assess their
readiness. However, we are unable to control whether our
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current and future collaborative partners', clinical trial sites', or
suppliers' systems are Y2K compliant. The assessment phase was completed in
the first quarter of 1999.
TESTING. In the first quarter of 1999, we completed testing our
workstations in a Y2K environment to ensure systems perform properly.
However, we do not intend to test recently purchased software and hardware
that have been certified as Y2K compliant by the manufacturers.
COSTS TO ADDRESS OUR Y2K ISSUES. We are expensing Y2K compliance
costs as incurred. We do not expect these costs to be material to our
financial position or results of operations. To date the costs related to
Y2K issues have been minimal, consisting only of time spent by existing
personnel to review systems, to obtain documentation, and to carry out other
procedures discussed above. We have not needed to incur capital expenditures
to address Y2K problems. We expect our total cost of reviewing and achieving
Y2K compliance to be less than $25,000, most of which has been incurred to
date. This estimate is based on currently available information and will be
updated as we continue our assessment of third party relationships, and
proceed with implementation and design contingency plans.
THE RISKS OF OUR Y2K ISSUES. If any key information technologies
or embedded microprocessor technology systems are overlooked, there could be
a material adverse effect on our business. For example, our operations could
be adversely affected to the extent that our suppliers, collaborators, or
clinical trial sites are adversely affected by Y2K.
In a worse case scenario, if our vendors or the suppliers of our
necessary energy, telecommunications systems and transportation needs fail to
provide us with (1) the materials and services which are necessary to develop
our products, (2) the electrical power and other utilities necessary to
sustain our operations, or (3) reliable means of transporting supplies to us,
such failure could interrupt our business, substantially delay progress of
our product development programs, and generate substantial expenses.
OUR CONTINGENCY PLAN. Our contingency plan includes identifying
alternatives for all key laboratory suppliers and services. Further, we
maintain a short-term back-up power generation system for key scientific
equipment at our preclinical research center. The back-up power system is
expected to be adequate to sustain our preclinical research center for at
least several days. However, we do not maintain a back-up power generation
system for our administrative office. Although our contingency plan is
essentially complete, we intend to update it on an ongoing basis as needed.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY NEVER BE PROFITABLE.
We formed Collateral in 1995 and have only a limited operating
history to review in evaluating our business and prospects. We have incurred
operating losses since our inception in 1995. As of September 30, 1999, our
accumulated deficit was approximately $12.6 million. We
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expect to incur additional losses for the foreseeable future. We also expect
our losses to increase as our research and development efforts and clinical
trials progress.
Our revenues to date have consisted of payments under our
collaborative arrangements and interest income. To date, we have not
generated any revenue from product sales. We do not expect to generate any
revenue from our products for a number of years, if at all. If we, alone or
with our collaborators, do not successfully develop, manufacture and
commercialize our products, we may never achieve profitability. Even if we
do achieve profitability, we cannot predict the level of such profitability.
IF WE NEED ADDITIONAL FUNDS AND ARE UNABLE TO RAISE THEM, WE WOULD
HAVE TO CURTAIL OR CEASE OPERATIONS.
We will need substantial additional resources to develop our
products. Our future capital requirements will depend on many factors,
including:
- the pace of scientific progress in our research and development
programs,
- the magnitude of our research and development programs,
- the scope and results of preclinical studies and clinical trials,
- the time and costs involved in obtaining regulatory approvals,
- the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims,
- the costs involved in any potential litigation,
- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in existing collaborations,
- our dependence on others for development and commercialization
of our potential products,
- the cost of manufacturing, and
- the effectiveness of our commercialization activities.
We believe that our cash and anticipated sources of funding,
including Schering AG and the net proceeds from our private placement
completed on August 11, 1999, will be adequate to satisfy our anticipated
capital needs through 2000. If our plans change, we may need to raise
additional funds through new or existing collaborations or through private or
public equity or debt financings. However, additional financing may not be
available on acceptable terms or at all.
IF OUR POTENTIAL PRODUCTS ARE NOT SUCCESSFULLY DEVELOPED, OUR
REVENUES WILL BE REDUCED.
Our potential products are in the early stages of development.
Either we or a collaborative partner must undertake the time-consuming and
costly processes of completing
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development and testing for each of our potential products. To date, only
one of our potential products, GENERX-TM-, has advanced to clinical trials,
and those trials are not yet complete. Our other potential products have not
yet advanced to clinical trials, and it is uncertain whether we or a
collaborative partner will be able to complete product development.
There are many reasons that our potential products may not advance
beyond early stage testing, including the possibility that:
- our potential products may be ineffective or toxic;
- our potential products may be too expensive to develop
or manufacture;
- others may hold or acquire proprietary rights that could prevent
us from developing our products; or
- others may develop equivalent or superior products.
Even if our potential products advance in preclinical development, we or
our partners may not succeed in carrying these potential products forward to
clinical testing. The uncertainties inherent in the development of our
potential products are especially significant in view of their early stage
nature.
IF OUR PRODUCT CANDIDATES DO NOT SUCCESSFULLY COMPLETE THE CLINICAL
TRIAL PROCESS, WE WILL NOT BE ABLE TO MARKET THEM.
For product candidates that advance to clinical testing, we cannot
be certain that we will successfully complete the clinical trials necessary
to receive regulatory product approvals. This process is lengthy and
expensive. To obtain regulatory approvals, we must demonstrate through
preclinical studies and clinical trials that our products are safe and
effective for use in at least one medical indication. Promising results in
preclinical studies and initial clinical trials do not ensure successful
results in later clinical trials, which test broader human use of our
products. Many companies in our industry have suffered significant setbacks
in advanced clinical trials, despite promising results in earlier trials.
Clinical trials may not result in a marketable product.
Many factors may adversely affect clinical trials. For example,
clinical trials are often conducted with patients who have the most advanced
stages of disease. During the course of treatment, these patients can die or
suffer other adverse conditions for reasons that may not be related to the
proposed product being tested. These reactions may adversely affect our
clinical trial results. As a result, our ability to ultimately market the
products and obtain revenues would suffer.
In addition, our ability to complete clinical trials depends on
many factors, including obtaining adequate clinical supplies and having a
sufficient rate of patient recruitment. For example, patient recruitment is
a function of many factors, including:
- the size of the patient population,
- the proximity of patients to clinical sites, and
- the eligibility criteria for the trial.
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Even if patients are successfully recruited, we cannot be sure that
they will complete the treatment process. Delays in patient enrollment or
treatment in clinical trials may result in increased costs, program delays or
both.
With respect to foreign markets, we or our partner will also be
subject to foreign regulatory requirements governing clinical trials. Even
if we complete clinical trials, we may not be able to submit a marketing
application. If we submit an application, the regulatory authorities may not
review or approve it in a timely manner, if at all.
OUR COLLABORATORS MAY CONTROL ASPECTS OF OUR CLINICAL TRIALS WHICH
COULD RESULT IN DELAYS OR OTHER OBSTACLES TO THE COMMERCIALIZATION OF THESE
PRODUCTS.
Our collaborative partners may have or acquire rights to control
aspects of our product development and clinical programs. For example,
Schering AG has rights to control the planning and implementation of product
development and clinical programs related to angiogenic gene therapy
products. As a result, we may not be able to conduct these programs in the
manner or on the time schedule we currently contemplate.
OUR PRODUCTS MAY HAVE UNACCEPTABLE SIDE EFFECTS WHICH COULD DELAY
OR PREVENT PRODUCT APPROVAL.
Possible side effects of gene therapy technologies may be serious
and life-threatening. The occurrence of any unacceptable side effects during
or after preclinical and clinical testing of our potential products could
delay approval of our products and our revenues would suffer. For example,
possible serious side effects of viral vector-based gene transfer include
viral infections resulting from contamination with replication-competent
viruses and inflammation or other injury to the heart or other parts of the
body. In addition, the development of cancer in a patient is a possible side
effect of all methods of gene transfer. Furthermore, there is a possibility
of side effects or decreased effectiveness associated with an immune response
toward any viral vector or gene used in gene therapy. The possibility of
such response may increase if there is a need to deliver the viral vector
more than once.
RISKS RELATED TO PATENTS AND PROPRIETARY INFORMATION
IF OUR PRODUCTS ARE NOT EFFECTIVELY PROTECTED BY VALID ISSUED
PATENTS OR IF WE ARE NOT OTHERWISE ABLE TO PROTECT OUR PROPRIETARY
INFORMATION IT COULD HARM OUR BUSINESS.
Our business success will depend in part on our ability and that of
our licensors to:
- obtain patent protection for our methods of gene therapy,
therapeutic genes and/or gene-delivery vectors both in the U.S.
and in foreign countries,
- defend patents once obtained,
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- maintain trade secrets and operate without infringing upon the
patents and proprietary rights of others, and
- obtain appropriate licenses to patents or proprietary rights
held by others with respect to our technology, both in the U.S.
and in foreign countries.
IF WE ARE NOT ABLE TO MAINTAIN ADEQUATE PATENT PROTECTION FOR OUR
PRODUCTS, WE MAY BE UNABLE TO PREVENT OUR COMPETITORS FROM USING OUR
TECHNOLOGY.
The patent positions of gene therapy technologies such as those
being developed by us and our collaborators involve complex legal and factual
uncertainties. As a consequence, we cannot be certain that we or our
collaborators will be able to obtain adequate patent protection for our
potential products.
We do not know whether our or our licensors' pending patent
applications will result in the issuance of patents. In addition, issued
patents may be subjected to proceedings limiting their scope, may be held
invalid or unenforceable, or may otherwise provide insufficient proprietary
protection or commercial advantage. Changes in patent laws may also
adversely affect the scope of our patent protection and our competitive
situation.
Due to the significant time lag between the filing of patent
applications and the publication of such patents, we cannot be certain that
we were or our licensor was the first to file such patent applications. In
addition, a number of pharmaceutical and biotechnology companies and research
and academic institutions have developed technologies, filed patent
applications or received patents on various technologies that may be related
to our business. Some of these technologies, applications or patents may
conflict with our or our licensors' technologies or patent applications. A
conflict could limit the scope of the patents, if any, that we or our
licensors may be able to obtain or result in denial of our or our licensors'
patent applications. If patents that cover our activities are issued to
other companies, we cannot be sure that we could develop or obtain
alternative technology.
In addition, some of our products rely on patented inventions
developed using U.S. government resources. The U.S. government retains
rights in such patents, and may choose to exercise its rights.
WE MAY BE SUBJECT TO COSTLY CLAIMS AND IF WE ARE UNSUCCESSFUL IN
RESOLVING CONFLICTS REGARDING PATENT RIGHTS, WE MAY BE PREVENTED FROM
DEVELOPING OR COMMERCIALIZING OUR PRODUCTS.
Numerous patent applications and patents related to our business
could result in third party claims against us. As the biotechnology industry
expands and more patents are issued, the risk increases that our processes
and potential products may give rise to claims that they infringe on the
patents of others. Others could bring legal actions against us claiming
damages and seeking to stop clinical testing, manufacturing and marketing of
the affected product or use of the affected process. Litigation may be
necessary to enforce our proprietary rights or to determine the
enforceability, scope and validity of proprietary rights of others. If we
become involved in litigation, it could be costly and divert our efforts and
resources. In addition, if any of our
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competitors file patent applications in the U.S. claiming technology also
invented by us, we may need to participate in interference proceedings held
by the U.S. Patent and Trademark Office to determine priority of invention
and the right to a patent for the technology. Like litigation, interference
proceedings can be lengthy and often result in substantial costs and
diversion of resources.
If there were an adverse outcome of any litigation or interference
proceeding we could have potential liability for significant damages. In
addition, we could be required to obtain a license to continue to make or
market the affected product or use the affected process. Costs of a license
may be substantial and could include ongoing royalties. We may not be able
to obtain such a license on acceptable terms.
WE MAY NOT HAVE ADEQUATE PROTECTION FOR OUR UNPATENTED PROPRIETARY
INFORMATION WHICH COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION.
We also rely on trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain our
competitive position. However, others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology. To protect our
trade secrets, we require confidentiality agreements upon beginning
employment, consulting or collaboration with us. Agreements with employees
also provide that all inventions resulting from work performed by them while
in our employ will be our exclusive property. However, these agreements may
not provide meaningful protection of our trade secrets or adequate remedies
in the event of unauthorized use or disclosure of such information.
Likewise, our trade secrets or know-how may become known through other means
or be independently discovered by our competitors. Any of these events could
prevent us from developing or commercializing our products.
OTHER RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MAINTAIN
COLLABORATIVE AND LICENSING ARRANGEMENTS WHICH COULD HINDER OR PREVENT OUR
ABILITY TO DEVELOP AND COMMERCIALIZE OUR POTENTIAL PRODUCTS.
Our strategy for the development, testing, manufacturing and
commercialization of our potential products relies on our establishing and
maintaining collaborations with corporate partners, licensors, licensees and
others. At present we have a collaboration with Schering AG in the area of
angiogenic gene therapy. We may not be able to maintain or expand this
collaboration or establish additional collaborations or licensing
arrangements necessary to develop and commercialize potential products based
on our technology. If we are successful in establishing additional
collaborations or licensing arrangements, they may not be on favorable terms.
Any failure to enter into additional collaborative or licensing arrangements
on favorable terms would adversely affect our revenues. The development
programs contemplated by the collaborations or licensing arrangements also
may not ultimately be successful.
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Under our current strategy, and for the foreseeable future, we will
rely on our collaborative partners to develop and/or market our products. As
a result, we will depend on collaborators to perform the following activities:
- fund preclinical studies,
- fund clinical development,
- obtain regulatory approval, and
- manufacture and market any successfully developed products.
IF WE ARE NOT ABLE TO CONTROL THE AMOUNT AND TIMING OF RESOURCES
OUR CURRENT AND FUTURE COLLABORATORS DEVOTE TO OUR PROGRAMS OR POTENTIAL
PRODUCTS, OUR PRODUCT DEVELOPMENT COULD BE DELAYED OR TERMINATED, WHICH WOULD
ADVERSELY AFFECT OUR REVENUES.
Our collaborators may have significant discretion over whether or
not to pursue development activities with us. We also cannot be certain that
our collaborators will not pursue alternative technologies, on their own or
with others, to develop competitive gene therapy products. If our
collaborators develop competitive products, they may withdraw support for our
programs. Our collaborative partners also may breach or terminate our
agreements or otherwise fail to conduct their collaborative activities
successfully. As a result, our product development could be delayed or
terminated, which would adversely affect our revenues. In addition, revenues
we receive from marketed products under our collaborations may depend on the
marketing and sales efforts of our collaborators.
Disputes may arise with our collaborators about who has ownership
rights to any technology developed. These disputes could have the following
results:
- delay achievement of milestones or receipt of milestone
payments,
- adversely affect collaborative research, development and
commercialization of potential products, or
- lead to litigation or arbitration.
Any of these results could be time consuming, expensive and
disruptive to our operations.
IF SCHERING AG TERMINATES OUR COLLABORATION AGREEMENT OR
DEVELOPMENT PROGRAMS, WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS ON
COMMERCIALLY REASONABLE TERMS, IF AT ALL.
We have entered into a research and development collaboration with
Schering AG in the field of angiogenic gene therapy. Under this agreement,
Schering AG has the following rights that could adversely affect the
development of potential products under our collaboration:
- discretion to pursue or not to pursue any development programs
with us,
- the right to terminate the agreement at any time if we
materially breach the agreement or on 60 days written notice
subject to the payment of a termination fee, and
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- the right to terminate the agreement upon 90 days written
notice, without payment of a termination fee, if a competitor
of Schering AG or us acquires substantially all of our assets
or 49% or more of our voting stock.
We cannot be certain that this collaboration will continue or will
be successful.
We also intend to rely on our collaboration with Schering AG for
significant continued funding of our angiogenic gene therapy research
efforts. We cannot be certain Schering AG will continue to fund this
research, especially if they develop competitive products. If they reduce or
terminate this funding, we may have to fund clinical trials, product
development and commercialization ourselves by using additional resources or
by scaling back or terminating other research and development programs. We
also may need to seek alternative collaborations or financing sources or sell
or license rights to some of our proprietary technology that we consider
valuable to our business. If Schering AG withdraws support, we may be unable
to complete our product development programs.
IF OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, IT COULD
MATERIALLY ADVERSELY AFFECT YOUR INVESTMENT AND OUR ABILITY TO RAISE
ADDITIONAL CAPITAL AS NEEDED.
We expect that our operating results will fluctuate from quarter to
quarter based on when we incur expenses and receive revenues from our
collaborative arrangements and other sources. We believe that some of these
fluctuations may be significant. The level of funding by Schering AG may
vary or they may withdraw funding altogether from one or more of our
products. If Schering AG were to withdraw funding, our revenues and our
ability to develop and commercialize our products would suffer.
WE DEPEND ON THIRD-PARTY MANUFACTURERS OR COLLABORATORS TO
MANUFACTURE OUR PRODUCTS WHICH MAY DELAY OR IMPAIR OUR ABILITY TO DEVELOP AND
COMMERCIALIZE PRODUCTS ON A TIMELY AND COMPETITIVE BASIS OR ADVERSELY AFFECT
OUR POTENTIAL FUTURE PROFITABILITY.
We do not have internal manufacturing capabilities. Our current
strategy is to establish relationships with our collaborators and others to
manufacture our products for clinical trials and commercial sales. To date,
we have established a manufacturing relationship as part of our collaboration
with Schering AG. The agreement provides that Schering AG is solely
responsible for manufacturing gene therapy products developed under our
collaboration. We cannot be certain, however, that we will be able to
maintain our relationship with Schering AG or establish relationships with
other manufacturers on commercially acceptable terms. Any failure to do so
would adversely affect our potential future profitability.
Further, our manufacturers may experience a variety of problems in
manufacturing our products, including:
- an inability to manufacture commercial quantities of our
products on a cost-effective basis,
- non-compliance with Good Manufacturing Practices mandated by
the FDA or by any foreign regulatory authority,
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- manufacturing or quality control problems, or
- an inability to obtain or maintain the governmental licenses and
approvals required to manufacture our products.
We will need to rely on third parties to market, sell and
distribute our products and those third parties may not perform
successfully. We do not have internal marketing and sales capabilities and
may not be able to successfully market and sell our products. Our current
strategy is to market and sell our products through our collaborative
partners. For example, our collaboration with Schering AG provides that they
will be solely responsible for marketing and selling gene therapy products we
develop together. We cannot be certain, however, that we will be able to
maintain our relationship with Schering AG or establish relationships with
other drug or healthcare companies with distribution systems and direct sales
forces on commercially acceptable terms. If we are required to market and
sell our products directly, we will need to develop a marketing and sales
force with technical expertise and distribution capability. Creating a
marketing and sales infrastructure is expensive and time-consuming and thus
could divert resources from other aspects of our business. In addition, to
the extent we enter into co-promotion or other licensing arrangements, any
revenues we receive will be dependent on the efforts of others, and we cannot
be certain that their efforts will be successful.
OUR PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL BECAUSE PHYSICIANS
AND PATIENTS MAY NOT ACCEPT THEM.
Our success will depend on the market acceptance of our products.
The degree of market acceptance will depend upon a number of factors,
including:
- the receipt and scope of regulatory approval,
- the establishment and demonstration in the medical community
of the safety and effectiveness of our products and their
potential advantages over other treatments, and
- reimbursement policies of government and healthcare payors.
In the past, parts of the medical community have been concerned
with the potential safety and effectiveness of gene therapy products derived
from disease-causing viruses, such as adenoviruses, which we use in our
proposed gene therapy products. Physicians, patients, payors or the medical
community in general may not accept our products as safe or may not use any
product that we may develop.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND
ADVISORS, IT MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN FINANCING OR DEVELOP
OUR PRODUCTS.
Our success depends on the key members of our scientific and
management staff. The loss of one or more of these key members could impede
our development objectives. We do not have employment agreements with our
scientific or management staff. Certain key scientific staff members have
entered into scientific advisory consulting agreements with us. However,
these agreements may be terminated at any time by either party.
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Our future success also depends on recruiting additional qualified
management, operations and scientific personnel. To pursue our research and
development programs, we will need to hire additional qualified scientists and
managers. There is intense competition for these qualified personnel among
numerous pharmaceutical and biotechnology companies, universities and other
research institutions. We may not be able to continue to attract and retain the
personnel necessary to develop our business. If we are not able to attract and
retain key personnel, we may not successfully develop our products or achieve
our other business objectives.
In addition, we rely on the members of our scientific advisory
board to help formulate our research and development strategy. All of our
scientific advisors are employed by others and may have commitments to, or
consulting contracts with, other entities that may limit their availability
to us. Each scientific advisor has agreed not to perform services for us
that might conflict with services the advisor performs for another entity.
However, a conflict of interest could result from these services which could
impede our ability to develop our products.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS IN CONNECTION WITH
OUR ONGOING CLINICAL TRIALS OR FOLLOWING COMMERCIALIZATION, IT MAY RESULT IN
REDUCED DEMAND FOR OUR PRODUCTS OR DAMAGES THAT EXCEED OUR INSURANCE
LIMITATIONS OR RESOURCES.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacture and sale of human healthcare products. We
have some product liability insurance for our Phase 1/2 human clinical trial for
GENERX-TM-. As it becomes necessary, we intend to expand our insurance coverage
to include clinical trials of other products under development and the
manufacture and commercial sale of our potential products. We may be unable to
obtain additional product liability insurance on commercially acceptable terms.
Failure to obtain product liability insurance or to otherwise protect against
product liability claims could prevent or delay the commercialization of our
products. If we do not have insurance or adequate insurance, a successful
product liability claim, series of claims, or product recall could divert our
resources and result in significant expenses to us.
WE MAY INCUR SUBSTANTIAL COSTS RELATED TO OUR USE OF HAZARDOUS
MATERIALS.
We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials. Although we believe that our activities currently comply with
these laws and regulations, the risk of contamination or injury still exists.
For example, if an accident occurs we could be responsible for any damages
and the amount of the damages could exceed our resources. In addition, we
may incur significant costs to comply with environmental laws and regulations
in the future.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT FLUCTUATIONS WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL WHICH COULD IN TURN
DELAY COMMERCIALIZATION OF OUR PRODUCTS.
The market prices and trading volumes for securities of emerging
companies in our industry have historically been highly volatile and have
experienced significant fluctuations. These fluctuations may be unrelated or
disproportionate to the operating performance of companies. Our common stock
has been publicly traded since July 1998. As of September 30,
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1999, our common stock has traded as low as $2 7/8 per share and as high as
$29 7/8 per share. In addition to factors related to the volatility of our
industry and the stock market, the market price of our common stock may be
affected by announcements regarding:
- results of research,
- development testing,
- technological innovations,
- new commercial products,
- government regulation,
- developments concerning proprietary rights,
- litigation,
- public perception regarding the safety of our products, or
- securities analysts' expectations.
Since our common stock is thinly traded, its price can also
fluctuate significantly as a result of sales of a relatively large number of
shares of our common stock or the perception that these sales could occur.
Such sales also might make it more difficult for us to sell equity securities
in the future at a price we deem appropriate.
OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT
TRANSACTIONS THAT COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict how our stockholders can act to affect us. For
example:
- Our stockholders can only act at a duly called annual or special
meeting and they may not act by written consent;
- Special meetings can only be called by our chief executive
officer, president, or chairman of the board or by our president
or secretary at the written request of a majority of the board of
directors; and
- Stockholders also must give advance notice to the secretary of
any nominations for director or other business to be brought by
stockholders at any stockholders' meeting.
Some of these restrictions can only be amended by a super-majority
vote of members of the board and/or the stockholders. These and other
provisions of our charter and bylaws, as well as provisions of Delaware law,
could prevent changes in our management and discourage, delay or prevent a
merger, tender offer or proxy contest, even if the events could be beneficial
to our stockholders. These provisions could also limit the price that
investors might be willing to pay for our stock.
In addition, our charter authorizes our board of directors to issue
shares of undesignated preferred stock without stockholder approval on terms
that the board may determine. The
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issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to our other stockholders or otherwise adversely
affect their rights and powers, including voting rights. Moreover, the
issuance of preferred stock may make it more difficult for another party to
acquire, or may discourage another party from acquiring, voting control of us.
IF WE FAIL TO BE YEAR 2000 COMPLIANT IT COULD HARM OUR BUSINESS.
We cannot be assured that our information technology systems will
function properly in the year 2000. If any key information technologies or
embedded microprocessor technology systems related to our business and
operations are not year 2000 compliant, there could be a material adverse
effect on our business. For further information regarding the status of our
ongoing investigations, related risks, contingency plans and expenses, please
see "Management's Discussion and Analysis of Financial Condition and Results
of Operation--Impact of the Year 2000 or Y2K."
Risks Related to Our Industry
WE FACE INTENSE COMPETITION IN OUR INDUSTRY WHICH COULD RENDER OUR
POTENTIAL PRODUCTS LESS COMPETITIVE OR OBSOLETE.
There are a number of potential gene therapy, cell therapy
treatments and angiogenic protein infusion therapies which could compete with
our potential products. Our products could also compete with drugs or other
pharmaceutical products. In addition, a number of new surgical procedures
could compete with our potential products, including:
- laser-based systems to stimulate angiogenesis in the heart, and
- catheter-based treatments including balloon angioplasty,
atherectomy and coronary stenting.
Many of our competitors have larger research and development staffs
and substantially more financial and other resources. These competitors also
have more experience and capability in researching, developing and testing
products in clinical trials, in obtaining FDA and other regulatory approvals
and in manufacturing, marketing and distribution.
In addition, the competitive positions of other early stage
companies may be enhanced significantly through their collaborative
arrangements with large pharmaceutical companies, biotechnology companies or
academic institutions, which may be more beneficial than our collaborative
arrangements. Our competitors may succeed in developing, obtaining patent
protection for, receiving regulatory approvals for, or commercializing
products at a more rapid pace. If we are successful in commercializing our
products, we will be required to compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have no experience.
Our competitors may develop or acquire new technologies and products from
research institutions, universities or others that are available for sale
before our potential products or are more effective than our potential
products.
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Any of these developments could render our potential products less
competitive or obsolete, and could delay or prevent our commercialization of
products. Further, gene therapy in general is a new and rapidly developing
technology. We expect this technology to undergo significant change in the
future. If there is rapid technological development, our current and future
products or methods may become obsolete before we can successfully
commercialize them.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD
PREVENT OR DELAY THE COMMERCIALIZATION OF OUR PRODUCTS.
We and our collaborators are subject to extensive government
regulation. The FDA and foreign regulatory authorities require rigorous
preclinical testing, clinical trials and other product approval procedures.
Numerous regulations also govern the manufacturing, safety, labeling,
storage, record keeping, reporting and marketing of our drug products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary greatly from country to country. The process
of seeking these approvals and complying with applicable government
regulations is time consuming and expensive, and approvals may not be
obtained. Even if approvals are obtained for certain products, any
subsequent discovery of problems with a product, manufacturer or facility may
result in restrictions on the product or manufacturer, including withdrawal
of the product from the market.
In addition, gene therapies such as those we are developing are
relatively new and are only beginning to be tested in humans. Regulatory
authorities may require us or our partners to demonstrate that our products
are improved treatments relative to other therapies or may significantly
modify the requirements governing gene therapies, which could result in
regulatory delays or rejections. Also, even if we obtain regulatory product
approval, the approval could limit the uses for which we may market the
product which could have the effect of restricting our ability to
commercialize the product and reducing our potential revenues.
We are also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local laws and regulations. We or our
partners may also be subject to similar regulations in other countries.
Failure to comply with such regulatory requirements or to obtain product
approvals could impair our ability to develop and market our products and our
revenues would suffer.
IF THE COST OF OUR PRODUCTS IS NOT REIMBURSED BY THIRD PARTIES, IT
COULD HARM OUR COMMERCIAL SUCCESS.
Our commercial success will depend heavily upon whether consumers
will be reimbursed for the use of our products. Third-party payors, such as
government and private insurance plans, may not authorize or otherwise budget
reimbursement for our products. Additionally, third-party payors, including
Medicare, are increasingly challenging the prices charged for medical
products and services. We may be required to provide substantial cost-benefit
data to demonstrate that our products are cost-effective. Third-party payors
may not pay the prices set for our products or reimburse consumers for the
use of our products. Federal and state regulations also affect the
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reimbursement to healthcare providers of fees and capital equipment costs in
connection with medical treatment.
HEALTHCARE REFORM MEASURES AND REIMBURSEMENT PROCEDURES MAY
ADVERSELY IMPACT THE COMMERCIALIZATION OF OUR PRODUCTS.
The efforts of governments and third-party payors to contain or
reduce the cost of healthcare will continue to affect our business and
financial condition as a biotechnology company. In the U.S., government and
other third-party payors are increasingly attempting to contain healthcare
costs by limiting both coverage and the level of reimbursement for new
products approved for marketing by the FDA. These cost containment efforts
are currently increasing in response to recent initiatives to reform
healthcare delivery. As managed care organizations continue efforts to
contain health care costs, we believe these organizations may attempt to
restrict the use of or limit coverage and reimbursements for new products
such as those being developed by us. Internationally, where national
healthcare systems are prevalent, little if any funding may be available for
new products, and cost containment and cost reduction efforts can be more
pronounced than in the U.S. These cost controls may have a material adverse
effect on our revenues and profitability and may affect our ability to raise
additional capital in a number of ways, including:
- decreasing the price we, or any of our partners or licensees,
receive for any of our products,
- preventing the recovery of development costs, which could be
substantial, and
- minimizing profit margins.
Further, our commercialization strategy depends on our
collaborators. As a result, our ability to commercialize our products and
realize royalties may be hindered if cost control initiatives adversely
affect our collaborators.
OUR MANAGEMENT AND CONTROLLING STOCKHOLDERS WHICH TOGETHER CONTROL
A LARGE PORTION OF OUR COMMON STOCK MAY CONTROL OUR OPERATIONS AND MAKE
DECISIONS WHICH YOU DO NOT CONSIDER IN YOUR BEST INTEREST.
Our present directors, executive officers and principal
stockholders and their affiliates beneficially own a significant majority of
our outstanding common stock. As a result, if all or some of these
stockholders were to act together, they would be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in our control that may be favored by other stockholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We are a development stage company with products in the early
stages of development. As a result, a substantial number of statements
contained in this quarterly report on Form 10-Q and the
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1998 annual report on Form 10-K, including without limitation, statements
containing the words "believes," "anticipates," "expects" and words of
similar import, may constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or
achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those
discussed under the caption "Risks Factors" as well as those factors
addressed in our annual report on Form 10-K filed with the Securities and
Exchange Commission. Given these uncertainties, investors and prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. We undertake no obligation to release publicly the results of
any revisions to these forward-looking statements to reflect events and
circumstances arising after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1999, we had cash and cash equivalents and
short-term investments of $41.1 million. We invest our excess cash in high
credit quality debt instruments of corporations and financial institutions.
These investments are not held for trading or other speculative purposes.
Generally, our investments mature in less than 18 months. Changes in
interest rates affect the investment income we earn on our investments and,
therefore, impact our cash flows and results of operations.
At September 30, 1999, we had an outstanding bank loan of $0.8
million. This loan bears interest at prime plus 1.25% (9.5% at September 30,
1999). We pay monthly principal payments of $18,500 plus interest on the
bank loan; these payments extend through April 2003. We also had outstanding
$500,000 in loans from Schering AG. These loans bear interest at 1% below
the prime rate (7.25% at September 30, 1999). Principal and interest on
these loans are due and payable upon demand. Changes in interest rates
affect the interest expense we pay on these loans and, therefore, impact our
cash flows and results of operations.
We are not exposed to risks for changes in foreign currency
exchange rates, commodity prices, or any other market rates.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On August 11, 1999, we completed a private placement covering
the sale of 2,150,000 shares of common stock for aggregate cash consideration
of approximately $33.9 million. Net proceeds from the placement were
approximately $31.2 million. We incurred total expenses of approximately
$2.7 million, of which approximately $2.0 million represented commissions.
Bear Stearns & Co. Inc. acted as placement agent for the sale of these
shares. We filed a registration statement with the SEC relating to the
resale of the common stock which was declared effective on September 29, 1999.
24
<PAGE>
The shares were offered and sold to selected accredited
institutional investors pursuant to a claim of exemption under Regulation D
promulgated by the SEC or, alternatively, under Section 4(2) of the
Securities Act of 1933. We did not use any general advertisement or
solicitation in connection with the offer or sale of the common stock. Each
Purchaser represented and warranted, among other things, that it was
purchasing the Shares for investment only and not with a view to distribution
and that it was an "accredited investor" (as defined in Regulation D).
Appropriate legends were affixed to the certificates for the Shares.
(d) The registration statement on Form S-1 filed by us with the
SEC in connection with our July 8, 1998 public offering (File No. 333-51029),
as amended, was declared effective by the SEC on June 24, 1998. We then
filed three post-effective amendments to the registration statement. On July
2, 1998 concurrent with our filing of post-effective amendment No. 3 to the
registration statement, the SEC declared our amended registration statement
effective. Our net proceeds from the offering, after deducting the total
expenses, were $13.0 million.
Since the completion of the public offering in July 1998, the net
offering proceeds have been applied to approximately $8.8 million in working
capital and general corporate expenditures, including research and
development, and approximately $1.3 million to purchase equipment and
leasehold improvements. The proceeds applied to purchase equipment and
leasehold improvements are lower then what was estimated in the registration
statement on Form S-1 as a result of a $1.0 million bank loan we obtained
after the public offering and we were able to apply to acquiring such
equipment and leasehold improvements. Additionally, $1.5 million of the
costs to construct our preclinical laboratory facility were paid with
Collateral's cash available prior to the public offering.
We have temporarily invested the $2.9 million balance of the
offering proceeds in cash equivalents and short-term investments. The cash
equivalents consist primarily of high credit quality debt instruments of
corporations and financial institutions with maturities of three months or
less when purchased.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Incorporated by reference to the Second Restated
Certificate of Incorporation of the Company filed as
Exhibit 3.1 to the Form 10-Q for the quarter ended
June 30, 1998, filed on August 6, 1998.
3.2 Incorporated by reference to the Restated Bylaws of the
Company filed as Exhibit 3.4 to Registration Statement
No. 333-51029 on Form S-1 filed on April 24, 1998,
as amended.
10.1 Form of Purchase Agreement completed in connection with the
private placement of August 11, 1999.
27.1 Financial Data Schedule.
25
<PAGE>
(b) Reports on Form 8-K.
During the third quarter, a report on Form 8-K was filed on
August 12, 1999 concerning the completion of our private placement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned.
COLLATERAL THERAPEUTICS, INC.
Date: October 22, 1999 \s\ CHRISTOPHER J. REINHARD
---------------------------
Christopher J. Reinhard
President
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)
26
<PAGE>
FORM OF PURCHASE AGREEMENT
THIS AGREEMENT (the "Agreement") is made as of the 6th day of
August, 1999, by and among Collateral Therapeutics Inc. (the "Company"), a
corporation organized under the laws of the State of Delaware, with its
principal offices at 11622 El Camino Real, San Diego, California 92130, and
the purchaser whose name and address is set forth on the signature page
hereof (the "Purchaser").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
the Company, and the Purchaser agree as follows:
SECTION 1. AUTHORIZATION OF SALE OF THE SHARES. Subject to the terms and
conditions of this Agreement, the Company has authorized the sale of up to
2,150,000 shares (the "Shares") of the common stock, par value $0.001 per share
(the "Common Stock"), of the Company.
SECTION 2. AGREEMENT TO SELL AND PURCHASE THE SHARES. At the Closing (as
defined in Section 3), the Company will, subject to the terms of this Agreement,
sell to the Purchaser, and the Purchaser will buy from the Company, upon the
terms and conditions hereinafter set forth, the number of Shares (at the
purchase price) set forth on the signature page hereof:
The Company proposes to enter into this same form of purchase
agreement with the other investors (the "Other Purchasers") and to complete
sales of the Shares to them. The Purchaser and the Other Purchasers are
hereinafter sometimes collectively referred to as the "Purchasers," and this
Agreement and the agreements executed by the Other Purchasers are hereinafter
sometimes collectively referred to as the "Agreements." The term "Placement
Agent" shall mean Bear, Stearns & Co. Inc.
SECTION 3. DELIVERY OF THE SHARES AT THE CLOSING. The "Subscription Date"
shall be the date when the Company has notified the Placement Agent in writing
that it is no longer accepting Purchase Agreements from investors. The
completion of the purchase and sale of the Shares (the "Closing") shall occur at
a place and time (the "Closing Date") to be determined by the Company and the
Placement Agent, which date shall not be less than three nor more than ten
business days after the Subscription Date. The Purchasers will be notified by
facsimile transmission or otherwise of the Closing Date.
At the Closing, the Company shall issue to the Purchaser one or more
stock certificates registered in the name of the Purchaser, or in such nominee
name(s) as designated by the Purchaser in writing, representing the number of
Shares set forth in Section 2 above. The name(s) in which the stock certificates
are to be registered are set forth in the Stock Certificate Questionnaire
attached hereto as part of Appendix 1. The Company's obligation to complete the
purchase and sale of the Shares and deliver such stock certificate(s) to the
Purchaser at the Closing shall be subject to the following conditions, any one
or more of which may be waived by the Company: (a) receipt by the Company of
same-day funds in the full amount of the purchase price for the Shares being
purchased hereunder; (b) completion of the purchases and sales under the
Agreements with all of the Other Purchasers; and (c) the accuracy of the
representations and warranties made by the Purchasers and the fulfillment of
those undertakings of the Purchasers to be fulfilled prior to the Closing. The
Purchaser's obligation to accept delivery of such stock
<PAGE>
certificate(s) and to pay for the Shares evidenced thereby shall be subject
to the accuracy in all material respects of the representations and
warranties made by the Company herein and the fulfillment in all material
respects of those undertakings of the Company to be fulfilled prior to
Closing. The Purchaser's obligations hereunder are expressly conditioned on
the purchase by Other Purchasers of the Shares that they have agreed to
purchase from the Company to the extent that the Purchaser's Shares, in
combination with Shares purchased by Other Purchasers, shall total at least
2.0 million Shares.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company hereby represents and warrants to, and covenants with, the Purchaser as
follows:
4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is qualified to do business as a foreign
corporation in each jurisdiction in which qualification is required, except
where failure to so qualify would not have a Material Adverse Effect (as defined
herein) on the Company.
4.2 AUTHORIZED CAPITAL STOCK. Except as described by the Confidential
Private Placement Memorandum dated July 21, 1999 prepared by the Company,
including all Exhibits (except for this Agreement), the Supplemental Package(s)
(as defined therein), amendments and any other documents incorporated by
reference thereto (the "Private Placement Memorandum"), the Company had
authorized and outstanding capital stock as set forth under the heading
"Capitalization" in the Private Placement Memorandum as of the date set forth
therein; the issued and outstanding shares of the Company's Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities and conform in all material respects to any
descriptions thereof contained in the Private Placement Memorandum. Except as
described by the Private Placement Memorandum and except with respect to the
issuance of options under the Company's 1998 Stock Incentive Plan and the
issuance of shares of Common Stock pursuant to the Company's Employee Stock
Purchase Plan and pursuant to any options outstanding as of the date hereof, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, or any contracts or
commitments to issue or sell, any securities or obligations convertible into
shares of its capital stock or any shares of capital stock of any subsidiary.
The description of the Company's stock, stock bonus and other stock plans or
arrangements and the options or other rights granted and exercised thereunder,
set forth in the documents incorporated by reference in the Private Placement
Memorandum accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
4.3 ISSUANCE, SALE AND DELIVERY OF THE SHARES. The Shares have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform in all material respects to the description
thereof set forth in the Private Placement Memorandum. No preemptive rights or
other rights to subscribe for or purchase exist with respect to the issuance and
sale of the Shares by the Company pursuant to this Agreement. No stockholder of
the Company has any right (which has not been waived or has not expired by
reason of lapse of time following
<PAGE>
notification of the Company's intent to file the registration statement to be
filed by the Company pursuant to Section 7.1 hereof (the "Registration
Statement")) to require the Company to register the sale of any shares owned
by such stockholder under the Securities Act of 1933, as amended (the
"Securities Act"), in the Registration Statement. No further approval or
authority of the stockholders, or the Board of Directors of the Company will
be required for the issuance and sale of the Shares to be sold by the Company
as contemplated herein. The Company's issuance of the Shares shall be in
compliance with all applicable Federal, state securities or blue sky laws.
4.4 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The
Company has full legal right, corporate power and authority to enter into the
Agreements and perform the transactions contemplated hereby. The Agreements have
been duly authorized, executed and delivered by the Company. The making and
performance of the Agreements by the Company and the consummation of the
transactions herein contemplated will not violate any provision of the
organizational documents of the Company. The making and performance of the
Agreements by the Company and the consummation of the transactions herein
contemplated will not (i) result in the creation of any lien, charge, security
interest or encumbrance upon any assets of the Company pursuant to the terms or
provisions of, or (ii) conflict with, result in the breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
default under any material agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which the Company is a party
or by which the Company or any of its respective properties may be bound or
affected, or, to the Company's knowledge, any statute or any authorization,
judgment, decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its respective properties and, in each case (i) or (ii), which
individually or in the aggregate would have a material adverse effect on the
condition (financial or otherwise), properties, business, prospects as of the
date hereof or results of operations of the Company, taken as a whole (a
"Material Adverse Effect"). No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body
is required for the execution and delivery of this Agreement or the consummation
of the transactions contemplated by this Agreement, except for compliance with
the Blue Sky laws and federal securities laws applicable to the offering of the
Shares. Upon their execution and delivery, and assuming the valid execution
thereof by the respective Purchasers, the Agreements will constitute valid and
binding obligations of the Company, enforceable in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except as the indemnification agreements of the Company in Section 7.3
hereof may be legally unenforceable.
4.5 ACCOUNTANTS. Ernst & Young LLP, who have expressed their opinion with
respect to the financial statements to be incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 into
the Registration Statement and the Prospectus which forms a part thereof, are
independent accountants as required by the Securities Act and the rules and
regulations promulgated thereunder (the "Rules and Regulations").
<PAGE>
4.6 NO DEFAULTS. Except as to defaults, violations and breaches which
individually or in the aggregate would not have a Material Adverse Effect, the
Company is not in violation or default of any provision of its certificate of
incorporation or bylaws, or other organizational documents, or in breach of or
default with respect to any provision of any agreement, judgment, decree, order,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties are
bound; and there does not exist any state of fact which, with notice or lapse of
time or both, would constitute an event of default as defined in such documents
on the part of the Company, except such defaults which individually or in the
aggregate would not have a Material Adverse Effect.
4.7 CONTRACTS. The contracts described in the Private Placement
Memorandum or incorporated by reference therein that are material to the Company
are in full force and effect on the date hereof, and neither the Company nor, to
the Company's knowledge, any other party to such contracts is in breach of or
default under any of such contracts which would have a Material Adverse Effect.
4.8 NO ACTIONS. Except as disclosed in the Private Placement Memorandum,
there are no legal or governmental actions, suits or proceedings pending or, to
the Company's knowledge, threatened to which the Company is or may be a part or
of which property owned or leased by the Company is or may be the subject, or
related to environmental or discrimination matters, which actions, suits or
proceedings, individually or in the aggregate, might prevent or might reasonably
be expected to materially and adversely affect the transactions contemplated by
this Agreement or result in a Material Adverse Effect; and no labor disturbance
by the employees of the Company exists, or, to the Company's knowledge, is
threatened which might reasonably be expected to have a Material Adverse Effect.
Except as disclosed in the Private Placement Memorandum, the Company is not a
party to or subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body administrative agency or other
governmental body.
4.9 PROPERTIES. The Company has good and marketable title to all the
properties and assets reflected as owned by it in the financial statements
included in or incorporated by reference into the Private Placement Memorandum,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements, (ii) those of the
United States Government to exercise rights with respect to inventions made with
Government support, or (iii) those which are not material in amount and do not
adversely affect the use made and promised to be made of such property by the
Company. The Company holds its leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
their respective businesses. Except as disclosed in the Private Placement
Memorandum, the Company owns or leases all such properties as are necessary to
its operations as now conducted.
4.10 NO MATERIAL CHANGE. Since June 30, 1999 and except as addressed by
the Private Placement Memorandum, (i) the Company has not incurred any material
liabilities or obligations, indirect, or contingent, or entered into any
material oral or written agreement or other transaction which is not in the
ordinary course of business or which could reasonably be expected to result in a
material reduction in the future earnings of the Company or other Material
Adverse Effect; (ii) the Company has not sustained any material loss or
interference with its
<PAGE>
businesses or properties from fire, flood, windstorm, accident or other
calamity not covered by insurance; (iii) the Company has not paid or declared
any dividends or other distributions with respect to its capital stock and
the Company is not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the
capital stock of the Company other than the sale of the Shares hereunder and
shares or options issued pursuant to the Company's 1998 Stock Incentive Plan,
the Company's Employee Stock Purchase Plan and any options outstanding as of
the date hereof, or indebtedness, liens or claims material to the Company
(other than in the ordinary course of business); and (v) except for the
operating losses and negative cash flow the Company has continued to incur,
there has not been a material adverse change in the condition (financial or
otherwise), properties, business, prospects as of the date hereof or results
of operations of the Company.
4.11 INTELLECTUAL PROPERTY. Except as addressed by the Private Placement
Memorandum, the Company believes it has the necessary trademark, trade name
rights, patent rights, copyrights, licenses and trade secret rights to conduct
its business as it is now being conducted and as specifically described in the
Private Placement Memorandum; and, except as described in the Private Placement
Memorandum under "Business," the Company has no knowledge of any material
infringement by it of the trademark, trade name rights, patent rights,
copyrights or trade secret rights of others, or of any claim made against the
Company regarding trademark, trade name, patent or trade secret infringement,
that would be expected to have a material adverse effect on the Company. The
foregoing is subject to and must be considered in view of the numerous
uncertainties and complexities inherent in seeking intellectual property
protection of sufficient scope to protect the Company's technologies, in
defending intellectual property rights that may be obtained, and in avoiding or
being able to license or defend against intellectual property rights that may
belong to or may be acquired by others; see the discussion of Risks Related to
Patents and Proprietary Information in the Private Placement Memorandum.
4.12 COMPLIANCE. The Company has not been advised, and has no reason to
believe, that it is not conducting business in compliance with all applicable
laws, rules and regulations of the jurisdictions in which it is conducting
business, including, without limitation, all applicable local, state and federal
environmental laws and regulations; except where failure to be so in compliance
would not have a Material Adverse Effect.
4.13 TAXES. The Company has filed all necessary federal, state and foreign
income and franchise tax returns and has paid or accrued all taxes shown as due
thereon, and the Company has no knowledge of a tax deficiency which has been or
might be asserted or threatened against it which would have a Material Adverse
Effect.
4.14 TRANSFER TAXES. On the Closing Date, all stock transfer or other
taxes (other than income taxes) which are required to be paid in connection with
the sale and transfer of the Shares to be sold to the Purchaser hereunder will
be, or will have been, fully paid or provided for by the Company and all laws
imposing such taxes will be or will have been fully complied with.
4.15 INVESTMENT COMPANY. The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.
<PAGE>
4.16 OFFERING MATERIALS. The Company has not distributed and will not
distribute prior to the Closing Date any offering material in connection with
the offering and sale of the Shares other than the Private Placement Memorandum.
The Company has not in the past nor will it hereafter take any action
independent of the Placement Agent to sell, offer for sale or solicit offers to
buy any securities of the Company which would bring the offer, issuance or sale
of the Shares, as contemplated by this Agreement, within the provisions of
Section 5 of the Securities Act, unless such offer, issuance or sale was or
shall be within the exemptions of Section 4 of the Securities Act.
4.17 INSURANCE. Except as disclosed in the Private Placement Memorandum,
the Company maintains and will continue to maintain insurance of the types and
in the amounts that the Company reasonably believes is adequate for its
business, including, but not limited to, insurance covering all real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against
by similarly situated companies, all of which insurance is in full force and
effect.
4.18 CONTRIBUTIONS. The Company has not at any time since its
incorporation, directly or indirectly, (i) made any unlawful contribution to any
candidate for public office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
4.19 REPORTING COMPANY; LISTED SECURITIES. The Company is a reporting
company and has filed all reports required to be filed by Sections 13(a), 14(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
in a timely manner during the preceding twelve (12) months and has been subject
to such filing requirements for the past twelve (12) months. The Common Stock
is quoted on the Nasdaq National Market System ("Nasdaq"). To the Company's
knowledge, there is no stop order suspending the trading of the Common Stock on
Nasdaq or any information which would result in the Common Stock from being
delisted from Nasdaq. The Company will continue to use commercially reasonable
efforts to satisfy the Non-Quantitative Designation Criteria contained in
Section 5 of Part III of Schedule D of the NASD's Bylaws to the extent such
criteria are within the control of the Company. Nothing in this Section shall
be interpreted to preclude the Company from listing its Common stock on a
national securities exchange in lieu of the Nasdaq National Market.
4.20 ADDITIONAL INFORMATION. The Company represents and warrants that the
information contained in the following documents, which the Placement Agent has
furnished to the Purchaser, or will furnish prior to the Closing, complies in
all material respects with the Rules and Regulations and is, or will be, true
and complete in all material respects as of their respective filing dates:
(a) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (without exhibits);
(b) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (without exhibits);
<PAGE>
(c) the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders;
(d) the Registration Statement;
(e) the Private Placement Memorandum (other than the Purchase
Agreement and appendices thereto); and
(f) all other documents, if any, filed by the Company with the
Securities and Exchange Commission (the "SEC") since December 31, 1998 pursuant
to the reporting requirements of the Exchange Act.
4.21 LEGAL OPINION. Prior to the Closing, Brobeck, Phleger & Harrison LLP,
counsel to the Company, will deliver its legal opinion to the Placement Agent
reasonably satisfactory to the Placement Agent and counsel to the Placement
Agent. Such opinion shall also state that each of the Purchasers may rely
thereon as though it were addressed directly to such Purchaser.
4.22 CERTIFICATE. At the Closing, the Company will deliver to Purchaser a
certificate executed by the Chairman of the Board or President and the chief
financial or accounting officer of the Company, dated the Closing Date, in form
and substance reasonably satisfactory to the Purchasers, to the effect that the
representations and warranties of the Company set forth in this Section 4 are
true and correct in all material respects as of the date of this Agreement and
as of the Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions herein on its part to be performed or satisfied on
or prior to such Closing Date.
SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.
(a) The Purchaser represents and warrants to, and covenants with, the
Company that: (i) the Purchaser is knowledgeable, sophisticated and experienced
in making, and is qualified to make, decisions with respect to investments in
shares representing an investment decision like that involved in the purchase of
the Shares, including investments in securities issued by the Company, and has
requested, received, reviewed and considered all information it deems relevant
in making an informed decision to purchase the Shares; (ii) the Purchaser is
acquiring the number of Shares set forth in the signature page hereto, for its
own account for investment (as defined for purposes of the Hart-Scott-Rodino
Antitrust Improvement Act of 1976 and the regulations thereunder) only and with
no present intention of distributing any of such Shares or any arrangement or
understanding with any other persons regarding the distribution of such Shares;
(iii) the Purchaser will not, directly or indirectly, offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) any of the Shares except in compliance
with the Act, the Rules and Regulations and any applicable state securities or
blue sky laws; (iv) the Purchaser has completed or caused to be completed the
Registration Statement Questionnaire and the Stock Certificate Questionnaire,
both attached hereto as Appendix I, for use in preparation of the Registration
Statement, and the answers thereto are true and correct as of the date hereof
and will be true and correct as of the effective date of the Registration
Statement; (v) the Purchaser has, in connection with its decision to purchase
the number of Shares set forth in Section 2 above, not relied upon any
representations or other information (whether oral or written) other than as set
forth in the
<PAGE>
Private Placement Memorandum and the documents included therein and the
representations and warranties of the Company contained herein; (vi) the
Purchaser has had an opportunity to discuss this investment with
representatives of the Company and ask questions of them; and (vii) the
Purchaser is an "accredited investor" within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act.
(b) The Purchaser hereby covenants with the Company not to make any
sale of the Shares without satisfying the prospectus delivery requirement under
the Securities Act, and the Purchaser acknowledges and agrees that such Shares
are not transferable on the books of the Company unless the certificate
submitted to the transfer agent evidencing the Shares is accompanied by a
separate officer's certificate: (i) in the form of Appendix II hereto,
(ii) executed by an officer of, or other authorized person designated by, the
Purchaser, and (iii) to the effect that (A) the Shares have been sold in
accordance with the Registration Statement, the Securities Act and the Rules and
Regulations and any applicable state securities or blue sky laws and (B) the
requirement of delivering a current prospectus has been satisfied, except to the
extent that the requirement of delivering a current prospectus is inapplicable
under the Rules and Regulations as applied to: (i) a transfer to an affiliate of
the Purchaser (including a mutual fund with a common investment advisor) that is
carried out in accordance with an applicable exemption from registration under
the Securities Act and the Rules and Regulations, or (ii) a transfer or sale
pursuant to Rule 144 or another applicable exemption from registration under the
Securities Act and the Rules and Regulations. The Purchaser acknowledges that
there may occasionally be times when the Company must suspend the use of the
prospectus forming a part of the Registration Statement until such time as an
amendment to the Registration Statement has been filed by the Company and
declared effective by the SEC, or until such time as the Company has filed an
appropriate report with the SEC pursuant to the Exchange Act. The Purchaser
hereby covenants that it will not sell any Shares pursuant to said prospectus
during the period commencing at the time at which the Company gives the
Purchaser written notice of the suspension of the use of said prospectus and
ending at the time the Company gives the Purchaser written notice that the
Purchaser may thereafter effect sales pursuant to said prospectus; provided,
however, that the Company will deliver such notices to Purchaser as promptly as
practicable and will use commercially reasonable and diligent efforts to limit
the aggregate duration of such suspensions to forty-five (45) days per calendar
year. The Purchaser further covenants to notify the Company promptly of the sale
of all of its Shares.
(c) The Purchaser further represents and warrants to, and covenants
with, the Company that (i) the Purchaser has full right, power, authority and
capacity to enter into this Agreement and to consummate the transactions
contemplated hereby and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, (ii) if applicable, the
Purchaser is duly organized, validly existing and in good standing under the
laws of its jurisdiction, (iii) the making and performance of the Agreement by
Purchaser and the consummation of the transactions herein contemplated will not
violate any provision of the organizational documents of Purchaser or conflict
with, result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under any material
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Purchaser is a party or, any statute or any
authorization, judgment, decree, order, rule or regulation of any court or any
regulatory body, administrative agency or other governmental body applicable to
Purchaser, (iv) no consent, approval, authorization or
<PAGE>
other order of any court, regulatory body, administrative agency or other
governmental body is required on the part of the Purchaser for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, and (v) upon the execution and delivery of
this Agreement, this Agreement shall constitute a valid and binding
obligation of the Purchaser enforceable in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and
contracting parties' rights generally and except as enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except
as the indemnification agreements of the Purchaser in Section 7.3 hereof may
be legally unenforceable and (vi) there is not in effect any order enjoining
or restraining the Purchaser from entering into or engaging in any of the
transactions contemplated by this Agreement.
(d) The Purchaser recognizes that an investment in the Shares
involves a high degree of risk, including a risk of total loss of Purchaser's
investment, and the Purchaser has full cognizance of and understands all of the
risk factors related to Purchaser's purchase of the Shares, including, but not
limited to, those set forth under the caption "Risk Factors" in the Private
Placement Memorandum.
(e) All of the information provided to the Company or its agents or
representatives concerning the Purchaser's suitability to invest in the Company
and the representations and warranties contained herein, are complete, true and
correct as of the date hereof. Purchaser understands that the Company is
relying on the statements contained herein to establish an exemption from
registration under federal and state securities laws.
(f) The address set forth in the signature page hereto is the
Purchaser's true and correct residence and the Purchaser has no present
intention of becoming a resident of any other state or jurisdiction.
(g) The Purchaser covenants to provide Company at all times as the
Company is required to keep the Registration Statement in effect with an
updated, accurate and complete plan of distribution.
(h) The Purchaser understands and agrees that each certificate or
other document evidencing any of the Shares shall be endorsed with the legend in
substantially the form set forth below as well as any other legends required by
applicable law and the Purchaser covenants that the Purchaser shall not transfer
the shares represented by any such certificate without complying with the
restrictions on transfer described in the legends endorsed on such certificate
and understands that the Company shall refuse to register any transfer of Shares
not complying with the following legend:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR REGISTERED OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT
BE TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES
LAWS OR (B) EXEMPTIONS FROM SUCH REGISTRATION OR QUALIFICATION REQUIREMENTS ARE
AVAILABLE. AS A CONDITION TO PERMITTING ANY TRANSFER OF THESE SECURITIES, THE
COMPANY MAY REQUIRE THAT IT BE FURNISHED WITH AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION OR QUALIFICATION IS
LEGALLY REQUIRED FOR SUCH TRANSFER
SECTION 6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Notwithstanding any investigation made by any party to this Agreement or by the
Placement Agent, all covenants, agreements, representations and warranties made
by the Company and the Purchaser herein and in the certificates for the Shares
delivered pursuant hereto shall survive for a period of two (2) years following
the execution of this Agreement, the delivery to the Purchaser of the Shares
being purchased and the payment therefor.
SECTION 7. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.
7.1 REGISTRATION PROCEDURES AND EXPENSES. Except for such times as the
Company may be required to suspend the use of a prospectus forming a part of the
Registration Statement, as further described in Section 5(b) hereof, the Company
shall use its reasonable best efforts to:
(a) as soon as practicable, but in no event later than five (5)
business days following the Subscription Date, prepare and file with the SEC the
Registration Statement on Form S-3 relating to the resale of the Shares by the
Purchaser from time to time through the automated quotation system of Nasdaq or
the facilities of any national securities exchange on which the Common Stock is
then traded or in privately-negotiated transactions;
(b) subject to receipt of necessary information from the Purchasers,
cause the SEC to notify the Company of the SEC's willingness to declare the
Registration Statement effective within ninety (90) days after the Registration
Statement is filed by the Company, and notify the Purchasers of such
notification from the SEC within three (3) business days of receipt;
(c) promptly prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep the Registration Statement effective until
the earlier of (i) the second anniversary of the Closing Date, (ii) the date on
which the Purchaser may sell all Shares then held by the Purchaser without
restriction by reason of Rule 144(k) under the Securities Act ("Rule 144") or
any other rule of similar effect, or (iii) such time as all Shares purchased by
the Purchaser have been sold pursuant to a registration statement;
(d) so long as the Registration Statement is effective covering the
resale of Shares owned by the Purchaser, furnish to the Purchaser with respect
to the Shares registered
<PAGE>
under the Registration Statement (and to each underwriter, if any, of such
Shares) such reasonable number of copies of prospectuses and such other
documents as the Purchaser may reasonably request, in order to facilitate the
public sale or other disposition of all or any of the Shares by the
Purchaser; provided, however, that the obligation of the Company to deliver
copies of prospectuses to the Purchaser shall be subject to the receipt by
the Company of reasonable assurances from the Purchaser that the Purchaser
will comply with the applicable provisions of the Securities Act and of such
other securities or blue sky laws as may be applicable in connection with any
use of such prospectuses;
(e) file documents required of the Company for normal blue sky
clearance in states specified in writing by the Purchaser; provided, however,
that the Company shall not be required to qualify to do business or consent to
service of process in any jurisdiction in which it is not now so qualified or
has not so consented;
(f) bear all expenses in connection with the procedures in paragraphs
(a) through (e) of this Section 7.1 and the registration of the Shares pursuant
to the Registration Statement, other than fees and expenses, if any, of counsel
or other advisers to the Purchaser or the Other Purchasers or underwriting
discounts, brokerage fees and commissions incurred by the Purchaser or the Other
Purchasers, if any; and
(g) with a view to making available to Purchaser the benefits of
Rule 144 (or its successor rule) and any other rule or regulation of the SEC
that may at any time permit Purchaser to sell Shares to the public without
registration, the Company covenants and agrees to: (i) make and keep public
information available, as those terms are understood and defined in Rule 144,
until the earlier of (A) such date as all of Purchaser's Shares may be resold
within a given three-month period pursuant to Rule 144 or any other rule of
similar effect or (B) such date as all of Purchaser's Shares shall have been
resold; (ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and under the
Exchange Act; and (iii) furnish to Purchaser upon request, as long as
Purchaser owns any Shares, (A) a written statement by the Company that it has
complied with the reporting requirements of the Securities Act and the
Exchange Act, (B) a copy of the most recent annual report on form 10-K or
quarterly report of the Company on form 10-Q, and (C) such other information
as may be reasonably requested in order to avail Purchaser of any rule or
regulation of the SEC that permits the selling of any such Shares without
registration.
7.2 TRANSFER OF SHARES AFTER REGISTRATION. The Purchaser agrees that it
will not effect any disposition of the Shares or its right to purchase the
Shares that would constitute a sale within the meaning of the Securities Act or
pursuant to any applicable state securities or blue sky laws, except as
contemplated in the Registration Statement referred to in Section 7. 1. and that
it will promptly notify the Company of any changes in the information set forth
in the Registration Statement regarding the Purchaser or its Plan of
Distribution, except to the extent that this Section 7.2 is inapplicable to a
transfer to an affiliate of the Purchaser (including a mutual fund with a common
investment advisor) that is carried out in accordance with an applicable
exemption from registration under the Securities Act and the Rules and
Regulations.
<PAGE>
7.3 INDEMNIFICATION. For the purpose of this Section 7.3:
(i) the term "Purchaser" shall include the Purchaser and any
affiliate of such Purchaser; and
(ii) the term "Registration Statement" shall include any final
prospectus, exhibit, supplement or amendment included in or relating to the
Registration Statement referred to in Section 7.1.
(a) The Company agrees to indemnify and hold harmless each of the
Purchasers and each person, if any, who controls any Purchaser within the
meaning of the Securities Act, against any losses, claims, damages, liabilities
or expenses, joint or several, to which such Purchasers or such controlling
persons may become subject, under the Securities Act, the Exchange Act, or any
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, including the prospectus, financial statements and schedules, and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the Registration Statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A,
or pursuant to Rule 434, of the Rules and Regulations, or the prospectus, in the
form first filed with the SEC pursuant to Rule 424(b) of the Regulations, or
filed as part of the Registration Statement at the time of effectiveness if no
Rule 424(b) filing is required (the "Prospectus"), or any amendment or
supplement thereto, or (in the case of the Registration Statement or any
amendment thereof) arise out of or are based upon the 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 (in the case of the
Prospectus and any amendment thereof or supplement thereto) arise out of or are
based upon the omission or alleged omission to state 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 arise out of or are
based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained in this Agreement, or any failure of the
Company to perform its obligations hereunder or under law, and will reimburse
each Purchaser and each such controlling person for any legal and other expenses
reasonably incurred as such expenses are reasonably incurred by such Purchaser
or such controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; provided, however, that the Company will not be liable to a
Purchaser seeking indemnification in any such case to the extent that any such
loss, claim, damage, liability or expense to such Purchaser arises out of or is
based upon (i) an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Purchaser expressly
for use therein, or (ii) the failure of such Purchaser to comply with the
covenants and agreements contained in Sections 5(b) or 7.2 hereof respecting
sale of the Shares, or (iii) the inaccuracy of any representations made by such
Purchaser herein or (iv) any statement or omission in any Prospectus that is
corrected in any subsequent
<PAGE>
Prospectus that was delivered to the Purchaser prior to the pertinent sale or
sales by the Purchaser.
(b) Each Purchaser will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Securities Act, against any losses, claims, damages, liabilities or
expenses to which the Company, each of its directors, each of its officers who
signed the Registration Statement or controlling person may become subject,
under the Securities Act, the Exchange Act, or any other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Purchaser) insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon (i) any failure by such Purchaser to comply with the covenants
and agreements contained in Sections 5(b) or 7.2 hereof respecting the sale of
the Shares or (ii) the inaccuracy of any representation made by such Purchaser
herein or (iii) any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, the Prospectus, or any amendment or
supplement thereto, or (in the case of the Registration Statement or any
amendment thereof) the 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 (in the case of the Prospectus and any amendment thereof or
supplement thereto) the omission or alleged omission to state 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, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of such Purchaser expressly for use therein, and will reimburse the
Company, each of its directors, each of its officers who signed the Registration
Statement or controlling person for any legal and other expense reasonably
incurred, as such expenses are reasonably incurred by the Company, each of its
directors, each of its officers who signed the Registration Statement or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action.
(c) Promptly after receipt by an indemnified party under this Section
7.3 of notice of the threat or commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party under this Section 7.3, promptly notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise to the extent it is not prejudiced as a result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to
<PAGE>
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 7.3 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the preceding
sentence (it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel, reasonably
satisfactory to the indemnifying party, representing the indemnified parties
who are parties to such action) or (ii) the indemnified party shall not have
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of action, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 7.3 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 7.3 in respect to any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying,
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Purchaser from the placement of Common Stock or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but the relative fault of the
Company and the Purchaser in connection with the statements or omissions or
inaccuracies in the representations and warranties in this Agreement which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The respective relative benefits
received by the Company on the one hand and each Purchaser on the other shall be
deemed to be in the same proportion as the amount paid by such Purchaser to the
Company pursuant to this Agreement for the Shares purchased by such Purchaser
that were sold pursuant to the Registration Statement bears to the difference
(the "Difference") between the amount such Purchaser paid for the Shares that
were sold pursuant to the Registration Statement and the amount received by such
Purchaser from such sale. The relative fault of such selling Purchaser and each
Purchaser shall be determined by reference to, among other things, whether the
untrue or alleged statement of a material fact or the omission or alleged
omission to state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Company or
by such Purchaser and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in paragraph (c) of this Section 7.3, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
paragraph (c) of this Section 7.3 with respect to the notice of the threat or
commencement of any threat or action shall apply if a claim for contribution is
to be made under this paragraph (d); provided, however that no additional notice
shall be required with respect to any threat or action for which notice has
<PAGE>
been given under paragraph (c) for purposes of indemnification. The Company
and each Purchaser agree that it would not be just and equitable if
contribution pursuant to this Section 7.3 were determined solely by pro rata
allocation (even if the Purchaser were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in this paragraph. Notwithstanding
the provisions of this Section 7.3, no Purchaser shall be required to
contribute any amount in excess of the amount by which the Difference exceeds
the amount of any damages that such Purchaser has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Purchasers' obligations to contribute pursuant to this
Section 7.3 are several and not joint.
7.4 TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent
imposed by Section 5(b) or Section 7.2 upon the transferability of the Shares
shall cease and terminate as to any particular number of the Shares upon the
earlier of the passage of twenty-four months from the effective date of the
Registration Statement covering such Shares or such time as an opinion of
counsel satisfactory in form and substance to the Company shall have been
rendered to the effect that such conditions are not necessary in order to comply
with the Securities Act.
SECTION 8. BROKER'S FEE. Except as otherwise agreed to between the
Purchaser and the Placement Agent, the Purchaser acknowledges that the Company
intends to pay to the Placement Agent a fee in respect of the sale of the Shares
to the Purchaser. Each of the parties hereto hereby represents that, on the
basis of any actions and agreements by it, there are no other brokers or finders
entitled to compensation in connection with the sale of the Shares to the
Purchaser.
SECTION 9. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified airmail, confirmed facsimile or nationally recognized
overnight express courier postage prepaid, and shall be deemed given when so
delivered as addressed as follows:
(a) if to the Company, to:
Collateral Therapeutics, Inc.
11622 El Camino Real
San Diego, California 92130
Attn: Tyler M. Dylan, Esq.
Fax: (858) 794-3440
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street
Suite 1300
San Diego, California 92101
Attn: Faye H. Russell, Esq.
Fax: (619) 234-3848
<PAGE>
or to such other person at such other place as the Company shall designate to
the Purchaser in writing; and
(b) if to the Purchaser, at its address as set forth at the end of
this Agreement, or at such other address or addresses as may have been furnished
to the Company in writing.
SECTION 10. CHANGES. This Agreement may not be modified or amended except
pursuant to an instrument in writing, signed by the Company and the Purchaser.
SECTION 11. HEADINGS. The headings of the various sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be part of this Agreement.
SECTION 12. SEVERABILITY. In case any provision contained in this Agreement
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
SECTION 13. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
any choice of law provisions thereof, and the federal law of the United States
of America.
SECTION 14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.
[REMAINDER OF THIS PAGE BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly-authorized representatives shown below.
PURCHASER*
<TABLE>
<CAPTION>
Number of
Name of Purchaser Shares
- --------------------------------------------------------------------------------
<S> <C>
1. Franklin Biotechnology Discovery Fund (#402) 63,000
2. Franklin California Growth Fund (#180) 125,000
3. Franklin Small Cap Fund (#198) 312,000
4. Heritage Series Trust Aggressive Growth 30,000
5. Heritage Series Trust Smallcap Stock Fund 60,000
6. Howard J. Leonhardt 60,000
7. Invesco Funds Group, Inc. 200,000
8. Jackson National Life Eagle Smallcap Equity Series 60,000
9. Moore Global Investments Ltd. 109,500
10. Nordbanken Fonder AB 40,000
11. Remington Investments Strategies, L.P. 24,000
12. SEB Fondforvaltning 85,000
13. SEB Private Bank Luxemburg 15,000
14. SL Holdings Ltd. 16,500
15. State of Wisconsin Investment Board 750,000
16. T. Rowe Price New Horizons Fund, Inc. 200,000
</TABLE>
Accepted and Agreed to by:
COLLATERAL THERAPEUTICS, INC.
/s/ Jack W. Reich, Ph.D.
------------------------------
Jack W. Reich, Ph.D.
President and Chief Executive Officer
Date: August 11, 1999
- ---------------------------
*Separate Purchase Agreements were executed on behalf of each named Purchaser.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,015,597
<SECURITIES> 13,127,330
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,440,097
<PP&E> 4,297,405
<DEPRECIATION> 1,078,582
<TOTAL-ASSETS> 45,731,520
<CURRENT-LIABILITIES> 2,942,890
<BONDS> 0
0
0
<COMMON> 12,916
<OTHER-SE> 42,201,640
<TOTAL-LIABILITY-AND-EQUITY> 45,731,520
<SALES> 0
<TOTAL-REVENUES> 5,320,381
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,398,550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,096
<INCOME-PRETAX> (5,469,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,469,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,469,836)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
