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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________
Commission File No. 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
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sales price of the common stock on the Nasdaq
National Market on February 29, 2000 was $208,571,395. This amount excludes
7,798,376 shares of the Registrant's common stock held by executive officers,
directors and affiliated parties at February 29, 2000. Exclusion of such shares
should not be construed to indicate that any such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
The number of shares of the Registrant's common stock outstanding was
12,980,274 as of February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the Company's 2000
Annual Meeting are incorporated herein by reference into Part III of this
Report.
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PART I
ITEM 1. BUSINESS
This report on Form 10-K may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. For a discussion of factors which may affect the outcome
projected in such statements, see "Cautionary Factors That May Affect Future
Results" and "Risks and Uncertainties" in this report on Form 10-K. While
this outlook represents our current judgment on the future direction of our
business, such risks and uncertainties could cause actual results to differ
materially from our future our outlook as presented below. 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 of this report on Form 10-K.
OVERVIEW
Collateral is focused on the discovery and development 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.
Cardiovascular disease is a leading cause of death in the U.S. In
1999, the American Heart Association reported that an estimated 58.8 million
patients in the U.S. had cardiovascular disease. The American Heart
Association also estimated in 1999 that the U.S. healthcare system spends
approximately $178.2 billion annually on the care and treatment of patients
with cardiovascular diseases.
We believe that our products under development hold the potential to
revolutionize the treatment of cardiovascular diseases. We believe that these
products could provide a new standard of care by offering patients simpler,
more cost-effective and lower-risk alternatives to currently available
treatments, such as coronary artery bypass surgery and angioplasty. Our
initial gene therapy products are designed to promote and enhance
angiogenesis, a natural biological process that results in the growth of
additional blood vessels to increase levels of blood flow to oxygen-deprived
tissues. In collaboration with our partner Schering AG, in May 1998 we began
early stage testing in humans, known as a Phase 1/2 trial, for GENERX-TM-,
the first of our gene therapy product candidates. In March 2000, based on
preliminary results from the Phase 1/2 trial, Collateral reported plans to
move forward with large-scale pivotal clinical trials of GENERX-TM- in
collaboration with Schering AG.
Our non-surgical gene therapy product candidates use technology
which includes:
- methods of gene therapy,
- therapeutic genes, and
- gene delivery vectors.
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We have designed our initial gene therapy product candidates for
non-surgical administration by an interventional cardiologist using our methods
of gene therapy. These methods involve a one-time intra-coronary infusion of our
product through a standard cardiac catheter, which could be administered at the
time of initial angiography, on an out-patient basis. In addition to our
products designed to promote and enhance angiogenesis, we are also actively
researching gene therapy products designed to enhance function of the heart in
patients suffering from heart failure and to improve cardiac function after a
heart attack.
We designed GENERX-TM-, our initial non-surgical gene therapy product,
to promote and enhance angiogenesis for the treatment of coronary artery disease
in patients with stable exertional angina. Stable exertional angina refers to
chest pain, or angina, that generally occurs in connection with exercise or
emotional stress. Other products under development are being designed for the
treatment of various forms of cardiovascular disease, including angina due to
coronary artery disease, congestive heart failure and peripheral vascular
disease. The following non-surgical cardiovascular gene therapy product
candidates are currently under development:
- GENERX-TM-, which uses a fibroblast growth factor
gene known as FGF-4 to promote and enhance
angiogenesis for the treatment of coronary artery
disease in patients with stable exertional angina;
- GENVASCOR-TM-, which uses the FGF-4 gene to promote
and enhance angiogenesis for the treatment of
peripheral vascular disease resulting from decreased
peripheral blood flow, usually in the lower limbs;
- GENEVX-TM-, which uses a vascular endothelial growth
factor gene known as a VEGF gene to promote and
enhance angiogenesis for the treatment of coronary
artery disease;
- GENECOR-TM-, which uses a combination of angiogenic
genes for the treatment of ischemic heart disease,
which could include congestive heart failure;
- CORGENIC-TM-, which uses an adrenergic signaling
protein gene for the treatment of congestive heart
failure to enhance responsiveness of the heart to
adrenergic stimulation; and
- MYOCOR-TM-, which is focused on the improvement of
heart muscle function and the prevention or reduction
of changes that can impair heart function following a
heart attack.
We have assembled a portfolio of therapeutic genes for use in our
potential gene therapy products. This portfolio consists of genes that we either
discovered or exclusively licensed for use in the development of cardiovascular
gene therapy products. The portfolio includes both issued patents and pending
patent applications.
We incorporated in California in April 1995 and reincorporated in
Delaware in 1998. The period from April 1995 to December 1995 represents our
start-up phase. During this phase, we began to establish infrastructure, build a
personnel base, secure initial funding, and pursue limited research. In 1995, we
borrowed $500,000 from Schering AG to fund operations. During this period, we
also entered
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into an agreement with the University of California to license certain
technology relating to non-surgical gene therapy for the promotion and
enhancement of angiogenesis.
During the period from January 1996 to April 1996, we continued
limited research and development activities and initiated discussions with
Schering AG to expand the funding relationship with respect to the field of
gene therapy for the promotion and enhancement of angiogenesis. In May 1996,
we entered into a strategic collaboration with Schering AG, directed to gene
therapy products for the promotion and enhancement of angiogenesis.
During 1997, we continued to expand our research and development
efforts and entered into additional licensing arrangements. We secured the
license rights to several therapeutic genes for the promotion and enhancement of
angiogenesis in March 1997. In December 1997, our strategic partner, Schering
AG, filed a commercial investigational new drug application for GENERX-TM- with
the U.S. Food and Drug Administration (FDA). A Phase 1/2 clinical trial, early
stage testing in humans, for GENERX-TM- began in May 1998. In July 1998, we
completed an initial public offering and in August 1999, we completed a private
placement of equity securities to support our continued growth and product
development activities. In March 2000, based on preliminary results from the
Phase 1/2 trial, Collateral reported plans to move forward with large-scale
pivotal clinical trials of GENERX-TM- in collaboration with Schering AG.
We intend to continue our 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. Schering AG has made equity
investments in us based upon our strategic collaboration agreement. In addition,
subject to the terms of the collaboration, Schering AG is to fund certain
research, development and clinical activities and make payments related to
products developed under our collaboration.
For further information regarding the collaboration with Schering
AG, please see "Collaborative, Licensing and Research Arrangements." For
other products, which could include certain of our angiogenic therapy
products, we intend to select development and/or commercialization partners
after we have completed preclinical and, in some cases, clinical research for
each product.
CARDIOVASCULAR DISEASE AND CURRENT TREATMENTS
According to the American Heart Association, cardiovascular disease
affects nearly 60 million patients in the U.S. It is also a leading cause of
death. The American Heart Association also estimated in 1999 that the U.S.
healthcare system spends approximately $178.2 billion annually on the care
and treatment of patients with cardiovascular diseases.
CORONARY ARTERY DISEASE. The coronary arteries supply blood to the
heart muscle. Blood flow to the heart muscle can be severely reduced by
atherosclerotic disease of the coronary arteries, which accounts for most
ischemic heart disease. Atherosclerosis is a general term for the build-up of
fatty and cholesterol plaque deposits on the inside lining of arterial walls
thereby restricting blood flow. When insufficient oxygen reaches the heart
muscle as a result of restricted blood flow, a condition called myocardial
ischemia develops that may result in a heart attack or death. Brief episodes of
ischemia often result in chest pain or angina. Restoring blood flow is the most
effective method to relieve painful ischemic symptoms and to reduce the
long-term risk of a heart attack. In response to ischemic injury signals, the
body's natural healing process is initiated and the heart may develop limited
collateral
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circulation in an effort to restore blood flow. Research has shown that the
extent of natural collateral vessel formation in the heart is often inadequate
to provide full restoration of blood flow.
The American Heart Association reported in 1999 that an estimated 12
million patients in the U.S. had coronary artery disease, including
approximately 6.0 million patients with angina. Current treatments for coronary
artery disease include drug therapy, coronary artery bypass surgery and
catheter-based treatments, including angioplasty, atherectomy and coronary
stenting.
Cardiovascular drug therapies represent a major component of the
worldwide pharmaceutical market; however, drug therapy in many cases only treats
symptoms and is not a cure, it may have adverse side effects, it may require
long-term administration and it can be costly.
Coronary artery bypass surgery is highly invasive and traumatic to
the patient. However, it is often considered the most effective and
long-lasting treatment currently available for severe coronary artery
disease. While current catheter-based treatments such as angioplasty and
coronary stents are less invasive, they are limited by restenosis, a
narrowing of the treated coronary artery, which often requires additional
interventions. The American Heart Association has estimated that in 1996 the
number of surgical procedures in the U.S. for the treatment of coronary
artery disease totaled 1.2 million. These procedures included about 600,000
coronary artery bypass surgeries and approximately 480,000 angioplasty
procedures.
PERIPHERAL VASCULAR DISEASE. Peripheral vascular disease results from
decreased blood flow in patients with atherosclerosis, usually in the lower
limbs. Based on an IMS Health marketing report which was prepared in 1996, there
were an estimated 726,000 patients in the U.S. suffering from peripheral
vascular disease, of whom over 100,000 would require a limb amputation. Current
treatments for patients with peripheral vascular disease include drug therapy in
the initial stages of the disease and surgery if the disease has progressed or
is incapacitating. If drug therapy is selected, agents designed to improve blood
flow by decreasing blood viscosity and low dose aspirin are therapies of choice.
When these agents are used in combination with a program of daily walking and
ceasing smoking, improved function may be obtained and the need for invasive
surgical therapies may be postponed or eliminated. Surgical intervention
includes arterial grafting, surgical removal of the fatty plaque deposits and
endovascular treatments such as angioplasty.
CONGESTIVE HEART FAILURE. Congestive heart failure is caused when the
heart is unable to contract adequately to pump blood throughout the body. The
normal physiological stimulation of heart function is generated when chemical
transmitters known as catecholamines bind with certain receptors on the surfaces
of heart cells, triggering a series of events that result in increased heart
rate and force of contraction. Typically, in congestive heart failure, the heart
is unable to respond adequately to catecholamines. According to the American
Heart Association, in 1999 there were an estimated 4.6 million patients in the
U.S. who had congestive heart failure which was the single most frequent cause
of hospitalization for people 65 and older. According to the American Heart
Association, approximately 50% of patients with congestive heart failure die
within five years of diagnosis. Current treatments for congestive heart failure
include drug therapy, and rarely, heart transplantation. Currently available
drug treatments generally only treat symptoms and have a limited effect on the
progression of the disease.
HEART ATTACK. A heart attack occurs when a blockage in a coronary
artery severely restricts or completely stops blood flow to a portion of the
heart. When blood supply is greatly reduced or stopped for more than a short
time, heart muscle cells die. Heart muscle cells generally lack the ability to
multiply to replace the dead cells. In the healing phase, after a heart attack,
white blood cells migrate into the area and remove the dead heart muscle cells,
and fibroblast cells proliferate and form a fibrous
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collagen scar in the affected region of the heart. Following a heart attack, the
heart's ability to maintain normal function will depend on the location of the
damage and the amount of damaged tissue. The American Heart Association
estimated that in 1999 approximately 1.1 million patients would have a heart
attack and an estimated 350,000 patients would die as a direct result of a heart
attack. Current therapeutic treatments for heart attack focus on acute care upon
the onset of a heart attack and on long-term care to limit the development of
heart failure and recurrent heart attack. A form of drug therapy may be used to
dissolve a blood clot immediately following a heart attack. After a heart
attack, patients generally are required to take medicines to alleviate symptoms
and to make certain lifestyle changes, such as altering their diet, increasing
their exercise levels and ceasing smoking.
GENE THERAPY
Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases. This approach involves the insertion of
genetic information into target cells to cause the cells to produce specific
proteins to correct or modulate disease conditions. Proteins are fundamental
components of all living cells and are essential for cellular structure,
growth and function. By directing the cells to produce proteins, gene therapy
offers the opportunity to correct defects or diseases that could not formerly
be treated.
A key factor in the progress of gene therapy is the development of
safe and efficient methods of transferring genes into cells. One important
gene delivery approach relies on viral gene transfer, in which modified
viruses are used to transfer the desired genetic material into cells. This
method involves the incorporation of a target gene into a delivery system
called a viral vector. A number of different viral vectors, including
adenovirus, adeno-associated virus and retrovirus, are being used for
potential gene therapy applications.
The use of viruses takes advantage of their ability to introduce genes
into host cells and to use the host's metabolic machinery to produce proteins
essential for the survival and function of the virus. Viruses used as vectors
are genetically modified (1) to remove DNA necessary for the virus to
replicate and (2) to contain desired gene. In order to achieve a therapeutic
effect, the viral vector must carry the desired gene and transfer that gene into
a sufficient number of target cells.
COLLATERAL'S APPROACH
Our non-surgical cardiovascular gene therapy approach is primarily focused on:
- angiogenesis,
- myocardial adrenergic signaling, and
- heart muscle regeneration.
ANGIOGENESIS. We are developing non-surgical gene therapy treatments to
enhance and promote angiogenesis for the treatment of coronary artery disease,
peripheral vascular disease and congestive heart failure.
Our angiogenic gene therapy methods are based on intravascular
delivery of a gene or a combination of genes designed to enhance and promote
the development of additional blood vessels which could restore adequate
levels of blood flow to oxygen-deprived tissues. We have designed our initial
gene therapy products for non-surgical administration by an interventional
cardiologist using our methods of gene therapy. Our preferred methods involve
a one-time intra-coronary infusion of the product
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through a standard cardiac catheter, which could be administered at the time
of initial angiography, on an out-patient basis. Gene transfer can be
accomplished using a human replication-deficient adenovirus vector.
Generx-TM-, our initial angiogenic product candidate, is presently
in human clinical trials. Our other angiogenic product candidates are in
preclinical development.
MYOCARDIAL ADRENERGIC SIGNALING. We are also developing methods of gene
therapy to enhance myocardial adrenergic signaling in patients with advanced
congestive heart failure by increasing the heart's ability to contract in
response to catecholamine stimulation, an aspect of the heart's normal
physiological response. In severe heart failure, the ability of the heart to
respond to catecholamines is markedly impaired. In our preclinical research,
investigators demonstrated that gene therapy can be used to produce the protein
adenylylcyclase in heart muscle cells. Production of this protein in animals
caused an increase in the response to catecholamine stimulation which in turn
enhanced the heart's ability to contract.
HEART MUSCLE REGENERATION. We are also developing methods of gene
therapy for the treatment of heart attack. Our research on the treatment of
heart attack is focused on the regeneration of heart muscle to reduce the
effects of muscle cell death and possibly improve heart performance following a
heart attack. We are exploring certain genes that may have the ability to
prevent or reduce the formation of scar tissue in the heart or otherwise
modulate cell development to improve cardiac function after a heart attack. If
these genes are confirmed to have the ability to improve cardiac function, we
plan to develop a non-surgical gene therapy product that could be delivered by
intra-coronary administration following heart attack using our methods of gene
therapy.
CORE TECHNOLOGIES
Collateral's non-surgical gene therapy products use technology which
includes:
- methods of gene therapy,
- therapeutic genes, and
- gene delivery vectors.
METHODS OF GENE THERAPY. Our core technologies are focused on the
administration of therapeutic genes to patients through the use of non-surgical,
intravascular delivery. The products are being developed to be administered by
an interventional cardiologist through a standard cardiac catheter. We intend to
use this technology to provide a means to increase production of specific
proteins in living cells and thereby alter cell function as a therapy to treat a
disease condition. Our method of delivering angiogenic genes to the heart is the
subject of a U.S. patent which was issued in August 1998. Please see "Risks
Related to Our Business--If our product candidates do not successfully complete
the clinical trial process, we will not be able to market them" and "Risks
Related to Patents and Proprietary Information" for further information
regarding these methods.
PORTFOLIO OF THERAPEUTIC GENES. Genes which regulate biological
activity in the cardiovascular system are key enabling components of our core
technology. Our portfolio consists of genes which we either discovered or
exclusively licensed for use in the development of cardiovascular gene therapy
products. Most of these genes in our portfolio are subject to issued patents and
pending patent applications. Please see "Risks Related to Our Business--Risks
Related to Patents and Proprietary Information".
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GENE DELIVERY VECTORS. We are using the human adenovirus gene delivery
vector, rendered replication-deficient by deleting specific portions of its DNA
and incorporating a particular therapeutic gene or genes. We are also seeking to
refine and enhance our proprietary methods of gene therapy to include, for
example, modified adenoviral, adeno-associated viral and other gene delivery
vectors, and to broaden the application of our methods of gene therapy to treat
other cardiovascular diseases.
PRODUCT DEVELOPMENT PROGRAMS
The following table shows the development status of GENERX-TM- and our
other non-surgical cardiovascular gene therapy product candidates:
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY MEDICAL DEVELOPMENT
CANDIDATE (DESIGNATED GENE) INDICATION STATUS
--------- ----------------- ---------- -----------
<S> <C> <C> <C>
Stable exertional angina
GENERX-TM- Angiogenesis due to coronary In Clinical Trials
(FGF-4) artery disease
Stable exertional angina
GENEVX-TM- Angiogenesis due to coronary Preclinical
(VEGF) artery disease
GENVASCOR-TM- Angiogenesis Peripheral Preclinical
(FGF-4) vascular disease
Angiogenesis
GENECOR-TM- (Combination of Angiogenic Ischemic Preclinical
Genes) heart disease
Myocardial adrenergic
CORGENIC-TM- signaling Congestive Preclinical
(AC-6) heart failure
MYOCOR-TM- Heart muscle regeneration Heart attack Research
</TABLE>
GENERX-TM-, which uses the FGF-4 gene in an adenovirus vector, is our
initial angiogenic product, designed for the treatment of patients with stable
exertional angina due to coronary artery disease. In May 1998, Berlex
Laboratories, Inc., a subsidiary of our partner Schering AG, initiated a Phase
1/2 clinical trial for GENERX-TM- in collaboration with us. The Phase 1/2 trial
was designed as a placebo-controlled double-blind study and was conducted at 12
medical centers in the U.S. In March 2000, based on preliminary results from the
Phase 1/2 trial, Collateral reported plans to move forward with large-scale
pivotal clinical trials of GENERX-TM- in collaboration with Schering AG.
GENEVX-TM-, which uses a VEGF gene in an adenovirus vector, is our
second product and is also designed for the treatment of patients with stable
exertional angina due to coronary artery disease. We believe that this product,
like GENERX-TM-, has the potential to stimulate the growth of collateral blood
vessels that will increase blood flow and improve heart function in an ischemic
region of the heart.
GENVASCOR-TM-, which uses the FGF-4 gene in an adenovirus vector, is
our first product designed for the treatment of peripheral vascular disease. We
are currently conducting preclinical studies in order to support a regulatory
submission for this product in collaboration with Schering AG.
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We believe that this product has the potential to stimulate the growth of
collateral blood vessels which will increase blood flow and function in an
ischemic region of peripheral tissue, particularly the lower limbs.
GENECOR-TM- which uses a combination of angiogenic genes is based on
our angiogenesis technology and its application to the treatment of ischemic
heart disease, which could include congestive heart failure. We are presently
conducting preclinical studies of GENECOR-TM- in order to support an
investigational new drug application.
CORGENIC-TM- is our first product being developed to enhance the
heart's ability to contract for the treatment of congestive heart failure. We
are presently conducting preclinical studies of CORGENIC-TM- in order to support
an investigational new drug application.
We are conducting discovery research to develop a potential product,
MYOCOR-TM-, intended to cause the regeneration of heart muscle to reduce the
effects of muscle cell death and possibly improve heart performance following a
heart attack.
COLLABORATIVE, LICENSING AND RESEARCH ARRANGEMENTS
THE FOLLOWING SECTION DESCRIBING CERTAIN COLLABORATIVE AND LICENSING
ARRANGEMENTS CONTAINS CERTAIN INFORMATION CONCERNING THE POTENTIAL FEES WHICH
ARE PAYABLE BY US UNDER SUCH ARRANGEMENTS. WE CONTINUALLY EVALUATE THE
SAFETY, EFFICACY AND POSSIBLE COMMERCIALIZATION OF OUR THERAPEUTIC GENES AND
METHODS OF GENE THERAPY. ON THE BASIS OF SUCH EVALUATIONS, WE MAY ALTER OUR
CURRENT RESEARCH AND DEVELOPMENT PROGRAMS. ACCORDINGLY, WE MAY ELECT TO
CANCEL, FROM TIME TO TIME, ONE OR MORE OF THESE ARRANGEMENTS SUBJECT TO ANY
APPLICABLE ACCRUED LIABILITIES AND, IN CERTAIN CASES, TERMINATION FEES.
ALTERNATIVELY, THE PARTY TO SUCH ARRANGEMENT MAY, IN CERTAIN CIRCUMSTANCES,
BE ENTITLED TO TERMINATE THE ARRANGEMENT. FURTHER, THE AMOUNTS PAYABLE UNDER
CERTAIN OF OUR ARRANGEMENTS DEPEND ON THE NUMBER OF PRODUCTS OR INDICATIONS
FOR WHICH ANY PARTICULAR TECHNOLOGY LICENSED UNDER SUCH ARRANGEMENT IS USED
BY US. THUS, ANY STATEMENT OF POTENTIAL FEES PAYABLE BY US UNDER EACH
ARRANGEMENT IS SUBJECT TO A HIGH DEGREE OF POTENTIAL VARIATION FROM THE
AMOUNTS INDICATED IN THIS REPORT.
Our business strategy includes the establishment of research
collaborations with major pharmaceutical and biotechnology companies and
academic institutions. The purpose of these collaborations is to support and
supplement our discovery, preclinical and Phase 1/2 clinical research and
subsequent development phases. Our strategy also includes the implementation of
long-term strategic partnerships with major pharmaceutical and biotechnology
companies to support Phase 2 and Phase 3 clinical trials and product
commercialization activities, including product manufacturing, marketing and
distribution. To date, we have established one such relationship with Schering
AG. For further information regarding this collaboration please see "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" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SCHERING AG COLLABORATION, LICENSE AND ROYALTY AGREEMENT
In May 1996, Collateral entered into a collaboration agreement with
Schering AG which established a strategic alliance to develop and commercialize
gene therapy products to promote angiogenesis. Under this collaboration
agreement, we agreed to conduct research and development in the field of gene
therapy to promote angiogenesis solely with Schering AG during the term of the
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agreement, until May 2001, and Schering AG was granted exclusive rights for
certain gene therapy technology that arose out of our 1996 base technology in
the field or from technology developed under our collaboration agreement,
provided that Schering AG pays milestone and other fees including royalties
based on net sales for each licensed product. Schering AG can sublicense rights
to its affiliates without our consent and to third parties who are not its
affiliates with our consent which is not to be unreasonably withheld.
In exchange for such rights, Schering AG agreed to:
- purchase up to $5.0 million of our equity;
- contribute up to $5.0 million annually to support our
research and development pursuant to the
collaboration agreement for a product considered an
"initial product" under the terms of the agreement,
which amount may be increased to support research and
development for additional products presented by us
and accepted by Schering AG within the field of gene
therapy to promote and enhance angiogenesis;
- pay us milestone payments totaling up to $20.5
million for the initial product, and up to $20.5
million for each new product presented by us and
accepted by Schering AG under the terms of the
agreement, based on our achievement of milestones
pertaining to certain regulatory filings and to
Schering's development and commercialization of the
products; and
- pay us a royalty rate based on worldwide net sales of
each product, and pay us an additional supplemental
royalty based on worldwide net sales of each product
and the product's cost of goods, up to a maximum
specified royalty rate, on a country-by-country
basis; which royalty payments are to be made from the
first commercial sale until the later of 10 years
following the first sale in such country or the
expiration of the last to expire patent covering
technology licensed or developed under the agreement
which has valid claims in such country.
Under the agreement, Collateral and Schering AG are collaborating in
the performance of certain research and development activities in the field of
angiogenic gene therapy, with Schering AG responsible for the preparation and
filing of regulatory applications and approvals for the initial product and for
any new product presented to and accepted by Schering AG pursuant to our
agreement. Schering AG is also responsible for all activities relating to the
manufacture, marketing and sale of such products.
Schering AG has a right of first refusal under our collaboration
agreement, through May 2003, to enter into exclusive license agreements with us
for new product opportunities that we present to them in the field of angiogenic
gene therapy, to the extent the new product arose out of our 1996 base
technology in the field or from technology developed under our collaboration
agreement. If Schering AG elects to pursue a new product opportunity presented
by us, but we are subsequently unable to reach agreement with Schering AG on
terms and conditions for the product opportunity, then we may take steps to
develop such product on our own or with third parties, provided that we or our
licensees pay Schering AG a royalty on worldwide net sales of the new product.
This arrangement is also subject to a residual right of Schering AG to enter
into an agreement on the same terms as were offered to a third party.
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Schering AG has a right of first negotiation under our collaboration
agreement, through May 2003, to enter into exclusive license agreements with us
for certain new products outside the field of gene therapy to promote
angiogenesis, if the new products use technology developed under the
collaboration agreement. From May 2003 through May 2006, Schering AG has a right
of first offer to enter into a license agreement with us covering potential new
products in the field of gene therapy to promote angiogenesis, and products
outside of the field and certain technology and know-how, to the extent such
products, technology or know-how use technology developed under the
collaboration agreement.
Schering AG has a right to terminate the collaboration agreement on 60
days prior written notice to us. Upon such notice, Schering AG is required to
pay us a termination fee. In addition, Schering AG would be required to provide
us with copies of and the right to reference all investigational new drug
applications or any other submissions that had been filed by Schering AG with
regulatory health authorities with respect to products covered under the
collaboration agreement. In the event that Schering AG terminates the agreement
by payment of the termination fee, Schering AG's rights to our base technology
would terminate at the end of the 60-day notice period. In addition, both
Schering AG and Collateral would have a paid-up, irrevocable, royalty-free,
nonexclusive, worldwide license, with the right to sublicense, to any new
inventions made during and pursuant to the collaboration agreement.
If a third party which is a competitor of Schering AG or us acquires
substantially all of our assets or 49% or more of our voting stock, then
Schering AG may terminate the collaboration agreement upon 90 days written
notice, without payment of a termination fee. Upon such termination, Schering AG
would retain any license granted by us to them subject to Schering AG's
compliance with the terms of the agreement, including their obligations to pay
royalties, while any licenses granted by Schering AG to us would terminate.
Either Schering AG or Collateral could also terminate the agreement
upon 60 days notice in the event that a dispute of the Steering Committee
established under the agreement is not subsequently resolved by the Presidents
or Chairmen of Collateral and of Berlex Laboratories on behalf of Schering AG.
If Collateral terminates the agreement on such basis, then any rights of
Schering AG would become non-exclusive, provided that Schering's obligations to
pay royalties would continue. If Schering AG terminates the agreement on such
basis, then any licenses granted by us to Schering AG would be terminated.
In 1995, Schering AG provided $500,000 in loans to fund our operations.
Principal and interest on the loans are due upon demand. In May 1996, under the
collaboration agreement, Schering Berlin Venture Corp., an affiliate of Schering
AG, made an equity investment of $2.5 million in us. Following our securing
certain rights to develop a gene, in June 1997, Schering Berlin Venture Corp.
made an additional equity investment of $2.5 million in us. Finally, in June
1997, Schering Berlin Venture Corp. made an additional equity investment of
$679,808 in us. As of December 31, 1999, Schering Berlin Venture Corp. owned
12.23% of all of our outstanding common stock. As of December 31, 1999, Schering
AG had paid us an aggregate of $17.1 million in research and development support
and milestone payments. As of December 31, 1999, Collateral had submitted an
additional product opportunity to Schering AG, and another product opportunity
was in the process of submission, however the parties had not reached agreement
with respect to such additional product opportunities.
We rely on our collaboration with Schering AG for significant funding
in support of our research efforts on gene therapy for the promotion and
enhancement of angiogenesis. If this funding were reduced or terminated, we
would be required to:
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- devote additional internal resources, if and to the
extent available, to clinical trials, and other
product development and commercialization activities,
- scale back or terminate certain research and
development programs,
- seek alternative collaborations or financing sources,
or
- sell or license rights to some of our proprietary
technology, including our genes.
For more information regarding our collaboration with Schering AG
please see "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" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
UNIVERSITY OF CALIFORNIA LICENSE AGREEMENTS
ANGIOGENESIS GENE THERAPY. In September 1995, we entered into an
exclusive license agreement with the Regents of the University of California,
with the right to sublicense, in the U.S. and in other countries for a gene
therapy approach for the promotion and enhancement of angiogenesis. This gene
therapy approach is based on scientific discovery research conducted at the
laboratory of Dr. H. Kirk Hammond, a co-founder, director and principal
stockholder of our company. The agreement may be canceled by us on 60 days
notice, following which we would continue to be responsible only for
obligations and liabilities accrued prior to termination. Under the
agreement, we are obligated to pay a non-refundable $550,000 licensing fee
payable in installments, of which $200,000 had been paid as of December 31,
1999. If we pursue development of products incorporating technology licensed
under this agreement, we could be obligated to pay (1) an annual royalty fee
based on net sales of products incorporating the technology licensed under
the agreement and (2) a minimum annual royalty fee (which may be offset
against the previously mentioned net sales-based royalty fee). For the period
from 2003 through 2007, the minimum annual royalty fees could amount to $2.15
million and, in each succeeding calendar year after 2007, $750,000 for the
life of the agreement.
GENE THERAPY FOR CONGESTIVE HEART FAILURE. In January 1997, we entered
into an exclusive license agreement with the Regents of the University of
California, with the right to sublicense, in the U.S. and in other countries for
rights to a gene therapy approach for congestive heart failure. The gene therapy
approach relates to increasing myocardial adrenergic responsiveness and is based
on scientific discovery research conducted at Dr. Hammond's laboratory. The
agreement may be canceled by us on 60 days notice, following which we would
continue to be responsible only for obligations and liabilities accrued prior to
termination. Under the agreement, we are obligated to pay a nonrefundable
$650,000 licensing fee payable in installments, of which $200,000 had been paid
as of December 31, 1999. If we pursue development of products incorporating
technology licensed under this agreement, we could be obligated to pay (1) an
annual royalty fee based on net sales of products incorporating the technology
licensed under the agreement and (2) a minimum annual royalty fee (which may be
offset against the net sales-based royalty fee). For the period from 2004
through 2008, the minimum annual royalty fee could amount to $2.15 million and,
in each succeeding calendar year after 2008, $750,000 for the life of the
agreement.
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ANGIOGENIC GENE THERAPY FOR CONGESTIVE HEART FAILURE. In June 1997, we
entered into an exclusive license agreement with the Regents of the University
of California, with the right to sublicense, in the U.S. and in other countries
for another gene therapy approach for congestive heart failure. This gene
therapy approach for promoting and enhancing angiogenesis for the treatment of
congestive heart failure is based on scientific discovery research conducted at
Dr. Hammond's laboratory. The agreement may be canceled by us on 60 days notice,
following which we would continue to be responsible only for obligations and
liabilities accrued prior to termination. Under the agreement, we are obligated
to pay a non-refundable $325,000 licensing fee payable in installments, of which
$50,000 had been paid as of December 31, 1999. If we pursue development of
products incorporating technology licensed under this agreement, we could be
obligated to pay (1) an annual royalty fee based on net sales of products
incorporating the technology licensed under the agreement and (2) a minimum
annual royalty fee (which may be offset against the net sales-based royalty
fee). For the period from 2005 through 2009, the minimum annual royalty fee
could amount to $700,000 and, in each succeeding calendar year after 2009,
$300,000 for the life of the agreement.
The University of California licensing agreements formed the initial
basis for our technology regarding methods of gene therapy and were entered into
to advance our present efforts to develop gene therapy products.
Each of these agreements provides us with exclusive rights, subject
to rights of the U.S. Government, to develop and commercialize technology
covered by patent applications that have been filed in the U.S. and in
certain other countries. Under the terms of these agreements, we are required
to satisfy certain due diligence provisions with respect to the timely
development and commercialization of products covered by patents under the
terms of the agreements. If we fail to meet the due diligence deadlines, the
Regents may terminate the agreement or reduce the exclusive licenses to
nonexclusive licenses. We are entitled to an extension of the due diligence
deadlines upon payment of certain fees. In the event of a material breach by
us of any of these agreements, which remains uncured for 60 days, the
agreement that was breached may be terminated by the Regents.
NEW YORK UNIVERSITY RESEARCH AND LICENSE AGREEMENT
In March 1997, we entered into an agreement with New York
University. Under this agreement, we have an exclusive worldwide license
(with the right to sublicense) to certain technology covering development,
manufacture, use and sale of gene therapy products based on FGF-4 for the
treatment of coronary artery disease, peripheral vascular disease and
congestive heart failure. This agreement provides us with exclusive rights in
such fields to develop and commercialize technology covered by patents and
patent applications that have been filed in the U.S. and in certain other
countries.
Under this agreement, we agreed to pay New York University license fees
through the completion of the first full year of sales of licensed product
which, if made through the year 2002, would aggregate up to $225,000, of which
$150,000 was paid as of December 31, 1999. If we pursue development of licensed
products under this agreement, we could be obligated to pay up to an aggregate
amount of $1.8 million, of which $250,000 has been paid as of December 31, 1999,
for each product in milestone payments. In addition, beginning in the year in
which we complete one full year of sales of licensed products and continuing
thereafter until the agreement terminates or expires, we could also be obligated
to pay minimum annual royalty fees of up to $500,000 which may be offset against
annual royalty fees based on net sales of licensed products during each calendar
year. We have also funded a three-year research program directed by us using the
technology covered by the patents and applications.
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Under the terms of this agreement, we are required to satisfy certain
due diligence provisions with respect to the timely development and
commercialization of products covered by patents under the terms of the
agreement. Failure to meet any due diligence requirements could result in the
termination of the agreement unless we and New York University mutually agree
otherwise or we pay New York University an additional fee to extend the due
diligence deadline. New York University may terminate the agreement upon a
failure to pay any amounts due under the agreement which remains uncured for 30
days or upon any other material breach of the agreement by us which remains
uncured for 60 days. On April 28, 1998, we amended this agreement with New York
University to expand the scope of the research conducted under this agreement
and pay additional funds to New York University. In connection with this
research program, we were obligated to pay up to $675,000 in research funding,
of which all had been paid as of December 31, 1999.
DIMOTECH LTD. AND TECHNION RESEARCH & DEVELOPMENT FOUNDATION LICENSE
AGREEMENT
In October 1996, we entered into an agreement with Dimotech Ltd., a
wholly-owned subsidiary of Technion Research and Development Foundation,
located at the Gurtwith Science Based Industries Center in Haifa, Israel, and
the inventor of the licensed technology, who is employed by Technion Research
and Development Foundation. Under this agreement, we have an exclusive
worldwide license with the right to sublicense to make, use and sell products
for the treatment of cardiovascular diseases, including coronary artery
disease, peripheral vascular disease and congestive heart failure, covered by
any patents with claims to VEGF-145, a vector comprising VEGF-145 or the use
of VEGF-145 for the treatment of cardiovascular diseases.
If we pursue development of products or processes incorporating
technology licensed under this agreement, then, in addition to a $16,000 paid
license fee we would be obligated to pay up to an aggregate of $450,000 (of
which $125,000 had been paid as of December 31, 1999). Milestone payments are
paid on a per product or process basis upon successful achievement of certain
product development benchmarks. In addition, beginning the later of (a) the
year 2004 or (b) the issuance in the U.S. and/or the European Union of a
patent covering certain patentable material licensed under the agreement, we
could be obligated to pay minimum annual royalties up to an aggregate amount
of $1.2 million through the year 2008. In each succeeding calendar year after
2008, we could be obligated to pay a minimum annual royalty of $500,000 for
the life of the agreement. These minimum annual royalties may be offset
against annual royalty fees payable by us based on net sales of any products
covered by any patents that issue.
Under the terms of this agreement, we are required to satisfy certain
due diligence provisions with respect to the timely development and
commercialization of products covered by any patents under the agreement. If the
due diligence deadlines are not met, we may extend the due diligence deadline
for 12 months upon payment of an additional fee. As of December 31, 1999, we
have paid $100,000 for two extensions of these deadlines. Technion may terminate
the agreement in the event of a material breach of the agreement by us which
remains uncured for 60 days. We may terminate the agreement at our option upon
60 days written notice and payment of a termination fee.
VETERANS MEDICAL RESEARCH FOUNDATION RESEARCH AGREEMENTS
Since 1995, we have contracted with the Veterans Medical Research
Foundation located in San Diego, California and operating at the Veterans
Affairs Medical Center to conduct certain research activities. In March 1999, we
entered into another three-year agreement with the Veterans Medical Research
Foundation. Under this agreement, Dr. Hammond, who serves as the investigator
for the
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related studies, and the Veterans Medical Research Foundation agree to
utilize their best efforts to conduct studies in the field of cardiovascular
disease. In consideration for such services, we have agreed to pay the Veterans
Medical Research Foundation monthly fees based on the overall level of
expenditures for research and development, plus certain administrative overhead
charges. To the extent that U.S. government resources are used in connection
with the work done, the U.S. government may have certain rights as defined by
U.S. law and may choose to exercise those rights.
UNIVERSITY OF MISSOURI SPONSORED RESEARCH CONTRACT
In 1998, we entered into an agreement with the Curators of the
University of Missouri-Columbia under which the University of Missouri would
conduct discovery research directed by us into the study of collateral blood
flow as it relates to peripheral vascular disease. Under this agreement, we were
obligated to pay a total of $150,000 all of which was paid as of December 31,
1999. This agreement terminated in 1999. In 1999, we entered into additional
agreements for ongoing discovery research into the study of collateral blood
flow as it relates to peripheral vascular disease. Under these agreements, we
were obligated to pay up to an aggregate funding amount of $277,438 all of which
was paid as of December 31, 1999.
MEDICAL COLLEGE OF WISCONSIN INVESTIGATOR AGREEMENT
In November 1998, we entered into an agreement with the Medical College
of Wisconsin. Under this agreement, Dr. Philip Clifford is to conduct discovery
research into the study of blood flow and locomotor function as it relates to
peripheral vascular disease. We have agreed to provide the Medical College with
research funding for work done under this agreement. This agreement grants us
the right to all inventions, discoveries and developments generated under the
study. The initial term of this agreement was October 1998 to April 1999. In
1999, we extended this agreement through December 31, 1999. Under this
agreement, we could be obligated to pay up to an aggregate amount of $257,248,
of which $194,137 has been paid as of December 31, 1999. The final payments were
made in January 2000.
ADDITIONAL COLLABORATIONS FOR GENE DELIVERY VECTORS
Consistent with our efforts to broaden our proprietary methods of gene
therapy, we are evaluating additional gene delivery vectors.
TARGETED GENETICS CORPORATION BIOLOGICAL MATERIALS AGREEMENT.
In January 1998, we entered into a biological materials transfer agreement with
Targeted Genetics Corporation for purposes of evaluating Targeted Genetics'
recombinant adeno-associated viral vector for application in the field of
cardiovascular gene therapy. Under the terms of this agreement, we and Targeted
Genetics each have the option to collaborate further to use Targeted Genetics'
recombinant adeno-associated viral vector to treat congestive heart failure. In
such event, Targeted Genetics would be responsible for constructing and
manufacturing the vector and we would be responsible for, among other things,
funding the costs of the future collaboration. Either party may terminate this
agreement at any time upon 30 days prior written notice.
CELL GENESYS COLLABORATIVE RESEARCH AGREEMENT. In November
1998, we entered into a collaborative research agreement with Cell Genesys, Inc.
for purposes of evaluating Cell Genesys' second-generation recombinant
adenoviral vectors for application in the field of cardiovascular gene therapy.
Under this agreement, we and Cell Genesys have options to negotiate the terms of
licenses for
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the use of such second-generation recombinant adenoviral vectors. Either party
may terminate upon 60 days prior written notice.
PATENTS AND PROPRIETARY RIGHTS
Our core technologies depend on the use of genes which regulate
biological activity in the cardiovascular system. We have either discovered or
exclusively licensed certain genes for use in our gene therapy products. Our
gene portfolio includes both issued patents and pending patent applications.
Our current methods of gene therapy use a replication-deficient
adenovirus gene delivery vector. We are also seeking to refine and enhance our
proprietary methods of gene therapy to include other gene delivery vectors, and
to broaden the applications of our methods of gene therapy. For more specific
information regarding our patent portfolio, please see "Core Technologies."
We have acquired rights to technology covered by several U.S. patents
and more than 10 U.S. patent applications, as well as corresponding patent
applications in certain other countries. Our policy is to file patent
applications to protect technology, inventions and improvements to inventions
that are considered important to the development of our business. We also rely
on trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Our business success will depend on our ability and the ability of our
licensors:
- to obtain patent protection of our technologies, both
in the U.S. and in other countries,
- to defend patents once obtained,
- to maintain trade secrets and operate without
infringing upon the patents and proprietary rights of
others, and
- to obtain appropriate licenses to patents or
proprietary rights held by others, if any, that may
relate to our technology, both in the U.S. and in
other countries.
For more detailed information regarding the importance of our
proprietary rights and related risks, please see "Risks Related to Our
Business--Risks Related to Patents and Proprietary Information."
GOVERNMENT REGULATION
All of our potential products will require regulatory approval by
U.S. and/or other governmental agencies prior to commercialization. Human
therapeutic products are subject to rigorous preclinical and clinical testing
and other premarket approval procedures administered by the FDA and similar
authorities in other countries. The FDA exercises extensive regulatory
authority over all facets of our products, from development through
commercialization. Government agencies in other countries have similar
authority. In some cases, local and state requirements also apply.
Gene therapy and cell therapy are relatively new technologies and have
not been extensively tested in humans. The regulatory requirements governing
gene and cell therapy products and related clinical procedures are uncertain and
are subject to change. Obtaining regulatory approval for our
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products is likely to take several years, if it is ever obtained, and is likely
to involve substantial expenditures. If approval is obtained, ongoing compliance
with applicable requirements can also require substantial resources. We may
encounter difficulties or unanticipated costs in our efforts to secure necessary
governmental approvals, which could delay or prevent us from marketing our
products.
The activities required before a new therapeutic agent may be marketed
in the U.S. begin with preclinical pharmacology and toxicology testing.
Preclinical testing includes laboratory evaluation and requires animal studies
to assess the product's potential safety and efficacy. Animal safety studies
must be conducted in accordance with the FDA's Good Laboratory Practice
regulations. The results of these studies must be submitted to the FDA as part
of an investigational new drug application, which must be reviewed and cleared
by the FDA before proposed clinical testing can begin. Clinical trials must be
conducted in accordance with Good Clinical Practices under protocols that detail
the objectives of the trial, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each clinical protocol must be submitted to
the FDA as part of the new drug application. The FDA's review or approval of a
study protocol does not necessarily mean that a successful trial would
constitute proof of efficacy or safety for product approval. Further, each
clinical trial must be approved by and conducted under an independent
institutional review board at the institution at which the trial will be
conducted. The institutional review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution. The institutional review board is also responsible for continuing
oversight of the approved protocols in active trials. An institutional review
board may require changes in a protocol and there can be no assurance that an
institutional review board will permit any given trial to be initiated or
completed.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase 1, clinical trials generally are
conducted with a small number of subjects, who may or may not have a specific
disease, to determine the preliminary safety profile. In Phase 2, clinical
trials are conducted with larger groups of patients who have a specific
disease. The purpose of this phase is to determine preliminary efficacy and
optimal dosages and to obtain expanded evidence of safety. In Phase 3,
large-scale, multicenter, controlled clinical trials are conducted with
patients who have a target disease. The purpose of this phase is to provide
enough data for the statistical proof of efficacy and safety required by the
FDA and others for market approval. The FDA receives reports on the progress
of each phase of clinical testing, and it may require the modification,
suspension or termination of clinical trials. Because gene therapy products
are a new category of therapeutics, there can be no assurance as to the
length of the clinical trial period or the number of patients the FDA will
require to be treated in the clinical trials.
FDA marketing approval must be obtained after completion of clinical
trials of a new product. We expect that our products will be regulated as
biological products. Our products are also subject to the drug provisions of
the Federal Food, Drug and Cosmetic Act. However, the FDA's regulatory
approach may evolve as scientific knowledge increases in the area of somatic
and gene therapy. Current regulations relating to biologic drugs will require
us to submit to the FDA a marketing application, which must be approved by
the FDA before commercial marketing is permitted. The marketing application
must include results of product development activities, preclinical studies
and clinical trials, in addition to detailed manufacturing information. FDA
approval of the marketing application generally takes at least one year but
could take substantially longer. The FDA may also request additional data
relating to safety and efficacy. Even if this data is submitted, the FDA may
ultimately decide that a marketing application does not satisfy its
regulatory criteria for approval. The FDA may modify the scope of the desired
claims or require the addition of warnings or other safety-related
information. The FDA may also require additional clinical tests following
approval based upon product safety data. Such
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products remain subject to continual review, and to later discovery of
previously unknown problems. This may result in restrictions on marketing, or
withdrawal of the product from the market, as well as possible civil or criminal
sanctions.
The FDA requires that product manufacturers comply with current Good
Manufacturing Practices as a condition for performing clinical studies and
for product approval. In complying with current Good Manufacturing Practices,
manufacturers must expend resources on a continuing basis in production,
record keeping and quality control. Manufacturing facilities are subject to
periodic inspections by the FDA to ensure compliance. Failure to pass such
inspections may result in suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA may
also require the manufacturer to recall a product.
In addition to regulations enforced by the FDA, 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 federal, state and local regulations. Our research
and development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. Even if our
safety procedures for handling and disposing of such materials comply with
the standards prescribed by local, state and federal laws and regulations,
the risk of contamination or injury from these materials cannot be
eliminated. In such an event, we could be held liable for any resulting
damages, and any such liability could exceed our resources.
For further information regarding the impact of various government
regulations please see "Risks Related to Our Business--If our product
candidates do not successfully complete the clinical trial process, we will
not be able to market them.", "Other Risks to Our Business--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 a competitive basis or adversely affect our potential future
profitability", and "We may incur substantial cost related to our use of
hazardous materials." Please also see "Risks Related to Our Industry--We are
subject to extensive government regulation which could prevent or delay the
commercialization of our products."
COMPETITION
We are aware of a number of companies and institutions that are
developing or considering the development of potential gene therapies, cell
therapy treatments and therapies infusing proteins which promote or enhance
angiogenesis. These organizations include early-stage gene therapy and other
biotech companies, fully-integrated pharmaceutical companies, universities,
research institutions, governmental agencies and others.
Additionally, there are a number of medical device companies which
are developing innovative surgical procedures. These include laser-based
systems to stimulate coronary angiogenesis, as well as surgical devices and
catheter-based treatments, including balloon angioplasty, atherectomy and
coronary stenting. In addition, our potential products will be required to
compete with existing pharmaceutical products, or products developed in the
future, that are based on new or established technologies. For further
information regarding competition in our industry, please see "Risks Related
to Our Industry--We face intense competition in our industry which could
render our potential products less competitive or obsolete."
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MANUFACTURING
Schering AG is responsible for all activities relating to the
manufacture of products developed under our agreement with them. We do not
have manufacturing capacity and currently plan to establish relationships
with others for the manufacture of clinical trial material and the commercial
production of our other products. We may not be able to establish
relationships with manufacturers on commercially acceptable terms. In
addition, we cannot be sure that Schering AG or others will be able to
manufacture products in commercial quantities under current Good
Manufacturing Practices as required by the FDA on a cost-effective basis. For
further information regarding risks related to manufacturing, please see
"Other Risks 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" and
"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 a competitive basis or adversely affect our
potential future profitability."
SALES AND MARKETING
We do not plan to develop our own sales and marketing capability for
our products. We plan to rely solely upon strategic partners to market and
sell our products. Schering AG is responsible for all activities relating to
the marketing and sale of products developed under our agreement with them.
For further information regarding factors impacting our ability to sell and
market our products, please see "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" and "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."
HUMAN RESOURCES
As of December 31, 1999, we had 56 full-time employees, including 39
in research and development, including clinical and regulatory affairs, and
17 in finance, legal and other administration. Of these employees, 21 hold
advanced degrees, of which 12 are M.D.s or Ph.D.s. Our success will depend in
large part on our ability to attract and retain key employees and scientific
advisors. Competition among biotechnology and pharmaceutical companies for
highly skilled scientific and management personnel is intense. We may not be
able to retain our existing personnel or advisors, or attract additional
qualified employees. For further information regarding our key personnel
please see "Other Risks Related to Our Business--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."
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
[CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995]
Our disclosure and analysis in this report, in our Annual Report to
Stockholders and in our other public statements may contain forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They may use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in
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connection with any discussion of future operating or financial performance.
In particular, these include statements relating to future actions,
prospective products or product approvals, future performance or results of
current and anticipated products, sales efforts, expenses and financial
results. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.
Any or all of our forward-looking statements in this report, in the
Annual Report and in any other public statements may turn out to be wrong.
They can be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Many factors mentioned in the discussion
below, for example regulatory approval and proprietary protection of our gene
therapy products, and their market success relative to alternative products,
will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we provide
the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect us. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
RISKS AND UNCERTAINTIES
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 December 31, 1999, our accumulated
deficit was approximately $14.8 million. We 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. Payments under our collaborative agreements
are subject to substantial risks, as described below, and interest income would
be reduced as our cash decreases as a result of ongoing expenses and other
capital outlays. 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:
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- 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,
- the willingness and ability of third parties such as
Schering AG to support the development and
commercialization of our potential products,
- changes to our existing collaborations and our
potential need to establish additional collaborations
or other strategic relationships,
- 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, or if our support from collaborative partners such as
Schering AG decreased, then 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 PRODUCTS WE ARE NOW DEVELOPING DO NOT ADVANCE BEYOND EARLY-STAGE
TESTING, OUR POTENTIAL REVENUES WOULD 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 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;
- our collaborators may withdraw support for or
otherwise impair the development and
commercialization of our potential products;
- others may hold or acquire proprietary rights that
could prevent us or our collaborators from developing
our products; or
- others may develop equivalent or superior products.
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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 or our collaborative partner must demonstrate
through preclinical studies and clinical trials that our potential 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. For instance, as reported in December 1999,
the death of one patient enrolled in the Phase 1/2 trial for GENERX-TM-,
which occurred approximately five months after the one-time product
administration, was determined to have been unlikely to be causally related
to the therapy. However, even if unrelated to our product such events could
nevertheless adversely impact our clinical trials. As a result, our ability
to ultimately develop and market the products and obtain revenues would
suffer.
Our clinical trials may also be adversely impacted by patient deaths
or problems that occur in other trials. For example, the death of a patient
in another trial in 1999 who had received an adenoviral gene delivery vector
expressing an ornithine transcarbamylase gene triggered several government
investigations and reviews of past and ongoing gene therapy trials.
Such deaths and other adverse events that occur in the conduct of
clinical trials may result in an increase in governmental regulations, and could
result in delays or halts being imposed upon clinical trials including our own.
In addition, fears regarding the potential consequences of gene therapy trials
or the conduct of such trials could dissuade investigators or patients from
participating in our trials, which could substantially delay or prevent our
product development efforts. Such consequences could also increase the risk that
any potential adverse event in our trial could give rise to claims for damages
against us, or could cause further delays or a halt of our clinical trial, any
of which results would negatively affect us.
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 markets in other countries, we or our partner will also
be subject to regulatory requirements governing clinical trials in those
countries. 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 certain angiogenic gene therapy products,
including our lead product candidate GENERX-TM-. As a result, we may not be able
to conduct these programs in the manner or on the time schedule we currently
contemplate. In addition, if any problems or delays occur in the conduct of our
clinical trials, or if Schering AG or any other collaborative partner that we
depend upon were to withdraw support for our products or otherwise impair their
development, our business could be negatively affected.
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 other countries with
substantial markets,
- 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 other countries with
substantial markets.
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 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.
As more potentially competing patent applications are filed, and as
more patents are actually issued, both in the field of gene therapy and with
respect to component methods or compositions that we
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may employ in our techniques, the risk increases that we may be subjected to
litigation or other proceedings that claim damages or seek to stop our product
development or commercialization efforts. Even if such patent applications or
patents are ultimately proven to be invalid, unenforceable or non-infringed,
such proceedings are generally expensive and time consuming, and could
substantially impair our product development efforts.
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.
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,
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- obtain regulatory approvals, and
- manufacture and market any successfully developed
products.
If we are unable to maintain or expand our collaborative relationships,
it could negatively affect our business.
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 such as Schering AG 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 may also breach or terminate our
agreements, fail to conduct their collaborative activities successfully or
otherwise act in ways that impair or block the development of our potential
products. 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, which may or may not be
successful.
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 PRODUCT
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
- 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.
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We effectively rely on our collaboration with Schering AG for
significant 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 current Good Manufacturing
Practices mandated by the FDA or by any other
regulatory authority,
- 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
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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.
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.
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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.
Failure to obtain sufficient product liability insurance or to otherwise protect
against product liability claims could prevent or delay the commercialization of
our products. In addition, any product liability claim, even if shown to be
invalid, or a product recall or halt in product use, 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
biohazardous and other hazardous materials. Even if 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 existing and/or
expanded 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.
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 December 31, 1999, our common stock
has traded as low as $2 7/8 per share and as high as $29 7/8 per share. As of
March 21, 2000, our common stock has traded as low as $2 7/8 per share and as
high as 50 1/8 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 in our laboratories or in other
laboratories,
- technological innovations or new products introduced
by us or by competitors,
- development testing and clinical trial progress of
our own or our competitors' product candidates,
- changes in government regulations or their
implementation,
- developments concerning proprietary rights,
- litigation or other adverse proceedings,
- public perception regarding the safety of our
products or of gene therapy in general, or
- securities analysts' expectations or
other financial factors.
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.
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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 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.
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 therapies, cell therapy
treatments and angiogenic protein infusion therapies which could compete with
our potential products. Our products would also be forced to 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,
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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.
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 other regulatory authorities require rigorous
preclinical testing, clinical trials and other product approval procedures. As
gene therapy has come under increased scrutiny in the U.S. and elsewhere, the
risk increases that changes in regulatory policies or procedures could slow or
block the development and/or clinical testing of potential gene therapy products
such as our own.
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.
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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 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.
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ITEM 2. PROPERTIES.
We currently occupy approximately 17,000 square feet of
administrative office space in San Diego, California. This lease was entered
into in 1998 and has a six-year term with one five-year renewal option. In
addition, we are currently conducting research in a 11,000 square foot
preclinical research center in San Diego, California. This lease was entered
into in 1998 and has an initial five-year term with two five-year renewal
options. We believe our facilities are adequate to meet our near-term space
requirements.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of filing of this report on Form 10-K, we are not a
party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 1999.
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<PAGE>
OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES
As of March 21, 2000, the following officers and key employees hold the
positions indicated:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jack W. Reich, Ph.D............................... 51 Chairman of the Board of Directors,
Chief Executive Officer and Co-Founder
Christopher J. Reinhard........................... 46 Director, President, Chief Operating and
Chief Financial Officer and Co-Founder
Tyler M. Dylan, Ph.D., J.D. ...................... 38 Vice President, General Counsel and
Corporate Secretary
Jeffrey Friedman, M.D. ........................... 53 Vice President, Development
H. Kirk Hammond, M.D.............................. 50 Director, Vice President, Research and Co-Founder
Victoria E. Lea .................................. 32 Controller
Kathleen E. Rooney................................ 51 Vice President, Administration
</TABLE>
JACK W. REICH, PH.D.
Dr. Reich is a cofounder and has served as a director and Chief
Executive Officer since April 1995, as President from April 1995 to September
1999 and as Chairman of the Board of Directors since June 1999. In May 1995, Dr.
Reich co-founded MyoTech, Inc., a newly-established venture based upon a novel
clinical service model and drug therapy to treat chronic muscle injury, which
was sold in November 1996. From October 1994 to January 1995, Dr. Reich was
Senior Vice President of Enterprise Partners, a Southern California based
venture capital firm that has played a key role in developing biotechnology and
medical technology companies. From September 1987 to October 1994, Dr. Reich was
Vice President, Regulatory Affairs and Quality Operations of Gensia, Inc., a
biopharmaceutical company formed to discover, develop, manufacture and market
novel pharmaceutical products for the diagnosis and treatment of human disease.
Dr. Reich received a B.A. in Biology from Washington and Jefferson College, a
B.S. in Pharmacy from Creighton University, an M.S. in Hospital Pharmacy
Administration from Temple University and a Ph.D. in
Pharmaceuticals-International Pharmaceutical Administration from Temple
University.
CHRISTOPHER J. REINHARD
Mr. Reinhard is a cofounder and has served as a director and Chief
Financial Officer since April 1995, as Chief Operating Officer since July 1997
and as President since September 1999. From 1990 to 1995, Mr. Reinhard was
President of the Colony Group Inc., a business and corporate development
company, and Reinhard Associates, an investor relations consulting company. From
1986 to 1990, Mr. Reinhard served as Vice President and Managing Director of the
Henley Group, a diversified industrial and manufacturing group, and as Vice
President of various public and private companies created by the Henley Group,
including Fisher Scientific Group, a leading international distributor of
laboratory equipment and test apparatus for the scientific community,
Instrumentations Laboratory, IMED Corporation, a medical device company,
Wheelabrator Technologies, an energy and environmental services company, and
Henley Properties Inc., a real estate company. From 1980 to 1985, prior to the
formation of the Henley Group, Mr. Reinhard was Assistant Treasurer of the
Signal
34
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Companies Inc., which in 1986 was merged with Allied Corporation to form
AlliedSignal, a diversified manufacturing company. Mr. Reinhard received a B.S.
in Finance and an M.B.A. from Babson College.
TYLER M. DYLAN, PH.D., J.D.
Dr. Dylan has served as General Counsel since November 1998 and was
appointed Corporate Secretary in December 1998 and Vice President in June 1999.
From July 1992 to November 1998, Dr. Dylan was a member of the international law
firm of Morrison & Foerster LLP and held positions including Associate, Partner
and Of Counsel. In his law firm practice, Dr. Dylan worked on the development,
acquisition and enforcement of intellectual property rights, as well as related
business and transactional issues. He also worked with both researchers and
business management in the biotech and pharmaceutical industries. Dr. Dylan
received a B.Sc. in Molecular Biology from McGill University, Montreal, Canada,
a Ph.D. in Biology from the University of California, San Diego, where he
performed research at the Center for Molecular Genetics, and a J.D. from the
University of California, Berkeley.
JEFFREY FRIEDMAN, M.D.
Dr. Friedman has served as Vice President of Development since
September 1998. From April 1997 to September 1998, Dr. Friedman was Senior
Director Cardiovascular/Internal Medicine at Knoll Pharmaceutical Company. From
1992 to 1997, Dr. Friedman held various positions at Gensia, Inc., including
Division Vice President of Clinical Development and Corporate Medical Director.
Before joining Gensia he held various positions in clinical research and product
development at E.R. Squibb & Sons, Inc. and Wyeth-Ayerst Research. Dr. Friedman
was on the faculty at Cornell University Medical College prior to joining
industry. Dr. Friedman earned a B.S. Degree from the University of Michigan and
an M.D. from the Albert Einstein College of Medicine.
H. KIRK HAMMOND, M.D.
Dr. Hammond, our chief scientist, is a cofounder and has served as a
director and as Vice President, Research since April 1995. Since July 1994, Dr.
Hammond has been Associate Professor of Medicine at UCSD. From 1987 to June
1994, Dr. Hammond was Clinical Assistant Professor of Medicine at UCSD. Since
1983, Dr. Hammond has been an active basic research scientist and cardiologist
at the San Diego Veterans' Affairs Healthcare System. Dr. Hammond's laboratory
at UCSD has focused on the development of gene therapy to treat cardiovascular
disease and Dr. Hammond was the primary co-inventor of the technology that
served as the basis for the formation of Collateral. Dr. Hammond received an
M.D. from Indiana University in 1980 and is board certified in internal medicine
(1983) and cardiovascular diseases (1987).
VICTORIA E. LEA
Ms. Lea has served as Controller since March 1999. From August 1995 to
March 1999, she held various positions at Mycogen Corporation, a diversified
agribusiness and biotechnology company, the most recent of which was Finance
Manager. From November 1993 to June 1995, Ms. Lea was an Audit Manager at
O'Sullivan Hicks, CPAs. From April 1992 to October 1993, she was a Senior
Accountant at Price Waterhouse. Ms. Lea is a Certified Public Accountant and
received a Bachelor of Business Administration Degree with a concentration in
accounting from the University of Washington.
35
<PAGE>
KATHLEEN E. ROONEY
Ms. Rooney has served as Vice President, Administration since August
1996. From November 1995 to August 1996, Ms. Rooney was Director of Project
Planning at Sequana Therapeutics Inc., a genomics company focused on positional
cloning and functional assessment of human genes. From October 1987 to November
1995, Ms. Rooney was Director of Project Planning and Administration at Gensia,
coordinating the discovery, development and manufacturing of several novel drug
candidates from preclinical research through to the submission of NDAs with the
FDA. From 1975 to 1987, Ms. Rooney held various positions at the Scripps Clinic
and Research Foundation including Chief Medical Technologist, Administrative
Director of Pathology Services and Ancillary Services Administrator. Ms. Rooney
received a B.S. in Medical Technology from the University of Wisconsin and an
M.B.A. from San Diego State University.
36
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Our common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol CLTX. Our common stock began trading on
July 2, 1998.
Set forth below is the range of high and low closing sale prices for
our common stock for each quarter in the fiscal years following the July 2, 1998
completion of our initial public offering, as regularly quoted in the Nasdaq
National Market. Such quotations represent inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions. Prior to the initial public offering on July 2, 1998, there was no
established published trading market for our common stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
- ----
Third Quarter $ 7.875 $ 3.750
Fourth Quarter $ 9.500 $ 3.625
1999
- ----
First Quarter $ 10.250 $ 6.500
Second Quarter $ 23.000 $ 9.625
Third Quarter $ 22.000 $ 14.625
Fourth Quarter $ 20.625 $ 14.125
</TABLE>
As of February 29, 2000, there were approximately 1,876 beneficial
stockholders of our common stock including 107 holders of record. No dividends
have been paid on the common stock since our inception, and we do not anticipate
paying any dividends in the foreseeable future.
(b) 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 $10.8 million in working
capital and general corporate expenditures (including research and development)
and approximately $1.4 million for the purchase of machinery, equipment and
leasehold improvements. The proceeds applied to purchase equipment and leasehold
improvements are lower than 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 that 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 $0.8 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following information has been summarized from the financial
statements included elsewhere in this report and should be read in conjunction
with such financial statements and the related notes (in thousands except per
share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995
YEARS ENDED DECEMBER 31, (INCEPTION)
---------------------------------------------------------------- THROUGH
DECEMBER 31,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY STATEMENTS OF OPERATIONS:
Revenues from a related party:
Ongoing research support $6,392 $5,403 $3,647 $1,679 $ -
Milestone payments - - 2,000 - -
---------------------------------------------------------------------------------
Total revenues 6,392 5,403 5,647 1,679 -
---------------------------------------------------------------------------------
Expenses:
Research and development (9,858) (7,451) (5,165) (1,142) (398)
General and administrative (5,445) (3,343) (1,768) (951) (271)
Interest and other, net 1,185 487 167 24 (10)
---------------------------------------------------------------------------------
Net loss $ (7,726) $(4,904) $ (1,119) $ (390) $ (679)
=================================================================================
Net loss per share (basic and diluted) $(0.67) $(0.62) $ (0.24) $ (0.11) $ (0.38)
=================================================================================
Weighted average shares used in
computing net loss per share
(basic and diluted) 11,471 7,968 4,651 3,599 1,799
=================================================================================
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
SUMMARY BALANCE SHEETS: 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash, cash equivalents and
short-term investments $39,628 $15,261 $5,605 $2,430 $107
Milestone receivable from related party - - 2,000 - -
Property and equipment, net 3,065 3,413 294 91 9
Other assets 723 593 171 95 6
---------------------------------------------------------------------------------
Total Assets $43,416 $19,267 $8,070 $2,616 $122
=================================================================================
Liabilities and Stockholders' Equity:
Accounts payable and accrued expenses $1,864 $1,647 $595 $392 $288
Notes payable to related party, including
accrued interest 656 624 588 550 511
Short-term portion of note payable to bank 222 222 - - -
Long-term portion of note payable to bank 519 723 - - -
Deferred revenue - 164 155 215 -
Stockholders' equity (deficit) 40,155 15,887 6,732 1,459 (677)
---------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $43,416 $19,267 $8,070 $2,616 $122
=================================================================================
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following comments should be read in conjunction with the Financial
Statements and Notes contained therein. See "Risks and Uncertainties" regarding
certain factors known to Collateral that could cause reported financial
information not to be necessarily indicative of future results, including
discussion of the risks related to the development, regulatory approval and
proprietary protection of Collateral's gene therapy products, and their market
success relative to alternative products.
OVERVIEW
Collateral is focused on the discovery and development 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 product candidates 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
continue focusing 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 increased and have exceeded revenues each year. Losses have
resulted principally from costs incurred in research and development activities
related to
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<PAGE>
our efforts to develop our technologies and from administrative costs required
to support our efforts, to the extent our costs were not covered by the
Schering AG collaboration. Our expenses and losses are expected to trend upward
as we continue our research and development efforts, and would be expected to
further increase with expanded product development and/or commercialization
efforts.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, Collateral completed its initial public offering of 2,200,000
shares of our common stock, providing us proceeds, net of underwriting fees and
offering expenses, of $13.0 million. 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 $31.3
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 December 31, 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 $31.3 million in net proceeds from a private placement of equity
securities, $13.0 million in net proceeds from our initial public offering of
our common stock and aggregate net proceeds of $9.0 million from other private
sales of equity securities.
Collateral had a bank loan of $0.7 million as of December 31, 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% (9.75% at December 31, 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 (7.5% at December
31, 1999). The notes are secured by our assets, except for equipment and
furniture pledged on a first priority basis under our bank loan. As of December
31, 1999, the principal and interest on these notes totaled $0.7 million and are
due and payable upon demand.
At December 31, 1999, cash, cash equivalents and short-term investments
were $39.6 million compared to $15.3 million at December 31, 1998. This increase
in cash, cash equivalents and short-term investments was due to the $31.3
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 $24.4 million to $37.5
million for the year ended December 31, 1999. This increase is primarily
attributable to the $31.3 million net proceeds from our private placement,
offset by cash of $6.4 million used for operating activities.
We have entered into certain technology license agreements related
to our 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 $1.1 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 methods of gene therapy and
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<PAGE>
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 designed 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. 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 December 31, 1999. In addition, upon any
successful commercialization of these products, we would be required under
the license agreements to make royalty payments on worldwide net 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 product candidates, GENEVX-TM- and
GENECOR-TM-, which are progressing through our preclinical 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 $9.3
million, of which $1.8 million has been paid through December 31, 1999. Our
financial obligations will vary depending on the selections of therapeutic
genes for use in our 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 presented by us and
accepted by Schering AG 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 and potentially
initiate or expand other product development activities and collaborations. We
may also elect or need to purchase additional technologies or enter into other
corporate transactions which may require substantial
41
<PAGE>
cash outlays. Increases in operating expenses will include, but are not limited
to, increased personnel costs, payments to research institutions and
consultants, supplies and other costs resulting from operating our facilities,
as well as expenses associated with other product development and/or
commercialization activities that we undertake. To the extent these costs are
incurred in fields other than angiogenic gene therapy or are otherwise not
reimbursable under our 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 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.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Our collaborative revenue was $6.4 million and $5.4 million for 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. While our costs are expected
to continue to increase, as noted below, our collaborative revenue may not.
Research and development expenses for 1999 rose to $9.9 million from
$7.5 million for 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 $5.4 million for 1999 compared
to $3.3 million for 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 $1.3 million for 1999 compared to $0.6
million for 1998. This increase was primarily due to higher average cash and
investment balances as a result of the private placement completed in August
1999.
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<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Our total collaborative revenue was $5.4 million for 1998 compared to
$5.6 million for 1997. All revenue was derived from our research and development
agreement with Schering AG. Revenue for ongoing research support increased to
$5.4 million in 1998 compared to $3.6 million for 1997. The increase was due to
increased costs reimbursable to us resulting from accelerating research and
development activities. For 1997, revenues under the Schering Agreement included
$2.0 million that was earned by us upon achievement of a milestone.
Research and development expenses increased to $7.5 million for 1998
compared to $5.2 million for 1997. The increase primarily resulted from expenses
associated with additional research and development personnel, operation of our
new preclinical research center, amortization of deferred compensation related
to stock options, and increased use of outside research institutions and
consultants, partially offset by reduced license fees incurred by us. General
and administrative expenses increased to $3.3 million for 1998 compared to $1.8
million for 1997; the increase primarily resulted from increased market research
and educational materials, increased expenses for personnel to support expanded
research efforts, and amortization of deferred compensation related to stock
options.
Interest income increased to $0.6 million for 1998 compared to $0.2
million for 1997. The increase was primarily due to higher average cash balances
as a result of our public offering in July 1998.
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, systems could mistake "00" for 1900 or any other incorrect year,
resulting in system failures or miscalculations.
In prior years, we discussed the nature and progress of our plans to
become Y2K compliant. In 1999, we completed our plans and our evaluation of
systems. While we continue to monitor Y2K compliance, as of the date of this
report, our systems have operated without any apparent Y2K-related problems and
they appear to be Y2K compliant. Our total cost of reviewing and achieving Y2K
compliance has been less than $25,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, we had cash and cash equivalents and
short-term investments of $39.6 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 December 31, 1999, we had an outstanding bank loan of $0.7 million.
This loan bears interest at prime plus 1.25% (9.75% at December 31, 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 (7.50% at
December 31, 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.
43
<PAGE>
We are not exposed to risks for changes in foreign currency exchange
rates, commodity prices, or any other market rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on page F-1 below for a list of the
financial statements being filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item, with the exception of information on
our executive officers, is incorporated by reference from the Proxy Statement in
the sections entitled "Election of Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934." The balance of the response to this
item regarding information on our executive officers is contained in the
discussion entitled "Our Executive Officers and Key Employees" in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Proxy Statement in the section entitled "Executive Compensation and Other
Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Proxy Statement in the section entitled "Ownership of Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Proxy Statement in the section entitled "Certain Relationships and Related
Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) See Index to Financial Statements on page F-1 below
for a list of the financial statements being filed
herein.
(a)(2) Index to Financial Statement Schedules
None required.
(a)(3) See Exhibits below for all Exhibits being filed or
incorporated by reference herein.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 (1) Our Second Restated Certificate of Incorporation.
3.2 (2) Our Restated Bylaws.
4.1 (2) Form of the Certificate for common stock.
10.1 (2) Form of Restricted Stock Issuance Agreement between the
Company and certain individuals listed on the attached schedule.
10.2 (2) Form of Stock Issuance Agreement between the Company
and certain individuals listed on the attached schedule.
10.3 (2) Preferred Stock Purchase Agreement between the Company and
Schering AG Berlin Venture Corp., dated May 7, 1996.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.4 (2) Series C Preferred Stock Purchase Agreement by and among the
Company and the investors listed on Schedule A thereto, dated
June 30, 1997.
10.5 (2) Amended and Restated Investors' Rights Agreement by and among
the Company and the investors listed on Schedule A thereto,
dated June 30, 1997.
10.6 (2) Amended and Restated Co-Sale Agreement by and among the Company
and the individuals listed on Schedule A thereto, dated June 30, 1997.
10.7 (2) Security Agreement between the Company and Schering Berlin
Venture Corp., dated August 16, 1995.
10.8 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated August 16, 1995, as amended May 16, 1996.
10.9 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated October 12, 1995, as amended May 16, 1996.
10.10 (2) Side Letter between the Company and Schering Berlin Venture
Group, dated May 6, 1996.
10.11 (2) Exclusive License Agreement between The Regents of the University
of California and the Company for Angiogenesis Gene Therapy,
dated September 27, 1995, as amended.
10.12 (2) Collaboration, License and Royalty Agreement between Schering AG
and the Company, dated May 6, 1996.
10.13 (2) License Agreement by and among Dimotech Ltd., Gera Neufeld and
the Company, dated October 17, 1996.
10.14 (2) Exclusive License Agreement between The Regents of the University
of California and the Company for Gene Therapy for Congestive
Heart Failure, dated January 22, 1997.
10.15 (2) Agreement between New York University and the Company, dated
March 24, 1997, as amended.
10.16 (2) License Agreement by and among AMRAD Developments Pty. Ltd.,
Ludwig Institute for Cancer Research and the Company, dated
March 25, 1997.
10.17 (2) Research Agreement between the University of Washington and
the Company, dated April 21, 1997, as amended.
10.18 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Angiogenic Gene
Therapy for Congestive Heart Failure, dated June 18, 1997.
10.19 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated August 13, 1997.
10.20 (2) Sponsored Research Contract between the Curators of The
University Of Missouri and the Company, dated October 22, 1997,
as amended.
10.21 (2) Biological Materials Agreement between Targeted Genetics
Corporation and the Company, dated January 26, 1998.
10.22 (2) Research Agreement between The Regents of the University
of California and the Company, dated February 23, 1998.
10.23 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated March 20, 1998.
10.25 (2) Standard Industrial/Commercial Multi-Tenant Lease-Modified
Net between the Company and ARE 11025 Roselle Street, LLC,
dated November 24, 1997, as amended.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.26 (2) Torrey Reserve Office Lease between Pacific Torrey Reserve
Holding, L.P. and the Company dated April 7, 1998.
10.27 (2) Form of Scientific Advisor Consulting Agreement between the
Company and certain individuals listed on the attached schedule.
10.28 (2) Form of Scientific Advisory Board Agreement between the Company
and certain individuals listed on the attached schedule.
10.29 (2) Form of Consulting Agreement between the Company and certain
individuals listed on the attached schedule.
10.30 (2)(3) 1995 Stock Option/Stock Issuance Plan.
10.31 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.32 (2)(3) 1998 Stock Incentive Plan Form of Notice of Grant.
10.33 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement.
10.34 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock
Issuance Agreement.
10.35 (2)(3) 1998 Stock Incentive Plan.
10.36 (2)(3) 1998 Stock Incentive Plan Form of Notice of Grant.
10.37 (2)(3) 1998 Stock Incentive Plan Form of Stock Option Agreement.
10.38 (2)(3) 1998 Stock Incentive Plan Form of Stock Issuance Agreement.
10.39 (2)(3) 1998 Employee Stock Purchase Plan.
10.40 (2)(3) Form of Indemnification Agreement between the Company and each of its directors.
10.41 (2)(3) Form of Indemnification Agreement between the Company and each of its officers.
10.42 (2)(4) Credit Agreement between the Company and Imperial Bank, dated
April 30, 1998, as amended on September 14, 1998 (Exhibit 10.1).
10.43 (5) Amendment to the September 27, 1995 Exclusive License Agreement
between The Regents of the University of California and the
Company for Angiogenesis Gene Therapy, dated April 23, 1999.
10.44 (5) Amendment to the January 22, 1997 Exclusive License Agreement
between The Regents of the University of California and the
Company for Gene Therapy for Congestive Heart Failure, dated
April 23, 1999.
10.45 (5) Amendment to the June 18, 1997 Exclusive License Agreement
between The Regents of the University of California and the
Company for Angiogenic Gene Therapy for Congestive Heart Failure,
dated April 23, 1999.
10.46 (6) Form of Purchase Agreement completed in connection with the
private placement of August 11, 1999.
10.47 1998 Stock Incentive Plan Forms of Notice of Grant for
Non-Employee Directors.
10.48 1998 Stock Incentive Plan Form Stock Option Agreement for
Non-Employee Directors.
10.49 1998 Stock Incentive Plan Form Stock Purchase Agreement for
Non-Employee Directors.
10.50 Letter Agreement between the Company and Veterans Medical
Research Foundation, dated March 31, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included under the caption "Signatures").
27.1 Financial Data Schedule.
</TABLE>
47
<PAGE>
(1) Incorporated by reference to exhibits filed with our Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, filed on August 6,
1998.
(2) Incorporated by reference to the same numbered exhibits (unless
otherwise indicated) filed with our Registration Statement on Form S-1,
File No. 333-51029, as amended.
(3) Management contract or compensation plan.
(4) Incorporated by reference to the exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, filed on
November 10, 1998.
(5) Incorporated by reference to the exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, filed on July
23, 1999.
(6) Incorporated by reference to the exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed on
October 22, 1999.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 20, 2000, attaching a
press release issued by Collateral on March 20, 2000, related to
preliminary results from the Phase 1/2 trial of GENERX-TM- and plans to
move ahead to larger-scale clinical trials.
(c) Exhibits
The exhibits required by this Item are listed under Item
14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this Item are
listed under Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COLLATERAL THERAPEUTICS, INC.
By: /S/ JACK W. REICH, PH.D. Date: March 27, 2000
------------------------------------------
Chairman and Chief Executive Officer
By: /S/ CHRISTOPHER J. REINHARD Date: March 27, 2000
------------------------------------------
President, Chief Operating and
Chief Financial Officer
48
<PAGE>
POWER OF ATTORNEY
Know all men by these present, that each person whose signature appears below
constitutes and appoints Jack W. Reich, Ph.D. or Christopher J. Reinhard, his
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JACK W. REICH, PH.D. Chairman of the Board of Directors March 27, 2000
- ------------------------------------- and Chief Executive Officer
Jack W. Reich, Ph.D. (Principal Executive Officer)
/S/ CHRISTOPHER J. REINHARD Director and President, Chief Operating March 27, 2000
- ------------------------------------- and Chief Financial Officer
Christopher J. Reinhard (Principal Financial and Accounting Officer)
/S/ H. KIRK HAMMOND, M.D. Director and Vice President, Research March 27, 2000
- -------------------------------------
H. Kirk Hammond, M.D.
/S/ CHARLES J. ASCHAUER Director March 27, 2000
- -------------------------------------
Charles J. Aschauer
/S/ RONALD I. SIMON Director March 27, 2000
- -------------------------------------
Ronald I. Simon
/S/ DALE A. STRINGFELLOW Director March 27, 2000
- -------------------------------------
Dale A. Stringfellow
</TABLE>
49
<PAGE>
COLLATERAL THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Report of Ernst & Young LLP, Independent Auditors F - 2
Statements of Operations F - 3
Balance Sheets F - 4
Statements of Stockholders' Equity F - 5
Statements of Cash Flows F - 6
Notes to Financial Statements F - 7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Collateral Therapeutics, Inc.
We have audited the accompanying balance sheets of Collateral Therapeutics, Inc.
as of December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
Collateral's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Collateral Therapeutics, Inc.
at December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 4, 2000
F-2
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues under collaborative research and
development agreement with a related party:
Ongoing research support $ 6,392,212 $ 5,403,481 $ 3,647,189
Milestone payment - - 2,000,000
---------------- --------------- ----------------
Total revenues 6,392,212 5,403,481 5,647,189
---------------- --------------- ----------------
Expenses:
Research and development 9,857,467 7,451,307 5,164,982
General and administrative 5,445,461 3,343,260 1,767,632
------------------ ------------------ ------------------
Total operating expenses 15,302,928 10,794,567 6,932,614
------------------ ------------------ ------------------
Loss from operations (8,910,716) (5,391,086) (1,285,425)
Interest income 1,297,855 624,259 204,570
Interest expense (112,944) (75,475) (37,741)
Other expense - (62,087) -
------------------ ------------------ ------------------
Net loss $ (7,725,805) $ (4,904,389) $ (1,118,596)
================== ================== ==================
Net loss per share (basic and diluted) $ (0.67) $ (0.62) $ (0.24)
================== ================== ==================
Weighted average shares used in
computing net loss per share
(basic and diluted) 11,470,789 7,968,260 4,651,094
================== ================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
COLLATERAL THERAPEUTICS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998
----------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,897,563 $ 14,041,777
Short-term investments 21,730,478 1,219,385
Prepaid expenses 203,779 393,415
Other current assets 445,985 126,433
----------------------- -----------------------
Total current assets 40,277,805 15,781,010
Restricted cash - noncurrent 72,600 72,600
Property and equipment, net 3,065,213 3,413,127
----------------------- -----------------------
Total Assets $ 43,415,618 $ 19,266,737
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 546,842 $ 858,819
Accrued compensation and benefits 1,019,277 658,902
Accrued expenses 297,115 129,015
Notes payable to a related party, including accrued interest 656,279 624,385
Note payable to bank, current portion 222,222 222,222
Deferred revenue - 164,232
------------------- -------------------
Total current liabilities 2,741,735 2,657,575
Note payable to bank, net of current portion 518,519 722,222
Stockholders' equity:
Preferred stock, par value $.001; 5,000,000 shares authorized;
none outstanding; - -
Common stock, par value $.001; 40,000,000 shares authorized;
12,919,103 and 10,521,903 shares issued and outstanding at
December 31, 1999 and 1998, respectively 12,919 10,522
Additional paid-in capital 55,584,481 24,124,429
Deferred compensation (403,007) (986,062)
Note receivable secured by common stock (180,000) (165,000)
Accumulated other comprehensive loss (40,762) (4,487)
Accumulated deficit (14,818,267) (7,092,462)
----------------------- -----------------------
Total stockholders' equity 40,155,364 15,886,940
----------------------- -----------------------
Total Liabilities and Stockholders' Equity $ 43,415,618 $ 19,266,737
======================= =======================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------------ ---------- ------------ --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance At December 31, 1996 ............ 374,532 $ 375 5,889,050 $ 5,889 $ 2,522,168 $ --
Issuance of Series B convertible
preferred stock ................... 374,532 375 -- -- 2,499,625 --
Issuance of Series C convertible
preferred stock net of expense
of $76,539 ........................ 472,476 472 -- -- 3,702,797 --
Stock options exercised ............. -- -- 82,597 83 18,789 --
Deferred compensation related
to stock options .................. -- -- -- -- 1,157,410 (1,157,410)
Amortization of deferred
compensation....................... -- -- -- -- -- 319,204
Note receivable secured
by common stock ................... -- -- -- -- -- --
Net loss ............................ -- -- -- -- -- --
-------- ----- ---------- ------- ----------- ----------
Balance at December 31, 1997............. 1,221,540 1,222 5,971,647 5,972 9,900,789 (838,206)
Conversion of preferred stock to
common stock.......................(1,221,540) (1,222) 2,320,926 2,321 (1,099) --
Common stock issued in
Initial Public Offering............ -- -- 2,200,000 2,200 12,988,754 --
Stock options exercised.............. -- -- 29,330 29 7,675 --
Deferred compensation related
to stock options................... -- -- -- -- 1,228,310 (1,228,310)
Amortization of deferred compensation -- -- -- -- -- 1,080,454
Interest on note receivable secured
by common stock.................... -- -- -- -- -- --
Net loss............................. -- -- -- -- -- --
Unrealized loss on short-term
investments........................ -- -- -- -- -- --
Comprehensive loss................... -- -- -- -- -- --
-------- ----- ---------- ------- ----------- ----------
Balance at December 31, 1998............. -- -- 10,521,903 10,522 24,124,429 (986,062)
Common stock issued in
private placement.................. -- -- 2,150,000 2,150 31,278,883 --
Stock options exercised.............. -- -- 231,314 231 97,881 --
Common stock issued under
employee stock purchase plan....... -- -- 15,886 16 105,578 --
Deferred compensation related
to stock options................... -- -- -- -- 162,407 (162,407)
Amortization of deferred compensation -- -- -- -- -- 560,765
Adjustment to deferred compensation
for terminations................... -- -- -- -- (184,697) 184,697
Interest on note receivable secured
by common stock.................... -- -- -- -- -- --
Net loss............................. -- -- -- -- -- --
Unrealized loss on short-term
investments........................ -- -- -- -- -- --
Comprehensive loss................... -- -- -- -- -- --
-------- ----- ---------- ------- ----------- ----------
Balance at December 31, 1999............. -- $ -- 12,919,103 $12,919 $55,584,481 $ (403,007)
======== ===== ========== ======= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
OTHER
NOTE RECEIVABLE COMPREHENSIVE TOTAL
SECURED BY INCOME ACCUMULATED STOCKHOLDERS'
COMMON STOCK (LOSS) DEFICIT EQUITY
---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance At December 31, 1996 ............ $ -- $ -- $(1,069,477) $ 1,458,955
Issuance of Series B convertible
preferred stock ................... -- -- -- 2,500,000
Issuance of Series C convertible
preferred stock net of expense
of $76,539 ........................ -- -- -- 3,703,269
Stock options exercised ............. -- -- -- 18,872
Deferred compensation related
to stock options .................. -- -- -- --
Amortization of deferred
compensation....................... -- -- -- 319,204
Note receivable secured
by common stock ................... (150,000) -- -- (150,000)
Net loss ............................ -- -- (1,118,596) (1,118,596)
--------- -------- ------------- ------------
Balance at December 31, 1997............. (150,000) -- (2,188,073) 6,731,704
Conversion of preferred stock to
common stock....................... -- -- -- --
Common stock issued in
Initial Public Offering............ -- -- -- 12,990,954
Stock options exercised.............. -- -- -- 7,704
Deferred compensation related
to stock options................... -- -- -- --
Amortization of deferred compensation -- -- -- 1,080,454
Interest on note receivable secured
by common stock.................... (15,000) -- -- (15,000)
Net loss............................. -- -- (4,904,389) (4,904,389)
Unrealized loss on short-term
investments........................ -- (4,487) -- (4,487)
------------
Comprehensive loss................... -- -- -- (4,908,876)
--------- -------- ------------- ------------
Balance at December 31, 1998............. (165,000) (4,487) (7,092,462) 15,886,940
Common stock issued in
private placement.................. -- -- -- 31,281,033
Stock options exercised.............. -- -- -- 98,112
Common stock issued under
employee stock purchase plan....... -- -- -- 105,594
Deferred compensation related
to stock options................... -- -- -- --
Amortization of deferred compensation -- -- -- 560,765
Adjustment to deferred compensation
for terminations................... --
Interest on note receivable secured
by common stock.................... (15,000) -- -- (15,000)
Net loss............................. -- -- (7,725,805) (7,725,805)
Unrealized loss on short-term
investments........................ -- (36,275) -- (36,275)
------------
Comprehensive loss................... -- -- -- (7,762,080)
--------- -------- ------------- ------------
Balance at December 31, 1999............. $(180,000) $(40,762) $ (14,818,267) $ 40,155,364
========= ======== ============= ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,725,805) $ (4,904,389) $ (1,118,596)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 868,788 369,954 144,107
Amortization of deferred compensation 560,765 1,080,454 319,204
Changes in operating assets and liabilities:
Milestone receivable from a related party - 2,000,000 (2,000,000)
Prepaid expenses and other current assets (129,916) (348,897) (76,378)
Accounts payable and accrued expenses 248,392 1,088,108 240,953
Deferred revenue (164,232) 9,189 (59,689)
Restricted cash - (72,600) -
Other (17,408) 46,061 -
------------------ ------------------ ------------------
Net cash used in operating activities (6,359,416) (732,120) (2,550,399)
INVESTING ACTIVITIES:
Purchases of property and equipment (520,873) (3,574,824) (346,038)
Purchases of short-term investments (22,755,961) (1,219,385) -
Proceeds from maturities of short-term investments 2,211,000 - -
Other - 19,642 -
------------------ ------------------ ------------------
Net cash used in investing activities (21,065,834) (4,774,567) (346,038)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 31,484,739 12,998,658 18,872
Issuance of Series B convertible preferred stock - - 2,500,000
Issuance of Series C convertible preferred stock - - 3,703,269
Proceeds from note payable to bank - 1,000,000 -
Payments on note payable to bank (203,703) (55,555) -
Issuance of note receivable secured by
common stock - - (150,000)
------------------ ------------------ ------------------
Net cash provided by financing activities 31,281,036 13,943,103 6,072,141
------------------ ------------------ ------------------
Net increase in cash and cash equivalents 3,855,786 8,436,416 3,175,704
Cash and cash equivalents at
beginning of the year 14,041,777 5,605,361 2,429,657
------------------ ------------------ ------------------
Cash and cash equivalents at end of the year $ 17,897,563 $ 14,041,777 $ 5,605,361
================== ================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Collateral is focused on the discovery and development 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. Collateral was incorporated in
California on April 3, 1995 and reincorporated in Delaware on May 28, 1998.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified our short-term investments as available-for-sale
securities in the accompanying financial statements. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. We consider
instruments purchased with an original maturity of three months or less to be
cash equivalents.
CONCENTRATION OF CREDIT RISK
We generally invest our excess cash in high credit quality debt instruments
of corporations and financial institutions, and in U.S. government securities.
Such investments are made in accordance with our investment policy, which
established guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. We have not
realized any losses on our cash, cash equivalents and short-term investments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from three years to five years, using the
straight-line method. Leasehold improvements are stated at cost and amortized
over the shorter of the estimated useful lives of the assets or the lease term.
REVENUE RECOGNITION
Collateral currently generates substantially all of our revenue through a
collaborative research and development agreement with a related party (Note 3).
Amounts received in advance for funding of research and development, which are
not refundable, are deferred and recognized as revenue when the related
reimbursable expenses are incurred and we have no future performance
obligations. Collateral is also entitled to milestone and royalty payments upon
attaining contract specified conditions. These amounts are recognized upon
satisfaction of the specified conditions when we have no further performance
obligations.
F-7
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
Collateral generally expenses amounts paid to obtain patents or acquire
licenses, as the ultimate recoverability of the amounts paid is uncertain.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS 123"), establishes the use of the fair value
based method of accounting for stock-based compensation arrangements, under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the periods
in which the related services are rendered. SFAS 123 also permits companies to
elect to continue using the implicit value accounting method specified in
Accounting Principles Board Opinion No. 25 to account for stock-based
compensation related to option grants and stock awards to employees. Collateral
has elected to retain the implicit value based method for such grants and
awards, and has disclosed the pro forma effect of using the fair value based
method to account for stock-based compensation (Note 5). Option grants to
non-employees are valued using the fair value based method prescribed by SFAS
123 and EITF 96-18 and expensed over the period services are provided.
NET LOSS PER SHARE
Collateral computes net loss per common share in accordance with Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS 128 requires
the presentation of basic and diluted income (loss) per share amounts. Basic
income (loss) per share is calculated based upon the weighted average number of
common shares outstanding during the period while diluted income per share also
gives effect to all potential dilutive common shares outstanding during the
period such as options, warrants, convertible securities, and contingently
issuable shares. All potential dilutive common shares have been excluded from
the calculation of diluted loss per share as their inclusion would be
anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation .
F-8
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. BALANCE SHEET INFORMATION
SHORT-TERM INVESTMENTS
Collateral classifies its investment securities as available-for-sale and
includes unrealized gains or losses as a component of stockholders' equity. The
following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
------------------ ------------------ ------------------
<S> <C> <C> <C>
DECEMBER 31, 1999:
Corporate debt securities .................. $ 21,771,240 $ 40,762 $ 21,730,478
================== ================== ==================
DECEMBER 31, 1998:
Corporate debt securities .................. $ 1,223,872 $ 4,487 $ 1,219,385
================== ================== ==================
</TABLE>
There were no sales of available-for-sale securities during the years ended
December 31, 1999 and 1998. The following is a summary of the amortized cost and
estimated fair value of short-term investments by contractual maturity at
December 31, 1999:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------------------- ------------------------
<S> <C> <C>
Due in one year or less..................... $ 4,469,047 $ 4,473,160
Due after one year through two years........ 17,302,193 17,257,318
----------------------- ------------------------
Total.............................. $ 21,771,240 $ 21,730,478
======================= ========================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998
--------------------- ----------------------
<S> <C> <C>
Laboratory equipment ....................... $ 1,159,277 $ 982,394
Computer equipment ......................... 399,610 311,676
Furniture and office equipment ............. 1,255,366 1,095,092
Leasehold improvements ..................... 1,553,358 1,457,574
--------------------- ----------------------
4,367,611 3,846,736
Accumulated depreciation
and amortization ....................... (1,302,398) (433,609)
--------------------- ----------------------
Total.............................. $ 3,065,213 $ 3,413,127
===================== ======================
</TABLE>
F-9
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT WITH RELATED PARTY
In May 1996, Collateral entered into a collaboration, license and royalty
agreement (the "Schering Agreement") with Schering AG, Germany ("Schering AG")
which established a strategic alliance covering the development and
commercialization of gene therapy products to promote angiogenesis. Under the
Schering Agreement, Collateral agreed to conduct research and development in the
field of gene therapy to promote angiogenesis solely with Schering AG during the
term of the Schering Agreement, until May 2001, and Schering AG was granted
exclusive rights for certain gene therapy technology that arose out of our 1996
base technology in the field or from technology developed under our
collaboration agreement, provided that Schering AG pays milestone and other fees
including royalties based on net sales for each licensed product. In exchange
for such rights, Schering AG agreed to: (i) purchase up to $5.0 million of
Collateral's preferred stock in 1996 and 1997; (ii) pay us up to $5.0 million
annually to support our research and development pursuant to the Schering
Agreement for an Initial Product (as defined therein), which amount may be
adjusted to support research and development for additional products presented
by Collateral and accepted by Schering AG within the field of angiogenic gene
therapy; (iii) pay Collateral milestone payments totaling up to $20.5 million
for the Initial Product and up to $20.5 million for each New Product (each as
defined therein) presented by Collateral and accepted by Schering AG under the
terms of the agreement, based on our achievement of milestones pertaining to
certain regulatory filings and to Schering's development and commercialization
of the products; and (iv) pay Collateral a royalty based on worldwide net sales
of each product and to pay an additional supplemental royalty based on worldwide
net sales of each product and the product's cost of goods, up to a maximum
specified royalty rate. To date, substantially all revenue received by
Collateral has been from our collaboration with Schering AG. Schering AG may
terminate the collaborative agreement upon 60 days written notice and payment of
a termination fee to Collateral.
In 1999, 1998 and 1997 Collateral's revenues under the agreement were $6.4
million, $5.4 million and $5.6 million (including $2.0 million for the
achievement of a milestone) respectively, and we had $164,000 recorded as
deferred revenue at December 31, 1998.
In 1995, Collateral entered into two promissory notes with Schering AG
totaling $500,000 to fund operations. Principal and interest on the notes are
due upon demand. The notes bear interest at prime rate less 1% (7.5% at December
31, 1999). These notes are secured by the assets of Collateral (with the
exception of certain equipment purchased from February 15, 1998 through December
31, 1998 which is pledged on a first priority basis under our bank loan referred
to in Note 4).
4. NOTE PAYABLE
On April 6, 1998 Collateral entered into a loan and security agreement with
a bank to borrow up to $400,000, which was amended on September 14, 1998 to
allow us to borrow up to $1.0 million to acquire equipment and furniture. We
borrowed the full $1.0 million, and in accordance with the agreement, began
making installment payments in November 1998. The installment payments consist
of monthly principal payments of $18,500 plus accrued interest, and extend
through April 2003. The loan bears interest at prime plus 1.25% (9.75% at
December 31, 1999) and is secured by the equipment and furniture acquired. The
F-10
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
4. NOTE PAYABLE (CONTINUED)
loan is subject to certain covenants including minimum working capital
levels and the requirement that Collateral must obtain the lenders' consent for
certain additional indebtedness.
5. SHAREHOLDERS' EQUITY
COMMON STOCK
In connection with certain stock purchase agreements with employees and
consultants, and options exercised under the 1995 stock option plan, Collateral
has the option to repurchase, at the original issue price, unvested shares in
the event of termination of employment or engagement. Shares issued under these
agreements generally vest over three or four years. At December 31, 1999, 25,255
shares were subject to repurchase by Collateral.
CONVERTIBLE PREFERRED STOCK
In May 1996, Collateral issued 374,532 shares of Series A Preferred Stock
to Schering AG at $6.675 per share, for total proceeds of $2,500,000. In June
1997, we issued 374,532 shares of Series B Preferred Stock to Schering AG at
$6.675 per share, for total proceeds of $2,500,000. Also in June 1997, we issued
472,476 shares of Series C Preferred Stock, including 84,976 to Schering AG, at
$8.00 per share, for net proceeds of $3,703,269. In conjunction with the
completion of Collateral's initial public offering on July 2, 1998, the
Preferred Stock was converted, on a 1.9-for-one basis, into shares of our common
stock.
EMPLOYEE STOCK PURCHASE PLAN
In April 1998, Collateral adopted the 1998 Employee Stock Purchase Plan. A
total of 50,000 shares of common stock have been authorized and reserved for
issuance under this Purchase Plan. The Purchase Plan permits all eligible
employees to purchase common stock through payroll deductions (which cannot
exceed 10% of each employee's compensation) at the lower of 85% of fair market
value at the beginning of a 24 month offering period or the end of each
six-month purchase period. During 1999, Collateral issued 15,886 shares of
common stock under the Purchase Plan. At December 31, 1999, 34,114 shares were
reserved for future issuance.
STOCK OPTIONS
In November 1995, we adopted a stock option plan (the "Predecessor Plan"),
under which 1,011,248 shares of common stock were reserved for issuance upon
exercise of options granted by Collateral. In June 1997, the number of shares
reserved for issuance under this plan was increased to 1,346,832 shares. The
stock option plan provides for the grant of incentive and nonstatutory options.
The exercise price of incentive stock options must equal at least the fair value
on the date of grant, and the exercise price of nonstatutory stock options may
be no less than 85% of the fair value on the date of grant. The options are
immediately exercisable for a period of up to ten years after the date of grant
and vest over either three or four year periods from the date of grant. Unvested
common shares obtained upon early exercise of options are subject to repurchase
by Collateral at the original issue price.
F-11
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
5. SHAREHOLDERS' EQUITY (CONTINUED)
In April 1998, we adopted the 1998 Stock Incentive Plan (the "1998 Plan")
that serves as the successor equity incentive program to the Predecessor Plan. A
total of 2,296,835 shares of common stock have been authorized for issuance
under the 1998 Plan. Outstanding options and unvested shares issued under the
Predecessor Plan have been incorporated into the 1998 Plan, and no further
option grants will be made under the Predecessor Plan. The incorporated options
will continue to be governed by their existing terms, unless the Plan
Administrator elects to extend one or more features of the 1998 Plan to those
options. After giving effect to the 1,882,389 options granted and outstanding
and the 137,144 options granted and exercised, 277,302 options remain available
for future grant under the 1998 Plan.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
-------------------------------------
<S> <C> <C>
Balance at December 31, 1996............... 415,150 $ 0.14
Granted................................. 330,600 $ 0.47
Exercised............................... (82,597) $ 0.23
Cancelled............................... (3,853) $ 0.10
----------------------
Balance at December 31, 1997............... 659,300 $ 0.30
Granted................................. 1,256,300 $ 5.03
Exercised............................... (29,330) $ 0.26
Cancelled............................... (19,000) $ 0.54
----------------------
Balance at December 31, 1998............... 1,867,270 $ 3.48
Granted................................. 280,000 $ 14.57
Exercised............................... (231,314) $ 0.42
Cancelled............................... (33,567) $ 1.23
----------------------
Balance at December 31, 1999............... 1,882,389 $ 5.54
======================
</TABLE>
A summary of stock options outstanding at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE PRICE
RANGE OF OPTIONS REMAINING LIFE AVERAGE OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
- ---------------------------------------- ------------------------------------ --------------- ------------------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.74......... 412,139 7.36 $ 0.39 412,139 $ 0.39
$4.92................. 202,000 8.29 $ 4.92 202,000 $ 4.92
$5.189 - $5.88........ 988,250 8.71 $ 5.26 351,579 $ 5.25
$9.62 - $12.25........ 87,000 9.35 $ 11.28 56,666 $ 12.17
$15.00 - $18.5625..... 193,000 9.73 $ 16.05 3,998 $ 16.14
----------------- ---------------
1,882,389 8.50 $ 5.54 1,026,382 $ 3.66
================= ===============
</TABLE>
F-12
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
5. SHAREHOLDERS' EQUITY (CONTINUED)
Adjusted pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if we had accounted for
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using the following pricing
models and assumptions:
<TABLE>
<CAPTION>
JULY 2, 1998 TO JANUARY 1, 1998 TO
1999 DECEMBER 31, 1998 JULY 1, 1998 1997
------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Pricing model......... Black-Scholes Black-Scholes Minimum Value Minimum Value
Expected life (years).. 4 4 4 6
Interest rate............ 5.25% to 6.00% 4.25% to 5.25% 5.5% 6.5%
Volatility............... 70% 65% - -
Dividend yield......... 0% 0% 0% 0%
</TABLE>
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options are amortized to expense over the vesting period. The
weighted-average fair value of options granted during 1999, 1998 and 1997 was
$8.26, $2.40 and $0.16, respectively. Adjusted pro forma information is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Adjusted pro forma net loss................... $(8,707,044) $(5,327,880) $(1,125,255)
Adjusted pro forma net loss
per share (basic and diluted).......... $(0.76) $(0.67) $(0.24)
</TABLE>
The pro forma effect on net loss for the year ended December 31, 1997 may
not be representative of the pro forma effect on net loss in future years
because it reflects less than four years of vesting.
DEFERRED COMPENSATION
Through December 31, 1999, Collateral recorded deferred compensation for
the difference between the exercise price of stock options granted and the fair
value of our common stock at the date of issuance or grant. The deferred
compensation will be amortized over the vesting period of the related options,
which is generally four years. Gross deferred compensation recorded during the
years ended December 31, 1999 and 1998 totaled $162,407 and $1,228,310,
respectively, and related amortization expense totaled $560,765, $1,080,454, and
$319,204 in 1999, 1998 and 1997, respectively.
6. COMMITMENTS
LEASES
In April 1998, Collateral entered into a multi-year operating lease for
administrative facilities, and lease payments commenced on occupancy of the
facilities in December 1998. Terms of the lease include renewal options, payment
of executory costs such as real estate taxes, insurance, and common area
maintenance, and escalation clauses.
F-13
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
6. COMMITMENTS (CONTINUED)
In December 1997, we entered into a multi-year operating lease for research
facilities commencing April 15, 1998, terms of which include renewal options,
payment of executory costs such as real estate taxes, insurance, and common area
maintenance, and escalation clauses. Additionally, Collateral is required to
maintain restricted cash balances totaling $72,600 on behalf of the landlord as
rent deposits through the end of the lease term (April 2003). Rent expense for
the years ended December 31, 1999, 1998 and 1997 was $699,000, $325,000 and
$106,000, respectively.
Annual future minimum lease obligations for operating leases as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31: LEASES
- ------------------------ ---------
<S> <C>
2000............................................................... $ 745,000
2001............................................................... 801,000
2002............................................................... 814,000
2003............................................................... 557,000
2004............................................................... 482,000
Thereafter.........................................................
--
-----------
Total...................................................... $ 3,399,000
===========
</TABLE>
LICENSE AND RESEARCH AGREEMENTS
In connection with certain license and research agreements, Collateral
recognized expenses of $2,606,000, $2,023,000 and $3,108,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The fees were charged to
research and development expense. In 2000, it is anticipated that Collateral
will be required to pay approximately $1.1 million to retain certain licensing
rights under cancelable agreements. Additionally, Collateral is obligated to pay
royalties upon commercial sales, if any, of certain products which utilize
in-licensed technology.
7. RELATED PARTY TRANSACTIONS
In March 1999, we entered into a three-year agreement with the Veterans
Medical Research Foundation, a foundation that Collateral has contracted with
since 1995 to conduct certain research activities. A Collateral director and
stockholder is the president of the foundation. Under this agreement, another
Collateral director and stockholder, and the foundation have agreed to conduct
certain studies in the field of cardiovascular disease. In consideration for
such services, we pay the foundation monthly fees based on the overall level of
expenditures for research and development, plus certain administrative overhead
charges. These fees totaled $404,000, $445,000, and $640,000 in 1999, 1998 and
1997, respectively.
F-14
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. RELATED PARTY TRANSACTIONS (CONTINUED)
A partner of a law firm that we use for general corporate purposes is a
member of Collateral's Board of Directors and other partners of that firm are
stockholders. We incurred expenses from such firm totaling $244,648, $695,373,
and $145,252 for the years ended December 31, 1999, 1998 and 1997, respectively.
Collateral had payables to the general counsel firm of $1,096, $18,192, and
$5,000 at December 31, 1999, 1998 and 1997, respectively.
In December 1997, we loaned $150,000 to a stockholder who was also of
counsel with a law firm that we use for certain patent matters. This loan bears
interest at ten percent per annum. Principal and interest are due upon demand,
and the loan is secured by the common stock of Collateral owned by such
stockholder.
In 1999, a Collateral director and stockholder provided consulting services
to Collateral upon management's request. His consulting fees totaled $133,000 in
1999.
8. INCOME TAXES
At December 31, 1999, Collateral had federal and California income tax net
operating loss carryforwards of approximately $12,118,000 and $3,740,000,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2010 and 2003, respectively, unless previously utilized. The net
operating losses for California and federal primarily differ due to the
capitalization of R&D for California purposes. We also have federal and
California research tax credit carryforwards of approximately $283,000 and
$148,000, respectively, which will begin to expire in 2010, unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of our net operating loss and credit carryforwards may be limited if cumulative
changes in ownership of more than 50% occur during any three year period.
Significant components of our deferred tax assets are shown below. A
valuation allowance has been recognized to offset the deferred tax assets as of
December 31, 1999 as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1999 1998
----------------------- -----------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 4,457,000 $ 2,290,000
Research and development credits...................... 380,000 52,000
Capitalized research and development.................. 480,000 --
Other, net............................................ 300,000 147,000
----------------------- -----------------------
Total deferred tax assets................................ 5,617,000 2,489,000
Valuation allowance for deferred tax assets.............. (5,617,000) (2,489,000)
----------------------- -----------------------
Net deferred tax assets......................... $ -- $ --
======================= =======================
</TABLE>
F-15
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
9. 401(k) PLAN
Effective October 1, 1996, Collateral adopted a 401(k) defined contribution
plan that covers substantially all full time employees, as defined, who meet
certain length-of-service requirements. Employees may contribute up to a maximum
of 15% of their annual compensation (subject to a maximum limit imposed by
federal tax law).
F-16
<PAGE>
EXHIBIT 10.47
INITIAL GRANT
COLLATERAL THERAPEUTICS, INC.
NOTICE OF GRANT
NON-EMPLOYEE DIRECTORS STOCK OPTION
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of Collateral Therapeutics, Inc. (the
"Corporation"):
OPTIONEE: "Non-Employee Director"
GRANT DATE: "Grant Date"
EXERCISE PRICE: "FMV on Grant Date per share"
NUMBER OF OPTION SHARES: "15,000 shares"
EXPIRATION DATE: "Expiration Date"
TYPE OF OPTION: "Non-Statutory Stock Option"
DATE EXERCISABLE: "Immediately Exercisable"
VESTING SCHEDULE: The Option Shares shall initially be
unvested and subject to repurchase by the Corporation at the
Exercise Price paid per share. Optionee shall acquire a vested
interest in, and the Corporation's repurchase right shall
accordingly lapse with respect to, the Option Shares in a
series of three (3) successive equal annual installments upon
the Optionee's completion of each year of service as a member
of the Corporation's Board of Directors (the "Board") over the
three (3)-year period measured from the Grant Date. In no
event shall any additional Option Shares vest after Optionee's
cessation of Board service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the Non-Employee Directors option grant
program under the Collateral Therapeutics, Inc. 1998 Stock Incentive Plan (the
"Plan"). Optionee further agrees to be bound by the terms of the Plan and the
terms of the Option as set forth in the Stock Option Agreement for Non-Employee
Directors attached hereto as EXHIBIT A.
<PAGE>
Collateral Therapeutics, Inc.
Notice of Grant of Non-Employee Director
Automatic Stock Option
Page 2
Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as EXHIBIT B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.
REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE
RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT
SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION
EXERCISE.
NO IMPAIRMENT OF RIGHTS. Nothing in this Notice or the attached Stock
Option Agreement for Non-Employee Directors or in the Plan shall interfere with
or otherwise restrict in any way the rights of the Corporation and the
Corporation's stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.
DEFINITIONS. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement for Non-Employee Directors.
COLLATERAL THERAPEUTICS, INC.
By:
Title:
-----------------------------
OPTIONEE
Address:
---------------------
---------------------
ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS
<PAGE>
RECURRING GRANT
COLLATERAL THERAPEUTICS, INC.
NOTICE OF GRANT
NON-EMPLOYEE DIRECTORS STOCK OPTION
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of Collateral Therapeutics, Inc. (the
"Corporation"):
OPTIONEE: "Non-Employee Director"
GRANT DATE: "Grant Date"
EXERCISE PRICE: "FMV on Grant Date per share"
NUMBER OF OPTION SHARES: "5,000 shares"
EXPIRATION DATE: "Expiration Date"
TYPE OF OPTION: "Non-Statutory Stock Option"
DATE EXERCISABLE: "Immediately Exercisable"
VESTING SCHEDULE: The Option Shares shall initially be
unvested and subject to repurchase by the Corporation at the
Exercise Price paid per share. Optionee shall acquire a vested
interest in, and the Corporation's repurchase right shall
accordingly lapse with respect to, the Option Shares upon the
Optionee's completion of one (1) year of service as a member
of the Corporation's Board of Directors (the "Board") measured
from the Grant Date. In no event shall any additional Option
Shares vest after Optionee's cessation of Board service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the Non-Employee Directors option grant
program under the Collateral Therapeutics, Inc. 1998 Stock Incentive Plan (the
"Plan"). Optionee further agrees to be bound by the terms of the Plan and the
terms of the Option as set forth in the Stock Option Agreement for Non-Employee
Directors attached hereto as EXHIBIT A.
<PAGE>
Collateral Therapeutics, Inc.
Notice of Grant
Non-Employee Director Stock Option
Page 2
Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as EXHIBIT B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.
REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE
RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT
SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION
EXERCISE.
NO IMPAIRMENT OF RIGHTS. Nothing in this Notice or the attached Stock
Option Agreement for Non-Employee Directors or in the Plan shall interfere with
or otherwise restrict in any way the rights of the Corporation and the
Corporation's stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.
DEFINITIONS. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement for Non-Employee Directors.
COLLATERAL THERAPEUTICS, INC.
By:
Title:
-----------------------------
OPTIONEE
Address:
---------------------
---------------------
ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS
<PAGE>
EXHIBIT 10.48
COLLATERAL THERAPEUTICS, INC.
STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
RECITALS
I. The Corporation has implemented an automatic option grant program
under the Plan pursuant to which eligible non-employee members of the Board will
automatically receive special option grants at periodic intervals over their
period of Board service in order to provide such individuals with a meaningful
incentive to continue to serve as members of the Board.
A. Optionee is an eligible non-employee Board member, and this
Agreement is executed pursuant to, and is intended to carry out the purposes of,
the Plan in connection with the automatic grant of an option to purchase shares
of Common Stock under the Plan.
B. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, a Non-Statutory Option to purchase up to the number of Option
Shares specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term specified in Paragraph 2 at the
Exercise Price.
2. OPTION TERM. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 7.
3. LIMITED TRANSFERABILITY. This option may, in connection with the
Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of the Optionee's immediate family or to a trust
established for the exclusive benefit of the Optionee and/or one or more such
family members. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to such
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for this option immediately prior to such assignment. Should the
Optionee die while holding this option, then this option shall be transferred in
accordance with Optionee's will or the laws of descent and distribution.
<PAGE>
4. EXERCISABILITY/VESTING.
(a) This option shall be immediately exercisable for any or all of
the Option Shares, whether or not the Option Shares are at the time vested in
accordance with the Vesting Schedule, and shall remain so exercisable until the
Expiration Date or sooner termination of the option term under Paragraph 5, 6 or
7.
(b) Optionee shall, in accordance with the Vesting Schedule set
forth in the Grant Notice, vest in the Option Shares in one or more installments
over his or her period of Board service. Vesting in the Option Shares may be
accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event,
however, shall any additional Option Shares vest following Optionee's cessation
of service as a Board member.
5. CESSATION OF BOARD SERVICE. Should Optionee's service as a Board
member cease while this option remains outstanding, then the option term
specified in Paragraph 2 shall terminate (and this option shall cease to be
outstanding) prior to the Expiration Date in accordance with the following
provisions:
(a) Should Optionee cease to serve as a Board member for any reason
(other than death or Permanent Disability) while this option is outstanding,
then the period for exercising this option shall be reduced to a twelve
(12)-month period (commencing with the date of such cessation of Board service),
but in no event shall this option be exercisable at any time after the
Expiration Date. During such limited period of exercisability, this option may
not be exercised in the aggregate for more than the number of Option Shares (if
any) in which Optionee is vested on the date of his or her cessation of Board
service. Upon the EARLIER of (i) the expiration of such twelve (12)-month period
or (ii) the specified Expiration Date, the option shall terminate and cease to
be exercisable with respect to any vested Option Shares for which the option has
not been exercised.
(b) Should Optionee die within the twelve (12)-month period
following his or her cessation of Board service and hold this option at the time
of his or her death, then the personal representative of Optionee's estate or
the person or persons to whom the option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and distribution shall have the
right to exercise this option for any or all of the Option Shares in which
Optionee is vested at the time of Optionee's cessation of Board service (less
any Option Shares purchased by Optionee after such cessation of Board service
but prior to death). Such right of exercise shall terminate, and this option
shall accordingly cease to be exercisable for such vested Option Shares, upon
the EARLIER of (i) the expiration of the twelve (12)-month period measured from
the date of Optionee's cessation of Board service or (ii) the specified
Expiration Date.
(c) Should Optionee cease service as a Board member by reason of
death or Permanent Disability, then all Option Shares at the time subject to
this option but not otherwise vested shall vest in full so that this option may
be exercised for any or all of the Option Shares as fully vested shares of
Common Stock at any time prior to the EARLIER of (i) the expiration of the
twelve (12)-month period measured from the date of Optionee's cessation of
<PAGE>
Board service or (ii) the specified Expiration Date, whereupon this option shall
terminate and cease to be outstanding.
(d) Upon Optionee's cessation of Board service for any reason other
than death or Permanent Disability, this option shall immediately terminate and
cease to be outstanding with respect to any and all Option Shares in which
Optionee is not otherwise at that time vested in accordance with the normal
Vesting Schedule or the special vesting acceleration provisions of Paragraph 6
or 7 below.
6. CHANGE IN CONTROL.
(a) In the event of a Change in Control transaction, all Option
Shares at the time subject to this option but not otherwise vested shall
automatically vest so that this option shall, immediately prior to the specified
effective date for the Change in Control, become exercisable for all of those
Option Shares as fully-vested shares of Common Stock and may be exercised for
all or any portion of those vested shares. Immediately following the
consummation of the Change in Control, this option shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation or its
parent company or otherwise continued in full force and effect pursuant to the
terms of the Change in Control transaction.
(b) If this option is assumed in connection with a Change in Control
(or otherwise continued in full force and effect), then this option shall be
appropriately adjusted, immediately after such Change in Control, to apply to
the number and class of securities or other property which would have been
issuable to Optionee in consummation of such Change in Control had the option
been exercised immediately prior to such Change in Control, and appropriate
adjustments shall also be made to the Exercise Price, PROVIDED the aggregate
Exercise Price shall remain the same.
7. HOSTILE TAKE-OVER.
(a) Optionee shall have an unconditional right, exercisable at the
time during the thirty (30)-day period immediately following the consummation of
a Hostile Take-Over, to surrender this option to the Corporation in exchange for
a cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the Option Shares at the time subject to the surrendered
option (whether or not those Option Shares are otherwise at the time vested)
over (ii) the aggregate Exercise Price payable for such shares. This Paragraph
7(a) limited stock appreciation right shall in all events terminate upon the
expiration or sooner termination of the option term and may not be assigned or
transferred by Optionee.
(b) To exercise the Paragraph 7(a) limited stock appreciation right,
Optionee must, during the applicable thirty (30)-day exercise period, provide
the Corporation with written notice of the option surrender in which there is
specified the number of Option Shares as to which the option is being
surrendered. Such notice must be accompanied by the return of Optionee's copy of
this Agreement, together with any written amendments to such Agreement. The cash
distribution shall be paid to Optionee within five (5) business days following
such delivery date. The exercise of such limited stock appreciation right in
accordance with the terms of this Paragraph 7 has been pre-approved pursuant to
the express provisions of
<PAGE>
the Automatic Option Grant Program, and neither the approval of the Plan
Administrator nor the consent of the Board shall be required at the time of the
actual option surrender and cash distribution. Upon receipt of the cash
distribution, this option shall be cancelled with respect to the shares subject
to the surrendered option (or the surrendered portion), and Optionee shall cease
to have any further right to acquire those Option Shares under this Agreement.
The option shall, however, remain outstanding for the balance of the Option
Shares (if any) in accordance with the terms and provisions of this Agreement,
and the Corporation shall accordingly issue a replacement stock option agreement
(substantially in the same form as this Agreement) for those remaining Option
Shares.
8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
9. STOCKHOLDER RIGHTS. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
10. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or any part
of the Option Shares for which this option is at the time exercisable, Optionee
(or any other person or persons exercising the option) must take the following
actions:
(i) To the extent the option is exercised for vested Option
Shares, execute and deliver to the Corporation a Notice of Exercise for
the Option Shares for which the option is exercised. To the extent this
option is exercised for unvested Option Shares, execute and deliver to
the Corporation a Purchase Agreement for those unvested Option Shares.
(ii) Pay the aggregate Exercise Price for the purchased shares
in one or more of the following forms:
(A) cash or check made payable to the Corporation,
(B) shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date, or
(C) to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
<PAGE>
pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions (I) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate
Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (II) to the Corporation to deliver the
certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
(b) Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the Exercise Price
must accompany the Notice of Exercise (or the Purchase Agreement) delivered to
the Corporation in connection with the option exercise.
(c) As soon after the Exercise Date as practical, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto. To the extent any such Option Shares are
unvested, the certificates for those Option Shares shall be endorsed with an
appropriate legend evidencing the Corporation's repurchase rights and may be
held in escrow with the Corporation until such shares vest.
(d) In no event may this option be exercised for any fractional
shares.
11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise make
changes in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets. In
addition, this Agreement shall not in any way be construed or interpreted so as
to affect adversely or otherwise impair the right of the Corporation or the
stockholders to remove Optionee from the Board at any time in accordance with
the provisions of applicable law.
12. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of
<PAGE>
any liability with respect to the non-issuance or sale of the Common Stock as to
which such approval shall not have been obtained. The Corporation, however,
shall use its best efforts to obtain all such approvals.
13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee's assigns and the legal representatives, heirs and legatees
of Optionee's estate.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
15. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan.
16. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify Collateral Therapeutics, Inc. (the "Corporation")
that I elect to purchase "___" shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $ "___" per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to
me under the Corporation's 1998 Stock Incentive Plan on "_______" , 19__ .
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price for any Purchased Shares in which I am vested at the time of exercise of
the Option.
_________, 20___.
Date
---------------------------------------
Optionee
Address:
-------------------------------
---------------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
---------------------------------------
Address to which certificate
is to be sent, if different
from address above:
---------------------------------------
---------------------------------------
Social Security Number: ---------------------------------------
<PAGE>
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Automatic Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or
(iv) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
D. COMMON STOCK shall mean shares of the Corporation's common stock.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. CORPORATION shall mean Collateral Therapeutics, Inc., a Delaware
corporation.
<PAGE>
G. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 10 of the Agreement.
H. EXERCISE PRICE shall mean the exercise price per share as specified
in the Grant Notice.
I. EXPIRATION DATE shall mean the date on which the option expires
as specified in the Grant Notice.
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as the
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
which serves as the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
K. GRANT DATE shall mean the date of grant of the option as specified
in the Grant Notice.
L. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock
Option accompanying the Agreement, pursuant to which Optionee has been informed
of the basic terms of the option evidenced hereby.
M. HOSTILE TAKEOVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
<PAGE>
N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
O. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
P. NOTICE OF EXERCISE shall mean the notice of exercise in the form of
Exhibit I.
Q. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option.
R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
S. PERMANENT DISABILITY shall mean the inability of Optionee to perform
his or her usual duties as a member of the Board by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
T. PLAN shall mean the Corporation's 1998 Stock Incentive Plan.
U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which grants the Corporation the
right to repurchase, at the Exercise Price, any and all unvested Option Shares
held by Optionee at the time of Optionee's cessation of Board service and which
precludes the sale, transfer or other disposition of any purchased Option Shares
while those shares are unvested and subject to such repurchase right.
V. STOCK EXCHANGE shall mean the American Stock Exchange or the New
York Stock Exchange.
W. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting the
Hostile Take-Over.
X. VESTING SCHEDULE shall mean the vesting schedule specified in the
Grant Notice, pursuant to which the Option Shares will vest in one or more
installments over the Optionee's period of Board service, subject to
acceleration in accordance with the provisions of the Agreement.
<PAGE>
EXHIBIT 10.49
COLLATERAL THERAPEUTICS, INC.
1998 STOCK INCENTIVE PLAN
AUTOMATIC OPTION GRANT
FOR NON-EMPLOYEE BOARD MEMBERS
(IMMEDIATELY EXERCISABLE
SUBJECT TO REPURCHASE RIGHT)
STOCK PURCHASE AGREEMENT
FOR NON-EMPLOYEE BOARD MEMBERS
THIS AGREEMENT is made as of this _______ day of ______________,
20____, by and among Collateral Therapeutics, Inc., a Delaware corporation (the
"Corporation"), and ________________, the holder of a stock option (the
"Optionee") granted as an Automatic Option Grant for Non-Employee Board Members
under the Corporation's 1998 Stock Incentive Plan and __________________, the
Optionee's spouse (if any). Grants under the Automatic Option Grant program are
immediately exercisable for all option shares but unvested shares are subject to
Repurchase Rights of the Corporation.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases _____________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock") pursuant
to that certain option ("Option") granted Optionee on _____________, 19___
("Grant Date") to purchase up to ____________ shares of the Common Stock ("Total
Purchasable Shares") under the Corporation's 1998 Stock Incentive Plan (the
"Plan") at an option price of $__________ per share ("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement to
the Corporate Secretary of the Corporation, Optionee shall pay the Option Price
for the Purchased Shares in accordance with the provisions of the agreement
between the Corporation and Optionee evidencing the Option (the "Option
Agreement") and shall deliver whatever additional documents may be required by
the Option Agreement as a condition for exercise, together with a duly-executed
blank Assignment Separate from Certificate (in the form attached hereto as
Exhibit A) with respect to the Purchased Shares.
1.3 UNVESTED SHARES. Unvested Shares (as defined in paragraph 4.1
below) will be held in book form by the Corporation's transfer agent.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation
actually exercises its Repurchase Right under Article IV, Optionee (or any
successor in interest) shall have all the rights of a shareholder (including
voting and dividend rights) with respect to the Purchased Shares, subject,
however, to the transfer restrictions of Article III.
<PAGE>
II. SPECIAL TAX ELECTION
2.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A
NON-STATUTORY STOCK OPTION. The Purchased Shares are acquired hereunder pursuant
to the exercise of A NON-STATUTORY STOCK OPTION. The Optionee understands that
under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"),
the excess of the fair market value of the Purchased Shares on the date any
forfeiture restrictions applicable to such shares lapse over the Option Price
paid for such shares will be reportable as ordinary income on such lapse date.
For this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right
provided under Article IV of this Agreement. Optionee understands that he/she
may elect under Section 83(b) of the Code to be taxed at the time the Purchased
Shares are acquired hereunder, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be filed
with the Internal Revenue Service within thirty (30) days after the date of this
Agreement. Even if the fair market value of the Purchased Shares at the date of
this Agreement equals the Option Price paid (and thus no tax is payable), the
election must be made to avoid adverse tax consequences in the future.
2.2 A form for making an election under Section 83(b) is attached
as EXHIBIT B hereto. Optionee understands that failure to make this filing
within the thirty (30)-day period may result in the recognition of ordinary
income by the Optionee as the forfeiture restrictions lapse. OPTIONEE
ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE
REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER
BEHALF. This filing should be made by registered or certified mail, return
receipt requested, and Optionee must retain two (2) copies of the completed form
for filing with his or her State and Federal tax returns for the current tax
year and an additional copy for his or her records.
III. TRANSFER RESTRICTIONS
3.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign,
encumber or otherwise dispose of any of the Purchased Shares which are subject
to the Corporation's Repurchase Right under Article IV. Such restriction on
transfer, however, shall not be applicable to (i) a gratuitous transfer of the
Purchased Shares made to the Optionee's spouse or issue, including adopted
children, or to a trust for the exclusive benefit of the Optionee or the
Optionee's spouse or issue, PROVIDED AND ONLY IF the Optionee obtains the
Corporation's prior written consent to such transfer, (ii) a transfer of title
to the Purchased Shares effected pursuant to the Optionee's will or the laws of
intestate succession or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by the Optionee in
connection with the acquisition of the Purchased Shares.
3.2 TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of one of the
permitted transfers specified in paragraph 3.1 must, as a condition precedent to
the validity of such transfer, acknowledge in writing to the Corporation that
such person is bound by the provisions of this Agreement and that
2.
<PAGE>
the transferred shares are subject to the Corporation's Repurchase Right to the
same extent such shares would be so subject if retained by the Optionee.
3.3 DEFINITION OF OWNER. For purposes of Articles III and IV of
this Agreement, the term "Owner" shall include the Optionee and all subsequent
holders of the Purchased Shares who derive their chain of ownership through a
permitted transfer from the Optionee in accordance with paragraph 3.1.
IV. REPURCHASE RIGHT
4.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Option Price all or (at the discretion of the
Corporation and with the consent of the Optionee) any portion of the Purchased
Shares in which the Optionee has not acquired a vested interest in accordance
with the vesting provisions of paragraph 4.3 (such shares to be hereinafter
called the "Unvested Shares"). For purposes of this Agreement, the Optionee
shall be deemed to remain in Service for so long as the Optionee continues to
render periodic services to the Corporation or any parent or subsidiary
corporation, whether as an employee, a non-employee member of the board of
directors, or an independent contractor or consultant.
4.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to the Owner of the Unvested Shares
prior to the expiration of the applicable sixty (60)-day period specified in
paragraph 4.1. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of notice. The Corporation
shall, concurrently with the transfer of the Unvested Shares to the Corporation
on the Corporation's books, pay to Owner in cash or cash equivalents (including
the cancellation of any purchase-money indebtedness), an amount equal to the
Option Price previously paid for the Unvested Shares which are to be
repurchased.
4.3 TERMINATION OF THE REPURCHASE RIGHT.
A. The Repurchase Right shall terminate with respect to any
Unvested Shares for which it is not timely exercised under paragraph 4.2.
B. The Repurchase Right shall terminate, and cease to be
exercisable, with respect to any and all Purchased Shares in which the Optionee
vests in accordance with the vesting schedule specified in the Grant Notice.
C. The Repurchase Right shall terminate upon the consummation
of one of the following transactions unless expressly assigned by the
Corporation to its successor upon the occurrence of any one or more of the
following transactions:
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
3.
<PAGE>
(ii) a sale, transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) any transaction (including a merger)
through or by means of which a majority of the Corporation's
outstanding voting securities are transferred to a person or persons
other than those who held such securities immediately prior to the
merger.
For purposes of this Section, the Corporation shall be treated as a new
corporation following a transaction described in subparagraph (iii) above and
the Repurchase Right hereunder shall terminate absent an express assignment of
such right.
4.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that the Optionee is a party to one or more other
Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which the Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which the Optionee would otherwise at the time
be vested, in accordance with the vesting provisions of paragraph 4.3, had all
the Purchased Shares been acquired exclusively under this Agreement.
4.5 FRACTIONAL SHARES. No fractional shares shall be repurchased
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 4.3) at
the time the Optionee ceases Service, then such fractional share shall be added
to any fractional share in which the Optionee is at such time vested in order to
make one whole vested share no longer subject to the Repurchase Right.
4.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of
any stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which is
by reason of any such transaction distributed with respect to the Purchased
Shares shall be immediately subject to the Repurchase Right, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number of Purchased Shares and Total Purchasable Shares hereunder
and to the price per share to be paid upon the exercise of the Repurchase Right
in order to reflect the effect of any such transaction upon the Corporation's
capital structure; PROVIDED, however, that the aggregate purchase price shall
remain the same.
V. GENERAL PROVISIONS
5.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article IV to any person or entity selected by the Corporation's Board of
Directors, including (without limitation) one or more shareholders of the
Corporation.
If the assignee of the Repurchase Right is other than a one
hundred percent (100%) owned subsidiary corporation of the Corporation or the
parent corporation owning one hundred percent (100%) of the Corporation, then
such assignee must make a cash payment to the
4.
<PAGE>
Corporation, upon the assignment of the Repurchase Right, in an amount equal to
the excess (if any) of (i) the fair market value of the Unvested Shares at the
time subject to the assigned Repurchase Right over (ii) the aggregate repurchase
price payable for the Unvested Shares thereunder.
5.2 DEFINITIONS.
(a) Except as otherwise provided herein, capitalized
terms shall have the meanings assigned to them in the Plan.
(b) For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and
subsidiary corporations of the Corporation:
(i) Any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the
Corporation shall be considered to be a parent corporation of the
Corporation, provided each such corporation in the unbroken chain
(other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the
other corporations in such chain.
(ii) Each corporation (other than the
Corporation) in an unbroken chain of corporations beginning with
the Corporation shall be considered to be a subsidiary of the
Corporation, provided each such corporation (other than the last
corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the
other corporations in such chain.
5.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon the Optionee any right to continue in the
Service of the Corporation (or any parent or subsidiary corporation of the
Corporation employing or retaining Optionee) for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any parent or subsidiary corporation of the Corporation employing or
retaining Optionee) or the Optionee, which rights are hereby expressly reserved
by each, to terminate the Optionee's Service at any time for any reason
whatsoever, with or without cause.
5.4 NOTICES. Any notice required in connection with the Repurchase
Right or the disposition of any Purchased Shares covered thereby shall be given
in writing and shall be deemed effective upon personal delivery or upon deposit
in the United States mail, registered or certified, postage prepaid and
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph
5.4 to all other parties to this Agreement.
5.5 NO WAIVER. The failure of the Corporation (or its assignees)
in any instance to exercise the Repurchase Right granted under Article IV shall
not constitute a waiver
5.
<PAGE>
of any other repurchase rights that may subsequently arise under the provisions
of this Agreement or any other agreement between the Corporation and the
Optionee or the Optionee's spouse. No waiver of any breach or condition of this
Agreement shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.
5.6 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Purchased Shares to be repurchased
in accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement), and such
shares shall be deemed purchased in accordance with the applicable provisions
hereof and the Corporation (or its assignees) shall be deemed the owner and
holder of such shares.
VI. MISCELLANEOUS PROVISIONS
6.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
in its judgment deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either the Optionee or the
Purchased Shares pursuant to the express provisions of this Agreement.
6.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the express terms and provisions
of the Plan.
6.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State without resort
to that State's conflict of laws rules.
6.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
6.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and the Optionee and the Optionee's legal representatives, heirs,
legatees, distributees, assigns and transferees by operation of law, whether or
not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms and conditions hereof.
6.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority to
do and perform every act
6.
<PAGE>
necessary and proper to be done in the exercise of any of the foregoing powers
as fully as he or she might or could do if personally present, with full power
of substitution and revocation, hereby ratifying and confirming all that
Optionee shall lawfully do and cause to be done by virtue of this power of
attorney.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first indicated above.
COLLATERAL THERAPEUTICS, INC.
By:
------------------------------
Title:
---------------------------
OPTIONEE(1)
----------------------
Address:
-------------------------
The undersigned spouse of Optionee has read and hereby approves
the foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement, including
(specifically) the right of the Corporation (or its assignees) to purchase any
and all interest or right the undersigned may otherwise have in such shares
pursuant to community property laws or other marital property rights.
---------------------------------
OPTIONEE'S SPOUSE
Address:
-------------------------
---------------------------------
- --------
1 I understand that the Section 83(b) election that is attached hereto
may be filed in connection with this Stock Purchase Agreement. As set forth in
Article II, I understand that I, and NOT the Corporation, will be responsible
for completing the form and filing the election with the appropriate office of
the Federal and State tax authorities and that if such filing is not completed
within thirty (30) days after the date of this Agreement, I will not be entitled
to the tax benefits provided by Section 83(b).
7.
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
AND POWER OF ATTORNEY
FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELLS, ASSIGNS AND
TRANSFERS UNTO COLLATERAL THERAPEUTICS, INC. (THE "CORPORATION"), ______________
SHARES OF THE COMMON STOCK OF THE CORPORATION ACQUIRED THROUGH EXERCISE OF AN
OPTION GRANTED UNDER THE NON-EMPLOYEE DIRECTOR AUTOMATIC OPTION GRANT PROGRAM,
WHICH SHARES ARE STANDING IN HIS/HER NAME ON THE BOOKS OF THE CORPORATION
REPRESENTED BY CERTIFICATE NO. ____________ AND DOES HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT ______________ AS ATTORNEY TO TRANSFER THE SAID STOCK ON
THE BOOKS OF THE CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED:
---------------------
NAME:
------------------------------
SIGNATURE:
------------------------------
INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE DATE, NAME AND
SIGNATURE LINE. THE PURPOSE OF THIS ASSIGNMENT IS TO ENABLE THE CORPORATION TO
EXERCISE ITS REPURCHASE RIGHT SET FORTH IN THE AGREEMENT WITHOUT REQUIRING
ADDITIONAL SIGNATURES ON THE PART OF THE OPTIONEE.
A-1
<PAGE>
REPURCHASE RIGHTS
EXHIBIT B
SECTION 83(b) TAX ELECTION
THIS STATEMENT IS BEING MADE UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE,
PURSUANT TO TREAS. REG. SECTION 1.83-2.
(1) THE TAXPAYER WHO PERFORMED THE SERVICES IS:
NAME:
ADDRESS:
TAXPAYER IDENT. NO.:
(2) THE PROPERTY WITH RESPECT TO WHICH THE ELECTION IS BEING MADE IS
_________ SHARES OF THE COMMON STOCK OF COLLATERAL THERAPEUTICS, INC.
(3) THE PROPERTY WAS ISSUED ON _______________ , 20__.
(4) THE TAXABLE YEAR IN WHICH THE ELECTION IS BEING MADE IS THE CALENDAR
YEAR 20__ .
(5) THE PROPERTY IS SUBJECT TO A REPURCHASE RIGHT PURSUANT TO WHICH THE
ISSUER HAS THE RIGHT TO ACQUIRE THE PROPERTY AT THE ORIGINAL PURCHASE
PRICE IF FOR ANY REASON TAXPAYER'S SERVICE TO THE ISSUER IS TERMINATED.
THE ISSUER'S REPURCHASE RIGHT WITH RESPECT TO THE PROPERTY LAPSES IN A
SERIES OF ANNUAL INSTALLMENTS OVER A "_____" YEAR PERIOD BEGINNING ON
________,19__ AND ENDING ON ________, 20__.
(6) THE FAIR MARKET VALUE AT THE TIME OF TRANSFER (DETERMINED WITHOUT
REGARD TO ANY RESTRICTION OTHER THAN A RESTRICTION WHICH BY ITS TERMS
WILL NEVER LAPSE) IS $______ PER SHARE.
(7) THE AMOUNT PAID FOR SUCH PROPERTY IS $__________ PER SHARE.
(8) A COPY OF THIS STATEMENT WAS FURNISHED TO COLLATERAL THERAPEUTICS, INC.
FOR WHOM TAXPAYER RENDERED THE SERVICES UNDERLYING THE TRANSFER OF
PROPERTY.
(9) THIS STATEMENT IS EXECUTED AS OF: ____________.
_______________________________ _________________________________
SPOUSE (IF ANY) TAXPAYER
THIS FORM MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH
TAXPAYER FILES HIS/HER FEDERAL INCOME TAX RETURNS. THE FILING MUST BE MADE
WITHIN 30 DAYS AFTER THE EXECUTION DATE OF THE STOCK PURCHASE AGREEMENT.
B-1
<PAGE>
EXHIBIT 10.50
CONFIDENTIAL
March 31, 1999
Ms. Sandra Woodruff
Executive Director
Veterans Medical Research Foundation
VA Medical Center (151A)
3350 La Jolla Village Drive
San Diego, CA 92161
Dear Sandra:
Collateral Therapeutics, Inc. (hereinafter "CTI") proposes that this letter be
the written agreement which sets forth the understanding and obligations of the
parties regarding the research conducted by Dr. Kirk Hammond in the field of
cardiovascular disease (hereinafter, the "Studies").
1. Kirk Hammond, M.D. (hereinafter "Investigator") and the Veterans
Medical Research Foundation (hereinafter "VMRF" or the "Foundation")
agree to utilize their best efforts to conduct the Studies. Further
details concerning the Studies will be discussed in confidence by the
Investigator with CTI representatives. If during the term of this
agreement, the Investigator shall cease to conduct the studies,
and/or no longer be employed by the Veterns' Affairs Healthcare
System, then VMRF shall promptly so notify CTI and CTI shall have
the option to terminate the funding of the studies. CTI will
promptly advise VMRF in writing if CTI so elects.
2. The Investigator agrees to comply with the federal regulations relating
to the Animal Welfare Act (7. U.S.C. 2131, et seq) and the United
States Department of Agriculture regulations as set forth in 9 C.F.R.
parts 1, 2, and 3.
3. The Investigator will render periodic confidential reports as may be
requested to CTI.
4. In preparation for and during the course of these Studies, it may be
necessary for CTI to disclose to the Investigator or to VMRF certain
technical and business information; all such information, as well as
the results of the research, subject to the restriction in paragraph #5
of this agreement, is considered to be highly confidential by CTI. It
is understood that VMRF may disclose the amount of this research
funding in any routine disclosure as required by VMRF policy, but shall
not use or disclose the subject matter of the research. The
Investigator and the Foundation agree to take all reasonable
precautions to prevent disclosure of this and other
<PAGE>
Veterans Medical Research Foundation
March 19, 1999
Page 2
confidential information to others and to not use confidential
information without the prior express written consent of CTI. These
restrictions upon disclosure of said information shall extend beyond
the term of this contract for a period of ten (10) years, but shall
cease to apply as to any specific portion of the information which is
or becomes available to the public other than by the Investigator or
the Foundation's fault.
5. The text of any oral or written disclosure of the results of the
Studies shall be submitted to CTI at least sixty (60) days prior to any
and all such disclosures. The Investigator and the Foundation shall
consider any suggestions from CTI concerning said disclosure, but are
not bound to incorporate such suggestions in any oral or written
publications. CTI may request addition of a sponsor's representative to
authorship on documents submitted for publication. The Investigator and
the Foundation agree to delay any such disclosure for up to six (6)
months following notification of CTI, at CTI's request, to allow for
completion of development and filing of patent applications.
6. The Investigator and VMRF agree to disclose promptly and fully to an
authorized representative of CTI all ideas, developments and
inventions, whether or not patentable, conceived or reduced to practice
by the Investigator and/or VMRF as a result of the Studies provided for
herein. All of such ideas, developments and inventions shall be the
property of CTI. Accordingly, the Investigator and VMRF agree to assign
outright to CTI the entire right, title and interest, both in the
United States and abroad, to such ideas, developments and inventions
and any resulting patent applications and patents, without payment
other than the fees provided for herein. The Investigator and VMRF
further agree to execute any and all documents and take such other
steps which CTI determines are necessary or convenient to fully
implement its proprietary rights in such ideas, developments and
inventions, such as, including but not limited to executing assignment
documents, filing and obtaining patents, and fully cooperating in the
prosecution of such property rights, but at no expense to them. CTI
will have the above-mentioned patent documents drafted, prosecuted and
maintained at its own expense. The Investigator and VMRF warrant that
it has appropriate ownership rights in such ideas, developments and
inventions to carry out its obligations under this paragraph. Both
parties acknowledge that in so far as U.S. government facilities or
resources are utilized in this work, the U.S. Government may have
rights in any invention and may choose to exercise these rights.
7. Both parties also acknowledge that the Department of Veterans Affairs
has informed the VMRF that VMRF has waived all patent rights that may
develop in connection with this agreement.
<PAGE>
Veterans Medical Research Foundation
March 19, 1999
Page 3
8. CTI shall have the right to use the results and data of the Studies in
any manner deemed appropriate to CTI's business interests. Such uses
may include but are not limited to, disclosure as may be useful to meet
legal and business obligations, such as to support patent applications,
both foreign and domestic, or satisfy the requirements of any
government agency. In the event that work resulting from the Studies is
published in the scientific literature by CTI, acknowledgement will be
made to the Investigator and the Department of Veterans Affairs in the
accepted style, as appropriate. CTI will not use the name of the
Investigator or VMRF for advertising, other commercial purposes, in
publications or otherwise without appropriate written permission,
unless required by law or government regulations. CTI agrees that the
investigator shall have priority publication rights over data generated
from these studies subject to paragraph #5.
9. In consideration for the Studies, during the term of this agreement CTI
agrees to pay VMRF direct reimbursement for all expenditures made by
VMRF in connection with the Studies as directed by the Investigator,
and pay reimbursement for certain direct costs based on the formula as
set forth below. In this regard, CTI agrees to pay VMRF the following:
(i) a $5,000 primary monthly payment (hereafter the "Primary Monthly
Payment"); (ii) a supplemental monthly payment (hereafter the
"Supplemental Monthly Payment") equal to all other expenditures made by
VMRF in connection with the Studies during each month of the term of
this agreement in excess of the Primary Monthly Payment; and (iii) a
monthly payment covering the allocable indirect costs associated with
all amounts expended by VMRF for the Studies which shall be computed by
multiplying the sum of the Primary Monthly Payment and the Supplemental
Payment by a 40% indirect overhead factor.
The amount of the Supplemental Monthly Payment will be computed based
on the overall level of expenditures by VMRF for the Studies each
month, less the Primary Monthly Payment. VMRF shall agree to provide
CTI with sufficient information for it to compute the Supplemental
Monthly Payment. Following the term of the agreement, VMRF shall agree
to promptly return any amounts advanced to VMRF by CTI for which there
is not any corresponding expenditure in connection with the Studies.
CTI shall have the right to review any and all financial records of
VMRF relating solely to these Studies on a quarterly basis, to
determine the sufficiency of the Supplemental Payment. Annually VMRF
shall provide CTI with a financial statement and account reconciliation
covering all amounts expended by VMRF for the Studies during the term
of this agreement.
<PAGE>
Veterans Medical Research Foundation
March 19, 1999
Page 4
10. This contract will become effective on March 31, 1999, and will
terminate three years from that date unless otherwise extended by
mutual consent of CTI and the Foundation and Investigator, evidenced
by written agreement.
11. The parties agree to take all other action necessary to effect the
rights of the parties herein.
12. Only VMRF or CTI, or an assignee or affiliate of VMRF or CTI, shall
have rights to enforce any obligation under this Agreement. No other
persons or entities shall be deemed an intended beneficiary under this
Agreement.
13. The parties acknowledge that Dr. Robert L. Engler may have a conflict
of interest regarding this agreement and Dr. J. Parthemore shall serve
in his place for VMRF on all matters relating to this agreement.
14. If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted if possible rather than voided in order to
achieve the intent of the parties to the greatest extent possible. In
any event, other provisions of the Agreement shall be deemed valid and
enforceable to the greatest extent possible.
If the terms of this agreement meet with the approval of the Veterans Medical
Research Foundation, please sign and date two copies and return one to CTI at
your earliest convenience.
Most Sincerely,
COLLATERAL THERAPEUTICS, INC.
/s/ Christopher J. Reinhard
- -------------------------------
Christopher J. Reinhard
Chief Financial and Operating Officer
ACCEPTED AND AGREED TO:
VETERANS MEDICAL RESEARCH FOUNDATION
/s/ Sandra Woodruff 4/12/99
- -------------------------------- ---------------------------------
Sandra Woodruff Date
PRINCIPLE INVESTIGATOR
/s/ Dr. H. Kirk Hammond 4/15/99
- -------------------------------- ---------------------------------
Dr. H. Kirk Hammond Date
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-57741 and Form S-3 No. 333-85171) of our report dated
February 4, 2000, with respect to the financial statements of Collateral
Therapeutics, Inc., included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
-----------------------------------
Ernst & Young LLP
San Diego, California
March 24, 2000
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<PAGE>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<SECURITIES> 21,730,478
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0
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<COMMON> 12,919
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