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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE
TRANSITION PERIOD FROM ________________ TO ________________.
COMMISSION FILE NUMBER 0-20726
CORTECH, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0894091
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
6850 N. BROADWAY, SUITE G 80221
DENVER, COLORADO (Zip Code)
(Address of principal
executive offices)
(303) 650-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 nonaffiliates of the
registrant, based upon the closing price on the Nasdaq National Market, was
approximately $7.9 million as of February 27, 1998.
The number of shares of Common Stock outstanding as of February 27, 1998, was
18,523,918.
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TABLE OF CONTENTS
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PART I. . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . 11
PART II. . . . . . . . . . . . . . . . . . 12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART III . . . . . . . . . . . . . . . . . 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . 27
ITEM 11. EXECUTIVE COMPENSATION.. . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 34
PART IV. . . . . . . . . . . . . . . . . . 35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. . . . 35
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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PART I
ITEM 1. BUSINESS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. FOR A DISCUSSION OF CERTAIN FACTORS
WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS, SEE "RISK FACTORS"
AT THE END OF ITEM 7 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION") OF THIS ANNUAL REPORT ON FORM 10-K, AS
WELL AS FACTORS NOTED IN THE BALANCE OF ITEM 7, THIS ITEM 1 ("BUSINESS"), ITEM
3 ("LEGAL PROCEEDINGS), ITEM 5 ("MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS") AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. THESE
FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS OF THE DATE OF
THE FILING OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY DISCLAIMS,
HOWEVER, ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Cortech, Inc. (the "Company" or "Cortech") is a biopharmaceutical company
whose principal focus has been the discovery and development of novel
therapeutics for the treatment of inflammatory disorders. Specifically, Cortech
has directed its research and development efforts toward protease inhibitors and
bradykinin antagonists. These efforts have produced certain intellectual
property rights. See "-- Cortech's Work with Protease Inhibitors" and
"-- Cortech's Work with Bradykinin Antagonists".
In response to disappointing test results and its loss of collaborative
partner support, Cortech has implemented a series of reductions in force over
the past three-and-one-half years which has reduced the number of full-time,
regular employees from more than 200 to fewer than 15 and effectively
discontinued all internal efforts to advance its research and development
activities. In addition, Cortech is currently decommissioning its
laboratories, has sold most of its scientific and technical equipment and,
unless the Merger (see discussion below) is implemented and BioStar, Inc.
("BioStar") opts to retain such assets, plans to sell most of its office
furniture and equipment and, where possible, its leasehold improvements.
As a result of these actions, Cortech no longer has the staff or operative
facilities required to recommence internal research and development activities.
Cortech has retained a core group of professionals who, among other things, are
actively engaged in ongoing efforts to realize appropriate value from Cortech's
tangible and intangible assets. It is uncertain, however, whether Cortech will
be able to retain employees with sufficient knowledge and experience to realize
appropriate value from Cortech's intangible assets. In light of the above,
Cortech's management has focused on evaluating various strategic alternatives.
As a result, the Company entered into an Agreement and Plan of Merger and
Reorganization dated December 22, 1997 (the "Reorganization Agreement") with
BioStar, Inc. ("BioStar") of Boulder, Colorado.
BioStar develops, manufactures and markets point-of-care diagnostic tests
using its proprietary, highly sensitive, thin film technologies. BioStar's
current products employ its Optical Immuno Assay (OIA-Registered Trademark-)
technology, a thin film, platform technology developed for the rapid detection
of a variety of medical conditions. Pursuant to the Reorganization Agreement,
the Company would issue up to 28,500,000 shares of its common stock ("Common
Stock") to BioStar's stockholders in exchange for all of the issued and
outstanding capital stock of BioStar, and a wholly owned subsidiary of the
Company would merge with and into BioStar (the "Merger"), making BioStar a
wholly owned subsidiary of the Company. The Company anticipates that the
Merger, which is subject to the approval of the Company's and BioStar's
stockholders as well as certain other conditions, would be completed in the
second quarter of 1998. In connection with the Merger, the Company filed a
Registration Statement on Form S-4 (which includes a Joint Proxy
Statement/Prospectus) with the Securities and Exchange Commission on February
17, 1998 (File No. 333-46445).
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The Company was incorporated in 1982 in Colorado and reincorporated in
Delaware in August 1991. Cortech has incurred operating losses in each year
since its date of inception. For the fiscal year ended December 31, 1997,
Cortech had a net loss of $6.8 million and through such date has an
accumulated deficit of $84.6 million. The Company's offices are located at
6850 N. Broadway, Suite G, Denver, Colorado 80221. Its telephone number is
(303) 650-1200.
CORTECH'S WORK WITH PROTEASE INHIBITORS
BACKGROUND. Proteases are enzymes that cleave peptide bonds within
proteins. Since proteins are one of the fundamental building blocks of
biological systems, proteases are among the most important regulators of
biological activity that have been described. As a result of an increased
understanding of the causative role proteases play in a number of disease
processes, protease inhibition has become a very important area of drug
discovery. Cortech's work has focused primarily on the discovery and synthesis
of inhibitors of human neutrophil elastase ("HNE"), a serine protease capable of
degrading a variety of connective tissue proteins, most notably elastin. Elastin
is found in the lungs, vasculature and skin, and therapy directed against HNE
may have therapeutic application in acute and chronic respiratory,
cardiovascular and skin disorders. As a result of its research and development
efforts in this field, Cortech has developed proprietary technology which it has
demonstrated has the potential to be applied to the discovery and synthesis of a
broader range of therapeutically interesting protease inhibitors.
During inflammation, neutrophils are activated and migrate to sites of
inflammation to help kill microorganisms and eliminate inflammatory debris.
Neutrophils release HNE which disrupts the lining of blood vessels (endothelium)
and allows the neutrophils to reach their target destination. Because HNE is so
potent at digesting protein and thereby damaging tissue, the body possesses a
number of defenses against excessive HNE release, limiting its effect in minor
inflammatory states. In certain severe inflammatory conditions, however, HNE
production overwhelms the body's natural defenses, resulting in tissue
destruction. High levels of HNE release have also been found in cases of organ
dysfunction, such as those associated with acute respiratory distress syndrome
("ARDS"). Further, HNE appears to play a significant role in a number of chronic
diseases marked by tissue destruction, including cystic fibrosis and emphysema.
HNE also appears to be involved in less severe forms of tissue destruction, such
as rheumatoid arthritis, psoriasis and periodontal disease.
CE-1037 -- HNE INHIBITOR FOR PARENTERAL ADMINISTRATION. Cortech's early
work in the area of protease inhibition led to the establishment in 1987 of a
strategic partnering relationship with Marion Laboratories, Inc. ("Marion")
under which Cortech granted to Marion worldwide rights to develop, manufacture
and market any products resulting from Cortech's HNE inhibitor program, subject
to a royalty payable to Cortech based on net sales, and Marion substantially
funded the development of such products. Although certain rights were granted
back to Cortech in 1993 and 1996, this relationship continued in force through
subsequent merger transactions engaged in by Marion (and its successor) which
brought about the formation of Marion Merrill Dow Inc., and subsequently Hoechst
Marion Roussel, Inc. ("HMRI"). Cortech's work with HMRI (references to HMRI
hereafter include, as applicable in context, its predecessors) pursued discovery
and development of a parenterally administered inhibitor of HNE for use in the
treatment of ARDS and cystic fibrosis. As a result of this work, Cortech's
scientists produced a lead compound, designated "CE-1037", which Cortech
ultimately advanced, with HMRI's support, through Phase I and into Phase II
clinical trials.
HMRI continued to fund Cortech's development of CE-1037 (ultimately
providing $14.1 million in funding) until December 1996 when HMRI terminated its
agreement with Cortech and returned all rights to CE-1037 to Cortech. HMRI
terminated the agreement following an analysis of the results from two
preliminary, preclinical, genotoxicity experiments which suggested that CE-1037
might have genotoxic properties.
When the disappointing results of the genotoxicity experiments became
available, a small pilot study in ARDS was underway. Cortech and HMRI decided
to suspend the clinical trial in order to evaluate the genotoxicity results
and conduct a repeat experiment, if warranted. Following HMRI's termination
of its agreement with Cortech, Cortech undertook a repeat (but more
comprehensive) test which was conducted at an independent contract facility.
The results of this repeat test recently became available and showed no
genotoxic effects of CE-1037. In the
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meantime, Cortech has also evaluated data from the small cohort of patients
in the ARDS trial, and such data suggest that CE-1037 may deserve further
study in this and other acute respiratory indications. Notwithstanding these
tentative findings, there can be no assurance that CE-1037 would be proven
safe and efficacious in clinical trials, that the regulatory approvals
necessary for its commercialization (if it is ever advanced to this stage)
would be obtained or that it could be manufactured at acceptable costs and in
appropriate quantity. Furthermore, Cortech does not intend to undertake
further development of CE-1037 without a collaborative partner. Although
Cortech is currently seeking to secure such a partner or purchaser of
Cortech's related technology rights, there can be no assurance that Cortech
will be able to establish such a collaboration or effect any transaction
involving a sale of technology rights on favorable terms, if at all.
HNE INHIBITORS FOR ORAL ADMINISTRATION. HNE has been implicated in a number
of chronic diseases of the respiratory tract including chronic obstructive
pulmonary disease and emphysema. Optimally, these conditions would require a
compound that could be administered orally for a prolonged period of time. Thus,
Cortech's research and development in the area of elastase inhibition was
expanded to include compounds suitable for oral administration.
In March 1995, Cortech signed a three year research agreement with Ono
Pharmaceutical Co. Ltd., ("Ono") of Osaka, Japan to develop an orally active HNE
inhibitor using technology developed by Cortech prior to initiation of the
collaboration. Under the terms of the agreement, Ono substantially funded
Cortech's research on oral, HNE inhibitors ultimately providing a total of
approximately $10.0 million in funding from 1995-1997. The agreement also
granted Ono an exclusive, royalty-free license to make, use and sell certain
resulting products in Japan, Korea, Taiwan and China (the "Ono Territory"), with
Cortech retaining all rights outside of the Ono Territory.
In November 1996, Cortech reallocated some of its scientists to the oral
elastase project in light of the progress made over the preceding 18 months.
In return, Ono accelerated certain payments due under its agreement with
Cortech. In late 1996, disappointments from Cortech's collaborations with HMRI
on CE-1037 and SmithKline Beecham on Bradycor-TM- (see "-- Cortech's Work with
Protease Inhibitors -- CE-1037 HNE Inhibitor for Parenteral Administration"
and "--Cortech's Work with Bradykinin Antagonists") increased the pressure on
Cortech to conserve cash. Subsequently, in April 1997, Cortech and Ono amended
their agreement to transfer all responsibilities for research activities to
Ono during the final six months of the collaborative project (from September
15, 1997 through March 14, 1998). During the third quarter of 1997, Cortech's
remaining research staff focused their efforts primarily on elastase
inhibition in order to fulfill Cortech's responsibilities under its agreement
with Ono. On October 1, 1997, after fulfilling these responsibilities, Cortech
began to implement a further, corporate downsizing (to a staff of less than 15
full-time persons). Following the conclusion of the collaborative project on
March 14, 1998, Ono notified Cortech that Ono had selected a compound for
further evaluation (also indicating that Ono would further study the compound
prior to considering it for advancement to full development in the Ono
Territory). Although Cortech retains rights outside of the Ono Territory to
any compounds developed pursuant to the agreement with Ono, there can be no
assurance that any research and development efforts with respect to HNE
inhibitors (including the efforts of Ono) will prove successful, that any
potential product would be proven safe and efficacious in clinical trials,
that the regulatory approvals necessary for the commercialization of any
product (if any product is ever advanced to this stage) would be obtained or
that any product could be manufactured at acceptable costs and with
appropriate quantity. Cortech does not intend to undertake further development
of HNE inhibitors without a collaborative partner. Although Cortech is
currently seeking to secure such a partner or a purchaser of Cortech's related
technology rights, there can be no assurance that Cortech will be able to
establish such a collaboration or effect any transaction involving a sale of
technology rights on favorable terms, if at all.
OTHER PROTEASE TARGETS. As part of its protease inhibitor research efforts,
Cortech scientists synthesized and tested a number of compounds. Certain of
these compounds have been shown to have activity against other serine elastases,
such as proteinase-3 and endogenous vascular elastase. Serine elastases have
been shown to play an important role in vascular injury, and Cortech believes
that its portfolio of compounds may potentially provide useful therapeutic
interventions for certain acute and chronic vascular, skin and respiratory
diseases. A small, focused effort continues in this area through contractual
arrangements with selected experts at academic medical centers. Cortech has also
developed a proprietary technology which has the potential to be applied to the
discovery and synthesis of inhibitors of a broader range of therapeutically
interesting serine and cysteine proteases such as mast cell tryptase
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and picorna virus proteases, interleuken-1 beta converting enzyme, other
caspases involved in apoptosis and cell death and cathepsins B, K, L and S.
Notwithstanding these initial findings, there can be no assurance that any
of these compounds will be proven safe and efficacious in clinical trials, that
the regulatory approvals necessary for their commercialization (if any such
compounds are ever advanced to this stage) would be obtained or that they could
be manufactured at acceptable costs and with appropriate quantity. Furthermore,
Cortech does not intend to undertake further development of any of these
compounds without a collaborative partner. Although Cortech is currently seeking
to secure such a partner or purchaser of Cortech's related technology rights,
there can be no assurance that Cortech will be able to establish such a
collaboration or effect any transaction involving a sale of technology rights on
favorable terms, if at all.
CORTECH'S WORK WITH BRADYKININ ANTAGONISTS
BACKGROUND. Inflammation is the body's response to injury of any kind,
including injury caused by infections, immune responses or physical trauma.
Controlled inflammation is beneficial because it facilitates the clearance of
pathogens (disease-causing agents) and the repair of damaged tissue. However,
because inflammation is a comprehensive response involving numerous pathologic
mediators, the strength of the response often converts normal, controlled
inflammation into an abnormal, destructive process. When this occurs,
inflammation can cause acute or chronic disease, often accompanied by pain,
edema (swelling) or tissue destruction leading to organ failure and death in
severe cases.
Bradykinin is generated immediately following tissue injury or infection.
It is a pivotal inflammatory mediator, and its diverse effects include pain,
edema, vascular leak, and hypotension or low blood pressure that can lead to
shock, organ dysfunction and death. The body normally inactivates bradykinin
within seconds of its generation. However, in instances of severe injury,
bradykinin production outstrips the body's capacity to inactivate it, thereby
generating sustained inflammation, pain and edema. Existing preclinical and
clinical data continue to support the role of bradykinin as an important
mediator of inflammation, particularly in brain injury following trauma or acute
ischemia.
Cortech's efforts in connection with bradykinin antagonists have led to the
discovery and synthesis of bradykinin antagonist monomers, dimers and
heterodimers. The latter compounds link a bradykinin antagonist with an opioid
agonist to encompass the spectrum of pain and inflammation without central
nervous system penetration and its accompanying side effects. These heterodimers
may have therapeutic potential in the management of perioperative pain. In the
last two years, however, Cortech's efforts have focused on the development of
two of its bradykinin antagonists, Bradycor, a peptide dimer, and CP-0597, a
peptide monomer.
BRADYCOR-TM- (DELTIBANT OR CP-0127). Bradycor is Cortech's lead,
first-generation bradykinin antagonist which may potentially have therapeutic
application in the management of traumatic brain injury ("TBI"). The
rationale for its use in TBI is based on the important contribution of
inflammatory processes to the full expression of the injury. A number of
these inflammatory processes are mediated by bradykinin receptor mechanisms,
including neutrophil activation and migration, stimulation of vascular
endothelial cells and interactions with neuronal and non-neuronal cell
populations found within the brain parenchyma. Following brain injury, these
processes result in the production of inflammatory cytokines, endothelial
retraction, blood brain barrier disruption and neuronal death. Thus,
compounds such as Bradycor which can block these bradykinin mediated effects
may potentially be efficacious in ameliorating the inflammatory aspects of
TBI.
Until mid-1995, Cortech's work on Bradycor concentrated primarily on the
treatment of sepsis, but two Phase II clinical trials, completed in 1994 and
1995, failed to provide sufficient evidence of efficacy to warrant additional
development in that indication. Concurrent with the sepsis studies, Cortech also
undertook a small, pilot Phase II study in patients with large focal cerebral
contusions (a type of injury that represents a subset of the spectrum of TBI).
In that study, Bradycor had significant beneficial effects, compared with
placebo, on intracranial pressure, neurological status and the need for surgical
intervention. In addition, Bradycor was well tolerated and showed no clinically
significant adverse effects in these patients.
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In November 1995, Cortech entered into a worldwide product development
and license agreement with SmithKline Beecham ("SB") for the development of
Bradycor for the treatment of TBI and possibly stroke. Under the terms of this
agreement, SB undertook a multicenter, placebo-controlled, Phase II clinical
trial of Bradycor in patients with severe TBI (the "TBI Study"). Initial
results of the TBI Study, which became available in March 1997, failed to
demonstrate a statistically significant benefit of Bradycor on the primary
endpoint of intracranial pressure. Based on these results, SB and Cortech
agreed to discontinue the planned development of Bradycor. Moreover, SB,
after providing Cortech with $4.0 million in funding for the development of
Bradycor, terminated its agreement with Cortech.
Notwithstanding the initial results of the TBI Study, an analysis of
long-term functional outcome by the American Brain Injury Consortium, which
was completed during the third quarter of 1997, showed positive trends in
functional outcome for patients treated with Bradycor which were
statistically significant in the most severely injured patients. In addition,
patients treated with Bradycor in the TBI Study showed modest (but not
statistically significant) positive trends in intracranial pressure and the
requirement for other interventions to control intracranial pressure.
During the term of the agreement between SB and Cortech, SB also
conducted a number of preclinical and other early phase clinical studies to
broaden the profile of Bradycor. One of SB's preclinical studies in rats
yielded adverse findings which were inconsistent with the findings of
Cortech's toxicology program and not supported by the safety profile observed
in the clinic. These adverse findings led to the premature suspension of the
TBI Study with 133 patients available for analysis rather than the 160
patients planned. However, repeat rat studies failed to duplicate the
initially observed mortality or to provide an explanation for the adverse
findings. Furthermore, these results when considered in the context of the
entire body of preclinical and clinical data available on the compound remain
anomalous.
In the event that development efforts with respect to Bradycor are
continued, there can be no assurance that Bradycor would be proven safe and
efficacious in clinical trials, that the regulatory approvals necessary for
its commercialization (if Bradycor is ever advanced to this stage) would be
obtained or that it could be manufactured at acceptable costs and with
appropriate quantity. Cortech does not intend to undertake further
development of Bradycor without a collaborative partner. Although Cortech is
currently seeking to secure such a partner or a purchaser of Cortech's
related technology rights, there can be no assurance that Cortech will be
able to establish such a collaboration or effect any transaction involving a
sale of technology rights on favorable terms, if at all.
In February 1992, Cortech entered into a series of agreements with
CP-0127 Development Corporation ("CDC") that govern the development of
products utilizing Bradycor.
SECOND GENERATION BRADYKININ ANTAGONIST RESEARCH. Cortech has also
developed a series of peptide bradykinin antagonists that are 100 to 1,000
times more potent than Bradycor. Compared to Bradycor, these compounds have
longer durations of action IN VIVO and are expected to be less costly to
manufacture. Cortech has identified a lead compound, CP-0597, which has been
targeted for the treatment of acute ischemic stroke where inflammatory
consequences of the injury are felt to be similar to those following
traumatic injury. Acute ischemic stroke is the term applied when blood supply
to the brain is acutely compromised by the obstruction of an artery. This
obstruction leads to ischemia (insufficient blood flow and loss of oxygen) of
the brain tissue. As a result of the ischemia, there is neuronal death,
neurological impairment and death of brain tissue. The microvasculature in
the brain is acutely sensitive to ischemia and reacts with endothelial
swelling and changes in microvascular tone which further compromise blood
supply. There is blood brain barrier disruption in the ischemic territory and
an inflammatory response both at the vascular and neuronal levels.
Results from preclinical experiments demonstrating the neuroprotective
effects of CP-0597 were reported in the July 1997 issue of STROKE. These
results indicate that CP-0597 may have significant therapeutic potential in
the treatment of stroke. Accordingly, Cortech has continued a small highly
focused research effort with that compound through contractual arrangements
with academic institutions. Cortech does not, however, intend to undertake
further development of CP-0597 without a collaborative partner. Although
Cortech is currently seeking to secure such a partner to advance CP-0597
through remaining preclinical and clinical development and to help
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commercialize any drug(s) which may result or, alternatively, to sell
Cortech's related technology rights, there can be no assurance that Cortech
will be able to establish such a partnership or effect any transaction
involving a sale of technology rights on favorable terms, if at all.
Furthermore, there can be no assurance that CP-0597 would be proven safe and
efficacious in clinical trials, that the regulatory approvals necessary for
its commercialization (if it is ever advanced to this stage) would be
obtained or that it could be manufactured at acceptable costs and with
appropriate quantity.
PRODUCT DEVELOPMENT RISKS
Cortech's compounds, with the exception of Bradycor, are in an early
stage of research and development. All of the compounds in Cortech's
portfolio would require extensive additional research and development prior
to submission of any regulatory application for commercial use. Cortech is
seeking collaborative arrangements to support any further work on its
research portfolio or, alternatively, to sell Cortech's technology rights.
There can be no assurance that Cortech will be able to establish such
collaborative arrangements or to effect a transaction involving a sale of
technology rights on acceptable terms, if at all. Even if Cortech enters into
collaborative arrangements and/or receives funds for research and
development, there can be no assurance that research or product development
efforts would be successfully completed, that the compounds in Cortech's
portfolio would be proven to be safe and efficacious in clinical trials, that
required regulatory approvals for commercialization (if products are ever
advanced to this stage) could be obtained, that products could be
manufactured at acceptable cost and with appropriate quality or that any
approved products could be successfully marketed or would be accepted by
patients, health care providers and third-party payors.
PATENTS, TRADE SECRETS AND LICENSES
Cortech believes that patents and other proprietary rights are crucial
to its intellectual property portfolio. It is Cortech's policy to seek
appropriate patent protection of proprietary technologies and compounds
important to the development of its business. In addition to patents, Cortech
relies upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position. The
value of Cortech's intellectual property will depend in part on its ability
to obtain patents, maintain trade secrets and operate without infringing on
the proprietary rights of others in the United States and in other countries.
Cortech has patent protection related to the following: protease
inhibitors, bradykinin antagonists and immunology (vaccines and treatments).
Cortech holds seven United States patents and currently has fourteen United
States patent applications pending which concern protease inhibitors. Cortech
holds five United States patents, has three United States patent applications
pending and has one patent application which has been allowed which concern
bradykinin antagonists. In addition, Cortech holds 26 foreign patents and has
40 foreign patents pending concerning protease inhibitors and bradykinin
antagonists.
The patent positions of pharmaceutical and biopharmaceutical firms,
including Cortech, are uncertain and involve complex factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any of Cortech's pending applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated.
Since patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, there can be no
assurance that Cortech or any licensor was the first creator of inventions
covered by pending patent applications or that Cortech or such licensor was
the first to file patent applications for such inventions. Cortech is aware
of a patent that has issued that contains claims which may, if valid, block
Cortech from selling one or more compounds in the immunology area. There can
be no assurance that Cortech's patents, if issued, would be held valid and
infringed by a court of competent jurisdiction. An adverse outcome with
regard to a third party claim could subject Cortech to significant
liabilities to third parties, require disputed rights to be licensed from
third parties or require Cortech to cease using such technology.
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A number of pharmaceutical and biopharmaceutical companies and research and
academic institutions have filed patent applications or received patents in
Cortech's fields. Some of these applications or patents may be competitive with
Cortech's applications or may conflict in certain respects with claims made
under Cortech's applications. Such conflict could result in a significant
reduction of the coverage of Cortech's patents, if issued. In addition, if
patents are issued to other companies that contain competitive or conflicting
claims and such claims are ultimately determined to be valid, there can be no
assurance that Cortech would be able to obtain licenses to these patents at a
reasonable cost or be able to develop or obtain alternative technology.
Cortech also seeks to protect unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation. It is Cortech's
policy to require its employees, consultants, members of the Board of Directors,
outside scientific collaborators and sponsored researchers and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with Cortech. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Cortech is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees, the agreements provide that all inventions conceived by the
individual shall be the exclusive property of Cortech. There can be no
assurance, however, that these agreements will not be breached or will provide
meaningful protection or adequate remedies in the event of unauthorized use of
Cortech's trade secrets or disclosure of such information. Cortech also has
taken appropriate physical security measures to protect its intellectual
property. There can be no assurance, however, that such security measures will
be adequate.
CP-0127 DEVELOPMENT CORPORATION
In February 1992, Cortech entered into a series of agreements with CDC that
govern the development of products utilizing Bradycor. The agreements grant CDC
the right to utilize Bradycor in the United States, Canada and Europe for
certain indications, while Cortech retained rights to Bradycor in other parts of
the world. Cortech has the right to market, sell and license the technology
licensed to CDC or to sell products derived therefrom and is subject to a
royalty obligation in favor of CDC. Although Cortech has continued efforts to
secure a corporate partner in connection with Bradycor, Cortech is not currently
engaged in active development of any compounds covered by the agreements with
CDC. Kenneth R. Lynn, Chairman of the Cortech Board and Chief Executive Officer
of Cortech, and Bert Fingerhut, a member of the Cortech Board, serve as two of
the three members of the Board of Directors of CDC.
MARKETING STRATEGY
In the event that any of Cortech's compounds were to be approved for
marketing, this would be accomplished primarily through arrangements with other
pharmaceutical or biotechnology companies. Comprehensive sales and technical
support services would be necessary to market Cortech's products, and Cortech
does not anticipate establishing significant capabilities in these areas in the
foreseeable future. To the extent Cortech enters into co-marketing, co-promotion
or similar arrangements, any revenues received by Cortech will be dependent on
the efforts of third parties, and there can be no assurance that such efforts
will be successful. Sales of any products for which Cortech obtains regulatory
approval will be dependent in part on the availability of reimbursements to the
consumer from third-party payors, such as government and private insurance
programs.
MANUFACTURING
The manufacture of sufficient quantities of new drugs can be an expensive,
time-consuming and complex process and may require the use of materials with
limited availability or require dependence on sole-source suppliers. In the
event that any of Cortech's compounds reach the stage of development involving
manufacturing, Cortech will be reliant upon third parties or its corporate
partners for the manufacture of compounds. There can be no assurance that such
third-party arrangements can be established on a timely or commercially
reasonable basis, if at all. Where such arrangements are established, Cortech
will depend on such third parties to perform their obligations effectively
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and on a timely basis. There can be no assurance that such parties will
perform acceptably and any failures by third parties may delay clinical trial
development or the submission of products for regulatory approval, impair
Cortech's ability to deliver products on a timely basis, or otherwise impair
Cortech's competitive position, which could have a material adverse effect on
Cortech's business, financial condition and results of operations. If Cortech
does not find a suitable manufacturing partner or contractor, it may be
required to incur substantial financial obligations to construct or acquire
manufacturing facilities.
COMPETITION
The pharmaceutical and biopharmaceutical industries are engaged in
intense competition involving multiple technologies and strategies for
compound identification and development. Many companies are focused on
research in the same areas as Cortech. Cortech's most significant competitors
are fully integrated pharmaceutical companies and more-established
biotechnology companies. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical companies. In addition, Cortech faces competition from
academic institutions, governmental agencies, and other public and private
research organizations that conduct research, seek patent protection, and
establish collaborative arrangements for product and clinical development and
marketing. Furthermore, these companies and institutions compete with Cortech
in recruiting and retaining highly qualified scientific and management
personnel.
Many of Cortech's competitors have substantially greater financial,
technical and human resources than Cortech and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than Cortech in undertaking preclinical
testing and human clinical trials of new pharmaceutical products and
obtaining FDA approval for products. Furthermore, if Cortech is permitted to
commence commercial sales of products, it will also be competing with respect
to manufacturing efficiency and marketing capabilities.
Any of Cortech's products that successfully gain regulatory approval
must then compete for market acceptance and market share. For certain of
Cortech's potential products, an important competitive factor will be the
timing of market introduction. Accordingly, Cortech expects that important
competitive factors will be the relative speed with which companies can
develop products, complete the clinical testing and approval processes and
supply commercial quantities of the product to the market. With respect to
clinical testing, competition may delay progress by limiting the number of
clinical investigators and patients available to test Cortech's potential
products.
HNE inhibitors have been the target of research and development efforts
by a number of large pharmaceutical companies. While no company has succeeded
in developing a small molecular weight HNE inhibitor to the point of filing
an application for marketing approval, there can be no assurance that any of
these programs will not achieve success in the future. In addition,
alternative approaches to the use of HNE inhibitors are being developed.
At least four other companies have developed bradykinin antagonists and
may be engaged in product development activities. Numerous companies are
developing alternative strategies to treat inflammation and have a number of
product candidates in preclinical and clinical development. Any of these
approaches could compete with Cortech's HNE inhibitor programs.
GOVERNMENT REGULATION
The FDA is the primary agency regulating the research, development,
manufacture, sale and marketing of drugs in the United States From the time
at which a promising compound is identified, regulations dictate its
development, approval, marketing and sale. Product development and approval
within this regulatory framework takes a number of years and involves the
expenditure of substantial resources. Many products that initially appear
promising are never approved because they do not meet the safety and efficacy
requirements of the FDA. Regulatory requirements may change at any stage of
Cortech's product development and may affect approval, delay an
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application, or require additional expenditures by Cortech. If approval is
obtained, failure to comply with ongoing regulatory requirements, or new
information that negatively impacts the safety or effectiveness of the
approved drug, could cause the FDA to withdraw approval to market the product.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the preclinical
development period. A series of pharmacologic studies are also performed
during preclinical development to identify the essential characteristics of
the compound's behavior. In addition, both IN VITRO and IN VIVO animal
toxicity studies are required to characterize the toxicity profile of the
compound. Preclinical studies are regulated by the FDA under a series of
regulations called GLP regulations. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring those studies to
be repeated. During this time, a manufacturing process which is capable of
producing the compound in an adequately pure and well characterized form for
human use is developed. Production of compounds for use in humans is governed
by a series of FDA regulations known as GMP regulations, which regulate all
aspects of the manufacturing process.
The entire body of preclinical development work is summarized in a
submission to the FDA called a Notice of Claimed Exemption for an IND. FDA
regulations allow human clinical trials to begin 30 days following the
submission of the IND, unless the FDA requests additional information,
clarification or additional time to review the IND. There is no assurance
that the submission of an IND will allow a company to commence clinical
trials. Once trials have started, the company or the FDA may decide to stop
the trials because of concerns about the safety of the product or the
adequacy of the trial design. Such action can substantially delay individual
trials, as well as the entire development program for that compound and, in
some cases, may require abandonment of a product.
Clinical testing of new compounds in humans is designed to establish
both safety and efficacy in treating a specific disease or condition. These
studies are usually conducted in three phases of testing. In Phase I, a small
number of healthy subjects or patients with the specific condition being
targeted are given the new compound to determine the pharmacokinetic and
pharmacologic actions of the drug in humans, the side effects associated with
increasing doses and if possible, to gain early evidence of effectiveness. In
Phase II, small numbers of patients with the targeted disease are given the
compound to test its efficacy in treating the targeted disease, to determine
the common short term side effects and risks associated with the drug, and to
establish effective dose levels. Phase III studies are larger studies
designed to confirm the compound's efficacy and safety for the targeted
disease and to provide an adequate basis for physician labeling.
When a drug is being developed for a condition that is life- or
organ-threatening, or for which there is no alternative therapy, the FDA may,
in certain cases, grant an accelerated approval process. However, there is no
assurance any of Cortech's products would be eligible for this accelerated
approval process.
Once adequate data have been obtained in clinical testing to demonstrate
that the compound is both safe and effective for the intended use, all of the
data available is submitted to the FDA in an NDA. The FDA reviews this
application and, once it decides that adequate data are available which show
that the new compound is both safe and effective, approves the drug for
marketing. The approval process may take several years and is a function of a
number of variables including the quality of the submission and data
presented, the potential contribution that the compound will make in
improving the treatment of the disease in question, and the extent of
agreement between the sponsor and the FDA on the product labeling. There can
be no assurance that any new drug will successfully proceed through this
approval process or that it will be approved in any specific period of time.
The FDA may, during its review of an NDA, ask for additional data, and
may also require postmarketing testing, including potentially expensive Phase
IV studies. In addition, postmarketing surveillance to monitor the safety and
effectiveness of the drug must be done by the sponsor. The FDA may in some
circumstances impose additional restrictions on the use and or promotion of
the drug that may be difficult and expensive to administer.
Before marketing approval is granted, the facility in which the drug
product is manufactured must be inspected by the FDA and deemed to be
adequate for the manufacture, holding and distribution of drugs in compliance
with GMPs. Manufacturers must continue to expend time, money and effort in
the area of production, and quality control, labeling, advertising and
promotion of drug product to ensure full compliance with GMP
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requirements. Failure to comply with applicable requirements can lead to FDA
demands that production and shipment cease, that products be recalled, or to
enforcement actions that can include seizures, injunctions, or criminal
prosecution. Such failures or new information that negatively impact the
safety and effectiveness of the drug that becomes available after approval
may lead to FDA withdrawal of approval to market the product.
To market its products abroad, Cortech also must satisfy regulatory
requirements implemented by foreign regulatory authorities. The foreign
regulatory approval process includes all of the risks associated with FDA
approval set forth above, and may introduce additional requirements or risks.
There is no assurance that a foreign regulatory body will accept the data
developed by Cortech for any of its products. Approval by the FDA does not
ensure approval in other countries, nor does approval by any other country
ensure approval decisions by FDA.
In Europe, human pharmaceutical products are subject to extensive
regulation of the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, advertising and promotion of human pharmaceutical products.
Effective in January 1995, the European Union enacted new regulations providing
for a centralized licensing procedure, which is mandatory for certain kinds of
products, and a decentralized (country by country) procedure for all other
products. A license granted under the centralized procedure authorizes marketing
of the product in all of the member states of the European Union. Under the
decentralized procedure, a license granted in one member state can be extended
to additional member states pursuant to a simplified application process. The
assessment of products filed under the centralized procedure is coordinated by
the EMEA.
In addition to regulations enforced by the FDA, Cortech is 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, regulations promulgated by the United States Department of
Agriculture, and other related federal, state or local regulations. Cortech's
research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although Cortech believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, Cortech could be held liable for
any damages that result and any such liability could exceed the resources of
Cortech.
THIRD-PARTY REIMBURSEMENT
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to contain or reduce the cost of health care through
various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government
control. In particular, individual pricing negotiations are often required in
each country of the European Union, even if approval to market the drug under
the EMEA's centralized procedure is obtained. In the United States, there
have been, and Cortech expects that there will continue to be, a number of
federal and state proposals to implement similar government control. In
addition, an increasing emphasis on managed care in the United States has
increased and will likely continue to increase the pressure on pharmaceutical
pricing. While Cortech cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals or managed
care efforts may have on its business, the announcement or adoption of such
proposals or efforts could have a material adverse effect on Cortech's
business, financial condition and results of operations. Further, to the
extent that such proposals or efforts have a material adverse effect on other
pharmaceutical companies that are prospective corporate partners for Cortech,
Cortech's ability to establish and maintain strategic alliances may be
adversely affected. In addition, in both the United States and elsewhere,
sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such
as government and private insurance plans that mandate predetermined
discounts from list prices. In addition, third-party payors are increasingly
challenging the prices charged for medical products and services. If Cortech
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and
reimbursement to the consumer will be available or will be sufficient to
allow Cortech to sell its products on a competitive basis.
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HUMAN RESOURCES
At its peak in July 1994, Cortech employed 206 full-time, regular
employees. Over the past three-and-one-half years, Cortech has implemented a
series of reductions in force which reduced the number of full-time, regular
employees to 13 as of February 27, 1998. These employees are primarily
engaged in management, business development and administrative efforts
including the archiving of records, decommissioning of laboratories and
liquidation of non-cash tangible assets.
ITEM 2. PROPERTIES.
As of February 27, 1998, the Company occupied approximately 50,000
square feet of leased laboratory, warehouse and administrative space in
Denver, Colorado. These leases expire on these facilities over the period
from May 1998 to May 1999 and are renewable for up to an additional two
years. The Company is currently in discussions with several parties
regarding the sale of its leasehold improvements and is seeking to vacate the
premises. In addition, BioStar may have an interest in occupying some of the
space leased by the Company.
ITEM 3. LEGAL PROCEEDINGS.
On February 27, 1998, a complaint was filed in the New Castle County,
Delaware Court of Chancery naming the Company, the Company's directors
and BioStar as defendants. The complaint, filed by a stockholder of the
Company, claims to be on behalf of a class of all stockholders of the Company
and contends that the directors of the Company breached their fiduciary
duties to the Company's stockholders when they unanimously approved the
proposed combination with BioStar (the "Merger"). Specifically, the
complaint alleges that the Company's directors have (i) material conflicts of
interest in connection with the Merger (ii) put their own interests ahead of
the interests of the Company's stockholders when they approved the Merger and
(iii) failed to take all necessary and appropriate steps to maximize
stockholder value in their consideration of strategic alternatives and
approval of the Merger. The complaint further contends that BioStar aided
and abetted the Company's directors in committing these alleged breaches.
The complaint seeks to enjoin the Merger as well as the operation of the
Company's stockholder rights plan and seeks an order rescinding the Merger
upon its consummation as well as compensatory damages and costs.
The Company believes that the claims are without merit and intends to
vigorously defend against this lawsuit. Although there can be no assurances
in this regard, the Company believes that the suit will have no material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Since November 24, 1992, Cortech Common Stock has been quoted on the Nasdaq
National Market under the symbol "CRTQ." The following table sets forth, for
the quarters indicated, the reported high and low closing sales prices of
Cortech Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter . . . . . . . . . . . . . . . . 3.688 2.188
Second Quarter. . . . . . . . . . . . . . . . 3.438 2.688
Third Quarter . . . . . . . . . . . . . . . . 3.188 2.125
Fourth Quarter. . . . . . . . . . . . . . . . 2.500 1.375
1997
First Quarter . . . . . . . . . . . . . . . . 2.000 0.844
Second Quarter. . . . . . . . . . . . . . . . 0.938 0.594
Third Quarter . . . . . . . . . . . . . . . . 0.813 0.500
Fourth Quarter. . . . . . . . . . . . . . . . 0.844 0.531
1998
First Quarter (through March 27, 1998). . . . 0.688 0.375
</TABLE>
As of February 27, 1998, there were 563 holders of record of the
Company's Common Stock. On March 27, 1998, the last sale price reported
on the Nasdaq National Market for the Company's Common Stock was $0.594.
The Company has not paid any cash dividends on its capital stock since
its inception and does not intend to pay any cash dividends in the
foreseeable future. The Company currently intends to retain any future
earnings to finance the growth and development of its business.
POTENTIAL LOSS OF NASDAQ NATIONAL MARKET LISTING; LOW STOCK PRICE
Trading in the Company's Common Stock is presently quoted on the Nasdaq
National Market. The Company has received a letter from The Nasdaq Stock
Market, Inc. stating that its Common Stock is not in compliance with the
recently modified NASD Marketplace Rules which now require a $1.00 minimum
per share bid price. If the per share bid price for the Company's Common
Stock does not rise to at least $1.00 for ten consecutive trading days by May
28, 1998, The Nasdaq Stock Market, Inc. will issue a delisting letter to the
Company. At such time, the Company's Common Stock would be delisted from the
Nasdaq National Market unless the Company requests a review of the pending
delisting (which review will temporarily stay any delisting) and The Nasdaq
Stock Market, Inc. elects to reverse its decision.
The Company's management and Board of Directors believe that the
proposed combination with BioStar and a reverse split of the Company's Common
Stock (the "Reverse Split") which is being proposed for stockholder approval
at a special meeting of stockholders to be called in connection with such
combination (the "Special Meeting") would bring the Company into compliance
with the $1.00 minimum per share bid price requirement. In the event that
the Reverse Split is not implemented following the Special Meeting (e.g.,
because it is not approved at the Special Meeting), the Company would propose
a reverse stock split of its Common Stock for approval at an Annual Meeting
of the Company's Stockholders to be held as soon as reasonably practicable
following the Special Meeting. There can be no assurances that the Company
will be able to maintain its Nasdaq National Market listing
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(whether as a result of failure to meet the minimum bid price requirement or
other requirements imposed by the Nasdaq National Market).
The effects of delisting would include limited release of the market
prices of Cortech Common Stock and limited news coverage of Cortech.
Delisting may restrict investors' interest in Cortech Common Stock and have a
material adverse effect on the trading market and prices for such Common
Stock as well as Cortech's ability to issue additional securities or to
secure additional financing. In addition to the risk of volatility of stock
price and possible delisting, stocks with the low per share prices are
subject to additional federal and state regulatory requirements and the
potential loss of effective trading markets. In particular, if Cortech
Common Stock were delisted from trading on the Nasdaq National Market,
Cortech Common Stock could be subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended, which, among other things, requires that
broker/dealers satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving any
purchaser's written consent prior to any transaction in such stock. If
Cortech Common Stock was deemed to be a "penny stock" under the Securities
Enforcement and Penny Stock Reform Act of 1990, additional disclosure would
be required in connection with trades in Cortech Common Stock, including the
delivery of a disclosure schedule explaining the nature and risks of the
penny stock market. Such requirements could severely limit the liquidity of
an investment in Cortech Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data at and for each of the five fiscal
years in the period ended December 31, 1997 have been derived from the
Company's audited financial statements. Such statements have been audited by
Arthur Andersen LLP, independent public accountants, as set forth in their
report covering the three years ended December 31, 1997, 1996 and 1995,
included elsewhere herein. The data set forth below should be read in
conjunction with the financial statements and notes thereto included
elsewhere in this document and also with Item 7 ("Management's Discussion and
Analysis of Financial Condition and Results of Operations"). No dividends
were declared or paid for any periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sponsored research and development
revenues. . . . . . . . . . . . . . . . $ 3,472 $ 1,470 $ 4,140 $ 7,422 $ 3,451
Technology license revenue . . . . . . . . -- -- 1,000 -- --
-------- -------- -------- -------- -------
Total revenues. . . . . . . . . . . . . 3,472 1,470 5,140 7,422 3,451
Expenses:
Research and development . . . . . . . . . 15,462 25,016 18,551 11,339 7,552
General and administrative . . . . . . . . 3,442 4,943 4,695 3,614 3,616
-------- -------- -------- -------- -------
Total expenses. . . . . . . . . . . . . 18,904 29,959 23,246 14,953 11,168
-------- -------- -------- -------- -------
Operating loss. . . . . . . . . . . . . (15,432) (28,489) (18,106) (7,531) (7,717)
Interest income. . . . . . . . . . . . . . . 1,249 1,751 1,685 1,192 939
-------- -------- -------- -------- -------
Net loss . . . . . . . . . . . . . . . . . . $(14,183) $(26,738) $(16,421) $ (6,339) $(6,778)
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Basic net loss per share (1) . . . . . . . . $ (0.95) $ (1.52) $ (0.92) $ (0.35) $ (0.37)
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Weighted average common shares
outstanding(1) . . . . . . . . . . . . . . 14,874 17,560 17,754 18,225 18,522
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments. . . . . . . . . . . . . . . . $ 62,574 $ 36,268 $ 23,147 $ 20,978 $15,403
Working capital. . . . . . . . . . . . . . . 60,453 34,192 21,891 18,465 14,649
Total assets . . . . . . . . . . . . . . . 68,763 45,553 28,643 25,483 16,445
Accumulated deficit. . . . . . . . . . . . . (28,363) (55,101) (71,522) (77,860) (84,639)
Stockholders' equity . . . . . . . . . . . . 66,354 43,073 26,977 22,125 15,383
</TABLE>
- ---------------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
CORTECH'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM
10-K. WHEN USED IN THIS DISCUSSION, THE WORD "EXPECTS" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, THE RISKS DISCUSSED BELOW, THE RISKS DISCUSSED IN THE SECTIONS
OF THIS FORM 10-K ENTITLED "RISK FACTORS" AND "BUSINESS" AND THE RISKS DISCUSSED
ELSEWHERE IN THIS FORM 10-K.
GENERAL
Cortech (the "Company") is a biopharmaceutical company whose principal
focus has been the discovery and development of novel therapeutics for the
treatment of inflammatory disorders. Specifically, Cortech has directed its
research and development efforts principally toward protease inhibitors and
bradykinin antagonists. These efforts have produced certain intellectual
property rights. See "Item 1 -- Business -- Cortech's Work with Protease
Inhibitors" and "--Cortech's Work with Bradykinin Antagonists."
In response to disappointing test results and its loss of collaborative
partner support, Cortech has implemented a series of reductions in force over
the past three-and-one-half years which has reduced the number of full time,
regular employees from more than 200 to fewer than 15 and effectively
discontinued all internal efforts to advance its research and development
activities. In addition, Cortech is currently decommissioning its
laboratories, has sold most of its scientific and technical equipment and,
unless the Merger (see discussion below) is implemented and BioStar opts to
retain such assets, plans to sell most of its office furniture and equipment
and, where possible, its leasehold improvements.
As a result of these actions, Cortech no longer has the staff or operative
facilities required to recommence internal research and development activities.
Cortech has retained a core group of professionals who, among other things, are
actively engaged in ongoing efforts to realize appropriate value from Cortech's
tangible and intangible assets. It is uncertain, however, whether Cortech will
be able to retain employees with sufficient knowledge and experience to realize
appropriate value from Cortech's intangible assets. In light of the above,
Cortech's management has focused on evaluating various strategic alternatives.
As a result, the Company entered into the Reorganization Agreement with BioStar
on December 22, 1997.
BioStar develops, manufactures and markets point-of-care diagnostic
tests using its proprietary, highly sensitive, thin film technologies.
BioStar's current products employ its Optical Immuno Assay (OIA-Registered
Trademark-) technology, a thin film, platform technology developed for the
rapid detection of a variety of medical conditions. Pursuant to the
Reorganization Agreement, the Company would issue up to 28,500,000 shares of
its common stock ("Common Stock") to BioStar's stockholders in exchange for
all of the issued and outstanding capital stock of BioStar, and a wholly owned
subsidiary of the Company would merge with and into BioStar (the "Merger"),
making BioStar a wholly owned subsidiary of the Company. The Company
anticipates that the Merger, which is subject to the approval of the
Company's and BioStar's stockholders as well as certain other conditions,
would be completed in the second quarter of 1998. In connection with the
Merger, the Company filed a Registration Statement on Form S-4 (which
includes a Joint Proxy Statement/Prospectus) with the Securities and Exchange
Commission on February 17, 1998 (File No. 333-46445).
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996:
REVENUES: Revenues from sponsored research and development decreased from
$7.4 million in 1996 to $3.5 million in 1997. The decrease in revenues for 1997
resulted primarily from the termination of Cortech's collaborative agreements.
Cortech received $1.5 million from Ono Pharmaceutical Co. Ltd. ("Ono") for
work performed in 1997 under a contract to develop an oral elastase inhibitor
(the "Ono Agreement"). Pursuant to the Ono Agreement, Cortech had received an
additional $1.3 million in 1996 which was recorded as revenue in 1997 (as a
result of work performed in 1997 by Cortech). Under the terms of the Ono
Agreement, as amended in 1997, Ono has assumed all responsibilities for research
activities being conducted during the final six months of the collaborative
project (terminating on March 14, 1998). As a result, Ono is not required to pay
Cortech the last scheduled $1.5 million in research funding previously provided
for under the Ono Agreement to offset certain costs that Cortech would otherwise
have incurred. Cortech expects no further payments from Ono under the Ono
Agreement.
RESEARCH AND DEVELOPMENT: Research and development expenses decreased from
$11.3 million in 1996 to $7.6 million in 1997. The decrease is due primarily to
reductions in force implemented in 1997 (which included restructuring charges
recorded of $1.4 million), and the winding down, and substantial discontinuation
in late 1997, of Cortech's research and development activities.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $3.6
million in 1996 and 1997. Cortech's general and administrative expenses in 1997
included $349,000 of restructuring charges and $340,000 of professional fees
related to the Merger. Substantially all of Cortech's remaining employees'
payroll costs are classified as general and administrative expenses.
NET LOSS: Cortech's net loss for 1997 increased to $6.8 million from $6.3
million in 1996. The increase was due principally to decreased revenues and the
restructuring charges noted above.
YEARS ENDED DECEMBER 31, 1996 AND 1995:
REVENUES: Revenues from sponsored research and development increased from
$5.1 million in 1995 to $7.4 million in 1996. The increase in revenues for 1996
resulted primarily from milestone payments made by SmithKline Beecham ("SB"), of
which $2.6 million was recorded as revenue, and a $1.5 million payment received
from Ono under the Ono Agreement, of which $750,000 was recorded as revenue.
From 1987 until December 1996, Hoechst Marion Roussel, Inc. ("HMRI") funded
Cortech's development of CE-1037. During 1996, Cortech received payments of $1.1
million from HMRI. However, HMRI terminated its arrangements with Cortech in
December 1996.
RESEARCH AND DEVELOPMENT: Expenses for research and development decreased
from $18.6 million in 1995 to $11.3 million in 1996. This decrease was due
primarily to reductions in force initiated in 1995.
GENERAL AND ADMINISTRATIVE: General and administrative expenses decreased
from $4.7 million in 1995 to $3.6 million in 1996. This decline resulted from
decreases in staffing, office space and business activity.
NET LOSS: The net loss for 1996 decreased to $6.3 million from $16.4
million in 1995. This decrease was due principally to decreased expenses and
increased revenues noted above.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Cortech had cash, cash equivalents and short-term
investments totaling $15.4 million compared to $21.0 million at December 31,
1996. Cortech's net cash used in operating activities (including purchases of
property, plant and equipment) totaled $6.5 million, $3.1 million and $13.3
million in 1997, 1996 and 1995, respectively. The increase in net cash used from
1996 to 1997 reflects the reduction in, and eventual complete loss of, Cortech's
funded research and development collaborations as well as the payment of costs
relating to reductions in force which were accrued in 1997. Cortech's
expenditures, net of depreciation and non-cash charges, decreased from $13.1
million in 1996 to $9.6 million in 1997. This decrease reflects the winding
down, and substantial discontinuation in late 1997, of Cortech's research and
development activities as well as other effects of the reductions in force
implemented in 1997.
In November 1997, Cortech sold most of its scientific and technical
equipment for approximately $800,000. In January 1998, Cortech sold certain
leasehold improvements for $150,000 in cash and a note receivable of $125,000
payable in July 1998. There can be no assurances that any of Cortech's remaining
assets can be sold for book value, if at all.
In the absence of the Merger, Cortech presently expects to receive no
revenues from sponsored research and development arrangements in 1998 (or future
years).
From its inception through December 31, 1997, Cortech raised cash totaling
$97.1 million from the sale of equity securities, including $33.6 million in net
proceeds from its November 1992 initial public offering and $37.7 million in net
proceeds from its October 1993 follow-on public offering.
Cortech has experienced net losses and negative cash flows from operations
each year since inception and has incurred an accumulated deficit of $84.6
million through December 31, 1997.
Were Cortech to maintain current levels of staffing (and in the absence of
a strategic transaction such as the Merger), during 1998 Cortech estimates that
it would incur approximately $3.2 million in general and administrative
expenses, research and development salaries and overhead. Cortech expects to
incur costs in 1998 relating to the proposed Merger of approximately $500,000.
In addition, costs relating to the proposed Merger of $240,000 and reduction in
force costs of $184,000 will be paid in 1998 but were accrued in 1997. Although
reductions in staff from current levels would decrease ordinary salary expenses
in 1998 from current levels, such reductions would result in additional
severance benefits (aggregating to approximately $1.3 million assuming full
payment of severance benefits to all current officers and employees). During
1998, Cortech expects to receive approximately $1.0 million from interest income
and the sale of assets. However, there can be no assurances that Cortech will
receive such amounts. There can also be no assurances that Cortech will not be
required to incur additional expenses.
OTHER MATTERS
NET OPERATING LOSS CARRY FORWARDS AND TAX CREDITS: As of December 31,
1997, Cortech had approximately $77.2 million of net operating loss carry
forwards for income tax purposes, $74.3 million of which expire from 2005
through 2012. In addition, Cortech has approximately $2.9 million of research
and development tax credits available to offset future federal income tax,
subject to limitations for alternative minimum tax, $2.7 million of which expire
from 2005 to 2012. Cortech's use of operating loss carry forwards and tax
credits is subject to limitations imposed by the Internal Revenue Code. Due to
such limitations (particularly insofar as they relate to events such as the
Merger), Cortech believes that the Merger, if implemented, may result in
further, material limitations on Cortech's use of its operating loss carry
forwards and tax credits.
IMPACT OF YEAR 2000: The year 2000 will impact computer programs written
using two digits rather than four to define the applicable year. Any programs
with time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failure or
miscalculations causing disruptions
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of operation, including a temporary inability to process transactions, send
invoices or engage in other ordinary activities. This problem largely affects
software programs written years ago, before the issue came to prominence.
Insofar as Cortech has effectively discontinued all internal efforts to
advance its research and development activities, Cortech does not believe
that it has significant risk associated with the year 2000 problem.
RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT
FACTORS, AMONG OTHERS (INCLUDING THOSE NOTED ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K), IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT,
THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY.
HISTORY OF OPERATING LOSSES; NO ASSURANCE OF FUTURE PROFITABILITY
The Company has incurred operating losses in each year since its date of
inception. For the fiscal year ended December 31, 1997, the Company had a net
loss of $6.8 million and through such date has an accumulated deficit of $84.6
million. The Company's losses have resulted principally from costs incurred in
research and development and from general and administrative costs associated
with its operations. The Company's costs have exceeded its revenues, which have
come from research and development funding and interest income from investment
of excess cash. It is anticipated that the Company will continue to incur
operating losses as a result of its expenses for general and administrative
matters and limited research and product development.
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF THERAPEUTIC PRODUCTS
The Company's therapeutic compounds are at an early stage of development
and will require significant additional research, development and preclinical
and clinical testing prior to submission of any regulatory application for
commercial use. Accordingly, the Company's current business must be evaluated
in light of the uncertainties and complications present in a development stage
biopharmaceutical company.
Due to the high costs associated with the research and development of
its technology, the Company is currently seeking either to sell its rights to
its technology or to obtain financing from a corporate partner for further
development of such technology. The Company does not intend to undertake
further development of the Company's technology without a collaborative
partner. Presently, there are no agreements, understandings or active,
substantive negotiations between the Company and any third party to purchase
any of the Company's technology rights or fund further development of such
technology. There can be no assurance that the Company will be able to effect
any transaction involving a sale of technology rights or establish such a
collaboration on favorable terms, if at all.
Even if a collaborative partner is found to fund the Company's research and
development activities with respect to potential therapeutic products, there can
be no assurance that such activities will be successfully completed, that the
compounds under development will prove safe and effective in clinical trials,
that required regulatory approvals will be obtained, that products will be
manufactured at an acceptable cost and with appropriate quantity and quality or
that any approved products can be successfully marketed or will be accepted by
patients, health care providers and third party payors.
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DEPENDENCE ON COLLABORATIVE RELATIONSHIPS AND THIRD PARTIES FOR THERAPEUTIC
PRODUCT COMMERCIALIZATION
Drug discovery and development programs are capital intensive. Since
management believes that raising funds in the public capital markets to use to
develop therapeutic products may remain unattractive for the Company for the
foreseeable future, the Company's strategy for the development, clinical
testing, manufacture and commercialization of potential therapeutic products
largely depends upon collaborations with corporate partners and other third
parties. There can be no assurance that the Company will be able to negotiate
any such collaborative arrangements on acceptable terms, if at all. To the
extent that the Company is not able to establish such arrangements, it would
require more capital to undertake such activities at its own expense. The
Company may also encounter significant delays in introducing its products into
certain markets or find that the development, manufacture and sale of its
products in such markets is adversely affected by the absence or lack of success
of any such collaborations. There can be no assurance that any third party
collaborator will perform acceptably or that failures by such third parties
would not delay clinical trials or the submission of products for regulatory
approval or impair the Company's ability effectively to commercialize any
therapeutic products.
UNCERTAINTIES RELATED TO THERAPEUTIC PRODUCT DEVELOPMENT AND CLINICAL TRIALS
Before it can obtain regulatory approval for the commercial sale of any
therapeutic products, the Company must demonstrate, through preclinical studies
and clinical trials, that the product is safe and effective for use in each
target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing. Indeed, the Company discontinued planned development of its lead
bradykinin antagonist, Bradycor, after unsuccessful Phase II clinical trials and
suspended development of a lead HNE inhibitor, CE-1037, which was also in Phase
II clinical trials. There can be no assurance that the Company will conduct
future clinical trials or that those trials will demonstrate the safety or
efficacy of any products or will result in marketable products.
RELIANCE ON THIRD PARTIES TO MANUFACTURE THERAPEUTIC PRODUCTS
The manufacture of sufficient quantities of new drugs can be an expensive,
time-consuming and complex process, and it may require the use of materials with
limited availability or require dependence on sole-source suppliers. If the
manufacturing of compounds were ever required, the Company would rely on
corporate partners or other third parties for manufacturing services. There can
be no assurance that such third-party arrangements could be established on a
timely or commercially reasonable basis, if at all. If such arrangements were
established, the Company would depend on such third parties to perform their
obligations effectively and on a timely basis. There can be no assurance that
such parties would perform acceptably, and any failures by third parties may
delay clinical trial development or the submission of therapeutic products for
regulatory approval, impair the Company's ability to deliver therapeutic
products on a timely basis or otherwise impair the Company's competitive
position which could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company could not find a
suitable manufacturing partner or contractor, it might be required to incur
substantial financial obligations to construct or acquire manufacturing
facilities.
RELIANCE ON THIRD PARTIES TO MARKET THERAPEUTIC PRODUCTS
In the event that any of the Company's therapeutic compounds are ever
approved for marketing, the Company would rely primarily upon arrangements
with other pharmaceutical or biotechnology companies to market such products.
Comprehensive sales and technical support services would be necessary to
market the Company's therapeutic products. The Company does not anticipate
that it will establish significant capabilities in these areas in the
foreseeable future, if ever. To the extent the Company enters into
co-marketing, co-promotion or similar arrangements, any revenues received by
the Company would be dependent on the efforts of third parties, and there can
be no assurance that such efforts would be successful.
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THIRD-PARTY REIMBURSEMENT
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of government and
third-party payors to contain or reduce the cost of health care through
various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government
control. In particular, individual pricing negotiations are often required in
each country of the European Union, even if approval to market the drug under
the EMEA's centralized procedure is obtained. In the United States, there
have been, and Cortech expects that there will continue to be, a number of
federal and state proposals to implement similar government control. In
addition, an increasing emphasis on managed care in the United States has
increased and will likely continue to increase the pressure on pharmaceutical
pricing. While Cortech cannot predict whether any such legislative or
regulatory proposals will be adopted or the effect such proposals or managed
care efforts may have on its business, the announcement or adoption of such
proposals or efforts could have a material adverse effect on Cortech's
business, financial condition and results of operations. Further, to the
extent that such proposals or efforts have a material adverse effect on other
pharmaceutical companies that are prospective corporate partners for Cortech,
Cortech's ability to establish and maintain strategic alliances may be
adversely affected. In addition, in both the United States and elsewhere,
sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such
as government and private insurance plans that mandate predetermined
discounts from list prices. In addition, third-party payors are increasingly
challenging the prices charged for medical products and services. If Cortech
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and
reimbursement to the consumer will be available or will be sufficient to
allow Cortech to sell its products on a competitive basis.
REGULATION OF THE PHARMACEUTICAL INDUSTRY
The FDA is the primary agency regulating the research, development,
manufacture, sale and marketing of drugs in the United States. From the time at
which a promising compound is identified, regulations dictate its development,
approval, marketing and sale. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. Many products that initially appear promising are never
approved because they do not meet the safety and efficacy requirements of the
FDA. Regulatory requirements may change at any stage of the Company's product
development efforts and may affect approval, delay an application or require
additional expenditures by the Company. If approval is obtained, failure to
comply with ongoing regulatory requirements, or new information that negatively
impacts the safety or effectiveness of the approved drug, could cause the FDA to
withdraw approval to market the product.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the preclinical
development period. A series of pharmacologic studies are also performed during
preclinical development to identify the essential characteristics of the
compound's behavior. In addition, both in vitro and in vivo animal toxicity
studies are required to characterize the toxicity profile of the compound.
Preclinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practice ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
those studies to be repeated. During this time, a manufacturing process which
is capable of producing the compound in an adequately pure and well
characterized form for human use is developed. Production of compounds for use
in humans is governed by a series of FDA regulations known as GMP regulations,
which regulate all aspects of the manufacturing process.
The entire body of preclinical development work is summarized in a
submission to the FDA called a Notice of Claimed Exemption for Investigational
New Drug ("IND"). FDA regulations allow human clinical trials to begin 30 days
following the submission of the IND, unless the FDA requests additional
information, clarification or additional time to review the IND. There is no
assurance that the submission of an IND will allow a company to commence
clinical trials. Once trials have started, the company or the FDA may decide to
stop the trials because of concerns about the safety of the product or the
adequacy of the trial design. Such action can substantially delay individual
trials as well as the entire development program for that compound and, in some
cases, may require abandonment of a product.
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Clinical testing of new compounds in humans is designed to establish
both safety and efficacy in treating a specific disease or condition. These
studies are usually conducted in three phases of testing. In Phase I, a
small number of healthy subjects or patients with the specific condition
being targeted are given the new compound to determine the pharmacokinetic
and pharmacologic actions of the drug in humans, the side effects associated
with increasing doses and, if possible, to gain early evidence of
effectiveness. In Phase II, small numbers of patients with the targeted
disease are given the compound to test its efficacy in treating the targeted
disease, to determine the common short-term side effects and risks associated
with the drug and to establish effective dose levels. Phase III studies are
larger studies designed to confirm the compound's efficacy and safety for the
targeted disease and to provide an adequate basis for physician labeling.
When a drug is being developed for a condition that is life- or
organ-threatening, or for which there is no alternative therapy, the FDA may,
in certain cases, grant an accelerated approval process. However, there is
no assurance any of the Company's therapeutic products would be eligible for
this accelerated approval process.
Once adequate data have been obtained in clinical testing to demonstrate
that the compound is both safe and effective for the intended use, all of the
data available is submitted to the FDA in a New Drug Application ("NDA").
The FDA reviews this application and, once it decides that adequate data are
available which show that the new compound is both safe and effective,
approves the drug for marketing. The approval process may take several years
and is a function of a number of variables including the quality of the
submission and data presented, the potential contribution that the compound
will make in improving the treatment of the disease in question, and the
extent of agreement between the sponsor and the FDA on the product labeling.
There can be no assurance that any new drug will successfully proceed through
this approval process or that it will be approved in any specific period of
time.
The FDA may, during its review of an NDA, ask for additional data and
may also require postmarketing testing, including potentially expensive Phase
IV studies. In addition, postmarketing surveillance to monitor the safety
and effectiveness of the drug must be done by the sponsor. The FDA may in
some circumstances impose additional restrictions on the use and or promotion
of the drug which may be difficult and expensive to administer.
Before marketing approval is granted, the facility in which the drug
product is manufactured must be inspected by the FDA and deemed to be
adequate for the manufacture, holding and distribution of drugs in compliance
with GMP requirements. Manufacturers must continue to expend time, money and
effort in the areas of production, quality control, labeling, advertising and
promotion of drug product to ensure full compliance with GMP requirements.
Failure to comply with applicable requirements can lead to FDA demands that
production and shipment cease, that products be recalled or to enforcement
actions that can include seizures, injunctions or criminal prosecution. Such
failures or new information that negatively impact the safety and
effectiveness of the drug that becomes available after approval may lead to
FDA withdrawal of approval to market the product.
There can be no assurances that any product developed by the Company
would prove to be safe and efficacious in clinical trials or would meet all
of the applicable regulatory requirements necessary to obtain marketing
approval. Moreover, if regulatory approval of a drug is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. In addition, a failure to comply with applicable regulatory
requirements can, among other things, result in fines, suspension of
regulatory approvals, product recalls, seizure of products, operation
restrictions and criminal prosecutions. In addition, a marketed drug and its
manufacturer are subject to continual review and later discovery of
previously unknown problems with a product or manufacturer could lead to
adverse consequences, including withdrawal of the product from the market.
To market its therapeutic products abroad, the Company also would be
required to satisfy regulatory requirements implemented by foreign regulatory
authorities. The foreign regulatory approval process includes all of the
risks associated with FDA approval set forth above and may introduce
additional requirements or risks. There can be no assurance that a foreign
regulatory body would accept the data developed by the Company for any of its
potential therapeutic products. Approval by the FDA does not ensure approval
in other countries, nor does approval by any other country ensure approval
decisions by the FDA.
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In Europe, human pharmaceutical products are subject to extensive
regulation concerning testing, manufacture, safety, efficacy, labeling,
storage, record keeping, advertising and promotion. Effective in January
1995, the European Union enacted new regulations providing for a centralized
licensing procedure, which is mandatory for certain kinds of products, and a
decentralized (country by country) procedure for all other products. A
license granted under the centralized procedure authorizes marketing of the
product in all of the member states of the European Union. Under the
decentralized procedure, a license granted in one member state can be
extended to additional member states pursuant to a simplified application
process. The assessment of products filed under the centralized procedure is
coordinated by the European Medicine Evaluation Agency ("EMEA").
In addition to regulations enforced by the FDA, the Company is 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, regulations promulgated by the United States
Department of Agriculture, and other federal, state or local laws and
regulations. The Company's research and development involves the controlled
use of hazardous materials, chemicals, viruses and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.
COMPETITION IN THE PHARMACEUTICAL INDUSTRY
The drug development business which the Company has pursued in recent
years faces intense competition from pharmaceutical and other biotechnology
companies, academic institutions, governmental agencies and other
organizations which conduct research, seek patent protection and establish
collaborative arrangements for product development and marketing. Many of
the competitors for such business have substantially greater financial,
technical and human resources than the Company and have significant products
which are in development or have been approved. Many of these competitors
have significantly greater experience than the Company in undertaking
preclinical testing and human clinical trials of new pharmaceutical products
and obtaining FDA approval for products. In addition, if the Company ever
commences commercial sales of products, it would also be competing with
respect to manufacturing efficiency and marketing capabilities. Furthermore,
these other companies and institutions would compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
Many companies are focused on research in the same areas that the
Company has pursued in recent years. Human neutrophil elastase ("HNE")
inhibitors have been the target of research and development efforts by a
number of large pharmaceutical companies. While no company has succeeded in
developing a small molecular weight HNE inhibitor to the point of filing an
application for marketing approval, there can be no assurance that any of
these programs will not achieve success in the future. Furthermore, at least
four other companies have developed bradykinin antagonists and may be engaged
in product development activities. Numerous companies are developing
alternative strategies to treat inflammation.
Since the Company has ceased research operations, is decommissioning its
laboratory facilities and has reduced the number of full-time, regular
employees from more than 200 to fewer than 15, the Company has effectively
discontinued all internal efforts to advance its therapeutic research and
development activities. There can be no assurance that the Company's
competitors will not develop more effective or more affordable products or
achieve earlier or more efficient product commercialization than the Company.
UNCERTAINTY OF PROTECTION OF PATENTS, TRADE SECRETS AND TRADEMARKS
The Company's success will depend, in part, on its ability to obtain
patents and license patent rights, to maintain trade secret protection and to
operate without infringing on the proprietary rights of others. The Company
holds seven United States patents and currently has 14 United States patent
applications pending which concern protease inhibitors. The Company holds
five United States patents and currently has 14 United States patent
applications pending which concern protease inhibitors. The Company holds
five United States patents, has four United States patents pending and three
patent applications which have been allowed which concern bradykinin
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antagonists. The Company's patents expire beginning in 2008 and ending in
2015. In addition, the Company holds 26 foreign patents and has 40 foreign
patents pending concerning protease inhibitors and bradykinin antagonists.
Patent applications in the United States are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries, the Company cannot
be certain that it was the first creator of inventions covered by pending
patent applications or the first to file patent applications on such
inventions. There can be no assurance that the Company's pending patent
applications will result in issued patents or that any of its issued patents
will afford meaningful protection against a competitor. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States and, thus, there can
be no assurance that foreign patent applications related to United States
patents will issue. Furthermore, if these patent applications issue, some
foreign countries provide significantly less patent protection than the
United States.
The status of patents involves complex legal and factual questions and
the breadth of claims issued is uncertain. Accordingly, there can be no
assurance that patent applications filed by the Company will result in
patents being issued or that the Company patents, or any patents that may be
issued to the Company in the future, will afford protection against
competitors with similar technology. In addition, no assurances can be given
that patents issued to the Company will not be infringed upon or designed
around by others, or that others will not obtain patents that the Company
would need to license or design around. If existing or future patents
containing broad claims are upheld by the courts, the holders of such patents
could require other companies to obtain licenses. If the Company is found to
be infringing third party patents, there can be no assurance that licenses
that might be required for the Company's products would be available on
reasonable terms, if at all. In addition, a number of pharmaceutical and
biopharmaceutical companies and research and academic institutions have filed
patent applications or received patents in the Company's fields. Some of
these applications or patents may be competitive with the Company's
applications or may conflict in certain respects with claims made under the
Company's applications. Such conflict could result in a significant
reduction of the coverage of the Company's patents, if issued. In addition,
if patents are issued to other companies that contain competitive or
conflicting claims and such claims are ultimately determined to be valid,
there can be no assurance that the Company would be able to obtain licenses
to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company could incur substantial costs in defending itself or its
licensees in litigation brought by others or prosecuting infringement claims
against third parties. If the outcome of any such litigation is unfavorable
to the Company, the Company's business could be adversely affected. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the United States Patent Office, which
could result in substantial cost to the Company and could result in an
adverse decision as to the priority of the Company's inventions.
In addition to patent protection, the Company relies on the law of
unfair competition and trade secrets to protect their proprietary rights. It
is the Company's policy to require its employees, consultants, members of the
Board, outside scientific collaborators and sponsored researchers and other
advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with the
Company, is to be kept confidential and not disclosed to third parties except
in specific circumstances. In the case of employees, the agreements provide
that all inventions conceived by the individual shall be the exclusive
property of the Company. There can be no assurance that these agreements
will not be breached or will provide meaningful protection or adequate
remedies in the event of unauthorized use of the Company's trade secrets or
disclosure of such information. The Company has taken appropriate physical
security measures to protect its intellectual property. There can be no
assurance that such security measures will be adequate. the Company has
attempted and will attempt to protect trade secrets and other proprietary
information through agreements with customers and suppliers, proprietary
information agreements with employees and consultants and other security
measures. Although the Company intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
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DEPENDENCE ON KEY PERSONNEL
Because of the specialized nature of the Company's business, the ability
of the Company to realize appropriate value from its tangible and intangible
assets will be highly dependent upon its retention of qualified personnel.
There can be no assurance that the Company will be successful in retaining
such skilled personnel, who are generally in high demand by pharmaceutical
and biotechnology companies, universities and other research institutions.
The loss of key personnel may have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS REGARDING PRODUCT LIABILITY AND INSURANCE
The testing, manufacturing and marketing of therapeutic products entails
an inherent risk of product liability claims. To date, the Company has not
experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business,
financial condition and results of operations. Potential product liability
claims may exceed the amount of the Company's insurance coverage or may be
excluded from coverage under the terms of the Company's policy.
RISKS REGARDING USE OF HAZARDOUS MATERIALS
The Company has used a number of hazardous materials and is subject to
federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain wastes. Although the
Company believes that its procedures for handling and disposing of such
materials has complied and continues to comply with the standards prescribed
by state and federal regulations, there can be no assurances that the Company
will not incur significant costs to comply with such laws and regulations or
incur significant liability in connection with, among other things, the
de-commissioning of existing laboratory space and any future on-site research
and development work nor can there be any assurance that future laws or
regulation will not materially or adversely affect the Company.
POTENTIAL LOSS OF NASDAQ NATIONAL MARKET LISTING; LOW STOCK PRICE
Trading in the Company's Common Stock is presently quoted on the Nasdaq
National Market. The Company has received a letter from The Nasdaq Stock
Market, Inc. stating that its Common Stock is not in compliance with the
recently modified NASD Marketplace Rules which now require a $1.00 minimum
per share bid price. If the per share bid price for the Company's Common
Stock does not rise to at least $1.00 for ten consecutive trading days by May
28, 1998, The Nasdaq Stock Market, Inc. will issue a delisting letter to the
Company. At such time, the Company's Common Stock would be delisted from the
Nasdaq National Market unless the Company requests a review of the pending
delisting (which review will temporarily stay any delisting) and The Nasdaq
Stock Market, Inc. elects to reverse its decision.
The Company's management and Board of Directors believe that the
proposed combination with BioStar and a reverse split of the Company's Common
Stock (the "Reverse Split") which is being proposed for stockholder approval
at a special meeting of stockholders to be called in connection with such
combination (the "Special Meeting") would bring the Company into compliance
with the $1.00 minimum per share bid price requirement. In the event that
the Reverse Split is not implemented following the Special Meeting (e.g.,
because it is not approved at the Special Meeting), the Company would propose
a reverse stock split of its Common Stock for approval at an Annual Meeting
of the Company's Stockholders to be held as soon as reasonably practicable
following the Special Meeting. There can be no assurances that the Company
will be able to maintain its Nasdaq National Market listing (whether as a
result of failure to meet the minimum bid price requirement or other
requirements imposed by the Nasdaq National Market).
The effects of delisting would include limited release of the market
prices of Cortech Common Stock and limited news coverage of Cortech.
Delisting may restrict investors' interest in Cortech Common Stock and have a
material adverse effect on the trading market and prices for such Common
Stock as well as Cortech's ability to issue additional securities or to
secure additional financing. In addition to the risk of volatility of stock
price and possible delisting,
-24-
<PAGE>
stocks with low per share prices are subject to additional federal and state
regulatory requirements and the potential loss of effective trading markets.
In particular, if Cortech Common Stock were delisted from trading on the
Nasdaq National Market, Cortech Common Stock could be subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended, which, among other
things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability
determinations and receiving any purchaser's written consent prior to any
transaction in such stock. If Cortech Common Stock was deemed to be a "penny
stock" under the Securities Enforcement and Penny Stock Reform Act of 1990,
additional disclosure would be required in connection with trades in Cortech
Common Stock, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of an investment in Cortech Common Stock.
INCREASE IN AUTHORIZED STOCK
The Reverse Split will have the effect of increasing the number of
authorized but unissued shares of the Company's Common Stock. This would
permit the Company to use such shares in connection with strategic
transactions, including acquisitions, or the Company's employee benefit plans.
NO ASSURANCE OF ACTIVE TRADING MARKET; VOLATILITY OF THE COMPANY'S STOCK PRICE
There can be no assurance that an active trading market for the
Company's Common Stock will develop or, if developed, be maintained. In
addition, the market for the Company's Common Stock is expected to continue
to be highly volatile. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to a variety of factors,
including: (i) quarterly variations in operating and financial results; (ii)
announcement of the initiation or results of a significant research and
development collaboration; (iii) introduction of new product offerings by the
Company or its competitors; (iv) changes in the revenue and operating income
and revenue and operating income growth rates for the Company; (v) changes in
government regulation; and (vi) general conditions in the health care
industry and the economy, as well as other events or factors. Statements or
changes in opinions, ratings or earnings estimates by brokerage firms or
industry analysts relating to the market in which the Company does business,
or relating to the Company specifically, could result in immediate and
adverse effects on the market price of the Company's Common Stock. Such
adverse effects could also affect the Company and the market in which the
Company might do business. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations which have
particularly affected the market price for the securities of many companies
in the health care industry and which often have been unrelated to the
operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price of a company's
stock, securities class action lawsuits have been filed against the
publicly-held company. There can be no assurance that such litigation will
not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's
business and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has the authority to issue up to
2,000,000 shares of preferred stock and to fix the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by stockholders. In addition, the
Company's Board of Directors has adopted a stockholder rights plan (the
"Rights Plan") pursuant to which the Company's Board of Directors declared a
dividend of one preferred share purchase right (a "Right") for each then
outstanding share of the Company Common Stock. When a person or group of
affiliated persons (the "Acquiror") acquires 15% or more of the Company's
outstanding Common Stock, the holder of each Right (excluding the Acquiror)
may exercise it and acquire a certain number of shares of the Company's
Common Stock at a below market price.
The rights of the holders of the Company's Common Stock are subject to and
may be adversely affected by the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of such Common Stock
and may adversely affect the market price of and the voting and other rights of
the holders of the Company's Common Stock. In addition, certain provisions of
the Company's Certificate of Incorporation, the Company's Bylaws and Delaware
law applicable
-25-
<PAGE>
to the Company could have the effect of discouraging certain attempts to
acquire the Company which could deprive the Company's stockholders of
opportunities to sell their shares at prices higher than prevailing market
prices.
ABSENCE OF DIVIDENDS
The Company has never declared or paid dividends on its capital stock.
The Company does not anticipate paying any dividends in the foreseeable
future. The Company intends to retain its earnings, if any, for the
development of the business.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-K, such as those concerning
the Company's business strategy, products and revenues, capital requirements,
governmental regulation and other statements regarding matters that are not
historical facts, are forward-looking statements (as such term is defined in
the Securities Act of 1933, as amended). Because such forward-looking
statements include risks and uncertainties, actual results may differ
materially from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed herein under this Item 7
("Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations"), Item 1 ("Business"), Item 3 ("Legal
Proceedings") and elsewhere in this Annual Report on Form 10-K. The Company
undertakes no obligation to publicly release the results of any revision of
those forward-looking statements that may be made to reflect events and
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are set forth beginning
at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-26-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) IDENTIFICATION OF DIRECTORS.
The required information concerning Directors of the Company is as follows:
DONALD KENNEDY, PH.D., age 66, has been a director of the Company since
July 1993 and is a member of the Nominating and Compensation Committees. He
has served on Stanford University's faculty since 1960 and has been President
Emeritus and Bing Professor of Environmental Studies since 1992. He served
as President of Stanford University from 1980 to 1992. Dr. Kennedy received
his Ph.D. in biology from Harvard University. From 1976 to 1977, he was
senior consultant to the Office of Science and Technology Policy in the Ford
White House, and he served for two and one-half years as Commissioner of the
FDA during the Carter presidency.
KENNETH R. LYNN, age 44, has been a director of the Company and its
President and Chief Executive Officer since February 1995 and has served as
Chairman of the Board since April 1997. He is a member of the Executive,
Nominating and Equity Committees. Prior to becoming the Company's Chief
Executive Officer, he was the Company's Vice President, Business Development
and General Counsel from February 1993 until November 1994, when he was
promoted to Senior Vice President, Corporate Development and General Counsel.
He served as Secretary of the Company from March 1993 through March 1995.
From August 1991 to January 1993, he served as Vice President, General
Counsel and Corporate Secretary at U.S. Bioscience, Inc., a pharmaceutical
company. From 1984 to July 1991, he served in various legal positions at
Marion Merrell Dow Inc. (now Hoechst Marion Roussel), most recently as
Corporate Counsel. Mr. Lynn received his J.D. from the University of Kansas
in 1981 and his M.B.A. from Rockhurst College in 1990.
ALLEN MISHER, PH.D., age 65, has been a director of the company since
October 1994. He is a member of the Compensation and Nominating Committees.
Dr. Misher is President Emeritus of the Philadelphia College of Pharmacy and
Science, where he served from January 1984 until December 1994. He earned
his Ph.D. in Physiology from the University of Pennsylvania. He is also a
director of U.S. Healthcare, Inc., U.S. Bioscience, G.D. Searle & Company,
OraVax, Inc., Synthes (U.S.A.) and Litmus Concepts.
BERT FINGERHUT, age 54, has been a director of the Company since 1988
and served as Chairman of the Board from June 1991 to April 1997. He is a
member of the Executive, Audit and Compensation Committees. Mr. Fingerhut
presently pursues private business and conservation interests. From 1984 to
1985, he was Special Limited Partner and Senior Vice President of Odyssey
Partners, a private investment partnership. From 1965 to 1983, he was
General Partner, Managing Director, Executive Vice President and Director of
Research of Oppenheimer & Company, Inc., an investment banking firm. Mr.
Fingerhut is Chairman of the Board of Directors of Toxics Targeting, a
private company based in Ithaca, N.Y. that tracks and provides information on
toxic waste sites. He is currently a member of the Executive Committee of
the Governing Council of the Wilderness Society, the Vice-Chairman of the
Board of Directors of the Southern Utah Wilderness Alliance, a director of
the Grand Canyon Trust and Trustee of the Alaska Conservation Foundation.
CHARLES COHEN, age 47, has served as a director of the Company since
December 1996. He is a member of the Audit and Compensation Committees. He
currently is Chief Scientific Officer and a director of Creative BioMolecules,
Inc. He has served in various positions at Creative BioMolecules, Inc. since
co-founding it in 1985, including as President and Chief Executive Officer. Dr
Cohen received his B.A. from the State University of New York at Buffalo and his
Ph.D. in Basic Medical Science from New York University School of Medicine.
Additionally, Dr. Cohen served as a Research Fellow in the Department of
Biophysics and Biochemistry at the University of Virginia.
-27-
<PAGE>
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth R. Lynn . . . . 44 President, Chief Executive Officer and Chairman
Diarmuid F. Boran . . . 38 Vice President, Corporate Development and Planning
</TABLE>
Mr. Lynn was elected as President and Chief Executive Officer and as a
director of Cortech in February 1995. Mr. Lynn has served as Chairman of the
Board since April 1997. He had been Senior Vice President, Business
Development and General Counsel of the Company since 1994 and previously
served as Vice President, Business Development and General Counsel from 1993
to 1994. He was appointed Secretary in March 1993. From August 1991 to
January 1993, he served as Vice President, General Counsel and Corporate
Secretary at U.S. Bioscience, Inc., a pharmaceutical company. From 1984 to
July 1991, he served in various legal positions at Marion and Marion Merrell
Dow, Inc. (predecessors to HMRI), most recently as Corporate Counsel. Mr.
Lynn received his J.D. from the University of Kansas in 1981 and his M.B.A.
from Rockhurst College in 1990.
Mr. Boran has been Vice President, Corporate Development and Planning
since August, 1995. Previously, Mr. Boran had served as Senior Director,
Commercial Development and Planning. From 1988 to 1993, Mr. Boran worked for
Marion Merrell Dow Inc. (now Hoechst Marion Roussel, Inc.). He held
positions in marketing, strategic planning and finance, and most recently as
Director of Corporate Business Analysis. Mr. Boran earned both his M.B.A and
B.S. of Pharmacy from the University of Michigan.
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's Directors,
executive officers and any persons holding more than 10% of the Company's
issued and outstanding Common Stock are required to report their initial
ownership of Common Stock, any subsequent changes in that ownership and, in
certain instances, an annual statement of changes in ownership to the
Securities and Exchange Commission ("SEC"). Specific due dates for these
reports have been established, and the Company is required to identify in
this Form 10-K those persons who failed to file these reports in a timely
manner. In making this disclosure, the Company has relied solely upon the
written representations of its Directors and executive officers and copies of
the reports that have been filed with the SEC. Based upon the Company's
review of such representations and reports, the Company believes that all
such reports were filed on a timely basis for the year ended December 31,
1997.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Each non-employee director receives options to purchase Common Stock of
the Company under the 1992 Amended and Restated Non-Employee Directors' Stock
Option Plan (the "1992 Directors' Plan") as compensation for his or her
services as a director and receives additional options under such plans for
service on certain committees of the Board. Options were also granted to
non-employee directors outside of such Plan. Outside directors receive
$1,000 per Board meeting attended and $1,000 per committee meeting attended
if held on a non-Board meeting occasion and an additional $6,000 annually.
The 1992 Directors' Plan expired by its terms on December 31, 1997. No plan
has replaced the 1992 Directors' Plan.
Option grants under the 1992 Directors' Plan were automatic and
non-discretionary. Each person who was a non-employee director of the
Company as of the adoption date of the 1992 Directors' Plan was granted
options generally covering 25,000 shares, with adjustments to equalize the
directors' overall options in light of options previously granted to them.
Such options generally become exercisable ("vest") in year-end installments
of 5,000 shares. Each member of the Compensation and Audit Committees
received options covering an additional 500 shares
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<PAGE>
for each committee on which he served. In addition, (i) each person
subsequently elected for the first time as a non-employee director was
granted an option on the date of his or her initial election as a director to
purchase a pro rata portion of 25,000 shares, depending upon when he or she
was elected, which options generally vest in year-end installments of 5,000
shares; (ii) each person subsequently elected for the first time to the Audit
or Compensation Committee was granted an option to purchase 500 shares if
elected before July 1, or a portion thereof, prorated on a quarterly basis,
if elected after such date, vesting in full on December 31; (iii) each
non-employee director received an annual option to purchase an additional
number of shares, determined by multiplying 5,000 by a fraction, the
numerator of which was $20 and the denominator of which was the fair market
value per share of the Company's Common Stock on the grant date, subject to
minimum and maximum limits of 2,500 and 5,000 shares, respectively, vesting
quarterly over five years; and (iv) each non-employee director who was a
member of the Company's Audit or Compensation Committee received an annual
option to purchase 500 shares, vesting in full on December 31. Vesting of
all options is subject to continued service as a non-employee director or
employee of the Company during the vesting period and, in the case of options
granted for service on a committee, to continued service on the applicable
committee. As of March 1, 1997, 1,650 options had been exercised under the
1992 Directors' Plan.
All non-employee directors are reimbursed for their expenses incurred in
attending Board of Directors meetings.
Directors who are employees of the Company do not receive separate
compensation for their services as directors.
During the fiscal year ended December 31, 1997, non-employee directors
received options pursuant to the 1992 Directors' Plan as follows: Dr. Cohen
received options covering 5,000 shares at an exercise price of $1.47 per
share; Mr. Fingerhut received options covering 6,000 shares at $1.47 per
share; Dr. Misher received options covering 5,500 shares at $1.47 per share;
and Dr. Kennedy received options covering 5,500 shares at $1.47 per share.
-29-
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes for the fiscal years ended December 31,
1997, 1996 and 1995, all compensation awarded or paid to or earned by (i) the
Company's Chief Executive Officer and (ii) the Company's other most highly
compensated executive officers (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards
Annual Compensation -----------------------------
------------------- Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options Compensation(1)
- -------- ---- ------ ----- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth R. Lynn
President, Chief 1997 $265,513 $65,000 -- -- $1,141
Executive Officer and 1996 265,006 65,000 -- 75,000 1,174
Chairman of the Board 1995 230,499 75,000 -- 275,000 1,099
Joseph L. Turner (2)
Vice President, Finance and
Administration, Chief 1997 165,537 -- -- -- 2,165
Financial Officer and 1996 154,533 25,000 -- 40,000 2,399
Secretary 1995 155,349 30,000 -- 64,000 2,009
Diarmuid Boran(3)
Vice President, Corporate 1997 140,364 30,000 -- -- 1,708
Development and 1996 140,046 25,000 -- 40,000 1,707
Planning 1995 112,493 30,000 -- 64,000 1,386
</TABLE>
- ------------------
(1) Includes matching payments by the Company under its 401(k) Plan and
premiums paid by the Company for group term life insurance. For 1997, the
amounts were $631 and $510, respectively, for Mr. Lynn; $1,295 and $870,
respectively, for Mr. Turner; and $1,404 and $304, respectively, for Mr.
Boran.
(2) Mr. Turner resigned as an officer and employee of the Company as of
December 1, 1997. At such time, Mr. Turner and the Company entered into an
agreement pursuant to which Mr. Turner will serve as a consultant and
continue to receive his former salary until June 30, 1998. Stock options
held by Mr. Turner will continue to vest until June 30, 1998.
(3) Mr. Boran became an executive officer in 1995.
STOCK OPTION GRANTS AND EXERCISES
No options were granted to the Company's executive officers in 1997. As
of February 27, 1998, options to purchase a total of 1,067,042 shares were
outstanding under the 1993 Equity Incentive Plan.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Named Executive Officers during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Shares Options at 12/31/97 (#) 12/31/97 ($) (1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ----------------------- ------------------------
<S> <C> <C> <C> <C>
Kenneth R. Lynn -- -- 275,009 / 174,991 $ 0 / $ 0
Joseph L. Turner -- -- 101,305 / 62,695 0 / 0
Diarmuid Boran -- -- 79,940 / 66,560 0 / 0
</TABLE>
- --------------------
(1) Based on the closing price of the Company's Common Stock on December 31,
1997 ($0.594) minus the exercise price of the options.
EMPLOYMENT CONTRACTS AND SEVERANCE PLAN
The Company adopted the Executive Officers' Severance Benefit Plan (the
"Severance Plan") on September 18, 1995, which was amended on December 13, 1996,
to encourage senior employees to work in the Company's best interests following
a change in control. In the event of an involuntary termination of employment
within 60 days prior and 30 months following a change in control, all employees
employed at the level of Vice President or above and such other management
employees as may be designated by the Chief Executive Officer will receive
compensation during the Benefit Period (defined below), a proportional bonus
payment if one was received the year preceding the year in which the termination
date occurs, and all outstanding unvested stock options will become fully vested
on the termination date. The "Benefit Period" for employees other than the
Chief Executive Officer is the period commencing on the termination date and (i)
continues for 18 months following such date if the date occurs within 60 days
prior or 12 months after a change in control, or (ii) continues for the period
following the date the employee becomes eligible determined by reducing 30
months by the number of months the eligible employee was employed by the Company
following a change in control. With respect to the Chief Executive Officer, the
"Benefit Period" is the Chief Executive Officer's termination date and (i)
continues for 24 months following such date if the date occurs within 60 days
prior or 12 months after a change in control, or (ii) continues for the period
following such termination date determined by reducing 36 months by the number
of months the Chief Executive Officer was employed by the Company following a
change in control.
Cortech entered into an Executive Compensation and Benefits Continuation
Agreement with Kenneth R. Lynn (the "Employment Agreement") on October 14,
1997, which provides, upon the occurrence of a Termination Event (defined
below) for the payment of the equivalent of 24 months base salary, the
payment of health insurance policies for up to 18 months following the
Termination Event, immediate vesting of all stock options not already vested
and the payment of a bonus (equal to the fraction of the current year worked
multiplied by the bonus paid for the prior year.) A "Termination Event" is
defined as the involuntary termination of Mr. Lynn by Cortech without cause
or the termination of employment by Mr. Lynn on account of a material change
in the business of Cortech or the duties of Mr. Lynn prior to a change in
control of Cortech or within 30 months after a change in control of Cortech.
The Employment Agreement also provides that, with respect to any Termination
Event that is also covered by the Severance Plan, Mr. Lynn will receive
compensation and benefits pursuant to the Employment Agreement
-31-
<PAGE>
only and not pursuant to the Severance Plan. In connection with arrangements
relating to the Merger, Mr. Lynn agreed to an amendment of the Employment
Agreement. Pursuant to such amendment, Mr. Lynn would provide Cortech with
consulting services for up to 20 hours per week (on a non-cumulative basis)
for three months following the effectiveness of the Merger and defer three
months' worth of base salary otherwise payable following the Merger as
severance (to be paid, on a month-to-month basis, over the course of such
three-month consulting period).
In connection with arrangements relating to the Merger, Cortech has
entered into an agreement with Mr. Boran (the "Boran Agreement") which
provides that the cash benefits payable under the Severance Plan would be
paid to Mr. Boran upon the effectiveness of the Merger. The Boran Agreement
further provides that benefits available under the Severance Plan would also
be paid to Mr. Boran (with cash payments made over the course of six months)
in the event of Mr. Boran's involuntary termination in the absence of the
Merger and that Cortech will employ Mr. Boran at his current salary as a
full-time consultant for the six months following the effectiveness of the
Merger.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of February 27,
1998 as to shares of the Company's Common Stock beneficially owned by: (i)
each director; (ii) each of the executive officers named in the Summary
Compensation Table under the caption "Compensation of Executive Officers" in
Item 11 above; (iii) all executive officers and directors of the Company as a
group; and (iv) all those known by the Company to be beneficial owners of
more than five percent of its Common Stock.
<TABLE>
<CAPTION>
Percentage
Shares of Outstanding
Beneficial Owner Beneficially Owned (1) Shares Owned
---------------- ---------------------- --------------
<S> <C> <C>
Asset Value Fund 2,000,000 10.80%
Limited Partnership(2)
376 Main Street
P.O. Box 74
Bedminster, NJ 07921
BVF Partners L.P.(3) 1,225,252 6.61
333 West Wacker Drive
Suite 1600
Chicago, IL 60606
Bert Fingerhut(4) 562,230 3.01
Kenneth R. Lynn(5) 306,255 1.63
Joseph L. Turner(6) 124,396 *
Diarmuid Boran(7) 90,824 *
Donald Kennedy(8) 39,550 *
Allen Misher(9) 33,250 *
Charles Cohen(10) 16,250 *
All executive officers and 1,172,755 6.09
directors as a group (7
persons) (11)
</TABLE>
- ------------------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
Schedules 13D filed with the Securities and Exchange Commission (the
"SEC"). Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, the Company believes
that each of the stockholders named in this table has sole voting and
investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 18,523,918 shares outstanding
on February 27, 1998, adjusted as required by rules promulgated by the SEC.
(2) The sole general partner of Asset Value Fund Limited Partnership ("AVF") is
Asset Value Management, Inc., a Delaware corporation and a wholly owned
subsidiary of Kent Financial Services, Inc., a Delaware corporation. These
holdings are pursuant to a Schedule 13D/A filed March 10, 1998.
-33-
<PAGE>
(3) Includes 657,796 shares held by Biotechnology Value Fund, L.P. ("BVF").
Mark N. Lampert is the sole shareholder, director and president of BVF
Inc., which is the general partner of BVF Partners L.P. ("Partners"), which
is the general partner of BVF.
(4) Includes options to purchase 152,035 shares, which are exercisable within
60 days of the date of this table. Also includes 3,000 shares held by Mr.
Fingerhut's wife and 17,000 shares by Mr. Fingerhut's minor daughter.
(5) Includes options to purchase 302,822 shares, which are exercisable within
60 days of the date of this table.
(6) Includes options to purchase 111,478 shares, which are exercisable within
60 days of the date of this table.
(7) Includes options to purchase 89,315 shares, which are exercisable within 60
days of the date of this table.
(8) Includes options to purchase 39,550 shares, which are exercisable within 60
days of the date of this table.
(9) Includes options to purchase 28,250 shares, which are exercisable within 60
days of the date of this table.
(10) Includes options to purchase 16,250 shares, which are exercisable within 60
days of the date of this table.
(11) Includes options to purchase a total of 739,700 shares, which are
exercisable within 60 days of the date of this table by executive offers
and directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INDEMNIFICATION
The Company's Certificate of Incorporation and Bylaws provide, among other
things, that the Company will indemnify each officer or director, under the
circumstances and to the extent provided for therein, for expenses, damages,
judgments, fines and settlements he may be required to pay in actions or
proceedings to which he is or may be made a party by reason of his position as a
director, officer or other agent of the Company, and otherwise to the full
extent permitted under Delaware law. Under the Reorganization Agreement,
Cortech has agreed to provide indemnification, from and after the effective time
of the Merger and to the fullest extent permitted by applicable laws, to any
person who has served as a director or officer of Cortech or BioStar against
losses, claims, damages or expenses arising out of the fact that such person was
a director or officer of Cortech or BioStar.
SEVERANCE ARRANGEMENTS
Each of Kenneth R. Lynn and Diarmuid Boran has entered into certain
arrangements with Cortech which provide for certain payments and benefits in
certain severance events (see Item 11 "Executive Compensation - Employment
Contracts and Severance Plan"). Joseph L. Turner, Cortech's Former Vice
President, Finance and Administration, Chief Financial Officer and Secretary,
entered into a consulting arrangement with Cortech upon his resignation on
December 1, 1997 (see Item 11 "Executive Compensation - Compensation of
Executive Offices - Summary Compensation Table").
-34-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on Page F-1 of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
<S> <C>
Report of independent public accountants . . . . . . . . . . . . F-1
Balance sheets as of December 31, 1997 and 1996. . . . . . . . . F-2
Statement of operations for each of the three
years in the period ended December 31, 1997. . . . . . . . . . . F-3
Statements of changes in stockholders' equity
for each of the three years in the period
ended December 31, 1997. . . . . . . . . . . . . . . . . . . . . F-4
Statements of cash flows for each of the three
years in the period ended December 31, 1997. . . . . . . . . . . F-5
Notes to financial statements. . . . . . . . . . . . . . . . . . F-6
</TABLE>
(2) Financial Statement Schedules
Other information is omitted because it is either presented
elsewhere, is inapplicable or is immaterial as defined in the
instructions.
(3) Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K has been identified with
two asterisks ("**") on the table of exhibits set forth below at Item
14(c).
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1997. A Current
Report on Form 8-K was filed on January 13, 1998 in respect of the
proposed transaction with BioStar (see Exhibit 2.1 below).
(c) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-1.
Exhibit No. Description of Document
- ----------- -----------------------
2.1 Agreement and Plan of Merger and Reorganization dated as of
December 22, 1997 among Cortech, Inc., Cortech Merger Sub., Inc.
and BioStar, Inc. (16)
3.1 Certificate of Incorporation of Cortech, Inc. as amended. (1)
3.2 Proposed Certificate of Amendment to Certificate of Incorporation
of Cortech, Inc. (15)
-35-
<PAGE>
3.3 Certificate of Designation for Series A Junior Participating
Preferred Stock. (11)
3.4 Amended and Restated Bylaws of Cortech, Inc. (15)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 10.21, 10.22,
10.30, 10.34, 10.52, 10.71, 10.72, 10.73, 10.74, 10.75, 10.76,
10.77, 10.78, 10.79 and 10.81. (15)
4.2 Specimen certificate for the Common Stock of Cortech, Inc. (1)
10.2 Lease Agreement, dated April 2, 1992, as amended, between
Lyon-Stewart Associates and the Company. (1)
10.3 Lease Agreement, dated March 5, 1993, between Lyon-Stewart
Associates and the Company. (5)
10.7 Lease Agreement, dated May 14, 1993, as amended, between
Lyon-Stewart Associates and the Company. (5)
10.13 Purchase and Sale Agreement (Vacant Land) dated February 16, 1994,
between the Company and Golden West Equity Properties, Inc. and
Park Center Limited Partnerships. (7)
10.14 Research Agreement, dated June 30, 1987, between HMRI,
successor-in-interest to Marion Merrell Dow Inc. and the Company as
amended through December 31, 1996. (1)
10.19 Fifth Amendment of Research Agreement, dated January 14, 1994,
between HMRI and the Company. (6)
10.21 Warrant to Purchase, dated June 30, 1988, between HMRI and the
Company. (1)
10.22 Warrant to Purchase, dated February 28, 1990, between HMRI and the
Company. (1)
10.25 License Agreement, dated June 30, 1987, between HMRI and the
Company. (1)
10.27 Amended and Restated License Agreement dated as of May 28, 1993,
between HMRI and the Company. (3)
10.28 Sponsored Research and License Agreement, dated February 13, 1987,
between The John Hopkins University and the Company. (1)
10.29 License Agreement, dated June 30, 1987, between The Research
Foundation of the State of New York and the Company. (1)
10.30 Stock Purchase Agreement dated July 8, 1994, between the Company
and the Research Foundation of State University of New York. (9)
10.31 Royalty Buyout Agreement dated July 8, 1994, between the Company
and the Research Foundation of State University of New York. (9)
10.32 Development Agreement dated May 2, 1994, between the Company and
Abbott Laboratories. (8)*
10.34 Form of Warrant issued in connection with the CDC offering. (1)
10.35 Purchase Option Agreement, dated February 13, 1992, between CDC
and the Company. (1)
10.36 Technology License Agreement, dated February 13, 1992, between CDC
and the Company. (1)
-36-
<PAGE>
10.37 Research and Development Agreement, dated February 13, 1992,
between CDC and the Company. (1)
10.38 Services Agreement, dated February 13, 1992, between CDC and the
Company. (1)
10.39 Amended and Restated 1986 Incentive Stock Option Plan of the
Company. (1)**
10.40 1991 Non-employee Directors' Stock Option Plan of the Company.
(2)**
10.41 Amended and Restated 1992 Non-employee Directors' Stock Option
Plan of the Company. (6)**
10.42 1993 Employee Stock Purchase Plan of the Company, as amended.
(4)**
10.43 1993 Equity Incentive Plan of the Company, as amended.**
10.45 Resignation and Separation Agreement dated March 10, 1994, between
the Company and David K. Crossen. (7)
10.47 Executive Officers' Severance Benefit Plan. (13)**
10.48 Sixth Amendment of Research Agreement, dated March 15, 1995,
between HMRI and the Company. (13)
10.50 Product Development and License Agreement dated November 1, 1995
between the Company and SmithKline Beecham. (13)*
10.51 Seventh Amendment of Research Agreement, dated December 21, 1995,
between HMRI and the Company. (13)
10.52 Warrant to Purchase, dated June 30, 1992, between HMRI and the
Company. (13)
10.53 Rights Agreement drafted as of June 13, 1995, between the Company
and American Securities Transfer, Inc. (10)
10.54 Buy-Out Agreement, dated September 9, 1996 between the Company and
HMRI. (12)
10.55 Amendment No. 1 To Executive Officers' Severance Benefit Plan.
(13)**
10.57 Second Amendment of the Research, Development and License
Agreement dated April 23, 1997, between Ono and the Company (14)*
10.85 Amendment to Leases between Clear Creek II, LP and the Company
dated September 8, 1997. (15)
10.94 Executive Compensation Benefits Continuation Agreement between the
Company and Kenneth R. Lynn, dated October 14, 1997, as amended
February 12, 1998. (15)**
10.95 Agreement, dated February 12, 1998, between the Company and
Diarmuid F. Boran.(15)**
10.96 Agreement, dated October 15, 1997 between the Company and Joseph
L. Turner.**
10.97 Form of Option Agreement for Directors' Non-Plan Options.**
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included in Signature section of this Report).
-37-
<PAGE>
27.1 Financial Data Schedule.
- --------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1,
filed October 13, 1992, file number 33-53244, or amendments thereto and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's annual report on Form 10-K for the
year ended December 31, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-8,
filed March 29, 1993, file number 33-60242, or amendments thereto and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-1,
filed September 27, 1993, file number 33-69402, or amendments thereto and
incorporated herein by reference.
(6) Filed as an exhibit to the Company's annual report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1994, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1994, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by reference.
(11) Filed as an exhibit to Cortech Inc.'s annual report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(12) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended September 30, 1996, and incorporated herein by
reference.
(13) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
(14) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended June 30, 1997, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Registration Statement on Form S-4,
filed February 17, 1998, File Number 33-46445 and incorporated herein by
reference.
* Subject to Confidential Treatment Order.
** Compensatory Plan.
-38-
<PAGE>
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, on this 30th day
of March, 1998.
CORTECH, INC.
By: /s/ KENNETH R. LYNN
--------------------------------
Kenneth R. Lynn
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth R. Lynn, his attorney-in-fact,
with full power of substitution and resubstitution, for him in any and all
capacities, to sign any amendments to this Report, 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 of said
attorney-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
/s/ KENNETH R. LYNN President and Chief Executive March 30, 1998
- ---------------------- Officer, Chairman of the Board -------------
Kenneth R. Lynn of Directors, Acting Chief Date
Financial Officer and Director
(principal executive officer
and principal financial and
accounting officer)
/s/ BERT FINGERHUT Director March 30, 1998
- --------------------- --------------
Bert Fingerhut Date
/s/ CHARLES COHEN Director March 30, 1998
- --------------------- --------------
Charles Cohen Date
/s/ DONALD KENNEDY Director March 30, 1998
- --------------------- --------------
Donald Kennedy Date
/s/ ALLEN MISHER Director March 30, 1998
- --------------------- --------------
Allen Misher Date
-39-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cortech, Inc.:
We have audited the accompanying balance sheets of CORTECH, INC. (a
Delaware corporation), as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
During the fourth quarter of 1997, the Company terminated its on-site
research and development activities. The Company has retained certain
personnel who are engaged primarily in efforts to realize appropriate value
from the Company's tangible and intangible assets (Note 1).
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cortech, Inc., as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1998.
F-1
<PAGE>
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) . . . . . . . . $11,562 $ 7,792
Short-term investments (Note 2) . . . . . . . . . . 3,841 13,186
Prepaid expenses and other . . . . . . . . . . . . 308 845
-------- --------
Total current assets . . . . . . . . . . . 15,711 21,823
-------- --------
PROPERTY AND EQUIPMENT, at cost (Note 2):
Laboratory and pilot production equipment . . . . . -- 7,101
Leasehold improvements . . . . . . . . . . . . . . 8,026 8,026
Office furniture and equipment . . . . . . . . . . 2,300 2,483
-------- --------
10,326 17,610
Less -- Accumulated depreciation and amortization . (9,592) (13,950)
-------- --------
734 3,660
-------- --------
Total Assets . . . . . . . . . . . . . . . $16,445 $25,483
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . $600 $680
Accrued liabilities . . . . . . . . . . . . . . . . 162 206
Accrued vacation and other compensation . . . . . . 264 185
Unearned income . . . . . . . . . . . . . . . . . . -- 1,323
Advances from corporate partner . . . . . . . . . . 36 964
-------- --------
Total current liabilities . . . . . . . . . 1,062 3,358
-------- --------
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY (Notes 3 and 4):
Preferred stock, $.002 par value, 2,000,000 shares
authorized, none issued . . . . . . . . . . . . . -- --
Common stock, $.002 par value, 50,000,000 shares
authorized, 18,523,918 and 18,518,079 shares
issued and outstanding, respectively . . . . . . 37 37
Warrants . . . . . . . . . . . . . . . . . . . . . 1,077 2,330
Additional paid-in capital . . . . . . . . . . . . 98,909 97,659
Deferred compensation . . . . . . . . . . . . . . . (1) (40)
Accumulated deficit . . . . . . . . . . . . . . . . (84,639) (77,861)
-------- --------
Total stockholders' equity . . . . . . . . 15,383 22,125
-------- --------
Total Liabilities and Stockholders' Equity $16,445 $25,483
-------- --------
-------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-2
<PAGE>
CORTECH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sponsored research and development:
Ono. . . . . . . . . . . . . . . . . . $ 2,798 $ 3,500 $ 2,677
SB . . . . . . . . . . . . . . . . . . 653 2,550 --
Related parties (Note 3) . . . . . . . -- 1,372 1,463
Technology license revenue (Note 3). . . -- -- 1,000
----------- ----------- -----------
Total Revenues . . . . . . . . . . 3,451 7,422 5,140
----------- ----------- -----------
EXPENSES:
Research and development
(Notes 2 and 7) . . . . . . . . . . . 7,552 11,339 18,551
General and administrative. . . . . . . 3,616 3,614 4,695
----------- ----------- -----------
Total expenses . . . . . . . . . . 11,168 14,953 23,246
----------- ----------- -----------
Operating loss . . . . . . . . . . (7,717) (7,531) (18,106)
----------- ----------- -----------
Interest income . . . . . . . . . . . . 939 1,192 1,685
----------- ----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . $ (6,778) $(6,339) $ (16,421)
----------- ----------- -----------
----------- ----------- -----------
Basic net loss per share (Note 2) . . $ (0.37) $(0.35) $(0.92)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares
outstanding (Note 2). . . . . . . . 18,521,758 18,224,818 17,753,626
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
CORTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL COMPENSATION DEFICIT
---------- --------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994. . . . . . . 17,725,504 $35 $3,407 $94,925 $(193) $(55,101)
Reversal of deferred
compensation in connection
with resignation of two
directors. . . . . . . . . . . . . . -- -- -- (13) 13 --
Exercise of common stock
options for cash at
$1.75 to $2.60 per
share. . . . . . . . . . . . . . . . 41,454 -- -- 74 -- --
Amortization of deferred
compensation . . . . . . . . . . . . -- -- -- -- 83 --
Issuance of common stock
to consultant for
services valued at
$2.59 per share. . . . . . . . . . . 9,638 -- -- 25 -- --
Issuance of common stock
at $1.91 to $2.31 per
share pursuant to employee
stock purchase plan. . . . . . . . . 46,860 1 -- 89 -- --
Compensation expense
related to common
stock option issuances . . . . . . . -- -- -- 53 -- --
Net loss . . . . . . . . . . . . . . . -- -- -- -- -- (16,421)
---------- --------- -------- ---------- ------------ -----------
BALANCES, December 31, 1995. . . . . . . 17,823,456 36 3,407 95,153 (97) (71,522)
Exercise of common stock
options for cash at
$1.75 to $2.875 per
share. . . . . . . . . . . . . . . . 474,033 1 -- 828 -- --
Amortization of deferred
compensation . . . . . . . . . . . . -- -- -- -- 57 --
Issuance of common stock
at $1.33, $1.91, $2.55 and
$2.18 per share
pursuant to employee
stock purchase plan. . . . . . . . . 20,590 -- -- 37 -- --
Issuance of common stock
options in exchange for
termination of royalty
obligation valued at
$1.00 per share. . . . . . . . . . . -- -- -- 78 -- --
Issuance of common stock
in exchange for termination
of right of first
offer valued at $2.44 per
share. . . . . . . . . . . . . . . . 200,000 -- -- 486 -- --
Expiration of certain
CDC warrants . . . . . . . . . . . . -- -- (1,077) 1,077 -- --
Net loss . . . . . . . . . . . . . . . -- -- -- -- -- (6,339)
---------- --------- -------- ---------- ------------ -----------
BALANCES, December 31, 1996. . . . . . . 18,518,079 37 2,330 97,659 (40) (77,861)
Reversal of deferred
compensation in connection
with resignation of a
director and other . . . . . . . . . -- -- -- (7) 3 --
Amortization of deferred
compensation . . . . . . . . . . . . -- -- -- -- 36 --
Issuance of common stock
at $0.66 per share
pursuant to employee stock
purchase plan. . . . . . . . . . . . 5,839 -- -- 4 -- --
Contribution of certain
warrants . . . . . . . . . . . . . . -- -- (175) 175 -- --
Expiration of certain
CDC warrants . . . . . . . . . . . . -- -- (1,078) 1,078 -- --
Net loss . . . . . . . . . . . . . . . -- -- -- -- -- (6,778)
---------- --------- -------- ---------- ------------ -----------
BALANCES, December 31, 1997. . . . . . . 18,523,918 $37 $ 1,077 $98,909 $ (1) $(84,639)
---------- --------- -------- ---------- ------------ -----------
---------- --------- -------- ---------- ------------ -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . $ (6,778) $(6,339) $(16,421)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization . . . . . . . . . . . . 1,545 2,093 4,344
Issuance of stock in
exchange for termination of right
of first offer . . . . . . . . . . . -- 486 --
Issuance of common stock for
services . . . . . . . . . . . . . . -- -- 25
Loss on disposition of
equipment. . . . . . . . . . . . . . 530 14 52
Research and compensation
expense related to grant of
options, including amortization
of deferred compensation . . . . . . 32 137 149
Decrease (increase) in
prepaid expenses and other . . . . . 537 (435) (6)
(Increase) decrease in
accounts payable . . . . . . . . . . (80) 75 (1,387)
(Decrease) increase in
advances from corporate
partner . . . . . . . . . . . . . . (928) 964 --
Increase (decrease) in
accrued liabilities, accrued
vacation and other compensation. . . 35 (97) (13)
(Decrease) increase in
unearned income. . . . . . . . . . . (1,323) 750 573
-------- ------- --------
Net cash used in operating
activities . . . . . . . . . . . (6,430) (2,352) (12,684)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment. . . . . . . . . . . . . . . (39) (690) (601)
Proceeds from sales of property
and equipment. . . . . . . . . . . . . 890 7 --
Purchases of short-term
investments. . . . . . . . . . . . . . (15,505) (18,587) (34,477)
Sales of short-term
investments. . . . . . . . . . . . . . 24,850 22,354 41,465
-------- ------- --------
Net cash provided by investing
activities . . . . . . . . . . . 10,196 3,084 6,387
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock . . . . . . . . . . . . . 4 37 90
Proceeds from exercise of
common stock options . . . . . . . . . -- 829 74
-------- ------- --------
Net cash provided by
financing activities . . . . . . 4 866 164
-------- ------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . 3,770 1,598 (6,133)
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . 7,792 6,194 12,327
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period . . . . . . . . . . . . . . . . $ 11,562 $ 7,792 $ 6,194
-------- ------- --------
-------- ------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Contribution of 562,576 warrants
to the Company. . . . . . . . . . . . $ 175 $ -- $ --
-------- ------- --------
-------- ------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-5
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION
Cortech, Inc. ("Cortech" or the "Company") is a biopharmaceutical
company whose principal focus has been the discovery and development of novel
therapeutics for the treatment of inflammatory disorders. The Company has
directed its research and development efforts towards protease inhibitors and
bradykinin antagonists. Due to the termination of the Company's collaborative
agreements and the resulting corporate downsizings, the Company no longer has
the scientific staff that would be required to continue its research and
development activities on-site. Such on-site research and development
activities were terminated in late 1997. However, Cortech has retained a core
staff of professionals who are engaged primarily in ongoing efforts to
realize appropriate value out of Cortech's tangible and intangible assets. In
addition, Cortech is currently decommissioning its laboratories, has sold
most of its scientific and technical equipment and, unless the merger
discussed below is implemented and BioStar, Inc. ("BioStar") elects to retain
such assets, plans to sell most of its office furniture and equipment, and,
where possible, its leasehold improvements.
The Company announced in December 1997, that a definitive merger
agreement was signed with BioStar, Inc. ("BioStar") of Boulder, Colorado.
BioStar develops, manufactures and markets point-of-care diagnostic tests
using its proprietary, highly-sensitive, thin film technologies. BioStar's
current products employ its Optical Immuno Assay (OIA(R)) technology, a thin
film, platform technology developed for the rapid detection of a variety of
medical conditions. Under the agreement, and pursuant to the merger
transaction contemplated thereby (the "Merger"), Cortech would issue up to
28,500,000 shares of its common stock to BioStar's stockholders in exchange
for all of the equity interests in BioStar and BioStar would become a
wholly-owned subsidiary of the Company. The relative ownership of the merged
entity would be held approximately 40% by Cortech shareholders and
approximately 60% by BioStar shareholders (assuming the exercise in full of
all options and warrants to be assumed by Cortech in connection with the
Merger). Accordingly, the Merger would be accounted for as a reverse
acquisition. The transaction, which is subject to approval by the
stockholders of both companies as well as other closing conditions, is
anticipated to be completed in the second quarter of 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the statements of cash flows, the Company generally
considers all highly liquid debt instruments with an original maturity of
less than three months to be cash equivalents. Cash equivalents consist of
government obligations or investments collateralized by government
obligations. Short-term investments are carried at cost plus accrued
interest, which approximates market value, and consist entirely of United
States government obligations.
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company's
short-term investments are classified as available-for-sale. These securities
mature on various dates through February 1998. At December 31, 1997, these
securities had an amortized cost of $3.8 million, which approximated fair
market value.
F-6
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided on the straight-line
method over estimated useful lives of three to seven years. Amortization of
leasehold improvements is provided on the straight-line method over the
expected lease terms, which currently do not exceed two years.
Betterments, renewals and extraordinary repairs that extend the life of an
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition recognized in income.
The Company's policy is to depreciate its property and equipment over its
remaining useful life and to evaluate the remaining life and recoverability of
such property and equipment in light of current conditions. During 1997, the
Company recorded a restructuring charge of approximately $1.7 million, which
included a $580,000 permanent impairment of the value of the Company's
scientific and office equipment. The Company sold the majority of its
scientific and some of its office equipment to an unrelated third party during
the fourth quarter. The restructuring charge is included in research and
development expense ($1.4 million) and general and administrative expense
($349,000) in the accompanying statements of operations.
RESEARCH AND DEVELOPMENT EXPENSES
Costs incurred in connection with research and development activities
are expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities
that perform certain research on behalf of the Company. As discussed in Note
1, on-site research and development activities were terminated by the Company
in the fourth quarter of 1997.
SPONSORED RESEARCH AND DEVELOPMENT REVENUE
The Company recognizes revenue from sponsored research and development
as research activities are performed or as development milestones are
completed under the terms of the research and development agreements. Costs
incurred in connection with the performance of sponsored research and
development are expensed as incurred and were approximately $2,882,000,
$8,258,000, and $4,140,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Such costs are included in research and development
expense in the accompanying statements of operations.
BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which the Company is required to adopt for the year ended December
31, 1997. SFAS No. 128 requires restatement of amounts previously reported as
net loss per share. Application of SFAS No. 128 did not have an impact on
previously reported net loss per share amounts.
INCOME TAXES
The Company follows the provisions of SFAS No. 109 "Accounting for
Income Taxes" which requires the recognition of deferred tax assets and
liabilities related to the expected future tax consequences of events that
have been recognized in the Company's financial statements and tax returns.
However, if it is more likely than not that
F-7
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
some portion or all of the net deferred tax assets will not be realized, a
valuation allowance is established and the tax benefit is not recognized in
the statements of operations.
(3) SPONSORED RESEARCH AND DEVELOPMENT
ONO PHARMACEUTICAL CO., LTD. ("ONO")
In March 1995, Cortech entered into a research agreement with Ono to
develop an orally active human neutrophil elastase inhibitor using Cortech's
protease inhibitor research capabilities. Upon entering into the agreement,
Ono paid the Company $500,000 for research previously conducted by the
Company. Under the agreement as amended in 1996, Ono paid $4.3 million in
1996 and an additional $1.5 million was paid in March 1997 for work that was
performed in the second and third quarters of 1997. Under the terms of the
agreement, as amended in April, 1997, Ono has assumed all responsibilities
for research activities during the final six months of the collaborative
project, which will terminate on March 14, 1998. As a result of this
reallocation of responsibilities, Ono is no longer required to pay the
Company the last scheduled $1.5 million in research funding previously
provided for under the agreement to offset certain costs that the Company
would otherwise have incurred under the agreement. Cortech expects no further
payments from Ono under the agreement.
Under the terms of the agreement, Ono will have an exclusive,
royalty-free license to make, use and sell a resulting product in Japan,
Korea, Taiwan and China. Cortech has retained all other rights.
HOECHST MARION ROUSSEL, INC.("HMRI")
The Company had an agreement with HMRI whereby HMRI funded certain
research and development being conducted by the Company. In December 1996,
HMRI terminated the agreement and returned all rights to Cortech. No further
funding was provided by HMRI in 1997 and none will be provided in the future.
HMRI accounted for $1,372,000 and $1,463,000 of the Company's sponsored
research and development revenues for the years ended December 31, 1996, and
1995, respectively.
In return for providing this research funding, the Company granted HMRI
warrants to purchase common stock of the Company (Note 4). The Company
records any cash received in connection with the issuance of the warrants as
a component of equity in the accompanying financial statements. In October
1997, HMRI sold the warrants to an unrelated third party who subsequently
contributed them to the capital of the Company. Also during October 1997,
HMRI sold all Cortech common stock held by HMRI to the same unrelated third
party.
In August 1996, the Company issued 200,000 shares of unregistered common
stock to HMRI to purchase the "right of first offer" it had previously
granted to HMRI. The right of first offer, granted as part of a transaction
between the parties entered into in February 1988, had covered all new
technologies developed by the Company.
SMITHKLINE BEECHAM("SB")
In November 1995, Cortech entered into a worldwide product development
and license agreement with SB for the development of Bradycor. In March 1997,
SB and the Company agreed to terminate their collaboration when a Phase II
trial of Bradycor in patients with traumatic brain injury failed to
demonstrate a statistically significant effect of the compound on
intracranial pressure, the primary endpoint of the trial. SB made a one-time
payment to Cortech of $1.0 million for an exclusive license to Bradycor in
1995, and paid Cortech $4.0 million during 1996. No payments were received in
1997 and Cortech expects no further payments from SB under the agreement.
F-8
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(4) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of $.002 par value
preferred stock which may be issued with various terms in one or more series,
as the Board of Directors may determine.
On June 2, 1995, the Company's Board of Directors approved the adoption
of a Preferred Share Rights plan under which stockholders received one Right
to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock ("Junior Preferred Stock") for each outstanding share of
Cortech common stock of record held at the close of business on June 26,
1995. The rights were distributed as a non-taxable dividend and will expire
in June 2005. The rights would separate from shares of Cortech common stock
and become exercisable at $20.00 each, subject to future adjustment, only if
a person or group acquires 15 percent or more of the Cortech common stock.
Cortech's Board of Directors may terminate the plan or redeem the rights, at
a nominal redemption price, prior to the time a person acquires more than 15
percent of the Cortech common stock. The Company has designated 500,000
shares of its Preferred Stock as Junior Preferred Stock.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." This new
standard encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments based on a fair-value method of accounting.
Companies that do not choose to adopt the new expense recognition rules
of SFAS No. 123 will continue to apply the existing rules contained in
Accounting Principles Board ("APB") Opinion No. 25, but will be required to
provide pro forma disclosures of the compensation expense determined under
the fair-value provisions of SFAS No. 123, if material. APB No. 25 requires
no recognition of compensation expense for most of the stock-based employee
compensation arrangements provided by the Company, namely, broad-based
employee stock option grants and stock purchase plans where the exercise
price is equal to the market price at the date of grant.
The Company adopted the disclosure provisions of SFAS No. 123 for the
years ended December 31, 1997, 1996 and 1995. The Company will continue to
follow the accounting provisions of APB No. 25 for stock-based compensation
and will furnish the pro forma disclosures required under SFAS No. 123.
At December 31, 1997, the Company has four stock option plans, which are
described below. The Company applies APB No. 25 and related Interpretations
in accounting for its plans. Had compensation cost for the Company's four
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS
No. 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic net loss -- as reported. . . . . . . $(6,778) $(6,339) $(16,421)
Basic net loss -- pro forma. . . . . . . . $(7,577) $(7,005) $(16,887)
Basic loss per share -- as reported. . . . $ (0.37) $ (0.35) $ (0.92)
Basic loss per share -- pro forma. . . . . $ (0.41) $ (0.38) $ (0.95)
</TABLE>
The Company's 1986 Stock Option Plan ("1986 Plan") authorizes the grant
of stock options to officers and employees of the Company to purchase an
aggregate of 1,500,000 shares of common stock. Although 407,100 shares
F-9
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
were available under the 1986 Plan as of December 19, 1997, on such date the
Board of Directors effectively suspended future grants of options under the
1986 Plan to the extent that any such grant would increase the shares subject
to outstanding grants above the figure as of such date. Such suspension shall
remain in effect pending the proposed Merger and other actions to be
considered for approval by the Company's stockholders in connection with such
Merger.
The Company's 1993 Equity Incentive Plan ("1993 Plan"), approved by the
stockholders on May 10, 1994, authorizes the issuance of 1,700,000 shares
through the grant of options to purchase common stock, stock bonuses, and
rights to purchase restricted stock. The options outstanding as of December
31, 1997, generally become exercisable in varying amounts over a
two-to-five-year period from the date of grant. Although 370,845 shares were
available under the 1993 Plan as of December 19, 1997, on such date the Board
of Directors effectively suspended further grants of options under the 1993
Plan to the extent that any such grant would increase the shares subject to
outstanding grants above the figure as of such date. Such suspension shall
remain in effect pending the proposed Merger and other actions to be
considered for approval by the Company's stockholders in connection with such
Merger.
The stock options granted from either plan may be incentive stock
options ("ISO") or nonstatutory stock options ("NSO"). The Board of Directors
may set the rate at which the options become exercisable and determine when
the options expire, subject to limitations discussed below. However, no
options shall be exercisable after the tenth anniversary of the date of grant
or, in the case of ISOs, three months following termination of employment,
except in cases of death or disability, for which the time of exercisability
is extended. In the event of a dissolution, liquidation or other corporate
reorganization, all stock options outstanding under the 1986 Plan and the
1993 Plan would become exercisable in full (the proposed Merger would not
effect such an acceleration).
ISOs may not be granted at an exercise price of less than the fair
market value of the common stock at the date of grant. If an ISO is granted
to an employee who owns more than 10% of the Company's total voting stock,
such exercise price shall be at least 110% of fair market value of the common
stock, and the ISO shall not be exercisable until after five years from the
date of grant. The exercise price of each NSO may not be less than 85% of the
fair market value of the common stock at the date of grant. The ISOs
outstanding as of December 31, 1997, generally become exercisable in varying
amounts over a two-to-five year period from the date of grant. NSOs also
generally become exercisable over a two-to-five year period.
Each of these plans also provides for stock appreciation rights, which
may be granted with respect to any stock option. No stock appreciation rights
have been granted as of December 31, 1997.
During 1991, a Nonemployee Directors' Stock Option Plan was approved which
authorized the grant of stock options to purchase up to 150,000 shares of
common stock to the nonemployee directors of the Company. The exercise price of
the options is equal to the fair market value of the shares on the date of
grant, which is generally the later of initiation of the plan or the date of
election to the Board of Directors. In March 1993, the Board of Directors
suspended further grants under this plan. Vesting of the options occurred upon
the participation by a director in a Board meeting. As of December 31, 1997,
options to purchase 108,000 shares of common stock had been granted and were
fully vested. Such options were granted at exercise prices ranging from $1.75
to $2.60 per share. The Company recorded the difference between the fair market
value of the underlying common stock and the exercise price as compensation
expense on the date the options vested.
The Company's 1992 Nonemployee Directors' Stock Option Plan authorizes the
granting of options to purchase up to 400,000 shares of common stock to the
nonemployee directors of the Company. The plan was originally approved by the
stockholders on May 17, 1993, and an amendment to the plan was approved by the
stockholders on May 10, 1994. During 1997, 1996 and 1995, respectively, options
to purchase 27,500, 28,750, and
F-10
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
36,000 shares of common stock were granted to nonemployee directors. During
1994, in order to effect a repricing of certain of these options, options to
purchase 162,250 shares of common stock were amended to become options to
purchase 148,535 shares of common stock at an exercise price of $1.75 per
share. The amended options generally become exercisable from one to two years
later than as originally granted. The Company recorded deferred compensation
in 1993 of approximately $114,000 based on the amount that the fair market
value of the Company's common stock exceeded the exercise price on the date
the options were approved by the stockholders. The Company began in July 1993
to amortize such deferred compensation over approximately five years and has
recorded compensation expense of approximately $6,000, $15,000, and $18,000
in 1997, 1996 and 1995, respectively. There are currently options to purchase
190,535 shares of common stock outstanding under the plan at exercise prices
ranging from $1.47 to $8.75 per share. By its terms, the plan terminated on
December 31, 1997 (although such event does not affect outstanding options
granted under the plan).
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected Life (years) . . . . 1.0 8.7 7.0
Interest Rate . . . . . . . . 5.54% 6.13% 5.38%
Volatility . . . . . . . . . 93.1% 111.1% 117.6%
</TABLE>
A summary of the status of the Company's 1986 plan, 1993 plan and
nonemployee directors' stock option plans as of December 31, 1997, 1996 and
1995 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- -------------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------- --------- ---------------- ------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year . . . . . . . 2,442,701 $2.08 2,611,602 $2.02 2,270,748 $2.58
Granted . . . . . . . 46,800 $1.39 489,345 $1.99 813,779 $2.13
Exercised . . . . . . -- -- (458,133) $1.74 (41,454) $1.79
Forfeited/Cancelled . (489,992) $2.08 (200,113) $2.05 (431,471) $2.99
--------- --------- ---------
Outstanding at end of
year . . . . . . . . 1,999,509 $2.06 2,442,701 $2.08 2,611,602 $2.02
--------- --------- ---------
--------- --------- ---------
Options exercisable at
year-end . . . . . . 1,441,568 $2.09 1,278,836 $2.08 1,095,860 $1.92
--------- --------- ---------
--------- --------- ---------
Weighted-average fair
value of options
granted during the
year . . . . . . . . $0.52 $1.78 $1.92
</TABLE>
F-11
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Company has granted other options to certain directors and consultants:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ------------------------------ -------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------ -------- ---------------- -------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year . . . . . . . . . . 160,584 $3.92 141,734 $4.16 381,484 $4.13
Granted . . . . . . . . . -- -- 38,750 $1.25 -- --
Exercised . . . . . . . . -- -- (15,900) $1.80 -- --
Forfeited/Cancelled . . . (15,000) $6.00 (4,000) $2.60 (239,750) $3.99
------- ------- --------
Outstanding at end of
year . . . . . . . . . . 145,584 $3.71 160,584 $3.92 141,734 $4.16
------- ------- --------
------- ------- --------
Options exercisable at
year-end . . . . . . . . 131,755 $3.86 137,002 $4.27 135,027 $4.44
------- ------- --------
------- ------- --------
Weighted-average fair value
of options granted during
the year . . . . . . . . -- $2.73 --
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ---------------------- ----------- ---------------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$ .69 - $1.00 . . . . . 24,000 8.41 $0.95 20,000 $1.00
$1.38 - $2.00 . . . . . 1,273,654 7.26 $1.73 942,217 $1.75
$2.06 - $3.00 . . . . . 772,483 6.95 $2.53 541,150 $2.55
$3.06 - $3.75 . . . . . 25,372 6.81 $3.50 20,372 $3.49
$8.00 - $8.75 . . . . . 49,584 4.31 $8.06 49,584 $8.06
----------- ---------
2,145,093 1,573,323
----------- ---------
----------- ---------
</TABLE>
During 1992, the Company granted options to purchase 50,000 shares of the
Company's common stock at $2.60 per share to the former president of the
Company. These options began vesting upon the occurrence of certain events. The
Company recorded $170,000 in deferred compensation based on the difference
between the fair value of the underlying common stock on the date the specified
event occurred and the exercise price of $2.60 per share. Deferred compensation
is being amortized over the applicable vesting periods. In connection with
these options, the Company has recorded amortization expense of approximately
$20,000 in 1997 and $34,000 in each of 1996 and 1995.
STOCK PURCHASE PLAN
In December 1992, the Board of Directors approved an employee stock
purchase plan. Under the terms of the plan, 300,000 shares of the Company's
common stock have been authorized for purchase by eligible employees as
specified by the Board of Directors. Eligible employees shall be granted the
right to purchase shares with a percentage of such employees' earnings at the
lesser of 85% of the fair market value of the common stock on the offering date
or exercise date. Under the plan, employees purchased 5,839 shares of the
Company's common stock in 1997 at $0.66 per share; 20,590 shares in 1996 at
$1.33, $1.91, $2.55 and $2.18 per share and 46,860 shares in 1995 at $1.91,
$2.18 and $2.31 per share. In November 1997, the employee stock purchase plan
was effectively suspended pending further action by the Board of Directors.
F-12
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
For disclosure purposes under SFAS No. 123, compensation cost is
recognized for the fair value of the employees' purchase rights, which was
estimated using the Black-Scholes model with the following assumptions.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected Life (years). . . . . . . . . 1.0 1.0 1.0
Interest Rate. . . . . . . . . . . . . 5.54% 6.13% 5.38%
Volatility . . . . . . . . . . . . . . 93.1% 111.1% 117.6%
</TABLE>
The weighted-average fair value of those purchase rights granted in 1997,
1996 and 1995 was $0.33, $1.49 and $1.59, respectively.
WARRANTS
Warrants to purchase shares of the Company's common stock, are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------
EXERCISE PRICE DIRECTORS
PER SHARE AND OFFICERS OTHERS TOTAL
-------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Outstanding and exercisable
at December 31, 1995 . . . . $4.00-$10.00 20,889 1,736,219 1,757,108
Expired. . . . . . . . . . . $4.00-$ 6.00 -- (477,344) (477,344)
------------ ---------- ---------
Outstanding and exercisable
at December 31, 1996 . . . . $4.00-$10.00 20,889 1,258,875 1,279,764
Expired. . . . . . . . . . . $4.00-$ 8.00 (20,889) (904,031) (924,920)
------------ ---------- ---------
Outstanding and exercisable
at December 31, 1997 . . . . $10.00 -- 354,844 354,844
------------ ---------- ---------
------------ ---------- ---------
</TABLE>
The remaining warrants expire on December 31, 1998 (Note 7).
REGISTRATION RIGHTS
Investors in the CP-0127 Development Corporation ("CDC") offering (Note 7)
are entitled to certain piggyback registration rights with respect to shares of
common stock they hold or may acquire on exercise of the warrants received in
the CDC offering or the common stock which may be used by the Company to
exercise its option to repurchase the CDC shares. At December 31, 1997, CDC
investors owned 750 shares of Cortech common stock and owned warrants for the
purchase of 354,844 common shares. Furthermore, 219,689 common shares acquired
through the exercise of warrants carry similar piggyback registration rights.
(5) INCOME TAXES
As of December 31, 1997, the Company has approximately $77.2 million of
net operating loss ("NOL") carry forwards for income tax purposes and
approximately $2.9 million of research and development tax credits available to
offset future federal income tax, subject to limitations for alternative
minimum tax. The NOLs and credit carry forwards are subject to examination by
the tax authorities and expire in various years from 1998 through 2012, with
approximately $74.3 million of the NOL and $2.7 million of the credits expiring
from 2005 through 2012.
F-13
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The components of the net deferred income tax asset at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
INCREASE
1997 (DECREASE) 1996
------------ ----------- ------------
<S> <C> <C> <C>
Net operating loss carry forwards . $ 29,998,000 $ 2,418,000 $ 27,580,000
Research and development credits . 2,880,000 45,000 2,835,000
Depreciation expense . . . . . . . 2,358,000 224,000 2,134,000
Compensated absences . . . . . . . 25,000 (45,000) 70,000
Less: Valuation allowance . . . . . (35,261,000) (2,642,000) (32,619,000)
------------ ----------- ------------
$ -- $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The Company has not yet achieved profitable operations. Accordingly,
management believes the deferred tax assets as of December 31, 1997 and 1996,
do not satisfy the realization criteria set forth in SFAS No. 109 and has
recorded a valuation allowance for the entire net tax asset.
By recording a valuation allowance for the entire amount of future tax
benefits, the Company has not recognized a benefit provision for income taxes
in its statements of operations. The difference between the Company's recorded
income tax benefit and that computed by applying the statutory Federal income
tax rate to its net loss before income taxes is due primarily to the valuation
allowance established to offset the Company's net deferred tax asset. The
valuation allowance increased $2.6 million in 1997 due primarily to increases
in the Company's net operating losses and research and development credits.
Included in the net operating loss carry forward is approximately $1.7
million related to income tax deductions for the Company's stock option plans.
The tax benefit of such deductions will be recorded as an increase to
additional paid-in capital when realized.
The Tax Reform Act of 1986 contains provisions that may limit the NOL and
credit carry forwards available to be used in any given year upon the
occurrence of certain events, including significant changes in ownership
interest. A change in ownership of a company of greater than 50% within a
three-year period results in an annual limitation on the company's ability to
utilize its NOLs and tax credits from tax periods prior to the ownership
change. Due to changes in ownership that took place in 1993 and changes that
would take place upon the proposed Merger (see Note 1), the Company's use of
operating loss and tax credit carry forwards is subject to such limitations.
(6) COMMITMENTS
The Company has various noncancellable operating leases for its office and
laboratory space. Rent expense for these facilities was approximately $427,000,
$443,000, and $585,000 in 1997, 1996 and 1995, respectively. Future minimum
cash obligations under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998 . . . . . . . . . . . . . . . $201,000
1999 . . . . . . . . . . . . . . . 25,000
--------
$226,000
--------
--------
</TABLE>
(7) CP-0127 DEVELOPMENT CORPORATION
In February 1992, the Company completed a private placement of 709,687
units (as discussed below) to unrelated third parties representing total
subscriptions of approximately $8,516,000. Under the terms of the subscription
agreements, one third of the total amount subscribed was paid at closing
(approximately $2,839,000); one third was paid April 30, 1992; and the final
installment was paid July 31, 1992. Each unit was comprised of one share of CDC
common stock and three warrants, of which one warrant expired on December 31,
1996 and one warrant expired on December 31, 1997. Each remaining warrant
represents the right to purchase one half of one
F-14
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
share of the Company's common stock for $10.00 per share and expires on
December 31, 1998 (Note 4). The net proceeds received by CDC have been
allocated to CDC as consideration for its common stock and to the Company for
the issuance of the warrants in the amounts of approximately $5,284,000 and
$3,232,000, respectively. Such allocation was based on the relative fair
market value of the Company's warrants and the CDC common stock. In
connection with the formation of CDC, the Company granted to CDC, under the
terms of a technology license agreement, an exclusive license to certain
technology for human pharmaceutical use within the United States, Canada and
Europe for $1,000,000. CDC, in turn, granted to Cortech a world-wide
exclusive right and license to the technology that is developed by Cortech.
CDC has 709,687 common shares issued and outstanding at December 31,
1997. All such stockholders acquired their shares through the purchase of the
above units.
In connection with the technology license agreement referred to above,
the Company entered into a research and development agreement with CDC
whereby the Company performed research and development activities to further
develop the licensed technology and was paid for such services on a cost
reimbursement basis. CDC also paid the Company for its allocable share of
certain overhead costs. The cost to fully develop the licensed technology has
exceeded the research and development funding provided by CDC. Such
additional costs have been and would continue to be borne by the Company
and/or its corporate partners. As of December 31, 1997, the Company was not
engaged in active development of any compounds covered by the license
agreement. The Company would be responsible for manufacturing and marketing
of CDC's products, if any, in the United States, Canada and Europe and would
be required to make royalty payments to CDC based on future product revenues,
if any, subject to the purchase option discussed below.
The Company has been granted an option by the purchasers of the CDC
common stock to purchase all, but not less than all, of the 709,687 shares of
CDC common stock outstanding. The purchase option is exercisable at any date
before December 31, 1998, and is based on an exercise price of $75.40 per
share of CDC common stock in 1998. The option may be exercised in cash,
common stock of the Company or any combination thereof.
The Company's chief executive officer is also an officer of CDC. In
addition, the Company's chief executive officer and one of the Company's
directors are also directors of CDC.
(8) EMPLOYEE RETIREMENT PLAN
The Company provides a defined contribution 401(k) plan for eligible
employees. Employee contribution to the plan is voluntary. In 1994, the
Company voluntarily began contributing an amount equal to 25% of a covered
employee's contribution to a maximum of 1% of compensation. The Company's
contributions to the plan totaled $21,000 in 1997, $32,000 in 1996 and
$45,000 in 1995.
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EXHIBIT 10.43
CORTECH, INC.
1993 EQUITY INCENTIVE PLAN
Adopted December 10, 1993
Approved by the Stockholders May 10, 1994
1. PURPOSES
(a) The purpose of the 1993 Equity Incentive Plan (the "Plan") is to
provide a means by which employees of and consultants to the Company, and its
Affiliates, may be given an opportunity to benefit from increases in value of
the stock of the Company through the granting of (i) Incentive Stock Options,
(ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase
restricted stock, and (v) stock appreciation rights, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company,
to secure and retain the services of new Employees, Directors and
Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which
responsibility for administration of the Plan has been delegated pursuant to
subsection 3(c), be either (i) Options granted pursuant to paragraph 6
hereof, including Incentive Stock Options and Nonstatutory Stock Options,
(ii) stock bonuses or rights to purchase restricted stock granted pursuant to
paragraph 7 hereof, or (iii) stock appreciation rights granted pursuant to
paragraph 8 hereof. All Options shall be separately designated Incentive
Stock Options or Nonstatutory Stock Options at the time of grant, and in such
form as issued pursuant to section 6, and a separate certificate or
certificates will be issued for shares purchased on exercise of each type of
Option.
2. DEFINITIONS
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections
424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Cortech, Inc., a Delaware corporation.
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(f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a
right granted pursuant to subsection 8(b)(ii) of the Plan.
(g) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render services and who is compensated for such
services, provided that the term "Consultant" shall not include Directors who
are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated by the Company or any Affiliate. The Board, in its sole
discretion, may determine whether Continuous Status as an Employee, Director
or Consultant shall be considered interrupted in the case of: (i) any leave of
absence approved by the Board, including sick leave, military leave, or any
other personal leave; provided, however, that for purposes of Incentive Stock
Options and Stock Appreciation Rights appurtenant thereto, any such leave may
not exceed ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract (including certain Company policies) or
statute; or (ii) transfers between locations of the Company or between the
Company, Affiliates or its successor.
(i) "COVERED EXECUTIVE" means each Officer of the Company.
(j) "DIRECTOR" means a member of the Board.
(k) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(l) "DISINTERESTED PERSON" means a Director: (i) who was either (A) not
during the one year prior to service as an administrator of the Plan granted
or awarded equity securities pursuant to the Plan or any other plan of the
Company or any of its affiliates entitling the participants therein to acquire
equity securities of the Company or any of its affiliates except as permitted
by Rule 16b-3(c)(2)(i) or (B) who is otherwise considered to be a
"disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other
applicable rules, regulations or interpretations of the Securities and
Exchange Commission; and (ii) who either (A) is not a current Employee, is
not a former Employee receiving compensation for prior services (other than
benefits under a tax qualified pension plan), was not an officer of the
Company or an Affiliate at any time, and is not currently receiving
compensation for personal services in any capacity other than as a Director,
or (B) is otherwise considered an outside director for purposes of Section
162(m) of the Code.
(m) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as
a Director nor payment of a director's fee by the Company shall be sufficient
to constitute "employment" by the Company.
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(n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(o) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share
of common stock shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such system or exchange
(or the exchange with the greatest volume of trading in common stock) on the
last market trading day prior to the day of determination, as reporting in
the Wall Street Journal or such other source as the Board deems reliable;
(ii) If the common stock is quoted on the NASDAQ System (but not on
the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a share of common stock shall be the mean between the bid and asked prices
for the common stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(iii) In the absence of an established market for the common stock,
the Fair Market Value shall be determined in good faith by the Board.
(p) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(q) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means
a right granted under subsection 8(b)(iii) of the Plan.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(s) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "OPTION" means a stock option granted pursuant to the Plan.
(u) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
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(v) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(w) "PLAN" means this 1993 Equity Incentive Plan.
(x) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect
to the Plan.
(y) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(z) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, any right to purchase restricted stock, and any
Stock Appreciation Right.
(aa) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of
an individual Stock Award grant. The Stock Award Agreement is subject to the
terms and conditions of the Plan.
(ab) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right
granted under subsection 8(b)(i) of the Plan.
3. ADMINISTRATION
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection
3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards, when and how Stock Awards shall
be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, a stock appreciation right, or a combination of the foregoing: the
provisions of each Stock Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive
stock pursuant to a Stock Award; whether a person shall be permitted to
receive stock upon exercise of an Independent Stock Appreciation Right; and
the number of shares with respect to which Stock Awards shall be granted to
each such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
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(3) To amend the Plan as provided in Section 14.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the
members of which Committee shall be disinterested persons, if required and as
defined by the provisions of subsection 3(d). If administration is delegated
to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board
(and references in this Plan to the Board shall thereafter be to the
Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board.
The Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to
the contrary, the Board or the Committee may delegate to a committee of one
or more members of the Board the authority to grant options to eligible
persons who are not then subject to Section 16 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
(d) Any requirement that an administrator of the Plan be a Disinterested
Person shall not apply if the Board or the Committee expressly declares that
such requirement shall not apply. Any Disinterested Person shall otherwise
comply with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN
(a) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate one million seven hundred thousand
(1,700,000) shares of the Company's common stock. If any Stock Award shall
for any reason expire or otherwise terminate without having been exercised in
full, the stock not purchased under such Stock Award shall again become
available for the Plan. Shares subject to Stock Appreciation Rights
exercised in accordance with Section 8 of the Plan shall not be available for
subsequent issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be
granted only to Employees, Directors or Consultants.
(b) A Director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of the
Director as a person to whom Stock
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Awards may be granted, or in the determination of the number of shares which
may be covered by Stock Awards granted to the Director: (i) the Board has
delegated its discretionary authority over the Plan to a Committee which
consists solely of Disinterested Persons; or (ii) the Plan otherwise
complies with the requirements of Rule 16b-3. This subsection 5(b) shall
not apply if the Board or Committee expressly declares that it shall not
apply.
(c) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates unless the exercise price of such
Incentive Stock Option is at least one hundred ten percent (110%) of the Fair
Market Value of such stock at the date of grant and the Incentive Stock Option
is not exercisable after the expiration of five (5) years from the date of
grant.
(d) No Employee shall be eligible to be granted Options and Stock
Appreciation Rights covering more than two hundred fifty thousand (250,000)
shares of the Company's common stock in any twelve (12) month period.
6. OPTION PROVISIONS
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise)
the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the fair market value of the
stock subject to the Option on the date the Option is granted. The exercise
price of each Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the fair market value of the stock subject to the Option on
the date the Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extend permitted by applicable statutes and
regulations, either (i) in cash at the time the option is exercised, or (ii)
at the discretion of the Board or the Committee, either at the time of the
grant or exercise of the Option, (A) by delivery to the Company of other
common stock of the Company, (B) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other common stock of the Company) with the person to
whom the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d) or (C) in any other form of legal consideration that may be
acceptable to the Board.
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In the case of any deferred payment arrangement, interest shall be payable at
least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the
Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by will
or by the laws of descent and distribution, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period,
and may be exercised with respect to some or all of the shares allotted to
such period and/or any prior period as to which the Option became vested but
was not fully exercised. During the remainder of the term of the Option (if
its term extends beyond the end of the installment periods), the option may
be exercised from time to time with respect to any shares then remaining
subject to the Option. The Board or the Committee may, in its discretion,
with the consent of the Optionee, alter or amend the provisions, if any, for
the vesting of any Option.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced
in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits
and risks of exercising the Option; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock
subject to the Option for such person's own account and not with any present
intention of selling or otherwise distributing the stock. These
requirements, and any assurances given pursuant to such requirements, shall
be inoperative if (i) the issuance of the shares upon the exercise of the
Option has been registered under a then currently effective registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) as to any particular requirement, a determination is made by
counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities law.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
Disability), the Optionee may exercise his or her Option, but only within
such period of time as is determined by the Board (in no event later than the
expiration of the term of such Option as set forth in the Option Agreement)
(the "Post-Termination Exercise Period"), and only to the extent that the
Optionee was entitled to exercise it at the date of termination. In the case
of an Incentive Stock Option, the Board shall determine the Post-Termination
Exercise Period (in no event to exceed three (3) months from the date of
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termination) when the Option is granted. In addition, the Board may at any
time, with the consent of the Optionee, extend the Post-Termination Exercise
Period: provided however that any extension of such period by the Board in
excess of three (3) months from the date of termination shall cause an
Incentive Stock Option so extended to become a Nonstatutory Stock Option,
effective as of the date of the action by the Board. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified in the Option Agreement, the
Option shall terminate, and the shares covered by such Option shall revert to
the Plan. Notwithstanding the foregoing, the Board shall have the power to
permit an option to continue to vest during the Post Termination Exercise
Period.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option, but only
within twelve (12) months from the date of such termination (or such shorter
period specified in the Option Agreement), and only to the extent that the
Optionee was entitled to exercise it at the date of such termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option shall fully vest and may be exercised at any time within eighteen (18)
months following the date of death (or such other period specified in the
Option Agreement but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement), by the Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance. If, after death, the Optionee's estate or a person who acquired
the right to exercise the Option by bequest or inheritance does not exercise
the Option within the time specified herein, the Option shall terminate, and
the shares covered by such Option shall revert to the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares
so purchased may be subject to a repurchase right in favor of the Company or
to any other restriction the Board determines to be appropriate.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Option by any of the
following means or by a combination of such means: (1) tendering a cash
payment; (2) authorizing the Company to withhold shares from the shares of
the common stock otherwise issuable to the participant a result of the
exercise of the Option;
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or (3) delivering to the Company owned and unencumbered shares of the common
stock of the Company.
(l) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the
Board or Committee shall have the authority (but not an obligation) to
include as part of any Option Agreement a provision entitling the Optionee to
a further Option (a "Re-Load Option") in the event the Optionee exercises the
Option evidenced by an Option agreement, in whole or in part, by surrendering
other shares of Common Stock in accordance with this Plan and the terms and
conditions of the Option Agreement. Any such Re-Load Option (i) shall be for
a number of shares equal to the number of shares surrendered as part or all
of the exercise price of such Option; (ii) shall have an expiration date
which is the same as the expiration date of the Option the exercise of which
gave rise to such Re-Load Option; and (iii) shall have an exercise price
which is equal to one hundred percent (100%) of the Fair Market Value of the
Common Stock subject to the Re-Load Option on the date of exercise of the
original Option or, in the case of a Re-Load Option which is an Incentive
Stock Option and which is granted to a 10% stockholder (as described in
subparagraph 5(c)) shall have an exercise price which is equal to one hundred
ten percent (110%) of the Fair Market Value of the stock subject to the
Re-Load Option on the date of exercise of the original Option.
Any such Re-Load Option may be an Incentive Stock Option or a Nonqualified
Stock Option, as the the Board or Committee may designate at the time of the
grant of the original Option, provided, however, that the designation of any
Re-Load Option as an Incentive Stock Option shall be subject to the one
hundred thousand dollars ($100,000) annual limitation on exercisability of
Incentive Stock Options described in subparagraph 12(d) of the Plan and in
Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load
Option. Any such Re-Load Option shall be subject to the availability of
sufficient shares under subparagraph 4(a) and shall be subject to such other
terms and conditions as the Board or Committee may determine.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the
terms and conditions of separate agreements need not be identical, but each
stock bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each stock purchase
agreement shall be such amount as the Board or Committee shall determine and
designate in such agreement. Notwithstanding the foregoing, the Board or the
Committee may determine that
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eligible participants in the Plan may be awarded stock pursuant to a stock
bonus agreement in consideration for past services actually rendered to the
Company or for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be assignable by an participant under the Plan,
either voluntarily or by operation of law, except where such assignment is
required by law or expressly authorized by the terms of the applicable stock
bonus or restricted stock purchase agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to
a deferred payment or other arrangement with the person to whom the stock is
sold; or (iii) in any other form of legal consideration that may be
acceptable to the Board or the Committee in their discretion.
Notwithstanding the foregoing, the Board or the Committee to which
administration of the Plan has been delegated may award stock pursuant to a
stock bonus agreement in consideration for past services actually rendered
to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have
not vested as of the date of termination under the terms of the stock bonus
or restricted stock purchase agreement between the Company and such person.
8. STOCK APPRECIATION RIGHTS
(a) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights to
Employees or Directors of or Consultants to, the Company or its Affiliates
under the Plan. Each such right shall entitle the holder to a distribution
based on the appreciation in the fair market value per share of a designated
amount of stock.
(b) three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Rights will be
granted appurtenant to an Option and will require the holder to elect between
the exercise of the underlying Option for shares of stock and the surrender,
in whole or in part, of such Option for an appreciation distribution equal to
the excess of (A) the Fair Market Value (on the date of Option surrender) of
vested shares of stock purchasable under the surrendered Option over (B) the
aggregate exercise price payable for such shares.
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(ii) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights
will be granted appurtenant to an Option and may apply to all or any portion
of the shares of stock subject to the underlying Option and will be exercised
automatically at the same time the Option is exercised for those shares. The
appreciation distribution to which the holder of such concurrent right shall
be entitled upon exercise of the underlying Option shall be in an amount
equal to the excess of (A) the aggregate fair market value (at date of
exercise) of the vested shares purchased under the underlying Option with
such concurrent rights over (B) the aggregate exercise price paid for those
shares.
(iii) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights
may be granted independently of any Option and will entitle the holder upon
exercise to an appreciation distribution equal in amount to the excess of (A)
the aggregate fair market value (at the date of exercise) of a number of
shares of stock equal to the number of vested share equivalents exercised at
such time (as described in subsection 7(c)(iii)(B)) over (B) the aggregate
fair market value of such number of shares of stock at the date of grant.
(c) The terms and conditions applicable to each Tandem Right, Concurrent
Right and Independent Right shall be as follows:
(i) TANDEM RIGHTS
(A) Tandem Rights may be tied to either Incentive
Stock Options or Nonstatutory Stock Options. Each such right shall, except
as specifically set forth below, be subject to the same terms and conditions
applicable to the particular Option to which it pertains. If Tandem Rights
are granted appurtenant to an Incentive Stock Option, they shall satisfy any
applicable Treasury Regulations so as not to disqualify such Option as an
Incentive Stock Option under the Code.
(B) The appreciation distribution payable on the
exercised Tandem Right shall be in cash in an amount equal to the excess of
(I) the fair market value (on the date of the Option surrender) of the number
of shares of stock covered by that portion of the surrendered Option in which
the optionee is vested over (II) the aggregate exercise price payable for
such vested shares.
(ii) CONCURRENT RIGHTS
(A) Concurrent Rights may be tied to any or all of the
shares of stock subject to any Incentive Stock Option or Nonstatutory Stock
Option grant made under the Plan. A Concurrent Right shall, except as
specifically set forth below, be subject to the same terms and conditions
applicable to the particular Option grant to which it pertains.
(B) A Concurrent Right shall be automatically exercised
at the same time the underlying Option is exercised with respect to the
particular shares of stock to which the Concurrent Right pertains.
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(C) The appreciation distribution payable on an
exercised Concurrent Right shall be in cash in an amount equal to such
portion as shall be determined by the Board or the Committee at the time of
the grant of the excess of (I) the aggregate fair market value (on the
Exercise Date) of the vested shares of stock purchased under the underlying
Option which have Concurrent Rights appurtenant to them over (II) the
aggregate exercise price paid for such shares.
(iii) INDEPENDENT RIGHTS
(A) Independent Rights shall, except as specifically
set forth below, be subject to the same terms and conditions applicable to
Nonstatutory Stock Options as set forth in Section 6. They shall be
denominated in share equivalents.
(B) The appreciation distribution payable on the
exercised Independent Right shall be in an amount equal to the excess of (I)
the aggregate fair market value (on the date of the exercise of the
Independent Right) of a number of shares of Company stock equal to the number
of share equivalents in which the holder is vested under such Independent
right, and with respect to which the holder is exercising the Independent
Right on such date, over (II) the aggregate fair market value (on the date of
the grant of the Independent Right) of such number of shares of Company stock.
(C) The appreciation distribution payable on the
exercised Independent Right may be paid, in the discretion of the Board or
the Committee, in cash, in shares of stock or in a combination of cash and
stock. Any shares of stock so distributed shall be valued at fair market
value on the date the Independent Right is exercised.
(iv) TERMS APPLICABLE TO TANDEM RIGHTS
CONCURRENT RIGHTS AND INDEPENDENT RIGHTS
(A) To exercise any outstanding Tandem, Concurrent or
Independent Right, the holder must provide written notice of exercise to the
Company in compliance with the provisions of the instrument evidencing such
right.
(B) If a Tandem, Concurrent or Independent Right is
granted to an individual who is at the time subject to Section 16(b) of the
Exchange Act (a "Section 16(b) Insider"), then the instrument of grant shall
incorporate all the terms and conditions at the time necessary to assure that
the subsequent exercise of such right shall qualify for the safe-harbor
exemption from short-swing profit liability provided by Rule 16b-3
promulgated under the Exchange Act (or any successor rule or regulation).
(C) No limitation shall exist on the aggregate amount
of cash payments the Company may make under the Plan in connection with the
exercise of Tandem, Concurrent or Independent Rights.
12
<PAGE>
9. CANCELLATION AND RE-GRANT OF OPTIONS
The Board or the Committee shall have the authority to effect, at any
time and from time to time, with the consent of the affected holders of
Options and/or Stock Appreciation Rights, (i) the repricing of any
outstanding Options and/or any Stock Appreciation Rights under the Plan
and/or (ii) the cancellation of any outstanding Options and/or any Stock
Appreciation Rights under the Plan and the grant in substitution therefor of
new Options and/or Stock Appreciation Rights under the Plan covering the same
or different numbers of shares of stock, but having an exercise price per
share not less than eighty-five percent (85%) of the Fair Market Value (one
hundred percent (100%) of the Fair Market Value in the case of an Incentive
Stock Option or, in the case of a 10% stockholder (as described in
subparagraph 5(c)), not less than one hundred ten percent (110%) of the Fair
Market Value) per share of stock on the new grant date.
10. COVENANTS OF THE COMPANY
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards up to the number of shares of stock authorized under the Plan.
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may
be required to issue and sell shares of stock under the Stock Awards:
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any Stock Award or any
stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems
necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell
stock under such Stock Awards unless and until such authority is obtained.
11. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
12. MISCELLANEOUS
(a) The Board shall have the power to accelerate the time at which
a Stock Award may first be exercised or the time during which a Stock Award
or any part thereof will vest, notwithstanding the provisions in the Stock
Award stating the time at which it may first be exercised or the time during
which it will vest.
13
<PAGE>
(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to
such Option unless and until such person has satisfied all requirements for
exercise of the Option pursuant to its terms.
(c) Throughout the term of any Option, the Company shall deliver to
the holder of such Option, not later than one hundred twenty (120) days after
the close of each of the Company's fiscal years during the Option term, a
balance sheet and an income statement.
(d) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director,
Consultant, Optionee, or other hold of Stock Awards any right to continue in
the employ of the Company or any Affiliate (or to continue acting as a
Director or Consultant) or shall affect the right of the Company or any
Affiliate to terminate the employment or relationship as a Director or
Consultant of any Employee, Director, Consultant or Optionee with or without
cause.
(e) To the extent that the aggregate Fair Market Value (determined
at the time of grant) of stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by any Optionee during
any calendar year under all plans of the Company and its Affiliates exceeds
one hundred thousand dollars ($100,000), the Options or portions thereof
which exceed such limit (according to the order in which they were granted)
shall be treated as Nonstatutory Stock Options.
13. ADJUSTMENTS UPON CHANGES IN STOCK
(a) If any change is made in the stock subject to the Plan, or
subject to any Stock Award (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or otherwise), the Plan and outstanding Stock
Awards will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price
per share of stock subject to outstanding Stock Awards.
(b) Subject to subparagraph 13(c) below, in the event of: (1) a
dissolution or liquidation of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger
in which the Company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then, at the sole discretion of the Board and
to the extent permitted by applicable law: (i) any surviving corporation
shall assume any Stock Awards outstanding under the Plan or shall substitute
similar Stock Awards for those outstanding under the Plan, (ii) such Stock
Awards shall continue in full force and effect, or (iii) the time during
which such Stock Awards become vested or may be exercised shall be
accelerated and any outstanding unexercised rights under any Stock Awards
terminated if not exercised prior to such event.
14
<PAGE>
(c) In the event of any dissolution, liquidation, merger,
consolidation or reverse merger described in subparagraph 13(b) hereof (each,
an "Event"), (i) the vesting of that portion, if any, of any Stock Award held
by an employee of the Company who at the time of such Event has the title of
Vice President or a title senior to that of Vice President, which by the
terms of such Stock Award will vest within 24 months of such Event, shall be
accelerated to permit exercise prior to such Event, and (ii) the vesting of
that portion, if any, of any Stock Award held by an employee of the Company
who at the time of such Event has the title of Director or a title senior to
that of Director but who is not eligible for the accelerated vesting provided
in clause (i) above, which by the terms of such Stock Award will vest within
12 months of such Event, shall be accelerated to permit exercise prior to
such Event. The acceleration provided for in this subparagraph (c) shall be
in addition to any other adjustment provided for in the Plan.
14. AMENDMENT OF THE PLAN
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 13 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for participation
in the Plan to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code; or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the
requirements of Section 422 of the Code or to comply with the requirements of
Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide Optionees
with the maximum benefits provided or to be provided under the provisions of
the Code and the regulations promulgated thereunder relating to Incentive
Stock Options and/or to bring the Plan and/or Incentive Stock Options granted
under it into compliance therewith.
(c) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be altered or impaired by any amendment of
the Plan unless (i) the Company requests the consent of the person to whom
the Stock Award was granted and (ii) such person consents in writing.
15
<PAGE>
15. TERMINATION OR SUSPENSION OF THE PLAN
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on December 9, 2003. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Stock Award granted while the
Plan is in effect shall not be altered or impaired by suspension or
termination of the Plan, except with the consent of the person to whom the
Stock Award was granted.
16. EFFECTIVE DATE OF PLAN
The Plan shall become effective as determined by the Board, but no
Stock Awards granted under the Plan to officers of the Company shall be
exercisable unless and until the Plan has been approved by the stockholders
of the Company.
16
<PAGE>
AMENDMENT NO. 1 TO THE
CORTECH, INC.
1993 EQUITY INCENTIVE PLAN
This Amendment No. 1 to the Cortech, Inc. 1993 Equity Incentive Plan
(the "Plan") was adopted by the Board of Directors on September 18, 1995, to
provide as follows:
Subsection 13(c) is hereby amended to read in its entirety as follows:
(c) In the event of a Change Of Control (as defined below), the time at
which Stock Awards which are Options or Stock Appreciation Rights held
by any person who is an Employee, Director or Consultant at the time of
the occurrence of such event may be exercised (and become fully vested),
shall be accelerated to provide the optionee with a reasonable
opportunity to exercise the fully-vested Stock Award in full, and any
outstanding unexercised rights under Stock Awards held by such persons
shall terminate if not exercised prior to or coincident with the
occurrence of such event (or if an event described in clause (v) or (vi)
below occurs, if not exercised within a reasonable period of time, which
shall be no less than thirty (30) days, following the occurrence of such
event). For any Stock Award which is a restricted stock bonus or a
restricted stock purchase, in the event of a Change of Control (as defined
below), the time during which such a Stock Award may become fully vested
shall be accelerated immediately prior to the occurrence of such event.
"Change Of Control" shall mean (i) a merger or consolidation in which
the Company is not the surviving corporation; (ii) a reverse merger in
which the Company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise; (iii) any other capital
reorganization in which more than thirty percent (30%) of the shares of
the Company entitled to vote are exchanged; (iv) a transaction or group
of related transactions involving the sale of all or substantially all
of the Company's assets; (v) the acquisition by any person, entity or
group (excluding any employee benefit plan, or related trust, sponsored
or maintained by the Company or any subsidiary of the Company) of the
beneficial ownership, directly or indirectly, of securities of the
Company representing more than thirty percent (30%) of the combined
voting power in the election of directors; or (vi) a change in the
composition of the Company's Board of Directors such that, during any
period of two consecutive years, individuals who, at the beginning of
such period, constitute the Board, together with individuals who are
Approved New Directors (as defined below), cease for any reason to have
authority to cast at least a majority of the votes which all directors
on the Board are entitled to vote.
An "Approved New Director" shall be a Board member whose election, or
the nomination for election by the Company's stockholders, was approved
by a vote of a majority of the votes entitled to be cast by the
directors then still in office who were directors at the beginning of
the period.
1
<PAGE>
EXHIBIT 10.96
October 14, 1997
Joseph L. Turner
98 Lupine Way
Golden, CO 80401
Dear Joe:
Cortech, Inc. ("Cortech" or the "Company") has accepted your voluntary
resignation as an officer effective December 1, 1997, and as an employee of
the Company effective December 1, 1997. The Company wishes to continue to
receive your services and to provide compensation and certain other benefits
in consideration of such services, as follows:
CONTINUED SERVICE AS EMPLOYEE OR CONSULTANT You shall continue to serve as an
employee of the Company and shall provide services to the Company in any area
of your expertise as requested by the Company's management approximately on a
half-time basis until the end of the day on December 1, 1997, at such times
and places as reasonably requested.
At the end of the day on December 1, 1997, your status as an employee will
terminate, and thereafter you shall have the status of a consultant to the
Company. Your status as non-employee consultant under this Agreement will
end June 30, 1998. During the period of December 2, 1997, to June 30, 1998,
you agree to make yourself available to review documents, including the Form
10-K, to enter into discussions by telephone, and to visit Cortech from time
to time at Cortech's expense. Such tasks will be cooperatively arranged to
accommodate your responsibilities to your new employer.
COMPENSATION
You shall receive as compensation continuation of your salary at the level in
effect immediately preceding your resignation ("Salary") until June 30, 1998,
paid on the Company's regular payroll dates. As required by law, all
payments will be subject to standard withholding for social security and tax
purposes.
<PAGE>
Joseph L. Turner
October 14, 1997
Page 2
Cortech agrees to pay you for seventeen days of unused vacation, less
customary withholdings.
EQUITY COMPENSATION
Your stock options will continue to vest during periods in which you continue
to be employed by the Company or serve as a consultant as provided hereunder
on their normal vesting schedule through June 30, 1998.
HEALTH INSURANCE
Your normal coverage under the Company's health insurance plans will
terminate on December 1, 1997. You may be eligible to continue your health
benefits under federal COBRA law for up to 18 months thereafter. Cortech
will pay for this benefit until the earlier of June 30, 1998, or the date
upon which you become covered by another plan.
EXPENSE REIMBURSEMENT
Cortech will reimburse the customary and reasonable expenses for any travel
and communications associated with your consulting to Cortech, subject to the
requirement that any travel must be approved in advance by Cortech's senior
management and that Cortech may, in its discretion, require you to provide
receipts for any expense for which you seek reimbursement.
SEVERANCE PLAN
You hereby agree to waive all benefits under Cortech's Executive Officers'
Severance Benefit Plan, effective October 14, 1997, and that the compensation
you receive under this Agreement shall be in lieu of any compensation to
which you might otherwise have been entitled under that Plan.
COMPLETE AGREEMENT
This Agreement constitutes the complete, final and exclusive embodiment of
the entire agreement between you and the Company with respect to the terms
and conditions of your employment or the consulting relationship subsequent
to employment. In no way does this Agreement affect your obligations under
the Invention and Trade Secret Agreement signed by you on February 27, 1992,
attached hereto and incorporated by reference. The Company's obligations
hereunder are contingent upon you complying with all obligations specified in
this Invention and Trade Secret Agreement.
<PAGE>
Joseph L. Turner
October 14, 1997
Page 3
This Agreement is entered into without relying upon any promise, warranty or
representation, written or oral, other than those expressly contained in this
Agreement, and it supersedes any other such promises, warranties,
representations or agreements. It may not be amended or modified except by a
written instrument signed by both you and a duly authorized officer of the
Company. This Agreement shall be construed and interpreted in accordance
with the laws of the State of Colorado. If any provision of this Agreement
is determined to be invalid or unenforceable, in whole or in part, this
determination will not affect any other provision of this Agreement. A
failure of either you or the Company to enforce at any time, or for any
period of time, the provisions of this Agreement shall not be construed to be
a waiver of such provisions or of your right or the right of the Company to
enforce each and every such provision.
If you choose to contract with the Company under the terms described above,
please indicate you acceptance by signing below. Please return the signed
Agreements to me.
Sincerely,
ACCEPTED AND AGREED:
/s/ Kenneth R. Lynn
/s/ Joseph L. Turner 10/15/97
Kenneth R. Lynn -------------------------------
Chief Executive Officer Joseph L. Turner Date
<PAGE>
LEGAL RELEASE
I, Joseph L. Turner, in consideration of the separation compensation and
benefits that I will receive pursuant to my agreement with Cortech, Inc.
dated October 14, 1997, to which I would not otherwise be entitled, release
Cortech, Inc., all of its past and present parent, subsidiary, affiliated and
related corporations, their predecessors, successors and assigns, and all
past or present officers, directors, employees, insurers and agents of any of
them, (hereinafter referred to collectively as "Releases"), of and from all
claims, administrative complaints, demands, actions and causes of action, of
every kind and nature whatsoever, whether at law or in equity, arising from
or relating to my employment by Cortech, Inc. and/or the termination thereof,
based in whole or in part on any act or omission occurring on or before the
date of this legal release, whether negligent or intentional, without regard
to my present actual knowledge of the act or omission, which I may now have,
or which I, or any person acting on my behalf may at any future time have or
claim to have, including specifically, but not by way of limitation, any
claim for compensation of any kind payable prior to or concurrent with the
execution of this Legal Release, and matters which may arise at common law,
such as breach of contract, express or implied, promissory estoppel, wrongful
discharge, tortious interference with contractual rights, infliction of
emotional distress, defamation, or under federal, state or local laws, such
as the Fair Labor Standards Act, the Employee Retirement Income Security Act,
the National Labor Relations Act, Title VII of the Civil Rights Act of 1964,
the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the
Equal Pay Act, the Americans with Disabilities Act, and the Colorado Civil
Rights Act, excepting only my vested rights, if any, in Cortech, Inc.'s stock
ownership, stock options, or retirement income plans.
I assume all risk that the facts and law concerning this legal release
may be other than as presently known to or believed by me, and I acknowledge
that, in signing this legal release, I am not relying on any information
provided to me by Releases or upon Releases to provide information not
known to me. I agree that I will never institute a claim of any kind against
Cortech, Inc., including but not limited to claims relating to my employment
with Cortech, Inc. or the termination of that employment. If I violate this
release by suing Cortech, Inc. or anyone associated with Cortech, Inc., I
agree that I will pay all costs and expenses incurred by Cortech, Inc. or
anyone associated with Cortech, Inc. in defending against the suit, including
reasonable attorneys' fees.
I understand that because this release may affect or limit my legal
rights, the Company has advised me that I may wish to seek legal counsel of
my own choosing.
<PAGE>
I understand and agree that if any part of this release is invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability
of the remaining provisions will not in any way be affected or impaired
thereby.
I have read this release and sign it voluntarily and without threat or
coercion, after having been advised to seek my own legal counsel, with full
knowledge and understanding of its contents, and without promise of benefit,
except as expressly recited in this release.
I understand that I must return this signed, notarized release to Cortech
Human Resources no later than November 4, 1997.
Date: 10/15/97
------------
/s/ Joseph L. Turner
----------------------------------
EMPLOYEE SIGNATURE
- ------------------------------------------------------------------------------
STATE OF COLORADO )
)ss
COUNTY OF ADAMS )
-------------
Subscribed and sworn to before me this 15th day of October, 1997.
---- -------
by Joseph L. Turner (EMPLOYEE)
------------------
[illegible]
----------------------------------
Notary Public
My commission expires: 8-16-2000
---------
<PAGE>
EXHIBIT 10.97
CORTECH, INC.
NONSTATUTORY STOCK OPTION
(NON-PLAN REPRICING)
, OPTIONEE:
Cortech, Inc. (the "Company") has this day granted to you, the optionee
named above, an option to purchase shares of the common stock of the Company
("Common Stock"). This option is not intended to qualify as and will not be
treated as an "incentive stock option" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
The details of this option are as follows:
1. a. The total number of shares of Common Stock subject to this option
is _____. Subject to the limitations contained herein, this option
shall be exercisable with Schedule A annexed hereto and hereby made apart of
this agreement.
b. Notwithstanding the foregoing, the vesting of this option shall
cease upon termination of your services as a director or employee of, or
consultant to, the Company.
2. a. The exercise price of this option is $1.75 per share, the fair
market value of the Common Stock on the date of grant of this option.
b. Payment of the exercise price per share is due in full in cash
(including check) upon exercise of all or any part of each installment which
has become exercisable by you; provided, however, that, if at the time of
exercise, the Company's Common Stock is publicly traded and quoted regularly
in the Wall Street Journal, payment of the exercise price, to the extent
permitted by applicable statutes and regulations, may be made by delivery of
already-owned shares of Common Stock, or a combination of cash and
already-owned Common Stock. Such Common Stock (i) shall be valued at its fair
market value on the date of exercise, (ii) if originally acquired from the
Company, must have been held for the period required to avoid a charge to the
reported earnings of the Company, and (iii) must be owned free and clear of
any liens, claims, encumbrances or security interests.
c. Notwithstanding the foregoing, this option may be exercised
pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board which results in the receipt of cash (or check) by the
Company prior to the issuance of Common Stock.
3. This option may not be exercised for any number of shares which
would require the issuance of anything other than whole shares.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such Shares are not then so
registered, the Company has determined that such exercise and issuance would
be exempt from the registration requirements of the Act.
1
<PAGE>
5. The term of this option commences on the date hereof and terminates
on _______. In no event may this option be exercised on or after
the date on which it terminates.
6. a. This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
b. By exercising this option you agree that the Company may require
you to enter an arrangement providing for the cash payment by you to the
Company of any tax withholding obligation of the Company arising by reason
of: (1) the exercise of this option; (2) the lapse of any substantial risk of
forfeiture to which the shares are subject at the time of exercise; or (3)
the disposition of shares acquired upon such exercise.
7. This option is not transferable, except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order
(a "QDRO"), and is exercisable during your life only by you or your guardian
or legal representative or transferee pursuant to a QDRO.
8. This option does not confer upon any employee, director or
consultant any right to continue in the service of the Company or the
Company's right to terminate such service.
9. Neither you nor any transferee of this option shall be deemed the
holder of, or have any rights of a holder with respect to, any shares subject
to this option until and unless all requirements have been satisfied for the
exercise of this option in accordance with its terms.
10. Any notices provided for in this option shall be given in writing
and shall be deemed effectively given upon receipt or, in the case of notices
delivered by the Company to you, five (5) days after deposit in the United
States mail, postage prepaid, addressed to you at the address specified below
or at such other address as you hereafter designate by written notice to the
Company.
11. a. If any change is made in the stock subject to this option
(through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), this option will be appropriately adjusted in the
class(es) and number of shares subject thereto and the class(es) and number
of shares and price per share of stock subject thereto.
b. In the event of: (i) a merger or consolidation in which the
Company is not the surviving corporation; (ii) a reverse merger in which the
Company is the surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise; or (iii) any other capital reorganization in which more than fifty
percent (50%) of the shares of the Company entitled to vote are exchanged,
then the time during which outstanding options may be excised shall be
accelerated to permit you to exercise all such options prior to such merger,
consolidation, reverse merger or reorganization, and the options terminated
if not exercised prior to such event.
12. This option agreement shall be construed in accordance with the laws
of the State of Colorado.
2
<PAGE>
Dated the 16th day of August, 1994.
Very truly yours,
CORTECH, INC.
By _____________________________
The undersigned:
a. Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with
respect to this option are set forth in the option and the Plan; and
b. Acknowledges that this option sets forth the entire understanding
between the undersigned optionee and the Company regarding acquisition of
stock in the Company and supersedes all prior oral and written agreements on
that subject except for (i) options previously granted and delivered to the
undersigned, and (ii) stock acquired under the employee stock purchase plan,
and (iii) the following agreements only: _____________________________________
______________________________________________________________________________
c. The undersigned understands that the options described in this
agreement replace the options dated ______ (Predate), for ______ (Preshares)
shares and exercisable at $_____ (Preprice) per share, (the "Old Option"). By
signing below, the undersigned acknowledges and agrees that the Old Option is
void and of no effect whatsoever.
_________________________________
OPTIONEE: _____(fname) _____(lname)
ATTACHMENTS:
Form of Notice of Exercise
3
<PAGE>
NOTICE OF EXERCISE
Cortech, Inc.
6850 North Broadway
Denver, CO 80221 Date of Exercise: _____________________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Stock option dated: _________________________
Number of shares as to
which option is exercised: _________________________
Certificates to be
issued in name of: _________________________
Total exercise price: _________________________
Cash payment delivered
herewith: _________________________
Value of ______ shares of
______________ common
stock delivered herewith(1): _________________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of this option, and (ii) to provide for
the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option.
Very truly yours,
______________________________
______________________
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or
security interests. Certificates must be endorsed or accompanied by an
executed assignment separate from certificate.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 12, 1998 included in this Form 10-K
into Cortech, Inc.'s previously filed Form S-8 Registration Statement File
Nos. 33-60242, 33-87656, 33-95226 and 333-04317.
Denver, Colorado,
March 27, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES F-2 AND F-3 OF THE COMPANY'S
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,562
<SECURITIES> 3,841
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,711
<PP&E> 10,326
<DEPRECIATION> 9,592
<TOTAL-ASSETS> 16,445
<CURRENT-LIABILITIES> 1,062
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 15,346
<TOTAL-LIABILITY-AND-EQUITY> 16,445
<SALES> 0
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<CHANGES> 0
<NET-INCOME> (6,778)
<EPS-PRIMARY> (0.37)
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</TABLE>
