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This schedule contains summary financial information extracted from the
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
MARK ONE:
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the Fiscal year ended December 31, 1999
[ ] Transaction Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
_____________.
Commission file number 0-20726
-------
CORTECH, INC.
--------------
(Name of small business issuer in its charter)
DELAWARE 84-0894091
- -------------------------------- ------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
376 Main Street, PO Box 74, Bedminster, New Jersey 07921
--------------------------------------------------------
(Address of principal executive offices with Zip Code)
Issuer's telephone number, including area code (908) 234-1881
--------------
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Act
----------------------------------------------------
Common Stock, par value $.002 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the fiscal year ended December 31, 1999 were
approximately $3,225,000.
As of March 15, 2000, there were 1,852,209 shares of common stock
outstanding. The aggregate market value of the common stock held by non-
affiliates of the issuer, based upon the closing price on the NASDAQ National
Market, was approximately $9 million.
Traditional Small Business Disclosure Format Yes No X
--- ---
Portions of the following documents are incorporated by reference in this
Report on Form 10-KSB:
1) Information set forth in Part III of this report is incorporated by
reference to the Registrants 2000 Proxy Statement.
<PAGE>
Item 1. - DESCRIPTION OF BUSINESS
- ------- -----------------------
General
- -------
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-KSB 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 Item 6 ("Management's
Discussion and Analysis of Financial Condition and Results of Operations") of
this Annual Report, as well as factors noted in the balance of this Item 1
("Description of Business"). Actual results may differ materially from those
projected. These forward-looking statements represent the Company's judgement as
of the date of the filing of this Annual Report. The Company disclaims, however,
any intent or obligation to update these forward-looking statements.
Overview
- --------
Cortech, Inc. ("Cortech" or the "Company") is a biopharmaceutical company
whose research and development efforts were focused primarily on protease
inhibitors and bradykinin antagonists. These efforts produced a technology
portfolio which may have therapeutic application across a broad range of medical
conditions. Cortech's strategy is to use collaborative partners to conduct and
fund on-going research and development on those components of its portfolio that
have not been outlicensed. At the same time, the Company is seeking to redeploy
its assets into an operating business.
In response to disappointing test results and its loss of collaborative
partner support, Cortech implemented a series of reductions in force over the
past five years which resulted in the Company having no compensated employees at
February 29, 2000, and effectively discontinued all research and development
activities. In addition, Cortech decommissioned its laboratories and sold all of
its remaining scientific, technical and office equipment.
As a result of these actions, Cortech no longer has the staff or operative
facilities required to recommence internal research and development activities.
Throughout 1998, Cortech retained a core group of professionals who, among other
things, were engaged in efforts to secure collaborative partners for Cortech's
technology portfolio. In November 1998, these efforts resulted in a
collaboration based on CE-1037 (the Company's lead human neutrophil elastase
inhibitor) with United Therapeutics Corp. ("UT") a pharmaceutical company based
in North Carolina. Under the exclusive worldwide product and license agreement,
UT made an up-front payment of $250,000 and will pay the future costs of
developing the compound in pulmonary diseases. The agreement also provides for
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<PAGE>
Cortech to receive milestone payments if the compound is successfully advanced
in development and a royalty on product sales should the compound be
successfully commercialized. The agreement resulted in no revenues in 1999, and
it is not expected that the agreement will result in significant revenues in
2000. UT has recently started clinical development of CE-1037, targeting chronic
obstructive pulmonary disease.
In June 1999, the Company finalized an Agreement to license to Ono
Pharmaceutical Co., Ltd. of Osaka Japan ("Ono") the worldwide rights to an oral
elastase inhibitor program on which the two companies have been collaborating.
Prior to this Agreement, Ono's rights to this technology were limited to the
territories of Korea, Japan, China and Taiwan. In connection with the expansion
of Ono's rights to the technology, Cortech received a $2,000,000 payment less
applicable taxes both in the United States and Japan. Ono withheld at the source
$200,000 of withholding taxes which they remitted directly to the Japanese
taxing authorities. This withholding tax was expensed in the accompanying
financial statements. The Company believed it was not liable for this
withholding and appealed the withholding, seeking reimbursement from the
Japanese taxing authorities. The Company was informed by the Japanese taxing
authorities that its appeal was denied. If Ono's studies of the technology are
favorable, Cortech could also receive milestone payments of up to $9.5 million.
Ono also agreed to pay Cortech a royalty on sales generated outside the original
territories on products using Cortech's technology. Milestone payments or
royalties are not assured and in any event could be expected only after several
more years of continued evaluation of the technology by Ono.
Elastase is a protein-degrading enzyme released from the neutrophil and is
considered to play a major role in tissue damage and organ failure in severe
inflammatory conditions. Development of an orally active elastase inhibitor is
expected to bring a new therapy for patients with chronic inflammatory diseases.
Efforts to sell or establish partnerships for the remaining components of
Cortech's technology portfolio have now virtually ceased and although
discussions with some potential collaborators continue, there can be no
assurance that any transaction will be completed.
In December 1997, Cortech announced that it had signed a definitive merger
agreement with BioStar, Inc. ("BioStar"), a privately held diagnostics company
based in Boulder, Colorado. The merger agreement was mutually terminated by
BioStar and Cortech on May 7, 1998.
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<PAGE>
Following its Annual Meeting on September 4, 1998, the Company announced on
September 18, 1998 that four of the nominees of Asset Value Fund Limited
Partnership ("AVF"), a Delaware limited partnership, had been elected to the
Company's Board of Directors, constituting a majority of the Board of Directors.
Then on September 21, 1998, the Company announced that three of AVF's elected
nominees, Paul O. Koether, Mark W. Jaindl and John W. Galuchie, Jr., had been
elected to the positions of Chairman, Vice Chairman and President, respectively,
at the Company's annual organizational meeting of the Board of Directors. The
Company also announced implementation of a one-for-ten reverse stock split which
became effective at the close of business on September 22, 1998, and elimination
of the Company's Shareholder Rights Plan (the "Plan"). The Company redeemed all
rights issued under the Plan. The redemption resulted in a one-time payment of
$0.10 per share on a split adjusted basis to the Company's stockholders.
The Company was incorporated in 1982 in Colorado and reincorporated in
Delaware in August 1991.
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 had become a very important area of drug
discovery. Cortech's work 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 inflamation, neutrophils are activated and migrate to sites of
inflamation to help kill micro-organisms 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
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<PAGE>
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. CE-1037 was
developed and advanced into early Phase II clinical trials in collaboration with
Hoechst Marion Roussel, Inc. ("HMRI"). HMRI terminated that collaboration in
December 1996 following animal experiments which suggested that the compound
might have genotoxic effects at high concentrations. A repeat experiment,
sponsored by Cortech but conducted by an independent outside laboratory failed
to show any genotoxic effect of the compound. Subsequently, in November 1998,
Cortech was successful in securing UT as a new corporate partner for CE-1037.
Under the exclusive worldwide product and license agreement, UT made an up-front
payment of $250,000 and will pay the future costs of developing the compound for
the potential treatment of pulmonary diseases. Notwithstanding this Agreement,
there can be no assurance that CE-1037 will be proven safe and efficacious in
clinical trials, that the regulatory approvals necessary for this
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.
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 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 million in funding from 1995-1997. The
agreement also granted Ono an exclusive, royalty-free license to make, use and
sell a resulting product in Japan, Korea, Taiwan and China (the "Ono
Territory"), with Cortech retaining all rights outside of the Ono Territory.
I-4
<PAGE>
In June 1999, the Company finalized an Agreement to license to Ono the
worldwide rights to the oral elastase inhibitor program on which the two
companies had been collaborating. Prior to this Agreement, Ono's rights to this
technology were limited to the territories of Korea, Japan, China and Taiwan. In
connection with the expansion of Ono's rights to the technology, Cortech
received a $2,000,000 payment less applicable taxes both in the United States
and Japan. Ono withheld at the source $200,000 of withholding taxes which they
remitted directly to the Japanese taxing authorities. This withholding tax was
expensed in the accompanying financial statements. The Company believed it was
not liable for this withholding and appealed the withholding, seeking
reimbursement from the Japanese taxing authorities. The Company was informed by
the Japanese taxing authorities that its appeal was denied.
If Ono's studies of the technology are favorable, Cortech could also
receive milestone payments of up to $9.5 million. Ono also agreed to pay Cortech
a royalty on sales generated outside the original territories on products using
Cortech's technology. Milestone payments or royalties are not assured and in any
event could be expected only after several more years of continued evaluation of
the technology by Ono.
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. Cortech has also developed a proprietary technology which has the
potential to be applied to the discovery and syntheses of inhibitors of a
broader range of therapeutically interesting serine and cysteine proteases such
as mast cell tryptase 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 it 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.
I-5
<PAGE>
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. Preclinical and clinical work
continues to support the role of bradykinin as an important mediator of
inflammation, particularly in brain injury following trauma or acute ischemia.
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
I-6
<PAGE>
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 intra cranial 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. In 1998, a manuscript
describing the results of that study was published in Acta NeurochiSurgica.
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"). Results of the TBI
Study, which became available in March 1997, failed to demonstrate a
statistically significant benefit of Bradycor on intra cranial pressure, the
primary endpoint of the TBI Study. Based on these results, SB and Cortech agreed
to discontinue the planned development of Bradycor. Moreover, SB, after
providing Cortech with $4 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 ("ABIC"),
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 intra cranial pressure and the requirement for other
interventions to control intra cranial pressure. In November 1999, the study and
the results generated by ABIC were published in the Journal of Neurotrauma.
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.
I-7
<PAGE>
Cortech does not intend to undertake further development of Bradycor
without a collaborative partner. 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 the event that such
a partnership is secured and 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.
In February 1992, Cortech entered into a series of agreements with CP-0127
Development Corporation ("CDC") that govern the development of products
utilizing Bradycor. See "CP-0127 Development Corporation".
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. Cortech does not, however, intend to undertake further
development of CP-0597 without a collaborative partner. 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.
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<PAGE>
Product Development Risks
- -------------------------
Cortech's compounds 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. At this point, Cortech's compounds could only be advanced
through collaborative arrangements or sale of its technology. There can be no
assurance that Cortech will be able to establish collaborative arrangements for
the remaining components of its portfolio 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 maintain
appropriate patent protection of proprietary technologies and compounds in its
portfolio. 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 sixteen United States patents and has numerous United States
patent applications pending which concern protease inhibitors. Cortech holds
eight United States patents and has numerous United States patent applications
pending which concern bradykinin antagonists. In addition, Cortech holds
twenty-six foreign patents and has numerous 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
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<PAGE>
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 patent 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. 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.
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 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 and
unpatented know-how. It is Cortech's policy to require its consultants, members
of the Board of Directors, outside scientific collaborators 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 scientific circumstances. 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 ("CDC")
- ---------------------------------------
In February 1992, Cortech entered into a series of agreements with CDC that
govern the development of products utilizing Bradycor. The agreements grant CDC
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<PAGE>
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 or a
royalty obligation in favor of CDC.
Marketing Strategy
- ------------------
Cortech's compounds are in the early stages of research and development. In
the event that any of Cortech's compounds are approved for marketing in the
future, Cortech will be entirely reliant upon its corporate partners to market
those compounds. Any revenues received by Cortech will, therefore, be dependent
on the efforts of third parties, and there can be no assurance that such efforts
will be successful.
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 solely dependent upon its corporate partners for
the manufacture of compounds.
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.
Many of Cortech's competitors have substantially greater financial,
technical and human resources than Cortech and have significant products
approved or in development.
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
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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. A number of these are in
preclinical and clinical development. Any of these approached could compete with
Cortech's HNE inhibitor programs.
Government Regulation
- ---------------------
The Food and Drug Administration ("FDA") is the primary agency regulating
the research, development, manufacturer, 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 safety
and efficacy requirements of the FDA. Regulatory requirements may change at any
stage of Cortech's product development and may affect approval, delay in
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.
I-12
<PAGE>
Preclinical studies are regulated by the FDA under a series of regulations
called Good Laboratory Practice ("GLP") regulations. Violations of these
regulations can, in come 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 Good Manufacturing Practice
("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
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 the 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 that any of Cortech's products would be eligible for this accelerated
approval process.
I-13
<PAGE>
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 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 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 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 of 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
regulations of testing, manufacture, safety, efficacy, labeling, storage, record
keeping, advertising and promotion. Effective in January 1995, the European
I-14
<PAGE>
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, 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 involved 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 complied
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated.
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 will likely continue to increase the pressure
on pharmaceutical pricing. While Cortech cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals or efforts could have a material adverse effect on
pharmaceutical companies that are prospective corporate partners for Cortech.
Therefore, Cortech's ability to establish and maintain strategic alliances may
be adversely affected. In addition, in 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.
I-15
<PAGE>
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.
Human Resources
- ---------------
Currently, Cortech has no compensated employees.
ITEM 2. - DESCRIPTION OF PROPERTY
- ------- -----------------------
NONE.
ITEM 3. - LEGAL PROCEEDINGS
- ------- -----------------
On February 27, 1998, a complaint was filed in the Court of Chancery of the
State of Delaware, naming the Company, the Company's then current directors and
BioStar as defendants. The complaint, filed by a stockholder of the Company,
claims to be on behalf of a class of all the Company's stockholders and contends
that the then current directors of the Company breached their fiduciary duties
to the Company's stockholders when they unanimously approved the proposed
combination with BioStar. The complaint originally sought to enjoin the proposed
combination with BioStar as well as the operation of the Company's stockholder
rights plan and sought an order rescinding the proposed combination with BioStar
upon its consummation as well as compensatory damages and costs. The complaint
was amended following termination of the proposed BioStar merger to seek to
force an auction of the Company's assets and other relief. Thereafter, the
parties negotiated a settlement of the claims. Pursuant to the terms of the
settlement a payment in the amount of $235,000 shall be made to Cortech on
behalf of Defendants by Cortech's directors and officers insurance carrier. If
the Court approves the settlement, Plaintiff's counsel intend to ask the Court
for an award of attorneys' fees and expenses in an amount not to exceed
$160,000. Defendants have agreed that they will not oppose such an application
up to $160,000 and Cortech has agreed to pay, from the settlement proceeds, the
fees and expenses actually awarded by the Court up to $160,000. Such settlement
will be presented to the Court of Chancery at a hearing scheduled for April 6,
2000. Copies of the Notice to Shareholders relating to the settlement are
available upon request from the Company.
I-16
<PAGE>
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
The Company held its Annual Meeting of Stockholders on November 4, 1999.
All nominees to the Company's Board of Directors were elected. The following is
a vote tabulation for all nominees:
For Withheld
--------- --------
Leonard M. Tannenbaum 1,703,002 8,743
Sheri Perge 1,703,002 8,743
I-17
<PAGE>
PART II
ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
At February 29, 2000, the Company had approximately 500 stockholders of
record. The Company's common stock currently trades on the NASDAQ National
Market System under the symbol "CRTQ". On February 29, 2000, the closing price
per share of the common stock was $7.9375.
On July 13, 1998, the NASDAQ Stock Market, Inc. ("NASDAQ") Listing
Qualification Panel (the "Panel") notified the Company that as of the close of
business on such date, the Company's Common Stock ("Common Stock") would be
delisted from the NASDAQ National Market. NASDAQ's maintenance standards
require, among other things, that the common stock of companies listed on the
NASDAQ National Market must have a bid price of at least $1.00 per share, and
the basis for the Panel's decision was that the bid price of the common stock
was less than $1.00 per share. As a result of the delisting, the Common Stock
traded on the Over-the-Counter Bulletin Board. The Company implemented a
one-for-ten stock split, as approved by the stockholders, as of the close of
business on September 22, 1998. On January 21, 1999, NASDAQ approved Cortech's
Common Stock for re-listing on the NASDAQ National Market, and the shares began
trading on January 25, 1999.
The following table sets forth the high and low bid and ask prices for the
common stock for the periods indicated, as reported by the Over-the-Counter
Bulletin Board.
Bid Ask
---------------- -------------------
Low High Low High
--- ---- --- ----
Calendar Quarter Ended:
1998
----
September 30 $3.90 $5.8125 $4.10 $6.65625
December 31 4.25 6.625 4.8125 6.75
The following table sets forth the high and low closing prices for the
common stock for the periods indicated, as reported by NASDAQ on the National
Market System. All closing prices have been adjusted to reflect the one-for-ten
stock split.
II-1
<PAGE>
Low High
----- ------
Calendar Quarter Ended:
1999
----
March 31 $ 5.625 $ 6.25
June 30 5.625 6.25
September 30 5.875 7.3125
December 31 5.50 6.75
1998
----
March 31 $ 3.75 $ 6.875
June 30 4.375 5.625
On September 29, 1998, the Board of Directors authorized the redemption of
all outstanding preferred share purchase rights issued pursuant to the Rights
Agreement, dated as of June 13, 1995, between the Company and American
Securities Transfer, Inc., as Rights Agent, effective as of the close of
business on October 13, 1998, with the redemption price of $.01 ($.10 on a split
adjusted basis) per right to be paid in cash on October 14, 1998 to the holders
of record of Common Stock of the Company as of the close of business on October
13, 1998.
The Company has not paid any cash dividends on its Common Stock since its
inception and does not intend to pay any cash dividends in the foreseeable
future.
ITEM 6. - 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-KSB. 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 and include, but are not limited to, the risks discussed
below, the risks discussed in the section of this Form 10-KSB entitled
"Description of Business" and risks discussed elsewhere in this Form 10-KSB.
II-2
<PAGE>
General
- -------
Cortech was a biopharmaceutical company whose primary focus has been the
discovery and development of novel therapeutics for the treatment of
inflammatory disorders. Specifically, Cortech had directed its research and
development efforts principally toward protease inhibitors and bradykinin
antagonists. These efforts produced certain intellectual property rights. (See
Item 1. - Description of 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 implemented a series of reductions in force over the
past five years which reduced the number of full time, regular employees to zero
at February 29, 2000 and effectively discontinued all internal research and
development activities. In addition, Cortech decommissioned its laboratories,
and sold all scientific, technical and office equipment. As of December 31,
1998, all fixed assets had been written-off. As a result of these actions,
Cortech no longer had the staff or operative facilities required to recommence
internal research and development activities. Cortech's strategy is to seek
collaborative partners to conduct and fund future research and development on
the components of its portfolio or to sell the rights to certain of the
compounds in the portfolio to third parties interested in funding future
research and development, while conserving the Company's cash. There can be no
assurance that any particular agreement will be completed. At the same time, the
Company is seeking to redeploy its assets into an operating business.
Results of Operations
- ---------------------
Revenues
- --------
Revenues for the year ended December 31, 1999 were $3,225,000 compared to
revenues of $1,347,000 for the year ended December 31, 1998.
In 1999, the Company recorded $2,000,000 in license revenues in connection
with an Agreement to license to Ono the worldwide rights to the oral elastase
inhibitor program on which the two companies have been collaborating.
During 1998, the Company recorded $250,000 in license revenues from an
unrelated third party, UT, in connection with the signing of an exclusive
worldwide product development and license agreement for Cortech's elastase
inhibitor, CE-1037, for the potential treatment of emphysema and other diseases.
The agreement provided for certain milestone payments in the event the compound
is successfully advanced and a royalty on product sales should the compound be
successfully commercialized. This agreement did not result in revenues in 1999,
II-3
<PAGE>
nor is it expected to result in significant revenues in 2000.
Interest income decreased from $695,000 in 1998 to $574,000 in 1999. Lower
yields on investments accounted for this decrease.
The disposition of property and equipment relating to the sale of certain
leasehold improvements and equipment resulted in gains of $435,000 during 1999
and $380,000 during 1998.
Research and development related expenses decreased from $436,000 in 1998
to zero in 1999. The decrease was due to the cessation of on-site research and
development activities by the Company in late 1997.
General and administrative expenses decreased from $5.6 million in 1998 to
$342,000 in 1999. This decrease was due to the cessation of activities by the
Company. General and administrative expenses of $342,000 in 1999 include: legal
expenses of $159,000 relating primarily to the Company's patent portfolio;
Directors and Officers liability insurance premiums of $82,000 and all other
general expenses of $101,000. General and administrative expenses in 1998 of
$5,565,000 include: severance payment for former employees and officers of $1.1
million (including $605,000 to the Company's former Chief Executive Officer);
certain costs related to the proposed combination with BioStar, Inc. that was
terminated on May 7, 1998 of $328,000; costs related to stockholder litigation
of $185,000; Directors and Officers liability run-off policy, approved by the
prior Board of Directors of $198,000; $258,000 in expenses incurred by the prior
Board of Directors for the solicitation of proxies in connection with the Annual
Meeting of Stockholders; legal fees of $987,000; consulting fees of $236,000;
general insurance of $281,000; utilities expense of $265,000; rent expense of
$314,000; depreciation and amortization of $622,000 and all other expenses of
$791,000.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999, the Company had cash and cash equivalents of $6.6
million. Cash equivalents consisted of U.S. Treasury Bills with original
maturities of three months or less and yields ranging from 4.918% to 5.39%.
Working capital at December 31, 1999 was approximately $13.2 million. Management
believes its cash and cash equivalents are sufficient for its remaining business
activities and for the costs of seeking an acquisition of an operating business.
The Company also had short-term investments, consisting of U.S. Treasury Bills
with original maturities of six months of $6.6 million at December 31, 1999.
II-4
<PAGE>
Net cash of approximately $816,000 was used in operations in 1999. Cash
flows from net income of $2.6 million were partially offset by the decrease in
accrued liabilities of $820,000; gains on disposition of equipment of $435,000
which is classified as an investing activity and the sale of licensing rights of
$2 million, also classified as an investing activity. In 1998, net cash of
approximately $4.1 million was used in operations due primarily to the net loss
of $4.7 million and the decrease in accounts payable of $549,000, partially
offset by depreciation and amortization of $623,000 and an increase in accrued
liabilities of $656,000.
Net cash used in investing activities was $4.1 million in 1999, due
primarily to the purchase of short-term investments of $6.6 million offset by
the sale of licensing rights of $2 million and the proceeds from the sale of
property and equipment of $435,000. Net cash provided by investing activities
was approximately $4.3 million in 1998, primarily due to the sales of short-term
investments of $3.8 million and the proceeds from the sale of property and
equipment of $491,000.
Net cash used in financing activities was $189,000 in 1998, due to the
redemption of the preferred share purchase rights. See Part II, Item 5. - Market
for Common Equity and Related Stockholder Matters for more information on the
redemption.
Other Matters
- -------------
Net Operating Loss Carryforwards and Tax Credits: As of December 31, 1999,
Cortech had approximately $78 million of net operating loss carry forwards for
income tax purposes which expire from 2000 through 2013. In addition, Cortech
has approximately $3.1 million of research and development and foreign tax
credit carryforwards available to offset future federal income tax, subject to
limitations for alternative minimum tax. Cortech's use of operating loss
carryforwards and tax credit carryforwards is subject to limitations imposed by
the Internal Revenue Code.
II-5
<PAGE>
Year 2000 Issue
- ---------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company has not experienced any Year 2000 issues subsequent to 1999's
fiscal year end. Although the Company believes it has taken the appropriate
steps to address Year 2000 readiness, there is no guarantee that the Company's
efforts will prevent a material adverse impact on the results of operations and
financial condition.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date for FASB Statement No. 133, an Amendment of FASB Statement No.
133", which defers the effective date of SFAS No. 133 to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
currently holds no derivative instruments, nor is it currently participating in
hedging activities. Management does not expect adoption of SFAS No. 133 to have
a material effect on the Company's financial condition, results of operations or
liquidity.
II-6
<PAGE>
ITEM 7. - FINANCIAL STATEMENTS
- ------- --------------------
The financial statements filed with this item are listed below:
Report of Independent Accountant
Financial Statements:
Balance Sheet as of December 31, 1999
Statements of Operations for the Years ended December 31, 1999
and 1998
Statements of Stockholders' Equity for the Years ended
December 31, 1999 and 1998
Statements of Cash Flows for the Years ended December 31, 1999
and 1998
Notes to Financial Statements
II-7
<PAGE>
PricewaterhouseCoopers LLP
400 Campus Drive
P.O. Box 988
Florham Park, NJ 07932
Telephone (973) 236 4000
Facsimile (973) 236 5000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Cortech Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Cortech, Inc. at December 31, 1999,
and the results of its operations and its cash flows for the years ended
December 31, 1999 and 1998, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 15, 2000
F-1
<PAGE>
CORTECH, INC.
BALANCE SHEET
December 31, 1999
(in 000's)
ASSETS
Current assets:
Cash and cash equivalents $ 6,648
Short-term investments 6,568
Prepaid expenses and other 154
-------
Total current assets $13,370
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17
Accrued liabilities 162
-------
Total current liabilities 179
-------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 4):
Preferred stock, $.002 par value 2,000,000 shares
authorized, none issued -
Common stock, par value $.002;
5,000,000 shares authorized;
1,852,209 shares issued and outstanding 4
Additional paid-in capital 99,830
Accumulated deficit ( 86,643)
-------
Total stockholders' equity 13,191
-------
Total liabilities and stockholders' equity $13,370
=======
See accompanying notes to financial statements.
F-2
<PAGE>
CORTECH, INC.
STATEMENTS OF OPERATIONS
(in 000's, except per share amounts)
Year Ended December 31,
--------------------------
1999 1998
------ ------
Revenues:
Interest income $ 574 $ 695
Gain on disposition of property
and equipment 435 380
Technology license revenue 2,000 250
Sponsored research and development - 22
Other income 216 -
------ ------
Total revenues 3,225 1,347
------ ------
Expenses:
Research and development - 436
General and administrative 342 5,565
------ ------
Total expenses 342 6,001
------ ------
Income (loss) before income taxes 2,883 ( 4,654)
Provision for income taxes 233 -
------ ------
Net income (loss) $2,650 ($4,654)
====== ======
Basic net income (loss) per share $ 1.43 ($ 2.51)
====== ======
Diluted net income (loss) per share $ 1.43 ($ 2.51)
====== ======
Weighted average common shares
outstanding 1,852 1,852
====== ======
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CORTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4)
(in 000's, except share amounts)
Common Stock Additional
------------ Paid-In Deferred Accumulated
Shares Amount Warrants Capital Compensation Deficit Total
------ ------ -------- ----------- -------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,852 $ 4 $1,077 $98,942 ($ 1) ($84,639) $15,383
Amortization of deferred
compensation - - - - 1 - 1
Redemption of preferred share
purchase rights - - - ( 189) - - ( 189)
Expiration of CDC Warrants - - ( 1,077) 1,077 - - -
Net loss - - - - - ( 4,654) ( 4,654)
----- ---- ------ ------- ---- ------- -------
Balance, December 31, 1998 1,852 4 - 99,830 - ( 89,293) 10,541
Net income - - - - - 2,650 2,650
----- ---- ------ ------- ---- ------- -------
Balance, December 31, 1999 1,852 $ 4 - $99,830 - ($86,643) $13,191
===== ==== ====== ======= ==== ======= =======
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------ ------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 2,650 ($ 4,654)
Adjustments:
Depreciation and amortization - 623
Gains on disposition of equipment ( 435) ( 380)
Gain on sale of licensing rights ( 2,000) -
(Increase) decrease in prepaid expenses and
other assets ( 77) 231
Decrease in accounts payable ( 134) ( 549)
Increase (decrease)in accrued liabilities ( 820) 656
Other, net - ( 35)
------- -------
Net cash used in operating activities ( 816) ( 4,108)
------- -------
Cash flows from investing activities:
Gain on sale of licensing rights 2,000 -
Proceeds from sale of property and equipment 435 491
Purchases of short-term investments ( 6,568) ( 9)
Sales of short-term investments - 3,850
------- -------
Net cash provided by (used in) investing
activities ( 4,133) 4,332
------- -------
Cash flows from financing activities:
Redemption of preferred share purchase rights - ( 189)
------- -------
Net cash used in financing activities - ( 189)
------- -------
Net increase (decrease) in cash and cash
equivalents ( 4,949) 35
Cash and cash equivalents, beginning of period 11,597 11,562
------- -------
Cash and cash equivalents, end of period $ 6,648 $11,597
======= =======
Supplemental disclosure cash flow information:
Cash paid for taxes $ 231 $ -
======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
1. Organization
------------
Cortech, Inc. ("Cortech" or the "Company") was a biopharmaceutical
company whose primary focus was the discovery and development of novel
therapeutics for the treatment of inflammatory disorders. Specifically,
Cortech directed its research and development efforts principally toward
protease inhibitors and bradykinin antagonists. These efforts produced
certain intellectual property rights.
In response to disappointing test results and its loss of
collaborative partner support, Cortech implemented a series of reductions
in force over the past five years (which reduced the number of full time,
regular employees from more than 200 down to zero) and effectively
discontinued all internal research and development activities. In addition,
Cortech has decommissioned its laboratories, and sold its scientific,
technical office equipment and leasehold improvements. As of December 31,
1998, all fixed assets had been written off. As a result of these actions,
Cortech no longer has the staff or operative facilities required to
recommence internal research and development activities. Cortech's strategy
is to seek collaborative partners to conduct and fund future research and
development on the components of its portfolio or to sell the rights to
certain of the compounds in the portfolio to third parties interested in
funding future research and development, while conserving the Company's
cash, although there can be no assurance that any particular agreement will
be completed. At the same time, the Company is seeking to redeploy its
assets into an operating business.
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. Prior years financial statements have been reclassified to
conform to the current year's presentation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist primarily of cash in banks and U.S.
Treasury Bills purchased with an original maturity of three months or less.
F-6
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
Short-Term Investments
----------------------
Short-term investments consist of U.S. Treasury Bills purchased with
an original maturity of six months and are valued at cost plus accrued
interest, which approximates the fair market value. The Company currently
intends to hold these investments until maturity.
Research and Development Expenses
---------------------------------
Costs incurred in connection with research and development activities
were 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. 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. There were no costs in connection
with these activities in 1999 or 1998.
Basic Net Income (Loss) Per Share
---------------------------------
Basic net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding during the period as
adjusted for the one-for-ten reverse stock split which was effective on
September 22, 1998. Excluded from the calculation of the net income (loss)
per share are 98,077 and 117,149 common stock options, in 1999 and 1998
respectively which, if included, would have an antidilutive effect. (See
Note 4.)
Income Taxes
------------
The Company recognizes 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 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.
F-7
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 in 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 assumed all responsibilities for
research activities during the final six months of the collaborative
project, which terminated on March 14, 1998. As a result of this
reallocation of responsibilities, Ono was 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 had an exclusive, royalty-free license to make, use and sell
a resulting product in Japan, Korea, Taiwan and China.
In June 1999, the Company finalized an agreement to license to Ono the
worldwide rights to the oral elastase inhibitor program on which the two
companies had been collaborating. In connection with the expansion of Ono's
rights to the technology, Cortech received a $2,000,000 payment less
applicable taxes both in the United States and Japan. Ono withheld at the
source $200,000 of withholding taxes which they remitted directly to the
Japanese taxing authorities. This withholding tax has been expensed in the
accompanying financial statements. If Ono's studies of the technology are
favorable, Cortech could also receive milestone payments of up to $9.5
million. Ono also agreed to pay Cortech a royalty on sales generated
outside the original territories on products using Cortech's technology.
Milestone payments or royalties are not assured and in any event could be
expected only after several more years of continued evaluation of the
technology by Ono.
F-8
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 (one-tenth on a split adjusted
basis - see "Common Stock" below) 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. These rights were distributed as a non-taxable
dividend and were set to expire in June 2005. The rights would separate
from shares of Cortech common stock and become exercisable at $20.00 each
($200 on a split adjusted basis - see "Common Stock" below), subject to
future adjustment, only if a person or group acquired 15 percent or more of
the Cortech common stock. Cortech's Board of Directors could 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 had designated 500,000 shares of its Preferred Stock as Junior
Preferred Stock.
On September 29, 1998, the Board of Directors authorized the
redemption of all outstanding rights, effective as of the close of business
on October 13, 1998, with the redemption price of $.01 ($.10 on a split
adjusted basis - see "Common Stock" below) per right paid in cash on
October 14, 1998 to the holders of record of Common Stock of the Company as
of the close of business on October 13, 1998.
F-9
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
Common Stock
------------
The stockholders of the Company approved a one-for-ten reverse stock
split which was effective as of the close of business on September 22,
1998. Also on this date, the Company's authorized shares were reduced from
50,000,000 to 5,000,000. Accordingly, all common share information has been
adjusted to reflect this reverse stock split.
Stock Option Plans
------------------
On September 22, 1998, the Company effected a one-for-ten reverse
stock split. All stock option information has been adjusted to reflect this
reverse stock split.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation". This new standard encouraged, but did 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 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
proforma 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 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 income (loss) and net income (loss) per
F-10
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
share would have been increased (decreased) to the pro forma amounts
indicated below (In 000's, except per share amounts):
1999 1998
---- ----
Net income (loss) - as reported $ 2,650 ($ 4,654)
Net income (loss) - pro forma $ 2,650 ($ 5,053)
Net income (loss) per share - as reported $ 1.43 ($ 2.51)
Net income (loss) per share - pro forma $ 1.43 ($ 2.73)
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 150,000 shares of common stock. Although 40,710 shares 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.
The Company's 1993 Equity Incentive Plan ("1993 Plan"), approved by
the stockholders on May 10, 1994, authorizes the issuance of 170,000 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, 1999 generally become exercisable in varying amounts over a five-year
period from the date of grant. Although 37,085 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 figures as of such date.
F-11
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 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 or 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.
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, 1999, 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, 1999.
During 1991, a Nonemployee Directors' Stock Option Plan was approved
which authorized the grant of stock options to purchase up to 15,000 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, 1999, options to purchase 10,800 shares of common stock had
been granted and were fully vested. The Company recorded the difference
between the fair market value of the underlying common stock and the
exercise price as compensation expense over the vesting period.
F-12
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
The Company's 1992 Nonemployee Directors' Stock Option Plan authorizes
the granting of options to purchase up to 40,000 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. No options were granted
during 1999 or 1998. During 1994, in order to effect a repricing of certain
of these options, options to purchase 16,225 shares of common stock were
amended to become options to purchase 14,854 shares of common stock at an
exercise price of $17.50 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 $1,000 in 1998. By December 31, 1998, all deferred
compensation had been expensed. By its terms, the plan terminated on
December 31, 1997 (although such event does not affect outstanding options
granted under the plan).
A summary of the status of the Company's 1986 Plan, 1993 Plan and
nonemployee directors' stock option plans as of December 31, 1999 and 1998
and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Weighted-Average Weighted-Average
Options Shares Exercise Price Shares Exercise Price
------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options
outstanding
at beginning
of year 103,823 $20.20 199,951 $20.60
Forfeited/canceled ( 16,547) $18.39 ( 96,128) $21.30
------- --------
Outstanding at
year end 87,276 $20.59 103,823 $20.20
======= ========
Options exercisable
at year end 83,396 $20.65 93,608 $20.30
======= ========
</TABLE>
F-13
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
The Company granted other options to certain directors and
consultants:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Weighted-Average Weighted-Average
Options Shares Exercise Price Shares Exercise Price
- ------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options outstanding
at beginning
of year 13,326 $38.40 14,559 $37.10
Forfeited/canceled ( 2,525) $29.88 ( 1,233) $21.50
------- ------
Outstanding at
year end 10,801 $40.36 13,326 $38.40
======= ======
Options exercisable
at year end 10,801 $40.36 13,326 $38.40
======= ======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-Average Weighted-
Range of Outstanding at Remaining Life Average Outstanding at Remaining Life Average
Exercise Prices December 31, 1999 (in years) Exercise Price December 31, 1999 (in years) Exercise Price
---------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10 - $20 61,900 5.03 $17.00 59,901 4.96 $17.10
$20.01 - $30 29,718 4.58 $25.30 27,837 4.44 $25.40
$30.01 - $40 2,000 4.79 $35.00 2,000 4.79 $35.00
$80 - $87.50 4,459 2.31 $80.60 4,459 2.00 $80.60
------- -------
98,077 94,197
======= =======
</TABLE>
During 1992, the Company granted options to purchase 5,000 shares of
the Company's common stock at $26.00 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 incurred and the exercise price of $26.00 per
share. Deferred compensation was amortized over the applicable vesting
periods.
F-14
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
5. Income Taxes
------------
As of December 31, 1999, the Company has approximately $78 million of
net operating loss carryforwards ("NOL") for income tax purposes and
approximately $3.1 million of research and development and foreign tax
credit carryforwards available to offset future federal income tax, subject
to limitations for alternative minimum tax. The NOL's and credit
carryforwards are subject to examination by the tax authorities and expire
in various years from 2000 through 2013.
The components of income tax expense are as follows (in 000's):
1999 1998
---- ----
Federal-current $ 5 $ -
State-current 28 -
Foreign-current 200 -
---- ----
$233 $ -
==== ====
The income tax expense for the year ended December 31, 1999 and 1998
is different from the amount computed by multiplying total earnings before
income taxes by the statutory Federal income tax rate of 34%. The reasons
for this difference and the related tax effect are as follows (in 000's):
1999 1998
------ ------
Income (loss) before income taxes $2,883 ($4,654)
Statutory federal income tax rate 34% 34%
------ ------
Expected income tax (benefit) 980 ( 1,582)
State tax 18 -
Change in valuation allowance, net
of operating losses ( 842) 1,578
Expiring research credit carryforwards 15 -
Other, net 62 4
------ ------
Provision for income tax $ 233 $ -
====== ======
Deferred income taxes reflect the net effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards.
F-15
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
The tax effect of significant items comprising the Company's net
deferred tax asset as of December 31, 1999 are as follows (in 000's):
Net operating loss carryforwards $26,390
Research and development and other credits 3,062
Other, net 2,430
-------
31,882
Valuation allowance ( 31,882)
-------
Net deferred tax asset $ -
=======
Management believes the deferred tax assets as of December 31, 1999 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 deferred tax benefit 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 loss before income taxes is due primarily to
the valuation allowance established to offset the Company's net deferred
tax asset.
Included in the net operating loss carryforward 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
in additional paid-in capital when realized.
The Tax Reform Act of 1986 contains provisions that may limit the NOL
and credit carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes 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
credit carryforwards from tax periods prior to the ownership change.
F-16
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
6. 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. Each unit was comprised of one
share of CDC common stock and three warrants for Cortech common stock, of
which one warrant expired each on December 31, 1998, 1997 and 1996 (Note
4). The net proceeds received by CDC were 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
worldwide exclusive right and license to the technology that is developed
by Cortech.
In connection with the technology license agreement referred to above,
the Company entered into a research and development agreement with CDC.
Since December 31, 1997, the Company was not engaged in active development
of any compounds covered by the license agreement.
The Company was 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 was exercisable at any date
before December 31, 1998, based on an exercise price of $75.40 per share of
CDC common stock in 1998. The option has expired unexercised.
7. Employee Retirement Plan
------------------------
The Company provided a defined contribution 401(k) plan for eligible
employees which was discontinued effective December 31, 1999. Employee
contribution to the plan was 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 approximately $200 in 1999 and $6,000 in
1998.
F-17
<PAGE>
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
8. Legal Proceedings
-----------------
On February 27, 1998, a complaint was filed in the Court of Chancery
of the State of Delaware, naming the Company, the Company's then current
directors and BioStar as defendants. The complaint, filed by a stockholder
of the Company, claims to be on behalf of a class of all the Company's
stockholders and contends that the then current directors of the Company
breached their fiduciary duties to the Company's stockholders when they
unanimously approved the proposed combination with BioStar. The complaint
originally sought to enjoin the proposed combination with BioStar as well
as the operation of the Company's stockholder rights plan and sought an
order rescinding the proposed combination with BioStar upon its
consummation as well as compensatory damages and costs. The complaint was
amended following termination of the proposed BioStar merger to seek to
force an auction of the Company's assets and other relief. Thereafter, the
parties negotiated a settlement of the claims. Pursuant to the terms of the
settlement a payment in the amount of $235,000 shall be made to Cortech on
behalf of Defendants by Cortech's directors and officers insurance carrier.
If the Court approves the settlement, Plaintiff's counsel intend to ask the
Court for an award of attorneys' fees and expenses in an amount not to
exceed $160,000. Defendants have agreed that they will not oppose such an
application up to $160,000 and Cortech has agreed to pay, from the
settlement proceeds, the fees and expenses actually awarded by the Court up
to $160,000. Such settlement will be presented to the Court of Chancery at
a hearing scheduled for April 6, 2000. Copies of the Notice to Shareholders
relating to the settlement are available upon request from the Company.
F-18
<PAGE>
ITEM 8. - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
- ------- ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------
On January 14, 1999, Arthur Andersen LLP ("Arthur Andersen") resigned as
independent auditors of the financial statements of Cortech, Inc. (the
"Company") as of and for the year ended December 31, 1998. On January 14, 1999,
the Board of Directors of the Company retained PricewaterhouseCoopers LLP
("PwC"), Certified Public Accountants, as its certifying accountant for the
fiscal year ended December 31, 1998.
No report on the financial statements of the Company issued by Arthur
Andersen during the last two fiscal years prior to their resignation contained
an adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles, nor were there any
disagreements during the last two fiscal years and through January 14, 1999,
between Arthur Andersen and the Company concerning any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved would have required Arthur
Andersen to make reference to the subject matter thereof in connection with its
report. During the last two fiscal years prior to their resignation and through
January 14, 1999, none of the events listed in items (1) through (3) of Item
304(b) of Regulation S-K have occurred; and during such period the Company has
not consulted with PwC concerning any matter referred to under paragraphs (i) or
(ii) of Item 304(a)(2) of Regulation S-K.
II-8
<PAGE>
PART III
ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information required under this item is incorporated by reference to
Cortech's 2000 Proxy Statement.
ITEM 10. - EXECUTIVE COMPENSATION
- -------- ----------------------
The information required under this item is incorporated by reference to
Cortech's 2000 Proxy Statement.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The information required under this item is incorporated by reference to
Cortech's 2000 Proxy Statement.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required under this item is incorporated by reference to
Cortech's 2000 Proxy Statement.
III-1
<PAGE>
PART IV
ITEM 13. - EXHIBITS
- -------- --------
The following exhibits are filed as part of this report:
Exhibit
Number Description of Document
- ------- -----------------------
3.1 (a) Certificate of Incorporation of Cortech, Inc. as
amended.(1)
(b) Certificate of Amendment of Certificate of
Incorporated of Cortech, Inc.(11)
3.3 Certificate of Designation for Series A Junior
Participating Preferred Stock.(6)
3.4 Amended and Restated ByLaws of Cortech, Inc.(9)
4.1 Reference is made to Exhibits 3.3 and 10.30(9)
4.2 Specimen certificate for the Common Stock of
Cortech, Inc.(1)
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, 1997
between The Research Foundation of the
State University 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.(5)
10.31 Royalty Buyout Agreement dated July 8, 1994,
between the Company and the Research
Foundation of State University of New York.(5)
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)**
IV-1
<PAGE>
Exhibit
Number Description of Document
- ------- -----------------------
10.41 Amended and Restated 1992 Non-employee Directors'
Stock Option Plan of the Company.(4)**
10.42 1993 Employee Stock Purchase Plan of the Company,
as amended.(3)**
10.43 1993 Equity Incentive Plan of the Company,
as amended.(10)**
10.47 Executive Officers' Severance Benefit Plan.(7)**
10.55 Amendment No. 1 To Executive Officers' Severance
Benefit Plan.(7)**
10.57 Second Amendment of the Research, Development
and License Agreement dated April 23, 1997,
between Ono and the Company.(8)*
10.94 Executive Compensation Benefits Continuation
Agreement between the Company and Kenneth R. Lynn,
dated October 14, 1997, as amended February 12,
1998.(9)**
10.97 Form of Option Agreement for Directors' Non-Plan
Options.(10)**
10.98 Termination Agreement between the Company and
Diarmuid Boran dated January 29, 1999.(11)**
27.1 Financial Data Schedule.(12)
Reports on Form 8-K
On February 17, 2000, the Company filed a Form 8-K reporting that on
February 15, 2000, the Vice Chancellor of the Court of Chancery of the
State of Delaware in and for New Castle County, signed a Scheduling
Order For Approval of Settlement of a previously filed and amended
complaint. The complaint was brought by a stockholder of the Company as
(i) a proposed class action on behalf of all the Company's stockholders
and (ii) derivative in the right of the Company, against the members of
Cortech's former board of directors.
IV-1
<PAGE>
- --------------------------
(1) Filed as an exhibit to the Company's Registration Statement of 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 Registration Statement on Form
S-8, filed March 29, 1993, file number 33-60242, or amendments thereto
and incorporated herein by reference.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by reference.
(11) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-KSB for
the year ended December 31, 1998, and incorporated herein by reference.
(12) Filed herewith.
* Subject to Confidential Treatment Order.
** Compensatory Plan.
IV-3
<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.
CORTECH, INC.
March 30, 2000 By: /s/ Paul O. Koether
-----------------------
Paul O. Koether
Chairman and Chief
Executive Officer
March 30, 2000 By: /s/ Sue Ann Itzel
---------------------
Sue Ann Itzel
Treasurer
(Principal Financial and
Accounting Officer)
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.
Signature Capacity Date
------------------- --------------------- ---------------
/s/ Paul O. Koether Chairman and Director March 30, 2000
-------------------
Paul O. Koether (Principal Executive
Officer)
/s/ John W. Galuchie, Jr. President and Director March 30, 2000
-------------------------
John W. Galuchie, Jr.
/s/ James L. Bicksler Director March 30, 2000
---------------------
James L. Bicksler
/s/ Sheri Perge Director March 30, 2000
---------------
Sheri Perge
/s/ Leonard M. Tannenbaum Director March 30, 2000
-------------------------
Leonard M. Tannenbaum
IV-4
