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UNITED STATES,
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Fee required) For the fiscal year ended March 31, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) For the transition period
from _____________ to _____________.
Commission File Number: 0-18976
CELTRIX PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3121462
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2033 GATEWAY PLACE, SUITE 600, SAN JOSE, CA 95110
(Address of principal executive offices and zip code)
Registrant's Telephone Number: (408) 988-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: NONE Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing price of the Common Stock on June 1, 1999 in
the Nasdaq National Market was approximately $14.5 million as of such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of June 1, 1999, the Registrant had outstanding 26,569,804 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, and in particular the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements regarding future events or the future
performance of the Company that involve certain risks and uncertainties
including those discussed in "Risk Factors" below. In this report, the words
"anticipates", "believes", "expects", "future", "plans" and similar expressions
identify forward-looking statements.
Actual events or the actual future results of the Company may differ
materially from any forward-looking statements due to a variety of factors
including, but not limited to, (i) the ability to enter into collaborative
arrangements with corporate partners for diabetes, and protein wasting
conditions, (ii) the efficacy and safety of SomatoKine(R) and other of the
Company's products, (iii) results of clinical trials, (iv) the ability to timely
enroll patients in the Company's clinical studies, (v) significant unforeseen
delays in the regulatory approval process, (vi) complications relating to the
use of SomatoKine, (vii) competitive products and technology, (viii) the ability
to raise additional working capital, and (ix) other risk factors described
herein.
The Company assumes no obligation to update these forward-looking statements
to reflect actual results or changes in factors or assumptions affecting such
forward-looking assumptions. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
GENERAL
Celtrix Pharmaceuticals, Inc. ("Celtrix" or the "Company") is a
biopharmaceutical company developing novel therapeutics for the treatment of
seriously debilitating, degenerative conditions primarily associated with aging,
chronic diseases and severe trauma. The Company's focus is on restoring lost
tissues and metabolic processes essential for the patient's health and quality
of life. Product development programs have targeted severe osteoporosis,
including hip fracture surgery in the elderly, diabetes, and acute traumatic
injury as in severe burns. Other potential indications include protein wasting
diseases associated with cancer, AIDS, advanced kidney failure, and other
life-threatening conditions.
The Company's leading drug candidate is SomatoKine, a naturally occurring
complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I)
and its primary binding protein, BP3. IGF-I is known to play a major role in
diverse biological processes, including bone and muscle formation, tissue
repair, and endocrine regulation. However, IGF-I does not naturally exist in
quantity free of its binding proteins, and limitations associated with
administering free IGF-I therapeutically have proven significant. When IGF-I is
bound to BP3, as it is in nature, it does not display these acute limitations.
Human clinical study results from three Phase I studies have shown that (1)
repeated or continuous administration of SomatoKine safely delivers IGF-I at
substantially higher dosage levels than have ever been achievable with free
IGF-I, (2) SomatoKine safely increases the peak blood concentration of IGF-I up
to 35-times normal levels, and (3) elevated levels of SomatoKine substantially
stimulate bone and connective tissue metabolism, based on measures of metabolic
markers in blood and urine of subjects.
Celtrix completed a Phase II clinical feasibility study in December 1998
using SomatoKine to treat severely osteoporotic patients recovering from hip
fracture surgery. Studies have shown that blood levels of IGF-I drop
significantly following hip fracture surgery. These patients, whose bone mineral
density already is reduced, begin rapidly to lose even further bone and lean
body mass, further increasing the risk of refracture and leading to impaired
recovery and diminished patient independence. Final results obtained from the
Phase II feasibility study suggest that SomatoKine has the potential to amplify
bone metabolism and reverse the loss of bone mineral density that usually occurs
following a hip fracture. Furthermore, these
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effects appear to be sustained for up to 3 months post-treatment (6 months
post-surgery). There also appears to be a positive trend in functional
independence in patients treated with SomatoKine.
Based on the results of the trial which treated severely osteoporotic hip
fracture patients, in April 1999 Celtrix established a joint venture with Elan
Corporation, plc to continue the global development of SomatoKine for severe
osteoporosis and recovery from hip fracture surgery.
Previous research by other investigators had demonstrated the importance of
IGF-I in the hormonal regulation of insulin and growth hormone and it's ability
to improve insulin sensitivity and proper glycemic control. Early studies, using
free IGF-I (without the benefit of the binding protein present in SomatoKine)
were complicated by side-effects brought on by the use of the free form of the
molecule.
In January 1999, Celtrix completed a Phase II study in patients with Type I
diabetes using SomatoKine. Final data revealed significant treatment results in
several key measurements. The average daily insulin requirements decreased
significantly and average daily blood glucose levels were decreased. Serum
growth hormone and cholesterol levels were also significantly reduced. These
findings suggest that SomatoKine is a potential therapeutic for improving
insulin sensitivity and helping patients to manage their disease, thereby
avoiding the complications which ultimately accompany diabetes. Celtrix intends
to find a corporate partner(s) for the continued worldwide development of
SomatoKine for the treatment of diabetes.
The Company conducted a Phase II feasibility study in patients with severe
burns from July 1997 to December 1998. Studies have shown that patients with
severe burns typically have very low IGF-I levels along with major tissue damage
which disrupt the biological processes that are essential for efficient and
successful healing and protection from burn complications. Data from the study
suggest that SomatoKine has a normalizing effect on protein metabolism. In
addition, SomatoKine-treated patients recorded improvements in several measures
of immune system and heart function.
Celtrix also plans to establish corporate collaborations to develop
SomatoKine for treatment of severe burns and protein wasting diseases such as
cancer, AIDS, advanced kidney failure, and other life-threatening conditions.
SomatoKine's anabolic effects offer the potential to preserve and restore muscle
strength and mobility important for these patients' survival and quality of
life.
As part of the Company's corporate restructuring announced in September
1998, Celtrix discontinued the manufacture of SomatoKine at its Santa Clara
facility. Currently, the Company has sufficient quantities of the drug to
conduct clinical trials over the next two years. The Company believes that its
future requirements for SomatoKine, beyond the drug already in inventory, can be
met through contract manufacturing. Celtrix has the ability to transfer the
necessary technology to a contract manufacturer to supply SomatoKine.
Celtrix has a product development, license and marketing agreement with
Genzyme Corporation ("Genzyme") for TGF-beta-2. Genzyme is currently conducting
a Phase II clinical trial using TGF-beta-2 for tissue repair and the treatment
of systemic indications. Celtrix is not currently pursuing an in-house
TGF-beta-2 program.
BACKGROUND: MEDICAL NEED
Many of the body's physiological functions, such as growth of bone and
muscle, tissue healing, immune processes and endocrine functions are controlled
by regulatory proteins (growth factors, cytokines, and protein hormones) that
bind to specific cells to modulate their function. When the body produces
appropriate levels of these proteins and when the target cells respond properly,
the body functions normally. When the body encounters adverse situations such as
trauma, infection, or chronic disease, the production and regulation of these
factors can become unbalanced. Normally, the body has the ability to naturally
modulate the production of these regulating proteins to return to a balanced
physiological state (homeostasis). However, when the ability to make these
changes is impaired, it can result in a number of undesirable consequences
including, but not limited to, poor nutritional status, an impaired ability to
maintain and repair tissues and organs normally, and impaired immune and
endocrine functions. Celtrix, alone or in
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collaboration with others, is developing biopharmaceuticals based on such
naturally occurring, regulating proteins.
SOMATOKINE
SomatoKine is a human recombinant equivalent to the naturally occurring
complex formed by insulin-like growth factor-I (IGF-I) and its primary binding
protein (BP3). The therapeutic potential of SomatoKine stems from a variety of
demonstrated IGF-I bioactivities which include:
- Bone formation
- Muscle formation
- Prevention of muscle degradation
- Tissue and organ repair
- Nutrient utilization
- Hormonal regulation of insulin and growth hormone
- Immune system stimulation
- Neurotrophic activity
The metabolic activities of IGF-I suggest that SomatoKine may provide a safe
and effective therapeutic approach to treating debilitating conditions
associated with adverse metabolic, immune and hormonal functions. Clinical and
preclinical studies have demonstrated that circulating IGF-I levels are often
lower than normal in a variety of conditions including aging, chronic disease,
and severe trauma. Low levels of IGF-I are often associated with destructive
metabolic processes (catabolism) causing bone and muscle loss, delay healing,
and increase the patient's risk of life-threatening complications and
infections. Low levels of IGF-I may also exacerbate immunocompromised and
diabetic conditions. The overall development of SomatoKine is aimed at elevating
the circulating reservoir of IGF-I thereby overcoming these destructive
metabolic processes.
Once in the bloodstream, the SomatoKine complex attaches to a third
naturally occurring protein known as an acid labile subunit, or ALS. The
resulting larger complex emulates what is observed in nature, safely storing and
transporting IGF-I throughout the patient's body with an extended half life
compared to free IGF-I. The BP3 contains important biological information used
by the body in regulating IGF-I bioavailability and biodistribution. In
addition, IGF-I can separate from this circulating reservoir and bind to target
cells whenever it is needed by the body. Through its specific receptor, IGF-I
then stimulates essential metabolic activities important for regeneration of
bone and muscle, tissue repair, regulation of blood glucose levels and other
critical biological processes.
Although other biopharmaceutical companies may have development programs
involving IGF-I, Celtrix does not believe that any other company is currently
developing the IGF-BP3 (SomatoKine) complex. This complex is of key importance
because most naturally occurring IGF-I does not circulate in its free form, but
is bound to its primary binding protein, BP3. The natural association of the two
molecules appears to be of fundamental biological significance.
Preclinical experimentation, including toxicology studies, indicates that
SomatoKine substantially improves IGF-I safety and efficacy. In addition, a
variety of biological effects have been demonstrated with SomatoKine that could
not be demonstrated upon the administration of IGF-I alone. This is believed to
be related to the observation that SomatoKine significantly removes the known
dose limitations associated with free (unbound) IGF-I. By removing dosage
limitations and improving safety while still providing the benefits of IGF-I,
SomatoKine has the potential to serve as a superior IGF-I therapeutic
composition for a wide range of applications.
Realization of the therapeutic potential of IGF-I, although pursued by
several companies over the past years, has been hampered by a number of
limitations mainly associated with the administration of IGF-I in its free form.
As demonstrated in preclinical and clinical studies, SomatoKine given over a
range of doses is well tolerated, whereas equivalent doses of IGF-I without BP3
can cause serious side effects, such as hypoglycemia, joint pain and swelling,
and parotid discomfort. Human clinical studies with IGF-I, administered without
BP3, have shown that IGF-I by itself must be administered in low-dose daily
injections
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in order to avoid acute side effects and this, in turn, may limit the observed
clinical efficacy. In contrast, Celtrix's Phase I clinical data suggested that
injectable, higher doses of SomatoKine are feasible and provide the benefits of
IGF-I without dose-limiting side effects. The higher safety margins of
SomatoKine, in combination with potentially less frequent dosing, should make it
possible to use SomatoKine to treat a variety of conditions that may be
difficult to treat successfully with IGF-I alone.
Because IGF-BP3 is involved in a wide variety of essential biological
processes, Celtrix believes that SomatoKine therapy could have broad range
potential. This potential is supported by preclinical laboratory and animal and
clinical studies conducted by Company scientists and other academic
collaborations.
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PRODUCTS UNDER RESEARCH AND DEVELOPMENT
The following table summarizes potential products currently under research
and development, alone and in collaboration with others.
CELTRIX PRODUCT PORTFOLIO: SOMATOKINE(R)
<TABLE>
<CAPTION>
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PATIENT
INDICATION BIOLOGICAL ACTION STATUS POPULATION
(U.S./WORLD)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Recovery from Build bone and muscle Phase IIA Study 300,000/
Hip Fracture Surgery Prevent muscle loss Completed 12/98 1,700,000
(See Corporate Partners)
Severe Osteoporosis Build bone and muscle Assessing bone formation 1,500,000(1)/
strength & muscle strength in hip 5,000,000
fracture study
Completed 12/98
(See Corporate Partners)
Diabetes Improve glycemic control Phase IIA Study 9,100,000(2)/
Reduce insulin usage Completed 1/99 57,000,000
(increase insulin
sensitivity)
Severe Burns Reverse catabolic Phase IIA Study 10,000/
condition Completed 9/98 30,000
Stimulate tissue repair
Protein Wasting: Prevent muscle loss Preclinical data 2,600,000(3)/
Cancer cachexia, and build muscle Also assessing effect 6,000,000
AIDS, advanced on protein wasting in
kidney failure, and severe burn feasibility
other life-threatening study
conditions Completed 9/98
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</TABLE>
<TABLE>
<CAPTION>
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CORPORATE PARTNERS
- -----------------------------------------------------------------------------------------------------
INDICATION PRODUCT (DELIVERY) BIOLOGICAL ACTION STATUS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severe Osteoporosis SomatoKine Build bone and muscle strength Phase IIB
(Elan Corporation, plc) (subcutaneous Prevent loss of bone Clinical Trial
infusion) mineral density planned 1999
Dermal Ulcers TGF-beta-2 in a Stimulate local tissue repair; Phase II
(Genzyme Corporation) collagen matrix accelerate healing Clinical Trial
(local)
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</TABLE>
1 Of the estimated 24 million people in the United States with osteoporosis,
there are an estimated 1.5 million fractures per year due to osteoporosis.
2 This population size represents the diagnosed cases of Type I and Type II
diabetes.
3 The population of patients suffering from muscle wasting diseases is
comprised of the following groups: Protein wasting associated with
gastrointestinal surgery/damage/dysfunction - 500,000; cancer cachexia -
500,000; AIDS - 350,000; kidney failure - 1 million; chronic pulmonary
disease - 250,000.
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CLINICAL DEVELOPMENT
Recovery from Hip Fracture Surgery
Celtrix's initial treatment targets have been elderly patients who have
undergone hip fracture surgery, a subset of the severe osteoporosis patient
population. Each year approximately 300,000 patients in the United States (1.7
million worldwide) undergo hip surgery to repair fractures of the femur that
have occurred during falls. Studies have shown that blood levels of IGF-I drop
significantly following hip fracture surgery. These osteoporotic elderly
patients begin to rapidly lose even further bone and lean body mass. These
losses can prolong patient immobility, further threaten recovery and survival,
interfere with quality of life and add to the high cost of hip repair and
rehabilitation. Celtrix's goal is to provide SomatoKine as a short-term
therapeutic treatment to prevent bone loss, improve muscle strength, restore
mobility, and increase the patient's functional independence.
In January 1997, Celtrix initiated a multi-center Phase II clinical
feasibility study in osteoporotic women (ages 65-90) who have undergone hip
fracture surgery. This study, performed in Belgium, evaluated approximately 26
patients (approximately eight patients per dose group), who received either
SomatoKine or placebo over a period of eight weeks. Multiple dosage levels were
tested. End points evaluated included change in the patient's body composition
(bone, lean mass and fat mass), muscle function (measured by grip strength),
trends in measures of daily activity (ADL, or activities of daily living scores)
and bone metabolism markers.
Final results from this Phase II study demonstrated important trend
information. Hip fracture patients typically suffer an accelerated loss (5-9%)
of hip bone mineral density. In fact, at six months following fracture, the hip
bone mineral density of placebo-treated patients had declined approximately 6%
from baseline value. Following an initial characteristic loss,
SomatoKine-treated patients who were administered drug for eight weeks at 1.0
mg/kg per day, regained a substantial portion of their hip bone mineral density.
At the six-month time point (four months post-treatment), SomatoKine-treated
patients showed a hip bone mineral density average decrease of less than 2% from
baseline value. Hip bone mineral density is a strong predictor of fracture risk
where loss of hip bone mineral density predisposes hip fracture patients to a
high risk of refracture; population studies show that a 5% decrease in hip bone
mineral density increases the risk of fracture by approximately 25%.
Final results also demonstrated that hand grip strength improved
approximately 10% from baseline value for patients treated with 1.0 mg/kg dose
of SomatoKine, versus an approximately 10% loss for those receiving the placebo.
Whether improved grip strength is related to the anabolic effects of SomatoKine
on muscle remains to be determined. Preclinical studies, however, suggest
SomatoKine has an effect on building lean body mass. There also appeared to be a
positive trend in parameters indicative of functional independence.
Based on findings from the Company's Phase II clinical feasibility study,
Celtrix established a joint venture with Elan Corporation, plc in April 1999 to
continue the global development of SomatoKine for osteoporosis and recovery from
hip fracture surgery. The joint venture brings together Celtrix's drug
technology and Elan's MEDIPAD(TM) delivery system. MEDIPAD is a state of the
art, disposable micro-infusion pump, worn by the patient in a manner similar to
a transdermal patch, that will facilitate the administration of SomatoKine to
this indication.
Severe Osteoporosis
Osteoporosis is a chronic, debilitating disorder in which the bones become
increasingly porous, brittle and subject to fracture. Severe osteoporosis
(defined by the number of patients suffering osteoporotic fractures) affects
approximately 1.5 million elderly people in the United States (5 million
worldwide). Celtrix believes the findings from the Phase II feasibility study in
hip fracture patients present a strong argument for development of SomatoKine
for the short-term treatment of severe osteoporosis. This patient population
consists largely of post-menopausal women who already have lost a substantial
quantity of bone and are at high risk of fractures of the hip, wrist or spine.
In fact, it is estimated that 25% of all women over age 60 will suffer an
osteoporosis-related fracture. While estrogens, calcitonins, bisphosphonates and
other therapies
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are prescribed for osteoporosis, these treatments are used primarily to prevent
further bone loss rather than to form new bone in this population. A relatively
short period of treatment with SomatoKine offers the potential to substantially
restore the patient's bone mineral density and improve supportive muscle
strength, thus reducing fracture risk and improving the patient's strength and
mobility. SomatoKine could provide a much needed therapeutic complement to the
existing preventative therapies. Celtrix has established a corporate
collaboration with Elan Corporation, plc for continued global development of
SomatoKine for the treatment of severe osteoporosis, including recovery from hip
fracture surgery.
Diabetes
Diabetes is typically characterized by the inadequate production or
utilization of insulin, a vital hormone needed by the body for normal control of
blood glucose levels. It afflicts over 5% of the populations of Europe, Japan
and North America. In the United States alone, an estimated 9.1 million people
have been diagnosed with diabetes. The endocrine activities of IGF-I suggest
that SomatoKine may provide an effective therapeutic approach to treating
diabetes patients. A number of clinical studies conducted by other researchers
have shown that administration of free IGF-I can significantly increase insulin
sensitivity and glucose tolerance in patients with diabetes, and IGF-I treatment
substantially reduced the requirement for injected insulin and improved glycemic
control. In a number of studies, the use of free IGF-I, however, without its
primary binding protein, resulted in substantial side effects that limited the
therapeutic value of the molecule.
Celtrix conducted a Phase II study in 12 patients to determine whether the
SomatoKine complex provided similar beneficial therapeutic effects on glycemic
control as free IGF-I without its limiting side effects. The study began in July
1998 to treat patients with Type I diabetes. These patients typically produce
little or no insulin of their own, and although they require frequent insulin
injections, their tissue may become partially resistant to insulin over time.
They also have low blood levels of IGF-I due to lack of normal insulin
secretion. Celtrix completed the Phase II study in patients with Type I diabetes
in January 1999. Final data revealed significant treatment results in several
key measurements. In treated patients, the average daily insulin requirements
decreased 49% and average daily blood glucose levels were decreased by 23%.
Serum growth hormone was reduced 77% and cholesterol levels were reduced 12% in
treated patients. These findings suggest that SomatoKine is a potential
therapeutic for improving insulin sensitivity in both Type-I and Type-II
diabetes and helping patients to manage their disease, thereby avoiding the
complications which ultimately accompany the disease. Celtrix intends to find a
corporate partner(s) for the continued worldwide development of SomatoKine for
the treatment of diabetes.
Severe Burns
Another treatment target is severe burns. Annually, approximately 10,000
people in the United States (30,000 worldwide) suffer from traumatic burns over
greater than 20% of their body surface. Very low IGF-I levels, along with major
tissue damage, are associated with disruption of biological processes that are
essential for efficient and successful healing and protection from burn
complications. Furthermore, the length of time spent in a burn trauma center is
directly related to the time required to conduct the skin grafting required to
heal the burn wound. Research has shown that IGF-I plays a significant role in
tissue repair and that IGF-I supplementation can potentially promote the healing
process and reduce hospital stay.
In July 1997, Celtrix initiated a Phase II feasibility trial in severely
burned patients, collaborating with leaders in burn care at key burn trauma
centers throughout the United States. In addition to their standard burn care,
approximately 60 patients, both children and adults, received systemic
SomatoKine and/or placebo through two skin graft cycles.
Data provided evidence supporting the use of SomatoKine to attenuate the
degradation of muscle tissue (protein wasting) that is associated with severe
trauma such as burn injury. In burn patients, the balance between protein
synthesis and degradation is shifted towards degradation, leading to muscle and
weight loss which in turn leads to delayed wound healing and increases in
infectious complications and mortality. Data obtained from the treatment of 28
severely burned patients with SomatoKine indicate substantial improvement in
restoring the balance between protein synthesis and degradation which is a
prerequisite for accelerated wound healing and reduced hospital stay.
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Additionally, data indicate that SomatoKine may have a positive effect on
the immune system of severely burned patients. After severe burn, patients
typically experience immune system effects that impair their ability to resist
infection (i.e. an adverse shift in cytokines produced by T-cell lymphocytes).
However, lymphocytes collected from six severely burned SomatoKine-treated
patients (ages 2-18) showed an approximately 280% increase in the production of
interleukin-2 and a 25-90% increase in the production of interferon gamma, both
vital immune system proteins.
SomatoKine appears to have a normalizing effect on immune functions and
protein synthesis which offers the potential to provide critical protection from
serious infection and protein wasting response that occur in severe burn
patients. The positive findings from this feasibility study allow the Company to
design a pivotal Phase II/III clinical study in burn patients. Such a study may
be initiated upon the completion of a partnership arrangement or other means of
funding.
Protein Wasting
Many critically ill patients suffer from serious protein wasting conditions
which contribute to physical weakness and increase their risk of morbidity and
mortality. Annually, the total is estimated at 2.6 million people in the United
States (6 million worldwide). They include patients with chronic, debilitating
conditions such as cancer cachexia, AIDS, and advanced kidney failure, as well
as those with acute traumatic injuries, such as severe burns. SomatoKine's
anabolic effects offer the potential to preserve and restore muscle strength
important to patient survival and quality of life.
Results from the severe burns trial provided encouraging human data which
demonstrated an improvement in the balance between protein synthesis and
degradation in SomatoKine-treated severely burned adults. This finding
demonstrates potential efficacy for SomatoKine to treat serious medical
conditions associated with muscle and weight loss, and provides further evidence
supporting the use of SomatoKine to treat wasting diseases associated with
cancer cachexia, AIDS and advanced kidney failure.
Celtrix is actively seeking to establish corporate partnerships to address
these major opportunities. Relevant human data has been obtained from the
clinical trial in burn patients, a patient population subject to severe protein
wasting. Additionally, preclinical studies are continuing in collaboration with
academic researchers.
CORPORATE COLLABORATIONS
Elan Corporation, plc
In April 1999, the Company entered into an agreement with Elan Corporation,
plc to establish a joint venture for the development of SomatoKine to treat
osteoporosis using Elan's MEDIPAD Delivery System. The terms of the agreement
include Elan's purchase of up to $12.8 million in Celtrix preferred stock.
Celtrix will use the proceeds of the preferred stock sale to fund its share of
the joint venture's initial capitalization and research and development costs.
Elan will commit additional funds to the joint venture to support its operating
costs.
The joint venture is initially 80.1% owned by Celtrix and 19.9% by Elan and
Elan, at its option, has either the right to convert the preferred stock into
Celtrix common stock or exchange a portion of the preferred stock into
additional ownership in the new joint venture.
The joint venture will pay a license fee to Elan for the use of the MEDIPAD
technology while Celtrix will have an 80% share in any future proceeds related
to the further development and commercialization of the osteoporosis product
(e.g. upfront payments, milestones or royalties) received by the joint venture,
regardless of ownership, until it is paid $10 million. Thereafter, Celtrix and
Elan will share the joint venture's proceeds in accordance with their ownership
interest. In a separate transaction, in April 1999 the Company issued 1,508,751
shares of common stock to Elan International Services, Ltd. at a price of
$1.657 per share.
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Yoshitomi Pharmaceuticals Industries, Ltd.
In July 1994, Celtrix entered into a license agreement with The Green Cross
Corporation covering the development and commercialization of SomatoKine for the
treatment of osteoporosis in Japan. Under the terms of the agreement, Green
Cross was to be responsible for all related research, development and marketing,
as well as product manufacturing to support its needs in Japan. The agreement
provided for Celtrix to receive license fees, milestone payments, and upon
commercialization, royalties from product sales. Celtrix had an exclusive
royalty-bearing license to related know-how and technology development by Green
Cross and retained full rights to SomatoKine outside of Japan. In April 1998,
Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. In May
1998, Celtrix received notice from Yoshitomi of its intent to terminate this
license agreement. This license was terminated in March 1999 upon Yoshitomi's
payment of $600,000 to Celtrix. Celtrix regained the rights to the treatment of
osteoporosis in Japan.
Genzyme Corporation
In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme on TGF-beta-2 which included equity
investments, milestone payments and potential royalties to Celtrix. The
objective was to commercialize TGF-beta-2 for tissue repair and treatment of
systemic applications. Genzyme has been granted exclusive commercialization
rights for all systemic applications and select local applications of
TGF-beta-2. In December 1997, under amended terms, the Company granted Genzyme
expanded territory rights to TGF-beta-2 to include Japan, China, Korea and
Taiwan. In exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained all rights to
applications of TGF-beta-2 concerning ophthalmic disease and has the option to
reacquire rights to other product applications not pursued by Genzyme. Genzyme
is conducting a 15-center, double-blinded, randomized Phase II clinical study to
evaluate the treatment of 177 diabetic patients suffering from neurotrophic
diabetic foot ulcers.
Additionally, in December 1997, under a separate license agreement, Genzyme
was granted a worldwide royalty-bearing license to TGF-beta antibodies and
receptor technology. Under the terms of the agreement, Genzyme will assume the
licensing and royalty obligations of Celtrix related to TGF-beta receptor.
Genentech, Inc.
In March 1993, the Company entered into a cross-license agreement with
Genentech. Under the terms of the agreement, Genentech granted Celtrix rights to
certain process patents which may have application in the manufacturing of
TFG-beta-2 and TGF-beta receptors, in return for a $4.0 million licensing fee
and future product royalties. Celtrix granted Genentech patent rights to
TGF-beta for certain fields of use for future product royalties. The license fee
was balanced by an equity purchase by Genentech of 572,450 shares of newly
issued Celtrix common stock for a total value of $4.0 million, resulting in a
non-cash transaction.
RESEARCH AND DEVELOPMENT
The Company has substantial accumulated or retained expertise with IGF-I and
BP3. Through an extensive collaboration program with leading scientists
worldwide, research and development efforts are focused on demonstrating the
safety and effectiveness of SomatoKine (IGF-I in combination with BP3) in human
clinical studies that are relevant to the indications being evaluated. Studies
to evaluate optimal formulations, doses and dosing frequencies are being
conducted to aid in the development of SomatoKine. These collaborative efforts
have effectively contributed to the Company's understanding of the underlying
causes and potential treatment strategies for conditions leading to muscle and
bone loss and other catabolic conditions. Celtrix is continuing to expand
collaborations into other fields where SomatoKine therapy may be of benefit.
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<PAGE> 11
Advances by the Company's research staff in the development of a novel
protein expression technology for SomatoKine provided Celtrix with a proprietary
manufacturing method which will position the Company for large-scale commercial
manufacturing. Efforts in this area will continue to focus on ways that this
technology can advance the SomatoKine program. The Company believes that this
technology not only provides benefits to Celtrix programs, but also offers the
potential of being useful to other biopharmaceutical companies in need of novel
protein expression technology. The Company intends to evaluate its options to
license such technology to other biopharmaceutical companies in the future.
MANUFACTURING
Celtrix manufactured human recombinant SomatoKine according to current Good
Manufacturing Practices (cGMP) at its Santa Clara location. Since the Company
believes it has a supply of SomatoKine sufficient for future, large scale Phase
II studies, it ceased manufacturing as part of its September 1998 restructuring.
When larger-scale manufacturing is needed, Celtrix will arrange to resume
manufacturing efforts through collaborative relationships or contract
manufacturers.
INTELLECTUAL PROPERTY
Proprietary protection for Celtrix's potential products is important to the
Company's business. Celtrix's policy is to protect its technology by filing
patent applications for technology that it considers important to the
development of its business. Celtrix intends to file additional patent
applications, when appropriate, relating to improvements in its technology and
other specific products that it develops.
In the United States, Celtrix currently holds a total of 19 issued or
allowed patents related to the composition, production, antibodies and methods
of use for SomatoKine, including one issued patent with claims to a BP3
composition-of-matter, six issued or allowed therapeutic use patents for
SomatoKine, nine issued patents regarding novel expression and production
methods which may be used for the manufacture of SomatoKine and one issued
patent relating to methods of predicting drug response. Celtrix has 23 families
of applications, pending in the U.S. or abroad, regarding the therapeutic use of
BP3, antibodies to BP3 and their uses, and therapeutic uses and production of
the complex, SomatoKine. These applications are in various stages of review. In
Europe, Celtrix has an issued patent with claims to: a BP3
composition-of-matter; certain therapeutic uses of that BP3; and certain
therapeutic uses of a complex of IGF and the claimed BP3. Celtrix has received a
European patent with claims to: recombinantly produced BP3; therapeutic uses of
BP3; and therapeutic uses of the complex, SomatoKine. This patent has been
opposed by another company.
The Company also owns or co-owns 27 issued patents regarding the
composition-of-matter, methods of purification, and therapeutic uses of
TGF-beta-2 and antagonists of TGF-beta-2. Celtrix also owns the rights to a
patent application relating to therapeutic uses of TGF-beta antagonists.
Celtrix seeks patent protection for its inventions and discoveries which the
Company believes are patentable in the United States and, in most instances, in
at least Australia, Canada, Japan and various countries in Europe. As with any
pending patent application, there can be no assurance that any of these
applications will be issued in the United States or foreign countries, nor can
there be any assurance that any United States or foreign patents issuing from
any of these applications will not later be held invalid or unenforceable.
At least three large biotechnology and pharmaceutical companies with
substantial financial and legal resources have patent applications on file in
the United States and abroad directed at the production of recombinant IGF-I by
various methods. The earliest date of filing of these patent applications is
April 25, 1983. Unless and until these applications issue in the United States,
it is not possible to determine the breadth of these claims regarding a process
for IGF-I production. Furthermore, a large biotechnology and pharmaceutical
company with substantial financial and legal resources has a patent issued in
the United States directed toward certain DNA molecules encoding BP3 and the
corresponding BP3 protein. This
11
<PAGE> 12
same patent was granted in Europe and was successfully opposed by Celtrix.
However, this large biotechnology and pharmaceutical company has recently
appealed the decision and there can be no assurance that the appeal will not be
successful, and it is not possible to determine what, if any, claims will be
reinstated or the breadth of such claims. In addition, this large biotechnology
company has been issued a patent directed toward the subcutaneous bolus
administration of IGF-BP3 for certain limited areas of use. Each of the
referenced companies can be expected to defend its patent position vigorously.
Celtrix has developed a new process for the production of IGF and BP3 which
it does not believe will infringe on other patents relating to recombinant
protein production in general or on other patents relating to the production of
IGF and BP3 in particular, although there can be no assurance that a contrary
position will not be asserted. A large number of other companies have pending
patent applications and/or issued patents which claim certain methods of use of
IGF. There can be no assurance that third parties will not claim that the
Company's technology, current or future products or manufacturing processes
infringe the proprietary rights of others. If other companies were to
successfully bring legal actions against the Company claiming patent or other
intellectual property infringements, in addition to any potential liability for
damages, the Company could be required to obtain a license in order to continue
to use the affected process or to manufacture or use the affected products or
cease using such products or process if enjoined by a court. Any such claim,
with or without merit, could result in costly litigation or might require the
Company to enter into royalty or licensing agreements, all of which could delay
or otherwise adversely impact the Company's potential products for commercial
use. If any licenses are required, there can be no assurance that the Company
will be able to obtain any such license on commercially favorable terms, if at
all, and if these licenses are not obtained, the Company might be prevented from
pursuing the development of certain of its potential products. The Company's
breach of an existing license or failure to obtain or delay in obtaining a
license to any technology that it may require to commercialize its products may
have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of another party's proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction. An adverse outcome in litigation or
an interference or other proceeding in a court or patent office could subject
the Company to significant liabilities to other parties, require disputed rights
to be licensed from other parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company.
Celtrix also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable. Celtrix
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors in such a manner that the Company has no practical
recourse. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
COMPETITION
In each of the Company's potential product areas, competition from large
pharmaceutical companies, biotechnology companies and other companies,
universities and research institutions is substantial. Relative to the Company,
most of these entities have greater capital resources, research and development
staffs, facilities and experience in conducting clinical trials and obtaining
regulatory approvals, as well as in manufacturing and marketing pharmaceutical
products. Furthermore, the Company believes that competitors have used, and may
continue to use, litigation to gain competitive advantage. In addition, these
and other entities may have or develop new technologies or use existing
technologies that are, or may in the future be, the basis for competitive
products.
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<PAGE> 13
Any potential products that the Company succeeds in developing and for which
it gains regulatory approval will have to compete for market acceptance and
market share. For certain of the Company's potential products, an important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition will be based, among other things, on product efficacy, safety,
reliability, availability, timing and scope of regulatory approval and price.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, many of the Company's
competitors may achieve product commercialization or patent protection earlier
than the Company.
GOVERNMENT REGULATION
The research and development, production and marketing of Celtrix's products
are and will be subject to substantial regulation by numerous governmental
authorities in the United States and other countries. The regulatory process,
which includes preclinical testing and clinical trials of each compound in order
to establish its safety and efficacy, can take many years and requires the
expenditure of substantial resources.
In the United States, pharmaceutical products are subject to rigorous Food
and Drug Administration ("FDA") regulation. The Federal Food, Drug and Cosmetic
Act and the regulations promulgated thereunder, as well as other federal and
state statutes and regulations, govern, among other things, the testing,
manufacture, safety, effectiveness, labeling, storage, record-keeping, approval,
advertising and promotion of Celtrix's potential products. The steps required
before a pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
Investigational New Drug ("IND") application, which must become effective before
human clinical trials may commence, (iii) the conduct of adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug product for its intended indications, (iv) the submission to the FDA of
a New Drug Application ("NDA") for pharmaceuticals, and (v) FDA approval of the
NDA prior to any commercial shipment or sale of the product.
Although SomatoKine is a DNA-derived protein complex and is manufactured
using biotechnology techniques, the FDA has indicated to Celtrix that products
containing SomatoKine will fall into the category of hormones and will be
reviewed as a drug. The review has been assigned to the Division of Endocrine
and Metabolism Products, Center for Drug Evaluation and Research (CDER). During
the investigational phase, the IND requirements will govern the development of
the drug. Prior to marketing, FDA approval of products containing SomatoKine
will be based on submission of an NDA containing the results of preclinical and
clinical studies, and complete manufacturing and controls information.
Furthermore, NDA approval requires preapproval inspection by the FDA of the
proposed commercial manufacturing facilities to assess compliance with GMP.
Prior to the commencement of clinical trials for its potential products,
Celtrix must conduct preclinical tests of its products, which include laboratory
characterization of the products and the conduct of animal studies to assess
preliminarily the safety and pharmacological effect of the products. The
preclinical safety tests must be conducted in compliance with FDA regulations
regarding good laboratory practices. The results of preclinical tests must be
submitted to the FDA as part of the IND application and reviewed by the FDA
during the course of the agency's determination as to whether the clinical
trials described in the IND application may commence. There is no certainty that
submission of an IND application will result in FDA authorization to commence
clinical trials.
Clinical trials involve the administration of the investigational compound
to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND application. Further, each clinical
study must be conducted under the auspices of an independent
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<PAGE> 14
Institutional Review Board at the institution at which the study will be
conducted, and informed consent must be obtained from each clinical subject.
Clinical trials of drug products are typically conducted in three phases,
but the phases may overlap. In Phase I, the product is tested for safety
(adverse effects) and may include dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. Phase II involves studies in a limited
patient population to (i) determine the efficacy of the product for specific,
targeted indications, (ii) determine dosage tolerance and optimal dosage, and
(iii) identify possible adverse effects and safety risks. When a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to further confirm clinical
efficacy and to further test for safety within an expanded patient population at
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of Celtrix's products
subject to such testing. Furthermore, Celtrix or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients are being exposed
to an unacceptable health risk.
The results of the product development efforts, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval to
permit marketing and commercial shipment and sales of the pharmaceutical
product. The testing and approval process is likely to require substantial time
and effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. The FDA may deny an NDA if applicable regulatory
criteria are not satisfied, may require additional testing or information if it
does not view the NDA as containing adequate evidence of the safety and efficacy
of the product, or may require post-marketing testing and surveillance to
monitor the safety of Celtrix's products. Notwithstanding the submission of such
data, the FDA may ultimately decide that the application does not satisfy its
regulatory criteria for approval. Finally, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Among the conditions for NDA approval is the requirement that the
manufacturer's manufacturing procedures and quality control must comply with the
FDA regulations as published in the current GMP regulations, as well as any
additional standards or guidelines issued for specific drug or biological
products. The FDA monitors compliance with these requirements by requiring all
drug manufacturers to register with the FDA, which subjects them to biennial FDA
inspections of manufacturing facilities. In addition, a precondition for NDA
approval is that the FDA conducts an inspection of the manufacturing facility
and determines that it complies with all applicable regulatory requirements. In
order to assure compliance with those requirements, manufacturers must continue
to expend time, resources and effort in the areas of production and quality
control to ensure full technical compliance.
For marketing outside the United States, Celtrix is also subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The Company has conducted clinical trials in Europe and the
considerations set forth above also apply to European clinical trials; for
example, clinical trials must be conducted in several phases and there can be no
assurance that such phases of testing in Europe will be completed successfully
within any specified time period, if at all, with respect to the Company's
product. Although the new drug approval process has been centralized for the
European Union ("EU"), clinical research is still controlled at the national
level. For clinical trials in certain European countries, the Company is
required to give a simple notification process and no submission is required.
Other European countries may require the submission of a Clinical Trial
Exemption ("CTX"), which is the equivalent of the United States IND and which
must be effective before human clinical trials may be commenced. Once submitted,
the review and approval process typically takes three months, although there can
be no assurance that an approval will be obtained within that time period, or at
all.
For the marketing and commercial shipment and sales of new biotechnology
products, the EU has centralized the process for new drug approval. The
centralized approval process involves the submission of a Marketing Application
("MA"), the equivalent of a United States NDA, to the European Medicines
Evaluation Authority ("EMEA"). The EMEA uses the centralized scientific body of
reviewers from the Committee for Proprietary Medicinal Products to assess the
new drug product and obtains a recommendation whether or not to approve the new
product. A single approval from the centralized EMEA is typically applicable to
the entire European Community.
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<PAGE> 15
Because Celtrix intends to have its products marketed in certain foreign
countries in the future, approval by these countries' regulatory authorities may
need to be obtained. The approval procedures vary from country to country, and
the time required for approval may be longer or shorter than that required for
FDA approval. Even after foreign approvals are obtained, further delays may be
encountered before products may be marketed. For example, many countries require
additional government approval for price reimbursement under national health
systems. Such approvals can be critical to any extensive marketing of drug
products in such countries.
INSURANCE; PRODUCT LIABILITY
The Company currently has in force general liability insurance, with
coverage limits of $3.0 million per incident and $4.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $3.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability and general liability on a
claims made and on an occurrence basis, respectively. These policies are subject
to annual renewal.
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<PAGE> 16
EMPLOYEES
As of March 31, 1999, Celtrix employed 7 full-time employees. Since the
September 1998 restructuring, the Company utilizes consultants as necessary to
assist in various research and development activities. The Company plans to add
staff as necessary to manage the clinical and related activities planned by the
Celtrix/Elan joint venture.
The Company is highly dependent on the principal members of its management
and scientific staff as well as consultants. Its future success depends in large
part upon its ability to attract and retain highly qualified scientific and
management personnel. Celtrix faces significant competition for such personnel
from other companies, academic institutions, government entities and other
organizations. There can be no assurance that Celtrix will be successful in
hiring or retaining requisite personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the current
executive officers of Celtrix and their ages as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Andreas Sommer, Ph.D. 57 President and Chief Executive Officer
and Director
Donald D. Huffman 52 Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
Malcolm J. McKay, Ph.D. 43 Vice President, Regulatory Affairs and Quality Assurance
</TABLE>
Dr. Sommer has served as President and CEO of Celtrix since April 1995 and
as a member of the Board of Directors since May 1994. He served as Celtrix's
Senior Vice President from July 1993 to April 1995. Previously, Dr. Sommer
served as Vice President, Research of Celtrix since 1992, following Celtrix's
merger with BioGrowth, Inc., where he served as Vice President, Research and
Development since 1989. He previously was a member of the scientific management
team at Synergen. Also during his professional career, Dr. Sommer served as an
advanced research fellow in the Department of Microbiology at the Biocenter,
University of Basel and was a postdoctoral fellow in the Department of
Biological Chemistry at the University of California, Davis. He received his
Ph.D. in Microbiology from the University of California, Davis, and has
published extensively in noted scientific journals.
Mr. Huffman was appointed Vice President of Finance and Administration and
Chief Financial Officer of Celtrix in October 1997. Previously, he was Vice
President and Chief Financial Officer of Endosonics Corporation from July 1995
to October 1997 and served in the same capacity at Qualimatrix, Inc. from
October 1990 to June 1995. Mr. Huffman has an extensive background in finance
and strategic planning for Fortune 200, mid-size and emerging growth companies.
He received an MBA from State University of New York at Buffalo and a B.S. from
Pennsylvania State University.
Dr. McKay was appointed Vice President of Regulatory Affairs and Quality
Assurance in August 1996 and has served in that capacity for Celtrix since then.
He was formerly a director of quality assurance and quality control at COR
Therapeutics from September 1995 until August 1996. Previously, he served as
director of quality assurance at Celtrix from April 1991 to September 1995, and
he oversaw this function at Triton Biosciences from March 1989 to April 1991. In
addition, he served as group leader of technical support at Abbott Laboratories.
Dr. McKay received his Ph.D. in biochemistry at the University of London and was
a postdoctoral fellow at the Medical College of Virginia.
The Board of Directors elects Celtrix's officers and such officers serve at
the discretion of the Board of Directors of Celtrix. There are no family
relationships among the directors or officers of Celtrix.
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<PAGE> 17
ITEM 2. PROPERTIES
Celtrix leases administrative offices at 2033 Gateway Place, San Jose,
California 95110. In the fourth calendar quarter of 1998, the Company ceased
manufacturing operations and administrative functions at its Santa Clara
facility. The Santa Clara facility was designed to address the Company's
anticipated manufacturing needs to provide its initial drug supply for clinical
studies. In the future, the Company plans to subcontract its manufacturing
operations to supply drug for Phase III clinical studies and commercialization.
However, there can be no assurance that the Company or any other party will be
able to arrange to manufacture any of its current or future products on a
commercial scale, or that such products can be manufactured by the Company or
any other party at a cost or in quantities to make commercially viable products.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there are no legal proceedings pending against or
involving Celtrix or its assets that, in the opinion of management, could result
in a materially adverse change in the business or financial condition of
Celtrix.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth fiscal quarter ended March 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market under
the symbol CTRX. The following table represents quarterly information on the
high and low closing prices of Celtrix's common stock for the last two fiscal
years:
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
------ ------
<S> <C> <C>
First Quarter .............................. $ 3.75 $ 1.75
Second Quarter ............................. $ 2.19 $ 1.00
Third Quarter .............................. $ 2.97 $ 0.50
Fourth Quarter ............................. $ 2.00 $ 0.91
Fiscal Year 1998
First Quarter .............................. $ 3.00 $ 2.00
Second Quarter ............................. $ 2.94 $ 2.00
Third Quarter .............................. $ 2.63 $ 1.66
Fourth Quarter ............................. $ 3.88 $ 1.72
</TABLE>
As of June 1, 1999, there were approximately 1,154 stockholders of record.
No cash dividends have been paid to date by the Company on its common stock.
Celtrix does not anticipate the payment of dividends on common stock in the
foreseeable future.
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<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------
Statement of Operations Data: 1999 1998 1997 1996 1995
- ----------------------------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 131 $ 661 $ 658 $ 1,750 $ 2,200
Costs and expenses:
Cost of sales -- 1 5 31 134
Research and development 6,830 13,006 11,999 10,990 18,091
General and administrative 2,272 1,985 1,814 2,063 3,459
Restructuring costs(1) 5,160 -- -- -- 2,108
-------- -------- -------- -------- --------
14,262 14,992 13,818 13,084 23,792
-------- -------- -------- -------- --------
Operating loss $(14,131) $(14,331) $(13,160) $(11,334) $(21,592)
Interest income, net 132 681 464 625 843
Gain on sale of investment -- 737 -- 3,463 --
Proceeds from settlement agreement 600 -- -- -- --
-------- -------- -------- -------- --------
Net loss $(13,399) $(12,913) $(12,696) $ (7,246) $(20,749)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.58) $ (0.61) $ (0.83) $ (0.51) $ (1.57)
======== ======== ======== ======== ========
Shares used in basic and diluted
per share computation 22,941 21,004 15,238 14,161 13,255
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
- ------------------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments(2) $ 1,258(3) $ 7,913 $ 5,788 $17,643 $19,929
Total assets $ 4,501 $17,876 $16,956 $30,145 $35,024
Long-term obligations -- -- -- $ 238 $ 828
Total stockholders' equity $ 3,280 $14,744 $14,210 $26,786 $29,436
</TABLE>
(1) Restructuring costs for the year ended March 31, 1999 resulted from the
discontinuation of manufacturing and other related activities in September
1998 and include charges for leasehold improvements, severance and operating
lease obligations. Restructuring costs for the year ended March 31, 1995
resulted from the termination of the Company's ophthalmic program in 1995
and include charges for severance, equipment leases and purchase
commitments.
(2) Cash, cash equivalents and short-term investments balances for the years
1995-1997 include restricted cash related to equipment leases.
(3) In April 1999, the Company raised cash in the amount of $2.3 million, net of
expenses, through the sale of 1,508,751 shares of common stock to Elan
International Services. This amount is not included in the cash balance
shown as of March 31, 1999.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company developing
novel therapeutics for the treatment of seriously debilitating, degenerative
conditions primarily associated with severe trauma, chronic diseases or aging.
The Company's focus is on regenerating lost tissue and metabolic processes
essential for the patient's health and quality of life. Ongoing product
development programs target severe osteoporosis (recovery from hip fracture
surgery), traumatic burns and diabetes. Other potential indications include
protein wasting diseases associated with cancer, AIDS, advanced kidney failure
and other life-threatening conditions.
The Company's development focus is on SomatoKine, a naturally occurring
complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I)
and its primary binding protein, BP3. IGF-I is known to play a major role in
diverse biological processes, including muscle and bone formation, tissue repair
and endocrine regulation. However, limitations associated with administering
free IGF-I therapeutically have proven significant because IGF-I does not
naturally exist in quantity free of its binding proteins. SomatoKine delivers
IGF-I complexed with BP3, which contains biological information important for
the body's natural regulation of IGF-I bioavailability and biodistribution, and
the resulting complex does not display the acute limitations seen in free IGF-I
administration.
Results from the Company's three earlier Phase I studies demonstrated
that the repeated or continuous administration of SomatoKine safely delivers
IGF-I at substantially higher dosage levels than have ever been achievable with
free IGF-I, increasing the peak blood concentration of IGF-I up to 35-times its
normal level. Furthermore, the elevated levels substantially stimulated bone and
connective tissue metabolism.
In early 1997, the Company initiated a Phase II clinical feasibility
study using SomatoKine to treat severe osteoporosis patients recovering from hip
fracture surgery. Following the trauma of hip fracture, patients typically
suffer an accelerated loss of hip bone mineral density (BMD) which predisposes
them to a high risk of refracture. Final data from this Phase II clinical
feasibility study reveal significant treatment results in several key
measurements including hip bone mass and tests of functional ability. The
results suggest that SomatoKine amplifies the body's natural bone metabolism and
that short-term treatment with SomatoKine appears to have sustained effects. The
findings suggest the potential usefulness of SomatoKine for the treatment of
osteoporosis. Based on these promising findings, in April 1999 the Company
established a corporate partnership with Elan Corporation, plc to continue the
global development of SomatoKine for severe osteoporosis in conjunction with
Elan's proprietary drug delivery technology, the MEDIPAD.
In mid-1997, the Company began a Phase II clinical feasibility study in
severely burned patients. Severe burns patients typically have low IGF-I levels
which may be connected to the disruption of the biological processes that are
essential for efficient and successful healing and protection from
complications. Results provided evidence that SomatoKine improved the metabolic
processes involved in maintaining muscle protein. In addition, SomatoKine
appeared to have a positive effect on the heart function and immune system of
these severely burned patients. Clinical findings from this study may be used to
establish corporate partnership(s) for future development of SomatoKine in
severe burns.
In July 1998, Celtrix initiated a Phase II feasibility study in Type I
diabetes. This 12-patient study investigated SomatoKine's potential to increase
sensitivity to insulin and improve blood glucose control. In a cross-over study,
patients served as their own control group. All patients reacted positively to
SomatoKine. On average, while using SomatoKine, patients reduced exogenous
insulin by 49% and recorded a 23% reduction in blood sugar levels, while
improving glycemic control. Clinical findings from this study, released in first
calendar quarter 1999, will be used to establish corporate partnership(s) for
future development of SomatoKine in diabetes.
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<PAGE> 20
Other potential indications include protein wasting conditions associated
with cancer cachexia, AIDS, advanced kidney failure, and other life-threatening
conditions. Celtrix plans to pursue the use of SomatoKine in these areas through
corporate collaborations. SomatoKine's anabolic effects offer the potential to
preserve and restore muscle strength and mobility which are important for these
patients' survival and quality of life.
The Company has a product development, license and marketing agreement
with Genzyme Corporation ("Genzyme") for TGF-beta-2, a potential pharmaceutical
based on a naturally occurring compound which appears to play an important role
in regulating healthy cell functions. In December 1997, under amended terms, the
Company granted Genzyme expanded territory rights to TGF-beta-2 to include
Japan, China, Korea and Taiwan. Additionally, under a separate license
agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta
antibodies and receptor technology. Genzyme is conducting a Phase II clinical
study in dermal ulcers; Celtrix is not currently pursuing an in-house TGF-beta-2
program.
The Company entered into a license agreement in 1994 with The Green Cross
Corporation ("Green Cross"), a Japanese pharmaceutical company, covering the
development and commercialization of SomatoKine for the treatment of
osteoporosis in Japan. Green Cross was merged with Yoshitomi Pharmaceuticals
Industries, Ltd. ("Yoshitomi") in April 1998, and in May 1998, the Company
received notification of intent from Yoshitomi to terminate the Green Cross
license agreement with Celtrix. The license agreement was terminated in March
1999 upon the payment by Yoshitomi of $600,000 to Celtrix and return of the
rights to the treatment of osteoporosis in Japan.
Celtrix has not earned substantial revenues from product sales since
inception and at March 31, 1999 has an accumulated deficit of $130.4 million.
The Company's revenues to date consist principally of licensing and milestone
payments from pharmaceuticals, research and development funding, related party
revenue, and to a lesser extent, sales of products for use in research and assay
applications. The Company expects to incur additional operating losses, which
may fluctuate quarter to quarter, for at least the next several years as the
Company continues its development activities, including clinical trials.
In November 1998, the Company received notice from the Nasdaq Stock
Market that it failed to comply with two Nasdaq continued listing requirements -
the minimum net tangible assets requirement and the minimum bid price
requirement. In January 1999, Nasdaq officials confirmed that the Company had
regained compliance with the minimum bid price requirement, but that it would be
subject to delisting if it failed to comply with the minimum net tangible assets
requirement. In response, the Company requested an oral hearing before a Nasdaq
Listing Qualifications Panel to present its plan to regain compliance with the
minimum net tangible assets requirement. Such plan was presented at an oral
hearing on April 1, 1999. Although the Company intends to comply with all
continued listing requirements of Nasdaq, it awaits the Nasdaq Panel's decision
concerning its continued listing on the Nasdaq Stock Market. There can be no
assurance that it will be able to satisfy Nasdaq's requirements in the future or
that the Nasdaq Panel will render a favorable decision. Recently the Company's
minimum bid price again fell below the minimum bid price required to qualify for
Nasdaq listing. Failure to meet Nasdaq's requirements may result in delisting by
Nasdaq, and may have a material adverse effect on the price of the Company's
Common Stock and the levels of liquidity currently available to its
stockholders.
There can be no assurance that Celtrix will ever achieve either
significant revenues from product sales or profitable operations. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for and market its potential products. No
assurance can be given that the Company's product development efforts will be
successfully completed, that required regulatory approvals will be obtained, or
that any products, if developed and introduced, will be successfully marketed or
achieve market acceptance.
RESULTS OF OPERATIONS
The Company incurred net losses of $13.4 million, $12.9 million, and $12.7
million in fiscal 1999, 1998, and 1997, respectively. Basic and diluted net loss
per share for these years were $0.58, $0.61, and $0.83, respectively.
Revenues consist of licensing revenue and miscellaneous product sales.
Revenues were $131,000, $661,000 and $658,000 in fiscal 1999, 1998 and 1997,
respectively. The 80% decrease in revenues from 1998 to 1999 is due primarily to
loss of licensing revenue resulting from the termination of the Yoshitomi
license agreement.
Operating expenses decreased 5% to $14.3 million in 1999 from $15.0
million in 1998 due to the reduction of expenses since the September 1998
restructuring of the Company, offset by the one-time restructuring charge of
$5.2 million recorded in September 1998. At year-end, the Company had reduced
its expenditure level to approximately $2.4 million per year, and it expects to
maintain this rate of expenditure for its corporate activities for the next 12
months. Clinical and administrative expenditures anticipated by the Celtrix/Elan
joint venture are the responsibility of each party in proportion to their
ownership shares. The joint venture agreement provides for Celtrix to obtain
funds for its share of such expenditures through the sale of additional equity
securities to Elan. Operating expenses increased 9% to $15.0 million in 1998
from
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$13.8 million in 1997 due primarily to increased costs associated with the Phase
II clinical trials, and additional staffing to support increased SomatoKine
manufacturing and clinical activities.
Interest income, net of interest expense, decreased 81% to $132,000 in
1999 from $681,000 in 1998 due primarily to the lower average cash, cash
equivalents and short-term investment balances in 1999. Net interest income
increased 47% to $681,000 in 1998 from $464,000 in 1997 due primarily to an
increase in average cash, cash equivalents and short-term investments resulting
from net proceeds received from the Company's April 1997 private equity
financing of approximately $13.3 million. Interest expense was $1,000, $24,000,
and $89,000 in 1999, 1998, and 1997, respectively.
In 1999, the Company received a $600,000 payment from Yoshitomi, as a
settlement related to the termination of the Green Cross license agreement. In
1998, the Company reported a gain on investment of $737,000 as a result of the
sale of preferred stock in Prograft Medical, Inc.
("Prograft"), held by the Company since 1993.
At March 31, 1999, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $127.7 million
and $4.3 million, respectively, expiring in the years 2006 through 2019. Due
to ownership changes as defined by the Internal Revenue Code, the Company's
utilization of its net operating loss carryforwards and tax credits is subject
to substantial annual limitations. The Company has determined that a valuation
allowance for deferred tax assets of $51.2 million and $45.8 million at March
31, 1999 and 1998, respectively, is required to reduce the deferred tax assets
to the amount realizable, zero, based upon the Company's earnings history of
losses.
In September 1998, Celtrix announced a restructuring of the Company to
focus on the clinical development of SomatoKine, and to significantly reduce its
cash burn rate. Since the Company believes that sufficient clinical grade
SomatoKine has been manufactured for the conduct of clinical trials over the
next two years, it discontinued its manufacturing operations. As part of the
restructuring, the Company reduced its work force by 59 employees, or
approximately 80%, in September 1998. The Company further reduced its work force
by the end of the calendar year, for a total reduction of approximately 90%. The
reduction in work force affected all levels of staff in manufacturing and other
functions. Also, as a result of discontinuing its manufacturing operations, the
Company is currently in the process of selling its equipment and other assets.
The Company terminated its 69,000 square foot facility lease effective November
30, 1998, and relocated to offices in San Jose, California to support ongoing
clinical and business development activities.
As a result of the restructuring, the Company recognized a $5.2 million
one-time charge in the quarter ended September 30, 1998, which included a net
$4.5 million non-cash charge for the write-off of leasehold improvements,
$358,000 for severance and benefit expenses, $250,000 related to certain
non-cancelable operating lease obligations and $75,000 in other
restructuring-related charges.
LIQUIDITY AND CAPITAL RESOURCES
Celtrix has funded its activities with proceeds from public and private
offerings, advances from Collagen, research and development revenues from
collaborative arrangements, lease and debt financing arrangements, proceeds from
liquidating its equity investments and, to a lesser extent, other revenues and
product sales.
At March 31, 1999, Celtrix's cash and cash equivalents were $1.3 million
compared to $7.9 million at March 31, 1998. The net decrease of $6.6 million was
due primarily to cash outlays consisting of $8.9 million in net cash and
investments used in operating activities and $260,000 used for investing and
financing activities, partially offset by net proceeds of $1.9 million received
from the issuance of common stock, and $600,000 in proceeds from the sale of
fixed assets.
In November 1998, the Company completed a private placement of 4,000,000
shares of newly issued common stock at $0.50 per share, resulting in net
proceeds to the Company of approximately $1.9 million. In addition, for every
share of stock issued, the Company also issued one and one-half warrants to
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purchase additional shares at $0.55 per share pursuant to a Common Stock and
Warrant Purchase Agreement dated October 12, 1998.
In February 1999, the Securities and Exchange Commission informed the
Company that it did not have a valid exemption for the sale of its Common Stock
and Warrants to purchasers in connection with the November 1998 financing and,
consequently, the Company has offered the purchasers from the November 1998
financing an opportunity to rescind their purchase of Common Stock and Warrants.
The exercise by any of the investors of such rescission right will reduce the
Company's available cash and cash equivalents, and could have a material adverse
effect on the Company's ability to conduct its business in the future. The
accompanying financial statements do not reflect the impact of such potential
rescission. However, as of the date hereof, all purchasers from the November
1998 financing have informed the Company that they do not intend to rescind
their purchases, and they have agreed to waive certain rights (including certain
financial penalties) in connection with the timing of the Company's obligation
to register the shares of Common Stock and Warrants purchased in the November
1998 financing with the Securities and Exchange Commission.
In April 1999, in connection with the closing of a joint venture
agreement with Elan Corporation, plc, Elan International Services, Ltd.
purchased 1,508,751 shares of Celtrix common stock at a purchase price of $1.657
per share, resulting in net proceeds to the Company of $2.3 million.
At March 31, 1999, the Company had working capital of $0.2 million and
an accumulated deficit of $130.4 million, and incurred a net loss of $13.4
million for the year ended March 31, 1999. Working capital was increased in
April 1999 by the proceeds of the financing described above. The Company expects
that current cash and cash equivalents, including proceeds from the April 1999
financing, will be sufficient to fund operations into the third calendar quarter
of 2000. The Company will be required to seek additional funds to finance
operations beyond that period. The joint venture transaction with Elan
Corporation, plc provides for the purchase by Elan of additional Celtrix equity
securities, the proceeds from which will be used to fund the Company's share of
anticipated clinical expenses associated with the joint venture's large-scale
trial in osteoporosis (recovery from hip fracture surgery).
To minimize future dilution to stockholders from additional equity
financing, the Company plans to concentrate on establishing additional corporate
partner arrangements and other opportunities that will enable the continued
development of SomatoKine. Merger opportunities that are consistent with the
Company's clinical development of SomatoKine will also be considered. There can
be no assurance that the Company will be able to raise additional funds or enter
into further collaborative arrangements on terms favorable to the Company.
The Company anticipates that it will be necessary to expend significant
capital resources to support further clinical development. Capital resources may
also be required for the acquisition of complementary businesses, products or
technologies. The Company's future capital requirements will depend on many
factors, including progress with its clinical trials, the time and costs
involved in obtaining regulatory approvals, the time and costs involved in
filing, prosecuting, enforcing and defending patent claims, competition in
technological and market developments, the establishment of and changes in
collaborative relationships and the cost of commercialization activities and
arrangements. The Company anticipates that it will be required to raise
substantial additional capital over a period of several years in order to
continue its clinical development programs and to prepare for commercialization.
Raising additional funds may result in further dilution to then-existing
shareholders. No assurance can be given that such additional funds will be
available on reasonable terms, or at all. The unavailability of such financing
could delay or prevent the development and marketing of the Company's potential
products.
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RISK FACTORS
Early Stage of Development; No Developed or Approved Products
The Company's potential products are in research and development and no
material revenues have been generated to date from product sales. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, manufacture and market its potential
products. Much of the clinical development work for the Company's potential
products remains to be completed. No assurance can be given that the Company's
product development effort will be successfully completed, that required
regulatory approval will be obtained or that any products, if developed and
introduced, will be successfully marketed or achieve market acceptance.
History of Operating Losses; Accumulated Deficit
The Company has incurred net operating losses in every year of operation
since its inception. As of March 31, 1999, the Company had an accumulated
deficit of approximately $130.4 million. Losses have resulted principally from
costs incurred in connection with the Company's research and development
activities and from general and administrative costs associated with the
Company's operations. The Company expects to incur substantial and increasing
operating losses for at least the next several years. The Company's ability to
achieve profitability will depend in part on completing the research and
development of, and obtaining regulatory approvals for, its products and
successfully commencing product commercialization.
Possible Volatility of Stock Price; Dividend Policy
Since the Company's common stock became listed for public trading, its
market price has fluctuated over a wide range and the Company expects that it
will continue to fluctuate. Like the market prices for securities of
biopharmaceutical and biotechnology companies generally, the Company's stock
price has from time to time experienced significant price and volume
fluctuations that are unrelated to the Company's operating performance. In
addition, announcements concerning the Company or its competitors, the results
of clinical trials, technological innovations or new commercial products,
government regulations, developments concerning proprietary rights, litigation
or public concern as to safety of the Company's potential products as well as
changes in general market conditions may have a significant effect on the market
price of Celtrix's common stock.
The Company has never paid dividends on its capital stock and the Company
does not anticipate paying any cash dividends in the foreseeable future.
Future Capital Requirements and Uncertainty of Additional Funding
The Company anticipates that proceeds from the November 1998 and April
1999 financings, as well as proceeds from the sale of fixed assets as a result
of discontinuing manufacturing operations and the $600,000 payment received in
March 1999 pursuant to a settlement agreement with Yoshitomi will be sufficient
to fund the Company's operations into the third calendar quarter of 2000.
Further development of the Company's products will require the commitment of
substantial resources to conduct the time-consuming research and development,
clinical studies and regulatory activities necessary to bring any potential
therapeutic products to market and to establish production, marketing and sales
capabilities. Such additional funding will need to be raised through
collaborative arrangements or through public or private financings, including
equity financing. The joint venture transaction with Elan Corporation, plc in
April 1999 provides for the purchase by Elan of additional Celtrix equity
securities, the proceeds from which will be used to fund the Company's share of
anticipated clinical expenses associated with the joint venture's large-scale
trial in osteoporosis (recovery from hip fracture surgery). Any additional
equity financing may be dilutive to stockholders, and any debt financing, if
available, may involve restrictions on the Company's ability to pay future
dividends on its capital stock or the manner in which the Company conducts its
business.
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There can be no assurance that any such financing will be available to
the Company or on terms attractive to the Company, or that the Company can enter
into an additional collaborative relationship with a corporate partner for the
continuation of the clinical trials in its current indications. In February
1999, the Securities and Exchange Commission informed the Company that it did
not have a valid exemption for the sale of its Common Stock and Warrants to
purchasers in connection with the November 1998 financing and, consequently, the
Company has offered the purchasers from the November 1998 financing an
opportunity to rescind their purchase of Common Stock and Warrants. The exercise
by any of the investors of such rescission right will reduce the Company's
available cash and cash equivalents, and could have a material adverse effect on
the Company's ability to conduct its business in the future. The accompanying
financial statements do not reflect the impact of such potential rescission.
However, as of the date hereof, all purchasers from the November 1998 financing
have informed the Company that they do not intend to rescind their purchases,
and they have agreed to waive certain rights (including certain financial
penalties) in connection with the timing of the Company's obligation to register
the shares of Common Stock and Warrants purchased in the November 1998 financing
with the Securities and Exchange Commission.
Stringent Government Regulation; Need for Product Approvals
The preclinical testing and clinical trials of any compounds developed by
the Company or its collaborative partners and the manufacturing and marketing of
any drugs resulting therefrom are subject to regulation by numerous federal,
state and local governmental authorities in the United States, the principal one
of which is the United States Food and Drug Administration (the "FDA"), and by
similar agencies in other countries in which drugs developed by the Company or
its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies, a "Regulatory Agency"). Any
compound developed by the Company or its collaborative partners must receive
Regulatory Agency approval before it may be marketed as a drug in a particular
country. The regulatory process, which includes preclinical testing and clinical
trials of each compound in order to establish its safety and efficacy, can take
many years and requires the expenditure of substantial resources. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent Regulatory Agency approval.
In addition, delays or rejections may be encountered based upon changes in
Regulatory Agency policy during the period of drug development and/or the period
of review of any application for Regulatory Agency approval for a compound.
Delays in obtaining Regulatory Agency approvals could adversely affect the
marketing of any drugs developed by the Company or its collaborative partners,
result in the imposition of costly procedures upon the Company's and its
collaborative partners' activities, diminish any competitive advantages that the
Company or its collaborative partners may attain and adversely affect the
Company's ability to receive royalties, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
There can be no assurance that, even after such time and expenditures,
Regulatory Agency approvals will be obtained for any compounds developed by or
in collaboration with the Company. Moreover, if Regulatory Agency approval for a
drug is granted, such approval may entail limitations on the indicated uses for
which it may be marketed that could limit the potential market for any such
drug. Furthermore, if and when such approval is obtained, the marketing and
manufacture of the Company's products would remain subject to extensive
regulatory requirements, and discovery of previously unknown problems with a
drug or its manufacturer may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. Failure to
comply with regulatory requirements could, among other things, result in fines,
suspension of regulatory approvals, operating restrictions and criminal
prosecution. In addition, Regulatory Agency approval of prices is required in
many countries and may be required for the marketing of any drug developed by
the Company or its collaborative partners in such countries.
Uncertainties Related to Clinical Trials
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no
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assurance that the Company's clinical trials will demonstrate the safety and
efficacy of any products or will result in marketable products. A number of
companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after experiencing promising results in earlier
trials. For example, in fiscal year 1995, Celtrix discontinued its in-house
TGF-beta-2 program for the treatment of ophthalmic conditions as a result of
disappointing clinical study results.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
No Assurance of Market Acceptance
There can be no assurance that any products successfully developed by the
Company, if approved for marketing, will achieve market acceptance. The products
and therapies which the Company is attempting to develop will compete with a
number of well-established traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over existing treatment methods, and reimbursement policies
of government and third-party payors. Competitors may also develop new
technologies or products which are more effective or less costly than SomatoKine
or perceived to be more cost-effective. There is no assurance that physicians,
patients or the medical community in general will accept and utilize any
products that may be developed by the Company. The Company's business, financial
condition and results of operations may be materially adversely affected if
SomatoKine does not receive market acceptance for any reason.
Substantial Competition
In each of the Company's potential product areas, competition from large
pharmaceutical companies, biotechnology companies and other companies,
universities and research institutions is substantial. At least three large
biotechnology and pharmaceutical companies with substantial financial and legal
resources have patent applications on file in the United States and abroad
directed at the production of recombinant IGF-I by various methods. Relative to
the Company, most of these entities have substantially greater capital
resources, research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals, as well as in
manufacturing and marketing pharmaceutical products. Furthermore, the Company
believes that competitors have used, and may continue to use, litigation to gain
competitive advantage. In addition, these and other entities may have or develop
new technologies or use existing technologies that are, or may in the future be,
the basis for competitive products.
Any potential products that the Company succeeds in developing and for
which it gains regulatory approval will have to compete for market acceptance
and market share. For certain of the Company's potential products, an important
factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market are
expected to be important competitive factors. The Company expects that
competition will be based, among other things, on product efficacy, safety,
reliability, availability, timing and scope of regulatory approval and price.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. In addition, many of the Company's
competitors may achieve product commercialization or patent protection earlier
than the Company. The failure of the Company to compete effectively would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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Dependence on Proprietary Technology; Uncertainty of Patent Protection
The Company's success will depend in part on its ability to obtain
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others, both in the United States and in other countries.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are highly uncertain and involve complex legal
and factual questions. Patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights is therefore uncertain.
No consistent policy has emerged regarding the permissible breadth of coverage
of claims in biotechnology patents. Therefore, no assurance can be given that
any of the Company's or its licensors' patent applications will issue as patents
or that any such issued patents will provide competitive advantages for the
Company's products or will not be successfully challenged or circumvented by its
competitors. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary technology that is
not covered by the Company's patents or that others will not be issued patents
that may prevent the sale of the Company's proposed products or require
licensing and the payment of significant fees or royalties by the Company.
At least three large biotechnology and pharmaceutical companies with
substantial financial and legal resources have issued patents and/or patent
applications on file in the United States and abroad directed at the production
and/or use of recombinant IGF-I by various methods. The earliest date of filing
of these patent applications is April 25, 1983. Unless and until all of these
applications issue, it is not possible to determine the breadth of these claims
regarding a process for IGF-I production or for the use of IGF-I for any
particular indication. Furthermore, a large biotechnology and pharmaceutical
company with substantial financial and legal resources has a patent issued in
the United States directed towards certain DNA molecules encoding BP3 and the
corresponding BP3 protein. This same patent was previously granted in Europe and
was successfully opposed by Celtrix. However, this large biotechnology and
pharmaceutical company has recently appealed the decision and there can be no
assurance that the appeal will not be successful, and it is not possible to
determine what, if any, claims will be reinstated or the breadth of such claims.
In addition, this large biotechnology company has been issued a patent directed
toward the subcutaneous bolus administration of IGF-BP3 for certain limited
areas of use. Each of the referenced companies can be expected to defend its
patent position vigorously.
Celtrix has developed a new process for the production of IGF and BP3
which it does not believe will infringe on other patents relating to recombinant
protein production in general or on other patents relating to the production of
IGF and BP3 in particular, although there can be no assurance that a contrary
position will not be asserted. A large number of other companies have pending
patent applications and/or issued patents which claim certain methods of use of
IGF. There can be no assurance that third parties will not claim the Company's
technology, current or future products or manufacturing processes infringe the
proprietary rights of others. If other companies were to successfully bring
legal actions against the Company claiming patent or other intellectual property
infringements, in addition to any potential liability for damages, then the
Company could be required to obtain a license in order to continue to use the
affected process or to manufacture or use the affected products or cease using
such products or process if enjoined by a court. Any such claim, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements, all of which could delay or otherwise
adversely impact the Company's potential products for commercial use. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially favorable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from pursuing
the development of certain of its potential products. The Company's breach of an
existing license or failure to obtain or delay in obtaining a license to any
technology that it may require to commercialize its products may have a material
adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of another party's proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be held
valid by a court of competent jurisdiction. An adverse outcome in litigation or
an interference or other proceeding in a court or patent office could subject
the Company to significant liabilities to other parties,
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require disputed rights to be licensed from other parties or require the Company
to cease using such technology, any of which could have a material adverse
effect on the Company.
Celtrix also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. Celtrix
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors in such a manner that the Company has no practical
recourse. To the extent that the Company or its consultants or research
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions.
Limited Manufacturing Experience and Capacity
The Company's products must be manufactured in compliance with regulatory
requirements and at acceptable costs. In September 1998, the Company implemented
a restructuring plan to focus its operation on the clinical development of its
lead drug compound, SomatoKine, and to reduce its cash burn rate. With
sufficient clinical grade SomatoKine to support the conduct of clinical trials
over the next two years, the Company discontinued its in-house manufacturing
operations. In the future, the Company will need to contract its manufacturing
operations or enter into corporate partnering arrangements that will support
manufacturing of drug material to support additional clinical drug needs and
eventual commercial scale manufacturing. There can be no assurance that the
Company will be able to successfully identify and contract a third party
manufacturer to manufacture any of its current or future products on a
commercial scale, nor that such products can be manufactured at a cost or in
quantities to make commercially viable products. Failure to obtain sufficient
commercial quantities of SomatoKine at acceptable terms will have an adverse
impact on the Company's attempts to seek approval for this product, or to
commercialize this product.
Limited Sales and Marketing Experience
If the Company is permitted to commence commercial sales of products, it
will face commercial competition with respect to sales, marketing and
distribution, areas in which it has no experience. To market any of its products
directly, the Company must develop a marketing and sales force with technical
expertise and with supporting distribution capability. Alternatively, the
Company may obtain the assistance of a pharmaceutical company with a large
distribution system and a large direct sales force. There can be no assurance
that the Company will be able to establish sales and distribution capabilities
or be successful in gaining market acceptance for its proprietary products. To
the extent the Company enters into co-promotion or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful.
Reliance on Qualified and Key Personnel
The Company is highly dependent on the principal members of its scientific
and management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development, or business objectives.
Although the Company believes it has retained sufficient employees to achieve
its near-term business objectives after its reduction in force in September
1998, there can be no assurance that the loss of service of such employees would
not impede the Company's objectives. Furthermore, there can be no assurance that
the reduction in force will not adversely affect the Company's ability to retain
its remaining employees. The loss of key management or scientific personnel
could adversely affect the Company's continued business.
The Company's potential expansion into areas and activities requiring
additional expertise, such as further clinical trials, governmental approvals,
contract manufacturing and marketing, are expected to place additional
requirements on the Company's management, operational and financial resources.
These
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demands are expected to require an increase in management and scientific
personnel and the development of additional expertise by existing management
personnel. The failure to attract and retain such personnel or to develop such
expertise could materially adversely affect prospects for the Company's success.
Product Liability; Availability of Insurance
The Company currently has in force general liability insurance, with
coverage limits of $3.0 million per incident and $4.0 million in the aggregate
annually, and product liability insurance with coverage limits of $1.0 million
per incident and $3.0 million in the aggregate annually. The Company's insurance
policies provide coverage for product liability on a claims made basis and
general liability on occurrence basis. These policies are subject to annual
renewal. Such insurance may not be available in the future on acceptable terms
or at all. There can be no assurance that the Company's insurance coverage will
be adequate or that a product liability claim or recall would not materially
adversely affect the business or financial condition of the Company.
The use of the Company's potential products or technology in clinical
trials and the sale of such products may expose the Company to liability claims.
Such risks exist even with respect to those potential products, if any, that
receive regulatory approval for commercial sale. Although Celtrix has taken and
will continue to take what it believes are appropriate precautions, there can be
no assurance that it will avoid significant product liability exposure. There
also can be no assurance that the Company's insurance coverage will be adequate
or that a product liability claim or recall would not materially adversely
affect the business or financial condition of the Company.
Concentration of Stock Ownership
As of June 1, 1999 the Company's directors and officers and their
affiliates beneficially owned approximately 24% of the outstanding common stock.
As a result, these stockholders have been able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may have the effect of delaying or preventing a change in control
of the Company.
Impact of Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be upgraded or
modified prior to the Year 2000 in order to remain functional. The Company is
currently assessing the impact of Year 2000 on its existing software and
systems. The Company expects to implement successfully the systems and software
changes necessary to address the Year 2000 issues, and does not believe that the
costs of such actions will have a material effect on the Company's results of
operations or financial condition. However, it is unknown the extent, if any, of
the impact of the Year 2000 on other systems and equipment of third parties with
which the Company does business. There can be no assurance that third parties
will address the Year 2000 issue in a timely fashion, or at all. Any Year 2000
compliance problem or delay of either the Company, its suppliers, its clinical
research organizations, or its collaborative partners could have a material
adverse effect on the Company's business, operating results and financial
conditions.
Nasdaq Issues
In November 1998, the Company received notice from the Nasdaq Stock
Market that it failed to comply with two Nasdaq continued listing requirements -
the minimum net tangible assets requirement and the minimum bid price
requirement. In January 1999, Nasdaq officials confirmed that the Company had
regained compliance with the minimum bid price requirement, but that it would be
subject to delisting if it failed to comply with the minimum net tangible assets
requirement. In response, the Company requested an oral hearing before a Nasdaq
Listing Qualifications Panel to present its plan to regain compliance with the
minimum net tangible assets requirement. Such plan was presented at an oral
hearing on April 1, 1999. Although the Company intends to comply with all
continued listing requirements of Nasdaq, it awaits the Nasdaq Panel's decision
concerning its continued listing on the Nasdaq Stock Market. There can be
28
<PAGE> 29
no assurance that it will be able to satisfy Nasdaq's requirements in the future
or that the Nasdaq Panel will render a favorable decision. Recently the
Company's minimum bid price again fell below the minimum bid price required to
qualify for Nasdaq listing. Failure to meet Nasdaq's requirements may result in
delisting by Nasdaq, and may have a material adverse effect on the price of the
Company's Common Stock and the levels of liquidity currently available to its
stockholders.
Restructuring
In order to reduce the Company's cash burn rate and preserve value in the
Company's core assets and technologies, in September 1998, the Company
restructured its operations to eliminate manufacturing and announced a reduction
in work force of up to 90%. Such actions were designed to permit the Company to
continue its clinical development of SomatoKine. There can be no assurance that
the restructuring efforts the Company has engaged in to date will be successful
or that the Company will be able to sustain its clinical development activities
going forward, with the exception of the large-scale Phase II trial in
osteoporosis (recovery from hip fracture surgery) which will be undertaken by
the Celtrix/Elan Corporation joint venture. In addition, there can be no
assurance that the Company's management will not deem it appropriate to
undertake other restructuring efforts in the future or to what degree any such
efforts will result in improved performance or a reduction in the Company's cash
burn rate.
Dilutive and Potential Dilutive Effect to Stockholders
In November 1998, pursuant to the terms of a Common Stock and Warrant
Purchase Agreement dated October 12, 1998, the Company completed a private
placement of 4,000,000 shares of the Company's Common Stock (the "Private
Placement"), resulting in net proceeds to the Company, after deducting estimated
transaction costs, of approximately $1.9 million. Also in connection with the
Private Placement for every share of stock issued, the Company issued one and
one-half warrants to purchase additional shares at $0.55 per share. In April
1999, the Company completed a private placement of 1,508,751 shares of the
Company's Common Stock to Elan International Services, Ltd., resulting in net
proceeds to the Company, after deducting estimated transaction costs, of
approximately $2.3 million. The foregoing issuances of shares of the Company's
common stock and warrants exercisable for common stock dilutes the beneficial
ownership of existing Company stockholders.
In February 1999, the Securities and Exchange Commission informed the
Company that it did not have a valid exemption for the sale of its Common Stock
and Warrants to purchasers in connection with the November 1998 financing and,
consequently, the Company has offered the purchasers from the November 1998
financing an opportunity to rescind their purchase of Common Stock and Warrants.
The exercise by any of the investors of such rescission right will reduce the
Company's available cash and cash equivalents, and could have a material adverse
effect on the Company's ability to conduct its business in the future. The
accompanying financial statements do not reflect the impact of such potential
rescission. However, as of the date hereof, all purchasers from the November
1998 financing have informed the Company that they do not intend to rescind
their purchases, and they have agreed to waive certain rights (including certain
financial penalties) in connection with the timing of the Company's obligation
to register the shares of Common Stock and Warrants purchased in the November
1998 financing with the Securities and Exchange Commission.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
course of ordinary business on certain assets including cash and cash
equivalents. The Company employs established policies to manage its exposure to
fluctuations in interest rates, including placing its investments with high
quality issuers, limiting the amount of credit exposure to any one issuer and
limiting duration by restricting the term.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules of the Company
required by this item are incorporated herein and listed under Item 14(a)(1) and
(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors of the Company as of June 1, 1999.
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
----------------- --- ------------------------------- ----------
<S> <C> <C> <C>
Henry E. Blair..................... 55 Chairman and Chief Executive Officer 1995
of Dyax Corporation; Co-Founder and
Consultant, Genzyme Corporation and
Director of the Company
Barry Sherman, M.D................. 57 Executive Vice President and Chief 1997
Medical Officer, Pain Therapeutics,
Inc. and Director of the Company
Andreas Sommer, Ph.D............... 57 Chief Executive Officer, President 1994
and Director of the Company
James E. Thomas.................... 39 Chairman of the Board of Directors of 1993
the Company; Managing Director of
E.M. Warburg, Pincus & Co., Inc.
</TABLE>
Except as set forth below, each of the directors has been engaged in the
principal occupation set forth next to his name above during the past five
years. There are no family relationships among the directors or executive
officers of the Company.
Mr. Blair was elected to the Board of Directors of Celtrix in January
1995. Since April 1997, Mr. Blair has served as Chairman and Chief Executive
Officer of Dyax Corporation. He was a co-founder of Genzyme Corporation in 1981
and served as Genzyme's Senior Vice President, Manufacturing, Research and
Development until 1988. He continues to serve on Genzyme's Board of Directors
and as a consultant. Mr. Blair is also a director of Genzyme Transgenic
Corporation, DynaGen Inc. and several privately-held companies.
Dr. Sherman was elected to the Board of Directors of Celtrix in December
1997. He currently serves as Executive Vice President and Chief Medical Officer
of Pain Therapeutics Inc., and has been a Clinical Professor of Internal
Medicine at Stanford University since 1986. Previously, Dr. Sherman served as
President and Chief Executive Officer of Anergen, Inc. and Senior Vice President
and Chief Medical Officer at Genentech, Inc.
Dr. Sommer was appointed Chief Executive Officer and President of Celtrix
in April 1995 and has served as a director of Celtrix since May 1994.
Previously, Dr. Sommer served as Senior Vice President of Celtrix since July
1993 and as Vice President, Research of Celtrix since 1992, following the merger
with BioGrowth, Inc. ("BioGrowth"). From 1989 to 1991, Dr. Sommer served as Vice
President, Research and Development of BioGrowth.
Mr. Thomas was elected Chairman of the Board of Celtrix in April 1995 and
has served as a director of Celtrix since November 1993. He has been a Managing
Director of E.M. Warburg, Pincus & Co., Inc. since January 1994 and has held
various other positions at Warburg since 1989. He is also a director of Menley &
James Laboratories, Inc., Oxford Glyco Sciences, plc, Xomed Surgical Products,
Inc., Transkaryotic Therapies, Inc. and several privately-held companies.
30
<PAGE> 31
The information concerning the Registrant's executive officers is set
forth in "Item 1--Business--Executive Officers of the Company" in this Annual
Report on Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and executive officers, and persons who
own more than ten percent (10%) of a registered class of the Company's equity
securities to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and
greater-than-ten-percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon review of the copies of
such reports furnished to the Company and written representations from officers
and directors that no other reports were required, during the three fiscal years
ended March 31, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater-than-ten-percent stockholders were complied
with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors are reimbursed for out-of-pocket travel expenses associated
with their attendance at Board meetings. During fiscal 1999, independent
non-employee directors Blair and Sherman received a fee of $1,500 for each
meeting of the Board of Directors attended. In accordance with internal policies
at Warburg, director Thomas does not receive compensation for attending the
Company's Board meetings. Independent non-employee directors holding less than
2% of the Company's Common Stock participate in the Company's 1991 Directors'
Option Plan (the "Directors' Plan"), pursuant to which such directors are
automatically granted options to purchase shares of Common Stock of the Company
on the terms and conditions set forth in the Directors' Plan. Additionally, at
the discretion of the Board, non-employee directors may also receive option
grants under the 1991 Stock Option Plan. During the year ended March 31, 1999,
director Blair was granted options to purchase 3,333 shares and 40,000 shares of
Common Stock of the Company under the Directors' Plan at an exercise price of
$2.875 per share and $1.688 per share, respectively, and an additional option to
purchase 10,001 shares under the 1991 Stock Option Plan at an exercise price of
$2.875. Director Sherman was granted an option to purchase 40,000 shares under
the Directors' Plan at an exercise price of $1.688, and an additional option to
purchase 5,000 shares under the 1991 Stock Option Plan at an exercise price of
$2.875 per share. Except for the option grant of 3,333 shares to director Blair,
the options granted under the Directors' Plan during the fiscal year ended March
31, 1999 are exercisable with respect to 1/4th of the shares granted on the
first anniversary of the grant date, and 1/48th per month thereafter. The 3,333
options granted to director Blair under the Directors' Plan are exercisable on
the third anniversary of the grant date. Options granted under the 1991 Stock
Option Plan are exercisable with respect to 12% of the shares granted six months
after the grant date, and 2% per month thereafter.
31
<PAGE> 32
SUMMARY COMPENSATION TABLE
The following table shows the compensation received by (a) the Company's
Chief Executive Officer, (b) the most highly compensated executive officers
(other than the Chief Executive Officer) who were serving as executive officers
of the Company as of March 31, 1999 and whose total compensation for the year
exceeded $100,000, (c) the most highly compensated individual who would have
been included under item (b) above but for the fact that he was no longer
serving as an executive officer of the Company as of March 31, 1999, and the
compensation received by each such individual for the Company's two prior fiscal
years.
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation (1) Awards (1)
------------------------- --------------
Fiscal Options/ All Other
Name and Principal Position Year Salary(2) Bonuses SARS Granted Compensation(1)
--------------------------- -------- ----------- -------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Andreas Sommer 1999 $269,315 $ 81,277(3)
Chief Executive Officer, President 1998 $251,100 $ 56,250(4) 170,000
& Director 1997 $212,925 $ 40,000(5)
Donald D. Huffman (6)
Vice President, Finance & 1999 $156,504
Administration, 1998 $ 68,874 $ 19,893(4) 165,000
Chief Financial Officer &
Assistant Secretary
Malcolm J. McKay 1999 $155,535
Vice President, Regulatory Affairs 1998 $144,242 $ 21,750(4) 80,000
& Quality Assurance 1997 $ 78,587 $ 25,000(5) 50,000
David M. Rosen 1999 $ 87,804 $ 41,293(7)
Senior Vice President, Research & 1998 $154,074 $ 23,250(4) 100,000
Development 1997 $136,463 $ 25,000(5)
</TABLE>
(1) Except as disclosed in the table, there was no other cash compensation,
long-term incentive plan or restricted stock award that required
disclosure.
(2) Includes amounts earned but deferred at the election of the executive,
such as salary deferrals under Celtrix's retirement savings plan ("the
401(k) Plan").
(3) Consists of forgiveness of loan principal and accrued interest.
(4) Includes amounts earned as of March 31, 1998 related to achieving certain
corporate milestones during fiscal year 1998. The awards were paid in
April 1998.
(5) Includes amounts earned as of March 31, 1997 related to meeting certain
corporate milestones. The awards were paid in April 1997.
(6) Mr. Huffman was hired by the Company in October 1997 as Vice President of
Finance and Administration and Chief Financial Officer.
(7) Consists of severance payment to Dr. Rosen upon termination of his
employment in September 1998. Dr. Rosen's salary, on an annualized basis,
would have been $175,000.
32
<PAGE> 33
STOCK OPTION GRANTS IN LAST FISCAL YEAR
There were no stock option grants for the named executive officers made in
the fiscal year ended March 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information for the named executive
officers with respect to exercises, during the fiscal year ended March 31, 1999,
of options to purchase Common Stock of the Company, and the number and value of
unexercised options at fiscal year end.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options
Shares Fiscal Year-End at Fiscal Year-End
Acquired Value (Exercisable/ (Exercisable/
Name On Exercise Realized Unexercisable) Unexercisable)
- ---------------------- --------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Andreas Sommer 0 $0 316,850/128,150 -/- (1)
Donald Huffman 0 $0 54,900/110,100 -/- (1)
Malcolm McKay 0 $0 60,800/69,200 -/- (1)
David Rosen 0 $0 0/0 -/- (1)
</TABLE>
- ---------------
(1) The fair market value of Celtrix's Common Stock as reported on the Nasdaq
National Market System at the close of business on March 31, 1999 was
$1.094. The exercise price of all stock options held by the named officers
was above the market value of Celtrix's Common Stock on March 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee (the "Committee") of the Board of Directors is
responsible for setting and administering the polices for executive salaries and
short-term and long-term incentive programs. The Committee consists of Henry E.
Blair and James E. Thomas, non-employee directors of Celtrix.
33
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 1, 1999, as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's current directors, (iii) each of the executive
officers named in the Summary Compensation Table on page 32, and (iv) all
current directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Owned (1)
--------------------------
5% Stockholders, Directors, Named Executive Officers, and
Directors and Executive Officers as a Group Number Percent (2)
--------------------------------------------------------- --------- ---------
<S> <C> <C>
Biotechnology Development Fund (3) ...................... 5,670,774 19.2%
575 High Street, Suite 201
Palo Alto, CA 94301
Warburg, Pincus Investors, L.P. (4) ..................... 3,643,175 13.5%
466 Lexington Avenue, Tenth Floor
New York, NY 10017
Veron International, Ltd. (5) ........................... 3,272,887 11.6%
Chinachem Golden Plaza
77 Mody Road
Tsiu Sha Tsui East
Kowloon, Hong Kong
Genzyme Corporation ..................................... 3,023,217 11.4%
One Kendall Square
Cambridge, MA 02139
Lee Wei Chen (6) ........................................ 2,350,000 8.4%
c/o Fu Sheng Industrial Co., Ltd.
172 Nanking East Road, Sec. 2
Taipei 104 Taiwan
ROC
Elan International Services, Ltd. ....................... 1,508,751 5.7%
102 St. James Court
Flatts, Smiths Parish
Bermuda, FL 04
Pequot Capital Management, Inc. (7) ..................... 1,531,344 5.6%
500 Nyla Farm Road
Westport, CT 06680
Henry E. Blair (8) ...................................... 3,044,350 11.5%
One Kendall Square
Cambridge, MA 02139
Donald D. Huffman (9) ................................... 61,500 *
Malcolm J. McKay, Ph.D. (9) ............................. 67,817 *
David M. Rosen, Ph.D .................................... 2,904 *
Barry M. Sherman, M.D. (10) ............................. 10,433 *
250 E. Grand Avenue
South San Francisco, CA 94080
Andreas Sommer, Ph.D. (9) ............................... 351,011 1.3%
James E. Thomas (11) .................................... 3,643,175 13.5%
466 Lexington Avenue, 10th Floor
New York, NY 10017
All directors and executive officers as a group
(6 persons) (12) ........................................ 7,178,286 26.5%
</TABLE>
-----------------
*Less than 1%.
34
<PAGE> 35
(1) Information with respect to beneficial ownership is based upon
information furnished by each director and officer or contained in
filings made with the Securities and Exchange Commission. Except as
indicated in the footnotes to this table, the stockholders named in the
table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
(2) Percentage of ownership is based on 26,569,804 shares of Common Stock
outstanding on June 1, 1999. The number of shares of Common Stock
beneficially owned includes the shares issuable pursuant to stock
options that are exercisable within 60 days after June 1, 1999. Shares
issuable pursuant to warrants and stock options are deemed outstanding
for computing the percentage of the person holding such options but are
not outstanding for computing the percentage of any other person.
(3) Includes a warrant for the purchase of 615,258 shares of Common Stock at
an exercise price of $2.68 which expires on April 1, 2000 and warrants
for 2,250,000 shares of Common Stock at an exercise price of $0.55 which
expire on November 20, 2001. Also includes an option to purchase 75,000
shares of Common Stock at an exercise price of $2.438 per share which
expires on April 1, 2000.
(4) Warburg, Pincus Investors, L.P. ("WPI") is a Delaware limited
partnership whose sole general partner is Warburg, Pincus & Co., a New
York general partnership ("WP"). E. M. Warburg, Pincus & Co., LLC, a New
York limited liability company ("EMW LLC"), manages WP. The members of
EMW LLC are substantially the same as the partners of WP. Lionel I.
Pincus is the managing partner of WP and the managing member of EMW LLC
and may be deemed to control both WP and EMW LLC. WP, as the sole
general partner of WPI, has a 20% interest in the profits of WPI. Mr.
James E. Thomas, Chairman of the Board of Directors of the Company, is a
Managing Director and member of EMW LLC and a general partner of WP. As
such, Mr. Thomas may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange Act of
1934) in an indeterminable portion of the shares beneficially owned by
WPI and WP. The number of shares beneficially owned includes a warrant
for the purchase of 461,443 shares of Common Stock at an exercise price
of $2.68 which expires on April 1, 2000.
(5) Includes a warrant for the purchase of 307,629 shares of Common Stock at
an exercise price of $2.68 which expires on April 1, 2000 and a warrant
for 1,410,000 shares of Common Stock at an exercise price of $0.55 which
expires on November 20, 2001.
(6) Includes a warrant for 1,410,000 shares of Common Stock at an exercise
price of $0.55 which expires on November 20, 2001.
(7) Includes 1,325,956 shares held by Pequot Private Equity Fund, L.P. (of
which 728,152 shares are issuable upon exercise of a warrant at an
exercise price of $2.68 and which expires on April 1, 2000), 168,688
shares held by Pequot Offshore Private Equity Fund, Inc. (of which
92,192 shares are issuable upon exercise of a warrant at an exercise
price of $2.68 and which expires on April 1, 2000), and 36,700 shares
held by Pequot Scout Fund, L.P.
(8) 3,023,217 of the shares indicated as owned by Mr. Blair are owned
directly by Genzyme Corporation ("Genzyme") and are included because Mr.
Blair is a member of the Board of Directors of Genzyme. Mr. Blair
disclaims "beneficial ownership" of these shares within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934. Also, includes
11,133 shares issuable upon exercise of options exercisable within 60
days after June 1, 1999.
(9) As to each of Mr. Huffman, Dr. McKay, and Dr. Sommer, includes 61,500,
66,000, and 329,550 shares, respectively, issuable upon exercise of
options exercisable within 60 days after June 1, 1999.
35
<PAGE> 36
(10) Represents 10,433 shares issuable upon exercise of options exercisable
within 60 days after June 1, 1999.
(11) All of the shares indicated as owned by Mr. Thomas are owned directly by
Warburg, Pincus Investors ("WPI") and are included because Mr. Thomas
may be deemed to have an indirect pecuniary interest (within the meaning
of rule 16a-1 under the Securities Exchange Act of 1934) in an
indeterminable portion of the shares beneficially owned by WPI and WP.
Mr. Thomas disclaims "beneficial ownership" of these shares, except to
the extent of his pecuniary interest in such funds within the meaning of
rule 13d-3 under the Securities Exchange Act of 1934.
(12) Includes 478,616 shares issuable upon exercise of options held by
officers and directors exercisable within 60 days after June 1, 1999,
including shares issuable upon exercise of options held by the officers
and directors named in the foregoing table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
In November 1998, Celtrix sold 4,000,000 shares of common stock in a
private placement at $0.50 per share, which resulted in net proceeds to the
Company of approximately $1.9 million. Additionally, the Company issued
three-year warrants to purchase 6,000,000 shares of Celtrix common stock at
$0.55 per share. As of March 31, 1999, 6,000,000 shares of warrants are
outstanding. Purchasers in the offering included the following holders of more
than 5% of the Company's outstanding common stock: Biotechnology Development
Fund, Veron International, Ltd. and Lee Wei Chen.
In January 1997, the Company entered into a two-year employment
agreement with Andreas Sommer which provides in pertinent part for annual
compensation of $215,000 as subsequently adjusted by the Compensation Committee,
and up to 18 months severance, in the event of termination of employment under
certain circumstances. In January 1999, the Company executed a one-year
extension of the employment agreement with Dr. Sommer.
In January 1992, the Company loaned Dr. Sommer $60,000 to pay income
taxes associated with Dr. Sommer's exercise of his options to purchase BioGrowth
Common stock. The loan was secured by Dr. Sommer's Celtrix stock and bore
interest at the rate of 5.12% per annum. The loan principal and accrued interest
totaling $81,277 were forgiven in September 1998. Withholding taxes of $28,813
due from Dr. Sommer upon forgiveness of the loan were paid by the Company in
December 1998, and a receivable was established in that amount.
The Company has entered into separate indemnification agreements with
each of its directors and executive officers that may require the Company, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers, to advance their
expenses as incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' liability insurance
if available on reasonable terms.
The Company believes that the transactions set forth above are on terms
no less favorable to the Company than could have been obtained from unaffiliated
third parties. All future material transactions, including loans, between the
Company and its officers, directors, principal stockholders and affiliates will
be approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) INDEX TO FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ............... 45
Consolidated Balance Sheets - March 31, 1999 and 1998 ........... 46
Consolidated Statements of Operations
Years Ended March 31, 1999, 1998 and 1997 ................... 47
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1999, 1998 and 1997 ................... 48
Consolidated Statements of Cash Flows
Years Ended March 31, 1999, 1998 and 1997 ................... 49
Notes to the Consolidated Financial Statements .................. 50
</TABLE>
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in the
Financial Statements or notes thereto.
(a) (3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
2.1 - Stock Exchange Agreement dated September 14, 1992, among Registrant,
Baltimore Biotech, Inc. ("BBI") and holders of outstanding stock of
BBI. (6) (10)
3.1 - Certificate of Designations, Preferences, and Rights of Series A
Preferred Stock and Series B Preferred Stock of the Registrant filed
with the Delaware Secretary of State on April 21, 1999.
3.2 - Bylaws of the Registrant. (1)
4.1 - Certificate of Incorporation of the Registrant. (See Exhibit 3.1)
4.2 - Bylaws of the Registrant. (See Exhibit 3.2)
4.3 - Warrant of the Registrant dated November 17, 1993 to Warburg, Pincus
Investors, L.P. (13)
10.1 - Distribution Agreement dated January 23, 1991, between Collagen
Corporation and the Registrant. (2)
10.2a - Registrant's 1991 Directors' Stock Option Plan. (3)
10.3a - Registrant's 1991 Employee Stock Purchase Plan. (3)
10.4a - Registrant's 1991 Stock Option Plan. (3)
10.5 - Agreement by the Registrant to provide services to Collagen
Corporation dated as of February 1, 1991, between Collagen
Corporation and the Registrant. (2)
10.6 - Supply and License Agreement from the Registrant to Collagen
Corporation effective as of February 1, 1991, between Collagen
Corporation and the Registrant. (2) (8)
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.7 - Agreement by Collagen Corporation to provide services to the
Registrant dated as of February 1, 1991, between Collagen Corporation
and the Registrant. (2)
10.8 - Supply and License Agreement from Collagen Corporation to the
Registrant effective as of February 1, 1991, between Collagen
Corporation and the Registrant. (2) (8)
10.9 - Distribution Agency Agreement dated as of February 1, 1991, among the
Registrant, Collagen Corporation and the Bank of New York. (2)
10.11 - Tax Allocation Agreement dated as of February 1, 1991, between
Collagen Corporation and the Registrant. (2)
10.12 - Vitrogen(R) Agreement Between Collagen Corporation and the Registrant
effective as of February 1, 1991. (2) (8)
10.14 - Joint Venture Agreement dated as of March 26, 1987, between Collagen
Corporation and Hercules Incorporated. (1)
10.15 - Letter Agreement dated as of July 21, 1989, by and among Collagen
Corporation, Hercules Incorporated and Epicor Laboratories, Inc. (1)
10.16 - License Agreement for Wound Healing Composition dated as of April 15,
1987, between the University of Washington and Collagen Corporation.
(1)
10.18 - Form of Indemnification Agreement between the Registrant and each of
its executive officers and directors. (1)
10.19 - Form of Loan and Security Agreement between the Registrant and
certain of its employees. (1)
10.20 - Agreement Between Bristol-Myers Squibb and Collagen Corporation dated
September 7, 1990. (1)
10.21 - License Agreement dated as of December 4, 1991, among Massachusetts
Institute of Technology, Whitehead Institute and the Registrant. (4)
(9)
10.22 - License Agreement dated as of June 15, 1990, between the Board of
Trustees of the Leland Stanford Junior University and BioGrowth, Inc.
(4)
10.23 - Lease Agreement dated as of August 1, 1991, between Spieker French
Foster #249, a California General Partnership, and the Registrant, as
amended. (4)
10.24 - Escrow Agreement dated as of December 12, 1991, among the Registrant,
BioGrowth, Inc., The Bank of New York, and Larry Brown and James
Bennington, M.D., as representatives of and on behalf of the
BioGrowth, Inc. Shareholders. (4)
10.25 - Form of Non-Competition Agreement between the Registrant and each of
Edward O. Lanphier II, Andreas Sommer, Christopher Maack and E.
Martin Spencer. (4)
10.26 - Form of Affiliate's Agreement between the Registrant and each of
Edward O. Lanphier II, Andreas Sommer and certain other shareholders
of BioGrowth, Inc. (4)
10.28 - Loan and Security Agreement dated as of January 28, 1992, between the
Registrant and Andreas Sommer. (4)
10.30 - Master Lease Agreement Number 9131 between the Registrant and LeasTec
Corporation. (6)
10.33 - License Agreement dated April 1, 1993, between the Registrant and
Genentech, Inc. (11) (12)
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.34 - Registration Rights Agreement dated April 1, 1993, between the
Registrant and Genentech, Inc. (12)
10.37 - Common Stock Purchase Agreement dated June 2, 1993, between the
Registrant and Certain Purchasers of its Common Stock. (12)
10.38 - Common Stock and Warrant Purchase Agreement dated October 27, 1993,
between the Registrant and Warburg, Pincus Investors, L.P. (14)
10.39 - Registration Rights Agreement dated November 17, 1993, between the
Registrant and Warburg, Pincus Investors, L.P. (13)
10.40 - Common Stock Purchase Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation. (15)
10.41 - Registration Rights Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation. (15)
10.42 - License and Development Agreement dated June 22, 1994, between the
Registrant and Genzyme Corporation. (15) (16)
10.43 - License Agreement dated July 5, 1994, between the Registrant and The
Green Cross Corporation. (17) (18)
10.44 - Common Stock Purchase Agreement dated September 2, 1994, between the
Registrant and Kingsbury Capital Partners, L.P. (19)
10.45 - Registration Rights Agreement dated September 2, 1994, between the
Registrant and Kingsbury Capital Partners, L.P. (19)
10.46 - Vitrogen Distribution Agreement and Option to Purchase dated January
1, 1995, between the Registrant and Collagen Corporation. (20) (21)
10.48 - Separation Agreement and Mutual Release between the Registrant and
the employees who participated in the Registrant's
reductions-in-force. (22) (23)
10.49 - Amendment dated September 29, 1995 to Common Stock Purchase Agreement
dated June 24, 1994, between the Registrant and Genzyme Corporation.
(24)
10.50 - Common Stock and Warrant Purchase Agreement dated April 1, 1997,
between the Registrant and each of the Selling Stockholders. (25)
10.51 - Employment Agreement dated January 7, 1997 between the Registrant and
Dr. Andreas Sommer. (26)
10.53 - License Agreement dated December 18, 1997, between the Registrant and
Genzyme Corporation. (27) (28)
10.54 - Amendment dated December 31, 1997 to License and Development
Agreement dated June 24, 1994, between the Registrant and Genzyme
Corporation. (27) (28)
10.55 - Common Stock and Warrant Purchase Agreement dated as of October 12,
1998 between the Registrant and the Purchasers listed on Exhibit A.
(29)
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.58 - Subscription, Joint Development and Operating Agreement by and among
the Registrant, Elan Corporation, plc, Elan International Services,
Ltd., and Celtrix Newco Ltd. dated as of April 21, 1999. (30) (31)
10.59 - License Agreement by and between Celtrix Newco Ltd. and the
Registrant dated as of April 21, 1999. (30) (31)
10.60 - License Agreement by and between Celtrix Newco Ltd. and Elan
Pharmaceutical Technologies, a division of Elan Corporation, plc,
dated as of April 21, 1999. (30) (31)
21 - Subsidiaries of the Registrant. (4)
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (See page 44 of this report.)
27 - Financial Data Schedule.
</TABLE>
- --------------------
(1) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10 Registration Statement, filed with the Securities
and Exchange Commission on January 14, 1991.
(2) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 8 Amendment to Form 10 Registration Statement, filed
with the Securities and Exchange Commission on January 30, 1991.
(3) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-1 (File No. 33-40915),
filed with the Securities and Exchange Commission declared effective on
July 23, 1991.
(4) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-1 (File No. 33-45370),
filed with the Securities and Exchange Commission declared effective on
March 6, 1992.
(6) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1992, filed with the Securities and Exchange Commission on November 9,
1992.
(8) Confidential treatment has been granted with respect to portions of this
exhibit by order dated February 1, 1991.
(9) Confidential treatment has been granted with respect to portions of this
exhibit by order dated March 6, 1992.
(10) Confidential treatment has been granted with respect to portions of this
exhibit by order dated December 1, 1992.
(11) Confidential treatment has been granted with respect to portions of this
exhibit by order dated August 6, 1993.
(12) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1993, filed with the
Securities and Exchange Commission on June 18, 1993.
(13) Exhibit to the Registrant's Current Report on Form 8-K dated November
18, 1993.
40
<PAGE> 41
(14) Exhibit to the Registrant's Current Report on Form 8-K dated October 29,
1993.
(15) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1994, filed with the
Securities and Exchange Commission on June 28, 1994.
(16) Confidential treatment has been granted with respect to portions of this
exhibit by order dated August 16, 1994.
(17) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1994,
filed with the Securities and Exchange Commission on August 15, 1994.
(18) Confidential treatment has been granted with respect to portions of this
exhibit by order dated February 17, 1995.
(19) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1994, filed with the Securities and Exchange Commission on November 15,
1994.
(20) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31, 1994,
filed with the Securities and Exchange Commission on February 13, 1995.
(21) Confidential treatment has been granted with respect to portions of this
exhibit by order dated March 31, 1995.
(22) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1995, filed with the
Securities and Exchange Commission on June 28, 1995.
(23) Confidential treatment has been granted with respect to portions of this
exhibit by order dated June 26, 1995.
(24) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31, 1995,
filed with the Securities and Exchange Commission on February 12, 1996.
(25) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-3 (File No. 333-27263),
filed with the Securities and Exchange Commission on May 16, 1997.
(26) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-K for the year ended March 31, 1997, filed with the
Securities and Exchange Commission on June 24, 1997.
(27) Incorporated by reference to identically numbered exhibits filed with
Registrant's Form 10-Q for the quarterly period ended December 31, 1997,
filed with the Securities and Exchange Commission on February 12, 1998.
(28) Confidential treatment has been granted with respect to portions of this
exhibit by order dated March 18, 1998.
(29) Incorporated by reference to identically numbered exhibit filed with
Registrant's Registration Statement on Form S-3/A (File No. 333-61873),
filed with the Securities and Exchange Commission on December 16, 1998
and withdrawn by order dated February 18, 1999.
41
<PAGE> 42
(30) Incorporated by reference to identically numbered exhibits filed with
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 4, 1999.
(31) Confidential treatment has been requested with respect to portions of
these exhibits.
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1999:
1. Report Date: February 18, 1999
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The Registrant announced Celtrix Substantially Bolsters Its Patent
Portfolio.
2. Report Date: February 25, 1999
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The Registrant announced SomatoKine(R) Demonstrates Positive Effects
in Diabetes Patients.
3. Report Date: March 18, 1999
Item 5. Other Events
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The Registrant announced Third Quarter Results.
42
<PAGE> 43
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.
CELTRIX PHARMACEUTICALS, INC.
By: /s/ Andreas Sommer
------------------------------------
Andreas Sommer, Ph.D.
Chief Executive Officer and President
Date: June 28, 1999
-----------------------------------
43
<PAGE> 44
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints jointly and severally, Andreas Sommer and Donald D.
Huffman, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -----------------------------------------------------------------------------------
<S> <C> <C>
/s/ ANDREAS SOMMER Chief Executive Officer, June 28, 1999
- ------------------------------ President and Director -------------
(Andreas Sommer)
/s/ DONALD D. HUFFMAN Vice President, Finance June 28, 1999
- ------------------------------ and Administration, -------------
(Donald D. Huffman) Chief Financial Officer
and Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ HENRY E. BLAIR Director June 28, 1999
- ------------------------------ -------------
(Henry E. Blair)
/s/ BARRY M. SHERMAN Director June 28, 1999
- ------------------------------ -------------
(Barry M. Sherman)
/s/ JAMES E. THOMAS Chairman of the Board June 28, 1999
- ------------------------------ -------------
(James E. Thomas)
</TABLE>
44
<PAGE> 45
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Celtrix Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Celtrix
Pharmaceuticals, Inc. as of March 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Celtrix
Pharmaceuticals, Inc. at March 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
May 28, 1999
45
<PAGE> 46
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,258 $ 1,608
Short-term investments -- 6,305
Receivables and other current assets 172 219
--------- ---------
Total current assets 1,430 8,132
Property and equipment, at cost:
Leasehold improvements -- 11,133
Machinery and equipment 164 8,974
--------- ---------
164 20,107
Less accumulated depreciation and amortization (63) (13,045)
--------- ---------
101 7,062
Assets held for sale 416 --
Intangible and other assets, net of accumulated amortization of
$1,235 and $938 at March 31, 1999 and 1998, respectively 2,554 2,682
--------- ---------
$ 4,501 $ 17,876
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 547 $ 751
Accrued clinical expenses 439 482
Accrued compensation 47 421
Other accrued liabilities 188 580
Short-term debt and lease obligations -- 8
--------- ---------
Total current liabilities 1,221 2,242
Deferred rent -- 890
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000
shares and 2,000,000 shares at March 31, 1999 and
1998, respectively; none issued and outstanding -- --
Common stock, $.01 par value, authorized 60,000,000
shares and 30,000,000 shares at March 31, 1999 and
1998, respectively; 25,061,053 shares and 21,061,053
shares issued and outstanding at March 31, 1999 and
1998, respectively 251 211
Additional paid-in capital 133,437 131,542
Accumulated deficit (130,408) (117,009)
--------- ---------
Total stockholders' equity 3,280 14,744
--------- ---------
$ 4,501 $ 17,876
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 47
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales $ 10 $ 51 $ 31
Licensing revenues and other 121 610 627
-------- -------- --------
131 661 658
Costs and expenses:
Cost of sales -- 1 5
Research and development 6,830 13,006 11,999
General and administrative 2,272 1,985 1,814
Restructuring costs 5,160 -- --
-------- -------- --------
14,262 14,992 13,818
-------- -------- --------
Operating loss (14,131) (14,331) (13,160)
Interest income, net 132 681 464
Gain on sale of investments -- 737 --
Proceeds from settlement agreement 600 -- --
-------- -------- --------
Net loss $(13,399) $(12,913) $(12,696)
======== ======== ========
Basic and diluted net loss per share $ (0.58) $ (0.61) $ (0.83)
======== ======== ========
Shares used in basic and diluted per share
computation 22,941 21,004 15,238
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 48
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 $ 152 $ 118,052 $ (91,418) $ 26,786
Issuance of 20,249 shares of common
stock upon exercise of stock options -- 51 -- 51
Issuance of 29,188 shares of common
stock under the Employee Stock
Purchase Plan 1 49 -- 50
Unrealized gain on available-for-sale
securities -- -- 19 19
Net loss -- -- (12,696) (12,696)
--------- --------- --------- ---------
Balance at March 31, 1997 153 118,152 (104,095) 14,210
Issuance of 5,721,876 shares of common
stock and warrants to purchase
2,860,934 shares of common stock in
a private placement, net 57 13,274 -- 13,331
Issuance of 75,748 shares of common
stock under the Employee Stock
Purchase Plan 1 116 -- 117
Unrealized loss on available-for-sale
securities -- -- (1) (1)
Net loss -- -- (12,913) (12,913)
--------- --------- --------- ---------
Balance at March 31, 1998 211 131,542 (117,009) 14,744
Issuance of 4,000,000 shares of common
stock and warrants to purchase
6,000,000 shares of common stock
in a private placement, net 40 1,872 -- 1,912
Issuance of warrants to purchase 75,000
shares of common stock and options to
purchase 50,000 shares of common stock
to non-employees -- 23 -- 23
Net loss -- -- (13,399) (13,399)
--------- --------- --------- ---------
Balance at March 31, 1999 $ 251 $ 133,437 $(130,408) $ 3,280
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 49
CELTRIX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,399) $(12,913) $(12,696)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write off of leasehold improvements 5,311 -- --
Write off of deferred rent liability (816) -- --
Reduction in deferred rent liability (74) -- --
Depreciation and amortization 1,036 1,660 1,840
Gain on sale of investments -- (737) --
Changes in operating accounts:
Receivables and other current assets 4 (22) (2)
Accounts payable, accrued compensation
and other accrued liabilities (992) 854 79
-------- -------- --------
Net cash used in operating activities (8,930) (11,158) (10,779)
Cash flows from investing activities:
Sales and maturities of available-for-sale
securities 7,575 40,497 35,210
Purchase of available-for-sale securities (1,270) (43,482) (30,315)
Decrease (increase) in restricted cash -- 520 (470)
Proceeds from sale of fixed assets 600 -- --
Capital expenditures (84) (187) (198)
Increase in intangible and other assets (168) (394) (455)
-------- -------- --------
Net cash provided by (used in) investing
activities 6,653 (3,046) 3,772
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,935 13,448 101
Principal payments under lease obligations (8) (320) (543)
-------- -------- --------
Net cash provided by (used in) financing
activities 1,927 13,128 (442)
-------- -------- --------
Net decrease in cash and cash equivalents (350) (1,076) (7,449)
Cash and cash equivalents at beginning of year 1,608 2,684 10,133
-------- -------- --------
Cash and cash equivalents at end of year $ 1,258 $ 1,608 $ 2,684
======== ======== ========
Supplemental disclosure:
Interest paid $ 1 $ 24 $ 89
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
CELTRIX PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Celtrix Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical
company focused on developing novel therapeutics for the treatment of seriously
debilitating, degenerative conditions primarily associated with severe trauma,
chronic diseases or aging.
The consolidated financial statements include the accounts of Celtrix and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
At March 31, 1999, the Company had net working capital of $0.2 million and
an accumulated deficit of $130.4 million, and incurred a net loss of $13.4
million for the year ended March 31, 1999. Working capital was increased in
April 1999 from the issuance of common stock to Elan International Services,
Ltd., which resulted in net proceeds of $2.3 million. The Company expects
current cash and cash equivalents, including proceeds from the April 1999
financing, will be sufficient to fund operations into the third calendar quarter
of 2000. The Company will be required to seek additional funds to finance
operations beyond that period. The transaction with Elan Corporation, plc
provides for the purchase by Elan of additional Celtrix equity securities, the
proceeds from which will be used to fund the Company's share of anticipated
clinical expenses associated with the joint venture's large-scale trial in
osteoporosis (recovery from hip fracture surgery).
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 amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Cash Equivalents and Short-term Investments
Celtrix considers all highly liquid investment securities with maturity
from date of purchase of three months or less to be cash equivalents and
investment securities with maturity from date of purchase of more than three
months to be short-term investments.
To date, all marketable securities have been classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses reported in accumulated deficit. Fair values of investment securities are
based on quoted market prices, and the costs of securities sold are based on the
specific identification method. Premiums and discounts are amortized over the
period from acquisition to maturity and are included in investment income, along
with interest and dividends.
Property and Equipment
Depreciation and amortization of property and equipment is provided on the
straight-line method over the estimated useful lives (three to seven years) of
the assets. Leasehold improvements are amortized over the shorter of the life of
the lease or their estimated useful lives using the straight-line method.
Intangible Assets
Intangible and other assets consist primarily of patents. Patents, carried
at cost, are amortized using the straight-line method over the estimated useful
lives of the related intellectual property, generally 12 years. Celtrix
regularly performs reviews regarding the carrying value of the assets. The
reviews look for the existence of facts or circumstances, either internal or
external, which may indicate that the carrying value of the assets cannot be
recovered. To date no adjustments have been made to the carrying value of the
assets.
50
<PAGE> 51
Revenue Recognition
Licensing revenues are recorded when contractually earned. Revenue from
product sales is recognized at time of shipment.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation" in October 1995, which encourages, but does not
require, companies to record compensation expense for stock-based employee
compensation plans at fair value. The Company has elected to follow the
disclosure requirements of SFAS 123 for the fiscal years ended 1999, 1998 and
1997 (see Note 5) and will continue to measure stock-based compensation to
employees in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees".
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, and, accordingly, recognizes no compensation expense for the
stock option grants.
Recently Issued Accounting Standard
In April 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income". Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net loss or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Total comprehensive income (loss) approximates net loss for the fiscal
years ended March 31, 1999, 1998 and 1997.
51
<PAGE> 52
2. INVESTMENT SECURITIES
There were no available-for-sale securities held at March 31, 1999. The
following is a summary of available-for-sale securities at March 31, 1998 (in
thousands). Gross unrealized losses were immaterial.
<TABLE>
<CAPTION>
1998
-------------------------------
Net Estimated
Unrealized Fair
Cost Losses Value
-------------------------------
<S> <C> <C> <C>
U.S. treasury securities and
obligations of U.S. government
agencies $5,808 $ 1 $5,807
U.S. corporate debt securities 499 1 498
------------------------------
$6,307 $ 2 $6,305
==============================
Classified as:
Cash equivalents $ -- $ -- $ --
Short-term investments 6,307 2 6,305
------------------------------
$6,307 $ 2 $6,305
==============================
</TABLE>
During fiscal years 1999 and 1998, no securities were sold prior to maturity.
3. ASSETS HELD FOR SALE
As a result of the September 1998 restructuring and the discontinuation of
manufacturing, the Company is in the process of selling certain equipment and
other fixed assets. The assets held for sale are recorded at their net
realizable value.
4. DEBT AND COMMITMENTS
As of March 31, 1999, the Company had fully amortized its obligation under
capital leases and debt arrangements. Amortization expense for leased assets is
included in depreciation and amortization expense.
As a result of restructuring the Company and discontinuing manufacturing
operations in September 1998, the Company terminated its office, laboratory and
manufacturing facility lease effective November 1998. The Company also
terminated certain equipment operating leases as a result of the restructuring.
The Company currently leases offices in San Jose under an operating lease which
expires in December 1999. Deferred rent at March 31, 1998 reflects the
landlord's funding of certain leasehold improvements prior to lease commencement
and was amortized over the lease term to offset rent expense. Rent expense was
$600,000, $1.1 million and $1.2 million for the years ended March 31, 1999,
1998, and 1997 respectively.
Future minimum lease payments under operating leases at March 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999 $117
2000 --
2001 --
2002 --
2003 --
Thereafter --
----
Total minimum lease payments $117
====
</TABLE>
52
<PAGE> 53
5. INCENTIVE AND BENEFIT PLANS
In September 1997, the stockholders approved an increase in the number of
shares reserved for issuance under the Company's 1991 Stock Option Plan from
1,500,000 to 3,000,000 shares of common stock. Under the 1991 Directors' Stock
Option Plan, 200,000 shares of Celtrix's common stock have been reserved for
issuance. The exercise prices under these plans are determined by the Board of
Directors or its committee and may not be less than 100% of the fair market
value of Celtrix's common stock at the time of grant. The options expire ten
years from the date of grant, unless otherwise provided in the option agreement.
The options generally become vested and exercisable over four years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to March 31, 1995 under the fair value method of that Statement. The fair value
of these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 4.88%, 6.03%, and
6.55%; dividend yields of zero; volatility factors of the expected market price
of the Company's common stock of .801, .792 and .733; and an expected option
life of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected option life. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
In September 1998, the stockholders approved an increase in the number of
shares reserved for issuance under the Company's 1991 Employee Stock Purchase
Plan from 250,000 to 500,000 shares of common stock. Under the plan, employees
have an opportunity to purchase common stock of Celtrix at 85% of the fair
market value at the beginning or end of each 12-month offering period, whichever
is lower. The first offering period commenced January 1, 1994. As of March 31,
1999, 176,880 shares of common stock have been issued to company employees.
There were no shares issued, and subsequently no fair value of employees'
purchase rights estimated, for 1999. The fair value of the employees' purchase
rights for 1998 and 1997, respectively, was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.59% and 5.66%; dividend yields of zero; volatility factors
of the expected market price of the Company's common stock of .792 and .733; and
an expected life of 1 year.
53
<PAGE> 54
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss $ (13,391) $ (13,275) $ (12,929)
Pro forma net loss per share $ (0.58) $ (0.63) $ (0.85)
</TABLE>
The weighted-average fair value of options granted during 1999, 1998 and
1997 was $1.14, $1.59, and $1.47, respectively.
A summary of the Company's stock option activity, which includes the 1991
Stock Option Plan and the 1991 Directors' Stock Option Plan, for the years ended
March 31 follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------
Shares Weighted-
Available Number of Price Average
For Grant Shares Per Share Exercise Price
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 653,335 1,034,740 $1.25-$11.50 $ 2.94
Options granted (137,116) 137,116 $1.94-$3.94 $ 2.45
Options exercised -- (20,249) $1.31-$2.63 $ 2.52
Options canceled 191,249 (191,249) $1.31-$9.50 $ 4.30
---------- ---------- -------------- -------
Balance at March 31, 1997 707,468 960,358 $1.25-$11.50 $ 2.61
Shares authorized 1,500,000 -- -- --
Options granted (1,073,783) 1,073,783 $2.00-$2.94 $ 2.34
Options canceled 272,450 (272,450) $2.44-$3.94 $ 2.60
---------- ---------- -------------- -------
Balance at March 31, 1998 1,406,135 1,761,691 $1.25-$11.50 $ 2.39
Options granted (211,084) 211,084 $1.06 -$ 2.88 $ 1.62
Options canceled 731,275 (731,275) $1.25-$11.50 $ 2.38
---------- ---------- -------------- -------
Balance at March 31, 1999 1,926,326 1,241,500 $1.06-$8.00 $ 2.26
========== ========== ============== =======
</TABLE>
The following table summarizes information concerning outstanding options
at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Options Remaining Average Options Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Price at Mar. 31, 99 Life Price at Mar. 31, `98 Price
- ----------------------- -------------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
$1.06 - $2.50 853,083 7.4 $ 2.06 444,003 $ 2.22
$2.51 - $4.00 386,917 7.3 $ 2.68 251,550 $ 2.72
$4.01 - $8.00 1,500 3.2 $ 8.00 1,500 $ 8.00
--------- ---------
1,241,500 697,053
========= =========
</TABLE>
Under Celtrix's 1991 retirement savings plan ("401(k) Plan"), employees
may elect to defer up to 20% of their total compensation, not to exceed the
amount allowed by applicable Internal Revenue Service guidelines. There were no
employer contributions to the plan as of March 31, 1999.
54
<PAGE> 55
6. STOCKHOLDERS' EQUITY
In November 1998, Celtrix sold 4,000,000 shares of common stock in a
private placement at $0.50 per share, which resulted in net proceeds to the
Company of approximately $1.9 million. Additionally, the Company issued a
three-year warrant to purchase 6,000,000 shares of Celtrix common stock at $0.55
per share. As of March 31, 1999, 6,000,000 shares of warrants are outstanding.
In April 1997, the Company completed a private placement of 5,721,876
newly issued shares of common stock at $2.438 per share. For every two shares of
stock issued, the Company also issued a warrant to purchase an additional share
of Celtrix common stock at $2.682 per share. The warrants are exercisable only
after the shares of stock are held for at least one year and as of March 31,
1999, there were 2,758,391 warrants outstanding related to this financing
(102,543 were cancelled due to the sale of stock). The warrant expires in April
2000. The net proceeds to the Company, after fees and expenses of approximately
$619,000, were $13.3 million.
7. LICENSE AND COLLABORATIVE ARRANGEMENTS
In July 1994, Celtrix entered into a license agreement with The Green
Cross Corporation ("Green Cross"), covering the development and
commercialization of SomatoKine for the treatment of osteoporosis in Japan.
Under the terms of the agreement, Green Cross was to be responsible for all
related research, development and marketing, as well as manufacturing the
product to support its preclinical, clinical and commercial needs in Japan. The
agreement provided for Celtrix to receive licensing fees, milestone payments
upon Green Cross accomplishing specific product development activities and
royalties on future product sales. Celtrix retained full rights outside of Japan
to SomatoKine and also to related know-how and technology developed by Green
Cross. In April 1998, Green Cross was merged with Yoshitomi Pharmaceuticals
Industries, Ltd. In May 1998, Celtrix received notice from Yoshitomi of its
intent to terminate this license agreement. This license was terminated in March
1999 upon the payment by Yoshitomi of $600,000 to Celtrix. Celtrix regained the
rights to the treatment of osteoporosis in Japan.
In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme Corporation ("Genzyme") on TGF-beta-2 which
includes equity investments, milestone payments and potential royalties to
Celtrix. As part of the agreement, Celtrix sold to Genzyme 1,550,388 shares of
Celtrix common stock in June 1994, and subsequently, in December 1995 Celtrix
exercised the option to receive an additional investment by Genzyme for
1,472,829 shares of Celtrix common stock resulting in $4.4 million of net
proceeds to the Company. Under recently amended terms, Genzyme has been granted
expanded worldwide commercialization rights for all systemic applications and
select local applications of TGF-beta-2 to include Japan, China, Korea and
Taiwan; in exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained rights to select
applications of TGF-beta-2 and the Company has the option to reacquire rights to
other product applications not pursued by Genzyme. In December 1997, the Company
also entered into a new license agreement with Genzyme granting Genzyme a
worldwide exclusive royalty-bearing license to TGF-beta antibodies, and license
and sublicense rights to TGF-beta receptor. Under the terms of the agreement,
Genzyme will assume the licensing and royalty obligations of Celtrix related to
TGF-beta receptor.
Since inception, Celtrix has entered into various other research and
development and licensing arrangements. Some of these agreements contain royalty
and other obligations.
8. RESTRUCTURING COSTS
During fiscal year 1999, the Company restructured to focus on the clinical
development of SomatoKine, cease manufacturing operations and reduce the cash
burn rate. As a result, the Company recognized a $5.2 million restructuring
charge in the quarter ended September 30, 1998 consisting of a $5.3 million
non-cash write-off of leasehold improvements partly offset by $816,000 non-cash
reduction
55
<PAGE> 56
of deferred rent liability, $358,000 in severance expenses, $250,000 related to
non-cancelable operating lease obligations, and $75,000 in other
restructuring-related charges. As part of the restructuring, the Company reduced
its workforce by 69 employees, or approximately 90%, by the end of the calendar
year. The reduction in workforce affected all levels of staff in manufacturing
and other functions. As of March 31, 1999, the Company has no restructuring
liabilities remaining to be paid.
9. GAIN ON SALE OF INVESTMENTS
In June 1997, the Company sold 43,750 shares of Prograft Medical, Inc.
preferred stock, resulting in the recording of $737,000 in gain on investment.
These shares were held by Celtrix since 1993.
10. INCOME TAXES
At March 31, 1999, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $127.7 million
and $4.3 million, respectively, expiring in the years 2006 through 2019. The
federal net operating loss carryforward differs from the accumulated deficit
principally due to (i) the nondeductibility for tax purposes of the charges for
in-process research and development resulting from the BioGrowth, Inc. merger
and the Baltimore Biotech, Inc. acquisition, and (ii) timing differences in the
recognition of certain revenue and expense items for financial and federal tax
reporting purposes (primarily certain expenses not currently deductible).
Approximately $8.8 million of the total federal net operating losses are
available only to offset future consolidated taxable income to the extent
contributed by the Company's wholly owned subsidiary, BioGrowth, Inc.
Utilization of the net operating losses and credits is subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of March 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards $44,300 $ 39,100
Research credits 5,900 5,500
Acquired intangibles -- --
Research expenses capitalized for tax purposes 2,400 2,200
Other (1,400) (1,000)
-------- --------
Total deferred tax assets 51,200 45,800
Valuation allowance for deferred tax assets (51,200) (45,800)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $5.4 million, $4.8 million, and
$5.2 million during the years ended March 31, 1999, 1998, and 1997,
respectively.
56
<PAGE> 57
11. SUBSEQUENT EVENT
The Company entered into an agreement on April 21, 1999 with Elan
Corporation, plc to establish a joint venture for the development of SomatoKine
to treat osteoporosis using Elan's MEDIPAD Delivery System.
The joint venture company is initially owned 80.1% by Celtrix and 19.9%
by Elan. The new company has licensed SomatoKine technology from Celtrix and
MEDIPAD technology from Elan. Celtrix has invested $8.01 million in the joint
venture and Elan has invested $1.99 million. At the time of closing, Elan
International Services, Ltd. (EIS) purchased $8.01 million of Celtrix Series A
Convertible/Exchangeable Preferred Stock, which is convertible into Celtrix
common stock at a price of $2.006 per share or exchangeable for an incremental
30.1% ownership in the joint venture to a total of 50.0%. If the exchange right
is excercised, the Series A Convertible/Exchangeable Preferred Stock will be
cancelled. The Series A Convertible/Exchangeable Preferred Stock pays a 5%
annual in-kind dividend.
The agreement with Elan also provides for EIS to purchase from time to
time Series B Convertible Preferred Stock up to an amount of $4.8 million, the
proceeds from which sale will be used by Celtrix to fund its share of the joint
venture's operating expenses. The Series B Convertible Preferred Stock is
convertible into Celtrix common stock at a price of $2.006 per share and pays a
9% annual in-kind dividend.
Elan received a $10 million license payment from the joint venture for
the use of MEDIPAD technology while Celtrix will have an 80% share in any future
proceeds related to the further development and commercialization of the
osteoporosis product (e.g. upfront payments, milestones or royalties) received
by the joint venture, regardless of ownership, until it is paid $10 million.
Thereafter, Celtrix and Elan will share the joint venture's proceeds in
accordance with their ownership interests.
In April 1999, in a separate transaction, the Company issued 1,508,751
shares of common stock to Elan International Services, Ltd. at a price of $1.657
per share, amounting to $2.3 million (net of expenses).
57
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
3.1 - Certificate of Designations, Preferences, and Rights of
Series A Preferred stock and Series B Preferred Stock of Celtrix
Pharmaceuticals, Inc.
23.1 - Consent of Ernst & Young LLP, Independent Auditors.
24 - Power of Attorney. (See page 44 of this report.)
27 - Financial Data Schedule.
</TABLE>
58
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RIGHTS
OF
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
OF
CELTRIX PHARMACEUTICALS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
We, Andreas Sommer and Edmund S. Ruffin, Jr., the President and the
Secretary, respectively, of Celtrix Pharmaceuticals, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors on March 31, 1999 adopted the following resolution, as required by
Section 151(g) of the Delaware General Corporation Law, creating two series of
shares of Preferred Stock designated respectively as Series A Preferred Stock
and Series B Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Certificate of Incorporation, the Board of
Directors does hereby provide for the issuance of a series of Preferred Stock,
$0.01 par value, of the Corporation, to be designated "Series A Preferred
Stock", initially consisting of Ten Thousand (10,000) shares and another series
of Preferred Stock, $0.01 par value, of the Corporation, to be designated
"Series B Preferred Stock", initially consisting of Nine Thousand (9,000)
shares, and to the extent that the designations, powers, preferences and
relative and other special rights and the qualifications, limitations and
restrictions of the Series A Preferred Stock and the Series B Preferred Stock
are not stated and expressed in the Certificate of Incorporation, the Board of
Directors does hereby fix and herein state and express such designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions thereof, as follows (all terms used
herein which are defined in the Certificate of Incorporation shall be deemed to
have the meanings provided therein):
I
All cross-references in each subparagraph of this Section I refer
to other subparagraphs in this Section I unless otherwise indicated.
1. Designation. 10,000 shares of Preferred Stock shall be
designated and known as the "Series A Preferred Stock." Such number of shares
may be increased or decreased by resolution of the Board of Directors after
obtaining the consent of a majority in interest of the then-outstanding shares
of Series A Preferred Stock; provided, that no decrease shall reduce the number
of shares of
- 1 -
<PAGE> 2
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
2. Dividend Provisions.
a. Commencing on the third anniversary after the first
issuance of Series A Preferred Stock, when and if the Board of Directors shall
declare a dividend or distribution payable with respect to the then-outstanding
shares of Common Stock of the Corporation, the holders of the Series A Preferred
Stock shall be entitled to the amount of dividends per share that would be
payable on the largest number of whole shares of Common Stock into which a
holder's aggregate shares of Series A Preferred Stock could then be converted
pursuant to Section 4 hereof (such number to be determined as of the record date
for the determination of holders of Common Stock entitled to receive such
dividend); provided, however that such dividends be payable solely by the
issuance of additional shares of Series A Preferred Stock, at a price per share
equal to the Series A Original Purchase Price thereof, and not in cash.
b. In addition to Section 2.a. above, the Series A
Preferred Stock, for a period of 36 months from the date of first issuance of
the Series A Preferred Stock, shall be entitled to a mandatory dividend equal to
5.0% per year of the Series A Original Purchase Price (as defined below)
thereof. Such dividend shall (1) be cumulative and shall compound on a
semi-annual basis, and (2) be payable solely by the issuance of additional
shares of Series A Preferred Stock, at a price per share equal to the Series A
Original Purchase Price thereof, and not in cash. Fractional shares of Series A
Preferred Stock shall be issuable for purposes hereunder.
3. Liquidation Preference.
a. In the event of any liquidation, dissolution or
winding-up of the affairs of the Corporation, whether voluntary or involuntary,
(collectively, a "Liquidation"), before any payment of cash or distribution of
other property shall be made to the holders of the Common Stock or any other
class or series of stock subordinate in liquidation preference to the Series A
Preferred Stock, the holders of the Series A Preferred Stock shall be entitled
to receive out of the assets of the Corporation legally available for
distribution to its shareholders, the greater of (i) the Series A Original
Purchase Price per share (as appropriately adjusted for any combinations or
divisions or similar recapitalizations affecting the Series A Preferred Stock
after issuance) and accrued and unpaid dividends thereon (the "Series A
Liquidation Preference") and (ii) the amount such stockholders would have
received had their shares of Series A Preferred Stock been converted to Common
Stock immediately prior to such Liquidation, based upon the Series A Conversion
Price. As used herein, the "Series A Original Purchase Price" per share is
$1,000.
b. If, upon any Liquidation, the assets of the Corporation
available for distribution to its shareholders shall be insufficient to pay the
holders of the Series A Preferred Stock the full amounts to which they shall be
entitled, the holders of the Series A Preferred Stock shall share ratably in any
distribution of assets in proportion to the respective amounts which would be
- 2 -
<PAGE> 3
payable to them in respect of the shares held by them if all amounts payable to
them in respect of such were paid in full pursuant to Section 3.b.
c. After the distributions described in Section 3.b above
have been paid, subject to the rights of other series of preferred stock that
may from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each.
4. Conversion. The holders of the Series A Preferred Stock shall
have conversion rights, through and including the Series A Conversion
Termination Date (as defined below), as follows (the "Series A Conversion
Rights"):
a. Right to Convert.
(i) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time, at the
office of the Corporation or any transfer agent for such stock, into
such number of fully paid and non-assessable shares of Common Stock as
is determined by dividing (x) the sum of the Series A Original Issue
Price and all accrued and unpaid dividends thereon by (y) $2.006 (such
quotient, the "Series A Conversion Price"); provided, however, that the
Series A Conversion Price for the Series A Preferred Stock shall be
subject to adjustment as set forth in subsection 4(a)(iii).
(ii) Before any holder of Series A Preferred Stock
shall be entitled to convert such shares into shares of Common Stock,
such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and shall give written notice
to the Corporation at its principal corporate office, of the election
to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Series A Preferred Stock,
or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as set forth above. Such conversion shall be
deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to
be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
as of such date.
(iii) In the event the Corporation should at any
time fix a record date for the effectuation of a split or subdivision of
the outstanding shares of Common Stock or the determination of holders
of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive
directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without
- 3 -
<PAGE> 4
payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional
shares of Common Stock issuable upon conversion or exercise thereof) or
with payment that is less than the then-market price of the Common Stock
(including, in the case of Common Stock Equivalents, on an as-converted
basis) then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the
Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion
to such increase of the aggregate of (a) shares of Common Stock
outstanding and (b) those issuable with respect to such Common Stock
Equivalents, with the number of shares issuable with respect to Common
Stock Equivalents determined from time to time as provided in Section
4(a)(v) below.
(iv) If the number of shares of Common Stock
outstanding at any time is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of
such combination, the Series A Conversion Price for the Series A
Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding
shares.(iv) If the number of shares of Common Stock outstanding at any
time is decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination, the
Conversion Price for the Series A Convertible Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased
in proportion to such decrease in outstanding shares.
(v) The following provisions shall apply for
purposes of this Section 4(a):
(A) The aggregate maximum number of shares
of Common Stock deliverable upon conversion or exercise of Common Stock
Equivalents (assuming the satisfaction of any conditions to
convertibility or exercisability, including, without limitation, the
passage of time, but without taking into account potential antidilution
adjustments) shall be deemed to have been issued at the time such Common
Stock Equivalents were issued.
(B) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to
the Corporation upon conversion or exercise of such Common Stock
Equivalents including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price of the Series A
Preferred Stock, to the extent in any way affected by or computed using
such Common Stock Equivalents, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual issuance
of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such
securities.
(C) Upon the termination or expiration of
the convertibility or exercisability of any such Common Stock
Equivalents, the Conversion Price of each of the Series A Preferred
Stock, to the extent in any way affected by or computed using such
Common Stock Equivalents, shall be recomputed to reflect the issuance of
only the number of shares of Common Stock (and Common Stock Equivalents
which remain convertible or
- 4 -
<PAGE> 5
exercisable) actually issued upon the conversion or exercise of such
Common Stock Equivalents.
b. Automatic Conversion.
(i) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the Series A
Conversion Price at the time in effect for such share upon the earliest
to occur prior to the Series A Conversion Termination Date of: the time
immediately prior to the effective time of (x) the acquisition of the
Corporation by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization,
merger or consolidation, but excluding any merger effected exclusively
for the purpose of changing the domicile of the Corporation); (y) the
sale of all or substantially all of the assets of the Corporation,
unless the Corporation's stockholders of record as constituted
immediately prior to such acquisition or sale will, immediately after
such acquisition or sale (by virtue of securities issued as
consideration for the Corporation's acquisition or sale or otherwise)
hold at least fifty percent (50%) of the voting power of the surviving
entity in approximately the same relative percentages after such
acquisition or sale as before such acquisition or sale, or (z) the date
specified by written consent or agreement of the holders of a majority
of the then outstanding shares of Series A Preferred Stock, provided
that in the case of the occurrence of (x) or (y) above, the Corporation
shall have also given the holders of Series A Preferred Stock notice
that such event shall occur and that the Corporation desires the Series
A Preferred Stock to be converted.
(ii) Commencing on the occurrence of an automatic
conversion pursuant to Section 4.b.(i)(x) or (y) above of shares of the
Series A Preferred Stock for shares of Common Stock and until the Series
A Exchange Termination Date, ELAN INTERNATIONAL SERVICES, LTD., a
Bermuda corporation ("EIS") EIS shall have the right to exchange
("Automatic Conversion Exchange Right") the number of shares of Common
Stock of the Corporation which were received upon the automatic
conversion of the 8,010 originally issued shares of the Series A
Preferred Stock (or the ultimate consideration received therefor in the
event of merger or other similar transaction), and such number of shares
of Series B Preferred Stock representing 30.1% of the aggregate amount
of funding by the Corporation and EIS to Newco for developmental funding
(the "Make Whole Shares")(or the equivalent number of shares of Common
Stock of the Corporation issued upon conversion of the Series B
Preferred Stock or the ultimate consideration received therefore in the
event of a merger or other similar transaction) for 3,612 Ordinary
shares (as adjusted for any combinations or divisions or similar
recapitalizations) of CELTRIX NEWCO, LTD., a Bermuda exempted company,
("Newco"), held by the Corporation, so that, after giving effect to the
exercise of the exchange right, EIS and the Corporation will each hold
an equal number of Ordinary shares of Newco assuming that neither EIS
nor the Corporation has sold any Ordinary shares of Newco.
In order to exercise the Automatic Conversion
Exchange Right, EIS shall provide written notice thereof to the
Corporation, setting forth (a) the fact that EIS
- 5 -
<PAGE> 6
intends to exercise the Automatic Conversion Exchange Right, and (b) the
proposed date for such exercise (the "Automatic Conversion Exercise
Date"), which shall be between 10 and 30 days after the date of such
notice, provided, however, that if the Corporation shall deliver the
holders a written request to delay the date for such exercise by no more
than 45 days, the Automatic Conversion Exercise Date will be as set
forth in that request. During the period after the receipt of such
written request, and before the Automatic Conversion Exercise Date, the
holders shall negotiate with the Corporation in good faith an
alternative mechanism for the transfer of the Ordinary Shares of Newco
that will reduce the Corporation's tax liability, provided that the
holders shall not be required to agree to any transaction which is
financially disadvantageous to them. Such notice shall be irrevocable.
On the Automatic Conversion Exercise Date, (y) EIS shall tender its
shares of Common Stock of the Corporation which were received upon the
automatic conversion of the 8,010 originally issued shares of Series A
Preferred Stock (or the ultimate consideration received therefor in the
event of merger or other similar transaction) and the Make Whole Shares
to the Corporation for cancellation, and (z) the Corporation shall cause
to be delivered to EIS, acting on behalf of itself and any other holders
to which the Automatic Conversion Exchange Right applies, such shares of
Newco. EIS and the Corporation shall take all other necessary or
appropriate actions in connection with or to effect such closing.
5. Exchange Right. a. Provided that (a) all shares of Series A
Preferred Stock initially issued and sold by the Corporation to EIS, together
with those issued in respect of dividends provided for in Section 2 above have
not been converted as provided in Section 4 above and (b) the Series A Exchange
Termination Date (as defined below) shall not have occurred, the holders of the
Series A Preferred Stock (acting by act of the majority holders thereof) shall
have the right to exchange their shares of Series A Preferred Stock (the
"Exchange Right") of the Corporation for 3,612 Ordinary shares (as adjusted for
any combinations or divisions or similar recapitalizations) of Newco held by the
Corporation, so that, after giving effect to the exercise of the Exchange Right
EIS and the Corporation will each hold an equal number of Ordinary shares of
Newco assuming that neither EIS nor the Corporation has sold any Ordinary shares
of Newco.
Upon exercise of the Exchange Right, 8,010 shares (as adjusted
for any combinations or divisions or similar recapitalizations) of the Series A
Preferred Stock of the Corporation (or the equivalent number of shares of Common
Stock of the Corporation issued upon conversion of the Series A Preferred Stock)
and the Make Whole Shares (or the equivalent number of shares of Common Stock of
the Corporation issued upon conversion of the Series B Preferred Stock) shall be
cancelled (the "Exchange Price"), and the Series A Preferred Stock and the Make
Whole Shares shall no longer be entitled to any rights in the Corporation and
the accrued dividends thereon shall be converted into Common Stock.
If any shares of the Series A Preferred Stock are converted
pursuant to Section 4.a., to shares of Common Stock, the Exchange Right with
respect to all shares of Series A Preferred Stock shall be terminated and of no
further force and effect.
In order to exercise the Exchange Right, the holders shall
provide written notice
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<PAGE> 7
thereof to the Corporation, setting forth (a) the fact that such holders intend
to exercise the Exchange Right, and (b) the proposed date for such exercise (the
"Exercise Date"), which shall be between 10 and 30 days after the date of such
notice, provided, however, that if the Corporation shall deliver the holders a
written request to delay the date for such exercise by no more than 45 days, the
Exercise Date will be as set forth in that request. During the period after the
receipt of such written request, and before the Exercise Date, the holders shall
negotiate with the Corporation in good faith an alternative mechanism for the
transfer of the Ordinary Shares of Newco that will reduce the Corporation's tax
liability, provided that the holders shall not be required to agree to any
transaction which is financially disadvantageous to them. Such notice shall be
irrevocable. On the Exercise Date, (y) the holders shall tender their shares of
Series A Preferred Stock to the Corporation for cancellation, and (z) the
Corporation shall cause to be delivered to EIS, acting on behalf of such
holders, such shares of Newco. The holders and the Corporation shall take all
other necessary or appropriate actions in connection with or to effect such
closing.
b. Mandatory Exchange. Each share of Series A Preferred Stock
shall automatically be exchanged for Ordinary shares of Newco at the Exchange
Price at the time in effect for such share upon the earliest to occur after the
Series A Conversion Termination Date and prior to the Series A Exchange
Termination Date of: (i) the time immediately prior to the effective time of (x)
the acquisition of the Corporation by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation, but excluding any merger effected
exclusively for the purpose of changing the domicile of the Corporation); (y)
the sale of all or substantially all of the assets of the Corporation, unless
the Corporation's stockholders of record as constituted immediately prior to
such acquisition or sale will, immediately after such acquisition or sale (by
virtue of securities issued as consideration for the Corporation's acquisition
or sale or otherwise) hold at least fifty percent (50%) of the voting power of
the surviving entity in approximately the same relative percentages after such
acquisition or sale as before such acquisition or sale, or (z) the date
specified by written consent or agreement of the holders of a majority of the
then outstanding shares of Series A Preferred Stock, provided that in the case
of the occurrence of (x) or (y) above, the Corporation shall have also given the
holders of Series A Preferred Stock notice that such event shall occur and that
the Corporation desires the Series A Preferred Stock be exchanged.
6. Termination Date.
a. The rights of the holders to convert the shares of Series A
Preferred Stock into shares of Common Stock, shall terminate and be of no
further force and effect on the date that is 42 months after the date of the
first issuance of any shares of Series A Preferred Stock hereunder (the "Series
A Conversion Termination Date").
b. The rights of the holders to exercise the Exchange Right shall
terminate and be of nor further force and effect on the date that is six (6)
years after the date of the first issuance of any shares of the Series A
Preferred Stock hereunder (the "Series A Exchange Termination Date"). In the
event that any shares of Series A Preferred Stock remain outstanding on the
Series A Exchange Termination Date, then, in such event, all such shares of
Series A Preferred Stock shall
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<PAGE> 8
automatically, and without the requirement of further action by the Corporation
or the holders, be exchanged pursuant to Section 5 above.
7. Other Distributions. On or prior to the Series A Conversion
Termination Date, in the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by the
Corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in Section 4, then, in each such case for the purpose of
this Section 7, the holders of the Series A Preferred Stock shall be entitled to
a proportionate share of any such distribution as though they were the holders
of the number of shares of Common Stock of the Corporation into which their
shares of Series A Preferred Stock would be convertible as of the record date
fixed for the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
8. Recapitalizations. On or prior to the Series A Conversion
Termination Date, if at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets provided for in Section 3 or Section 4 hereof)
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
Section 4 with respect to the rights of the holders of the Series A Preferred
Stock after the recapitalization to the end that the provisions of Section 4
(including adjustment of the Series A Conversion Price then in effect and the
number of shares purchasable upon conversion of the Series A Preferred Stock)
shall be applicable after that event as nearly equivalent as may be practicable.
9. No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions hereof and in the taking of all such action as may be
necessary or appropriate in order to protect the Series A Conversion Rights and
Exchange Right of the holders of the Series A Preferred Stock against
impairment.
10. No Fractional Shares and Certificate as to Adjustments.
a. No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the aggregate number of shares of Series A
Preferred Stock each holder is at the time converting into Common Stock and the
aggregate number of shares of Common Stock issuable to each such holder upon
such conversion.. No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Convertible Preferred Stock, and the number
of shares of Common Stock to be issued shall be rounded to the nearest whole
share. Whether or not fractional shares are issuable upon such conversion shall
be determined on the basis of the total number of shares of Series A Convertible
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
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<PAGE> 9
b. Upon the occurrence of each adjustment or readjustment
of the Conversion Price pursuant to Section 4, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of shares of Series A
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment and readjustment, (ii) the Series
A Conversion Price at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series A Preferred Stock.
11. Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, such number of its
shares of Common Stock that shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock not
otherwise reserved for issuance shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, in addition to
such other remedies as shall be available to the holders of such Series A
Preferred Stock, the Corporation will take such corporate action that may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to its Certificate of
Incorporation.
12. Notices. Any notice required by the provisions hereof to be
given to the holders of shares of Series A Preferred Stock shall be deemed given
on the date of service if served personally on the party to whom notice is to be
given, or on the date of transmittal of services by facsimile transmission to
the party to whom notice is to be given, and addressed to each holder of record
at his address appearing on the books of the Corporation.
13. Voting Rights. Subject to Section 14 below, holders of Series
A Preferred Stock shall not be entitled to vote together with holders of Common
Stock, including with respect to the election of directors of the Corporation.
14. Protective Provisions. Subject to the rights of any series of
preferred stock that may from time to time come into existence, so long as any
shares of Series A Preferred Stock are outstanding, the Corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then- outstanding shares of
Series A Preferred Stock, voting separately as a series:
a. amend its Certificate of Incorporation so as to affect
adversely the shares of Series A Preferred Stock or any holder thereof; or
b. change the rights of the holders of the holders of the
Series A Preferred
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<PAGE> 10
Stock in any other respect.
15. Status of Converted Stock. In the event any shares of Series
A Preferred Stock shall be converted pursuant to Section 4 or exchanged pursuant
to Section 5 hereof, the shares so converted or exchanged shall be cancelled and
shall not be reissuable by the Corporation. The Certificate of Incorporation of
the Corporation shall be appropriately amended to effect the corresponding
reduction in the Corporation's authorized capital stock.
II
All cross-references in each subparagraph of this Section II
refer to other subparagraphs in this Section II unless otherwise indicated.
1. Designation. 9,000 shares of the Preferred Stock shall be
designated and known as the "Series B Preferred Stock." Such number of shares
may be increased or decreased by resolution of the Board of Directors after
obtaining the consent of a majority in interest of the then-outstanding shares
of Series B Preferred Stock; provided, that no decrease shall reduce the number
of shares of Series B Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
2. Dividend Provisions. a. When and if the Board of Directors
shall declare a dividend or distribution payable (other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) with respect to the then-outstanding shares of Common Stock of the
Corporation, the holders of the Series B Preferred Stock shall be entitled to
the amount of dividends per share that would be payable on the largest number of
whole shares of Common Stock into which a holder's aggregate shares of Series B
Preferred Stock could then be converted pursuant to Section 4 hereof (such
number to be determined as of the record date for the determination of holders
of Common Stock entitled to receive such dividend).
b. In addition to Section 2.a. above, the Series B
Preferred Stock shall be entitled to a mandatory dividend equal to 9.0% per year
of the Series B Original Purchase Price per share (as defined below) thereof.
Such dividend shall (1) be cumulative and shall compound on a semi-annual basis,
and (2) be payable solely by the issuance of additional shares of Series B
Preferred Stock, at a price per share equal to the Series B Original Purchase
Price thereof, and not in cash. Fractional shares of Series B Preferred Stock
shall be issuable for purposes hereunder.
3. Liquidation Preference. a. No future class or series of
preferred stock issued by the Corporation shall rank senior to the Series B
Preferred Stock, provided, however that any future class or series of preferred
stock issued by the Corporation may rank pari passu with the Series B Preferred
Stock.
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<PAGE> 11
b. In the event of a Liquidation, before any payment of
cash or distribution of other property shall be made to the holders of the
Common Stock or any other class or series of stock subordinate in liquidation
preference to the Series B Preferred Stock, the holders of the Series B
Preferred Stock shall be entitled to receive out of the assets of the
Corporation legally available for distribution to its shareholders, the greater
of (i) the Series B Original Purchase Price per share (as appropriately adjusted
for any combinations or divisions or similar recapitalizations affecting the
Series B Preferred Stock after issuance) and accrued and unpaid dividends
thereon (the "Series B Liquidation Preference"), and (ii) the amount such
stockholders would have received had their shares of Series B Preferred Stock
been converted to Common Stock immediately prior to such Liquidation, based upon
the Series B Conversion Price. As used Section II, the "Series B Original
Purchase Price" per share is $1,000.
c. If, upon any Liquidation, the assets of the Corporation
available for distribution to its shareholders shall be insufficient to pay the
holders of the Series B Preferred Stock the full amounts to which they shall be
entitled, the holders of the Series B Preferred Stock shall share ratably in any
distribution of assets in proportion to the respective amounts which would be
payable to them in respect of the shares held by them if all amounts payable to
them in respect of such were paid in full pursuant to Section 3.b.
d. After the distributions described in Section 3.b above
have been paid, subject to the rights of other series of preferred stock that
may from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each.
4. Conversion. Subject to Section I, paragraph 5, the holders of
the Series B Preferred Stock shall have conversion rights, through and including
the Series B Termination Date (as defined below), as follows (the "Series B
Conversion Rights"):
a. Right to Convert.
(i) Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time, at the
office of the Corporation or any transfer agent for such stock, into
such number of fully paid and non-assessable shares of Common Stock as
is determined by dividing (x) the sum of the Series B Original Issue
Price and all accrued and unpaid dividends thereon by (y) $2.006 (such
quotient, (the "Series B Conversion Price"); provided, however, that the
Series B Conversion Price for the Series B Preferred Stock shall be
subject to adjustment as set forth in subsection 4(a)(iii).
(ii) Before any holder of Series B Preferred Stock
shall be entitled to convert such shares into shares of Common Stock,
such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent
for the Series B Preferred Stock, and shall give written notice to the
Corporation at its principal corporate office, of the election to
convert the same and shall state therein the name
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<PAGE> 12
or names in which the certificate or certificates for shares of Common
Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series B
Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled as set forth above. Such conversion
shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series B
Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such
shares of Common Stock as of such date.
(iii) In the event the Corporation should at any
time fix a record date for the effectuation of a split or subdivision of
the outstanding shares of Common Stock or the determination of holders
of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or the Common Stock
Equivalents without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon
conversion or exercise thereof) or with payment that is less than the
then-market price of the Common Stock (including, in the case of Common
Stock Equivalents, on an as-converted basis), then, as of such record
date (or the date of such dividend distribution, split or subdivision if
no record date is fixed), the Series B Conversion Price of the Series B
Preferred Stock shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of the
aggregate of (a) shares of Common Stock outstanding and (b) those
issuable with respect to such Common Stock Equivalents, with the number
of shares issuable with respect to Common Stock Equivalents determined
from time to time in the manner provided in Section 4(a)(v).
(iv) If the number of shares of Common Stock
outstanding at any time is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such
combination, the Series B Conversion Price for the Series B Preferred
Stock shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of such series shall
be decreased in proportion to such decrease in outstanding shares.
(v) The following provisions shall apply for
purposes of this Section 4(a):
(A) The aggregate maximum number of shares
of Common Stock deliverable upon conversion or exercise of Common Stock
Equivalents (assuming the satisfaction of any conditions to
convertibility or exercisability, including, without limitation, the
passage of time, but without taking into account potential antidilution
adjustments) shall be deemed to have been issued at the time such Common
Stock Equivalents were issued.
(B) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to
the Corporation upon
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<PAGE> 13
conversion or exercise of such Common Stock Equivalents including, but
not limited to, a change resulting from the antidilution provisions
thereof, the Conversion Price of the Series B Preferred Stock, to the
extent in any way affected by or computed using such Common Stock
Equivalents, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(C) Upon the termination or expiration of
the convertibility or exercisability of any such Common Stock
Equivalents, the Conversion Price of each of the Series B Preferred
Stock, to the extent in any way affected by or computed using such
Common Stock Equivalents, shall be recomputed to reflect the issuance of
only the number of shares of Common Stock (and Common Stock Equivalents
which remain convertible or exercisable) actually issued upon the
conversion or exercise of such Common Stock Equivalents.
b. Automatic Conversion. Each share of Series B Preferred
Stock shall automatically be converted into shares of Common Stock at the Series
B Conversion Price at the time in effect for such share upon the earliest to
occur prior to the Series B Conversion Temination Date of: (i) the time
immediately prior to the effective time of (x) the acquisition of the
Corporation by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation, but excluding any merger effected exclusively for the purpose of
changing the domicile of the Corporation); (y) the sale of all or substantially
all of the assets of the Corporation, unless the Corporation's stockholders of
record as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as
consideration for the Corporation's acquisition or sale or otherwise) hold at
least fifty percent (50%) of the voting power of the surviving entity in
approximately the same relative percentages after such acquisition or sale as
before such acquisition or sale, or (z) the date specified by written consent or
agreement of the holders of a majority of the then outstanding shares of Series
B Preferred Stock, provided that in the case of the occurrence of (x) or (y)
above, the Corporation shall have also given the holders of the Series B
Preferred Stock notice that such event shall occur and that the Corporation
desires the Series B Preferred Stock be converted.
5. Termination Date. The rights of the holders to (a) convert the
shares of Series B Preferred Stock into shares of Common Stock and (b) receive
dividends on the Series B Preferred Stock shall terminate and be of no further
force and effect on the date that is six years after the date of the first
issuance of any shares of Series B Preferred Stock hereunder (the "Series B
Termination Date"). In the event that any shares of Series B Preferred Stock
remain outstanding on the Series B Termination Date, then, in such event, all
such shares of Series B Preferred Stock shall automatically, and without the
requirement of further action by the Corporation or the holders, be converted
into shares of Common Stock, at the Series B Conversion Price in effect on the
Series B Termination Date. Upon surrender of the Series B Preferred Stock
certificates by the holders of Series B Preferred Stock to the Corporation or
its transfer agent, the Corporation shall thereafter, as
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<PAGE> 14
expeditiously as practicable, issue to the holders certificates in respect of
such shares of Common Stock, based on the aggregate number of shares of Series B
Preferred Stock held by each of such holders as of such date.
6. Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4, then, in each such
case for the purpose of this Section 6, the holders of the Series B Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series B Preferred Stock would be
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
7. Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets provided for in Section 3 or Section 4
hereof) provision shall be made so that the holders of the Series B Preferred
Stock shall thereafter be entitled to receive upon conversion of the Series B
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
Section 4 with respect to the rights of the holders of the Series B Preferred
Stock after the recapitalization to the end that the provisions of Section 4
(including adjustment of the Series B Conversion Price then in effect and the
number of shares purchasable upon conversion of the Series B Preferred Stock)
shall be applicable after that event as nearly equivalent as may be practicable.
8. No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions hereof and in the taking of all such action as may be
necessary or appropriate in order to protect the Series B Conversion Rights of
the holders of the Series B Preferred Stock against impairment.
9. No Fractional Shares and Certificate as to Adjustments.
a. No fractional shares shall be issued upon the
conversion of any share or shares of the Series B Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the aggregate number of shares of Series B
Preferred Stock each holder is at the time converting into Common Stock and the
aggregate number of shares of Common Stock issuable to each such holder upon
such conversion.. No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Convertible Preferred Stock, and the number
of shares of Common Stock to be issued shall be rounded to the nearest whole
share. Whether or not fractional shares are issuable upon such conversion shall
be determined on the basis of the total number of shares of Series A Convertible
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
b. Upon the occurrence of each adjustment or readjustment
of the Series B
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<PAGE> 15
Conversion Price pursuant to Section 4, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of shares of Series B Preferred
Stock a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment and readjustment, (ii) the Series
B Conversion Price at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series B Preferred Stock.
10. Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series B Preferred Stock, such number of its
shares of Common Stock that shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock not
otherwise reserved for issuance shall not be sufficient to effect the conversion
of all then outstanding shares of the Series B Preferred Stock, in addition to
such other remedies as shall be available to the holders of such Series B
Preferred Stock, the Corporation will take such corporate action that may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to its Certificate of
Incorporation.
11. Redemption by the Corporation. a. Subject to the provisions
in Sections 4-10 above, shares of the Series B Preferred Stock may be redeemed
in cash by the Corporation, as follows, any time, upon 30 days' prior written
notice to EIS, at a price equal to minimum increments of at least $500,000 at
the Series B Original Issue Price per share plus accrued and unpaid dividends
thereof (the "Redemption Price").
b. Thirty days prior to the date of any redemption (each a
"Redemption Date"), as permitted in this Section 11, the Corporation shall send
a written notice of redemption (the "Notice") to EIS informing it of the
Corporation's proposed redemption of Series B Preferred Stock to be redeemed in
the manner provided herein. The notice shall identify:
(i) the Redemption Date;
(ii) the number of shares of Series B Preferred Stock to
be redeemed by the Corporation;
(iii) the number of shares of Common Stock into which a
share of Series B Preferred Stock is convertible;
(iv) the Redemption Price of the Series B Preferred Stock
to be redeemed;
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(v) the name and address of the transfer agent, if any, in
respect of the Series B Preferred Stock;
(vi) that the Series B Preferred Stock called for
redemption may be converted by EIS, as otherwise provided herein, at any
time before the close of business on the Redemption Date; and
(vii) that the Series B Preferred Stock called for
redemption must be surrendered to the transfer agent at the office of
the Corporation or its transfer agent to collect the Redemption Price.
c. Upon issuance of the Notice, the Series B Preferred Stock
called for redemption shall become due and payable on the Redemption Date,
unless converted prior to such date, and at the Redemption Price stated in the
Notice. Upon their surrender to the Corporation or transfer agent, shares of
Series B Preferred Stock shall be redeemed by the Corporation and the Redemption
Price stated in the Notice shall be paid in cash in full by the Corporation.
d. If due to a redemption pursuant to this paragraph 11, an
insufficient number of shares of Series B Preferred Stock are issued and
outstanding to permit EIS to exchange the Make Whole Shares upon exercise of the
Exchange Right, EIS shall exchange all of the outstanding shares of the Series B
Preferred Stock and shall pay any remaining amount owed in cash.
12. Notices. Any notice required by the provisions hereof to be
given to the holders of shares of Series B Preferred Stock shall be deemed given
on the date of service if served personally on the party to whom notice is to be
given, or on the date of transmittal of services by facsimile transmission to
the party to whom notice is to be given, and addressed to each holder of record
at his address appearing on the books of the Corporation.
13. Voting Rights. Subject to Section 14 below, holders of Series
B Preferred Stock shall not be entitled to vote together with holders of Common
Stock, including with respect to the election of directors of the Corporation.
14. Protective Provisions. Subject to the rights of any series of
preferred stock that may from time to time come into existence, so long as any
shares of Series B Preferred Stock are outstanding, the Corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then- outstanding shares of
Series B Preferred Stock, voting separately as a series:
a. amend its Certificate of Incorporation so as to affect
adversely the shares of Series B Preferred Stock or any holder thereof,
including without limitation, by creating any series of preferred stock (or
issuing any shares under any such series) that is senior, in right of payment
upon liquidation, in respect of dividends, or otherwise, to the Series B
Preferred Stock; or
b. change the rights of the holders of the holders of the
Series B Preferred
- 16 -
<PAGE> 17
Stock in any other respect.
15. Status of Converted Stock. In the event any shares of Series
B Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so
converted shall be cancelled and shall not be reissuable by the Corporation. The
Certificate of Incorporation of the Corporation shall be appropriately amended
to effect the corresponding reduction in the Corporation's authorized capital
stock."
- 17 -
<PAGE> 18
IN WITNESS WHEREOF, said Celtrix Pharmaceuticals, Inc. has caused this
Certificate of Designation to be signed by Donald Huffman, it Vice President and
Chief Financial Officer, this 21st day of April, 1999.
CELTRIX PHARMACEUTICALS, INC.
By: /s/ Donald Huffman
------------------------------------------
Donald Huffman
Vice President and Chief Financial Officer
- 18 -
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-55482) pertaining to the Celtrix Pharmaceuticals, Inc. 1991 Stock
Option Plan and 1991 Directors' Stock Option Plan, in the Registration Statement
(Form S-8 No. 33-42703) pertaining to the Celtrix Pharmaceuticals, Inc. 1991
Stock Option Plan, 1991 Employee Stock Purchase Plan, and 1991 Directors' Stock
Option Plan and in the Registration Statements (Form S-3 No. 33-66008 and No.
333-27263) of Celtrix Pharmaceuticals, Inc. of our report dated May 28, 1999,
with respect to the consolidated financial statements of Celtrix
Pharmaceuticals, Inc. included in its Annual Report (Form 10-K) for the year
ended March 31, 1999, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,258
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,430
<PP&E> 164
<DEPRECIATION> 63
<TOTAL-ASSETS> 4,501
<CURRENT-LIABILITIES> 1,221
<BONDS> 0
0
0
<COMMON> 251
<OTHER-SE> 3,029
<TOTAL-LIABILITY-AND-EQUITY> 4,501
<SALES> 10
<TOTAL-REVENUES> 131
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,399)
<EPS-BASIC> (0.58)
<EPS-DILUTED> (0.58)
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