-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnjlXZZmS8xuX5c6hokzR89e37qIDC0nlcZgvxd7NQwgrfASdwnStSwvM9Udh7z0 HGeGozT7hoG4a4o48EmmiA== 0000728478-00-000005.txt : 20000331 0000728478-00-000005.hdr.sgml : 20000331 ACCESSION NUMBER: 0000728478-00-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORTECH INC CENTRAL INDEX KEY: 0000728478 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 840894091 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-20726 FILM NUMBER: 587728 BUSINESS ADDRESS: STREET 1: 6850 NORTH BROADWAY STREET 2: SUITE G CITY: DENVER STATE: CO ZIP: 80221 BUSINESS PHONE: 3036501200 MAIL ADDRESS: STREET 1: 376 MAIN STREET STREET 2: P.O. BOX 74 CITY: BEDMINSTER STATE: NJ ZIP: 07921 EX-27 1 FDS --
5 This schedule contains summary financial information extracted from the Form 10-KSB of Cortech, Inc. for the year ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 0000728478 CORTECH, INC. 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 6,648 0 0 0 0 13,370 0 0 13,370 179 0 0 0 4 13,187 13,370 0 3,225 0 342 0 0 0 2,883 233 2,650 0 0 0 2,650 1.43 1.43
10KSB 2 FOR THE YEAR ENDED DECEMBER 31, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB MARK ONE: [X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Fiscal year ended December 31, 1999 [ ] Transaction Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________. Commission file number 0-20726 ------- CORTECH, INC. -------------- (Name of small business issuer in its charter) DELAWARE 84-0894091 - -------------------------------- ------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 376 Main Street, PO Box 74, Bedminster, New Jersey 07921 -------------------------------------------------------- (Address of principal executive offices with Zip Code) Issuer's telephone number, including area code (908) 234-1881 -------------- Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Act ---------------------------------------------------- Common Stock, par value $.002 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Issuer's revenues for the fiscal year ended December 31, 1999 were approximately $3,225,000. As of March 15, 2000, there were 1,852,209 shares of common stock outstanding. The aggregate market value of the common stock held by non- affiliates of the issuer, based upon the closing price on the NASDAQ National Market, was approximately $9 million. Traditional Small Business Disclosure Format Yes No X --- --- Portions of the following documents are incorporated by reference in this Report on Form 10-KSB: 1) Information set forth in Part III of this report is incorporated by reference to the Registrants 2000 Proxy Statement. Item 1. - DESCRIPTION OF BUSINESS - ------- ----------------------- General - ------- Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-KSB are forward-looking statements that involve risks and uncertainties. For a discussion of certain factors which may affect the outcome projected in such statements, see Item 6 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") of this Annual Report, as well as factors noted in the balance of this Item 1 ("Description of Business"). Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgement as of the date of the filing of this Annual Report. The Company disclaims, however, any intent or obligation to update these forward-looking statements. Overview - -------- Cortech, Inc. ("Cortech" or the "Company") is a biopharmaceutical company whose research and development efforts were focused primarily on protease inhibitors and bradykinin antagonists. These efforts produced a technology portfolio which may have therapeutic application across a broad range of medical conditions. Cortech's strategy is to use collaborative partners to conduct and fund on-going research and development on those components of its portfolio that have not been outlicensed. At the same time, the Company is seeking to redeploy its assets into an operating business. In response to disappointing test results and its loss of collaborative partner support, Cortech implemented a series of reductions in force over the past five years which resulted in the Company having no compensated employees at February 29, 2000, and effectively discontinued all research and development activities. In addition, Cortech decommissioned its laboratories and sold all of its remaining scientific, technical and office equipment. As a result of these actions, Cortech no longer has the staff or operative facilities required to recommence internal research and development activities. Throughout 1998, Cortech retained a core group of professionals who, among other things, were engaged in efforts to secure collaborative partners for Cortech's technology portfolio. In November 1998, these efforts resulted in a collaboration based on CE-1037 (the Company's lead human neutrophil elastase inhibitor) with United Therapeutics Corp. ("UT") a pharmaceutical company based in North Carolina. Under the exclusive worldwide product and license agreement, UT made an up-front payment of $250,000 and will pay the future costs of developing the compound in pulmonary diseases. The agreement also provides for I-1 Cortech to receive milestone payments if the compound is successfully advanced in development and a royalty on product sales should the compound be successfully commercialized. The agreement resulted in no revenues in 1999, and it is not expected that the agreement will result in significant revenues in 2000. UT has recently started clinical development of CE-1037, targeting chronic obstructive pulmonary disease. In June 1999, the Company finalized an Agreement to license to Ono Pharmaceutical Co., Ltd. of Osaka Japan ("Ono") the worldwide rights to an oral elastase inhibitor program on which the two companies have been collaborating. Prior to this Agreement, Ono's rights to this technology were limited to the territories of Korea, Japan, China and Taiwan. In connection with the expansion of Ono's rights to the technology, Cortech received a $2,000,000 payment less applicable taxes both in the United States and Japan. Ono withheld at the source $200,000 of withholding taxes which they remitted directly to the Japanese taxing authorities. This withholding tax was expensed in the accompanying financial statements. The Company believed it was not liable for this withholding and appealed the withholding, seeking reimbursement from the Japanese taxing authorities. The Company was informed by the Japanese taxing authorities that its appeal was denied. If Ono's studies of the technology are favorable, Cortech could also receive milestone payments of up to $9.5 million. Ono also agreed to pay Cortech a royalty on sales generated outside the original territories on products using Cortech's technology. Milestone payments or royalties are not assured and in any event could be expected only after several more years of continued evaluation of the technology by Ono. Elastase is a protein-degrading enzyme released from the neutrophil and is considered to play a major role in tissue damage and organ failure in severe inflammatory conditions. Development of an orally active elastase inhibitor is expected to bring a new therapy for patients with chronic inflammatory diseases. Efforts to sell or establish partnerships for the remaining components of Cortech's technology portfolio have now virtually ceased and although discussions with some potential collaborators continue, there can be no assurance that any transaction will be completed. In December 1997, Cortech announced that it had signed a definitive merger agreement with BioStar, Inc. ("BioStar"), a privately held diagnostics company based in Boulder, Colorado. The merger agreement was mutually terminated by BioStar and Cortech on May 7, 1998. I-2 Following its Annual Meeting on September 4, 1998, the Company announced on September 18, 1998 that four of the nominees of Asset Value Fund Limited Partnership ("AVF"), a Delaware limited partnership, had been elected to the Company's Board of Directors, constituting a majority of the Board of Directors. Then on September 21, 1998, the Company announced that three of AVF's elected nominees, Paul O. Koether, Mark W. Jaindl and John W. Galuchie, Jr., had been elected to the positions of Chairman, Vice Chairman and President, respectively, at the Company's annual organizational meeting of the Board of Directors. The Company also announced implementation of a one-for-ten reverse stock split which became effective at the close of business on September 22, 1998, and elimination of the Company's Shareholder Rights Plan (the "Plan"). The Company redeemed all rights issued under the Plan. The redemption resulted in a one-time payment of $0.10 per share on a split adjusted basis to the Company's stockholders. The Company was incorporated in 1982 in Colorado and reincorporated in Delaware in August 1991. Cortech's Work with Protease Inhibitors - ---------------------------------------- Background. Proteases are enzymes that cleave peptide bonds within proteins. Since proteins are one of the fundamental building blocks of biological systems, proteases are among the most important regulators of biological activity that have been described. As a result of an increased understanding of the causative role proteases play in a number of disease processes, protease inhibition had become a very important area of drug discovery. Cortech's work focused primarily on the discovery and synthesis of inhibitors of human neutrophil elastase ("HNE"), a serine protease capable of degrading a variety of connective tissue proteins, most notably elastin. Elastin is found in the lungs, vasculature and skin, and therapy directed against HNE may have therapeutic application in acute and chronic respiratory, cardiovascular and skin disorders. As a result of its research and development efforts in this field, Cortech has developed proprietary technology which it has demonstrated has the potential to be applied to the discovery and synthesis of a broader range of therapeutically interesting protease inhibitors. During inflamation, neutrophils are activated and migrate to sites of inflamation to help kill micro-organisms and eliminate inflammatory debris. Neutrophils release HNE which disrupts the lining of blood vessels (endothelium) and allows the neutrophils to reach their target destination. Because HNE is so potent at digesting protein and thereby damaging tissue, the body possesses a number of defenses against excessive HNE release, limiting its effect in minor inflammatory states. In certain severe inflammatory conditions, however, HNE production overwhelms the body's natural defenses, resulting in tissue destruction. High levels of HNE release have also been found in cases of organ I-3 dysfunction, such as those associated with acute respiratory distress syndrome ("ARDS"). Further, HNE appears to play a significant role in a number of chronic diseases marked by tissue destruction, including cystic fibrosis and emphysema. HNE also appears to be involved in less severe forms of tissue destruction, such as rheumatoid arthritis, psoriasis and periodontal disease. CE-1037 - HNE Inhibitor for Parenteral Administration. CE-1037 was developed and advanced into early Phase II clinical trials in collaboration with Hoechst Marion Roussel, Inc. ("HMRI"). HMRI terminated that collaboration in December 1996 following animal experiments which suggested that the compound might have genotoxic effects at high concentrations. A repeat experiment, sponsored by Cortech but conducted by an independent outside laboratory failed to show any genotoxic effect of the compound. Subsequently, in November 1998, Cortech was successful in securing UT as a new corporate partner for CE-1037. Under the exclusive worldwide product and license agreement, UT made an up-front payment of $250,000 and will pay the future costs of developing the compound for the potential treatment of pulmonary diseases. Notwithstanding this Agreement, there can be no assurance that CE-1037 will be proven safe and efficacious in clinical trials, that the regulatory approvals necessary for this commercialization (if it is ever advanced to this stage)would be obtained or that it could be manufactured at acceptable costs and in appropriate quantity. HNE Inhibitors for Oral Administration. HNE has been implicated in a number of chronic diseases of the respiratory tract including chronic obstructive pulmonary disease and emphysema. Optimally, these conditions would require a compound that could be administered orally for a prolonged period of time. Thus, Cortech's research and development in the area of elastase inhibition was expanded to include compounds suitable for oral administration. In March 1995, Cortech signed a three-year research agreement with Ono to develop an orally active HNE inhibitor using technology developed by Cortech prior to initiation of the collaboration. Under the terms of the agreement, Ono substantially funded Cortech's research on oral HNE inhibitors ultimately providing a total of approximately $10 million in funding from 1995-1997. The agreement also granted Ono an exclusive, royalty-free license to make, use and sell a resulting product in Japan, Korea, Taiwan and China (the "Ono Territory"), with Cortech retaining all rights outside of the Ono Territory. I-4 In June 1999, the Company finalized an Agreement to license to Ono the worldwide rights to the oral elastase inhibitor program on which the two companies had been collaborating. Prior to this Agreement, Ono's rights to this technology were limited to the territories of Korea, Japan, China and Taiwan. In connection with the expansion of Ono's rights to the technology, Cortech received a $2,000,000 payment less applicable taxes both in the United States and Japan. Ono withheld at the source $200,000 of withholding taxes which they remitted directly to the Japanese taxing authorities. This withholding tax was expensed in the accompanying financial statements. The Company believed it was not liable for this withholding and appealed the withholding, seeking reimbursement from the Japanese taxing authorities. The Company was informed by the Japanese taxing authorities that its appeal was denied. If Ono's studies of the technology are favorable, Cortech could also receive milestone payments of up to $9.5 million. Ono also agreed to pay Cortech a royalty on sales generated outside the original territories on products using Cortech's technology. Milestone payments or royalties are not assured and in any event could be expected only after several more years of continued evaluation of the technology by Ono. Other Protease Targets. As part of its protease inhibitor research efforts, Cortech scientists synthesized and tested a number of compounds. Certain of these compounds have been shown to have activity against other serine elastases, such as proteinase-3 and endogenous vascular elastase. Serine elastases have been shown to play an important role in vascular injury, and Cortech believes that its portfolio of compounds may potentially provide useful therapeutic interventions for certain acute and chronic vascular, skin and respiratory diseases. Cortech has also developed a proprietary technology which has the potential to be applied to the discovery and syntheses of inhibitors of a broader range of therapeutically interesting serine and cysteine proteases such as mast cell tryptase and picorna virus proteases, interleuken-1 beta converting enzyme, other caspases involved in apoptosis and cell death and cathepsins B, K, L and S. Notwithstanding these initial findings, there can be no assurance that any of these compounds will be proven safe and efficacious in clinical trials, that the regulatory approvals necessary for their commercialization (if any such compounds are ever advanced to this stage) would be obtained or that it could be manufactured at acceptable costs and with appropriate quantity. Furthermore, Cortech does not intend to undertake further development of any of these compounds without a collaborative partner. Although Cortech is currently seeking to secure such a partner or purchaser of Cortech's related technology rights, there can be no assurance that Cortech will be able to establish such a collaboration or effect any transaction involving a sale of technology rights on favorable terms, if at all. I-5 Cortech's Work with Bradykinin Antagonists - ------------------------------------------ Background. Inflammation is the body's response to injury of any kind, including injury caused by infections, immune responses or physical trauma. Controlled inflammation is beneficial because it facilitates the clearance of pathogens (disease-causing agents) and the repair of damaged tissue. However, because inflammation is a comprehensive response involving numerous pathologic mediators, the strength of the response often converts normal, controlled inflammation into an abnormal, destructive process. When this occurs, inflammation can cause acute or chronic disease, often accompanied by pain, edema (swelling) or tissue destruction leading to organ failure and death in severe cases. Bradykinin is generated immediately following tissue injury or infection. It is a pivotal inflammatory mediator, and its diverse effects include pain, edema, vascular leak, and hypotension or low blood pressure that can lead to shock, organ dysfunction and death. The body normally inactivates bradykinin within seconds of its generation. However, in instances of severe injury, bradykinin production outstrips the body's capacity to inactivate it, thereby generating sustained inflammation, pain and edema. Preclinical and clinical work continues to support the role of bradykinin as an important mediator of inflammation, particularly in brain injury following trauma or acute ischemia. Bradycor (TM) (Deltibant or CP-0127). Bradycor is Cortech's lead, first-generation bradykinin antagonist which may potentially have therapeutic application in the management of traumatic brain injury ("TBI"). The rationale for its use in TBI is based on the important contribution of inflammatory processes to the full expression of the injury. A number of these inflammatory processes are mediated by bradykinin receptor mechanisms, including neutrophil activation and migration, stimulation of vascular endothelial cells and interactions with neuronal and non-neuronal cell populations found within the brain parenchyma. Following brain injury, these processes result in the production of inflammatory cytokines, endothelial retraction, blood brain barrier disruption and neuronal death. Thus, compounds such as Bradycor which can block these bradykinin mediated effects may potentially be efficacious in ameliorating the inflammatory aspects of TBI. Until mid-1995, Cortech's work on Bradycor concentrated primarily on the treatment of sepsis, but two Phase II clinical trials, completed in 1994 and 1995, failed to provide sufficient evidence of efficacy to warrant additional development in that indication. Concurrent with the sepsis studies, Cortech also I-6 undertook a small, pilot Phase II study in patients with large focal cerebral contusions (a type of injury that represents a subset of the spectrum of TBI). In that study, Bradycor had significant beneficial effects, compared with placebo, on intra cranial pressure, neurological status and the need for surgical intervention. In addition, Bradycor was well tolerated and showed no clinically significant adverse effects in these patients. In 1998, a manuscript describing the results of that study was published in Acta NeurochiSurgica. In November 1995, Cortech entered into a worldwide product development and license agreement with SmithKline Beecham ("SB") for the development of Bradycor for the treatment of TBI and possibly stroke. Under the terms of this agreement, SB undertook a multicenter, placebo controlled, Phase II clinical trial of Bradycor in patients with severe TBI (The "TBI Study"). Results of the TBI Study, which became available in March 1997, failed to demonstrate a statistically significant benefit of Bradycor on intra cranial pressure, the primary endpoint of the TBI Study. Based on these results, SB and Cortech agreed to discontinue the planned development of Bradycor. Moreover, SB, after providing Cortech with $4 million in funding for the development of Bradycor, terminated its agreement with Cortech. Notwithstanding the initial results of the TBI Study, an analysis of long-term functional outcome by the American Brain Injury Consortium ("ABIC"), which was completed during the third quarter of 1997, showed positive trends in functional outcome for patients treated with Bradycor which were statistically significant in the most severely injured patients. In addition, patients treated with Bradycor in the TBI Study showed modest (but not statistically significant) positive trends in intra cranial pressure and the requirement for other interventions to control intra cranial pressure. In November 1999, the study and the results generated by ABIC were published in the Journal of Neurotrauma. During the term of the agreement between SB and Cortech, SB also conducted a number of preclinical and other early phase clinical studies to broaden the profile of Bradycor. One of SB's preclinical studies in rats yielded adverse findings which were inconsistent with the findings of Cortech's toxicology program and not supported by the safety profile observed in the clinic. These adverse findings led to the premature suspension of the TBI Study with 133 patients available for analysis rather than the 160 patients planned. However, repeat rat studies failed to duplicate the initially observed mortality or to provide an explanation for the adverse findings. Furthermore, these results, when considered in the context of the entire body of preclinical and clinical data available on the compound, remain anomalous. I-7 Cortech does not intend to undertake further development of Bradycor without a collaborative partner. There can be no assurance that Cortech will be able to establish such a collaboration or effect any transaction involving a sale of technology rights on favorable terms, if at all. In the event that such a partnership is secured and development efforts with respect to Bradycor are continued, there can be no assurance that Bradycor would be proven safe and efficacious in clinical trials, that the regulatory approvals necessary for its commercialization (if Bradycor is ever advanced to this stage) would be obtained or that it could be manufactured at acceptable costs and with appropriate quantity. In February 1992, Cortech entered into a series of agreements with CP-0127 Development Corporation ("CDC") that govern the development of products utilizing Bradycor. See "CP-0127 Development Corporation". Second Generation Bradykinin Antagonist Research. Cortech has also developed a series of peptide bradykinin antagonists that are 100 to 1,000 times more potent than Bradycor. Compared to Bradycor, these compounds have longer durations of action in vivo and are expected to be less costly to manufacture. Cortech has identified a lead compound, CP-0597, which has been targeted for the treatment of acute ischemic stroke where inflammatory consequences of the injury are felt to be similar to those following traumatic injury. Acute ischemic stroke is the term applied when blood supply to the brain is acutely compromised by the obstruction of an artery. This obstruction leads to ischemia (insufficient blood flow and loss of oxygen) of the brain tissue. As a result of the ischemia, there is neuronal death, neurological impairment and death of brain tissue. The microvasculature in the brain is acutely sensitive to ischemia and reacts with endothelial swelling and changes in microvascular tone which further compromise blood supply. There is blood brain barrier disruption in the ischemic territory and an inflammatory response both at the vascular and neuronal levels. Results from preclinical experiments demonstrating the neuroprotective effects of CP-0597 were reported in the July 1997 issue of Stroke. These results indicate that CP-0597 may have significant therapeutic potential in the treatment of stroke. Cortech does not, however, intend to undertake further development of CP-0597 without a collaborative partner. There can be no assurance that Cortech will be able to establish such a partnership or effect any transaction involving a sale of technology rights on favorable terms, if at all. Furthermore, there can be no assurance that CP-0597 would be proven safe and efficacious in clinical trials, that the regulatory approvals necessary for its commercialization (if it is ever advanced to this stage) would be obtained or that it could be manufactured at acceptable costs and with appropriate quantity. I-8 Product Development Risks - ------------------------- Cortech's compounds are in an early stage of research and development. All of the compounds in Cortech's portfolio would require extensive additional research and development prior to submission of any regulatory application for commercial use. At this point, Cortech's compounds could only be advanced through collaborative arrangements or sale of its technology. There can be no assurance that Cortech will be able to establish collaborative arrangements for the remaining components of its portfolio or to effect a transaction involving a sale of technology rights on acceptable terms, if at all. Even if Cortech enters into collaborative arrangements and/or receives funds for research and development, there can be no assurance that research or product development efforts would be successfully completed, that the compounds in Cortech's portfolio would be proven to be safe and efficacious in clinical trials, that required regulatory approvals for commercialization (if products are ever advanced to this stage) could be obtained, that products could be manufactured at acceptable cost and with appropriate quality or that any approved products could be successfully marketed or would be accepted by patients, health care providers and third-party payors. Patents, Trade Secrets and Licenses - ----------------------------------- Cortech believes that patents and other proprietary rights are crucial to its intellectual property portfolio. It is Cortech's policy to maintain appropriate patent protection of proprietary technologies and compounds in its portfolio. The value of Cortech's intellectual property will depend in part on its ability to obtain patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries. Cortech has patent protection related to the following: protease inhibitors, bradykinin antagonists and immunology vaccines and treatments. Cortech holds sixteen United States patents and has numerous United States patent applications pending which concern protease inhibitors. Cortech holds eight United States patents and has numerous United States patent applications pending which concern bradykinin antagonists. In addition, Cortech holds twenty-six foreign patents and has numerous foreign patents pending concerning protease inhibitors and bradykinin antagonists. The patent positions of pharmaceutical and biopharmaceutical firms, including Cortech, are uncertain and involve complex factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before or after the patent is issued. Consequently, there can be no assurance that any of Cortech's pending applications will result in the issuance I-9 of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patent issue and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, there can be no assurance that Cortech or any licensor was the first creator of inventions covered by pending patent applications or that Cortech or such licensor was the first to file patent applications for such inventions. There can be no assurance that Cortech's patents, if issued, would be held valid and infringed by a court of competent jurisdiction. An adverse outcome with regard to a third party claim could subject Cortech to significant liabilities to third parties, require disputed rights to be licensed from third parties or require Cortech to cease using such technology. A number of pharmaceutical and biopharmaceutical companies and research and academic institutions have filed patent applications or received patents in Cortech's fields. Some of these applications or patents may be competitive with Cortech's applications or may conflict in certain respects with claims made under Cortech's applications. Such conflict could result in a significant reduction of coverage of Cortech's patents, if issued. In addition, if patents are issued to other companies that contain competitive or conflicting claims and such claims are ultimately determined to be valid, there can be no assurance that Cortech would be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology. Cortech also seeks to protect unpatented trade secrets and improvements and unpatented know-how. It is Cortech's policy to require its consultants, members of the Board of Directors, outside scientific collaborators and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with Cortech. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with Cortech is to be kept confidential and not disclosed to third parties except in scientific circumstances. There can be no assurance, however, that these agreements will not be breached or will provide meaningful protection or adequate remedies in the event of unauthorized use of Cortech's trade secrets or disclosure of such information. Cortech also has taken appropriate physical security measures to protect its intellectual property. There can be no assurance, however, that such security measures will be adequate. CP-0127 Development Corporation ("CDC") - --------------------------------------- In February 1992, Cortech entered into a series of agreements with CDC that govern the development of products utilizing Bradycor. The agreements grant CDC I-10 the right to utilize Bradycor in the United States, Canada and Europe for certain indications, while Cortech retained rights to Bradycor in other parts of the world. Cortech has the right to market, sell and license the technology licensed to CDC or to sell products derived therefrom and is subject or a royalty obligation in favor of CDC. Marketing Strategy - ------------------ Cortech's compounds are in the early stages of research and development. In the event that any of Cortech's compounds are approved for marketing in the future, Cortech will be entirely reliant upon its corporate partners to market those compounds. Any revenues received by Cortech will, therefore, be dependent on the efforts of third parties, and there can be no assurance that such efforts will be successful. Manufacturing - ------------- The manufacture of sufficient quantities of new drugs can be an expensive, time-consuming and complex process and may require the use of materials with limited availability or require dependence on sole-source suppliers. In the event that any of Cortech's compounds reach the stage of development involving manufacturing, Cortech will be solely dependent upon its corporate partners for the manufacture of compounds. Competition - ----------- The pharmaceutical and biopharmaceutical industries are engaged in intense competition involving multiple technologies and strategies for compound identification and development. Many companies are focused on research in the same areas as Cortech. Cortech's most significant competitors are fully integrated pharmaceutical companies and more established biotechnology companies. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. In addition, Cortech faces competition from academic institutions, governmental agencies, and other public and private research organizations that conduct research, seek patent protection, and establish collaborative arrangements for product and clinical development and marketing. Many of Cortech's competitors have substantially greater financial, technical and human resources than Cortech and have significant products approved or in development. Any of Cortech's products that successfully gain regulatory approval must then compete for market acceptance and market share. For certain of Cortech's potential products, an important competitive factor will be the timing of market I-11 introduction. Accordingly, Cortech expects that important competitive factors will be the relative speed with which companies can develop products, complete the clinical testing and approval processes and supply commercial quantities of the product to the market. With respect to clinical testing, competition may delay progress by limiting the number of clinical investigators and patients available to test Cortech's potential products. HNE inhibitors have been the target of research and development efforts by a number of large pharmaceutical companies. While no company has succeeded in developing a small molecular weight HNE inhibitor to the point of filing an application for marketing approval, there can be no assurance that any of these programs will not achieve success in the future. In addition, alternative approaches to the use of HNE inhibitors are being developed. At least four other companies have developed bradykinin antagonists and may be engaged in product development activities. Numerous companies are developing alternative strategies to treat inflammation. A number of these are in preclinical and clinical development. Any of these approached could compete with Cortech's HNE inhibitor programs. Government Regulation - --------------------- The Food and Drug Administration ("FDA") is the primary agency regulating the research, development, manufacturer, sale and marketing of drugs in the United States. From the time at which a promising compound is identified, regulations dictate its development, approval, marketing and sale. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources. Many products that initially appear promising are never approved because they do not meet safety and efficacy requirements of the FDA. Regulatory requirements may change at any stage of Cortech's product development and may affect approval, delay in application, or require additional expenditures by Cortech. If approval is obtained, failure to comply with ongoing regulatory requirements, or new information that negatively impacts the safety or effectiveness of the approved drug, could cause the FDA to withdraw approval to market the product. The time period between when a promising new compound is identified and when human testing is initiated is generally referred to as the preclinical development period. A series of pharmacologic studies are also performed during preclinical development to identify the essential characteristics of the compound's behavior. In addition, both in vitro and in vivo animal toxicity studies are required to characterize the toxicity profile of the compound. I-12 Preclinical studies are regulated by the FDA under a series of regulations called Good Laboratory Practice ("GLP") regulations. Violations of these regulations can, in come cases, lead to invalidation of the studies, requiring those studies to be repeated. During this time, a manufacturing process which is capable of producing the compound in an adequately pure and well characterized form for human use is developed. Production of compounds for use in humans is governed by a series of FDA regulations known as Good Manufacturing Practice ("GMP") regulations, which regulate all aspects of the manufacturing process. The entire body of preclinical development work is summarized in a submission to the FDA called a Notice of Claimed Exemption for an Investigational New Drug ("IND"). FDA regulations allow human clinical trials to begin 30 days following the submission of the IND, unless the FDA requests additional information, clarification or additional time to review the IND. There is no assurance that the submission of an IND will allow a company to commence clinical trials. Once trials have started, the company or the FDA may decide to stop the trials because of concerns about the safety of the product or the adequacy of the trial design. Such action can substantially delay individual trials, as well as the entire development program for the compound and, in some cases, may require abandonment of a product. Clinical testing of new compounds in humans is designed to establish both safety and efficacy in treating a specific disease or condition. These studies are usually conducted in three phases of testing. In Phase I, a small number of healthy subjects or patients with the specific condition being targeted are given the new compound to determine the pharmacokinetic and pharmacologic actions of the drug in humans, the side effects associated with increasing doses and if possible, to gain early evidence of effectiveness. In Phase II, small numbers of patients with the targeted disease are given the compound to test its efficacy in treating the targeted disease, to determine the common short-term side effects and risks associated with the drug, and to establish effective dose levels. Phase III studies are larger studies designed to confirm the compound's efficacy and safety for the targeted disease and to provide an adequate basis for physician labeling. When a drug is being developed for a condition that is life or organ threatening, or for which there is no alternative therapy, the FDA may, in certain cases, grant an accelerated approval process. However, there is no assurance that any of Cortech's products would be eligible for this accelerated approval process. I-13 Once adequate data have been obtained in clinical testing to demonstrate that the compound is both safe and effective for the intended use, all of the data available is submitted to the FDA in an New Drug Application ("NDA"). The FDA reviews this application and, once it decides that adequate data are available which show that the new compound is both safe and effective, approves the drug for marketing. The approval process may take several years and is a function of a number of variables including the quality of the submission and data presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and the extent of agreement between the sponsor and the FDA on the product labeling. There can be no assurance that any new drug will successfully proceed through this approval process or that it will be approved in any specific period of time. The FDA may, during its review of an NDA, ask for additional data, and may also require postmarketing testing, including potentially expensive Phase IV studies. In addition, postmarketing surveillance to monitor the safety and effectiveness of the drug must be done by the sponsor. The FDA may in some circumstances impose additional restrictions on the use and or promotion of the drug that may be difficult and expensive to administer. Before marketing approval is granted, the facility in which the drug product is manufactured must be inspected by the FDA and deemed to be adequate for the manufacture, holding and distribution of drugs in compliance with GMPs. Manufacturers must continue to expend time, money and effort in the area of production, and quality control, labeling, advertising and promotion of drug product to ensure full compliance with GMP requirements. Failure to comply with applicable requirements can lead to FDA demands that production and shipment cease, that products be recalled, or to enforcement actions that can include seizures, injunctions, or criminal prosecution. Such failures or new information that negatively impact the safety and effectiveness of the drug that becomes available after approval may lead to FDA withdrawal of approval to market the product. To market its products abroad, Cortech also must satisfy regulatory requirements implemented by foreign regulatory authorities. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above, and may introduce additional requirements of risks. There is no assurance that a foreign regulatory body will accept the data developed by Cortech for any of its products. Approval by the FDA does not ensure approval in other countries, nor does approval by any other country ensure approval decisions by FDA. In Europe, human pharmaceutical products are subject to extensive regulations of testing, manufacture, safety, efficacy, labeling, storage, record keeping, advertising and promotion. Effective in January 1995, the European I-14 Union enacted new regulations providing for a centralized licensing procedure, which is mandatory for certain kinds of products, and a decentralized (country by country) procedure for all other products. A license granted under the centralized procedure authorizes marketing of the product in all of the member states of the European Union. Under the decentralized procedure, a license granted in one member state can be extended to additional member states pursuant to a simplified application process. The assessment of products filed under the centralized procedure is coordinated by the European Medicine Evaluation Agency ("EMEA"). In addition to regulations enforced by the FDA, Cortech is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, regulations promulgated by the United States Department of Agriculture, and other related federal, state or local regulations. Cortech's research and development involved the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although Cortech believes that its safety procedures for handling and disposing of such materials complied with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. Third-Party Reimbursement - ------------------------- The business and financial condition of pharmaceutical and biotechnology companies will continue to be affected by the efforts of government and third-party payors to contain or reduce the cost of health care through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control. In particular, individual pricing negotiations are often required in each country of the European Union, even if approval to market the drug under the EMEA's centralized procedure is obtained. In the United States, there have been, and Cortech expects that there will continue to be, a number of federal and state proposals to implement similar government control. In addition, an increasing emphasis on managed care in the United States will likely continue to increase the pressure on pharmaceutical pricing. While Cortech cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals or efforts could have a material adverse effect on pharmaceutical companies that are prospective corporate partners for Cortech. Therefore, Cortech's ability to establish and maintain strategic alliances may be adversely affected. In addition, in the United States and elsewhere, sales of prescription pharmaceuticals are dependent in part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans that mandate predetermined discounts from list prices. I-15 In addition, third-party payors are increasingly challenging the prices charged for medical products and services. If Cortech succeeds in bringing one or more products to the market, there can be no assurance that these products will be considered cost effective and reimbursement to the consumer will be available or will be sufficient to allow Cortech to sell its products on a competitive basis. Human Resources - --------------- Currently, Cortech has no compensated employees. ITEM 2. - DESCRIPTION OF PROPERTY - ------- ----------------------- NONE. ITEM 3. - LEGAL PROCEEDINGS - ------- ----------------- On February 27, 1998, a complaint was filed in the Court of Chancery of the State of Delaware, naming the Company, the Company's then current directors and BioStar as defendants. The complaint, filed by a stockholder of the Company, claims to be on behalf of a class of all the Company's stockholders and contends that the then current directors of the Company breached their fiduciary duties to the Company's stockholders when they unanimously approved the proposed combination with BioStar. The complaint originally sought to enjoin the proposed combination with BioStar as well as the operation of the Company's stockholder rights plan and sought an order rescinding the proposed combination with BioStar upon its consummation as well as compensatory damages and costs. The complaint was amended following termination of the proposed BioStar merger to seek to force an auction of the Company's assets and other relief. Thereafter, the parties negotiated a settlement of the claims. Pursuant to the terms of the settlement a payment in the amount of $235,000 shall be made to Cortech on behalf of Defendants by Cortech's directors and officers insurance carrier. If the Court approves the settlement, Plaintiff's counsel intend to ask the Court for an award of attorneys' fees and expenses in an amount not to exceed $160,000. Defendants have agreed that they will not oppose such an application up to $160,000 and Cortech has agreed to pay, from the settlement proceeds, the fees and expenses actually awarded by the Court up to $160,000. Such settlement will be presented to the Court of Chancery at a hearing scheduled for April 6, 2000. Copies of the Notice to Shareholders relating to the settlement are available upon request from the Company. I-16 ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- The Company held its Annual Meeting of Stockholders on November 4, 1999. All nominees to the Company's Board of Directors were elected. The following is a vote tabulation for all nominees: For Withheld --------- -------- Leonard M. Tannenbaum 1,703,002 8,743 Sheri Perge 1,703,002 8,743 I-17 PART II ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- At February 29, 2000, the Company had approximately 500 stockholders of record. The Company's common stock currently trades on the NASDAQ National Market System under the symbol "CRTQ". On February 29, 2000, the closing price per share of the common stock was $7.9375. On July 13, 1998, the NASDAQ Stock Market, Inc. ("NASDAQ") Listing Qualification Panel (the "Panel") notified the Company that as of the close of business on such date, the Company's Common Stock ("Common Stock") would be delisted from the NASDAQ National Market. NASDAQ's maintenance standards require, among other things, that the common stock of companies listed on the NASDAQ National Market must have a bid price of at least $1.00 per share, and the basis for the Panel's decision was that the bid price of the common stock was less than $1.00 per share. As a result of the delisting, the Common Stock traded on the Over-the-Counter Bulletin Board. The Company implemented a one-for-ten stock split, as approved by the stockholders, as of the close of business on September 22, 1998. On January 21, 1999, NASDAQ approved Cortech's Common Stock for re-listing on the NASDAQ National Market, and the shares began trading on January 25, 1999. The following table sets forth the high and low bid and ask prices for the common stock for the periods indicated, as reported by the Over-the-Counter Bulletin Board. Bid Ask ---------------- ------------------- Low High Low High --- ---- --- ---- Calendar Quarter Ended: 1998 ---- September 30 $3.90 $5.8125 $4.10 $6.65625 December 31 4.25 6.625 4.8125 6.75 The following table sets forth the high and low closing prices for the common stock for the periods indicated, as reported by NASDAQ on the National Market System. All closing prices have been adjusted to reflect the one-for-ten stock split. II-1 Low High ----- ------ Calendar Quarter Ended: 1999 ---- March 31 $ 5.625 $ 6.25 June 30 5.625 6.25 September 30 5.875 7.3125 December 31 5.50 6.75 1998 ---- March 31 $ 3.75 $ 6.875 June 30 4.375 5.625 On September 29, 1998, the Board of Directors authorized the redemption of all outstanding preferred share purchase rights issued pursuant to the Rights Agreement, dated as of June 13, 1995, between the Company and American Securities Transfer, Inc., as Rights Agent, effective as of the close of business on October 13, 1998, with the redemption price of $.01 ($.10 on a split adjusted basis) per right to be paid in cash on October 14, 1998 to the holders of record of Common Stock of the Company as of the close of business on October 13, 1998. The Company has not paid any cash dividends on its Common Stock since its inception and does not intend to pay any cash dividends in the foreseeable future. ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- AND RESULTS OF OPERATIONS -------------------------- The following discussion and analysis should be read in conjunction with Cortech's Financial Statements and Notes thereto included elsewhere in this Form 10-KSB. When used in this discussion, the word "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected and include, but are not limited to, the risks discussed below, the risks discussed in the section of this Form 10-KSB entitled "Description of Business" and risks discussed elsewhere in this Form 10-KSB. II-2 General - ------- Cortech was a biopharmaceutical company whose primary focus has been the discovery and development of novel therapeutics for the treatment of inflammatory disorders. Specifically, Cortech had directed its research and development efforts principally toward protease inhibitors and bradykinin antagonists. These efforts produced certain intellectual property rights. (See Item 1. - Description of Business - "Cortech's Work with Protease Inhibitors" and "Cortech's Work with Bradykinin Antagonists.") In response to disappointing test results and its loss of collaborative partner support, Cortech implemented a series of reductions in force over the past five years which reduced the number of full time, regular employees to zero at February 29, 2000 and effectively discontinued all internal research and development activities. In addition, Cortech decommissioned its laboratories, and sold all scientific, technical and office equipment. As of December 31, 1998, all fixed assets had been written-off. As a result of these actions, Cortech no longer had the staff or operative facilities required to recommence internal research and development activities. Cortech's strategy is to seek collaborative partners to conduct and fund future research and development on the components of its portfolio or to sell the rights to certain of the compounds in the portfolio to third parties interested in funding future research and development, while conserving the Company's cash. There can be no assurance that any particular agreement will be completed. At the same time, the Company is seeking to redeploy its assets into an operating business. Results of Operations - --------------------- Revenues - -------- Revenues for the year ended December 31, 1999 were $3,225,000 compared to revenues of $1,347,000 for the year ended December 31, 1998. In 1999, the Company recorded $2,000,000 in license revenues in connection with an Agreement to license to Ono the worldwide rights to the oral elastase inhibitor program on which the two companies have been collaborating. During 1998, the Company recorded $250,000 in license revenues from an unrelated third party, UT, in connection with the signing of an exclusive worldwide product development and license agreement for Cortech's elastase inhibitor, CE-1037, for the potential treatment of emphysema and other diseases. The agreement provided for certain milestone payments in the event the compound is successfully advanced and a royalty on product sales should the compound be successfully commercialized. This agreement did not result in revenues in 1999, II-3 nor is it expected to result in significant revenues in 2000. Interest income decreased from $695,000 in 1998 to $574,000 in 1999. Lower yields on investments accounted for this decrease. The disposition of property and equipment relating to the sale of certain leasehold improvements and equipment resulted in gains of $435,000 during 1999 and $380,000 during 1998. Research and development related expenses decreased from $436,000 in 1998 to zero in 1999. The decrease was due to the cessation of on-site research and development activities by the Company in late 1997. General and administrative expenses decreased from $5.6 million in 1998 to $342,000 in 1999. This decrease was due to the cessation of activities by the Company. General and administrative expenses of $342,000 in 1999 include: legal expenses of $159,000 relating primarily to the Company's patent portfolio; Directors and Officers liability insurance premiums of $82,000 and all other general expenses of $101,000. General and administrative expenses in 1998 of $5,565,000 include: severance payment for former employees and officers of $1.1 million (including $605,000 to the Company's former Chief Executive Officer); certain costs related to the proposed combination with BioStar, Inc. that was terminated on May 7, 1998 of $328,000; costs related to stockholder litigation of $185,000; Directors and Officers liability run-off policy, approved by the prior Board of Directors of $198,000; $258,000 in expenses incurred by the prior Board of Directors for the solicitation of proxies in connection with the Annual Meeting of Stockholders; legal fees of $987,000; consulting fees of $236,000; general insurance of $281,000; utilities expense of $265,000; rent expense of $314,000; depreciation and amortization of $622,000 and all other expenses of $791,000. Liquidity and Capital Resources - ------------------------------- At December 31, 1999, the Company had cash and cash equivalents of $6.6 million. Cash equivalents consisted of U.S. Treasury Bills with original maturities of three months or less and yields ranging from 4.918% to 5.39%. Working capital at December 31, 1999 was approximately $13.2 million. Management believes its cash and cash equivalents are sufficient for its remaining business activities and for the costs of seeking an acquisition of an operating business. The Company also had short-term investments, consisting of U.S. Treasury Bills with original maturities of six months of $6.6 million at December 31, 1999. II-4 Net cash of approximately $816,000 was used in operations in 1999. Cash flows from net income of $2.6 million were partially offset by the decrease in accrued liabilities of $820,000; gains on disposition of equipment of $435,000 which is classified as an investing activity and the sale of licensing rights of $2 million, also classified as an investing activity. In 1998, net cash of approximately $4.1 million was used in operations due primarily to the net loss of $4.7 million and the decrease in accounts payable of $549,000, partially offset by depreciation and amortization of $623,000 and an increase in accrued liabilities of $656,000. Net cash used in investing activities was $4.1 million in 1999, due primarily to the purchase of short-term investments of $6.6 million offset by the sale of licensing rights of $2 million and the proceeds from the sale of property and equipment of $435,000. Net cash provided by investing activities was approximately $4.3 million in 1998, primarily due to the sales of short-term investments of $3.8 million and the proceeds from the sale of property and equipment of $491,000. Net cash used in financing activities was $189,000 in 1998, due to the redemption of the preferred share purchase rights. See Part II, Item 5. - Market for Common Equity and Related Stockholder Matters for more information on the redemption. Other Matters - ------------- Net Operating Loss Carryforwards and Tax Credits: As of December 31, 1999, Cortech had approximately $78 million of net operating loss carry forwards for income tax purposes which expire from 2000 through 2013. In addition, Cortech has approximately $3.1 million of research and development and foreign tax credit carryforwards available to offset future federal income tax, subject to limitations for alternative minimum tax. Cortech's use of operating loss carryforwards and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code. II-5 Year 2000 Issue - --------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company has not experienced any Year 2000 issues subsequent to 1999's fiscal year end. Although the Company believes it has taken the appropriate steps to address Year 2000 readiness, there is no guarantee that the Company's efforts will prevent a material adverse impact on the results of operations and financial condition. New Accounting Standards - ------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date for FASB Statement No. 133, an Amendment of FASB Statement No. 133", which defers the effective date of SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently holds no derivative instruments, nor is it currently participating in hedging activities. Management does not expect adoption of SFAS No. 133 to have a material effect on the Company's financial condition, results of operations or liquidity. II-6 ITEM 7. - FINANCIAL STATEMENTS - ------- -------------------- The financial statements filed with this item are listed below: Report of Independent Accountant Financial Statements: Balance Sheet as of December 31, 1999 Statements of Operations for the Years ended December 31, 1999 and 1998 Statements of Stockholders' Equity for the Years ended December 31, 1999 and 1998 Statements of Cash Flows for the Years ended December 31, 1999 and 1998 Notes to Financial Statements II-7 PricewaterhouseCoopers LLP 400 Campus Drive P.O. Box 988 Florham Park, NJ 07932 Telephone (973) 236 4000 Facsimile (973) 236 5000 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Cortech Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Cortech, Inc. at December 31, 1999, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP February 15, 2000 F-1 CORTECH, INC. BALANCE SHEET December 31, 1999 (in 000's) ASSETS Current assets: Cash and cash equivalents $ 6,648 Short-term investments 6,568 Prepaid expenses and other 154 ------- Total current assets $13,370 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 17 Accrued liabilities 162 ------- Total current liabilities 179 ------- Commitments and contingencies (Note 8) Stockholders' equity (Note 4): Preferred stock, $.002 par value 2,000,000 shares authorized, none issued - Common stock, par value $.002; 5,000,000 shares authorized; 1,852,209 shares issued and outstanding 4 Additional paid-in capital 99,830 Accumulated deficit ( 86,643) ------- Total stockholders' equity 13,191 ------- Total liabilities and stockholders' equity $13,370 ======= See accompanying notes to financial statements. F-2 CORTECH, INC. STATEMENTS OF OPERATIONS (in 000's, except per share amounts) Year Ended December 31, -------------------------- 1999 1998 ------ ------ Revenues: Interest income $ 574 $ 695 Gain on disposition of property and equipment 435 380 Technology license revenue 2,000 250 Sponsored research and development - 22 Other income 216 - ------ ------ Total revenues 3,225 1,347 ------ ------ Expenses: Research and development - 436 General and administrative 342 5,565 ------ ------ Total expenses 342 6,001 ------ ------ Income (loss) before income taxes 2,883 ( 4,654) Provision for income taxes 233 - ------ ------ Net income (loss) $2,650 ($4,654) ====== ====== Basic net income (loss) per share $ 1.43 ($ 2.51) ====== ====== Diluted net income (loss) per share $ 1.43 ($ 2.51) ====== ====== Weighted average common shares outstanding 1,852 1,852 ====== ====== See accompanying notes to financial statements. F-3
CORTECH, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4) (in 000's, except share amounts) Common Stock Additional ------------ Paid-In Deferred Accumulated Shares Amount Warrants Capital Compensation Deficit Total ------ ------ -------- ----------- -------------- ------------ ------ Balance, December 31, 1997 1,852 $ 4 $1,077 $98,942 ($ 1) ($84,639) $15,383 Amortization of deferred compensation - - - - 1 - 1 Redemption of preferred share purchase rights - - - ( 189) - - ( 189) Expiration of CDC Warrants - - ( 1,077) 1,077 - - - Net loss - - - - - ( 4,654) ( 4,654) ----- ---- ------ ------- ---- ------- ------- Balance, December 31, 1998 1,852 4 - 99,830 - ( 89,293) 10,541 Net income - - - - - 2,650 2,650 ----- ---- ------ ------- ---- ------- ------- Balance, December 31, 1999 1,852 $ 4 - $99,830 - ($86,643) $13,191 ===== ==== ====== ======= ==== ======= ======= See accompanying notes to financial statements.
F-4 CORTECH, INC. STATEMENTS OF CASH FLOWS (in 000's)
Year Ended December 31, 1999 1998 ------ ------ Cash flows from operating activities: Net income (loss) $ 2,650 ($ 4,654) Adjustments: Depreciation and amortization - 623 Gains on disposition of equipment ( 435) ( 380) Gain on sale of licensing rights ( 2,000) - (Increase) decrease in prepaid expenses and other assets ( 77) 231 Decrease in accounts payable ( 134) ( 549) Increase (decrease)in accrued liabilities ( 820) 656 Other, net - ( 35) ------- ------- Net cash used in operating activities ( 816) ( 4,108) ------- ------- Cash flows from investing activities: Gain on sale of licensing rights 2,000 - Proceeds from sale of property and equipment 435 491 Purchases of short-term investments ( 6,568) ( 9) Sales of short-term investments - 3,850 ------- ------- Net cash provided by (used in) investing activities ( 4,133) 4,332 ------- ------- Cash flows from financing activities: Redemption of preferred share purchase rights - ( 189) ------- ------- Net cash used in financing activities - ( 189) ------- ------- Net increase (decrease) in cash and cash equivalents ( 4,949) 35 Cash and cash equivalents, beginning of period 11,597 11,562 ------- ------- Cash and cash equivalents, end of period $ 6,648 $11,597 ======= ======= Supplemental disclosure cash flow information: Cash paid for taxes $ 231 $ - ======= =======
See accompanying notes to financial statements. F-5 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 1. Organization ------------ Cortech, Inc. ("Cortech" or the "Company") was a biopharmaceutical company whose primary focus was the discovery and development of novel therapeutics for the treatment of inflammatory disorders. Specifically, Cortech directed its research and development efforts principally toward protease inhibitors and bradykinin antagonists. These efforts produced certain intellectual property rights. In response to disappointing test results and its loss of collaborative partner support, Cortech implemented a series of reductions in force over the past five years (which reduced the number of full time, regular employees from more than 200 down to zero) and effectively discontinued all internal research and development activities. In addition, Cortech has decommissioned its laboratories, and sold its scientific, technical office equipment and leasehold improvements. As of December 31, 1998, all fixed assets had been written off. As a result of these actions, Cortech no longer has the staff or operative facilities required to recommence internal research and development activities. Cortech's strategy is to seek collaborative partners to conduct and fund future research and development on the components of its portfolio or to sell the rights to certain of the compounds in the portfolio to third parties interested in funding future research and development, while conserving the Company's cash, although there can be no assurance that any particular agreement will be completed. At the same time, the Company is seeking to redeploy its assets into an operating business. 2. Significant Accounting Policies ------------------------------- Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Prior years financial statements have been reclassified to conform to the current year's presentation. Cash and Cash Equivalents ------------------------- Cash and cash equivalents consist primarily of cash in banks and U.S. Treasury Bills purchased with an original maturity of three months or less. F-6 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 Short-Term Investments ---------------------- Short-term investments consist of U.S. Treasury Bills purchased with an original maturity of six months and are valued at cost plus accrued interest, which approximates the fair market value. The Company currently intends to hold these investments until maturity. Research and Development Expenses --------------------------------- Costs incurred in connection with research and development activities were expensed as incurred. These costs consist of direct and indirect costs associated with specific projects as well as fees paid to various entities that perform certain research on behalf of the Company. On-site research and development activities were terminated by the Company in the fourth quarter of 1997. Sponsored Research and Development Revenue ------------------------------------------ The Company recognizes revenue from sponsored research and development as research activities are performed or as development milestones are completed under the terms of the research and development agreements. Costs incurred in connection with the performance of sponsored research and development are expensed as incurred. There were no costs in connection with these activities in 1999 or 1998. Basic Net Income (Loss) Per Share --------------------------------- Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period as adjusted for the one-for-ten reverse stock split which was effective on September 22, 1998. Excluded from the calculation of the net income (loss) per share are 98,077 and 117,149 common stock options, in 1999 and 1998 respectively which, if included, would have an antidilutive effect. (See Note 4.) Income Taxes ------------ The Company recognizes deferred tax assets and liabilities related to the expected future tax consequences of events that have been recognized in the Company's financial statements and tax returns. However, if it is more likely than not that some portion or all of the net deferred tax assets will not be realized, a valuation allowance is established and the tax benefit is not recognized in the statements of operations. F-7 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 3. Sponsored Research and Development ---------------------------------- Ono Pharmaceutical Co., Ltd. ("Ono") ------------------------------------ In March 1995, Cortech entered into a research agreement with Ono to develop an orally active human neutrophil elastase inhibitor using Cortech's protease inhibitor research capabilities. Upon entering into the agreement, Ono paid the Company $500,000 for research previously conducted by the Company. Under the agreement as amended in 1996, Ono paid $4.3 million in 1996 and an additional $1.5 million in 1997 for work that was performed in the second and third quarters of 1997. Under the terms of the agreement, as amended in April, 1997, Ono assumed all responsibilities for research activities during the final six months of the collaborative project, which terminated on March 14, 1998. As a result of this reallocation of responsibilities, Ono was no longer required to pay the Company the last scheduled $1.5 million in research funding previously provided for under the agreement to offset certain costs that the Company would otherwise have incurred under the agreement. Cortech expects no further payments from Ono under the agreement. Under the terms of the agreement, Ono had an exclusive, royalty-free license to make, use and sell a resulting product in Japan, Korea, Taiwan and China. In June 1999, the Company finalized an agreement to license to Ono the worldwide rights to the oral elastase inhibitor program on which the two companies had been collaborating. In connection with the expansion of Ono's rights to the technology, Cortech received a $2,000,000 payment less applicable taxes both in the United States and Japan. Ono withheld at the source $200,000 of withholding taxes which they remitted directly to the Japanese taxing authorities. This withholding tax has been expensed in the accompanying financial statements. If Ono's studies of the technology are favorable, Cortech could also receive milestone payments of up to $9.5 million. Ono also agreed to pay Cortech a royalty on sales generated outside the original territories on products using Cortech's technology. Milestone payments or royalties are not assured and in any event could be expected only after several more years of continued evaluation of the technology by Ono. F-8 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 4. Stockholders' Equity -------------------- Preferred Stock --------------- The Company is authorized to issue 2,000,000 shares of $.002 par value preferred stock which may be issued with various terms in one or more series, as the Board of Directors may determine. On June 2, 1995, the Company's Board of Directors approved the adoption of a Preferred Share Rights Plan under which stockholders received one Right to purchase one one-hundredth (one-tenth on a split adjusted basis - see "Common Stock" below) of a share of Series A Junior Participating Preferred Stock ("Junior Preferred Stock") for each outstanding share of Cortech common stock of record held at the close of business on June 26, 1995. These rights were distributed as a non-taxable dividend and were set to expire in June 2005. The rights would separate from shares of Cortech common stock and become exercisable at $20.00 each ($200 on a split adjusted basis - see "Common Stock" below), subject to future adjustment, only if a person or group acquired 15 percent or more of the Cortech common stock. Cortech's Board of Directors could terminate the plan or redeem the rights, at a nominal redemption price, prior to the time a person acquires more than 15 percent of the Cortech common stock. The Company had designated 500,000 shares of its Preferred Stock as Junior Preferred Stock. On September 29, 1998, the Board of Directors authorized the redemption of all outstanding rights, effective as of the close of business on October 13, 1998, with the redemption price of $.01 ($.10 on a split adjusted basis - see "Common Stock" below) per right paid in cash on October 14, 1998 to the holders of record of Common Stock of the Company as of the close of business on October 13, 1998. F-9 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 Common Stock ------------ The stockholders of the Company approved a one-for-ten reverse stock split which was effective as of the close of business on September 22, 1998. Also on this date, the Company's authorized shares were reduced from 50,000,000 to 5,000,000. Accordingly, all common share information has been adjusted to reflect this reverse stock split. Stock Option Plans ------------------ On September 22, 1998, the Company effected a one-for-ten reverse stock split. All stock option information has been adjusted to reflect this reverse stock split. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". This new standard encouraged, but did not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments based on a fair-value method of accounting. Companies that do not adopt the new expense recognition rules of SFAS No. 123 will continue to apply the existing rules contained in Accounting Principles Board ("APB") Opinion No. 25, but will be required to provide proforma disclosures of the compensation expense determined under the fair- value provisions of SFAS No. 123, if material. APB No. 25 requires no recognition of compensation expense for most of the stock-based employee compensation arrangements provided by the Company, namely broad-based employee stock option grants and stock purchase plans where the exercise price is equal to the market price at the date of grant. The Company applies APB No. 25 and related Interpretations in accounting for its plans. Had compensation cost for the Company's four stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income (loss) and net income (loss) per F-10 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 share would have been increased (decreased) to the pro forma amounts indicated below (In 000's, except per share amounts): 1999 1998 ---- ---- Net income (loss) - as reported $ 2,650 ($ 4,654) Net income (loss) - pro forma $ 2,650 ($ 5,053) Net income (loss) per share - as reported $ 1.43 ($ 2.51) Net income (loss) per share - pro forma $ 1.43 ($ 2.73) The Company's 1986 Stock Option Plan ("1986 Plan") authorizes the grant of stock options to officers and employees of the Company to purchase an aggregate of 150,000 shares of common stock. Although 40,710 shares were available under the 1986 Plan as of December 19, 1997, on such date the Board of Directors effectively suspended future grants of options under the 1986 Plan to the extent that any such grant would increase the shares subject to outstanding grants above the figure as of such date. The Company's 1993 Equity Incentive Plan ("1993 Plan"), approved by the stockholders on May 10, 1994, authorizes the issuance of 170,000 shares through the grant of options to purchase common stock, stock bonuses, and rights to purchase restricted stock. The options outstanding as of December 31, 1999 generally become exercisable in varying amounts over a five-year period from the date of grant. Although 37,085 shares were available under the 1993 Plan as of December 19, 1997, on such date the Board of Directors effectively suspended further grants of options under the 1993 Plan to the extent that any such grant would increase the shares subject to outstanding grants above the figures as of such date. F-11 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 The stock options granted from either plan may be incentive stock options ("ISO") or nonstatutory stock options ("NSO"). The Board of Directors may set the rate at which the options expire, subject to limitations discussed below. However, no options shall be exercisable after the tenth anniversary of the date of grant or, in the case of ISOs, three months following termination of employment, except in cases of death or disability, for which the time or exercisability is extended. In the event of a dissolution, liquidation or other corporate reorganization, all stock options outstanding under the 1986 Plan and the 1993 Plan would become exercisable in full. ISOs may not be granted at an exercise price of less than the fair market value of the common stock at the date of grant. If an ISO is granted to an employee who owns more than 10% of the Company's total voting stock, such exercise price shall be at least 110% of fair market value of the common stock, and the ISO shall not be exercisable until after five years from the date of grant. The exercise price of each NSO may not be less than 85% of the fair market value of the common stock at the date of grant. The ISOs outstanding as of December 31, 1999, generally become exercisable in varying amounts over a two-to-five year period from the date of grant. NSOs also generally become exercisable over a two-to-five year period. Each of these plans also provides for stock appreciation rights, which may be granted with respect to any stock option. No stock appreciation rights have been granted as of December 31, 1999. During 1991, a Nonemployee Directors' Stock Option Plan was approved which authorized the grant of stock options to purchase up to 15,000 shares of common stock to the nonemployee directors of the Company. The exercise price of the options is equal to the fair market value of the shares on the date of grant, which is generally the later of initiation of the plan or the date of election to the Board of Directors. In March 1993, the Board of Directors suspended further grants under this plan. Vesting of the options occurred upon the participation by a director in a Board meeting. As of December 31, 1999, options to purchase 10,800 shares of common stock had been granted and were fully vested. The Company recorded the difference between the fair market value of the underlying common stock and the exercise price as compensation expense over the vesting period. F-12 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 The Company's 1992 Nonemployee Directors' Stock Option Plan authorizes the granting of options to purchase up to 40,000 shares of common stock to the nonemployee directors of the Company. The plan was originally approved by the stockholders on May 17, 1993, and an amendment to the plan was approved by the stockholders on May 10, 1994. No options were granted during 1999 or 1998. During 1994, in order to effect a repricing of certain of these options, options to purchase 16,225 shares of common stock were amended to become options to purchase 14,854 shares of common stock at an exercise price of $17.50 per share. The amended options generally become exercisable from one to two years later than as originally granted. The Company recorded deferred compensation in 1993 of approximately $114,000 based on the amount that the fair market value of the Company's common stock exceeded the exercise price on the date the options were approved by the stockholders. The Company began in July 1993 to amortize such deferred compensation over approximately five years and has recorded compensation expense of approximately $1,000 in 1998. By December 31, 1998, all deferred compensation had been expensed. By its terms, the plan terminated on December 31, 1997 (although such event does not affect outstanding options granted under the plan). A summary of the status of the Company's 1986 Plan, 1993 Plan and nonemployee directors' stock option plans as of December 31, 1999 and 1998 and changes during the years ended on those dates is presented below:
1999 1998 ---------------------------- ---------------------------- Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price ------- ------ ---------------- ------ ---------------- Options outstanding at beginning of year 103,823 $20.20 199,951 $20.60 Forfeited/canceled ( 16,547) $18.39 ( 96,128) $21.30 ------- -------- Outstanding at year end 87,276 $20.59 103,823 $20.20 ======= ======== Options exercisable at year end 83,396 $20.65 93,608 $20.30 ======= ========
F-13 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 The Company granted other options to certain directors and consultants:
1999 1998 ---------------------------- ---------------------------- Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price - ------- ------ ---------------- ------ ---------------- Options outstanding at beginning of year 13,326 $38.40 14,559 $37.10 Forfeited/canceled ( 2,525) $29.88 ( 1,233) $21.50 ------- ------ Outstanding at year end 10,801 $40.36 13,326 $38.40 ======= ====== Options exercisable at year end 10,801 $40.36 13,326 $38.40 ======= ======
The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------- ---------------------------------------------------- Number Weighted-Average Weighted- Number Weighted-Average Weighted- Range of Outstanding at Remaining Life Average Outstanding at Remaining Life Average Exercise Prices December 31, 1999 (in years) Exercise Price December 31, 1999 (in years) Exercise Price ---------------------------------------------------------------------- ---------------------------------------------------- $10 - $20 61,900 5.03 $17.00 59,901 4.96 $17.10 $20.01 - $30 29,718 4.58 $25.30 27,837 4.44 $25.40 $30.01 - $40 2,000 4.79 $35.00 2,000 4.79 $35.00 $80 - $87.50 4,459 2.31 $80.60 4,459 2.00 $80.60 ------- ------- 98,077 94,197 ======= =======
During 1992, the Company granted options to purchase 5,000 shares of the Company's common stock at $26.00 per share to the former president of the Company. These options began vesting upon the occurrence of certain events. The Company recorded $170,000 in deferred compensation based on the difference between the fair value of the underlying common stock on the date the specified event incurred and the exercise price of $26.00 per share. Deferred compensation was amortized over the applicable vesting periods. F-14 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 5. Income Taxes ------------ As of December 31, 1999, the Company has approximately $78 million of net operating loss carryforwards ("NOL") for income tax purposes and approximately $3.1 million of research and development and foreign tax credit carryforwards available to offset future federal income tax, subject to limitations for alternative minimum tax. The NOL's and credit carryforwards are subject to examination by the tax authorities and expire in various years from 2000 through 2013. The components of income tax expense are as follows (in 000's): 1999 1998 ---- ---- Federal-current $ 5 $ - State-current 28 - Foreign-current 200 - ---- ---- $233 $ - ==== ==== The income tax expense for the year ended December 31, 1999 and 1998 is different from the amount computed by multiplying total earnings before income taxes by the statutory Federal income tax rate of 34%. The reasons for this difference and the related tax effect are as follows (in 000's): 1999 1998 ------ ------ Income (loss) before income taxes $2,883 ($4,654) Statutory federal income tax rate 34% 34% ------ ------ Expected income tax (benefit) 980 ( 1,582) State tax 18 - Change in valuation allowance, net of operating losses ( 842) 1,578 Expiring research credit carryforwards 15 - Other, net 62 4 ------ ------ Provision for income tax $ 233 $ - ====== ====== Deferred income taxes reflect the net effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. F-15 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 The tax effect of significant items comprising the Company's net deferred tax asset as of December 31, 1999 are as follows (in 000's): Net operating loss carryforwards $26,390 Research and development and other credits 3,062 Other, net 2,430 ------- 31,882 Valuation allowance ( 31,882) ------- Net deferred tax asset $ - ======= Management believes the deferred tax assets as of December 31, 1999 do not satisfy the realization criteria set forth in SFAS No. 109 and has recorded a valuation allowance for the entire net tax asset. By recording a valuation allowance for the entire amount of future tax benefits, the Company has not recognized a deferred tax benefit for income taxes in its statements of operations. The difference between the Company's recorded income tax benefit and that computed by applying the statutory Federal income tax rate to its loss before income taxes is due primarily to the valuation allowance established to offset the Company's net deferred tax asset. Included in the net operating loss carryforward is approximately $1.7 million related to income tax deductions for the Company's stock option plans. The tax benefit of such deductions will be recorded as an increase in additional paid-in capital when realized. The Tax Reform Act of 1986 contains provisions that may limit the NOL and credit carryforwards available to be used in any given year upon the occurrence of certain events, including significant changes in ownership of a company of greater than 50% within a three-year period results in an annual limitation on the Company's ability to utilize its NOLs and tax credit carryforwards from tax periods prior to the ownership change. F-16 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 6. CP-0127 Development Corporation ------------------------------- In February 1992, the Company completed a private placement of 709,687 units (as discussed below) to unrelated third parties representing total subscriptions of approximately $8,516,000. Each unit was comprised of one share of CDC common stock and three warrants for Cortech common stock, of which one warrant expired each on December 31, 1998, 1997 and 1996 (Note 4). The net proceeds received by CDC were allocated to CDC as consideration for its common stock and to the Company for the issuance of the warrants in the amounts of approximately $5,284,000 and $3,232,000, respectively. Such allocation was based on the relative fair market value of the Company's warrants and the CDC common stock. In connection with the formation of CDC, the Company granted to CDC, under the terms of a technology license agreement, an exclusive license to certain technology for human pharmaceutical use within the United States, Canada and Europe for $1,000,000. CDC, in turn, granted to Cortech a worldwide exclusive right and license to the technology that is developed by Cortech. In connection with the technology license agreement referred to above, the Company entered into a research and development agreement with CDC. Since December 31, 1997, the Company was not engaged in active development of any compounds covered by the license agreement. The Company was granted an option by the purchasers of the CDC common stock to purchase all, but not less than all, of the 709,687 shares of CDC common stock outstanding. The purchase option was exercisable at any date before December 31, 1998, based on an exercise price of $75.40 per share of CDC common stock in 1998. The option has expired unexercised. 7. Employee Retirement Plan ------------------------ The Company provided a defined contribution 401(k) plan for eligible employees which was discontinued effective December 31, 1999. Employee contribution to the plan was voluntary. In 1994, the Company voluntarily began contributing an amount equal to 25% of a covered employee's contribution to a maximum of 1% of compensation. The Company's contributions to the plan totaled approximately $200 in 1999 and $6,000 in 1998. F-17 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 1999 and 1998 8. Legal Proceedings ----------------- On February 27, 1998, a complaint was filed in the Court of Chancery of the State of Delaware, naming the Company, the Company's then current directors and BioStar as defendants. The complaint, filed by a stockholder of the Company, claims to be on behalf of a class of all the Company's stockholders and contends that the then current directors of the Company breached their fiduciary duties to the Company's stockholders when they unanimously approved the proposed combination with BioStar. The complaint originally sought to enjoin the proposed combination with BioStar as well as the operation of the Company's stockholder rights plan and sought an order rescinding the proposed combination with BioStar upon its consummation as well as compensatory damages and costs. The complaint was amended following termination of the proposed BioStar merger to seek to force an auction of the Company's assets and other relief. Thereafter, the parties negotiated a settlement of the claims. Pursuant to the terms of the settlement a payment in the amount of $235,000 shall be made to Cortech on behalf of Defendants by Cortech's directors and officers insurance carrier. If the Court approves the settlement, Plaintiff's counsel intend to ask the Court for an award of attorneys' fees and expenses in an amount not to exceed $160,000. Defendants have agreed that they will not oppose such an application up to $160,000 and Cortech has agreed to pay, from the settlement proceeds, the fees and expenses actually awarded by the Court up to $160,000. Such settlement will be presented to the Court of Chancery at a hearing scheduled for April 6, 2000. Copies of the Notice to Shareholders relating to the settlement are available upon request from the Company. F-18 ITEM 8. - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS - ------- ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------------- On January 14, 1999, Arthur Andersen LLP ("Arthur Andersen") resigned as independent auditors of the financial statements of Cortech, Inc. (the "Company") as of and for the year ended December 31, 1998. On January 14, 1999, the Board of Directors of the Company retained PricewaterhouseCoopers LLP ("PwC"), Certified Public Accountants, as its certifying accountant for the fiscal year ended December 31, 1998. No report on the financial statements of the Company issued by Arthur Andersen during the last two fiscal years prior to their resignation contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, nor were there any disagreements during the last two fiscal years and through January 14, 1999, between Arthur Andersen and the Company concerning any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved would have required Arthur Andersen to make reference to the subject matter thereof in connection with its report. During the last two fiscal years prior to their resignation and through January 14, 1999, none of the events listed in items (1) through (3) of Item 304(b) of Regulation S-K have occurred; and during such period the Company has not consulted with PwC concerning any matter referred to under paragraphs (i) or (ii) of Item 304(a)(2) of Regulation S-K. II-8 PART III ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- The information required under this item is incorporated by reference to Cortech's 2000 Proxy Statement. ITEM 10. - EXECUTIVE COMPENSATION - -------- ---------------------- The information required under this item is incorporated by reference to Cortech's 2000 Proxy Statement. ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------- The information required under this item is incorporated by reference to Cortech's 2000 Proxy Statement. ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information required under this item is incorporated by reference to Cortech's 2000 Proxy Statement. III-1 PART IV ITEM 13. - EXHIBITS - -------- -------- The following exhibits are filed as part of this report: Exhibit Number Description of Document - ------- ----------------------- 3.1 (a) Certificate of Incorporation of Cortech, Inc. as amended.(1) (b) Certificate of Amendment of Certificate of Incorporated of Cortech, Inc.(11) 3.3 Certificate of Designation for Series A Junior Participating Preferred Stock.(6) 3.4 Amended and Restated ByLaws of Cortech, Inc.(9) 4.1 Reference is made to Exhibits 3.3 and 10.30(9) 4.2 Specimen certificate for the Common Stock of Cortech, Inc.(1) 10.28 Sponsored Research and License Agreement, dated February 13, 1987, between The John Hopkins University and the Company.(1) 10.29 License Agreement, dated June 30, 1997 between The Research Foundation of the State University of New York and the Company.(1) 10.30 Stock Purchase Agreement dated July 8, 1994, between the Company and the Research Foundation of State University of New York.(5) 10.31 Royalty Buyout Agreement dated July 8, 1994, between the Company and the Research Foundation of State University of New York.(5) 10.39 Amended and Restated 1986 Incentive Stock Option Plan of the Company.(1)** 10.40 1991 Non-employee Directors' Stock Option Plan of the Company.(2)** IV-1 Exhibit Number Description of Document - ------- ----------------------- 10.41 Amended and Restated 1992 Non-employee Directors' Stock Option Plan of the Company.(4)** 10.42 1993 Employee Stock Purchase Plan of the Company, as amended.(3)** 10.43 1993 Equity Incentive Plan of the Company, as amended.(10)** 10.47 Executive Officers' Severance Benefit Plan.(7)** 10.55 Amendment No. 1 To Executive Officers' Severance Benefit Plan.(7)** 10.57 Second Amendment of the Research, Development and License Agreement dated April 23, 1997, between Ono and the Company.(8)* 10.94 Executive Compensation Benefits Continuation Agreement between the Company and Kenneth R. Lynn, dated October 14, 1997, as amended February 12, 1998.(9)** 10.97 Form of Option Agreement for Directors' Non-Plan Options.(10)** 10.98 Termination Agreement between the Company and Diarmuid Boran dated January 29, 1999.(11)** 27.1 Financial Data Schedule.(12) Reports on Form 8-K On February 17, 2000, the Company filed a Form 8-K reporting that on February 15, 2000, the Vice Chancellor of the Court of Chancery of the State of Delaware in and for New Castle County, signed a Scheduling Order For Approval of Settlement of a previously filed and amended complaint. The complaint was brought by a stockholder of the Company as (i) a proposed class action on behalf of all the Company's stockholders and (ii) derivative in the right of the Company, against the members of Cortech's former board of directors. IV-1 - -------------------------- (1) Filed as an exhibit to the Company's Registration Statement of Form S-1, filed October 13, 1992, file number 33-53244, or amendments thereto and incorporated herein by reference. (2) Filed as an exhibit to the Company's annual report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. (3) Filed as an exhibit to the Company's Registration Statement on Form S-8, filed March 29, 1993, file number 33-60242, or amendments thereto and incorporated herein by reference. (4) Filed as an exhibit to the Company's annual report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (5) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference. (6) Filed as an exhibit to Cortech Inc.'s annual report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (7) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (8) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Registration Statement on Form S-4, filed February 17, 1998, file number 33-46445 and incorporated herein by reference. (10) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (11) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-KSB for the year ended December 31, 1998, and incorporated herein by reference. (12) Filed herewith. * Subject to Confidential Treatment Order. ** Compensatory Plan. IV-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORTECH, INC. March 30, 2000 By: /s/ Paul O. Koether ----------------------- Paul O. Koether Chairman and Chief Executive Officer March 30, 2000 By: /s/ Sue Ann Itzel --------------------- Sue Ann Itzel Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Capacity Date ------------------- --------------------- --------------- /s/ Paul O. Koether Chairman and Director March 30, 2000 ------------------- Paul O. Koether (Principal Executive Officer) /s/ John W. Galuchie, Jr. President and Director March 30, 2000 ------------------------- John W. Galuchie, Jr. /s/ James L. Bicksler Director March 30, 2000 --------------------- James L. Bicksler /s/ Sheri Perge Director March 30, 2000 --------------- Sheri Perge /s/ Leonard M. Tannenbaum Director March 30, 2000 ------------------------- Leonard M. Tannenbaum IV-4 -----END PRIVACY-ENHANCED MESSAGE-----