-----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, STFtO3MarlYJF3lETV4ScVLHxU5V6DLNzq3E7nw3jcJBRmjzznyUXo/tI8tuA6db cp0p0WqJvSqoPMyaTFAzdg== 0000728478-03-000003.txt : 20030331 0000728478-03-000003.hdr.sgml : 20030331 20030331094626 ACCESSION NUMBER: 0000728478-03-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 1934 Act SEC FILE NUMBER: 000-20726 FILM NUMBER: 03627422 BUSINESS ADDRESS: STREET 1: 376 MAIN STREET CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9082341881 MAIL ADDRESS: STREET 1: 376 MAIN STREET STREET 2: P.O. BOX 74 CITY: BEDMINSTER STATE: NJ ZIP: 07921 10KSB 1 crtq10k.txt 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, 2002 [ ] 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, P.O. 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, 2002 were approximately $209,000. As of February 28, 2003, there were 3,596,280 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 SmallCap Market, was approximately $4.9 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 2002 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. Background - ---------- Cortech, Inc. ("Cortech" or the "Company") was incorporated in 1982 in Colorado and reincorporated in Delaware in August of 1991. Cortech 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 had not been outlicensed. In response to disappointing test results and its loss of collaborative partner funding for international research, Cortech implemented a series of reductions in force which resulted in the Company having no compensated employees since February 1999, and effectively discontinued all internal research and development activities. In addition, Cortech decommissioned its laboratories and sold all of its remaining scientific, technical and office equipment. ONO Collaboration - ----------------- 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 had been collaborating (the "1999 Agreement"). 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. The Agreement anticipated the development of an orally active elastase inhibitor as a new therapy for patients with chronic inflammatory diseases. I-1 Prior to the 1999 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. Were Ono's studies of the technology 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 were not assured and in any event could be expected only after several more years of continued evaluation of the technology by Ono. Arbitration of Dispute I - ------------------------ Subsequent to March 31, 2001, disagreements arose between Cortech and Ono as to the status of Ono's license rights under the 1999 Agreement. On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. Prior to the dispute, Ono had designated ONO-6818 as a "Developed Compound," thereby giving Ono exclusive rights to this compound under the 1999 Agreement. In the arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to Ono-6818. The arbitration panel concurred with Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. Arbitration of Dispute II - ------------------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this I-2 development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so-called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating Developed Compounds, as defined in such agreement. Cortech intends to defend the Arbitration vigorously. At the same time, Cortech will continue to seek other partners to develop the elastase technology, although there can be no assurance that it will succeed in this endeavor. 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. 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 and certain viral 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, I-3 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. Elastase 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 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 United Therapeutics Corp. ("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 was to pay the future I-4 costs of developing the compound for the potential treatment of pulmonary diseases. The agreement was terminated by UT in June 2000 and resulted in no further revenues. 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. The agreement was subsequently amended with the final agreement executed in June 1999. See above " Ono Collaboration". 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. I-5 Bradycor (TM) (Deltibant or CP-0127). Bradycor is Cortech's lead, first-generation bradykinin antagonist which may potentially have therapeutic application in the management of traumatic brain injury ("TBI"). The rationale for its use in TBI is based on the important contribution of inflammatory processes to the full expression of the injury. A number of these inflammatory processes are mediated by bradykinin receptor mechanisms, including neutrophil activation and migration, stimulation of vascular endothelial cells and interactions with neuronal and non-neuronal cell populations found within the brain parenchyma. Following brain injury, these processes result in the production of inflammatory cytokines, endothelial retraction, blood brain barrier disruption and neuronal death. Thus, compounds such as Bradycor which can block these bradykinin mediated effects may potentially be efficacious in ameliorating the inflammatory aspects of TBI. Until mid-1995, Cortech's work on Bradycor concentrated primarily on the treatment of sepsis, but two Phase II clinical trials, completed in 1994 and 1995, failed to provide sufficient evidence of efficacy to warrant additional development in that indication. Concurrent with the sepsis studies, Cortech also undertook a small, pilot Phase II study in patients with large focal cerebral contusions (a type of injury that represents a subset of the spectrum of TBI). In that study, Bradycor had significant beneficial effects, compared with placebo, on 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 Neurochirurgica. 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 I-6 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. 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 I-7 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. 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. I-8 Cortech has patent protection related to the following: protease inhibitors, bradykinin antagonists and immunology vaccines and treatments. Cortech holds twenty-one United States patents and has numerous United States patent applications pending which concern protease inhibitors. Cortech holds eleven United States patents and has numerous United States patent applications pending which concern bradykinin antagonists. In addition, Cortech holds fifty-four 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 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 I-9 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 the right to utilize Bradycor in the United States, Canada and Europe for certain indications, while Cortech retained rights to Bradycor in other parts of the world. Cortech has the right to market, sell and license the technology licensed to CDC or to sell products derived therefrom and is subject to a royalty obligation in favor of CDC. 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 I-10 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 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 approaches 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 I-11 information that negatively impacts the safety or effectiveness of the approved drug, could cause the FDA to withdraw approval to market the product. The time period between when a promising new compound is identified and when human testing is initiated is generally referred to as the preclinical development period. A series of pharmacologic studies are also performed during preclinical development to identify the essential characteristics of the compound's behavior. In addition, both in vitro and in vivo animal toxicity studies are required to characterize the toxicity profile of the compound. Preclinical studies are regulated by the FDA under a series of regulations called 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. I-12 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. Once adequate data have been obtained in clinical testing to demonstrate that the compound is both safe and effective for the intended use, all of the data available is submitted to the FDA in a New Drug Application ("NDA"). The FDA reviews this application and, once it decides that adequate data are available which show that the new compound is both safe and effective, approves the drug for marketing. The approval process may take several years and is a function of a number of variables including the quality of the submission and data presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and the extent of agreement between the sponsor and the FDA on the product labeling. There can be no assurance that any new drug will successfully proceed through this approval process or that it will be approved in any specific period of time. The FDA may, during its review of an NDA, ask for additional data, and may also require postmarketing testing, including potentially expensive Phase IV studies. In addition, postmarketing surveillance to monitor the safety and effectiveness of the drug must be done by the sponsor. The FDA may in some circumstances impose additional restrictions on the use and/or promotion of the drug 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 I-13 ensure approval in other countries, nor does approval by any other country ensure approval decisions by the 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 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 I-14 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. 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 - ------- ----------------- Arbitration I - ------------- Subsequent to March 31, 2001, disagreements arose between Cortech and Ono as to the status of Ono's license rights under the 1999 Agreement. On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. In the arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to Ono-6818. The arbitration panel concurred with Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration I-15 Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. Arbitration II - -------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so-called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating Developed Compounds, as defined in such agreement. Cortech intends to defend the Arbitration vigorously. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None I-16 PART II ------- ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- At February 28, 2003, the Company had approximately 435 stockholders of record. The Company's common stock currently trades on the NASDAQ SmallCap Market under the symbol "CRTQ". On February 28, 2003, the closing price per share of the common stock was $2.51. On October 1, 2002 the Company announced that the Nasdaq Stock Market approved the Company's request to transfer its common stock to the Nasdaq SmallCap Market from the Nasdaq National Market effective October 4, 2002. Cortech's stock will continue to trade under the symbol "CRTQ." The Company requested the transfer to the Nasdaq SmallCap Market because it was unable to meet the Minimum Market Value of Publicly Held Shares requirement for continued listing on the Nasdaq National Market as set forth in Marketplace Rule 4450(e)(1). On May 14, 2001, the Company announced a 100% stock dividend. The record date and distribution date for the stock dividend was May 22, 2001 and June 1, 2001, respectively. 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 and SmallCap Market Systems. All closing prices have been adjusted to reflect the stock dividend. Low High --- ---- Calendar Quarter Ended: 2002 ---- March 31 $ 3.58 $ 4.10 June 30 3.23 4.00 September 30 2.75 3.40 December 31 2.28 2.75 2001 ---- March 31 $ 3.64 $ 4.25 June 30 3.75 5.30 September 30 3.75 4.12 December 31 3.90 4.15 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. II-1 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. General - ------- Cortech is 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 which resulted in the Company having no compensated employees since February 1999, and effectively discontinued all internal research and development activities. In addition, Cortech decommissioned its laboratories, and sold all 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. 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, consisting of interest income were $209,000 and $551,000 for the years ended December 31, 2002 and 2001, respectively. Lower yields on invested balances was the primary reason for this decrease. II-2 General and administrative expenses increased from $795,000 in 2001 to $1,306,000 in 2002. This increase was due principally to higher legal fees incurred in connection with the Ono Arbitration. For more information on the Ono Arbitration see Item 3.-Legal Proceedings. Liquidity and Capital Resources - ------------------------------- At December 31, 2002, the Company had cash and cash equivalents of $12.1 million. Cash equivalents consisted of U.S. Treasury Bills with original maturities of three months or less and yields ranging from 1.076% to 1.219%. Working capital at December 31, 2002 was approximately $11.9 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. Net cash of approximately $1,056,000 was used in operations in 2002 due primarily to the net loss of $1,097,000. In 2001, net cash of approximately $222,000 was used in operations, due primarily to the net loss of $236,000. In 2001, cash of $6.6 million was provided by investing activities due to the maturity of short-term investments. Net cash of $332,000 was used in financing activities in 2002, due to the repurchase of common stock and net cash of $48,000 was used in financing activities in 2001, due to the issuance and repurchase of common stock. Factors Which May Affect Future Results - --------------------------------------- Future earnings of the Company are dependent on interest rates earned on the Company's invested balances and expenses incurred, particularly expenses associated with an arbitration with Ono. Other Disclosures - Related Party Transactions - ---------------------------------------------- A management fee of $15,000 per month is paid to Asset Value Fund Limited Partnership ("AVF") for management services performed for the Company. Management services include, among other things, SEC filings, negotiation, evaluating merger and acquisition proposals, licensing, accounting and shareholder relations. The Company believes that the management fee is materially less than the cost for the Company to perform these services. AVF is the beneficial owner of approximately 44% of the Company's Common Stock at December 31, 2002. II-3 Other Matters - ------------- Net Operating Loss Carryforwards and Tax Credits: As of December 31, 2002, Cortech had approximately $86 million of net operating loss carryforwards ("NOL") for income tax purposes. 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. The NOL's and credit carryforwards expire in various years from 2005 through 2022. Cortech's use of operating loss carryforwards and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code. New Accounting Standards - ------------------------ In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (FAS) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends FAS 123, Accounting for Stock-Based Compensation. In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The amendments to Statement 123 in paragraphs 2(a)-2(e) of this Statement shall be effective for financial statements for fiscal years ending after December 15, 2002. As previously mentioned, additional disclosures will be required by this standard, and the FASB is expecting to begin a project to evaluate fair value accounting for stock compensation. Cortech is currently evaluating the impact of these pronouncements to determine the effect, if any, they may have on the financial positions and results of operations. II-4 ITEM 7. - FINANCIAL STATEMENTS - ------- -------------------- The financial statements filed with this item are listed below: Report of Independent Accountants Financial Statements: Balance Sheet as of December 31, 2002 Statements of Operations for the Years ended December 31, 2002 and 2001 Statements of Stockholders' Equity for the Years ended December 31, 2002 and 2001 Statements of Cash Flows for the Years ended December 31, 2002 and 2001 Notes to Financial Statements II-5 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 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, 2002, and the results of its operations and its cash flows for each of the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP March 7, 2003 F-1 CORTECH, INC. BALANCE SHEET December 31, 2002 (in 000's) ASSETS - ------ Current assets: Cash and cash equivalents $ 12,060 Other assets 7 --------- Total assets $ 12,067 ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accrued liabilities $ 189 --------- Total liabilities 189 --------- Commitments and contingencies (Note 7) 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; 3,596,280 shares issued and outstanding 7 Additional paid-in capital 99,446 Accumulated deficit ( 87,575) --------- Total stockholders' equity 11,878 --------- Total liabilities and stockholders' equity $ 12,067 ========= See accompanying notes to financial statements. F-2 CORTECH, INC. STATEMENTS OF OPERATIONS (in 000's, except per share amounts) Year Ended December 31, --------------------------- 2002 2001 -------- --------- Revenues: Interest income $ 209 $ 551 Expenses: General and administrative 1,306 795 -------- -------- Loss before income taxes ( 1,097) ( 244) Benefit for income taxes - ( 8) -------- -------- Net loss ($ 1,097) ($ 236) ======== ======== Basic and diluted net loss per share ($ .30) ($ .06) ======== ======== Weighted average common shares outstanding 3,644 3,700 ======== ======== See accompanying notes to financial statements. F-3 CORTECH, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4) (in 000's) Common Stock Additional ------------ Paid-In Accumulated Shares Amount Capital Deficit Total ------ ------ ------- ------- ----- Balance, December 31, 2000 3,704 $ 7 $ 99,827 ($ 86,242) $ 13,592 Issuance of common stock 50 - 175 - 175 Repurchase of common stock ( 58) - ( 223) - ( 223) Net loss - - - ( 236) ( 236) Effect of stock dividend - - ( 1) - ( 1) ----- ------ -------- -------- -------- Balance, December 31, 2001 3,696 7 99,778 ( 86,478) 13,307 Repurchase of common stock ( 100) - ( 332) - ( 332) Net loss - - - ( 1,097) ( 1,097) ----- ------ -------- -------- -------- Balance, December 31, 2002 3,596 $ 7 $ 99,446 ($ 87,575) $ 11,878 ===== ====== ======== ======== ======== See accompanying notes to financial statements. F-4 CORTECH, INC. STATEMENTS OF CASH FLOWS (in 000's) Year Ended December 31, ----------------------- 2002 2001 ------- -------- Cash flows from operating activities: Net loss ($ 1,097) ($ 236) Adjustments: Decrease in other assets 31 43 Increase (decrease) in accrued liabilities 10 ( 29) -------- -------- Net cash used in operating activities ( 1,056) ( 222) -------- -------- Cash flows from investing activities: Maturities of short-term investments - 6,611 -------- -------- Net cash provided by investing activities - 6,611 -------- -------- Cash flows from financing activities: Issuance of common stock - 175 Repurchase of common stock ( 332) ( 223) -------- -------- Net cash used in financing activities ( 332) ( 48) -------- -------- Net increase (decrease) in cash and cash equivalents ( 1,388) 6,341 Cash and cash equivalents at beginning of period 13,448 7,107 -------- -------- Cash and cash equivalents at end of period $ 12,060 $ 13,448 ======== ======== Supplemental disclosure cash flow information: Cash paid for taxes $ - $ - ======== ======== See accompanying notes to financial statements. F-5 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 1. Organization ------------ Cortech, Inc. ("Cortech" or the "Company") is 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 which resulted in the Company having no compensated employees since February 1999, and effectively discontinued all internal research and development activities. In addition, Cortech decommissioned its laboratories, and sold its scientific, technical office equipment and leasehold improvements. As a result of these actions, Cortech no longer has the staff or operative facilities required to recommence internal research and development activities. Cortech'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 accounting principles generally accepted in the United States of America 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. F-6 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. 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 had no short-term investments at December 31, 2002. Basic and Diluted Net Income (Loss) Per Share --------------------------------------------- Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options. The shares used for basic earnings (loss) per common share and diluted earnings per common share are reconciled below. (Shares in Thousands) 2002 2001 ---- ---- Average shares outstanding for basic loss per share 3,644 3,700 Dilutive effect of stock options - - ----- ----- Average shares outstanding for diluted loss per share 3,644 3,700 ===== ===== F-7 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. 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 (the "1999 Agreement"). 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. Were 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 F-8 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 only after several more years of continued evaluation of the technology by Ono. Arbitration I ------------- Subsequent to March 31, 2001, disagreements arose between Cortech and Ono as to the status of Ono's license rights under the 1999 Agreement. On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. In the arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to Ono-6818. The arbitration panel concurred with Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. Arbitration II -------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so- F-9 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating Developed Compounds, as defined in such agreement. Cortech intends to defend the Arbitration vigorously. At the same time, it will continue to seek other partners to develop its patented technology. 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. Common Stock ------------ On May 14, 2001, the Company announced a 100% stock dividend. The record date for the stock dividend was May 22, 2001 and the distribution date was June 1, 2001. Accordingly, all common share information has been restated to reflect this stock dividend. On October 30, 2000, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 320,000 shares of its Common Stock at prices deemed favorable from time to time in the open market or in privately negotiated transactions subject to market conditions, the Company's financial position and other considerations. As of December 31, 2002, 158,140 shares of Common Stock were repurchased for approximately $555,000. All shares repurchased were returned to the status of authorized but unissued shares. Stock Option Plans ------------------ 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. F-10 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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 and net income per share would have been decreased to the pro forma amounts indicated below: 2002 2001 ---- ---- Net loss As reported (in $000's) ($ 1,097) ($ 236) Pro forma (in $000's) ($ 1,223) ($ 361) Basic net loss per share: As reported ($ .30) ($ .06) Pro forma ($ .34) ($ .10) Diluted net loss per share: As reported ($ .30) ($ .06) Pro forma ($ .34) ($ .10) All options granted to date have an exercise price equal to the market price of the Company's stock on the grant date. For purposes of calculating the compensation cost consistent with FASB Statement 123, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used: no dividend yield; expected volatility of 113.85 percent in 2000; risk free interest rates of 5.00 percent; and weighted average expected lives of 10 years. No options were granted in 2002 or 2001. F-11 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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 300,000 shares of common stock. Although 81,420 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. On June 19, 2000, the Board of Directors restored the 1986 Plan. In 2000, 230,000 stock options were issued under the 1986 Plan at prices ranging from $3.50 to $3.6875, the approximate fair market values at the time of grant. No options were granted in 2002 or 2001. The Company's 1993 Equity Incentive Plan ("1993 Plan"), approved by the stockholders on May 10, 1994, authorizes the issuance of 340,000 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, 2002 generally become exercisable in varying amounts over a five-year period from the date of grant. Although 74,170 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. On June 19, 2000, the Board of Directors restored the 1993 Plan. In 2000, 150,000 stock options were issued under this plan at $3.50 per share, the approximate fair market value at the time of grant. No options were granted in 2002 or 2001. 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 F-12 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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, 2002, 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, 2002. During 1991, a Non-employee Directors' Stock Option Plan was approved which authorized the grant of stock options to purchase up to 30,000 shares of common stock to the non-employee 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. No options were granted in 2002 or 2001. 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. The Company's 1992 Non-employee Directors' Stock Option Plan authorizes the granting of options to purchase up to 80,000 shares of common stock to the non-employee 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 2002 or 2001. F-13 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 A summary of the status of the Company's 1986 Plan, 1993 Plan and non-employee directors' stock option plans as of December 31, 2002 and 2001 and changes during the years ended on those dates is presented below: 2002 2001 ----------------------------- ------------------------ Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding at beginning of year 485,952 $ 5.59 554,552 $ 5.65 Forfeited/canceled ( 20,750) 4.95 ( 18,600) 13.00 Exercised - - ( 50,000) 3.50 ------- ------- Outstanding at year end 465,202 5.62 485,952 5.59 ======= ======= Options exercisable at year end 465,202 5.62 359,286 6.32 ======= ======= The Company granted other options to certain directors and consultants: 2002 2001 ------------------------------- ---------------------- Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding at beginning of year 21,002 $ 20.139 21,602 $ 20.18 Forfeited/canceled ( 8,168) 40.00 ( 600) 13.00 ------ ------ Outstanding at year end 12,834 7.50 21,002 20.39 ====== ====== Options exercisable at year end 12,834 7.50 21,002 20.39 ====== ====== F-14 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 For options outstanding and exercisable at December 31, 2002, the exercise price ranges are: 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, 2002 (in years) Exercise Price December 31, 2002 (in years) Exercise Price --------------- ----------------- ---------- -------------- ----------------- ---------- -------------- $3.50-$10.00 433,801 6.01 $ 4.94 433,801 6.01 $ 4.94 10.01-20.00 44,235 2.83 12.92 44,235 2.83 12.92 ------- ------- 478,036 478,036 ======= =======
5. Income Taxes ------------ As of December 31, 2002, the Company has approximately $86 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 2005 through 2022. The components of income tax expense (benefit) are as follows (in 000's): 2002 2001 ---- ---- Federal-current $ - ($ 8) State-current - - Foreign-current - - ---- ---- $ - ($ 8) ==== ==== F-15 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 The income tax expense (benefit) for the year ended December 31, 2002 and 2001 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): 2002 2001 ---- ---- Loss before income taxes ($ 1,097) ($ 244) Statutory federal income tax rate 34% 34% ------- ------- Expected income tax benefit ( 373) ( 83) Change in valuation allowance of operating losses 373 83 Other, net - ( 8) ------- ------- Provision (benefit) for income tax $ - ($ 8) ======= ======= 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. The tax effect of significant items comprising the Company's net deferred tax asset as of December 31, 2002 are as follows (in 000's): Net operating loss carryforwards $ 29,140 Research and development and other credits 3,060 -------- 32,200 Valuation allowance ( 32,200) -------- Net deferred tax asset $ - ======== Management believes the deferred tax assets as of December 31, 2002 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. F-16 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. 6. Legal Proceedings ----------------- Arbitration I ------------- Subsequent to March 31, 2001, disagreements arose between Cortech and Ono as to the status of Ono's license rights under the 1999 Agreement. On August 7, 2001, Cortech filed a Demand for Arbitration with the American Arbitration Association against Ono seeking resolution of the dispute. The arbitration concluded in August 2002, purportedly resolving any questions concerning the ownership of Cortech's Intellectual Property and Ono's development rights. In the arbitration, among other things, Ono argued that it had the right to name 42 other compounds as "Developed Compounds" giving it the same rights with respect to these other compounds as it had with respect to ONO-6818. Cortech argued that Ono was entitled to designate only one of the 42 compounds as a back-up to Ono-6818. The arbitration panel concurred with Cortech and provided Ono with 20 days to name one compound as the back-up which Ono did. Ono also argued and the Arbitration Panel agreed that 15 other compounds were "Improved Compounds" to which Ono was entitled to exclusive rights for oral uses. However the Arbitration Panel gave Cortech the joint right to develop these "Improved Compounds" for non oral use subject to paying a reasonable royalty on any Products developed outside the United States. The Arbitration Panel also held that Ono had no license, express or implied, to Cortech's patent portfolio. F-17 CORTECH, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 Arbitration II -------------- On November 1, 2002, the Company announced that Ono had advised it of Ono's intention to discontinue the development of ONO-6818 because of potential liver toxicity. In a series of subsequent letters, Ono sought to renegotiate its rights to make compounds using Cortech's technology. When Cortech declined, on February 7, 2003 Ono admitted that it had been developing what it called "Improved Compounds" since April of 2002 and that it had not disclosed this development as required by the 1999 Agreement, assuming that these new compounds met the Agreement's definition of "Improved Compounds". In further breach of the 1999 Agreement, Ono refused to reveal the chemical structure of these so-called "Improved Compounds" and announced that Ono had filed a patent in Japan. Within days, Cortech received a notice of Arbitration in which Ono claimed that its rights to develop and designate compounds for development as commercial products extended beyond the termination of the period provided in the 1999 Agreement for designating Developed Compounds, as defined in such agreement. Cortech intends to defend the Arbitration vigorously. Cortech intends to defend the Arbitration vigorously. 7. Related Party Transactions -------------------------- A management fee of $15,000 per month is paid to Asset Value Fund Limited Partnership ("AVF") for management services performed for the Company. Management services include, among other things, SEC filings, negotiation, evaluating merger and acquisition proposals, licensing, accounting and shareholder relations. The Company believes that the management fee is materially less than the cost for the Company to perform these services. AVF is the beneficial owner of approximately 44% of the Company's Common Stock at December 31, 2002. F-18 Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- -------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None II-6 PART III -------- ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- The information required under this item is incorporated by reference to Cortech's 2003 Proxy Statement. ITEM 10. - EXECUTIVE COMPENSATION - -------- ---------------------- The information required under this item is incorporated by reference to Cortech's 2003 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 2003 Proxy Statement. ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information required under this item is incorporated by reference to Cortech's 2003 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)** 99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Reports on Form 8-K - ------------------- None IV-2 - -------------------------- (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. * 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 31, 2003 By: /s/ Paul O. Koether -------------------------- Paul O. Koether Chairman and Chief Executive Officer March 31, 2003 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 31, 2003 - --------------------------- (Principal Executive Paul O. Koether Officer) /s/ John W. Galuchie, Jr. President and Director March 31, 2003 - ------------------------- John W. Galuchie, Jr. /s/ James L. Bicksler Director March 31, 2003 - --------------------------- James L. Bicksler /s/ Sheri Perge Stettner Director March 31, 2003 - ------------------------ Sheri Perge Stettner /s/ Qun Yi Zheng Director March 31, 2003 - --------------------------- Qun Yi Zheng IV-4 CERTIFICATIONS I, Paul O. Koether, certify that: 1. I have reviewed this annual report on Form 10-KSB of Cortech, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 31, 2003 /s/ Paul O. Koether -------------------------- Paul O. Koether Chairman CERTIFICATIONS I, Sue Ann Itzel, certify that: 1. I have reviewed this annual report on Form 10-KSB of Cortech, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 31, 2003 /s/ Sue Ann Itzel --------------------------- Sue Ann Itzel Chief Financial Officer Treasurer and Secretary Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), Paul O. Koether, the Chairman of Cortech, Inc., (the "Company"), and Sue Ann Itzel, the Chief Financial Officer, Treasurer and Secretary of the Company each hereby certifies that, to the best of their knowledge: 1. The Company's Annual Report on Form 10-KSB for the period ended December 31, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: March 31, 2003 /s/ Paul O. Koether - ---------------------------------- Paul O. Koether Chairman /s/ Sue Ann Itzel - --------------------------------- Sue Ann Itzel Chief Financial Officer, Treasurer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----