10-Q 1 corvas_10q-063002.txt FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ---------------- Commission file number 0-19732 ------- CORVAS INTERNATIONAL, INC. (Exact name of Registrant as specified in its charter) DELAWARE 33-0238812 (State or other jurisdiction (I .R.S. Employer of incorporation or organization) Identification No.) 3030 SCIENCE PARK ROAD SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices and zip code) (858) 455-9800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class) Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- At August 8, 2002, there were 27,567,968 shares of Common Stock, $0.001 par value, of the Registrant issued and outstanding. CORVAS INTERNATIONAL, INC.
INDEX Page ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001 1 Condensed Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited) 2 Condensed Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited) 3 Notes to Condensed Financial Statements (unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 None Item 3. Defaults Upon Senior Securities 22 None Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 23 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 23 (b) Reports on Form 8-K 23 SIGNATURES 24 CERTIFICATION 24
PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CORVAS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS In thousands (unaudited)
JUNE 30, 2002 DECEMBER 31, 2001 ------------- ----------------- ASSETS ------ Current assets: Cash and cash equivalents $ 7,246 $ 4,332 Short-term debt securities held to maturity and time deposits, partially restricted 71,586 72,359 Receivables 1,382 1,865 Note receivable from related party 250 250 Other current assets 1,268 382 ------------ ------------ Total current assets 81,732 79,188 ------------ ------------ Debt issuance costs 79 89 Long-term debt securities held to maturity 22,556 35,608 Property and equipment, net 2,600 2,118 ------------ ------------ $ 106,967 $ 117,003 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 864 $ 925 Accrued liabilities 1,013 1,123 Accrued benefits 96 -- Accrued leave 617 546 ------------ ------------ Total current liabilities 2,590 2,594 ------------ ------------ Convertible notes payable 12,141 11,736 Deferred rent 243 216 Stockholders' equity: Common stock 27 27 Additional paid-in capital 227,610 227,430 Accumulated deficit (135,644) (125,000) ------------ ------------ Total stockholders' equity 91,993 102,457 Commitments and contingencies ------------ ------------ $ 106,967 $ 117,003 ============ ============ See accompanying notes to condensed financial statements. 1
CORVAS INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS In thousands, except per share data (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- REVENUES: Royalties $ 46 $ 37 $ 73 $ 67 Research grants -- 57 -- 96 ---------- ---------- ---------- ---------- Total revenues 46 94 73 163 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Research and development 5,001 9,817 9,725 15,020 General and administrative 1,206 1,296 2,473 2,495 ---------- ---------- ---------- ---------- Total costs and expenses 6,207 11,113 12,198 17,515 ---------- ---------- ---------- ---------- Loss from operations (6,161) (11,019) (12,125) (17,352) OTHER INCOME (EXPENSE): Interest income 916 1,659 1,896 3,676 Interest expense (209) (198) (415) (393) ---------- ---------- ---------- ---------- 707 1,461 1,481 3,283 ---------- ---------- ---------- ---------- Net loss and other comprehensive loss $ (5,454) $ (9,558) $ (10,644) $ (14,069) ========== ========== ========== ========== Basic and diluted net loss per share $ (0.20) $ (0.35) $ (0.39) $ (0.51) ========== ========== ========== ========== Shares used in calculation of basic and diluted net loss per share 27,507 27,400 27,505 27,380 ========== ========== ========== ========== See accompanying notes to condensed financial statements. 2
CORVAS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS In thousands (unaudited)
Six Months Ended June 30, ------------------------------- 2002 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,644) $ (14,069) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 452 296 Amortization of premiums and discounts on investments 564 (120) Amortization of debt issuance costs 10 10 Non-cash interest expense on convertible notes payable 405 384 Gain on sale of property and equipment (5) -- Stock compensation expense 38 96 Changes in assets and liabilities: Decrease in receivables 483 222 Increase in other current assets (886) (88) Increase (decrease) in accounts payable, accrued liabilities, accrued benefits and accrued leave (4) 2,476 Increase in deferred rent 27 49 ------------- ------------- Net cash used in operating activities (9,560) (10,744) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments held to maturity (32,847) (81,138) Proceeds from maturity of investments held to maturity 34,369 85,542 Proceeds from sale of investments held to maturity 11,739 1,981 Proceeds from sale of property and equipment 5 -- Purchases of property and equipment (934) (1,032) ------------- ------------- Net cash provided by investing activities 12,332 5,353 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 142 402 Capital contribution -- 225 ------------- ------------- Net cash provided by financing activities 142 627 ------------- ------------- Net increase (decrease) in cash and cash equivalents 2,914 (4,764) Cash and cash equivalents at beginning of period 4,332 14,153 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,246 $ 9,389 ============= ============= See accompanying notes to condensed financial statements. 3
CORVAS INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) (1) The Company ----------- Corvas International, Inc. (the "Company") was incorporated on March 27, 1987 under the laws of the State of California. In July 1993, the Company reincorporated in the State of Delaware. The Company is focused on development of new therapeutics that target serine proteases, the largest human protease gene family, for the treatment of cardiovascular disease and cancer. (2) Basis of Presentation --------------------- The interim financial information contained herein is unaudited but, in management's opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The condensed financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-K. Results for the interim periods are not necessarily indicative of results for other interim periods or for the full year. (3) Net Loss Per Share ------------------ Net loss per share for the three months ended June 30, 2002 and 2001 is computed using the weighted-average number of common shares outstanding. Options totaling 3,211,000 and 2,356,000 shares were excluded from the calculation of diluted net loss per share for the six months ended June, 2002 and 2001 respectively. In addition, 3,745,000 and 3,394,000 shares from the assumed conversion of the 5.5% convertible senior subordinated notes issued in 1999 have been excluded from this calculation as of June 30, 2002 and 2001, respectively. (4) Debt Securities Held to Maturity -------------------------------- Certain securities that were no longer in compliance with the Company's investment policy were sold prior to maturity during the six months ended June 30, 2002. (5) Subsequent Event ---------------- On July 22, 2002, the Company announced a significant workforce reduction of nearly 40% of its research and administrative staff, representing 42 employees. This restructuring is part of an extensive strategic realignment of the Company's research and development programs designed to focus resources on the most advanced programs. The restructuring will result in a third quarter restructuring charge of up to $2.0 million and, along with other cost-cutting measures, is expected to result in an annualized cost savings of more than $8.0 million. 4 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM WHAT IS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS." THE TERMS "CORVAS," "WE," "US" AND "OUR" REFER TO CORVAS INTERNATIONAL, INC. OVERVIEW We are a biopharmaceutical company focused on the development of new therapeutics that address today's largest medical markets, including cardiovascular disease and cancer. We are currently developing our cardiovascular drug candidate, a novel proprietary injectable anticoagulant known as rNAPc2, for the treatment of people affected by acute coronary syndromes, specifically unstable angina and non-ST-segment elevation myocardial infarction, or UA/NSTEMI. In anticipation of studies in UA/NSTEMI, we have completed a Phase IIa safety study in patients undergoing elective coronary angioplasty. Our cancer research programs are focused on the development of new therapies, including monoclonal antibodies and synthetic prodrugs, that target serine protease enzymes associated with the growth and spread of cancerous tumors. We have collaborations with Abgenix, Inc. and Dyax Corp. to discover, develop and commercialize therapeutic antibodies against cancer. Our Protease Activated Cancer Therapy, or PACT, research program employs a synthetic conjugate molecule, or prodrug, approach designed to target tumor-associated proteases followed by the activation of potent, cytotoxic drugs to kill tumor cells. We currently have no products for sale and are focused on research and development and clinical trial activities. We have not been profitable on an annual basis since inception and we anticipate that we will incur substantial additional operating losses over the next several years as we progress in our cardiovascular and cancer programs. To date, we have funded our operations primarily through the sale of equity and debt securities, payments received from collaborators and interest income. At June 30, 2002, we had an accumulated deficit of $135.6 million. Unless we enter into any new collaborative agreements that include funding for research and development or funding for the continued development of clinical drug candidates, we expect that our sources of revenue, if any, for the next several years will continue to primarily consist of interest income. We may not enter into any additional collaborative agreements and may not recognize any revenue pursuant to collaborative agreements in the future. Based upon results from a Phase IIb study, Pfizer terminated our collaborative agreement with them in June 2002 covering UK-279,276, formerly known as neutrophil inhibitory factor or rNIF, an anti-inflammatory agent being developed for the treatment of reperfusion injury associated with ischemic stroke. Accordingly, we will not recognize any additional revenue pursuant to this agreement. Since we have never had a product candidate advance beyond Phase II clinical trials, the process of developing our product candidates will require significant additional research and development, preclinical and clinical testing, and regulatory approvals prior to commercialization of a product candidate. Pending appropriate regulatory approvals, we intend to initiate a Phase II clinical study of rNAPc2 in UA/NSTEMI patients in the second half of 2002. The primary objective of the proposed Phase II trial is to determine a safe and effective dose of rNAPc2 for the prophylaxis of ischemic complications 5 of UA/NSTEMI. We also plan to continue to build on selected preclinical cancer programs. In July 2002, we announced a significant workforce reduction as part of an extensive strategic alignment of our research and development programs. As a result of this reduction in personnel and other cost-cutting measures, we anticipate that our research and development and, to a lesser degree, general and administrative expenditures in 2002 will be less than those incurred in 2001. However, we expect to continue to incur substantial operating losses for the foreseeable future. In addition, we continue to pursue and evaluate various possible strategic transactions to expand our pipeline of clinical drug candidates, including in-licensing or acquiring complementary products, technologies or companies, or combining with another company. If we in-license or acquire products, technologies or companies, we expect that our operating expenses would increase as a result. SUBSEQUENT EVENT On July 22, 2002 we announced a significant workforce reduction of nearly 40% of our research and administrative staff, representing 42 employees. This restructuring is part of an extensive strategic realignment of our research and development programs designed to focus resources on the continued development of rNAPc2 and on selected cancer programs including our antibody collaborations with Abgenix and Dyax, as well as our PACT program. The restructuring will result in a third quarter restructuring charge of up to $2.0 million, of which $290,000 is expected to be paid in 2003. Along with other cost-cutting measures, the restructuring is expected to result in an annualized cost savings of more than $8.0 million. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 AND 2001 REVENUES. Our operating revenues, comprised solely of royalties from the license of recombinant tissue factor to two Johnson & Johnson companies, decreased to $46,000 in the three months ended June 30, 2002 from $94,000 in the corresponding period of 2001. This $48,000 decrease was primarily attributable to the completion of a research grant in August 2001. We do not expect to receive any revenues under collaborative agreements in 2002. In the event that we enter into new collaborative agreements, it is possible that we may recognize related revenue; however, we cannot predict whether or when we will enter into new collaborative agreements, if any. Even if we do enter into new collaborative agreements, we may not recognize any revenue under these agreements in 2002 or in subsequent years. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the quarter ended June 30, 2002 decreased to $5.0 million, or 81% of our total expenses, compared to $9.8 million, or 88%, in the corresponding quarter of 2001. This $4.8 million decrease was primarily attributable to expenses associated with the manufacturing of rNAPc2 in the first half of 2001. This decrease was partially offset by an increased number of scientists working on our cancer programs and costs incurred in anticipation of our planned Phase II rNAPc2 trial. Pending appropriate regulatory approvals, we expect to initiate a double-blinded, placebo-controlled Phase II clinical trial of rNAPc2 for the 6 treatment of UA/NSTEMI in the second half of this year. However, as a result of the recently-announced workforce reduction, we expect our research and development expenses for 2002 to decrease from the 2001 levels. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in the three months ended June 30, 2002 decreased to $1.2 million from $1.3 million in the same quarter of 2001. This $90,000 decrease was mainly the result of lower utility costs. NET OTHER INCOME. Net other income, which consists of interest income and interest expense on our convertible notes payable, was $707,000 in the second quarter of 2002, compared to nearly $1.5 million one year earlier. This $754,000 decrease was due to a combination of lower balances available for investment and the significant reduction in interest rates. Unless our cash position increases, we expect that our interest income will continue to decline in subsequent quarters. SIX MONTHS ENDED JUNE 30, 2002 AND 2001 REVENUES. Operating revenues for the six months ended June 30, 2002 decreased to $73,000 from $163,000 in the same period of 2001. This $90,000 decrease was primarily attributable to the completion of a research grant in August 2001. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the six months ended June 30, 2002 decreased to $9.7 million, or 80% of our total costs, from $15.0 million, or 86% of our total costs, one year earlier. This $5.3 million decrease was primarily attributable to the expenses associated with manufacturing of rNAPc2 in the first half of 2001. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses remained at $2.5 million for both of the six month periods ended June 30, 2002 and 2001. NET OTHER INCOME. Net other income decreased to $1.5 million for the six months ended June 30, 2002 from $3.3 million one year earlier. This $1.8 million decrease was due to lower balances available for investment and the significant reduction in interest rates. We expect that we will continue to incur substantial additional operating losses over the next several years as we pursue our clinical trials and research and development efforts. We also expect both our expenses and losses to fluctuate from quarter to quarter and that the fluctuations may, at times, be substantial. LIQUIDITY AND CAPITAL RESOURCES Since inception, our operations have been financed primarily through public offerings and private placements of our equity and debt securities, payments received through collaborative agreements, and interest income earned on cash and investment balances. Our principal sources of liquidity are cash and cash equivalents, time deposits and short- and long-term held to maturity debt securities, which, net of $303,000 in restricted time deposits, totaled $101.1 million as of June 30, 2002. Working capital at June 30, 2002 was approximately $79.1 million. We invest available cash in accordance with an investment policy set by our board of directors, which has established objectives of preserving principal, maintaining adequate liquidity and maximizing income. Our policy provides guidelines concerning the quality, term and liquidity of investments. We presently invest our excess cash primarily in debt instruments of corporations with strong credit ratings and government-backed debt obligations. In the six months ended June 30, 2002, we used net cash of $9.6 million in our operating activities, the majority of which was provided by our investing activities. 7 In August and October of 1999 we issued and sold, in two private financings, a total of 2,000,000 shares of our common stock for $2.50 per share and 5.5% convertible senior subordinated notes due in August 2006 in an aggregate principal amount of $10.0 million. Net proceeds of $14.8 million were raised in these financings. At the option of the note holder, the principal balance of both notes is convertible into shares of our common stock at $3.25 per share, subject to certain adjustments. Interest on the outstanding principal amounts of these notes accretes at 5.5% per annum, compounded semi-annually, with interest payable upon redemption or conversion. Upon maturity, these notes will have an accreted value of $14.6 million. At our option, the accreted interest portion of both notes may be paid in cash or in our common stock priced at the then-current market price. We have agreed to pay any applicable withholding taxes on behalf of the note holder that may be incurred in connection with the accreted interest, which are estimated and accrued at 30% of the annual accretion. We may redeem the notes any time after August 18, 2002 upon payment of the outstanding principal and accreted interest, although we have no current intent to redeem these notes. In April 2002, we entered into an exclusive collaboration agreement with Abgenix, Inc. to discover, develop and commercialize fully-human monoclonal antibodies against two selected antigens from our portfolio of membrane-bound serine proteases. Under the terms of the collaboration, Abgenix will use its human antibody technologies to generate and select antibodies against the Corvas targets. Both companies will have the right to co-develop and commercialize, or, if co-development is not elected, to solely develop and commercialize any antibody products discovered during the collaboration. Both companies will share equally in the product development costs and any profits from product sales of products successfully commercialized from any co-development efforts. In September 2001, we entered into a collaboration agreement with Dyax Corp. to discover, develop and commercialize novel cancer therapeutics focused on serine protease inhibitors for two targets that we isolated and characterized. Under the terms of this agreement, both companies will assume joint development of any product candidates that may be identified and will share commercialization rights and profits from any marketed products. In July 2001, we entered into an agreement with Incyte Genomics, Inc. for a multi-year subscription to Incyte's LifeSeq(R) Gold database for use in our cancer research programs focused on serine proteases. The LifeSeq Gold database provides researchers with a view of the entire human genome by integrating proprietary expressed sequence tag and full-length gene sequence information, mapping data and public genomic sequence information. We have non-exclusive rights to Incyte's full-length gene program in addition to sequence-verified cDNA clones, or copies of genes to facilitate the identification and validation of new drug targets in the serine protease gene family. Our agreement requires us to pay an annual subscription fee and, in the event that any products based on the information acquired from this database are developed and commercialized, we would also be required to make milestone and royalty payments. Over the next several years, we expect additional operating losses and negative cash flows from operations. Assuming an estimated restructuring charge of nearly $2.0 million and estimated annual savings of approximately $8.0 million from our recently-announced workforce reduction and other cost-cutting measures, we currently expect our burn rate for 2002 to be in the mid $20 million range. Our current estimate assumes that we commence our Phase II UA/NSTEMI trial in the second half of 2002 and does not account for any potential strategic transactions. We expect to fund our working capital and capital expenditure requirements during the next twelve months from our available cash and investments and, based on our current estimates, we believe that our available cash and investments should be sufficient to satisfy our anticipated funding requirements for at least the next several years. 8 Our material external commitments for the balance of 2002 and for 2003, based on contractual obligations and/or our current estimates, are as follows: Payments Due/Estimated by Year ------------------------------ 2002 2003 ----------- ----------- Commitments (In thousands) ----------- Operating lease $ 655 $ 1,345 Capital expenditures (1) 415 900 Committed research and development (2) 6,600 16,500 Workforce reduction termination costs (3) 1,315 290 ----------- ----------- $ 8,985 $ 19,035 =========== =========== Our current estimate of our future burn rate and capital requirements may change for many reasons, some of which are beyond our control, including, but not limited to: o whether and when we begin our planned double-blinded, placebo-controlled, dose-ranging Phase II clinical study of rNAPc2 in patients with UA/NSTEMI; o the rate of patient recruitment in our planned Phase II clinical study of rNAPc2 in patients with UA/NSTEMI; o the timing and magnitude of expenses incurred to further develop rNAPc2; o the costs and timing of regulatory approvals related to rNAPc2; o the progress related to our collaboration agreements with Abgenix and Dyax, including the selection of any preclinical candidates; o the progress on, and scope of, our internally-funded cancer programs; o our success in entering into future collaborative agreements, if any; o the costs of, and our success in, acquiring and integrating complementary products, technologies or companies, if any; o competing technological and market developments; o the costs we incur in obtaining and enforcing patent and other proprietary rights; and o the costs we incur in defending against potential infringement of the patents of others or in obtaining a license to operate under such patents. Our expected cash requirements may vary materially from those now anticipated for many reasons. We recently announced a significant workforce reduction of nearly 40% of our research and administrative staff. The objective of this restructuring was to conserve cash by reducing expenses to allow us to -------------------- 1) Based on our current projections for 2002 and 2003. These estimates may change for many reasons including, but not limited to, the reasons listed above. 2) Includes both contractually-committed items and costs estimated for 2002 and 2003 for rNAPc2 and for our cancer programs. These future estimates may change for many reasons including, but not limited to, the reasons listed above. 3) Excludes estimated asset impairment and other non-cash charges included in the estimated restructuring charge. 9 focus on the programs that we believe have the highest probability of success, since we do not expect to be able to raise capital through the sale of equity securities in the near term. However, in the future we may need to raise additional capital through strategic or other financings or through collaborative relationships. Our ability to raise additional funds through the sale of securities depends in part on investors' perceptions of the biotechnology industry, in general, and of Corvas, in particular. Market prices for securities of biotechnology companies, particularly Corvas, have been highly volatile and may continue to be volatile in the future. Accordingly, additional funding may not be available on acceptable terms or at all. If additional funds are raised by issuing securities, our stockholders will experience dilution, which may be substantial, especially if our stock price remains at the current low levels. If we are not able to raise adequate funds in the future, we may be required to significantly delay, further scale back or discontinue one or more additional drug discovery programs, clinical trials or other aspects of our operations. CRITICAL ACCOUNTING POLICIES Our significant accounting policies, which have been consistently applied in all material respects, are more fully described in Note 2 to our Notes to Financial Statements included in our Annual Report on Form 10-K. Certain of our accounting policies require the application of judgment and estimates by management, which may be affected by different assumptions and conditions. These estimates are typically based on historical experience, terms of existing contracts, trends in the industry and information available from other outside sources, as appropriate. We believe the estimates and judgments associated with our reported amounts are appropriate in the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We consider our most critical accounting policy to be revenue recognition. We apply Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which reflects the SEC's views on revenue recognition. We recognize revenue from collaborative agreements as the related research and development activities are performed under the terms of our agreements; any advance payments received in excess of amounts earned are classified as deferred revenue. Non-refundable license fees are recognized when we receive such payments, absent any continuing involvement. We recognize milestone payments as revenue upon achievement of the milestones specified in our agreements. We recognize research grant revenue as the related research is performed under the terms of the grant. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In accordance with our investment policy, we do not invest in derivative financial instruments or any other market risk sensitive instruments. Our available cash is invested in high quality fixed income investments that we intend to hold to maturity. We believe that our interest rate market risk is limited, and that we are not exposed to significant changes in fair value because our investments are held to maturity and are primarily short-term in nature. The fair value of each investment approximates its amortized cost. For purposes of measuring interest rate sensitivity, we have assumed that the similar nature of our investments allow us to aggregate their value. The carrying amount of all held to maturity investments as of June 30, 2002 is $93.8 million and they have a weighted-average interest rate of 3.1%. 10 Considering our investment balances as of June 30, 2002, rates of return and the fixed rate nature of the convertible notes payable that were issued in the second half of 1999, an immediate 10% change in interest rates would not have a material impact on our financial condition or results of operations. Since the $10.0 million aggregate principal of the 5.5% convertible senior subordinated notes that we issued is convertible into common stock at $3.25 per share at the option of the holder, there is underlying market risk related to an increase in our stock price or an increase in interest rates that may make conversion of these notes into common stock beneficial to the holder. Conversion of these convertible notes will have a dilutive effect on our common stock. RISK FACTORS WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NEVER BECOME PROFITABLE. We have experienced significant operating losses since our inception in 1987. At June 30, 2002, we had an accumulated deficit of approximately $135.6 million. We have not earned any revenues from commercial sales of any therapeutic products. We have funded our operations principally from sales of our equity and debt securities, payments received from collaborators and interest income. Pfizer recently terminated our collaboration with them covering UK-279,276, or rNIF, and we do not currently have any committed sources of external funding. We will continue to incur substantial additional operating losses over the next several years as we pursue our clinical trials and research and development efforts. To become profitable, we, either alone or with collaborators, must successfully identify, develop, manufacture and market new product candidates. We do not expect to generate revenues from product sales or royalties for at least a number of years, and it is possible that we will never have significant product sales revenue or receive significant royalties on any licensed product candidates. WE HAVE NEVER HAD A PRODUCT CANDIDATE ADVANCE BEYOND PHASE II CLINICAL TRIALS AND WE DO NOT HAVE, AND MAY NEVER DEVELOP, ANY COMMERCIAL DRUGS OR OTHER PRODUCTS THAT GENERATE REVENUES. We are at an early stage of development as a biopharmaceutical company, and we do not have any commercial products. We expect to begin a Phase II clinical trial for our only product candidate, rNAPc2, in the second half of 2002. rNAPc2 will require significant additional development, clinical trials, regulatory clearances and additional investment before it can be commercialized. Our product development efforts may not lead to commercial drugs, either because the product candidates fail to be safe and effective in clinical trials or because we have inadequate financial or other resources to pursue the program through the clinical trial process. We do not expect to be able to market rNAPc2 or any future product candidates for a number of years, if at all. If we are unable to develop any commercial drugs, or if such development is delayed, we will be unable to generate revenues, which may require that we raise additional capital through financings, scale back or discontinue some part of our operations, or cease our operations entirely. WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF THE CLINICAL TRIALS FOR OUR RNAPC2 PRODUCT CANDIDATE AND ANY FUTURE PRODUCT CANDIDATES, IF ANY. 11 We have completed a Phase IIa clinical trial of rNAPc2 in patients undergoing elective coronary angioplasty to establish safety prior to conducting additional clinical trials in patients with UA/NSTEMI. Subject to government approval, we intend to enter rNAPc2 into a Phase II clinical study in UA/NSTEMI patients in the second half of 2002. Our business prospects depend on our ability, alone or with collaborators, to complete patient enrollment in clinical trials, to obtain satisfactory results, to obtain required regulatory approvals and to successfully commercialize our products. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in patient enrollment in the trials may result in increased costs, program delays, or both, which could slow down our product development and approval process. In addition, we may not be able to commence the planned Phase II clinical trial for rNAPc2 in UA/NSTEMI patients in the second half of 2002 due to regulatory or other reasons. If clinical trials for any of our product candidates are not completed or conducted as planned, due to any reason including, but not limited to, the product candidate not being safe or effective, the commercialization of our product candidates would likely be delayed or prevented, our business would likely be materially harmed and our stock price would likely decline. In addition, if we do not receive required regulatory approvals, we may never commercialize any products and therefore may never be profitable. OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE NEGATIVE, WE MAY BE FORCED TO STOP DEVELOPING PRODUCT CANDIDATES IMPORTANT TO OUR FUTURE. The results of preclinical studies and initial clinical trials of our product candidates will not necessarily predict the results obtained from later-stage clinical trials. For example, Pfizer conducted successful preclinical trials, several Phase I trials and a Phase IIa trial of UK-279,276, but the results of a Phase IIb trial indicated that UK-279,276 did not have an effect on recovery in stroke patients. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy endpoints despite having progressed through initial clinical testing. In addition, the data collected from clinical trials of our product candidates may not be sufficient to support FDA or other regulatory approval. rNAPc2, or any of our future product candidates, may not be safe for human use. Administering any product candidates we may develop to humans may produce undesirable side effects. These side effects could interrupt, delay or cause us or the FDA to halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. Along with the FDA or other regulatory authorities, we or our collaborators may suspend or terminate clinical trials at any time. THE FDA HAS NEVER APPROVED ANY CORVAS PRODUCT CANDIDATE AND WE MAY NEVER BE PERMITTED TO COMMERCIALIZE ANY PRODUCT WE MAY DEVELOP. We have never had a product candidate advance beyond the early stages of development and none have received the regulatory clearance required from the FDA or any other regulatory body to be commercially marketed and sold. While our goal is to commence commercial sales of rNAPc2 and any other product candidates we may develop, we may not achieve this goal for any product candidate in the expected timeframe, or at all. The regulatory clearance process typically takes many years and is extremely expensive, and regulatory clearance is never guaranteed. If we fail to obtain regulatory clearance for our current or future 12 product candidates, we will be unable to market and sell any products and therefore may never be profitable. As part of the regulatory clearance process, we must conduct, at our own expense or our collaborators' expense, preclinical research and clinical trials for each product candidate to demonstrate safety and efficacy. In addition, it is difficult to predict if the FDA will agree with the design of our clinical trials. Even though earlier clinical trial results for a particular compound and a specific indication may indicate that the compound appears to be safe and effective, the FDA may suggest or even require that additional trials be completed before advancing to later-stage trials. The number of preclinical studies and clinical trials that will be required varies depending on many factors including the product, disease or condition that the product is in development for, and any regulations applicable to a particular product. The regulatory process typically also includes a review of the manufacturing process to ensure compliance with applicable standards. The FDA can delay, limit or not grant approval for many reasons, including: o a product candidate may not demonstrate sufficient safety or efficacy; o FDA officials may interpret data from preclinical testing and clinical trials in different ways than we interpret it, or require data that is different from what was obtained in our clinical trials; o the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of our collaborators; and o the FDA may change its approval policies or adopt new regulations. The FDA also may approve a product candidate for fewer indications than requested or may condition approval on the performance of post-marketing studies for a product candidate. Even if we receive FDA and other regulatory approvals, our product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. In addition, any marketed product and its manufacturer continue to be subject to strict regulation after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons. Any delay in, or failure to receive approval for, any of our products could materially harm our business, financial condition and results of operations. IF WE FAIL TO OBTAIN ADDITIONAL FINANCING, WE MAY BE UNABLE TO COMPLETE THE DEVELOPMENT AND COMMERCIALIZATION OF RNAPC2 AND ANY OTHER PRODUCT CANDIDATES WE MAY DEVELOP, OR TO CONTINUE OUR RESEARCH AND DEVELOPMENT PROGRAMS. Our operations have consumed substantial amounts of cash since inception. Our sources of revenue have been primarily limited to research funding, license fees and milestone payments from corporate collaborators. In 2001, we had a net loss of approximately $23.4 million and we anticipate that 13 our 2002 net loss will be larger than in 2001. We expect that we will continue to spend substantial amounts on research and development, including amounts spent on our planned Phase II UA/NSTEMI trial of rNAPc2 and clinical trials for future product candidates, if any. Our future burn rate and capital needs will depend on many factors, including, but not limited to, those outlined in "Liquidity and Capital Resources." We do not have committed external sources of funding. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our drug discovery programs, clinical trials or other aspects of our operations. We also could be required to: o seek corporate collaborators for programs at an earlier stage than would be desirable to maximize the rights to future product candidates that we retain; and/or o relinquish or license rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable to us than might otherwise be available. IF WE DO NOT FIND COLLABORATORS FOR RNAPC2 AND FOR ANY OTHER PRODUCT CANDIDATES WE MAY DEVELOP, WE MAY HAVE TO REDUCE OR DELAY OUR RATE OF PRODUCT DEVELOPMENT AND/OR INCREASE OUR EXPENDITURES. Our strategy for developing, manufacturing and commercializing our products includes entering into various relationships with pharmaceutical and/or biotechnology companies to advance our programs and reduce our expenditures on each program. We may not be able to negotiate additional collaborations on acceptable terms or at all. If we are not able to establish additional collaborative arrangements, in the future we may have to reduce or delay further development of rNAPc2 or some of our cancer programs and/or increase our expenditures and undertake further development activities at our own expense. Future clinical development of rNAPc2 in deep vein thrombosis, or DVT, will depend on securing an appropriate development partner. If we elect to increase our expenditures to fund our development programs, we will need to obtain additional capital, which may not be available on acceptable terms or at all. We may have to rely on our collaborators for all aspects of the programs, including the conduct of research and development that the collaborator chooses to conduct, clinical trials and the regulatory approval process. We may have no control over the amount and timing of resources that our collaborators dedicate to the development of our licensed product candidates, if any. Our ability to generate royalties from our collaborators depends on our collaborators' abilities to establish the safety and efficacy of our product candidates, obtain regulatory approvals and achieve market acceptance of our products. Collaborative agreements generally pose the following risks: o collaborators may not pursue further development and commercialization of compounds resulting from collaborations or may elect not to renew research and development programs; o collaborators may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product 14 candidate, repeat or conduct new clinical trials, require a new formulation or encounter other manufacturing difficulties of a product candidate for clinical testing; o collaborators could independently develop, or develop with third parties, products that could compete with our future products; o the terms of our agreements with current or future collaborators may not be favorable to us in the future; o a collaborator with marketing and distribution rights to one or more products may not commit enough resources to the marketing and distribution of our products, limiting our potential revenues from the commercialization of a product; o disputes may arise delaying or terminating the research, development or commercialization of our product candidates, or result in significant litigation or arbitration; o collaborations may be terminated and we will experience increased capital requirements if we elect to pursue further development of the product candidate; and o collaborators may not have the financial or other resources to fund the research, development or commercialization of our product candidates, and we will experience increased capital requirements if we elect to pursue further development of these candidates. In addition, there continues to be a significant number of business consolidations among and between large pharmaceutical and biopharmaceutical companies that have resulted in a reduced number of potential future collaborators. If business combinations involving our collaborators were to occur, the effect could be to diminish, terminate or cause delays in one or more of our product development programs. IF WE ARE SUCCESSFUL IN ACQUIRING COMPLEMENTARY PRODUCTS, TECHNOLOGIES OR COMPANIES, WE MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF SUCH ACQUISITIONS, AND OUR CASH REQUIREMENTS MAY INCREASE SIGNIFICANTLY. We continue to actively pursue and evaluate various possible strategic transactions, including in-licensing or acquiring complementary products, technologies or businesses. If we in-license or acquire products, technologies or companies, we may not be able to successfully integrate any products, technologies, companies or personnel that we might acquire without a significant expenditure of financial and management resources, if at all. We expect that our operating expenses and cash requirements would increase as a result, and such increase could be significant. Further, we may fail to realize the anticipated benefits of any acquisition or investment, or it may not ultimately be consistent with our overall objectives. We may have to incur debt or issue equity securities to pay for such acquisition, which could be dilutive to our stockholders. We could also be exposed to contingent liabilities that could negatively impact our business operations. However, we may not be successful in our efforts to acquire any such complementary products, technologies or companies. 15 OUR COMPETITORS MAY DEVELOP AND MARKET DRUGS THAT ARE LESS EXPENSIVE, MORE EFFECTIVE, OR SAFER, OR REACH THE MARKET SOONER, WHICH MAY DIMINISH OR ELIMINATE THE COMMERCIAL SUCCESS OF ANY PRODUCTS WE MAY COMMERCIALIZE. The biopharmaceutical market is highly competitive. We expect that the competition from other biopharmaceutical companies, pharmaceutical companies, universities and public and private research institutions will increase. Almost all of the larger biopharmaceutical companies have developed, or are attempting to develop, products that will compete with products we may develop, including some that are in advanced stage clinical trials. In particular, many other companies and institutions have active programs for cancer and cardiovascular disease against which ours may compete. It is possible that our competitors will develop and market products that are less expensive and more effective than our future products or that will render our products obsolete. It is also possible that our competitors will commercialize competing products before any of our products are marketed. Many of our competitors have substantially greater financial, technical, research and other resources than we do. We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. FAILURE TO RETAIN OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, OUR CHIEF SCIENTIFIC OFFICER AND OTHER KEY PERSONNEL COULD DECREASE OUR ABILITY TO OBTAIN FINANCING, CONDUCT CLINICAL TRIALS OR DEVELOP OUR PRODUCT CANDIDATES. We depend on our key personnel, particularly our President and Chief Executive Officer, Randall E. Woods, and our Chief Scientific Officer, George P. Vlasuk, Ph.D. The loss of either of these individuals may prevent us from achieving our business objective of commercializing our product candidates. Both of these employees have employment agreements with us, but the agreements provide for "at-will" employment with no specified term. In addition, we maintain key man life insurance for Dr. Vlasuk in the amount of $1.0 million. Our future success will also depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing and governmental regulation. We face intense competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. If we are unsuccessful in our recruiting and retention efforts, our business operations will be harmed. BECAUSE WE HAVE LIMITED MANUFACTURING EXPERIENCE AND RELY ON THIRD-PARTY MANUFACTURERS, WE ARE UNABLE TO CONTROL THE AVAILABILITY OF, AND MANUFACTURING COSTS FOR, OUR PRODUCT CANDIDATES. In order to be successful, our product candidates must be capable of being manufactured in sufficient quantities, in compliance with regulatory requirements, and at an acceptable cost. We have only limited experience in pilot scale manufacturing. For larger-scale production, which is required for clinical testing, we expect that we will continue to rely on third parties to manufacture our product candidates. If we cannot continue to contract for large-scale manufacturing capabilities on acceptable terms, or if we encounter delays or difficulties with manufacturers, we may not be able to conduct clinical trials as planned. This would delay or cause us to halt submission of our product candidates for regulatory clearance, and may prevent us from selling our products and achieving profitability. Also, third-party manufacturers may be unable to manufacture any product candidate we develop in commercial quantities on a cost-effective basis. 16 We may need to expand our existing relationships or establish new relationships with third-party manufacturers for our current and future product candidates. We may be unable to establish or maintain relationships with third-party manufacturers on acceptable terms, or at all. Our dependence on third parties may reduce our profit margins and delay or limit our ability to develop and commercialize our products on a timely and competitive basis. Furthermore, third-party manufacturers may encounter manufacturing or quality control problems in connection with the manufacture of our product candidates and may be unable to obtain or maintain the necessary governmental licenses and approvals to manufacture any product candidates. Any such failure could delay or preclude receiving regulatory approvals to sell our product candidates. IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO COMPETE AS EFFECTIVELY. Our success depends in part on our ability to obtain and enforce patent protection for our products, both in the United States and other countries, and operate without infringing the proprietary rights of third parties. The scope and extent of patent protection for our product candidates is uncertain and frequently involves complex legal and factual questions. We cannot predict the breadth of claims that will be allowed and issued in patents related to biotechnology or pharmaceutical applications. Once patents have issued, we cannot predict how the claims will be construed or enforced. In addition, statutory differences between countries may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not patentable in many countries outside of the United States. We rely on patent and other intellectual property protection to prevent our competitors from developing, manufacturing and marketing products based on our technology. Our patents may not be enforceable and they may not afford us protection against competitors, especially since there is a lengthy lead time between when a patent application is filed and when it is actually issued. Because of this, we may infringe on intellectual property rights of others without being aware of the infringement. If a patent holder believes that one of our product candidates infringes on their patent, they may sue us even if we have applied, or received patent protection, for our technology. If another party claims we are infringing their technology, we could face a number of issues, including the following: o defending a lawsuit, which is very expensive and time consuming; o paying a large sum for damages if we are found to be infringing; o being prohibited from selling or licensing our products or product candidates until we obtain a license from the patent holder, who may refuse to grant us a license or only agree to do so on unfavorable terms. Even if we are granted a license, we may have to pay substantial royalties or grant cross-licenses to our patents; and o redesigning our drug so it does not infringe on the patent holder's technology. This may not be possible and, even if possible, it would require substantial additional capital and would delay commercialization. The coverage claimed in a patent application can be significantly narrowed before a patent is issued, either in the United States or abroad. We do not know whether any of our pending or future patent applications will result in the issuance of patents. To the extent patents have been issued or will be 17 issued, we do not know whether these patents will be subjected to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Furthermore, patents already issued to us, or patents that may issue on our pending applications, may become subject to dispute, including interference proceedings in the United States to determine priority of invention or opposition proceedings in foreign countries contesting the validity of issued patents. We also rely on trade secrets, proprietary know-how and continuing inventions to develop and maintain our competitive position. While we have procedures to protect our trade secrets, some of our current or former employees, consultants or scientific advisors, or current or prospective corporate collaborators, may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. Furthermore, enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop equivalent knowledge, methods and know-how or gain access to our proprietary information through some other means. Since we collaborate with third parties on some of our technology, there is also the risk that disputes may arise as to the rights to technology or drugs developed in collaboration with other parties. IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, THE DAMAGES MAY EXCEED OUR INSURANCE. Since we conduct clinical trials on humans, we face the risk that the use of our product candidates will result in adverse effects. These risks will exist even for products that may be cleared for commercial sale. Although we maintain liability insurance of $10.0 million for our product candidates in clinical trials, the amount of insurance coverage we currently hold may not be adequate to protect us from any liabilities. Furthermore, coverage is becoming increasingly expensive and we may not be able to maintain or obtain insurance at a reasonable cost or in sufficient amounts to protect us against potential losses. We may not have sufficient resources to pay for any liabilities resulting from a claim beyond the limit of our insurance coverage. THE REIMBURSEMENT STATUS OF NEWLY APPROVED HEALTHCARE DRUGS IS UNCERTAIN AND FAILURE TO OBTAIN ADEQUATE REIMBURSEMENT COULD LIMIT OUR ABILITY TO MARKET ANY PRODUCTS WE MAY DEVELOP AND DECREASE OUR ABILITY TO GENERATE REVENUE. There is significant uncertainty related to the reimbursement of newly approved pharmaceutical products. Our ability, and that of our collaborators, to commercialize our products in both domestic and foreign markets will partially depend on the reimbursements obtained from third-party payors such as government health administration authorities, private health insurers, managed care programs and other organizations. Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new pharmaceutical products. Cost control initiatives could decrease the price that we, or our collaborators, would receive for our products and affect our ability to commercialize any products we may develop so that the sale of our drug would not be economically feasible. If third parties fail to provide reimbursement for any drugs we may develop, consumers and doctors may not choose to use our products, and we may not realize an acceptable return on our investment in product development. 18 IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS. Because we do not have any marketed products, we have virtually no experience in sales, marketing and distribution. To directly market and distribute any products we may develop, we must build a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities. Alternatively, we may obtain the assistance of a pharmaceutical company or other entity with a large distribution system and a large direct sales force. We may not be able to establish sales, marketing and distribution capabilities of our own or enter into such arrangements with third parties in a timely manner or on acceptable terms. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, which efforts may not be successful. OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS AND WE MUST COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE. Our research and development activities involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We are subject to a variety of federal, state and local regulations relating to the use, handling and disposal of these materials. We generally contract with third parties for the disposal of such substances, and store our low level radioactive waste at our facility until the materials are no longer considered radioactive because there are no facilities permitted to accept such waste in California or neighboring states. While we believe that we comply with current regulatory requirements, we cannot eliminate the risk of accidental contamination or injury from these materials. We may be required to incur substantial costs to comply with current or future environmental and safety regulations. In the event of an accident or contamination, we would likely incur significant costs associated with civil penalties or criminal fines and in complying with environmental laws and regulations. OUR STOCK HAS BEEN, AND MAY CONTINUE TO BE, EXTREMELY VOLATILE, AND YOUR INVESTMENT IN OUR COMMON STOCK COULD DECLINE IN VALUE. Our stock price has been extremely volatile and has continued to decline in price. As with many other companies, our stock price will likely continue to be subject to wide fluctuations in response to a variety of factors, many of which are beyond our control, and include the following: o changes in the market valuations and perceptions of biotechnology companies; o announcements and results of our clinical trials, or those of our competitors; o results of the government clearance and approval process for rNAPc2 or any of our future products, if any, as well as competing products; o the termination of any existing collaborative agreements or other developments in our relationships with our existing or any future collaborators; o fluctuations in our operating results; 19 o announcements of technological innovations or new products or services by us or by our competitors; o developments related to patents or other proprietary rights of us or others; o comments, or changes in financial estimates, by securities analysts; o actions by governmental regulatory agencies; o announcements by us or our competitors of acquisitions, strategic relationships, joint ventures or capital commitments; o developments in domestic and international affairs or governmental regulations; o additions or departures of our key personnel; o sales of our common stock in the open market; and o general market conditions and other events or factors, including factors unrelated to our performance or the performance of our competitors. ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND STOCKHOLDER RIGHTS PLAN AND UNDER DELAWARE LAW MAY ADVERSELY AFFECT A POTENTIAL TAKEOVER AND COULD PREVENT STOCKHOLDERS FROM RECEIVING A FAVORABLE PRICE FOR THEIR SHARES. Provisions in our certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in our control, even if the transaction would benefit our stockholders. These provisions: o authorize our board of directors, without requiring stockholder approval, to issue up to 8.25 million shares of "blank check" preferred stock to increase the number of outstanding shares and prevent a takeover attempt; o limit who has the authority to call a special meeting of stockholders; o prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and o require the approval of holders of at least 66 2/3% of our voting stock as a condition to a merger or other specified business transactions with, or proposed by, a holder of 15% or more of our voting stock. Further, our board of directors has adopted a stockholder rights plan, commonly known as a "poison pill," that may delay or prevent a change in control. ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER STOCK PLANS AND OUTSTANDING CONVERTIBLE NOTES WILL DILUTE CURRENT STOCKHOLDERS. 20 We maintain stock plans under which employees, directors and certain consultants can acquire shares of our common stock through the exercise of stock options and other purchase rights. We also have outstanding convertible notes. You will incur dilution upon exercise of our outstanding options and convertible notes. If we raise additional funds by issuing additional stock or convertible debt, further dilution to our stockholders will result, and new investors could have rights superior to existing stockholders. 21 PART II -- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS From time to time, we are involved in certain litigation arising out of our operations. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition. Item 2. CHANGES IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of Corvas was held on May 29, 2002. The matters described below were submitted to a vote of stockholders. The Company had 27,507,382 shares of common stock outstanding and entitled to vote as of April 5, 2002, the date of record for the meeting. At the annual meeting, holders of a total of 20,296,702 shares of common stock were present in person or represented by proxy. a. Election of Class I directors for a three-year term expiring at the 2005 annual meeting of stockholders. Name Shares voting for Shares withheld ---- ----------------- --------------- J. Stuart Mackintosh 20,239,523 57,179 George P. Vlasuk, Ph.D. 20,240,231 56,471 Class II directors continuing in office until the 2003 annual meeting of stockholders: Susan B. Bayh Michael Sorell, M.D. Nicole Vitullo Class III directors continuing in office until the 2004 annual meeting of stockholders: M. Blake Ingle, Ph.D. Burton E. Sobel, M.D. Randall E. Woods 22 b. A proposal to ratify the appointment of KPMG LLP as our independent public accountants for the fiscal year ending December 31, 2002. For 20,039,651 Against 37,850 Abstain 219,201 Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit Number Description -------------- ----------- 10.50 Termination of License and Development Agreement between the Company and Pfizer Inc. and Pfizer Limited, dated as of June 13, 2002. 10.51 Corvas International, Inc. 401(k) Compensation Deferral Savings Plan and Trust Agreement (Amended and Restated as of January 1, 1997), and First Amendment thereto (Revised to incorporate amendments to plan). b. Reports on Form 8-K On July 25, 2002, the Company filed a Current Report of Form 8-K. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CORVAS INTERNATIONAL, INC. Date: August 12, 2002 By: /s/ RANDALL E. WOODS ------------------------------------------ Randall E. Woods President and Chief Executive Officer (Principal Executive Officer) Date: August 12, 2002 By: /s/ CAROLYN M. FELZER ------------------------------------------ Carolyn M. Felzer Vice President and Controller (Principal Financial Officer) CERTIFICATION Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. ss. 1350, as adopted), each of the undersigned hereby certifies that to the best of his or her knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 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 this Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by this Report and the results of operations of the Company for the period covered by this Report. Date: August 12, 2002 By: /s/ RANDALL E. WOODS ------------------------------------------ Randall E. Woods President and Chief Executive Officer Date: August 12, 2002 By: /s/ CAROLYN M. FELZER ------------------------------------------ Carolyn M. Felzer Vice President and Controller 24