1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CORTECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 8731 84-0894091
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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CORTECH, INC.
6850 N. BROADWAY, SUITE G
DENVER, COLORADO 80221
TELEPHONE: (303) 650-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
KENNETH R. LYNN
CHIEF EXECUTIVE OFFICER
CORTECH, INC.
6850 N. BROADWAY, SUITE G
DENVER, CO 80221
TELEPHONE: (303) 650-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
ALAN C. MENDELSON, ESQ. DAVID R. SNYDER, ESQ.
CARRIE L. SCHIFF, ESQ. T. MICHAEL HIRD, ESQ.
LISA S. DUMAW, ESQ. HAMILTON SOUTHWORTH III, ESQ.
COOLEY GODWARD LLP PILLSBURY MADISON & SUTRO LLP
2595 CANYON BOULEVARD, SUITE 250 101 W. BROADWAY, SUITE 1800
BOULDER, CO 80302 SAN DIEGO, CA 92101
(303) 546-4000 (619) 234-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement and the effective time of the proposed merger (the "Merger") of
Cortech Merger Sub, Inc. with and into BioStar, Inc. ("BioStar"), as described
in the Agreement and Plan of Merger and Reorganization, dated as of December 22,
1997, attached as Appendix A to the Joint Proxy Statement/Prospectus forming a
part of this Registration Statement (the "Reorganization Agreement").
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
=================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(2)
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Common Stock par value $0.002 per
share(3)............................... 28,500,000 N/A $1,734 $100.00
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(1) This Registration Statement relates to the maximum number of securities of
the Registrant that may be issued in the proposed Merger. This number
includes shares of the Registrant's Common Stock which may be issued upon
conversion of shares of BioStar capital stock which may be issued after the
effective date of this registration statement and prior to the consummation
of the Merger pursuant to outstanding BioStar options and warrants. With
respect to such options, promptly upon the effectiveness of the Merger the
Registrant intends either to incorporate such options into existing plans
for which registration statements on Form S-8 have been filed, to file
amendments to such registration statements to incorporate such options or to
file new registration statements on Form S-8 with respect to such options.
(2) There is no established trading market for the shares of BioStar common
stock and preferred stock which are to be converted into shares of Common
Stock of the Registrant pursuant to the Merger described herein. In
accordance with Rule 457(f)(2) under the Securities Act of 1933, as amended,
given that BioStar has an accumulated capital deficit, the proposed maximum
aggregate offering price has been calculated on the basis of one-third of
the aggregate par value of the BioStar shares. One-third of such aggregate
par value was $1,734 on February 13, 1997, the most recent practicable date
for determination.
(3) This Registration Statement also relates to the rights to purchase Series A
Junior Participating Preferred Stock associated with the Common Stock of the
Registrant. Until the occurrence of certain prescribed events, such rights
are not exercisable, are evidenced by the certificate for the Registrant's
Common Stock and will be transferred along with and only with the
Registrant's Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CORTECH, INC.
6850 N. BROADWAY, SUITE G
DENVER, COLORADO 80221
Dear Stockholder:
Cortech, Inc., a Delaware corporation ("Cortech"), and BioStar, Inc., a
Delaware corporation ("BioStar"), have entered into an Agreement and Plan of
Merger and Reorganization (the "Reorganization Agreement") providing for the
merger of a wholly owned subsidiary of Cortech with and into BioStar (the
"Merger") and the issuance of shares of Cortech Common Stock to the BioStar
stockholders. As a result of the Merger, BioStar would become a wholly owned
subsidiary of Cortech.
A special meeting of the stockholders of Cortech will be held at
, Denver, Colorado on [ ,] 1998 at 9:00 a.m., local time
(including any adjournments or postponements thereof, the "Cortech Special
Meeting"). At the Cortech Special Meeting, you will be asked to consider and
vote upon a proposal to adopt and approve the Reorganization Agreement and the
transactions contemplated thereby (including the Merger and the related issuance
of Cortech Common Stock to the BioStar stockholders) (the "Merger Proposal"). As
a result of the Merger, each outstanding share of BioStar common stock and
preferred stock would be converted into the right to receive shares of Cortech
Common Stock and all outstanding options and warrants to acquire BioStar common
stock or preferred stock would become options and warrants to acquire Cortech
Common Stock. The number of shares of Cortech Common Stock to be issued in the
Merger in exchange for the outstanding shares of BioStar common stock and
preferred stock and in respect of outstanding options and warrants for BioStar
capital stock would not exceed 28,500,000 shares (without giving effect to the
reverse stock split described below) in the aggregate. The Merger and the
Reorganization Agreement are described more fully in the accompanying Joint
Proxy Statement/Prospectus.
The Bylaws of Cortech and the rules of the Nasdaq National Market require
that the Merger Proposal be approved by a majority of the shares of Cortech
Common Stock having voting power present in person or by proxy at the Cortech
Special Meeting. Consummation of the Merger is conditioned upon, among other
things, the receipt of such stockholder approval. After careful consideration,
the Board of Directors of Cortech (the "Cortech Board") has unanimously approved
the Reorganization Agreement and the Merger and has concluded they are fair to,
and in the best interests of, Cortech and its stockholders. The Cortech Board
unanimously recommends that you vote in favor of the Merger Proposal.
At the Cortech Special Meeting, you will also be asked to consider and vote
upon a proposal to approve and adopt an amendment (the "Certificate of
Amendment") to Cortech's Certificate of Incorporation effecting a one-for[ ]
reverse stock split and changing the name of Cortech to "BioStar Holdings, Inc."
(the "Cortech Certificate Proposal"). The Cortech Certificate Proposal, which is
contingent upon the effectiveness of the Merger, requires the affirmative vote
of the holders of a majority of the outstanding shares of Cortech Common Stock.
Approval of the Cortech Certificate Proposal, however, is not a condition to the
consummation of the Merger. The Cortech Board has unanimously approved the
Certificate of Amendment and has unanimously recommended that you vote in favor
of the Cortech Certificate Proposal.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
proposals to be voted upon at the Cortech Special Meeting and a proxy card. The
Joint Proxy Statement/Prospectus more fully describes the Merger Proposal, the
Cortech Certificate Proposal and the actions contemplated thereby.
All stockholders are cordially invited to attend the Cortech Special
Meeting in person. If you attend the Cortech Special Meeting, you may vote in
person if you wish even though you have previously returned your completed
proxy. WHETHER OR NOT YOU PLAN TO ATTEND THE CORTECH SPECIAL MEETING, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED, REGARDLESS OF HOW MANY
SHARES YOU HOLD. APPROVAL OF THE CORTECH CERTIFICATE PROPOSAL REQUIRES THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
CORTECH COMMON STOCK. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR
PROXY IN THE ENCLOSED ENVELOPE.
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On behalf of the Cortech Board, I thank you for your support and ask you to
vote in favor of the Merger Proposal and the Cortech Certificate Proposal.
Sincerely,
Kenneth R. Lynn
Chairman of the Board
YOUR VOTE IS IMPORTANT -- PLEASE RETURN YOUR PROXY PROMPTLY
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CORTECH, INC.
6850 N. BROADWAY, SUITE G
DENVER, COLORADO 80221
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ,] 1998
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TO THE STOCKHOLDERS OF CORTECH, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Cortech,
Inc., a Delaware corporation ("Cortech"), will be held on [ ,] 1998 at
[9:00] a.m. local time at , Denver, Colorado (including any
adjournments or postponements thereof, the "Cortech Special Meeting") to
consider and vote upon the following proposals:
1. To adopt and approve the Agreement and Plan of Merger and
Reorganization (the "Reorganization Agreement"), dated as of December 22,
1997, among Cortech, BioStar, Inc., a Delaware corporation ("BioStar"), and
Cortech Merger Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of Cortech ("Merger Sub"), and the transactions contemplated
thereby (including the merger of Merger Sub with and into BioStar (the
"Merger") and the related issuance of Cortech Common Stock to the BioStar
stockholders). Pursuant to the Merger, BioStar would become a wholly owned
subsidiary of Cortech and the stockholders of BioStar would receive shares
of Cortech Common Stock in exchange for their BioStar stock. A copy of the
Reorganization Agreement is attached as Appendix A to the Joint Proxy
Statement/Prospectus accompanying this Notice.
2. To adopt and approve an amendment to the Certificate of
Incorporation of Cortech (the "Cortech Certificate of Amendment") which
provides for (i) a change in the corporate name of Cortech to "BioStar
Holdings, Inc." and (ii) a one-for-[ ] reverse split of outstanding
shares of Cortech Common Stock. The Cortech Certificate of Amendment will
be implemented only if the Merger is approved; however, approval of the
Cortech Certificate of Amendment is not a condition to the closing of the
Merger.
3. To transact such other business as may properly come before the
Cortech Special Meeting.
The proposed Merger, the Reorganization Agreement, the Cortech Certificate
of Amendment and other related matters are more fully described in the attached
Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on [ ], 1998 are
entitled to notice of, and to vote at, the Cortech Special Meeting.
Commencing ten days prior to [ ], 1998, a list of stockholders
entitled to vote at the Cortech Special Meeting shall be open to examination by
any Cortech stockholder for any purpose germane to the Cortech Special Meeting
at Cortech's offices at 6850 N. Broadway, Suite G, Denver, Colorado 80221.
All stockholders are cordially invited to attend the Cortech Special
Meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Cortech Board of
Directors
Diarmuid Boran
Secretary
Denver, Colorado
, 1998
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BIOSTAR, INC.
6655 LOOKOUT ROAD
BOULDER, COLORADO 80301
Dear Stockholder:
BioStar, Inc., a Delaware corporation ("BioStar"), and Cortech, Inc., a
Delaware corporation ("Cortech"), have entered into an Agreement and Plan of
Merger and Reorganization (the "Reorganization Agreement") providing for the
merger of a wholly owned subsidiary of Cortech with and into BioStar (the
"Merger") and the issuance of shares of Cortech Common Stock to the BioStar
stockholders. Subject to the approval of a charter amendment by Cortech's
stockholders, after the Merger Cortech would change its name "BioStar Holdings,
Inc." As a result of the Merger, BioStar would become a wholly owned subsidiary
of Cortech. Pursuant to the Reorganization Agreement, a special meeting of the
stockholders of BioStar (the "BioStar Special Meeting") will be held
at on [ ], 1998 at 9:00 a.m., local time.
At the BioStar Special Meeting you will be asked to consider and vote upon
a proposal to adopt and approve the Reorganization Agreement and the Merger (the
"Merger Proposal"). As a result of the Merger, each outstanding share of common
stock and preferred stock of BioStar would be converted into the right to
receive shares of common stock of Cortech and all outstanding options and
warrants to acquire BioStar common stock or preferred stock would become options
and warrants to acquire Cortech Common Stock. The number of shares of Cortech
Common Stock to be issued in the Merger in exchange for the outstanding shares
of BioStar common stock and preferred stock and in respect of outstanding
options and warrants for BioStar capital stock would not exceed 28,500,000
shares (prior to the effect of a one-for-[--] reverse stock split which is being
proposed for approval at a meeting of Cortech's stockholders). The Merger is
described more fully in the accompanying Joint Proxy Statement/Prospectus.
After careful consideration, the Board of Directors of BioStar (the
"BioStar Board") has unanimously approved the Reorganization Agreement and the
Merger, and has concluded they are fair to, and in the best interests of,
BioStar and its stockholders. The BioStar Board unanimously recommends a vote in
favor of the adoption and approval of the Reorganization Agreement and approval
of the Merger. At the BioStar Special Meeting, you will also be asked to
consider and vote upon a proposal to approve and adopt an amendment to the
BioStar Restated Certificate of Incorporation (the "BioStar Certificate
Proposal") which provides that the holders of BioStar preferred stock will only
receive the consideration for their shares set forth in the Reorganization
Agreement. Consummation of the Merger is contingent upon approval of the BioStar
Certificate Proposal. The BioStar Board unanimously recommends a vote in favor
of the adoption and approval of the BioStar Certificate Proposal.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
proposals to be voted upon at the BioStar Special Meeting and a proxy card. The
Joint Proxy Statement/Prospectus more fully describes the Merger, the
Reorganization Agreement and the BioStar Certificate Proposal.
All stockholders are cordially invited to attend the BioStar Special
Meeting in person. If you attend the BioStar Special Meeting, you may vote in
person if you wish even though you have previously returned your completed
proxy. WHETHER OR NOT YOU PLAN TO ATTEND THE BIOSTAR SPECIAL MEETING, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED, REGARDLESS OF THE NUMBER OF
SHARES YOU HOLD. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN
THE ENCLOSED ENVELOPE. PLEASE DO NOT SEND IN THE STOCK CERTIFICATE(S)
REPRESENTING YOUR BIOSTAR COMMON STOCK OR PREFERRED STOCK AT THIS TIME.
On behalf of the BioStar Board, we thank you for your support and ask you
to vote in favor of the Merger Proposal and the BioStar Certificate Proposal.
Sincerely,
Teresa W. Ayers
President/Chief Executive Officer
YOUR VOTE IS IMPORTANT -- PLEASE RETURN YOUR PROXY PROMPTLY
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BIOSTAR, INC.
6655 LOOKOUT ROAD
BOULDER, COLORADO 80301
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 1998
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TO THE STOCKHOLDERS OF BIOSTAR, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "BioStar
Special Meeting") of BioStar, Inc., a Delaware corporation ("BioStar"), will be
held on [ ], 1998, at a.m., local time, at to consider
and vote upon the following proposals:
1. To (i) adopt and approve the Agreement and Plan of Merger and
Reorganization (the "Reorganization Agreement"), dated as of December 22,
1997, among BioStar, Cortech, Inc., a Delaware corporation ("Cortech"), and
Cortech Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of Cortech ("Merger Sub"), and (ii) approve the merger of Merger
Sub with and into BioStar pursuant to which BioStar would become a wholly
owned subsidiary of Cortech (the "Merger"). A copy of the Reorganization
Agreement is attached as Appendix A to the Joint Proxy Statement/Prospectus
accompanying this Notice.
2. To adopt and approve an amendment to the BioStar Restated
Certificate of Incorporation which provides that the holders of BioStar
preferred stock would only receive the consideration for their shares set
forth in the Reorganization Agreement (the "BioStar Certificate Proposal").
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The proposed Merger, the Reorganization Agreement, the BioStar Certificate
Proposal and other related matters are more fully described in the attached
Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on [ ], 1998 are
entitled to notice of, and to vote at, the BioStar Special Meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the BioStar Special
Meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the BioStar Board
Edward C. Pritchard
Secretary
Boulder, Colorado
, 1998
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY OR THE SOLICITATION OF ANY PROXY,
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES OR THE SOLICITATION OF ANY
PROXY, IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION FEBRUARY 13, 1998
CORTECH, INC.
AND
BIOSTAR, INC.
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS TO BE HELD ON [ ], 1998
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CORTECH, INC.
PROSPECTUS
FOR UP TO 28,500,000 SHARES OF COMMON STOCK
PAR VALUE $0.002 PER SHARE
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, $.002 par value per share ("Cortech Common Stock"), of Cortech,
Inc., a Delaware corporation ("Cortech"), in connection with the solicitation of
proxies by the Board of Directors of Cortech (the "Cortech Board") for use at a
special meeting of the stockholders of Cortech to be held on [ ],
1998, as well as at any adjournments or postponements thereof (the "Cortech
Special Meeting"). This Joint Proxy Statement/Prospectus is also being furnished
to holders of common stock, $.0001 par value per share, and preferred stock,
$.0001 par value per share (collectively, "BioStar Capital Stock"), of BioStar,
Inc., a Delaware corporation ("BioStar"), in connection with the solicitation of
proxies by the Board of Directors of BioStar (the "BioStar Board") for use at a
special meeting of the stockholders of BioStar to be held on [ ],
1998, as well as at any adjournments or postponements thereof (the "BioStar
Special Meeting"). The Cortech Special Meeting and the BioStar Special Meeting
are being called to consider and vote upon a proposal (the "Merger Proposal") to
adopt and approve the Agreement and Plan of Merger and Reorganization dated as
of December 22, 1997 (the "Reorganization Agreement") among Cortech, BioStar and
Cortech Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary
of Cortech ("Merger Sub"), and the transactions contemplated thereby (including
the merger of Merger Sub with and into BioStar (the "Merger") and (in the case
of Cortech) the related issuance of Cortech Common Stock to the BioStar
stockholders). The stockholders of Cortech and BioStar also will consider and
vote upon other proposals at the Cortech Special Meeting and the BioStar Special
Meeting, respectively. Such proposals are discussed more fully elsewhere in this
Joint Proxy Statement/Prospectus.
Upon consummation of the proposed Merger, BioStar will become a wholly
owned subsidiary of Cortech, each outstanding share of BioStar Capital Stock
will be converted into the right to receive shares of Cortech Common Stock and
all outstanding options and warrants to acquire BioStar Capital Stock will
become options and warrants to acquire Cortech Common Stock. The number of
shares of Cortech Common Stock to be issued in the Merger in exchange for the
outstanding shares of BioStar Capital Stock and in respect of outstanding
options and warrants for BioStar Capital Stock will not exceed 28,500,000 shares
in the aggregate (prior to the effect of a one-for[ ] reverse stock split which
is being proposed for approval at the Cortech Special Meeting). The fraction of
a share of Cortech Common Stock into which each share of BioStar Capital Stock
will be converted pursuant to the Reorganization Agreement is referred to as the
"Exchange Ratio". Although the Exchange Ratio will depend upon the
capitalization of BioStar at the time of the Merger and the market price for
Cortech Common Stock prior to the Merger, BioStar presently estimates that the
Exchange Ratio will be approximately .5512 (based upon BioStar's capitalization
as of the date of this Joint Proxy Statement/Prospectus and assuming a per share
market price for Cortech Common Stock of $0.656 (the market price per share of
Cortech Common Stock as of the date of the Reorganization Agreement) immediately
prior to the Effective Time (as defined below)). See "The Reorganization
Agreement -- Merger Consideration".
The obligations of Cortech and BioStar to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction or waiver of various conditions,
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including (i) approval of the Merger Proposal by a majority of the shares of
Cortech Common Stock having voting power present in person or by proxy at the
Cortech Special Meeting and (ii) approval of the Merger Proposal by (a) holders
of a majority of the outstanding shares of BioStar Capital Stock, voting
together as a single class (on an as-converted basis), and (b) holders of a
majority of the shares of each series of BioStar preferred stock, voting as
separate classes. The Merger is expected to be consummated shortly after such
approvals are obtained and the other conditions to the consummation of the
Merger are satisfied or waived. It is currently anticipated that the Merger will
be consummated in [ ], 1998.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Cortech included as a part of a registration statement filed with the Securities
and Exchange Commission relating to up to 28,500,000 shares of Cortech Common
Stock issuable in connection with the Merger. All information contained herein
concerning Cortech has been furnished by Cortech, and all information contained
herein concerning BioStar has been furnished by BioStar.
This Joint Proxy Statement/Prospectus does not cover any resales of the
Cortech Common Stock issuable in the Merger. No person is authorized to make use
of this Joint Proxy Statement/Prospectus in connection with any such resale.
Holders of BioStar Capital Stock will be entitled to appraisal rights with
respect to the proposed Merger by complying with the procedures set forth in
Section 262 of the Delaware General Corporation Law. Holders of Cortech Common
Stock have no appraisal rights in connection with the Merger.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxies
are first being mailed to stockholders of Cortech and BioStar on or about
, 1998.
---------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS OF CORTECH AND BIOSTAR ARE STRONGLY URGED TO
READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS
ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING AT
PAGE 14.
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THE SHARES OF CORTECH COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
The date of this Joint Proxy Statement/Prospectus is , 1998.
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TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION
SUMMARY..................................................... 1
The Companies............................................. 1
Cortech, Inc. ......................................... 1
BioStar, Inc. ......................................... 1
Cortech Merger Sub, Inc. .............................. 2
The Cortech Special Meeting............................... 2
Time, Date, Place and Purpose.......................... 2
Record Date and Vote Required.......................... 2
The BioStar Special Meeting............................... 3
Time, Date, Place and Purpose.......................... 3
Record Date and Vote Required.......................... 3
The Merger................................................ 4
General................................................ 4
Effective Time of the Merger; Closing Date............. 4
Stock Ownership Following the Merger................... 5
Exchange of BioStar Stock Certificates................. 5
Cortech's Reasons for the Merger....................... 5
Recommendation of the Cortech Board.................... 6
Opinion of Financial Advisor to Cortech................ 6
BioStar's Reasons for the Merger....................... 6
Recommendation of the BioStar Board.................... 6
Non-Solicitation....................................... 6
Conduct of Business.................................... 6
Composition of the Cortech Board and Officers.......... 7
Conditions to the Merger............................... 7
Termination............................................ 7
Expenses and Termination Fees.......................... 8
Interests of Certain Persons in the Merger............. 9
Registration Rights.................................... 9
Comparison of Stockholder Rights....................... 9
Certain Federal Income Tax Consequences................ 9
Accounting Treatment................................... 9
Appraisal Rights....................................... 10
Risk Factors.............................................. 10
Markets and Market Prices................................. 10
Cortech Certificate Proposal.............................. 10
Selected Historical Financial Information................. 11
Summary Selected Unaudited Consolidated Pro Forma
Financial Data......................................... 12
Comparative Per Share Data................................ 13
RISK FACTORS................................................ 14
Risks Related to the Merger............................... 14
Risks Related to the Business and Operations of Cortech
and BioStar............................................ 15
INTRODUCTION................................................ 30
THE CORTECH SPECIAL MEETING................................. 30
Purpose of the Cortech Special Meeting.................... 30
Date, Time and Place of Meeting........................... 30
i
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PAGE
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Record Date; Voting Rights and Outstanding Shares......... 30
Solicitation of Proxies; Expenses......................... 30
Quorum; Vote Required..................................... 31
Effect of Abstentions and Broker Nonvotes................. 31
Voting and Revocability of Proxies........................ 31
THE BIOSTAR SPECIAL MEETING................................. 33
Purpose of the BioStar Special Meeting.................... 33
Date, Time and Place of Meeting........................... 33
Record Date; Voting Rights and Outstanding Shares......... 33
Solicitation of Proxies; Expenses......................... 33
Quorum; Vote Required..................................... 33
Effect of Abstentions..................................... 34
Voting and Revocability of Proxies........................ 34
CORTECH STOCK PRICE AND DIVIDEND INFORMATION................ 34
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............. 35
Background of the Merger.................................. 35
Cortech's Reasons for the Merger.......................... 37
Cortech Board Recommendation.............................. 39
BioStar's Reasons for Merger.............................. 39
Opinion of Financial Advisor to Cortech................... 40
Interests of Certain Persons in the Merger................ 45
Voting Agreements......................................... 46
Affiliate Agreements...................................... 47
Certain Federal Income Tax Consequences................... 47
Anticipated Accounting Treatment.......................... 49
Regulatory Matters........................................ 49
Rights of Dissenting Stockholders......................... 50
Resale of Cortech Common Stock............................ 51
Effect under Cortech Rights Plan.......................... 51
THE REORGANIZATION AGREEMENT................................ 52
General................................................... 52
Merger Consideration...................................... 52
No Fractional Shares...................................... 53
Stock Options and Warrants................................ 53
Stock Ownership Following the Merger...................... 53
Conversion of Shares; Procedures for Exchange of
Certificates........................................... 53
Effect on Certificates.................................... 54
Corporate Matters; Composition of the Cortech Board and
Officers............................................... 54
Conditions to the Merger.................................. 54
Representations and Warranties............................ 57
Covenants................................................. 58
Termination............................................... 63
Expenses and Termination Fees............................. 64
PROPOSAL TO AMEND THE CORTECH CERTIFICATE OF
INCORPORATION............................................. 66
Corporate Name Change..................................... 66
Reverse Split............................................. 66
Effects of the Reverse Split.............................. 67
Federal Income Tax Consequences........................... 68
Exchange of Shares........................................ 68
Required Vote............................................. 69
Board Recommendation...................................... 69
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PAGE
----
AMENDMENT OF BIOSTAR CERTIFICATE OF INCORPORATION........... 70
Effect of Amendment....................................... 70
Required Vote............................................. 70
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... 71
Unaudited Pro Forma Combined Consolidated Balance Sheet... 72
Unaudited Pro Forma Condensed Consolidated Statements of
Operations............................................. 73
CORTECH BUSINESS............................................ 74
Overview.................................................. 74
Cortech's Work with Protease Inhibitors................... 74
Cortech's Work with Bradykinin Antagonists................ 76
Product Development Risks................................. 78
Patents, Trade Secrets and Licenses....................... 78
CP-0127 Development Corporation........................... 79
Marketing Strategy........................................ 80
Manufacturing............................................. 80
Competition............................................... 80
Government Regulation..................................... 81
Third-Party Reimbursement................................. 83
Human Resources........................................... 83
Properties................................................ 83
Legal Proceedings......................................... 83
CORTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 84
General................................................... 84
Results of Operations..................................... 84
Liquidity and Capital Resources........................... 85
Other Matters............................................. 86
CORTECH MANAGEMENT AND EXECUTIVE COMPENSATION............... 87
Compensation of Directors................................. 87
Compensation of Executive Officers........................ 88
Stock Option Grants and Exercises......................... 88
CORTECH PRINCIPAL STOCKHOLDERS.............................. 90
BIOSTAR BUSINESS............................................ 92
Overview.................................................. 92
Industry Overview......................................... 93
Strategy.................................................. 94
Thin Film Technologies.................................... 94
Products and Markets...................................... 96
Sales and Marketing....................................... 101
Manufacturing............................................. 102
Strategic Relationships................................... 102
Research and Development.................................. 104
Competition............................................... 105
Patents, Trade Secrets and Trademarks..................... 106
Regulation................................................ 106
Reimbursement............................................. 109
Technical and Business Advisors........................... 109
Human Resources........................................... 110
Facilities................................................ 110
Legal Proceedings......................................... 110
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PAGE
----
BIOSTAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 111
General................................................... 111
Results of Operations..................................... 111
Liquidity and Capital Resources........................... 113
Other Matters............................................. 113
BIOSTAR MANAGEMENT AND EXECUTIVE COMPENSATION............... 114
Compensation of Directors................................. 115
Compensation of Executive Officers........................ 116
Stock Option Grants and Exercises......................... 117
Employment Agreements..................................... 118
BIOSTAR PRINCIPAL STOCKHOLDERS.............................. 119
CERTAIN TRANSACTIONS........................................ 122
DESCRIPTION OF CORTECH CAPITAL STOCK........................ 124
Authorized Capital Stock.................................. 124
Cortech Common Stock...................................... 124
Cortech Preferred Stock................................... 124
Cortech Options........................................... 124
Warrants.................................................. 125
Certain Anti-takeover Provisions.......................... 125
Stockholder Rights Plan................................... 125
Registration Rights....................................... 126
COMPARISON OF STOCKHOLDERS' RIGHTS.......................... 127
Class Votes............................................... 127
Classified Board of Directors............................. 127
Removal of Directors...................................... 127
Limitation on Directors' Liability; Indemnification of
Directors and Officers................................. 128
Amendments to the Certificate of Incorporation............ 128
Power to Call Special Stockholders' Meeting; Action By
Consent................................................ 128
Inspection of Stockholders' List.......................... 129
Dividends and Repurchases of Shares....................... 129
Amendment of Bylaws....................................... 129
Approval of Certain Corporate Transactions................ 129
Certain Business Combination.............................. 129
Appraisal Rights.......................................... 130
Dissolution............................................... 130
Registration Rights....................................... 130
STOCKHOLDER PROPOSALS....................................... 131
EXPERTS..................................................... 131
LEGAL MATTERS............................................... 131
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS........... 131
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- Agreement and Plan of Merger and
Reorganization............................................ A-1
APPENDIX B -- Proposed Amendments to Cortech Certificate of
Incorporation............................................. B-1
APPENDIX C -- Opinion of Cowen & Company ................... C-1
APPENDIX D -- Section 262 of the Delaware General
Corporation Law........................................... D-1
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AVAILABLE INFORMATION
Cortech is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Cortech with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Commission's regional offices at CitiCorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such material may also be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Under the rules and regulations of the Commission, the vote on the Merger
Proposal by holders of BioStar Capital Stock constitutes an offering of the
Cortech Common Stock to be issued in connection with the Merger. Accordingly,
Cortech has filed with the Commission a Registration Statement on Form S-4
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to such Cortech Common Stock. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant to
the rules and regulations of the Commission and to which portions reference is
hereby made. Statements contained in this Joint Proxy Statement/Prospectus as to
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to Cortech, BioStar, the Merger, the securities offered hereby and
related matters, reference is made to the Registration Statement. The
Registration Statement and the exhibits thereto may be inspected, without
charge, at the offices of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies may be obtained from the Commission at prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
---------------------
This Joint Proxy Statement/Prospectus is being furnished to Cortech's
stockholders in connection with the solicitation of proxies by the Cortech Board
for use at the Cortech Special Meeting and to BioStar's stockholders in
connection with the solicitation of proxies by the BioStar Board for use at the
BioStar Special Meeting. Each copy of this Joint Proxy Statement/Prospectus
mailed to the Cortech stockholders is accompanied by a form of proxy for use at
the Cortech Special Meeting and each copy of this Joint Proxy
Statement/Prospectus mailed to the BioStar stockholders is accompanied by a form
of proxy for use at the BioStar Special Meeting. This Joint Proxy
Statement/Prospectus is also being furnished by Cortech to holders of BioStar
Capital Stock as a prospectus in connection with the shares of Cortech Common
Stock to be issued upon consummation of the Merger.
14
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING AND THE SOLICITATION MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CORTECH, MERGER SUB OR BIOSTAR. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF EITHER CORTECH OR
BIOSTAR SINCE THE DATE HEREOF.
---------------------
This Joint Proxy Statement/Prospectus contains trademarks of Cortech and
BioStar as well as trademarks of other companies.
15
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. This summary is not, and is not intended
to be, complete by itself. This Joint Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. Cortech's,
BioStar's and the combined company's actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Joint Proxy Statement/Prospectus. This summary is qualified in its entirety by
reference to the more detailed information contained elsewhere in this Joint
Proxy Statement/Prospectus, the appendices attached hereto and the documents
referred to herein. Stockholders of Cortech and BioStar are urged to review
carefully all of the information contained in this Joint Proxy
Statement/Prospectus, the Reorganization Agreement attached hereto as Appendix A
and the other appendices attached hereto.
THE COMPANIES
CORTECH, INC.
Cortech is a biopharmaceutical company whose principal focus has been the
discovery and development of novel therapeutics for the treatment of
inflammatory disorders. Specifically, Cortech has directed its research and
development efforts towards protease inhibitors and bradykinin antagonists.
These efforts have produced certain intellectual property rights.
In response to disappointing test results and its loss of collaborative
partner support, Cortech has implemented a series of reductions in force over
the past three-and-one-half years which has reduced the number of full-time,
regular employees from more than 200 to fewer than 15 and effectively
discontinued all internal efforts to advance its research and development
activities. In addition, Cortech is currently de-commissioning its laboratories,
has sold most of its scientific and technical equipment and, unless BioStar opts
to retain such assets, plans to sell most of its office furniture and equipment
and, where possible, its leasehold improvements.
As a result of these actions, Cortech no longer has the staff or operative
facilities required to re-commence internal research and development activities.
Cortech has retained a core group of professionals who, among other things, are
actively engaged in ongoing efforts to realize appropriate value from Cortech's
tangible and intangible assets. It is uncertain, however, whether Cortech will
be able to retain employees with sufficient knowledge and experience to realize
appropriate value from Cortech's intangible assets. In light of the above,
Cortech's management has focused on evaluating various strategic alternatives.
As a result, Cortech entered into the Reorganization Agreement with BioStar on
December 22, 1997.
Cortech was incorporated in 1982 in Colorado and reincorporated in Delaware
in August 1991. The principal executive offices of Cortech are located at 6850
N. Broadway, Suite G, Denver, Colorado 80221 (the "Cortech Principal Offices").
Cortech's telephone number is (303) 650-1200.
BIOSTAR, INC.
BioStar develops, manufactures and markets point-of-care diagnostic tests
using its proprietary, highly-sensitive, thin film technologies. BioStar's
current products employ its Optical ImmunoAssay (OIA(R)) technology, a thin
film, platform technology developed for the rapid detection of a variety of
medical conditions. BioStar's OIA tests help caregivers, in a cost-effective and
efficient manner, to identify causes of illness and select appropriate patient
therapy by providing information during the initial patient encounter.
Internally and through collaborative arrangements, BioStar is developing
additional thin film technologies which are intended to broaden the range of
applications for its existing products and to enable the introduction of new
products.
BioStar was incorporated in Delaware in May 1992. The principal executive
offices of BioStar are located at 6655 Lookout Road, Boulder, Colorado 80301
(the "BioStar Principal Offices"). BioStar's telephone number is (303) 530-3888.
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CORTECH MERGER SUB, INC.
Merger Sub is a corporation recently organized as a wholly owned subsidiary
of Cortech for the purpose of effecting the Merger. Merger Sub has no material
assets and has not engaged in any activities except in connection with the
Merger.
The principal executive offices of Merger Sub are located at 6850 N.
Broadway, Suite G, Denver, Colorado 80221. Merger Sub's telephone number is
(303) 650-1200.
THE CORTECH SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Cortech Special Meeting will be held at on [ ],
1998, at a.m. local time. The purpose of the Cortech Special Meeting is to
vote upon proposals to (i) approve and adopt the Reorganization Agreement,
attached hereto as Appendix A, and the transactions contemplated thereby
(including the Merger and the related issuance of Cortech Common Stock to the
BioStar stockholders) (the "Merger Proposal") and (ii) approve an amendment (the
"Cortech Certificate of Amendment") of the Certificate of Incorporation of
Cortech, attached hereto as Appendix B, which provides for a change in Cortech's
corporate name to "BioStar Holdings, Inc." and a one-for-[ ] reverse stock
split (collectively, the "Cortech Certificate Proposal"). Approval of the
Cortech Certificate Proposal is not a condition to consummation of the Merger
and would be implemented only if the Merger is consummated. Holders of Cortech
Common Stock may also consider and vote upon such other matters as may be
properly brought before the Cortech Special Meeting or any postponements or
adjournments thereof.
RECORD DATE AND VOTE REQUIRED
Only Cortech stockholders of record at the close of business on
[ ,] 1998 (the "Cortech Record Date") are entitled to vote at the
Cortech Special Meeting. Approval of the Merger Proposal will require approval
by a majority of the shares of Cortech Common Stock having voting power present
in person or by proxy at the Cortech Special Meeting (the "Required Cortech
Stockholder Vote"). Approval of the Cortech Certificate Proposal will require
approval by the holders of a majority of the outstanding shares of Cortech
Common Stock entitled to vote at the Cortech Special Meeting.
Certain directors, an officer and other affiliates of Cortech, who together
hold approximately 2.3% of the Cortech Common Stock outstanding as of the
Cortech Record Date, have entered into voting agreements with BioStar (the
"Cortech Voting Agreements") pursuant to which such directors, officer and other
affiliates of Cortech have agreed to vote in favor of the Merger Proposal and
the Cortech Certificate Proposal and have granted BioStar an irrevocable proxy
to vote their shares of Cortech Common Stock in favor of the Merger Proposal and
the Cortech Certificate Proposal. See "Approval of the Merger and Related
Transactions -- Voting Agreements".
This Joint Proxy Statement/Prospectus and accompanying Notice of Special
Meeting of Stockholders are being mailed to all of the holders of record of
Cortech Common Stock as of the Record Date and constitute notice of the Cortech
Special Meeting in conformity with the requirements of the Delaware General
Corporation Law (the "DGCL").
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17
THE BIOSTAR SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The BioStar Special Meeting will be held at on [
,] 1998, at a.m. local time. The purpose of the BioStar's
Special Meeting is to vote upon (i) a proposal to approve and adopt the Merger
Proposal (excluding action specific to Cortech such as the related issuance of
Cortech Common Stock) and (ii) a proposal to approve and adopt an amendment (the
"BioStar Certificate of Amendment") of the Restated Certificate of Incorporation
of BioStar, attached to the Reorganization Agreement as Exhibit B, which
provides that the holders of BioStar preferred stock will only receive the
consideration for their shares as set forth in the Reorganization Agreement (the
"BioStar Certificate Proposal"). Consummation of the Merger is conditioned upon
approval of the BioStar Certificate Proposal. BioStar stockholders may also
consider and vote upon such other matters as may be properly brought before the
BioStar Special Meeting or any postponements or adjournments thereof.
RECORD DATE AND VOTE REQUIRED
Only BioStar stockholders of record at the close of business on
, 1998 (the "BioStar Record Date") are entitled to vote at the BioStar Special
Meeting. The Merger Proposal and the BioStar Certificate Proposal each will
require approval by the affirmative vote of the holders of a majority of the
outstanding shares of BioStar common stock and BioStar preferred stock (voting
on an as-converted basis), voting together as a single class, and the
affirmative vote of the holders of a majority of the shares of each series of
BioStar preferred stock voting as separate classes (the "Required BioStar
Stockholder Vote").
Certain directors, officers and other affiliates of BioStar, who together
hold approximately 65% of the BioStar common stock and preferred stock voting
together as a single class (the "Voting Agreement Stockholders"), and 100% of
the Series A Preferred Stock, 100% of the Series B Preferred Stock, 100% of the
Series C Preferred Stock, at least 50% of the Series D Preferred Stock and at
least 38% of the Series E Preferred Stock outstanding as of the BioStar Record
Date, have entered into voting agreements with Cortech (the "BioStar Voting
Agreements") pursuant to which such Voting Agreement Stockholders have agreed to
vote in favor of the Merger Proposal and the BioStar Certificate Proposal and
have granted Cortech an irrevocable proxy to vote their shares of BioStar
Capital Stock in favor of the Merger Proposal and the BioStar Certificate
Proposal. See "Approval of the Merger and Related Transactions -- Voting
Agreements".
This Joint Proxy Statement/Prospectus and accompanying Notice of Special
Meeting of Stockholders were mailed to all BioStar stockholders of record as of
the BioStar Record Date and constitute notice of the BioStar Special Meeting in
conformity with the requirements of the DGCL.
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THE MERGER
GENERAL
At the Effective Time (as defined below), Merger Sub will merge with and
into BioStar, the separate existence of Merger Sub will cease and BioStar will
become a wholly owned subsidiary of Cortech. It is currently anticipated that
the Effective Time will occur during [ ] 1998. In addition, the
Reorganization Agreement provides that, subject to the terms and conditions
thereof, at the Effective Time the following will occur:
Conversion of BioStar Capital Stock. Subject to the provisions contained in
the Reorganization Agreement relating to the payment of cash in lieu of
fractional shares and shares with respect to which appraisal rights have
properly been exercised, each share of BioStar common stock and preferred stock
(collectively, "BioStar Capital Stock") then outstanding will be converted into
the right to receive a number of shares of Cortech Common Stock equal to the
"Exchange Ratio." The Exchange Ratio is equal to a fraction the numerator of
which is 28,500,000 and the denominator of which is the number of shares of
BioStar Capital Stock outstanding plus the number of shares of BioStar Capital
Stock issuable upon exercise of all (x) outstanding BioStar Warrants (defined
below) and (y) outstanding BioStar Options (defined below), in each case as of
immediately prior to the Effective Time. Although the Exchange Ratio will depend
upon the capitalization of BioStar at the Effective Time and the market price
for Cortech Common Stock prior to the Effective Time, BioStar presently
estimates that the Exchange Ratio will be approximately .5512 (based upon
BioStar's capitalization as of the date of this Joint Proxy Statement/Prospectus
and assuming a per share market price for Cortech Common Stock of $0.656 (the
per share market price of Cortech Common Stock as of the date of the
Reorganization Agreement) immediately prior to the Effective Time). See "The
Reorganization Agreement -- Merger Consideration". The number of shares of
Cortech Common Stock to be issued in the Merger in exchange for the outstanding
shares of BioStar Capital Stock (and in respect of outstanding options and
warrants for BioStar Capital Stock) will not exceed 28,500,000 shares in the
aggregate (prior to the effect of the one-for-[ ] reverse stock split to be
considered at the Cortech Special Meeting).
BioStar Stock Options. Each unexpired and unexercised option to purchase
shares of BioStar common stock granted under the 1995 Equity Incentive Plan
("BioStar Options") will be assumed by Cortech. Each BioStar Option so assumed
by Cortech will continue to have, and be subject to, substantially the same
terms and conditions set forth in the documents governing such BioStar Options
immediately prior to the Effective Time (subject to appropriate adjustments to
the exercise price and number of shares subject thereto based upon the Exchange
Ratio). As promptly as possible after the consummation of the Merger, Cortech
will file a Registration Statement on Form S-8 to register the shares of Cortech
Common Stock issuable upon exercise of the BioStar Options. See "The
Reorganization Agreement -- Options".
BioStar Warrants. Unless otherwise provided by the terms of each
outstanding warrant to purchase securities of BioStar which are not exercised
prior to the Merger and which do not expire if not exercised prior to the Merger
(the "BioStar Warrants"), all rights with respect to BioStar Capital Stock
underlying the BioStar Warrants will be converted into and become rights with
respect to Cortech Common Stock, and Cortech will assume each such BioStar
Warrant in accordance with its terms (subject to appropriate adjustments to the
exercise price and number of shares subject thereto based upon the Exchange
Ratio). See "The Reorganization Agreement -- Warrants".
EFFECTIVE TIME OF THE MERGER; CLOSING DATE
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware or at such later time as
may be specified in the Certificate of Merger (the "Effective Time"). The
consummation of the transactions contemplated by the Reorganization Agreement
will take place on a date to be agreed upon by Cortech and BioStar (the "Closing
Date"), which will be no later than the tenth business day after the
satisfaction or waiver of all of the conditions to closing of the Merger set
forth in the Reorganization Agreement. Assuming that all of the conditions to
the Merger are satisfied or waived, it
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is anticipated that the Merger will be consummated in [ ] 1998. See "The
Reorganization Agreement -- Conditions to the Merger".
STOCK OWNERSHIP FOLLOWING THE MERGER
A maximum of 28,500,000 shares of Cortech Common Stock will be issued or
issuable to holders of BioStar Capital Stock, BioStar Options and BioStar
Warrants (prior to the effect of the one-for-[ ] reverse stock split to be
considered at the Cortech Special Meeting). Based upon the number of shares of
Cortech Common Stock issued and outstanding as of the Cortech Record Date, and
after giving effect to the additional shares of Cortech Common Stock that are
proposed to be issued or issuable pursuant to the Merger, the former holders of
BioStar Capital Stock would hold approximately 60% of Cortech's total issued and
outstanding shares (assuming exercise of all BioStar Options and BioStar
Warrants).
EXCHANGE OF BIOSTAR STOCK CERTIFICATES
As soon as reasonably practicable after the Effective Time, an exchange
agent to be selected by Cortech (the "Exchange Agent") will mail to the holders
of BioStar Capital Stock (i) a letter of transmittal (the "Letter of
Transmittal") with respect to the surrender of valid certificates representing
shares of BioStar Capital Stock ("BioStar Stock Certificates") in exchange for
certificates representing Cortech Common Stock and (ii) instructions for use of
the Letter of Transmittal. BIOSTAR STOCKHOLDERS SHOULD NOT SURRENDER THEIR
BIOSTAR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL. See "The Reorganization Agreement -- Conversion of Shares;
Procedures for Exchange of Certificates".
CORTECH'S REASONS FOR THE MERGER
In approving the Reorganization Agreement and the Merger, the Cortech Board
considered a number of factors, including that: (i) the combination of Cortech's
cash resources and status as a public company with BioStar's products, platform
technology and organization would offer Cortech's stockholders an opportunity to
realize appropriate value from their investment in Cortech; (ii) the combination
would afford Cortech's existing technology an enhanced opportunity to be (a)
recognized as valuable and (b) advanced in externally funded development,
thereby permitting Cortech stockholders an opportunity to realize any benefits
therefrom; (iii) as compared with a voluntary corporate liquidation, (a) the
combination would permit Cortech's stockholders an opportunity to share in
potential value which would otherwise be lost in a liquidation (such as value
potentially to be derived from Cortech's public company status as well as the
potential going concern value of other intangible and tangible Cortech assets)
and (b) Cortech's stockholders would not have to face risks as to whether or not
reserves allocated to cover residual liabilities in connection with any
liquidation would prove to be adequate; (iv) after reviewing numerous potential
strategic transactions, and balanced against Cortech's diminishing prospects and
status as a stand-alone entity (due, primarily, to continued incremental
depletion of cash assets, the impairment of Cortech's ability (through a series
of corporate downsizings) to undertake internal research and development and the
resulting/growing potential for technological stagnation), management and the
Cortech Board determined that an alternative transaction of comparable or
superior terms for Cortech's stockholders likely would not become available to
Cortech within the reasonably foreseeable future (if ever); and (v) BioStar
possesses a variety of assets and resources that would bring value to a combined
entity and thereby potentially benefit Cortech's stockholders, including: (a) a
capable management team with the demonstrated ability to lead the development
and commercialization of products; (b) a business plan for continued efforts to
develop and commercialize products; and (c) current product revenues which will,
at least partially, offset continuing research and development expenses (and
thereby extend the cash resources of a combined company). See "Approval of the
Merger and Related Transactions -- Cortech's Reasons for the Merger" and "The
Cortech Special Meeting -- Board Recommendation".
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RECOMMENDATION OF THE CORTECH BOARD
The Cortech Board has unanimously approved the Reorganization Agreement and
the Merger and has unanimously recommended a vote FOR approval of the Merger
Proposal. The Cortech Board also has unanimously approved the Cortech
Certificate of Amendment and has unanimously recommended a vote FOR approval of
the Cortech Certificate Proposal.
OPINION OF FINANCIAL ADVISOR TO CORTECH
Cowen & Company ("Cowen") delivered its opinion dated December 22, 1997
(the "Cowen Opinion") to the Cortech Board that, as of the date of such opinion
and subject to the various considerations set forth therein, the financial terms
of the Merger are fair from a financial point of view to Cortech. The full text
of the Cowen Opinion, which sets forth, among other things, assumptions made,
matters considered and limitations on the scope of the review undertaken in
connection with the Cowen Opinion, is attached hereto as Appendix C and is
incorporated herein by reference. Holders of Cortech Common Stock are urged to,
and should, read the Cowen Opinion in its entirety. See "Approval of the Merger
and Related Transactions-Opinion of Financial Advisor to Cortech".
BIOSTAR'S REASONS FOR THE MERGER
The BioStar Board considered a wide variety of information and a number of
factors in connection with its evaluation of the proposed Merger and the
Reorganization Agreement, and determined that the Merger provides an opportunity
that serves the best interests of BioStar and its stockholders. The BioStar
Board believes that the Merger may result in a number of benefits to BioStar and
its stockholders, including, among other benefits, the following: (i) providing
BioStar with substantially greater resources, including cash and a
publicly-traded security; (ii) providing BioStar's stockholders with liquidity;
and (iii) providing BioStar with access to the intangible assets associated with
Cortech's business. See "Approval of the Merger and Related
Transactions -- BioStar Reasons for the Merger," and "The BioStar Special
Meeting -- Board Recommendation".
RECOMMENDATION OF THE BIOSTAR BOARD
The BioStar Board has unanimously approved the Reorganization Agreement and
the Merger and has unanimously recommended a vote FOR the Merger Proposal. The
BioStar Board also has unanimously recommended a vote FOR the BioStar
Certificate Proposal.
NON-SOLICITATION
Pursuant to the Reorganization Agreement, Cortech and BioStar each have
agreed not to directly or indirectly solicit or initiate discussions or
negotiations relating to a transaction (other than the Merger) involving a
merger, consolidation, sale or similar transaction involving a significant
portion of the stock or assets of Cortech or BioStar, respectively. However,
Cortech and BioStar may each furnish information and enter into discussions or
negotiations in response to a bona fide, unsolicited acquisition proposal if and
only to the extent that the board of directors of the company receiving the
proposal determines in good faith (i) after consultation with its financial
advisor, that the acquisition proposal is reasonably likely to result in an
offer superior to the one proposed in the Reorganization Agreement and (ii)
after consultation with its outside counsel, that such actions are required in
order for such board of directors to comply with its fiduciary obligations. See
"The Reorganization Agreement -- Non-Solicitation".
CONDUCT OF BUSINESS
Pursuant to the Reorganization Agreement, BioStar and Cortech have made
certain covenants regarding the conduct of their respective businesses during
the period from the date of the execution of the Reorganization Agreement
through the Effective Time, including, without limitation, covenants to: (i)
conduct their respective business and operations (a) in the ordinary course and
in accordance with operating parameters previously discussed among Cortech and
BioStar with regard to Cortech and in
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21
accordance with past practices with regard to BioStar and (b) in compliance with
all applicable legal requirements and material contracts; (ii) use all
reasonable efforts to preserve their respective business organizations and the
services of their current officers and employees and maintain their respective
relations and goodwill with suppliers, customers, landlords, creditors,
licensors, licensees, employees and other persons; (iii) maintain insurance
policies; (iv) provide all reasonable notices, assurances and support required
by any material contract relating to proprietary assets; and (v) cause their
officers to report regularly concerning the status of their respective business
to the other party. See "The Reorganization Agreement -- Covenants -- Conduct of
BioStar's Business" and "-- Conduct of Cortech's Business".
COMPOSITION OF THE CORTECH BOARD AND OFFICERS
Cortech has agreed to use all reasonable efforts to have the Cortech Board
consist of five persons from and after the Effective Time to serve until the
next election of directors (for each director's respective class), three of whom
have been specified by BioStar. Promptly following the Effective Time, it is
expected that the Cortech Board will be composed of Teresa W. Ayers, with a term
expiring in 2000, Alexander E. Barkas, Ph.D., with a term expiring in 1999,
Thomas A. Bologna, with a term expiring in 2000, Bert Fingerhut, with a term
expiring in 1999, and Kenneth R. Lynn, with a term expiring in 1998. Ms. Ayers
and Messrs. Barkas and Bologna have been specified by BioStar. See "Cortech
Management and Executive Compensation" and "BioStar Management and Executive
Compensation". Promptly following the Effective Time, the BioStar executive
officers will become the executive officers of Cortech.
CONDITIONS TO THE MERGER
The obligations of Cortech and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by the Reorganization
Agreement are subject to the satisfaction or waiver of certain conditions
relating to, among other things: (i) the accuracy of the representations and
warranties of BioStar contained in the Reorganization Agreement (subject to
certain materiality limitations); (ii) the performance in all material respects
by BioStar of certain covenants and obligations contained in the Reorganization
Agreement; (iii) the approval of the Merger Proposal by BioStar's stockholders
and Cortech's stockholders and the approval of the BioStar Certificate Proposal
by BioStar's stockholders; (iv) fewer than 10% of the outstanding shares of
BioStar Capital Stock having asserted appraisal rights under the DGCL; (v)
receipt of certain consents; (vi) receipt of certain certificates and legal
opinions; (vii) the absence of any material adverse change to BioStar; (viii)
the absence of restraining orders, injunctions and other orders preventing the
consummation of the Merger; (ix) the absence of certain litigation or
administrative actions or proceedings; (x) delivery of affiliate agreements by
certain directors and officers of BioStar; and (xi) the Cowen Opinion not having
been withdrawn as of the date of this Joint Proxy Statement/Prospectus.
The obligation of BioStar to effect the Merger and otherwise consummate the
transactions contemplated by the Reorganization Agreement is subject to the
satisfaction of certain conditions relating to, among other things: (i) the
accuracy of the representations and warranties of Cortech contained in the
Reorganization Agreement (subject to certain materiality limitations); (ii) the
performance in all material respects by Cortech of certain covenants and
obligations contained in the Reorganization Agreement; (iii) the approval of the
Merger Proposal by BioStar's stockholders and Cortech's stockholders and the
approval of the BioStar Certificate Proposal by BioStar's stockholders; (iv)
receipt of certain legal opinions and certificates; (v) the absence of any
material adverse change to Cortech; (vi) the absence of restraining orders,
injunctions and other orders preventing the consummation of the Merger; (vii)
the taking of all actions necessary by Cortech to cause the Cortech Board to
consist of five persons, three of whom have been specified by BioStar; (viii)
the absence of certain litigation or administrative actions or proceedings; and
(ix) receipt of certain consents. See "The Reorganization
Agreement -- Conditions to the Merger".
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time,
whether before or after approval of the Merger Proposal by the stockholders of
Cortech and BioStar: (i) by mutual written consent of Cortech and BioStar; (ii)
subject to certain exceptions, by either Cortech or BioStar if the Merger shall
not
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22
have been consummated by May 31, 1998; (iii) by either Cortech or BioStar in
connection with certain legal or governmental actions having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger; (iv) by
Cortech or BioStar if the BioStar Special Meeting shall have been held and the
Merger Proposal and the BioStar Certificate Proposal shall not have been
approved by BioStar's stockholders; (v) by Cortech or BioStar if the Cortech
Special Meeting shall have been held and the Merger Proposal shall not have been
approved by Cortech's stockholders; (vi) by BioStar if (a) the Cortech Board
withdraws or amends in a way adverse to BioStar its unanimous recommendation in
favor of the Merger and approval of the Reorganization Agreement, (b) Cortech
shall have failed to include in this Joint Proxy Statement/Prospectus such
recommendation of its board, (c) the Cortech Board fails to reaffirm its
unanimous recommendation within five business days of BioStar's request, (d) the
Cortech Board shall have approved, endorsed or recommended a proposal (other
than the Merger) for, or entered into a letter of intent or contract relating
to, the acquisition of Cortech, (e) Cortech shall have failed to timely hold the
Cortech Special Meeting, (f) subject to certain limitations, a tender or
exchange offer for Cortech's securities shall have been commenced and Cortech
does not within five days recommend rejection of such tender or exchange offer
or (g) a proposal (other than the Merger) to acquire Cortech is publicly
announced and Cortech does not issue a press release announcing its opposition
to the proposal within five days or otherwise fails actively to oppose such
proposal (any such event, a "Cortech Triggering Event"); (vii) by Cortech if (a)
the BioStar Board withdraws or amends in a way adverse to Cortech its unanimous
recommendation in favor of the Merger and approval of the Reorganization
Agreement, (b) BioStar shall have failed to include in this Joint Proxy
Statement/Prospectus such recommendation of its board, (c) the BioStar Board
fails to reaffirm its unanimous recommendation within five business days of
Cortech's request, (d) the BioStar Board shall have approved, endorsed or
recommended a proposal (other than the Merger) for, or entered into a letter of
intent or contract relating to, the acquisition of BioStar, (e) BioStar shall
have failed to timely hold the BioStar Special Meeting, (f) subject to certain
limitations, a tender or exchange offer for BioStar's securities shall have been
commenced and BioStar does not within five business days recommend rejection of
such tender or exchange offer or (g) a proposal (other than the Merger) to
acquire BioStar is publicly announced and BioStar does not issue a press release
announcing its opposition to the proposal within five business days or otherwise
fails actively to oppose such proposal (any such event, a "BioStar Triggering
Event"); (viii) by Cortech, subject to certain limitations, if any of BioStar's
representations and warranties contained in the Reorganization Agreement shall
be or shall have become materially inaccurate, if any of BioStar's covenants in
the Reorganization Agreement shall have been breached or if Cowen withdraws its
fairness opinion on or before the date of this Joint Proxy Statement/Prospectus;
(ix) by BioStar, subject to certain limitations, if any of Cortech's
representations and warranties contained in the Reorganization Agreement shall
be or shall have become materially inaccurate or if any of Cortech's covenants
contained in the Reorganization Agreement shall have been breached. See "The
Reorganization Agreement -- Termination".
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, except as set forth below, all
fees and expenses incurred in connection with the Reorganization Agreement and
the transactions contemplated by the Reorganization Agreement shall be paid by
the party incurring such expenses, whether or not the Merger is consummated;
provided, however, that Cortech and BioStar shall share equally all fees and
expenses, other than attorney's fees, incurred in connection with the printing,
filing and mailing of this Joint Proxy Statement/Prospectus and the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part. In the event
that the Reorganization Agreement is terminated by Cortech (i) following the
occurrence of a BioStar Triggering Event or (ii) due to a breach of the
Reorganization Agreement by BioStar, then BioStar shall pay Cortech a
termination fee of $500,000 plus the amount of professional fees and expenses
(not to exceed $150,000) incurred by Cortech in connection with the Merger.
Similarly, in the event that the Reorganization Agreement is terminated by
BioStar (i) following the occurrence of a Cortech Triggering Event or (ii) due
to a breach of the Reorganization Agreement by Cortech, then Cortech shall pay
BioStar a termination fee of $500,000 plus the amount of professional fees and
expenses (not to exceed $150,000) incurred by BioStar in connection with the
Merger. See "The Reorganization Agreement -- Expenses and Termination Fees".
8
23
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Cortech Board and the BioStar
Board with respect to the Reorganization Agreement and transactions contemplated
thereby, Cortech and BioStar stockholders should be aware that certain members
of Cortech's management and the Cortech Board and BioStar's management and the
BioStar Board have interests in the Merger that are in addition to the interests
of each corporation's stockholders generally. These interests arise from, among
other things, certain employment agreements, severance plans, management
incentive and retention programs, indemnification arrangements and other
matters. For a discussion and quantification of these interests, see "Approval
of the Merger and Related Transactions -- Interests of Certain Persons in the
Merger".
REGISTRATION RIGHTS
Cortech will assume BioStar's obligations to persons who have registration
rights with BioStar under the BioStar Restated Investors' Rights Agreement (the
"Investors' Rights Agreement"); however, such agreement provides that such
persons may not request any registration until the earlier of (i) 90 days after
the effective date of a registration statement for the first public offering of
securities of Cortech following the Effective Time and (ii) the first
anniversary of the Effective Time. For a discussion of these registration
rights, see "Comparison of Stockholder Rights".
COMPARISON OF STOCKHOLDER RIGHTS
In the event that the Merger is consummated, holders of BioStar Capital
Stock will become holders of shares of Cortech Common Stock. The rights of
stockholders of Cortech differ from the rights of BioStar stockholders with
respect to certain matters. For a summary of these differences, see "Comparison
of Stockholders' Rights".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization for federal income
tax purposes, so that no gain or loss will be recognized by the BioStar
stockholders on the exchange of BioStar Capital Stock for Cortech Common Stock,
except to the extent that BioStar stockholders receive cash pursuant to the
exercise of appraisal rights or in lieu of fractional shares. The Reorganization
Agreement does not require the parties to obtain a ruling from the Internal
Revenue Service as to the tax consequences of the Merger. As a condition to the
closing of the Merger, BioStar and Cortech are to receive opinions from their
respective counsel that, based on certain assumptions and certifications, the
Merger will be treated as a tax-free reorganization for federal income tax
purposes. BIOSTAR STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER. See "Approval of the
Merger and Related Transactions -- Certain Federal Income Tax Consequences".
ACCOUNTING TREATMENT
Although as a legal matter Cortech is acquiring BioStar, the Merger will be
accounted for as a "purchase" of Cortech by BioStar for accounting and financial
reporting purposes. Accordingly, BioStar's historical financial statements will
be the financial statements of the post-merger combined company. Under the
purchase method of accounting, Cortech's results of operations will be combined
with those of BioStar from and after the Effective Time, and Cortech's specific
tangible and identifiable intangible assets and liabilities will be recorded on
BioStar's books at their respective fair values at the Effective Time. A
determination of the fair value of Cortech's specific tangible and identifiable
intangible assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed. See "Approval of the
Merger and Related Transactions -- Anticipated Accounting Treatment".
9
24
APPRAISAL RIGHTS
Holders of BioStar Capital Stock are generally entitled to appraisal rights
with respect to the Merger under the DCGL. If the Merger Proposal is approved by
the Required BioStar Stockholder Vote and is not terminated in accordance with
the Reorganization Agreement, BioStar's stockholders who do not vote for the
Merger Proposal and who comply with all applicable provisions of the DCGL will
have the right to exercise appraisal rights and receive the "fair value" of
their shares of BioStar Capital Stock in cash. A dissenting stockholder of
BioStar must follow the appropriate procedures under the DGCL or suffer the
termination or waiver of such appraisal rights. For a more detailed description
of the procedures applicable to the exercise of appraisal rights, see "Approval
of the Merger and Related Transactions -- Rights of Dissenting Stockholders".
The full text of the pertinent statutory provisions of the DCGL relating to the
proper exercise of such appraisal rights is attached hereto as Appendix D and
should be read carefully and in its entirety.
Holders of Cortech Common Stock will not be entitled to exercise appraisal
rights under the DGCL with respect to the Merger.
RISK FACTORS
The Merger and an investment in securities of Cortech involve certain risks
and uncertainties, including risks related to the respective businesses of
Cortech and BioStar and other risks and uncertainties discussed under "Risk
Factors" and elsewhere in this Joint Proxy Statement/Prospectus. See "Risk
Factors".
MARKETS AND MARKET PRICES
Cortech Common Stock is listed on the Nasdaq National Market under the
symbol "CRTQ". On December 19, 1997, the last trading day before the
announcement by Cortech and BioStar that they had entered into the
Reorganization Agreement, the closing sale price of Cortech Common Stock as
reported on the Nasdaq National Market was $0.594 per share. On February 12,
1998, the closing sale price of Cortech Common Stock as reported on the Nasdaq
National Market was $0.61 per share. There can be no assurance as to the actual
market price of Cortech Common Stock prior to, at or at any time following the
Effective Time.
Following the Merger, assuming necessary stockholder approval of the
Cortech Certificate Proposal, Cortech will change its corporate name to "BioStar
Holdings, Inc." Cortech will apply to have the Cortech Common Stock, including
the Cortech Common Stock issuable upon the consummation of the Merger in
exchange for BioStar Capital Stock, approved for quotation by Nasdaq under the
symbol "BSTR". Cortech's continued listing on the Nasdaq National Market is
dependent upon Cortech achieving a minimum bid price of $1.00 per share of
Cortech Common Stock. See "Risk Factors -- Potentional Loss of Nasdaq National
Market Listing."
BioStar is privately held and no established trading market exists for
BioStar Capital Stock. Accordingly, information with respect to the market price
of Cortech Common Stock on an historical and equivalent per share basis has been
omitted.
CORTECH CERTIFICATE PROPOSAL
The Cortech Certificate Proposal, which would be implemented only if the
Merger is consummated, provides for a change in Cortech's corporate name to
"BioStar Holdings, Inc." and a one-for-[ ] reverse stock split. The
primary objective of the Cortech Board with respect to such reverse stock split
is to increase the per share market price of Cortech Common Stock. A significant
collateral effect will be to increase the number of authorized but unissued
shares of Cortech Common Stock. See "Proposal to Amend the Cortech Certificate
of Incorporation".
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SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables set forth certain selected historical financial data
of Cortech and BioStar. This data is derived from and should be read in
conjunction with, and is qualified in its entirety by, the financial statements,
including the notes thereto, of Cortech and BioStar appearing elsewhere in this
Joint Proxy Statement/Prospectus. See "Cortech Financial Statements" and
"BioStar Financial Statements".
CORTECH
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 3,451 $ 7,422 $ 5,140 $ 1,470 $ 3,472
Losses from operations...................... $(7,717) $(7,531) $(18,106) $(28,489) $(15,432)
Net loss.................................... $(6,778) $(6,339) $(16,421) $(26,738) $(14,183)
Basic net loss per share.................... $ (0.37) $ (0.35) $ (0.92) $ (1.52) $ (0.95)
HISTORICAL BALANCE SHEET DATA:
Total assets................................ $16,445 $25,483 $ 28,643 $ 45,553 $ 68,763
======= ======= ======== ======== ========
Stockholders' equity........................ $15,383 $22,125 $ 26,977 $ 43,073 $ 66,354
======= ======= ======== ======== ========
BIOSTAR
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenues....................................... $15,858 $12,367 $ 9,591 $ 3,990 $ 1,272
Losses from operations......................... $(1,143) $(3,172) $(4,624) $(7,096) $(6,341)
Net loss....................................... $(1,933) $(3,823) $(4,803) $(6,969) $(6,174)
Basic and diluted net loss per share........... $ (1.00) $ (2.23) $ (2.55) $ (5.39) $(18.13)
HISTORICAL BALANCE SHEET DATA:
Total assets................................... $ 6,329 $ 5,782 $ 6,916 $ 7,387 $ 5,930
Total short term and long term debt............ $ 8,499 $ 7,248 $ 5,249 $ 1,149 $ 593
Stockholders' equity (deficit)................. $(5,613) $(3,773) $ (16) $ 4,869 $ 4,274
11
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SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
The following table sets forth unaudited pro forma condensed consolidated
financial data for Cortech and BioStar which gives effect to the Merger,
accounted for as a purchase of Cortech by BioStar for accounting and financial
reporting purposes, as if it had been consummated as of January 1, 1997 for
income statement data and as of December 31, 1997 for balance sheet data. See
"Approval of the Merger and Related Transactions -- Anticipated Accounting
Treatment." The pro forma data is not necessarily indicative of the results that
would have been achieved had such transaction been consummated on such dates and
should not be construed as representative of future operations. This
presentation is subject to the assumptions set forth in the notes to the
Unaudited Pro Forma Condensed Consolidated Financial Information appearing
elsewhere in this Joint Proxy Statement/Prospectus. The information presented
should be read in conjunction with such pro forma financial information and the
notes thereto, and the historical financial statements including the notes
thereto, of Cortech and BioStar, respectively, appearing elsewhere in this Joint
Proxy Statement/Prospectus. See "Unaudited Pro Forma Condensed Consolidated
Financial Information", "Cortech Financial Statements" and "BioStar Financial
Statements".
AT OR FOR THE
YEAR ENDED
DECEMBER 31, 1997
-----------------------------------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.................................................. $19,309
Loss from operations...................................... $(8,860)
Net loss.................................................. $(8,118)
Basic and diluted net loss per share...................... $ (0.18)
Shares used in basic and diluted net loss per share
calculation............................................ 44,619
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $22,287
Total short term and long term debt....................... $ 2,434
Stockholders' equity...................................... $13,342
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Cortech
and BioStar, as well as unaudited pro forma per share data of Cortech and
BioStar based on the assumption that the Merger was effective on January 1, 1997
for income statement data and on December 31, 1997 for balance sheet data. The
pro forma data is not necessarily indicative of the results that would have been
achieved had such transaction been consummated on such dates and should not be
construed as representative of future operations. The pro forma presentation is
subject to the assumptions set forth in the notes to the unaudited pro forma
condensed consolidated financial information appearing elsewhere in this Joint
Proxy Statement/Prospectus. The information presented should be read in
conjunction with such unaudited pro forma condensed consolidated financial
information and notes thereto, and the historical financial statements and notes
thereto, of Cortech and BioStar, respectively, included elsewhere in this Joint
Proxy Statement/Prospectus. No cash dividends have ever been declared or paid on
Cortech Common Stock or BioStar Capital Stock. See "Unaudited Pro Forma
Condensed Consolidated Financial Information", "Cortech Financial Statements"
and "BioStar Financial Statements".
AT OR FOR THE
YEAR ENDED
DECEMBER 31, 1997
-----------------
HISTORICAL -- CORTECH:
Basic and diluted net loss per common share................. $(0.37)
Book value per common share................................. $ 0.83
HISTORICAL -- BIOSTAR:
Basic and diluted net loss per common share................. $(1.00)
Book value per common share................................. $(2.86)
PRO FORMA COMBINED PER CORTECH SHARE:
Basic and diluted net loss per common share................. $(0.18)
Book value per common share................................. $ 0.30
PRO FORMA EQUIVALENT PER BIOSTAR SHARE (1):
Basic and diluted net loss per common share................. $(0.10)
Book value per common share................................. $ 0.17
- ---------------
(1) Reflects the Pro Forma Combined Per Cortech Share amounts multiplied by the
estimated Exchange Ratio of .5512 of a share of Cortech Common Stock for
each share of BioStar Capital Stock. Such Exchange Ratio assumes a per share
market price of $.656 for Cortech Common Stock (based upon BioStar's
capitalization as of the date of this Joint Proxy Statement/Prospectus and
the per share market price of Cortech Common Stock as of the date of the
Reorganization Agreement) immediately prior to the Effective Time. See "The
Reorganization Agreement -- Merger Consideration".
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RISK FACTORS
The following factors should be considered carefully in evaluating the
proposals to be voted upon by the stockholders of Cortech and BioStar and in
evaluating an investment in the Cortech Common Stock offered hereby. For periods
following the Merger, references to the products, businesses, results of
operations or financial condition of Cortech or the combined company should be
considered to refer to Cortech and its subsidiaries, including BioStar, unless
the context otherwise requires.
RISKS RELATED TO THE MERGER
Dependence Upon BioStar Business, Operations and Management. Following the
Merger, the combined company's business, operations and management will consist
almost entirely of the business, operations and management of BioStar as
existing prior to the Merger. Cortech stockholders should be aware that the
Merger represents the investment of substantially all of Cortech's existing cash
resources into a new and different line of business, and that the combined
company's future performance will be almost entirely dependent upon (and subject
to the risks relating to) BioStar's business, strategy, operations, management
and personnel. Although Cortech and BioStar believe that the combined company
will be able to realize value from Cortech's tangible and intangible assets
after the Merger, there can be no assurance that the combined company will be
able to do so. In addition, there can be no assurance that stockholders of
Cortech and BioStar would not achieve greater returns on their investment if
Cortech and BioStar were to remain independent companies.
Potential Loss of Nasdaq National Market Listing. Trading in Cortech Common
Stock is presently quoted on the Nasdaq National Market. Cortech has been
advised by Nasdaq that the continued quotation of Cortech Common Stock on the
Nasdaq National Market is in jeopardy due to a bid price for Cortech Common
Stock of less than $1.00 per share. The reverse stock split included as part of
the Cortech Certificate Proposal (the "Reverse Split") is intended to increase
the post-Merger per share bid price of Cortech Common Stock in order to satisfy
Nasdaq's related requirement. In the event that the Merger Proposal is approved
but the Cortech Certificate Proposal is not implemented following the Cortech
Special Meeting (for example, because the Cortech Certificate Proposal is not
approved at the Cortech Special Meeting), Cortech would propose a reverse stock
split of Cortech Common Stock for approval at an Annual Meeting of the Cortech
Stockholders to be held as soon as reasonably practicable following the Cortech
Special Meeting. There can be no assurances that Cortech will be able to
maintain its Nasdaq National Market listing (whether as a result of failure to
meet the minimum bid price requirement or other requirements imposed by the
Nasdaq National Market). The absence of the quotation of trading in Cortech
Common Stock on the Nasdaq National Marketwould have an adverse effect on the
market for, and the market price of, Cortech Common Stock. See "Proposal to
Amend the Cortech Certificate of Incorporation -- Reverse Split".
Availability of Additional Shares. The Reverse Split will have the effect
of increasing the number of authorized but unissued shares of Cortech Common
Stock. This would permit Cortech to use such shares in connection with Cortech's
employee benefit plans, the options, warrants and rights formerly relating to
BioStar Capital Stock which will be assumed by Cortech in the Merger and
possible future issuances. At the Cortech Record Date, there were issued and
outstanding [ ] shares of Cortech Common Stock and options and warrants to
acquire an additional [ ] shares of Cortech Common Stock. The number of
shares of Cortech Common Stock to be issued in connection with the Merger will
not exceed 28,500,000 shares (pre-Reverse Split). Accordingly, only [ ]
of the 50,000,000 shares of Cortech Common Stock authorized would be available
for possible future issuances absent the Reverse Split. See "Proposal to Amend
the Cortech Certificate of Incorporation -- Reverse Split".
Shares Eligible for Future Sale. In excess of 80% of Cortech's currently
outstanding shares (as of January 30, 1998) are freely tradable (subject to
volume limitations applicable to affiliates). If the Merger is consummated,
Cortech will issue to securityholders of BioStar an aggregate maximum of
28,500,000 shares of Cortech Common Stock. Substantial sales of shares of
Cortech Common Stock could occur after the Merger. Immediately upon consummation
of the Merger, all of the shares issuable in the Merger will be freely-tradable
(subject to volume limitations and other restrictions of Rule 145 under the
Securities Act for persons who were affiliates of BioStar prior to the Merger or
who are affiliates of the combined company following the
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29
Merger). However, holders of approximately 23,139,053 of such shares have agreed
not to, directly or indirectly, sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any such shares for a period ending 180 days from the Effective Time (the
"lock-up period") without the prior written consent of Cortech. Based on the
number of BioStar Options outstanding as of January 31, 1998 and Cortech's
intent to file a registration statement with respect to the underlying shares of
Cortech Common Stock promptly following the Merger, an additional 2,403,050
shares could be sold upon the exercise of BioStar Options promptly following the
Effective Time. Also, holders of 25,324,452 shares of BioStar's Capital Stock
have certain rights to require that BioStar file a registration statement with
the Securities and Exchange Commission with respect to their shares. See
"Comparison of Stockholders' Rights". Future sales of a substantial number of
such shares of Cortech Common Stock could adversely affect or cause substantial
fluctuations in the market price of Cortech Common Stock.
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF CORTECH AND BIOSTAR
History of Operating Losses; No Assurance of Future Profitability. Each of
Cortech and BioStar has incurred operating losses in each year since their
respective dates of inception. For the fiscal year ended December 31, 1997,
Cortech had a net loss of $6.8 million, and through such date has an accumulated
deficit of $84.6 million. For the fiscal year ended December 31, 1997, BioStar
had a net loss of $1.9 million, and through such date has an accumulated deficit
of $25.8 million. Each of Cortech's and BioStar's losses have resulted
principally from costs incurred in research and development and from selling,
general and administrative costs associated with their respective operations.
Cortech's costs have exceeded its revenues, which have come from research and
development funding and interest income from investment of excess cash.
BioStar's costs also have exceeded its revenues, which, to date, have
principally been derived from sales of diagnostic products, funding from
government research grants and payments from collaborators. After the Merger,
the combined company will continue to incur operating losses as a result of
increases in its expenses for research and product development, clinical trials,
regulatory approvals and expansion of sales and marketing capability. The amount
of future operating losses and time required by the combined company to reach
profitability, if ever, are highly uncertain. The combined company's ability to
generate significant revenues and become profitable is dependent in large part
on its ability to commercialize successfully new BioStar products, continue
selling current products and generate revenues through strategic partnerships.
There can be no assurance that the combined company will continue to generate
revenue from BioStar's current products, successfully commercialize any of
BioStar's current or future products or secure ongoing revenues from strategic
partners. See "Cortech Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "BioStar Management's Discussion and
Analysis of Financial Condition and Results of Operations".
No Assurance of Successful or Timely Development of Additional Diagnostic
Products. The combined company's business strategy will involve the development
of additional diagnostic products. The combined company's success in developing
new diagnostic products will depend on its ability to achieve scientific and
technological advances and to translate these advances into commercially
competitive products on a timely basis. Development of new products requires
significant research, development and testing efforts. There can be no assurance
that future diagnostic products will be successfully developed or commercialized
on a timely basis, if at all. The combined company will have limited resources
to devote to the development of products and, consequently, a delay in the
development of one product or the use of resources for product development
efforts that prove unsuccessful may delay or jeopardize the development of other
products. The combined company will also depend on collaborative partners
successfully and timely performing research and development activities on behalf
of or together with the combined company. The combined company's development
efforts may be adversely affected by a number of factors, many of which will be
beyond the combined company's control, including technological difficulties,
proprietary technologies of others, possible changes in government regulation of
diagnostic products and the availability of sources of funding. Even if future
diagnostic products become commercially viable, there can be no assurance that
such products will receive FDA clearance. Furthermore, the combined company may
experience significant delays in the commercial introduction of such products.
Any delay in the development, introduction and marketing of
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future diagnostic products could result in such products being marketed at a
time when their cost and performance characteristics would not enable them to
compete effectively in their respective markets. If the combined company is
unable, for technological or other reasons, to complete the development and
introduction of any new product or if any new product is not approved or cleared
for marketing or does not achieve a significant level of market acceptance, the
combined company's results of operation could be materially and adversely
affected. See "BioStar Business -- Products and Markets" and "-- Regulation".
No Assurance of Successful or Timely Development of Therapeutic Products.
Following the Merger, it is anticipated that the combined company will focus its
resources on the development, production and marketing of diagnostic products.
Since Cortech's therapeutic compounds are at an early stage of development and
will require significant additional research, development and preclinical and
extensive clinical testing prior to submission of any regulatory application for
commercial use, Cortech's current business must be evaluated in light of the
uncertainties and complications present in a development stage biopharmaceutical
company.
Due to the high costs associated with the research and development of its
technology, Cortech is currently seeking either to sell its rights to its
technology or to obtain financing from a corporate partner for further
development of such technology. Neither Cortech nor BioStar intends that the
combined company will undertake further development of Cortech's technology
without a collaborative partner. Presently, there are no agreements,
understandings or active, substantive negotiations between Cortech and any third
party to purchase any of Cortech's technology rights or fund further development
of such technology. There can be no assurance that the combined company will be
able to effect any transaction involving a sale of technology rights or
establish such a collaboration on favorable terms, if at all.
Even if a collaborative partner is found to fund the combined company's
research and development activities with respect to potential therapeutic
products, there can be no assurance that such activities will be successfully
completed, that the compounds under development will prove safe and effective in
clinical trials, that required regulatory approvals will be obtained, that
products will be manufactured at an acceptable cost and with appropriate
quantity and quality or that any approved products can be successfully marketed
or will be accepted by patients, health care providers and thirdparty payors.
See "Cortech Business -- Cortech's Work with Protease Inhibitors", "-- Cortech's
Work with Bradykinin Antagonists", "-- Regulation" and "-- Reimbursement".
Dependence on Collaborative Relationships and Third Parties for Diagnostic
Product Development and Commercialization. BioStar has entered into licensing
and research and development agreements with collaborative partners from which
it derived a significant percentage of its revenues in 1997. Contract revenues
consist of milestone payments, grant revenues, funded feasibility, product
development costs and licensing fees. Pursuant to these agreements, BioStar's
collaborative partners have significant responsibilities for the costs of
development, promotion, regulatory approval and/or sale of BioStar's products.
For example, BioStar's grants from the National Institutes of Health ("NIH") are
government funded and, as a result, are subject to the continued availability of
funding for medical research in the federal budget. The combined company will
continue to rely on collaborative partners for the development of products and
technologies. The amount and timing of resources that any of these partners
devotes to these activities will generally be based on progress by the combined
company in its product development efforts. In addition, several of these
agreements may be terminated by the partner upon prior notice without cause.
There can be no assurance that any of these partners will perform its
contractual obligations or that it will not terminate its agreement. The failure
to adapt BioStar products to different formats and instruments, or otherwise to
commercialize such products would have a material adverse effect on the combined
company's business, financial condition and results of operations.
Additionally, the combined company's strategy for future development,
clinical testing, manufacturing and commercialization of BioStar products is
largely dependent upon the establishment of collaborations with corporate
partners and other third parties. There can be no assurance that the combined
company will be able to negotiate such collaborative arrangements on acceptable
terms, if at all, or that current or future collaborative arrangements will be
successful. To the extent that the combined company is not able to establish
such arrangements, it would experience increased capital requirements to
undertake such activities at
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its own expense. The combined company also may encounter significant delays in
introducing diagnostic products into certain markets or find that the
development, manufacture or sale of diagnostic products in such markets is
adversely affected by the absence or lack of success of any such collaborations.
With respect to any products manufactured by third parties, there can be no
assurance that any such third-party manufacturer would perform acceptably or
that failures by third parties would not delay clinical trials or the submission
of products for regulatory approval or impair the combined company's ability to
deliver products on a timely basis. The combined company also will be dependent
on the efforts of such third parties to market or promote its products. See
"Cortech Business -- Cortech's Work with Protease Inhibitors", "-- Cortech's
Work with Bradykinin Antagonists" and "BioStar Business -- Strategic Partners".
Dependence on Collaborative Relationships and Third Parties for Therapeutic
Product Commercialization. Drug discovery and development programs are capital
intensive. Since management anticipates that it will focus its capital resources
on diagnostic products and believes that raising funds in the public capital
markets to use to develop therapeutic products may remain unattractive for the
combined company for the foreseeable future, the combined company's strategy for
the development, clinical testing, manufacture and commercialization of
potential therapeutic products largely depends upon collaborations with
corporate partners and other third parties. There can be no assurance that the
combined company will be able to negotiate any such collaborative arrangements
on acceptable terms, if at all. To the extent that the combined company is not
able to establish such arrangements, it would require more capital to undertake
such activities at its own expense. The combined company may also encounter
significant delays in introducing its products into certain markets or find that
the development, manufacture and sale of its products in such markets is
adversely affected by the absence or lack of success of any such collaborations.
There can be no assurance that any third party collaborator will perform
acceptably or that failures by such third parties would not delay clinical
trials or the submission of products for regulatory approval or impair the
combined company's ability effectively to commercialize any therapeutic
products. See "Cortech Business -- Cortech's Work with Protease Inhibitors" and
"-- Cortech's Work with Bradykinin Antagonists".
Seasonality of Products; Quarterly Fluctuations in Results of Operations.
BioStar's operating results have historically been subject to quarterly
fluctuations. For as long as the majority of BioStar's product sales are sales
of its group A streptoccocus ("GAS") tests, BioStar's revenues will be seasonal,
concurrent with the time of the year in which respiratory infections and viruses
are prevalent. In addition, two of BioStar's products in development are also
directed at respiratory infections (pneumonia and influenza). Consequently,
BioStar's revenues are, and BioStar and Cortech expect that the combined
company's revenues will be, concentrated in the first and fourth quarters of
each fiscal year. This seasonal variation could have negative effects on the
trading price of Cortech Common Stock. Cortech and BioStar believe that future
operating results of the combined company will also be subject to quarterly
fluctuations due to a variety of other factors, including whether and when new
products are successfully developed and introduced by the combined company or
its competitors, market acceptance of current or new products, regulatory
delays, product recalls, competition and pricing pressures from competitive
products, manufacturing delays, shipment problems and changes in the mix of
products sold. In addition, the combined company's operating results will be
adversely affected if its products do not gain substantial market acceptance or
if its product development efforts are unsuccessful or subject to delays. See
"BioStar Business".
Concentration of Sales of Diagnostic Products. In 1997, at least 80% of
BioStar's product sales revenues were derived from sales of GAS products. For
the foreseeable future, Cortech and BioStar expect that the combined company's
revenues and profitability will substantially depend on sales of GAS products.
Competitive pressures could erode the combined company's profit margins for its
GAS products. A decrease in the competitiveness or market acceptance of
BioStar's GAS products could have a material adverse effect on BioStar's
business, financial condition and results of operations. See "BioStar
Business -- Products and Markets".
Dependence on Externally Sourced Products for Growth. BioStar currently
sells four diagnostic products under license from Wyntek Diagnostics, Inc.
("Wyntek"), and BioStar may seek to expand its relationship with Wyntek to
include additional products. Termination of the Wyntek agreement could have a
material adverse effect on the combined company's business, financial condition
and results of operations. In addition
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to the Wyntek arrangement, the combined company's growth strategy includes sales
of externally sourced products. There can be no assurance that the combined
company will be able to identify suitable products or, once identified, be able
to enter into agreements to in-license such products on acceptable terms, if at
all. See "BioStar Business -- Products and Markets".
Reliance on Sales Force for Sales of Diagnostic Products. BioStar has
marketed and sold its products in the clinical and physician office markets in
the United States through a "flex" representative sales force. The costs
associated with hiring and training flex sales representatives are substantial,
and the orientation and training period for flex sales representatives can be as
long as three months. In the past, BioStar has experienced significant employee
turnover in its flex representative sales force and incurred substantial costs
as a result. There can be no assurances that the combined company will not
experience substantial turnover in the its sales force in the future. Such
substantial turnover could have a material adverse effect on the combined
company's business, financial condition and results of operations. In addition,
in order to effectively distribute the higher volume and greater breadth of
products that will be necessary for the combined company's success, the combined
company may need to expand the efforts of its sales force. Failure to do so
could materially and adversely affect the combined company's business, financial
condition and results of operations. See "BioStar Business -- Sales and
Marketing".
Dependence on Distribution Partners for Sales of Diagnostic Products. In
the United States hospital and reference laboratory markets, BioStar has
marketed and sold its products through the efforts of Murex Diagnostics, Inc.
("Murex"), one of BioStar's distributors. If the Murex distribution agreement is
terminated and the combined company is unable to enter into a replacement
agreement, or if the combined company elects to distribute new products
directly, it would have to invest in additional sales and marketing resources,
possibly including additional field sales personnel, which would significantly
increase expenses. Loss of effective distribution capability in the hospital and
reference laboratory markets could have a material adverse effect on the
combined company's sales of diagnostic products unless suitable alternatives can
be arranged. There can be no assurance that the combined company would be able
to enter into replacement distribution or marketing agreements on favorable
terms, if at all, or that if the combined company elected to replace
distributors, it would be able to do so successfully. See "BioStar
Business -- Sales and Marketing".
Risks Regarding Potential Future Acquisitions. The combined company's
growth strategy is dependent upon a number of factors, including its ability to
acquire complementary companies, products or technologies. Acquisitions involve
a number of risks such as short-term negative effects on the combined company's
reported operating results, diversion of management's attention, unanticipated
problems or legal liabilities, and the integration of potentially dissimilar
operations, some or all of which could have a material adverse effect on the
combined company's business, financial condition and results of operations. See
"BioStar Business -- Strategy".
No Assurance of Market Acceptance of Point-of-Care Diagnostic Products. The
majority of diagnostic testing is currently performed at large clinical
laboratories rather than point-of-care sites. There can be no assurance that the
combined company will be successful in developing and penetrating the
point-of-care market for diagnostic testing. To date, BioStar has penetrated
only a small portion of the point-of-care market. Market acceptance of the
combined company's point-of-care products will depend on the combined company's
ability to demonstrate the accuracy and value of its products and to persuade
caregivers to perform the combined company's tests in the caregivers' own
facilities rather than send those tests to clinical laboratories. In addition,
market acceptance of new products will depend on a number of factors, including
the receipt and timing of regulatory approvals or clearances, the availability
of third-party reimbursement and the establishment and demonstration in the
medical community of the clinical safety, efficacy and cost-effectiveness of
diagnostic products and their advantages over existing technologies and
products. There can be no assurance that the combined company will be able to
market potential diagnostic products successfully, even if they perform
successfully in clinical trials. Furthermore, there can be no assurance that
caregivers, laboratories or the medical community in general will accept and
utilize the point-of-care testing system in general or existing diagnostic
products or products that may be developed in particular. See "BioStar
Business -- Industry Overview," "-- Products and Markets," "-- Regulation" and
"-- Reimbursement".
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Dependence on Suppliers. The components of BioStar's OIA tests are chemical
and packaging supplies that are generally available from several suppliers,
except certain antibodies, absorbent papers which BioStar purchases from single
suppliers. BioStar mitigates the risk of a loss of supply by maintaining a
sufficient supply of such antibodies to ensure an uninterrupted supply for at
least six months. Although BioStar believes that it can substitute a new
supplier with respect to any of these components in a timely manner, there can
be no assurances that the combined company will be able to substitute a new
supplier in a timely manner and failure to do so could have a material adverse
effect on the combined company's business, financial condition and results of
operations.
Limited Manufacturing Experience with Diagnostic Products and Detection
Technologies in Development. Although BioStar has manufactured over ten million
diagnostic tests based on its OIA technology, certain of BioStar's diagnostic
products in development incorporate new surfaces and detection technologies with
which BioStar has no manufacturing experience. Assuming successful development
and receipt of required regulatory approvals, significant work may be required
to scale up production for each new product prior to such product's
commercialization. There can be no assurance that such work can be completed in
a timely manner and that such new products can be manufactured cost-effectively,
to regulatory standards or in sufficient volume.
Uncertainties Related to Therapeutic Product Development and Clinical
Trials. Before it can obtain regulatory approval for the commercial sale of any
of any therapeutic products, the combined company must demonstrate, through
preclinical studies and clinical trials, that the product is safe and effective
for use in each target indication. The results from preclinical studies and
early clinical trials may not be predictive of results that will be obtained in
large-scale testing. Indeed, Cortech discontinued planned development of its
lead bradykinin antagonist, Bradycor, after unsuccessful Phase II clinical
trials and suspended development of a lead HNE inhibitor, CE-1037, which was
also in Phase II clinical trials. There can be no assurance that the combined
company will conduct future clinical trials or that those trials will
demonstrate the safety or efficacy of any products or will result in marketable
products. See "Cortech Business -- Product Development Risks".
Reliance on Third Parties to Manufacture Therapeutic Products. The
manufacture of sufficient quantities of new drugs can be an expensive,
time-consuming and complex process, and it may require the use of materials with
limited availability or require dependence on sole-source suppliers. If the
manufacturing of compounds were ever required, the combined company would rely
on corporate partners or other third parties for manufacturing services. There
can be no assurance that such third-party arrangements could be established on a
timely or commercially reasonable basis, if at all. If such arrangements were
established, the combined company would depend on such third parties to perform
their obligations effectively and on a timely basis. There can be no assurance
that such parties would perform acceptably, and any failures by third parties
may delay clinical trial development or the submission of therapeutic products
for regulatory approval, impair the combined company's ability to deliver
therapeutic products on a timely basis or otherwise impair the combined
company's competitive position which could have a material adverse effect on the
combined company's business, financial condition and results of operations. If
the combined company could not find a suitable manufacturing partner or
contractor, it might be required to incur substantial financial obligations to
construct or acquire manufacturing facilities. See "Cortech
Business -- Manufacturing".
Reliance on Third Parties to Market Therapeutic Products. In the event that
any of the combined company's therapeutic compounds are ever approved for
marketing, the combined company would rely primarily upon arrangements with
other pharmaceutical or biotechnology companies to market such products.
Comprehensive sales and technical support services would be necessary to market
the combined company's therapeutic products. Neither Cortech nor BioStar
anticipates that the combined company will establish significant capabilities in
these areas in the foreseeable future, if ever. To the extent the combined
company enters into co-marketing, co-promotion or similar arrangements, any
revenues received by the combined company would be dependent on the efforts of
third parties, and there can be no assurance that such efforts would be
successful. See "Cortech Business -- Marketing Strategy".
Regulation of Diagnostics Products. The testing, manufacture and sale of
BioStar's diagnostic products has been, and the testing, manufacturing and sale
of the combined company's products will be, subject to
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regulation by numerous governmental authorities, principally the Food and Drug
Administration ("FDA") and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices. The
combined company will not be able to commence marketing or commercial sales in
the United States of new products under development until it receives clearance
from the FDA. In addition, various foreign countries in which BioStar's products
are, or the combined company's products may be, sold impose local regulatory
requirements. The testing for, preparation of and subsequent FDA and foreign
regulatory review of required filings can be a lengthy, expensive and uncertain
process. Noncompliance with applicable requirements can result in, among other
consequences, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing clearances or approvals, and criminal prosecution. The FDA also has
the authority to request recall, repair, replacement or refund of the cost of
any device manufactured or distributed by the combined company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed necessary
by the FDA to ensure their safety and effectiveness. Class I devices are subject
to general controls (e.g., labeling, premarket notification and adherence to
current Good Manufacturing Practices ("cGMP") and Class II devices are subject
to general and special controls (e.g., performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices or new devices that have been found not to be substantially
equivalent to legally marketed devices). The majority of BioStar's products and
products under development are, and the combined company's diagnostic products
are expected to be, classified as Class I or Class II devices.
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance or approval through either clearance of a 510(k)
premarket notification or approval of a product marketing application ("PMA"). A
PMA must be filed if a proposed device is a new device not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMAs. A PMA must
be supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device, typically including the results of clinical
investigations, bench tests and laboratory and, where applicable, animal
studies. The PMA must also contain a complete description of the device and its
components and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and any training materials. The PMA
approval process can be expensive, uncertain and lengthy, and a number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a preamendment Class III medical device
for which the FDA has not called for PMAs. The FDA recently has been requiring
more rigorous demonstration of substantial equivalence than in the past,
including in some cases, requiring submission of clinical data. It generally
takes from four to 12 months from submission to obtain 510(k) premarket
clearance but may take longer. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category. For any devices that are cleared through
the 510(k) process, modifications or enhancements that could significantly
affect safety or effectiveness, or constitute a major change in the intended use
of the device, will require new 510(k) submissions. Although all of BioStar's
internally developed products currently on the market have received 510(k)
clearances and all products currently under development are expected to be
subject to the 510(k) clearance process, there can be no assurance that the FDA
will not require the combined company to submit a PMA for any products in
development or any future products. If a PMA is
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required, introduction of such products likely will be significantly delayed,
which could have a material adverse effect on the combined company's business,
financial condition or results of operations.
There can be no assurance that the combined company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely basis,
if at all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, limitations
on intended use imposed as a condition of such approvals or clearances or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
Before the manufacturer of a device can submit the device for FDA approval
or clearance, it generally must conduct a clinical investigation of the device.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic tests, such as all of BioStar's products and products
currently under development, are exempt from the IDE requirements, including the
requirement to obtain the FDA's prior approval, provided the testing is
noninvasive, do not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into the subject and
are not used as a diagnostic procedure without confirmation by another medically
established test or procedure. In addition, patient informed consents and
approvals from the Internal Review Board of the clinic sites must be obtained as
appropriate. The in vitro diagnostic test must be labeled "for research use
only" ("RUO") or "for investigative use only" ("IUO"), and distribution controls
must be established to assure that in vitro diagnostic tests distributed for
research or clinical investigation are used only for those purposes.
The combined company intends to conduct clinical investigations of
diagnostic products under development, which will entail distributing them in
the United States on an IUO basis. There can be no assurance that the FDA would
agree that the combined company's IUO distribution of its in vitro diagnostic
products under development will meet the requirements for IDE exemption.
Furthermore, failure by the combined company or the recipients of its products
under development to maintain compliance with the IDE exemption requirements
could result in enforcement action by the FDA, including, among other things,
the loss of the IDE exemption or the imposition of other restrictions on the
combined company's distribution of diagnostic products under development, which
would adversely affect the combined company's ability to conduct the clinical
investigations necessary to support marketing clearance or approval.
Any devices manufactured or distributed by the combined company pursuant to
FDA clearance are subject to extensive and continuing regulation by the FDA and
certain state agencies. Manufacturers of medical devices for marketing in the
United States are required to adhere to applicable regulations setting forth
detailed cGMP requirements, which include testing, control and documentation
requirements. Manufacturers must also comply with Medical Device Report ("MDR")
requirements that a manufacturer report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in which
its product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
BioStar is, and the combined company will be, subject to routine inspection
by the FDA and certain state agencies for compliance with cGMP requirements, MDR
requirements and other applicable regulations. The FDA has recently finalized
changes to the cGMP requirements, including the addition of design controls that
will likely increase the cost of compliance. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
combined company's business, financial condition and results of operations.
There can be no assurance that the combined company will not incur significant
costs to comply with laws and regulations in the future, or that laws and
regulation will not have a material adverse effect upon the combined company's
business, financial condition and results of operations.
Distribution of diagnostic products outside the United States is, and will
be, subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market, the time required for
regulatory review and the sanctions imposed for violations, vary from country to
country.
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There can be no assurance that the combined company will obtain regulatory
approvals in such countries or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. In addition,
the export by the combined company of certain of its products that have not yet
been cleared for domestic commercial distribution may be subject to FDA export
restrictions. Failure to obtain necessary regulatory approvals, the restriction,
suspension or revocation of existing approvals or any other failure to comply
with regulatory requirements could have a material adverse effect on the
combined company's business, financial condition and results of operations.
The combined company's customers which use diagnostic tests for clinical
purposes in the United States are also regulated under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality
and reliability of all medical testing in laboratories in the United States by
requiring that any health care facility in which testing is performed meet
specified standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations have established three levels
of regulatory control based on test complexity -- "waived," "moderately complex"
and "highly complex". BioStar's current OIA tests and ACCEAVA Mono tests are
categorized as "moderately complex" tests for clinical use in the United States.
Under the CLIA regulations, all laboratories performing high or moderately
complex tests are required to obtain either a registration certificate or
certification of accreditation from the Health Care Financial Administration
("HCFA"). As a result of the CLIA requirements, physician office laboratories
and small volume test sites may be dissuaded from initiating, continuing or
expanding patient testing, particularly if the tests are classified as
moderately or highly complex tests. There can be no assurance that the CLIA
regulations and future administrative interpretations of CLIA will not have an
adverse impact on the potential market for the combined company's products.
BioStar's ACCEAVA hCG and ACCEAVA Strep A products are categorized as CLIA
"waived". Laboratories performing CLIA "waived" tests face less stringent
registration and certification requirements. See "BioStar Business -- Products
and Markets".
BioStar and Cortech are, and the combined company will be, subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the combined company will not incur significant costs to
comply with laws and regulations in the future or that such laws or regulations
will not have a material adverse effect upon the combined company's business,
financial condition and results of operations. See "BioStar
Business -- Regulation".
Uncertain Availability of Third Party Reimbursement for Diagnostic
Products. In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third party
payors, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. Such third
party payors can affect the pricing or the relative attractiveness of BioStar
products by regulating the maximum amount of reimbursement provided by such
payors for testing services. Each BioStar test has been assigned a payment code
by the HCFA, which determines the amount of reimbursement that third party
payors will reimburse for using BioStar's diagnostic tests. Moreover, certain
health care providers are moving towards a managed care system in which such
providers contract to provide comprehensive health care for a fixed cost per
patient. There may be future changes in third party reimbursement methodology.
The combined company could be adversely affected by changes in reimbursement
policies of governmental or private health insurance payors for procedures in
which diagnostic products are used. Third party payors are increasingly
scrutinizing and challenging the prices charged for medical products and
services. Decreases in reimbursement amounts for tests performed using the
combined company's diagnostic products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
the combined company's ability to sell diagnostic products on a profitable
basis. Failure by physicians and other users to obtain reimbursement from third
party payors, or changes in government and private third party payors' policies
regarding reimbursement of tests utilizing diagnostic products, could have a
material adverse effect on the combined company's business, financial condition
or results of operation. Given the efforts to control and reduce health care
costs in the United States in recent years, there can be no assurance that
currently available levels of reimbursement will continue to be available in the
future for BioStar's existing products or products under development.
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Market acceptance of BioStar products in international markets is
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored health care and private insurance.
Cortech and BioStar each believe that the overall escalating cost of
medical products and services has led, and will continue to lead, to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including diagnostic products offered by BioStar
and to be offered by the combined company. There can be no assurance that third
party reimbursement and coverage will be available or adequate in either U.S. or
foreign markets, that current reimbursement amounts will not be decreased in the
future, or that future legislation, regulation or reimbursement policies of
third party payors will not adversely affect the demand for diagnostic products
or the combined company's ability to sell diagnostic products on a profitable
basis. See "BioStar Business -- Regulation" and "-- Reimbursement".
Regulation of the Pharmaceutical Industry. The FDA is the primary agency
regulating the research, development, manufacture, 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 the
safety and efficacy requirements of the FDA. Regulatory requirements may change
at any stage of the combined company's product development efforts and may
affect approval, delay an application or require additional expenditures by the
combined company. If approval is obtained, failure to comply with ongoing
regulatory requirements, or new information that negatively impacts the safety
or effectiveness of the approved drug, could cause the FDA to withdraw approval
to market the product.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the preclinical
development period. A series of pharmacologic studies are also performed during
preclinical development to identify the essential characteristics of the
compound's behavior. In addition, both in vitro and in vivo animal toxicity
studies are required to characterize the toxicity profile of the compound.
Preclinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practice ("GLP") regulations. Violations of these
regulations can, in some 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 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 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 that 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.
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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 any of the combined company's therapeutic 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 which 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 GMP
requirements. Manufacturers must continue to expend time, money and effort in
the areas of production, 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.
There can be no assurances that any product developed by Cortech would
prove to be safe and efficacious in clinical trials or would meet all of the
applicable regulatory requirements necessary to obtain marketing approval.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. In addition, a
failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspension of regulatory approvals, product recalls,
seizure of products, operation restrictions and criminal prosecutions. In
addition, a marketed drug and its manufacturer are subject to continual review
and later discovery of previously unknown problems with a product or
manufacturer could lead to adverse consequences, including withdrawal of the
product from the market.
To market its therapeutic products abroad, the combined company also would
be required to 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 or risks. There can be no assurance that a foreign regulatory body
would accept the data developed by the combined company for any of its potential
therapeutic products. Approval by the FDA does not 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
regulation concerning 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
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assessment of products filed under the centralized procedure is coordinated by
the European Medicine Evaluation Agency ("EMEA"). See "Cortech
Business -- Regulation".
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 federal, state or local laws and regulations. Cortech's
research and development involves 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 comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, Cortech could be held liable for
any damages that result and any such liability could exceed the resources of
Cortech.
Competition in the Diagnostics Industry. Competition in the human medical
diagnostics industry is, and is expected to remain, intense. The competitors
range from development stage diagnostics companies to major domestic and
international pharmaceutical companies. Many of these companies have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than those of the combined company. In addition, many of
these companies have name recognition, established positions in the market and
long standing relationships with customers and distributors. Moreover, the
diagnostics industry has recently experienced a period of consolidation during
which many of the large domestic and international pharmaceutical companies have
been acquiring mid-sized diagnostics companies, further increasing the
concentration of resources. There can be no assurance that technologies will not
be introduced which could be directly competitive with or superior to BioStar's
OIA technologies.
BioStar's primary competitors for rapid, point-of-care immunodiagnostic
tests and the markets in which they compete with BioStar are as follows: Abbott
Laboratories (GAS and Chlamydia), Carter-Wallace, Inc./Wampole Labs.
("Carter-Wallace") (GAS and Chlamydia), SmithKline Beckman (GAS), Becton,
Dickinson and Company ("Becton Dickinson") (GAS) and Quidel Corporation
("Quidel") (GAS). These companies are larger than BioStar and have substantial
resources and market presence. BioStar competes with these companies on the
basis of product performance and customer service. BioStar's OIA tests have been
demonstrated to be more sensitive and/or specific than any of the rapid,
point-of-care immunodiagnostic tests for GAS and chlamydia sold by these
competitors. Additionally, BioStar believes that its sales and marketing
organization is capable of providing more comprehensive customer support than
competitors who use third party distributors.
BioStar's primary laboratory-based competitor for highly sensitive
immunodiagnostic tests is Gen-Probe Incorporated ("Gen-Probe"). Gen-Probe has
GAS and chlamydia tests which are instrumented and used in high-volume
laboratories. Gen-Probe is a subsidiary of a Japanese company which has
substantial resources. BioStar competes with Gen-Probe on the basis of
cost-effective outcomes, speed, ease-of-use and customer service. BioStar's
products are as sensitive as Gen-Probe's tests and are more specific, but
Gen-Probe's tests require several hours reaction time and are not point-of-care
tests. Therefore, in populations where initial visit follow-up rates are low,
BioStar's tests offer the potential of improved treatment outcomes.
BioStar's OIA tests also compete with traditional agar culture tests for
GAS, GBS and chlamydia. Agar culture tests consist of commodity-based supply
materials. As a result, a variety of diagnostics companies market agar culture
tests. Agar culture tests have historically been considered the standard against
which diagnostic tests for GAS and GBS have been measured. BioStar competes with
agar culture tests on the basis of ease-of-use, reaction speed and sensitivity.
The market for the diagnostic tests that BioStar has under development and
that BioStar has targeted for development is highly competitive and subject to
rapid technological change. Other companies are devoting significant resources
to developing new tests and dominating distribution channels. BioStar believes
that for all of its immunodiagnostic assay products it competes on the basis of
how quickly companies can (i) develop products and demonstrate clinical
feasibility, (ii) complete clinical testing, (iii) obtain regulatory approval,
(iv) obtain favorable reimbursement policies and (v) supply commercial
quantities of the product to the market at a competitive price. The combined
company's inability to compete favorably with respect to any of
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these factors could have a material adverse effect on its business, financial
condition and results of operations. See "BioStar Business -- Competition".
Competition in the Pharmaceutical Industry. The drug development business
which Cortech has pursued in recent years faces intense competition from
pharmaceutical and other biotechnology companies, academic institutions,
governmental agencies and other organizations which conduct research, seek
patent protection and establish collaborative arrangements for product
development and marketing. Many of the competitors for such business have
substantially greater financial, technical and human resources than Cortech and
have significant products which are in development or have been approved. Many
of these competitors have significantly greater experience than Cortech in
undertaking preclinical testing and human clinical trials of new pharmaceutical
products and obtaining FDA approval for products. In addition, if Cortech ever
commences commercial sales of products, it would also be competing with respect
to manufacturing efficiency and marketing capabilities. Furthermore, these other
companies and institutions would compete with Cortech in recruiting and
retaining highly qualified scientific and management personnel.
Many companies are focused on research in the same areas that Cortech has
pursued in recent years. Human neutrophil elastase ("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. Furthermore, 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.
Since Cortech has ceased research operations, is decommissioning its
laboratory facilities and reduced the number of full-time, regular employees
from more than 200 to fewer than 15, Cortech has effectively discontinued all
internal efforts to advance its therapeutic research and development activities.
There can be no assurance that the combined company's competitors will not
develop more effective or more affordable products or achieve earlier or more
efficient product commercialization than the combined company. See "Cortech
Business -- Competition".
Future Capital Needs; Uncertainty of Additional Funding. Assuming no
significant uses of cash in acquisition activities or other significant changes
in BioStar's activities, the combined company will have sufficient cash to
satisfy its funding needs for at least the next 24 months. However, both Cortech
and BioStar have incurred negative cash flow from operations since their
respective dates of inception, and neither Cortech nor BioStar expects the
combined company to generate positive cash flow to fund its operations for the
foreseeable future. If the combined company is not able to generate revenues
from collaborations with strategic partners, it may need to raise additional
capital to fund its research and development programs or acquisition activities.
If the combined company needs additional financing to meet its requirements,
there can be no assurance that it will be able to obtain such financing on terms
satisfactory to it, if at all. If the combined company obtains funds through
arrangements with strategic partners or others, as a condition of such funding
the combined company may be required to relinquish rights with respect to the
combined company's technologies, products or sales territories. Alternatively,
any additional equity financing may be dilutive to existing stockholders, and
debt financing, if available, may include restrictive covenants. If adequate
funds are not available, the combined company would be required to limit its
research and development activities, which could have a material adverse effect
on the combined company's business, financial condition and results of
operations.
Uncertainty of Protection of Patents, Trade Secrets and Trademarks. The
combined company's success will depend, in part, on its ability to obtain
patents and license patent rights, to maintain trade secret protection and to
operate without infringing on the proprietary rights of others. BioStar holds 15
United States patents which expire beginning in 1999 and ending in 2014 as well
as 44 foreign patents covering a number of inventions which comprise the OIA
technology, including the base OIA technology, optical surfaces for a variety of
assays, manufacturing methods and new instruments. An additional five United
States and 15 foreign patents are now pending. Cortech holds seven United States
patents and currently has 14 United States patent applications pending which
concern protease inhibitors. Cortech holds five United States patents
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and currently has 14 United States patent applications pending which concern
protease inhibitors. Cortech holds five United States patents, has four United
States patents pending and three patent applications which have been allowed
which concern bradykinin antagonists. Cortech's patents expire beginning in 2008
and ending in 2015. In addition, Cortech holds 26 foreign patents and has 40
foreign patents pending concerning protease inhibitors and bradykinin
antagonists.
Patent applications in the United States are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries, BioStar and Cortech cannot be
certain that they were the first creator of inventions covered by pending patent
applications or the first to file patent applications on such inventions. There
can be no assurance that BioStar's or Cortech's pending patent applications will
result in issued patents or that any of their issued patents will afford
meaningful protection against a competitor. In addition, patent applications
filed in foreign countries are subject to laws, rules and procedures that differ
from those of the United States and, thus, there can be no assurance that
foreign patent applications related to United States patents will issue.
Furthermore, if these patent applications issue, some foreign countries provide
significantly less patent protection than the United States.
The status of patents involves complex legal and factual questions and the
breadth of claims issued is uncertain. Accordingly, there can be no assurance
that patent applications filed by Cortech or BioStar will result in patents
being issued or that the Cortech or BioStar patents, or any patents that may be
issued to the combined company in the future, will afford protection against
competitors with similar technology. In addition, no assurances can be given
that patents issued to the combined company will not be infringed upon or
designed around by others, or that others will not obtain patents that the
combined company would need to license or design around. If existing or future
patents containing broad claims are upheld by the courts, the holders of such
patents could require other companies to obtain licenses. If the combined
company is found to be infringing third party patents, there can be no assurance
that licenses that might be required for the combined company's products would
be available on reasonable terms, if at all. In addition, a number of
pharmaceutical and biopharmaceutical companies and research and academic
institutions have filed patent applications or received patents in the combined
company's fields. Some of these applications or patents may be competitive with
the combined company's applications or may conflict in certain respects with
claims made under the combined company's applications. Such conflict could
result in a significant reduction of the coverage of the combined company'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 the combined company
would be able to obtain licenses to these patents at a reasonable cost or be
able to develop or obtain alternative technology.
The combined company could incur substantial costs in defending itself or
its licensees in litigation brought by others or prosecuting infringement claims
against third parties. If the outcome of any such litigation is unfavorable to
the combined company, the combined company's business could be adversely
affected. To determine the priority of inventions, the combined company may have
to participate in interference proceedings declared by the United States Patent
Office, which could result in substantial cost to the combined company and could
result in an adverse decision as to the priority of the combined company's
inventions.
In addition to patent protection, Cortech and BioStar rely on the law of
unfair competition and trade secrets to protect their proprietary rights. It is
Cortech's and BioStar's policies to require their employees, consultants,
members of the Board, outside scientific collaborators and sponsored researchers
and other advisors to execute confidentiality agreements upon the commencement
of employment or consulting relationships with Cortech or BioStar, respectively.
These agreements provide that all confidential information developed or made
known to the individual during the course of the individual's relationship with
Cortech or BioStar, respectively, is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual shall be the
exclusive property of Cortech or BioStar, respectively. There can be no
assurance that these agreements will not be breached or will provide meaningful
protection or adequate remedies in the event of unauthorized use of the combined
company's trade secrets or disclosure of such information. Cortech and
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BioStar each have taken appropriate physical security measures to protect their
respective intellectual property. There can be no assurance that such security
measures will be adequate. Cortech and BioStar have attempted, and the combined
company will attempt, to protect trade secrets and other proprietary information
through agreements with customers and suppliers, proprietary information
agreements with employees and consultants and other security measures. Although
the combined company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. See "Cortech Business --
Patents, Trade Secrets and Licenses" and "BioStar Business -- Patents, Trade
Secrets and Trademarks".
Dependence on Key Personnel. Because of the specialized nature of the
combined company's business, the success of the combined company will be highly
dependent upon its ability to attract and retain qualified scientific and
executive personnel. There can be no assurance that the combined company will be
successful in attracting and retaining such skilled personnel, who are generally
in high demand by pharmaceutical and biotechnology companies, universities and
other research institutions. The loss of, or inability to attract, key
scientific and executive personnel may have a material adverse effect on the
combined company's business, financial condition and results of operations. See
"Cortech Business -- Human Resources" and "BioStar Business -- Human Resources".
Risks Regarding Product Liability and Insurance. The testing, manufacturing
and marketing of medical diagnostic devices and therapeutic products entails an
inherent risk of product liability claims. To date, neither Cortech nor BioStar
has experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the combined company's business,
financial condition and results of operations. Potential product liability
claims may exceed the amount of the combined company's insurance coverage or may
be excluded from coverage under the terms of the combined company's policy.
Additionally, there can be no assurance that BioStar's existing insurance can be
renewed by Cortech at a cost and level of coverage comparable to that presently
in effect, if at all. In the event that the combined company is held liable for
a claim against which it is not insured or for damages exceeding the limits of
its insurance coverage, such claim could have a material adverse effect on the
combined company's business, financial condition and results of operations.
Risks Regarding Use of Hazardous Materials. Cortech has used a number of
hazardous materials and is subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain wastes. Although Cortech believes that its procedures for handling
and disposing of such materials has complied and continues to comply with the
standards prescribed by state and federal regulations, there can be no
assurances that the combined company will not incur significant costs to comply
with such laws and regulations or incur significant liability in connection
with, among other things, the de-commissioning of existing laboratory space and
any future on-site research and development work nor can there be any assurance
that future laws or regulation will not materially or adversely affect the
combined company.
No Assurance of Active Trading Market; Volatility of Cortech Stock
Price. There can be no assurance that an active trading market for Cortech
Common Stock will develop following the Merger, or if one does develop, that it
will be maintained. In addition, the market for Cortech Common Stock is expected
to be highly volatile. The trading price of Cortech Common Stock after the
Merger could be subject to wide fluctuations in response to a variety of
factors, including: (i) quarterly variations in operating and financial results;
(ii) announcement of the initiation or results of a significant research and
development collaboration; (iii) introduction of new product offerings by the
combined company or its competitors; (iv) changes in prices of the combined
company's or its competitors' products; (v) changes in the revenue and operating
income and revenue and operating income growth rates for the combined company;
(vi) changes in government regulation; and (vii) general conditions in the
health care industry and the economy, as well as other events or factors.
Statements or changes in opinions, ratings or earnings estimates by brokerage
firms or industry analysts relating to the market in which the combined company
does business, or relating to the combined company specifically, could result in
immediate and adverse effects on the market price of Cortech's Common Stock.
Such adverse effects could also affect the combined company and the market in
which the combined company will do business after the Merger. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for the
securities of many companies in the health care industry and which often have
been unrelated to the operating
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performance of these companies. These broad market fluctuations may adversely
affect the market price of Cortech Common Stock. In the past, following periods
of volatility in the market price of a company's stock, securities class action
lawsuits have been filed against the publicly-held company. There can be no
assurance that such litigation will not occur in the future with respect to the
combined company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on the combined company's business and results of operations. Any
adverse determination in such litigation could also subject the combined company
to significant liabilities.
Anti-takeover Effect of Delaware Law and Certain Charter Provisions. The
Cortech Board has the authority to issue up to 2,000,000 shares of preferred
stock and to fix the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. In addition, the Cortech Board has adopted a stockholder rights
plan (the "Rights Plan") pursuant to which the Cortech Board declared a dividend
of one preferred share purchase right (a "Right") for each then outstanding
share of Cortech Common Stock. When a person or group of affiliated persons (the
"Acquiror") acquires 15% or more of the outstanding Cortech Common Stock, the
holder of each Right (excluding the Acquiror) may exercise it and acquire a
certain number of shares of Cortech Common Stock at a below market price.
The rights of the holders of Cortech Common Stock are subject to and may be
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, may have the effect of delaying, deferring or preventing a
change in control of the combined company, may discourage bids for Cortech
Common Stock at a premium over the market price of such Common Stock and may
adversely affect the market price of and the voting and other rights of the
holders of Cortech Common Stock. In addition, certain provisions of the Cortech
Certificate of Incorporation, the Cortech Bylaws and Delaware law applicable to
the combined company could have the effect of discouraging certain attempts to
acquire the combined company which could deprive the combined company's
stockholders of opportunities to sell their shares at prices higher than
prevailing market prices. See "Description of Cortech Capital Stock".
Control by Directors, Executive Officers, Principal Stockholders and
Affiliated Entities. Upon consummation of the Merger, the combined company's
directors, executive officers, principal stockholders and entities affiliated
with them will, in the aggregate, beneficially own approximately 38.89% of the
outstanding Cortech Common Stock. These persons, if acting together, could
substantially control all matters requiring approval by the stockholders of
Cortech, including the election of directors and the approval of mergers or
other business combination transactions. See "Cortech Principal Stockholders"
and "BioStar Principal Stockholders".
Absence of Dividends. Neither Cortech nor BioStar has ever declared or paid
dividends on its capital stock. The combined company does not anticipate paying
any dividends in the foreseeable future. The combined company intends to retain
its earnings, if any, for the development of the business.
Cautionary Statement Regarding Forward-Looking Information. Certain
statements contained in this Joint Proxy Statement/Prospectus, such as those
concerning BioStar's business strategy, products and revenues, capital
requirements, governmental regulation and other statements regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Securities Act). Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors," "Cortech Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Cortech -- Business," "BioStar Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "BioStar -- Business".
Cortech undertakes no obligation to publicly release the results of any revision
of those forward-looking statements that may be made to reflect events and
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by (i) the Cortech Board to be used at the Cortech
Special Meeting and (ii) the BioStar Board to be used at the BioStar Special
Meeting. This Joint Proxy Statement/Prospectus is also furnished by Cortech to
BioStar stockholders in connection with the issuance of shares of Cortech Common
Stock in connection with the Merger described herein.
The information set forth herein concerning Cortech has been furnished by
Cortech and the information set forth herein concerning BioStar has been
furnished by BioStar.
THE CORTECH SPECIAL MEETING
PURPOSE OF THE CORTECH SPECIAL MEETING
The purpose of the Cortech Special Meeting is to consider and vote upon (i)
the approval and adoption of the Reorganization Agreement, attached hereto as
Appendix A, and the transactions contemplated thereby (including, the Merger and
the related issuance of Cortech Common Stock to the BioStar stockholders) (the
"Merger Proposal") and (ii) the approval of an amendment to Cortech's
Certificate of Incorporation to (a) change Cortech's corporate name to "BioStar
Holdings, Inc." and (b) effect a one-for [ ] reverse stock split of the
Cortech Common Stock (collectively, the "Cortech Certificate Proposal"). The
Cortech Certificate Proposal will be implemented only if the Merger Proposal is
approved. Approval of the Cortech Certificate Proposal is not a condition to the
consummation of the Merger. Cortech stockholders will also consider and vote
upon such other matters, if any, as may be properly brought before the Cortech
Special Meeting.
THE CORTECH BOARD HAS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT,
THE MERGER AND THE CORTECH CERTIFICATE PROPOSAL AND HAS UNANIMOUSLY RECOMMENDED
A VOTE FOR APPROVAL OF THE MERGER PROPOSAL AND THE CORTECH CERTIFICATE PROPOSAL.
DATE, TIME AND PLACE OF MEETING
The Cortech Special Meeting will be held at on [ ], 1998,
at [ a.m.], local time.
RECORD DATE; VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Cortech Common Stock at the close of business
on[ ,] 1998 (the "Cortech Record Date") will be entitled to notice
of and to vote at the Cortech Special Meeting. On that date, there were
[ ] shares of Cortech Common Stock outstanding and entitled to vote.
Except for the stockholders identified herein under "Cortech Principal
Stockholders," as of the Cortech Record Date, to the knowledge of Cortech, no
other person beneficially owned more than 5% of the outstanding Cortech Common
Stock. See "Cortech Principal Stockholders".
Each holder of record of Cortech Common Stock on the Cortech Record Date
will be entitled to one vote for each share held on all matters to be voted upon
at the Cortech Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from holders of Cortech Common
Stock and all related costs will be borne by Cortech. In addition, Cortech may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their expenses in forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of Cortech or, at Cortech's request, D.F. King & Co., Inc.
("D.F. King"). No additional compensation will be paid to directors, officers or
other regular employees for such
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services, but D.F. King will be paid a fee, estimated to be up to approximately
$60,000 plus reasonable expenses, to assist in the solicitation of proxies.
QUORUM; VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the issued and outstanding shares of Cortech Common Stock entitled
to vote at the Cortech Special Meeting is necessary to constitute a quorum.
Approval of the Merger Proposal by Cortech's stockholders is not required
by the DGCL. Such approval is, however, required by the rules of the Nasdaq
National Market because (i) the Merger would effect a change of control of
Cortech and (ii) the number of shares of Cortech Common Stock to be issued or
reserved for issuance in connection with the Merger would exceed 20% of the
number of shares of Cortech Common Stock outstanding prior to the Merger.
According to the Bylaws of Cortech and the rules of the Nasdaq National Market,
approval of the Merger Proposal requires the approval of a majority of the
shares of Cortech Common Stock having voting power present in person or by proxy
at the Cortech Special Meeting.
Approval of the Cortech Certificate Proposal requires the approval of a
majority of the outstanding shares of Cortech Common Stock entitled to vote as
of the Cortech Record Date.
The officers and directors of Cortech, who own approximately 2.3% of the
outstanding Cortech Common Stock as of the Cortech Record Date, have entered
into Voting Agreements with BioStar and have delivered an irrevocable proxy to
BioStar pursuant to which they have agreed, subject to certain limitations, to
vote in favor of the Merger Proposal and the Cortech Certificate Proposal.
EFFECT OF ABSTENTIONS AND BROKER NONVOTES
If an executed Cortech proxy is returned and the stockholder has
specifically abstained from voting on the Merger Proposal or the Cortech
Certificate Proposal, the shares represented by such proxy will be considered
present at the Cortech Special Meeting for purposes of determining a quorum, but
will not be considered to have been voted in favor of such matter. Accordingly,
abstentions will have the effect of a negative vote with respect to the Merger
Proposal and the Cortech Certificate Proposal.
Brokerage firms who hold shares in street name for customers have authority
to vote those shares with respect to certain matters if they do not receive
instructions from a beneficial owner. Brokers will not have the authority to
vote Cortech Common Stock with respect to the Merger Proposal or the Cortech
Certificate Proposal if they have not received instructions from the beneficial
owners of such shares. Broker nonvotes will be considered present for purposes
of determining a quorum, but will have no effect on the vote with respect to the
Merger Proposal. Broker nonvotes will have the effect of a negative vote with
respect to the Cortech Certificate Proposal.
VOTING AND REVOCABILITY OF PROXIES
All shares of Cortech Common Stock that are entitled to vote and are
represented at the Cortech Special Meeting, either in person or by properly
executed proxies received prior to or at the Cortech Special Meeting and not
duly and timely revoked, will be voted at the Cortech Special Meeting in
accordance with the instructions indicated on such proxies. If no such
instructions are indicated, such proxies will be voted FOR approval of the
Merger Proposal and FOR approval of the Cortech Certificate Proposal.
If any other matters are properly presented for consideration at the
Cortech Special Meeting (including, among other things, consideration of a
motion to adjourn or postpone the Cortech Special Meeting to another time and/or
place (including, without limitation, for the purpose of soliciting additional
proxies)), the persons named in the enclosed form of proxy and voting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Cortech, at or before the taking of the vote
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at the Cortech Special Meeting, a written notice of revocation bearing a later
date than the proxy; (ii) duly executing a later-dated proxy relating to the
same shares and delivering it to the Secretary of Cortech before the taking of
the vote at the Cortech Special Meeting or (iii) attending the Cortech Special
Meeting and voting in person (although attendance at the Cortech Special Meeting
will not in and of itself constitute a revocation of proxy). Any written notice
of revocation or subsequent proxy should be sent so as to be delivered to
Cortech, Inc. at 6850 North Broadway, Suite G, Denver, Colorado 80221,
Attention: Corporate Secretary, or hand-delivered to the Secretary at Cortech,
in each case at or before the taking of the vote at the Cortech Special Meeting.
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THE BIOSTAR SPECIAL MEETING
PURPOSE OF THE BIOSTAR SPECIAL MEETING
The purpose of the BioStar Special Meeting is to consider and vote upon (i)
the approval and adoption of the Merger Proposal and (ii) the approval and
adoption of the BioStar Certificate Proposal.
THE BIOSTAR BOARD UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND THE
MERGER AND RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER PROPOSAL
AND FOR APPROVAL OF THE BIOSTAR CERTIFICATE PROPOSAL.
DATE, TIME AND PLACE OF MEETING
The BioStar Special Meeting will be held at on [ ],
1998, at [ a.m.], local time.
RECORD DATE; VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of BioStar Capital Stock at the close of business on
, 1998 (the "BioStar Record Date") will be entitled to notice of and
to vote at the BioStar Special Meeting. On that date, there were
shares of BioStar Capital Stock outstanding and entitled to vote. Except for
the stockholders identified herein under "BioStar Principal Stockholders," as of
the BioStar Record Date, to the knowledge of BioStar, no other person
beneficially owns more than 5% of the outstanding BioStar Capital Stock. See
"BioStar Principal Stockholders".
Each holder of record of BioStar Capital Stock on the BioStar Record Date
will be entitled to one vote for each share held on all matters to be voted upon
at the BioStar Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from holders of BioStar Capital
Stock and all related costs will be borne by BioStar. In addition, BioStar may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their expenses in forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of BioStar. No additional compensation will be paid to
directors, officers or other regular employees for such services.
QUORUM; VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of BioStar Capital Stock entitled to vote at
the BioStar Special Meeting is necessary to constitute a quorum.
Approval of the Merger Proposal and the BioStar Certificate Proposal will
each require approval by the affirmative vote of the holders of a majority of
the outstanding shares of BioStar common stock and BioStar preferred stock
(voting on an as-converted-to-common stock basis), voting together as a single
class, and the affirmative vote of a majority of the shares of each series of
BioStar preferred stock voting as separate classes.
Pursuant to the BioStar Voting Agreements, certain directors, officers and
other affiliates of BioStar, who together hold approximately 65% of the BioStar
common stock and BioStar preferred stock voting as a single class, and 100% of
the Series A Preferred Stock, 100% of the Series B Preferred Stock, 100% of the
Series C Preferred Stock, at least 50% of the Series D Preferred Stock and at
least 38% of the Series E Preferred Stock voting as separate classes,
outstanding as of the BioStar Record Date, have agreed to vote in favor of the
Merger Proposal and the BioStar Certificate Proposal. See "Approval of the
Merger and Related Transactions -- Voting Agreements".
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EFFECT OF ABSTENTIONS
Abstentions may be specified on the Merger Proposal and the BioStar
Certificate Proposal. If an executed BioStar proxy is returned and the
stockholder has specifically abstained from voting on any matter, the shares
represented by such proxy will be considered present at the BioStar Special
Meeting for purposes of determining a quorum, but will not be considered to have
been voted in favor of such matter. Abstentions will have the effect of a
negative vote with respect to the Merger Proposal and the BioStar Certificate
Proposal.
VOTING AND REVOCABILITY OF PROXIES
All shares of BioStar Capital Stock that are entitled to vote and are
represented at the BioStar Special Meeting either in person or by properly
executed proxies received prior to or at the BioStar Special Meeting and not
duly and timely revoked will be voted at the BioStar Special Meeting in
accordance with the instructions indicated on such proxies. If no such
instructions are indicated, such proxies will be voted for the approval of the
Merger Proposal and for approval of the BioStar Certificate Proposal.
If any other matters are properly presented for consideration at the
BioStar Special Meeting (or any adjournments or postponements thereof)
including, among other things, consideration of a motion to adjourn or postpone
the BioStar Special Meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the enclosed forms of proxy and voting thereunder will have the discretion to
vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of BioStar at or before the taking of the vote at the BioStar
Special Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of BioStar before the taking of the vote at the
BioStar Special Meeting or (iii) attending the BioStar Special Meeting and
voting in person (although attendance at the BioStar Special Meeting will not in
and of itself constitute a revocation of proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to BioStar,
Inc. at 6655 Lookout Road, Boulder, Colorado 80301, Attention: Secretary, or
hand-delivered to the Secretary at BioStar, in each case at or before the taking
of the vote at the BioStar Special Meeting. Proxies given by BioStar
stockholders pursuant to the BioStar Voting Agreements are irrevocable.
CORTECH STOCK PRICE AND DIVIDEND INFORMATION
Since November 24, 1992, Cortech Common Stock has been quoted on the Nasdaq
National Market under the symbol "CRTQ". The following table sets forth, for the
quarters indicated, the reported high and low closing sales prices of Cortech
Common Stock as reported on the Nasdaq National Market.
CORTECH COMMON STOCK
---------------------
HIGH LOW
-------- -------
1996
First Quarter............................................. 3.688 2.188
Second Quarter............................................ 3.438 2.688
Third Quarter............................................. 3.188 2.125
Fourth Quarter............................................ 2.500 1.375
1997
First Quarter............................................. 2.000 0.844
Second Quarter............................................ 0.938 0.594
Third Quarter............................................. 0.813 0.500
Fourth Quarter............................................ 0.844 0.531
1998
First Quarter (through February 12, 1998)................. 0.688 0.578
------- ------
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The last sales price per share of Cortech Common Stock, as reported by the
Nasdaq National Market, was $0.594 on December 19, 1997, the last trading day
preceding the public announcement of the proposed Merger on December 22, 1997.
On February 12, 1998, the last reported sale price per share of Cortech Common
Stock on the Nasdaq National Market was $0.61.
As of the Cortech Record Date and the BioStar Record Date, respectively,
there were approximately 559 record holders of Cortech Common Stock and
approximately 239 record holders of BioStar Capital Stock. Neither Cortech nor
BioStar has ever paid cash dividends on its respective capital stock. The
policies of Cortech and BioStar are to retain earnings for use in their
respective businesses.
CORTECH AND BIOSTAR STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR CORTECH COMMON STOCK.
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
Following upon the terminations in December 1996 and March 1997 of
Cortech's corporate collaborative arrangements with key partners and the
announcement of disappointing test results involving Cortech's principal
technologies under development, Cortech's Board determined that (i) an
aggressive restructuring would be necessary to conserve Cortech's existing
resources and (ii) a strategic transaction would likely be required in order for
Cortech's stockholders to achieve appropriate value from their investment in
Cortech. In 1997, Cortech promptly began implementation in the second quarter of
a significant corporate-wide downsizing (from 75 full-time, regular employees to
approximately 30) and undertook an additional downsizing in the fourth quarter
(to less than 15 full-time, regular employees) following the contractually
scheduled end, on September 14, 1997, of Cortech's operational responsibilities
with respect to its last remaining corporate collaborative arrangement.
As a result of these downsizings, which were undertaken to accomplish the
fundamental objective of reducing Cortech's rate of spending thereby preserving
cash, Cortech no longer had the staff that would be required to conduct research
and development within Cortech. Accordingly, Cortech faced a limited number of
alternatives which included:
(i) continuing as a stand-alone entity (i.e., attempting to attract
new collaborative partners to support research and development of
technology, including in areas where significant corporate partners had
recently terminated arrangements and ceded back to Cortech related rights);
(ii) engaging in a voluntary corporate liquidation; or
(iii) entering into a strategic transaction to realize appropriate
value from Cortech's tangible and intangible assets in a reasonably
expedient manner.
Insofar as the stand-alone alternative would continue incrementally to
deplete Cortech's cash and impair Cortech's ability to realize appropriate value
from its technology assets, from April 1997 to the date of Cortech's execution
of the Reorganization Agreement, management and the Cortech Board reviewed
potential opportunities for the realization of appropriate value from Cortech's
tangible and intangible assets. This activity included reviewing numerous
potential strategic transactions with third parties involving either a
combination with Cortech or a sale of certain of its assets. Management and the
Cortech Board also reviewed, and used as a baseline analysis against which to
measure potential strategic transactions, the possible returns for stockholders
in the event of a voluntary corporate liquidation. With the exception of
BioStar, however, no discussions or exchanges by Cortech with any third party
during this period led to (i) any agreement in principle regarding a proposed
transaction or (ii) any sustained discussions regarding the terms of any
transaction which management or the Cortech Board believed might reasonably
represent a transaction for the stockholders to achieve appropriate value from
their investment in Cortech.
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From December 1996 through early December 1997 Cortech internally discussed
and interviewed and held discussions with outside investment bankers regarding
potential strategic transactions. Such discussions did not result in a formal
engagement until December 8, 1997, at which time Cortech formally retained Cowen
to serve as its financial advisor in connection with Cortech's exploration of
strategic alternatives.
In February 1997, the BioStar Board began initial discussions concerning
the feasibility of a strategic transaction by which BioStar could achieve a
significant cash infusion to fund future growth opportunities and provide an
opportunity for stockholder liquidity. In May 1997, BioStar engaged Lehman
Brothers Inc. ("Lehman") to provide financial advisory services to BioStar
(including identifying opportunities for a potential strategic transaction).
Between May 1997 and the execution of the Reorganization Agreement, BioStar
engaged in discussions and exchanges with third parties regarding various
potential strategic transactions as well as the evaluation of a variety of
financing alternatives, both public and private.
On October 23, 1997, Teresa W. Ayers, President and Chief Executive Officer
of BioStar, was introduced to Kenneth R. Lynn, President, Chief Executive
Officer and Chairman of the Board of Cortech, through Cooley Godward LLP
("Cooley"). Cooley has acted as legal counsel to both entities (although Cortech
had retained Pillsbury Madison & Sutro LLP ("Pillsbury") in August 1997 to act
as legal counsel in connection with potential strategic transactions).
On October 24, 1997, officers of Cortech and BioStar (including Mr. Lynn
and Ms. Ayers) met at Cortech for a tour of its facilities, an exchange of
general information and a discussion regarding the potential benefits from a
combination of the two entities. The discussion was general in nature and no
formal proposal or relative valuation was discussed. Cortech and BioStar also
entered into a mutual non-disclosure agreement as of October 24, 1997.
On October 28, 1997, Mr. Lynn and Ms. Ayers participated in a telephone
conference with a representative from Lehman during which the possibility of a
combination of Cortech and BioStar was discussed. At the end of the conference,
Mr. Lynn and Ms. Ayers agreed to meet in person with the representative from
Lehman to engage in further discussions.
On October 31, 1997, officers of BioStar and Cortech (including Mr. Lynn
and Ms. Ayers) met at BioStar for a tour of its facility and discussion
concerning the business operations, products and financial results and prospects
of BioStar.
On November 5, 1997, officers of BioStar and Cortech (including Mr. Lynn
and Ms. Ayers) met with representatives of Lehman and discussed the possibility
of a business combination, including possible terms and structure. A
representative of Lehman outlined a proposed combination involving an issuance
of shares by Cortech to BioStar's stockholders to accomplish a relative
valuation between Cortech and BioStar, respectively, of approximately 30:70. Mr.
Lynn responded that such a relative valuation would be unacceptable for Cortech
and, following the November 5, 1997 meeting, officers of BioStar and Cortech
(principally Mr. Lynn and Ms. Ayers) engaged in various discussions regarding
relative valuation and other significant terms of a possible transaction.
On November 12, 1997, officers of Cortech (including Mr. Lynn) and one
outside member of the Cortech Board (Bert Fingerhut) met with Ms. Ayers and
Alexander E. Barkas, Ph.D., Chairman of the BioStar Board, to provide BioStar
with an overview of Cortech's business and technology development status.
On November 13, 1997, the BioStar Board met at a regularly scheduled
meeting at which the potential merits of a business combination with Cortech
were discussed relative to other financial and strategic alternatives available
to BioStar. Following such discussion, the BioStar Board authorized management
to undertake the negotiation of a potential business combination with Cortech.
On November 24, 1997, officers of BioStar and Cortech (including Mr. Lynn
and Ms. Ayers) met with representatives of Cowen. At this meeting, BioStar
presented an overview of its business operations, products and financial results
and prospects.
Following the November 24, 1997 meeting, representatives of Lehman
circulated an outline for a possible combination of BioStar and Cortech. As part
of the discussions concerning such outline, officers of BioStar
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and Cortech addressed the matter of relative valuation, eventually agreeing upon
a relative valuation for Cortech and BioStar, respectively, of 40:60 as the
basis for a proposed combination.
During the period of meetings between officers of Cortech and BioStar, Mr.
Lynn communicated regularly with his fellow members of the Cortech Board
regarding the status of discussions between the parties. In addition, officers
of Cortech (including Mr. Lynn) consulted regularly with representatives from
Cowen and Pillsbury regarding such discussions.
From December 5, 1997, when a draft of the Reorganization Agreement was
first circulated, until December 22, 1997, representatives from Cortech, BioStar
and their respective legal counsel negotiated the terms of the Reorganization
Agreement as well as the terms of related arrangements and documents.
On December 12, 1997, the Cortech Board met at a regularly scheduled
meeting at which the potential merits of a business combination with BioStar
were discussed relative to other potential financial and strategic alternatives
available to Cortech (in particular, a voluntary corporate liquidation). The
meeting was attended by representatives of Cowen and Pillsbury. In addition,
BioStar's management team (including Ms. Ayers) and Chairman of the Board joined
the meeting to make a presentation to the Cortech Board regarding BioStar and to
answer questions regarding BioStar's business operations, products and financial
results and prospects. Following this presentation, the representatives of
BioStar were excused from the meeting and the Cortech Board considered the
preliminary analyses of Cowen regarding a combination of Cortech and BioStar
from a financial point of view as well as the alternative of a voluntary
corporate liquidation. Following discussion, and based upon its review of the
information presented at the meeting, the Cortech Board authorized management to
undertake the negotiation of a potential business combination with BioStar.
On December 19, 1997, at a special telephonic meeting of the BioStar Board,
(1) management of BioStar and representatives from Cooley reviewed the results
of their due diligence of Cortech, (2) management reviewed the possible benefits
and risks relating to the proposed combination, (3) the Directors reviewed with
management and representatives of Cooley the specific terms of the proposed
Reorganization Agreement and (4) Lehman presented an analysis regarding the
combination from a financial point of view. At the meeting, the BioStar Board
unanimously approved the Merger and the Reorganization Agreement.
On December 19, 1997, at a special meeting of the Cortech Board, (1)
management of Cortech and a representative from Pillsbury reviewed the results
of due diligence conducted with respect to BioStar, (2) management reviewed the
possible benefits and risks relating to the proposed combination, (3) the
Cortech Board reviewed with management and a representative of Pillsbury the
specific terms of the proposed Reorganization Agreement and (4) Cowen made a
presentation regarding the combination from a financial point of view. The
meeting was adjourned to December 22, 1997 at which time (i) the Cortech Board
reviewed with management and a representative of Pillsbury the proposed
Reorganization Agreement and related documents in their final form, (ii) Cowen
delivered its oral opinion that the financial terms of the Merger were fair, as
of such date and from a financial point of view, to Cortech (and such oral
opinion was subsequently confirmed by delivery of the written opinion of Cowen
dated December 22, 1997) and (iii) the Cortech Board unanimously approved the
Reorganization Agreement and the Merger.
On December 22, 1997, Cortech and BioStar executed the Reorganization
Agreement and, subsequently, issued a joint press release announcing the
execution of the Reorganization Agreement.
CORTECH'S REASONS FOR THE MERGER
In the course of reaching its decision to approve the Reorganization
Agreement and the Merger, the Cortech Board consulted with Cortech's legal and
financial advisors, as well as with Cortech's management and others, and
considered a number of factors, including that:
(1) The combination of Cortech's cash resources and status as a public
company with BioStar's products, platform technology and organization would
offer Cortech's stockholders an opportunity to realize appropriate value
from their investment in Cortech;
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(2) The combination would afford Cortech's existing technology an
enhanced opportunity to be (i) recognized as valuable and (ii) advanced in
externally funded development, thereby permitting Cortech stockholders an
opportunity to realize any benefits therefrom;
(3) As compared with a voluntary corporate liquidation, (i) the
combination would permit Cortech's stockholders an opportunity to share in
potential value which would otherwise be lost in a liquidation (such as
value potentially to be derived from Cortech's public company status as
well as the potential going concern value of other intangible and tangible
Cortech assets) and (ii) Cortech's stockholders would not have to face
risks as to whether or not reserves allocated to cover residual liabilities
in connection with any liquidation would prove to be adequate;
(4) After reviewing numerous potential strategic transactions, and
balanced against Cortech's diminishing prospects and status as a
stand-alone entity (due, primarily, to continued incremental depletion of
cash assets, the impairment of Cortech's ability (through a series of
corporate downsizings) to undertake internal research and development and
the resulting/growing potential for technological stagnation), management
and the Cortech Board determined that an alternative transaction of
comparable or superior terms for Cortech's stockholders likely would not
become available to Cortech within the reasonably foreseeable future (if
ever); and
(5) BioStar possesses a variety of assets and resources that would
bring value to a combined entity and thereby potentially benefit Cortech's
stockholders, including: (i) a capable management team with the
demonstrated ability to lead the development and commercialization of
products; (ii) a business plan for continued efforts to develop and
commercialize products; and (iii) current product revenues which would, at
least partially, offset continuing research and development expenses (and
thereby extend the cash resources of a combined company).
In the course of its deliberations, the Cortech Board reviewed and
considered a number of other factors relevant to the Merger and the
Reorganization Agreement, including:
(a) Information concerning the respective businesses, financial
position, results of operations, product development schedules,
technologies and properties of Cortech and BioStar;
(b) Cowen's oral opinion, delivered on December 22, 1997 and
subsequently confirmed in writing, that as of such date the financial terms
of the Merger were fair, from a financial point of view, to Cortech;
(c) Analysis from management concerning the possible returns to
Cortech stockholders in the event of a voluntary corporate liquidation;
(d) Analysis from management concerning due diligence conducted with
respect to BioStar's business, operations, technology and competitive
position, as well as the potential opportunities for growth by a combined
company;
(e) Presentations from management and a representative from Pillsbury
concerning the specific terms of the Reorganization Agreement and related
documents, including the obligations of Cortech to refrain from soliciting
or encouraging other proposals with respect to a strategic combination,
provisions relating to the possible payment of a break-up fee, the possible
circumstances under which the Reorganization Agreement could be terminated
and the conditions precedent to a closing of the Merger; and
(f) The requirements that the Merger be approved by votes of the Cortech
and BioStar stockholders, respectively.
The Cortech Board also considered certain potentially negative factors in
its deliberations concerning the Merger, including (i) the possibility that the
anticipated benefits of the Merger would not be realized, (ii) the dilutive
effects of the issuance of shares of Cortech Common Stock in the Merger to the
stockholders of BioStar, (iii) the possibility that the Merger would not be
consummated and (iv) other risks described above
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under "Risk Factors". The Cortech Board concluded that the potential
benefits of the Merger to Cortech and its stockholders outweighed the potential
risks.
The foregoing discussion of the information and factors considered by the
Cortech Board is not intended to be exhaustive, but is believed to include the
material information and factors considered by the Cortech Board. In reaching a
determination whether to approve the Reorganization Agreement and the Merger, in
view of the variety of factors considered the Cortech Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative or
specific weights to the information and factors considered in reaching its
determinations, and individual directors may have given differing weights to
different factors.
CORTECH BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE CORTECH BOARD HAS DETERMINED THAT THE
TERMS OF THE REORGANIZATION AGREEMENT AND THE MERGER ARE FAIR TO, AND IN THE
BEST INTERESTS OF, CORTECH AND THE CORTECH STOCKHOLDERS. ACCORDINGLY, THE
CORTECH BOARD HAS UNANIMOUSLY RECOMMENDED THAT CORTECH STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE MERGER PROPOSAL.
BIOSTAR'S REASONS FOR THE MERGER
In reaching its decision to approve the Reorganization Agreement and the
Merger, the BioStar Board consulted with BioStar's legal and financial advisors,
and considered a number of factors, including that:
(1) The Merger is expected to provide BioStar with substantially
greater resources, including cash and a publicly-traded security, to fund
internal development work and pursue strategic transactions, including
acquisitions and strategic partnerships.
(2) BioStar's stockholders will receive Cortech Common Stock in the
Merger for which there is a ready public market, in contrast to the
illiquid nature of their present holdings of BioStar Capital Stock.
(3) The Merger is expected to provide BioStar with access to the
intangible assets associated with Cortech's business.
(4) The parties have overlapping technology interests. BioStar has
completed feasibility testing for brain marker assays which may be useful
for developing a brain trauma diagnostic test.
(5) The Merger is expected to provide BioStar with access to Cortech's
laboratory and office facilities in Denver, Colorado which may be useful
for BioStar's continued growth.
In addition to the factors described above, the BioStar Board considered,
among other things, the following factors:
(a) Detailed financial analyses, pro forma and other information with
respect to Cortech and BioStar presented by Lehman and BioStar's
management;
(b) The BioStar Board's own knowledge of Cortech, BioStar and their
respective businesses, financial position, historical and prospective
results of operations and product development plans;
(c) The current economic, financial and business climate, including
the states of the clinical diagnostics and pharmaceutical industries,
including current and future competition, and consolidations within the
industries;
(d) The historical price and volume trading data for Cortech's Common
Stock as well as the composition of Cortech's stockholder base;
(e) Other alternatives available to BioStar in short and long-term
time frames, including the availability of public and private financing, a
range of business combinations and a sale of BioStar to achieve BioStar's
funding, liquidity and other strategic objectives;
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(f) The expectation that the Merger will be tax free for federal income
tax purposes to BioStar's stockholders; and
(g) Reports from management and legal and financial advisors
concerning the specific terms of the Reorganization Agreement and ancillary
documents, including the obligation of Cortech not to solicit or encourage
other acquisition proposals, the breakup fee provisions, the circumstances
under which either Cortech or BioStar can terminate the Reorganization
Agreement and the closing conditions to the Merger.
The BioStar Board also considered a number of potential risks relating to
the Merger, including (i) the risk that the Merger would not be consummated due
to the failure of the parties to satisfy conditions to the Merger, (ii) the risk
that the market price of Cortech Common Stock might decline between execution of
the Reorganization Agreement and consummation of the Merger, (iii) the risk that
despite the intentions and efforts of the parties, the key technical and
management personnel of Cortech and BioStar required to facilitate a successful
integration may not remain with the combined company, and (iv) the other risks
described above under "Risk Factors".
The foregoing discussion of the factors considered by the BioStar Board is
not intended to be exhaustive but is intended to include all of the material
factors considered by the BioStar Board. In view of the complexity and variety
of factors considered by the BioStar Board, the BioStar Board did not consider
it practical to quantify or otherwise attempt to assign any relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors.
FOR THE REASONS DISCUSSED ABOVE, THE BIOSTAR BOARD HAS APPROVED THE
REORGANIZATION AGREEMENT AND THE MERGER AND HAS DETERMINED THAT THE TERMS OF THE
REORGANIZATION AGREEMENT AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS
OF, BIOSTAR AND THE BIOSTAR STOCKHOLDERS. ACCORDINGLY, THE BIOSTAR BOARD HAS
UNANIMOUSLY RECOMMENDED THAT THE BIOSTAR STOCKHOLDERS VOTE IN FAVOR OF APPROVAL
OF THE MERGER PROPOSAL.
OPINION OF FINANCIAL ADVISOR TO CORTECH
Pursuant to an engagement letter dated December 8, 1997 (the "Cowen
Engagement Letter"), Cortech retained Cowen to serve as its financial advisor in
connection with Cortech's exploration of strategic alternatives. As part of this
assignment, Cowen was asked to render an opinion to the Cortech Board as to the
fairness to Cortech, from a financial point of view, of the terms of the Merger.
On December 22, 1997, Cowen delivered its oral opinion to the Cortech
Board, subsequently confirmed in writing as of the same date, to the effect
that, as of December 22, 1997, the financial terms of the Merger pursuant to the
Reorganization Agreement were fair, from a financial point of view, to Cortech.
THE FULL TEXT OF THE WRITTEN OPINION OF COWEN, DATED DECEMBER 22, 1997, IS
ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED BY REFERENCE. HOLDERS OF
CORTECH COMMON STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF
THE REVIEW BY COWEN. THE SUMMARY OF THE WRITTEN OPINION OF COWEN SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION. COWEN'S ANALYSES AND OPINION WERE PREPARED FOR THE CORTECH BOARD AND
ARE DIRECTED TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE FINANCIAL
TERMS OF THE MERGER. THE OPINION DOES NOT CONSTITUTE AN OPINION AS TO THE MERITS
OF THE MERGER OR A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW TO VOTE ON THE
PROPOSED MERGER. THE AMOUNT OF STOCK CONSIDERATION WAS DETERMINED THROUGH
NEGOTIATIONS BETWEEN CORTECH AND BIOSTAR. COWEN DID NOT MAKE ANY RECOMMENDATION
TO CORTECH AS TO FORM AND AMOUNT OF CONSIDERATION TO BE PAID IN THE MERGER.
Cowen was selected by the Cortech Board as its financial advisor, and to
render an opinion to the Board, because Cowen is a nationally recognized
investment banking firm and because certain principals of Cowen have substantial
experience in transactions similar to the Merger and are familiar with Cortech
and its businesses. As part of its investment banking business, Cowen is
regularly engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions and valuations for corporate and other
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purposes. In the ordinary course of its business, Cowen trades equity securities
of Cortech for its account and for the accounts of its customers, and,
accordingly, it may at any time hold a long or short position in such
securities.
In arriving at its opinion, Cowen (a) reviewed Cortech's financial
statements for the fiscal years ended December 31, 1994, 1995, and 1996 and for
the quarters ended September 30, 1996 and September 30, 1997, respectively,
certain publicly available filings with the Securities and Exchange Commission
and certain other relevant financial and operating data of Cortech; (b) reviewed
BioStar's financial statements for the fiscal years ended December 31, 1994,
1995, and 1996 and for the quarters ended September 30, 1996 and September 30,
1997, respectively, and certain other relevant financial and operating data of
BioStar; (c) reviewed a draft Reorganization Agreement, dated December 22, 1997;
(d) held meetings and discussions with management and senior personnel of
Cortech and BioStar to discuss the business, operations, historical financial
results and future prospects of Cortech and BioStar; (e) reviewed financial
projections furnished to Cowen by the management of Cortech, including, among
other things, the capital structure, sales, net income, cash flow, capital
requirements and other data of Cortech that Cowen deemed relevant; (f) reviewed
financial projections furnished to Cowen by the management of BioStar,
including, among other things, the capital structure, sales, net income, cash
flow, capital requirements and other data of BioStar that Cowen deemed relevant;
(g) reviewed the valuation of Cortech and BioStar in comparison to other similar
publicly traded companies; (h) analyzed the potential pro forma financial
effects of the Merger; and (i) conducted such other studies, analysis, inquiries
and investigations as Cowen deemed appropriate. Cowen was not requested to, and
did not, solicit third party indications of interest in acquiring all or
substantially all of the stock or assets of Cortech.
In rendering its opinion, Cowen relied upon Cortech's and BioStar's
managements with respect to the accuracy and completeness of the financial and
other information furnished to it as described above. Cowen assumed that
financial forecasts, projections and estimates of operating efficiencies and
potential synergies reflected the best currently available estimates of expected
future financial performance of their respective entities. Cowen has not assumed
any responsibility for independent verification of such information, including
financial information, nor has it made an independent evaluation or appraisal of
any of the properties or assets of Cortech or BioStar. Cowen has conducted no
inquiry as to legal matters relating to Cortech and BioStar, and Cowen expresses
no opinion with respect to any such matters.
Cowen's opinion is necessarily based on general economic, market, financial
and other conditions as they exist on, and can be evaluated as of, the date of
the opinion, as well as the information currently available to Cowen at that
time. It should be understood that, although subsequent developments may affect
Cowen's opinion, Cowen does not have any obligation to update, revise or
reaffirm its opinion. Cowen's opinion does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed Merger.
Cowen's opinion does not imply any conclusion as to the likely trading range for
Cortech Common Stock following consummation of the Merger or otherwise, which
may vary depending on numerous factors that generally influence the price of
securities. Cowen's opinion is limited to the fairness, from a financial point
of view, of the terms of the Merger. Cowen expresses no opinion with respect to
any other reasons, legal, business or otherwise, that may support the decision
of the Cortech Board to approve, or Cortech's decision to consummate, the
Merger.
For purposes of rendering its opinion, Cowen has assumed in all respects
material to its analysis, that the representations and warranties of each party
contained in the Reorganization Agreement are true and correct, that each party
will perform all of the covenants and agreements required to be performed by it
under the Reorganization Agreement and that all conditions to the consummation
of the Merger will be satisfied without waiver thereof. Cowen has also assumed
that all governmental, regulatory or other consents and approvals contemplated
by the Reorganization Agreement will be obtained and that in the course of
obtaining any of those consents no restrictions will be imposed or waivers made
that would have an adverse effect on the contemplated benefits of the Merger.
The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each of
the financial analyses described below, and reviewed
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with the management of Cortech the assumptions on which such analyses were based
and other factors, including the historical and projected results of Cortech and
BioStar. No limitations were imposed by the Cortech Board with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
Valuation of Cortech
Analysis of Certain Publicly Traded Companies. Using publicly available
information, Cowen compared, among other things, the market value of the total
outstanding common equity (the "Market Value") and market value minus "cash"
(the "Technology Value") of Cortech to the corresponding Market Value and
Technology Value of certain other biotechnology companies (the "Biotech
Companies") whose securities are publicly traded and which Cowen deemed
comparable to Cortech. "Cash" equals cash and cash equivalents plus marketable
securities. The Technology Values of these companies is a measure of the value
attributed by the market to the current value of the companies' products under
development. Selected Biotech Companies included: Anergen, Inc., Corvas
International, Inc., Cytel Corporation, La Jolla Pharmaceutical Company,
Repligen Corporation, T Cell Sciences, Inc., and Xenova Group plc. Technology
Values ranged from a high of $45.2 million to a low of ($6.9) million. Cortech's
Technology Value was calculated to be ($4.0) million. Based on this analysis,
Cortech's Technology Value was shown to be at the low end of the range of
Technology Values of the Biotech Companies.
Although the Biotech Companies were used for comparison purposes, none of
such companies is directly comparable to Cortech. Accordingly, an analysis of
the results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Biotech Companies and
other factors that could affect the public trading value of the Biotech
Companies or the company to which they are being compared.
Liquidation Analysis. Cowen performed a liquidation analysis on Cortech as
a way of determining the cash value of Cortech assuming the Merger did not
occur. Such analysis assumes Cortech would complete its liquidation by the end
of 1998. This analysis was based upon certain assumptions described by,
projections supplied by and discussions held with the management of Cortech.
Based on this analysis, Cortech was projected to receive approximately $1.0
million in cash from interest income and the sale of assets by the end of 1998
and spend approximately $4.4 million in general and administrative expenses,
research and development salaries and overhead by the end of 1998. Given
Cortech's cash position of $15.4 million at the beginning of the first quarter
of 1998, the net result of these cash receipts and expenditures by the end of
the fourth quarter of 1998 would yield a cash position of $12.1 million as a
result of the liquidation of Cortech by the end of 1998.
In connection with the liquidation analysis, it should be noted that such
analysis is based upon observations and estimates of management as of December
1997. Management has not prepared a detailed plan in preparation for an actual
liquidation, and there can be no assurances that Cortech would receive the
projected income, that Cortech would not incur additional expenses (whether or
not relating to a liquidation) or that Cortech would seek to or could effect an
orderly liquidation by the end of 1998, if at all. Accordingly, there can be no
assurances that the projected cash position of $12.1 million (or a figure
approximating such amount) would result from the liquidation of Cortech.
Valuation of BioStar
Analysis of Certain Publicly Traded Companies. Cowen compared selected
historical operating and financial data and ratios for BioStar to the
corresponding financial data and ratios of certain other point-of-care
diagnostic companies (the "Diagnostics Companies") whose securities are publicly
traded and which Cowen deemed comparable to BioStar. These companies included:
Abaxis, Inc., Abbott Laboratories, Beckman Instruments, Inc., BioSite
Diagnostics, Incorporated, CardioVascular Diagnostics, Inc., Cholestech
Corporation, Diametrics Medical, Inc., i-STAT Corporation, International Murex
Technologies Corporation, Meridian Diagnostics, Inc. and Quidel Corporation.
Such data and ratios include the "Enterprise Value" of such Diagnostics
Companies as multiples of revenues, earnings before interest and taxes plus
depreciation and
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amortization ("EBITDA") and earnings before interest and taxes ("EBIT") for the
latest twelve months ("LTM"), estimated 1997 calendar year and estimated 1998
calendar year periods. Cowen also examined the ratios of the current prices of
the Diagnostics Companies to the LTM earnings per share ("EPS"), estimated 1997
calendar year EPS and estimated 1998 calendar year EPS, as estimated by Cowen or
First Call, for these companies.
Such analysis indicated that, for the Diagnostics Companies, (i) the median
values of Enterprise Value (a) as a multiple of LTM revenue, EBITDA and EBIT
were 3.50 times, 13.7 times and 22.4 times, respectively; (b) of estimated 1997
revenue, EBITDA and EBIT were 4.46 times, 28.5 times and 18.9 times,
respectively; (c) of estimated 1998 revenue, EBITDA and EBIT were 2.95 times,
10.9 times and 14.2 times, respectively; and (ii) the median values of price per
share as a multiple of LTM EPS, estimated 1997 EPS and estimated 1998 EPS were
25.6 times, 24.2 times and 19.1 times, respectively.
Although the Diagnostics Companies were used for comparison purposes, none
of such companies is directly comparable to BioStar. Accordingly, an analysis of
the results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Diagnostics Companies
and other factors that could affect the public trading value of the Diagnostics
Companies or BioStar to which they are being compared.
BioStar provided certain revenue projections and expense projections
("Management Case"). The Management Case was adjusted based upon certain
assumptions described by, projections supplied by and discussions held with the
managements of BioStar and Cortech (the "Adjusted Case"). Utilizing Adjusted
Case 1997 and 1998 revenue projections, a range of equity values for BioStar was
determined by applying such Adjusted Case revenue projections to median 1997 and
1998 Diagnostics Companies revenue multiples and subtracting projected debt as
of December 31, 1997 of $8.4 million and adding projected cash as of December
31, 1997 of $10,000. Once these equity values were determined, a 35% illiquidity
discount to compensate for the additional risk and lack of liquidity associated
with a private company was applied to BioStar's range of equity values, yielding
equity values for BioStar ranging from $33.5 million to $39.5 million.
Discounted Cash Flow Analysis. Cowen estimated the range of values for
BioStar based upon the discounted present value of the Management Case projected
after-tax free cash flows of BioStar for the years ending December 1997 through
December 2001, and of the terminal value of BioStar at December 30, 2001 based
upon estimated EBIT multiples and 2001 EBIT. After-tax cash flow was calculated
by taking projected EBIT and subtracting from such amount projected taxes,
capital expenditures, changes in working capital and changes in other assets and
liabilities and adding back projected depreciation and amortization. This
analysis was based upon certain assumptions described by, projections supplied
by and discussions held with the managements of Cortech and BioStar. In
performing this analysis, Cowen utilized discount rates ranging from 20% to 40%.
These discount rates were selected based on a number of criteria including the
estimated industry weighted average cost of capital for Diagnostics Companies
and as a way to account for the risks inherent in private diagnostics companies
and BioStar. Cowen utilized terminal multiples of EBIT ranging from 8.0 times to
12.0 times for BioStar. These multiples were derived by taking the general range
of 1998 EBIT multiples for the Diagnostics Companies and reducing these
multiples to 8.0 times to 12.0 times as a way to account for the risks inherent
in private diagnostics companies and BioStar. Such analysis resulted in a range
of equity values for BioStar to which a 35% illiquidity discount was applied to
account for the additional risk and lack of liquidity associated with a private
company. Utilizing this methodology, BioStar's midrange equity value ranged from
$22.3 million to $34.7 million.
IPO Valuation Analysis. As a result of the Merger, if consummated,
BioStar's shareholders will hold publicly traded securities. Cowen estimated the
range of equity values for BioStar assuming a theoretical initial public
offering ("IPO") of BioStar in 2000 and discounting such equity values to the
end of 1997. The equity value of BioStar was calculated by taking the average
1998 price to earnings multiple of publicly traded companies Cowen deemed most
comparable to BioStar. These companies included International Murex Technologies
Corporation, Meridian Diagnostics, Inc. and Quidel Corporation. The average 1998
price to earnings multiple of these companies was 14.2 times, to which a
standard 15% IPO discount was applied,
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yielding a multiple of 12.0 times. This multiple was then applied to BioStar's
Adjusted Case projected 2000 net income, yielding an equity valuation which was
discounted to the present at discount rates ranging from 20% to 40%. These
discount rates were selected based on a number of criteria, including the
estimated industry weighted average cost of capital for Diagnostics Companies
and as a way to account for the risks inherent in private diagnostics companies
and BioStar. Utilizing this methodology, BioStar's equity values ranged from
$27.6 million to $37.5 million.
Pro Forma Valuation
Pro Forma Analysis. Cowen analyzed the potential effect of the Merger on
the projected pro forma Management Case and Adjusted Case income statement of
BioStar for the years ended December 1998, 1999, 2000 and 2001. This analysis
was based on (a) the liquidation value of Cortech provided by Cortech's
management; (b) Management Case projections for BioStar; and (c) Adjusted Case
projections for BioStar. The analysis excluded all one-time events, including
the effects of a BioStar financing transaction projected to occur in the first
quarter of 1998. In addition, the analysis excluded the effects of any negative
goodwill amortization which may be created by the Merger. The analysis showed,
among other things, that on a pro forma Management Case basis, BioStar is
projected to earn $15.8 million in 2001 and on a pro forma Adjusted Case basis,
BioStar is projected to earn $7.3 million in 2001.
The summary set forth above does not purport to be a complete description
of the analyses performed by Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Cowen did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, notwithstanding the separate factors summarized above, Cowen
believes, and has advised the Cortech Board, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Cortech and BioStar. These analyses performed by Cowen
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
uncertain and are subject to significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and are beyond the control of Cowen, Cortech and
BioStar. As mentioned above, the analyses supplied by Cowen and its opinion were
among several factors taken into consideration by the Cortech Board in making
its decision to enter into the Reorganization Agreement and should not be
considered as determinative of such decision.
Pursuant to the Cowen Engagement Letter, Cortech has agreed to pay certain
fees to Cowen for its financial advisory services provided in connection with
the Merger. Cowen has been paid a non-refundable retainer fee and a fairness
opinion fee totaling $250,000. In addition, if the Merger is consummated,
Cortech has agreed to pay Cowen an additional advisory fee of $150,000 in
consideration for Cowen's professional services. Additionally, Cortech has
agreed to reimburse Cowen for its out-of-pocket expenses (including the
reasonable fees and expenses of its counsel) incurred or accrued during the
period of, and in connection with, Cowen's engagement. Cortech has also agreed
to indemnify Cowen against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of services performed by
Cowen as financial advisor to the Cortech Board in connection with the Merger,
unless it is finally judicially determined that such liabilities arose out of
Cowen's gross negligence or willful misconduct. The terms of the fee arrangement
with Cowen, which are customary in transactions of this nature, were negotiated
at arms' length between Cortech and Cowen, and the Cortech Board was aware of
such arrangement, including the fact that a significant portion of the aggregate
fee payable to Cowen is contingent upon consummation of the Merger.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Cortech's and BioStar's management and the BioStar Board
may be deemed to have certain interests in the Merger that are in addition to
their interests as stockholders of Cortech or BioStar generally. The BioStar
Board and the Cortech Board were each aware of these interests and considered
them, among other matters, in approving the Reorganization Agreement and the
transactions contemplated thereby.
Indemnification. Under the Reorganization Agreement, Cortech has agreed to
provide indemnification, to the fullest extent permitted by applicable laws, to
any person who has served as a director or officer of Cortech or BioStar against
losses, claims, damages or expenses arising out of the fact that such person was
a director or officer of Cortech or BioStar.
Acceleration of Stock Options. At the Effective Time of the Merger, vesting
of options to purchase BioStar common stock held by the following BioStar
directors shall accelerate (or the repurchase option held by BioStar with
respect to shares underlying such options shall expire) so that the following
portions of options shall be vested as of such time: option to purchase 100,000
shares at an exercise price of $.23 per share held by Thomas Bologna (50,000
shares will be vested and the remainder will be canceled); options to purchase
200,000 shares at an exercise price of $.23 per share held by Alexander E.
Barkas (125,000 shares will be vested and the remainder will be canceled); and
100,000 shares subject to a repurchase option held by Marvin H. Caruthers
(50,000 shares will be vested and the remainder will be canceled).
BioStar Management Bonuses. In February 1998, the BioStar Board granted its
executive officers stock options in the following amounts as compensation for
services provided by such persons to BioStar in connection with the Merger:
Teresa W. Ayers (150,000 shares), Lyndal K. Hesterberg (130,000 shares), Noel T.
Doheny (115,000 shares), Kim L. Stebbings (95,000 shares) and Edward C.
Pritchard (10,000 shares), (each a "Bonus Option"). The Bonus Options are
exercisable at $.40 per share of BioStar Common Stock and will vest in full on
the first anniversary of the Merger. The Bonus Options will be assumed by
Cortech in the Merger. The Bonus Options may be exercised early pursuant to
restricted stock purchase agreements which provide that BioStar can repurchase
any shares if the employee leaves prior to the first anniversary of the Merger.
In addition, in February 1998, BioStar paid Ms. Ayers, Mr. Hesterberg, Mr.
Doheny, Ms. Stebbings and Mr. Pritchard a cash bonus equal to the exercise price
for the number of shares equal to two years of vesting on outstanding options
(the "Two Year Vesting Amount") held by such executive plus an amount equal to
such executive's tax liability. The executive officers are required to use the
cash bonus to exercise the Two Year Vesting Amount. The aggregate cash bonus
amount paid was $380,000.
Severance Arrangements. Cortech adopted an Executive Officers' Severance
Benefit Plan (the "Severance Plan") on September 18, 1995, which was amended on
December 13, 1996, to encourage senior employees to continue working on
Cortech's behalf during and following a change in control. In the event of an
involuntary termination of employment within 60 days prior to and up to 30
months following a change in control, all employees employed at the level of
Vice President or above, and such other management employees as may be
designated by the Chief Executive Officer, will receive compensation during the
Benefit Period (defined below), as well as a proportional bonus payment if one
was received the year preceding the year in which the termination date occurs,
and all outstanding unvested stock options held by any such employee will become
fully vested on the termination date. The "Benefit Period" for employees other
than the Chief Executive Officer is the period commencing on the termination
date and (i) continuing for 18 months following such date if the date occurs
within 60 days prior or up to 12 months after a change in control, or (ii) if
termination occurs beyond 12 months after a change in control, continuing for
the period following the termination date determined by reducing 30 months by
the number of months the eligible employee was employed by Cortech following a
change in control. With respect to the Chief Executive Officer, the "Benefit
Period" is the period commencing on the Chief Executive Officer's termination
date and (i) continuing for 24 months following such date if the date occurs
within 60 days prior or up to 12 months after a change in control, or (ii) if
termination occurs beyond 12 months after a change in control, continuing for
the period following such termination date determined by reducing 36 months by
the number of months the Chief Executive Officer was employed by Cortech
following a change in control.
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Cortech entered into an Executive Compensation and Benefits Continuation
Agreement with Kenneth R. Lynn (the "Employment Agreement") on October 14, 1997,
which provides, upon the occurrence of the Termination Event (defined below) for
the payment of the equivalent of 24 months base salary, the payment of health
insurance policies for up to 18 months following the Termination Event,
immediate vesting of all stock options not already vested and the payment of a
bonus (equal to the fraction of the current year worked multiplied by the bonus
paid for the prior year). A "Termination Event" is defined as the involuntary
termination of Mr. Lynn by Cortech without cause or the termination of
employment by Mr. Lynn on account of a material change in the business of
Cortech or the duties of Mr. Lynn prior to a change in control of Cortech or
within 30 months after a change in control of Cortech. The Employment Agreement
also provides that, with respect to any Termination Event that is also covered
by the Severance Plan, Mr. Lynn will receive compensation and benefits pursuant
to the Employment Agreement only and not pursuant to the Severance Plan. As part
of the arrangements relating to the Reorganization Agreement and the Merger, Mr.
Lynn would be terminated as Chief Executive Officer of Cortech at the Effective
Time. Accordingly, Mr. Lynn would become entitled to benefits under the
Employment Agreement upon such termination (and would not be entitled to any
benefits under the Severance Plan). In connection with arrangements relating to
the Reorganization Agreement, Mr. Lynn has agreed to an amendment of the
Employment Agreement. Pursuant to such amendment, Mr. Lynn would provide Cortech
with consulting services for up to 20 hours per week (on a non-cumulative basis)
for three months following the Effective Time and (ii) defer three months' worth
of base salary otherwise payable following the Merger as severance (to be paid,
on a month-to-month basis, over the course of such three-month consulting
period).
As a result of Mr. Lynn's Employment Agreement, it is anticipated that the
only individual covered by the Severance Plan will be Diarmuid F. Boran,
Cortech's Vice President of Corporate Development and Planning. As part of the
arrangements relating to the Reorganization Agreement and the Merger, it is
contemplated that Mr. Boran will be terminated as an officer of Cortech at the
Effective Time of the Merger. Pursuant to an agreement with Mr. Boran (the
"Boran Agreement"), the cash benefits payable under the Severance Plan would be
paid at the Effective Time. The Boran Agreement further provides that benefits
available under the Severance Plan would also be paid to Mr. Boran (with cash
payments made over the course of six months) in the event of Mr. Boran's
involuntary termination in the absence of the Merger.
Cortech Employment and Consulting Arrangements. Pursuant to agreements
reached between Cortech and BioStar, Cortech has entered into agreements with
three key employees of Cortech (including Mr. Boran, as part of the Boran
Agreement, but no other officers or directors of Cortech). Pursuant to these
agreements, Cortech has agreed to employ these individuals at their current
salaries as full or part-time employees and/or consultants for periods ranging
from six to nine months following the Effective Time (six months for Mr. Boran).
To ensure their continued employment, Cortech has agreed to make certain
additional payments to two of these employees (excluding Mr. Boran who would
otherwise be receiving benefits pursuant to the Severance Plan and in accordance
with the Boran Agreement).
VOTING AGREEMENTS
Certain directors, officers and other affiliates of BioStar (the "Voting
Agreement Stockholders"), who together hold approximately 65% of the BioStar
common stock and preferred stock voting together as a single class, and 100% of
the Series A Preferred Stock, 100% of the Series B Preferred Stock, 100% of the
Series C Preferred Stock, at least 50% of the Series D Preferred Stock and at
least 38% of the Series E Preferred Stock, outstanding as of the BioStar Record
Date, have entered into voting agreements with Cortech (the "BioStar Voting
Agreements") pursuant to which such Voting Agreement Stockholders have agreed to
vote in favor of the Merger Proposal and the BioStar Certificate Proposal and
have granted Cortech an irrevocable proxy to vote their shares of BioStar
Capital Stock in favor of the Merger Proposal and the BioStar Certificate
Proposal. In addition, subject to certain exceptions, the Voting Agreement
Stockholders have agreed not to Transfer any of their beneficial ownership of,
interest in, or risk relating to, securities owned by them unless and until the
proposed transferee of such securities shall have (i) executed a counterpart of
the BioStar Voting Agreement and an irrevocable proxy and (ii) agreed to hold
such securities subject to all of the terms and
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conditions of the BioStar Voting Agreement. See "Approval of the Merger and
Related Transactions -- Voting Agreements".
Certain directors, officers and other affiliates of Cortech, who together
hold approximately 2.3% of the Cortech Common Stock outstanding as of the
Cortech Record Date, have entered into the Cortech Voting Agreements pursuant to
which such directors, officer and other affiliates of Cortech have agreed to
vote in favor of the Merger Proposal and the Cortech Certificate Proposal and
have granted BioStar an irrevocable proxy to vote their shares of Cortech Common
Stock in favor of the Merger Proposal and the Cortech Certificate Proposal.
AFFILIATE AGREEMENTS
It is a condition to consummation of the Merger that each person who could
reasonably be determined to be an "affiliate," as such term is defined in Rule
145 promulgated under the Securities Act, of BioStar ("Affiliate") execute an
agreement that generally requires such holder, for the one year period following
consummation of the Merger, to sell shares to the public only in accordance with
the volume restrictions and manner of sale restrictions of Rule 144. These
restrictions generally require that sales to the public be made only through
unsolicited "brokers' transactions" or in transactions directly with a "market
maker," as such terms are defined in Rule 144. Additionally, the number of
shares to be sold by an affiliate (together with certain related persons and
certain persons acting in concert) within any three-month period for purposes of
Rule 145 may not exceed the greater of 1% of the outstanding shares of Cortech
Common Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. One year after the Effective Time, an
affiliate would be able to sell such Cortech Common Stock without such manner of
sale or volume limitations provided that Cortech was current with its Exchange
Act informational filings and such affiliate was not then an affiliate of
Cortech. This requirement will lapse if the SEC repeals the provisions currently
contained in Rule 145(c) in a manner that would apply to this transaction.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of BioStar
Capital Stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to Cortech, BioStar or
BioStar stockholders as described herein.
BioStar stockholders should be aware that this discussion does not deal
with all U.S. federal income tax considerations that may be relevant to
particular BioStar stockholders in light of their particular circumstances, such
as stockholders who are dealers in securities, banks, insurance companies or
tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions or who hold their shares as a hedge or as part of a hedging,
straddle, conversion or other risk reduction transaction. Further, this
discussion does not address the federal income tax treatment with respect to
holders of warrants for BioStar Capital Stock. In addition, the following
discussion does not address the tax consequences of the Merger under foreign,
state or local tax laws or the tax consequences of transactions effectuated
prior to or after the Merger (whether or not such transactions are in connection
with the Merger).
BIOSTAR STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
Neither Cortech nor BioStar has requested a ruling from the Internal
Revenue Service (the "IRS") with regard to any of the U.S. federal income tax
consequences of the Merger. As a condition to the consummation of the Merger,
Pillsbury Madison & Sutro LLP, counsel to Cortech, and Cooley Godward LLP,
counsel to BioStar, will each render an opinion (collectively, the "Tax
Opinions") that the Merger will constitute a
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reorganization under Section 368(a) of the Code (a "Reorganization"). Such
opinions are, and will be, based on certain assumptions as well as
representations (discussed below) and are and, will be subject to the
limitations discussed below. Moreover, such opinions will not be binding on the
IRS nor preclude the IRS from adopting a contrary position.
The discussion below assumes that the Merger will qualify as a
Reorganization, based upon the Tax Opinions. The tax description set forth below
has been prepared and reviewed by Pillsbury Madison & Sutro LLP and Cooley
Godward LLP, and in their opinion, to the extent such description relates to
statements of law, it is correct in all material respects.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following U.S.
federal income tax consequences should result:
(i) No gain or loss will be recognized by the holders of BioStar
Capital Stock upon the receipt of Cortech Common Stock solely in exchange
for such BioStar Capital Stock in the Merger (except to the extent of cash
received in lieu of fractional shares);
(ii) The aggregate tax basis of the Cortech Common Stock so received
by BioStar stockholders in the Merger (including any fractional share of
Cortech Common Stock not actually received) will be the same as the
aggregate tax basis of BioStar Capital Stock surrendered in exchange
therefor;
(iii) The holding period of the Cortech Common Stock so received by
each BioStar stockholder in the Merger will include the period for which
the BioStar Capital Stock surrendered in exchange therefor was considered
to be held, provided that the BioStar Capital Stock so surrendered is held
as a capital asset at the Effective Time;
(iv) Cash payments received by holders of BioStar Capital Stock in
lieu of a fractional share will be treated as if such fractional share of
Cortech Common Stock had been issued in the Merger and then redeemed by
Cortech. A BioStar stockholder receiving such cash will recognize gain or
loss upon such payment, measured by the difference (if any) between the
amount of cash received and the basis in such fractional share. The gain or
loss should be capital gain or loss provided that such share of BioStar
Capital Stock was held as a capital asset at the Effective Time;
(v) A stockholder of BioStar who exercises dissenters' rights under
any applicable law with respect to a share of BioStar Capital Stock and
receives a cash payment for such stock will generally recognize capital
gain or loss (if such stock was held as a capital asset at the Effective
Time of the Merger) measured by the difference between the amount of cash
received and the stockholder's basis in such share, provided such payment
is neither essentially equivalent to a dividend within the meaning of
Section 302 of the Code nor has the effect of a distribution of a dividend
within the meaning of Section 356(a)(2) of the Code (collectively, a
"Dividend Equivalent Transaction"). A sale of BioStar shares incident to an
exercise of dissenters' rights will generally not be a Dividend Equivalent
Transaction if, as a result of such exercise, the dissenting stockholder
owns no shares of Cortech Common Stock (either actually or constructively
within the meaning of Section 318 of the Code); and
(vi) Neither Cortech nor BioStar will recognize gain solely as a result
of the Merger.
The Tax Opinions will be subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations of
Cortech, BioStar and certain stockholders of BioStar, including representations
in certain certificates delivered to counsel by the respective managements of
Cortech and BioStar and certain stockholders of BioStar. Of particular
importance are the assumptions and representations relating to the "continuity
of interest" requirement.
To satisfy the "continuity of interest" requirement, BioStar stockholders
must not, pursuant to a plan or intent existing at or prior to the Effective
Time, dispose of or transfer so much of either (i) their BioStar Capital Stock
in anticipation of the Merger or (ii) the Cortech Common Stock to be received in
the Merger (collectively, "Planned Dispositions"), such that the BioStar
stockholders, as a group, would no longer have a "significant equity interest"
in the BioStar business being conducted by Cortech after the Merger. BioStar
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stockholders will generally be regarded as having a "significant equity
interest" as long as the Cortech Common Stock received in the Merger (after
taking into account Planned Dispositions), in the aggregate, represents a
substantial portion of the entire consideration received by the BioStar
stockholders in the Merger. This requirement is frequently referred to as the
"continuity of interest" requirement. If the continuity of interest requirement
is not satisfied, the Merger would not be treated as a Reorganization. The law
is unclear as to what constitutes a "significant equity interest" or a
"substantial portion". The IRS ruling guidelines require a minimum of 50%
continuity (although such guidelines do not purport to represent the applicable
substantive law). The Reorganization Agreement and certificates from certain
BioStar stockholders regarding continuity contemplate that the 50% standard will
be applied. No assurance can be made that the "continuity of interest"
requirement will be satisfied, and if such requirement is not satisfied, the
Merger would not be treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
could result in significant adverse tax consequences to the BioStar
stockholders. A BioStar stockholder would recognize gain or loss with respect to
each share of BioStar Capital Stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
Effective Time, of the Cortech Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the Cortech Common Stock so
received would equal its fair market value, and the stockholder's holding period
for such stock would begin the day after the Closing Date.
Certain noncorporate BioStar stockholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Cortech Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies that he, she or it is not subject to backup withholding on
the substitute Form W-9 included in the Transmittal Letter, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each BioStar stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
ANTICIPATED ACCOUNTING TREATMENT
Although as a legal matter Cortech is acquiring BioStar, the Merger will be
accounted for as a "purchase" of Cortech by BioStar for accounting and financial
reporting purposes. Accordingly, BioStar's historical financial statements will
be the financial statements of the post-merger combined company. Under the
purchase method of accounting, Cortech's results of operations will be combined
with those of BioStar from and after the Effective Time, and Cortech's specific
tangible and identifiable intangible assets and liabilities will be recorded on
BioStar's books at their respective fair values at the Effective Time. A
determination of the fair value of Cortech's specific tangible and identifiable
intangible assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed.
REGULATORY MATTERS
Antitrust. Cortech and BioStar do not believe that any governmental filings
with the Federal Trade Commission ("FTC") are required with respect to the
Merger. However, the FTC or the United States Department of Justice Antitrust
Division could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin consummation of
the Merger or seeking to cause divestiture of significant assets of Cortech or
BioStar or their subsidiaries. There can be no assurance that a challenge to the
Merger on antitrust grounds will not be made, or, if such challenge is made, of
what the result would be. Consummation of the Merger is conditioned upon, among
other things, the absence of any temporary restraining order, preliminary or
permanent injunction, or other order issued by any federal or state court in the
United States which prevents the consummation of the Merger.
Filing with the Delaware Secretary of State. Certificate of Merger must be
filed with the Secretary of State of the State of Delaware in order to
consummate the Merger.
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Securities Laws. Cortech and BioStar must comply with the federal
securities laws and applicable securities laws of various states.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of BioStar may, under certain circumstances and by following
the procedure prescribed by the DGCL, exercise appraisal rights and receive cash
for their shares of BioStar Capital Stock. The stockholders exercising appraisal
rights under the DGCL must follow the appropriate procedures under the DGCL or
suffer the termination or waiver of such rights.
If a holder of BioStar Capital Stock exercises appraisal rights in
connection with the Merger under Section 262 of the DGCL ("Section 262"), any
shares of BioStar Capital Stock in respect of which such rights have been
exercised and perfected will not be converted into Cortech Common Stock but
instead will be converted into the right to receive such consideration as may be
determined by the Delaware Court of Chancery (the "Court") to be due with
respect to such shares pursuant to the laws of the State of Delaware.
The following summary of the provisions of Section 262 is not intended to
be a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Joint Proxy Statement/Prospectus as Appendix D and incorporated herein by
reference.
Holders of shares of BioStar Capital Stock who object to the Merger and who
follow the procedures in Section 262 will be entitled to have their shares of
BioStar Capital Stock appraised by the Court and to receive payment of the "fair
value" of such shares as of the Effective Time.
A stockholder of BioStar electing to exercise appraisal rights must, prior
to the BioStar Special Meeting, perfect his, her or its appraisal rights by
demanding in writing from BioStar the appraisal of his, her or its shares of
BioStar Capital Stock, as provided in Section 262. A holder who elects to
exercise appraisal rights should mail or deliver his, her or its written demand
to BioStar at 6655 Lookout Road, Boulder, Colorado 80301, Attn: Corporate
Secretary. The demand should specify the holder's name and mailing address, the
number of shares of BioStar Capital Stock owned and that such holder is
demanding appraisal of his, her or its shares. Only a holder of record of shares
of BioStar Capital Stock (or his, her or its duly appointed representative) is
entitled to assert appraisal rights for the shares registered in that holder's
name.
Within 120 days after the Effective Time, any stockholder who has made a
valid written demand and who has not voted in favor of approval and adoption of
the Reorganization Agreement and approval of the Merger may (i) file a petition
in the Court demanding a determination of the value of shares of BioStar Capital
Stock and (ii) upon written request, receive from BioStar a statement setting
forth the aggregate number of shares of BioStar Capital Stock not voted in favor
of approval and adoption of the Reorganization Agreement and approval of the
Merger and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. Such statement must be mailed
within ten days after the written request therefor has been received by BioStar.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of BioStar Capital
Stock entitled to appraisal rights and will determine the "fair value" of such
BioStar Capital Stock exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the value of such BioStar Capital Stock. In
determining the "fair value" of such BioStar Capital Stock, the Court is
required to take into account all relevant factors, including the market value
of BioStar Capital Stock and the net asset and earnings value of BioStar. In
determining the fair value of interest, the Court may consider all relevant
factors including the rate of interest which BioStar would have had to pay to
borrow money during the pendency of the proceedings. Upon application by a
stockholder, the Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of BioStar Capital Stock entitled to
appraisal.
Any holder of BioStar Capital Stock who has duly demanded an appraisal
under Section 262 will not, after the Effective Time, be entitled to vote the
shares subject to such demand for any purpose or be entitled to
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the payment of dividends or other distributions on such BioStar Capital Stock
(except dividends or other distributions payable to stockholders of record as of
a date prior to the Effective Time).
If any holder of shares of BioStar Capital Stock who demands appraisal
under Section 262 effectively withdraws or loses his, her or its right to
appraisal, the shares of such holder will be converted into a right to receive
that number of shares of Cortech Common Stock as is determined in accordance
with the Reorganization Agreement. A holder will effectively lose his right to
appraisal if he, she or it votes in favor of approval and adoption of the
Reorganization Agreement and approval of the Merger, if no petition for
appraisal is filed within 120 days after the Effective Time or if the holder
delivers to BioStar a written withdrawal of such holder's demand for an
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time requires the written
approval of BioStar. A holder of stock represented by certificates may also lose
his, her or its right of appraisal if he, she or it fails to comply with the
Court's direction to submit such certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings.
Holders of Cortech Common Stock are not entitled to appraisal rights under
the DGCL because Cortech is not a constituent corporation to the Merger under
the DGCL.
RESALE OF CORTECH COMMON STOCK
Cortech Common Stock issued in connection with the Merger will be freely
transferable, except that shares issued to any BioStar stockholder that may be
an "affiliate" of BioStar or who becomes an "affiliate" of Cortech are subject
to certain restrictions on resale. Affiliates generally include, without
limitation, directors, certain executive officers and certain other persons who
control a company. Certain stockholders of BioStar who may be deemed to be
affiliates have executed agreements that prohibit the sale, transfer or other
disposition of Cortech Common Stock received by such stockholders in the Merger,
except under certain circumstances, in order to comply with the requirements of
certain federal securities laws. See "Approval of the Merger and Related
Transactions -- Affiliate Agreements". Certain stockholders of BioStar have also
delivered to Cortech certificates certifying that such stockholders have no
present intention to dispose of certain of the shares of Cortech Common Stock to
be received by such stockholders in the Merger in order to comply with the
requirements of certain United States federal tax laws. See "-- Certain Federal
Income Tax Consequences".
EFFECT UNDER CORTECH RIGHTS PLAN
In 1995, the Cortech Board adopted a stockholder rights plan (the "Rights
Plan"). The Cortech Board has determined that neither the Merger, the
Reorganization Agreement nor the arrangements contemplated thereby will cause
any preferred stock purchase rights to become exercisable under the Rights Plan.
Although such an event is not anticipated, the Cortech Board has not taken any
action to prevent any former BioStar stockholder from triggering the
exercisability of such rights through any post-Merger holding or accumulation of
Cortech Common Stock (including, without limitation, shares issued pursuant to
the Merger). See "Description of Cortech Capital Stock -- Certain Anti-takeover
Provisions".
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THE REORGANIZATION AGREEMENT
GENERAL
The following is a summary of the material provisions of the Reorganization
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. The following is
not a complete statement of all provisions of the Reorganization Agreement and
related agreements. Statements made in this Joint Proxy Statement/Prospectus
with respect to the terms of the Reorganization Agreement and such related
agreements are qualified in their respective entireties by reference to the more
detailed information set forth in the Reorganization Agreement and such related
agreements.
The Reorganization Agreement provides for the merger of Merger Sub with and
into BioStar. As a result of the Merger, Merger Sub will cease to exist, BioStar
will become a wholly owned subsidiary of Cortech and the former stockholders of
BioStar will become stockholders of Cortech. BioStar will continue as the
surviving corporation of the Merger (the "Surviving Corporation"). The Merger
will become effective upon the filing of a Certificate of Merger with the
Delaware Secretary of State. Such filing is anticipated to take place as soon as
practicable after the receipt of all required regulatory approvals and the
satisfaction or waiver of the other conditions to the Merger, including the
approval of the Merger Proposal by the stockholders of BioStar and Cortech. It
is currently anticipated that the Effective Time will occur on or about
1998. There can be no assurance, however, that the required
regulatory approvals will be obtained, that the other conditions to the Mergers
will be satisfied or waived by such date, or at all, or that the Reorganization
Agreement will not be terminated. See "-- Conditions to the Merger" and "The
Merger and Related Transactions -- Regulatory Matters".
MERGER CONSIDERATION
Subject to the provisions contained in the Reorganization Agreement
relating to the payment of cash in lieu of fractional shares and shares properly
exercising appraisal rights, each share of BioStar Capital Stock outstanding
will be converted into the right to receive shares of Cortech Common Stock equal
to the "Exchange Ratio." The Exchange Ratio is equal to a fraction the numerator
of which is 28,500,000 and the denominator of which is the number of shares of
BioStar Capital Stock outstanding plus the number of shares of BioStar Capital
Stock issuable upon exercise of all (x) outstanding BioStar Warrants and (y)
outstanding BioStar Options, in each case as of immediately prior to the
Effective Time. Although the Exchange Ratio will depend upon the capitalization
of BioStar at the Effective Time and the per share market price for Cortech
Common Stock prior to the Effective Time, BioStar presently estimates that the
Exchange Ratio will be approximately .5512 (based upon BioStar's capitalization
as of the date of this Joint Proxy Statement/Prospectus and assuming a per share
market price for Cortech Common Stock of $0.656 (the per share market price of
Cortech Common Stock as of the date of the Reorganization Agreement) immediately
prior to the Effective Time).
Certain outstanding debt of BioStar and related accrued interest will
convert into shares of BioStar preferred stock immediately prior to the Merger.
The rate at which such debt will be converted will depend upon, and vary with,
the average market price of Cortech Common Stock over a period ending shortly
before the Merger. BioStar will issue fewer shares to convert such debt as the
per share market price for Cortech Common Stock increases; similarly, BioStar
will issue a greater number of shares to convert such debt as such market price
decreases. The number of shares of BioStar Capital Stock outstanding immediately
prior to the Merger (and, therefore, the Exchange Ratio) will fluctuate based
upon such market price.
Assuming, (solely for purposes of illustration) that the per share market
price for Cortech Common Stock immediately prior to the Merger is (i) $0.35, the
Exchange Ratio is estimated to be .1055; (ii) $0.50, the Exchange Ratio is
estimated to be .3919; and (iii) $0.656 (the per share market price as of the
date of the Reorganization Agreement and the price assumed in preparing the
unaudited pro forma condensed consolidated financial information included
elsewhere herein), the Exchange Ratio is estimated to be .5512. To the extent
the per share market price for Cortech Common Stock is higher than $0.656, the
Exchange Ratio will increase accordingly.
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NO FRACTIONAL SHARES
No Fractional Shares of Cortech Common Stock will be issued in connection
with the Merger, and no certificates for any such fractional shares will be
issued. In lieu of such fractional shares, any holder of BioStar Capital Stock
(after aggregating all fractional shares of Cortech Common Stock issuable to
such holder) will, upon surrender of such holder's stock certificate(s)
representing BioStar Capital Stock to the Exchange Agent, be paid in cash the
dollar amount (rounded to the nearest whole cent), without interest, determined
by multiplying such fraction by the closing price of a share of Cortech Common
Stock on the Nasdaq National Market on the date the Merger becomes effective.
STOCK OPTIONS AND WARRANTS
At the Effective Time, each unexpired and unexercised BioStar Option shall
be assumed by Cortech and will continue to have and be subject to, substantially
the same terms and conditions set forth in the documents governing such options
immediately prior to the Effective Time, except that (i) such options will be
exercisable for that number of shares of Cortech Common Stock equal to the
number of shares of BioStar Common Stock subject to such BioStar Option
immediately prior to the Effective Time multiplied by the Exchange Ratio
(rounded down to the nearest whole share of Cortech Common Stock) and (ii) the
per share exercise price of such options will be equal to the exercise price per
BioStar share immediately prior to the Effective Time divided by the Exchange
Ratio (rounded up to the nearest whole share). As soon as practicable after the
Effective Time, the combined company shall issue to each holder of a BioStar
Option assumed in connection with the Merger a notice evidencing the stock
option assumption by the combined company. After the Merger, the combined
company will file a Form S-8 Registration Statement to register shares under the
BioStar 1995 Equity Incentive Plan.
Each BioStar Warrant shall be, in connection with the Merger, assumed by
Cortech. Each warrant so assumed by Cortech under the Reorganization Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the respective warrant agreements governing such warrant immediately
prior to the Effective Time, except that each such warrant shall, following the
Effective Time, be exercisable only for shares of Cortech Common Stock in such
number, and at such exercise price as is determined by applying the Exchange
Ratio in accordance with the terms of the applicable warrant agreement.
STOCK OWNERSHIP FOLLOWING THE MERGER
A maximum of 28,500,000 shares of Cortech Common Stock will be issued to
holders of BioStar Capital Stock or reserved for issuance upon exercise of
BioStar Options or BioStar Warrants (prior to the effect of the one-for-[ ]
reverse stock split to be considered at the Cortech Special Meeting). Based upon
the number of shares of Cortech Common Stock issued and outstanding as of the
Cortech Record Date, and after giving effect to the additional shares of Cortech
Common Stock proposed to be issued, or reserved for issuance, in the Merger
(assuming the full exercise of all outstanding options and warrants to purchase
Cortech Common Stock), the former holders of BioStar Capital Stock, BioStar
Options and BioStar Warrants would hold and have voting power with respect to
approximately 60% of Cortech's total issued and outstanding shares.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES.
As soon as practicable after the Effective Time, the Exchange Agent will
mail to the registered holders of BioStar Capital Stock (i) a Letter of
Transmittal and (ii) instructions for the use of the Letter of Transmittal in
effecting the surrender of the BioStar Stock Certificates in exchange for
certificates representing Cortech Common Stock. Upon surrender of a BioStar
Stock Certificate to the Exchange Agent for exchange, together with a duly
executed Letter of Transmittal and such other documents as may reasonably be
required by the Exchange Agent or Cortech, the holder of such BioStar Stock
Certificate shall be entitled to receive in exchange therefor a certificate
representing the whole number of shares of Cortech Common Stock that such holder
has the right to receive. No fractional shares of Cortech Common Stock will be
issued in connection with the Merger, and no certificates for any such
fractional shares will be issued.
If any BioStar Stock Certificate has been lost, stolen or destroyed,
Cortech may require the owner of such
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lost, stolen or destroyed BioStar Stock Certificate to provide an appropriate
affidavit and to deliver a bond as indemnity against any claim that may be made
against the Exchange Agent, Cortech or BioStar with respect to such BioStar
Stock Certificate.
BIOSTAR STOCKHOLDERS SHOULD NOT SURRENDER THEIR BIOSTAR STOCK CERTIFICATES
FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
EFFECT ON CERTIFICATES
At the Effective Time, (i) all shares of BioStar Capital Stock outstanding
immediately prior to the Effective Time will automatically be canceled and
retired and will cease to exist, (ii) all holders of certificates representing
shares of BioStar Capital Stock that were outstanding immediately prior to the
Effective Time will cease to have any rights as stockholders of BioStar and
(iii) the stock transfer books of BioStar will be closed with respect to all
shares of BioStar Capital Stock outstanding immediately prior to the Effective
Time. No further transfer of any such shares of BioStar Capital Stock will be
made on such stock transfer books after the Effective Time. If, after the
Effective Time, a BioStar Stock Certificate is presented to the Exchange Agent
(or to BioStar or Cortech), such BioStar Stock Certificate will be canceled and
will be exchanged as provided above under the caption "-- Conversion of Shares;
Procedure for Exchange of Certificates".
CORPORATE MATTERS; COMPOSITION OF THE CORTECH BOARD AND OFFICERS
As of the Effective Time, the Certificate of Incorporation of Merger Sub
will be the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of Merger Sub will be the Bylaws of the Surviving Corporation. Cortech
has agreed to use all reasonable efforts to have the Cortech Board consist of
five persons from and after the Effective Time to serve until the next election
of directors for each director's respective class, three of whom have been
specified by BioStar. Promptly following the Effective Time, it is expected that
the Cortech Board will be composed of Teresa W. Ayers, with a term expiring in
2000, Alexander E. Barkas, Ph.D., with a term expiring in 1999, Thomas A.
Bologna, with a term expiring in 2000, Kenneth R. Lynn, with a term expiring in
1998, and Bert Fingerhut, with a term expiring in 1999. Ms. Ayers and Messrs.
Barkas and Bologna have been specified by BioStar. As of the Effective Time, the
BioStar executive officers will become the executive officers of Cortech.
CONDITIONS TO THE MERGER
Cortech and Merger Sub. The obligations of Cortech and Merger Sub to effect
the Merger and otherwise consummate the transactions contemplated by the
Reorganization Agreement are subject to the satisfaction, at or prior to the
consummation of the transactions contemplated by the Reorganization Agreement
(the "Closing") of each of the following conditions:
(i) representations and warranties of BioStar contained in the
Reorganization Agreement, except for any representation and warranty that
refers specifically to the date of the Reorganization Agreement or to any
date or period prior to the date of the Reorganization Agreement, shall be
accurate in all material respects as of the date of the Closing (the
"Closing Date") as if made on and as of the Closing Date except that any
inaccuracies in such representations and warranties shall be disregarded if
the circumstances giving rise to such inaccuracies (individually and
collectively) do not constitute a Material Adverse Effect (as defined
below) on BioStar (it being understood that, for purposes of determining
the accuracy of such representations and warranties, (a) all "Material
Adverse Effect" qualifications and other materiality qualifications
contained in such representations and warranties shall be disregarded and
(b) any update of or modification to BioStar's disclosure schedule made or
purported to have been made after the date of the Reorganization Agreement
shall be disregarded);
(ii) each covenant or obligation that BioStar is required to comply
with or to perform at or prior to the Closing shall have been complied with
and performed in all material respects;
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(iii) this Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to this Registration
Statement;
(iv) the Merger Proposal and the BioStar Certificate Proposal shall
have been duly approved by the Required BioStar Stockholder Vote, and the
Merger Proposal shall have been duly approved by the Required Cortech
Stockholder Vote;
(v) the holders of fewer than 10% of the outstanding shares of BioStar
Capital Stock shall have notified BioStar of their intention to assert
appraisal rights with respect to the Merger;
(vi) all material consents required to be obtained in connection with
the Merger and the other transactions contemplated by the Reorganization
Agreement shall have been obtained and shall be in full force and effect;
(vii) Cortech shall have received the following legal documents, each
of which shall be in full force and effect: (a) a legal opinion of Cooley
Godward LLP, dated as of the Closing Date, in the form reasonably
satisfactory to Cortech and its legal counsel, (b) a legal opinion of
Pillsbury Madison & Sutro LLP dated as of the Closing Date and addressed to
Cortech, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"); (c) a certificate executed on behalf of BioStar by
its President/Chief Executive Officer confirming that the conditions set
forth in clauses (i), (ii), (iv), (v), (vi) and (viii) have been duly
satisfied;
(viii) there shall have been no material adverse change in the
business, financial condition, capitalization, assets, liabilities,
operations or financial performance of the BioStar since the date of the
Reorganization Agreement;
(ix) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall
have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any legal requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal;
(x) there shall not be (i) pending or threatened any legal proceeding
in which a governmental body is or is threatened to become a party or is
otherwise involved (a) challenging or seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by
the Reorganization Agreement; (b) relating to the Merger and seeking to
obtain from Cortech or any of its subsidiaries any damages that may be
material to Cortech; or (c) which would materially and adversely affect the
right of Cortech to own the assets or operate the business of BioStar, or
(ii) pending any legal proceeding in which there is a reasonable
probability of an outcome that would have a Material Adverse Effect on
BioStar or on Cortech (a) challenging or seeking to restrain or prohibit
the consummation of the Merger or any of the other transactions
contemplated by the Reorganization Agreement; (b) relating to the Merger
and seeking to obtain from Cortech or any of its subsidiaries any damages
that may be material to Cortech; (c) seeking to prohibit or limit in any
material respect Cortech's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of the
Surviving Corporation; or (d) which would materially and adversely affect
the right of Cortech to own the assets or operate the business of BioStar;
(xi) BioStar shall have delivered the Affiliate Agreements; and
(xii) The Cowen Opinion shall not have been withdrawn as of the date
of the mailing of the definitive Joint Proxy Statements/Prospectus to the
Cortech Stockholders.
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BioStar. The obligations of BioStar to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction, at or prior to the Closing of the following
conditions:
(i) the representations and warranties of Cortech contained in the
Reorganization Agreement shall have been accurate in all material respects
as of the date of the Reorganization Agreement and shall be accurate as of
the Closing Date as if made on and as of the Closing Date except that any
inaccuracies in such representations and warranties shall be disregarded if
the circumstances giving rise to such inaccuracies (individually and
collectively) do not constitute a Material Adverse Effect on Cortech (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, (a) all "Material Adverse Effect"
qualifications and other materiality requirements contained in such
representations and warranties shall be disregarded and (b) any update of
or modification to the Cortech Disclosure Schedule made or purported to
have been made after the date of the Reorganization Agreement shall be
disregarded);
(ii) all of the covenants and obligations that Cortech is required to
comply with or to perform at or prior to the Closing shall have been
complied with and performed in all material respects;
(iii) this Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to this Registration
Statement;
(iv) the Merger Proposal and the BioStar Certificate Proposal shall
have been approved by the Required BioStar Stockholder Vote, and the Merger
Proposal shall have been duly approved by the Required Cortech Stockholder
Vote.
(v) The holders of fewer than 10% of the outstanding shares of BioStar
Capital Stock shall have notified BioStar of their intention to asset
appraisal rights with respect to the Merger;
(vi) BioStar shall have received the following documents: (a) a legal
opinion of Pillsbury Madison & Sutro LLP, dated as of the Closing Date, in
a form reasonably satisfactory to BioStar and its legal counsel, (b) a
legal opinion of Cooley Godward LLP, dated as of the Closing Date, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368 of the Code and (c) a certificate executed on behalf of
Cortech by an executive officer of Cortech, confirming that conditions set
forth in Sections (i), (ii), (iv), (v), (vii) and (xi) have been duly
satisfied;
(vii) there shall have been no material adverse change in Cortech's
business, financial condition, assets, liabilities, operations or financial
performance since the date of the Reorganization Agreement (it being
understood that a decline in Cortech's stock price or the delisting of
Cortech's stock shall not constitute, in and of itself, a Material Adverse
Effect);
(viii) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by
BioStar shall have been issued by any court of competent jurisdiction and
remain in effect, and there shall not be any legislation enacted or deemed
applicable to the Merger that makes consummation of the Merger by BioStar
illegal;
(ix) Cortech shall have taken all actions necessary to cause the
Cortech Board following the Effective Time to consist of the following
individuals: Teresa W. Ayers, with a term expiring in 2000, Alexander E.
Barkas, Ph.D., with a term expiring in 1999, Thomas A. Bologna, with a term
expiring in 2000, Kenneth R. Lynn, with a term expiring in 1998 and Bert
Fingerhut, with a term expiring in 1999. Ms. Ayers and Messrs. Barkas and
Bologna have been specified by BioStar;
(x) all material consents required to be obtained in connection with
the Merger and the other transactions contemplated by the Reorganization
Agreement shall have been obtained and shall be in full force and effect;
and
(xi) there shall not be (i) pending or threatened any legal proceeding
to which a governmental body is or is threatened to become a party or is
otherwise involved (a) challenging or seeking to restrain or
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prohibit the consummation of the Merger or any of the other transactions
contemplated by the Reorganization Agreement; (b) relating to the Merger
and seeking to obtain from BioStar or any of its subsidiaries any damages
that may be material to BioStar; or (c) which would materially and
adversely affect the right of BioStar to own the assets or operate the
business of Cortech or (ii) pending any legal proceeding in which there is
a reasonable probability of an outcome that would have a Material Adverse
Effect on BioStar or on Cortech (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by the Reorganization Agreement; (b) relating to the Merger
and seeking to obtain from BioStar any damages that may be material to
BioStar; (c) seeking to prohibit or limit in any material respect BioStar's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or
(d) resulting in Cortech as constituted after the Effective Time not
containing all of the assets and business of Cortech as constituted
immediately prior to the Effective Time.
For purposes of the Reorganization Agreement, an event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "Material
Adverse Effect" on BioStar if such event, violation, inaccuracy, circumstance or
other matter would have a material adverse effect on (i) the business, financial
condition, capitalization, assets, liabilities, operations or financial
performance of the BioStar, (ii) the ability of the party to consummate the
Merger or any of the other transactions contemplated by the Reorganization
Agreement or to perform obligations under the Reorganization Agreement, or (iii)
Cortech's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "Material Adverse Effect" on Cortech if such event,
violation, inaccuracy, circumstance or other matter would have a material
adverse effect on (i) the business, financial condition, assets, liabilities,
operations or financial performance of the Cortech Corporations taken as a
whole, (ii) the ability of Cortech to consummate the Merger or any of the other
transactions contemplated by the Reorganization Agreement or to perform its
obligations under the Reorganization Agreement, or (iii) the ability of
BioStar's stockholders to vote, receive dividends with respect to, or otherwise
exercise ownership rights with respect to the stock of Cortech received by them.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties by BioStar as to: (i) due organization and subsidiaries; (ii)
BioStar's Certificate of Incorporation and Bylaws; (iii) capitalization; (iv)
financial statements; (v) absence of certain changes; (vi) title to assets;
(vii) real property, equipment and leaseholds; (viii) proprietary assets; (ix)
material contracts; (x) liabilities; (xi) compliance with legal requirements;
(xii) certain business practices; (xiii) governmental authorizations; (xiv) tax
matters; (xv) employee and labor matters and benefit plans; (xvi) environmental
matters; (xvii) insurance; (xviii) transactions with Affiliates; (xix) legal
proceedings and orders; (xx) authority and binding nature of the Reorganization
Agreement; (xxi) absence of existing discussions or negotiations concerning
other acquisition proposals; (xxii) vote required; (xxiii) non-contravention and
consents; (xxiv) brokers, finders, investment bankers or other fees or
commissions; and (xxv) full disclosure.
The Reorganization Agreement also contains representations and warranties
by Cortech and Merger Sub as to: (i) due organization and subsidiaries; (ii)
Cortech's Certificate of Incorporation and Bylaws; (iii) capitalization; (iv)
filings with the Commission and financial statements; (v) absence of certain
changes; (vi) title to assets; (vii) real property, equipment and leaseholds;
(viii) proprietary assets; (ix) material contracts; (x) liabilities; (xi)
compliance with legal requirements; (xii) certain business practices; (xiii)
governmental authorizations; (xiv) tax matters; (xv) employee and labor matters
and benefit plans; (xvi) environmental matters; (xvii) insurance; (xviii)
transactions with Affiliates; (xix) legal proceedings and orders; (xx) authority
and binding nature of the Reorganization Agreement; (xxi) absence of discussions
or negotiations concerning other acquisition proposals; (xxii) vote required;
(xxiii) non-contravention and consents; (xxiv) the receipt of a fairness opinion
from an investment bank; (xxv) valid issuance of Cortech Common Stock; (xxvi)
brokers, finders, investment bankers or other fees or commissions; (xxvii) full
disclosure; and (xxviii) cash position.
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COVENANTS
Conduct of BioStar's Business. The Reorganization Agreement requires that
during the period from the date of the Reorganization Agreement through the
Effective Time (the "Pre-Closing Period"), (i) BioStar shall conduct its
business and operations (A) in the ordinary course and in accordance with past
practices or the operating plan previously delivered by BioStar to Cortech and
(B) in compliance with all applicable legal requirements and the requirements of
all of material contracts to which any BioStar is a party, by which BioStar or
any of its assets is or may become bound or under which BioStar has or may be
come subject to any obligation, or under which BioStar has or may acquire any
rights or interest (a "BioStar Contract"); (ii) BioStar shall use all reasonable
efforts to ensure that BioStar preserves intact its current business
organization, keeps available the services of its current officers and employees
and maintains its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons having
business relationships with BioStar; (iii) BioStar shall keep in full force
certain insurance policies or replace any such policies that terminate with
comparable or superior policies; (iv) BioStar shall provide all notices,
assurances and support required by any BioStar Contract relating to any
proprietary asset in order to ensure that no condition under such BioStar
Contract occurs which could result in, or could increase the likelihood of, any
transfer or public disclosure by BioStar of any proprietary asset; and (v)
BioStar shall (to the extent requested by Cortech) cause its officers to report
regularly Cortech concerning the status of the BioStar's business. During the
Pre-Closing Period, BioStar shall not (without the prior written consent of
Cortech):
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date of the
Reorganization Agreement;
(ii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security (except BioStar common stock upon the valid
exercise of options or warrants to purchase BioStar Capital Stock
outstanding on the date of the Reorganization Agreement or pursuant to
equipment lease financings, in connection with BioStar's line of credit
with Venture Lending and similar transactions or otherwise in the ordinary
course of business), (B) any option, call, warrant or right to acquire any
capital stock or other security, or (C) any instrument convertible into or
exchangeable for any capital stock or other security; provided, however,
that notwithstanding the foregoing, BioStar may grant up to 800,000 options
to employees following the date of the Reorganization Agreement under its
existing stock option plans;
(iii) except as contemplated by the Reorganization Agreement, amend or
waive any of its rights under, or accelerate the vesting under, any
provision of any of the BioStar stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related contract;
(iv) except as contemplated by the Reorganization Agreement, amend or
permit the adoption of any amendment to the BioStar Certificate of
Incorporation or Bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(v) form any subsidiary or acquire any equity interest or other
interest in any other entity;
(vi) make any capital expenditure, except capital expenditures through
December 31, 1997 in an aggregate amount of no more than the amount
provided for in the capital budget provided to Cortech for such period, and
thereafter in an aggregate amount of no more than is provided for in a 1998
capital budget to be provided to and approved by Cortech (such approval not
to be unreasonably withheld) prior to January 1, 1998;
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(vii) except as set forth in the operating plan provided to Cortech,
enter into or become bound by, or permit any of the assets owned or used by
it to become bound by, any material contract, or amend or terminate, or
waive or exercise any material right or remedy under, any material
contract;
(viii) acquire, lease or license any right or other asset from any
other person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other person (except in each case for (A)
assets not constituting proprietary assets acquired, leased, licensed or
disposed of by BioStar in the ordinary course of business; (B) consistent
with past practices and except in the case of the in-licensing of
proprietary assets, agreements involving the payment of less than $25,000
per year and a royalty of less than 0.75% and (C) rights granted to
academic institutions and researchers to use the data collected pursuant to
tissue sample agreements for research purposes), or waive or relinquish any
material right;
(ix) lend money to any person, except travel advances and loans
related to relocation, education and immigration-related expenses made in
the ordinary course of business, and loans in connection with employee
stock purchases as provided for in agreements in effect on the date hereof,
or incur or guarantee any indebtedness or pledge or encumber any material
assets (except that BioStar may make routine borrowings in the ordinary
course of business and in accordance with past practices under its line of
credit with Venture Lending);
(x) except as set forth in the BioStar's disclosure schedule,
establish, adopt or amend any employee benefit plan, pay any bonus (except
pursuant to existing incentive plans and employment contracts or
understandings currently in effect) or make any profit-sharing or similar
payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees;
(xi) change any of its methods of accounting or accounting practices
in any respect;
(xii) make any material tax election;
(xiii) commence or settle any legal proceeding;
(xiv) materially amend or otherwise modify any of the terms of its
engagement of Lehman Brothers Inc.;
(xv) amend or otherwise modify any of the terms of any warrants to
purchase BioStar Capital Stock, except to the extent necessary to terminate
such warrants or reduce the number of shares issuable upon exercise
thereunder;
(xvi) enter into any material transaction or take any other material
action in each case not specifically provided for in the operating plan
provided by BioStar to Cortech, or outside the ordinary course of business
or inconsistent with past practices; or
(xvii) agree or commit to take any of the actions described in clauses
(i) through (xvi).
During the Pre-Closing Period, BioStar must promptly notify Cortech in
writing of: (i) the discovery by BioStar of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of the
Reorganization Agreement and that caused or constitutes a material inaccuracy in
any representation or warranty made by BioStar in the Reorganization Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or exists
after the date of the Reorganization Agreement and that would cause or
constitute a material inaccuracy in any representation or warranty made by
BioStar in the Reorganization Agreement if (a) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (b) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of the
Reorganization Agreement; (iii) any material breach of any covenant or
obligation of BioStar; and (iv) any event, condition, fact or circumstance that
would make the timely satisfaction of any of the conditions to closing set forth
in the Reorganization Agreement impossible or unlikely or that has had or could
reasonably be expected to have a Material Adverse Effect on BioStar. No
notification so given to Cortech will limit or otherwise affect any of the
representations, warranties, covenants or obligations of BioStar contained in
the Reorganization Agreement.
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Conduct of Cortech's Business. The Reorganization Agreement further
provides that during the Pre-Closing Period: (i) Cortech shall ensure that each
of the Cortech Corporations conducts its business and operations (A) in the
ordinary course and in accordance with operating parameters previously discussed
among Cortech and BioStar and (B) in compliance with all applicable legal
requirements and the requirements of all material contracts to which any Cortech
Corporation is a party, by which any Cortech Corporation or any of their
respective assets is or may become bound or under which any of the Cortech
Corporations has or may be come subject to any obligation, or under which any of
the Cortech Corporations has or may acquire any rights or interest (a "Cortech
Corporation Contract"); (ii) Cortech shall use all reasonable efforts to ensure
that each of the Cortech Corporations preserves intact its current business
organization, keeps available the services of its current officers and employees
and maintains its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons having
business relationships with the respective Cortech Corporations; and (iii)
Cortech shall keep in full force certain insurance policies or replace such
policies with comparable or superior policies; and (iv) Cortech shall provide
all notices, assurances and support required by any Cortech Corporation Contract
relating to any proprietary asset in order to ensure that no condition under
such Cortech Corporation Contract occurs which could result in, or could
increase the likelihood of, any transfer or public disclosure by any Cortech
Corporation of any proprietary asset. During the Pre-Closing Period, Cortech
shall not (without the prior written consent of BioStar), and shall not permit
any of the other Cortech Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date hereof;
(ii) hire any new employees, excluding those persons hired to replace
employees who terminate their employment with a Cortech Corporation during
the Pre-Closing Period;
(iii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security (except Cortech Common Stock upon the valid
exercise of options or warrants to purchase Cortech Common Stock
outstanding on the date of the Reorganization Agreement or the exercise of
rights under the Cortech ESPP or pursuant to equipment lease financings and
similar transactions or otherwise in the ordinary course of business), (B)
any option, call, warrant or right to acquire any capital stock or other
security, (C) any instrument convertible into or exchangeable for any
capital stock or other security;
(iv) except as contemplated by the Reorganization Agreement, amend or
waive any of its rights under, or accelerate the vesting under, any
provision of any of Cortech's stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related contract;
(v) except as contemplated by the Reorganization Agreement, amend or
permit the adoption of any amendment to its Certificate of Incorporation or
Bylaws or other charter or organizational documents, or effect or become a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(vi) except as contemplated by the Reorganization Agreement and,
except as previously disclosed to BioStar, form any subsidiary or acquire
any equity interest or other interest in any other entity;
(vii) make any capital expenditure, except capital expenditures in an
aggregate amount of no more than $25,000;
(viii) establish, adopt or amend any employee benefit plan, or pay any
bonus or make any profit sharing or similar payment to, or increase the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees except as disclosed to BioStar;
(ix) change any of its methods of accounting or accounting practices
in any respect;
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(x) make any material tax election;
(xi) commence or settle any legal proceeding except in the ordinary
course of business;
(xii) materially amend or otherwise modify any of the terms of its
engagement of Cowen;
(xiii) enter into any material transaction or take any other material
action in each case either inconsistent with the operating plan provided by
Cortech to BioStar, or outside the ordinary course of business;
(xiv) except as previously disclosed to BioStar, sell or otherwise
dispose of, or grant an exclusive license or any other exclusive right to
utilize Cortech proprietary assets which individually or in the aggregate
constitute core technology material to the business of Cortech, or grant to
any third party a right of first refusal, first offer, or first negotiation
with regard to material products or such core technology;
(xv) make any expenditure singly or in the aggregate, that exceeds the
aggregate expenditures set forth in the Cortech cash projection during the
period ended March 31, 1998 by more than a net $350,000 or make any
expenditure, singly or in the aggregate, that exceeds the aggregate
expenditures set forth in the cash projections by more than a net $100,000
for the months of April 1998 or May 1998; or
(xvi) agree or commit to take any of the actions described in clause
(i) through (xv).
During the Pre-Closing Period, Cortech shall promptly notify BioStar in
writing of: (i) the discovery by Cortech of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of the
Reorganization Agreement and that caused or constitutes a material inaccuracy in
any representation or warranty made by Cortech in the Reorganization Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or exists
after the date of the Reorganization Agreement and that would cause or
constitute a material inaccuracy in any representation or warranty made by
Cortech in the Reorganization Agreement if (a) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (b) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of the
Reorganization Agreement; (iii) any material breach of any covenant or
obligation of Cortech; and (iv) any event, condition, fact or circumstance that
would make the timely satisfaction of any of the conditions to closing
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Cortech Corporations. No notification so given to
BioStar will limit or otherwise affect any of the representations, warranties,
covenants or obligations of Cortech contained in the Reorganization Agreement.
Non-Solicitation. Pursuant to the Reorganization Agreement, BioStar and
Cortech have each agreed that they will not directly or indirectly, and will not
authorize or permit any representative of BioStar, in the case of BioStar, or
any representative of Cortech or Merger Sub, in the case of Cortech, directly or
indirectly to (i) solicit, initiate, knowingly encourage or induce the making,
submission or announcement of any Acquisition Proposal (as such term is defined
below) or take any similar action, (ii) furnish any non-public information
regarding BioStar or any of the Cortech Corporations, respectively, to any
person in connection with or in response to an Acquisition Proposal, (iii)
engage in discussions or negotiations with any person with respect to any
Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
contract contemplating or otherwise relating to any Acquisition Transaction (as
such term is defined below). BioStar and Cortech and their respective boards of
directors are not prevented, however, from (i) furnishing information regarding
BioStar or any of the Cortech Corporations, respectively, to any person in
connection with or in response to a bona fide, unsolicited Acquisition Proposal
or engaging in discussions or negotiations with respect thereto if and only to
the extent that (a) the relevant board of directors determines in good faith,
after consultation with its financial advisor that such Acquisition Proposal is
reasonably likely to result in an offer for acquisition superior to the one
provided for in the Reorganization Agreement, (b) the relevant board of
directors determines in good faith, after consultation with its outside counsel
that such action is required in order for the board of directors to comply with
its fiduciary duties under applicable law, (c) the person who has requested such
information has
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executed and delivered to the relevant company a non-disclosure agreement that
is not less restrictive than the non-disclosure agreement in effect between
BioStar and Cortech, and (d) the company engaging in such activities has not
breached its obligations concerning non-solicitation set forth herein or (ii)
complying with Exchange Act Rules 14e-2 and 14d-9. Notwithstanding the
foregoing, the relevant board of directors may recommend a superior offer to its
stockholders, if the relevant board of directors determines, after consultation
with its outside counsel that, in light of such superior offer, such
recommendation is required in order for the relevant board of directors to
comply with its fiduciary obligations; provided, however, that Cortech provides
BioStar with at least 48 hours prior written notice of its intentions to
consider an Acquisition Proposal and Cortech does not recommend a superior offer
to its stockholders for at least two business days after Cortech has provided
BioStar with the material terms of such superior offer.
In addition, each of BioStar and Cortech shall promptly advise the other
orally and in writing of any Acquisition Proposal (including the identity of the
person making or submitting such Acquisition Proposal and the terms thereof)
that is made or submitted by any person during the Pre-Closing Period. Each of
BioStar and Cortech shall keep the other informed with respect to material
changes to the terms of any such Acquisition Proposal and any material
modification or proposed modifications thereto. BioStar and Cortech shall both
immediately cease and cause to be terminated any existing discussions with any
person that relate to any Acquisition Proposal and shall request the return or
destruction of any confidential information previously disclosed to such person
and shall use commercially reasonable efforts to ensure that such information is
destroyed or returned.
An "Acquisition Proposal" is any offer or proposal (other than an offer or
proposal between Cortech and BioStar) contemplating or otherwise relating to any
Acquisition Transaction. An "Acquisition Transaction" shall mean any transaction
or series of related transactions involving: (i) any merger, consolidation,
share exchange, business combination, issuance of securities, acquisition of
securities, tender offer, exchange offer or other similar transaction (a) in
which Cortech or BioStar is a constituent corporation, (b) in which a person or
"group" (as defined in the Exchange Act and the rules promulgated thereunder) of
persons directly or indirectly acquires Cortech or BioStar or more than 50% of
Cortech's business or BioStar's business or directly or indirectly acquires
beneficial or record ownership of securities representing more than 20% of the
outstanding securities of any class of voting securities of any of Cortech or
BioStar, or (c) in which any of Cortech or BioStar issues securities
representing more than 20% of the outstanding securities of any class of voting
securities of BioStar or Cortech, respectively; (ii) any sale, lease, exchange,
transfer, license, acquisition or disposition of more than 50% of the assets of
BioStar or Cortech; or (iii) any liquidation or dissolution of BioStar or
Cortech.
Meetings of Stockholders. Pursuant to the Reorganization Agreement, BioStar
will take all action necessary in accordance with applicable law to convene and
hold the BioStar Special Meeting to vote upon the approval of the Merger
Proposal and the BioStar Certificate Proposal. BioStar's obligation to call,
give notice of, convene and hold the BioStar Special Meeting will not be limited
or otherwise affected by the withdrawal, amendment or modification of the
recommendation of the board of directors of BioStar with respect to the Merger,
except as is required by applicable law. Pursuant to the Reorganization
Agreement, Cortech will take all action necessary in accordance with applicable
law to convert and hold the Cortech Special Meeting to vote upon the approval of
the Merger Proposal and the Cortech Certificate Proposal. Cortech's obligation
to call, give notice of, convene and hold the Cortech Special Meeting will not
be limited or otherwise affected by any withdrawal, amendment or modification of
the recommendation of the Cortech Board with respect to the Merger, except as
may be required by applicable law.
Election of Directors. Cortech must use all reasonable efforts to nominate
and appoint a five person board of directors as further set forth in the caption
above entitled "-- Composition of the Cortech Board".
Indemnification. Under the Reorganization Agreement, Cortech has agreed to
provide indemnification to the fullest extent permitted by applicable laws, to
any person who has served as a director or officer of Cortech or BioStar against
losses, claims, damages or expenses arising out of the fact that such person was
a director or officer of Cortech or BioStar.
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Registration Rights. Pursuant to the Reorganization Agreement, Cortech
shall assume all of BioStar's obligations to certain BioStar stockholders under
the BioStar Restated Investors' Rights Agreement to register shares of Cortech
Common Stock issued in exchange for BioStar Capital Stock in the Merger to such
stockholders; provided, however, the BioStar Restated Investors' Rights
Agreement shall provide that no party may request registration or participate in
a registration of Cortech Common Stock thereunder until the earlier of (a) the
date 90 days after the effective date of a registration statement for the first
public offering of Cortech's shares following the Effective Time and (b) the
first anniversary of the Effective Time.
Market Stand-off Agreement. BioStar shall obtain the agreement of certain
holders of BioStar Capital Stock that such holders shall not directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any Cortech Common
Stock issued to such BioStar stockholders in connection with the Merger for 180
days from the Effective Time.
Certain Other Covenants. The Reorganization Agreement contains certain
other covenants including covenants relating to: (i) information and access,
(ii) preparation and filing of the Registration Statement, (iii) obtaining
regulatory approvals, (iv) public announcements, (v) tax qualification and
opinion back-up certificates, (vi) resignation of Cortech's officers and certain
of Cortech's directors, (vii) the Foreign Investment in Real Property Tax Act,
(viii) affiliate agreements, (ix) further action and (x) obtaining required
consents.
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time
(whether before or after approval of the Merger Proposal by the Required BioStar
Stockholder Vote and the Required Cortech Stockholder Vote);
(i) by mutual written consent of Cortech and BioStar;
(ii) by either Cortech or BioStar if the Merger shall not have been
consummated by May 31, 1998 (unless the failure to consummate the Merger is
attributable to a failure on the part of the party seeking to terminate the
Reorganization Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(iii) by either Cortech or BioStar if a court of competent
jurisdiction or other governmental body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(iv) by either Cortech or BioStar if (i) the BioStar Stockholders'
Meeting shall have been held and completed and (ii) the Merger Proposal
shall not have been approved at such meeting by the Required BioStar
Stockholder Vote;
(v) by either Cortech or BioStar if (i) the Cortech Stockholders'
Meeting shall have been held and completed and (ii) the Merger Proposal
shall not have been approved at such meeting by the Required Cortech
Stockholder Vote;
(vi) by Cortech (at any time prior to the approval of the Merger
Proposal and the BioStar Certificate Amendment by the Required BioStar
Stockholder Vote) if a BioStar Triggering Event (as such term is defined
below) shall have occurred;
(vii) by BioStar (at any time prior to the approval of the Merger
Proposal by the Required Cortech Stockholder Vote) if a Cortech Triggering
Event (as such term is defined below) shall have occurred;
(viii) by Cortech if (a) any of BioStar's representations and
warranties contained in the Reorganization Agreement shall be or shall have
become materially inaccurate, (b) if any of BioStar's covenants contained
in the Reorganization Agreement shall have been breached, and such
inaccuracy or breach would cause the condition set forth in clauses (i) or
(ii) under "-- Conditions to the Merger -- Cortech and Merger Sub" to not
be satisfied or (c) if Cowen withdraws its fairness opinion because of a
material
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change in the underlying assumptions of the financial projections provided
to Cowen by BioStar; provided, however, that if an inaccuracy in BioStar's
representations and warranties or a breach of a covenant by BioStar is
curable by BioStar and BioStar is continuing to exercise all reasonable
efforts to cure such inaccuracy or breach, then Cortech may not terminate
the Reorganization Agreement on account of such inaccuracy or breach until
20 days after delivery of written notice of the inaccuracy or breach to
BioStar by Cortech, if the inaccuracy or breach has not at that time been
cured or May 31, 1998, whichever shall first occur; or
(ix) by BioStar if any of Cortech's representations and warranties
contained in the Reorganization Agreement shall be or shall have become
materially inaccurate, or if any of Cortech's covenants contained in the
Reorganization Agreement shall have been breached, and such inaccuracy or
breach would cause the condition set forth in clauses (i) or (ii) under
"-- Conditions to the Merger -- BioStar" to not be satisfied (except as
BioStar may consider any breach of the covenant set forth in clause "(xv)"
under "-- Conditions to the Merger -- BioStar" to be a material breach);
provided, however, that (except with respect to a breach of the covenant
set forth in clause "(xv)" under "-- Conditions to the Merger -- BioStar"
which shall be considered a breach incapable of cure) if an inaccuracy in
Cortech's representations and warranties or a breach of a covenant by
Cortech is curable by Cortech and Cortech is continuing to exercise all
reasonable efforts to cure such inaccuracy or breach, then BioStar may not
terminate the Reorganization Agreement on account of such inaccuracy or
breach until 20 days after delivery of written notice of the breach or
inaccuracy to Cortech by BioStar, if the inaccuracy or breach has not at
that time been cured or May 31, 1998, whichever shall first occur.
A "Triggering Event" of a party shall be deemed to have occurred if: (i)
the board of directors of the party shall have failed to recommend, or shall for
any reason have withdrawn or shall have amended or modified in a manner adverse
to the other party its unanimous recommendation in favor of, the Merger or
approval of the Reorganization Agreement; (ii) the party shall have failed to
include in this Joint Proxy Statement/Prospectus the unanimous recommendation of
its board of directors in favor of approval of the Reorganization Agreement and
the Merger; (iii) the board of directors of the party fails to unanimously
reaffirm its recommendation in favor of approval of the Reorganization Agreement
and the Merger within five business days after the other party requests in
writing that such recommendation be reaffirmed; (iv) the board of directors of
the party shall have approved, endorsed or recommended any Acquisition Proposal;
(v) the party shall have entered into any letter of intent or similar document
or any contract relating to any Acquisition Proposal; (vi) the party shall have
failed to hold the relevant stockholders' meeting as promptly as practicable and
in any event within 45 days after this registration statement is declared
effective under the Securities Act; (vii) a tender or exchange offer relating to
securities of the party shall have been commenced and the party shall not have
sent to its security holders, within five business days after the commencement
of such tender or exchange offer, a statement disclosing that the party
recommends rejection of such tender or exchange offer; or (viii) an Acquisition
Proposal is publicly announced, and the party (A) fails to issue a press release
announcing its opposition to such Acquisition Proposal within five business days
after such Acquisition Proposal is announced or (B) otherwise fails to actively
oppose such Acquisition Proposal.
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, except as provided below, all
fees and expenses incurred in connection with the Reorganization Agreement and
the transactions contemplated by the Reorganization Agreement shall be paid by
the party incurring such expenses, whether or not the Merger is consummated;
provided, however, that Cortech and BioStar shall share equally all fees and
expenses, other than attorneys' fees, incurred in connection with the filing,
printing and mailing of this registration statement and this Joint Proxy
Statement/Prospectus and any amendments or supplements thereto.
The Reorganization Agreements provides that if it is terminated by Cortech
pursuant to clause (vi) or (viii) under the caption "Termination," then BioStar
must pay to Cortech, in cash, a nonrefundable termination fee in the amount of
$500,000 plus the amount of professional fees and expenses which Cortech has
incurred in connection with the Merger, up to $150,000. If the Reorganization
Agreement is terminated by BioStar pursuant to clause (vii) or (ix) under
"Termination," then Cortech shall pay to BioStar, in cash, a
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nonrefundable termination fee in the amount of $500,000, plus the amount of
professional fees and expenses which BioStar has incurred in connection with the
Merger, up to $150,000.
Cowen has acted as a financial advisor to the Cortech Board in connection
with the Merger. Pursuant to the terms of the letter agreement with Cowen, Cowen
has been paid a non-refundable retainer fee and fairness opinion fee totalling
$250,000. If the Merger is consummated, Cortech has agreed to pay Cowen an
additional advisory fee of $150,000 in consideration for Cowen's professional
services. Cortech also has agreed to reimburse Cowen for its reasonable
out-of-pocket expenses and to indemnify Cowen and certain related persons
against certain liabilities, including liabilities under the federal securities
laws, relating to or arising out of its engagement.
Lehman has acted as financial advisor to the BioStar Board in connection
with the Merger. Pursuant to the terms of the letter agreement with Lehman,
BioStar will pay Lehman $ , including shares of BioStar
Series F Preferred Stock, for its financial advisory services. In addition,
BioStar has agreed to reimburse Lehman for its reasonable out-of-pocket expenses
and to indemnify Lehman and certain related persons against certain liabilities,
including liabilities under the federal securities laws, relating to or arising
out of its engagement.
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PROPOSAL TO AMEND THE CORTECH CERTIFICATE OF INCORPORATION
In addition to the Merger Proposal, at the Cortech Special Meeting the
stockholders of Cortech as of the Cortech Record Date are being asked to approve
the Cortech Certificate of Amendment (attached hereto as Appendix B) which will
effect (i) a corporate name change for Cortech and (ii) a reverse split of the
issued and outstanding Cortech Common Stock. Although these actions are further
described below, it should be noted that the Cortech Certificate of Amendment
would not be implemented in the event that the Cortech Certificate of Amendment
is approved but the Merger Proposal is not approved.
CORPORATE NAME CHANGE
As part of its consideration of the Merger and the Reorganization
Agreement, the Cortech Board has unanimously approved an amendment to the
Cortech Certificate, contingent upon the effectiveness of the Merger and
stockholder approval, to change the corporate name of Cortech to "BioStar
Holdings, Inc." (the "Name Change"). The Name Change would entail a new
quotation symbol of "BSTR" for Cortech Common Stock on the Nasdaq National
Market (provided that the combined company maintains its listing on the Nasdaq
National Market).
REVERSE SPLIT
The Cortech Board has unanimously approved an amendment to the Cortech
Certificate to effect a reverse split of the Cortech Common Stock (the "Reverse
Split"). The Reverse Split, if approved and implemented, would cause all issued
and outstanding shares of Cortech Common Stock to be split, on a reverse basis,
one-for-[ ]. However, the Reverse Split would not affect the number of
authorized shares of Cortech Common Stock. Accordingly, the Reverse Split would
effectively increase the number of available authorized shares of Cortech Common
Stock. The effective date of the Reverse Split would be the date on which the
Certificate of Amendment is filed with the Secretary of State of Delaware.
Implementation of the Reverse Split is contingent upon approval of the Cortech
Certificate Proposal and the Merger Proposal by the Cortech stockholders.
Assuming such implementation, the effective date of the Reverse Split is
anticipated to be at or about the Effective Time. As described below, the
primary objective of the Cortech Board in effecting the Reverse Split is to
increase the per share market price of Cortech Common Stock. A significant
collateral effect would be to increase the number of authorized but unissued
shares of Cortech Common Stock.
Trading in Cortech Common Stock is presently quoted on the Nasdaq National
Market. Cortech has been advised by Nasdaq that the continued quotation of
Cortech Common Stock on the Nasdaq National Market is in jeopardy due to a bid
price for Cortech Common Stock of less than $1.00 per share. The Reverse Split
is intended to increase the post-Merger per share bid price of Cortech Common
Stock in order to satisfy Nasdaq's related requirement. In the event that the
Merger Proposal is approved and the Cortech Certificate Proposal is not
implemented following the Cortech Special Meeting (for example, because the
Cortech Certificate Proposal is not approved at the Cortech Special Meeting),
Cortech would propose a reverse stock split of Cortech Common Stock for approval
at an Annual Meeting of the Cortech stockholders to be held as soon as
reasonably practicable following the Cortech Special Meeting. There can be no
assurances that Cortech will be able to maintain its Nasdaq National Market
Listing (whether as a result of failure to meet the minimum bid price
requirement or other requirements imposed by the Nasdaq National Market). The
absence of the quotation of trading in Cortech Common Stock on the Nasdaq
National Market would have an adverse effect on the market for, and the market
price of, Cortech Common Stock.
The Reverse Split will have the significant collateral effect of increasing
the number of authorized but unissued shares of Cortech Common Stock. This would
permit Cortech to use such shares in connection with Cortech's employee benefit
plans, the options, warrants and rights formerly relating to BioStar Capital
Stock which will be assumed by Cortech in the Merger and possible future
issuances. At the Cortech Record Date, there were issued and outstanding
[ ] shares of Cortech Common Stock and options and warrants to acquire
an additional [ ] shares of Cortech Common Stock. The number of shares
of Cortech Common Stock to be issued in connection with the Merger will not
exceed 28,500,000 shares (pre-Reverse
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Split). Accordingly, only [ ] of the 50,000,000 shares of Cortech Common
Stock authorized would be available for possible future issuances absent the
Reverse Split.
The Cortech Board believes that the Reverse Split is beneficial to
Cortech's future prospects since Cortech Common Stock will not continue to be
eligible for inclusion on the Nasdaq National Market if the Reverse Split does
not take place or if the market price for the Cortech Common Stock does not
otherwise meet the $1.00 minimum bid price. In addition, the Reverse Split will
provide the combined company flexibility in meeting its possible needs by
enabling it to raise additional capital through the issuance of Cortech Common
Stock or securities convertible into or exercisable for Cortech Common Stock,
make additional stock awards under Cortech's employee benefit plans (and the
employee benefit plans of the combined company) and/or employ Cortech Common
Stock as a form of consideration for acquisitions. Other than in connection with
the Merger, Cortech does not presently intend to issue any additional shares for
any specific purpose (except in connection with Cortech's employee benefit
plans, employee benefit plans of the combined company and the options, warrants
and rights formerly relating to BioStar Capital Stock which will be assumed by
Cortech in connection with the Merger).
For the foregoing reasons, the Cortech Board has determined that a
recapitalization through the Reverse Split, which would be implemented at or
about the Effective Time, would be in the best interests of Cortech and its
stockholders.
EFFECTS OF THE REVERSE SPLIT
General Effects. The principal effect of the Reverse Split would be to
decrease the number of outstanding shares of Cortech Common Stock. Specifically,
the [ ] shares of Cortech Common Stock issued and outstanding on the
Cortech Record Date would, as a result of the Reverse Split, be converted into
approximately [ ] shares of Cortech Common Stock (with the precise
number depending upon the extent of fractional shares resulting from the Reverse
Split, which will be converted to cash based upon the market price for a share
of Cortech Common Stock on the trading day prior to implementation of the
Reverse Split). After giving effect to the Merger (i.e., assuming the issuance
of an aggregate of 28,500,000 shares of Cortech Common Stock in connection with
the Merger), the [ ] shares of Cortech Common Stock issued and
outstanding would, as a result of the Reverse Split, be converted into
approximately [ ] shares of Cortech Common Stock (with the precise
number depending upon the extent of fractional shares). Since the number of
shares of Cortech Common Stock authorized for issuance by the Cortech
Certificate following the Reverse Split will remain at 50,000,000 shares, the
Reverse Split will result in approximately [ ] "new" (or
post-Reverse Split) shares of Cortech Common Stock ("New Shares") available for
issuance by Cortech.
Effect on Market for Cortech Common Stock. On [ ], 1998, the
closing price of Cortech Common Stock quoted on the Nasdaq National Market was
$[ ] per share. By decreasing the number of shares of Cortech Common
Stock otherwise outstanding without altering the aggregate economic interest in
Cortech represented by such shares, the Cortech Board believes that the per
share market price for Cortech Common Stock will be increased to the price
required for continued inclusion of the shares on the Nasdaq National Market.
Effect on Cortech's Stock Options and Warrants. The total number of shares
of Cortech Common Stock issuable upon the exercise of options and warrants to
acquire such shares, and the exercise price thereof, shall be proportionally
adjusted to reflect the Reverse Split.
Effect under Cortech's Rights Plan. Following the implementation of the
Reverse Split, each share of Cortech Common Stock will continue to have one
preferred share purchase right (a "Right") associated with it; however, the
number of shares of preferred stock issuable upon the exercise of each Right
shall be proportionally adjusted to reflect the Reverse Split (i.e., following
the effectiveness of the Reverse Split, each Right, under certain circumstances,
would be eligible to purchase up to [ ] one-hundredths of a
share of preferred stock). See "Description of Cortech Capital
Stock -- Stockholder Rights Plan".
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Changes in Stockholders' Equity. The Reverse Split would reduce Cortech's
stated capital, which consists of the par value per share of Cortech Common
Stock multiplied by the number of such shares outstanding, from the amount which
would otherwise exist following the Effective Time (assuming the effectiveness
of the Merger and the share amounts otherwise set forth above, the Reverse Split
would reduce Cortech's stated capital by approximately $[ ]. Although the
par value of Cortech Common Stock would remain at $.002 per share following the
Reverse Split, stated capital would be decreased because the number of shares
outstanding would be reduced. Correspondingly, Cortech's additional paid-in
capital, which consists of the difference between Cortech's stated capital and
the aggregate amount paid to Cortech upon the issuance by Cortech of all then
outstanding shares of Cortech Common Stock, would be increased.
Appraisal Rights. Pursuant to the DGCL, Cortech's stockholders are not
entitled to appraisal rights with respect to the Reverse Split.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the federal income tax consequences of the Reverse
Split is based on current law, including the Code, and is for general
information only. The tax treatment for any stockholder may vary depending upon
the particular facts and circumstances of such stockholder. Certain
stockholders, including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, non-resident aliens, foreign corporations and
persons who do not hold Cortech Common Stock as a capital asset, may be subject
to special rules not discussed below. ACCORDINGLY, EACH STOCKHOLDER SHOULD
CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
HIM OR HER OF THE REVERSE SPLIT, INCLUDING THE APPLICATION AND EFFECT OF
FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAXES AND OTHER LAWS.
The receipt of whole New Shares (excluding fractional New Shares) in the
Reverse Split should be non-taxable for federal income tax purposes.
Consequently, a stockholder receiving New Shares will not recognize either gain
or loss, or any other type of income, with respect to whole New Shares received
as a result of the Reverse Split. In addition, the tax basis of such
stockholder's shares of Cortech Common Stock prior to the Reverse Split will
carry over as the tax basis of the stockholder's New Shares. The holding period
of the New Shares should also include the stockholder's holding period of the
Cortech Common Stock prior to the Reverse Split, provided that such Cortech
Common Stock was held by the stockholder as a capital asset on the effective
date of the Reverse Split.
Any stockholder who receives cash in lieu of a fractional New Share
pursuant to the Reverse Split will recognize gain or loss equal to the
difference between the amount of cash received and the portion of the aggregate
tax basis in his or her shares of Cortech Common Stock allocable to such
fractional New Share. If the shares of Cortech Common Stock were held as a
capital asset on the effective date of the Reverse Split, then the stockholder's
gain or loss will be a capital gain or loss. Such capital gain or loss will be a
long-term capital gain or loss if the stockholder's holding period for the
shares of Cortech Common Stock is longer than eighteen months, a short-term
capital gain or loss if the stockholder's holding period is twelve months or
less and mid-term gain or loss if the stockholder's holding period is longer
than twelve months and less than eighteen months.
Based on certain exceptions contained in regulations issued by the Internal
Revenue Service, Cortech does not believe that it or its stockholders would be
subject to backup withholding or informational reporting with respect to cash
distributed in lieu of fractional New Shares.
EXCHANGE OF SHARES
On or after the effective date of the Reverse Split, Cortech will mail to
each Cortech stockholder of record a letter of transmittal. Cortech stockholders
will be able to receive a certificate representing New Shares and, if
applicable, cash in lieu of a fractional New Share only by transmitting to the
Exchange Agent such stockholder's stock certificate(s) for shares of Cortech
Common Stock outstanding prior to the Reverse Split, together with the properly
executed and completed letter of transmittal, and such evidence of ownership of
such shares as Cortech may require. Cortech stockholders will not receive
certificates for New
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Shares unless and until the certificates representing their shares of Cortech
Common Stock outstanding prior to the Reverse Split are surrendered. Cortech
stockholders should not forward their certificates to the Exchange Agent until
the letter of transmittal is received and should surrender their certificates
only with such letter of transmittal. Holders of BioStar Capital Stock prior to
the Merger will receive a letter of transmittal which combines the procedure for
exchanging their certificates representing BioStar Capital Stock for
certificates representing New Shares.
Payment in lieu of a fractional New Share will be made to any Cortech
stockholder entitled thereto promptly after receipt by Cortech or its Exchange
Agent of a properly completed letter of transmittal and stock certificate(s) for
all of his or her shares of Cortech Common Stock (or BioStar Capital Stock, as
the case may be) outstanding prior to the Reverse Split. There will be no
service charge payable by Cortech stockholders in connection with the exchange
of certificates or in connection with the payment of cash in lieu of the
issuance of a fractional New Share. These costs will be borne by Cortech.
REQUIRED VOTE
Approval and adoption of the Cortech Certificate Proposal (which includes
the Name Change and the Reverse Split) requires the affirmative vote of the
holders of a majority of the shares of Cortech Common Stock issued and
outstanding on the Cortech Record Date and entitled to vote. Therefore, the
effect of an abstention or broker nonvote on the proposal is the same as a vote
against the proposal.
BOARD RECOMMENDATION
THE CORTECH BOARD HAS UNANIMOUSLY APPROVED THE CORTECH CERTIFICATE OF
AMENDMENT, WHICH INCLUDES THE NAME CHANGE AND THE REVERSE SPLIT, AND RECOMMENDS
THAT STOCKHOLDERS VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE CORTECH
CERTIFICATE PROPOSAL.
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AMENDMENT OF THE BIOSTAR CERTIFICATE OF INCORPORATION
The BioStar Board has approved and submitted for a vote with the BioStar
stockholders an amendment (the "BioStar Certificate of Amendment") of the
Restated Certificate of Incorporation of BioStar. A copy of the proposed
amendment is attached as Exhibit B to the Reorganization Agreement attached
hereto as Appendix A.
Conditioned upon the satisfaction or waiver of the various conditions to
closing the Merger in the Reorganization Agreement, the BioStar Certificate of
Amendment provides that the holders of BioStar preferred stock will only receive
the consideration for their shares set forth in the Reorganization Agreement.
The Merger is conditioned upon approval of the BioStar Certificate of
Amendment by the BioStar preferred stockholders. If the BioStar Certificate of
Amendment is not approved then the Merger will not be implemented.
EFFECT OF AMENDMENT
Holders of BioStar preferred stock are entitled, under certain
circumstances, to receive payment of a preferential amount prior to any payments
or distributions in respect of BioStar common stock. Under BioStar's Restated
Certificate of Incorporation, the preferred stock preference is not payable in
the event of a merger in which BioStar stockholders obtain more than 50% of the
voting power of the entity "surviving or continuing" after such merger.
BioStar stockholders will hold more than 50% of the outstanding voting
power of Cortech following the Merger. Because of the legal structure of the
Merger, however, Cortech (rather than BioStar) could be deemed to be such
"surviving or continuing" entity. The BioStar Certificate of Amendment clarifies
that, despite the legal structure of the Merger, holders of BioStar preferred
stock will not receive in connection with the Merger any payments or amounts in
preference to the BioStar common stock, but will only receive the consideration
for their shares specified in the Reorganization Agreement.
REQUIRED VOTE
Approval and adoption of the BioStar Certificate of Amendment requires the
affirmative vote of the holders of a majority of the outstanding shares of
BioStar common stock and preferred stock, voting together as a single class (on
an as-converted basis), and the affirmative vote of the holders of a majority of
the shares of each series of BioStar preferred stock, voting as separate
classes. The effect of an abstention or broker nonvote on the proposal is the
same as a vote against the proposal.
Pursuant to the BioStar Voting Agreements, certain directors, officers and
other affiliates of BioStar, who together hold approximately 65% of the BioStar
common stock and BioStar preferred stock voting as a single class, and 100% of
the Series A Preferred Stock, 100% of the Series B Preferred Stock, 100% of the
Series C Preferred Stock, at least 50% of the Series D Preferred Stock and at
least 38% of the Series E Preferred Stock voting as separate classes,
outstanding as of the BioStar Record Date, have agreed to vote in favor of the
BioStar Certificate Proposal. See "Approval of the Merger and Related
Transactions -- Voting Agreements".
THE BIOSTAR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE BIOSTAR
CERTIFICATE AMENDMENT.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On December 22, 1997, Cortech, BioStar and Merger Sub entered into the
Reorganization Agreement pursuant to which BioStar would become a wholly owned
subsidiary of Cortech at the Effective Time and the stockholders of BioStar
would receive shares of Cortech Common Stock in exchange for their BioStar
Capital Stock. The Cortech Common Stock to be issued or reserved for issuance to
holders of BioStar Capital Stock, BioStar Options and BioStar Warrants amounts
to approximately 60% of the Cortech Common Stock issued and outstanding
immediately after the Merger (assuming the exercise in full of all BioStar
Options and BioStar Warrants). For financial reporting purposes, the transaction
would be accounted for as a reverse acquisition whereby BioStar is deemed the
acquiror of Cortech since the former stockholders of BioStar would have voting
control of Cortech after the transaction.
The following unaudited pro forma condensed consolidated balance sheet
gives effect to the consummation of the Merger as if it had occurred on December
31, 1997. The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1997 gives effect to the Merger as if
it had occurred on January 1, 1997. The unaudited pro forma condensed
consolidated financial information and notes thereto do not purport to represent
what the Company's results of operations would have been if the Merger had
occurred on such dates.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that Cortech and BioStar management believe are
reasonable. The unaudited pro forma condensed consolidated financial information
and accompanying notes should be read in conjunction with the financial
statements and related notes thereto of both Cortech and BioStar, and other
financial information pertaining to Cortech and BioStar, including "Cortech
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "BioStar Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Joint Proxy
Statement/Prospectus.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
CORTECH BIOSTAR
-------------------------------------- -------------------------------------- UNAUDITED
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL ADJUSTMENTS AS ADJUSTED AS ADJUSTED
---------- ----------- ----------- ---------- ----------- ----------- -----------
ASSETS:
Cash and cash equivalents...... $ 11,562 $ -- $11,562 $ 1 $ -- $ 1 $ 11,563
Short term investments......... 3,841 -- 3,841 -- -- -- 3,841
Trade accounts receivable,
net.......................... -- -- -- 1,663 -- 1,663 1,663
Inventories.................... -- -- -- 1,413 -- 1,413 1,413
Prepaid expenses and other..... 308 -- 308 285 -- 285 593
-------- -------- ------- -------- ------- -------- --------
Total current assets......... 15,711 -- 15,711 3,362 -- 3,362 19,073
-------- -------- ------- -------- ------- -------- --------
Laboratory and manufacturing
equipment.................... -- -- -- 3,040 -- 3,040 3,040
Leasehold improvements......... 8,026 (2,324)(1) 159 123 -- 123 282
(5,543)(2)
Office furniture and
equipment.................... 2,300 (2,043)(2) 257 617 -- 617 874
-------- -------- ------- -------- ------- -------- --------
10,326 (9,910) 416 3,780 -- 3,780 4,196
Less accumulated depreciation
and amortization............. (9,592) 2,006 (1) -- (1,624) -- (1,624) (1,624)
7,586 (2)
-------- -------- ------- -------- ------- -------- --------
734 (318) 416 2,156 -- 2,156 2,572
-------- -------- ------- -------- ------- -------- --------
Purchased patents.............. -- -- -- 920 -- 920 920
Deferred patent and trademark
costs........................ -- -- -- 815 -- 815 815
-------- -------- ------- -------- ------- -------- --------
-- -- -- 1,735 -- 1,735 1,735
Accumulated amortization....... -- -- -- (1,159) -- (1,159) (1,159)
-------- -------- ------- -------- ------- -------- --------
-- -- -- 576 -- 576 576
-------- -------- ------- -------- ------- -------- --------
Other assets................... -- -- -- 234 (168)(3) 66 66
-------- -------- ------- -------- ------- -------- --------
Total assets................... $ 16,445 $ (318) $16,127 $ 6,328 $ (168) $ 6,160 $ 22,287
======== ======== ======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Accounts payable and accrued
liabilities.................. $ 762 $ 2,026 (4) $ 2,788 $ 1,538 $ (88)(5) $ 2,350 $ 5,138
900 (6)
Accrued compensation........... 264 -- 264 880 -- 880 1,144
Deferred revenue and other..... 36 -- 36 166 -- 166 202
Note payable and line of
credit....................... -- -- -- 1,251 -- 1,251 1,251
Current portion of capital
lease obligations............ -- -- -- 374 -- 374 374
Current portion of subordinated
debt......................... -- -- -- 747 -- 747 747
Subordinated promissory
notes........................ -- -- -- 1,565 (1,565)(5) -- --
-------- -------- ------- -------- ------- -------- --------
1,062 2,026 3,088 6,521 (753) 5,768 8,856
-------- -------- ------- -------- ------- -------- --------
Capital lease obligations, net
of current portion above..... -- -- -- 62 -- 62 62
Convertible subordinated
debt......................... -- -- -- 4,500 (4,500)(7) -- --
Other long-term liabilities.... -- -- -- 858 (831)(7) 27 27
-------- -------- ------- -------- ------- -------- --------
-- -- -- 5,420 (5,331) 89 89
-------- -------- ------- -------- ------- -------- --------
Total liabilities............ 1,062 2,026 3,088 11,941 (6,984) 5,857 8,945
-------- -------- ------- -------- ------- -------- --------
Common stock................... 37 52 (8) 89 -- 1 (7) -- 89
(1)(9)
Convertible preferred stock.... -- -- -- 2 (2)(10) -- --
Warrants....................... 1,077 (1,077)(8) -- -- -- -- --
Additional paid in capital..... 98,909 (85,959)(8) 12,950 20,207 5,330 (7) 26,125 39,075
(900)(6)
2 (10)
58 (11)
(58)(11)
(168)(3)
1 (9)
1,653 (5)
Deferred compensation.......... (1) 1 (8) -- -- -- -- --
Accumulated deficit............ (84,639) (318)(1) -- (25,822) -- (25,822) (25,822)
(2,026)(4)
86,983 (8)
-------- -------- ------- -------- ------- -------- --------
Total stockholders' equity 15,383 (2,344) 13,039 (5,613) 5,916 303 13,342
-------- -------- ------- -------- ------- -------- --------
Total liabilities and
stockholders' equity......... $ 16,445 $ (318) $16,127 $ 6,328 $(1,068) $ 6,160 $ 22,287
======== ======== ======= ======== ======= ======== ========
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
CORTECH BIOSTAR PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- -----------
Sponsored research and development revenues........... $ 3,451 $ 5,028 $ -- $ 8,479
Net sales............................................. -- 10,830 -- 10,830
---------- ------- ---------- ----------
Total revenues................................... 3,451 15,858 -- 19,309
---------- ------- ---------- ----------
Research and development expense...................... 7,552 3,236 -- 10,788
Cost of sales and other manufacturing costs........... -- 4,924 -- 4,924
Sales and marketing................................... -- 6,179 -- 6,179
General and administrative expense.................... 3,616 2,662 -- 6,278
---------- ------- ---------- ----------
Total expenses................................... 11,168 17,001 -- 28,169
---------- ------- ---------- ----------
Royalties and grants.................................. -- 94 -- 94
Interest income....................................... 939 4 -- 943
Interest expense...................................... -- (888) 470(12) (295)
123(13)
---------- ------- ---------- ----------
939 (790) 593 742
---------- ------- ---------- ----------
Net loss......................................... $ (6,778) $(1,933) $ 593 $ (8,118)
========== ======= ========== ==========
Basic and diluted net loss per share.................. $ (0.37) $ (0.18)
Weighted average common shares outstanding............ 18,521,758 26,096,950(8) 44,618,708
- ---------------
(1) Represents the write-off of leasehold improvements and related accumulated
amortization of Cortech's leased facilities, as it is assumed BioStar will
not occupy such leased space.
(2) Represents the adjustment of the remaining tangible assets to estimated
fair market value.
(3) Represents historical costs incurred by BioStar related to the Merger which
will be offset against additional paid-in capital upon consummation of the
Merger.
(4) Represents additional costs to be incurred by Cortech related to severance
agreements ($1.3 million), continuing operating lease obligations
($226,000) and estimated costs to close the Merger of $500,000.
(5) Represents the conversion of BioStar subordinated promissory notes and
related accrued interest into BioStar preferred stock immediately prior to
the Effective Time. The actual conversion will include accrued interest
through the date of the Merger.
(6) Represents additional costs estimated to be incurred by BioStar in
connection with the Merger.
(7) Represents the conversion of BioStar convertible subordinated debt and
related accrued interest into BioStar preferred stock immediately prior to
the Effective Time. The actual conversion will include accrued interest
through the date of the Merger.
(8) Represents the issuance of approximately 26.1 million shares of Cortech
Common Stock upon the consummation of the Merger. The amount of Cortech
shares issued does not include Cortech shares to be reserved for issuance
in connection with the assumption of BioStar Options. As the Merger is to
be accounted for as a reverse acquisition, Cortech's stockholders' equity
balances are adjusted to reflect the fair market value of the Cortech
assets less the fair market value of the liabilities.
(9) Represents the elimination of the historical BioStar common stock balance,
as adjusted for the conversion of subordinated promissory notes and
convertible subordinated debt, together with accrued interest.
(10) Represents the conversion of BioStar's convertible preferred stock into
BioStar common stock immediately prior to the Effective Time.
(11) Represents the issuance of 160,000 shares of BioStar preferred stock
(valued at $0.36 per share) immediately prior to the Effective Time in
connection with BioStar's cancellation of the convertible contingent
payment instrument.
(12) Represents the elimination of interest expense on BioStar convertible
subordinated debt as such debt is assumed converted into BioStar preferred
stock as of January 1, 1997.
(13) Represents the elimination of interest expense on BioStar convertible
promissory notes as such notes are assumed converted into BioStar preferred
stock as of January 1, 1997.
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CORTECH BUSINESS
OVERVIEW
Cortech is a biopharmaceutical company whose principal focus has been the
discovery and development of novel therapeutics for the treatment of
inflammatory disorders. Specifically, Cortech has directed its research and
development efforts toward protease inhibitors and bradykinin antagonists. These
efforts have produced certain intellectual property rights. See "-- 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 has implemented a series of reductions in force over
the past three-and-one-half years which has reduced the number of full-time,
regular employees from more than 200 to fewer than 15 and effectively
discontinued all internal efforts to advance its research and development
activities. In addition, Cortech is currently de-commissioning its laboratories,
has sold most of its scientific and technical equipment and, unless BioStar opts
to retain such assets, plans to sell most of its office furniture and equipment
and, where possible, its leasehold improvements.
As a result of these actions, Cortech no longer has the staff or operative
facilities required to re-commence internal research and development activities.
Cortech has retained a core group of professionals who, among other things, are
actively engaged in ongoing efforts to realize appropriate value from Cortech's
tangible and intangible assets. It is uncertain, however, whether Cortech will
be able to retain employees with sufficient knowledge and experience to realize
appropriate value from Cortech's intangible assets. In light of the above,
Cortech's management has focused on evaluating various strategic alternatives.
As a result, Cortech entered into the Reorganization Agreement with BioStar on
December 22, 1997.
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 has become a very important area of drug
discovery. Cortech's work has focused primarily on the discovery and synthesis
of inhibitors of human neutrophil elastase ("HNE"), a serine protease capable of
degrading a variety of connective tissue proteins, most notably elastin. Elastin
is found in the lungs, vasculature and skin, and therapy directed against HNE
may have therapeutic application in acute and chronic respiratory,
cardiovascular and skin disorders. As a result of its research and development
efforts in this field, Cortech has developed proprietary technology which it has
demonstrated has the potential to be applied to the discovery and synthesis of a
broader range of therapeutically interesting protease inhibitors.
During inflammation, neutrophils are activated and migrate to sites of
inflammation to help kill microorganisms 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. Cortech's early
work in the area of protease inhibition led to the establishment in 1987 of a
strategic partnering relationship with Marion Laboratories, Inc. ("Marion")
under which Cortech granted to Marion worldwide rights to develop, manufacture
and market any products resulting from Cortech's HNE inhibitor program, subject
to a royalty payable to Cortech based
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on net sales, and Marion substantially funded the development of such products.
Although certain rights were granted back to Cortech in 1993 and 1996, this
relationship continued in force through subsequent merger transactions engaged
in by Marion (and its successor) which brought about the formation of Marion
Merrill Dow Inc., and subsequently Hoechst Marion Roussel, Inc. ("HMRI").
Cortech's work with HMRI (references to HMRI hereafter include, as applicable in
context, its predecessors) pursued discovery and development of a parenterally
administered inhibitor of HNE for use in the treatment of ARDS and cystic
fibrosis. As a result of this work, Cortech's scientists produced a lead
compound, designated "CE-1037", which Cortech ultimately advanced, with HMRI's
support, through Phase I and into Phase II clinical trials.
HMRI continued to fund Cortech's development of CE-1037 (ultimately
providing $14.1 million in funding) until December 1996 when HMRI terminated its
agreement with Cortech and returned all rights to CE-1037 to Cortech. HMRI
terminated the agreement following an analysis of the results from two
preliminary, preclinical, genotoxicity experiments which suggested that CE-1037
might have genotoxic properties.
When the disappointing results of the genotoxicity experiments became
available, a small pilot study in ARDS was underway. Cortech and HMRI decided to
suspend the clinical trial in order to evaluate the genotoxicity results and
conduct a repeat experiment, if warranted. Following HMRI's termination of its
agreement with Cortech, Cortech undertook a repeat (but more comprehensive) test
which was conducted at an independent contract facility. The results of this
repeat test recently became available and showed no genotoxic effects of
CE-1037. In the meantime, Cortech has also evaluated data from the small cohort
of patients in the ARDS trial, and such data suggest that CE-1037 may deserve
further study in this and other acute respiratory indications. Notwithstanding
these tentative findings, there can be no assurance that CE-1037 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 in appropriate
quantity. Furthermore, Cortech does not intend to undertake further development
of CE-1037 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.
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
Pharmaceutical Co. Ltd., ("Ono") of Osaka, Japan 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 $10.0 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.
In November 1996, Cortech reallocated some of its scientists to the oral
elastase project in light of the progress made over the preceding 18 months. In
return, Ono accelerated certain payments due under its agreement with Cortech.
In late 1996, disappointments from Cortech's collaborations with HMRI on CE-1037
and SmithKline Beecham on Bradycor(TM) (see "-- Cortech's Work with Protease
Inhibitors -- CE-1037 -- HNE Inhibitor for Parenteral Administration" and
"-- Cortech's Work with Bradykinin Antagonists") increased the pressure on
Cortech to conserve cash. Subsequently, in April 1997, Cortech and Ono amended
their agreement to transfer all responsibilities for research activities to Ono
during the final six months of the collaborative project (from September 15,
1997 through March 14, 1998). During the third quarter of 1997, Cortech's
remaining research staff focused their efforts primarily on elastase inhibition
in order to fulfill Cortech's responsibilities under its agreement with Ono. On
October 1, 1997, after fulfilling
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these responsibilities, Cortech began to implement a further, corporate
downsizing (to a staff of less than 15 full-time persons). Although Cortech
retains rights outside of the Ono Territory to any compounds developed pursuant
to the agreement with Ono, including those that might result from Ono's efforts
during the final six months of the collaborative project, there can be no
assurance that any research and development efforts with respect to HNE
inhibitors (including the efforts of Ono) will prove successful, that any
potential product would be proven safe and efficacious in clinical trials, that
the regulatory approvals necessary for the commercialization of any product (if
any product is ever advanced to this stage) would be obtained or that any
product could be manufactured at acceptable costs and with appropriate quantity.
Cortech does not intend to undertake further development of HNE inhibitors
without a collaborative partner. Although Cortech is currently seeking to secure
such a partner or a 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.
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. A small, focused effort continues in this area through contractual
arrangements with selected experts at academic medical centers. Cortech has also
developed a proprietary technology which has the potential to be applied to the
discovery and synthesis of inhibitors of a broader range of therapeutically
interesting serine and cysteine proteases such as mast cell tryptase and picorna
virus proteases, interleuken-1 beta converting enzyme, other caspases involved
in apoptosis and cell death and cathepsins B, K, L and S.
Notwithstanding these initial findings, there can be no assurance that any
of these compounds will be proven safe and efficacious in clinical trials, that
the regulatory approvals necessary for their commercialization (if any such
compounds are ever advanced to this stage) would be obtained or that it could be
manufactured at acceptable costs and with appropriate quantity. Furthermore,
Cortech does not intend to undertake further development of any of these
compounds without a collaborative partner. Although Cortech is currently seeking
to secure such a partner or purchaser of Cortech's related technology rights,
there can be no assurance that Cortech will be able to establish such a
collaboration or effect any transaction involving a sale of technology rights on
favorable terms, if at all.
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.
Cortech's efforts in connection with bradykinin antagonists have led to the
discovery and synthesis of bradykinin antagonist monomers, dimers and
heterodimers. The latter compounds link a bradykinin antagonist with an opioid
agonist to encompass the spectrum of pain and inflammation without central
nervous system penetration and its accompanying side effects. These heterodimers
may have therapeutic potential in the
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management of perioperative pain. In the last two years, however, Cortech's
efforts have focused on the development of two of its bradykinin antagonists,
Bradycor, a peptide dimer, and CP-0597, a peptide monomer.
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 intracranial 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 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 intracranial 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 $4.0 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, 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 intracranial pressure and the requirement for other
interventions to control intracranial pressure.
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.
In the event that 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. Cortech does not intend to undertake further development of Bradycor
without a collaborative partner. Although Cortech is currently seeking to secure
such a partner or a 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.
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In February 1992, Cortech entered into a series of agreements with CP-0127
Development Corporation ("CDC") that govern the development of products
utilizing Bradycor. See "-- CP-0127 Development Corporation".
Second Generation Bradykinin Antagonist Research. Cortech has also
developed a series of peptide bradykinin antagonists that are 100 to 1,000 times
more potent than Bradycor. Compared to Bradycor, these compounds have longer
durations of action in vivo and are expected to be less costly to manufacture.
Cortech has identified a lead compound, CP-0597, which has been targeted for the
treatment of acute ischemic stroke where inflammatory consequences of the injury
are felt to be similar to those following traumatic injury. Acute ischemic
stroke is the term applied when blood supply to the brain is acutely compromised
by the obstruction of an artery. This obstruction leads to ischemia
(insufficient blood flow and loss of oxygen) of the brain tissue. As a result of
the ischemia, there is neuronal death, neurological impairment and death of
brain tissue. The microvasculature in the brain is acutely sensitive to ischemia
and reacts with endothelial swelling and changes in microvascular tone which
further compromise blood supply. There is blood brain barrier disruption in the
ischemic territory and an inflammatory response both at the vascular and
neuronal levels.
Results from preclinical experiments demonstrating the neuroprotective
effects of CP-0597 were reported in the July 1997 issue of Stroke. These results
indicate that CP-0597 may have significant therapeutic potential in the
treatment of stroke. Accordingly, Cortech has continued a small highly focused
research effort with that compound through contractual arrangements with
academic institutions. Cortech does not, however, intend to undertake further
development of CP-0597 without a collaborative partner. Although Cortech is
currently seeking to secure such a partner to advance CP-0597 through remaining
preclinical and clinical development and to help commercialize any drug(s) which
may result or, alternatively, to sell Cortech's related technology rights, 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. Cortech is seeking collaborative arrangements to support any
further work on its research portfolio or, alternatively, to sell Cortech's
technology rights. There can be no assurance that Cortech will be able to
establish such collaborative arrangements 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 seek appropriate
patent protection of proprietary technologies and compounds important to the
development of its business. In addition to patents, Cortech relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. 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.
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Cortech has patent protection related to the following: protease
inhibitors, bradykinin antagonists and immunology (vaccines and treatments).
Cortech holds seven United States patents and currently has fourteen United
States patent applications pending which concern protease inhibitors. Cortech
holds five United States patents, has three United States patent applications
pending and has one patent application which has been allowed which concern
bradykinin antagonists. In addition, Cortech holds 26 foreign patents and has 40
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 patents 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. Cortech is aware of a patent that has issued
that contains claims which may, if valid, block Cortech from selling one or more
compounds in the immunology area. 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 the 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,
unpatented know-how and continuing technological innovation. It is Cortech's
policy to require its employees, consultants, members of the Board of Directors,
outside scientific collaborators and sponsored researchers and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with Cortech. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Cortech is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees, the agreements provide that all inventions conceived by the
individual shall be the exclusive property of Cortech. 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
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. Although Cortech has continued efforts to
secure a corporate partner in connection with Bradycor, Cortech is not currently
engaged in active development of any compounds covered by the agreements with
CDC. Kenneth R. Lynn, Chairman of the Cortech Board and Chief Executive Officer
of Cortech, and Bert Fingerhut, a member of the Cortech Board, serve as two of
the three members of the Board of Directors of CDC.
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MARKETING STRATEGY
Cortech's compounds are in the early stages of research and development. In
the event that any of Cortech's compounds were to be approved for marketing,
this would be accomplished primarily through arrangements with other
pharmaceutical or biotechnology companies. Comprehensive sales and technical
support services would be necessary to market Cortech's products, and Cortech
does not anticipate establishing significant capabilities in these areas in the
foreseeable future. To the extent Cortech enters into co-marketing, co-promotion
or similar arrangements, any revenues received by Cortech will be dependent on
the efforts of third parties, and there can be no assurance that such efforts
will be successful. Sales of any products for which Cortech obtains regulatory
approval will be dependent in part on the availability of reimbursements to the
consumer from third-party payors, such as government and private insurance
programs.
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 reliant upon third parties or its corporate
partners for the manufacture of compounds. There can be no assurance that such
third-party arrangements can be established on a timely or commercially
reasonable basis, if at all. Where such arrangements are established, Cortech
will depend on such third parties to perform their obligations effectively and
on a timely basis. There can be no assurance that such parties will perform
acceptably and any failures by third parties may delay clinical trial
development or the submission of products for regulatory approval, impair
Cortech's ability to deliver products on a timely basis, or otherwise impair
Cortech's competitive position, which could have a material adverse effect on
Cortech's business, financial condition and results of operations. If Cortech
does not find a suitable manufacturing partner or contractor, it may be required
to incur substantial financial obligations to construct or acquire manufacturing
facilities.
COMPETITION
The pharmaceutical and biopharmaceutical industries are engaged in intense
competition involving multiple technologies and strategies for compound
identification and development. Many companies are focused on research in the
same areas as Cortech. Cortech's most significant competitors are fully
integrated pharmaceutical companies and more-established biotechnology
companies. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical
companies. In addition, Cortech faces competition from academic institutions,
governmental agencies, and other public and private research organizations that
conduct research, seek patent protection, and establish collaborative
arrangements for product and clinical development and marketing. Furthermore,
these companies and institutions compete with Cortech in recruiting and
retaining highly qualified scientific and management personnel.
Many of Cortech's competitors have substantially greater financial,
technical and human resources than Cortech and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than Cortech in undertaking preclinical testing
and human clinical trials of new pharmaceutical products and obtaining FDA
approval for products. Furthermore, if Cortech is permitted to commence
commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities.
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.
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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 FDA is the primary agency regulating the research, development,
manufacture, 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 the safety and efficacy requirements of the
FDA. Regulatory requirements may change at any stage of Cortech's product
development and may affect approval, delay an application, or require additional
expenditures by Cortech. If approval is obtained, failure to comply with ongoing
regulatory requirements, or new information that negatively impacts the safety
or effectiveness of the approved drug, could cause the FDA to withdraw approval
to market the product.
The time period between when a promising new compound is identified and
when human testing is initiated is generally referred to as the preclinical
development period. A series of pharmacologic studies are also performed during
preclinical development to identify the essential characteristics of the
compound's behavior. In addition, both in vitro and in vivo animal toxicity
studies are required to characterize the toxicity profile of the compound.
Preclinical studies are regulated by the FDA under a series of regulations
called GLP regulations. Violations of these regulations can, in some 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 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 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 that compound and, in some cases, may require
abandonment of a product.
Clinical testing of new compounds in humans is designed to establish both
safety and efficacy in treating a specific disease or condition. These studies
are usually conducted in three phases of testing. In Phase I, a small number of
healthy subjects or patients with the specific condition being targeted are
given the new compound to determine the pharmacokinetic and pharmacologic
actions of the drug in humans, the side effects associated with increasing doses
and if possible, to gain early evidence of effectiveness. In Phase II, small
numbers of patients with the targeted disease are given the compound to test its
efficacy in treating the targeted disease, to determine the common short term
side effects and risks associated with the drug, and to establish effective dose
levels. Phase III studies are larger studies designed to confirm the compound's
efficacy and safety for the targeted disease and to provide an adequate basis
for physician labeling.
When a drug is being developed for a condition that is life- or
organ-threatening, or for which there is no alternative therapy, the FDA may, in
certain cases, grant an accelerated approval process. However, there is no
assurance any of Cortech's products would be eligible for this accelerated
approval process.
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Once adequate data have been obtained in clinical testing to demonstrate
that the compound is both safe and effective for the intended use, all of the
data available is submitted to the FDA in an 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 or risks.
There is no assurance that a foreign regulatory body will accept the data
developed by Cortech for any of its products. Approval by the FDA does not
ensure approval in other countries, nor does approval by any other country
ensure approval decisions by FDA.
In Europe, human pharmaceutical products are subject to extensive
regulation of the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, advertising and promotion of human pharmaceutical products.
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 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 involves 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 comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, Cortech could be held liable for
any damages that result and any such liability could exceed the resources of
Cortech.
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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 has increased and will likely continue to
increase the pressure on pharmaceutical pricing. While Cortech cannot predict
whether any such legislative or regulatory proposals will be adopted or the
effect such proposals or managed care efforts may have on its business, the
announcement or adoption of such proposals or efforts could have a material
adverse effect on Cortech's business, financial condition and results of
operations. Further, to the extent that such proposals or efforts have a
material adverse effect on other pharmaceutical companies that are prospective
corporate partners for Cortech, Cortech's ability to establish and maintain
strategic alliances may be adversely affected. In addition, in both 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
At its peak in July 1994, Cortech employed 206 full-time, regular
employees. Over the past three-and-one-half years, Cortech has implemented a
series of reductions in force which reduced the number of full-time, regular
employees to 13 as of February 1, 1998. These employees are primarily engaged in
management, business development and administrative efforts including the
archiving of records, decommissioning of laboratories and liquidation of
non-cash tangible assets.
PROPERTIES
As of February 1, 1998, Cortech occupied approximately 50,000 square feet
of leased laboratory, warehouse and administrative space in Denver, Colorado.
These leases expire on these facilities over the period from May 1998 to May
1999 and are renewable for up to an additional two years. Cortech is currently
in discussions with several parties regarding the sale of its leasehold
improvements and is seeking to vacate the premises. In addition, BioStar may
have an interest in occupying some of the space leased by Cortech.
LEGAL PROCEEDINGS
Cortech is not a party to any material litigation or legal proceedings.
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CORTECH 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
Joint Proxy Statement/Prospectus. 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. Such risks and
uncertainties include, but are not limited to, the risks discussed below, the
risks discussed in the sections of this Joint Proxy Statement/Prospectus
entitled "Risk Factors" and "Cortech Business" and the risks discussed elsewhere
in this Joint Proxy Statement/Prospectus. The following discussion should be
read in conjunction with the Cortech Financial Statements, including the notes
thereto, included elsewhere in this Joint Proxy Statement/Prospectus.
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 has directed its research and
development efforts principally toward protease inhibitors and bradykinin
antagonists. These efforts have produced certain intellectual property rights.
See "Cortech 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 has (i) implemented a series of reductions in force
over the past three-and-one-half years (which has reduced the number of full
time, regular employees from more than 200 to fewer than 15) and (ii)
effectively discontinued all internal efforts to advance its research and
development activities. In addition, Cortech is currently decommissioning its
laboratories, has sold most of its scientific and technical equipment and,
unless the Merger is implemented and BioStar opts to retain such assets, plans
to sell most of its office furniture and equipment and, where possible, its
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 has retained a core group of professionals who, among other things, are
actively engaged in ongoing efforts to realize appropriate value from Cortech's
tangible and intangible assets. It is uncertain, however, whether Cortech will
be able to retain employees with sufficient knowledge and experience to realize
appropriate value from Cortech's intangible assets. In light of the above,
Cortech's management has focused on evaluating various strategic alternatives.
As a result, Cortech entered into the Reorganization Agreement with BioStar on
December 22, 1997.
RESULTS OF OPERATIONS
Years ended December 31, 1997 and 1996:
Revenues: Revenues from sponsored research and development decreased from
$7.4 million in 1996 to $3.5 million in 1997. The decrease in revenues for 1997
resulted primarily from the termination of Cortech's collaborative agreements.
Cortech received $1.5 million from Ono Pharmaceutical Co. Ltd. ("Ono") for
work performed in 1997 under a contract to develop an oral elastase inhibitor
(the "Ono Agreement"). Pursuant to the Ono Agreement, Cortech had received an
additional $1.3 million in 1996 which was recorded as revenue in 1997 (as a
result of work performed in 1997 by Cortech). Under the terms of the Ono
Agreement, as amended in 1997, Ono has assumed all responsibilities for research
activities being conducted during the final six months of the collaborative
project (terminating on March 14, 1998). As a result, Ono is not required to pay
Cortech the last scheduled $1.5 million in research funding previously provided
for under the Ono Agreement to offset certain costs that Cortech would otherwise
have incurred. Cortech expects no further payments from Ono under the Ono
Agreement.
Research and Development: Research and development expenses decreased from
$11.3 million in 1996 to $7.6 million in 1997. The decrease is due primarily to
reductions in force implemented in 1997 (which
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included restructuring charges recorded of $1.4 million), and the winding down,
and substantial discontinuation in late 1997, of Cortech's research and
development activities.
General and Administrative: General and administrative expenses were $3.6
million in 1996 and 1997. Cortech's general and administrative expenses in 1997
included $349,000 of restructuring charges and $340,000 of professional fees
related to the Merger. Substantially all of Cortech's remaining employees'
payroll costs are classified as general and administrative expenses.
Net Loss: Cortech's net loss for 1997 increased to $6.8 million from $6.3
million in 1996. The increase was due principally to decreased revenues and the
restructuring charges noted above.
Years ended December 31, 1996 and 1995:
Revenues: Revenues from sponsored research and development increased from
$5.1 million in 1995 to $7.4 million in 1996. The increase in revenues for 1996
resulted primarily from milestone payments made by SmithKline Beecham ("SB"), of
which $2.6 million was recorded as revenue, and a $1.5 million payment received
from Ono under the Ono Agreement, of which $750,000 was recorded as revenue.
From 1987 until December 1996, Hoechst Marion Roussel, Inc. ("HMRI") funded
Cortech's development of CE-1037. During 1996, Cortech received payments of $1.1
million from HMRI. However, HMRI terminated its arrangements with Cortech in
December 1996.
Research and Development: Expenses for research and development decreased
from $18.6 million in 1995 to $11.3 million in 1996. This decrease was due
primarily to reductions in force initiated in 1995.
General and Administrative: General and administrative expenses decreased
from $4.7 million in 1995 to $3.6 million in 1996. This decline resulted from
decreases in staffing, office space and business activity.
Net Loss: The net loss for 1996 decreased to $6.3 million from $16.4
million in 1995. This decrease was due principally to decreased expenses and
increased revenues noted above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Cortech had cash, cash equivalents and short-term
investments totaling $15.4 million compared to $21.0 million at December 31,
1996. Cortech's net cash used in operating activities (including purchases of
property, plant and equipment) totaled $6.5 million, $3.1 million and $13.3
million in 1997, 1996 and 1995, respectively. The increase in net cash used from
1996 to 1997 reflects the reduction in, and eventual complete loss of, Cortech's
funded research and development collaborations as well as the payment of costs
relating to reductions in force which were accrued in 1997. Cortech's
expenditures, net of depreciation and non-cash charges, decreased from $13.1
million in 1996 to $9.6 million in 1997. This decrease reflects the winding
down, and substantial discontinuation in late 1997, of Cortech's research and
development activities as well as other effects of the reductions in force
implemented in 1997.
In November 1997, Cortech sold most of its scientific and technical
equipment for approximately $800,000. In January 1998, Cortech sold certain
leasehold improvements for $150,000 in cash and a note receivable of $125,000
payable in July 1998. There can be no assurances that any of Cortech's remaining
assets can be sold for book value, if at all.
In the absence of the Merger, Cortech presently expects to receive no
revenues from sponsored research and development arrangements in 1998 (or future
years).
From its inception through December 31, 1997, Cortech raised cash totaling
$97.1 million from the sale of equity securities, including $33.6 million in net
proceeds from its November 1992 initial public offering and $37.7 million in net
proceeds from its October 1993 follow-on public offering.
Cortech has experienced net losses and negative cash flows from operations
each year since inception and has incurred an accumulated deficit of $84.6
million through December 31, 1997.
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Were Cortech to maintain current levels of staffing (and in the absence of
a strategic transaction such as the Merger), during 1998 Cortech estimates that
it would incur approximately $3.2 million in general and administrative
expenses, research and development salaries and overhead. Cortech expects to
incur costs in 1998 relating to the proposed Merger of approximately $500,000.
In addition, costs relating to the proposed Merger of $240,000 and reduction in
force costs of $184,000 will be paid in 1998 but were accrued in 1997. Although
reductions in staff from current levels would decrease ordinary salary expenses
in 1998 from current levels, such reductions would result in additional
severance benefits (aggregating to approximately $1.3 million assuming full
payment of severance benefits to all current officers and employees). During
1998, Cortech expects to receive approximately $1.0 million from interest income
and the sale of assets. However, there can be no assurances that Cortech will
receive such amounts. There can also be no assurances that Cortech will not be
required to incur additional expenses.
OTHER MATTERS
Net Operating Loss Carry Forwards and Tax Credits: As of December 31, 1997,
Cortech had approximately $77.2 million of net operating loss carry forwards for
income tax purposes, $74.3 million of which expire from 2005 through 2012. In
addition, Cortech has approximately $2.9 million of research and development tax
credits available to offset future federal income tax, subject to limitations
for alternative minimum tax, $2.7 million of which expire from 2005 to 2012.
Cortech's use of operating loss carry forwards and tax credits is subject to
limitations imposed by the Internal Revenue Code. Due to such limitations
(particularly insofar as they relate to events such as the Merger), Cortech
believes that the Merger, if implemented, may result in further, material
limitations on Cortech's use of its operating loss carry forwards and tax
credits.
Impact of Year 2000: The year 2000 will impact computer programs written
using two digits rather than four to define the applicable year. Any programs
with time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operation, including a temporary
inability to process transactions, send invoices or engage in other ordinary
activities. This problem largely affects software programs written years ago,
before the issue came to prominence. Insofar as Cortech has effectively
discontinued all internal efforts to advance its research and development
activities, Cortech does not believe that it has significant risk associated
with the year 2000 problem.
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CORTECH MANAGEMENT AND EXECUTIVE COMPENSATION
Kenneth R. Lynn, an executive officer and director of Cortech, and Bert
Fingerhut, a director of Cortech, will serve as directors of the combined
company following the Merger. Set forth below is information regarding Messrs.
Lynn and Fingerhut as of December 31, 1997.
NAME POSITION WITH CORTECH
---- ---------------------
Kenneth R. Lynn.............................. President, Chief Executive Officer and
Chairman Director
Bert Fingerhut............................... Director
Kenneth R. Lynn, 44, has been a director of the Company and its President
and Chief Executive Officer since February 1995 and has served as Chairman of
the Board since April 1997. He is a member of the Executive, Nominating and
Equity Committees. Prior to becoming the Company's Chief Executive Officer, he
was the Company's Vice President, Business Development and General Counsel from
February 1993 until November 1994, when he was promoted to Senior Vice
President, Corporate Development and General Counsel. He served as Secretary of
the Company from March 1993 through March 1995. From August 1991 to January
1993, he served as Vice President, General Counsel and Corporate Secretary at
U.S. Bioscience, Inc., a pharmaceutical company. From 1984 to July 1991, he
served in various legal positions at Marion Merrell Dow Inc. (now Hoechst Marion
Roussel), most recently as Corporate Counsel. Mr. Lynn received his J.D. from
the University of Kansas in 1981 and his M.B.A. from Rockhurst College in 1990.
Mr. Fingerhut, 54, has been a director of the Company since 1988 and served
as Chairman of the Board from June 1991 to April 1997. He is a member of the
Executive, Audit and Compensation Committees. Mr. Fingerhut presently pursues
private business and conservation interests. From 1984 to 1985, he was Special
Limited Partner and Senior Vice President of Odyssey Partners, a private
investment partnership. From 1965 to 1983, he was General Partner, Managing
Director, Executive Vice President and Director of Research of Oppenheimer &
Company, Inc., an investment banking firm. Mr. Fingerhut is Chairman of the
Board of Directors of Toxics Targeting, a private company based in Ithaca, N.Y.
that tracks and provides information on toxic waste sites. He is currently a
member of the Executive Committee of the Governing Council of the Wilderness
Society, the Vice-Chairman of the Board of Directors of the Southern Utah
Wilderness Alliance, a director of the Grand Canyon Trust and Trustee of the
Alaska Conservation Foundation.
COMPENSATION OF DIRECTORS
Each non-employee director has received options to purchase Common Stock of
Cortech under the 1992 Amended and Restated Non-Employee Directors' Stock Option
Plan (the "1992 Directors' Plan") as compensation for his or her services as a
director and receives additional options under such plans for service on certain
committees of the Board. Options were also granted to non-employee directors
outside of such Plan. Outside directors receive $1,000 per Board meeting
attended and $1,000 per committee meeting attended if held on a non-Board
meeting occasion and an additional $6,000 annually. The 1992 Directors' Plan
expired by its terms on December 31, 1997. No plan has replaced the 1992
Director's Plan.
Options granted under the 1992 Directors' Plan were automatic and
non-discretionary. Each person who was a non-employee director of Cortech as of
the adoption date of the 1992 Directors' Plan was granted options generally
covering 25,000 shares of Common Stock, with adjustments to equalize the
directors' overall options in light of options previously granted to them. Such
options generally became exercisable ("vest") in year-end installments of 5,000
shares. Each member of the Compensation and Audit Committees received options
covering an additional 500 shares for each committee on which he served. In
addition, (i) each person subsequently elected for the first time as a
non-employee director was granted an option on the date of his or her initial
election as a director to purchase a pro rata portion of 25,000 shares,
depending upon when he or she was elected, which options generally vest in
year-end installments of 5,000 shares; (ii) each person subsequently elected for
the first time to the Audit or Compensation Committee was granted an option to
purchase 500 shares if elected before July 1, or a portion thereof, prorated on
a quarterly basis, if elected after
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such date, vesting in full on December 31; (iii) each non-employee director
received an annual option to purchase an additional number of shares, determined
by multiplying 5,000 by a fraction, the numerator of which was $20 and the
denominator of which was the fair market value per share of Cortech Common Stock
on the grant date, subject to minimum and maximum limits of 2,500 and 5,000
shares, respectively, vesting quarterly over five years; and (iv) each
non-employee director who was a member of Cortech's Audit or Compensation
Committee received an annual option to purchase 500 shares, vesting in full on
December 31. Vesting of all options was subject to continued service as a
non-employee director or employee of Cortech during the vesting period and, in
the case of options granted for service on a committee, to continued service on
the applicable committee. As of December 31, 1997, 1,650 options had been
exercised under the 1992 Directors' Plan. Mr. Fingerhut received options
covering 6,000 shares at $1.47 per share during the fiscal year ended December
31, 1997.
All non-employee directors are reimbursed for their expenses incurred in
attending Board of Directors meetings.
Directors who are employees of Cortech do not receive separate compensation
for their services as directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1997,
1996 and 1995 compensation awarded or paid to or earned by Kenneth R. Lynn:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS-
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS COMPENSATION(1)
- --------------------------- ---- --------- -------- --------------- ------------ ---------------
Kenneth R. Lynn............ 1997 $265,513 $65,000 -- -- $1,141
President, Chief 1996 265,006 65,000 -- 75,000 1,174
Executive Officer and 1995 230,499 75,000 -- 275,000 1,099
Chairman of the Board
- ---------------
(1) Includes matching payments by Cortech under its 401(k) Plan and premiums
paid by Cortech for group term life insurance.
STOCK OPTION GRANTS AND EXERCISES
Cortech grants options to its executive officers under its 1993 Equity
Incentive Plan (the "1993 Plan"). As of December 31, 1997, options to purchase a
total of 1,098,265 shares were outstanding under the 1993 Equity Incentive Plan.
Although 370,845 shares were available for grant under the 1993 Plan as of
December 19, 1997, on such date the Cortech Board effectively suspended further
grants of options under the 1993 Plan to the extent that any such grant would
increase the shares subject to outstanding grants above the figure as of such
date. Such suspension shall remain in effect pending the proposed Merger and
other actions to be considered for approval by Cortech's stockholders in
connection with such Merger.
During the fiscal year ended December 31, 1997, there were no options
granted to Kenneth R. Lynn.
The following table shows for the fiscal year ended December 31, 1997
certain information regarding options exercised and held at year end by Kenneth
R. Lynn:
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED
IN-THE-MONEY
OPTIONS AT 12/31/97(#)
OPTIONS AT 12/31/94($)(1)
------------------------------------------
SHARES ACQUIRED VALUE(1) EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- ------------------ ----------------
Kenneth R. Lynn......... -- -- 275,009/174,991 $0/$0
- ---------------
(1) Based on the closing price of Cortech's Common Stock on December 31, 1997
($0.594) minus the exercise price of the options.
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CORTECH PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Cortech's Common Stock as of January 30, 1998 by: (i) each director and
nominee for director; (ii) Cortech's chief executive officer as well as
Cortech's four most highly compensated executive officers other than Mr. Lynn;
(iii) all executive officers and directors of Cortech as a group; and (iv) all
those known by Cortech to be beneficial owners of more than five percent of its
Common Stock.
SHARES OF PERCENT OF PERCENT OF
CORTECH COMMON CORTECH STOCK CORTECH STOCK
BENEFICIALLY OUTSTANDING OUTSTANDING
BENEFICIAL OWNER OWNED(1) PRIOR TO THE MERGER AFTER THE MERGER
---------------- -------------- ------------------- ----------------
Asset Value Fund Limited Partnership(2)..... 2,770,000 14.95% 6.21%
376 Main Street
P.O. Box 74
Bedminster, NJ 07921
BVF Partners L.P.(3)........................ 1,225,252 6.61 2.75
333 West Wacker Drive
Suite 1600
Chicago, IL 60606
Bert Fingerhut(4)........................... 561,480 3.01 1.25
Kenneth R. Lynn(5).......................... 304,849 1.62 *
Diarmuid Boran(6)........................... 90,043 * *
Donald Kennedy(7)........................... 38,800 * *
Allen Misher(8)............................. 32,500 * *
Charles Cohen(9)............................ 16,000 * *
All executive officers and directors as a
group (7 persons)(10)..................... 1,043,672 6.68 2.33%
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* Less than one percent.
(1) This table is based upon information supplied by officers and directors and
Schedules 13D filed with the Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Cortech believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
18,523,918 shares outstanding on January 30, 1998, adjusted as required by
rules promulgated by the Commission and 44,620,868 shares of Cortech Common
Stock following the Merger.
(2) The sole general partner of Asset Value Fund Limited Partnership ("AVF") is
Asset Value Management, Inc., a Delaware corporation and a wholly owned
subsidiary of Kent Financial Services, Inc., a Delaware corporation.
Pursuant to a Schedule 13D/A filed February 10, 1998, Mark W. Jaindl and
Frederick J. Jaindl acquired from AVF on February 10, 1998 250,000 shares
and 520,000 shares of Cortech Common Stock, respectively, in a privately
negotiated transaction.
(3) Includes 657,796 shares held by Biotechnology Value Fund, L.P. ("BVF").
Mark N. Lampert is the sole shareholder, director and president of BVF
Inc., which is the general partner of BVF Partners L.P. ("Partners"), which
is the general partner of BVF.
(4) Includes options to purchase 151,285 shares, which are exercisable within
60 days of the date of this table. Also includes 3,000 shares held by Mr.
Fingerhut's wife and 17,000 shares by Mr. Fingerhut's minor daughter.
(5) Includes options to purchase 301,416 shares, which are exercisable within
60 days of the date of this table.
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(6) Includes options to purchase 88,534 shares, which are exercisable within 60
days of the date of this table.
(7) Consists of options to purchase 38,800 shares, which are exercisable within
60 days of the date of this table.
(8) Includes options to purchase 27,500 shares, which are exercisable within 60
days of the date of this table.
(9) Consists of options to purchase 16,000 shares, which are exercisable within
60 days of this table.
(10) Includes options to purchase a total of 623,535 shares, which are
exercisable within 60 days of the date of this table by executive officers
and directors.
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BIOSTAR BUSINESS
OVERVIEW
BioStar develops, manufactures and markets point-of-care diagnostic tests
using its proprietary, highly-sensitive, thin film technologies. BioStar's
current products employ its proprietary Optical ImmunoAssay (OIA(R)) technology,
a thin film, platform technology developed for the rapid detection of a variety
of medical conditions. BioStar's OIA tests help caregivers, in a cost-effective
and efficient manner, to identify causes of illness and select appropriate
patient therapy by providing information during the initial patient encounter.
Internally and through collaborative arrangements, BioStar is developing
additional thin film technologies which are intended to broaden the range of
applications for its existing products and to enable the introduction of new
products.
BioStar currently sells immunodiagnostic tests for group A streptococcus
(GAS), the cause of strep throat; group B streptococcus (GBS), the leading cause
of neonatal septicemia; and chlamydia, the most commonly reported sexually
transmitted disease in the United States and a leading cause of female
infertility. BioStar's OIA tests are generally considered to be the most
sensitive, non-instrumented rapid tests available today for point-of-care
testing for GAS, GBS and chlamydia. BioStar is currently developing tests,
primarily through arrangements with corporate partners, for the rapid detection
and diagnosis of influenza, pneumonia, clostridium difficile, gonorrhea and
chlamydia (using urine specimens), as well as certain non-infectious medical
conditions. Drawing upon the speed and sensitivity of BioStar's current,
single-target, visually measured tests, BioStar and a corporate partner are
developing an instrumented, multitarget test based on BioStar's "new concept
ellipsometer" technology. BioStar believes that instrumentation may allow the
development of easy-to-use, quantitative tests in point-of-care or automated
delivery formats. BioStar believes this development will be significant since
quantitative tests would provide numeric results (as opposed to merely a
positive or negative result), thereby broadening the potential application of
BioStar's thin film technologies.
BioStar's current products use the ability of the human eye to detect
changes of thickness on the mirror-like surface of a silicon chip, which are
seen as a change in surface color. BioStar's OIA tests currently being sold, and
certain tests under development, are performed by placing patient specimens on
the reflective surface of a chip coated with appropriate reagents. If targeted
organisms are present in the specimen, even at low levels, the surface of the
chip changes thickness in minutes. Targets can be detected in a wide variety of
samples, including throat and nasal swabs, urine and whole blood.
BioStar's GAS, GBS and chlamydia tests are sold by BioStar's dedicated
marketing and sales organization, which targets the United States outpatient
markets, including physician offices, clinics and student and public health
centers; and BioStar's domestic and international distributor network, which
targets hospital and reference laboratory accounts in major markets worldwide.
Since 1992, BioStar's sales force and distribution partners have sold over nine
million OIA-based tests worldwide. In addition to selling OIA-based tests,
BioStar's dedicated, nationwide sales force also sells products to the
outpatient market which are licensed from an outside supplier.
An integral part of BioStar's strategy is to work with corporate partners
to develop market opportunities and access important resources. In this regard,
BioStar has established strategic relationships with a number of companies,
including Biota Scientific Management Pty Ltd ("Biota"), an Australian
pharmaceutical company, Asahi Chemical Industry Co., Ltd. ("Asahi"), one of
Japan's largest chemical manufacturers, and Murex Diagnostics, Inc. ("Murex"),
the United States subsidiary of a publicly-traded Canadian company. BioStar
believes that its relationships with these and other potential partners will
enable BioStar to enhance its menu of diagnostic products and accelerate its
ability to penetrate the worldwide point-of-care markets for both manual and
instrumented testing sites. In addition, BioStar is pursuing collaborations with
strategic partners to apply its versatile thin film technologies to develop
screening and monitoring products for applications in industries such as food,
beverage and environmental testing and life sciences research.
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INDUSTRY OVERVIEW
In vitro diagnostic testing is the process of analyzing the constituents of
a wide variety of body fluids to identify the presence of markers for diseases
or other human health conditions. The worldwide human health in vitro
diagnostics market consists of reference laboratory and hospital testing, clinic
and physician office markets.
Traditionally, diagnostic testing has been performed in large, high-volume
commercial or hospital-based laboratories using instruments operated by skilled
technicians involving multi-step protocols and lengthy reaction times. These
testing methods are often inefficient and can negatively impact the cost and
quality of patient care because the amount of sample handling increases
operating costs and the delay in providing test results reduces the ability of
health care workers to manage patient care effectively and efficiently. For
example, many traditional infectious disease diagnosis methods use culture-based
assays such as agar culture. These assays are complicated, must be performed by
laboratories and can take up to several days to provide a result.
One of the largest categories of in vitro diagnostic tests performed today
is immunodiagnostic testing. Immunodiagnostic tests involve complex biological
reactions and test for molecules that are found in very low concentrations.
Immunodiagnostic tests cover a wide variety of medical conditions, including
diagnosing infectious diseases, measuring hormones in the endocrine system,
monitoring therapeutic drug levels, testing for drug abuse, determining the
overall immune status, measuring sensitivity to allergens and measuring various
markers associated with cancers. Recent technological advances in
immunodiagnostic testing have focused on shortening test reaction times,
providing higher sensitivity and specificity, lengthening the shelf-life and
increasing the accuracy of tests. These technological advances have allowed the
development of new, point-of-care immunodiagnostic tests.
One of the fastest growing segments of the human health in vitro
diagnostics market is the market for highly accurate tests that can be used
close to the point of patient care (such as clinics, physician offices, homes,
patient bedsides and emergency rooms) as well as in laboratories. It has been
estimated that the total worldwide market for point-of-care tests (primarily in
physician office and hospital facilities) was $1.3 billion in annual sales in
1997 and will grow over 10% annually through the year 2000. The growth in the
point-of-care market is primarily due to pressure on health care providers to
reduce the overall cost of health care as well as the availability of technology
that enables health care providers to process tests on-site, rather than sending
them to remotely located laboratories.
Point-of-care testing helps to reduce overall health care delivery costs
and can improve patient outcomes by enabling the primary caregiver to determine
a diagnosis of the medical condition during the patient's initial visit,
minimizing the time to medical intervention and reducing the need for additional
patient follow-up. Point-of-care diagnosis and treatment of infectious diseases
can permit earlier prescription of appropriate medications (including
antibiotics), shortening the duration of illness. In addition, rapid
point-of-care tests for infectious diseases allow the caregiver to begin to
address the critical issue of antibiotic overuse. A major recent study has shown
that over one-half of the antibiotics prescribed in the United States for
ambulatory, episodic respiratory disease are for patients who will not benefit
from the drug as their condition is likely viral in nature. The availability of
rapid, accurate results can allow physicians to make informed treatment
decisions regarding antibiotic use and, through appropriate dosing, help control
the emergence of drug-resistant organisms. In emergency situations, caregivers
can have the timely and accurate information necessary to ensure appropriate
diagnosis and treatment and to potentially reduce unnecessary use of costly
inpatient care. The availability of a larger number of rapid, point-of-care
tests will enable the adoption of "test and treat" strategies by caregivers for
appropriate selection of therapeutic interventions for medical conditions.
Commercializing products in the point-of-care diagnostics market initially
requires the dedication of substantial resources to training caregivers to use
tests and incorporate them into the caregiver's medical practice. In addition,
diagnostic tests may require substantial ongoing customer support to assist
caregivers with use of the products, regulatory compliance and product
reimbursement. The human diagnostic testing industry has undergone major
consolidation over the last few years. As a result, the industry is dominated by
a small number of large companies or divisions of large companies that
manufacture and sell numerous
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diagnostic products incorporating a variety of technologies. In addition, there
are many small diagnostic companies which generally have limited resources to
commercialize new products. As a result of technological fragmentation and
customer support requirements, BioStar believes that there may be a substantial
competitive advantage for companies with differentiated technologies that can be
used to generate a broad menu of diagnostic products and that have developed
successful customer support systems.
STRATEGY
BioStar's primary objective is to apply its proprietary technologies to the
development and commercialization of products for use in a variety of markets.
BioStar's strategies for achieving this objective include the following:
Exploit Proprietary Thin Film Technologies to Broaden Potential Market
Applications. BioStar has focused its resources on developing highly accurate,
rapid, manual OIA tests. BioStar believes that it can also develop new
applications for its platform thin film technologies by creating alternative
test formats (such as instrumented or automated tests) and developing new
surface platforms (such as flow-through surfaces or flexible solid surfaces).
Target Large Indication Human Health Care Opportunities. BioStar has
focused its product development and sales efforts on the human infectious
disease diagnostic market (which has an estimated $1 billion in annual sales) to
obtain commercial validation of the OIA technology and help generate a portion
of the resources to fund expansion of BioStar's product offerings. BioStar
intends to target other large indication human health applications (such as
cancer, respiratory and critical care diagnostic tests) through both expanded
internal research and development efforts and collaborations with strategic
partners.
Leverage Sales and Marketing Resources. BioStar has a dedicated, nationwide
marketing and sales organization which is experienced in selling diagnostic
tests into the highly-competitive outpatient market. BioStar plans to leverage
its sales force by expanding BioStar's product menu with more high value,
quality products through internal development and the acquisition or additional
in-licensing of complementary products and technologies.
Use Strategic Alliances to Leverage Company Resources. BioStar is using and
plans to continue to use strategic alliances to access complementary resources
(such as proprietary markers, funding, marketing expertise and research and
development assistance), to leverage its thin film technologies, expand its
product menu and maximize the use of its sales force. For example, BioStar is
currently developing with different partners an influenza test, a sexually
transmitted disease panel test, a chlamydia (urine specimen) test and a
gonorrhea test. BioStar has also in-licensed complementary products from Wyntek
Diagnostics, Inc. ("Wyntek") for distribution by BioStar's sales organization
and has entered into distribution partnerships for its OIA tests in major
markets worldwide.
Pursue Strategic Acquisitions. BioStar intends proactively to evaluate
strategic acquisitions of companies, technologies and product lines where
BioStar identifies a strategic opportunity to grow its core business or to
increase revenues and profitability.
Use Thin Film Technologies to Expand Beyond Human Health
Diagnostics. BioStar seeks to expand its product portfolio beyond human health
and point-of-care diagnostics to take advantage of opportunities in other
industries. BioStar is pursuing collaborations with strategic partners to apply
its versatile thin film technologies to develop screening and monitoring
products for applications in industries such as food, beverage and environmental
testing and life sciences research.
THIN FILM TECHNOLOGIES
OIA Technology. BioStar's OIA technology uses the interaction of light with
thin films on an optical surface to create highly sensitive and specific
immunodiagnostic "assays" or tests. BioStar's OIA technology uses the ability of
the human eye to detect angstrom-level (one ten-billionth of a meter) thickness
changes on the mirror-like surface of a silicon chip. This change in thickness
is seen by the human eye as a change in surface color. OIA tests are performed
by placing patient specimens and reagents on the reflective surface of a
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silicon chip. If target organisms are present in the specimen, even at low
levels, the surface of the chip changes thickness in minutes.
BioStar's OIA tests typically comprise a test device, reagents, a swab and
an extraction tube. The test device includes a reactive surface comprised of a
solid substrate (for ease of test delivery), an optical layer of a reflective
surface (to make the reaction visible to the human eye), an attachment layer (to
link the biological to the reflective surface) and an active biological capture
layer (to create a surface thickening). Once a specimen is applied to the
surface, the capture layer specifically reacts with targets in the specimen.
This results in the binding of the target to the surface. The reaction sequence
includes addition of an enzyme conjugate and substrate to the reactive surface
to amplify each binding event by depositing a thin layer of mass around each
target molecule that has been bound to the surface. This mass enhancement step
amplifies the signal and creates the thin film. The human eye sees this
thickening as a color change, due to the destruction of certain wavelengths of
light as layers on the surface thicken. The color change is similar to the
colors produced in a soap bubble as light passes through different thicknesses
of the surface film on the perimeter of the bubble.
[GRAPHIC DEPICTION OF THE REACTION OF LIGHT AS IT PASSES THROUGH THE OPTICAL
LAYERS OF AN UNREACTED AND A REACTED SURFACE. THE DEPICTION SHOWS A CLEAR COLOR
DIFFERENTIATION.]
BioStar's OIA technology has the following attributes which, when combined,
help differentiate BioStar's OIA tests from competitive products:
Accurate. Tests using BioStar's OIA technology have been demonstrated by
independent laboratory testing to perform at levels of sensitivity and
specificity superior to other commercially available rapid tests and equivalent
to many other commercially available laboratory reference tests using
alternative technologies. This accuracy is a functional characteristic of
BioStar's thin film technology. Unlike other detection technologies, thin films
use reflective surfaces that are exceptionally smooth, and which virtually
eliminate the problem of non-specific binding of targets to the surface. In
addition, thin film technology does not rely on the use of chromophores, which
are commonly used in diagnostic tests to generate the color signals that
indicate the presence or absence of the target organism. Chromophore-based
technologies are not as efficient as BioStar's OIA technology in generating
color signals and, therefore, they are less sensitive.
Clinical Validation of the OIA Technology. The clinical performance of
BioStar's OIA tests has validated the OIA technology. For example, BioStar's
Strep A OIA test has been reported in peer reviewed medical literature to be
more sensitive than tests using agar culture, the Food and Drug Administration's
("FDA's") laboratory "gold standard" for detecting strep throat. In addition,
independent laboratory testing
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has demonstrated that BioStar's Chlamydia OIA test is as sensitive as culture
and the most commonly used laboratory DNA probe method. The Strep B OIA test is
the only rapid assay commercially available today in the United States for
testing pregnant women for GBS because other less sensitive products were
voluntarily removed from the market.
Rapid. Another characteristic of BioStar's thin film OIA technology is the
speed with which it binds the target to the surface. By way of comparison,
current OIA test results are available in five-to-24 minutes while laboratory
methods for the same tests take from hours to days to obtain a result. This
relative speed is due to the fact that the kinetics of thin film technologies
are nearly instantaneous.
Easy-to-Use. BioStar developed its OIA technology to minimize the number of
operator steps to simplify operation, provide for flexible timing intervals and
generate permanent results. BioStar's customers report that its OIA tests are
easy-to-use relative to many other commercially available tests.
Flexible Platform Technology with Multiple Formats. BioStar's OIA
technology provides a flexible platform that is used for single assays (as with
all current OIA tests) and multiple test panels which are currently under
development. BioStar is currently focusing its research and development efforts
on its OIA technology on improving operator ease-of-use and assay speed. In the
third quarter of 1997, BioStar introduced OIA MAX(TM), its improved OIA test for
GAS. OIA MAX was designed to increase speed and offer improved ease-of-use.
BioStar is currently applying new surface manufacturing technologies, such as
ion beam deposition, which enable BioStar to construct OIA tests using
silicon-coated porous membrane materials. Such tests further reduce the number
of operator steps as a result of reagents flowing through the surface.
Potentially Applicable to Wide Variety of Markets. BioStar believes that
the characteristics of the optical surface and attachment layer of its OIA
technology may enable BioStar to develop a broad OIA product menu. The optical
surface is versatile because it can be used with a wide variety of sample types
(e.g., whole blood, serum, urine, feces, and swab extracts from vaginal,
cervical, nasal, throat, and ocular sites) without a significant level of
interference. Additionally, the attachment layer allows for the use of a wide
variety of capture molecule types, including antibodies, antigens, nucleotides,
and polymers.
Feasibility studies have shown that using BioStar's OIA technology,
multi-day laboratory methods for the following common human diseases may be
converted to rapid point-of-care tests: pneumonia, influenza A/B (the most
common pathogenic forms of the influenza virus), clostridium difficile (a
leading cause of diarrhea), and gonorrhea (a common sexually transmitted
disease). BioStar is in various stages of development with respect to these
tests.
NEW CONCEPT ELLIPSOMETER TECHNOLOGY. BioStar has developed and patented
instrumented measurement technology, the "new concept ellipsometer", which uses
ellipsometry in combination with BioStar's OIA technology. BioStar has produced
several prototypes but has not yet completed development of products which
incorporate the new concept ellipsometer. Ellipsometer technology was originally
developed for the computer microprocessor manufacturing industry to measure
angstrom-level thickness changes in silicon wafers for microprocessor
manufacturing quality control. BioStar has adapted this measuring technique to
its OIA technology to create products that make quantitative measurements. New
concept ellipsometry measures the change in response of a polarized beam of
light as it passes through a thin film. Ellipsometric reading of thin films
increases the sensitivity of tests by an order of magnitude over visual methods
which rely on the human eye. BioStar believes that the levels of sensitivity and
accuracy that it may be able to achieve with new concept ellipsometry products
may allow BioStar to develop tests for new markets. For example, instrumented
tests would be useful for running multiple tests on patient specimens
simultaneously or for running high volume tests for multiple patient specimens.
This technology is not yet commercially available.
PRODUCTS AND MARKETS
BioStar and its distribution partners are currently selling OIA tests in
major markets worldwide for GAS, GBS and chlamydia. To date, BioStar's sales
force and distribution partners have sold over nine million OIA tests since
BioStar first received product marketing clearance from the FDA for the original
GAS test in 1992. Over 20 peer reviewed medical publications, abstracts and
symposia have been presented on the favorable
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technical differentiation of BioStar's OIA tests over competitive products. The
OIA sensitivity differentiation is recognized by organizations such as the
American Academy of Pediatrics which has stated that BioStar's OIA test for GAS
"is as sensitive as standard throat cultures on sheep blood agar and more
sensitive than other rapid tests for GAS".
To extend the product offering for the rapid, point-of-care segment, and to
complement its premium-priced, high quality assays, BioStar recently introduced
three new "CLIA-waived" assays, ACCEAVA Strep A, ACCEAVA hCG Urine and ACCEAVA
hCG Basic, and one moderately complex assay, ACCEAVA Mono, all of which BioStar
sells under license from Wyntek. See "-- Strategic Relationships". For a
discussion of the classification of products for Clinical Laboratory
Improvements Amendments of 1988 (CLIA) compliance see "-- Regulation".
CLIA-waived products are designed for the less demanding user and generally are
not as accurate as moderately complex tests.
BioStar's current point-of-care product menu includes the following:
OIA PRODUCTS ACCEAVA PRODUCTS***
------------ -------------------
Strep A OIA Max ACCEAVA Strep A (CLIA-waived)
Strep A OIA ACCEAVA hCG Urine (CLIA-waived)
Strep B OIA Maternal ACCEAVA hCG Basic (CLIA-waived)
Strep B OIA Infant Urine* ACCEAVA Mono (Moderately complex)
Chlamydia OIA
Chlamyfast**
Chlamydia OIA Urethral*
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* Sold internationally only
** Sold in France only
*** In-licensed from Wyntek
GROUP A STREPTOCOCCUS. Group A streptococcus (GAS), the bacteria that
causes strep throat, is the most frequent bacterial cause of pharyngitis in
children and adolescents. Pharyngitis is characterized by painful throat and
fever and is a major cause of pediatric visits. Rapid and accurate diagnosis of
GAS is essential for several reasons: (i) the disease is sensitive to antibiotic
therapy, (ii) it helps caregivers avoid the unnecessary use of antibiotics if
the disease is not present, (iii) untreated GAS can deteriorate into
life-threatening complications such as rheumatic fever, and (iv) early treatment
may reduce the risk of transmission to others and lessen the economic impact on
sufferers by allowing them to quickly return to their usual activities. In 1997,
the United States market for GAS tests was estimated to be $100 million, and
BioStar estimates that the worldwide market for GAS tests was $120 million in
annual sales. The United States market for moderately complex GAS tests (such as
BioStar's OIA tests) was estimated to be $70 million and the market for
CLIA-waived tests was estimated to be $16 million. The remainder of the United
States market is composed of sales of agar culture materials and reagents.
BioStar's sales of all GAS products in 1997 represented over 83% of BioStar's
total product sales.
Strep A OIA MAX. BioStar's flagship product, Strep A OIA MAX (OIA MAX), the
second generation of BioStar's rapid OIA test for GAS, detects more true
positives than agar culture tests and is the most sensitive commercially
available rapid test in the United States and management believes, worldwide.
OIA MAX is sold in major markets worldwide to physician offices as well as
hospitals and reference laboratories. OIA MAX results are available in five
minutes. The procedure for use of OIA MAX begins with the collection of a
patient sample using a standard throat swab. The patient specimen is then
chemically extracted, mixed with an enzyme conjugate and placed on the OIA
surface. If GAS is present, a purple color appears. OIA MAX represents an
improvement over BioStar's original GAS product, Strep A OIA. OIA MAX is 38%
faster, requires less handling and, because it has one less reagent step, is
easier to use than Strep A OIA. OIA MAX was cleared for sale by the FDA in July
1997.
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Strep A OIA. Strep A OIA is BioStar's original Strep A test and is sold in
major markets worldwide to physician offices as well as hospitals and reference
laboratories. Some OIA users prefer the original test format or may not yet have
been trained on the OIA MAX test. BioStar expects the majority of Strep A OIA
users to have converted to the OIA MAX test by the end of 1998.
BioStar's Strep A OIA test represents a breakthrough technology for Strep A
detection since it is the only product of its kind the FDA has allowed the claim
"more sensitive than routine culture". Agar culture is one of the traditional
methods for detecting GAS. Agar culture tests are performed by culturing a
specimen from a patient's throat swab on bacterial media. This method requires
18-48 hours to generate results. BioStar's Strep A OIA procedure can be
completed in eight minutes and has demonstrated up to a 37% greater sensitivity
over routine agar culture (the basic comparison for rapid GAS tests). Moreover,
BioStar's Strep A OIA test also compares favorably against enhanced broth
culture (which is a more exacting standard than agar culture). The diagram below
represents comparative sensitivity performance results of Strep A OIA vs.
resolved enhanced broth from a series of studies performed over the last few
years.
SENSITIVITY PERFORMANCE COMPARISON VS. ENHANCED BROTH (DISCREPANT ANALYSIS)*
[BAR CHART WHICH DEPICTS SENSITIVITY OF STREP A OIA (AT 97% SENSITIVITY) AS
COMPARED WITH AGAR CULTURE (AT 80% SENSITIVITY) AND THE LEADING COMPETITIVE
RAPID TEST (AT 72% SENSITIVITY)]
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* Derived from the results of internal and independent studies published in a
number of peer-reviewed professional medical journals.
Research conducted by independent physicians and clinicians has shown that
Strep A OIA consistently demonstrates greater sensitivity than any other rapid
streptococcal antigen test currently available. Targeting the United States GAS
market, BioStar began selling the Strep A OIA product nationally in April 1993.
By the end of 1997, BioStar estimates that it had achieved a 10.5% dollar market
share of the United States market for rapid GAS tests.
ACCEAVA Strep A Test. ACCEAVA Strep A completes the GAS product line,
complementing BioStar's OIA tests by being the first "CLIA-waived" test sold by
BioStar's sales force. BioStar sells ACCEAVA Strep A under license from Wyntek.
ACCEAVA Strep A is the most sensitive, CLIA-waived rapid antigen test available.
Although it is not as sensitive as OIA MAX, it is sold for use in clinics and
physician offices that are not CLIA moderate complexity compliant. The procedure
for use of ACCEAVA Strep A begins with the collection of a patient sample using
a standard throat swab. The patient specimen is then extracted. The test strip
is added to the sample. If GAS is present, a blue signal line will appear.
ACCEAVA Strep A was cleared for sale by the FDA in 1996 and was introduced in
July 1997 by BioStar. ACCEAVA Strep A is also sold by a large diagnostic company
through its distribution channel under a different trade name.
GROUP B STREPTOCOCCUS. Group B streptococcus ("GBS") is the primary cause
of life-threatening neonatal sepsis and meningitis in the United States. Up to
30% of all expectant mothers can be carriers of GBS. There are approximately
8,000 cases of GBS-related neonatal infections each year which result in
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hundreds of deaths and approximately 1,500 children with neurological damage
annually. Historically, there has been no timely and effective method to test
for GBS in the crucial final hours before delivery when the newborn is most
vulnerable. Other rapid tests have not been sufficiently sensitive and the
culture method takes 24-48 hours to complete.
Recently, the Centers for Disease Control and Prevention has recommended
broth culture on vaginal-rectal samples at 36 weeks of gestation for women with
GBS risk factors. GBS culture methods are sensitive and specific, but detection
of GBS by culture requires viable organisms and several days to provide a
result. In contrast, immunological detection methods, such as BioStar's OIA,
identify the presence of GBS antigen in minutes regardless of whether the
bacteria are alive. A standardized approach to GBS testing utilizing a rapid
method, however, has not been implemented due to the insufficient sensitivity of
previously available rapid tests for detecting GBS antigen. The use of rapid,
point-of-care tests in the detection of GBS infection is being studied in
laboratories worldwide. BioStar's OIA GBS tests are currently indicated as an
adjunct to diagnosis. BioStar believes that the market for GBS will continue to
grow as awareness of the role of GBS in infant diseases continues to grow. In
1997, the United States market for rapid GBS tests was estimated to be
approximately $3 million in annual sales. In 1997, BioStar's revenues from sales
of GBS products constituted approximately 11.5% of its total product sales.
Strep B OIA Maternal. Strep B OIA provides agar culture-level sensitivity
for the rapid detection of GBS in pregnant women. The procedure for use of Strep
B OIA begins with the collection of a patient sample using a standard vaginal
swab technique. The patient specimen is extracted and conjugated, then applied
to the device. If GBS is present, a purple color appears within 30 minutes.
Strep B OIA was cleared for sale by the FDA in 1994.
Strep B OIA Infant Urine. Outside the United States, BioStar sells a GBS
test for infants using urine as a sample source. This test is generally used
when infants display symptoms of sepsis in the first 72 hours of life. A
positive GBS urine result provides information to the neonatologist regarding
the cause of neonatal symptoms. The urine protocol is slightly faster than Strep
B OIA Maternal because the specimen does not require extraction. BioStar does
not intend to sell this product in the United States.
CHLAMYDIA. Chlamydia is the most commonly reported sexually transmitted
disease in the United States and is also highly prevalent outside of the United
States. According to the Centers for Disease Control and Prevention,
approximately four million new cases of chlamydia infection occur in the United
States each year. Up to two-thirds of infected women may be asymptomatic and up
to 40% of women with untreated chlamydia will develop pelvic inflammatory
disease, a leading cause of infertility. According to research published by the
Journal of the American Medical Association (JAMA) in September 1994, the median
time between testing and treatment is 14 days and nearly 25% of patients testing
positive with chlamydia never return for treatment. Other studies published by
the American Journal of Obstetrics and Gynecology in May 1993 reveal that
treatment delays of as little as three days from the onset of symptoms
contribute to infertility or ectopic pregnancies. A 1996 New England Journal of
Medicine study showed that screening of young women for chlamydia can reduce the
costly long-term complications of pelvic inflammatory diseases caused by
chlamydia infections. In 1997, the United States market for chlamydia tests was
estimated to be over $60 million, and BioStar estimates that the worldwide
market was $100 million. BioStar's sales of chlamydia products represented 6% of
its total sales in 1997.
Chlamydia OIA. BioStar's Chlamydia OIA test is the only rapid test for
chlamydia that provides 100% specificity (95% confidence interval 99.3%-100%)
and 100% positive predictive value. In addition, Chlamydia OIA has demonstrated
comparable diagnostic efficiency to single pass culture available in the United
States (the basic comparison for chlamydia tests). The procedure for use of
Chlamydia OIA begins with the collection of a patient sample using a standard
endocervical swab. The patient specimen is extracted and then applied to the
test device surface. A conjugate and substrate are added. If chlamydia is
present, a purple color appears within 24 minutes. Chlamydia OIA was cleared for
sale by the FDA in 1995.
Chlamyfast. Chlamyfast is a version of Chlamydia OIA which BioStar
developed for sale in France with International Microbio, a privately-held
French company. Chlamyfast was customized to meet the unique French regulatory
requirements. BioStar does not intend to market this product in the United
States.
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Chlamydia OIA Urethral. Chlamydia OIA Urethral is a version of Chlamydia
OIA which BioStar sells outside the United States for testing males for
chlamydia, using a urethral swab sample collection. BioStar does not intend to
market this product in the United States (due to painful sampling procedures
currently required). See "-- Strategic Relationships".
PREGNANCY. In 1997, the market for pregnancy tests used in the physician
office market in the United States was estimated to be over $100 million.
BioStar sells ACCEAVA hCG Urine under license from Wyntek. BioStar's sales of
Wyntek's ACCEAVA hCG Urine test kits constituted only a very small percentage of
BioStar's total 1997 product sales. To date, BioStar has marketed this product
solely to its existing customers.
ACCEAVA hCG Urine. Wyntek's ACCEAVA hCG Urine test is an accurate, rapid
test for the detection of human chorionic gonadotropin in urine for early
detection of pregnancy. In clinical trials, ACCEAVA hCG Urine was demonstrated
to be 100% sensitive and specific. The procedure for use of ACCEAVA hCG Urine
includes the ability to perform midstream or cup specimen collection. Midstream
specimen collection avoids the handling and pipetting of patient specimens and
reduces office staff time. If hCG is present in the specimen, a blue line
appears within minutes.
ACCEAVA hCG Basic. In 1998, BioStar introduced Wyntek's ACCEAVA hCG Basic,
a CLIA-waived "dipstick" test for early detection of pregnancy. ACCEAVA hCG
Basic is based on the same technology as the ACCEAVA hCG Urine test but it is
lower in cost and directed at high volume, cost-sensitive customers.
INFECTIOUS MONONUCLEOSIS. Infectious mononucleosis ("Mono") is a viral
disease caused by the Epstein-Barr virus. While it may infect people of any age,
it is most prevalent in late adolescents and young adults (15-24 years of age).
In theory, any activity involving salivary exchange can spread the disease as it
is mildly contagious. The symptoms (sore throat, fever, swollen lymph nodes) and
epidemiology of Mono are similar to GAS. As a result, Mono is managed in the
same primary care environment as GAS. In 1997, the United States market for
mononucleosis tests was estimated to be $13 million. Recent approvals for
CLIA-waived status of Mono tests and pending submissions for waived status, if
granted, may increase the point-of-care market for Mono diagnostic tests.
BioStar did not sell any mononucleosis products in 1997.
ACCEAVA Mono. Wyntek's ACCEAVA Mono test, which BioStar sells under license
from Wyntek, is a rapid, moderately complex test for Mono which uses whole
blood, plasma or serum samples. The procedure for use of ACCEAVA Mono begins
with the collection of a patient sample using a standard finger-prick technique.
The patient specimen is then diluted after which the test device is placed into
the specimen solution. If Mono is present, results appear in minutes. BioStar
began selling the ACCEAVA Mono test in February 1998. Wyntek has applied for
CLIA-waived status on the ACCEAVA Mono test. If Wyntek is successful in
obtaining CLIA-waived status, then BioStar will add the CLIA-waived version to
its product menu.
PRODUCTS AND TECHNOLOGY IN DEVELOPMENT. BioStar intends to expand its
product menu through internal development, development in collaboration with
strategic partners and acquisition of new products and technologies. BioStar is
currently working with partners to develop OIA tests for influenza A/B,
gonorrhea and pneumonia. BioStar has licensed the materials and completed
feasibility studies to develop a clostridium difficile assay. BioStar is
currently working with Asahi to develop a cartridge-based, multiple target
instrumented test based on its new concept ellipsometry technology. This
instrumented system is intended to expand the application of thin film
technologies by enabling caregivers to run multiple assays on patient specimens
at the same time. This is particularly important with medical conditions that
may be caused by a variety of infectious agents, each of which requires a
specific therapeutic intervention.
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The following table shows BioStar's current product and technology
development programs:
PRODUCT PARTNER STATUS
------- ------- ------
Influenza A/B....................................... Biota Human clinical trials
Chlamydia Urine..................................... NIH In development
C Difficile......................................... None Ready for clinical trials
Pneumonia........................................... * Feasibility studies
Gonorrhea........................................... NIH Feasibility studies
Point-of-Care Instrumentation....................... Asahi In development
Multi-Target Panel Tests............................ Asahi In development
- ---------------
* Confidential
BioStar believes that its new concept ellipsometry technology will expand
the point-of-care market opportunity for its OIA tests by enabling the
quantitative detection of targets in a variety of specimens at an extremely high
level of sensitivity (the sub-nanogram level). This level of sensitivity is
particularly important for drug and disease marker monitoring for cancer, brain
trauma, allergies and thyroid function. BioStar has developed successful
prototype assays utilizing blood or serum specimens for thyroid, allergy and
cancer monitoring and is seeking strategic partners to pursue additional product
development work. This technology is not yet commercially available and there
can be no assurances that BioStar will be able to develop commercially viable
products.
In addition, BioStar believes that its thin film technologies may enable
the development of new products in industrial applications beyond infectious
diseases and human health care where detection of specific targets is critical,
such as in identifying potential toxins in foods and beverages and contaminants
in air and water, and performing life sciences research. BioStar intends to seek
partners to co-fund development of appropriate testing systems and to market
collaboratively any resulting products.
Notwithstanding the foregoing, there can be no assurances that BioStar's
current product and technology development programs will result in the
development and commercialization of new products or technologies.
SALES AND MARKETING
BioStar markets and sells its products to the outpatient primary care
market and the traditional microbiology laboratory market. There are over 80,000
testing sites in the United States in the outpatient primary care market, which
includes: pediatric, obstetrics/gynecology, family practice and general practice
physician offices; student and public health centers; and walk-in clinics. There
are more than 5,000 United States laboratories in the diagnostic microbiology
laboratory market, which includes hospital laboratories and private reference
laboratories.
BioStar's products are typically higher-priced than competitive products
and are marketed on the basis of superior sensitivity, specificity and customer
service. BioStar sells its products through its "flex" representative sales
force and worldwide distribution partners. BioStar believes that its flex
representatives, with their exclusive focus on BioStar products, provide broad
support to the outpatient point-of-care markets. Each flex representative is
focused on developing and maintaining a highly satisfied user base which will
provide superior references to build the flex representative's account base.
BioStar's flex representatives work a minimum of 20 hours per week in their
territory on a "flex basis". The flex basis permits the flex representatives to
choose the hours they work based on their customer's needs and their lifestyle
demands. The flex representatives' compensation is incentive-based, with a base
salary and a significant sales bonus structure.
In 1995, BioStar announced a strategic relationship with Murex, a leading
distributor of microbiological diagnostic products in the United States. Murex's
30-person sales organization represents BioStar's OIA tests in the United States
hospital laboratory and reference laboratory markets. In addition, Murex sells
BioStar's OIA tests through national purchasing agreements with large health
care providers. As a result of Murex's national account efforts, BioStar's
products are included in their contracts with AmeriNet and VHA, Inc. ("VHA"),
two of the largest hospital group purchasing organizations. See "-- Strategic
Relationships".
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To service the international market, BioStar has initiated a 21-country
distribution network comprised of 16 international distribution partners which
covers critical markets in Western Europe and Asia. BioStar's agreements with
its international distribution partners provide for three year terms which are
generally terminable by BioStar if the distributor fails to achieve certain
sales targets.
MANUFACTURING
BioStar's manufacturing process for its OIA tests combines high-volume
processes from the semi-conductor industry with more traditional bioprocesses.
BioStar currently utilizes two semi-automated production lines for the
manufacturing, assembly and packaging of its OIA tests. BioStar's production
capacity is 20,000 tests per day with a single ten-hour shift. Since 1992,
BioStar's manufacturing group has successfully produced over ten million test
devices in its Boulder, Colorado facility. BioStar expects that its
manufacturing facilities will be sufficient to meet expected customer demand for
the foreseeable future.
BioStar employs performance-based, quality control methods in its
manufacturing facility and uses a lot-controlled approach for production.
BioStar is able to achieve volume-related, economy-of-scale production for its
OIA tests because the components of all OIA tests are substantially the same
even though they are for different disease targets. In addition, BioStar expects
that per-unit test production costs will decline as more OIA tests are added to
the BioStar product menu in the future, permitting BioStar to achieve greater
economies of scale at higher volume. BioStar has registered its facility with
the FDA and with appropriate state agencies and operates in compliance with the
FDA promulgated cGMP regulatory requirements for its products.
BioStar's OIA test kits typically comprise test devices, reagents, swabs
and extraction tubes. The test device includes a reactive surface comprised of a
solid substrate (for ease of test delivery), an optical layer of a reflective
surface (to make the reaction visible to the human eye), an attachment layer (to
link the biological to the reactive surface) and an active biological captive
layer (to create a surface thickening). The manufacturing process starts with
the construction of test chips. The solid substrate is manufactured in an
automated process in which "raw" silicon wafers are batch coated with silicon
nitride and the capture layer in quantities sufficient for up to 90,000 tests
per lot. Once coated, the wafers are cut into individual test chips before being
assembled into devices. Additional reagents are formulated, bottled and labeled
for their respective test kits prior to final assembly. The final step in the
manufacturing process includes kit assembly, where test devices, reagents and
other test materials are packaged into finished product.
The components of BioStar's OIA tests are chemical and packaging supplies
that are generally available from several suppliers, except certain antibodies
and absorbent paper which BioStar purchases from single suppliers. BioStar
mitigates the risk of a loss of supply by maintaining a sufficient supply of
such antibodies and absorbent paper to ensure an uninterrupted supply for at
least six months. BioStar also believes that it can substitute a new supplier
with regard to any of these components in a timely manner. There can be no
assurances that BioStar will be able to substitute a new supplier in a timely
manner and failure to do so could have a material adverse effect on BioStar's
business, financial condition and results of operations.
BioStar purchases components for the ACCEAVA Strep A test from Wyntek and
performs final assembly and shipping at its Boulder facility. BioStar purchases
the final, assembled ACCEAVA hCG Urine, ACCEAVA hCG Basic and ACCEAVA Mono tests
from Wyntek and warehouses the tests until they are shipped to customers.
STRATEGIC RELATIONSHIPS
An integral part of BioStar's strategy has been and will continue to be
entering into strategic alliances as a means of accessing resources or
developing specific markets. The primary aspects of BioStar's corporate
partnering strategy include seeking partners that (i) are interested in
developing diagnostic tests to be sold in conjunction with new therapeutics;
(ii) have complementary "marker" technology that when combined with the unique
capabilities of BioStar's thin film technologies will allow the development of
new point-of-care applications for specific proprietary markers or formats;
(iii) have complementary technology whose performance can be upgraded because of
BioStar's thin film technologies; (iv) have complementary products
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which can be sold by BioStar's sales and marketing organization; or (v) have
access to distribution channels that supplement BioStar's existing distribution
channels.
To date, BioStar has established strategic relationships with the following
companies:
Biota Scientific Management Pty Ltd. Biota is an Australian pharmaceutical
company focused principally on the discovery of new human pharmaceuticals for
the treatment of viral respiratory diseases and cancer. BioStar is collaborating
with Biota on the development of the first rapid, point-of-care immunodiagnostic
assay for the simultaneous detection of both influenza A and B. BioStar
estimates that more than 350 million cases of influenza occur worldwide each
year. The lack of accurate and timely diagnosis of influenza is estimated to be
the leading cause of influenza complications, such as pneumonia, especially in
the elderly and in people who are immunocompromised (such as cancer patients).
In the United States, influenza and pneumonia, a common complication of
influenza, are jointly the sixth leading cause of death. Other influenza
diagnostic methods, such as enzyme immunoassay or viral culture, detect only
influenza A or take hours or days to provide results. BioStar began clinical
trials of the influenza OIA test in the United States in January 1998. If the
trials are successful, BioStar anticipates filing for FDA clearance in the
second quarter of 1998. BioStar and Biota intend that the diagnostic test will
be available for sale initially in international markets when Biota's influenza
therapeutic product candidate zanamivir, or GG167, for which Glaxo Wellcome plc
holds the exclusive distribution rights, is launched. Pursuant to the terms of
its arrangement with BioStar, Biota funded the development of the influenza OIA
test in exchange for which Biota secured the exclusive right to distribute the
test outside of the United States. BioStar retains worldwide manufacturing
rights and will be the exclusive distributor in the United States (with Biota
receiving a percentage of the profits from those sales). The exclusivity of
BioStar's position is subject to BioStar's ability to maintain sales minimums.
There can be no assurances that the clinical trials will be successful, and if
successful, that the influenza diagnostic product will achieve broad market
acceptance.
Asahi Chemical Industry Co., Ltd. Asahi is one of Japan's largest chemical
manufacturers and a worldwide leader in thin film technologies. Asahi's
operations range from petrochemicals, plastics, synthetic rubber and synthetic
fibers to construction materials, housing, computer chips, electronics-related
products, liquors, foods and health care. BioStar and Asahi have entered into a
multi-year contract to develop a point-of-care diagnostic system which combines
BioStar's OIA and ellipsometry technologies in a rapid testing system for highly
sensitive detection of multiple targets from a single specimen. The
point-of-care instrument is being designed to be both qualitative and
quantitative, opening up additional testing opportunities using the same system.
Pursuant to the terms of its arrangement, Asahi is funding the development of
the instrumented system and the reagents by BioStar in exchange for which Asahi
has the royalty-bearing exclusive right to manufacture and distribute the test
in Asia. BioStar retains manufacturing and distribution rights for the rest of
the world. There can be no assurances that the product development program will
be successful, and if successful, that the instrumented test will achieve broad
market acceptance.
Wyntek Diagnostics, Inc. Wyntek is a privately-held company located in San
Diego, California, which has developed CLIA-waived tests for the detection of
GAS and pregnancy, as well as a moderately complex test for mononucleosis. In
July 1997, BioStar became a non-exclusive distributor of Wyntek's tests in the
United States and distributes them through BioStar's flex representative sales
force under the brand names ACCEAVA Strep A, ACCEAVA hCG Urine, ACCEAVA hCG
Basic and, beginning in February 1998, ACCEAVA Mono. In November 1997, Wyntek
authorized BioStar to distribute its products worldwide on a non-exclusive
basis. The initial term of the distribution arrangement with Wyntek will expire
in June 2000 and it may be renewed at BioStar's election for additional
successive one-year terms. Wyntek also sells these tests under the trade name
OSOM through a small network of regional distributors and has licensed the GAS
test to Abbott Diagnostics, which is selling the test under the trade name
"Signify".
National Institutes of Health. BioStar is collaborating with the National
Institutes of Health (NIH) on two major programs in the field of
sexually-transmitted diseases. The initial program is focused on developing the
first highly sensitive, rapid OIA test to diagnose chlamydia in males using a
urine specimen. Although chlamydia is one of the most prevalent sexually
transmitted diseases in males, it is rarely tested for or monitored in males due
to the painful sampling procedures currently required. BioStar believes that a
rapid
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chlamydia test using a male urine specimen would allow better detection and
medical management of the disease. To date, the NIH has committed over
$1,500,000 toward the development of the chlamydia assay. The second NIH program
is focused on the development of a rapid, point-of-care OIA assay for gonorrhea
which uses female endocervical or male urethral swab specimens. BioStar received
notification in early September 1997 that an additional grant of up to $850,000
would be awarded to fund development of the gonorrhea assay pending the
achievement of certain milestones. BioStar may exploit the commercial rights to
any tests developed through these programs.
Murex Diagnostics, Inc. Murex is a leading distributor of microbiological
diagnostic products in the United States. Murex's 30-person sales organization
represents BioStar's OIA MAX and Strep B OIA tests (subject to performance
levels) in the United States hospital laboratory and reference laboratory. Murex
distributes BioStar's Chlamydia OIA test on a non-exclusive basis. In addition,
as a result of Murex's national account efforts, BioStar's products are included
in its contracts with AmeriNet and VHA, two of the largest hospital group
purchasing organizations. BioStar's distribution agreement with Murex, which
began in 1995, is in its first one-year renewal period which expires in January
1999 and may be renewed for two additional one-year periods in succession upon
delivery of notice of intent to renew by Murex to BioStar.
RESEARCH AND DEVELOPMENT
BioStar is directing its research and development efforts towards
continuously improving its platform OIA technology and new concept ellipsometry
technology to address operator ease-of-use and reaction speed, creating new
products and technologies which complement BioStar's existing products and
technologies and optimizing the manufacturing process to reduce manufacturing
costs. In that regard, BioStar has organized its research and development
department into four major areas: (i) feasibility/new methods, (ii) methods
development, (iii) system development, and (iv) program management.
The feasibility/new methods group is responsible for performing internal
studies or working with potential corporate partners to evaluate the performance
of delivery technology, novel antibodies, antigens or capture reagents on
different surfaces and new applications or sample types. The feasibility/new
methods group includes individuals skilled in molecular biology, protein
chemistry, biochemistry and basic sciences. This group creates working prototype
assays of new methods or potential products. Additionally, the feasibility/new
methods group technically validates all externally-sourced products.
The methods development group is responsible for taking the candidate
reagents identified by the feasibility/new methods group and developing thin
film products for commercialization. This process includes producing a validated
clinical method which can be consistently manufactured. The methods development
group is further divided into groups which direct their efforts towards
development of different assays. The methods development group includes
individuals skilled in immunology, microbiology, virology, protein chemistry and
assay development. The methods development group works closely with
manufacturing, regulatory and clinical affairs groups to satisfy regulatory
requirements.
The system development group is responsible for the development of the
instrumented system combining BioStar's OIA technology and new concept
ellipsometry technology on which BioStar is collaborating with Asahi. See
"-- Strategic Partners". The system development group is directing hardware
suppliers for the development of the instrument and test cartridges, integrating
assays with the test cartridge and instrument, leading the design group for
creating the user interface and validating the performance of the instrumented
test system. The system development group includes individuals skilled in
optics, electronics, software, reagent integration and validation methods.
The program management group is responsible for tracking, coordinating and
reporting the status of BioStar's development projects, including maintaining
appropriate documentation for obtaining intellectual property protection and
supporting regulatory clearance. The program management group includes
individuals skilled in planning, clinical laboratory testing and project
management.
BioStar maintains facilities to support its development efforts,
microbiology and virology laboratories and product development laboratories in
Boulder, Colorado. In addition, BioStar has two technical advisory boards
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which assist BioStar with product menu, product development and technology
related topics. See "-- Technical and Business Advisors".
BioStar's research and development expenses for the years ended 1995, 1996
and 1997 were $1.4 million, $2.3 million and $3.3 million, respectively.
COMPETITION
Competition in the human medical diagnostics industry is, and is expected
to remain, intense. The competitors range from development stage diagnostics
companies to major domestic and international pharmaceutical companies. Many of
these companies have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than those of BioStar. In
addition, many of these companies have name recognition, established positions
in the market and long standing relationships with customers and distributors.
Moreover, the diagnostics industry has recently experienced a period of
consolidation during which many of the large domestic and international
pharmaceutical companies have been acquiring mid-sized diagnostics companies,
further increasing the concentration of resources. There can be no assurance
that new, more sensitive or rapid technologies will not be introduced that could
be directly competitive with or superior to BioStar's thin film technologies.
BioStar's primary competitors for rapid, point-of-care immunodiagnostic
tests and the markets in which they compete with BioStar are as follows: Abbott
Laboratories (GAS and chlamydia), Carter-Wallace (GAS and chlamydia), SmithKline
Beckman (GAS), Becton Dickinson (GAS) and Quidel (GAS and chlamydia). These
companies are larger than BioStar and have substantial resources and market
presence. BioStar competes against these companies on the basis of product
performance and customer service. BioStar's OIA tests have been demonstrated to
be more sensitive and/or specific than any of the rapid, point-of-care
immunodiagnostic tests for GAS and chlamydia currently sold by these
competitors. Additionally, BioStar believes that its sales organization is
capable of providing more comprehensive customer support than competitors who
use third party distributors.
BioStar's primary laboratory-based competitor for highly sensitive
immunodiagnostic tests is Gen-Probe. Gen-Probe has GAS and chlamydia tests which
are instrumented and used in high-volume laboratories. Gen-Probe is a subsidiary
of a Japanese company which has substantial resources. BioStar competes against
Gen-Probe on the basis of cost-effective outcomes, speed, ease-of-use and
customer service. BioStar's products are as sensitive as Gen-Probe's tests and
are more specific. Gen-Probe's tests require several hours reaction time and are
not point-of-care tests. Therefore, in populations where initial visit follow-up
rates are low, BioStar's tests offer the potential of improved treatment
outcomes.
BioStar's OIA tests also compete against traditional agar culture tests for
GAS, GBS and chlamydia. Agar culture tests consist of commodity-based supply
materials. As a result, a variety of diagnostics companies market agar culture
tests. Agar culture tests historically have been considered the standard against
which diagnostic tests for GAS and GBS have been measured. BioStar competes
against agar culture tests on the basis of ease-of-use, reaction speed and
sensitivity.
The market for the diagnostic tests that BioStar has under development as
well as those which BioStar has targeted for development is highly competitive
and subject to rapid technological change. Other companies are devoting
significant resources to developing new tests and dominating distribution
channels. BioStar believes that for all of its immunodiagnostic assay products,
it competes on the basis of how quickly companies can (i) develop products and
demonstrate clinical feasibility, (ii) complete clinical testing, (iii) obtain
regulatory approval, (iv) obtain favorable reimbursement policies, and (v)
supply commercial quantities of the product to the market at a competitive
price. BioStar's inability to compete favorably with respect to any of these
factors could have a material adverse effect on its business, financial
condition and results of operations.
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PATENTS, TRADE SECRETS AND TRADEMARKS
BioStar has built a strong patent and intellectual property position around
its OIA technology platform covering composition, targets, assays, extraction
methods and delivery systems. BioStar holds 15 United States patents which
expire beginning in 1999 and ending in 2014, as well as 44 international patents
covering a number of inventions which comprise the OIA technology, including the
base OIA technology, optical surfaces for a variety of assays, manufacturing
methods and new instruments. An additional five United States and 15
international patents are now pending. Patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries, BioStar cannot be certain that it was the first creator of
inventions covered by pending patent applications or the first to file patent
applications on such inventions. There can be no assurance that BioStar's
pending patent applications will result in issued patents or that any of its
issued patents will afford meaningful protection against a competitor. In
addition, patent applications filed in foreign countries are subject to laws,
rules and procedures which differ from those of the United States, and thus
there can be no assurance that foreign patent applications related to United
States patents will issue. Furthermore, if these patent applications issue, some
foreign countries provide significantly less patent protection than the United
States.
The status of patents involves complex legal and factual questions and the
breadth of claims issued is uncertain. Accordingly, there can be no assurance
that patent applications filed by BioStar will result in patents being issued or
that its patents, and any patents that may be issued to it in the future, will
afford protection against competitors with similar technology. In addition, no
assurances can be given that patents issued to BioStar will not be infringed
upon or designed around by others or that others will not obtain patents that
BioStar would need to license or design around. If existing or future patents
containing broad claims are upheld by the courts, the holders of such patents
could require companies to obtain licenses. If BioStar is found to be infringing
third party patents, there can be no assurance that licenses that might be
required for BioStar's products would be available on reasonable terms, if at
all.
BioStar could incur substantial costs in defending itself or its licensees
in litigation brought by others or prosecuting infringement claims against third
parties. If the outcome of any such litigation is unfavorable to BioStar,
BioStar's business could be adversely affected. To determine the priority of
inventions, BioStar may have to participate in interference proceedings declared
by the United States Patent Office, which could result in substantial cost to
BioStar and may result in an adverse decision as to the priority of BioStar's
inventions.
In addition to patent protection, BioStar relies on the law of unfair
competition and trade secrets to protect its proprietary rights. BioStar
considers several elements of its manufacturing process and selling techniques
to be trade secrets. BioStar attempts to protect trade secrets and other
proprietary information through agreements with customers and suppliers,
proprietary information agreements with employees and consultants and other
security measures. Although BioStar intends to protect its rights vigorously,
there can be no assurance that these measures will be successful. See "Risk
Factors -- Patents and Proprietary Rights".
BioStar has registered its trademarks OIA(R), BioStar(R) and Better Results
Mean Better Medicine(R) as trademarks on the principal federal trademark
register and with the trademark registries in many countries of the world.
BioStar has registrations pending for Sagax(TM), ACCEAVA(TM), and Strep A OIA
MAX(TM).
REGULATION
The testing, manufacturing and sale of BioStar's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. BioStar will not be able to
commence marketing or commercial sales in the United States of new products
under development until it receives clearance from the FDA. In addition, various
foreign countries in which BioStar's products are or may be sold impose local
regulatory requirements. The testing for, preparation of and subsequent FDA and
foreign regulatory review of required filings can be a lengthy, expensive and
uncertain process. Noncompliance with applicable requirements can result in,
among other things, fines,
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injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, withdrawal of marketing clearances or
approvals and criminal prosecution. The FDA also has the authority to request
recall, repair, replacement or refund of the cost of any device manufactured or
distributed by BioStar.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed necessary
by the FDA to ensure their safety and effectiveness in a reasonable manner.
Class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to cGMP) and Class II devices are subject to general
and special controls (e.g., performance standards, post-market surveillance,
patient registries and FDA guidelines), Generally, Class III devices are those
that must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices or
new devices that have been found not to be substantially equivalent to legally
marketed devices). The majority of BioStar's products and products under
development are, and the combined company's products are expected to be,
classified as Class I or Class II devices.
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance or approval through either clearance of a 510(k)
premarket notification or approval of a product marketing approval ("PMA")
application. A PMA application must be filed if a proposed device is a new
device not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a pre-amendment Class III device for which the FDA has
called for PMAs. A PMA application must be supported by valid scientific
evidence to demonstrate the safety and effectiveness of the device, typically
including the results of clinical investigations, bench tests, laboratory and,
where applicable, animal studies. The PMA application must also contain a
complete description of the device and its components and a detailed description
of the methods, facilities and controls used to manufacture the device. In
addition, the submission must include the proposed labeling, advertising
literature and any training materials. The PMA approval process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a preamendment Class III medical device
for which the FDA has not called for PMAs. The FDA recently has been requiring
more rigorous demonstration of substantial equivalence than in the past,
including in some cases requiring submission of clinical data. It generally
takes from four to 12 months from submission to obtain 510(k) premarket
clearance but may take longer. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category. For any devices that are cleared through
the 510(k) process, modifications or enhancements that could significantly
affect safety or effectiveness, or constitute a major change in the intended use
of the device, will require new 510(k) submissions.
There can be no assurance that BioStar will be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis, if at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, limitations
on intended use imposed as a condition of such approvals or clearances, or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on BioStar's business, financial condition and results
of operations.
Before the manufacturer of a device can submit the device for FDA approval
or clearance, it generally must conduct a clinical investigation of the device.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic tests, such as all of BioStar's products and products
currently under development, are exempt from the IDE requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an invasive sampling procedure that presents a significant
risk, does not intentionally introduce energy into the subject, and is not used
as a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, patient informed consents and approvals from the
Internal Review
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Board of the clinic sites must be obtained, as appropriate. The in vitro
diagnostic test must be labeled "for research use only" ("RUO") or "for
investigative use only" ("IUO"), and distribution controls must be established
to assure that in vitro diagnostic tests distributed for research or clinical
investigation are used only for those purposes.
BioStar intends to conduct clinical investigations of its products under
development, which will entail distributing them in the United States on an IUO
basis. There can be no assurance that the FDA would agree that BioStar's IUO
distribution of its in vitro diagnostic products under development will meet the
requirements for IDE exemption. Furthermore, failure by BioStar or the
recipients of its products under development to maintain compliance with the IDE
exemption requirements could result in enforcement action by the FDA, including,
among other things, the loss of the IDE exemption or the imposition of other
restrictions on BioStar's distribution of its products under development, which
would adversely affect BioStar's ability to conduct the clinical investigations
necessary to support marketing clearance or approval.
Any devices manufactured or distributed by BioStar pursuant to FDA
clearance are subject to pervasive and continuing regulation by the FDA and
certain state agencies. Manufacturers of medical devices for marketing in the
United States are required to adhere to applicable regulations setting forth
detailed cGMP requirements, which include testing control and documentation
requirements. Manufacturers must also comply with MDR requirements that a
manufacturer report to the FDA any incident in which its product may have caused
or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to cause
or contribute to a death or serious injury. Labeling and promotional activities
are subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
BioStar is subject to routine inspection by the FDA and certain state
agencies for compliance with cGMP requirements, MDR requirements and other
applicable regulations. The FDA has recently finalized changes to the cGMP
requirements, including the addition of design controls that will likely
increase the cost of compliance. Changes in existing requirements or adoption of
new requirements could have a material adverse effect on BioStar's business,
financial condition and results of operations. There can be no assurance that
BioStar will not incur significant costs to comply with laws and regulations in
the future, or that laws and regulation will not have a material adverse effect
upon BioStar's business, financial condition and results of operations.
Distribution of BioStar's products outside the United States is subject to
extensive government regulation. These regulations, including the requirements
for approvals or clearance to market, the time required for regulatory review
and the sanctions imposed for violations, vary from country to country. There
can be no assurance that BioStar will obtain regulatory approvals in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals. In addition, the
export by BioStar of certain of its products which have not yet been cleared for
domestic commercial distribution may be subject to FDA export restrictions.
Failure to obtain necessary regulatory approvals; the restriction, suspension or
revocation of existing approvals or any other failure to comply with regulatory
requirements would have a material adverse effect on BioStar's business,
financial condition and results of operations.
BioStar's customers using diagnostic tests for clinical purposes in the
United States are also regulated under CLIA. CLIA is intended to ensure the
quality and reliability of all medical testing in laboratories in the United
States by requiring that any health care facility in which testing is performed
meets specified standards in the areas of personnel qualification,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations have
established three levels of regulatory control based on test
complexity -- "waived", "moderately complex" and "highly complex". BioStar's
current OIA tests and ACCEAVA Mono tests are categorized as a "moderately
complex" tests for clinical use in the United States. Under the CLIA
regulations, all laboratories performing high or moderately complex tests are
required to obtain either a registration certificate or certification of
accreditation from the HCFA. As a result of the CLIA requirements, physician
office laboratories and small volume test sites may be
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dissuaded from initiating, continuing or expanding patient testing, particularly
if the tests are classified as moderately or highly complex tests. There can be
no assurance that the CLIA regulations and future administrative interpretations
of CLIA will not have an adverse impact on the potential market for BioStar's
products. BioStar's ACCEAVA hCG and ACCEAVA Strep A products are categorized as
CLIA "waived". Laboratories performing CLIA "waived" tests face less stringent
registration and certification requirements.
BioStar also is subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that BioStar will
not incur significant costs to comply with laws and regulations in the future or
that such laws or regulations will not have a material adverse effect upon
BioStar's business, financial condition and results of operations.
REIMBURSEMENT
BioStar's largest market segment is the outpatient market. Payment for
testing in this segment is largely based on third party payor reimbursement. The
site which performs the test will submit an invoice to the patient's insurance
provider (or the patient if not covered by a program). Each diagnostic procedure
(and in some instances, specific technologies) is assigned a CPT code by HCFA.
Third party insurance payors typically establish a specific fee to be paid for
each code submitted. Third party payor reimbursement policies are generally
determined with reference to the reimbursement for CPT codes for Medicare
patients which themselves are determined on a national basis by HCFA. Third
party payors can indirectly affect the pricing or the relative attractiveness of
BioStar's products by regulating the maximum amount of reimbursement they will
provide for BioStar's CPT codes. For example, the reimbursement of fees for CPT
codes for diagnostic tests for Medicare patients in hospitals are included under
Medicare's prospective payment system, diagnosis-related group regulations. If
the reimbursement amounts for the CPT codes for diagnostic tests are decreased
in the future, such a change likely would decrease the amount that caregivers
are able to charge Medicare patients for such services and consequently the
price BioStar can charge caregivers for its products. BioStar cannot predict the
reimbursement of fees for the CPT codes for its products for Medicare patients,
or any other types of patients. Any decreases in reimbursement fees could have a
material adverse effect on BioStar's business, financial condition and results
of operations.
TECHNICAL AND BUSINESS ADVISORS
BioStar periodically draws on the expertise of several advisors and
consultants in fields related to BioStar's technology and business. In addition,
BioStar has a Managed Care Advisory Board and a Pediatric Medical Advisory
Board, which meet with BioStar periodically.
Managed Care Advisory Board. The Managed Care Advisory Board was formed to
assist BioStar with charting trends in managed care and developing business
strategies for addressing those trends. As of January 1, 1998, the Managed Care
Advisory Board was comprised of the following individuals:
Kenneth Webb, M.D., MPH, has served as an advisor to BioStar since 1995.
Dr. Webb joined BioStar on a full-time basis as its Medical Director in January
1998.
Nancy Grove, M.D., MBA, has served as an advisor to BioStar since January
1, 1998. Dr. Grove is currently Vice President, Systems Laboratory Operations of
Sutter Health Care as well as Medical Director of the Palo Alto Medical
Foundation and has extensive experience in clinical and laboratory operations.
Christopher Stanley, M.D. has served as an advisor to BioStar since January
1, 1998. Dr. Stanley is the Medical Director of Focus Health Services and Focus
IPA (divisions of PhyCor) and is a Board-Certified Pediatrician.
Elizabeth Dichter, M.P.H. has served as an advisor to BioStar since January
1, 1998. Ms. Dichter is Executive Vice President, Strategic Marketing with PCS
Health Systems, Inc. (Eli Lilly and Co.). Ms. Dichter has extensive experience
in public health, managed healthcare, health economics, outcomes management and
pharmaceuticals.
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Pediatric Medical Advisory Board. The Pediatric Medical Advisory Board
meets at least quarterly to discuss with and advise BioStar on trends in the
medical management of pediatric medical conditions and standards of care. As of
December 31, 1997, the Pediatric Advisory Board was comprised of the following
individuals:
Stephen Fries, M.D. has served as an advisor to BioStar since 1993. Dr.
Fries is a pediatrician and is the President of the Board of Directors at the
Boulder Medical Center.
Harley A. Rotbart, M.D. has served as an advisor to BioStar since 1995. Dr.
Rotbart is Vice Chairman for Academic Affairs and a Professor in the Departments
of Pediatrics and Microbiology at the University of Colorado School of Medicine
and a Co-Director of the Children's Clinical Studies Office.
Gregory Storch, M.D. has served as an advisor to BioStar since 1995. Dr.
Storch is a Professor of Pediatrics and Medicine and Associate Professor of
Molecular Microbiology at Washington University School of Medicine and a member
of the staff at St. Louis Children's Hospital, Barnes Hospital and Shriner
Hospital for Crippled Children.
Kenneth Webb, M.D. has served as an advisor to BioStar since 1995. Dr. Webb
joined BioStar on a full-time basis as its Medical Director in January 1998.
HUMAN RESOURCES
As of December 31, 1997, BioStar employed 174 individuals, 110 of whom were
full time and 64 of whom were flex-time. Of these, 14 hold Ph.D.s and 11 hold
other advanced degrees. None of BioStar's employees is covered by a collective
bargaining agreement. BioStar believes that it maintains good relations with its
employees.
FACILITIES
BioStar currently leases approximately 37,000 square feet of space in one
building in Boulder, Colorado which is used for its administrative offices,
research and development facilities and manufacturing operations. The lease
expires in August 1998 with renewal options through 2008. BioStar also leases
approximately 10,000 square feet of warehouse space in Longmont, Colorado under
a lease which expires in August 1998. BioStar is investigating alternative
locations which may be more able to meet future requirements. BioStar believes
that suitable additional or alternative space will be available on commercially
reasonable terms as needed.
LEGAL PROCEEDINGS
BioStar is not a party to any material litigation or legal proceedings.
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BIOSTAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. BioStar's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled "Risk
Factors" and "BioStar Business" as well as those discussed in this section and
elsewhere in this Joint Proxy Statement/Prospectus. The following discussion
should be read in conjunction with the BioStar Financial Statements, including
the notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus.
GENERAL
Since BioStar's inception in 1992, BioStar has been primarily involved in
the research, development, manufacturing and marketing of point-of-care
diagnostic tests. BioStar began commercial sales of its first diagnostic test
based on its proprietary OIA technology in 1992 and currently markets tests for
GAS, GBS and chlamydia. Its tests are sold by BioStar's dedicated, nationwide
marketing and sales organization, which targets the outpatient market, and its
domestic and international distributor network, which targets hospital and
reference laboratory accounts.
BioStar manufactures products for inventory based upon expected sales
demand, ships products to customers within 24 hours of receipt of orders and
anticipates that it will continue to do so in the future. Accordingly, BioStar
does not operate with a backlog and does not anticipate it will develop a
backlog in the future.
BioStar has experienced significant revenue growth since its inception,
primarily from sales of products and recently from contract revenues from
strategic partners. In order to support these activities, BioStar has incurred
significant levels of sales and marketing expenses. BioStar has entered into
licensing and research and development agreements with strategic partners from
which it derived a significant percentage of its revenues in 1997. Contract
revenues consist of milestone payments, grant revenues, funding for feasibility
testing, funding for product development and licensing fees. BioStar has also
increased its revenues through the sales of four diagnostic products which it
in-licenses from Wyntek. BioStar may seek to expand its relationship with Wyntek
to include additional products. In addition, BioStar's growth strategy includes
potential sales of other externally-sourced products. Although BioStar has
experienced steady growth in revenues, there can be no assurance that, in the
future, BioStar will sustain revenue growth or achieve profitability.
BioStar's results of operations may fluctuate significantly from
period-to-period as the result of several factors, including: (i) whether and
when new products are successfully developed and introduced, (ii) market
acceptance of current or new products, (iii) seasonal customer demand, (iv)
whether and when BioStar receives milestone payments and license fees from
strategic partners, (v) changes in reimbursement policies for the products which
BioStar sells, (vi) competitive pressures on average selling prices for the
products which BioStar sells, and (vii) changes in the mix of products BioStar
sells. For example, in 1997, BioStar's sales of its tests for GAS represented
approximately 83% of its total sales with most of the sales occurring during the
first and fourth quarters, concurrent with the time of the year in which
respiratory infections are prevalent. In addition, two of BioStar's products in
development are also directed at respiratory infections (pneumonia and
influenza). Consequently, BioStar's revenues are, and BioStar expects that they
will continue to be, concentrated in the first and fourth quarters of each
fiscal year. Due to the foregoing factors, BioStar believes that
period-to-period comparisons of its operating results cannot be relied upon as
indicators of future financial performance.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996:
Total revenue: Total revenue increased 28% to $15.9 million for the year
ended December 31, 1997 from $12.4 million in 1996. The increase is primarily
due to an increase in contract revenues (from $778,000 in
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1996 to $5.0 million in 1997) which resulted from three new research contracts
and continued funding from two previous contracts. A component of total
revenues, product sales, decreased 7% to $10.8 million in 1997 from $11.6
million in 1996. The decrease was due to lower unit sales which resulted from:
(a) reduced orders from BioStar's largest distributor caused by their
overstocking product in late 1996; (b) the introduction of a competitor's
product for GAS in mid-1996; and (c) discontinued sales of a urinary tract
infection product. Additionally, the average selling price of GAS products
decreased 10% due to the introduction of the ACCEAVA GAS test, which has an
average selling price approximately 30% lower than BioStar's OIA-based GAS
products.
Cost of sales: Cost of sales includes material, labor and overhead costs
associated with manufacturing products. Cost of sales decreased 3% to $4.9
million in 1997 from $5.1 million in 1996, due primarily to a decrease in total
units sold. The decrease in cost of sales was less than the decrease in product
sales due to fixed costs which do not vary with production volume.
Research and development: Research and development expenses increased 38%
to $3.2 million in 1997 from $2.3 million in 1996 primarily due to hiring
additional scientific staff, consulting fees and other costs related to research
performed under three new research contracts in 1997.
Sales and marketing: Sales and marketing expenses consist of the costs
associated with maintaining, compensating, training and supporting BioStar's
sales and marketing organization. Sales and marketing expenses were unchanged at
$6.2 million for both 1997 and 1996.
General and administrative: General and administrative expenses increased
41% to $2.7 million in 1997 from $1.9 million in 1996, due in part to legal,
accounting and other costs relating to strategic partnering activities,
financing activities and slightly higher staffing levels.
Other income (expense): Other income (expense) includes interest expense,
including interest paid or accrued on debt and capital leases, as well as
interest, royalty and other miscellaneous income. Other income (expense)
increased 21% to $(790,000) in 1997 from $(651,000) in 1996 due primarily to
higher interest expense resulting from higher interest rates in 1997 over 1996,
and higher debt levels throughout 1997.
Years Ended December 31, 1996 and 1995:
Total revenue: Total revenue increased 29% to $12.4 million for the year
ended December 31, 1996 from $9.6 million in 1995, primarily due to an increase
in sales of GAS and GBS products. Product sales increased 22% to $11.6 million
in 1996 from $9.5 million in 1995. Contract revenues increased to $778,000 in
1996 from $61,000 in 1995 from one new research contract and the continuation of
a contract.
Cost of sales: Cost of sales increased 36% to $5.1 million in 1996 from
$3.7 million in 1995, due primarily to an increase in total units sold and an
increase in production costs per unit sold.
Research and development: Research and development expenses increased 65%
to $2.3 million in 1996 from $1.4 million in 1995 representing an increase in
staffing and related expenses needed to support BioStar's increased product and
technology development efforts.
Sales and marketing: Sales and marketing expenses decreased 19% to $6.2
million in 1996 from $7.7 million in 1995 primarily due to lower expenses in
1996 for the costs associated with building the infrastructure of the sales and
marketing organization which was initiated in 1995.
General and administrative: General and administrative expenses increased
40% to $1.9 million in 1996 from $1.3 million in 1995, primarily due to
increased staffing levels and costs associated with recruiting and relocating
employees.
Other income (expense): Other income (expense) increased 264% to $(651,000)
in 1996 from $(179,000) in 1995 primarily due to higher levels of debt. Interest
income decreased 52% to $29,000 in 1996 from $61,000 in 1995 mainly due to lower
cash balances, while interest expense increased 113% to $(731,000) in 1996 from
$(344,000) in 1995 due to higher levels of debt.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, BioStar has financed its operations primarily through
private placements of preferred stock and debt securities, raising net proceeds
of $24,719,000 million from sales of these securities. BioStar has also received
financing for operations from sales of diagnostic products, contract revenues
received under arrangements with strategic partners and, to a lesser extent,
through equipment financing. Through December 31, 1997, BioStar had invested
$3.8 million in leasehold improvements, laboratory and computer equipment and
office furnishings and equipment to support its development and administrative
activities. BioStar had financed $1.8 million of these capital additions through
capital lease lines. In addition, BioStar leases its laboratory and office
facilities under operating leases.
BioStar's principal sources of liquidity are available lines of credit and
bridge financing with a bank, of which $1.5 million remained available as of
February 12, 1998. BioStar anticipates that its current level of cash and
borrowing capacity would allow it to operate for approximately six months before
requiring additional sources of funding if it were to remain independent.
Thereafter, in the absence of the Merger, BioStar would need to raise
substantial additional funds in order to continue its planned growth, and
BioStar would attempt to acquire such funding through public or private
financings or through agreements with suitable strategic partners. The Company
has obtained commitments from the holders of its subordinated promissory notes
aggregating $1,510,092, that should the Merger not be consummated, they will
extend the due dates to March 31, 1999. In addition, certain preferred
stockholders who are also subordinated debt holders have committed to actively
support and assist the Company in obtaining operating funds through March 31,
1999 and to participate in a private placement, if required, to provide adequate
working capital.
The Merger, anticipated to be consummated in the second quarter of 1998,
would change BioStar's financial position significantly, due to Cortech's cash
resources, and, in the absence of significant acquisitions or other significant
changes in BioStar activities, would eliminate the need for BioStar to obtain
additional funding for at least 24 months following the Effective Time. In
connection with the Merger, (i) holders of $4.5 million of convertible
subordinated notes have agreed to convert those notes and related accrued
interest into equity, and (ii) holders of at least $1,541,535 of subordinated
promissory notes have agreed to convert those notes and related accrued interest
into equity.
OTHER MATTERS
Impact of Year 2000:
The Year 2000 will impact computer programs written using two digits rather
than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence.
BioStar recently reviewed all of its software for exposure to Year 2000
issues, including network and workstation software, and does not believe that it
has significant risk associated with the problem. BioStar primarily uses
third-party software programs written and updated by outside firms, each of whom
has stated that its software is Year 2000 compliant. To assure that all software
programs can successfully work in conjunction with each other after the year
1999, BioStar plans to test all of its software during the first quarter of 1998
using a combination of past and future dates. Although no problems are expected
from this test, any problems will be corrected before the end of the 1998
calendar year. The cost of modifying or replacing software to bring BioStar into
compliance, if necessary, is not expected to be material.
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BIOSTAR MANAGEMENT AND EXECUTIVE COMPENSATION
The following table sets forth information as of February 12, 1998
regarding the directors and executive officers of BioStar who will become
directors or executive officers of Cortech upon consummation of the Merger.
NAME POSITION WITH BIOSTAR
---- ---------------------
Alexander E. Barkas(1)................ Chairman of the Board of Directors
Teresa W. Ayers(1)(2)................. President, Chief Executive Officer and Director
Noel T. Doheny........................ Executive Vice President, Commercial
Development
Lyndal K. Hesterberg.................. Executive Vice President, Scientific Affairs
Kim L. Stebbings...................... Vice President, National Sales and Marketing
Edward C. Pritchard................... Vice President, Finance and Manufacturing and
Chief Financial Officer
Thomas A. Bologna..................... Director
- ---------------
(1) Member of the Compensation Committee of BioStar.
(2) Member of the Audit Committee of BioStar.
The members of the Board of Directors are elected each year at the annual
meeting of BioStar's stockholders.
Dr. Alexander E. Barkas, 50, was elected Chairman of the Board of Directors
of BioStar in February 1997. Dr. Barkas has been a managing member of the
general partner of Prospect Venture Partners, L.P., a venture capital investment
firm, since June 1997. Prior to assuming this position, Dr. Barkas was a partner
of the general partner of Kleiner Perkins Caufield & Byers, a venture capital
investment firm, from 1991 to June 1997. Dr. Barkas is Chairman of the Board of
Geron Corporation, a biopharmaceutical company, and is a member of the Board of
Directors of Connetics Corp., a biopharmaceutical company. Dr. Barkas received a
Ph.D. in Biology from New York University in 1986 and a B.A. in Biology from
Brandeis University.
Teresa W. Ayers, 44, was elected Chief Executive Officer of BioStar in
February 1997 and President, Chief Operating Officer and Director of BioStar in
December 1995. From August 1992 to December 1995, she served as BioStar's Vice
President of Finance, Treasurer and Secretary. From 1989 to August 1992, Ms.
Ayers served as Vice President of Finance, Treasurer and Secretary of
Plasti-Line, Inc., a manufacturer of internally illuminated signage. From 1986
to 1989, Ms. Ayers served as Vice President of Finance of CytRx Corporation, a
public biotechnology company, and CytRx Biopool, a public in vitro diagnostic
company. Ms. Ayers received her B.B.A. in Business from the University of
Georgia in 1976 and is a Certified Public Accountant.
Noel T. Doheny, 43, has served as Executive Vice President, Commercial
Development of BioStar, since July 1995. Previously, Mr. Doheny served as Vice
President of New Business Development of BioStar from March 1995 to July 1995
and as Vice President of Sales of BioStar from March 1994 to March 1995. Prior
to joining BioStar, Mr. Doheny served as General Sales Manager-Near Patient
Testing of Ciba Corning Diagnostics (now Chiron Diagnostics) ("Ciba Corning").
From 1977 to 1993 he held a variety of business roles, including sales,
worldwide marketing management, business development and general management with
Ciba Corning. Mr. Doheny received his B.A. in Biology and B.A. in Chemistry from
West Virginia University in 1976. Mr. Doheny completed graduate work and a
teaching fellowship in Biochemistry at Georgetown University from 1976 - 1977.
Dr. Lyndal K. Hesterberg, 43, has served as Vice President, Scientific
Affairs of BioStar since January 1992 and was elected Executive Vice President,
Scientific Affairs of BioStar in February 1997. Prior to joining BioStar, Dr.
Hesterberg served as Manager, Diagnostic Product Development of Amgen, Inc. from
1986 to 1989 and Director of Product Development and Regulatory Affairs at
Syrgene Products and Research, Inc. from 1982 to 1986. Dr. Hesterberg received
his Ph.D. in Biochemistry from St. Louis University in 1980
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and his B.S. in Biochemistry from the University of Illinois in 1976. Dr.
Hesterberg was a Postdoctoral Fellow at Max Planck Institute for Biophysical
Chemistry in Goettingen, West Germany from 1981 - 1982.
Kim L. Stebbings, 42, has served as Vice President, National Sales and
Marketing of BioStar since September 1996. Prior to joining BioStar, Ms.
Stebbings held various management positions with Boehringer Mannheim Corporation
from February 1983 to September 1996, most recently serving as Western Area
Business Manager -- Diabetes Care Division and National Sales Manager -- Point
of Care Division. Ms. Stebbings received her B.S. in Biology from St. Lawrence
University in 1977.
Edward C. Pritchard, 48, has served as Vice President, Finance and
Manufacturing and Chief Financial Officer of BioStar since May 1977. Prior to
joining BioStar, Mr. Pritchard served as Vice President, Finance and Chief
Financial Officer of Renaissance Entertainment Corporation, a publicly-owned
entertainment firm, from March 1995 to September 1996. From January 1991 to
December 1994, Mr. Pritchard served as Vice President, Financial Planning,
Finance & Administration of Centre Reinsurance, a Bermuda-based reinsurance
company. From January 1988 to December 1990, Mr. Pritchard served as Financial
Officer of GTE Reinsurance, a Bermuda-based captive reinsurance company. Mr.
Pritchard received his M.B.A. in Finance from the University of Connecticut in
1997 and his B.A. in English from Trinity University in 1996.
Thomas A. Bologna, 49, has served as a director of BioStar since May 1997.
In July 1997, Mr. Bologna became President and Chief Executive Officer and a
member of the Board of Directors of Ostex International, Inc., a publicly-held
biotechnology company that develops, manufactures and markets products for the
management of osteoporosis and other collagen-related diseases. Mr. Bologna
formed Healthcare Venture Associates, a strategic consulting firm, in January
1996. From January 1994 to January 1996, Mr. Bologna was the President and Chief
Executive Officer of Scriptgen Pharmaceuticals, Inc., a pharmaceutical company.
Mr. Bologna served as President and co-Chief Executive Officer of Gen-Probe
Incorporated, a medical diagnostics company ("Gen-Probe"), from July 1987 to
January 1994, as Chief Executive Officer of Gen-Probe from March 1988 to January
1994 and as Chairman of the Board of Directors of Gen-Probe from July 1992 to
January 1994. From February 1991 to September 1994, Mr. Bologna also served as
acting Chief Executive Officer of Camino Laboratories, Inc., a neurosurgical
products company. Mr. Bologna received a B.S. in Engineering and Science from
New York University in 1970 and an M.B.A. from the Stern School of Management in
1972.
COMPENSATION OF DIRECTORS
It is BioStar's practice to grant, upon election to BioStar's Board of
Directors, to each person who is not an officer of BioStar and does not,
directly or through a primary business affiliation, own 5% or more of the
outstanding BioStar Capital Stock (an "Outside Director") an option to purchase
100,000 shares of BioStar common stock under the 1995 Equity Incentive Plan as
compensation for services as a director. Such options generally become
exercisable ("vest") in annual installments over a four-year period. Vesting of
all options is subject to continued service as a director of BioStar during the
vesting period. During the fiscal year ended December 31, 1997, outside
directors received options pursuant to the 1995 Equity Incentive Plan as
follows: Mr. Bologna received an option to purchase 100,000 shares of BioStar
common stock at an exercise price of $.23 per share and Dr. Barkas received an
option to purchase 100,000 shares of BioStar common stock at an exercise price
of $.23 per share. In addition, Dr. Barkas received an option to purchase an
additional 100,000 shares at an exercise price of $.23 per share as compensation
for his service as Chairman of the Board. The vesting of the options granted to
Mr. Bologna and Dr. Barkas will accelerate in connection with the Merger
aggregating 50,000 shares for Mr. Bologna and 125,000 shares for Dr. Barkas.
BioStar reimburses its directors for reasonable and necessary costs associated
with attending BioStar Board meetings.
Mr. Bologna and BioStar entered into a consulting agreement for the period
of May 1, 1997 through December 31, 1998, during which period Mr. Bologna will
be paid $1,500 per full business day of services rendered by Mr. Bologna
pursuant to such consulting agreement. In 1997, Mr. Bologna received $54,448 in
cash for his consulting services. In addition, in consideration for Mr. Bologna
entering into such consulting agreement, Mr. Bologna received an option to
purchase 53,335 shares of BioStar common stock at an exercise price of $.23 per
share. Subsequently, pursuant to an amendment of Mr. Bologna's consulting
agreement,
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Mr. Bologna and BioStar agreed to terminate Mr. Bologna's option with respect to
26,667 shares. Dr. Barkas and BioStar entered into a consulting agreement for
the period of October 1, 1997 through December 31, 1998 during which period Dr.
Barkas will be paid $1,500 per full business day of services rendered by Dr.
Barkas pursuant to such consulting agreement. Dr. Barkas did not receive any
cash compensation during 1997 for his consulting services.
Directors who are not Outside Directors do not receive separate
compensation for their services as directors, other than reimbursement for
reasonable and necessary costs associated with attending BioStar Board meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1997,
1996 and 1995, compensation awarded or paid to, or earned by, each person who
served as Chief Executive Officer or one of the four next most highly
compensated executive officers (the "Named Executive Officers") of BioStar and
who will serve as an executive officer of Cortech upon consummation of the
Merger:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
------------------------------------- COMPENSATION
OTHER AWARDS
ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPEN- UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR ($) ($) SATION($) OPTIONS SATION(1)
------------------ ---- -------- ------- --------- ------------ ---------
Teresa W. Ayers................... 1997 $175,385 $50,000 $ $ 90
President and Chief 1996 150,000 30,000 84
Executive Officer 1995 101,923 -- 90
Lyndal K. Hesterberg.............. 1997 $146,923 $45,000 $ 90
Executive Vice President, 1996 128,846 28,385 84
Scientific Affairs 1995 100,000 -- 90
Noel T. Doheny.................... 1997 $132,163 $32,500 $ 90
Executive Vice President, 1996 130,000 18,276 84
Commercial Development 1995 126,287 10,000 90
Kim L. Stebbings(2)............... 1997 $119,904 $25,000 $29,277
Vice President, 1996 35,128 5,500 $8,500 21
National Sales and 1995 -- -- --
Marketing
Edward C. Pritchard(3)............ 1997 $ 31,308 $ 5,000
Vice President, 1996 -- --
Finance and Manufacturing 1995 -- --
and Chief Financial Officer
- ---------------
(1) Represents premiums paid by BioStar for group term life insurance, except
for Ms. Stebbings' 1997 amount, which represents premiums paid by BioStar
for group term life insurance of $90 and reimbursement for relocation
expenses of $29,187.
(2) Ms. Stebbings received a signing bonus in the amount of $8,500 upon joining
BioStar in 1996. Ms. Stebbings' 1996 salary, on an annualized basis, was
$110,000.
(3) Mr. Pritchard became an executive officer in 1997. Mr. Pritchard received
$24,231 in consulting fees from BioStar prior to his joining BioStar in May
1997. Mr. Pritchard's 1997 salary, on an annualized basis, was $110,000.
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STOCK OPTION GRANTS AND EXERCISES
BioStar grants options to its executive officers under its 1995 Equity
Incentive Plan. As of February 12, 1998, options to purchase a total of
4,106,647 shares were outstanding under the 1995 Equity Incentive Plan and
options to purchase 828,648 shares remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1997,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF
TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
NUMBER OF GRANTED INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES OF
SECURITIES TO ------------------------------ STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM(4)
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------------------
NAME GRANTED(1) YEAR PRICE(2) DATE(3) 5%($) 10%($)
---- ---------- ---------- --------- ------------------ --------- ----------
Teresa W. Ayers...... 300,000 23.9% $.23 June 19, 2006 $43,394 $109,968
Lyndal K.
Hesterberg......... 160,000 12.7 $.23 June 16, 2006 23,143 58,650
Noel T. Doheny....... -0- -- $.23 -0- -- --
Kim L. Stebbings..... 75,000 6.0 $.23 June 19, 2006 10,848 27,492
Edward C.
Pritchard.......... 200,000 15.9 $.23 September 9, 2006 28,929 73,312
- ---------------
(1) Options vest over four years with 25% vesting on the first anniversary of
the date of grant and the remainder vesting pro rata on a monthly basis. The
Board of Directors has the authority to reprice options.
(2) The exercise price is equal to 100% of the fair market value on the date of
grant as determined by BioStar's Board.
(3) The options have a term of ten years, subject to earlier termination on
certain events.
(4) The potential realizable value is calculated based on the term of the option
at the date of grant (10 years). It is calculated assuming that the fair
market value of BioStar common stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
VALUE OF
NUMBER OF SECURITIES UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT 12/31/97(#) 12/31/97($)(1)
----------------------- -------------------
SHARES ACQUIRED VALUE(1) EXERCISABLE / EXERCISABLE /
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------------------- -------------------
Teresa W. Ayers.............. -- -- 422,292/385,208 $19,500/$0
Lyndal K. Hesterberg......... -- -- 260,003/194,375 12,594/0
Noel T. Doheny............... -- -- 280,209/119,791 0/0
Kim L. Stebbings............. -- -- 70,312/179,688 0/0
Edward C. Pritchard.......... -- -- 0/200,000 0/0
- ---------------
(1) Values calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the applicable per share exercise
price.
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EMPLOYMENT AGREEMENTS
BioStar has entered into employment agreements with each of Teresa W.
Ayers, President and Chief Executive Officer, Lyndal K. Hesterberg, Executive
Vice President, Scientific Affairs, Noel T. Doheny, Executive Vice President,
Commercial Development, Kim L. Stebbings, Vice President, National Sales and
Marketing and Edward C. Pritchard, Vice President, Finance and Manufacturing and
Chief Financial Officer. These agreements provide for severance payments if the
employment of the individual is terminated without cause or is "Constructively
Terminated" (as defined in the respective agreements). In the case of Ms. Ayers
and Mr. Hesterberg, the payments would be 12 months of salary plus an additional
12 months of vesting for all stock options held by the individual at the date of
termination. In the case of Mr. Doheny and Ms. Stebbings, the payments would be
six months of salary plus an additional six months of vesting for all stock
options held by the individual at the date of termination. In the case of Mr.
Pritchard, the payments would be three months of salary plus an additional three
months of vesting for all stock options held by Mr. Pritchard at the date of
termination.
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BIOSTAR PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of BioStar, common stock as of January 30, 1998 and as
adjusted to give effect to the exchange of all outstanding shares of BioStar
Capital Stock for shares of Cortech Common Stock pursuant to the Merger by (i)
each person known by BioStar to be a beneficial owner of 5% or more of BioStar's
outstanding common stock, (ii) each director, (iii) each executive officer named
in the Summary Compensation Table above, (iv) entities affiliated with certain
directors and (v) all directors and executive officers as a group:
PERCENTAGE OF PERCENTAGE OF
BIOSTAR CORTECH
COMMON COMMON
SHARES OF BIOSTAR STOCK SHARES OF CORTECH STOCK
COMMON STOCK OUTSTANDING COMMON STOCK OUTSTANDING
BENEFICIALLY PRIOR TO BENEFICIALLY OWNED AFTER THE
BENEFICIAL OWNER OWNED(1) MERGER(1) AFTER THE MERGER(1) MERGER(1)
---------------- ----------------- ------------- -------------------- -------------
Kleiner Perkins Caufield & Byers VI... 5,948,827(2) 14.32% 4,205,686 8.93%
2750 Sand Hill Road
Menlo Park, California 94205
Mayfield VI........................... 5,916,136(3) 13.99 4,465,553 9.35
2800 Sand Hill Road
Menlo Park, California 94025
Marquette Venture Partners II, L.P.... 4,559,173(4) 11.11 3,280,249 7.03
620 Lake Cook Road, Suite 450
Deerfield, Illinois 60015
Skandigen AB.......................... 4,106,032 9.76 3,376,466 7.10
Norrlandsgatan 15
S-111 43
Stockholm, Sweden
The Hill Partnership.................. 3,979,297(5) 9.74 2,895,006 6.23
885 Arapahoe Avenue
Boulder, Colorado 80303
BMPI Liquidating Trust................ 3,717,143 9.55 2,120,697 4.74
c/o Colorado Venture Management Inc.
4845 Pearl Street, Suite 300
Boulder, Colorado 80301
Teresa W. Ayers....................... 464,781(6) 1.18 256,187(7) *
Alexander E. Barkas, Ph.D............. 125,000(8) * 68,900(9) *
Thomas A. Bologna..................... 76,668(10) * 42,259(11) *
Marvin H. Caruthers................... 628,024(12) 1.60 477,787 1.06
John G. Hill.......................... 3,979,297(5) 9.74 2,895,006 6.23
Wendell G. Van Auken.................. 5,916,136(4) 13.99 4,465,553 9.35
Noel T. Doheny........................ 305,208(13) * 168,231(14) *
Lyndal K. Hesterberg.................. 388,125(15) * 213,935(16) *
Edward C. Pritchard................... -- -- -- --
Kim L. Stebbings...................... 85,937(17) * 47,368(18) *
All current directors and executive
officers as a group (10 persons).... 11,969,176(19) 25.95% 8,635,227(20) 17.03%
- ---------------
* Less than one percent of the outstanding shares
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(1) Assumes an Exchange Ratio of 0.5512 and the exercise and conversion of all
convertible promissory notes and warrants. Applicable percentage of
ownership is based on 38,762,961 shares of common stock on an as-converted
basis outstanding as of January 30, 1998 together with applicable options,
convertible promissory notes or warrants for such stockholder and
44,620,868 shares of Cortech Common Stock following the Merger. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to the community property laws, where
applicable. Shares of common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of January 30, 1998 are
deemed to be beneficially owned by the person holding such options or
warrants for the purpose of computing the percentage of ownership of such
person. Options exercisable within 60 days of January 30, 1998 are not
treated as outstanding for purposes of computing the percentage ownership
of any person other than the person holding such options.
(2) Includes warrants to purchase 345,948 shares of BioStar common stock and
warrants to purchase 359,961 shares of BioStar Series F Preferred Stock and
promissory notes convertible into 2,064,822 shares of BioStar Series F
Preferred Stock convertible or exercisable within 60 days of the date of
this table.
(3) Consists of 2,010,680 shares of BioStar preferred stock, warrants to
purchase 433,465 shares of BioStar common stock, warrants to purchase
267,968 shares of BioStar Series F Preferred Stock and promissory notes
convertible into 2,252,404 shares of BioStar Series F Preferred Stock
exercisable within 60 days of January 30, 1998 held by Mayfield VI; 95,857
shares of BioStar preferred stock, warrants to purchase 20,665 shares of
BioStar common stock, warrants to purchase 12,708 shares of BioStar Series
F Preferred Stock and promissory notes convertible into 107,259 shares of
BioStar Series F Preferred Stock exercisable within 60 days of January 30,
1998 held by Mayfield Associates; and 289,892 shares of BioStar preferred
stock, warrants to purchase 62,501 shares of BioStar common stock, warrants
to purchase 38,400 shares of BioStar Series F Preferred Stock and
promissory notes convertible into 324,337 shares of BioStar Series F
Preferred Stock exercisable within 60 days of January 30, 1998 held by
Mayfield Medical Partners. Mr. Van Auken, a director of BioStar, is a
general partner of the general partner of each of Mayfield VI, Mayfield
Associates, and Mayfield Medical Partners (collectively, the "Mayfield
Entities"). Mr. Van Auken disclaims beneficial ownership of the shares held
by the Mayfield Entities except to the extent of his pecuniary interest
therein arising from his general partnership in the general partner of each
of the Mayfield Entities.
(4) Consists of 2,218,363 shares of BioStar common and BioStar preferred stock,
warrants to purchase 295,252 shares of BioStar common stock, warrants to
purchase 259,956 shares of BioStar Series F Preferred Stock and promissory
notes convertible into 1,675,814 shares of BioStar Series F Preferred Stock
exercisable within 60 days of January 30, 1998 held by Marquette Venture
Partners II, L.P., and 63,384 shares of BioStar common and BioStar
preferred stock, warrants to purchase 4,687 shares of BioStar common stock,
warrants to purchase 8,011 shares of BioStar Series F Preferred Stock and
promissory notes convertible into 33,706 shares of BioStar Series F
Preferred Stock exercisable within 60 days of January 30, 1998 held by MVP
II Affiliates Fund, L.P.
(5) Consists of 1,905,160 shares of BioStar preferred stock, warrants to
purchase 281,251 shares of BioStar common stock, warrants to purchase
229,568 shares of BioStar Series F Preferred Stock and promissory notes
convertible into 1,563,318 shares of BioStar Series F Preferred Stock
exercisable within 60 days of January 30, 1998. Hill, Carmen Ventures is
the general partner of The Hill Partnership. Mr. Hill, a director of
BioStar, is a general partner of Hill, Carmen Ventures. Mr. Hill disclaims
beneficial ownership of the shares held by The Hill Partnership except to
the extent of his pecuniary interest therein arising from his general
partnership interests in Hill, Carmen Ventures.
(6) Includes 1,865 shares held by Ms. Ayers' spouse and 462,916 shares issuable
pursuant to BioStar options exercisable within 60 days of the date of this
table.
(7) Includes 255,159 shares of Cortech Common Stock issuable pursuant to
options exercisable within 60 days of the date of this table.
(8) Includes 125,000 shares issuable pursuant to BioStar options exercisable
within 60 days of the date of this table.
(9) Includes 68,900 shares of Cortech Common Stock issuable pursuant to options
exercisable within 60 days of the date of this table.
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(10) Includes 76,668 shares issuable pursuant to BioStar options exercisable
within 60 days of the date of this table.
(11) Includes 42,259 shares of Cortech Common Stock issuable pursuant to options
exercisable within 60 days of the date of this table.
(12) Includes an aggregate of 224,284 shares of BioStar common stock, warrants
to purchase 57,142 shares of BioStar common stock; warrants to purchase
33,326 shares of BioStar Series F Preferred Stock and promissory notes
convertible into 293,272 shares of BioStar Series F Preferred Stock held in
trusts for Dr. Caruthers' two sons (the "Caruthers Entities"). Dr.
Caruthers is a director of BioStar.
(13) Includes 305,208 shares issuable pursuant to BioStar options exercisable
within 60 days of the date of this table.
(14) Includes 168,231 shares of Cortech Common Stock issuable pursuant to
options exercisable within 60 days of the date of this table.
(15) Includes 335,003 shares issuable pursuant to BioStar options exercisable
within 60 days of the date of this table.
(16) Includes 184,654 shares of Cortech Common Stock issuable pursuant to
options exercisable within 60 days of the date of this table.
(17) Includes 85,937 shares issuable pursuant to BioStar options exercisable
within 60 days of the date of this table.
(18) Includes 47,368 shares of Cortech Common Stock issuable pursuant to options
exercisable within 60 days of the date of this table.
(19) Includes shares included pursuant to notes 3, 5, 6, 8, 10, 12, 13, 15, and
17.
(20) Includes shares included pursuant to notes 3, 5, 7, 9, 11, 14, 16, and 18.
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CERTAIN TRANSACTIONS
During March 1996 and April 1996, BioStar issued Convertible Subordinated
Promissory Notes in the aggregate amount of $4,500,000.50 (the "1996 Notes") and
warrants to purchase up to 2,571,426 shares of BioStar common stock pursuant a
certain Note and Warrant Purchase Agreement, dated March 20, 1996, as amended
(the "Note and Warrant Purchase Agreement"). In February 1998, the 1996 Notes
were amended to provide that two days prior to the Effective Time (the
"Conversion Date"), the 1996 Notes will convert automatically into shares of
BioStar Series F Preferred Stock at a price per share (the "Conversion Price")
equal to the lesser of (i) $0.88 or (ii) the price per share determined by
multiplying the Cortech Stock Price (as defined in such amendment) by the
Exchange Ratio, less 20%. On the Conversion Date, the aggregate principal and
interest due on the 1996 Notes will automatically be converted into an aggregate
of 18,967,212 shares of BioStar's Series F Preferred Stock and, pursuant to the
Merger, converted into an aggregate of 10,454,727 shares of Cortech Common Stock
assuming an Exchange Ratio of 0.5512 (based upon BioStar's capitalization as of
the date of this Joint Proxy Statement/Prospectus and assuming a per share
market price for Cortech Common Stock of $0.656 (the per share market price of
the Cortech Common Stock as of the Reorganization Agreement) immediately prior
to the Effective Time). The 1996 Notes and related warrants to purchase shares
of BioStar common stock (the "1996 Warrants") were issued to the following
persons or entities, who are directors, executive officers or holders of more
than five percent of the outstanding shares of one of BioStar's classes of
voting securities, in such amounts as set forth opposite their names. The 1996
Warrants will expire unless exercised prior to the consummation of the Merger.
PRINCIPAL AMOUNT OF
CONVERTIBLE SUBORDINATED WARRANTS TO PURCHASE SHARES
NAME OF NOTEHOLDER PROMISSORY NOTES OF BIOSTAR COMMON STOCK
------------------ ------------------------ ---------------------------
Mayfield Entities........................ $904,105.84 516,631
Skandigen AB............................. 730,944.00 417,683
Kleiner Perkins Caufield & Byers VI,
L.P.................................... 605,411.32 345,948
Marquette Entities....................... 524,892.36 299,939
Hill Partnership III..................... 492,189.20 281,251
Caruthers Entities....................... 100,000.00 57,142
In February 1997, BioStar issued an aggregate of $1,000,000 in principal
amount of Subordinated Promissory Notes (the "February 1997 Notes") to the
following persons or entities, who are directors, executive officers or holders
of more than five percent of the outstanding shares of one of BioStar's classes
of voting securities, in such amounts as set forth opposite their names:
PRINCIPAL AMOUNT OF THE
NAME OF NOTEHOLDER SUBORDINATED PROMISSORY NOTE
------------------ ----------------------------
Kleiner Perkins Caufield & Byers VI......................... $305,940.37
Marquette Entities.......................................... 227,752.99
Mayfield Entities........................................... 271,190.42
Hill Partnership III........................................ 195,116.22
The February 1997 Notes were terminated in exchange for the issuance of the
June 1997 Notes (as defined below).
On June 20, 1997, BioStar issued Subordinated Promissory Notes in the
aggregate amount of $1,565,049.73 (the "June 1997 Notes") and warrants to
purchase up to 1,778,465 shares BioStar's Series F Preferred Stock (the "June
1997 Warrants") to each of the following persons or entities, who are directors,
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executive officers or holders of more than five percent of the outstanding
shares of one of BioStar's classes of voting securities, in such amounts as set
forth opposite their names:
PRINCIPAL SUM OF WARRANTS TO PURCHASE SHARES
NAME OF NOTEHOLDER SUBORDINATED PROMISSORY NOTES OF SERIES F PREFERRED STOCK
------------------ ----------------------------- ---------------------------
Skandigen AB......................... $376,420.00 427,750
Kleiner Perkins Caufield & Byers
VI................................. 316,765.63 359,961
Mayfield Entities.................... 280,786.11 319,076
Marquette Entities................... 235,811.70 267,967
Hill Partnership III................. 202,020.13 229,568
Caruthers Entities................... 29,326.76 33,326
In February 1998, the June 1997 Notes were amended to provide that upon
election of the noteholder at any time prior to the Conversion Date to convert
such holder's June 1997 Note, such holder will be entitled to receive shares of
BioStar Series F Preferred Stock at a price per share equal to the Conversion
Price. As of February 12, 1998, BioStar has received notices of election to
convert an aggregate of $1,706,869 in principal and interest of the 1997 Notes
into approximately 5,900,613 shares of BioStar Series F Preferred Stock and,
pursuant to the Merger, converted into an aggregate of 3,252,418 shares of
Cortech Common Stock, assuming an Exchange Ratio of 0.5512 (based upon BioStar's
capitalization as of the date of this Joint Proxy Statement/Prospectus and
assuming a per share market price for Cortech Common Stock of $0.656 (the per
share market price of the Cortech Common Stock as of the date of the
Reorganization Agreement) immediately prior to the Effective Time).
In February 1998, the June 1997 Warrants were amended to provide that upon
election of the warrantholder at any time prior to the Conversion Date to
exercise such holder's June 1997 Warrant, such holder will be entitled to
receive shares of BioStar Series F Preferred Stock at a price per share equal to
the Conversion Price; provided that if the holder does not elect to convert its
related June 1997 Note, the exercise price of such holder's June 1997 Warrant
will be $0.88 per share. Assuming exercise of all of such June 1997 Warrants,
1,778,465 shares of BioStar's Series F Preferred Stock will be issued pursuant
to such exercises and, pursuant to the Merger, converted into an aggregate of
980,289 shares of Cortech Common Stock assuming an Exchange Ratio of 0.5512
(based upon BioStar's capitalization as of the date of this Joint Proxy
Statement/Prospectus and assuming a per share market price for Cortech Common
Stock of $0.656 (the per share market price of the Cortech Common Stock as of
the date of the Reorganization Agreement) immediately prior to the Effective
Time).
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DESCRIPTION OF CORTECH CAPITAL STOCK
The following description of the capital stock of Cortech and certain
provisions of Cortech's Certificate of Incorporation, as amended (the "Cortech
Certificate"), and Bylaws (the "Cortech Bylaws") is a summary and is qualified
in its entirety by the provisions of the Cortech Certificate and the Cortech
Bylaws which are filed as exhibits to the registration statement of which this
Joint Proxy Statement/Prospectus forms a part.
AUTHORIZED CAPITAL STOCK
Cortech's authorized capital stock consists of 50,000,000 shares of Common
Stock, par value $.002 per share (the "Cortech Common Stock"), and 2,000,000
shares of Preferred Stock, par value $.002 per share (the "Cortech Preferred
Stock").
CORTECH COMMON STOCK
The holders of Cortech Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any then outstanding Preferred Stock,
holders of Cortech Common Stock are entitled to receive ratably such dividends
as may be declared by the Cortech Board out of funds legally available therefor.
Upon the dissolution or liquidation of Cortech, whether voluntary or
involuntary, holders of Cortech Common Stock are entitled to receive ratably all
assets remaining after payment of liabilities and the liquidation preference of
any then outstanding Preferred Stock.
As of January 30, 1998, 18,523,918 shares of Cortech Common Stock were
issued and outstanding and no shares were held in Cortech's treasury. As of the
same date, Cortech had approximately 559 stockholders of record.
CORTECH PREFERRED STOCK
The Cortech Board has the authority, without further vote or action by the
stockholders, to issue up to 1,500,000 shares of Cortech Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any additional series of Cortech Preferred Stock or the designation
of such series. The issuance of Cortech Preferred Stock could adversely affect
the voting power of holders of Cortech Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of
Cortech. This could have an adverse impact on Cortech's Common Stock price.
As of January 31, 1998, there were no shares of Cortech Preferred Stock
outstanding. Cortech has no present plans to issue any shares of Cortech
Preferred Stock.
The Cortech Board has designated five hundred thousand (500,000) shares of
Cortech Preferred Stock Series A Junior Participating Preferred Stock, $.002 par
value per share (the "Junior Preferred Stock"). Holders of Junior Preferred
Stock are entitled to (i) certain dividends in preference to holders of Cortech
Common Stock and subject to the rights of holders of any shares or series of
Cortech Preferred Stock, (ii) 100 votes for each share held of record on all
matters submitted to a vote of the stockholders and will vote together with the
holders of Cortech Common Stock and (iii) in the event of a liquidation,
dissolution or winding up of Cortech, $100 per share plus an amount equal to all
accrued and unpaid dividends. Holders of Junior Preferred Stock possess no
redemption rights. See "-- Certain Anti-Takeover Provisions".
As of January 31, 1998, there were no shares of Junior Preferred Stock
outstanding.
CORTECH OPTIONS
As of January 30, 1998, there were options outstanding to purchase an
aggregate of 2,148,261 shares of Cortech Common Stock at exercise prices ranging
from $0.59 to $8.75 per share with a weighted average
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139
exercise price of $2.16 per share. The options contain provisions for the
adjustment of exercise prices in certain events, including sales of Cortech
Common Stock at less than the exercise price, stock dividends, stock splits,
reorganizations, reclassifications or mergers. See "Cortech Management and
Executive Compensation".
WARRANTS
As of January 30, 1998, there were warrants outstanding to purchase an
aggregate of 354,844 shares of Cortech Common Stock all with an exercise price
of $10.00 per share. The warrants contain provisions for the adjustment of
exercise prices in certain events, including sales of Cortech Common Stock at
less than the exercise price, stock dividends, stock splits, reorganizations,
reclassifications or mergers. These warrant holders are entitled to certain
registration rights with respect to Cortech Common Stock issued upon exercise of
the warrants held by them. See "-- Registration Rights".
CERTAIN ANTI-TAKEOVER PROVISIONS
The Cortech Certificate and the Cortech Bylaws contain certain provisions
which may have an effect of delaying, deferring or preventing a change of
control of Cortech. The Cortech Certificate provides that the Cortech Board
shall consist of three classes of directors, each serving for a three-year term
ending in successive years. Each class consists of three directors. This
provision may make it more difficult to effect a takeover of Cortech because it
would generally take two annual meetings of stockholders for an acquiring party
to elect a majority of the Cortech Board. As a result, a classified board of
directors may discourage proxy contests for the election of directors or
purchases of a substantial block of stock because it could operate to prevent
obtaining control of the Cortech Board in a relatively short period of time. In
addition, Cortech directors may only be removed by stockholders for cause.
The Cortech Certificate provides that actions requiring stockholder
approval may be approved only at a duly convened stockholders' meeting. In
addition, the Cortech Bylaws provide that special meetings of stockholders may
be called only by the president, by the Cortech Board or by the president or
secretary at the written request of stockholders owning a majority of the
outstanding capital stock entitled to vote. Also, the Cortech Bylaws require
that stockholders wishing to present business for consideration at the annual
stockholders' meeting provide the Company with timely prior notice of the
business to be presented.
Cortech is subject to Section 203 of the Delaware General Corporation Law
which imposes restrictions on business combinations (as defined therein) with
interested persons (defined as any person who acquires 15 percent or more of
Cortech's outstanding voting stock). In general Cortech is prohibited from
engaging in business combinations with an interested person for a period of
three years from the date a person becomes an interested person, subject to
certain exceptions. By restricting the ability of Cortech to engage in business
combinations with an interested person, the application of Section 203 to
Cortech may provide a barrier to hostile or unsolicited takeovers.
STOCKHOLDER RIGHTS PLAN
The Cortech Board has adopted a stockholders rights plan (the "Rights
Plan") which provides for the distribution of one preferred share purchase right
as a dividend for each outstanding share of Cortech Common Stock as of June 26,
1995 and the issuance of one such purchase right in connection with issuances of
Cortech Common Stock after June 26, 1995. Each Right entitles its holder to
purchase one one-hundredth of a share of Junior Preferred Stock for $20.00,
subject to adjustment pursuant to the Rights Plan. All purchase rights expire on
June 12, 2005. Generally, a Right may be exercised 10 days after any person or
group of affiliated or associated persons acquire beneficial ownership of 15% or
more of the outstanding shares of Cortech Common Stock or 10 business days after
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
Cortech Common Stock unless such offer or acquisition is made with approval of
the Cortech Board. The Cortech Board has determined that neither the Merger, the
Reorganization Agreement nor the arrangements contemplated thereby will cause
any purchase rights to become exercisable under the Rights Plan. Although such
an event is not anticipated, the Cortech
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Board has not taken any action to prevent any former BioStar stockholder from
triggering the exercisability of such rights through any post-Merger
accumulation of Cortech Common Stock (including, without limitation, shares
issued pursuant to the Merger).
REGISTRATION RIGHTS
In connection with the CDC Offering, each CDC Investor is entitled to
certain piggyback registration rights with respect to the shares of Cortech
Common Stock which such CDC Investor holds or may acquire on exercise of the
warrants received in the CDC Offering or the Cortech Common Stock which may be
used by Cortech to exercise its option to repurchase the CDC shares, subject to
the terms and conditions of the Subscription Agreement. Pursuant to the
Subscription Agreement, whenever Cortech proposes to register any of its
securities under the Securities Act, with certain exceptions, the holders of
shares as to which there are piggyback rights are entitled, subject to certain
restrictions, to include their shares in such registration. Cortech is required
to bear the expenses of the registration of the CDC Investors' registrable
securities; provided, however, that such CDC Investors will bear their pro rata
share of all underwriting discounts and commissions incurred.
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COMPARISON OF STOCKHOLDERS' RIGHTS
In connection with the Merger, the BioStar stockholders will be converting
their shares of BioStar Capital Stock into shares of Cortech Common Stock. Both
Cortech and BioStar are Delaware corporations, but the Cortech Certificate and
the Cortech Bylaws differ from the BioStar Certificate and the BioStar Bylaws in
several significant respects. Because of the differences in the charter
documents of Cortech and BioStar, the rights of a holder of Cortech Common Stock
differ from the rights of a holder of BioStar common stock.
Below is a summary of some of the important differences between the charter
documents of Cortech and BioStar. It is not practical to summarize all of such
differences in this Joint Proxy Statement/Prospectus, but some of the principal
differences which could materially affect the rights of stockholders include the
following:
CLASS VOTES
The DCGL does not require separate class votes of all voting classes in
order to approve charter amendments generally. However, Section 242 of the DCGL
does provide that each class of stock, even a nonvoting class of stock, shall
vote on charter amendments that increase or decrease the aggregate number of
authorized shares of such class, increase or decrease the par value of such
class or adversely affect the rights of holders of shares of such class.
The Cortech Certificate provides for additional class voting for its Series
A Junior Participating Preferred Stock. Cortech may not amend the Cortech
Certificate in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Junior Participating Preferred
Stock so as to affect such shares adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of the Series A Junior
Participating Preferred Stock, voting together as a single class. The Cortech
Certificate does not provide for any additional class voting other than for the
Series A Junior Participating Preferred Stock.
The BioStar Certificate provides that BioStar shall not, without first
obtaining the approval of the holders of at least a majority of the
then-outstanding shares of BioStar's Series A, Series B, Series C, Series D,
Series E and Series F Preferred Stock, voting together as a single class: (i)
sell, convey, or otherwise dispose of or encumber all or substantially all of
its property or business or merge into or consolidate with any other corporation
(other than a wholly owned subsidiary corporation) or effect any transaction or
series of related transactions in which more than 50% of the voting power of
BioStar is disposed of; (ii) alter or change the rights, preferences or
privileges of the shares of Series A, Series B, Series C, Series D, Series E or
Series F Preferred Stock so as to adversely affect the shares; or (iii) create
any new class or series of stock or any other securities convertible into equity
securities of BioStar having a preference over, or being on a parity with, the
Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock
with respect to voting, dividends, or upon liquidation.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. The DGCL permits, but does
not require, a classified board of directors, pursuant to which the directors
can be divided into as many as three classes with staggered terms of office,
with only one class of directors standing for election each year. Unlike the
BioStar charter documents which provide that directors shall be elected at each
annual stockholders' meeting for a term of one year, the Cortech charter
documents provide for a classified board of directors, with only one class out
of three being elected each year.
REMOVAL OF DIRECTORS
Under the DGCL, if a corporation has a classified board, the stockholders
may remove a director only for cause, unless the certificate of incorporation
provides otherwise. The Cortech Certificate does not provide otherwise;
therefore, any and all directors may only be removed with cause by a majority
vote of the stockholders entitled to vote. By contrast, the BioStar Certificate
provides that a majority vote of the stockholders entitled to vote may remove a
director with or without cause.
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LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the DGCL allows a corporation to include in its certificate
of incorporation a provision that limits or eliminates the personal liability of
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director. Section 102 of the DGCL does not, however,
permit a corporation to limit or eliminate the personal liability of a director
for (i) any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) intentional or
negligent payment of unlawful dividends or unlawful stock purchases or
redemptions or (iv) any transaction from which the director derived an improper
personal benefit.
Both the Cortech Certificate and the BioStar Certificate provide for
limitations on the personal liability of directors to the extent permitted by
the DGCL.
Cortech and BioStar provide for similar indemnification of directors,
officers and employees. Both companies' bylaws provide that the company shall,
to the maximum extent and in the manner permitted by the law, indemnify each of
its directors, officers and employees against expenses (including attorney's
fees), judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact that
such person is or was an agent of the corporation.
Under Section 145 of the DGCL, other than an action brought by or in the
right of the corporation, such indemnification is available if it is determined
that the proposed indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her conduct was unlawful. In actions brought
by or in the right of the corporation, such indemnification is limited to
expenses (including attorneys' fees) actually and reasonably incurred and is
permitted only if the indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person is adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought determines that, despite the adjudication of liability but in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses which the court deems proper. To the
extent that the proposed indemnitee has been successful in defense of any
action, suit or proceeding, he must be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
action.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Under the DGCL, a corporation's certificate of incorporation can be amended
by the affirmative vote of the board of directors and approved by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, unless the certificate of incorporation requires the vote of a
larger portion of the shares. The Cortech Certificate requires approval only by
a majority of the outstanding shares entitled to vote. By contrast, the BioStar
Certificate provides that holders of BioStar preferred stock have a right to a
separate class vote, in addition to the vote of BioStar stockholders as a whole,
with respect to certain amendments to the BioStar Certificate which would affect
the rights and privileges of the holders of BioStar preferred stock.
POWER TO CALL SPECIAL STOCKHOLDERS' MEETING; ACTION BY CONSENT
Under the DGCL, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
corporation's certificate of incorporation or Bylaws. The Cortech Bylaws provide
that special meetings of stockholders may be called only by the President, the
Secretary, the Cortech Board or, at the written request of stockholders owning a
majority of outstanding shares of Cortech Common Stock. The Cortech Certificate
provides that any action taken by stockholders must be effected at an annual or
special meeting and may not be effected by written consent without a meeting.
The BioStar bylaws provide that special meetings of stockholders may be called
by the President and shall be called by the President or Secretary of BioStar
upon written request of either a majority of the BioStar Board or holders of a
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majority in interest in the BioStar Capital Stock outstanding. The BioStar
bylaws allow stockholders to take action by written consent without a meeting.
INSPECTION OF STOCKHOLDERS' LIST
The DGCL allows any stockholder to inspect the stockholders' list for a
purpose reasonably related to such person's interest as a stockholder.
DIVIDENDS AND REPURCHASES OF SHARES
The DGCL permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared or for the preceding fiscal year as long as the amount of
capital of the corporation is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. Neither the Cortech Certificate nor
the BioStar Certificate contains any such restrictions on the corporation's
ability to declare and pay dividends. In addition, the DGCL generally provides
that a corporation may redeem or repurchase its shares only if such redemption
or repurchase would not impair the capital of the corporation. The ability of a
Delaware corporation to pay dividends on, or to make repurchases or redemptions
of, its shares is dependent on the financial status of the corporation standing
alone and not on a consolidated basis. In determining the amount of surplus of a
Delaware corporation, the assets of the corporation, including stock of
subsidiaries owned by the corporation, must be valued at their fair market value
as determined by the board of directors, regardless of their historical book
value.
AMENDMENT OF BYLAWS
Section 109 of the DGCL provides that the stockholders entitled to vote
have the power to adopt, amend or repeal bylaws and that a corporation may
confer, in its certificate of incorporation, such powers on the board of
directors. In addition to the stockholders' rights pursuant to Section 109, both
the Cortech Certificate and the BioStar Certificate provide that the
corporation's board of directors may make, alter or repeal its respective
bylaws.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under the DGCL, any merger, consolidation or sale, lease or exchange of all
or substantially all of the assets (an "Extraordinary Event") must be approved
by the board of directors and by the affirmative vote of a majority of the
outstanding shares entitled to vote. The Cortech Certificate does not provide
for any additional vote that would be required to approve such a transaction.
The BioStar Certificate provides that in addition to an affirmative vote of a
majority of the outstanding shares of capital stock entitled to vote, approval
of a majority of the then outstanding shares of BioStar preferred stock, voting
as a separate class, is required with respect to an Extraordinary Event.
CERTAIN BUSINESS COMBINATIONS
Section 203 of the DGCL prohibits a corporation from engaging in any
business combination with an interested stockholder (defined as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person associated with, affiliated with or
controlling or controlled by such entity or person) for a period of three years
after the time that the stockholder became an interested stockholder unless (i)
prior to that time, the board of directors of the corporation approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
pursuant to which the person became an interested stockholder, such stockholder
owned 85% or more of the outstanding voting stock at the time the transaction
commenced (excluding shares owned by directors and officers and shares owned by
employee stock option plans in which the participants cannot determine
confidentially whether or not the shares would be tendered in response to a
tender or an exchange offer) or (iii) at or subsequent to the time of the
transaction, the business
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combination is approved by the corporation's board of directors and by a vote at
a meeting (and not by written consent) of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
Section 203 only applies to Delaware corporations that have a class of
voting stock (i) listed on a national securities exchange, (ii) authorized for
quotation by the Nasdaq Stock Market, Inc. or (iii) held of record by more than
2,000 stockholders. A Delaware corporation may elect in its original certificate
of incorporation, or by amending its certificate of incorporation or bylaws, not
to be governed by Section 203. Any such amendment must be approved by the
stockholders and may not be further amended by the board of directors.
Since Cortech is authorized for quotation by the Nasdaq Stock Market, Inc.,
Cortech is subject to the antitakeover provisions of Section 203 of the DGCL.
Section 203 does not currently apply to BioStar since BioStar does not meet any
of the criteria set forth above. Cortech has not elected to be excluded from
being governed by Section 203.
APPRAISAL RIGHTS
Under the DGCL, a stockholder of a corporation participating in certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in an
amount equal to the "fair value" of the shares held by such stockholder (as
determined by the Delaware Court of Chancery) in lieu of the consideration such
stockholder may otherwise receive in the transaction.
Under the DGCL, appraisal rights are not available to: (i) stockholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than 2,000
holders if such stockholders receive only (a) shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or are held of record by more than 2,000 holders and (b) cash in
lieu of fractional shares; or (ii) stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because, among other things, the number of shares to be
issued in the merger does not exceed twenty percent (20%) of the shares of the
surviving corporation outstanding immediately prior to the merger and if certain
other conditions are met.
APPRAISAL RIGHTS ARE AVAILABLE TO STOCKHOLDERS OF BIOSTAR WITH RESPECT TO
THE MERGER. SEE "APPROVAL OF THE MERGER AND RELATED TRANSACTIONS -- RIGHTS OF
DISSENTING STOCKHOLDERS".
DISSOLUTION
Under the DGCL, a dissolution must be initiated by the board of directors
and approved by the affirmative vote of a majority of the outstanding stock of
the corporation entitled to vote thereon.
REGISTRATION RIGHTS
Pursuant to BioStar's Investors' Rights Agreement, holders of BioStar
Registrable Securities currently have registration rights. The Investors' Rights
Agreement provides that the holders of Registrable Securities (as defined
therein) may (i) demand that the combined company effect two registrations
(subject to certain restrictions and limitations, including limitations as to
the number of shares which must request registration); (ii) include their shares
with any registration effected by the combined company (subject to certain
restrictions and limitations); and (iii) request that the combine company effect
an unlimited number of registrations pursuant to a Registration Statement on
Form S-3 (subject to certain restrictions and limitations).
Upon the consummation of the Merger, Cortech will assume BioStar's
obligations under the Investors' Rights Agreement. Pursuant to the terms of the
Reorganization Agreement, the Investors' Rights Agreement
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will be restated to provide that the holders of Registrable Securities may not
request registration until the earlier of (i) ninety (90) days after the
effective date of a registration statement for the first public offering of
securities by the combined company after the Effective Time of the Merger and
(ii) the first anniversary of the Effective Time of the Merger. In addition, the
Investors' Rights Agreement will provide that holders may not include their
Registrable Securities in a company-initiated registration until the earlier of
(i) ninety (90) days after the effective date of a registration statement for
the first public offering of securities of Cortech following the Effective Time
of the Merger and (ii) the first anniversary of the Effective Time of the
Merger.
STOCKHOLDER PROPOSALS
Proposals of stockholders of Cortech which are intended to be presented by
such stockholders at Cortech's 1998 annual meeting of stockholders were to have
been received by the Secretary of Cortech no later than December 17, 1997 in
order to be included in the proxy statement and form of proxy relating to that
meeting.
EXPERTS
The financial statements of Cortech, Inc. in the Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of BioStar, Inc. as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, included
in this Joint Proxy Statement/Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for Cortech by Pillsbury Madison & Sutro LLP, San Diego, California.
Certain legal matters in connection with the Merger will be passed upon for
BioStar by Cooley Godward LLP ("Cooley"), Boulder, Colorado. Cooley owns an
aggregate of approximately 25,343 shares of BioStar Capital Stock and $7,258.36
in principal amount of promissory notes which will be converted into
approximately 16,344 shares of BioStar Series F Preferred Stock two days prior
to Effective Time, based upon the assumptions set forth in the Unaudited Pro
Forma Financial Statements. See "Unaudited Pro Forma Financial Information."
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Arthur Andersen LLP and Ernst & Young LLP, respectively,
expect to be present at the Cortech Special Meeting and the BioStar Special
Meeting. While such representatives have stated that they do not plan to make a
statement at such meetings, they will be available to respond to appropriate
questions from stockholders in attendance.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
CORTECH, INC.
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995....................................... F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-6
Notes to Financial Statements............................... F-7
BIOSTAR, INC.
Report of Independent Auditors.............................. F-17
Balance Sheets as of December 31, 1997 and 1996............. F-18
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995....................................... F-19
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1996 and 1995.................... F-20
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-21
Notes to Financial Statements............................... F-23
F-1
147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cortech, Inc.:
We have audited the accompanying balance sheets of CORTECH, INC. (a
Delaware corporation), as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
During the fourth quarter of 1997, the Company terminated its on-site
research and development activities. The Company has retained certain personnel
who are engaged primarily in efforts to realize appropriate value from the
Company's tangible and intangible assets (Note 1).
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cortech, Inc., as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1998.
F-2
148
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
1997 1996
-------- --------
CURRENT ASSETS:
Cash and cash equivalents (Note 2)........................ $ 11,562 $ 7,792
Short-term investments (Note 2)........................... 3,841 13,186
Prepaid expenses and other................................ 308 845
-------- --------
Total current assets.............................. 15,711 21,823
-------- --------
PROPERTY AND EQUIPMENT, at cost (Note 2):
Laboratory and pilot production equipment................. -- 7,101
Leasehold improvements.................................... 8,026 8,026
Office furniture and equipment............................ 2,300 2,483
-------- --------
10,326 17,610
Less -- Accumulated depreciation and amortization......... (9,592) (13,950)
-------- --------
734 3,660
-------- --------
Total Assets...................................... $ 16,445 $ 25,483
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 600 $ 680
Accrued liabilities....................................... 162 206
Accrued vacation and other compensation................... 264 185
Unearned income........................................... -- 1,323
Advances from corporate partner........................... 36 964
-------- --------
Total current liabilities......................... 1,062 3,358
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY (Notes 3 and 4):
Preferred stock, $.002 par value, 2,000,000 shares
authorized, none issued................................ -- --
Common stock, $.002 par value, 50,000,000 shares
authorized, 18,523,918 and 18,518,079 shares issued and
outstanding, respectively.............................. 37 37
Warrants.................................................. 1,077 2,330
Additional paid-in capital................................ 98,909 97,659
Deferred compensation..................................... (1) (40)
Accumulated deficit....................................... (84,639) (77,861)
-------- --------
Total stockholders' equity........................ 15,383 22,125
-------- --------
Total Liabilities and Stockholders' Equity........ $ 16,445 $ 25,483
======== ========
The accompanying notes to financial statements are an integral part of these
statements.
F-3
149
CORTECH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
REVENUES:
Sponsored research and development:
Ono............................................... $ 2,798 $ 3,500 $ 2,677
SB................................................ 653 2,550 --
Related parties (Note 3).......................... -- 1,372 1,463
Technology license revenue (Note 3).................. -- -- 1,000
---------- ---------- ----------
Total revenues............................... 3,451 7,422 5,140
---------- ---------- ----------
EXPENSES:
Research and development (Notes 2 and 7)............. 7,552 11,339 18,551
General and administrative........................... 3,616 3,614 4,695
---------- ---------- ----------
Total expenses............................... 11,168 14,953 23,246
---------- ---------- ----------
Operating loss............................... (7,717) (7,531) (18,106)
---------- ---------- ----------
Interest income........................................ 939 1,192 1,685
---------- ---------- ----------
NET LOSS............................................... $ (6,778) $ (6,339) $ (16,421)
========== ========== ==========
Basic net loss per share (Note 2).................... $ (0.37) $ (0.35) $ (0.92)
========== ========== ==========
Weighted average common shares outstanding (Note
2)................................................ 18,521,758 18,224,818 17,753,626
========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-4
150
CORTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL
------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL COMPENSATION DEFICIT
---------- ------ -------- ---------- ------------ -----------
BALANCES, December 31, 1994.............. 17,725,504 $35 $3,407 $94,925 $(193) $(55,101)
Reversal of deferred compensation in
connection with resignation of two
directors............................ -- -- -- (13) 13 --
Exercise of common stock options for
cash at $1.75 to $2.60 per share..... 41,454 -- -- 74 -- --
Amortization of deferred
compensation......................... -- -- -- -- 83 --
Issuance of common stock to consultant
for services valued at $2.59 per
share................................ 9,638 -- -- 25 -- --
Issuance of common stock at $1.91 to
$2.31 per share pursuant to employee
stock purchase plan.................. 46,860 1 -- 89 -- --
Compensation expense related to common
stock option issuances............... -- -- -- 53 -- --
Net loss............................... -- -- -- -- -- (16,421)
---------- --- ------ ------- ----- --------
BALANCES, December 31, 1995.............. 17,823,456 36 3,407 95,153 (97) (71,522)
Exercise of common stock options for
cash at $1.75 to $2.875 per share.... 474,033 1 -- 828 -- --
Amortization of deferred
compensation......................... -- -- -- -- 57 --
Issuance of common stock at $1.33,
$1.91, $2.55 and $2.18 per share
pursuant to employee stock purchase
plan................................. 20,590 -- -- 37 -- --
Issuance of common stock options in
exchange for termination of royalty
obligation valued at $1.00 per
share................................ -- -- -- 78 -- --
Issuance of common stock in exchange
for termination of right of first
offer valued at $2.44 per share...... 200,000 -- -- 486 -- --
Expiration of certain CDC warrants..... -- -- (1,077) 1,077 -- --
Net loss............................... -- -- -- -- -- (6,339)
---------- --- ------ ------- ----- --------
BALANCES, December 31, 1996.............. 18,518,079 37 2,330 97,659 (40) (77,861)
Reversal of deferred compensation in
connection with resignation of a
director and other................... -- -- -- (7) 3 --
Amortization of deferred
compensation......................... -- -- -- -- 36 --
Issuance of common stock at $0.66 per
share pursuant to employee stock
purchase plan........................ 5,839 -- -- 4 -- --
Contribution of certain warrants....... -- -- (175) 175 -- --
Expiration of certain CDC warrants..... -- -- (1,078) 1,078 -- --
Net loss............................... -- -- -- -- -- (6,778)
---------- --- ------ ------- ----- --------
BALANCES, December 31, 1997.............. 18,523,918 $37 $1,077 $98,909 $ (1) $(84,639)
========== === ====== ======= ===== ========
The accompanying notes to financial statements are an integral part of these
statements.
F-5
151
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (6,778) $ (6,339) $(16,421)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,545 2,093 4,344
Issuance of stock in exchange for termination of right
of first offer....................................... -- 486 --
Issuance of common stock for services.................. -- -- 25
Loss on disposition of equipment....................... 530 14 52
Research and compensation expense related to grant of
options, including amortization of deferred
compensation......................................... 32 137 149
Decrease (increase) in prepaid expenses and other...... 537 (435) (6)
(Increase) decrease in accounts payable................ (80) 75 (1,387)
(Decrease) increase in advances from corporate
partner.............................................. (928) 964 --
Increase (decrease) in accrued liabilities, accrued
vacation and other compensation...................... 35 (97) (13)
(Decrease) increase in unearned income................. (1,323) 750 573
-------- -------- --------
Net cash used in operating activities............. (6,430) (2,352) (12,684)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (39) (690) (601)
Proceeds from sales of property and equipment............. 890 7 --
Purchases of short-term investments....................... (15,505) (18,587) (34,477)
Sales of short-term investments........................... 24,850 22,354 41,465
-------- -------- --------
Net cash provided by investing activities......... 10,196 3,084 6,387
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 4 37 90
Proceeds from exercise of common stock options............ -- 829 74
-------- -------- --------
Net cash provided by financing activities......... 4 866 164
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,770 1,598 (6,133)
CASH AND CASH EQUIVALENTS, beginning of period.............. 7,792 6,194 12,327
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 11,562 $ 7,792 $ 6,194
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Contribution of 562,576 warrants to the Company........... $ 175 $ -- $ --
======== ======== ========
The accompanying notes to financial statements are an integral part of these
statements.
F-6
152
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION
Cortech, Inc. ("Cortech" or the "Company") is a biopharmaceutical company
whose principal focus has been the discovery and development of novel
therapeutics for the treatment of inflammatory disorders. The Company has
directed its research and development efforts towards protease inhibitors and
bradykinin antagonists. Due to the termination of the Company's collaborative
agreements and the resulting corporate downsizings, the Company no longer has
the scientific staff that would be required to continue its research and
development activities on-site. Such on-site research and development activities
were terminated in late 1997. However, Cortech has retained a core staff of
professionals who are engaged primarily in ongoing efforts to realize
appropriate value out of Cortech's tangible and intangible assets. Cortech is
also decommissioning its laboratories, has sold most of its scientific and
technical equipment and, unless the merger discussed below is implemented and
BioStar, Inc. ("BioStar") elects to retain such assets, plans to sell most of
its office furniture and equipment, and, where possible, its leasehold
improvements.
The Company announced in December 1997, that a definitive merger agreement
was signed with BioStar, Inc. ("BioStar") of Boulder, Colorado. BioStar
develops, manufactures and markets point-of-care diagnostic tests using its
proprietary, highly-sensitive, thin film technologies. BioStar's current
products employ its Optical Immuno Assay (OIA(R)) technology, a thin film,
platform technology developed for the rapid detection of a variety of medical
conditions. Under the agreement, and pursuant to the merger transaction
contemplated thereby (the "Merger"), Cortech would issue up to 28,500,000 shares
of its common stock to BioStar's stockholders in exchange for all of the equity
interests in BioStar and BioStar would become a wholly-owned subsidiary of the
Company. The relative ownership of the merged entity would be held approximately
40% by Cortech shareholders and approximately 60% by BioStar shareholders
(assuming the exercise in full of all options and warrants to be assumed by
Cortech in connection with the Merger). Accordingly, the Merger would be
accounted for as a reverse acquisition. The transaction, which is subject to
approval by the stockholders of both companies as well as other closing
conditions, is anticipated to be completed in the second quarter of 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
For purposes of the statements of cash flows, the Company generally
considers all highly liquid debt instruments with an original maturity of less
than three months to be cash equivalents. Cash equivalents consist of government
obligations or investments collateralized by government obligations. Short-term
investments are carried at cost plus accrued interest, which approximates market
value, and consist entirely of United States government obligations.
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company's short-term
investments are classified as available-for-sale. These securities mature on
various dates through February 1998. At December 31, 1997, these securities had
an amortized cost of $3.8 million, which approximated fair market value.
F-7
153
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Depreciation of property and equipment is provided on the straight-line
method over estimated useful lives of three to seven years. Amortization of
leasehold improvements is provided on the straight-line method over the expected
lease terms, which currently do not exceed two years.
Betterments, renewals and extraordinary repairs that extend the life of an
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition recognized in income.
The Company's policy is to depreciate its property and equipment over its
remaining useful life and to evaluate the remaining life and recoverability of
such property and equipment in light of current conditions. During 1997, the
Company recorded a restructuring charge of approximately $1.7 million, which
included a $580,000 permanent impairment of the value of the Company's
scientific and office equipment. The Company sold the majority of its scientific
and office equipment to an unrelated third party during the fourth quarter. The
restructuring charge is included in research and development expense ($1.4
million) and general and administrative expense ($349,000) in the accompanying
statements of operations.
Research and Development Expenses
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company. As discussed in Note 1,
on-site research and development activities were terminated by the Company in
the fourth quarter of 1997.
Sponsored Research and Development Revenue
The Company recognizes revenue from sponsored research and development as
research activities are performed or as development milestones are completed
under the terms of the research and development agreements. Costs incurred in
connection with the performance of sponsored research and development are
expensed as incurred and were approximately $2,882,000, $8,258,000, and
$4,140,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Such costs are included in research and development expense in the accompanying
statements of operations.
Basic Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
the Company is required to adopt for the year ended December 31, 1997. SFAS No.
128 requires restatement of amounts previously reported as net loss per share.
Application of SFAS No. 128 did not have an impact on previously reported net
loss per share amounts.
Income Taxes
The Company follows the provisions of SFAS No. 109 "Accounting for Income
Taxes" which requires the recognition of deferred tax assets and liabilities
related to the expected future tax consequences of events that have been
recognized in the Company's financial statements and tax returns. However, if it
is more likely than not that some portion or all of the net deferred tax assets
will not be realized, a valuation allowance is established and the tax benefit
is not recognized in the statements of operations.
F-8
154
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 was paid in March 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 has assumed all responsibilities for research
activities during the final six months of the collaborative project, which will
terminate on March 14, 1998. As a result of this reallocation of
responsibilities, Ono is 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 will have an exclusive, royalty-free
license to make, use and sell a resulting product in Japan, Korea, Taiwan and
China. Cortech has retained all other rights.
Hoechst Marion Roussel, Inc.("HMRI")
The Company had an agreement with HMRI whereby HMRI funded certain research
and development being conducted by the Company. In December 1996, HMRI
terminated the agreement and returned all rights to Cortech. No further funding
was provided by HMRI in 1997 and none will be provided in the future.
HMRI accounted for $1,372,000 and $1,463,000 of the Company's sponsored
research and development revenues for the years ended December 31, 1996, and
1995, respectively.
In return for providing this research funding, the Company granted HMRI
warrants to purchase common stock of the Company (Note 4). The Company records
any cash received in connection with the issuance of the warrants as a component
of equity in the accompanying financial statements. In October 1997, HMRI sold
the warrants to an unrelated third party who subsequently contributed them to
the capital of the Company. Also during October 1997, HMRI sold all Cortech
common stock held by HMRI to the same unrelated third party.
In August 1996, the Company issued 200,000 shares of unregistered common
stock to HMRI to purchase the "right of first offer" it had previously granted
to HMRI. The right of first offer, granted as part of a transaction between the
parties entered into in February 1988, had covered all new technologies
developed by the Company.
SmithKline Beecham("SB")
In November 1995, Cortech entered into a worldwide product development and
license agreement with SB for the development of Bradycor. In March 1997, SB and
the Company agreed to terminate their collaboration when a Phase II trial of
Bradycor in patients with traumatic brain injury failed to demonstrate a
statistically significant effect of the compound on intracranial pressure, the
primary endpoint of the trial. SB made a one-time payment to Cortech of $1.0
million for an exclusive license to Bradycor in 1995, and paid Cortech $4.0
million during 1996. No payments were received in 1997 and Cortech expects no
further payments from SB under the agreement.
F-9
155
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 2,000,000 shares of $.002 par value
preferred stock which may be issued with various terms in one or more series, as
the Board of Directors may determine.
On June 2, 1995, the Company's Board of Directors approved the adoption of
a Preferred Share Rights plan under which stockholders received one Right to
purchase one one-hundredth of a share of Series A Junior Participating Preferred
Stock ("Junior Preferred Stock") for each outstanding share of Cortech common
stock of record held at the close of business on June 26, 1995. The rights were
distributed as a non-taxable dividend and will expire in June 2005. The rights
would separate from shares of Cortech common stock and become exercisable at
$20.00 each, subject to future adjustment, only if a person or group acquires 15
percent or more of the Cortech common stock. Cortech's Board of Directors may
terminate the plan or redeem the rights, at a nominal redemption price, prior to
the time a person acquires more than 15 percent of the Cortech common stock. The
Company has designated 500,000 shares of its Preferred Stock as Junior Preferred
Stock.
Stock Option Plans
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This new standard
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments based on a
fair-value method of accounting.
Companies that do not choose to 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 pro
forma 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 adopted the disclosure provisions of SFAS No. 123 for the years
ended December 31, 1997, 1996 and 1995. The Company will continue to follow the
accounting provisions of APB No. 25 for stock-based compensation and will
furnish the pro forma disclosures required under SFAS No. 123.
At December 31, 1997, the Company has four stock option plans, which are
described below. 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 loss and loss per share would have been increased to the
pro forma amounts indicated below:
1997 1996 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic net loss -- as reported............ $(6,778) $(6,339) $(16,421)
Basic net loss -- pro forma.............. $(7,577) $(7,005) $(16,887)
Basic loss per share -- as reported...... $ (0.37) $ (0.35) $ (0.92)
Basic loss per share -- pro forma........ $ (0.41) $ (0.38) $ (0.95)
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 1,500,000 shares of common stock. Although 407,100 shares were available
under the 1986 Plan as of December 19, 1997, on such date the Board of
F-10
156
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. Such suspension shall remain in effect
pending the proposed Merger and other actions to be considered for approval by
the Company's stockholders in connection with such Merger.
The Company's 1993 Equity Incentive Plan ("1993 Plan"), approved by the
stockholders on May 10, 1994, authorizes the issuance of 1,700,000 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, 1997,
generally become exercisable in varying amounts over a five-year period from the
date of grant. Although 370,845 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 figure as of
such date. Such suspension shall remain in effect pending the proposed Merger
and other actions to be considered for approval by the Company's stockholders in
connection with such Merger.
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 become exercisable and determine when 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 of 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 (the proposed Merger would not effect such an acceleration).
ISOs may not be granted at an exercise price of less than the fair market
value of the common stock at the date of grant. If an ISO is granted to an
employee who owns more than 10% of the Company's total voting stock, such
exercise price shall be at least 110% of fair market value of the common stock,
and the ISO shall not be exercisable until after five years from the date of
grant. The exercise price of each NSO may not be less than 85% of the fair
market value of the common stock at the date of grant. The ISOs outstanding as
of December 31, 1997, 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, 1997.
During 1991, a Nonemployee Directors' Stock Option Plan was approved which
authorized the grant of stock options to purchase up to 150,000 shares of common
stock to the nonemployee directors of the Company. The exercise price of the
options is equal to the fair market value of the shares on the date of grant,
which is generally the later of initiation of the plan or the date of election
to the Board of Directors. In March 1993, the Board of Directors suspended
further grants under this plan. Vesting of the options occurred upon the
participation by a director in a Board meeting. As of December 31, 1997, options
to purchase 108,000 shares of common stock had been granted and were fully
vested. Such options were granted at exercise prices ranging from $1.75 to $2.60
per share. The Company recorded the difference between the fair market value of
the underlying common stock and the exercise price as compensation expense on
the date the options vested.
The Company's 1992 Nonemployee Directors' Stock Option Plan authorizes the
granting of options to purchase up to 400,000 shares of common stock to the
nonemployee directors of the Company. The plan was originally approved by the
stockholders on May 17, 1993, and an amendment to the plan was approved by the
stockholders on May 10, 1994. During 1997, 1996 and 1995, respectively, options
to purchase 27,500, 28,750, and 36,000 shares of common stock were granted to
nonemployee directors. During 1994, in order to effect a repricing of certain of
these options, options to purchase 162,250 shares of common stock were amended
to
F-11
157
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
become options to purchase 148,535 shares of common stock at an exercise price
of $1.75 per share. The amended options generally become exercisable from one to
two years later than as originally granted. The Company recorded deferred
compensation in 1993 of approximately $114,000 based on the amount that the fair
market value of the Company's common stock exceeded the exercise price on the
date the options were approved by the stockholders. The Company began in July
1993 to amortize such deferred compensation over approximately five years and
has recorded compensation expense of approximately $6,000, $15,000, and $18,000
in 1997, 1996 and 1995, respectively. There are currently options to purchase
190,535 shares of common stock outstanding under the plan at exercise prices
ranging from $1.47 to $8.75 per share. By its terms, the plan terminated on
December 31, 1997 (although such event does not affect outstanding options
granted under the plan).
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
---- ----- -----
Expected Life (years)....................................... 1.0 8.7 7.0
Interest Rate............................................... 5.54% 6.13% 5.38%
Volatility.................................................. 93.1% 111.1% 117.6%
A summary of the status of the Company's 1986 plan, 1993 plan and
nonemployee directors' stock option plans as of December 31, 1997, 1996 and 1995
and changes during the years ending on those dates is presented below:
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- --------- ---------------- --------- ---------------- --------- ----------------
Outstanding at beginning
of year............... 2,442,701 $2.08 2,611,602 $2.02 2,270,748 $2.58
Granted............... 46,800 $1.39 489,345 $1.99 813,779 $2.13
Exercised............. -- -- (458,133) $1.74 (41,454) $1.79
Forfeited/Cancelled... (489,992) $2.08 (200,113) $2.05 (431,471) $2.99
--------- --------- ---------
Outstanding at end of
year.................. 1,999,509 $2.06 2,442,701 $2.08 2,611,602 $2.02
========= ========= =========
Options exercisable at
year-end.............. 1,441,568 $2.09 1,278,836 $2.08 1,095,860 $1.92
========= ========= =========
Weighted-average fair
value of options
granted during the
year.................. $ 0.52 $ 1.78 $ 1.92
The Company has granted other options to certain directors and consultants:
1997 1996 1995
-------------------------- -------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ------- ---------------- ------- ---------------- -------- ----------------
Outstanding at beginning of
year...................... 160,584 $3.92 141,734 $4.16 381,484 $4.13
Granted................... -- -- 38,750 $1.25 -- --
Exercised................. -- -- (15,900) $1.80 -- --
Forfeited/Cancelled....... (15,000) $6.00 (4,000) $2.60 (239,750) $3.99
------- ------- --------
Outstanding at end of
year...................... 145,584 $3.71 160,584 $3.92 141,734 $4.16
======= ======= ========
Options exercisable at
year-end.................. 131,755 $3.86 137,002 $4.27 135,027 $4.44
======= ======= ========
Weighted-average fair value
of options granted during
the year.................. -- $ 2.73 --
F-12
158
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ .69 - $1.00............ 24,000 8.41 $0.95 20,000 $1.00
$1.38 - $2.00............ 1,273,654 7.26 $1.73 942,217 $1.75
$2.06 - $3.00............ 772,483 6.95 $2.53 541,150 $2.55
$3.06 - $3.75............ 25,372 6.81 $3.50 20,372 $3.49
$8.00 - $8.75............ 49,584 4.31 $8.06 49,584 $8.06
--------- ---------
2,145,093 1,573,323
========= =========
During 1992, the Company granted options to purchase 50,000 shares of the
Company's common stock at $2.60 per share to the former president of the
Company. These options began vesting upon the occurrence of certain events. The
Company recorded $170,000 in deferred compensation based on the difference
between the fair value of the underlying common stock on the date the specified
event occurred and the exercise price of $2.60 per share. Deferred compensation
is being amortized over the applicable vesting periods. In connection with these
options, the Company has recorded amortization expense of approximately $20,000
in 1997 and $34,000 in each of 1996 and 1995.
Stock Purchase Plan
In December 1992, the Board of Directors approved an employee stock
purchase plan. Under the terms of the plan, 300,000 shares of the Company's
common stock have been authorized for purchase by eligible employees as
specified by the Board of Directors. Eligible employees shall be granted the
right to purchase shares with a percentage of such employees' earnings at the
lesser of 85% of the fair market value of the common stock on the offering date
or exercise date. Under the plan, employees purchased 5,839 shares of the
Company's common stock in 1997 at $0.66 per share; 20,590 shares in 1996 at
$1.33, $1.91, $2.55 and $2.18 per share and 46,860 shares in 1995 at $1.91,
$2.18 and $2.31 per share. In November 1997, the employee stock purchase plan
was effectively suspended pending further action by the Board of Directors.
For disclosure purposes under SFAS No. 123, compensation cost is recognized
for the fair value of the employees' purchase rights, which was estimated using
the Black-Scholes model with the following assumptions.
1997 1996 1995
---- ----- -----
Expected Life (years)....................................... 1.0 1.0 1.0
Interest Rate............................................... 5.54% 6.13% 5.38%
Volatility.................................................. 93.1% 111.1% 117.6%
The weighted-average fair value of those purchase rights granted in 1997,
1996 and 1995 was $0.33, $1.49 and $1.59, respectively.
F-13
159
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
Warrants to purchase shares of the Company's common stock, are as follows:
NUMBER OF SHARES
------------------------------------
EXERCISE PRICE DIRECTORS
PER SHARE AND OFFICERS OTHERS TOTAL
-------------- ------------ --------- ---------
Outstanding and exercisable at December 31,
1995....................................... $ 4.00-$10.00 20,889 1,736,219 1,757,108
Expired.................................... $ 4.00-$ 6.00 -- (477,344) (477,344)
------- --------- ---------
Outstanding and exercisable at December 31,
1996....................................... $ 4.00-$10.00 20,889 1,258,875 1,279,764
Expired.................................... $ 4.00-$ 8.00 (20,889) (904,031) (924,920)
------- --------- ---------
Outstanding and exercisable at December 31,
1997....................................... $10.00 -- 354,844 354,844
======= ========= =========
The remaining warrants expire on December 31, 1998 (Note 7).
Registration Rights
Investors in the CP-0127 Development Corporation ("CDC") offering (Note 7)
are entitled to certain piggyback registration rights with respect to shares of
common stock they hold or may acquire on exercise of the warrants received in
the CDC offering or the common stock which may be used by the Company to
exercise its option to repurchase the CDC shares. At December 31, 1997, CDC
investors owned 750 shares of Cortech common stock and owned warrants for the
purchase of 354,844 common shares. Furthermore, 219,689 common shares acquired
through the exercise of warrants carry similar piggyback registration rights.
(5) INCOME TAXES
As of December 31, 1997, the Company has approximately $77.2 million of net
operating loss ("NOL") carry forwards for income tax purposes and approximately
$2.9 million of research and development tax credits available to offset future
federal income tax, subject to limitations for alternative minimum tax. The NOLs
and credit carry forwards are subject to examination by the tax authorities and
expire in various years from 1998 through 2012, with approximately $74.3 million
of the NOL and $2.7 million of the credits expiring from 2005 through 2012.
The components of the net deferred income tax asset at December 31, 1997
and 1996 were as follows:
INCREASE
1997 (DECREASE) 1996
------------ ----------- ------------
Net operating loss carry forwards.......... $ 29,998,000 $ 2,418,000 $ 27,580,000
Research and development credits........... 2,880,000 45,000 2,835,000
Depreciation expense....................... 2,358,000 224,000 2,134,000
Compensated absences....................... 25,000 (45,000) 70,000
Less: Valuation allowance.................. (35,261,000) (2,642,000) (32,619,000)
------------ ----------- ------------
$ -- $ -- $ --
============ =========== ============
The Company has not yet achieved profitable operations. Accordingly,
management believes the deferred tax assets as of December 31, 1997 and 1996, 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 benefit provision for income taxes in
its statements of operations. The difference between the Company's recorded
income tax benefit and that computed by applying the statutory Federal income
tax rate
F-14
160
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to its net loss before income taxes is due primarily to the valuation allowance
established to offset the Company's net deferred tax asset. The valuation
allowance increased $2.6 million in 1997 due primarily to increases in the
Company's net operating losses and research and development credits.
Included in the net operating loss carry forward 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 to additional
paid-in capital when realized.
The Tax Reform Act of 1986 contains provisions that may limit the NOL and
credit carry forwards available to be used in any given year upon the occurrence
of certain events, including significant changes in ownership interest. A change
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
credits from tax periods prior to the ownership change. Due to changes in
ownership that took place in 1993 and changes that would take place upon the
proposed Merger (see Note 1), the Company's use of operating loss and tax credit
carry forwards is subject to such limitations.
(6) COMMITMENTS
The Company has various noncancellable operating leases for its office and
laboratory space. Rent expense for these facilities was approximately $427,000,
$443,000, and $585,000 in 1997, 1996 and 1995, respectively. Future minimum cash
obligations under these leases are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998.................................. $201,000
1999.................................. 25,000
-----------
$226,000
===========
(7) CP-0127 DEVELOPMENT CORPORATION
In February 1992, the Company completed a private placement of 709,687
units (as discussed below) to unrelated third parties representing total
subscriptions of approximately $8,516,000. Under the terms of the subscription
agreements, one third of the total amount subscribed was paid at closing
(approximately $2,839,000); one third was paid April 30, 1992; and the final
installment was paid July 31, 1992. Each unit was comprised of one share of CDC
common stock and three warrants, of which one warrant expired on December 31,
1996 and one warrant expired on December 31, 1997. Each remaining warrant
represents the right to purchase one half of one share of the Company's common
stock for $10.00 per share and expires on December 31, 1998 (Note 4). The net
proceeds received by CDC have been allocated to CDC as consideration for its
common stock and to the Company for the issuance of the warrants in the amounts
of approximately $5,284,000 and $3,232,000, respectively. Such allocation was
based on the relative fair market value of the Company's warrants and the CDC
common stock. In connection with the formation of CDC, the Company granted to
CDC, under the terms of a technology license agreement, an exclusive license to
certain technology for human pharmaceutical use within the United States, Canada
and Europe for $1,000,000. CDC, in turn, granted to Cortech a world-wide
exclusive right and license to the technology that is developed by Cortech.
CDC has 709,687 common shares issued and outstanding at December 31, 1997.
All such stockholders acquired their shares through the purchase of the above
units.
In connection with the technology license agreement referred to above, the
Company entered into a research and development agreement with CDC whereby the
Company performed research and development activities to further develop the
licensed technology and was paid for such services on a cost reimbursement
basis. CDC also paid the Company for its allocable share of certain overhead
costs. The cost to fully develop
F-15
161
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the licensed technology has exceeded the research and development funding
provided by CDC. Such additional costs have been and would continue to be borne
by the Company and/or its corporate partners. As of December 31, 1997, the
Company was not engaged in active development of any compounds covered by the
license agreement. The Company would be responsible for manufacturing and
marketing of CDC's products, if any, in the United States, Canada and Europe and
would be required to make royalty payments to CDC based on future product
revenues, if any, subject to the purchase option discussed below.
The Company has been granted an option by the purchasers of the CDC common
stock to purchase all, but not less than all, of the 709,687 shares of CDC
common stock outstanding. The purchase option is exercisable at any date before
December 31, 1998, and is based on an exercise price of $75.40 per share of CDC
common stock in 1998. The option may be exercised in cash, common stock of the
Company or any combination thereof.
The Company's chief executive officer is also an officer of CDC. In
addition, the Company's chief executive officer and one of the Company's
directors are also directors of CDC.
(8) EMPLOYEE RETIREMENT PLAN
The Company provides a defined contribution 401(k) plan for eligible
employees. Employee contribution to the plan is voluntary. In 1994, the Company
voluntarily began contributing an amount equal to 25% of a covered employee's
contribution to a maximum of 1% of compensation. The Company's contributions to
the plan totaled $21,000 in 1997, $32,000 in 1996 and $45,000 in 1995.
F-16
162
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BioStar, Inc.
We have audited the accompanying balance sheets of BioStar, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioStar, Inc. at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 12, 1998
F-17
163
BIOSTAR, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31
----------------------------
1997 1996
------------ ------------
Current assets:
Cash...................................................... $ 1,281 $ 87,472
Trade accounts receivable, net of allowance for doubtful
accounts of $100,000 for 1997 and $125,318 for 1996..... 1,663,427 1,442,477
Other receivables......................................... 126,403 160,538
Inventories (Note 3)...................................... 1,412,710 1,650,476
Prepaid expenses.......................................... 159,248 184,785
------------ ------------
Total current assets............................... 3,363,069 3,525,748
------------ ------------
Property and equipment:
Laboratory and manufacturing equipment.................... 3,040,311 2,521,747
Office equipment.......................................... 518,433 415,239
Furniture and fixtures.................................... 98,778 166,815
Leasehold improvements.................................... 123,304 109,695
------------ ------------
3,780,826 3,213,496
Accumulated depreciation and amortization................. (1,624,166) (1,606,300)
------------ ------------
2,156,660 1,607,196
------------ ------------
Patents and trademarks:
Purchased patents......................................... 920,431 920,431
Deferred patent and trademark costs....................... 814,650 641,538
------------ ------------
1,735,081 1,561,969
Accumulated amortization.................................. (1,159,474) (1,031,281)
------------ ------------
575,607 530,688
------------ ------------
Other assets................................................ 234,125 118,133
------------ ------------
Total assets....................................... $ 6,329,461 $ 5,781,765
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 1,217,909 $ 955,635
Accrued compensation...................................... 879,662 594,526
Accrued liabilities....................................... 320,715 306,185
Deferred revenue.......................................... 165,843 25,000
Note payable.............................................. 251,301 --
Current portion of capital lease obligations (Note 7)..... 374,072 518,031
Current portion of subordinated debt (Note 6)............. 747,047 596,427
Line of credit (Note 6)................................... 1,000,000 450,000
Subordinated promissory notes (Note 6).................... 1,565,050 --
------------ ------------
Total current liabilities.......................... 6,521,599 3,445,804
------------ ------------
Total long-term liabilities................................. 5,420,603 6,109,082
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' deficit (Note 4):
Convertible preferred stock, $.0001 par value, 20,327,784
shares authorized, 15,605,320 shares issued and
outstanding in 1997 (15,559,606 in 1996)................ 1,561 1,556
Common stock, $.0001 par value, 41,644,443 shares
authorized, 1,963,708 shares issued and outstanding in
1997 (2,402,755 in 1996)................................ 196 240
Additional paid-in capital................................ 20,207,268 20,232,433
Accumulated deficit....................................... (25,821,766) (23,888,517)
Less treasury stock at cost, 0 shares in 1997 (516,667 in
1996)................................................... -- (118,833)
------------ ------------
Total stockholders' deficit........................ (5,612,741) (3,773,121)
------------ ------------
Total liabilities and stockholders' deficit........ $ 6,329,461 $ 5,781,765
============ ============
See accompanying notes.
F-18
164
BIOSTAR, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Net sales.......................................... $10,829,631 $11,589,030 $ 9,529,535
Contract revenues.................................. 5,027,930 778,148 61,497
----------- ----------- -----------
Total revenue...................................... 15,857,561 12,367,178 9,591,032
Operating costs and expenses:
Cost of sales.................................... 4,924,467 5,066,519 3,723,414
Research and development......................... 3,235,601 2,345,169 1,417,924
Sales and marketing.............................. 6,179,280 6,241,660 7,726,880
General and administrative....................... 2,661,633 1,885,449 1,346,985
----------- ----------- -----------
Total operating costs and expenses................. 17,000,981 15,538,797 14,215,203
----------- ----------- -----------
Loss from operations............................... (1,143,420) (3,171,619) (4,624,171)
----------- ----------- -----------
Other income (expense):
Royalties and miscellaneous...................... 93,882 50,544 103,653
Interest income.................................. 4,182 28,821 61,124
Interest expense................................. (887,893) (730,859) (343,781)
----------- ----------- -----------
Total other expense, net........................... (789,829) (651,494) (179,004)
----------- ----------- -----------
Net loss........................................... $(1,933,249) $(3,823,113) $(4,803,175)
=========== =========== ===========
Basic and diluted net loss per share............... $ (1.00) $ (2.23) $ (2.55)
=========== =========== ===========
Weighted average shares outstanding................ 1,935,341 1,710,914 1,881,477
=========== =========== ===========
See accompanying notes.
F-19
165
BIOSTAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE TREASURY STOCK
PREFERRED STOCK COMMON STOCK ADDITIONAL AT COST
------------------- ------------------ PAID-IN ACCUMULATED -------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
---------- ------ --------- ------ ----------- ------------ -------- --------
Balance at December 31, 1994.......... 15,559,606 $1,556 1,829,089 $183 $20,129,436 $(15,262,229) -- $ --
Purchase of treasury stock............ -- -- -- -- -- -- (516,667) (118,833)
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. -- -- 247,925 25 37,362 -- -- --
Net loss.............................. -- -- -- -- -- (4,803,175) -- --
---------- ------ --------- ---- ----------- ------------ -------- --------
Balance at December 31, 1995.......... 15,559,606 1,556 2,077,014 208 20,166,798 (20,065,404) (516,667) (118,833)
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. -- -- 325,741 32 65,635 -- -- --
Net loss.............................. -- -- -- -- -- (3,823,113) -- --
---------- ------ --------- ---- ----------- ------------ -------- --------
Balance at December 31, 1996.......... 15,559,606 1,556 2,402,755 240 20,232,433 (23,888,517) (516,667) (118,833)
Issuance of preferred stock to Lehman
Brothers Inc........................ 45,714 5 -- -- 79,995 -- -- --
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. -- -- 77,620 8 13,621 -- -- --
Retirement of treasury stock.......... -- -- (516,667) (52) (118,781) -- 516,667 118,833
Net loss.............................. -- -- -- -- -- (1,933,249) -- --
---------- ------ --------- ---- ----------- ------------ -------- --------
Balance at December 31, 1997.......... 15,605,320 $1,561 1,963,708 $196 $20,207,268 $(25,821,766) -- $ --
========== ====== ========= ==== =========== ============ ======== ========
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance at December 31, 1994.......... $ 4,868,946
Purchase of treasury stock............ (118,833)
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. 37,387
Net loss.............................. (4,803,175)
-----------
Balance at December 31, 1995.......... (15,675)
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. 65,667
Net loss.............................. (3,823,113)
-----------
Balance at December 31, 1996.......... (3,773,121)
Issuance of preferred stock to Lehman
Brothers Inc........................ 80,000
Issuance of common stock upon exercise
of stock options and stock
bonuses............................. 13,629
Retirement of treasury stock.......... --
Net loss.............................. (1,933,249)
-----------
Balance at December 31, 1997.......... $(5,612,741)
===========
See accompanying notes.
F-20
166
BIOSTAR, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss............................................ $(1,933,249) $(3,823,113) $(4,803,175)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment...................................... 763,121 732,252 452,010
Amortization of patents and trademarks............ 128,193 67,479 183,999
Deferred rent credit.............................. (38,993) (30,068) (21,401)
Changes in operating assets and liabilities:
Trade accounts receivable...................... (220,950) 200,522 (729,896)
Other receivables.............................. 34,135 (78,508) (35,650)
Inventories.................................... 237,766 (122,527) (414,949)
Prepaid expenses............................... 25,537 45,745 (110,435)
Other assets................................... (35,992) (10,918) (30,779)
Accounts payable............................... 262,274 143,185 359,806
Accrued liabilities............................ 912,144 511,211 (25,167)
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ 133,986 (2,364,740) (5,175,637)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of marketable securities.................. -- -- (2,305,400)
Sales of marketable securities...................... -- -- 3,525,461
Purchase of property and equipment.................. (1,012,460) (379,488) (643,250)
Capitalized patent and trademark costs.............. (173,112) (101,792) (152,694)
Note receivable from officer........................ -- 106,167 --
----------- ----------- -----------
Net cash provided by (used in) investing
activities........................................ (1,185,572) (375,113) 424,117
----------- ----------- -----------
FINANCING ACTIVITIES
Issuance of common stock............................ 13,629 65,667 37,387
Issuance of subordinated debt....................... -- -- 2,500,000
Payments on subordinated debt....................... (596,427) (248,483) (408,043)
Issuance of convertible subordinated debt........... -- 3,000,000 1,000,000
Issuance of subordinated promissory notes........... 1,565,050 -- --
Payments on note payable............................ (48,824) -- --
Proceeds from line of credit........................ 2,931,732 500,000 1,070,000
Payments on line of credit.......................... (2,381,732) (970,000) (150,000)
Proceeds from sale-leaseback transactions........... -- 81,718 385,166
Payments on capital lease obligations............... (518,033) (572,940) (412,211)
----------- ----------- -----------
Net cash provided by financing activities........... 965,395 1,855,962 4,022,299
----------- ----------- -----------
Net decrease in cash................................ (86,191) (883,891) (729,221)
Cash at beginning of year........................... 87,472 971,363 1,700,584
----------- ----------- -----------
Cash at end of year................................. $ 1,281 $ 87,472 $ 971,363
=========== =========== ===========
F-21
167
BIOSTAR, INC.
STATEMENTS OF CASH FLOWS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred no capital lease obligations in 1997 and obligations
of $208,136 and $115,515 in 1996 and 1995, respectively, in connection with
Master Lease Agreements in which the lessors paid vendors directly for the
Company to acquire equipment and furniture and fixtures.
The Company paid interest of approximately $292,000, $371,000, and $342,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
In 1997, the Company purchased manufacturing equipment for $687,250, of
which $300,125 was financed with a note from the manufacturer, payable in
installments over 12 months.
In 1997, the Company issued 45,714 shares of Series E Preferred Stock to
Lehman Brothers Inc. in exchange for consulting services in connection with the
proposed merger discussed in Note 2.
In connection with issuance of Convertible Subordinated Notes in 1996,
$500,000 of subordinated debt was converted to convertible subordinated debt.
In 1995, the Company received shares of common stock for payment of
principal and interest of $118,833 on the note receivable from an officer.
See accompanying notes.
F-22
168
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Purpose
BioStar develops, manufactures and markets point-of-care diagnostic tests
using its proprietary highly-sensitive, thin film technologies. BioStar's
current products employ its Optical ImmunoAssay ("OIA(R)") technology, a thin
film, platform technology developed for the rapid detection of a variety of
medical conditions. BioStar's OIA tests help caregivers, in a cost-effective and
efficient manner, to identify causes of illness and select appropriate patient
therapy by providing information during the initial patient encounter.
Internally and through collaborative arrangements, BioStar is developing
additional thin film technologies which are intended to broaden the range of
applications for its existing products and to enable the introduction of new
products.
The Company was formed on June 17, 1992 pursuant to the purchase of the
assets and assumption of certain liabilities of BioStar Medical Products, Inc.
("BMPI") from the BMPI Liquidating Trust (the "Trust") under an Asset Purchase
Agreement (the "Purchase Agreement"). In conjunction with the transaction, the
Company issued to the Trust a Convertible Contingent Payment Instrument (the
"CCPI"), which will be canceled immediately prior to the effective date of the
proposed merger (see Note 2).
At December 31, 1997 and 1996, all trade accounts receivable were due from
customers in the health care industry. Substantially all of these customers are
physicians, clinics, universities, hospitals and laboratories located in the
United States. Credit losses relating to these customers have been within
management's expectations. The Company does not require collateral from its
customers. Sales of Group A strep products accounted for 83% of gross sales in
1997 and 1996, and 93% of gross sales in 1995.
Liquidity and Management Plans
The Company incurred a net loss of $1,933,249 for the year ended December
31, 1997 and has an accumulated deficit of $25,821,766. In addition, the Company
had a net capital deficiency of $5,612,741 at December 31, 1997. As is more
fully described in Note 2, BioStar and Cortech, Inc. ("Cortech") have entered
into an Agreement and Plan of Merger and Reorganization. Cortech's principal
assets are cash and short-term investments which amounted to $15,403,000 at
December 31, 1997. If the merger is not successfully completed, the Company will
need to raise additional funds through equity or debt placements to meet its
obligations on existing debt and to sustain operations. The Company has obtained
commitments from the holders of its subordinated promissory notes aggregating
$1,510,092, that should the Merger not be consummated, they will extend the due
dates to March 31, 1999. In addition, certain preferred stockholders who are
also subordinated debt holders have committed to actively support and assist the
Company in obtaining operating funds through March 31, 1999 and participate in a
private placement, if required, to provide adequate working capital.
Fair Value of Financial Instruments
The carrying values of cash, accounts receivable and payable, debt and
capital lease obligations approximate fair value. The carrying values of
long-term debt are the principal balances of each debt instrument, which
approximate their fair value when using discounted cash flow analysis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-23
169
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes sales revenue upon shipment of product and records
royalty income when royalties are received. Revenues earned under collaborative
research agreements are recognized as the related services are performed and
research expenses are incurred. Amounts received in advance of services to be
performed are recorded as deferred revenue until the related expenses are
incurred. Milestone payments are recognized as revenue in the period earned.
The Company has received government grants which support the Company's
research efforts on specific research projects. These grants generally provide
for reimbursement to the Company of approved costs incurred as defined in the
various awards.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Excess and idle capacity costs are expensed as incurred.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements and equipment under capitalized leases are amortized on a
straight-line basis over the shorter of their estimated lives or the lease term.
Patents and Trademarks
Purchased patents were capitalized and amortized over their estimated
economic lives of three years and are fully amortized.
Costs related to patents and trademarks for which the Company has applied
are deferred until such time as the patents or trademarks are issued or
declined. Costs of patents and trademarks issued are amortized over their
estimated economic lives. Costs of patents and trademarks declined are charged
to operations.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for outstanding stock options. Under APB 25,
because the exercise price of the Company's stock options equals the fair value
of the underlying stock on the date of grant, no compensation expense is
recognized.
Net Loss Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. All
periods presented conform to Statement 128 requirements. As of December 31,
1997, 1996 and 1995, respectively, the Company has 15,605,320; 15,559,606 and
15,559,606 shares of preferred stock which were convertible to common,
Convertible Subordinated Notes in 1997 and 1996 which can be converted to
2,571,426 preferred shares (Note 5), 5,177,569; 3,077,675 and 471,249 preferred
and common stock warrants outstanding, and 3,610,406; 2,873,315 and 2,523,130
employee stock options outstanding. In the event that all these common stock
equivalents were converted to common stock, there would be 28,928,429;
26,484,777 and 20,630,999 common shares outstanding for calculation of diluted
earnings per share.
F-24
170
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AGREEMENT
On December 22, 1997, the Company signed an Agreement and Plan of Merger
and Reorganization with Cortech, a publicly-owned biopharmaceutical company
which, until significant reductions in work force were made in 1997, had been
engaged in the discovery and development of therapeutics for treatment of
inflammatory disorders. Upon consummation of the merger contemplated by such
Agreement, which is expected to occur in the second quarter of 1998 if approved
by stockholders of both companies, the Company would become a wholly owned
subsidiary of Cortech and each share of the Company's common and preferred stock
would be exchanged for a pro rata share of Cortech common stock. For accounting
purposes, the merger would be treated as a purchase of Cortech by the Company.
All assets and obligations of Cortech would be combined with those of the
Company, and the Company's current management would manage the combined entity.
The costs related to the merger incurred as of December 31, 1997, of $168,719
have been deferred and are included in other assets.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31
------------------------
1997 1996
---------- ----------
Raw materials............................................... $ 539,413 $ 770,008
Work-in-process............................................. 139,268 290,474
Finished goods.............................................. 734,029 589,994
---------- ----------
$1,412,710 $1,650,476
========== ==========
4. STOCKHOLDERS' EQUITY
Series A, Series B, Series C, Series D, Series E and Series F Convertible
Preferred Stock
The authorized and outstanding shares of convertible preferred stock and
related liquidation preferences were as follows at December 31, 1997:
SHARES AS
CONVERTED
INTO LIQUIDATION LIQUIDATION
AUTHORIZED SHARES COMMON PREFERENCE PREFERENCE
DESIGNATION SHARES OUTSTANDING STOCK PER SHARE TOTAL
----------- ---------- ----------- ---------- ----------- -----------
Series A..................... 3,500,000 3,500,000 3,500,000 $1.00 $ 3,500,000
Series B..................... 5,060,750 5,000,000 5,000,000 $1.00 5,000,000
Series C..................... 1,691,786 -- -- $5.00 --
Series D..................... 2,908,889 2,908,889 2,908,889 $2.25 6,545,000
Series E..................... 4,928,359 4,196,431 4,196,431 $1.75 7,343,754
Series F..................... 2,238,000 -- -- $1.75 --
---------- ---------- ---------- -----------
20,327,784 15,605,320 15,605,320 $18,752,645
========== ========== ========== ===========
The significant features of the Series A, Series B, Series C, Series D,
Series E and Series F convertible preferred stock are as follows:
Voting Rights -- The Series A, B, C, D, E, and F stockholders are
entitled to the number of votes equal to the number of shares of common
stock into which each share of preferred stock is convertible.
Preferences -- The Series A, B, C, D, E, and F stockholders are
entitled to quarterly noncumulative dividends, at the rate of $.10, $.10,
$.50, $.23, $.175, and $.175 per share, per annum, respectively, payable
only when and if declared by the Company's Board of Directors.
F-25
171
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of Series F will be entitled to
receive, prior to Series A, B, C, D and E and common stockholders, an
amount equal to the sum of $1.75 for each outstanding share, plus all
declared but unpaid dividends. The Series B, Series D, and Series E
stockholders will be entitled to receive, prior to Series A and Series C
and common stockholders, an amount per share equal to the original Series B
($1.00), Series D ($2.25), and Series E ($1.75) issue price for each
outstanding share, plus all declared but unpaid dividends. Series A and
Series C stockholders will be entitled to receive, prior to common
stockholders, an amount equal to the original Series A ($1.00) and Series C
($5.00) issue price for each outstanding share, plus all declared but
unpaid dividends. No dividends have been declared through December 31,
1997.
Immediately prior to the effective time of the proposed merger (see
Note 2), the Company's Certificate of Incorporation will be amended to
eliminate the liquidation preferences described above.
Optional Conversion -- The Series A, B, C, D, E, and F stockholders,
at their option, may convert their shares into common stock at any time
based on the conversion rate in effect. The conversion rate is subject to
adjustment, to prevent the dilution of Series A, B, C, D, E, and F
conversion rights, pursuant to the Company's Certificate of Incorporation.
Automatic Conversion -- All Series A, B, C, D, E, and F shares shall
automatically be converted into common stock, based on the conversion rate
in effect, upon the closing of a qualified underwritten public offering as
described in the Company's Certificate of Incorporation. Upon consummation
of the proposed merger (see Note 2), all preferred shares will be exchanged
for shares of Cortech common stock.
Redemption -- The Company has no right to redeem the Series A, B, C,
D, E, or F shares.
Other Series A, B, C, D, E, and F Rights
As long as Series A, B, C, D, E, and F shares are outstanding, the Company
will not, without the consent of a majority of the outstanding shares voting
together as a single class:
- Authorize any liquidation, dissolution, winding up, consolidation or
merger of the Company or effect any transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed.
- Alter or change the rights, preferences or privileges of the Series A, B,
C, D, E, or F shares so as to adversely affect the shares.
- Authorize any other series of capital stock ranking prior to the Series
A, B, C, D, E, or F shares or on a parity with the Series A, B, C, D, E,
or F shares with respect to voting, dividends or upon liquidation.
All of the above rights terminate upon the proposed merger with Cortech
(see Note 2).
Stock Option Plan
The Company has a Stock Option Plan (the "Plan") for its employees,
directors, and consultants which provides for the issuance of incentive and
nonqualified options for up to 6,250,000 shares of common stock. The options
shall be exercisable under conditions as determined by the Board of Directors,
with the term of each option being up to ten years from the date of grant.
The per share price for any option shall be determined by the Board of
Directors. The exercise price of the shares covered by each incentive stock
option shall not be less than the fair market value of the shares at the time of
granting the incentive stock option. The exercise price of a nonqualified stock
option may be less
F-26
172
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
than the fair market value at the time of granting the nonqualified stock
option, as determined by the Board of Directors. If an incentive stock option is
granted to an employee who then owns more than 10% of the combined voting power
of all classes of stock, then the option price must be at least 110% of the fair
market value of the stock subject to the option, and the option shall not be
exercisable after expiration of five years from the date the option was granted.
Stock option activity for the years ended December 31, 1997 and 1996 is as
follows:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE PRICE
--------- ----------- --------
Balance, December 31, 1995........................ 2,523,130 $.10 - $.23
Granted........................................... 904,370 $ .23 $.23
Exercised......................................... (323,008) $.10 - $.23 $.16
Canceled.......................................... (231,177) $.10 - $.23 $.23
---------
Balance, December 31, 1996........................ 2,873,315 $.10 - $.23 $.21
Granted........................................... 1,587,968 $ .23 $.23
Exercised......................................... (60,620) $.10 - $.23 $.21
Canceled.......................................... (790,257) $.10 - $.23 $.23
---------
Balance, December 31, 1997........................ 3,610,406 $.10 - $.23 $.21
=========
Options exercisable at December 31, 1997.......... 1,660,770 $.10 - $.23 $.20
The weighted-average fair value of options granted during 1997 and 1996 was
$.05 for both years. The weighted-average remaining contractual life was 3.6
years.
Pro forma information regarding net income is required by Statement 123,
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using a minimum value method option pricing
model with the following assumptions for 1997 and 1996: risk-free interest rate
range of 5.34% to 7.84%; no expected dividend; and an estimated expected life of
four years.
The minimum value method was developed for use in estimating the fair value
of the awards. Under Statement 123, the "minimum value" method may be used by
nonpublic companies to value options, which calculates the excess of the fair
value of the stock at the date of grant over the present value of both the
exercise price and the expected dividend payments, each discounted at the
risk-free rate, over the expected exercise life of the option. In concept, the
minimum value method is similar to the Black-Scholes and binomial models, except
that it excludes the factor for volatility.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma financial information is as follows:
1997 1996 1995
----------- ----------- -----------
Pro forma net loss............................ $(1,947,811) $(3,832,735) $(4,805,686)
=========== =========== ===========
Pro forma basic and diluted net loss per
share....................................... $ (1.01) $ (2.24) $ (2.55)
=========== =========== ===========
Statement 123 is applicable only to options granted subsequent to December
31, 1994. Because options vest over periods up to four years, the pro forma
effect of the Statement will not be fully reflected until 1998.
In May 1994, a key executive purchased 800,000 shares of restricted common
stock from the Company at $.23 per share. Twenty-five percent of the stock
became unrestricted twelve months from the purchase date
F-27
173
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and the remainder became unrestricted on a monthly basis thereafter. In 1995,
when the executive left the Company, the Company repurchased 516,667 common
shares from the executive at $.23 per share.
In April 1997, the Board of Directors, upon subsequent approval by the
shareholders of the Company, increased total authorized shares to 61,972,227
with 41,644,443 shares designated common stock and 20,327,784 shares designated
preferred stock. As part of that authorization, 536,667 shares of common stock
held in treasury in connection with the repurchase of unvested shares previously
held by a former officer of the Company, including 20,000 shares which were
repurchased from a former Director in 1997, were retired.
In February 1998, the Board of Directors approved an aggregate cash bonus
of $380,000 to five executives. In connection with such bonus, the executives
have agreed to use an aggregate of $240,000 to purchase an aggregate of
1,032,000 common stock options previously awarded to the executives. The Board
of Directors also approved the award of options to purchase an aggregate of
500,000 common shares which vest one year after the closing of the proposed
merger with Cortech or monthly over four years if the proposed merger with
Cortech does not close.
Warrants
An immediately exercisable warrant to purchase 60,750 shares of Series B
convertible preferred stock for $2.20 per share was issued in connection with a
Master Lease Agreement during 1992. The warrant expires in the year 2000. The
Company has reserved 60,750 shares of Series B convertible preferred stock for
issuance in connection with this warrant.
During February 1994, an additional warrant was issued in connection with
the amended Master Lease Agreement to purchase 53,357 shares of Series E
convertible preferred stock at $1.75 per share. The warrant, which is currently
exercisable, expires on the earlier of February 18, 2003 or four years after the
closing of a qualified underwritten public offering of at least $5,000,000. The
Company has reserved 53,357 shares of Series E convertible preferred stock for
issuance in connection with this warrant.
In connection with a $2,500,000 subordinated debt security agreement and a
separate Master Lease Agreement, two warrants to purchase a total of 271,428
shares of Series E convertible preferred stock for $1.75 per share were issued
in May 1995. The warrants are exercisable and expire on the earlier of May 3,
2004 or four years from the effective date of a qualified underwritten public
offering. If the Company has not repaid the principal in its entirety at the end
of the thirty-six month term, the Company shall grant the lender additional
warrants, on the same terms as the two warrants described above, equal to 1% of
the principal amount each month. The Company has reserved 271,428 shares of
Series E convertible preferred stock for issuance in connection with these
warrants.
A warrant to purchase 85,714 shares of Series E convertible preferred stock
at $1.75 per share was issued in 1995 to a bank in connection with a $2,000,000
line of credit agreement (see Note 6). The warrant expires upon the earlier of
September 14, 2001 or three years after the Company sells its shares in a
registered public offering.
In connection with the issuance of $4,500,000 Convertible Subordinated
Notes, the Company issued warrants to purchase 2,571,426 shares of common stock
at an exercise price of $.23. The warrants expire at the earlier of the closing
of the proposed merger (see Note 2) or March 2001.
A warrant to purchase 321,429 shares of Series E convertible preferred
stock at $1.75 per share was issued in April 1997 to a bank in connection with a
$1,000,000 line of credit and a $2,000,000 bridge loan agreement (see Note 6).
The warrant expires on April 30, 2002.
In connection with an amendment to the bank credit facility of $2,000,000,
a warrant to purchase 35,000 shares of common stock at $.23 per share was issued
in October 1996 with an expiration date of October 27, 2002.
F-28
174
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common shares reserved for future issuance are as follows:
Preferred stock conversions................................. 15,605,320
CCPI conversion (see Note 7)................................ 1,600,000
Stock option plan........................................... 4,901,054
Convertible Subordinated Notes.............................. 2,571,426
Warrants.................................................... 5,177,569
----------
Total............................................. 29,855,369
==========
5. INCOME TAXES
The Company accounts for income taxes in conformity with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes. Under the
provisions of Statement 109, a deferred tax liability or asset (net of a
valuation allowance) is provided in the financial statements by applying the
provisions of applicable tax laws to measure the deferred tax consequences of
temporary differences that will result in net taxable or deductible amounts in
future years as a result of events recognized in the financial statements in the
current or preceding years.
The Company has net operating loss carryforwards of approximately $25
million for income tax purposes expiring from 2007 through 2012. Research and
development tax credits will be recognized on the flow-through method as a
reduction of income taxes in the year in which such credits are utilized. The
Company has research and development tax credit carryforwards of approximately
$233,000 expiring from 2007 through 2011. The Tax Reform Act of 1986 contains
provisions that limit the utilization of net operating loss and tax credit
carryforwards if there has been a "change of ownership" as described in Section
382 of the Internal Revenue Code. Such change of ownership may limit the
Company's utilization of its net operating loss and tax credit carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's current and long-term deferred tax assets are as follows:
DECEMBER 31
--------------------------
1997 1996
----------- -----------
Current deferred tax assets:
Accrued liabilities....................................... $ 18,375 $ 74,411
Other..................................................... 34,000 57,103
----------- -----------
Total current deferred tax assets........................... 52,375 131,514
Valuation allowance for current deferred tax assets......... (52,375) (131,514)
----------- -----------
Net current deferred tax assets............................. $ -- $ --
=========== ===========
Long-term deferred tax assets:
Book over tax depreciation................................ $ 1,128 $ 32,958
Research and development credit carryforwards............. 233,379 199,598
Tax net operating loss carryforwards...................... 8,659,129 7,899,421
Other..................................................... 9,310 23,052
----------- -----------
Total long-term deferred tax assets......................... 8,902,946 8,155,029
Valuation allowance for long-term deferred tax assets....... (8,902,946) (8,155,029)
----------- -----------
Net long-term deferred tax assets........................... $ -- $ --
=========== ===========
F-29
175
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
The detail of long-term liabilities is as follows:
DECEMBER 31
------------------------
1997 1996
---------- ----------
Long-term portion of subordinated debt...................... $ -- $ 747,047
Long-term portion of capital lease obligations.............. 61,924 435,998
Convertible subordinated debt............................... 4,500,000 4,500,000
Accrued interest and other liabilities...................... 858,679 426,037
---------- ----------
$5,420,603 $6,109,082
========== ==========
The Company entered into a $2,000,000 line of credit agreement with a bank
in September 1995. The agreement provided for borrowings of up to 70% of
eligible accounts receivable. Interest on outstanding borrowings under the
agreement accrued at prime plus 2%. The line of credit was terminated in May
1997, and any amounts then due were repaid.
In May 1995, the Company borrowed $2.5 million at 14% interest under a
subordinated debt line. Principal and interest payments are due monthly. A lump
sum payment of $523,000 is due in May 1998 and is collateralized by all tangible
and intangible assets of the Company, up to the extent of the outstanding
balance. This secured interest may be subordinated to the interests of a senior
lender. As of December 31, 1997, the Company had $747,047 of principal
outstanding.
In March and April 1996, the Company completed Convertible Subordinated
Notes and Warrant Purchase agreements (the "Agreements") with certain
stockholders and debt holders. The Agreements provided the Company with
$3,000,000 in cash proceeds and converted $1,000,000 of subordinated debt to
convertible subordinated debt (the "Notes"). Additionally, the holder of
additional subordinated debt converted $500,000 of that debt into the Notes and
agreed to forbear receipt of another $500,000 of principal repayments due on the
subordinated debt in 1996 until May 1998. The resulting principal balance of the
Notes at December 31, 1997 was $4,500,000. Interest accrues at prime plus 2%.
The Notes plus interest are due upon the earlier of: (a) three years from the
date of issuance; or (b) the closing of an initial public offering; or (c) the
closing of a consolidation, merger or sale of the Company. Accrued interest,
totaling $831,298 at December 31, 1997, is included in other long-term
liabilities. The Notes are collateralized by all tangible and intangible assets
of the Company, up to the extent of the outstanding balance. This secured
interest may be subordinated to the interests of a senior lender. Immediately
prior to the effective time of the proposed merger (see Note 2), principal and
interest due on this note will be converted to Series F convertible preferred
stock of the Company.
In February 1997, the Company issued $1,000,000 in Subordinated Promissory
Notes to certain of its stockholders. The Notes provide the holder with rights
for demand payment, subject to subordination to certain other debt holders and
with an interest rate of 10.25%.
In April 1997, the Company changed its primary banking relationship and
entered into a new credit agreement. A $1,000,000 credit facility provides for
borrowings of up to 75% of eligible accounts receivable. Interest on the
outstanding borrowings under this facility accrues at prime plus 2% and is due
monthly. Any outstanding principal amount under the loan is due April 30, 1998.
A second credit facility for $2,000,000 was provided under a bridge loan funded
to an equity event or October 30, 1997, whichever occurred first. Interest on
the bridge loan accrued under this facility at prime plus 3%. The agreement
required that the Company maintain a certain minimum financial covenant on
monthly losses. Amounts outstanding under this agreement were secured by
substantially all the Company's tangible and intangible assets. As of December
31, 1997, $1,000,000 was drawn on the credit facility. The $2,000,000 bridge
loan terminated on October 30, 1997 and any amounts borrowed were repaid with
interest. In connection with this credit facility, warrants were issued
F-30
176
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the purchase of 321,429 shares of Series E Preferred Stock with a exercise
price of $1.75 per share. In February 1998, the credit facility was amended such
that the facility secured by eligible accounts receivable was increased to
$1,500,000 and the bridge loan was renewed at a maximum at $1,500,000. The
credit facility is due May 3, 1999. The bridge loan term expires June 4, 1998
and is made available in tranches as the proposed merger with Cortech
progresses. In connection with the amendment, the Company issued warrants to
purchase 59,659 shares of Series F convertible preferred stock at a purchase
price of $.88 per share. The warrant expires on February 3, 2003.
In June 1997, the Company converted the February 1997 Promissory Notes into
new Subordinated Promissory Notes ("New Notes") expiring February 1998 with an
interest rate of prime plus 2%. This offering had a principal amount of
$1,565,050, which included $1,000,000 from the February 1997 notes, $35,384 in
accrued interest on those notes, and $529,666 in new funds. Participation in the
note offering was made available to all qualifying stockholders, debt holders
and warrant holders. The offering included 1,778,465 warrants for Series F
shares at a purchase price of $.88 per share with a preferred liquidation value
of $1.75. All holders of the New Notes, subsequent to December 31, 1997, agreed
to extend the due date to the earlier of the merger (see Note 2) or May 31,
1998. Accrued interest, totaling $87,787 at December 31, 1997, is included in
accrued liabilities. The holders of at least $1,541,535 of face amount of New
Notes have committed to convert these New Notes into Series F Preferred Stock
immediately prior to the effective time of the proposed merger (see Note 2).
Maturities of the line of credit and long-term debt for the years ending
December 31 are as follows:
1998..................................................... $3,563,398
1999..................................................... 4,500,000
----------
$8,063,398
==========
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases equipment and furniture and fixtures under capital
leases. Title of assets acquired under the lease line of credit resides with the
lessor. The Company has the option to purchase these assets at the end of the
lease term for fair market value. The interest rates on borrowings under the
lease line of credit range between 9.25% and 10.75% per annum.
Assets and related accumulated amortization included in the above leasing
arrangements are as follows:
DECEMBER 31
-------------------------
1997 1996
---------- -----------
Laboratory and manufacturing equipment..................... $1,281,438 $ 1,811,485
Office equipment........................................... 110,940 215,242
Furniture and fixtures..................................... 32,197 143,104
Accumulated amortization................................... (914,740) (1,215,802)
---------- -----------
$ 509,835 $ 954,029
========== ===========
The Company leases its facility under a noncancelable operating lease which
expires August 1998. The Company has the option to renew the facility lease for
two additional five-year periods. The rental amount upon renewal will be based
upon the market rate, not to exceed the initial lease rate indexed for
inflation, at the inception of the original lease. The Company incurred rent
expense of approximately $267,000 for each of the years ended December 31, 1997,
1996 and 1995.
F-31
177
BIOSTAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company subleased approximately 14% of its facility to an
unrelated third party at a rate of $3,700 per month, including operating and
maintenance costs, from June 1993 to June 1997. Rental income from this sublease
totaled $24,295, $50,165, and $69,822 in 1997, 1996 and 1995, respectively.
Future minimum payments under capital leases and a noncancelable operating
lease are as follows at December 31, 1997:
CAPITAL OPERATING
LEASES LEASE
--------- ---------
1998........................................................ $ 396,962 $317,863
1999........................................................ 63,703 58,979
2000........................................................ -- 6,792
2001........................................................ -- 1,624
--------- --------
Total minimum lease payments................................ 460,665 $385,258
========
Less amounts representing interest.......................... (24,669)
---------
Present value of future minimum lease payments.............. 435,996
Less current maturities..................................... (374,072)
---------
Long-term maturities........................................ $ 61,924
=========
CCPI
In conjunction with the purchase of the assets and assumption of certain
liabilities of BMPI from the Trust, the Company issued to the Trust the
Convertible Contingent Payment Instrument (see Note 1). The CCPI provides that
under certain circumstances, the Company could be required to pay up to
$8,000,000 or issue 1,600,000 shares of Series C convertible preferred stock.
The Company has assigned no dollar value to the CCPI because of its contingent
nature. A liability for the CCPI and additional cost of the acquisition would be
recorded if it became probable that an amount will become due under the CCPI and
such amount could be reasonably estimated.
As a result of the uncertainties in determining whether the CCPI will
ultimately have value and because determination of such value is not measurable
until such time as the contingencies are resolved, no value was assigned to the
CCPI in the proposed merger (see Note 2). However, subsequent to year end, the
Trust agreed to cancel the CCPI immediately prior to the effective time of the
proposed merger (see Note 2) in exchange for the issuance of 160,000 shares of
the Company's preferred stock which will be exchanged for Cortech shares at the
time of the merger.
8. RETIREMENT PLAN
The Company established a 401(k) Retirement Plan for its employees during
1993. Any full-time employee of the Company is eligible and can make voluntary
contributions to the plan.
F-32
178
APPENDIX A -- AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG:
CORTECH, INC.,
A DELAWARE CORPORATION,
CORTECH MERGER SUB, INC.
A DELAWARE CORPORATION,
AND
BIOSTAR, INC.,
A DELAWARE CORPORATION
---------------------
DATED AS OF DECEMBER 22, 1997
---------------------
================================================================================
179
TABLE OF CONTENTS
PAGE
----
1. DESCRIPTION OF TRANSACTION......................................... A-1
1.1 Merger of Merger Sub into BioStar........................... A-1
1.2 Effect of the Merger........................................ A-1
1.3 Closing; Effective Time..................................... A-1
1.4 Certificate of Incorporation and Bylaws..................... A-1
1.5 Conversion of Stock; Options and Warrants................... A-2
1.6 Closing of BioStar's Transfer Books......................... A-3
1.7 Exchange of Certificates.................................... A-4
1.8 Dissenting Shares........................................... A-5
1.9 Tax Consequences............................................ A-5
1.10 Accounting Consequences..................................... A-5
1.11 Further Action.............................................. A-5
1.12 Cortech Charter Amendment................................... A-6
1.13 BioStar Charter Amendment................................... A-6
2. REPRESENTATIONS AND WARRANTIES OF BIOSTAR.......................... A-6
2.1 Due Organization; Subsidiaries; Etc......................... A-6
2.2 Certificate of Incorporation and Bylaws..................... A-6
2.3 Capitalization, Etc......................................... A-6
2.4 Financial Statements........................................ A-8
2.5 Absence of Changes.......................................... A-8
2.6 Title to Assets............................................. A-8
2.7 Real Property; Equipment; Leasehold......................... A-8
2.8 Proprietary Assets.......................................... A-9
2.9 Material Contracts.......................................... A-9
2.10 Liabilities................................................. A-11
2.11 Compliance with Legal Requirements.......................... A-11
2.12 Certain Business Practices.................................. A-11
2.13 Governmental Authorizations................................. A-11
2.14 Tax Matters................................................. A-12
2.15 Employee and Labor Matters; Benefit Plans................... A-12
2.16 Environmental Matters....................................... A-14
2.17 Insurance................................................... A-14
2.18 Transactions with Affiliates................................ A-14
2.19 Legal Proceedings; Orders................................... A-14
2.20 Authority; Binding Nature of Agreement...................... A-15
2.21 No Existing Discussions..................................... A-15
2.22 Vote Required............................................... A-15
2.23 Non-Contravention; Consents................................. A-15
2.24 Financial Advisor........................................... A-16
2.25 Full Disclosure............................................. A-16
i
180
PAGE
----
3. REPRESENTATIONS AND WARRANTIES OF CORTECH AND MERGER SUB........... A-16
3.1 Due Organization, Subsidiaries, Etc......................... A-16
3.2 Certificate/Certificate of Incorporation and Bylaws......... A-16
3.3 Capitalization, Etc......................................... A-17
3.4 SEC Filings; Financial Statements........................... A-18
3.5 Absence of Changes.......................................... A-18
3.6 Title to Assets............................................. A-18
3.7 Real Property; Equipment; Leasehold......................... A-19
3.8 Proprietary Assets.......................................... A-19
3.9 Material Contracts.......................................... A-20
3.10 Liabilities................................................. A-21
3.11 Compliance with Legal Requirements.......................... A-21
3.12 Certain Business Practices.................................. A-21
3.13 Governmental Authorizations................................. A-22
3.14 Tax Matters................................................. A-22
3.15 Employee and Labor Matters; Benefit Plans................... A-23
3.16 Environmental Matters....................................... A-24
3.17 Insurance................................................... A-24
3.18 Transactions with Affiliates................................ A-24
3.19 Legal Proceedings; Orders................................... A-25
3.20 Authority; Binding Nature of Agreement...................... A-25
3.21 No Existing Discussions..................................... A-25
3.22 Vote Required............................................... A-25
3.23 Non-Contravention; Consents................................. A-25
3.24 Fairness Opinion............................................ A-26
3.25 Valid Issuance; Reservation of Shares....................... A-26
3.26 Financial Advisor........................................... A-26
3.27 Full Disclosure............................................. A-27
3.28 Cash Position............................................... A-27
4. CERTAIN COVENANTS OF THE PARTIES................................... A-27
4.1 Access and Investigation; Confidentiality................... A-27
4.2 Operation of BioStar's Business............................. A-27
4.3 Operation of Cortech's Business............................. A-29
4.4 No Solicitation by BioStar.................................. A-31
4.5 No Solicitation by Cortech.................................. A-31
5. ADDITIONAL COVENANTS OF THE PARTIES................................ A-32
5.1 Registration Statement; Joint Proxy Statement............... A-32
5.2 BioStar Stockholders' Meeting............................... A-33
5.3 Cortech Stockholders' Meeting............................... A-34
5.4 Regulatory Approvals........................................ A-35
5.5 ESPP........................................................ A-35
5.6 Indemnification Continuation................................ A-35
5.7 Additional Agreements....................................... A-36
5.8 Disclosure.................................................. A-37
5.9 Tax Matters................................................. A-37
5.10 Resignation of Officers and Directors....................... A-37
5.11 FIRPTA Matters.............................................. A-37
5.12 Affiliate Agreements........................................ A-37
5.13 Election of Directors....................................... A-37
5.14 Registration Rights......................................... A-37
5.15 Market Stand-off Agreement.................................. A-38
ii
181
PAGE
----
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CORTECH AND MERGER SUB...... A-38
6.1 Accuracy of Representations................................. A-38
6.2 Performance of Covenants.................................... A-38
6.3 Effectiveness of Registration Statement..................... A-38
6.4 Stockholder Approval........................................ A-38
6.5 Consents.................................................... A-38
6.6 Documents................................................... A-38
6.7 No Material Adverse Change.................................. A-39
6.8 No Restraints............................................... A-39
6.9 No Governmental Litigation.................................. A-39
6.10 No Other Litigation......................................... A-39
6.11 Delivery of Affiliates Agreements........................... A-39
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BIOSTAR..................... A-39
7.1 Accuracy of Representations................................. A-39
7.2 Performance of Covenants.................................... A-40
7.3 Effectiveness of Registration Statement..................... A-40
7.4 Stockholder Approval........................................ A-40
7.5 Documents................................................... A-40
7.6 No Material Adverse Change.................................. A-40
7.7 No Restraints............................................... A-40
7.8 Directors................................................... A-40
7.9 Consents.................................................... A-40
7.10 No Governmental Litigation.................................. A-40
7.11 No Other Litigation......................................... A-40
8. TERMINATION........................................................ A-41
8.1 Termination................................................. A-41
8.2 Effect of Termination....................................... A-42
8.3 Expenses; Termination Fees.................................. A-42
9. MISCELLANEOUS PROVISIONS........................................... A-42
9.1 Amendment................................................... A-42
9.2 Waiver...................................................... A-43
9.3 No Survival of Representations and Warranties............... A-43
9.4 Entire Agreement; Counterparts; Applicable Law.............. A-43
9.5 Jury Waiver................................................. A-43
9.6 Disclosure Schedule......................................... A-43
9.7 Attorneys' Fees............................................. A-43
9.8 Assignability............................................... A-43
9.9 Notices..................................................... A-44
9.10 Cooperation................................................. A-44
9.11 Construction................................................ A-44
EXHIBITS
Exhibit A -- Certain Definitions
Exhibit B -- Form of BioStar Charter Amendment
Exhibit C -- Forms of Affiliate Agreement
iii
182
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of December 22, 1997, by and among CORTECH, INC., a Delaware
corporation ("Cortech"); CORTECH MERGER SUB, INC., a Delaware corporation and a
wholly-owned subsidiary of Cortech ("Merger Sub"); and BIOSTAR, INC., a Delaware
corporation ("BioStar"). Certain capitalized terms used in this Agreement are
defined in Exhibit A.
RECITALS
A. Cortech, Merger Sub and BioStar intend to effect a merger of Merger Sub
into BioStar in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will
cease to exist, and BioStar will become a wholly-owned subsidiary of Cortech.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended. For financial reporting purposes, it is intended that the Merger be
accounted for as a purchase.
C. The respective boards of directors of Cortech, Merger Sub and BioStar
adopted this Agreement and approved the Merger.
D. Certain stockholders of Cortech and BioStar have executed Voting
Agreements in connection with the Merger obligating them to vote to approve the
Merger when it is presented for approval at a meeting of stockholders of Cortech
and BioStar, respectively.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO BIOSTAR. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into BioStar, and the separate
existence of Merger Sub shall cease. BioStar will continue as the surviving
corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law ("DGCL").
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder, Colorado at
10:00 a.m. on a date to be agreed by Cortech and BioStar (the "Closing Date"),
which shall be no later than the tenth business day after the satisfaction or
waiver of the conditions set forth in Sections 6 and 7. Contemporaneously with
or as promptly as practicable after the Closing, a properly executed certificate
of merger conforming to the requirements of Section 251 of the DGCL shall be
filed with the Secretary of State of the State of Delaware. The Merger shall
take effect at the time such certificate of merger is filed with the Secretary
of State of the State of Delaware (the "Effective Time").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) The Certificate of Incorporation of Merger Sub shall be the Certificate
of Incorporation of the Surviving Corporation.
(b) The Bylaws of Merger Sub shall be the Bylaws of the Surviving
Corporation.
(c) The officers of BioStar immediately prior to the Effective Time shall
be the officers of the Surviving Corporation. The persons identified in Section
5.13 below shall be the directors of the Surviving Corporation.
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1.5 CONVERSION OF STOCK; OPTIONS AND WARRANTS.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of Cortech, Merger Sub, BioStar or any stockholder of
Cortech, Merger Sub or BioStar:
(i) any shares of BioStar Common Stock or BioStar Preferred Stock then
held by BioStar, if any, shall be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor;
(ii) any shares of BioStar Common Stock or BioStar Preferred Stock
then held by Cortech or any other subsidiary of Cortech, if any, shall be
canceled and retired and shall cease to exist, and no consideration shall
be delivered in exchange therefor;
(iii) except as provided in clauses "(i)" and "(ii)" above and subject
to Sections 1.5(b), 1.5(d) and 1.8, each share of BioStar Common Stock and
BioStar Preferred Stock then outstanding shall be converted into the right
to receive the number of fully paid and nonassessable shares of Cortech
Common Stock equal to a fraction the numerator of which is 28,500,000 and
the denominator of which is the number of shares of BioStar Common Stock
and BioStar Preferred Stock outstanding plus the number of shares of
BioStar Common Stock and BioStar Preferred Stock issuable upon exercise of
all (x) the outstanding BioStar Warrants and (y) outstanding BioStar
Options, in each case as of the Effective Time, and upon surrender of the
certificate representing such share of BioStar Common Stock and BioStar
Preferred Stock in the manner provided in Section 1.7 below.
(iv) each share of the common stock, $.001 par value, of Merger Sub
then outstanding shall be converted into one share of common stock of the
Surviving Corporation. Each stock certificate representing shares of common
stock of Merger Sub prior to the Effective Time shall represent an equal
number of shares of common stock of the Surviving Corporation from and
after the Effective Time.
(b) At the Effective Time of the Merger and without any further action on
the part of Cortech, Merger Sub, BioStar or any stockholder of Cortech, Merger
Sub or of BioStar:
(i) each BioStar Option shall be assumed by Cortech (an "Assumed
BioStar Option") (the aggregate number of shares of BioStar Common Stock
issuable upon the exercise of all outstanding BioStar Options immediately
prior to the Effective Time is referred to herein as the "Outstanding
Option Amount"). Each BioStar Option so assumed by Cortech will continue to
have, and be subject to, substantially the same terms and conditions set
forth in the documents governing such BioStar Options immediately prior to
the Effective Time, except that (A) such Assumed BioStar Option will be
exercisable for that number of whole shares of Cortech Common Stock equal
to the product of the number of shares of BioStar Common Stock subject to
such Assumed BioStar Option immediately prior to the Effective Time
multiplied by the Exchange Ratio (as defined in Section 1.5(d)), rounded
down to the nearest whole number of shares of Cortech Common Stock and (B)
the per share exercise price for the shares of Cortech Common Stock
issuable upon exercise of such Assumed BioStar Option will be equal to the
quotient obtained by dividing the exercise price per share under which such
BioStar Option, determined immediately prior to the Effective Time, by the
Exchange Ratio, rounded up to the nearest whole cent. The parties intend
that the assumption of the BioStar Options hereunder will constitute a
transaction to which Section 424(a) of the Code applies and this Section
shall be interpreted consistent with such intention. Consistent with the
terms of the BioStar Options and the documents governing such BioStar
Options, except as set forth in the BioStar Disclosure Schedule, the Merger
will not terminate or accelerate any Assumed BioStar Option or any right of
exercise, vesting or repurchase relating thereto with respect to shares of
Cortech Common Stock acquired upon exercise of such BioStar Option.
(ii) Holders of vested BioStar Options may elect to exercise such
options prior to the Effective Time and receive Cortech Common Stock by
providing notice of such exercise and payment of the exercise price thereof
to BioStar at any time prior to the Effective Time. In the event that any
holder of BioStar Options does not exercise such BioStar Options prior to
the Effective Time, such BioStar Options shall become Assumed BioStar
Options.
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(iii) As soon as practicable after the Effective Time, Cortech shall
issue to each holder of an Assumed BioStar Option a document evidencing the
stock option assumption by Cortech. The right to receive an Assumed BioStar
Option may not be assigned or transferred except as permitted by the
BioStar Stock Option Plans. Any attempted assignment contrary to this
Section 1.5(b)(iii) shall be null and void.
(c) Each warrant to purchase shares of BioStar Common Stock or BioStar
Preferred Stock remaining outstanding (other than those which will expire if
they remain unexercised as of the Effective Time) at the Effective Time shall
be, in connection with the Merger, assumed by Cortech. Each warrant so assumed
by Cortech under this Agreement shall continue to have, and be subject to, the
same terms and conditions set forth in the respective warrant agreements
governing such warrant immediately prior to the Effective Time, except that each
such warrant shall, following the Effective Time, be exercisable only for shares
of Cortech Common Stock in such number, and at such exercise price as is
determined by applying the Exchange Ratio in accordance with the terms of the
applicable warrant agreement.
(d) The fraction of a share of Cortech Common Stock determined in
accordance with Section 1.5(a)(iii) with regard to the BioStar Common Stock and
BioStar Preferred Stock (as such fraction may be adjusted in accordance with
this Section 1.5(d)) is hereinafter referred to as the "Exchange Ratio." If,
between the date of this Agreement and the Effective Time, the outstanding
shares of BioStar Common Stock or Cortech Common Stock are changed into a
different number or class of shares by reason of any stock split, stock
dividend, reverse stock split (including, without limitation, the reverse stock
split contemplated by Section 1.12 of this Agreement if effected prior to the
Effective Time), reclassification, recapitalization, exchange of shares or other
similar transaction, or if Cortech or BioStar pays an extraordinary dividend or
makes an extraordinary distribution, then such event shall be reflected in the
calculation of the Exchange Ratio as of the Effective Time.
(e) Except as set forth in the BioStar Disclosure Schedule, if any shares
of BioStar Common Stock or BioStar Preferred Stock outstanding immediately prior
to the Effective Time are unvested or are subject to a repurchase option, risk
of forfeiture or other condition under any applicable restricted stock purchase
agreement or other agreement with BioStar or under which BioStar has any rights,
then the shares of Cortech Common Stock issued in exchange for such shares of
BioStar Common Stock or BioStar Preferred Stock will also be unvested or subject
to the same repurchase option, risk of forfeiture or other condition, as the
case may be, and the certificates representing such shares of Cortech Common
Stock may accordingly be marked with appropriate legends. BioStar shall take all
action that may be necessary to ensure that, from and after the Effective Time,
Cortech is entitled to exercise any such repurchase option or other right set
forth in any such restricted stock purchase agreement or other agreement.
(f) No fractional shares of Cortech Common Stock shall be issued in
connection with the Merger, and no certificates or scrip for any such fractional
shares shall be issued. Any holder of BioStar Common Stock who would otherwise
be entitled to receive a fraction of a share of Cortech Common Stock (after
aggregating all fractional shares of Cortech Common Stock issuable to such
holder) shall, in lieu of such fraction of a share and, upon surrender of such
holder's BioStar Stock Certificate(s) (as defined in Section 1.6), be paid in
cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price (adjusted, if
necessary, to reflect the reverse stock split referenced in Section 1.12 below)
of a share of Cortech Common Stock on the Nasdaq National Market on the date the
Merger becomes effective.
1.6 CLOSING OF BIOSTAR'S TRANSFER BOOKS. At the Effective Time: (a) all
shares of BioStar Common Stock and BioStar Preferred Stock outstanding
immediately prior to the Effective Time shall automatically be canceled and
retired and shall cease to exist, and all holders of certificates representing
shares of BioStar Common Stock or BioStar Preferred Stock that were outstanding
immediately prior to the Effective Time shall cease to have any rights as
stockholders of BioStar except the right to receive (i) certificates
representing the number of fully paid and nonassessable shares of Cortech Common
Stock into which such shares of BioStar Common Stock or BioStar Preferred Stock
were converted at the Effective Time and (ii) any cash in lieu of fractional
shares of Cortech Common Stock, to be issued or paid in consideration therefor
upon
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surrender of such certificate in accordance with Section 1.7; and (b) the stock
transfer books of BioStar shall be closed with respect to all shares of BioStar
Common Stock and BioStar Preferred Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of BioStar Common Stock
or BioStar Preferred Stock shall be made on such stock transfer books after the
Effective Time. If, after the Effective Time, a valid certificate previously
representing any of such shares of BioStar Common Stock or BioStar Preferred
Stock (a "BioStar Stock Certificate") is presented to the Exchange Agent (as
defined in Section 1.7) or to the Surviving Corporation, such BioStar Stock
Certificate shall be canceled and shall be exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) On or prior to the Effective Time, Cortech shall select a reputable
bank or trust company reasonably acceptable to BioStar to act as exchange agent
in the Merger (the "Exchange Agent"). As of the Effective Time, Cortech shall
deposit with the Exchange Agent (i) certificates representing the shares of
Cortech Common Stock issuable pursuant to this Section 1, and (ii) cash
sufficient to make payments in lieu of fractional shares in accordance with
Section 1.5(f). The shares of Cortech Common Stock and cash amounts so deposited
with the Exchange Agent, together with any dividends or distributions with
respect to such shares with a record date on or after the Effective Time, are
referred to collectively as the "Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, and in any
event within five (5) business days, the Exchange Agent will mail to the holders
of BioStar Stock Certificates (i) a letter of transmittal in customary form and
containing such provisions as Cortech may reasonably specify (including a
provision confirming that delivery of BioStar Stock Certificates shall be
effected, and risk of loss and title to BioStar Stock Certificates shall pass,
only upon delivery of such BioStar Stock Certificates to the Exchange Agent),
and (ii) instructions for use in effecting the surrender of BioStar Stock
Certificates in exchange for certificates representing the Cortech Common Stock.
Upon surrender of a BioStar Stock Certificate to the Exchange Agent for
exchange, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by the Exchange Agent or Cortech, (1)
the holder of such BioStar Stock Certificate shall be entitled to receive in
exchange therefore a certificate representing the number of whole shares of
Cortech Common Stock that such holder has the right to receive pursuant to the
provisions of Section 1.5, any cash in lieu of any fractional share(s) of
Cortech Common Stock, and any dividends or other distributions to which such
holder is entitled, and (2) the BioStar Stock Certificate so surrendered shall
be canceled. Until surrendered as contemplated by this Section 1.7, each BioStar
Stock Certificate shall be deemed, from and after the Effective Time, to
represent only the right, upon surrender as provided in this Section 1.7, to
receive shares of Cortech Common Stock, any cash in lieu of any fractional
share(s) of Cortech Common Stock, and any dividends or other distributions to
which such holder is entitled, each as contemplated by Section 1. If any BioStar
Stock Certificate shall have been lost, stolen or destroyed, Cortech may, in its
discretion and as a condition precedent to the issuance of any certificate
representing Cortech Common Stock, require the owner of such lost, stolen or
destroyed BioStar Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Cortech may reasonably direct) as indemnity
against any claim that may be made against the Exchange Agent, the Surviving
Corporation or Cortech with respect to such BioStar Stock Certificate. In the
event of a transfer of ownership of BioStar Common Stock or BioStar Preferred
Stock which is not registered in the transfer records of BioStar, a certificate
representing the proper number of shares of Cortech Common Stock may be issued
to a Person other than the Person in whose name the certificate so surrendered
is registered, if, upon presentation to the Exchange Agent, such certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
Person requesting such issuance shall pay any transfer or other taxes required
by reason of the issuance of shares of Cortech Common Stock to a Person other
than the registered holder of such certificate or establish to the satisfaction
of Cortech that such tax has been paid or is not applicable.
(c) No dividends or other distributions declared or made with respect to
Cortech Common Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered BioStar Stock Certificate with respect to the
shares of Cortech Common Stock represented thereby, and no cash payment in lieu
of any fractional share nor any other cash payment shall be paid to any such
holder, until such holder surrenders such BioStar Stock Certificate in
accordance with this Section 1.7 (at which time such holder shall be entitled,
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subject to the effect of applicable escheat or similar laws, to receive all such
dividends, distributions and cash payments, without interest).
(d) Any portion of the Exchange Fund that remains undistributed to holders
of BioStar Stock Certificates as of the date 180 days after the date on which
the Merger becomes effective shall be delivered to Cortech upon demand, and any
holders of BioStar Stock Certificates who have not theretofore surrendered their
BioStar Stock Certificates in accordance with this Section 1.7 shall thereafter
look only to Cortech for satisfaction of their claims for Cortech Common Stock,
cash in lieu of fractional shares of Cortech Common Stock and any dividends or
distributions with respect to Cortech Common Stock.
(e) Each of the Exchange Agent, the Surviving Corporation and Cortech shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of BioStar
Common Stock or BioStar Preferred Stock such amounts as may be required to be
deducted or withheld therefrom under the Code or any provision of state, local
or foreign tax law or under any other applicable Legal Requirement. To the
extent such amounts are so deducted or withheld, such amounts shall be treated
for all purposes under this Agreement as having been paid to the Person to whom
such amounts would otherwise have been paid.
(f) Neither Cortech, the Surviving Corporation nor the Exchange Agent shall
be liable to any holder or former holder of BioStar Common Stock or BioStar
Preferred Stock or to any other Person with respect to any shares of Cortech
Common Stock (or dividends or distributions with respect thereto), or for any
cash amounts, delivered to any public official pursuant to any applicable
abandoned property law, escheat law or similar Legal Requirement.
1.8 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of BioStar Common Stock or BioStar Preferred Stock outstanding
immediately prior to the Effective Time held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with the
DGCL and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal or dissenters' rights, shall not be converted into or represent a
right to receive Cortech Common Stock pursuant to Section 1.5, but the holder
thereof shall only be entitled to such rights as are granted by the DGCL.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of BioStar Common Stock or BioStar Preferred Stock who demands appraisal
of such shares under the DGCL shall effectively withdraw or lose (through
failure to perfect or otherwise) the right to appraisal, then, as of the later
of the Effective Time and the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to receive
Cortech Common Stock and cash in lieu of fractional shares as provided in
Section 1.5, without interest thereon, upon surrender of the certificate
representing such shares.
(c) BioStar shall give Cortech (i) prompt notice of any written demands for
appraisal of any shares of BioStar Common Stock or BioStar Preferred Stock,
withdrawals of such demands, and any other instruments served pursuant to the
DGCL and received by BioStar and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for appraisal under the
DGCL. BioStar shall not, except with the prior written consent of Cortech,
voluntarily make any payment with respect to any demands for appraisal of
capital stock of BioStar or offer to settle or settle any such demands.
1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 ACCOUNTING CONSEQUENCES. For financial reporting purposes, the Merger
is intended to be accounted for as a purchase.
1.11 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Cortech to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and
BioStar,
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the officers and directors of the Surviving Corporation and Cortech shall be
fully authorized (in the names of Merger Sub, BioStar and otherwise) to take
such action.
1.12 CORTECH CHARTER AMENDMENT. The board of directors of Cortech will
approve and submit for approval of Cortech's stockholders an amendment to
Cortech's Certificate of Incorporation (the "Cortech Charter Amendment") to (i)
change the name of Cortech to a new name mutually acceptable to Cortech and
BioStar and (ii) effectuate a one-for-four reverse stock split of Cortech's
Common Stock (the "Reverse Stock Split"). If approved by Cortech's stockholders,
the Cortech Charter Amendment will be filed immediately prior to the Effective
Time. The approval and effectuation of the Cortech Charter Amendment are not a
condition of the parties' obligation to consummate the Merger.
1.13 BIOSTAR CHARTER AMENDMENT. The board of directors of BioStar has
approved an amendment to BioStar's Restated Certificate of Incorporation
attached hereto as Exhibit B (the "BioStar Charter Amendment"), in order to
effectuate the consummation of the Merger. If approved by the BioStar
stockholders, the BioStar Charter Amendment will be filed immediately prior to
the Effective Time. The approval and effectuation of the BioStar Charter
Amendment is a condition to the parties' obligations to consummate the Merger.
2. REPRESENTATIONS AND WARRANTIES OF BIOSTAR
BioStar represents and warrants to Cortech and Merger Sub, except as set
forth in the BioStar Disclosure Schedule as follows:
2.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) BioStar is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own, lease and use its
assets in the manner in which its assets are currently owned, leased and used;
and (iii) to perform its obligations under all BioStar Contracts by which it is
bound. BioStar is qualified to do business as a foreign corporation, and is in
good standing, under the laws of all jurisdictions where the nature of its
business requires such qualification except in jurisdictions where the failure
to so qualify, individually and in the aggregate, would not have a Material
Adverse Effect.
(b) BioStar has no Subsidiaries and does not own any capital stock of, or
any equity interest of any nature in, any other Entity, other than the Entities
identified in the BioStar Disclosure Schedule. Except as set forth in the
BioStar Disclosure Schedule, BioStar has not agreed nor is it obligated to make,
nor is it bound by any Contract under which it may become obligated to make, any
future investment in or capital contribution to any other Entity. Except as set
forth in the BioStar Disclosure Schedule, BioStar has not, at any time, been a
general partner of any general partnership, limited partnership or other Entity.
(c) BioStar has not conducted any business under or otherwise used, for any
purpose or in any jurisdiction, any fictitious name, assumed name, trade name or
other name, other than the name BioStar, Inc. and BioStar Medical Products, Inc.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS. BioStar has delivered to
Cortech accurate and complete copies of the Certificate of Incorporation, Bylaws
and other charter and organizational documents of BioStar, including all
amendments thereto.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of BioStar consists of: (i) 41,644,443
shares of BioStar Common Stock, $0.0001 par value, of which, as of November 30,
1997, 1,961,208 shares were issued and outstanding and (ii) 20,327,784 shares of
BioStar Preferred Stock, $0.0001 par value, of which, as of the date hereof, (A)
3,500,000 shares are designated Series A Preferred Stock of which 3,500,000 are
issued and outstanding; (B) 5,060,750 shares are designated Series B Preferred
Stock of which 5,000,000 are issued and outstanding; (C) 1,691,786 shares are
designated Series C Preferred Stock, none of which are issued and outstanding;
(D) 2,908,889 shares are designated Series D Preferred Stock, all of which are
issued and outstanding;
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(E) 4,928,359 shares are designated Series E Preferred Stock, of which 4,196,431
are issued and outstanding; and (F) 2,238,000 shares are designated Series F
Preferred Stock, none of which is issued and outstanding. All of the outstanding
shares of BioStar Common Stock and BioStar Preferred Stock have been duly
authorized and validly issued, and are fully paid and nonassessable. Except as
set forth in the BioStar Disclosure Schedule: (i) none of the outstanding shares
of BioStar Common Stock or BioStar Preferred Stock is entitled or subject to any
preemptive right, right of participation in future financings, right to maintain
a percentage ownership position, or any similar right; (ii) none of the
outstanding shares of BioStar Common Stock or BioStar Preferred Stock is subject
to any right of first refusal in favor of BioStar; and (iii) there is no
Contract relating to the voting or registration of, or restricting any Person
from purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of BioStar Common Stock or
BioStar Preferred Stock. Except as set forth in the BioStar Disclosure Schedule,
BioStar is not under any obligation, and is not bound by any Contract pursuant
to which it may become obligated, to repurchase, redeem or otherwise acquire any
outstanding shares of BioStar Common Stock or BioStar Preferred Stock.
(b) As of November 30, 1997, 3,618,823 shares of BioStar Common Stock are
reserved for future issuance pursuant to BioStar Options and 1,300,231 shares
remain available for grant under the BioStar Option Plan (defined below). The
BioStar Disclosure Schedule sets forth the following information with respect to
each BioStar Option outstanding as of the date of this Agreement: (i) the name
of the optionee; (ii) the number of shares of BioStar Common Stock subject to
such BioStar Option; (iii) whether the BioStar Option was granted pursuant to
the 1995 Equity Incentive Plan (the "BioStar Option Plan") or was granted
outside of the BioStar Option Plan; (iv) the exercise price of such BioStar
Option; (v) the date on which such BioStar Option was granted; and (vi) the
extent to which such BioStar Option is vested and exercisable as of November 30,
1997. BioStar has delivered to Cortech accurate and complete copies of all stock
option plans and forms of option grant pursuant to which BioStar has granted any
outstanding stock options. Except as set forth in the BioStar Disclosure
Schedule, BioStar did not grant any new BioStar Options between November 30,
1997 and the date hereof. BioStar has reserved 2,606,426 shares of BioStar
Common Stock for issuance upon the exercise of certain warrants to purchase
Common Stock, 60,750 shares of Series B Preferred Stock for issuance upon the
exercise of certain warrants to purchase Series B Preferred Stock, 731,928
shares of Series E Preferred Stock for issuance upon the exercise of certain
warrants to purchase Series E Preferred Stock, and 1,778,465 shares of Series F
Preferred Stock for issuance upon the conversion of certain warrants to purchase
Series F Preferred Stock. The BioStar Disclosure Schedule sets forth the
following information with respect to each outstanding warrant to purchase
BioStar Common Stock and BioStar Preferred Stock: (i) the name of the holder of
such warrant; (ii) the number of shares of BioStar Common Stock or BioStar
Preferred Stock subject to such warrant; (iii) the exercise price of such
warrant; (iv) the date on which such warrant was issued; and (v) the date on
which such warrant expires. BioStar has delivered to Cortech an accurate and
complete copy of each such warrant. BioStar has reserved 1,600,000 shares of
Series C Preferred Stock for issuance upon the conversion of a convertible
contingent payment instrument (the "Contingent Instrument"). BioStar has
delivered to Cortech an accurate and complete copy of such instrument. BioStar
issued notes which are convertible into either Series E Preferred Stock or any
subsequent series of preferred stock sold by BioStar at a price per share less
than $1.75 (the "Next Round Preferred")(the "Convertible Notes"). BioStar and
the BioStar stockholders have undertaken to amend its Certificate of
Incorporation immediately prior to the conversion of the Convertible Notes in
order to provide for the Next Round Preferred.
(c) Except as set forth in the BioStar Disclosure Schedule, there is no:
(i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of BioStar; (ii) outstanding security, instrument or obligation that
is or may become convertible into or exchangeable for any shares of the capital
stock or other securities of BioStar; (iii) stockholder rights plan (or similar
plan commonly referred to as a "poison pill") or Contract under which BioStar is
or may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities; or (iv) condition or circumstance that may
reasonably give rise to or provide a basis for the assertion of a claim by any
Person to the effect that such Person is entitled to acquire or receive any
shares of capital stock or other securities of BioStar. Except as set forth on
the BioStar Disclosure Schedule, or elsewhere in this Section 2.3, there are no
bonds, debentures, notes or other indebtedness of BioStar
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outstanding having the right to vote (or convertible into securities having the
right to vote) on any matters on which the stockholders of BioStar have the
right to vote. BioStar has reserved 1,600,000 shares of Series C Preferred Stock
for issuance upon the conversion of the Contingent Instrument.
(d) All outstanding securities of BioStar, including shares of BioStar
Common Stock and BioStar Preferred Stock, all outstanding BioStar Options, all
outstanding warrants to purchase BioStar Common Stock or BioStar Preferred
Stock, and all outstanding notes convertible into BioStar Preferred Stock have
been issued and granted in all material respects in compliance with (i) all
applicable securities laws and other applicable Legal Requirements, and (ii) all
requirements set forth in applicable Contracts.
2.4 FINANCIAL STATEMENTS.
(a) The BioStar Disclosure Schedule sets forth BioStar's audited balance
sheets as of December 31, 1995 and December 31, 1996 and related audited
statements of operations, stockholders' equity and cash flows for the three
years then ended (collectively, the "Audited Financials") and BioStar's
unaudited balance sheets as of September 30, 1997 (the "Balance Sheet") and the
related unaudited statements of operations and cash flows for the nine-month
period then ended (collectively, the "Unaudited Financials")(the Audited
Financials and the Unaudited Financials are collectively referred to herein as
the "BioStar Financials"). The BioStar Financials were prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods covered. The BioStar Financials present fairly in
all material respects the financial condition and operating results of BioStar
as of the dates and during the periods indicated therein, subject, in the case
of the Unaudited Financials, to normal year-end adjustments, which will not be
material in amount or significance, and the absence of footnotes.
(b) Since September 30, 1997, BioStar has not incurred any liabilities of
the type required under GAAP to be recorded on a balance sheet or reported in
the footnotes thereto except liabilities incurred in the ordinary course of
business.
2.5 ABSENCE OF CHANGES. Since September 30, 1997:
(a) there has not been any Material Adverse Change in the business,
condition, capitalization, assets, liabilities, operations or financial
performance of BioStar taken as a whole, and no event has occurred that could
reasonably be expected to have a Material Adverse Effect on BioStar;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the assets of BioStar (whether or
not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) which would be prohibited by Section
4.2(b)(i), (iii), (xi), (xii), or (xiii) if it were to be effected, accepted or
were to take place, between the date hereof and the Effective Time.
2.6 TITLE TO ASSETS. Except as set forth in the BioStar Disclosure
Schedule, BioStar owns, and has good, valid and marketable title to, all assets
purported to be owned by it, including all assets reflected in BioStar's books
and records as being owned by BioStar. All of said assets are owned by BioStar
free and clear of any Encumbrances, except for (a) any lien for current taxes
not yet due and payable, (b) minor liens that have arisen in the ordinary course
of business and that do not (in any case or in the aggregate) materially detract
from the value of the assets subject thereto or materially impair the operations
of BioStar, and (c) liens described in the BioStar Disclosure Schedule.
2.7 REAL PROPERTY; EQUIPMENT; LEASEHOLD.
(a) BioStar does not own any real property or any interest in real
property, except for the leasehold created under the real property lease(s) set
forth in the BioStar Disclosure Schedule. Complete and correct copies of such
lease(s) have previously been delivered to Cortech by BioStar.
(b) All material items of equipment and other tangible assets owned by or
leased to BioStar are reasonably adequate for the uses to which they are being
put, are in good condition and repair (ordinary wear and tear excepted) and are
reasonably adequate for the conduct of BioStar's business in the manner in which
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such business is currently being conducted and in the manner in which such
business is required to be conducted pursuant to BioStar Contracts and which are
in effect on the date hereof.
2.8 PROPRIETARY ASSETS.
(a) The BioStar Disclosure Schedule describes each Proprietary Asset owned
by BioStar and deemed by BioStar to have material value to BioStar. Except as
disclosed in the BioStar Disclosure Schedule, BioStar has good title to such
Proprietary Assets and has no obligation to make any material ongoing royalty or
other payment to any Person in respect thereto. Any limitation on the right of
BioStar to use or exploit a BioStar Proprietary Asset deemed by BioStar to have
material value to BioStar has been disclosed in the BioStar Disclosure Schedule.
(b) BioStar has taken reasonable measures and precautions to protect and
maintain the confidentiality, secrecy and value of all material BioStar
Proprietary Assets (except BioStar Proprietary Assets whose value would not be
impaired materially by disclosure). Except where the failure to obtain such
agreements would not impair the value of any BioStar Proprietary Asset in a
material respect, BioStar has obtained, from all current and former employees of
BioStar and from all current and former consultants and independent contractors
to BioStar, signed agreements appropriately restricting the use and disclosure
of BioStar Proprietary Assets, and providing for assignment to BioStar of
BioStar Proprietary Assets developed by such employees and consultants.
(c) To the best of the knowledge of BioStar: (i) all patents, patent
applications, registered trademarks, registered service marks and registered
copyrights held by BioStar and deemed by BioStar to have a material value to
BioStar were filed and were and have been prosecuted in good faith and in
compliance with all applicable Legal Requirements; and (ii) there has not been
any claim, action or proceeding, and there is no pending or threatened claim,
action or proceeding related to any registration or filing of a BioStar
Proprietary Asset; (iii) none of the BioStar Proprietary Assets infringes,
misappropriates or conflicts with any Proprietary Asset owned or used by any
other Person; (iv) none of the products that are or have been designed, created,
developed, assembled, manufactured or sold by BioStar is infringing,
misappropriating or making any unlawful or unauthorized use of any Proprietary
Asset owned or used by any other Person, and none of such products has at any
time infringed, misappropriated or made any unlawful or unauthorized use of, and
BioStar has not received any notice or other communication (in writing or
otherwise) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful or unauthorized use of, any Proprietary Asset owned
or used by any other Person; (v) no other Person is infringing, misappropriating
or making any unlawful or unauthorized use of, and no Proprietary Asset owned or
used by any other Person infringes or conflicts with, any material BioStar
Proprietary Asset.
(d) The BioStar Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable BioStar to conduct its business in the manner in
which such business is being conducted and in the manner in which such business
is required to be conducted pursuant to the BioStar Contracts which are in
effect on the date hereof. Except as set forth in the BioStar Disclosure
Schedule, BioStar has not (i) licensed any of the material BioStar Proprietary
Assets to any Person on an exclusive basis, or (ii) entered into any covenant
not to compete or Contract limiting its ability to exploit fully any material
BioStar Proprietary Assets or to transact business in any market or geographical
area or with any Person.
2.9 MATERIAL CONTRACTS.
(a) The BioStar Disclosure Schedule identifies each BioStar Contract that
constitutes a "BioStar Material Contract." For purposes of this Agreement, each
of the following shall be deemed to constitute a BioStar Material Contract:
(i) any Contract relating to the employment of, or the performance of
services by, any officer or consultant, and any Contract pursuant to which
BioStar is or may become obligated to make any severance, termination,
bonus or relocation payment or any other payment (other than payments in
respect of salary and the grant of standard benefits);
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(ii) any Contract relating to the acquisition, transfer, development,
sharing or license of any BioStar Proprietary Asset deemed by BioStar to
have material value to BioStar (except for any Contract pursuant to which
any Proprietary Asset is licensed to BioStar under any third party software
license generally available to the public);
(iii) any Contract which provides for indemnification of any officer,
director, employee or agent;
(iv) any Contract imposing any restriction on the right or ability of
BioStar (A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product or
other asset to or perform any services for any other Person or to transact
business or deal in any other manner with any other Person, or (C) to
develop or distribute any technology, in each case where breach thereof by
BioStar would have a Material Adverse Effect on BioStar;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any Person
with any preemptive right, right of participation, right of maintenance or
any similar right with respect to any securities, or (C) providing BioStar
with any right of first refusal with respect to, or right to repurchase or
redeem, any securities;
(vi) any Contract requiring that BioStar give any notice, obtain any
consent or provide any information to any Person prior to accepting any
Acquisition Proposal;
(vii) any Contract (not otherwise identified in this Section) that (A)
has a term of more than 60 days or that may not be terminated by BioStar
(without penalty) within 60 days after the delivery of a termination notice
by BioStar and (B) that contemplates or involves (I) the payment or
delivery of cash or other consideration on or after the date hereof in an
amount or having a value in excess of $100,000 in aggregate payments under
such Contract, or (II) the performance of services on or after the date
hereof having a value in excess of $100,000 in aggregate payments under
such Contract;
(viii) any Contract (A) to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations, or
involving or directly or indirectly benefiting any Governmental Body
(including any subcontract or other Contract between BioStar and any
contractor or subcontractor to any Governmental Body) and that (B)
contemplates or involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or having a value in
excess of $100,000 in aggregate payments under such Contract, or (II) the
performance of services on or after the date hereof having a value in
excess of $100,000 in aggregate payments under such Contract;
(ix) any open purchase order placed by BioStar requiring future
aggregate payments in excess of $100,000; and
(x) any Contract (not otherwise identified in this Section), if a
breach of such Contract could reasonably be expected to have a Material
Adverse Effect on BioStar.
(b) Each BioStar Material Contract is valid and in full force and effect,
and is enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies. Except as set forth in the BioStar Disclosure Schedule, the
aggregate amount payable by BioStar under Contracts that would be BioStar
Material Contracts but for the limitations of Sections 2.9(a)(vii)(B) or
2.9(a)(viii)(B) do not exceed $500,000. The aggregate amount payable by BioStar
under purchase orders not listed on the BioStar Disclosure Schedule does not
exceed $500,000.
(c) Except as set forth in the BioStar Disclosure Schedule: (i) BioStar has
not materially violated or breached, or committed any material default under,
any BioStar Material Contract, and, to the best of the knowledge of BioStar, no
other Person has materially violated or breached, or committed any material
default under, any BioStar Material Contract; (ii) to the best of the knowledge
of BioStar, no event has occurred, and no circumstance or condition exists, that
(with or without notice or lapse of time) could reasonably be expected to (A)
result in a material violation or breach of any of the provisions of any BioStar
Material Contract, (B) give any Person the right to declare a default or
exercise any remedy under any BioStar Material Contract, (C) give any Person the
right to a rebate, charge-back, penalty or change in delivery
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schedule under any BioStar Material Contract, (D) give any Person the right to
accelerate the maturity or performance of any BioStar Material Contract, or (E)
give any Person the right to cancel, terminate or materially modify any BioStar
Material Contract; (iii) since September 30, 1997, BioStar has not received any
written notice or other written communication regarding any actual or possible
violation or breach of, default under, or intention to terminate, any BioStar
Contract except for communication (A) that has subsequently been revoked; or (B)
has been received from a complaining party that has not contacted BioStar or
otherwise, to the knowledge of BioStar, taken any action with respect to such
party's complaint for a period of more than six months following receipt of the
communication; and (iv) BioStar has not waived any of its material rights under
any BioStar Material Contract, in each case where such breach, default,
violation or waiver would have a Material Adverse Effect on BioStar.
(d) To the best of the knowledge of BioStar, no Person is renegotiating, or
has the right to renegotiate, any material amount paid or payable to BioStar
under any BioStar Material Contract, or any other material term or provision of
any BioStar Material Contract, including termination provisions.
(e) The BioStar Contracts collectively constitute all of the Contracts
necessary to enable BioStar to conduct its business in the manner in which its
business is currently being conducted and in the manner in which its business is
required to be conducted pursuant to Contracts to which BioStar is a party and
which are in effect on the date hereof.
(f) The BioStar Disclosure Schedule sets forth a list of all claims made
under any BioStar Material Contract which are disputed in any material respect
or, to BioStar's knowledge, where a dispute as to any material matter has been
threatened.
2.10 LIABILITIES. BioStar has no accrued, contingent or other liabilities
of any nature, either matured or unmatured (whether or not required to be
reflected in financial statements in accordance with GAAP, and whether due or to
become due), except for: (a) liabilities identified as such in the BioStar
Financials; (b) normal and recurring liabilities that have been incurred by
BioStar since September 30, 1997 in the ordinary course of business and
consistent with past practices; and (c) other liabilities which have not had and
could not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on BioStar.
2.11 COMPLIANCE WITH LEGAL REQUIREMENTS. BioStar is, and to the best
knowledge of BioStar has at all times since inception been, in compliance with
all applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and could not reasonably be expected to have a
Material Adverse Effect on BioStar. Since inception, BioStar has not received
any notice or other communication from any Governmental Body regarding any
actual or possible violation of, or failure to comply with, any material Legal
Requirement.
2.12 CERTAIN BUSINESS PRACTICES. Neither BioStar nor any director, officer,
agent or employee of BioStar has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
2.13 GOVERNMENTAL AUTHORIZATIONS. BioStar holds all material Governmental
Authorizations necessary to enable BioStar to conduct its business in the manner
in which its business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. BioStar is, and to the
best knowledge of BioStar, at all times since inception has been, in substantial
compliance with the terms and requirements of such Governmental Authorizations.
Since inception, BioStar has not received any notice or other communication from
any Governmental Body regarding (a) any actual or possible violation of or
failure to comply with any term or requirement of any material Governmental
Authorization, or (b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification of any material Governmental
Authorization or (c) any requirement to apply for or hold Governmental
Authorization not held by BioStar, in each case where such violation,
revocation, suspension, cancellation, termination or modification would have a
Material Adverse Effect on BioStar.
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2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of BioStar with
any Governmental Body with respect to any taxable period ending on or before the
Closing Date (the "BioStar Returns") have been or will be filed on or before the
applicable due date (including any extensions of such due date). All amounts
shown on the BioStar Returns to be due on or before the Closing Date have been
or will be paid on or before the Closing Date.
(b) The BioStar Financials fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. BioStar will
establish, in the ordinary course of business and consistent with its past
practices, quarterly reserves adequate for the payment of all Taxes for the
applicable periods from December 31, 1996 through the Closing Date. Since
January 1, 1997, no material Tax liability has been incurred other than in the
ordinary course of business.
(c) Except as set forth in the BioStar Disclosure Schedule, no BioStar
Return has ever been examined or audited by any Governmental Body. No extension
or waiver of the limitation period applicable to any of the BioStar Returns has
been granted (by BioStar or any other Person), and no such extension or waiver
has been requested from BioStar.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of BioStar, has been threatened in writing against or with respect to
BioStar in respect of any Tax. There are no unsatisfied liabilities for Taxes
(including liabilities for interest, additions to tax and penalties thereon and
related expenses) with respect to any notice of deficiency or similar document
received by BioStar (other than liabilities for Taxes asserted under any such
notice of deficiency or similar document which are being contested in good faith
by BioStar and with respect to which adequate reserves for payment have been
established). There are no liens for Taxes upon any of the assets of BioStar
except liens for current Taxes not yet due and payable. BioStar has not entered
into nor has it become bound by any agreement or consent pursuant to Section
341(f) of the Code. BioStar has not been, and will not be, required to include
any adjustment in taxable income for any tax period (or portion thereof)
pursuant to Section 481 or 263A of the Code or any comparable provision under
state or foreign Tax laws as a result of transactions or events occurring, or
accounting methods employed, prior to the Closing. BioStar is not nor has it
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code. BioStar has no liability for the taxes of any
other Person.
(e) Except as set forth in the BioStar Disclosure Schedule, there is no
agreement, plan, arrangement or other Contract covering any employee or
independent contractor or former employee or independent contractor of BioStar
that, considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. BioStar is not, nor has it ever been, a
party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract (other than a Contract entered into in
the ordinary course of business in connection with the purchase or sale of
inventory or supplies).
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) The BioStar Disclosure Schedule identifies each salary, bonus, deferred
compensation, incentive compensation, stock purchase, stock option, severance
pay, termination pay, hospitalization, medical, life or other insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement plan
or program (collectively, the "BioStar Plans") sponsored, maintained,
contributed to or required to be contributed to by BioStar for the benefit of
any current or former employee of BioStar.
(b) No BioStar Plan is subject to Title IV of ERISA, Part 3 of Title I of
ERISA or Section 412 of the Code, and no BioStar Plan constitutes a
"multi-employer plan" (as defined in Section 3(37) of ERISA).
(c) With respect to each BioStar Plan, BioStar has made available to
Cortech: (i) an accurate and complete copy of each such BioStar Plan (including
all amendments thereto); (ii) an accurate and complete
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copy of the annual report, if required under ERISA, with respect to such BioStar
Plans for the last two plan years; (iii) an accurate and complete copy of the
most recent summary plan description, together with each summary of material
modifications thereto, if required under ERISA, with respect to such BioStar
Plans, (iv) if such BioStar Plans are funded through a trust or any third party
funding vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto); (v) accurate and complete copies
of all Contracts relating to such BioStar Plans, including service provider
agreements, insurance contracts, minimum premium contracts, stop-loss
agreements, investment management agreements, subscription and participation
agreements and record-keeping agreements; and (vi) an accurate and complete copy
of the most recent determination, opinion, notification or advisory letter
received from the Internal Revenue Service with respect to such BioStar Plans
(if such BioStar Plans are intended to be qualified under Section 401(a) of the
Code).
(d) BioStar has no plan or commitment to create any additional Plan, or to
modify or change any existing Plan (other than to comply with applicable law) in
a manner that would create any material liability for BioStar.
(e) No BioStar Plan provides death, medical or health benefits coverage
(whether or not insured) with respect to any current or former employee of
BioStar after any such employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant to
Section 4980B of the Code ("COBRA"), (ii) deferred compensation benefits accrued
as liabilities on the BioStar Financials, and (iii) benefits the full costs of
which are borne by current or former employees of BioStar (or the employees'
beneficiaries)).
(f) With respect to any BioStar Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of COBRA
have been complied with in all material respects. The BioStar Disclosure
Schedule lists all qualified beneficiaries under COBRA with respect to all such
BioStar Plans.
(g) Each of the BioStar Plans has been operated and administered in all
material respects in accordance with its terms and applicable Legal
Requirements, including but not limited to ERISA and the Code.
(h) All material contributions, premiums or other payments due from BioStar
to (or under) any BioStar Plan have been fully paid or adequately provided for
on the books and financial statements of BioStar.
(i) Each of the BioStar Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination, opinion, notification or
advisory letter from the Internal Revenue Service, and BioStar is not aware of
any reason why any such letter should be revoked.
(j) Except as set forth in the BioStar Disclosure Schedule, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, will
result in any payment (including any bonus, golden parachute or severance
payment) to any current or former employee or director of BioStar (whether or
not under any BioStar Plan), or materially increase the benefits payable under
any BioStar Plan, or result in any acceleration of the time of payment or
vesting of any such benefits.
(k) The BioStar Disclosure Schedule contains a list of the ten employees
with the highest salaries of BioStar as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to bonus,
deferred compensation or commission arrangements), their dates of employment and
their positions. BioStar is not a party to any collective bargaining contract or
other Contract with a labor union involving any of its employees. To the best
knowledge of BioStar, all of the employees of BioStar are "at will" employees.
(l) The BioStar Disclosure Schedule identifies each Employee who is not
fully available to perform work because of disability or other leave and sets
forth the basis of such leave and the anticipated date of return to full
service.
(m) BioStar is in compliance in all material respects with all applicable
Legal Requirements and Contracts relating to employment, employment practices,
wages, bonuses and terms and conditions of
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employment, including employee compensation matters and the classification of
independent contractors and workers.
2.16 ENVIRONMENTAL MATTERS. BioStar is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by BioStar of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. BioStar has not received any notice or other communication
(in writing or otherwise), whether from a Governmental Body, citizens group,
employee or otherwise, that alleges that BioStar is not in compliance with any
Environmental Law. To the knowledge of BioStar without further inquiry, no
current or prior owner of any property leased or controlled by BioStar has
received any notice or other communication (in writing or otherwise), whether
from a Government Body, citizens group, employee or otherwise, that alleges that
such current or prior owner or BioStar is not in compliance with any
Environmental Law. To the best knowledge of BioStar, all property that is leased
to, controlled by or used by BioStar, and all surface water, groundwater and
soil associated with or adjacent to such property is in clean and healthful
condition and is free of any material environmental contamination of any nature.
To the best knowledge of BioStar, BioStar has not disposed of, emitted,
discharged, handled, stored, transported, used or released any Materials of
Environmental Concern, arranged for the disposal, discharge, storage or release
of any Materials of Environmental Concern, or exposed any employee or other
individual to any Materials of Environmental Concern or condition so as to give
rise to any material liability or material corrective or remedial obligation
under any Environmental Laws.
2.17 INSURANCE. BioStar has delivered to Cortech a summary of all material
insurance policies and all material self-insurance programs relating to the
business, assets and operations of BioStar and has made available to Cortech
copies of the policies. Each of such insurance policies is in full force and
effect. Since September 30, 1997, BioStar has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any
material claim under any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance policy. Except as
set forth in the BioStar Disclosure Schedule, there is no pending claim
(including any workers' compensation claim) other than routine claims for
benefits under any BioStar Plan under or based upon any insurance policy of
BioStar.
2.18 TRANSACTIONS WITH AFFILIATES.
(a) Since December 31, 1996, except as set forth in the BioStar Disclosure
Schedule, no event has occurred that would be required to be reported by BioStar
pursuant to Item 404 of Regulation S-K promulgated by the SEC if BioStar was a
reporting company. The BioStar Disclosure Schedule identifies each Person who is
an "affiliate" (as that term is used in Rule 145 under the Securities Act) of
BioStar as of the date of this Agreement.
(b) The BioStar Disclosure Schedule contains an accurate and complete list
as of the date of this Agreement of all outstanding loans and advances made by
BioStar to any employee, director, consultant or independent contractor other
than routine travel advances and advances made for relocation purposes made to
employees in the ordinary course of business.
2.19 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the best of the knowledge
of BioStar) no Person has threatened to commence any Legal Proceeding: (i) that
involves BioStar or any of the assets owned or used by BioStar; or (ii) that
challenges, or that may have the effect of preventing, delaying, making illegal
or otherwise interfering with, the Merger or any of the other transactions
contemplated by this Agreement. To the best of the knowledge of BioStar, no
event has occurred, and no claim, dispute or other condition or circumstance
exists, that could reasonably be expected to give rise to or serve as a basis
for the commencement of any such Legal Proceeding that would reasonably be
expected to have a Material Adverse Effect on BioStar.
(b) There is no material order, writ, injunction, judgment or decree to
which BioStar, or any of the assets owned or used by BioStar, is subject. To the
best of the knowledge of BioStar, no officer or key employee of
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BioStar is subject to any order, writ, injunction, judgment or decree that
prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to the business of BioStar.
2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. BioStar has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The board of directors of BioStar (at a
meeting duly called and held) has unanimously (a) determined that the Merger is
advisable and fair and in the best interests of BioStar and its stockholders,
(b) authorized and approved the execution, delivery and performance of this
Agreement by BioStar and unanimously approved the Merger, and (c) recommended
the approval of this Agreement and the Merger by the holders of BioStar Common
Stock and BioStar Preferred Stock and directed that this Agreement and the
Merger be submitted for consideration by the BioStar stockholders at a BioStar
Stockholders' Meeting (as defined in Section 5.2). This Agreement constitutes
the legal, valid and binding obligation of BioStar, enforceable against BioStar
in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
2.21 NO EXISTING DISCUSSIONS. BioStar has terminated any existing
discussions with any Person that relate to any Acquisition Proposal. Neither
BioStar, nor any Representative of BioStar, is currently engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating to
any Acquisition Proposal.
2.22 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of BioStar Common Stock and BioStar Preferred Stock (voting on an
as-converted basis) outstanding on the BioStar Record Date, voting together as a
single class, and the affirmative vote of the holders of a majority of the
shares of each series of BioStar Preferred Stock outstanding on the BioStar
Record Date, voting as separate classes (the "Required BioStar Stockholder
Vote") are the only votes of the holders of any class or series of BioStar's
capital stock necessary to approve this Agreement, the Merger, the BioStar
Charter Amendment, and the other transactions contemplated by this Agreement.
2.23 NON-CONTRAVENTION; CONSENTS. Neither (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Certificate of Incorporation, Bylaws or other charter
or organizational documents of BioStar, or (ii) any resolution adopted by
the stockholders, the board of directors or any committee of the board of
directors of BioStar;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order,
writ, injunction, judgment or decree to which BioStar, or any of the assets
owned or used by BioStar, is subject, if the result would have a Material
Adverse Effect on BioStar;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by BioStar or that otherwise relates to the
business of BioStar or to any of the assets owned or used by BioStar, if
the result would have a Material Adverse Effect on BioStar;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event which with notice or lapse
of time or both would become a default) under, any provision of any BioStar
Material Contract, or give any Person the right to (i) declare a default or
exercise any remedy under any such BioStar Material Contract, (ii) a
rebate, charge-back, penalty or change in delivery schedule under any such
BioStar Material Contract, (iii) accelerate the maturity or performance of
any such BioStar Material Contract, or (iv) cancel, terminate or materially
modify any term of such BioStar Material Contract, if the result would have
a Material Adverse Effect on BioStar; or
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(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by BioStar (except for minor liens
that will not, in any case or in the aggregate, materially detract from the
value of the assets subject thereto or materially impair the operations of
BioStar).
Except as may be set forth in the BioStar Disclosure Schedule or as
required by the Exchange Act, the DGCL and the NASD Bylaws (as they relate to
the Form S-4 Registration Statement and the Joint Proxy Statement) BioStar is
not, nor will it be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
2.24 FINANCIAL ADVISOR. Except for Lehman Brothers, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
BioStar. BioStar has furnished to Cortech accurate and complete copies of all
agreements under which any such fees, commissions or other amounts have been
paid or may become payable and all indemnification and other arrangements
relating to the engagement of Lehman Brothers.
2.25 FULL DISCLOSURE. This Agreement (including the BioStar Disclosure
Schedule) does not, and the certificate referred to in Section 6.6(c) will not,
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
3. REPRESENTATIONS AND WARRANTIES OF CORTECH AND MERGER SUB
Cortech and Merger Sub represent and warrant to BioStar, except as set
forth in the Cortech Disclosure Schedule or the Cortech SEC Documents (as
defined in Section 3.4 below) as follows (and notwithstanding any particular
reference in a representation or warranty to the Cortech SEC Documents or
Cortech Disclosure Schedule):
3.1 DUE ORGANIZATION, SUBSIDIARIES, ETC.
(a) Each of Cortech and its Subsidiaries (collectively, the "Cortech
Corporations"), is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own, lease and use its
assets in the manner in which its assets are currently owned, leased and used;
and (iii) to perform its obligations under all contracts by which it is bound.
Each of the Cortech Corporations is qualified to do business as foreign
corporation, and is in good standing, under the laws of all jurisdictions where
the nature of its business requires such qualification except in jurisdictions
where the failure to so qualify, individually and in the aggregate, would not
have a Material Adverse Effect.
(b) Cortech has no Subsidiaries, except for the corporation identified in
the Cortech Disclosure Schedule; and neither Cortech nor the corporation
identified in the Cortech Disclosure Schedule owns any capital stock of, or any
equity interest of any nature in, any other Entity other than the Entities
identified in the Cortech Disclosure Schedule. None of the Cortech Corporations
has agreed or is obligated to make or is bound by any Contract under which it is
obligated to make, any future investment in or capital contribution to any other
Entity. None of the Cortech Corporations has, at any time, been a general
partner of any general partnership, limited partnership, or other Entity.
3.2 CERTIFICATE/CERTIFICATE OF INCORPORATION AND BYLAWS. Cortech has
delivered to BioStar complete and accurate copies of the Certificate of
Incorporation, Bylaws, and other charter and organizational documents of the
respective Cortech Corporations, including all amendments thereto.
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3.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of Cortech consists of: (i) 50,000,000
shares of Cortech Common Stock, par value $0.002, of which, as of November 30,
1997 18,523,918 shares were issued and outstanding and no shares were held in
its treasury, and (ii) 2,000,000 shares of Cortech Preferred Stock, par value
$0.002, none of which were issued and outstanding or held in its treasury as of
November 30, 1997. All of the outstanding shares of Cortech Common Stock have
been duly authorized and validly issued, and are fully paid and nonassessable.
Except as set forth in the Cortech Disclosure Schedule: (i) none of the
outstanding shares of Cortech Common Stock is entitled or subject to any
preemptive right, right of participation in future financings, right to maintain
a percentage ownership position, or any similar right; (ii) none of the
outstanding shares of Cortech Common Stock is subject to any right of first
refusal in favor of Cortech; and (iii) there is no Cortech Contract relating to
the voting or registration of, or restricting any Person from purchasing,
selling, pledging or otherwise disposing of (or granting any option or similar
right with respect to), any shares of Cortech Common Stock. None of the Cortech
Corporations is under any obligation, or is bound by any Contract pursuant to
which it may become obligated, to repurchase, redeem or otherwise acquire any
outstanding shares of Cortech Common Stock or any other securities of any
Cortech Corporation, other than the stockholder rights plan disclosed pursuant
to Section 3.3(c) hereof. The authorized capital of Merger Sub consists of 100
shares of Common Stock, par value $.001 per share, 10 shares of which are issued
and outstanding and are held beneficially, and of record, by Cortech.
(b) As of November 30, 1997: (i) 376,662 shares of Cortech Common Stock are
reserved for future issuance pursuant to stock options granted and outstanding
under Cortech's Amended and Restated 1986 Incentive Stock Option Plan, (ii) no
shares of Cortech Common Stock are reserved for future issuance pursuant to
stock options granted and outstanding under Cortech's 1991 Non-employee
Directors' Stock Option Plan, (iii) 207,815 shares of Cortech Common Stock are
reserved for future issuance pursuant to stock options granted and outstanding
under Cortech's Amended and Restated 1992 Non-employee Directors' Stock Option
Plan, (iv) 333,682 shares of Cortech Common Stock are reserved for future
issuance pursuant to stock options granted and outstanding under Cortech's 1993
Equity Incentive Plan, and (v) 108,236 shares of Cortech Common Stock are
reserved for future issuance under Cortech's 1993 Employee Stock Purchase Plan
(the "Cortech ESPP"). The Cortech Disclosure Schedule sets forth the following
information with respect to each Cortech Option outstanding as of the date of
this Agreement: (i) the particular plan pursuant to which such Cortech Option
was granted; (ii) the name of the optionee; (iii) the number of shares of
Cortech Common Stock subject to such Cortech Option; (iv) the exercise price of
such Cortech Option; (v) the date on which such Cortech Option was granted; and
(vi) the extent to which such Cortech Option is vested and exercisable as of
November 30, 1997. Cortech has delivered to BioStar accurate and complete copies
of all stock option plans and forms of option grant pursuant to which Cortech
has granted any outstanding stock options. Cortech has reserved 709,688 shares
of Cortech Common Stock for issuance upon exercise of warrants. The Cortech
Disclosure Schedule sets forth the following information with respect to the
outstanding warrant to purchase Cortech Common Stock: (1) the name of the holder
of such warrant; (2) the number of shares of Cortech Common Stock subject to
such warrant; (3) the exercise price of such warrant; (4) the date on which such
warrant was issued; and (5) the date on which such warrant expires. Cortech has
delivered to BioStar an accurate and complete copy of such warrant.
(c) Except as set forth in the Cortech Disclosure Schedule, there is no:
(i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of Cortech or any other Cortech Corporation; (ii) outstanding
security, instrument or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other securities of Cortech
or any other Cortech Corporation; (iii) stockholder rights plan (or similar plan
commonly referred to as a "poison pill") or Contract under which Cortech or any
other Cortech Corporation is or may become obligated to sell or otherwise issue
any shares of its capital stock or any other securities; or (iv) condition or
circumstance that may reasonably give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is entitled to
acquire or receive any shares of capital stock or other securities of Cortech or
any other Cortech Corporation. There are no bonds, debentures, notes or other
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indebtedness of Cortech outstanding having the right to vote (or convertible
into securities having the right to vote) on any matters on which the
stockholders of the Cortech have the right to vote.
(d) All outstanding securities of all of the Cortech Corporations,
including shares of Cortech Common Stock, all outstanding Cortech Options, all
outstanding warrants to purchase Cortech Common Stock, all outstanding rights
under the Cortech ESPP and all outstanding shares of capital stock of each
subsidiary of Cortech have been issued and granted in all material respects in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
(e) All of the outstanding shares of capital stock of Merger Sub have been
duly authorized and are validly issued, are fully paid and nonassessable and
(other than the capital stock of Cortech) are owned beneficially and of record
by Cortech, free and clear of any Encumbrances.
3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Cortech has made available to BioStar accurate and complete copies
(excluding copies of exhibits) of all registration statements, proxy statements
and other statements, reports, schedules, forms and other documents filed by
Cortech with the SEC since September 30, 1993 (the "Cortech SEC Documents"). All
statements, reports, schedules, forms and other documents required to have been
filed by Cortech with the SEC have been so filed by Cortech on a timely basis
with the exception of the 1997 Annual Meeting Proxy Statement. As of the time it
was filed with the SEC (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing): (i) each of the
Cortech SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may be); and
(ii) none of the Cortech SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements (including any related notes)
contained in the Cortech SEC Documents (the "Cortech Financial Statements"): (i)
complied as to form in all material respects with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods covered (except as may be indicated in the notes to such
financial statements and, in the case of unaudited statements, as permitted by
Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to normal and recurring year-end audit
adjustments which will not, individually or in the aggregate, be material in
amount); and (iii) fairly present the financial position of Cortech as of the
respective dates thereof and the results of operations and cash flows of Cortech
for the periods covered thereby.
(c) Since September 30, 1997, Cortech and its subsidiaries have not
incurred any liabilities of the type required under GAAP to be recorded on a
balance sheet or in the footnotes thereto except liabilities incurred in the
ordinary course of business.
3.5 ABSENCE OF CHANGES. Since September 30, 1997:
(a) there has not been any Material Adverse Effect on the business,
condition, capitalization, assets, liabilities, operations or financial
performance of the Cortech Corporations, and no event has occurred that could
reasonably be expected to have a Material Adverse Effect on the Cortech
Corporations;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the assets of the Cortech
Corporations which are necessary for the conduct of Cortech's business as
currently conducted (whether or not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) which would be prohibited by Section
4.3(b)(i), (iv), (ix), (x) or (xi) if it were to be effected, accepted or were
to take place between the date hereof and the Effective Time.
3.6 TITLE TO ASSETS. Except as set forth in the Cortech Disclosure Schedule
or the Cortech SEC Documents, the Cortech Corporations own, and have good, valid
and marketable title to, all assets purported to be owned by them, including:
all assets reflected in their books and records as being owned by the Cortech
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Corporations. All of said assets are owned by the Cortech Corporations free and
clear of any Encumbrances, except for (a) any lien for current taxes not yet due
and payable, (b) minor liens that have arisen in the ordinary course of business
and that do not (in any case or in the aggregate) materially detract from the
value of the assets subject thereto or materially impair the operations of any
of the Cortech Corporations, and (c) liens described in the Cortech Disclosure
Schedule.
3.7 REAL PROPERTY; EQUIPMENT; LEASEHOLD. Except as described in the Cortech
Disclosure Schedule or the Cortech SEC Documents:
(a) None of the Cortech Corporations owns any real property or any material
interest in real property, except for the leasehold created under real property
leases set forth in the Cortech Disclosure Schedule. Complete and correct copies
of such leases have previously been delivered to BioStar by Cortech.
(b) All material items of equipment and other tangible assets owned by or
leased to the Cortech Corporations are reasonably adequate for the uses to which
they are being put, are in good condition and repair (ordinary wear and tear
excepted) and are reasonably adequate for the conduct of the business of the
Cortech Corporations in the manner in which such business is currently being
conducted and in the manner in which such business is required to be conducted
pursuant to Cortech Contracts and which are in effect on the date hereof.
3.8 PROPRIETARY ASSETS.
(a) The Cortech SEC Documents describe each Proprietary Asset owned by
Cortech and deemed by Cortech to have material value to Cortech. Except as
disclosed in the Cortech SEC Documents, Cortech has good title to such
Proprietary Assets and has no obligation to make any material ongoing royalty or
other payment to any Person in respect thereto. Any limitation on the right of
Cortech to use or exploit a Cortech Proprietary Asset deemed by Cortech to have
material value to Cortech has been disclosed in the Cortech SEC Documents.
(b) The Cortech Corporations have taken reasonable measures and precautions
to protect and maintain the confidentiality, secrecy and value of all Cortech
Proprietary Assets (except Cortech Proprietary Assets whose value would be
unimpaired by disclosure). Except where the failure to obtain such agreements
would not impair the value of any Cortech Proprietary Asset, the Cortech
Corporations have obtained, from all current and former employees of the Cortech
Corporations and from all current and former consultants and independent
contractors to the Cortech Corporations, signed agreements appropriately
restricting the use and disclosure of the Cortech Proprietary Assets, and
providing for assignment to the Cortech Corporations of the Cortech Proprietary
Assets developed by such employees and consultants.
(c) To the best of the knowledge of Cortech: (i) all patents, patent
applications, registered trademarks, registered service marks and registered
copyrights held by any of the Cortech Corporations and deemed by Cortech to have
material value to Cortech were filed and were and have been prosecuted in good
faith and in compliance with all applicable Legal Requirements; (ii) there has
not been any claim, action or proceeding, and there is no pending or threatened
claim, action or proceeding relating to any registration or filing of a Cortech
Proprietary Asset; (iii) none of the Cortech Proprietary Assets infringes,
misappropriates or conflicts with any Proprietary Asset owned or used by any
other Person; (iv) no other Person is infringing, misappropriating or making any
unlawful or unauthorized use of, and no Proprietary Asset owned or used by any
other Person infringes or conflicts with, any material Cortech Proprietary
Asset.
(d) The Cortech Proprietary Assets constitute all of the Proprietary Assets
reasonably necessary to enable the Cortech Corporations to conduct their
businesses in the manner in which such businesses are being conducted and in the
manner in which such businesses are required to be conducted pursuant to
Contracts to which Cortech is a party and which are in effect on the date
hereof. Except as set forth in the Cortech Disclosure Schedule or the Cortech
SEC Documents, none of the Cortech Corporations has (i) licensed any of the
material Cortech Proprietary Assets to any Person on an exclusive basis, or (ii)
entered into any covenant not to compete or Contract limiting its ability to
exploit fully any material Cortech Proprietary Assets or to transact business in
any market or geographical area or with any Person.
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3.9 MATERIAL CONTRACTS.
(a) The Cortech Disclosure Schedule identifies each Cortech Corporation
Contract that constitutes a "Cortech Material Contract." For purposes of this
Agreement, each of the following shall be deemed to constitute a Cortech
Material Contract:
(i) any Contract relating to the employment of, or the performance of
services by, any officer or consultant, and any Contract pursuant to which
any of the Cortech Corporations is or may become obligated to make any
severance, termination, bonus or relocation payment or any other payment
(other than payments in respect of salary and the grant of standard
benefits);
(ii) any Contract relating to the acquisition, transfer, development,
sharing or license of any Proprietary Asset deemed by Cortech to have
material value to Cortech (except for any Contract pursuant to which any
Proprietary Asset is licensed to the Cortech Corporations under any third
party software license generally available to the public);
(iii) any Contract which provides for indemnification of any officer,
director, employee or agent;
(iv) any Contract imposing any restriction on the right or ability of
Cortech (A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product or
other asset to or perform any services for any other Person or to transact
business or deal in any other manner with any other Person, or (C) to
develop or distribute any technology, in each case where breach thereof by
Cortech would have a Material Adverse Effect on Cortech;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities, (B) providing any Person
with any preemptive right, right of participation, right of maintenance or
any similar right with respect to any securities, or (C) providing Cortech
with any right of first refusal with respect to, or right to repurchase or
redeem, any securities;
(vi) any Contract requiring that Cortech give any notice, obtain any
consent or provide any information to any Person prior to accepting any
Acquisition Proposal;
(vii) any Contract (not otherwise identified in this Section) that (A)
has a term of more than 60 days or that may not be terminated by a Cortech
Corporation (without penalty) within 60 days after the delivery of a
termination notice by such Cortech Corporation and (B) that contemplates or
involves (I) the payment or delivery of cash or other consideration on or
after the date hereof in an amount or having a value in excess of $100,000
in aggregate payments under such Contract, or (II) the performance of
services on or after the date hereof having a value in excess of $100,000
in aggregate payments under such Contract;
(viii) any Contract (A) to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations, or
involving or directly or indirectly benefiting any Governmental Body
(including any subcontract or other Contract between BioStar and any
contractor or subcontractor to any Governmental Body) and (B) that
contemplates and involves (I) the payment or delivery of cash or other
consideration on or after the date hereof in an amount or having a value in
excess of $100,000 in aggregate payments under such Contract, or (B) the
performance of services on or after the date hereof having a value in
excess of $100,000 in aggregate payments under such Contract;
(ix) any open purchase order placed by a Cortech Corporation requiring
future aggregate payments in excess of $100,000;
(x) any other Contract (not otherwise identified in this Section), if
a breach of such Contract could reasonably be expected to have a Material
Adverse Effect on any of the Cortech Corporations.
(b) Each Cortech Material Contract is valid and in full force and effect,
and is enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies. The aggregate amount payable by the Cortech Corporations
under Contracts that would be Cortech Material Contracts but for the limitations
of Sections 3.9(a)(vii)(B) or 3.9(a)(viii)(B) do not exceed
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$50,000. The aggregate amount payable by the Cortech Corporations under purchase
orders not listed on the Cortech Disclosure Schedule does not exceed $50,000.
(c) Except as set forth in the Cortech Disclosure Schedule: (i) none of the
Cortech Corporations has materially violated or breached, or committed any
material default under, any Cortech Material Contract, and, to the best of the
knowledge of Cortech, no other Person has materially violated or breached, or
committed any material default under, any Cortech Material Contract; (ii) to the
best of the knowledge of Cortech, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) could
reasonably be expected to (A) result in a material violation or breach of any of
the provisions of any Cortech Material Contract, (B) give any Person the right
to declare a default or exercise any remedy under any Cortech Material Contract,
(C) give any Person the right to a rebate, charge-back, penalty or change in
delivery schedule under any Cortech Material Contract, (D) give any Person the
right to accelerate the maturity or performance of any Cortech Material
Contract, or (E) give any Person the right to cancel, terminate or materially
modify any Cortech Material Contract; (iii) since September 30, 1997, none of
the Cortech Corporations has received any written notice or other written
communication regarding any actual or possible violation or breach of, default
under, or any intention to terminate, any Cortech Contract, except for
communication (A) that has subsequently been revoked; or (B) has been received
from a complaining party that has not contacted Cortech or otherwise, to
Cortech's knowledge, taken any action with respect to such party's complaint for
a period of more than six months following receipt of the communication; and
(iv) none of the Cortech Corporations has waived any of its material rights
under any Cortech Material Contract, in each case where such breach, default,
violation or waiver would have a Material Adverse Effect on Cortech.
(d) To the best of the knowledge of Cortech, no Person is renegotiating, or
has the right to renegotiate, any material amount paid or payable to the Cortech
Corporations under any Cortech Material Contract, or any other material term or
provision of any Cortech Material Contract, including termination provisions.
(e) The Cortech Material Contracts and other Contracts of the Cortech
Corporations collectively constitute all of the Contracts necessary to enable
the Cortech Corporations to conduct their respective businesses in the manner in
which their businesses are currently being conducted and in the manner in which
such businesses are required to be conducted pursuant to Contracts to which
Cortech is a party and which are in effect on the date hereof.
(f) The Cortech Disclosure Schedule sets forth a list of all claims made
under any Cortech Material Contract which are disputed in any material respect
or, to Cortech's knowledge, where a dispute as to any material matter has been
threatened.
3.10 LIABILITIES. None of the Cortech Corporations has any accrued,
contingent or other liabilities of any nature, either matured or unmatured
(whether or not required to be reflected in financial statements in accordance
with GAAP, and whether due or to become due), except for: (a) liabilities
identified as such in the Cortech Financial Statements; (b) normal and recurring
liabilities that have been incurred by the Cortech Corporations since September
30, 1997 in the ordinary course of business and consistent with past practices;
and (c) other liabilities which have not had and could not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on the Cortech Corporations.
3.11 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Cortech Corporations
is, and, to the best knowledge of Cortech, has at all times since inception
been, in compliance with all applicable Legal Requirements, except where the
failure to comply with such Legal Requirements has not had and could not
reasonably be expected to have, a Material Adverse Effect on the Cortech
Corporations. Since inception, none of the Cortech Corporations has received any
notice or other communication from any Governmental Body regarding any actual or
possible violation of, or failure to comply with, any material Legal
Requirement.
3.12 CERTAIN BUSINESS PRACTICES. None of the Cortech Corporations nor any
director, officer, agent or employee of any of the Cortech Corporations has (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns
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or violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended, or (iii) made any other unlawful payment.
3.13 GOVERNMENTAL AUTHORIZATIONS. The Cortech Corporations hold all
material Governmental Authorizations necessary to enable them to conduct their
respective businesses in the manner in which such businesses are currently being
conducted. All such Governmental Authorizations are valid and in full force and
effect. Each Cortech Corporation is, and to the best knowledge of Cortech, at
all times since inception has been, in substantial compliance with the terms and
requirements of such Governmental Authorizations. To the best knowledge of
Cortech, since inception, none of the Cortech Corporations has received any
notice or other communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any term or
requirement of any material Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any material Governmental Authorization or (c) any requirement
to apply for or hold a Governmental Authorization not held by Cortech, in each
case where such violation, revocation, suspension, cancellation, termination or
modification would have a Material Adverse Effect on Cortech.
3.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the respective
Cortech Corporations with any Governmental Body with respect to any taxable
period ending on or before the Closing Date (the "Cortech Returns") have been or
will be filed on or before the applicable due date (including any extensions of
such due date). All amounts shown on the Cortech Returns to be due on or before
the Closing Date have been or will be paid on or before the Closing Date.
(b) The Cortech Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with GAAP. Each Cortech Corporation will establish, in the ordinary
course of business and consistent with its past practices, quarterly reserves
adequate for the payment of all Taxes for the applicable periods from December
31, 1996 through the Closing Date. Since January 1, 1997 no material Tax
liability has been incurred other than in the ordinary course of business.
(c) Except as set forth in the Cortech Disclosure Schedule, no Cortech
Return has ever been examined or audited by any Governmental Body. No extension
or waiver of the limitation period applicable to any of the Cortech Returns has
been granted (by Cortech or any other Person), and no such extension or waiver
has been requested by the Cortech Corporations.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of Cortech, has been threatened in writing against or with respect to
any Cortech Corporation in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax and
penalties thereon and related expenses) with respect to any notice of deficiency
or similar document received by any Cortech Corporation (other than liabilities
for Taxes asserted under any such notice of deficiency or similar document which
are being contested in good faith by the Cortech Corporation and with respect to
which adequate reserves for payment have been established). There are no liens
for Taxes upon any of the assets of any of the Cortech Corporations except liens
for current Taxes not yet due and payable. None of the Cortech Corporations has
entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. None of the Cortech Corporations has been, and none of the
Cortech Corporations will be required to include any adjustment in taxable
income for any tax period (or portion thereof) pursuant to Section 481 or 263A
of the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing. None of the Cortech Corporations is nor has been a United
States real property holding corporation within the meaning of Section 847(c)(2)
of the Code. No Cortech Corporation has liabilities for the Taxes of any other
Person.
(e) Except as set forth in the Cortech Disclosure Schedule or the Cortech
SEC Documents, there is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of the Cortech Corporations that, considered
individually or considered collectively with any other such Contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G or
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Section 162 of the Code. None of the Cortech Corporations is, or has ever been,
a party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract (other than a Contract entered into in
the ordinary course of business in connection with the purchase or sale of
inventory or supplies).
3.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) The Cortech Disclosure Schedule or the Cortech SEC Documents identifies
salary, bonus, deferred compensation, incentive compensation, stock purchase,
stock option, severance pay, termination pay, hospitalization, medical, life or
other insurance, supplemental unemployment benefit, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "Cortech Plans")
sponsored, maintained, contributed to or required to be contributed to by any of
the Cortech Corporations for the benefit of any current of former employee of
each Cortech Corporation.
(b) No Cortech plan is subject to Title IV of ERISA, Part 3 of Title I of
ERISA or Section 412 of the Code, and no Cortech Plan constitutes a
"multi-employer plan" (as defined in Section 3(37) of ERISA).
(c) With respect to each Cortech Plan, Cortech has made available to
BioStar: (i) an accurate and complete copy of each such Cortech Plan (including
all amendments thereto); (ii) an accurate and complete copy of the annual
report, if required under ERISA, with respect to such Cortech Plans for the last
two plan years; (iii) an accurate and complete copy of the most recent summary
plan description, together with each summary of material modifications thereto,
if required under ERISA, with respect to such Cortech Plans; (iv) if such
Cortech Plans are funded through a trust or a third party funding vehicle, an
accurate and complete copy of the trust or other funding agreement (including
all amendments thereto); (v) accurate and complete copies of all Contracts
relating to such Cortech Plans, including service provider agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
record-keeping agreements; and (vi) an accurate and complete copy of the most
recent determination, opinion, notification or advisory letter received from the
Internal Revenue Service with respect to such Cortech Plans (if such Cortech
Plans are intended to be qualified under Section 401(a) of the Code).
(d) Cortech has no plan or commitment to create any additional Plan, or to
modify or change any existing Plan (other than to comply with applicable law) in
a manner that would create any material liability for any of the Cortech
Corporations.
(e) No Cortech Plan provides death, medical or health benefits coverage
(whether or not insured) with respect to any of its current or former employees
after any such employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant to
Section 4980B of the Code, (ii) deferred compensation benefits accrued as
liabilities on the most recent financial statements included in the Cortech SEC
filings, and (iii) benefits the full cost of which are borne by such current or
former employees (or the employees' beneficiaries)).
(f) With respect to any Cortech Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, COBRA has been complied
with in all material respects. The Cortech Disclosure Schedule lists all
qualified beneficiaries under COBRA with respect to all such Cortech Plans.
(g) Each of the Cortech Plans has been operated and administered in all
material respects in accordance with its terms and applicable Legal
Requirements, including but not limited to ERISA and the Code.
(h) All material contributions, premiums or other payments due from any of
the Cortech Corporations to (or under) any Cortech Plan have been fully paid or
adequately provided for on the books and financial statements of the Cortech
Corporations.
(i) Each of the Cortech Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination, opinion, notification or
advisory letter from the Internal Revenue Service, and Cortech is not aware of
any reason why any such letter should be revoked.
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(j) Except as set forth in the Cortech Disclosure Schedule, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, will
result in any payment (including any bonus, golden parachute or severance
payment) to any of Cortech's current or former employees or directors (whether
or not under any Cortech Plan), or materially increase the benefits payable
under any Cortech Plan, or result in any acceleration of the time of payment or
vesting of any such benefits.
(k) Cortech is not a party to any collective bargaining contract or other
Contract with a labor union involving any of its employees. To the best
knowledge of Cortech, all of Cortech's employees are "at will" employees.
(l) Each Cortech Corporation is in compliance in all material respects with
all applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of employment,
including employee compensation matters and the classification of independent
contractors and workers.
3.16 ENVIRONMENTAL MATTERS. Each of the Cortech Corporations is in
compliance in all material respects with all applicable Environmental Laws,
which compliance includes the possession by each of the Cortech Corporations of
all permits and other Governmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof. None
of the Cortech Corporations has received any notice or other communication (in
writing or otherwise), whether from a Governmental Body, citizens group,
employee or otherwise, that alleges that any of the Cortech Corporations is not
in compliance with any Environmental Law, and, to the best of the knowledge of
Cortech, there are no circumstances that may prevent or interfere with the
compliance by any of the Cortech Corporations with any Environmental Law in the
future. To the knowledge of Cortech without further inquiry, no current or prior
owner of any property leased or controlled by any of the Cortech Corporations
has received any notice or other communications (in writing or otherwise),
whether from a Government Body, citizens group, employee or otherwise, that
alleges that such current or prior owner or any of the Cortech Corporations is
not in compliance with any Environmental Law. To the best of the knowledge of
Cortech, all property that is leased to, controlled by or used by Cortech, and
all surface water, groundwater and soil associated with or adjacent to such
property is in clean and healthful condition and is free of any material
environmental contamination of any nature. To the best knowledge of Cortech,
none of the Cortech Corporations has disposed of, emitted, discharged, handled,
stored, transported, used or released any Materials of Environmental Concern,
arranged for the disposal, discharge, storage or release of any Materials of
Environmental Concern, or exposed any employee or other individual to any
Materials of Environmental Concern or condition so as to give rise to any
material liability or material corrective or remedial obligation under any
Environmental Laws.
3.17 INSURANCE. Cortech has delivered to BioStar a summary of all material
insurance policies and all material self-insurance programs relating to the
business, assets and operations of the respective Cortech Corporations and has
made available to BioStar copies of the polices. Each of such insurance policies
is in full force and effect. Since September 30, 1997, none of the Cortech
Corporations has received any notice or other communication regarding any actual
or possible (a) cancellation or invalidation of any insurance policy, (b)
refusal of any coverage or rejection of any material claim under any insurance
policy, or (c) material adjustment in the amount of the premiums payable with
respect to any insurance policy. Except as set forth in the Cortech Disclosure
Schedule, there is no pending claim (including any workers' compensation claim)
other than routine claims for benefits under any Cortech Plan, under or based
upon any insurance policy of any of the Cortech Corporations.
3.18 TRANSACTIONS WITH AFFILIATES.
(a) Except as set forth in the Cortech SEC Reports, since the date of
Cortech's last proxy statement filed with the SEC, no event has occurred that
would be required to be reported by Cortech pursuant to Item 404 of Regulation
S-K promulgated by the SEC. The Cortech Disclosure Schedule identifies each
Person who is an "affiliate" (as that term is used in Rule 145 under the
Securities Act) of Cortech and who beneficially owns more than one percent of
the outstanding voting capital stock of Cortech as of the date of this
Agreement.
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(b) The Cortech Disclosure Schedule contains an accurate and complete list
as of the date of this Agreement of all outstanding loans and advances made by
any of the Cortech Corporations to any employee, director, consultant or
independent contractor other than routine travel advances and advances made for
relocation purposes made to employees in the ordinary course of business.
3.19 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the best of the knowledge
of Cortech) no Person has threatened to commence any Legal Proceeding: (i) that
involves Cortech or any of the assets owned or used by Cortech or any of the
Cortech Corporations; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the best of
the knowledge of Cortech, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to, give
rise to or serve as a basis for the commencement of any such Legal Proceeding
that would reasonably be expected to have a Material Adverse Effect on the
Cortech Corporations.
(b) There is no material order, writ, injunction, judgment or decree to
which any of the Cortech Corporations, or any of the assets owned or used by any
of the Cortech Corporations, is subject. To the best of the knowledge of
Cortech, no officer or key employee of the Cortech Corporations is subject to
any order, writ, injunction, judgment or decree that prohibits such officer or
other employee from engaging in or continuing any conduct, activity or practice
relating to the business of any of the Cortech Corporations.
3.20 AUTHORITY; BINDING NATURE OF AGREEMENT. Cortech and Merger Sub have
the absolute and unrestricted right, power and authority to enter into and to
perform their obligations under this Agreement. The board of directors of
Cortech (at a meeting duly called and held) has unanimously (a) determined that
the Merger is advisable and fair and in the best interests of Cortech and its
stockholders, (b) authorized and approved the execution, delivery and
performance of this Agreement by Cortech and approved the Merger as sole
stockholder of Merger Sub, (c) recommended the approval of the issuance of
Cortech Common Stock in the Merger by the holders of Cortech Common Stock, and
directed that such issuance be submitted for consideration by Cortech's
stockholders at the Cortech Stockholders' Meeting (as defined in Section 5.3)
and the board of directors of Merger Sub has duly authorized by all necessary
action the execution, delivery and performance by Merger Sub of this Agreement.
This Agreement constitutes the legal, valid and binding obligation of Cortech
and Merger Sub, enforceable against Cortech and Merger Sub in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
3.21 NO EXISTING DISCUSSIONS. Cortech has terminated any existing
discussions with any Person that relate to any Acquisition Proposal. None of the
Cortech Corporations, and no Representative of any of the Cortech Corporations,
is currently engaged, directly or indirectly, in any discussions or negotiations
with any Person (other than BioStar) relating to any Acquisition Proposal.
3.22 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the total votes cast at a meeting of the Cortech stockholders at which a quorum
is present (the "Required Cortech Stockholder Merger Vote"), is the only vote of
the holders of any class or series of Cortech's capital stock necessary to
approve the issuance of Cortech Common Stock in the Merger. The affirmative vote
of the holders of a majority of the outstanding shares of Cortech Common Stock
entitled to vote at the Cortech Stockholders Meeting is the only vote of the
holder of any class or series of Cortech's capital stock necessary to approve
the Cortech Charter Amendment (the "Required Cortech Stockholder Charter Vote).
3.23 NON-CONTRAVENTION; CONSENTS. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Cortech's Certificate of Incorporation, Bylaws or other
charter or organizational documents of any of the Cortech
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Corporations, or (ii) any resolution adopted by the stockholders, the board
of directors or any committee of the board of directors of any of the
Cortech Corporations;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order,
writ, injunction, judgment or decree to which any of the Cortech
Corporations, or any of the assets owned or used by any of the Cortech
Corporations, is subject, if the result would have a Material Adverse
Effect on Cortech;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by Cortech or that otherwise relates to
Cortech's business or to any of the assets owned or used by any of the
Cortech Corporations, if the result would have a Material Adverse Effect on
Cortech;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event which with notice or lapse
of time or both would become a default) under, any provision of any Cortech
Contract that is or would constitute a Cortech Material Contract, or give
any Person the right to (i) declare a default or exercise any remedy under
any such Cortech Material Contract, (ii) a rebate, charge-back, penalty or
change in delivery schedule under any such Cortech Material Contract, (iii)
accelerate the maturity or performance of any such Cortech Material
Contract, or (iv) cancel, terminate or materially modify any term of such
Cortech Material Contract, if the result would have a Material Adverse
Effect on Cortech; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by any of the Cortech Corporations
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of any of the Cortech Corporations).
Except as may be required by the Exchange Act, the DGCL, and the NASD
Bylaws (as they relate to the Form S-4 Registration Statement and the Joint
Proxy Statement) none of the Cortech Corporations was, is or will be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
3.24 FAIRNESS OPINION. Cortech's board of directors has received the
written opinion of Cowen, financial advisor to Cortech, dated as of the date of
this Agreement, to the effect that the terms of the Merger are fair to Cortech
from a financial point of view.
3.25 VALID ISSUANCE; RESERVATION OF SHARES. The Cortech Common Stock to be
issued in the Merger in exchange for BioStar Common Stock and BioStar Preferred
Stock and to be issued upon exercise or conversion of all BioStar Options,
BioStar Warrants, the Contingent Instrument and the Convertible Notes will, when
issued in accordance with the provisions of this Agreement and the terms of such
BioStar Options, BioStar Warrants, Contingent Instrument and Convertible Notes,
be validly issued, fully paid and nonassessable. Cortech's board of directors
has duly reserved by all necessary action the Cortech Common Stock issuable upon
exercise or conversion of such BioStar Options, BioStar Warrants, Contingent
Instrument and Convertible Notes.
3.26 FINANCIAL ADVISOR. Except for Cowen, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or any of the other transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Cortech
Corporations. Cortech has furnished to BioStar accurate and complete copies of
all agreements under which any such fees, commissions, or other amounts have
been paid or may become payable and all indemnification and other arrangements
relating to the engagement of Cowen.
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3.27 FULL DISCLOSURE. This Agreement (including the Cortech Disclosure
Schedule) does not, and the certificate referred to in Section 7.5(c) will not,
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
3.28 CASH POSITION. The Cortech Disclosure Schedule sets forth the
projected cash position of Cortech as of December 31, 1997 and March 31, 1998
and, if the Closing shall not have theretofore occurred, projected expenses for
the months of April and May 1998 (the "Cortech Cash Projection").
4. CERTAIN COVENANTS OF THE PARTIES
4.1 ACCESS AND INVESTIGATION; CONFIDENTIALITY.
(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), BioStar and Cortech each shall, and BioStar and
Cortech shall cause the respective Representatives of BioStar and the Cortech
Corporations to: (a) provide each other and their respective Representatives
with reasonable access to each others' and their Subsidiaries' respective
Representatives, personnel and assets and to all existing books, records, Tax
Returns, work papers and other documents and information relating to each other
and to their Subsidiaries; and (b) provide each other and their respective
Representatives with such copies of the existing books, records, Tax Returns,
work papers and other documents and information relating to each other and their
Subsidiaries, and with such additional financial, operating and other data and
information regarding each other and their Subsidiaries, as Cortech and BioStar
may reasonably request.
(b) Each of the parties hereto hereby agrees to and reaffirms the terms and
provisions of the Mutual Nondisclosure Agreement between Cortech and BioStar
executed as of October 31, 1997 (the "Nondisclosure Agreement").
4.2 OPERATION OF BIOSTAR'S BUSINESS.
(a) During the Pre-Closing Period: (i) BioStar shall conduct its business
and operations (A) in the ordinary course and in accordance with past practices
or the operating plan previously delivered by BioStar to Cortech and (B) in
compliance with all applicable Legal Requirements and the requirements of all
BioStar Material Contracts; (ii) BioStar shall use reasonable efforts to ensure
that BioStar preserves intact its current business organization, keeps available
the services of its current officers and employees and maintains its relations
and goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business relationships with
BioStar; (iii) BioStar shall keep in full force all insurance policies referred
to in Section 2.17 or replace any such policies that terminate with comparable
or superior policies; (iv) BioStar shall provide all notices, assurances and
support required by any BioStar Contract relating to any BioStar Proprietary
Asset in order to ensure that no condition under such BioStar Contract occurs
which could result in, or could increase the likelihood of, any transfer or
public disclosure by BioStar of any BioStar Proprietary Asset; and (v) BioStar
shall (to the extent requested by Cortech) cause its officers to report
regularly to Cortech concerning the status of BioStar's business.
(b) During the Pre-Closing Period, BioStar shall not (without the prior
written consent of Cortech):
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date hereof;
(ii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security (except BioStar Common Stock upon the valid
exercise of BioStar Options or BioStar warrants outstanding on the date of
this Agreement or pursuant to equipment lease financings, in connection
with BioStar's line of credit with Venture Lending and similar transactions
or otherwise in the ordinary course of business), (B) any option, call,
warrant or right to acquire any capital stock or other security, or
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(C) any instrument convertible into or exchangeable for any capital stock
or other security; provided, however, that notwithstanding the foregoing,
BioStar may grant up to 800,000 options to employees following the date of
this Agreement under its existing stock option plans.
(iii) except as contemplated by this Agreement, amend or waive any of
its rights under, or accelerate the vesting under, any provision of the
BioStar Option Plan, any provision of any agreement evidencing any
outstanding stock option or any restricted stock purchase agreement, or
otherwise modify any of the terms of any outstanding option, warrant or
other security or any related Contract;
(iv) except as contemplated by this Agreement, amend or permit the
adoption of any amendment to its Certificate of Incorporation or Bylaws or
other charter or organizational documents, or effect or become a party to
any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(v) form any Subsidiary or acquire any equity interest or other
interest in any other Entity;
(vi) make any capital expenditure, except capital expenditures through
December 31, 1997 in an aggregate amount of no more than the amount
provided for in the capital budget previously provided to Cortech for such
period, and thereafter in an aggregate amount of no more than a pro-rata
portion of the amount that is provided for in a 1998 capital budget which
shall be provided to and approved by Cortech (such approval not to be
unreasonably withheld) prior to January 1, 1998;
(vii) except as set forth in the operating plan previously provided to
Cortech, enter into or become bound by, or permit any of the assets owned
or used by it to become bound by, any BioStar Material Contract, or amend
or terminate, or waive or exercise any material right or remedy under, any
BioStar Material Contract;
(viii) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except in each case for (A)
assets not constituting BioStar Proprietary Assets and acquired, leased,
licensed or disposed of by BioStar in the ordinary course of business; (B)
consistent with past practices and except in the case of the in-licensing
of Proprietary Assets, for agreements involving the payment of less than
$25,000 per year and a royalty of less than 0.75% and (C) rights granted to
academic institutions and researchers for research purposes, or waive or
relinquish any material right;
(ix) lend money to any Person, except travel advances and loans
related to relocation, education and immigration-related expenses made in
the ordinary course of business, and loans in connection with employee
stock purchases as provided for in agreements in effect on the date hereof,
or incur or guarantee any indebtedness or pledge or encumber any material
assets (except that BioStar may make routine borrowings in the ordinary
course of business and in accordance with past practices under its line of
credit with Venture Lending);
(x) except as set forth in the BioStar Disclosure Schedule, establish,
adopt or amend any employee benefit plan, pay any bonus or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees;
(xi) change any of its methods of accounting or accounting practices
in any respect;
(xii) make any material Tax election;
(xiii) commence or settle any Legal Proceeding except in the ordinary
course of business;
(xiv) materially amend or otherwise modify any of the terms of its
engagement of the financial advisor referenced in Section 2.24 above;
(xv) amend or otherwise modify any of the terms of any BioStar
Warrants, except to the extent necessary to terminate such Warrants or
reduce the number of shares issuable upon exercise thereunder;
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(xvi) enter into any material transaction or take any other material
action in each case not specifically provided for in the operating plan
previously provided by BioStar to Cortech, or outside the ordinary course
of business or inconsistent with past practices; or
(xvii) agree or commit to take any of the actions described in clauses
"(i)" through "(xvi)" of this Section 4.2(b).
(c) During the Pre-Closing Period, BioStar shall promptly notify Cortech in
writing of: (i) the discovery by BioStar of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by BioStar in this Agreement; (ii) any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any representation or
warranty made by BioStar in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or discovery
of such event, condition, fact or circumstance, or (B) such event, condition,
fact or circumstance had occurred, arisen or existed on or prior to the date of
this Agreement; (iii) any material breach of any covenant or obligation of
BioStar; and (iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on BioStar. No notification given to Cortech pursuant to
this Section 4.2(c) shall limit or otherwise affect any of the representations,
warranties, covenants or obligations of BioStar contained in this Agreement.
4.3 OPERATION OF CORTECH'S BUSINESS.
(a) During the Pre-Closing Period: (i) Cortech shall ensure that each of
the Cortech Corporations conducts its business and operations (A) in the
ordinary course and in accordance with the operating plan previously discussed
among Cortech and BioStar and (B) in compliance with all applicable Legal
Requirements and the requirements of all Cortech Material Contracts; (ii)
Cortech shall use reasonable efforts to ensure that each of the Cortech
Corporations preserves intact its current business organization, keeps available
the services of its current officers and employees and maintains its relations
and goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business relationships with the
respective Cortech Corporations; and (iii) Cortech shall keep in full force all
insurance policies referred to in Section 3.17 or replace such policies with
comparable or superior policies; and (iv) Cortech shall provide all notices,
assurances and support required by any Cortech Contract relating to any
Proprietary Asset in order to ensure that no condition under such Cortech
Contract occurs which could result in, or could increase the likelihood of, any
transfer or public disclosure by any Cortech Corporation of any Proprietary
Asset.
(b) During the Pre-Closing Period, Cortech shall not (without the prior
written consent of BioStar), and shall not permit any of the other Cortech
Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date hereof;
(ii) hire any new employees, excluding those persons hired to replace
employees who terminate their employment with a Cortech Corporation during
the Pre-Closing Period;
(iii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security (except Cortech Common Stock upon the valid
exercise of Cortech Options or Cortech warrants outstanding on the date of
this Agreement or the exercise of rights under the Cortech ESPP or pursuant
to equipment lease financings and similar transactions or otherwise in the
ordinary course of business), (B) any option, call, warrant or right to
acquire any capital stock or other security, (C) any instrument convertible
into or exchangeable for any capital stock or other security;
(iv) except as contemplated by this Agreement, amend or waive any of
its rights under, or accelerate the vesting under, any provision of any of
Cortech Option Plans, any provision of any
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agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify any of the terms of any outstanding
option, warrant or other security or any related Contract;
(v) except as contemplated by this Agreement, amend or permit the
adoption of any amendment to its Certificate of Incorporation or Bylaws or
other charter or organizational documents, or effect or become a party to
any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(vi) except as contemplated by this Agreement and except as previously
disclosed to BioStar, form any Subsidiary or acquire any equity interest or
other interest in any other Entity;
(vii) make any capital expenditure, except capital expenditures in an
aggregate amount of no more than $25,000;
(viii) establish, adopt or amend any employee benefit plan or pay any
bonus or make any profit sharing or similar payment to, or increase the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees, except as disclosed to BioStar;
(ix) change any of its methods of accounting or accounting practices
in any respect;
(x) make any material Tax election;
(xi) commence or settle any Legal Proceeding except in the ordinary
course of business;
(xii) materially amend or otherwise modify any of the terms of its
engagement of the financial advisor referenced in Section 3.26 above;
(xiii) enter into any material transaction or take any other material
action in each case either inconsistent with the operating plan previously
provided by Cortech to BioStar, or outside the ordinary course of business;
(xiv) except as previously disclosed to BioStar, sell or otherwise
dispose of, or grant an exclusive license or any other exclusive right to
utilize Cortech Proprietary Assets which individually or in the aggregate
constitute core technology material to the business of Cortech, or grant to
any third party a right of first refusal, first offer, or first negotiation
with regard to material products or such core technology; or
(xv) make any expenditure, singly or in the aggregate, that exceeds
the aggregate expenditures set forth in the Cortech Cash Projection during
the period ended March 31, 1998 by more than a net $350,000 or make any
expenditure, singly or in the aggregate, that exceeds the aggregate
expenditures set forth in the Cash Projections by more than a net $100,000
for the months of April 1998 or May 1998; or
(xvi) agree or commit to take any of the actions described in clause
"(i)" through "(xv)" of this Section 4.3(b).
(c) During the Pre-Closing Period, Cortech shall promptly notify BioStar in
writing of: (i) the discovery by Cortech of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by Cortech in this Agreement; (ii) any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any representation or
warranty made by Cortech in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or discovery
of such event, condition, fact or circumstance, or (B) such event, condition,
fact or circumstance had occurred, arisen or existed on or prior to the date of
this Agreement; (iii) any material breach of any covenant or obligation of
Cortech; and (iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Cortech Corporations. No notification given to
BioStar pursuant to this Section 4.3(c) shall
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limit or otherwise affect any of the representations, warranties, covenants or
obligations of Cortech contained in this Agreement.
4.4 NO SOLICITATION BY BIOSTAR.
(a) BioStar shall not directly or indirectly, and shall not authorize or
permit any Representative of BioStar directly or indirectly to, (i) solicit,
initiate, knowingly encourage or induce the making, submission or announcement
of any Acquisition Proposal or take any similar action, (ii) furnish any
non-public information regarding BioStar to any Person in connection with or in
response to an Acquisition Proposal, (iii) engage in discussions or negotiations
with any Person with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any Contract contemplating or otherwise relating to any
Acquisition Transaction. Without limiting the generality of the foregoing,
BioStar acknowledges and agrees that any violation of any of the restrictions
set forth in the preceding sentence by any Representative of BioStar, whether or
not such Representative is purporting to act on behalf of BioStar, shall be
deemed to constitute a breach of this Section 4.4 by BioStar.
(b) Nothing contained in this Agreement shall prevent BioStar or its board
of directors from (i) furnishing information regarding BioStar (including a copy
of this Section 4.4) to any Person in connection with or in response to a bona
fide, unsolicited Acquisition Proposal or engaging in discussions or
negotiations with respect thereto if and only to the extent that (A) the board
of directors of BioStar determines in good faith, after consultation with its
financial advisor that such Acquisition Proposal is reasonably likely to result
in a Superior Offer, (B) the board of directors of BioStar determines in good
faith, after consultation with its outside counsel, including discussions of
applicable legal standards under Delaware law, that such action is required in
order for the board of directors to comply with its fiduciary duties under
applicable law, (C) the Person who has requested such information has executed
and delivered to BioStar a non-disclosure agreement that is not less restrictive
than the non-disclosure agreement in effect between BioStar and Cortech, and (D)
BioStar has not breached Section 4.4(a)(i), or (ii) complying with Rule 14e-2
and Rule 14d-9 promulgated under the Exchange Act. In addition, nothing in
Section 4.4(a) above shall prevent the board of directors of BioStar from
recommending a Superior Offer to its stockholders, if the Board determines,
after consultation with its outside counsel, including discussions of applicable
legal standards under Delaware law that, in light of such Superior Offer, such
recommendation is required in order for the board of directors to comply with
its fiduciary obligations to BioStar's stockholders under applicable law (which
determination shall be made in light of a revised proposal, if any, made by the
Cortech prior to the date of such determination); provided however that BioStar
(i) shall provide Cortech with at least 48 hours prior written notice of its
intention to hold any meeting at which BioStar's board of directors is
reasonably expected to consider an Acquisition Proposal, or such lesser amount
of time as has been given to the Board in relation to such meeting, and (ii)
shall not recommend to its stockholders a Superior Offer for at least two
business days after BioStar has provided Cortech with the material terms of such
Superior Offer.
(c) BioStar shall promptly advise Cortech orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. BioStar shall keep Cortech informed
with respect to material changes to the terms of any such Acquisition Proposal
and any material modification or proposed modifications thereto.
(d) BioStar shall immediately cease and cause to be terminated any existing
discussions with any Person that relate to any Acquisition Proposal and shall
request the return or destruction of any confidential information previously
disclosed to such Person and shall use commercially reasonable efforts to ensure
that such information is destroyed or returned.
4.5 NO SOLICITATION BY CORTECH.
(a) Cortech shall not directly or indirectly, and shall not authorize or
permit any of the other Cortech Corporations or any Representative of any of the
Cortech Corporations directly or indirectly to, (i) solicit, initiate, knowingly
encourage or induce the making, submission or announcement of any Acquisition
Proposal or take any similar action, (ii) furnish any non-public information
regarding any of the Cortech Corporations
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to any Person in connection with or in response to an Acquisition Proposal,
(iii) engage in discussions or negotiations with any Person with respect to any
Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
Contract contemplating or otherwise relating to any Acquisition Transaction.
Without limiting the generality of the foregoing, Cortech acknowledges and
agrees that any violation of any of the restrictions set forth in the preceding
sentence by any Representative of any of the Cortech Corporations, whether or
not such Representative is purporting to act on behalf of Cortech, shall be
deemed to constitute a breach of this Section 4.5 by Cortech.
(b) Nothing contained in this Agreement shall prevent Cortech or its board
of directors from (i) furnishing information regarding any of the Cortech
Corporations (including copy of this Section 4.5) to any Person in connection
with or in response to a bona fide, unsolicited Acquisition Proposal or engaging
in discussions or negotiations with respect thereto if and only to the extent
that (A) the board of directors of Cortech determines in good faith, after
consultation with its financial advisor that such Acquisition Proposal is
reasonably likely to result in a Superior Offer, (B) the board of directors of
Cortech determines in good faith, after consultation with its outside counsel,
including discussions of applicable legal standards under Delaware law, that
such action is required in order for the board of directors to comply with its
fiduciary duties under applicable law, (C) the Person who has requested such
information has executed and delivered to Cortech a non-disclosure agreement
that is not less restrictive than the non-disclosure agreement in effect between
Cortech and BioStar, and (D) Cortech has not breached Section 4.5(a)(i), or (ii)
complying with Rule 14e-2 and Rule 14d-9 promulgated under the Exchange Act. In
addition, nothing in Section 4.5(a) above shall prevent the board of directors
of Cortech from recommending a Superior Offer to its stockholders, if the Board
determines, after consultation with its outside counsel, including discussions
of applicable legal standards under Delaware law, that, in light of such
Superior Offer, such recommendation is required in order for the board of
directors to comply with its fiduciary obligations to Cortech's stockholders
under applicable law (which determination shall be made in light of a revised
proposal, if any, made by BioStar prior to the date of such determination);
provided however that Cortech (i) shall provide BioStar with at least 48 hours
prior written notice of its intentions to hold any meeting at which Cortech's
board of directors is reasonably expected to consider an Acquisition Proposal,
or such lesser amount of time as has been given to the Board in relation to such
meeting, and (ii) Cortech shall not recommend to its stockholders a Superior
Offer for at least two business days after Cortech has provided BioStar with the
material terms of such Superior Offer.
(c) Cortech shall promptly advise BioStar orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. Cortech shall keep BioStar informed
with respect to material changes to the terms of any such Acquisition Proposal
and any material modification or proposed modifications thereto.
(d) Cortech shall immediately cease and cause to be terminated any existing
discussions with any Person that relate to any Acquisition Proposal and shall
request the return or destruction of any confidential information previously
disclosed to such Person and shall use commercially reasonable efforts to ensure
that such information is destroyed or returned.
5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 REGISTRATION STATEMENT; JOINT PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, Cortech
and BioStar shall prepare and cause to be filed with the SEC the Joint Proxy
Statement and simultaneously or thereafter Cortech shall prepare and cause to be
filed with the SEC the Form S-4 Registration Statement, in which the Joint Proxy
Statement will be included as a prospectus. Each of Cortech and BioStar shall
use all reasonable efforts to cause the Form S-4 Registration Statement and the
Joint Proxy Statement to comply with the rules and regulations promulgated by
the SEC, to respond promptly to any comments of the SEC or its staff and to have
the Form S-4 Registration Statement declared effective under the Securities Act
as promptly as practicable after it is filed with the SEC. Cortech will use all
reasonable efforts to cause the Joint Proxy Statement to be
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mailed to Cortech's stockholders, and BioStar will use all reasonable efforts to
cause the Joint Proxy Statement to be mailed to the BioStar's stockholders, as
promptly as practicable after the Form S-4 Registration Statement is declared
effective under the Securities Act. BioStar and Cortech shall promptly furnish
to the other all information concerning BioStar and the BioStar's stockholders
and the Cortech Corporations, respectively, that may be required or reasonably
requested in connection with any action contemplated by this Section 5.1.
BioStar and Cortech shall notify the other promptly of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for any amendment or supplement to the Form S-4 Registration Statement or Joint
Proxy Statement or for any other information and shall supply the other with
copies of all correspondence between such party and the SEC or its staff or
other governmental officials with respect to the S-4 Registration Statement or
Joint Proxy Statement. The information supplied by each of Cortech and BioStar
for inclusion in the Form S-4 Registration Statement and the Joint Proxy
Statement shall not (i) at the time the Form S-4 Registration Statement is
declared effective, (ii) at the time the Joint Proxy Statement is first mailed
to the stockholders of Cortech and BioStar, respectively, (iii) at the time of
the BioStar Stockholders' Meeting and at the time of the Cortech Stockholders'
Meeting, and (iv) at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If Cortech or BioStar
becomes aware of any information, that should be disclosed in an amendment or
supplement to the Form S-4 Registration Statement or the Joint Proxy Statement,
then Cortech or BioStar, as the case may be, shall promptly inform the other
party thereof and shall cooperate with the other in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of BioStar or the stockholders of Cortech.
(b) Prior to the Effective Time, Cortech shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Cortech Common Stock
to be issued in the Merger (i) will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
registered holder of BioStar Common Stock has an address of record on the record
date for determining the stockholders entitled to notice of and to vote at
BioStar Stockholders' Meeting; and (ii) will be approved for quotation at the
Effective Time on the Nasdaq National Market; provided, however, that Cortech
shall not be required (i) to qualify to do business as a foreign corporation in
any jurisdiction in which it is not now qualified or (ii) to file a general
consent to service of process in any jurisdiction.
5.2 BIOSTAR STOCKHOLDERS' MEETING.
(a) BioStar shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of BioStar Common Stock and BioStar Preferred Stock to consider, act upon and
vote upon the BioStar Charter Amendment and the approval of this Agreement and
of the Merger (the "BioStar Stockholders' Meeting"). The BioStar Stockholders'
Meeting will be held as promptly as practicable and in any event within 45 days
after the Form S-4 Registration Statement is declared effective under the
Securities Act. BioStar shall ensure that the BioStar Stockholders' Meeting is
called, noticed, convened, held and conducted, and that all proxies solicited in
connection with the BioStar Stockholders' Meeting are solicited, in compliance
with all applicable Legal Requirements. BioStar's obligation to call, give
notice of, convene and hold the BioStar Stockholders' Meeting in accordance with
this Section 5.2(a) shall not be limited or otherwise affected by the
withdrawal, amendment or modification of the recommendation of the board of
directors of BioStar with respect to the Merger, except as is required by
applicable law.
(b) Subject to Section 5.2(c): (i) the board of directors of BioStar shall
unanimously recommend that the BioStar stockholders vote in favor of and approve
this Agreement, the Merger and the BioStar Charter Amendment at the BioStar
Stockholders' Meeting; (ii) the Joint Proxy Statement shall include a statement
to the effect that the board of directors of BioStar has unanimously recommended
that the BioStar's stockholders vote in favor of and approve this Agreement, the
Merger and the BioStar Charter Amendment at the BioStar Stockholders' Meeting;
and (iii) neither the board of directors of BioStar nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify, in a manner adverse to Cortech, the unanimous recommendation of the
board of directors of BioStar that the BioStar's stockholders
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vote in favor of and approve this Agreement, the Merger and the BioStar Charter
Amendment. For purposes of this Agreement, said recommendation of the board of
directors of BioStar shall be deemed to have been modified in a manner adverse
to Cortech if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.2(b) shall prevent the board of directors of
BioStar from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger at any time prior to the approval of this Agreement by the
Required BioStar Stockholder Vote if (i) a Superior Offer is made to BioStar and
is not withdrawn, (ii) neither BioStar nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.4, and (iii) the board
of directors of BioStar concludes in good faith, after consultation with its
outside counsel, including discussion of applicable legal standards under
Delaware law, that, in light of such Superior Offer, the withdrawal, amendment
or modification of such recommendation is required in order for the board of
directors of BioStar to comply with its fiduciary obligations to the BioStar's
stockholders under applicable law. Except as may be limited by applicable law,
nothing contained in this Section 5.2 shall limit BioStar's obligation to call,
give notice of, convene and hold the BioStar Stockholders' Meeting (regardless
of whether the unanimous recommendation of the board of directors of BioStar
shall have been withdrawn, amended or modified).
5.3 CORTECH STOCKHOLDERS' MEETING.
(a) Cortech shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of Cortech Common Stock to consider, act upon and vote upon the issuance of
Cortech Common Stock in the Merger (the "Cortech Stockholders' Meeting"). The
Cortech Stockholders' Meeting will be held as promptly as practicable and in any
event within 45 days after the Form S-4 Registration Statement is declared
effective under the Securities Act. Cortech shall ensure that the Cortech
Stockholders' Meeting is called, noticed, convened, held and conducted, and that
all proxies solicited in connection with the Cortech Stockholders' Meeting are
solicited in compliance with all applicable Legal Requirements. Cortech's
obligation to call, give notice of, convene and hold the Cortech Stockholders'
Meeting in accordance with this Section 5.3(a) shall not be limited or otherwise
affected by any withdrawal, amendment or modification of the recommendation of
the board of directors of Cortech with respect to the Merger, except as may be
required by applicable law.
(b) Subject to Section 5.3(c): (i) the board of directors of Cortech shall
unanimously recommend that Cortech's stockholders vote in favor of and approve
the issuance of Cortech Common Stock in the Merger and the Cortech Charter
Amendment; (ii) the Joint Proxy Statement shall include a statement to the
effect that the board of directors of Cortech has unanimously recommended that
Cortech's stockholders vote in favor of and approve the issuance of Cortech
Common Stock in the Merger and the Cortech Charter Amendment at the Cortech
Stockholders' Meeting; and (iii) neither the board of directors of Cortech nor
any committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify, in a manner adverse to BioStar, the unanimous
recommendation of the board of directors of Cortech that Cortech's stockholders
vote in favor of and approve the issuance of Cortech Common Stock in the Merger
and the Cortech Charter Amendment. For purposes of this Agreement, said
recommendation of the board of directors of Cortech shall be deemed to have been
modified in a manner adverse to BioStar if said recommendation shall no longer
be unanimous. Approval of Cortech's Stockholders of the Cortech Charter
Amendment shall not be a condition to the consummation of the Merger.
(c) Nothing in Section 5.3(b) shall prevent the board of directors of
Cortech from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger at any time prior to the approval of this Agreement by the
Required Cortech Stockholder Vote if (i) a Superior Offer is made to Cortech and
is not withdrawn, (ii) neither Cortech nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.5, and (ii) the board of
directors of Cortech concludes in good faith, based upon the advice of its
outside counsel, including a discussion of applicable legal standards under
Delaware law, that the withdrawal, amendment or modification of such
recommendation is required in order for the board of directors of Cortech to
comply with its fiduciary obligations to Cortech's stockholders under applicable
law. Except as may be limited by applicable law, nothing contained in this
Section 5.3 shall limit Cortech's obligation to call, give notice of, convene
and hold the Cortech Stockholders' Meeting (regardless of
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whether the unanimous recommendation of the board of directors shall have been
withdrawn, amended or modified).
5.4 REGULATORY APPROVALS. BioStar and Cortech shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. BioStar and Cortech shall (1) give the other party
prompt notice of the commencement of any Legal Proceeding by or before any
Governmental Body with respect to the Merger or any of the other transactions
contemplated by this Agreement, (2) keep the other party informed as to the
status of any such Legal Proceeding, and (3) promptly inform the other party of
any communication to or from any Governmental Body regarding the Merger. BioStar
and Cortech will consult and cooperate with one another, and will consider in
good faith the views of one another, in connection with any analysis,
appearance, presentation, memorandum, brief, argument, opinion or proposal made
or submitted in connection with any Legal Proceeding under or relating to any
other federal or state antitrust or fair trade law. In addition, except as may
be prohibited by any Governmental Body or by any Legal Requirement, in
connection with any Legal Proceeding under or relating to any federal or state
antitrust or fair trade law or any other similar Legal Proceeding, BioStar and
Cortech will permit authorized Representatives of the other party to be present
at each meeting or conference relating to any such Legal Proceeding and to have
access to and be consulted in connection with any document, opinion or proposal
made or submitted to any Governmental Body in connection with any such Legal
Proceeding.
5.5 ESPP. Subject to the terms of Cortech's ESPP and applicable law,
Cortech shall take all reasonable actions to ensure that from and after the
Effective Time all employees of BioStar shall be entitled to participate in the
ESPP of Cortech.
5.6 INDEMNIFICATION CONTINUATION.
(a) For Purposes of this Section 5.6: (i) "Indemnified Person" means any
person who is now, or has been at any time prior to the Effective Time, an
officer or director of Cortech or BioStar or who was serving at the request of
Cortech or BioStar as an officer or director of another corporation, joint
venture or other enterprise, or a general partner of any partnership, or trustee
of any trust and (ii) "Proceeding" means any claim, action, suit, proceeding or
investigation.
(b) From and after the Effective Time, Cortech shall and shall cause the
Surviving Corporation, to the fullest extent permitted under applicable law,
indemnify, defend and hold harmless each Indemnified Person against and from (i)
any losses, claims damages, expenses (including reasonable attorneys' fees and
court costs), liabilities or judgements, and (ii) any amounts that are paid in
settlement with the consent of Cortech (which consent will not be unreasonably
withheld) of or in connection with any Proceeding based directly or indirectly
(in whole or in part) on, or arising directly or indirectly (in whole or in
part) out of, the fact that such Indemnified Person is or was an officer or
director of Cortech or BioStar or is or was serving at the request of Cortech or
BioStar as an officer or director of another corporation, joint venture or other
enterprise or general partner of any partnership or a trustee of any trust,
whether pertaining to any matter arising before or after the Effective Time.
Cortech shall use all reasonable efforts to assist in the vigorous defense of
every matter asserted in such Proceeding for which such Indemnified Person is
entitled to indemnification under applicable law. In the event of any
Proceeding, any Indemnified Person wishing to claim indemnification will
promptly notify Cortech thereof (provided that failure to so notify Cortech will
not affect the obligations of Cortech to provide indemnification except to the
extent that Cortech shall have been prejudiced as a result of such failure).
With respect to any Proceeding for which indemnification is requested, Cortech
will be entitled to participate therein at its own expense and, except as
otherwise provided below, to the extent that it may wish, Cortech may assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified Person.
After notice from Cortech to the Indemnified Person of its election to assume
the defense of a Proceeding, neither Cortech nor the Surviving Corporation will
be liable to the Indemnified Person for any legal or other expenses subsequently
incurred by the Indemnified Person in connection with the defense thereof, other
than as provided below. Cortech will not settle any Proceeding without the
consent of the
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Indemnified Person unless such settlement includes a full release of the
Indemnified Person, does not impose any injunctive or equitable remedy upon the
Indemnified Person, does not include any admission of civil or criminal
liability on behalf of an officer or director and does not require any payment
to be made by the Indemnified Person. The Indemnified Person will have the right
to employ counsel in any Proceeding, but the fees and expenses of such counsel
incurred after notice from Cortech of its assumption of the defense thereof will
be a the expense of the Indemnified Person, unless, (i) the employment of
counsel by the Indemnified Person has been authorized by Cortech, (ii) the
Indemnified Person shall have reasonably concluded upon the advice of counsel
that there may be a conflict of interest between the Indemnified Person, Cortech
and the Surviving Corporation in the conduct of the defense of a Proceeding, or
(iii) Cortech shall not in fact have employed counsel to assume the defense of a
Proceeding, in each of which cases the reasonable fees and expenses of counsel
selected by the Indemnified Person will be at the expense of Cortech, and
Cortech, to the fullest extent permitted under applicable law, shall in such
event pay expenses in advance of the final disposition of any such Proceeding
upon the receipt from the Indemnified Person to whom such expenses are advanced
of an undertaking to repay such advances if it is ultimately determined that
such Indemnified Person is not entitled to be indemnified by Cortech or the
Surviving Corporation. Notwithstanding the foregoing, neither Cortech nor the
Surviving Corporation will be liable for any settlement effected without its
written consent and neither Cortech nor the Surviving Corporation will be
obligated pursuant to this Section 5.6 to pay the fees and disbursement of more
than one counsel for all Indemnified Persons in any single Proceeding, except to
the extent two or more of such Indemnified Persons have conflicting interests in
the outcome of such action.
(c) In addition to the foregoing, Cortech and the Surviving Corporation
shall continue in full force provisions in Cortech's and the Surviving
Corporation's Certificate of Incorporation and Bylaws in effect on the date of
this Agreement providing for indemnification of Indemnified Persons to the
fullest extent now or hereafter permitted under Delaware Law, which provisions
shall not be amended except as required by applicable law or except to make
changes permitted by law that would enlarge the Indemnified Persons' right of
indemnification.
(d) Cortech shall pay all expenses, including attorneys' fees, that may be
incurred by any Indemnified Person in enforcing the indemnity and other
obligations provided for in this Section 5.6.
(e) The rights of each Indemnified Person hereunder shall be in addition to
any other rights such Indemnified Person may have under Delaware Law, Cortech's
and the Surviving Corporation's Certificate of Incorporation or bylaws in effect
prior to the Effective Time, any agreement or otherwise. The provisions of this
Section 5.6 shall survive the consummation of the Merger for a period of six
years and are expressly intended to benefit and may be relied upon each of the
Indemnified Persons; provided, however, that in the event that any claim or
claims for indemnification are asserted or made within such six-year period, all
rights to indemnification in respect to any such claim or claims shall continue
until the disposition of any and all such claims.
(f) In the event Cortech, the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person or entity and shall not be the continuing or surviving corporation or
entity of such consolidation or merger, or (ii) transfers or conveys all or a
substantial portion of their properties or assets to any person or entity, then,
and in each such case, to the extent necessary to effectuate the purposes of the
Section 5.6 proper provision shall be made so that the successors and assigns of
Cortech or the Surviving Corporation assume the obligations set forth in this
Section 5.6.
5.7 ADDITIONAL AGREEMENTS. Cortech and BioStar shall use all reasonable
efforts to take, or cause to be taken, all actions necessary to consummate the
Merger and make effective the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, each party to this Agreement
(i) shall make all filings (if any) and give all notices (if any) required to be
made and given by such party in connection with the Merger and the other
transactions contemplated by this Agreement, (ii) shall use all reasonable
efforts to obtain each Consent (if any) required to be obtained (pursuant to any
applicable Legal Requirement or Contract, or otherwise) by such party in
connection with the Merger or any of the other transactions contemplated by this
Agreement, and (iii) shall use all reasonable efforts to lift any restraint,
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injunction or other legal bar to the Merger. BioStar shall promptly deliver to
Cortech a copy of each such filing made, each such notice given and each such
Consent obtained by BioStar during the Pre-Closing Period.
5.8 DISCLOSURE. Cortech and BioStar shall consult with each other before
issuing any press release or otherwise making any public statement with respect
to the Merger or any of the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, neither BioStar nor Cortech
shall, and neither shall permit, any of its Representatives to, make any
disclosure regarding the Merger or any of the other transactions contemplated by
this Agreement unless (a) the other Party shall have approved such disclosure or
(b) the disclosing party shall have been advised in writing by its outside legal
counsel that such disclosure is required by applicable law and shall have given
the other Party the opportunity, to the extent practicable, to review and
comment upon the disclosure.
5.9 TAX MATTERS. Each of Cortech and BioStar acknowledge and agree that (i)
it intends the Merger to constitute a reorganization within the meaning of
Section 368(a) of the Code, (ii) it will report the Merger as such a
reorganization in any and all federal, state and local income tax returns filed
by it. BioStar and Cortech shall each use all reasonable efforts to obtain and
deliver to Cooley Godward LLP and to Pillsbury Madison & Sutro LLP, as soon as
practicable after the date of this Agreement, Continuity of Interest
Certificates (in a form agreed to by counsel to Cortech and the BioStar) signed
by those persons mutually agreed to by Cooley Godward LLP and Pillsbury Madison
& Sutro LLP. At or prior to the filing of the S-4 Registration Statement with
the SEC and, to the extent necessary, at the Closing, BioStar and Cortech shall
execute and deliver to Cooley Godward LLP and to Pillsbury Madison & Sutro LLP
management tax representation letters in a form agreed to by counsel to Cortech
and BioStar. Cortech and BioStar shall use all reasonable efforts prior to the
Effective Time to cause the Merger to qualify as a tax free reorganization under
Section 368(a)(1) of the Code. In the event of the issuance of final or
temporary Treasury regulations relating to the continuity of stockholder
interest (proposed regulations on the topic were issued in the Federal Register
on December 23, 1996 (Reg-252231-96); these regulations would, among other
things, add a new section 1.368-1(a) to existing regulations), the parties agree
to use their reasonable best efforts to take advantage of, and comply with, any
provisions therein (such as an election and/or reporting requirements) to the
extent necessary to cause such regulations to apply to the Merger.
5.10 RESIGNATION OF OFFICERS AND DIRECTORS. Cortech shall use all
reasonable efforts to obtain and deliver to BioStar prior to the Closing the
resignation of each officer and director of Cortech effective as of the
Effective Time, except any directors identified in Section 5.13 below who are
members of the board of directors of Cortech immediately prior to the Effective
Time.
5.11 FIRPTA MATTERS. At the Closing, (a) BioStar shall deliver to Cortech a
statement (in such form as may be reasonably requested by counsel to Cortech)
conforming to the requirements of Section 1.897 -- 2(h)(1)(i) of the United
States Treasury Regulations, and (b) BioStar shall deliver to the Internal
Revenue Service the notification required under Section 1.897 -- 2(h)(2) of the
United States Treasury Regulations.
5.12 AFFILIATE AGREEMENTS. BioStar shall, no later than twenty days in
advance of the Cortech Stockholders' Meeting, deliver to Cortech a list (the
"Affiliate List") of Persons who are "affiliates" (as that term is used in Rule
145 under the Securities Act). Prior to the date of the Cortech Stockholders'
Meeting, BioStar shall deliver to Cortech an Affiliate Agreement in the form of
Exhibit C duly executed by each Person on the Affiliate List, and by each Person
who becomes an affiliate after delivery of the Affiliate List and prior to the
date of delivery of the signed Affiliate Agreements.
5.13 ELECTION OF DIRECTORS. Cortech shall use all reasonable efforts to
nominate and appoint Teresa W. Ayers, Alexander E. Barkas, Ph.D., Thomas A.
Bologna, and two directors designated by Cortech in consultation with BioStar as
the board of directors of Cortech and the Surviving Corporation effective
immediately after the Effective Time.
5.14 REGISTRATION RIGHTS. Cortech shall assume BioStar's obligations under
the BioStar Restated Investors' Rights Agreement dated as of June 27, 1994, as
amended (the "Investors' Rights Agreement"); provided, however, that, BioStar
shall use all reasonable efforts to cause the Investors' Rights Agreement to be
amended to remove Sections 2, 3, and 4 and to provide that no Holder (as defined
in the Investors' Rights
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Agreement) shall request registration or participation in a registration of
Cortech Common Stock pursuant to Sections 1.2, 1.3, or 1.12 thereunder until the
earlier of (a) the date 90 days after the effective date of a registration
statement for the first public offering of Cortech's shares following the
Effective Time, and (b) the first anniversary of the Effective Time.
5.15 MARKET STAND-OFF AGREEMENT. BioStar shall obtain the agreement of each
of the holders of BioStar Common Stock and BioStar Preferred Stock listed on
Schedule A attached hereto (each a "BioStar Investor") that such BioStar
Investor shall not directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any Cortech Common Stock issued to such BioStar Investor in connection
with the Merger for 180 days from the Effective Time.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CORTECH AND MERGER SUB
The obligations of Cortech and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by this Agreement are subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions:
6.1 ACCURACY OF REPRESENTATIONS.
The representations and warranties of BioStar contained in this Agreement
shall be accurate in all material respects as of the date hereof and shall be
accurate as of the Closing Date as if made on and as of the Closing Date (except
representations and warranties that refer specifically to "the date of this
Agreement" or a specific date prior to the date of this Agreement) except that
any inaccuracies in such representations and warranties shall be disregarded if
the circumstances giving rise to such inaccuracies (individually and
collectively) do not constitute a Material Adverse Effect on BioStar (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect" qualifications
and other materiality qualifications contained in such representations and
warranties shall be disregarded and (ii) any update of or modification to the
BioStar Disclosure Schedule made or purported to have been made after the date
of this Agreement shall be disregarded).
6.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that BioStar is
required to comply with or to perform at or prior to the Closing shall have been
complied with and performed in all material respects.
6.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
6.4 STOCKHOLDER APPROVAL. This Agreement, the Merger and the BioStar
Charter Amendment shall have been duly approved by the Required BioStar
Stockholder Vote, and the issuance of Cortech Common Stock in the Merger shall
have been approved by the Required Cortech Stockholder Merger Vote. The number
of shares of BioStar Common Stock and BioStar Preferred Stock as to which
written notices from stockholders of BioStar to dissent from the Merger shall
have been received shall be less than 10% of the then outstanding shares of
BioStar Common Stock and BioStar Preferred Stock as of the BioStar Record Date.
6.5 CONSENTS. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in the BioStar Disclosure Schedule) shall
have been obtained and shall be in full force and effect.
6.6 DOCUMENTS. Cortech shall have received the following legal documents,
each of which shall be in full force and effect:
(a) a legal opinion of Cooley Godward LLP dated as of the Closing
Date, in a form reasonably satisfactory to Cortech and its legal counsel;
(b) a legal opinion of Pillsbury Madison & Sutro LLP dated as of the
Closing Date and addressed to Cortech, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Code
(it being understood that, in rendering such opinion, Pillsbury Madison &
Sutro
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LLP may rely upon the Continuity of Interest Certificates and tax
representation letters referred to in Section 5.9 and a copy of the legal
opinion described in Section 7.5(b) hereof). The opinions described in this
Section 6.6(b) and in Section 7.5(b) shall be substantially identical in
form and substance; and
(c) a certificate executed on behalf of BioStar by its Chief Executive
Officer confirming that the conditions set forth in Sections 6.1, 6.2, 6.4,
6.5 and 6.7 have been duly satisfied.
6.7 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business, financial condition, capitalization, assets,
liabilities, operations or financial performance of BioStar since the date of
this Agreement.
6.8 NO RESTRAINTS. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement enacted or deemed applicable to the
Merger that makes consummation of the Merger illegal.
6.9 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Cortech or any of its subsidiaries any damages that may be material to
Cortech; or (c) which would materially and adversely affect the right of Cortech
to own the assets or operate the business of BioStar.
6.10 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable probability of an outcome that would have a
Material Adverse Effect on BioStar or on Cortech: (a) challenging or seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from Cortech or any of its subsidiaries any damages that may
be material to Cortech; (c) seeking to prohibit or limit in any material respect
Cortech's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect adversely the right of Cortech to own the
assets or operate the business of BioStar.
6.11 DELIVERY OF AFFILIATES AGREEMENTS. BioStar shall have delivered the
Affiliate Agreements referred to in Section 5.12 above.
6.12 DELIVERY OF FAIRNESS OPINION. Cortech's board of directors has
received the written opinion of Cowen, dated as of the date of this Agreement,
to the effect that the terms of the Merger are fair to Cortech from a financial
point of view and the same has not been withdrawn as of the date of the mailing
of the Joint Proxy Statement to the Cortech stockholders for any reason,
including but not limited to a material change in the underlying assumptions of
the financial projections provided to Cowen by BioStar.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BIOSTAR
The obligations of BioStar to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of
Cortech contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement and shall be accurate as of the
Closing Date as if made on and as of the Closing Date except that any
inaccuracies in such representations and warranties shall be disregarded if the
circumstances giving rise to such inaccuracies (individually and collectively)
do not constitute a Material Adverse Effect on Cortech (it being understood
that, for purposes of determining the accuracy of such representations and
warranties, (i) all "Material Adverse Effect" qualifications and other
materiality qualifications contained in such representations and warranties
shall be disregarded and (ii) any update of or modification to the Cortech
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded).
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7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Cortech is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
7.4 STOCKHOLDER APPROVAL. This Agreement, the Merger and the BioStar
Charter Amendment shall have been approved by the Required BioStar Stockholder
Vote, and the issuance of Cortech Common Stock in the Merger shall have been
approved by the Required Cortech Stockholder Merger Vote. The number of shares
of BioStar Common Stock and BioStar Preferred Stock as to which written notices
from stockholders of BioStar to dissent from the Merger shall have been received
shall be less than 10% of the then outstanding shares of BioStar Common Stock
and BioStar Preferred Stock as of the BioStar Record Date.
7.5 DOCUMENTS. BioStar shall have received the following documents:
(a) a legal opinion of Pillsbury Madison & Sutro LLP, dated as of the
Closing Date, a form reasonably satisfactory to BioStar and its legal
counsel;
(b) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368 of the Code (it being understood that, in
rendering such opinion, Cooley Godward LLP, may rely upon the Continuity of
Interest Certificates and tax representation letters referred to in Section
5.9 and a copy of the legal opinions described in Section 6.6(b) hereof.
The opinions described in this Section 7.5(b) and in Section 6.6(b) shall
be substantially identical in form and substance; and
(c) a certificate executed on behalf of Cortech by an executive
officer of Cortech, confirming that conditions set forth in Sections 7.1,
7.2, 7.4, 7.6 and 7.10 have been duly satisfied.
7.6 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in Cortech's business, financial condition, assets, liabilities,
operations or financial performance since the date of this Agreement (it being
understood that a decline in Cortech's stock price or the delisting of Cortech's
stock shall not constitute, in and of itself, a Material Adverse Change).
7.7 NO RESTRAINTS. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by BioStar
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger by BioStar
illegal.
7.8 DIRECTORS. Cortech shall have taken all actions necessary to cause the
board of directors of Cortech and the Surviving Corporation following the
Effective Time to consist of the individuals set forth in Section 5.13.
7.9 CONSENTS. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in the Cortech Disclosure Schedule) shall
have been obtained and shall be in full force and effect.
7.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from BioStar or any of its subsidiaries any damages that may be material to
BioStar; or (c) which would materially and adversely affect the right of BioStar
to own the assets or operate the business of Cortech.
7.11 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable probability of an outcome that would have a
Material Adverse Effect on BioStar or on Cortech: (a) challenging or seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from BioStar
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or any of its subsidiaries any damages that may be material to BioStar; (c)
seeking to prohibit or limit in any material respect BioStar's ability to vote,
receive dividends with respect to or otherwise exercise ownership rights with
respect to the stock of the Surviving Corporation; or (d) resulting in Cortech
as constituted after the Effective Time not containing all of the assets and
business of Cortech as constituted immediately prior to the Effective Time.
8. TERMINATION
8.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time (whether before or after approval of this Agreement and the Merger by the
Required BioStar Stockholder Vote and the Required Cortech Stockholder Vote);
(a) by mutual written consent of Cortech and BioStar;
(b) by either Cortech or BioStar if the Merger shall not have been
consummated by May 31, 1998 (unless the failure to consummate the Merger is
attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Time);
(c) by either Cortech or BioStar if a court of competent jurisdiction
or other Governmental Body shall have issued a final and nonappealable
order, decree or ruling, or shall have taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger;
(d) by either Cortech or BioStar if (i) the BioStar Stockholders'
Meeting shall have been held and completed and (ii) this Agreement, the
Merger and the BioStar Charter Amendment shall not have been approved at
such meeting by the Required BioStar Stockholder Vote;
(e) by either Cortech or BioStar if (i) the Cortech Stockholders'
Meeting shall have been held and completed and (ii) the issuance of Cortech
Common Stock in the Merger shall not have been approved at such meeting by
the Required Cortech Stockholder Merger Vote;
(f) by Cortech (at any time prior to the approval of this Agreement,
the Merger and the BioStar Charter Amendment by the Required BioStar
Stockholder Vote) if a BioStar Triggering Event shall have occurred;
(g) by BioStar (at any time prior to the approval of the issuance of
Common Stock in the Merger by the Required Cortech Stockholder Merger Vote)
if a Cortech Triggering Event shall have occurred;
(h) by Cortech if (i) any of BioStar's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, (ii) if any of BioStar's covenants contained in this Agreement
shall have been breached, and such inaccuracy or breach would cause the
condition set forth in Sections 6.1 or 6.2, respectively, to not be
satisfied, or (iii) if Cowen withdraws its fairness opinion as further
provided in Section 6.12 because of a material change in the underlying
assumptions of the financial projections provided to Cowen by BioStar;
provided, however, that if an inaccuracy in BioStar's representations and
warranties or a breach of a covenant by BioStar is curable by BioStar and
BioStar is continuing to exercise all reasonable efforts to cure such
inaccuracy or breach, then Cortech may not terminate this Agreement under
this Section 8.1(h) on account of such inaccuracy or breach until 20 days
after delivery of written notice of the inaccuracy or breach to BioStar by
Cortech, if the inaccuracy or breach has not at that time been cured or May
31, 1998, whichever shall first occur; or
(i) by BioStar if any of Cortech's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of Cortech's covenants contained in this Agreement
shall have been breached, and such inaccuracy or breach would cause the
condition set forth in Sections 7.1 or 7.2, respectively, to not be
satisfied (except that BioStar may consider any breach of the covenant set
forth in Section 4.3(xv) above to be a material breach); provided, however,
that (except with respect to a breach of the covenant set forth in Section
4.3(xv) which shall be considered a breach incapable of cure) if an
inaccuracy in Cortech's representations and warranties or a breach of a
covenant by Cortech is curable by Cortech and Cortech is continuing to
exercise all reasonable efforts to cure such
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inaccuracy or breach, then BioStar may not terminate this Agreement under
this Section 8.1(i) on account of such inaccuracy or breach until 20 days
after delivery of written notice of the breach or inaccuracy to Cortech by
BioStar, if the inaccuracy or breach has not at that time been cured or May
31, 1998, whichever shall first occur.
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 8.2, Section 8.3 and
Section 9 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) the Nondisclosure Agreement shall remain in full
force and effect to the extent provides therein, and (iii) the termination of
this Agreement shall not relieve any party from any liability for any breach of
any representation, warranty or covenant contained in this Agreement occurring
prior to the date of such termination if such party is not obligated to pay a
termination fee pursuant to Section 8.3 hereof.
8.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that Cortech and BioStar shall share
equally all fees and expenses, other than attorneys' fees, incurred in
connection with the filing, printing and mailing of the Form S-4 Registration
Statement and the Joint Proxy Statement and any amendments or supplements
thereto.
(b) If this Agreement is terminated by Cortech pursuant to Section 8.1(f)
or 8.1(h) hereof, BioStar shall pay Cortech a termination fee equal to (i)
$500,000 plus (ii) if the preliminary Joint Proxy Statement has been filed with
the SEC, reimbursement of the amount of the professional fees and expenses which
Cortech incurred in connection with the Merger, up to $150,000.
(c) If this Agreement is terminated by BioStar pursuant to Section 8.1(g),
or 8.1(i) hereof, Cortech shall pay BioStar a termination fee equal to (i)
$500,000 plus (ii) if the preliminary Joint Proxy Statement has been filed with
the SEC, reimbursement of the amount of the professional fees and expenses which
BioStar incurred in connection with the Merger, up to $150,000.
(d) Any termination fees and expenses payable under Section 8.3(b) or
8.3(c) above shall be paid in cash, via wire transfer of immediately available
funds no later than the close of business on the second business day following
the date on which the termination giving rise to such payment occurs.
(e) Cortech and BioStar agree that the agreements contained in Sections
8.3(b) and (c) above are an integral part of the transactions contemplated by
this Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to the other any fee due under such Sections 8.3(b) and
(c), the defaulting party shall pay the costs and expenses (including legal fees
and expenses) in connection with any action, including the filing of any lawsuit
or other legal action, taken to collect payment, together with interest on the
amount of any unpaid fee at the publicly announced prime rate of Citibank, N.A.
from the date such fee was required to be paid.
9. MISCELLANEOUS PROVISIONS
9.1 AMENDMENT. This Agreement may be amended with the approval of the
respective boards of directors of BioStar and Cortech at any time (whether
before or after approval of this Agreement and the Merger by the stockholders of
BioStar; and whether before or after approval of the issuance of Cortech Common
Stock in the Merger by Cortech's stockholders) provided, however, that (i) after
any such approval of this Agreement and the Merger by BioStar's stockholders, no
amendment shall be made which by law or NASD regulation requires further
approval of the stockholders of BioStar without the further approval of such
stockholders, and (ii) after any such approval of the issuance of Cortech Common
Stock in the Merger by Cortech's stockholders, no amendment shall be made which
by law or NASD regulation requires further approval of Cortech's stockholders
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
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9.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
9.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
other agreements and schedules referred to herein and therein and the
Non-Disclosure Agreement constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among or between any of
the parties with respect to the subject matter hereof and thereof. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original and all of which shall constitute one and the same instrument, and
shall be governed in all respects by the laws of the State of Colorado as
applied to contracts entered into and to be performed entirely within Colorado
provided, however that matters of corporate governance involving Cortech and
BioStar shall be governed by the DGCL.
9.5 JURY WAIVER. The parties hereto hereby agree to waive their respective
rights to a trial by jury of any claim or cause of action based upon or arising
out of or related to this Agreement or the transactions contemplated thereby in
any action, proceeding or other litigation of any type brought by any party
against any other party with respect to contracts, claims, tort claims or
otherwise. The scope of this waiver is intended to be as broad as permitted by
law, covering all disputes that may be filed in any court that relate to the
subject matter of this Agreement, including tort claims, contract claims, claims
under common law, statutory claims and any action, counterclaim or other
proceeding which seeks in whole or in part to challenge the validity or
enforceability of this Agreement or the transactions contemplated thereby. This
waiver is irrevocable.
9.6 DISCLOSURE SCHEDULE. The BioStar Disclosure Schedule and the Cortech
Disclosure Schedule shall be arranged in separate parts corresponding to the
numbered and lettered sections contained in Sections 2 and 3, and the
information disclosed in any numbered or lettered part shall, together with any
other information in any other part or parts of the relevant Disclosure Schedule
which a reasonable Person would relate to such numbered or lettered part, be
deemed to relate to and to qualify the representation or warranty set forth in
the corresponding numbered or lettered section and shall otherwise not be deemed
to relate to or to qualify any other representation or warranty.
9.7 ATTORNEYS' FEES. In any action at law or suit in equity to enforce this
Agreement or the rights of any of the parties hereunder, the prevailing party in
such action or suit shall be entitled to receive a reasonable sum for its
attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.8 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights hereunder may be assigned by any party without
the prior written consent of the other party, and any attempted assignment of
this Agreement or any of such rights by a party without such consent shall be
void and of no effect. Except as set forth in Section 1.5 with respect to the
stockholders of BioStar or the holders of BioStar Options and BioStar Warrants,
and Section 5.6 with respect to the persons identified therein (with each of the
foregoing intended as a third party beneficiary of the corresponding referenced
Section of this Agreement), nothing in this Agreement, express or implied, is
intended to or shall confer upon any Person any right, benefit or remedy of any
nature whatsoever under or reason of this Agreement.
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9.9 NOTICES. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Cortech or Merger Sub:
Cortech, Inc.
6850 North Broadway
Denver, Colorado 80221
Attention: Kenneth R. Lynn
Phone: 303/650-1200
Fax: 303/650-5023
with a copy to:
Pillsbury Madison & Sutro LLP
101 W. Broadway, Suite 1800
San Diego, California 92101
Attention: David R. Snyder, Esq.
Phone: 619/234-5000
Fax: 619/236-1995
if to BioStar :
BioStar, Inc.
6655 Lookout Road
Boulder, Colorado 80301
Attention: Teresa W. Ayers
Phone: 303/530-6602
Fax: 303/530-6641
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard
Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Phone: 303/546-4000
Fax: 303/546-4099
9.10 COOPERATION. Each party agrees to cooperate fully with the other party
and to execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by the
other party to evidence or reflect the transactions contemplated by this
Agreement and to carry out the intent and purposes of this Agreement.
9.11 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include masculine
and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
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(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
CORTECH, INC.
By: /s/ KENNETH R. LYNN
----------------------------------
Kenneth R. Lynn
President/Chief Executive Officer
CORTECH MERGER SUB, INC.
By: /s/ KENNETH R. LYNN
----------------------------------
Kenneth R. Lynn
President/Chief Executive Officer
BIOSTAR, INC.
By: /s/ TERESA W. AYERS
----------------------------------
Teresa W. Ayers
President/ Chief Executive Officer
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION PROPOSAL. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal between Cortech and BioStar)
contemplating or otherwise relating to any Acquisition Transaction.
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which Cortech or BioStar is a
constituent corporation, (ii) in which a Person or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of Persons directly
or indirectly acquires Cortech or BioStar or more than 50% of Cortech's
business or BioStar's business or directly or indirectly acquires
beneficial or record ownership of securities representing more than 20% of
the outstanding securities of any class of voting securities of Cortech or
BioStar, or (iii) in which any of BioStar or Cortech issues securities
representing more than 20% of the outstanding securities of any class of
voting securities of BioStar or Cortech, respectively;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of BioStar or Cortech; or
(c) any liquidation or dissolution of BioStar or Cortech.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
BEST OF KNOWLEDGE; KNOWLEDGE. Information shall be deemed to be known to
the "best of knowledge" or to the "knowledge" of a party if that information was
actually known or reasonably should have been known by an executive officer of
such party.
BIOSTAR COMMON STOCK. "BioStar Common Stock" shall mean the Common Stock,
$.0001 par value, of BioStar.
BIOSTAR CONTRACT. "BioStar Contract" shall mean any Contract: (a) to which
BioStar is a party; (b) by which BioStar or any asset of BioStar is or may
become bound or under which BioStar has, or may become subject to, any
obligation; or (c) under which BioStar has or may acquire any right or interest.
BIOSTAR DISCLOSURE SCHEDULE. "BioStar Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by BioStar in accordance with the
requirements of Section 9.6 and that has been delivered by BioStar to Cortech on
the date of this Agreement and signed by the President of BioStar.
BIOSTAR OPTIONS. "BioStar Options" shall mean each unexpired and
unexercised option to purchase shares of BioStar Common Stock granted under the
1995 Equity Incentive Plan and stock option agreements of BioStar outside of the
1995 Equity Incentive Plan outstanding immediately prior to the Effective Time.
BIOSTAR PROPRIETARY ASSET. "BioStar Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to BioStar or otherwise used by BioStar.
BIOSTAR PREFERRED STOCK. "BioStar Preferred Stock" shall mean the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, $.0001
par value, of BioStar.
BIOSTAR RECORD DATE. "BioStar Record Date" shall mean the record date for
the BioStar Stockholders Meeting.
BIOSTAR TRIGGERING EVENT. A "BioStar Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of BioStar shall have failed to
recommend, or shall for any reason have withdrawn or shall
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have amended or modified in a manner adverse to Cortech its unanimous
recommendation in favor of, the Merger or approval of this Agreement; (ii)
BioStar shall have failed to include in the Joint Proxy Statement the unanimous
recommendation of the board of directors of BioStar in favor of approval of this
Agreement and the Merger; (iii) the board of directors of BioStar fails to
unanimously reaffirm its recommendation in favor of approval of this Agreement
and the Merger within five business days after the Cortech requests in writing
that such recommendation be reaffirmed; (iv) the board of directors of BioStar
shall have approved, endorsed or recommended any Acquisition Proposal; (v)
BioStar shall have entered into any letter of intent or similar document or any
Contract relating to any Acquisition Proposal; (vi) BioStar shall have failed to
hold BioStar Stockholders' Meeting as promptly as practicable and in any event
within 45 days after the Form S-4 Registration Statement is declared effective
under the Securities Act; (vii) a tender or exchange offer relating to
securities of BioStar shall have been commenced and BioStar shall not have sent
to its security holders, within five business days after the commencement of
such tender or exchange offer, a statement disclosing that BioStar recommends
rejection of such tender or exchange offer; or (viii) an Acquisition Proposal is
publicly announced, and BioStar (A) fails to issue a press release announcing
its opposition to such Acquisition Proposal within five business days after such
Acquisition Proposal is announced or (B) otherwise fails to actively oppose such
Acquisition Proposal.
BIOSTAR WARRANTS. BioStar Warrants shall mean the outstanding warrants of
BioStar and the Contingent Instrument, as amended prior to the Effective Time
(other than those which expire as of the Effective Time if they remain
unexercised as of the Effective Time).
CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
CORTECH COMMON STOCK. "Cortech Common Stock" shall mean the Common Stock,
$0.002 par value per share, of Cortech.
CORTECH CONTRACT. "Cortech Contract" shall mean any Contract: (a) to which
any of the Cortech Corporations is a party; (b) by which any Cortech Corporation
or any asset of a Cortech Corporation may become bound or under which any
Cortech Corporation has, or may become subject to, any obligation; or (c) under
which any Cortech Corporation has or may acquire any right or interest.
CORTECH DISCLOSURE SCHEDULE. "Cortech Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by Cortech in accordance with the
requirements of Section 9.6 and that has been delivered by Cortech to BioStar on
the date of this Agreement and signed by the President of Cortech.
CORTECH OPTIONS. "Cortech Options" shall mean stock options granted by
Cortech pursuant to the Amended and Restated 1986 Incentive Stock Option Plan,
1991 Non-employee Directors' Stock Option Plan, Amended and Restated 1992
Non-employee Directors' Stock Option Plan, and the 1993 Equity Incentive Plan
(collectively, the "Cortech Option Plans").
CORTECH PROPRIETARY ASSET. "Cortech Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to any of the Cortech Corporations or
otherwise used by any of the Cortech Corporations.
CORTECH RECORD DATE. "Cortech Record Date" shall mean the record date for
the Cortech Stockholders Meeting.
CORTECH TRIGGERING EVENT. A "Cortech Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Cortech shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to BioStar its unanimous recommendation in favor
of, the Merger or approval of this Agreement; (ii) Cortech shall have failed to
include in the Joint Proxy Statement the unanimous recommendation of the board
of directors of Cortech in favor of approval of this
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Agreement and the Merger; (iii) the board of directors of Cortech fails to
unanimously reaffirm its recommendation in favor of approval of this Agreement
and the Merger within five business days after BioStar requests in writing that
such recommendation be reaffirmed; (iv) the board of directors of Cortech shall
have approved, endorsed or recommended any Acquisition Proposal; (v) Cortech
shall have entered into any letter of intent or similar document or any Contract
relating to any Acquisition Proposal; (vi) Cortech shall have failed to hold the
Cortech Stockholders' Meeting as promptly as practicable and in any event within
45 days after the Form S-4 Registration Statement is declared effective under
the Securities Act; (vii) a tender or exchange offer relating to securities of
Cortech shall have been commenced and Cortech shall not have sent to its
security holders, within five business days after the commencement of such
tender or exchange offer, a statement disclosing that Cortech recommends
rejection of such tender or exchange offer; or (viii) an Acquisition Proposal is
publicly announced, and Cortech (A) fails to issue a press release announcing
its opposition to such Acquisition Proposal within five business days after such
Acquisition Proposal is announced or (B) otherwise fails to actively oppose such
Acquisition Proposal.
COWEN. "Cowen" shall mean Cowen & Company, financial advisor to Cortech.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ENVIRONMENTAL LAW. "Environmental Law" means any federal, state, local or
foreign Legal Requirement relating to pollution or protection of human health or
the environment (including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
FORM S-4 REGISTRATION STATEMENT. "Form S-4 Registration Statement" shall
mean the registration statement on Form S-4 to be filed with the SEC by Cortech
in connection with issuance of Cortech Common Stock in the Merger, as said
registration statement may be amended prior to the time it is declared effective
by the SEC.
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, variance, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
JOINT PROXY STATEMENT. "Joint Proxy Statement" shall mean the joint proxy
statement/prospectus to be sent to BioStar's stockholders in connection with the
BioStar Stockholder's Meeting and to Cortech's stockholders in connection with
the Cortech Stockholders' Meeting.
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
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examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
LEHMAN BROTHERS. "Lehman Brothers" shall mean Lehman Brothers Inc.,
financial advisor to BioStar.
MATERIAL ADVERSE EFFECT. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on BioStar if
such event, violation, inaccuracy, circumstance or other matter would have a
material adverse effect on (i) the business, financial condition,
capitalization, assets, liabilities, operations or financial performance of
BioStar, (ii) the ability of the company to consummate the Merger or any of the
other transactions contemplated by this Agreement or to perform obligations
under this Agreement, or (iii) Cortech's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on Cortech if
such event, violation, inaccuracy, circumstance or other matter would have a
material adverse effect on (i) the business, financial condition, assets,
liabilities, operations or financial performance of the Cortech Corporations
taken as a whole, (ii) the ability of Cortech to consummate the Merger or any of
the other transactions contemplated by this Agreement or to perform its
obligations under this Agreement, or (iii) the ability of BioStar's stockholders
to vote, receive dividends with respect to, or otherwise exercise ownership
rights with respect to the stock of Cortech received by them.
MATERIALS OF ENVIRONMENTAL CONCERN. "Materials of Environmental Concern"
include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products and any other substance that is now or hereafter
regulated by any Environmental Law or that is otherwise a danger to health,
reproduction or the environment.
PENSION PLAN. "Pension Plan" shall mean any employee pension benefit plan
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), whether or not excluded from coverage under specific
Titles or Subtitles of ERISA).
PERSON. "Person" shall mean any individual, Entity or Governmental Body.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any material: (a) patent,
patent application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, source code, algorithm, invention, design,
blueprint, engineering drawing, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset; or (b) right to
use or exploit any of the foregoing.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SUBSIDIARY. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities or other interests in such Entity that is sufficient
to enable such Person to elect at least a majority of the members of such
Entity's board of directors or other governing body.
SUPERIOR OFFER. "Superior Offer" shall mean an unsolicited, bona fide
written Acquisition Proposal on terms that the board of directors of BioStar or
Cortech, as the case may be, determines in its reasonable
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judgment, after consultation with its financial advisor, to be more favorable to
BioStar's stockholders or Cortech's stockholders, as the case may be, than the
terms of the Merger.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
WELFARE PLAN. "Welfare Plan" shall mean an employee welfare benefit plan
(as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA).
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EXHIBIT B
FORM OF BIOSTAR CHARTER AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
BIOSTAR, INC.
BioStar, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY:
FIRST: The name of the Corporation is BioStar, Inc.
SECOND: The original certificate of incorporation of the Corporation was
(i) filed with the Secretary of State of Delaware on May 21, 1992, and (ii) a
restated certificate of incorporation was filed on June 24, 1997 (the "Restated
Certificate").
THIRD: The board of directors of the Corporation, acting in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware, has adopted resolutions to amend the Certificate of Incorporation.
FOURTH: The Certificate of Incorporation shall be amended as follows:
1. Subsection 2(a) of Article IV shall be amended to read in full as
follows:
"a. In the event of a liquidation, dissolution or winding up of this
corporation, other than the Excluded Merger (as defined in subsection
5(a)(iv) below), either voluntary or involuntary:"
2. The following proviso shall be inserted at the end of subsection
5(a) of Article IV, immediately after subsection 5(a)(ii)(D):
"(iii) This Section 5 shall not apply to a merger of Cortech Merger Sub,
Inc., a wholly-owned subsidiary of Cortech, Inc., with and into the
Corporation (the "Excluded Merger") pursuant to the Agreement and Plan
of Merger and Reorganization dated as of December 19, 1997 among
Cortech, Inc., Cortech Merger Sub, Inc. and the Corporation, as such
agreement may be amended from time to time in accordance with the
provisions thereof (the "Reorganization Agreement").
3. The following subsection 5(g) shall be added to Article IV,
immediately following sub-section 5(f):
"g. Notwithstanding any other provision of this Restated Certificate, in
the event of the Excluded Merger no holder of Preferred Stock or Common
Stock shall be entitled to receive, as consideration for any of such
holder's Preferred Stock or Common Stock, any payment, consideration or
exchange of cash, securities or other property other than the
consideration set forth in the Reorganization Agreement."
FIFTH: Thereafter, pursuant to a resolution of the board of directors of
the Corporation, this Certificate of Amendment was submitted to the stockholders
of the Corporation for their approval in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its duly authorized officer this day of
, 1998.
BioStar, Inc.
By:
----------------------------------
Teresa W. Ayers
President/Chief Executive Officer
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EXHIBIT C
FORM OF AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT (this "Agreement") is made and entered into as of
, 199 , by and among Cortech, Inc., a Delaware corporation
("Cortech"), BioStar, Inc., a Delaware corporation ("BioStar") and the
undersigned stockholder who may be deemed an affiliate ("Affiliate") of BioStar.
Capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to them in the Reorganization Agreement (as defined below).
RECITALS
A. BioStar, Cortech and Cortech Merger Sub, Inc., a Delaware corporation
and a wholly-owned subsidiary of Cortech ("Merger Sub"), have entered into an
Agreement and Plan of Reorganization (the "Reorganization Agreement") which
contemplates that BioStar and Merger Sub will execute a Certificate of Merger,
which Agreement and Certificate (collectively, the "Merger Agreements") provide
for the merger (the "Merger") of Merger Sub with and into BioStar. Pursuant to
the Merger, all outstanding capital stock of BioStar will be converted into
Common Stock of Cortech.
B. Affiliate is the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares
of the outstanding BioStar capital stock as is indicated on the final page of
this Agreement, which shares shall be exchanged for shares of Cortech Common
Stock as a result of the Merger (for purposes of this Agreement, "Shares" means
shares of BioStar capital stock and the shares of Cortech Common Stock issued in
exchange therefor as a result of the Merger).
C. Affiliate understands that, since the Affiliate may be deemed to be an
"affiliate" of BioStar (within the meaning of Rule 145 ("Rule 145") promulgated
by the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended (the "Securities Act")), the Shares may only be disposed of in
conformity with the limitations described herein. Affiliate has been informed
that the treatment of the Merger as a tax-free reorganization under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), is
dependent upon the accuracy of certain of the representations and warranties and
the compliance with certain of the agreements set forth herein. Affiliate
further understands that the representations, warranties and agreements set
forth herein will be relied upon by Cortech, BioStar and their respective
counsel and independent auditors.
NOW THEREFORE, the parties agree as follows:
1) New Shares. Affiliate agrees that any shares of capital stock of BioStar
that Affiliate purchases or with respect to which Affiliate otherwise acquires
beneficial ownership after the date of this Agreement and prior to the Effective
Time of the Merger ("New Shares") shall be subject to the terms and conditions
of this Agreement to the same extent as if they constituted Shares.
2) Tax Treatment; Rule 145. Affiliate understands and agrees that it is
intended that the Merger qualify as a "reorganization" under Section 368 of the
Code. Affiliate further understands and agrees that Affiliate may be deemed to
be an "affiliate" of BioStar within the meaning of Rule 145, although nothing
contained herein should be construed as an admission of such fact.
3) Reliance Upon Representations, Warranties and Covenants. Affiliate has
been informed that the treatment of the Merger as a reorganization for federal
income tax purposes requires that a sufficient number of former stockholders of
BioStar maintain a meaningful continuing equity ownership interest in Cortech
after the Merger. Affiliate understands that the representations, warranties and
covenants of Affiliate set forth herein will be relied upon by Cortech, BioStar
and their respective counsel and independent auditors.
4) Representations, Warranties and Covenants of Affiliate.
(a) Affiliate has full power and authority to execute this Agreement, to
make the representations, warranties and covenants herein contained and to
perform Affiliate's obligations hereunder.
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(b) Set forth below the signatures below is the number of shares of BioStar
capital stock owned by Affiliate, including all BioStar capital stock as to
which Affiliate has sole or shared voting or investment power and all rights,
options and warrants to acquire BioStar capital stock owned or held by
Affiliate.
(c) Except as may be specifically required by court order, Affiliate will
not sell, transfer, exchange, pledge or otherwise dispose of, or make any offer
or agreement relating to the foregoing with respect to, any shares of Cortech
Common Stock that Affiliate may acquire in connection with the Merger, or any
securities that may be paid as a dividend or otherwise distributed thereon or
with respect thereto or issued or delivered in exchange or substitution therefor
(all such shares and other securities of Cortech are sometimes collectively
referred to as "Restricted Securities"), or any option, right or other interest
with respect to any Restricted Securities, unless: (i) such transaction is
permitted pursuant to Rule 145(d) under the Securities Act; (ii) counsel
representing Affiliate, which counsel is reasonably satisfactory to Cortech,
shall have advised Cortech in a written opinion letter satisfactory to Cortech
and Cortech's legal counsel, and upon which Cortech and its legal counsel may
rely, that no registration statement under the Securities Act would be required
in connection with the proposed sale, transfer or other disposition; (iii) a
registration statement under the Securities Act covering the Cortech Common
Stock proposed to be sold, transferred or otherwise disposed of, describing the
manner and terms of the proposed sale, transfer or other disposition, and
containing a current prospectus, shall have been filed with the SEC and made
effective under the Securities Act; or (iv) an authorized representative of the
SEC shall have rendered written advice to Affiliate (sought by Affiliate or
counsel to Affiliate, with a copy thereof and all other related communications
delivered to Cortech) to the effect that the SEC would take no action, or that
the staff of the SEC would not recommend that the SEC take any action, with
respect to the proposed disposition if consummated.
(d) Affiliate has, and as of the Effective Time of the Merger will have, no
present plan or intent to engage in a sale, exchange, transfer, pledge,
disposition or any other transaction that results in a reduction in the risk of
ownership (collectively, a "Sale") with respect to more than % of the shares
of Cortech Common Stock to be acquired by the undersigned Affiliate upon
consummation of the Merger. Affiliate is not aware of, or participating in, any
present plan or intention (a "Plan") on the part of BioStar stockholders to
engage in Sales of shares of Cortech Common Stock to be issued in the Merger
such that the aggregate fair market value, as of the Effective Time of the
Merger, of the shares subject to such Sales would exceed % of the aggregate
fair market value of all shares of outstanding BioStar capital stock immediately
prior to the Merger. For purposes of the preceding sentence, shares of BioStar
capital stock (i) that are exchanged for cash in lieu of fractional shares of
Cortech capital stock, or (ii) with respect to which a pre-Merger sale occurs in
a Related Transaction (as defined below), shall be considered to be shares of
BioStar capital stock that are exchanged for Cortech Common Stock in the Merger
and then disposed of pursuant to a Plan. A Sale of Cortech Common Stock shall be
considered to have occurred pursuant to a Plan if, among other things, such Sale
occurs in a Related Transaction. For purposes of this Section 4(d), a "Related
Transaction" shall mean a transaction that is in contemplation of, or related or
pursuant to, the Merger or the Merger Agreements. If any of Affiliate's
representations in this subsection (d) cease to be true at any time prior to the
Effective Time of the Merger, Affiliate will deliver to each of BioStar and
Cortech, prior to the Effective Time of the Merger, a written statement to that
effect, signed by Affiliate.
5) Rules 144 and 145. From and after the Effective Time of the Merger and
for so long as is necessary in order to permit Affiliate to sell the Cortech
Common Stock held by Affiliate pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Securities Act ("Rule 144"), Cortech will use its
best efforts to file on a timely basis all reports required to be filed by it
pursuant to Section 13 of the Exchange Act referred to in paragraph (c)(1) of
Rule 144 under the Securities Act (or if applicable, Cortech will use its best
efforts to make publicly available the information regarding itself referred to
in paragraph (c)(2) of Rule 144), in order to permit Affiliate to sell the
Cortech Common Stock held by it pursuant to the terms and conditions of Rule 145
and the applicable provisions of Rule 144.
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6) Limited Resales. Affiliate understands that, in addition to the
restrictions imposed under Section 4 of this Agreement, the provisions of Rule
145 currently limit Affiliate's public resales of Restricted Securities, in the
manner set forth in subsections (a), (b) and (c) below:
(a) Unless and until the restriction "Cut-off" provisions of Rule
145(d)(2) or Rule 145(d)(3) set forth below become available, public
resales of Restricted Securities may only be made by Affiliate in
compliance with the requirements of Rule 145(d)(1). Rule 145(d)(1) permits
such resales only: (i) while Cortech meets the public information
requirements of Rule 144(c); (ii) in brokers' transactions or in
transactions with a market maker; and (iii) where the aggregate number of
Restricted Securities sold at any time, together with all sales of Cortech
Common Stock sold for Affiliate's account during the preceding three-month
period does not exceed the greater of (A) one percent (1%) of the Cortech
Common Stock outstanding or (B) the average weekly volume of trading in
Cortech Common Stock during the four (4) calendar weeks preceding the date
of receipt of the order to execute the sale.
(b) Affiliate may make unrestricted sales of Restricted Securities
pursuant to Rule 145(d)(2) if: (i) Affiliate has beneficially owned (within
the meaning of Rule 144(d)) the Restricted Securities for at least one (1)
year after the Effective Time of the Merger; (ii) Affiliate is not an
affiliate of Cortech; and (iii) Cortech meets the public information
requirements of Rule 144(c).
(c) Affiliate may make unrestricted sales of Restricted Securities
pursuant to Rule 145(d)(3) if: (i) Affiliate has beneficially owned (within
the meaning of Rule 144(d)) the Restricted Securities for at least two (2)
years and (ii) Affiliate is not, and has not been for at least three (3)
months, an affiliate of Cortech.
(d) Cortech acknowledges that the provisions of Section 4(c) of this
Agreement will be satisfied as to any sale by the undersigned of the
Restricted Securities pursuant to Rule 145(d), by a broker's letter and a
letter from the undersigned with respect to that sale stating that each of
the above-described requirements of Rule 145(d)(1) has been met or is
inapplicable by virtue of Rule 145(d)(2) or Rule 145(d)(3) (as such Rules
may in effect at such time); provided, however, that Cortech has no
reasonable basis to believe that such sales were not made in compliance
with such provisions of Rule 145(d).
7. Legends. Affiliate also understands and agrees that there will be placed
on the certificates evidencing the Restricted Securities a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), APPLIES. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE
SECURITIES ACT."
Cortech agrees to remove promptly such legend upon full compliance with
this Agreement by the undersigned, including, without limitation, a sale or
transfer of Cortech Common Stock permitted under Section 4(c) above.
8) Termination. This Agreement shall be terminated and shall be of no
further force or effect in the event of the termination of the Reorganization
Agreement pursuant to Article VIII of the Reorganization Agreement.
9) Partnership Distributions. Any other provisions of this Agreement
notwithstanding, if the undersigned Affiliate is organized as a partnership,
BioStar and Cortech hereby agree that such partnership shall be permitted to
make a distribution to its partners of shares of BioStar capital stock (if made
prior to the Effective Time of the Merger) or of shares of Cortech capital stock
received in the Merger so long as the undersigned Affiliate and its partnership
distributees provide assurances, acceptable to Cortech and BioStar in their
reasonable discretion, that such distributions (i) are permissible under Rule
145, and (ii) will not prevent the Merger from being treated as a tax-free
reorganization for federal income tax purposes.
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10) Miscellaneous.
(a) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(b) Binding Agreement. This Agreement will inure to the benefit of and be
binding upon and enforceable against the parties and their successors and
assigns, including administrators, executors, representatives, heirs, legatees
and devisees of Affiliate and pledgees holding Restricted Securities as
collateral.
(c) Waiver. No waiver by any party hereto of any condition or of any breach
of any provision of this Agreement shall be effective unless in writing and
signed by each party hereto.
(d) Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State of
Delaware without giving effect to any choice or conflict of law provision or
rule (whether of the State of Delaware or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Delaware.
(e) Attorneys' Fees. In the event of any legal action or proceeding to
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
(f) Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
(g) Third Party Reliance. Counsel to and independent auditors for the
parties shall be entitled to rely upon this Affiliate Agreement.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be
duly executed on the day and year first above written.
CORTECH AFFILIATE
By: By:
------------------------------ --------------------------------
Name:
---------------------------- Affiliate's address for notice:
Title:
--------------------------- -----------------------------------
BIOSTAR -----------------------------------
By:
------------------------------ Shares beneficially owned:
Name: ____ shares of BioStar Common Stock
----------------------------
____ shares of BioStar Common Stock
Title: issuable upon exercise of
--------------------------- outstanding options and warrants
____ shares of BioStar Preferred
Stock
____ shares of BioStar Preferred
Stock issuable upon exercise
of outstanding options and
warrants
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APPENDIX B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CORTECH, INC.
Cortech, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Company"), does
hereby certify:
FIRST: That at a meeting of the Board of Directors of the Company,
resolutions were duly adopted setting forth proposed amendments of the
Certificate of Incorporation of the Company, declaring said amendments to be
advisable and calling a meeting of the stockholders of the Company for
consideration thereof. The resolutions setting forth the proposed amendments are
as follows:
RESOLVED, that a proposed amendment to the Certificate of
Incorporation of the Company effecting changes in Article II thereof is
hereby approved and adopted:
Article II is hereby amended to read in its entirety as follows:
The name of the Corporation is BioStar Holdings, Inc.
(hereinafter referred to as the "Corporation").
RESOLVED FURTHER, that a proposed amendment to the Certificate of
Incorporation of the Company effecting changes in Article V, Section 1
thereof is hereby approved and adopted:
Article V, Section 1 is hereby amended to read in its entirety as
follows:
Section 1. Authorized Shares.
The aggregate number of shares of capital stock which this
Corporation shall have the authority to issue shall be 52,000,000
shares, 50,000,000 of which shall be Common Stock, with a par value
of $0.002 per share (hereinafter referred to as "Common Stock"), and
2,000,000 of which shall be Preferred Stock, with a par value of
$0.002 per share (hereinafter referred to as "Preferred Stock").
Upon the amendment of this Section 1 of Article V to read as
herein set forth, each [ ( )] outstanding shares of Common
Stock are combined into one (1) share of Common Stock (without any
effect on the authorized number of such shares); provided, however,
that the Corporation shall issue no fractional shares, but shall
instead pay in cash to any stockholder who would be entitled to
receive a fractional share as the result of the action set forth in
this Section 1 of Article V the fair market value of such fractional
share as determined by the Board of Directors as of the effective
date of the Amendment of this Section 1 of Article V.
[SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of the Company was duly called and held,
upon notice in accordance with Section 222 of the General Corporation law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendments.]
[THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.]
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IN WITNESS WHEREOF, the Company has caused this certificate to be signed by
, its authorized officer, this day of , 1998.
CORTECH, INC.
By:
------------------------------------
Title:
------------------------------------
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APPENDIX C -- OPINION OF COWEN & COMPANY
December 22, 1997
Board of Directors
Cortech, Inc.
6859 North Broadway
Denver, CO 80221
Gentlemen:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to Cortech, Inc. (the "Company"), of the terms of the
Transaction (as hereinafter defined) with BioStar, Inc. ("BioStar"). For the
purposes of this opinion, the "Transaction" means the transaction described
below pursuant to that certain draft Agreement and Plan of Merger and
Reorganization among the Company, Cortech Merger Sub, Inc. ("Merger Sub") and
BioStar dated December 22, 1997 (the "Agreement").
As more specifically set forth in the Agreement, and subject to certain terms
and conditions thereof, Merger Sub shall be merged with and into BioStar (the
"Merger") with BioStar continuing as the surviving corporation, and (a) each
outstanding share of Common Stock, par value $0.0001 per share, of BioStar
("BioStar Common Stock") and each outstanding share of Preferred Stock, par
value of $0.0001 per share, of BioStar ("BioStar Preferred Stock") (other than
shares held by the Company or BioStar) shall be converted into the right to
receive the number of fully paid and nonassessable shares of Cortech Common
Stock (which number will reflect a one for four reverse stock split to be
effected immediately prior to the effective time of the Merger) equal to a
fraction the numerator of which is 28,500,000 and the denominator of which is
the number of shares of BioStar Common Stock and BioStar Preferred Stock
outstanding plus the number of shares of BioStar Common Stock and BioStar
Preferred Stock issuable upon exercise as of the effective time of all (i)
outstanding BioStar warrants and (ii) outstanding BioStar options; and (b) each
share of the common stock, $0.001 par value, of Merger Sub then outstanding
shall be converted into one share of common stock of the surviving corporation.
In the ordinary course of its services, Cowen & Company ("Cowen") is regularly
engaged in the valuation and pricing of businesses and their securities and in
advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Company's financial statements for the fiscal years
ended December 31, 1994, 1995 and 1996 and for the quarters ended September
30, 1996 and September 30, 1997, respectively, certain publicly available
filings with the Securities and Exchange Commission and certain other
relevant financial and operating data of the Company;
(2) reviewed BioStar's financial statements for the fiscal years ended
December 31, 1994, 1995 and 1996 and for the quarters ended September 30,
1996 and September 30, 1997, respectively, and certain other relevant
financial and operating data of BioStar;
(3) reviewed a draft Agreement, dated December 22, 1997;
(4) held meetings and discussions with management and senior personnel
of the Company and BioStar to discuss the business, operations, historical
financial results and future prospects of the Company and BioStar;
(5) reviewed financial projections furnished to us by the management
of the Company, including, among other things, the capital structure,
sales, net income, cash flow, capital requirements and other data of the
Company we deemed relevant;
(6) reviewed financial projections furnished to us by the management
of BioStar, including, among other things, the capital structure, sales,
net income, cash flow, capital requirements and other data of BioStar we
deemed relevant;
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(7) reviewed the valuation of the Company and BioStar in comparison to
other similar publicly traded companies;
(8) analyzed the potential pro forma financial effects of the
Transaction; and
(9) conducted such other studies, analysis, inquiries and
investigations as we deemed appropriate.
Cowen was not requested to, and did not, solicit third party indications of
interest in acquiring all or substantially all of the stock or assets of the
Company.
On December 22, 1997, the closing price of the Common Stock of the Company in
the last transaction reported by Nasdaq National Market was $0.656 per share.
In rendering our opinion, we relied upon the Company's and BioStar's respective
managements with respect to the accuracy and completeness of the financial and
other information furnished to us as described above. We assumed that financial
forecasts, projections and estimates of operating efficiencies and potential
synergies reflected the best currently available estimates and judgments of the
Company's and BioStar's management as to the expected future financial
performance of their respective entities. We have not assumed any responsibility
for independent verification of such information, including financial
information, nor have we made an independent evaluation or appraisal of any of
the properties or assets of the Company or BioStar. We have visited the
headquarters of the Company. With respect to all legal matters relating to the
Company and BioStar, we have relied on the advice of legal counsel to the
Company.
Our opinion is necessarily based on general economic, market financial and other
conditions as they exist on, and can be evaluated as of, the date hereof, as
well as the information currently available to us. It should be understood that,
although subsequent developments may affect our opinion, we do not have any
obligation to update, revise or reaffirm our opinion. Our opinion does not
constitute a recommendation to any stockholder as how such stockholder should
vote on the proposed Transaction. Our opinion does not imply any conclusion as
to the likely trading range for the Company Common Stock following consummation
of the Transaction or otherwise, which may vary depending on numerous factors
that generally influence the price of securities. Our opinion is limited to the
fairness, from a financial point of view, of the terms of the Transaction. We
express no opinion with respect to any other reasons, legal, business or
otherwise, that may support the decision of the Board of Directors of the
Company to approve, or the Company's decision to consummate, the Transaction.
For purposes of rendering our opinion we have assumed in all respects material
to our analysis, that the representations and warranties of each party contained
in the Agreement are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under the Agreement and
that all conditions to the consummation of the Transaction will be satisfied
without waiver thereof. We have also assumed that all governmental, regulatory
or other consents and approvals contemplated by the Agreement will be obtained
and that in the course of obtaining any of those consents no restrictions will
be imposed or waivers made that would have an adverse effect on the contemplated
benefits of the Transaction.
We have acted as financial advisor to the Board of Directors of the Company in
connection with the Transaction and will receive a fee for our services, a
significant portion of which is contingent on the consummation of the
Transaction. We will also receive a fee for rendering this opinion. In addition,
in the ordinary course of its business, Cowen trades the debt and equity
securities of the Company for its own account and for the accounts of its
customers, and, accordingly, it may at any time hold a long or short position in
such securities.
On the basis of our review and analysis, as described above, it is our opinion
as investment bankers that, as of the date hereof, the financial terms of the
Transaction are fair, from a financial point of view, to the Company.
Very truly yours,
Cowen & Company
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APPENDIX D -- SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251 (other than a merger effected pursuant to
subsection (g) of Section 251 of this title), 252, 254, 257, 258, 263 or 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
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of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
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entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law (the "Delaware
Code"), the Registrant has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Generally,
the Registrant's Bylaws provide that the Registrant will indemnify each of its
directors and officers to the fullest extent not prohibited by Delaware law,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. With respect to a suit brought by or
in the right of the Registrant, indemnification will not be provided for
expenses incurred in connection with any claim, issue or matter as to which such
person shall have been adjudged liable to the Registrant unless and only to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery of the State of Delaware or such other court shall
deem proper. The Registrant's Bylaws also provide that the Company may indemnify
employees and other agents of the Company who are not directors or officers as
set forth in the Delaware Code.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Reorganization Agreement provides that from and after the Effective
Time of the Merger, the Registrant shall and shall cause BioStar, to the fullest
extent permitted under applicable law, to indemnify, defend and hold harmless
each person who served as a director or officer of the Registrant or BioStar
prior to the Effective Time of the Merger against and from (i) any losses,
claims damages, expenses (including reasonable attorneys' fees and court costs),
liabilities or judgements and (ii) any amounts that are paid in settlement, with
the consent of the Registrant (which consent will not be unreasonably withheld),
of or in connection with any legal proceeding based directly or indirectly (in
whole or in part) on, or arising directly or indirectly (in whole or in part)
out of, the fact that such person is or was an officer or director of the
Registrant or BioStar, whether pertaining to any matter arising before or after
the Effective Time.
In addition, the Registrant will provide directors' and officers' insurance
to each of its directors and officers.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2.1 -- Agreement and Plan of Merger and Reorganization dated as
of December 22, 1997 among Cortech, Inc., Cortech Merger
Sub, Inc. and BioStar, Inc. (attached as Appendix A to
Joint Proxy Statement/Prospectus).
3.1 -- Certificate of Incorporation of Cortech, Inc.(1)
3.2 -- Proposed Certificate of Amendment to Certificate of
Incorporation of Cortech, Inc. (see Appendix B).
3.3 -- Certificate of Designation for Series A Junior
Participating Preferred Stock.(12)
3.4 -- Amended and Restated Bylaws of Cortech, Inc.
4.1 -- Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 10.21,
10.22, 10.30, 10.34, 10.52, 10.71, 10.72, 10.73, 10.74,
10.75, 10.76, 10.77, 10.78, 10.79 and 10.81.
4.2 -- Specimen certificate for the Common Stock of Cortech,
Inc.(1)
5.1 -- Legal opinion of Pillsbury Madison & Sutro LLP.
8.1** -- Tax opinion of Pillsbury Madison & Sutro LLP.
8.2** -- Tax opinion of Cooley Godward LLP.
10.2 -- Lease Agreement dated April 2, 1992, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(1)
10.3 -- Lease Agreement dated March 5, 1993, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(5)
10.7 -- Lease Agreement dated May 14, 1993, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(5)
10.13 -- Purchase and Sale Agreement (Vacant Land) dated February
16, 1994, between Cortech, Inc. and Golden West Equity
Properties, Inc. and Park Centre Limited Partnerships.(7)
10.14 -- Research Agreement dated June 30, 1987, as amended
through December 31, 1996, between HMRI,
successor-in-interest to Marion Merrell Dow Inc., and
Cortech, Inc.(1)
10.19 -- Fifth Amendment of Research Agreement dated January 14,
1994, between HMRI and Cortech, Inc.(6)
10.21 -- Warrant to Purchase dated June 30, 1998, between HMRI and
Cortech, Inc.(1)
10.22 -- Warrant to Purchase dated February 28, 1990, between HMRI
and Cortech, Inc.(1)
10.25 -- License Agreement dated June 30, 1987, between HMRI and
Cortech, Inc.(1)
10.27 -- Amended and Restated License Agreement dated as of May
28, 1993, between HMRI and Cortech, Inc.(3)
10.28 -- Sponsored Research and License Agreement dated February
13, 1987, between The John Hopkins University and
Cortech, Inc.(1)
10.29 -- License Agreement dated June 30, 1987, between the
Research Foundation of the State of New York and Cortech,
Inc.(1)
10.30 -- Stock Purchase Agreement dated July 8, 1994, between
Cortech, Inc. and the Research Foundation of State
University of New York.(9)
10.31 -- Royalty Buyout Agreement dated July 8, 1994, between
Cortech, Inc. and the Research Foundation of State
University of New York.(9)
II-2
249
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.32* -- Development Agreement dated May 2, 1994, between Cortech,
Inc. and Abbott Laboratories.(8)
10.34 -- Form of Warrant issued in connection with the CDC
offering.(1)
10.35 -- Purchase Option Agreement dated February 13, 1992,
between CDC and Cortech, Inc.(1)
10.36 -- Technology License Agreement dated February 13, 1992,
between CDC and Cortech, Inc.(1)
10.37 -- Research and Development Agreement dated February 13,
1992, between CDC and Cortech, Inc.(1)
10.38 -- Services Agreement dated February 13, 1992, between CDC
and Cortech, Inc.(1)
10.39 -- Amended and Restated Incentive Stock Option Plan of
Cortech, Inc.(1)
10.40 -- 1991 Non-employee Directors' Stock Option Plan of
Cortech, Inc.(2)
10.41 -- Amended and Restated 1992 Non-employee Directors' Stock
Option Plan of Cortech, Inc.(6)
10.42 -- 1993 Employee Stock Purchase Plan of Cortech, Inc.(4)
10.43 -- 1993 Equity Incentive Plan of Cortech, Inc.(6)
10.45 -- Resignation and Separation Agreement dated March 10,
1994, between Cortech, Inc. and David K. Crossen.(7)
10.47 -- Executive Officers' Severance Benefit Plan.(14)
10.48 -- Sixth Amendment of Research Agreement dated March 15,
1995, between HMRI and Cortech, Inc.(14)
10.50* -- Product Development and License Agreement dated November
1, 1995, between Cortech, Inc. and SmithKline
Beecham.(14)
10.51 -- Seventh Amendment of Research Agreement dated December
21, 1995, between HMRI and Cortech, Inc.(14)
10.52 -- Warrant to Purchase dated June 30, 1992, between HMRI and
Cortech, Inc.(14)
10.53 -- Rights Agreement drafted as of June 13, 1995, between
Cortech, Inc. and American Securities Transfer, Inc.(11)
10.54 -- Buy-Out Agreement dated September 9, 1996, between
Cortech, Inc. and HMRI.(13)
10.55 -- Amendment No. 1 to Executive Officers' Severance Benefit
Plan.(14)
10.57* -- Second Amendment of the Research, Development and License
Agreement dated April 23, 1997, between Ono and Cortech,
Inc.(15)
10.58+ -- Development Agreement between BioStar, Inc. and Asahi
Chemical Industry Co., Ltd. dated as of August 1, 1997.
10.59+ -- Technology License Agreement between BioStar, Inc. and
Asahi Chemical Industry Co., Ltd. dated as of August 1,
1997.
10.60+ -- Diagnostic Development and Commercialization Agreement
between BioStar, Inc. and Biota Scientific Management Pty
Ltd dated May 23, 1997.
10.61+ -- Distribution Agreement between BioStar, Inc. and Murex
Diagnostics, Inc. dated as of January 1, 1997, as
amended.
10.62+ -- Distribution Agreement between BioStar, Inc. and Wyntek
Diagnostics, Inc. dated as of July 1, 1997, as amended.
II-3
250
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.63 -- Notice of Grant Award to BioStar, Inc. from the National
Institutes of Health issued September 29, 1995.
10.64 -- Notice of Grant Award to BioStar, Inc. from the National
Institutes of Health issued September 30, 1997.
10.65 -- Subordinated Security Agreement between BioStar, Inc. and
Comdisco, Inc. dated May 3, 1995, as amended by Amendment
to Subordinated Security Agreement dated as of March 20,
1996.
10.66 -- Subordination Agreement between BioStar, Inc. and
Comdisco, Inc. dated as of May 3, 1995.
10.67 -- Subordinated Promissory Note payable by BioStar, Inc. to
Comdisco, Inc. dated March 20, 1996.
10.68 -- Form of Convertible Subordinated Promissory Note issued
by BioStar, Inc. on March 20, 1996 and April 15, 1996 to
certain investors.
10.69 -- Form of Subordinated Promissory Note issued by BioStar,
Inc. on June 20, 1997 to certain investors.
10.70 -- Loan and Security Agreement between BioStar, Inc. and
Venture Lending dated as of May 1, 1997.
10.71 -- Warrant to Purchase Shares of Series B Preferred Stock of
BioStar, Inc. issued to Dominion Ventures, Inc. dated
November 2, 1992.
10.72 -- Warrant Agreement to Purchase Shares of the Series E
Preferred Stock of BioStar, Inc. issued to Comdisco, Inc.
dated May 3, 1995.
10.73 -- Warrant Agreement to Purchase Shares of the Series E
Preferred Stock of BioStar, Inc. issued to Comdisco, Inc.
dated May 3, 1995.
10.74 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Dominion Ventures, Inc. dated
February 18, 1994.
10.75 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Silicon Valley Bank dated
September 15, 1995.
10.76 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Venture Lending dated May 1,
1997.
10.77 -- Warrant to Purchase Shares of Common Stock of BioStar,
Inc. issued to Silicon Valley Bank dated October 28,
1996.
10.78 -- Form of Warrant to Purchase Shares of Common Stock of
BioStar, Inc. issued to the Convertible Subordinated
Noteholders.
10.79 -- Form of Warrant to Purchase Shares of Series F Preferred
Stock of BioStar, Inc. issued to the Subordinated
Noteholders.
10.80 -- Restated Investors' Rights Agreement among BioStar, Inc.
and the investors named therein dated as of November 14,
1994, as amended.
10.81 -- Restated Investors' Rights Agreement among BioStar, Inc.
and the investors named therein dated as of ,
1998.
10.82 -- Master Lease Agreement between BioStar, Inc. and
Comdisco, Inc. dated May 3, 1995.
10.83 -- Dominion Ventures Master Lease Agreement between BioStar,
Inc. and Dominion Ventures, Inc. dated November 2, 1992.
10.84 -- Net Lease Agreement between BioStar, Inc. and Nationwide
Life Insurance Company dated as of September 10, 1992, as
amended by an amendment thereto dated as of February 13,
1993.
II-4
251
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.85 -- Amendment to Leases between Clear Creek II, L.P. and
Cortech, Inc. dated September 8, 1997.
10.86 -- Employment Agreement between Teresa W. Ayers and BioStar,
Inc. dated as of February 10, 1997.
10.87 -- Employment Agreement between Kim Stebbings and BioStar,
Inc. dated as of February 10, 1997.
10.88 -- Employment Agreement between Noel T. Doheny and BioStar,
Inc. dated as of February 10, 1997.
10.89 -- Employment Agreement between Edward C. Pritchard and
BioStar, Inc. dated as of September 1, 1997.
10.90 -- Employment Agreement between Lyndal K. Hesterberg and
BioStar, Inc. dated as of February 10, 1997.
10.91 -- Consulting Service Agreement between Alexander E. Barkas,
Ph.D. and BioStar, Inc. dated as of October 1, 1997.
10.92 -- Amended and Restated Consulting Services Agreement
between Thomas A. Bologna and BioStar, Inc. dated as of
August 31, 1997.
10.93 -- 1995 Equity Incentive Plan of BioStar, Inc.
10.94 -- Executive Compensation and Benefits Continuation
Agreement between Cortech, Inc. and Kenneth R. Lynn,
dated October 14, 1997, as amended February 12, 1998.
10.95 -- Agreement, dated February 12, 1998, between Cortech, Inc.
and Diarmuid F. Boran.
11.1 -- Statement re: computation of earnings per share.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Pillsbury Madison & Sutro LLP (included in
opinion filed as Exhibit 5.1).
23.4 -- Consent of Pillsbury Madison & Sutro LLP regarding tax
matters (included in opinion filed as Exhibit 8.1).
23.5 -- Consent of Cooley Godward LLP regarding tax matters
(included in opinion filed as Exhibit 8.2).
24.1 -- Power of Attorney (See page II-9).
27.1 -- Financial Data Schedule.
99.1 -- Proxy Card of Cortech, Inc.
99.2 -- Proxy Card of BioStar, Inc.
- ---------------
(1) Filed as an exhibit to Cortech, Inc.'s Registration Statement on 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 Cortech, Inc.'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 Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to Cortech, Inc.'s Registration Statement on Form S-8,
filed March 29, 1993, file number 33-60242, or amendments thereto, and
incorporated herein by reference.
(5) Filed as an exhibit to Cortech, Inc.'s Registration Statement on Form S-1,
filed September 27, 1993, file number 33-69402, or amendments thereto and
incorporated herein by reference.
II-5
252
(6) Filed as an exhibit to Cortech, Inc.'s annual report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by reference.
(7) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1994, 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, 1994, and incorporated herein by reference.
(9) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended September 30, 1994, and incorporated herein by reference.
(10) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1995, and incorporated herein by reference.
(11) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended June 30, 1995, and incorporated herein by reference.
(12) 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.
(13) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended September 30, 1996, and incorporated herein by reference.
(14) 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.
(15) 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.
* Subject to Confidential Treatment Order.
** To be filed by amendment.
+ The Registrant has applied for confidential treatment with respect to
portions of this exhibit.
(b) Financial Statement Schedules.
Schedules not listed have been omitted because they are not required, are
not applicable, or the information is included in the consolidated financial
statements, management's discussion and analysis or notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
253
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(5) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
II-7
254
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, County of Denver,
State of Colorado, on the 13th day of February, 1998.
CORTECH, INC.
By: /s/ KENNETH R. LYNN
------------------------------------
Kenneth R. Lynn
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth R. Lynn his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming his signature as it may
be signed by his said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KENNETH R. LYNN President, Chief Executive February 13, 1998
- ----------------------------------------------------- Officer and Chairman of
Kenneth R. Lynn the Board, Acting Chief
Financial Officer and
Director (principal
executive officer and
principal financial and
accounting officer)
/s/ DONALD KENNEDY, PH.D. Director February 13, 1998
- -----------------------------------------------------
Donald Kennedy, Ph.D.
/s/ ALLEN MISHER, PH.D. Director February 13, 1998
- -----------------------------------------------------
Allen Misher, Ph.D.
/s/ BERT FINGERHUT Director February 13, 1998
- -----------------------------------------------------
Bert Fingerhut
/s/ CHARLES COHEN, PH.D. Director February 13, 1998
- -----------------------------------------------------
Charles Cohen, Ph.D.
II-8
255
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2.1 -- Agreement and Plan of Merger and Reorganization dated as
of December 22, 1997 among Cortech, Inc., Cortech Merger
Sub, Inc. and BioStar, Inc. (attached as Appendix A to
Joint Proxy Statement/Prospectus).
3.1 -- Certificate of Incorporation of Cortech, Inc.(1)
3.2 -- Proposed Certificate of Amendment to Certificate of
Incorporation of Cortech, Inc. (see Appendix B).
3.3 -- Certificate of Designation for Series A Junior
Participating Preferred Stock.(12)
3.4 -- Amended and Restated Bylaws of Cortech, Inc.
4.1 -- Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 10.21,
10.22, 10.30, 10.34, 10.52, 10.71, 10.72, 10.73, 10.74,
10.75, 10.76, 10.77, 10.78, 10.79 and 10.81.
4.2 -- Specimen certificate for the Common Stock of Cortech,
Inc.(1)
5.1 -- Legal opinion of Pillsbury Madison & Sutro LLP.
8.1** -- Tax opinion of Pillsbury Madison & Sutro LLP.
8.2** -- Tax opinion of Cooley Godward LLP.
10.2 -- Lease Agreement dated April 2, 1992, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(1)
10.3 -- Lease Agreement dated March 5, 1993, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(5)
10.7 -- Lease Agreement dated May 14, 1993, as amended, between
Lyon-Stewart Associates and Cortech, Inc.(5)
10.13 -- Purchase and Sale Agreement (Vacant Land) dated February
16, 1994, between Cortech, Inc. and Golden West Equity
Properties, Inc. and Park Centre Limited Partnerships.(7)
10.14 -- Research Agreement dated June 30, 1987, as amended
through December 31, 1996, between HMRI,
successor-in-interest to Marion Merrell Dow Inc., and
Cortech, Inc.(1)
10.19 -- Fifth Amendment of Research Agreement dated January 14,
1994, between HMRI and Cortech, Inc.(6)
10.21 -- Warrant to Purchase dated June 30, 1998, between HMRI and
Cortech, Inc.(1)
10.22 -- Warrant to Purchase dated February 28, 1990, between HMRI
and Cortech, Inc.(1)
10.25 -- License Agreement dated June 30, 1987, between HMRI and
Cortech, Inc.(1)
10.27 -- Amended and Restated License Agreement dated as of May
28, 1993, between HMRI and Cortech, Inc.(3)
10.28 -- Sponsored Research and License Agreement dated February
13, 1987, between The John Hopkins University and
Cortech, Inc.(1)
10.29 -- License Agreement dated June 30, 1987, between the
Research Foundation of the State of New York and Cortech,
Inc.(1)
10.30 -- Stock Purchase Agreement dated July 8, 1994, between
Cortech, Inc. and the Research Foundation of State
University of New York.(9)
10.31 -- Royalty Buyout Agreement dated July 8, 1994, between
Cortech, Inc. and the Research Foundation of State
University of New York.(9)
10.32* -- Development Agreement dated May 2, 1994, between Cortech,
Inc. and Abbott Laboratories.(8)
10.34 -- Form of Warrant issued in connection with the CDC
offering.(1)
256
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.35 -- Purchase Option Agreement dated February 13, 1992,
between CDC and Cortech, Inc.(1)
10.36 -- Technology License Agreement dated February 13, 1992,
between CDC and Cortech, Inc.(1)
10.37 -- Research and Development Agreement dated February 13,
1992, between CDC and Cortech, Inc.(1)
10.38 -- Services Agreement dated February 13, 1992, between CDC
and Cortech, Inc.(1)
10.39 -- Amended and Restated Incentive Stock Option Plan of
Cortech, Inc.(1)
10.40 -- 1991 Non-employee Directors' Stock Option Plan of
Cortech, Inc.(2)
10.41 -- Amended and Restated 1992 Non-employee Directors' Stock
Option Plan of Cortech, Inc.(6)
10.42 -- 1993 Employee Stock Purchase Plan of Cortech, Inc.(4)
10.43 -- 1993 Equity Incentive Plan of Cortech, Inc.(6)
10.45 -- Resignation and Separation Agreement dated March 10,
1994, between Cortech, Inc. and David K. Crossen.(7)
10.47 -- Executive Officers' Severance Benefit Plan.(14)
10.48 -- Sixth Amendment of Research Agreement dated March 15,
1995, between HMRI and Cortech, Inc.(14)
10.50* -- Product Development and License Agreement dated November
1, 1995, between Cortech, Inc. and SmithKline
Beecham.(14)
10.51 -- Seventh Amendment of Research Agreement dated December
21, 1995, between HMRI and Cortech, Inc.(14)
10.52 -- Warrant to Purchase dated June 30, 1992, between HMRI and
Cortech, Inc.(14)
10.53 -- Rights Agreement drafted as of June 13, 1995, between
Cortech, Inc. and American Securities Transfer, Inc.(11)
10.54 -- Buy-Out Agreement dated September 9, 1996, between
Cortech, Inc. and HMRI.(13)
10.55 -- Amendment No. 1 to Executive Officers' Severance Benefit
Plan.(14)
10.57* -- Second Amendment of the Research, Development and License
Agreement dated April 23, 1997, between Ono and Cortech,
Inc.(15)
10.58+ -- Development Agreement between BioStar, Inc. and Asahi
Chemical Industry Co., Ltd. dated as of August 1, 1997.
10.59+ -- Technology License Agreement between BioStar, Inc. and
Asahi Chemical Industry Co., Ltd. dated as of August 1,
1997.
10.60+ -- Diagnostic Development and Commercialization Agreement
between BioStar, Inc. and Biota Scientific Management Pty
Ltd dated May 23, 1997.
10.61+ -- Distribution Agreement between BioStar, Inc. and Murex
Diagnostics, Inc. dated as of January 1, 1997, as
amended.
10.62+ -- Distribution Agreement between BioStar, Inc. and Wyntek
Diagnostics, Inc. dated as of July 1, 1997, as amended.
10.63 -- Notice of Grant Award to BioStar, Inc. from the National
Institutes of Health issued September 29, 1995.
10.64 -- Notice of Grant Award to BioStar, Inc. from the National
Institutes of Health issued September 30, 1997.
10.65 -- Subordinated Security Agreement between BioStar, Inc. and
Comdisco, Inc. dated May 3, 1995, as amended by Amendment
to Subordinated Security Agreement dated as of March 20,
1996.
257
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.66 -- Subordination Agreement between BioStar, Inc. and
Comdisco, Inc. dated as of May 3, 1995.
10.67 -- Subordinated Promissory Note payable by BioStar, Inc. to
Comdisco, Inc. dated March 20, 1996.
10.68 -- Form of Convertible Subordinated Promissory Note issued
by BioStar, Inc. on March 20, 1996 and April 15, 1996 to
certain investors.
10.69 -- Form of Subordinated Promissory Note issued by BioStar,
Inc. on June 20, 1997 to certain investors.
10.70 -- Loan and Security Agreement between BioStar, Inc. and
Venture Lending dated as of May 1, 1997.
10.71 -- Warrant to Purchase Shares of Series B Preferred Stock of
BioStar, Inc. issued to Dominion Ventures, Inc. dated
November 2, 1992.
10.72 -- Warrant Agreement to Purchase Shares of the Series E
Preferred Stock of BioStar, Inc. issued to Comdisco, Inc.
dated May 3, 1995.
10.73 -- Warrant Agreement to Purchase Shares of the Series E
Preferred Stock of BioStar, Inc. issued to Comdisco, Inc.
dated May 3, 1995.
10.74 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Dominion Ventures, Inc. dated
February 18, 1994.
10.75 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Silicon Valley Bank dated
September 15, 1995.
10.76 -- Warrant to Purchase Shares of Series E Preferred Stock of
BioStar, Inc. issued to Venture Lending dated May 1,
1997.
10.77 -- Warrant to Purchase Shares of Common Stock of BioStar,
Inc. issued to Silicon Valley Bank dated October 28,
1996.
10.78 -- Form of Warrant to Purchase Shares of Common Stock of
BioStar, Inc. issued to the Convertible Subordinated
Noteholders.
10.79 -- Form of Warrant to Purchase Shares of Series F Preferred
Stock of BioStar, Inc. issued to the Subordinated
Noteholders.
10.80 -- Restated Investors' Rights Agreement among BioStar, Inc.
and the investors named therein dated as of November 14,
1994, as amended.
10.81 -- Restated Investors' Rights Agreement among BioStar, Inc.
and the investors named therein dated as of ,
1998.
10.82 -- Master Lease Agreement between BioStar, Inc. and
Comdisco, Inc. dated May 3, 1995.
10.83 -- Dominion Ventures Master Lease Agreement between BioStar,
Inc. and Dominion Ventures, Inc. dated November 2, 1992.
10.84 -- Net Lease Agreement between BioStar, Inc. and Nationwide
Life Insurance Company dated as of September 10, 1992, as
amended by an amendment thereto dated as of February 13,
1993.
10.85 -- Amendment to Leases between Clear Creek II, L.P. and
Cortech, Inc. dated September 8, 1997.
10.86 -- Employment Agreement between Teresa W. Ayers and BioStar,
Inc. dated as of February 10, 1997.
10.87 -- Employment Agreement between Kim Stebbings and BioStar,
Inc. dated as of February 10, 1997.
10.88 -- Employment Agreement between Noel T. Doheny and BioStar,
Inc. dated as of February 10, 1997.
10.89 -- Employment Agreement between Edward C. Pritchard and
BioStar, Inc. dated as of September 1, 1997.
258
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.90 -- Employment Agreement between Lyndal K. Hesterberg and
BioStar, Inc. dated as of February 10, 1997.
10.91 -- Consulting Service Agreement between Alexander E. Barkas,
Ph.D. and BioStar, Inc. dated as of October 1, 1997.
10.92 -- Amended and Restated Consulting Services Agreement
between Thomas A. Bologna and BioStar, Inc. dated as of
August 31, 1997.
10.93 -- 1995 Equity Incentive Plan of BioStar, Inc.
10.94 -- Executive Compensation and Benefits Continuation
Agreement between Cortech, Inc. and Kenneth R. Lynn,
dated October 14, 1997, as amended February 12, 1998.
10.95 -- Agreement, dated February 12, 1998, between Cortech, Inc.
and Diarmuid F. Boran.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Pillsbury Madison & Sutro LLP (included in
opinion filed as Exhibit 5.1).
23.4 -- Consent of Pillsbury Madison & Sutro LLP regarding tax
matters (included in opinion filed as Exhibit 8.1).
23.5 -- Consent of Cooley Godward LLP regarding tax matters
(included in opinion filed as Exhibit 8.2).
24.1 -- Power of Attorney (See page II-9).
27.1 -- Financial Data Schedule.
99.1 -- Proxy Card of Cortech, Inc.
99.2 -- Proxy Card of BioStar, Inc.
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(1) Filed as an exhibit to Cortech, Inc.'s Registration Statement on 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 Cortech, Inc.'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 Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to Cortech, Inc.'s Registration Statement on Form S-8,
filed March 29, 1993, file number 33-60242, or amendments thereto, and
incorporated herein by reference.
(5) Filed as an exhibit to Cortech, Inc.'s Registration Statement on Form S-1,
filed September 27, 1993, file number 33-69402, or amendments thereto 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, 1993, and incorporated herein by reference.
(7) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1994, 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, 1994, and incorporated herein by reference.
(9) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended September 30, 1994, and incorporated herein by reference.
(10) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1995, and incorporated herein by reference.
(11) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended June 30, 1995, and incorporated herein by reference.
259
(12) 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.
(13) Filed as an exhibit to Cortech, Inc.'s quarterly report on Form 10-Q for
the quarter ended September 30, 1996, and incorporated herein by reference.
(14) 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.
(15) 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.
* Subject to Confidential Treatment Order.
** To be filed by amendment.
+ The Registrant has applied for confidential treatment with respect to
portions of this exhibit.