ITEM 2. PROPERTIES
We lease approximately 57,000 square feet of laboratory, manufacturing and office space in two adjacent buildings in Boulder, Colorado, under operating leases that last through October 2006 and June 2007. Our facilities are sufficient to meet our needs at least through 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We, along with our chief executive officer, are defendants in several related lawsuits which purport to be class actions on behalf of purchasers of common stock of the Company on November 16 and 17, 1999. The lawsuits, which are substantially identical, allege the defendants violated certain federal securities laws based upon an allegedly misleading announcement made on November 15, 1999. The cases have been consolidated in the United States District Court, District of Colorado. As of March 2001, the lawsuits have entered a discovery phase, with all discovery to be completed by October 1, 2001. Trial to a jury has been scheduled to commence on July 2, 2002. We believe that the suits are without merit and we intend to vigorously defend ourselves, and our chief executive officer, against the allegations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol "RZYM." The last sale price of the common stock as reported on the NASDAQ National Market on March 22, 2001, was $5.78 per share. At March 22, 2001, there were approximately 179 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We are also party to agreements restricting our ability to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from our audited financial statements. Our financial statements for 1996, 1997, 1998, 1999 and 2000 have been audited by Ernst & Young LLP, independent auditors. These historical results do not necessarily indicate future results. When you read this data, it is important that you also read our financial statements and related notes, as well as the section "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements of Ribozyme Pharmaceuticals and related notes included elsewhere in this Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward- looking statements as a result of certain factors.
Overview of our Business
We are developing a new class of drugs based on engineered molecules called "ribozymes." Ribozymes are a form of ribonucleic acid which have the ability to cleave RNA, including mRNA and viral RNA thereby selectively inhibit protein production and viral replication. Because many human diseases result from abnormal protein production, ribozymes are expected to be useful in developing pharmaceutical candidates for a broad range of human diseases. We are currently in clinical development and preclinical testing for four product candidates and expect to begin preclinical testing on one additional product candidate by the end of 2001.
We expect to initiate five Phase II clinical trials in 2001 for our lead product candidate, ANGIOZYME, for the treatment of solid tumor cancers with which we are in collaboration with Chiron. Also, we expect to initiate a Phase II clinical trial in 2001 for HEPTAZYME, our product candidate for the treatment of chronic Hepatitis C. In addition, we recently formed a joint venture with Elan to develop HERZYME, a treatment for breast and other cancers. We filed an IND in Canada in March 2001 for HERZYME. Also, we are in preclinical testing and expect to file an IND in 2001 for HepBzyme, our product candidate for the treatment of Hepatitis B.
To date, we have committed substantially all our resources to our research and product development programs. We have not generated any revenues from product sales, nor do we anticipate generating any revenues in the foreseeable future. Revenue recorded from our collaborative agreements consists of:
. Up-front revenue. Up-front non-refundable fees are fully recognized upon signing an agreement and are related to the value of the research at that point in time. Up-front revenue may also include a reimbursement to us of recent expenses related to product development which we incurred.
. Research revenue. Typically research revenue is based on the fully burdened cost of a researcher working on a collaboration. Rates are billed per employee, per year, pro-rated for time worked on a project. This revenue is typically invoiced on a quarterly basis, either up front or in arrears. Revenue is recognized ratably over the period, with the balance reflected as deferred revenue until earned. The revenue is typically recurring over the term of a collaboration.
. License revenue. License revenue is recognized ratably over the term of the license. Payments received in advance are recorded as deferred revenue until earned.
. Milestone revenue. Milestone revenue is recognized in full when the related milestone performance goal is achieved. Milestone revenue is typically not consistent or recurring in nature.
Our revenue has consisted primarily of research revenue payments from our collaborators. All revenues are either deferred as a liability or recognized upon satisfying revenue criteria. As of December 31, 2000, all revenues that have been recognized are earned, and no further obligation exists for recognized revenue. We depend upon funding from external financing and corporate collaborations for our research and product development programs and expect to do so for the foreseeable future.
We have not been profitable since inception and have an accumulated deficit of $100.0 million as of December 31, 2000. Losses have resulted primarily from our research and development programs. We expect to incur additional losses as ANGIOZYME, HEPTAZYME, HERZYME and HepBzyme and other potential product candidates advance through development and commercialization. In addition, future milestone payments under some of our collaborations are contingent upon our meeting particular research or development goals. The amount and timing of future milestone payments are contingent upon the terms of each collaboration agreement. Milestone performance criteria are specific to each agreement and based upon future performance. In some instances, we may forfeit milestone payments if we fail to accomplish a predetermined goal within a certain time frame. Therefore, we are subject to significant variation in the timing and amount of our revenues and results of operations from period to period.
In 1998, we transferred our target discovery and validation technology to Atugen in exchange for a substantial equity interest. We will continue our existing target discovery and validation agreements with our collaborators by subcontracting to Atugen the services to be performed. We currently own 31.6% of Atugen and will record our share of any future profits. In 1999, we completely expensed our remaining investment in Atugen.
Our revenues are denominated in U.S. dollars, therefore, we have not been exposed to foreign currency translation risks and have not engaged in any hedging instruments.
Results of Operations for Twelve Months Ended December 31, 2000 and 1999
Revenues from collaborative agreements increased $7.8 million to $15.5 million for the year ended December 31, 2000 from $7.7 million for the corresponding period in 1999. The increase is primarily due to $6.1 million of revenue recognized in 2000 from Medizyme, our joint venture with Elan related to the development of HERZYME. The joint venture began in January 2000 and therefore no revenues existed for Medizyme in 1999. In addition, the increase was due to milestone payments we received of $1.5 million in 2000 from Lilly related to our development of HEPTAZYME. The payments were for filing an IND and commencing clinical trials for HEPTAZYME.
Research and development expenses increased $6.3 million to $21.7 million in 2000 from $15.4 million in 1999. The increase is due to the cost of manufacturing, preclinical and clinical activities to support our drugs in clinical trials. Research and development expenses consist primarily of:
. clinical and preclinical supplies and related costs;
. salaries and benefits for scientific, regulatory, quality control and pilot manufacturing personnel;
. consultants;
. supplies;
. occupancy costs; and
. depreciation for laboratory equipment and facilities.
We expect future research and development expenses to increase from current levels as ANGIOZYME, HEPTAZYME, HERZYME and HepBzyme, proceed through clinical and preclinical trials. The effect of increased expenses related to HERZYME will be absorbed by us indirectly through our equity investment in Medizyme, our unconsolidated affiliate.
General and administrative expenses increased $1.6 million to $3.7 million for the year ended December 31, 2000 from $2.1 million for the corresponding period in 1999. The increase was primarily due to approximately $1.7 million of non-cash, stock option compensation expense recorded for performance stock options that vested during 2000. During 2000, a number of corporate milestones were accomplished, including achieving a market capitalization of $150 million or more and a number of other financial goals which were satisfied by the consummation of our agreement with Elan and the completion of our stock offering in April 2000. We expect general and administrative expenses to increase as a result of increasing legal and other professional fees in connection with the overall scale-up of our operations, business development efforts and patent protection.
Interest income increased $2.6 million to $3.2 million for the year ended December 31, 2000 from $614,000 for the corresponding period in 1999. The increase is due to higher average balances in our cash and cash equivalents and securities available-for-sale during 2000. Cash balances were higher as a result of public offerings completed in both July 1999 and April 2000 that resulted in $58.1 million of cumulative net proceeds. In addition, we received $5.0 million in January 2000 for the sale of common stock to Elan pursuant to our collaboration with Elan. Interest income generally fluctuates as a result of the average amount of cash available for investment and prevailing interest rates.
Interest expense decreased $401,000 to $151,000 for the year ended December 31, 2000 from $552,000 for the corresponding period in 1999. The decrease is due to our repayment of $6.9 million on a debt facility from Schering AG with proceeds from our 2000 public offering. The remaining balance of $997,000 was converted into 42,435 shares of our common stock in June 2000. Subsequently, we borrowed an additional $1.0 million from Schering AG in October 2000 and $2.7 million from Elan related to our joint venture. Therefore, interest expense is expected to increase in the future as we borrow additional funds from our partners and arrange for additional financing for operations.
Equity in loss of unconsolidated affiliates was $9.0 million for the year ending December 31, 2000, compared to $860,000 for the corresponding period in 1999. The expense in 2000 is our 80.1% share of Medizyme's recorded loss. While we own 80.1% of the outstanding common stock of Medizyme, Elan has retained significant minority investor rights that are considered "participating rights" as defined in EITF 96-16 Investors Accounting for an Investee When the Investor Owns a Majority of the Voting Stock but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. Therefore, we do not consolidate the financial statements of Medizyme, but instead account for our investment in Medizyme under the equity method of accounting. Medizyme's expenses include $1.25 million amortized expense in each quarter for payment of a $15.0 million license fee paid to Elan in January 2000, as well as $6.1 million we invoiced during 2000 for research we conducted on HERZYME.
The 1999 equity in loss of unconsolidated affiliate was in connection with our initial cash investment of $2.0 million and the subsequent transfer of our gene identification and target validation technology to Atugen AG in 1998. During 1999, we owned 83.2% of Atugen's outstanding common stock and as a result we recorded our share of Atugen's net losses for 1999 resulting in equity in loss of unconsolidated affiliate of $860,000. During 1999, we completely expensed our remaining investment in Atugen and therefore no expense related to Atugen was recorded during 2000.
Results of Operations for Twelve Months Ended December 31, 1999 and 1998
Revenues from collaborative agreements decreased $1.3 million to $7.7 million for the year ended December 31, 1999 from $9.0 million for the corresponding period in 1998. The decrease was primarily due to approximately $6.2 million of revenue recognized from the Chiron collaboration related to the development of ANGIOZYME in 1998, compared to $4.0 million recognized from the Chiron collaboration in 1999. Of the $6.2 million recognized from the Chiron collaboration in 1998, $5.0 million was a nonrecurring up-front payment for 50.0% of past expenses we incurred for the preclinical development of ANGIOZYME. The nonrefundable payment became due when Chiron agreed to resume our collaboration in the development of ANGIOZYME. In addition, 1998 revenues included approximately $2.6 million related to our target discovery and validation collaborations with Glaxo Wellcome, Parke-Davis, Roche Bioscience and Schering AG. In 1999, we subcontracted all existing target discovery and validation work to Atugen and therefore did not record any revenues related to those agreements. However, in 1999 we recorded $1.9 million in revenues from Atugen related to a service agreement in which we received payments for services and oligonucleotides we provide. In addition, in 1999 we recorded approximately $1.7 million in research revenues related to our collaboration with Eli Lilly for the development of HEPTAZYME.
Research and development expenses decreased to $15.4 million in 1999 from $16.9 million in 1998. Approximately $1.2 million of the decrease was primarily attributable to the transfer of approximately 15 employees and their related expenses to Atugen. In addition, we had decreases of approximately $750,000 in outside services, consultants and professional fees. However, offsetting the decreases, during 1999 we had an approximately $450,000 increase in personnel expenses. The increase was primarily due to hiring additional personnel related to the overall scale-up of research and product development.
General and administrative expenses increased to $2.1 million in 1999 from $1.8 million in 1998. The increase was primarily attributable to lower expenses incurred in 1998 because of $480,000 of reimbursements we received from Atugen related to the time our management devoted to Atugen operations. In 1999, Atugen hired most of its own management; our management devoted limited time to Atugen. Increases of approximately $180,000 during 1999 were primarily attributable to increased staffing and associated expenses necessary to manage and support our expanding product and business development efforts.
Interest income decreased slightly to $614,000 in 1999 from $635,000 in 1998. The decrease is due to lower average balances in our cash, cash equivalents and securities available-for-sale during 1999 compared to 1998. Interest income generally fluctuates as a result of cash available for investment and prevailing interest rates.
Interest expense decreased to $552,000 in 1999 from $704,000 in 1998. The decrease is due to the repayment of a loan for tenant improvements and equipment in December 1998. Equity in loss of unconsolidated affiliate was $860,000 for 1999 compared to $1.1 million for 1998. This expense is a result of our equity investment in Atugen.
Liquidity and Capital Resources
We have financed our operations since inception through sales of equity securities in public offerings, private placements of preferred and common stock, funds received under our collaborative agreements and financing under equipment and tenant improvement loans. From inception through December 31, 2000, we have received approximately:
. $29.0 million in net proceeds from private placements;
. $89.2 million in net proceeds from public offerings;
. $96.0 million from our collaborations; and
. $9.8 million from equipment financing.
We had cash, cash equivalents and securities available-for-sale of $64.5 million at December 31, 2000 compared with $14.0 million at December 31, 1999. The $50.5 million increase in cash, cash equivalents and securities available- for-sale is primarily the result of $3.5 million used for operations, net of revenues of $15.5 million, and $2.2 million used for investments in equipment, leasehold improvements and patents, offset by:
. $52.8 million received in the public offering of our common stock;
. $20.0 million received in sales of preferred and common stock to corporate collaborators;
. $15.4 million invested in Medizyme;
. $4.7 million in net borrowings;
. $6.9 million used to payoff convertible debt;
. $200,000 for payments on loan facilities; and,
. $929,000 received for the exercise of stock options.
We invest our cash, cash equivalents and securities available-for-sale in interest-bearing, investment-grade securities.
Accounts receivable at December 31, 2000 were $3.6 million compared to $2.0 million at December 31, 1999. Accounts receivable at December 31, 2000 included $345,000 due from Atugen for administrative services and patent expenses, $2.0 million due from Medizyme for research support for HERZYME and $1.2 million due from Chiron for reimbursement of ANGIOZYME fourth quarter expenses. All outstanding receivables due from 1999 were received in 2000.
Total additions for property, plant and equipment for the twelve months ending December 31, 2000 were $1.4 million, most of which were financed through our existing equipment loan facility with Schering AG. We anticipate future equipment needs to be financed by the Schering AG loan facility through 2001, as well as additional credit facilities yet to be determined.
In July 1994, we entered into an agreement with Chiron to collaborate exclusively on up to five specific targets selected by Chiron. Four targets are currently subject to the exclusivity provision, including ANGIOZYME. Currently, ANGIOZYME is being developed in collaboration with Chiron and we share equally all development costs and future profits with Chiron. Chiron has indicated its desire not to participate in the Phase II clinical trials for renal cell cancer and melanoma. In 2000, we recorded $4.5 million in revenues from Chiron for expenses incurred for the clinical development of ANGIOZYME.
In April 1997 we entered into a purchase agreement with Schering AG and Schering Berlin Venture Corporation ("SBVC"), an affiliate of Schering AG, subsequently amended, as part of our target discovery and validation program. SBVC made a $2.5 million equity investment in us in April 1997 in exchange for 212,766 shares of our common stock and made an additional equity investment of $2.5 million for 465,117 shares of our common stock in April 1998. Separately, Schering AG provided loans of $2.0 million in each of 1997, 1998, 1999 and 2000. Schering AG has agreed to continue to provide loans of up to $2.0 million annually through 2001, provided that the collaboration is continued. The loans, which carry an interest rate of 8.0% per annum, are immediately convertible into equity at the option of Schering AG. In April 2000, after the completion of our public offering, we repaid $6.9 million of our outstanding borrowings to Schering AG. In June 2000, Schering AG converted $997,000 of the balance into 42,435 shares of our common stock at a conversion price of $23.50. According to the terms of our agreement with Schering AG, 50.0% of any borrowings on the line of credit must be collateralized by equipment purchases. At December 31, 2000, we had $1.0 million in outstanding loans from Schering AG, which was convertible into approximately 70,800 shares of our common stock. Principal and interest payments are deferred until maturity of the loans in April 2004. As a result of the Atugen formation in 1998, we now subcontract all of our existing target discovery and
identification programs to Atugen; however, as long as our collaboration continues with Schering AG we expect to continue to borrow against the loans.
In March 1999, we entered into a collaboration with Eli Lilly to conduct research, development and commercialization of HEPTAZYME, our anti-HCV ribozyme for the treatment of Hepatitis C virus infection. We granted Lilly the exclusive worldwide right to develop and commercialize HEPTAZYME in return for funding all research, development and commercialization costs for the drug. Under the terms of the agreement, we received approximately $9.2 million during 1999, which included $1.7 million of funding for research and clinical trial expenses and a $7.5 million equity investment. In April 1999, Lilly purchased five shares of our Series L Convertible Preferred Stock for $7.5 million. Subsequently, in September 2000, we entered into an agreement with Lilly to repurchase all rights to HEPTAZYME. Lilly had directed the clinical trials for HEPTAZYME to date under the licensing agreement; however, according to the repurchase agreement, we renegotiated the global rights to HEPTAZYME and will direct all subsequent clinical trials. Pursuant to the repurchase agreement, Lilly converted the outstanding five shares of our Series L Convertible Preferred Stock into 636,640 shares of our common stock in December 2000. In addition, we issued to Lilly $3,000,000 of our common stock, which resulted in 252,632 shares, as payment for Lilly efforts in generating and providing clinical trial data. In return, Lilly paid us a termination fee of $2.8 million in December 2000.
In January 2000, we completed a joint venture with Elan for the development and commercialization of HERZYME, our potential product to treat breast and other cancers. In accordance with the collaboration, we sold to Elan our Series A Convertible Preferred Stock for $12.0 million and, in turn, used those funds for initial funding of Medizyme. Also as part of the collaboration, Elan purchased 641,026 shares of our common stock for a purchase price of $5.0 million. Elan has also committed to purchase an additional $5.0 million of common stock in May 2001 at a share price that is at a premium to the then market price and would also be based on the achievement of certain milestones. We have estimated that the development of HERZYME will require additional funds of up to $15 million and, therefore, Elan has made available to us a credit facility to fund our portion of Medizyme operating costs over a 30 month period. At the end of December 2000, we utilized the credit facility and had borrowed $2.7 million. Elan may convert this debt into shares of our Series B Convertible Preferred Stock in the future.
In November 2000, we signed an agreement with Acqua Wellington North American Equities Fund Ltd. to set up an equity financing facility covering the sale of up to $60 million of our common stock. Any sale of our common stock will be made pursuant to a shelf registration we filed with the Securities and Exchange Commission (SEC) covering the sale of up to 3 million shares of our common stock. The shelf registration was declared effective by the SEC in November 2000. We may sell the shares at our discretion and as market conditions warrant at a small discount to market at the time of sale. We will control the quantity and timing of each incremental sale of stock, if any. Proceeds from any sale of stock will be used for general corporate purposes.
We anticipate that our existing financial resources and expected revenues from our collaborations, should be sufficient to meet our anticipated operating and capital requirements through 2002. We expect to incur substantial additional costs, including:
. costs related to our research, drug discovery and development programs;
. preclinical studies and clinical trials of our products, if developed;
. prosecuting and enforcing patent claims;
. general administrative and legal items; and
. manufacturing and marketing of our products, if any.
At December 31, 2000, we had available net operating loss carryforwards, research and development credit carryforwards and state investment credit carryforwards of $86.5 million, $2.8 million and $6,000, respectively, for income tax purposes. Our ability to utilize our net operating loss carryforwards is subject to an annual limitation in future periods pursuant to the "change in ownership" rules under Section 382 of the Internal Revenue Code.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our investments in certain short-term investments. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market
risk sensitive instruments to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Submitted as part of Item 14(a) of this Form 10-K and incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors, executive officers and key employees of Ribozyme Pharmaceuticals are as follows:
- ------------------ (1) Member of the Executive Committee (2) Member of the Compensation Committee (3) Member of the Audit Committee.
Ralph E. Christoffersen, Ph.D., has served as Chief Executive Officer and Director of Ribozyme Pharmaceuticals since June 1992. From 1989 to June 1992, Dr. Christoffersen was Senior Vice President and Director of U.S. Research at SmithKline Beecham Pharmaceuticals, a pharmaceutical company. From 1983 to 1989, he held senior management positions in research at The Upjohn Company, a pharmaceutical company. Prior to joining The Upjohn Company, Dr. Christoffersen served as a Professor of Chemistry and Vice Chancellor for Academic Affairs at the University of Kansas and as President of Colorado State University. He received his Ph.D. in physical chemistry from Indiana University.
Howard W. Robin has served as Chief Operating Officer, President and Director since January 2001. From 1991 to 2001 Mr. Robin was Corporate Vice President and General Manager at Berlex Laboratories, Inc. and from 1987 to 1991 he served as Vice President of Finance and Business Development and Chief Financial Officer. From 1984 to 1987 Mr. Robin was Director of Business Planning & Development at Berlex. He was a Senior Associate with Arthur Anderson & Company prior to joining Berlex. He received his B.S. in Accounting & Finance from Farleigh Dickinson University in 1974.
Lawrence E. Bullock has served as Vice President of Administration and Finance, Chief Financial Officer and Secretary since January 1996. From December 1990 to January 1996, Mr. Bullock was Chief Financial Officer, Director of Finance and Administration and Secretary of La Jolla Pharmaceutical Company, a biopharmaceutical company. Mr. Bullock received his M.B.A. from the University of Utah.
Lawrence M. Blatt, Dr. P.H., has served as Vice President of Research since August 2000. From January 1999 to July 2000, Dr. Blatt served as Research Vice President, BioPharmacology and Preclinical. From January 1998 until January 1999, Dr. Blatt served as Senior Director of Preclinical and Clinical Development Prior to joining the Company, Dr. Blatt served as Vice President of Product Development for the National Genetic Institute, a molecular diagnostic company, from August 1996 to January 1998. From August 1984 to January 1996, Dr. Blatt served in various managerial and scientific positions at Amgen Inc., a bio-pharmaceutical company. He received his Doctorate in Public Health Administration from the University of La Verne in 1996 and his M.B.A. degree from California Sate University, Northridge in 1988.
J. Wayne Cowens, M.D., has served as Vice President of Clinical and Regulatory Affairs since July 1999. From 1992 until July 1999, Dr. Cowens served as Division Vice President of Product Development for Chiron Corporation, a biotechnology company. During that time he served as Chiron's commercial representative on the Ribozyme Pharmaceuticals/Chiron joint project team for the development of ANGIOZYME. From 1990 until 1992, Dr. Cowens served as Director of Clinical Oncology at Sterling-Winthrop, a pharmaceutical company, and from 1980 until 1990 as a cancer research Clinician in the Grace Cancer Drug Center at the Roswell Park Cancer Center. Dr. Cowens received his M.D. degree from The Johns Hopkins University.
Alene A. Holzman has served as Vice President of Corporate Development since December 1999. Ms. Holzman served as Business Development and General Manager of Target Validation and Discovery Business from April 1997 to December 1999. From January 1990 to March 1997, Ms. Holzman was Vice President of ChemTrak Corporation, a medical technology firm, where she was responsible for finance, business development and marketing and sales. From 1987 to 1990, she was Vice President of CytoSciences, Inc., a biomedical company, and from 1981 to 1987 she was Vice President of Marketing and Sales for Hana Biologics, Inc. (now Cell Genesys Corporation), a biotechnology firm. Ms. Holzman received her M.B.A. from the University of California at Berkeley.
Nassim Usman, Ph.D., has served as Vice President of Research and Development since August 2000. From December 1999 to July 2000, Dr. Usman served as Senior Vice President of Research. From May 1996 to December 1999, Dr. Usman served as Vice President of Research at Ribozyme Pharmaceuticals. From April 1994 until May 1996, Dr. Usman served as Director of Chemistry and Biochemistry Research and from September 1992 until April 1994 Dr. Usman served as Senior Scientist in Chemistry and Biochemistry. From January 1987 to September 1992, Dr. Usman was a Postdoctoral Fellow and Scientist in the Departments of Biology and Chemistry at the Massachusetts Institute of Technology. Dr. Usman received his Ph.D. in chemistry from McGill University.
Francine E. Wincott, Ph.D., has served as Senior Director of Manufacturing since April 1999. From March 1997 to March 1999, Dr. Wincott served as Director of Chemistry and Biochemistry Research and from 1993 to 1997 she was a Senior Scientist. From 1990 to 1993 Dr. Wincott was a Scientist involved in developing therapeutics directed against auto immune diseases at Cortech, Inc., a biotechnology company . From 1989 to 1990 she was a Scientist in the Medicinal Chemistry Group at Merck, Inc., a pharmaceutical company. Dr. Wincott earned a B.A. in Chemistry from the University of Pennsylvania and a Ph.D. from Yale University.
David T. Morgenthaler has served as a director since February 1992 and was elected Chairman of the Board in December 1995. Mr. Morgenthaler was a founder of and has been Managing Partner of Morgenthaler Ventures, a private venture capital firm, since 1968. He has been a director of a number of public and private companies. Mr. Morgenthaler received his M.S. degree from the Massachusetts Institute of Technology.
Jeremy L. Curnock Cook has served as a director since July 1995. Mr. Cook was a director of Rothschild Asset Management, an investment management company, where he was responsible for the Rothschild Bioscience Unit from 1987 until his retirement in 2000. Mr. Cook founded the International Biochemicals Group in 1975, which he subsequently sold to Royal Dutch Shell in 1985, remaining as Managing Director until 1987. He is also a director of Targeted Genetics Inc., Cantab Pharmaceuticals plc, AMRAD Corporation, Delsys Pharmaceuticals, Inc., GlycoDesign, Inc., Valigen, Inc., Inflazyme Pharmaceuticals, Inc. and Biocompatibles International plc. Mr. Cook received an M.A. in Natural Sciences from Trinity College Dublin.
John Groom has served as a director since April 2000. Mr. Groom served as President and Chief Operating Officer of Elan Corporation plc from 1996 until his retirement in 2001. Mr. Groom continues as a director of Elan Corporation plc. He served as President and Chief Executive Officer of Athena Neurosceiences, Inc. from 1987 to 1996. Mr. Groom is also a director of Ligand Pharmaceuticals, Inc.
David Ichikawa has served as a director since May 1998. Mr. Ichikawa has been employed by Chiron Corporation, a biotechnology company, since September 1994 and is currently Vice President of R&D Business Development and Finance. He has also held management positions at Boehringer Mannhiem Corporation and Chiron (Cetus) Corporation. Mr. Ichikawa received his M.B.A. from the University of California at Berkeley.
Samuel R. Saks, M.D. has served as a director since April 2000. Dr. Saks joined ALZA Corporation in 1992 as the Vice President for Medical Affairs and in 1995 he became Senior Vice President, Medical Affairs. In January 2000 he also became Group Vice President of ALZA Pharmaceuticals. Dr. Saks received his M.D. with honors form the University of Illinois and completed his residency in Internal Medicine at the University of Texas Southwestern Medical Center at Dallas.
Anders P. Wiklund has served as a director since August 1994. Since January 1997, Mr. Wiklund has been the principal of Wiklund International, an advisory firm to the biotechnology and pharmaceutical industries. From 1967 through 1996, Mr. Wiklund served in numerous executive positions for the Kabi and Pharmacia group of companies, including President and CEO of Kabi Vitrum Inc. and Kabi Pharmacia, Incorporated. Mr. Wiklund is also a director of Glyco Design, Inc., Esperion Therapeutics, Inc., Medivir, A.B. and InSite Vision, Inc., as well as serving on private company boards. Mr. Wiklund received a Master of Pharmacy degree from the Pharmaceutical Institute in Stockholm.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information under the caption "Executive Compensation" contained in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the information under the caption "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" contained in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
PAGE ------ Report of Independent Auditors Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements
(a)(2) EXHIBITS
Number Description - ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of Ribozyme Pharmaceuticals dated April 17, 1996(5) 3.2 Bylaws of Ribozyme Pharmaceuticals, as amended(1) 4.1 Specimen Stock Certificate(1) 4.2 Certificate of Designation, Preferences and Rights of Series L Preferred Shares (10) 4.3 Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Preferred Stock (11) 4.4 Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc., and American Stock Transfer & Trust Company, which includes the form of Certificate of Designation of Series AA Junior Participating Preferred Stock attached as Exhibit A thereto (14) 10.1 Form of Indemnity Agreement entered into between Ribozyme Pharmaceuticals and its directors and officers, with related schedule(1) 10.2 Ribozyme Pharmaceuticals' Incentive Stock Option Plan, including form of Incentive Stock Option Agreement(1) 10.3 Ribozyme Pharmaceuticals' Non-Qualified Stock Option Plan, including form of Non-Qualified Stock Option Agreement(1) 10.4 Ribozyme Pharmaceuticals' 1996 Stock Option Plan, including forms of Incentive Stock Option Nonstatutory Stock Option Agreements(1) 10.5 Ribozyme Pharmaceuticals' 1996 Stock Employee Stock Purchase Plan (1) 10.6 Employment Agreement dated January 1, 1997 between Ribozyme Pharmaceuticals and Ralph E. Christoffersen(5) 10.7 Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated December 23, 1992(1) 10.8 Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated September 23, 1994(1) 10.9 Warrant Purchase Agreement dated March 15, 1995, between Ribozyme Pharmaceuticals and Hambrecht & Quist Guaranty Finance(1) 10.10 Warrant to Purchase Common Stock dated March 15, 1995, issued to Hambrecht & Quist G uaranty Finance(1) 10.11 Warrant to Purchase Common Stock dated February 22, 1993, issued to LINC Scientific Leasing(1) 10.12 Warrant to Purchase Common Stock dated July 30, 1993, issued to Douglas E. Olson(1) 10.13 Warrant to Purchase Common Stock dated July 30, 1993, issued to Richard J. Warburg and Ruth P. Warburg(1) 10.14 Warrant to Purchase Common Stock dated December 28, 1994, issued to Competitive Technologies, Inc.(1) 10.15 Warrant to Purchase Common Stock dated December 29, 1995, issued to Silicon Valley Bank(1) 10.16 Warrant to Purchase Common Stock dated July 26, 1996, issued to Silicon Valley Bank(1) 10.17 Warrant to Purchase Common Stock dated April 17, 1996, issued to Chiron Corporation(1) 10.18 Collaborative Research, Development and Commercialization Agreement dated July 15, 1994, between Ribozyme Pharmaceuticals and Chiron Corporation(1) 10.19 Research Collaboration and Licensing Agreement dated November 1, 1995, between Ribozyme Pharmaceuticals and Pharmacia Biotech, AB(1) 10.20 Research and Development Collaboration Agreement dated April 19, 1993, between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner- Lambert Company(1)
10.21 First Amendment to the Research and Development Collaboration Agreement dated April 17, 1995, between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert Company(1) 10.22 Second Amendment to the Research and Development Collaboration Agreement dated February 8, 1996, between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert Company(1) 10.23 Financing Agreement dated March 16, 1995, among Wilderness Place Holdings L.L.C., Hambrecht & Quist Guaranty Finance, L.P. and Ribozyme Pharmaceuticals(1) 10.24 Negotiable Promissory Note dated October 7, 1992, between Ribozyme Pharmaceuticals and Ralph Christoffersen and Addendum dated June 25, 1993(1) 10.25 Employment Agreement dated January 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E. Bullock(1) 10.26 Promissory Note dated February 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E. Bullock(1) 10.27 Lease for Real Property dated May 20, 1992, between Aero-Tech Investments and Ribozyme Pharmaceuticals(1) 10.28 Non-Disturbance and Attornment Agreement dated March 31, 1995, among General American Life Insurance Company, Aero-Tech Investments, Wilderness Place Holdings L.L.C. and Ribozyme Pharmaceuticals(1) 10.29 Master Lease Agreement dated September 2, 1992, between Ribozyme Pharmaceuticals and LINC Scientific Leasing(1) 10.30 Loan and Security Agreement dated February 28, 1994, between Ribozyme Pharmaceuticals and Silicon Valley Bank(1) 10.31 Loan Modification Agreement dated December 21, 1994, between Ribozyme Pharmaceuticals and Silicon Valley Bank(1) 10.32 Loan and Security Agreement dated December 29, 1995, between Ribozyme Pharmaceuticals and Silicon Valley Bank and MMC/GATX Partnership No. 1(1) 10.33 Warrant to Purchase Common Stock dated December 29, 1995, issued to MMC/GATX Partnership No. 1(1) 10.34 Agreement dated February 29, 1996, between Ribozyme Pharmaceuticals and Chiron Corporation relating to research and development funding(1) 10.35 Amendments to original Employment Agreements between Ribozyme Pharmaceuticals and Ralph E. Christoffersen, Lawrence E. Bullock and Nassim Usman, pursuant to letters dated November 14, 1996, November 22, 1996, and December 15, 1996(3) 10.36 Promissory Note dated June 4, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(3) 10.37 Amendment to Lease for Real Property dated March 13, 1997, between Aero- Tech Investments and Ribozyme Pharmaceuticals(3) 10.38 Employment Agreement dated May 2, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(2) 10.39 Collaboration Agreement Regarding Use of Ribozymes to Determine Gene Function dated May 13, 1996, between Ribozyme Pharmaceuticals and Chiron Corporation(2) 10.40 Amended and Restated License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals, University Research Corporation, University of Colorado and United States Biochemical Corporation(3)* 10.41 Amended and Restated Sublicense Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and United States Biochemical Corporation(3)* 10.42 Amended and Restated License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and Competitive Technologies, Incorporated(3)* 10.43 Memorandum of Understanding dated March 1, 1996, between Ribozyme Pharmaceuticals and DowElanco(1) 10.44 Stock Subscription Agreement dated September 1996 between Ribozyme Pharmaceuticals and University of Research Corporation(3)* 10.45 Stock Subscription Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and United States Biochemical Corporation(3)* 10.46 Assignment of License and Restated License Agreement dated November 20, 1996, among Ribozyme Pharmaceuticals, United States Biochemical Corporation and Competitive Technologies(3)* 10.47 Letter Agreement dated May 22, 1996, between Ribozyme Pharmaceuticals and ALZA Corporation(3)* 10.48 Research and Development Collaboration Agreement dated December 2, 1996, between Ribozyme Pharmaceuticals and Protogene Laboratories(3)* 10.49 License Agreement dated February 14, 1997, between Ribozyme Pharmaceuticals and IntelliGene, Ltd.(3)* 10.50 Subscription Agreement dated April 17, 1995, between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert Company(1) 10.51 Stock Purchase Agreement dated June 28, 1995, among Ribozyme Pharmaceuticals and investors(1) 10.52 Agreement dated March 1, 1996, between Ribozyme Pharmaceuticals and DowElanco Corporation relating to the conversion of preferred stock(1) 10.53 Stock Subscription Agreement dated October 30, 1995, between Ribozyme Pharmaceuticals and Gewestelijke
Investeringsmaatschappij voor Vlaanderon n.v.(1) 10.54 Research, License, Supply and Royalty Agreement between Schering Aktiengesellschaft and Ribozyme Pharmaceuticals dated April 9, 1997(4)* 10.55 Purchase Agreement dated April 9, 1997, among Ribozyme Pharmaceuticals, Schering Berlin Venture Corporation and Schering Aktiengesellschaft(4)* 10.56 Employment Agreement dated February 27, 1997, between Ribozyme Pharmaceuticals and Alene Holzman(5) 10.57 Employment Agreement dated July 5, 1997, between Ribozyme Pharmaceuticals and Thomas Rossing(5) 10.58 Executive Bonus Plan dated March 27, 1998(6) 10.59 Research, Collaboration and License Agreement dated May 19, 1998, between Ribozyme Pharmaceuticals and Roche Bioscience, a division of Syntex (U.S.A.) Inc.(7)* 10.60 Employment Agreement dated September 8, 1998, between Ribozyme Pharmaceuticals and Nassim Usman(8) 10.61 Participation Agreement dated August 31, 1998, as amended, and related documents between Ribozyme Pharmaceuticals and Atugen Biotechnology GmbH(9)* 10.62 Research Collaboration and License Agreement dated March 17, 1999, between Ribozyme Pharmaceuticals and Eli Lilly and Company* (10) 10.63 Stock Purchase Agreement dated April 30, 1999, between Ribozyme Pharmaceuticals and Eli Lilly and Company (10) 10.64 Employment Agreement dated May 10, 1999 between Ribozyme Pharmaceuticals and Dr. Wayne Cowens (10) 10.65 Securities Purchase Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals, Elan International Services, Ltd. and Elan Corporation, plc (11) 10.66** License Agreement dated January 7, 2000 among Elan Pharmaceutical Technologies (a division of Elan Corporation, plc), Elan Pharma International Limited and Medizyme Pharmaceuticals, Ltd. (11)* 10.67 Warrant dated January 7, 2000, issued to Elan International Services, Ltd. to purchase up to 200,000 shares of Ribozyme Pharmaceuticals' common stock (11) 10.68 Warrant dated January 7, 2000 issued to Elan International Services Ltd. to purchase up to 300,000 shares of Ribozyme Pharmaceuticals' common stock (11) 10.69 Convertible Promissory Note dated January 7, 2000, from Ribozyme Pharmaceuticals to Elan International Services, Ltd. (11) 10.70** Subscription, Joint Development and Operating Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals, Elan Corporation, plc, Elan Pharma International Limited, Elan International Services, Ltd. and Medizyme Pharmaceuticals, Ltd. (11)* 10.71 Funding Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan Pharmaceutical Technologies (a division of Elan Corporation, plc), Elan Pharma International Limited and Elan International Services, Ltd. (11) 10.72** License Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals and Medizyme Pharmaceuticals, Ltd. (11)* 10.73 Registration Rights Agreement dated January 7, 2000, between Ribozyme Pharmaceuticals and Elan International Services, Ltd. (11) 10.74 Registration Rights Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan International Services, Ltd. and Medizyme Pharmaceuticals Ltd. (11) 10.75** Agreement dated January 31, 2000, between Ribozyme Pharmaceuticals and Avecia Limited (11)* 10.76 Employment Agreement dated July 6, 2000 between Ribozyme Pharmaceuticals and Dr. Nassim Usman (12) 10.77 Employment Agreement dated July 6, 2000, between Ribozyme Pharmaceuticals and Dr. Lawrence Blatt (12) 10.78 Repurchase of Ribozyme Product agreement dated September 28, 2000 between Ribozyme Pharmaceuticals and Eli Lilly and Company (13)* 10.79 Common Stock Purchase Agreement dated December 29, 2000 by and between Ribozyme Pharmaceuticals, Inc. and Acqua Wellington North America Equities Fund, Ltd. (15) 10.80 Employment Agreement dated January 4, 2001 between Ribozyme Pharmaceuticals and Howard Robin 23.1 Consent of Ernst & Young LLP, Independent Auditors
- ---------------- * Ribozyme Pharmaceuticals has applied for and received confidential treatment with respect to portions of these exhibits.
** Ribozyme Pharmaceuticals has applied for confidential treatment with respect to portions of these exhibits.
(1) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form SB-2 Registration Statement, File No. 333-1908-D.
(2) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-QSB for the
quarter ended June 30, 1996.
(3) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-KSB for the year ended December 31, 1996.
(4) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K dated June 12, 1997.
(5) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form SB-2 Registration Statement, File No. 333-34981.
(6) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-K for the year ended December 31, 1997.
(7) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-Q/A for the quarter ended June 30, 1998.
(8) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-Q for the quarter ended September 30, 1998.
(9) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K/A dated June 16, 1999.
(10) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form S-1 Registration Statement, File No. 333-75079.
(11) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K dated February 8, 2000.
(12) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 10-Q for the quarter ended June 30, 2000.
(13) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K dated September 28, 2000.
(14) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K dated November 22, 2000.
(15) Documents incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals' Form 8-K dated December 29, 2000.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on September 28, 2000 announcing the Repurchase of Ribozyme Product Agreement with Eli Lilly and Company.
A report on Form 8-K was filed on November 22, 2000 announcing the Company's adoption of a Shareholder Rights Plan.
A report on Form 8-K was filed on December 29, 2000 announcing the Stock Purchase Agreement entered into with Acqua Wellington North American Fund, Ltd.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Boulder, Colorado, on March 29, 2001.
RIBOZYME PHARMACEUTICALS, INC.
By: /s/ Ralph E. Christoffersen ------------------------------------- Ralph E. Christoffersen, Ph.D. Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors Ribozyme Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Ribozyme Pharmaceuticals, Inc., as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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 Ribozyme Pharmaceuticals, Inc. at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Denver, Colorado February 23, 2001
RIBOZYME PHARMACEUTICALS, INC. BALANCE SHEETS
See accompanying notes.
RIBOZYME PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
See accompanying notes.
RIBOZYME PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes.
RIBOZYME PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
See accompanying notes.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Summary of Significant Accounting Policies
Description of Business
Ribozyme Pharmaceuticals, Inc. (RPI or the Company) was founded in 1992 to capitalize on the broad potential of ribozymes for use in the development of human therapeutics and therapeutic target validation services. To date, the Company has engaged in the research and development of its ribozyme technology and has experienced significant operating losses in each fiscal year since inception. The Company has not generated any revenue from the commercialization of its ribozyme technology and it expects to continue to incur significant operating losses over at least the next several years.
Capital Requirements and Management's Plans
The Company incurred a net loss of $15,881,557 for the year ended December 31, 2000 and has an accumulated deficit of $99,964,629 at December 31, 2000. Development of the Company's products will require a commitment of substantial additional funds to conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring its proposed products to market and to establish manufacturing and marketing capabilities. The Company's future capital requirements will depend on many factors, including, among others, the progress of the Company's research, development and drug discovery efforts, the ability of the Company to establish collaborative arrangements for clinical testing, progress with preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, competing technological and market developments, changes in the Company's existing research relationships, determination as to the commercial potential of the Company's potential products, effective commercialization activities and arrangements, and the cost and availability of third-party financing for capital expenditures.
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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and short- term investments. The Company places its cash equivalents and short-term investments with high credit-quality financial institutions. The Company invests its excess cash primarily in money market instruments, and municipal and floating rate bonds. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. To date, the Company has not experienced significant losses on any of these investments.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company's cash equivalents are comprised of certificates of deposit, money market funds, and investment securities.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Useful lives of laboratory equipment and furniture are estimated at five years and all computer equipment is estimated at three years. Leasehold improvements and equipment subject to financing obligations are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease.
Deferred Patent Costs
The Company capitalizes legal costs directly incurred in pursuing patent applications as deferred patent costs. When such applications result in an issued patent, the related costs are amortized over the remaining legal life of the patents, using the straight-line method. On a quarterly basis, the Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
During 1999, the Company acquired certain pending and issued patents through the issuance of common stock and warrants, valued at approximately $1.0 million. The cost of these patents has been capitalized and is being treated consistent with the policies discussed above.
It is possible the above estimates of future economic life of the Company's commercialization revenues, the amount of anticipated future commercialization revenues, or both, will be reduced significantly in the near term due to alternative technologies developed by other biotechnology or pharmaceutical companies. As a result, the carrying amount of deferred patent costs may be reduced in the future.
Revenue Recognition and Accounts Receivable
Revenue from collaborative agreements typically consists of nonrefundable up-front fees, ongoing research and development funding and milestone, license fees and other payments. Revenue from nonrefundable up-front fees is recognized upon signing of the agreement. Revenue from ongoing research and development funding is recorded as the expenses are incurred. Revenue from milestone, license fees and other payments will be recognized when earned. Payments received in advance under these agreements are recorded as deferred revenue until earned. The Company has no further research commitments from our collaborators for any revenue recognized. The Company's accounts receivable are predominately collaborative agreement receivables, and to date, the Company has not experienced any losses with respect to the collection of its accounts receivables.
In 2000, 1999 and 1998, Chiron accounted for approximately 29%, 52% and 70% of collaborative revenues, respectively. In 2000 Medizyme accounted for approximately 39% of collaborative revenues. Revenues from Chiron and Medizyme were for nonrefundable, ongoing research and development fees.
Research and Development Expenses
Research and development costs are expensed as incurred.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting for Investments in Affiliates
The Company accounts for its investments in Medizyme Pharmaceuticals, Ltd. (Medizyme) and Atugen under the equity method. The Company has recorded its share of Medizyme's net losses against its cost basis. In 1999, the Company had absorbed its entire cost basis in Atugen through its share of Atugen's net losses and since the Company has no other funding commitments to Atugen the Company has ceased recording it share of Atugen's net losses.
Reclassifications
Certain amounts in the December 31, 1999 and 1998 financial statements were reclassified to conform with the December 31, 2000 presentation. These reclassifications had no impact on the reported results of operations.
Impact of Recently issued Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. As amended, SAB 101, outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies, including revenue earned from collaborations between companies. The SEC deferred the implementation date of SAB 101 until the quarter ended December 31, 2000, with retroactive application to the beginning of the Company's calendar year. The Company believes that revenue recorded through December 31, 2000 complies with SAB 101.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, which was issued in June 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has no derivative instruments and therefore the adoption of SFAS No. 133 had no effect on the Company's financial statements.
In March 2000, the FASB issued Financial Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 clarifies the application of Accounting Principles Board (APB) Opinion No. 25 for certain issues, such as the definition of an employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. Adoption of FIN 44 did not change the Company's existing accounting policies or disclosures.
2. Securities Available-for-Sale
At December 31, 2000 and 1999 management determined that certain marketable securities held by the Company were available-for-sale. Securities available- for-sale are carried at fair value, with unrealized gains and losses reported as a component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than- temporary on securities available-for-sale are included in investment income. Interest and dividends on securities available-for-sale are included in investment income. The cost of securities sold is based on the specific identification method. There were no gross realized gains or losses on sales of securities available-for-sale in 2000, 1999 or 1998.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Long-Term Debt
Long-term debt as of December 31, 2000 and 1999, consists of the following:
2000 1999 ---- ---- Equipment loan (I)............................ $ - $ 200,455 Convertible debt--related parties (II)........ 1,013,333 6,810,537 Convertible debt--joint venture (III)......... 2,743,213 - ---------- ---------- $3,756,546 $7,010,992 ========== ==========
I. In December 1995, the Company negotiated an equipment credit facility of $2,000,000 with a financial institution. The facility commitment was terminated on June 30, 1997. The agreement required monthly principal and interest payments through November 2000 at which time the loan was paid off. The interest rate on these borrowings was 12% at December 31, 1999. II. In April 1997, the Company entered into a collaboration agreement with a corporate partner whereby, among other items, the Company may borrow from the corporate partner up to $2.0 million annually through 2001. The loans are collateralized 50% by equipment purchases. The loans carry an interest rate of 8% per annum and under certain circumstances are convertible into equity at the option of the corporate partner. Principal and interest payments on the loans are deferred until maturity of the loans which is in April 2004. In April 2000, the Company paid down $6.9 million of the outstanding debt with proceeds from a public offering. In June 2000, the corporate partner elected to convert the remaining balance of approximately $997,000 into 42,435 shares of the Company's common stock. In October 2000, the Company took an additional $1.0 million draw down on the debt facility. The collaboration and loan facility may be terminated at the option of the corporate partner any time. III. In January 2000, the Company entered into a joint venture agreement with a corporate partner for the development and commercialization of a potential product to treat breast and other cancers. The development of the drug will require funds of up to $15 million and therefore the corporate partner has made available to the Company a convertible promissory note to fund up to $12,015,000 of development expenses through January 2006. The note carries an interest rate of 12% compounded on a semi-annual basis. At the sole discretion of the corporate partner, the note is convertible into the Company's Series B Preferred Convertible Stock. In lieu of conversion, principal and interest payments on the note are deferred until the note matures in January 2006.
Cash paid for interest for the years ended December 31, 2000, 1999 and 1998 was $892,199, $84,029 and $411,988, respectively. At December 31, 2000 the carrying amounts of the Company's long-term debt approximates the fair value as all borrowings bear interest rates which are comparable to the current market rate for such borrowings.
As of December 31, 2000, maturities of long-term debt are as follows:
Amount ------ 2001....................................... $ - 2002....................................... - 2003....................................... - 2004....................................... 1,013,333 2005....................................... - Thereafter........................... 2,743,213 ---------- $3,756,546 ==========
4. Leases
The Company leases office space in two buildings under noncancelable operating leases that expire in October 2006 and June 2007. According to the terms of the leases, rent for the buildings will increase each year based on Consumer Price Index increases, with a minimum of 3.5% and a maximum of 6.0%. Total rent expense, including miscellaneous laboratory equipment rentals, was $453,686, $398,452 and $493,188 in 2000, 1999 and 1998, respectively.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's minimum operating lease commitments at December 31, 2000 are as follows:
2001........................................ $ 917,064 2002........................................ 935,176 2003........................................ 939,094 2004........................................ 954,376 2005........................................ 974,457 2006 and thereafter......................... 1,083,120 ---------- $5,803,287 ==========
Under a separate agreement, the Company subleases a portion of their building to Atugen, an unconsolidated affiliate. The sublease expires in October 2002. Rental income from Atugen for 2000 and 1999 was $102,577 and $73,123, respectively. Estimated rental income for 2001 is $190,000 and rent for 2002 will increase subject to the terms of the Company's master lease for the building.
5. Stockholders' Equity
Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan (the Purchase Plan), authorizing the issuance of 300,000 shares pursuant to purchase rights granted to employees of the Company. The Purchase Plan provides a means by which employees purchase common stock of the Company through payroll deductions. The Purchase Plan is implemented by offerings of rights to eligible employees. Generally, each offering is twenty-four months' duration with purchases occurring on each October 31 and April 30 during each offering. Common stock is purchased for accounts of employees participating in the Purchase Plan at a price per share equal to the lower of (i) 85% of the fair market value of a share of common stock on the date of commencement of participation in the offering or (ii) 85% of the fair market value of a share of common stock on the date of purchase. Generally all regular employees, including executive officers, may participate in the Purchase Plan and may authorize payroll deduction of up to 15% of their base compensation for the purchase of stock under the Purchase Plan. The Company's Board of Directors has the authority to terminate the Purchase Plan at its discretion. Shares are deemed issued for accounting purposes in the year the shares are purchased. As of December 31, 2000, 222,513 shares have been issued under the Purchase Plan.
Stock Option Plans The Company has established a Non-Qualified Stock Option Plan and an Incentive Stock Option Plan (collectively, the Plans, as amended), under which it authorized stock option grants to purchase up to 2,767,154 shares of the Company's common stock to eligible employees, consultants, and other individuals, as defined in the Plans. Options to purchase the Company's common stock are exercisable at a price as determined by the Board of Directors at the time the option is granted, which shall not be less than 100% of the fair market value (110% in the case of 10 percent shareholders) at the date of grant. Vesting rights are determined by the Board of Directors at the time the option is granted and generally past options became exercisable at twenty percent at the end of each of years one through five. However, in December 2000 the Board of Directors approved future vesting of grants at twenty-five percent at the end of each of years one through four. If not exercised, the options expire after ten years. The Board of Directors has also granted certain employees options vesting upon achievement of certain contingent milestone events.
During the third quarter of 1998, the Company offered a repricing of existing stock options to all of its current employees. Pursuant to the offer, all non-executive employees were allowed to exchange each existing stock option for a newly priced stock option one for one, with the new stock options having an exercise price equal to the current market price of the underlying common stock. If exchanged, the vesting term would start over beginning on the date of exchange. A similar offer was given to all executives, except the options were exchanged at a one for .75 ratio. As a result of the offer, 890,921 options were canceled and 747,060 options were granted, effective September 18, 1998.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Changes in stock options for the years ended December 31, 2000, 1999 and 1998 were as follows:
The weighted average exercise price of options outstanding at December 31, 2000, 1999 and 1998 was $8.83, $6.52 and $4.21, respectively.
Stock options vest as follows:
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2000:
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Employee Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations in accounting for its employee stock. Under APB 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. During 2000, 1999 and 1998, the Company recorded $23,393, $25,663 and $32,162, respectively, of compensation relating to the grant of stock options and the Anti-dilution Agreement, all of which relates to pre-IPO issuances that have been deferred until vesting has been completed. In addition, the Company recorded expense of $1.7 million during 2000 related to performance stock options that vested due to achievement of specific performance criteria during the year.
Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.6%, 6.1% and 4.7%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 1.08, .971 and .967; and a weighted-average expected life of the option of 6 years. The weighted average fair value of stock options granted during 2000, 1999 and 1998 was $18.53, $5.42 and $4.04, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Equity Financing Facility In November 2000, the Company signed an agreement with Acqua Wellington North American Equities Fund Ltd. (Acqua Wellington) to set up an equity financing facility covering the sale of up to $60 million of the Company's common stock. The financing will be made pursuant to a shelf registration filed by the Company with the Securities and Exchange Commission (SEC) covering the sale of up to 3 million shares of its common stock. The shelf registration was declared effective by the SEC in November 2000. The shares may be sold at the Company's discretion and as market conditions warrant at a small discount to market at the time of sale. The Company will control the quantity and timing of each incremental sale of stock. Proceeds from the sale of stock will be used by the Company for general corporate purposes.
Shareholder Rights Plan In November 2000, the Company adopted a Shareholder Rights Plan (the Rights Plan) designed to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. The Rights Plan imposes a significant penalty upon any person or group that acquires 15 percent or more of the Company's outstanding common stock without the approval of the RPI Board. Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the close of business on December 8, 2000. The rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15 percent or more of the Company's common stock. In that event, each right will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase either the Company's common stock or shares in an acquiring entity at one-half of market value. The rights expire on December 8, 2010.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common Stock Reserved Below is a summary of common stock reserved by the Company at December 31, 2000 for issuance upon the exercise of the various options, warrants and the 401(k) plan and Purchase Plan.
The Company's ability to pay dividends is restricted by the terms of its collaborative, convertible debt and equipment loan facility agreements.
6. Unconsolidated German Affiliate - Atugen
In 1998, the Company transferred its gene function and target validation business and technology to Atugen, a separately funded German affiliate. Financing for Atugen was accomplished through an equity investment of $2.0 million in cash from the Company in 1998, a venture capital investment of $7.0 million and a commitment by the German government to provide grants and loans of up to $10.0 million. As a result, at December 31, 1998, the Company retained a 49.5% ownership in Atugen. However, since formation, Atugen has had additional rounds of financing and as a result, the Company retained a 31.6% ownership in Atugen at the end of 2000. The Company accounts for its investment in Atugen under the equity method of accounting. In connection with its formation, Atugen received exclusive royalty-free licenses to the Company's patents and technologies for target validation and discovery in exchange for a one-time $2.0 million payment which was received by the Company in January 1999. The entire amount of this one-time payment was deferred at December 31, 1998 and is being amortized over the five-year term of the license agreement and is reflected in the Company's equity in earnings. As of December 31, 1999, the Company had absorbed its entire cost basis in this equity investment through its share of Atugen's net losses.
According to a service agreement executed by both parties, the Company will provide management support, technologies, facilities and reagents to Atugen for reasonable fees. The Company will retain rights to develop ribozyme therapeutic agents against targets validated by Atugen.
7. Collaborative Agreements
Chiron
In July 1994, the Company entered into a research and development collaboration agreement with Chiron to research, develop and market products directed towards five genetic targets, and all human clinical indications associated with those targets. The Company and Chiron will share equally in the costs and profits of any jointly developed products. In addition, Chiron may, at its option, finance the Company's portion of its Phase II and Phase III drug development costs for mutually approved programs. The Company retains the option to reacquire its rights by reimbursing Chiron for such development costs plus a predetermined risk premium. The term of the research program is five years, with the terms of the agreement to be extended if products are jointly developed. As part of this agreement, Chiron made a $10,000,000 equity investment in the Company.
In 1998, the Company received $5.0 million from Chiron related to the joint product development of ANGIOZYME, the Company's lead product candidate for the treatment of solid tumor cancers. The non recurring payment was a reimbursement for 50% of past expenses incurred by the Company for the preclinical development of ANGIOZYME.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, the Company recorded revenue from Chiron of $4,529,795, $4,015,010 and $1,048,138, in 2000, 1999 and 1998, respectively, for 50% of ANGIOZYME clinical development expenses incurred by the Company. There are no future obligations between the Company and Chiron related to revenues which were fully recognized in 2000, 1999 and 1998.
In connection with the Company's collaboration with Chiron, an operational audit was performed by Chiron's internal audit department for years ending December 31, 2000 and 1999. As a result of this audit, the rate the Company charges per researcher working on the ANGIOZYME collaboration has been brought into question. The Company and Chiron have been discussing this matter and expect a resolution in the near term. However, currently it is uncertain as to whether or not an increase or decrease to the rate is necessary, or whether any such change will be prospectively or retroactively applied. The Company does not expect any material changes to the rate charged per researcher or any other matters of significance related to this collaboration.
Schering AG, Berlin
On April 9, 1997, the Company entered into a research collaboration with Schering AG, Berlin, (Schering AG) focusing on the use of ribozymes for therapeutic target validation, as well as the development of ribozymes as therapeutic agents. The collaboration utilizes the special selectivity of ribozymes to validate new molecular therapeutic targets and to discover new therapeutic agents based on those targets. The Company provides its expertise in ribozyme design, synthesis and delivery, and Berlex Laboratories, Inc., a U.S. subsidiary of Schering AG (Berlex) will provide candidate targets, cell culture screens, animal models and development and commercialization expertise to the collaboration. Since the formation of Atugen in 1998, the Company has subcontracted work related to the collaboration to Atugen. Subsequently, all revenues from Berlex have been transferred to Atugen as well.
Schering AG made an equity investment in the Company in May 1997 of $2.5 million in exchange for 212,766 shares of common stock, and made an additional equity investment of $2.5 million for 465,117 shares in April 1998. Separately, Schering AG provided a loan of $2.0 million in each of years 1997, 1998, 1999 and 2000. Schering AG is expected to provide a loan of up to $2.0 million in 2001, provided that the collaboration is continued. According to the terms of the Company's agreement with Schering AG, 50% of any borrowings on the line of credit must be collateralized by equipment purchases. The loans, which carry an interest rate of 8% per annum, are convertible into equity at the option of Schering AG under certain circumstances. In April 2000, after the completion of a public offering, the Company paid down $6.9 million of the outstanding borrowings from Schering AG. In June 2000, Schering AG converted the remaining balance of $997,205 into 42,435 shares of the Company's common stock at the market closing price on June 19, 2000 of $23.50. At December 31, 2000, the outstanding borrowings of $1.0 million were convertible into approximately 70,800 shares of the Company's common stock. Principal and interest payments are deferred until maturity of the loans which is in April 2004. The Company may earn success fees upon product development milestones and will manufacture synthetic ribozyme products and receive royalties on sales of both ribozyme and non- ribozyme products resulting from the collaboration. All such payments are subject to some restrictions, including receipt of certain third party consents. Upon payment of termination fees paid to the Company, the research collaboration may be terminated at Schering AG's option any time.
Eli Lilly and Company
In March 1999, the Company entered into a collaboration with Eli Lilly and Company (Eli Lilly) to conduct research, development and commercialization of the Company's ribozyme for the treatment of Hepatitis C virus infection, HEPTAZYME. Under the terms of the agreement, the Company received approximately $9.2 million in 1999, which included $1.7 million of funding for research and clinical trial expenses and a $7.5 million equity investment purchasing five shares of the Company's non-voting convertible Series L preferred stock which was completed in April 1999. Each share of Series L Convertible Preferred Stock was convertible into shares of the Company's common stock based upon milestones related to the development and commercialization of HEPTAZYME.
In September 2000, the Company entered into an agreement with Eli Lilly to repurchase all rights to HEPTAZYME. Eli Lilly had directed the clinical trials for HEPTAZYME to date under the licensing agreement. According to the repurchase agreement, the Company reacquired the global rights to HEPTAZYME and will direct all subsequent clinical trials. In addition, the Company agreed to pay royalties to Eli Lilly on future net sales of HEPTAZYME, as well as milestone payments if the Company completes an agreement for the development or marketing
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
rights to HEPTAZYME with a third party or if the Company files a New Drug Application for HEPTAZYME, whichever comes first. Pursuant to the repurchase agreement, Eli Lilly converted the outstanding five shares of the Company's Series L Convertible Preferred Stock into 636,640 shares of common stock on December 28, 2000 (the Termination Date). The conversion price was based on a preferred share value of $1.5 million for each of the five shares outstanding. The price per share of the common stock was based on the average closing price of the Company's common stock for the 30 days prior to the Termination Date. In addition, the Company issued to Eli Lilly $3,000,000 of its common stock, which resulted in 252,632 shares, as payment for Eli Lilly's efforts in generating and providing data. The price per share was based on the closing market price of the Company's common stock on the Termination Date. In return, Eli Lilly paid the Company a termination fee of approximately $2.8 million. The Company recorded the $225,891 difference between the value of the stock issued and the termination fee as a collaboration expense in December 2000.
Elan Corporation
In January 2000, the Company formed a joint venture with Elan Corporation (Elan) for the development and commercialization of HERZYME, the Company's product to treat breast and other cancers. As part of this arrangement, the Company licensed HERZYME and Elan licensed its MEDIPAD(R) drug delivery technology to the joint venture, Medizyme Pharmaceuticals, Ltd. (Medizyme). The MEDIPAD(R) system is a disposable continuous subcutaneous drug delivery system that allows a patient to administer the drug at home.
Initial funding of Medizyme included $12.0 million from the Company and $3.0 million from Elan. The Company's $12.0 million capital contribution was funded by the sale to Elan of (i) 12,015 shares of the Company's Series A Convertible Exchangeable Preferred Stock (the Series A Preferred Stock), (ii) a warrant to purchase up to 200,000 shares of the Company's common stock at an exercise price of $15.00 per share with a term of two years, and (iii) a warrant to purchase up to 300,000 shares of the Company's common stock at an exercise price of $20.00 per share with a term of seven years. The Series A Preferred Stock has a stated dividend rate of 6.0% which is payable semi-annually through the issuance of additional shares of Series A Preferred Stock at a nominal value of $1,000 per share. At December 31, 2000, the Company has recorded $716,456 as an accreted dividend related to this preferred stock arrangement.
As a result of Medizyme's initial capitalization, the Company owns 80.1% of the outstanding capital stock of Medizyme and Elan owns 19.9%. However, Elan can exchange, at its option, all of its shares of the Company's Series A Preferred Stock for 30.1% of RPI's interest in Medizyme. After such redemption, Elan would own 50% of the then outstanding capital stock of Medizyme. Elan also has the option of converting its shares of the Company's Series A Preferred Stock into approximately 1,200,000 shares of RPI's common stock.
Medizyme paid Elan in cash a $15.0 million non-refundable license fee for the MEDIPAD(R) drug delivery technology. As a result of this licensing transaction, Medizyme capitalized the entire license fee and is amortizing the balance over the three year term of the agreement. The Company estimates that funding for Medizyme will require approximately $15.0 million in additional operating and development costs. In connection with expected funding requirements, Elan has agreed to provide the Company with a $12.0 million credit facility to fund the Company's pro rata portion of Medizyme's operating costs over the development period, which is expected to be 30 months. The debt has a 12% interest rate and may be converted into shares of the Company's Series B Convertible Preferred Stock (the Series B Preferred Stock), which ultimately is convertible into shares of the Company's common stock at a 50% premium to the average price of its common stock for the 60 days prior to the time of the applicable draw down on the credit facility. The Series B Preferred Stock has a stated dividend rate of 12%, which is payable semi-annually through the issuance of additional shares of Series B Preferred Stock at a nominal value of $1,000 per share. During 2000, the Company borrowed $2.7 million on the credit facility. For the year ended December 31, 2000, the Company recorded $6.1 million in revenue from Medizyme, of the total $6.2 million of research and development expenses recorded by Medizyme, and recorded $9.0 million as equity in the net loss of Medizyme.
Also in connection with the Medizyme joint venture, Elan purchased 641,026 shares of the Company's common stock for a purchase price of $5.0 million. Elan has committed to purchase an additional $5.0 million of common stock in April 2001 at a share price that is at a premium to the average closing price for the 45 trading days preceding the purchase, but not less than such 45 trading day average. The price is also based on the achievement of certain milestones.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The joint venture agreement provides for equal representation by the Company and Elan in the operating and management decisions of Medizyme. Due to the significant minority investor rights retained by Elan Corporation, and its subsidiaries, the Company accounts for its investment in Medizyme under the equity method of accounting. The following table presents unaudited summary financial information for Medizyme as of December 31, 2000.
8. Commitments and Contingencies
At the core of the Company's technology are inventions and patents of the University of Colorado (CU) which were developed by Dr. Thomas R. Cech and various associates of Dr. Cech. Pursuant to the policies of CU, these inventions and the patents issued thereon, (the Cech Technology) became the property of CU. The Cech Technology was assigned to CU's affiliate, University Research Corporation (URC), which in turn assigned the rights to license certain of the Cech Technology to Competitive Technologies, Inc. (CTI), formerly known as University Patents, Inc. United States Biochemical Corporation (USB) licensed the Cech Technology pursuant to two sublicenses. One of these sublicenses was for the Cech Technology held by CTI. In November 1996, USB assigned to the Company its rights under the sublicense from CTI and the Company entered into an amended and restated license with CTI. The Company also has obtained a license from URC and a sublicense from USB for other Cech Technology held by URC. The CTI license, URC license and USB sublicense together grant the Company the exclusive (except for non-commercial academic research) worldwide right, among other things, to make, use and sell RNA enzymes covered by licensed patents and products incorporating them. The URC license and USB sublicense are fully paid. The CTI license provides for the payment of a royalty on sales of products incorporating RNA enzymes, covered by licensed patents, and for certain minimum annual royalties. The Company may grant sublicenses to the licensed technology subject to the payment to CTI of a share of royalty income from such sublicenses or a royalty on sales from sublicensed products, methods or services, depending on the particular licensed patents involved. In addition, the Company must pay CTI a share of any option fee, license fee, prepaid royalty or other front-end fee other than research and development funding paid in connection with such sublicense. At the Company's discretion, the payment may be in either cash or equity.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company, along with one or more of its officers or directors, are defendants in several related lawsuits which purport to be class actions on behalf of purchasers of common stock of the Company on November 16 and 17, 1999. The lawsuits, which are substantially identical, allege the defendants violated certain federal securities laws based upon an allegedly misleading announcement made on November 15, 1999. The cases have been consolidated in the United States District Court, District of Colorado. As of February 2001, the lawsuits have entered a discovery phase, with all discovery to be completed by October 1, 2001. Trial to a jury has been scheduled to commence on July 2, 2002. The Company intends to vigorously defend itself against the allegations.
In January 2000, the Company entered into a manufacturing agreement whereby the Company transferred its proprietary manufacturing processes and intellectual property to enable the manufacturing of its ribozyme products. Pursuant to this agreement, the Company must purchase minimum quantities of ribozymes over the next three years, which represents a significant majority of the expected usage during that time.
9. Related Party Transactions
At December 31, 2000, 1999 and 1998, the Company had a total of $316,187, $295,000 and $280,932, respectively, of non-interest bearing loans due from executive officers. The balances may be forgiven by the Company under certain employment agreement provisions. The loan balances are forgivable or payable to the Company under various terms not to exceed 5 years. The Company forgave $136,466, $88,000 and $126,466, of these loans during each of the years ending December 31, 2000, 1999 and 1998, respectively.
10. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS 109). Under the provisions of SFAS 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.
At December 31, 2000, the Company has the following net operating loss and tax credit carryforwards for income tax purposes:
Net Research and State Operating Development Investment Expiration Date Losses Credits Credits --------------- ----------- ------------ ---------- 2001.................. $ - $ - $ 6,000 2007.................. 3,506,000 101,000 - 2008.................. 7,363,000 185,000 - 2009.................. 9,239,000 316,000 - 2010.................. 11,953,000 139,000 - 2011.................. 15,125,000 181,000 - 2012.................. 15,291,000 296,000 - 2018.................. 10,109,000 475,000 - 2019.................. 8,215,000 405,000 - 2020.................. 5,729,000 735,000 - ----------- ------------ ---------- Total.............. $86,530,000 $ 2,833,000 $ 6,000 =========== ============ ==========
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 a change of ownership may limit the Company's utilization of its net operating loss and tax credit carryforwards, and could have been triggered by the Company's initial public offering or by subsequent sales of securities by the Company or its shareholders.
RIBOZYME PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred tax assets and liabilities, net of taxes, as of December 31, 2000 and 1999 are as follows:
11. Employee Savings Plan
The Company has a 401(k) plan which allows participants to contribute 1% to 20% of their salary, subject to eligibility requirements and annual limits. The Board may, at its sole discretion, approve matching contributions with the Company's common stock. In 2000, 1999 and 1998, the Board approved a 50% common stock match equal to total participant deferrals made in each respective year. The Company stock match is subject to vesting restrictions.
12. Quarterly Results (Unaudited)