-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L+18ykoRb6kXdKa558gRE6xk9hmdUBsaO5rrE9li6oDWIzaiPmDR5O7tRgzGCHDp IaBrjqJXmqPTUShppLMivQ== 0000891618-98-005079.txt : 19981123 0000891618-98-005079.hdr.sgml : 19981123 ACCESSION NUMBER: 0000891618-98-005079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELTRIX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000871395 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943121462 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18976 FILM NUMBER: 98756302 BUSINESS ADDRESS: STREET 1: 3055 PATRICK HENRY DR CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089882500 MAIL ADDRESS: STREET 2: 3055 PATRICK HENRY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: CELTRIX LABORATORIES INC DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 1998 OR ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from__________to___________. Commission File Number: 0-18976 CELTRIX PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3121462 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3055 Patrick Henry Drive, Santa Clara, CA 95054-1815 (Address of principal executive offices and zip code) Registrant's Telephone Number: (408) 988-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 1998, the Registrant had outstanding 21,061,053 shares of Common Stock. 2 CELTRIX PHARMACEUTICALS, INC. INDEX
Page No. PART I. FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998.............................................. 3 Condensed Consolidated Statements of Operations for the three-and six-month periods ended September 30, 1998 and 1997... 4 Condensed Consolidated Statements of Cash Flows for the three-and six-month periods ended September 30, 1998 and 1997... 5 Notes to Condensed Consolidated Financial Statements............... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 8 PART II. OTHER INFORMATION Item 2: Changes in Securities and Use of Proceeds........................... 21 Item 4: Submission of Matters to a Vote of Security Holders................. 22 Item 6: Exhibits and Reports on Form 8-K.................................... 22 SIGNATURES..................................................................... 24
2 3 PART I. FINANCIAL INFORMATION CELTRIX PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, March 31, 1998 1998 --------- --------- (Unaudited) (1) Assets Current assets: Cash and cash equivalents $ 1,002 $ 1,608 Short-term investments -- 6,305 Receivables and other current assets 165 219 --------- --------- Total current assets 1,167 8,132 Property and equipment, net 1,103 7,062 Intangible and other assets, net 2,620 2,682 --------- --------- $ 4,890 $ 17,876 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 583 $ 751 Other accrued liabilities 1,146 1,483 Accrued restructuring reserve 474 -- Current portion of capital lease obligations -- 8 --------- --------- Total current liabilities 2,203 2,242 Deferred rent -- 890 Stockholders' equity: Preferred stock -- -- Common stock 211 211 Additional paid-in capital 131,542 131,542 Accumulated deficit (129,066) (117,009) --------- --------- Total stockholders' equity 2,687 14,744 --------- --------- $ 4,890 $ 17,876 ========= =========
(1) Derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 4 CELTRIX PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, ------------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues: Product sales $ -- $ 33 $ 10 $ 33 Other revenues 23 22 49 46 -------- -------- -------- -------- 23 55 59 79 Costs and expenses: Cost of sales -- 1 -- 1 Research and development 2,817 3,060 5,818 6,065 General and administrative 667 399 1,230 947 Restructuring costs 5,178 -- 5,178 -- -------- -------- -------- -------- 8,662 3,460 12,226 7,013 -------- -------- -------- -------- Operating loss (8,639) (3,405) (12,167) (6,934) Interest income, net 33 192 108 416 Gain on sale of investment in Prograft Medical, Inc. -- -- -- 737 -------- -------- -------- -------- Net loss $ (8,606) $ (3,213) $(12,059) $ (5,781) ======== ======== ======== ======== Basic and diluted net loss per share $ (0.41) $ (0.15) $ (0.57) $ (0.28) ======== ======== ======== ======== Shares used in basic and diluted per share computation 21,061 20,985 21,061 20,985 ======== ======== ======== ========
See accompanying notes. 4 5 CELTRIX PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash and cash equivalents (In thousands) (Unaudited)
Six Months Ended September 30, ------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net loss $(12,059) $ (5,781) Adjustments to reconcile net loss to net cash used in operating activities: Write off of leasehold improvements 5,311 -- Reduction in deferred rent liability (890) -- Depreciation and amortization 864 868 Gain on sale of investment in Prograft Medical, Inc. -- (737) Other adjustments related to changes in operating accounts 23 (305) -------- -------- Net cash used in operating activities (6,751) (5,955) Cash flows from investing activities: Decrease (increase) in available-for-sale securities 6,307 (6,840) Capital expenditures (72) (80) Increase in intangible and other assets (82) (224) -------- -------- Net cash provided by (used in) investing activities 6,153 (7,144) Cash flows from financing activities: Proceeds from issuance of common stock, net -- 13,339 Principal payments under lease obligations (8) (231) -------- -------- Net cash (used in) provided by financing activities (8) 13,108 -------- -------- Net increase in cash and cash equivalents (606) 9 Cash and cash equivalents at beginning of period 1,608 2,734 -------- -------- Cash and cash equivalents at end of period $ 1,002 $ 2,743 ======== ========
See accompanying notes. 5 6 CELTRIX PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Condensed Consolidated Interim Financial Statements The condensed consolidated balance sheet as of September 30, 1998 and the condensed consolidated statements of operations and cash flows for the three- and six-month periods ended September 30, 1998 and 1997, have been prepared by the Company, without audit. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, which include normal recurring adjustments, necessary to present fairly the Company's financial position, results of its operations and its cash flows. Interim results are not necessarily indicative of results to be expected for a full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended March 31, 1998 in the Company's 1998 Annual Report to Stockholders. The accompanying financial statements have been prepared assuming that the Company continues as a going concern. At September 30, 1998, the Company had negative working capital of $1.0 million, an accumulated deficit of $129.1 million, and incurred a net loss of $8.6 million for the quarter ended September 30, 1998 which included a $5.2 million restructuring charge (see Note 3). In November 1998, the Company completed a private placement, resulting in net proceeds to the Company of approximately $1.9 million, reversing the negative working capital position on a pro forma basis (see Note 4). Current cash, cash equivalents and short-term investments, including proceeds from this financing, and the sale of fixed assets as a result of discontinuing the Company's manufacturing operations in connection with the September 1998 restructuring (see Note 3), will be sufficient to fund ongoing operations into the third calendar quarter of 1999. (See also Management's Discussion and Analysis of Financial Condition and Results of Operations.) 2. Recent Pronouncement As of April 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income". Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net loss or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale 6 7 securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Total comprehensive income was not significant during the periods ended September 30, 1998 and 1997. 3. Restructuring Charges In September 1998, Celtrix announced that it would restructure the Company to focus on the clinical development of SomatoKine, cease manufacturing operation and reduce the cash burn rate. As a result of this action, the Company recognized a $5.2 million restructuring charge in the quarter ended September 30, 1998; the components are as follows:
Non- Future (In thousands) Cash Cash Cash Outlays ------ ------- ------------ Write-off of leasehold improvements (1) $ 5,311 Severance benefit expenses $ 358 $ 213 Non-cancelable operating lease obligations 250 186 Other restructuring-related charges 75 75 Reduction of deferred rent liability (2) (816) ------ ------- ------- $ 683 $ 4,495 $ 474 ====== ======= =======
(1) In connection with the plan to cease manufacturing operation. (2) Represents a portion of leasehold improvements that were funded by the landlord. 4. Subsequent Event In November 1998, the Company completed a private placement of 4,000,000 shares of newly issued common stock at $0.50 per share pursuant to a Common Stock and Warrant Purchase Agreement dated October 12, 1998, resulting in net proceeds to the Company of approximately $1.9 million. For every share of stock issued, the Company also issued one and one-half warrants to purchase additional shares at $0.55 per share. The warrants are exercisable beginning in January 1999 and will expire in January 2002. The following pro-forma financial data gives effect, as of September 30, 1998, to the private placement described above:
Actual Pro-Forma (In thousands) Balance Balance ------- ------- Cash, cash equivalents and short-term investments $ 1,002 $2,902 Working capital $(1,036) $ 864 Stockholders' equity $ 2,687 $4,587
7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I - -- Item 1 of this Quarterly Report and the financial statements and notes thereto in the Company's 1998 Annual Report to Stockholders. OVERVIEW Celtrix Pharmaceuticals, Inc. is a biopharmaceutical company developing novel therapeutics for the treatment of seriously debilitating, degenerative conditions primarily associated with severe trauma, chronic diseases or aging. The Company's focus is on regenerating lost tissue and metabolic processes essential for the patient's health and quality of life. Ongoing product development programs target severe osteoporosis, including hip fracture surgery in the elderly, traumatic burns and diabetes. Other potential indications include protein wasting diseases associated with cancer, AIDS, advanced kidney failure and other life-threatening conditions. The Company's development focus is on SomatoKine, a naturally occurring complex comprised of the anabolic hormone insulin-like growth factor-I (IGF-I) and its primary binding protein, BP3. IGF-I is known to play a major role in diverse biological processes, including muscle and bone formation, tissue repair and endocrine regulation. However, limitations associated with administering free IGF-I therapeutically have proven significant because IGF-I does not naturally exist in quantity free of its binding proteins. SomatoKine delivers IGF-I complexed with BP3, which contains biological information important for the body's natural regulation of IGF-I bioavailability and biodistribution, and the resulting complex does not display the acute limitations seen in free IGF administration. Results from the Company's three earlier Phase I studies demonstrated that the repeated or continuous administration of SomatoKine safely delivers IGF-I at substantially higher dosage levels than have ever been achievable with free IGF-I, increasing the peak blood concentration of IGF-I up to 35-fold its normal level. Furthermore, the elevated levels substantially stimulated bone and connective tissue metabolism. Based on these positive results, the Company initiated a Phase II clinical feasibility study in early 1997, using SomatoKine to treat severe osteoporosis patients recovering from 8 9 hip fracture surgery. Following the trauma of hip fracture, patients typically suffer an accelerated loss of hip bone mineral density (BMD) which predisposes them to a high risk of refracture. Interim results from patients treated with SomatoKine for eight weeks showed a substantial retention in their hip bone mineral density. Final patient follow-up and data analysis are anticipated in fourth calendar quarter 1998. The Company intends to establish corporate partnership(s) to continue the global development of SomatoKine for severe osteoporosis. In mid-1997, the Company began a Phase II clinical feasibility study in severely burned patients. Severe burns patients typically have low IGF-I levels which may be connected to the disruption of the biological processes that are essential for efficient and successful healing and protection from complications. Interim results provided evidence that SomatoKine improved the metabolic processes involved in maintaining muscle protein. In addition, SomatoKine appeared to have a positive effect on the heart function and immune system of these severely burned patients. Clinical findings from this study will be used to establish corporate partnership(s) for future development of SomatoKine in severe burns. In July 1998, Celtrix initiated a Phase II feasibility study in Type I diabetes. This 12-patient study will investigate SomatoKine's potential to reduce the need for exogenous (injected) insulin and improve blood glucose control. A number of parameters are being measured including the amount of insulin required for optimal glycemic control. Clinical findings from this study will be used to establish corporate partnership(s) for future development of SomatoKine in diabetes. The Company has a product development, license and marketing agreement with Genzyme Corporation ("Genzyme") for TGF-beta-2, a potential pharmaceutical based on a naturally occurring compound which appears to play an important role in regulating healthy cell functions. Under amended terms in December 1997, the Company granted Genzyme expanded territory rights to TGF-beta-2 to include Japan, China, Korea and Taiwan. Additionally, under a separate license agreement, Genzyme was granted a worldwide royalty-bearing license to TGF-beta antibodies and receptor technology. The Company is not currently pursuing an in-house TGF-beta-2 program. Celtrix has not earned substantial revenues from product sales and at September 30, 1998 has an accumulated deficit of $129.1 million. The Company expects to incur additional operating losses, which may fluctuate from quarter to quarter, for at least the next several years as the Company continues its clinical development of SomatoKine. 9 10 Development of the Company's products beyond the current Phase II feasibility studies will require the commitment of substantial funding to conduct further clinical studies. Such additional funding will need to be raised through collaborative arrangements or through public or private financings, including equity financing. There can be no assurance that any such financing will be available to the Company or on terms attractive to the Company, or that the Company can enter into a collaborative relationship with a corporate partner for the continuation of the clinical trials in any of its current indications. Consequently, there can be no assurance that Celtrix will ever achieve either significant revenues from product sales or profitable operations. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for and market its potential products. No assurance can be given that the Company's product development efforts will be successfully completed, that required regulatory approvals will be obtained, or that any products, if developed and introduced, will be successfully marketed or achieve market acceptance. RESULTS OF OPERATIONS Celtrix incurred a net loss of $8.6 million and $12.1 million for the three- and six-month periods ended September 30, 1998, compared to $3.2 million and $5.8 million for the same periods in 1997. Net loss per share increased to $0.41 and $0.57 per share for the three- and six-months ended September 30, 1998, compared to $0.15 and $0.28 per share for the same periods in 1997. The increase in net loss and basic and diluted net loss per share for the three- and six-month periods ended September 30, 1998 is due primarily to the one-time restructuring charges made by the Company this quarter in its effort to reduce its cash burn rate. Revenues decreased to $23,000 and $59,000 for the three- and six-month periods ended September 30, 1998 from $55,000 and $79,000 for the same periods in 1997 due primarily to a reduction in sale of material for research purposes. Operating expenses increased to $8.7 million and $12.2 million for the three- and six-month periods ended September 30, 1998 from $3.5 million and $7.0 million for the same periods in 1997. The increase is due primarily to a one-time $5.2 million restructuring charge recorded in September 1998. Net interest income of $33,000 and $108,000 for the three- and six-month periods ended September 30, 1998 decreased from $192,000 and $416,000 for the same periods in 1997 due primarily to the decrease in average cash, cash equivalent and short-term investment balances. In September 1998, Celtrix announced that it would restructure the Company to focus on the clinical development of SomatoKine, and to significantly reduce its cash burn rate. Since sufficient clinical grade SomatoKine has been manufactured for the conduct of clinical trials 10 11 over the next two years, the Company discontinued its manufacturing operations. As part of the restructuring, the Company reduced its work force by 59 employees, or approximately 80%, in September 1998. The Company intends to further reduce its work force by the end of the calendar year, for a total reduction of approximately 90%. The reduction in work force affects all levels of staff in manufacturing and other functions. Also, as a result of discontinuing its manufacturing operations, the Company is currently in the process of selling its equipment and other assets. The Company terminated its facility lease effective November 30, 1998. As a result, the Company recognized a $5.2 million restructuring charge in the quarter ended September 30, 1998, which included a net $4.5 million non-cash charge for the write-off of leasehold improvements, $358,000 for severance and benefit expenses, $250,000 related to certain non-cancelable operating lease obligations and $75,000 in other restructuring-related charges. Of the $5.2 million in restructuring charges, the Company had reserved $474,000 for future payments related to the restructuring at September 30, 1998, which include $213,000 for severance and benefit payments, $186,000 under non-cancelable operating leases and $75,000 in other anticipated payments. (See also Note 3.) The $737,000 gain on investment reported in the quarter ended June 30, 1997 was the result of the sale of 43,750 shares of Prograft Medical, Inc. ("Prograft") preferred stock, held by the Company since 1993. LIQUIDITY AND CAPITAL RESOURCES Celtrix has funded its activities with proceeds from public and private offerings, advances from Collagen, research and development revenues from collaborative arrangements, lease and debt financing arrangements, proceeds from liquidating its equity investments and, to a lesser extent, other revenues and product sales. At September 30, 1998, Celtrix's cash, cash equivalents and short-term investments were $1.0 million compared to $7.9 million at March 31, 1998. The net decrease of $6.9 million was due primarily to cash outlays consisting of $6.8 million in net cash and investments used in operating activities and $162,000 used in investing and financing activities. In November 1998, the Company completed a private placement of 4,000,000 shares of newly issued common stock at $0.50 per share pursuant to a Common Stock and Warrant Purchase Agreement dated October 12, 1998, resulting in net proceeds to the Company of approximately $1.9 million. In addition, for every share of stock issued, the Company also issued one and one-half warrants to purchase additional shares at $0.55 per share. (See also 11 12 Note 4.) The Company's financial statements are prepared and presented on a basis assuming it continues as a going concern. At September 30, 1998, the Company had negative working capital of $1.0 million and an accumulated deficit of $129.1 million, and incurred a net loss of $8.6 million for the quarter ended September 30, 1998. The Company expects current cash, cash equivalents and short-term investments, including proceeds from the November 1998 financing and the sale of fixed assets as a result of discontinuing the manufacturing operations in connection with the September 1998 restructuring, will be sufficient to fund operations into the third calendar quarter of 1999. The Company will be required to seek additional funds to finance operations beyond that period. To minimize future dilution from additional equity financing, the Company plans to concentrate on establishing corporate partner arrangements and other opportunities that will enable the continued development of SomatoKine. Merger opportunities that are consistent with the Company's clinical development of SomatoKine will also be considered. There can be no assurance that the Company will be able to raise any additional funds or enter into any collaborative arrangement on terms favorable to the Company, or at all. If the Company is unable to obtain the necessary capital, it may be required to liquidate its assets or to cease operations. The Company anticipates that it will be necessary to expend significant capital resources to support further clinical development. Capital resources may also be required for the acquisition of complementary businesses, products or technologies. The Company's future capital requirements will depend on many factors, including progress with its clinical trials, the time and costs involved in obtaining regulatory approvals, the time and costs involved in filing, prosecuting, enforcing and defending patent claims, competition in technological and market developments, the establishment of and changes in collaborative relationships and the cost of commercialization activities and arrangements. The Company anticipates that it will be required to raise substantial additional capital over a period of several years in order to continue its clinical development programs and to prepare for commercialization. Raising additional funds may result in further dilution to then-existing shareholders. No assurance can be given that such additional funds will be available on reasonable terms, or at all. The unavailability of such financing could delay or prevent the development and marketing of the Company's potential products. 12 13 RISK FACTORS Early Stage of Development; No Developed or Approved Products The Company's potential products are in research and development and no material revenues have been generated to date from product sales. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for, manufacture and market its potential products. Much of the clinical development work for the Company's potential products remains to be completed. No assurance can be given that the Company's product development effort will be successfully completed, that required regulatory approval will be obtained or that any products, if developed and introduced will be successfully marketed or achieve market acceptance. History of Operating Losses; Accumulated Deficit The Company has incurred net operating losses in every year of operation since its inception. As of September 30, 1998, the Company had an accumulated deficit of approximately $129.1 million. Losses have resulted principally from costs incurred in connection with the Company's research and development activities and from general and administrative costs associated with the Company's operations. The Company expects to incur substantial and increasing operating losses for at least the next several years. The Company's ability to achieve profitability will depend in part on completing the research and development of, and obtaining regulatory approvals for, its products and successfully commencing product commercialization. Possible Volatility of Stock Price; Dividend Policy The market prices for securities of biopharmaceutical and biotechnology companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since the Company's Common Stock became listed for public trading, its market price has fluctuated over a wide range and the Company expects that it will continue to fluctuate. In addition, announcements concerning the Company or its competitors, the results of clinical trials, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, litigation or public concern as to safety of the Company's potential products as well as changes in general market conditions may have a significant effect on the market price of Celtrix's common stock. The Company has never paid dividends on its capital stock and the Company does not anticipate paying any cash dividends in the foreseeable future. Future Capital Requirements and Uncertainty of Additional Funding After the completion of the November 1998 financing and the sale of fixed assets as a result of discontinuing its manufacturing operations, the Company anticipates that sufficient funds will be available to fund the Company's operations into the third calendar quarter of 1999, not including further clinical trials beyond the fourth quarter of 1998. Accordingly, further development of the Company's products will require the commitment of substantial resources to conduct the time-consuming research and development, clinical studies and regulatory activities necessary to bring any potential therapeutic products to market and to establish production, marketing and sales capabilities. Such additional funding will need to be raised through collaborative arrangements or through public or private financings, including equity financing. Any additional equity financing may be dilutive to stockholders, and any debt financing, if available, may involve restrictions on the Company's ability to pay future dividends on its capital stock or the manner in which the Company conducts its business. 13 14 There can be no assurance that any such financing will be available to the Company or on terms attractive to the Company, or that the Company can enter into a collaborative relationship with a corporate partner for the continuation of the clinical trials in any of its current indications. The inability to obtain funds, or to enter into additional corporate collaborations, may require the Company, ultimately, to liquidate its assets or to cease operations. Stringent Government Regulation; Need for Product Approvals The preclinical testing and clinical trials of any compounds developed by the Company or its collaborative partners and the manufacturing and marketing of any drugs resulting therefrom are subject to regulation by numerous federal, state and local governmental authorities in the United States, the principal one of which is the United States Food and Drug Administration (the "FDA"), and by similar agencies in other countries in which drugs developed by the Company or its collaborative partners may be tested and marketed (each of such federal, state, local and other authorities and agencies, a "Regulatory Agency"). Any compound developed by the Company or its collaborative partners must receive Regulatory Agency approval before it may be marketed as a drug in a particular country. The regulatory process, which includes preclinical testing and clinical trials of each compound in order to establish its safety and efficacy, can take many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent Regulatory Agency approval. In addition, delays or rejections may be encountered based upon changes in Regulatory Agency policy during the period of drug development and/or the period of review of any application for Regulatory Agency approval for a compound. Delays in obtaining Regulatory Agency approvals could adversely affect the marketing of any drugs developed by the Company or its collaborative partners, impose costly procedures upon the Company's and its collaborative partners' activities, diminish any competitive advantages that the Company or its collaborative partners may attain and adversely affect the Company's ability to receive royalties, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that, even after such time and expenditures, Regulatory Agency approvals will be obtained for any compounds developed by or in collaboration with the Company. Moreover, if Regulatory Agency approval for a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed that could limit the potential market for any such drug. Furthermore, if and when such approval is obtained, the marketing and manufacture of the Company's products would remain subject to extensive regulatory requirements, and discovery of previously unknown problems with a drug or its manufacturer may result in restrictions on such drug or manufacturer, including withdrawal of the drug from the market. Failure to comply with regulatory requirements could, among other things, result in fines, suspension of regulatory approvals, operating restrictions and criminal prosecution. In addition, Regulatory Agency approval of prices is required in many countries and may be required for the marketing of any drug developed by the Company or its collaborative partners in such countries. Uncertainties Related to Clinical Trials Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in each target indication. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's clinical trials will demonstrate the safety and efficacy of any products or will result in marketable products. 14 15 A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. For example, in fiscal year 1995, Celtrix discontinued its in-house TGF-beta-2 program for the treatment of ophthalmic conditions as a result of disappointing clinical study results. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays, which could have a material adverse effect on the Company's business, financial condition and results of operations. No Assurance of Market Acceptance There can be no assurance that any products successfully developed by the Company, if approved for marketing, will achieve market acceptance. The products and therapies which the Company is attempting to develop will compete with a number of well-established traditional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any products developed by the Company will depend on a number of factors, including the establishment and demonstration in the medical community of the clinical efficacy and safety of the Company's product candidates, their potential advantage over existing treatment methods, and reimbursement policies of government and third-party payors. Competitors may also develop new technologies or products which are more effective or less costly than SomatoKine or perceived to be more cost-effective. There is no assurance that physicians, patients or the medical community in general will accept and utilize any products that may be developed by the Company. The Company's business, financial condition and results of operations may be materially adversely affected if SomatoKine does not receive market acceptance for any reason. Substantial Competition In each of the Company's potential product areas, competition from large pharmaceutical companies, biotechnology companies and other companies, universities and research institutions is substantial. At least three large biotechnology and pharmaceutical companies with substantial financial and legal resources have patent applications on file in the United States and abroad directed at the production of recombinant IGF-I by various methods. Relative to the Company, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Furthermore, the Company believes that competitors have used, and may continue to use, litigation to gain competitive advantage. In addition, these and other entities may have or develop new technologies or use existing technologies that are, or may in the future be, the basis for competitive products. Any potential products that the Company succeeds in developing and for which it gains regulatory approval will have to compete for market acceptance and market share. For certain of the Company's potential products, an important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the product to the market are expected to be important competitive factors. The Company expects that competition will be based, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete or 15 16 noncompetitive. In addition, many of the Company's competitors may achieve product commercialization or patent protection earlier than the Company. The failure of the Company to compete effectively would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Proprietary Technology; Uncertainty of Patent Protection The Company's success will depend in part on its ability to obtain patents, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including the Company, are highly uncertain and involve complex legal and factual questions. Patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving. The degree of future protection for the Company's proprietary rights is therefore uncertain. No consistent policy has emerged regarding the permissible breadth of coverage of claims in biotechnology patents. Therefore, no assurance can be given that any of the Company's or its licensors' patent applications will issue as patents or that any such issued patents will provide competitive advantages for the Company's products or will not be successfully challenged or circumvented by its competitors. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary technology that is not covered by the Company's patents or that others will not be issued patents that may prevent the sale of the Company's proposed products or require licensing and the payment of significant fees or royalties by the Company. At least three large biotechnology and pharmaceutical companies with substantial financial and legal resources have issued patents and/or patent applications on file in the United States and abroad directed at the production and/or use of recombinant IGF-I by various methods. The earliest date of filing of these patent applications is April 25, 1983. Unless and until all of these applications issue, it is not possible to determine the breadth of these claims regarding a process for IGF-I production or for the use of IGF-I for any particular indication. Furthermore, a large biotechnology and pharmaceutical company with substantial financial and legal resources has a patent issued in the United States directed towards certain DNA molecules encoding BP3 and the corresponding BP3 protein. This same patent was previously granted in Europe and was successfully opposed by Celtrix. However, this large biotechnology and pharmaceutical company has recently appealed the decision and there can be no assurance that the appeal will not be successful, and it is not possible to determine what, if any, claims will be reinstated or the breadth of such claims. In addition, this large biotechnology company has been issued a patent directed toward the subcutaneous bolus administration of IGF-BP3 for certain limited areas of use. Each of the referenced companies can be expected to defend its patent position vigorously. Celtrix has developed a new process for the production of IGF and BP3 which it does not believe will infringe on other patents relating to recombinant protein production in general or on other patents relating to the production of IGF and BP3 in particular, although there can be no assurance that a contrary position will not be asserted. A large number of other companies have pending patent applications and/or issued patents which claim certain methods of use of IGF. There can be no assurance that third parties will not claim the Company's technology, current or future products or manufacturing processes infringe the proprietary rights of others. If other companies were to successfully bring legal actions against the Company claiming patent or other intellectual property infringements, in addition to any potential liability for damages, then the Company could be required to obtain a license in order to continue to use the affected process or to manufacture or use the affected products or cease using such products or process if enjoined by a court. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements, all of which could delay or otherwise adversely impact the Company's potential products for commercial use. If any licenses are required, there can be no assurance that the 16 17 Company will be able to obtain any such license on commercially favorable terms, if at all, and if these licenses are not obtained, the Company might be prevented from pursuing the development of certain of its potential products. The Company's breach of an existing license or failure to obtain or delay in obtaining a license to any technology that it may require to commercialize its products may have a material adverse impact on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of another party's proprietary rights. There can be no assurance that the Company's issued or licensed patents would be held valid by a court of competent jurisdiction. An adverse outcome in litigation or an interference or other proceeding in a court or patent office could subject the Company to significant liabilities to other parties, require disputed rights to be licensed from other parties or require the Company to cease using such technology, any of which could have a material adverse effect on the Company. Celtrix also relies on trade secrets to protect technology, especially where patent protection is not believed to be appropriate or obtainable. Celtrix attempts to protect its proprietary technology and processes in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors in such a manner that the Company has no practical recourse. To the extent that the Company or its consultants or research collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Limited Manufacturing Experience and Capacity The Company's products must be manufactured in compliance with regulatory requirements and at acceptable costs. In September 1998, the Company implemented a restructuring plan to focus its operation on the clinical development of its lead drug compound, SomatoKine(R), and to reduce its cash burn rate. With sufficient clinical grade SomatoKine to support the conduct of clinical trials over the next two years, the Company discontinued its in-house manufacturing operations. In the future, the Company will need to contract its manufacturing operations or enter into corporate partnering arrangements that will support manufacturing of drug material to support additional clinical drug needs and eventual commercial scale manufacturing. There can be no assurance that the Company will be able to successfully identify and contract a third party manufacturer, to manufacture any of its current or future products on a commercial scale, nor that such products can be manufactured at a cost or in quantities to make commercially viable products. Failure to obtain sufficient commercial quantities of SomatoKine at acceptable terms will have an adverse impact on the Company's attempts to seek approval for this product, or to commercialize this product. Limited Sales and Marketing Experience If the Company is permitted to commence commercial sales of products, it will face commercial competition with respect to sales, marketing and distribution, areas in which it has no experience. To market any of its products directly, the Company must develop a marketing and sales force with technical expertise and with supporting distribution capability. Alternatively, the Company may obtain the assistance of a pharmaceutical company with a large distribution system and a large direct sales force. There can be no assurance that the Company will be able to establish sales and distribution capabilities or be successful in gaining market acceptance for its proprietary products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be 17 18 dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. Reliance on Qualified and Key Personnel The Company is highly dependent on the principal members of its scientific and management staff, the loss of whose services might significantly delay or prevent the achievement of research, development, or business objectives. Although the Company believes it has retained sufficient employees to achieve its near-term business objectives after its reduction in force in September 1998, there can be no assurance that the loss of service of such employees would not impede the Company's objectives. Furthermore, there can be no assurance that the reduction in force will not adversely affect the Company's ability to retain its remaining employees. The loss of key management or scientific personnel could adversely affect the Company's continued business. The Company's potential expansion into areas and activities requiring additional expertise, such as clinical trials, governmental approvals, contract manufacturing and marketing, are expected to place a significant strain on the Company's management, operational and financial resources. These demands are expected to require a substantial increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for the Company's success. Product Liability; Availability of Insurance The Company currently has in force general liability insurance, with coverage limits of $2.0 million per incident and $4.0 million in the aggregate annually, and product liability insurance with coverage limits of $1.0 million per incident and $3.0 million in the aggregate annually. The Company's insurance policies provide coverage for product liability on a claims made basis and general liability on occurrence basis. These policies are subject to annual renewal. Such insurance may not be available in the future on acceptable terms or at all. There can be no assurance that the Company's insurance coverage will be adequate or that a product liability claim or recall would not materially adversely affect the business or financial condition of the Company. The use of the Company's potential products or technology in clinical trials and the sale of such products may expose the Company to liability claims. Such risks exist even with respect to those potential products, if any, that receive regulatory approval for commercial sale. Although Celtrix has taken and will continue to take what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. There also can be no assurance that the Company's insurance coverage will be adequate or that a product liability claim or recall would not materially adversely affect the business or financial condition of the Company. Concentration of Stock Ownership As of September 30, 1998 the Company's directors and officers and their affiliates beneficially owned approximately 30% of the outstanding Common Stock. As a result, these stockholders have been able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. In November 1998, the Company completed a private placement of 4,000,000 shares of newly issued common stock pursuant to a Common Stock and Warrant Purchase Agreement dated October 12, 1998 which had a dilutive impact on the foregoing stock ownership percentage. However, it is anticipated that the Company's 18 19 directors and officers and their affiliates collectively will continue to be able to exercise influence in matters requiring stockholder approval in the future. Impact of Year 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be upgraded or modified prior to the Year 2000 in order to remain functional. The Company is currently assessing the impact of Year 2000 on its existing software and systems. The Company expects to implement successfully the systems and software changes necessary to address the Year 2000 issues, and does not believe that the costs of such actions will have a material effect on the Company's results of operations or financial condition. However, it is unknown the extent, if any, of the impact of the Year 2000 on other systems and equipment of third parties with which the Company does business. There can be no assurance that third parties will address the Year 2000 issue in a timely fashion, or at all. Any Year 2000 compliance problem or delay of either the Company, its suppliers, its clinical research organizations, or its collaborative partners could have a material adverse effect on the Company's business, operating results and financial conditions. Nasdaq Issues Since October 1998, the Company has failed to comply with certain Nasdaq continued listing requirements, including the minimum net tangible assets requirement and the minimum bid price requirement. The proceeds from the November 1998 financing allowed the Company to meet the minimum net tangible assets requirement, on a pro forma basis, for the quarter ended September 30, 1998. In November 1998, the Company received notice from Nasdaq advising that if it is unable to comply with the minimum bid price requirement for a ten (10) day period prior to February 1999, it will be subject to delisting from Nasdaq. Such delisting may have a material adverse effect on the price of the Company's Common Stock and the levels of liquidity currently available to its stockholders. Although the Company is working to comply with all continued listing requirements of Nasdaq, there can be no assurance that it will be able to satisfy such requirements prior to February 1999. Restructuring In efforts to reduce the Company's cash burn rate and preserve value in the Company's core assets and technologies, in the second quarter of 1998, the Company restructured its operations to eliminate manufacturing and announced a reduction in work force of up to 90%. Such actions were designed to permit the Company to continue its clinical development of SomatoKine. There can be no assurance that the restructuring efforts the Company has engaged in to date will be successful or that the Company will be able to sustain its clinical development activities going forward. In addition, there can be no assurance that the Company's management will not deem it appropriate to undertake other restructuring efforts in the future or to what degree any such efforts will result in improved performance or a reduction in the Company's cash burn rate. Dilutive and Potential Dilutive Effect to Stockholders In November 1998, pursuant to the terms of a Common Stock and Warrant Purchase Agreement dated October 12, 1998, the Company completed a private placement of 4,000,000 shares of the Company's common stock (the "Private Placement"), resulting in net proceeds to the Company, after deducting estimated transaction costs, of approximately $1.9 million. Also in connection with the Private Placement for every share of stock issued, the Company issued one and one-half warrants to purchase additional shares at $0.55 per share. 19 20 The Company also agreed to register the shares and warrants issued in the Private Placement under the Securities Act of 1933, as amended. The foregoing Private Placement issuance of shares of the Company's common stock and warrants exercisable for common stock will dilute the beneficial ownership of existing Company stockholders. FORWARD-LOOKING STATEMENTS The Company notes that certain of the foregoing statements are forward looking within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from the statements made due to a variety of factors including, but not limited to, the ability to obtain financing for the Company's working capital, clinical study results, the ability to secure corporate partnership arrangements, and other risk factors which are described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. 20 21 PART II. OTHER INFORMATION CELTRIX PHARMACEUTICALS, INC. Item 2. Changes in Securities and Use of Proceeds. (a) Securities Sold (I) On April 1, 1997, the Company issued and sold to purchasers in a private placement 5,721,876 shares of the Company's Common Stock (the "Shares") and warrants exercisable for 2,860,934 shares of the Company's Common Stock (the "Warrants"). The Shares and Warrants were sold in the form of "Units" which consisted of two Shares of Common Stock to purchase one share of Warrant. (II) On December 15, 1995, the Company issued and sold to Genzyme Corporation pursuant to a 1994 Product Development, License and Marketing Agreement, 1,472,829 shares (the "Genzyme Shares") of the Company's Common Stock. (b) Underwriters and Other Purchasers There were no underwriters for the foregoing transactions mentioned in (a)(I) and (a)(II). A finders fee of $520,000 was paid to BioAsia LLC in connection with the private placement described in (a)(I) above. The Shares and Warrants were offered only to a group of accredited investors. The Genzyme Shares were offered only to Genzyme Corporation, an accredited investor. (c) Consideration (I) The Shares and Warrants from the April 1997 private placement were sold for an aggregate offering price of $13,949,955.60. (II) The shares issued to Genzyme Corporation were sold for an aggregate price of $4,418,487.00. (d) Exemption from Registration Claimed (I) The foregoing transaction under (a)(I) was exempt from registration under the Securities Act of 1933, as amended (the "Act") pursuant to Rule 506 of Regulation D, which provides an exemption for sales without regard to the dollar amount of the offering, provided that there are no more than 35 purchasers, and the sale satisfies all terms and conditions of Rules 501 and 502 under the Act. (II) The foregoing transaction under (a)(II) was exempt from registration under the Act pursuant to Rule 505 of Regulation D, which provides an exemption for sales of securities not exceeding $5 million, provided that there are no more than 35 purchasers, and the sale satisfies all terms and conditions of Rules 501 and 502 under the Act. (e) Terms of Conversion or Exercise In connection with the April 1997 private placement, the Warrants are exercisable at a price of $2.6818 per share and expire on April 1, 2000. If the holder of a Unit sold any Shares between April 1, 1997 and April 1, 1998, the number of shares issuable upon exercise of that holder's Warrant would have been reduced by an amount equal to 0.5 multiplied by the number of Shares sold or otherwise disposed of during such 21 22 period. Also, in the event that the average of the daily high and low bid price per share of the Company's Common Stock as reported on the Nasdaq National Market (or such other equivalent market or exchange) exceeds $4.876 for a period of thirty (30) consecutive trading days (a "Callable Event"), then the Company may, on or before the tenth (10th) trading day after such Callable Event has occurred, send a written notice to the Warrantholder that a Callable Event has occurred and that the Warrant shall terminate on the thirtieth (30th) day after the date the notice became effective. Item 4. Submission of Matters to a Vote of Security Holders (a) On September 10, 1998, the Registrant held its Annual Meeting of Stockholders. (b) All of the Management's nominees for directors were elected at the meeting pursuant to proxies solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. The directors were elected as follows:
For Against --- ------- Henry E. Blair 15,446,872 205,864 Barry M. Sherman, M.D. 15,446,072 206,664 Andreas Sommer, Ph.D. 15,447,772 204,964 James E. Thomas 15,445,234 207,502
There were no broker non-votes as the election was uncontested. (c) The stockholders approved amendments to the Company's 1991 Directors' Stock Option Plan, to increase the number of shares which are automatically granted to non-employee directors and to amend the timing and vesting of such options, with 14,813,002 shares voting in favor, 773,017 voting against, and 66,717 shares abstaining. There were no broker non-votes. (d) The stockholders approved an amendment to the Company's 1991 Employee Stock Purchase Plan to the increase the number of shares of Common Stock reserved for issuance by 250,000 shares, with 15,116,757 shares voting in favor, 460,522 shares voting against, and 75,457 shares abstaining. There were no broker non-votes. (e) The stockholders also approved the selection of Ernst & Young LLP as independent auditors of the Company for the next fiscal year, with 15,497,999 shares voting in favor, 99,825 shares voting against, and 54,912 shares abstaining. There were no broker non-votes. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.55 Separation Agreement and Mutual Release between the Registrant and the employees who participated in the Registrant's 1998 reduction-in-force. 27.1 Financial Data Schedule 22 23 (b) The Company filed the following reports on Form 8-K during the quarter ended September 30, 1998: Report Date: July 15, 1998 Item 5. Other Events The Registrant announced the initiation of a Phase II clinical feasibility study in diabetes. Report Date: July 23, 1998 Item 5. Other Events The Registrant announced its first quarter financial results. Report Date: September 18, 1998 Item 5. Other Events The Registrant announced the restructure of the Company to concentrate on the clinical development of SomatoKine(R). 23 24 SIGNATURES Pursuant to the requirements 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. CELTRIX PHARMACEUTICALS, INC. (Registrant) Date: November 20, 1998 By: /s/ DONALD D. HUFFMAN --------------------------------------- Donald D. Huffman Vice President, Finance and Administration and Chief Financial Officer (Duly authorized principal financial and accounting officer) 24 25 CELTRIX PHARMACEUTICALS, INC. INDEX TO EXHIBITS 10.55 Separation Agreement and Mutual Release between the Registrant and the employees who participated in the Registrant's 1998 reduction-in-force. 27.1 Financial Data Schedule EX-10.55 2 SEPARATION AGREEMENT AND MUTUAL RELEASE 1 EXHIBIT 10.55 SEPARATION AGREEMENT AND MUTUAL RELEASE This Separation Agreement and Mutual Release ("Agreement") is made by and between Celtrix Pharmaceuticals, Inc., a Delaware corporation, and ___________("Employee"). As used herein, the "Company" shall refer to Celtrix Pharmaceuticals, Inc. and any corporation controlling, controlled by or under common control with Celtrix Pharmaceuticals, Inc. WHEREAS, Employee was employed by the Company; WHEREAS, the Company and Employee have mutually agreed to terminate the employment relationship as part of the Company's Reduction in Force and to release each other from any claims arising from or related to the employment relationship as described below. NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as "the Parties") hereby agree as follows: 1. Termination. Employee's employment with the Company as a ________ will terminate at the close of business on ________, 1998 (the "Termination Date"). 2. Severance Benefits. In consideration for the release of claims set forth below and other obligations under this Agreement, the Company shall provide to Employee those benefits set forth in the Celtrix Pharmaceuticals, Inc. Reduction in Force Severance Benefit Plan, a copy of which is attached hereto as Exhibit A. 3. Stock Option. During the course of Employee's employment with the Company, Employee was granted an option (or options) to purchase shares of the Company's common stock under the Company's 1991 Stock Option Plan. In accordance with the terms of the option agreement(s) issued to Employee: (i) to the extent any such Option is not vested on the date of termination of employment, in accordance with the vesting provisions of such Option, the Option shall expire, and (ii) any such Option must be exercised within thirty (30) days after termination of employment and, to the extent any such Option is not exercised within such thirty day period, it shall expire. 4. No Other Payments Due. Employee acknowledges and agrees that Employee has received all salary, accrued vacation, commissions, bonuses, compensation, shares of stock or options therefore or other such sums due to Employee other than amounts to be paid in accordance with the provisions of Section 2 above. In light of the payment by the Company of all wages due, or to become due to Employee, the Parties further acknowledge and agree that California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows: No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. 5. Release of Claims. Employee and the Company, on behalf of themselves, and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, hereby fully and forever release each other and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, of and from any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently 25 2 known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation: (a) any and all claims relating to or arising from Employee's employment relationship with the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company; (c) any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied, negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; negligence; and defamation; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, and the California Fair Employment and Housing Act; (e) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (f) any and all claims for attorneys' fees and costs. The Company and Employee agree that the release set forth in this Section 5 shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. 6. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that Employee is waiving and releasing any rights Employee may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that Employee has been advised by this writing that (a) Employee should consult with an attorney prior to executing this Agreement; (b) Employee has at least twenty-one (21) days within which to consider this Agreement; (c) Employee has at least seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (d) this Agreement shall not be effective until the revocation period has expired. 7. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Employee and the Company acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 3 Employee and the Company, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. 8. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payment of any sums to Employee under the terms of this Agreement. Employee agrees and understands that Employee is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of Employee's failure to pay federal or state taxes or damages sustained by the Company by reason of any such claims, including reasonable attorneys' fees. 9. Confidentiality. (a) The Parties hereto each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Severance Information"). Each Party hereto agrees to take every reasonable precaution to prevent disclosure of any Severance Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Severance Information. The Parties hereto agree to take every precaution to disclose Severance Information only to those employees, officers, directors, attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Severance Information. (b) Notwithstanding any other provision in this Agreement, Employee understands and agrees that Employee's obligations to the Company under the agreement entered into by Employee and the Company regarding confidential information and ownership of inventions (the "Employee Agreement"), a copy of which is attached hereto as Exhibit B, shall survive the termination of Employee's relationship with the Company under this Agreement. Employee shall return all Company property and confidential information in Employee's possession to the Company within five business days after the Termination Date. 10. Non-Disparagement. Each party agrees to refrain from any disparagement, criticism, defamation, slander of the other, or tortious interference with the contracts and relationships of the other. 11. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that Employee has the capacity to act on Employee's own behalf and on behalf of all who might claim through Employee to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 12. No Representations. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 13. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 4 14. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning Employee's separation from the Company, and supersedes and replaces any and all prior agreements and understandings concerning Employee's relationship with the Company and Employee's compensation by the Company, other than the Employee Agreement described in Section 9(b) herein. 15. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President of Celtrix Pharmaceuticals, Inc. 16. Governing Law. This Agreement shall be governed by the laws of the State of California. 17. Effective Date. This Agreement is effective seven (7) days after it has been signed by both parties. Such date is referred to herein as the "Effective Date." 18. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 19. Assignment. This Agreement may not be assigned by Employee or Celtrix Pharmaceuticals, Inc. without the prior written consent of the other party. Notwithstanding the foregoing, this Agreement may be assigned by Celtrix Pharmaceuticals, Inc. to a corporation controlling, controlled by or under common control with Celtrix Pharmaceuticals, Inc. without the consent of Employee. 20. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the parties hereto, with the full intent of releasing all claims. The parties acknowledge that: (1) they have read this agreement; (2) they have been represented in the preparation, negotiation, and execution of this agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (3) they understand the terms and consequences of this agreement and of the releases it contains and (4) they are fully aware of the legal and binding effect of this agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. CELTRIX PHARMACEUTICALS, INC. Dated: _________, 1998 By:______________________________________ ______________________________________ ______________________________________ ______________, an individual Dated: _________, 1998 ______________________________________ 5 EXHIBIT A CELTRIX PHARMACEUTICALS, INC. REDUCTION IN FORCE SEVERANCE BENEFIT PLAN (Effective for the Period September 18, 1998 through December 31, 1998) SECTION 1. INTRODUCTION. This Celtrix Pharmaceuticals, Inc. Reduction in Force Severance Benefit Plan (the "Plan") was established effective September 18, 1998. The purpose of the Plan is to provide for the payment of severance benefits to certain eligible employees of Celtrix Pharmaceuticals, Inc. ("Celtrix" or the "Company") whose employment with the Company is involuntarily terminated on or after September 18, 1998 as part of the Company's effort to restructure and reduce expenses. This Plan shall supersede any severance benefit plan, policy or practice previously maintained by the Company. This Plan document is also the Summary Plan Description for the Plan. SECTION 2. ELIGIBILITY FOR BENEFITS. (a) GENERAL RULES. Subject to the requirements set forth in this Section 2, the Company will grant severance benefits under the Plan to Eligible Employees. (i) "Eligible Employees" are full-time and part-time regular hire employees whose employment with the Company is involuntarily terminated due to a corporate reorganization, or a reduction in staff. The determination as to whether such an event has occurred shall be made by the Company, in its sole discretion. For purposes of this Plan, part-time employees include those regular hire employees who are regularly scheduled to work twenty (20) hours or more but less than forty (40) hours per week. Temporary (Fixed Term Employees) are not eligible for severance benefits under the Plan. (ii) All Eligible Employees will receive the benefits described in Section 5. In order to be eligible to receive benefits described in Section 3 and Section 4, an Eligible Employee must execute and deliver to the Company on or before twenty-one (21) days after his or her last day worked a general waiver and release form provided by the Company (the "Separation Agreement") and have completed the exit interview procedures of the Company (the "Exit Checklist"), including the return of all property and materials of the Company. (b) EXCEPTIONS. An employee who otherwise is an Eligible Employee will not receive benefits under the Plan in any of the following circumstances: (i) The employee has executed an individually negotiated employment contract or agreement with the Company related to severance benefits that is in effect on his or her termination date. Such employee's severance benefit, if any, shall be governed by the terms of such individually negotiated employment contract or agreement, subject to Section 7(a) of this Plan. (ii) The employee is involuntarily terminated for any reason other than a corporate reorganization or a reduction in staff. 6 (iii) The employee voluntarily terminates employment with the Company. Voluntary terminations include, but are not limited to, resignation, retirement or failure to return from a leave of absence on the scheduled date. SECTION 3. AMOUNT OF SEVERANCE BENEFIT. (a) Each Eligible Employee whose employment is involuntarily terminated as described in Section 2 of this Plan, who executes a Separation Agreement and who satisfies the requirements set forth in the Exit Checklist will receive a severance payment equal to the sum of (a) 1.125 days of Pay for each Year of Service with the Company calculated on a pro-rated basis for partial years, plus (b) 1.5 days of Pay for every ten thousand dollars ($10,000) of the Eligible Employee's Current Annual Base Salary (calculated on a pro-rated basis for increments of $10,000, plus (c) 1.5 additional days of Pay for every ten thousand dollars ($10,000) of Current Annual Base Salary over sixty thousand dollars ($60,000) (calculated on a pro-rated basis for increments of $10,000). (b) For the purposes of calculating Plan benefits, "Pay" shall mean the Eligible Employee's base pay (excluding overtime, bonuses, draws, commissions and other forms of additional compensation), at the rate in effect during the last regularly schedule payroll period immediately preceding the Eligible Employee's termination date. "Current Annual Base Salary" shall mean the annualized base Pay (excluding overtime, bonuses, draws, commissions and other forms of additional compensation). "Years of Service" shall mean the number of days elapsed since the Eligible Employee's Date of Hire through the Eligible Employee's termination date, divided by 365. The "Date of Hire" is the Eligible Employee's hire date with the Company or the Eligible Employee's hire date with Collagen Corporation, BioGrowth, Inc. or Baltimore Biotech if the Eligible Employee worked for any of such companies immediately preceding employment with the Company. (c) Notwithstanding any other provision of the Plan to the contrary, the total cash benefits to any Eligible Employee under Section 3(a) of this Plan shall not be less than an amount equal to three (3) weeks of the Eligible Employee's Current Annual Base Salary. (d) Notwithstanding any other provision of the Plan to the contrary, any benefits payable to an Eligible Employee under this Plan shall be offset, to the maximum extent permitted by law, by any severance benefits payable by the Company to such individual under any other arrangement covering the individual. SECTION 4. CONTINUATION OF EMPLOYMENT BENEFITS. (a) COBRA CONTINUATION. Each Eligible Employee who is enrolled in a health (including vision and the Employee Assistance Program) or dental plan sponsored by the Company may be eligible to continue coverage under such health or dental plan (or to convert to an individual policy) at the time of the Eligible Employee's termination of employment. The Company will provide such COBRA coverage at its expense through the earlier of (i) two (2) months from the date of termination or (ii) the date the Eligible Employee becomes ineligible for COBRA coverage (including the date, if any, on which the health and/or dental plan is terminated by the Company), provided that the Eligible Employee completes the requisite forms to obtain such continued coverage. (b) OTHER EMPLOYEE BENEFITS. All non-health benefits (such as life insurance and disability coverage) terminate as of the Eligible Employee's termination date (except to the extent that any conversion privilege is available thereunder). 7 SECTION 5. OUTPLACEMENT BENEFITS. Each Eligible Employee whose employment is terminated and who receives benefits under the Plan shall be eligible to participate in a Company-sponsored counseling and training program to assist the Eligible Employee in his or her transition to other employment. SECTION 6. TIME OF PAYMENT AND FORM OF BENEFIT. The Company reserves the right to choose the timing of payments under the Plan; provided, however, that all payments under this Plan will be completed within ten (10) days of the Eligible Employee having satisfied the requirements set forth in Section 2(a)(ii), unless the Eligible Employee has requested, and the Company has agreed, prior to the date of payment, to extend the payment to a mutually agreed-upon date. Celtrix will withhold all applicable state and federal taxes, as required by law. If a terminating employee is indebted to the Company at his or her termination date, the Company reserves the right to offset any severance payments under the Plan by the amount of such indebtedness. In no event shall payment of any Plan benefit be made prior to the Eligible Employee's termination date. SECTION 7. RIGHT TO INTERPRET PLAN, AMEND AND TERMINATE; OTHER ARRANGEMENTS. (a) EXCLUSIVE DISCRETION. The Plan Administrator shall have the exclusive discretion and authority to establish rules and procedures for the administration of the Plan, and to construe and interpret the Plan and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, including, but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan. The rules, interpretations, computations and other actions of the Plan Administrator shall be binding and conclusive on all persons. (b) AMENDMENT OR TERMINATION. The Company also reserves the right to amend or discontinue this Plan or the benefits provided hereunder at any time; provided, however, that no such amendment or termination shall affect the right to any unpaid benefit of any Eligible Employee whose termination date has occurred prior to amendment or termination of the Plan. (c) OTHER SEVERANCE ARRANGEMENTS. The Company reserves the right to make other arrangements regarding severance benefits in special circumstances. The foregoing notwithstanding, in no event shall any individual receive from the Company any severance benefit greater than the benefit provided under Section 3, unless such individual executes, as a condition upon the receipt of such additional benefit, a waiver and release of any and all claims that such individual may have against the Company, on the form provided by the Company. SECTION 8. NO IMPLIED EMPLOYMENT CONTRACT. The Plan shall not be deemed (i) to give any employee or other person any right to be retained in the employ of the Company or (ii) to interfere with the right of the Company to discharge any employee or other person at any time and for any reason, which right is hereby reserved. SECTION 9. LEGAL CONSTRUCTION. This Plan is intended to be governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent not preempted by ERISA, the laws of the State of California. 8 SECTION 10. CLAIMS, INQUIRIES AND APPEALS. (a) APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for benefits, inquiries about the Plan or about present or future rights under the Plan must be submitted to the Plan Administrator in writing on or before September 30, 1998. The Plan Administrator is: Celtrix Pharmaceuticals, Inc. 3055 Patrick Henry Drive Santa Clara, CA 95054-8203 (b) DENIAL OF CLAIMS. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must notify the applicant, in writing, of the denial of the application and of the applicant's right to review the denial. The written notice of denial will be set forth in a manner designed to be understood by the employee, and will include specific reasons for the denial, specific references to the Plan provision upon which the denial is based, a description of any information or material that the Plan Administrator needs to complete the review and an explanation of the Plan's review procedure. The written notice will be given to the employee within ninety (90) days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional ninety (90) days for processing the application. If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial ninety (90) day period. The notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the application. If written notice of denial of the application for benefits is not furnished within the specified time, the application shall be deemed to be denied. The applicant will then be permitted to appeal the denial in accordance with the review procedure described below. (c) REQUEST FOR A REVIEW. Any person (or that person's authorized representative) for whom an application for benefits is denied (or deemed denied), in whole or in part, may appeal the denial by submitting a request for review to the Plan Administrator within sixty (60) days after the application is denied (or deemed denied). The Plan Administrator will give the applicant (or his or her representative) an opportunity to review pertinent documents in preparing a request for review. A request for review shall be in writing and shall be addressed to: Celtrix Pharmaceuticals, Inc. 3055 Patrick Henry Drive Santa Clara, CA 95054-8203 A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels pertinent. The Plan Administrator may require the applicant to submit additional facts, documents or other materials as it may find necessary or appropriate in making its review. (d) DECISION ON REVIEW. The Plan Administrator will act on each request for review within sixty (60) days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional sixty (60) days) for processing the request for a review. If an extension for review is required, written notice of the extension will be furnished to the applicant within the sixty (60) day period. The Plan Administrator will give prompt, written notice of its decision to the applicant. In the event that the Plan 9 Administrator confirms the denial of the application for benefits in whole or in part, the notice will outline, in a manner calculated to be understood by the applicant, the specific Plan provisions upon which the decision is based. If written notice of the Plan Administrator's decision is not given to the applicant within the time prescribed in this subsection (d), the application will be deemed denied on review. (e) RULES AND PROCEDURES. The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out its responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial (or deemed denial) of benefits to do so at the applicant's own expense. (f) EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan may be brought until the claimant (i) has submitted written application for benefits in accordance with the procedures described by subsection 10(a) above, (ii) has been notified by the Plan Administrator that the application is denied (or the application is deemed denied due to the Plan Administrator's failure to act on it within the established time period), (iii) has filed a written request for review of the application in accordance with the appeal procedure described in section 10(c) above, and (iv) has been notified in writing that the Plan Administrator has denied the appeal (or the appeal is deemed denied due to the Plan Administrator's failure to take any action on the claim within the time prescribed by subsection 10(d) above). SECTION 11. BASIS OF PAYMENTS TO AND FROM PLAN. All benefits under the Plan shall be paid by the Company. The Plan shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company. SECTION 12. OTHER PLAN INFORMATION. (a) EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer Identification Number assigned to the Company (which is the "Plan Sponsor" as that term is used in ERISA) by the Internal Revenue Service is 94-3121462. The Plan Number assigned to the Plan by the Plan Sponsor is 503. (b) ENDING DATE FOR THE PLAN'S FISCAL YEAR. The date of the end of the fiscal year for the purpose of maintaining the Plan's records is December 31, 1998. (c) AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service of legal process with respect to the Plan is: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 (d) PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" and the "Plan Administrator" of the Plan is: Celtrix Pharmaceuticals, Inc. 3055 Patrick Henry Drive Santa Clara, CA 95054-8203 The Plan Sponsor's and the Plan Administrator's telephone number is (408) 988-2500. The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan. 10 SECTION 13. STATEMENT OF ERISA RIGHTS. Participants in this Plan (which is a welfare benefit plan sponsored by Celtrix) are entitled to certain rights and protections under ERISA. If you are an Eligible Employee, you are considered a participant in the Plan and, under ERISA, you are entitled to: (a) Examine, without charge, at the Plan Administrator's office and at other specified locations, such as work sites, all Plan documents and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports; (b) Obtain copies of all Plan documents and Plan information upon written request to the Plan Administrator, for which the Plan Administrator may make a reasonable charge; (c) Receive a summary of the Plan's annual financial report, in the case of a plan which is required to file an annual financial report with the Department of Labor. (Generally, all pension plans and welfare plans with one hundred (100) or more participants must file these annual reports.) In addition to creating rights for the Plan participants, ERISA imposes duties upon the people responsible for the operation of the employee benefit plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your employer or any other person, may fire you or otherwise discriminate against you in way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA. If your claim for a Plan benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and to have your claim reconsidered. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within thirty (30) days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide materials and pay you up to one hundred dollars ($100.00) per day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that the Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and fees. If you lose, the court may order you to pay these costs and fees if, for example, it finds your claim is frivolous. If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about your rights under ERISA, you should contact the nearest area office of the Labor-Management Services Administration, U.S. Department of Labor. SECTION 14. EXECUTION. To record the adoption of the Plan as set forth herein, effective as of September 18, 1998, Celtrix Pharmaceuticals, Inc. has caused its duly authorized officer to execute the same this ___ day of __________, 1998. CELTRIX PHARMACEUTICALS, INC. By:__________________________________ __________________________________ __________________________________ EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1999 APR-01-1998 SEP-30-1998 1,002 0 9 0 0 1,167 19,268 13,670 4,890 2,203 0 0 0 211 2,476 4,890 10 59 0 0 5,738 0 1 0 0 (8,606) 0 0 0 (8,606) (0.41) (0.41)
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