**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

ý         **ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December31, 2002**

 

**Commission file number 0-27914**

 

**RIBOZYME PHARMACEUTICALS,INC.**

(Exact Name of Registrant as Specified in Its Charter)

** **
| **DELAWARE**              | **34-1697351**                        |
|---------------------------|---------------------------------------|
| (State of  incorporation) | (I.R.S. Employer  Identification No.) |

 

**2950 WILDERNESS PLACE, BOULDER,COLORADO 80301**

(Address ofprincipal executive offices)

 

**(303) 449-6500**

(Registrant’stelephone number, including area code)

 

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

**NONE**

 

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

**COMMONSTOCK, PAR VALUE $0.01 PER SHARE**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý     Noo

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 underthe Act). Yes o No ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrants knowledge, in definitive proxy of informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. ý

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant, as of March 25, 2003, was approximately $6,700,798.

 

As of March 25, 2003, theregistrant had 20,285,356 shares of common stock, par value $.01 per share,outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Portions of theregistrant’s definitive Proxy Statement which will be filed on or before April30,****2003with the Securities and Exchange Commission in connection with Registrant’sannual meeting of stockholders to be held on or about May 22, 2003 isincorporated by reference into Part III (Items 10,11,12, and 13) of thisReport.

 

 

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Explanatory Note

 

**TABLE OF CONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| Item 1       | Business |
|         |   |
| Item 2.      | Properties |
|         |   |
| Item  3.     | Legal  Proceedings |
|         |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders |
|         |   |
| **PART II**  |
|         |   |
| Item  5.     | Market  for Registrant’s Common Equity and Related Stockholder Matters |
|         |   |
| Item 6.      | Selected Financial  Data |
|         |   |
| Item  7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |   |
| Item  7A.    | Quantitative  and Qualitative Disclosures About Market Risk |
|         |   |
| Item  8.     | Financial  Statements and Supplementary Data |
|         |   |
| Item  9.     | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|         |   |
| **PART III** |
|         |   |
| Item  10.    | Directors  and Executive Officers of Registrant |
|         |   |
| Item 11.     | Executive Compensation |
|         |   |
| Item  12     | Security  Ownership of Certain Beneficial Owners and Management. Changes in Control |
|         |   |
| Item  13.    | Certain  Relationships and Related Transactions |
|         |   |
| Item 14.     | Controls and  Procedures |
|         |   |
| **PART IV**  |
|         |   |
| Item 15.     | Exhibits,  Financial Statements and Reports on Form 8-K |

 

ANGIOZYMETM, HEPTAZYMETM,HERZYMETM and HepBzymeTM are trademarks of Ribozyme Pharmaceuticals, Inc.

 

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**BUSINESS**

**Forward-LookingStatements**

 

Statements in this Form 10-K, which are not strictlyhistorical are “forward-looking” statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934 that involve risks and uncertainties. These uncertainties include, but arenot limited to, the following: general economic and business conditions;ability to obtain adequate financing in the future; ability to obtain andenforce patents; ability to obtain rights to technology; ability to develop,manufacture and commercialize products; ability to obtain and retaincollaborators; changes in, or failure to comply with, governmental regulations;results of clinical studies; results of research and development activities;technological advances; competition; availability of qualified personnel; businessabilities and judgment of personnel; and the like, are set forth in the sectiontitled “Risk Factors” herein. We undertake no obligation to release publiclythe results of any revisions to these forward-looking statements to reflectevents or circumstances arising after the date hereof.

 

**AnOverview of Our Company**

 

Ribozyme Pharmaceuticals, Inc. is a leader in thefield of nucleic acid technology. We are using our proprietary technology andour expertise in molecular engineering to develop a new class of nucleic acidbased therapeutics based on ribonucleic acid (RNA) interference (RNAi). We planto continue as a manufacturer of oligonucleotides (chains of nucleotides thatcan be chemically synthesized in specific sequences) for our use and for use byour collaborators and customers to generate revenue for the purpose ofsupporting our therapeutic discovery operations.

 

Since inception in 1992, we have dedicated ourselvesto engineering RNA-based molecules. Until recently, we focused on developingribozyme-based therapeutics and diagnostics. As a result, we advanced threeproduct candidates into clinical development. We continue to have a jointdevelopment program with Chiron Corporation (Chiron) for one of these products,ANGIOZYME. We have exclusive rights to over 180 issued or allowed patents relating to nucleic acid technology.Our expertise in nucleic acid technology enables us to now focus on thedevelopment of a new type of nucleic acid based therapeutic based on RNAinterference. We have redirected our research to RNAi because we believe itwill have the best prospects for commercial success. We are using our expertiseto design, stabilize, manufacture and deliver small interfering nucleic acids(siNAs) that facilitate the process of RNAi. We believe siNA-based drugs willbecome important therapeutics in the future.

 

**We AreDeveloping a New Class of RNAi-Based Therapeutics**

 

*RNAiBackground*

 

RNAi technology generally uses a double-strandedsequence of nucleic acid, such as RNA, capable of reducing the expression ofmRNA and viral RNA in a sequence-specific manner. For simplicity, we refer tothe double-stranded RNA molecule facilitating this process as a smallinterfering nucleic acid or siNA. The process of reducing the expression of amRNA or viral RNA is called RNA interference or RNAi. The process of RNAi is amechanism used by cells in the body to regulate the expression of genes andreplication of viruses. The RNAi mechanism induces the destruction of targetRNA using a naturally occurring cellular protein machinery.

 

RNAi has become the focus of multiple scientificpublications over the past year. Harnessing the natural phenomenon of RNAiholds potential for the development of a brand new class of drugs withunrivalled specificity toward a wide range of different diseases resulting fromundesirable protein production or viral replication. Although using RNAi totarget gene expression is exciting, the development of RNAi-basedpharmaceuticals for therapeutic uses to target disease currently is in an earlystage of development.

 

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To date, one of the major limitations of RNAi has beenthe instability of unmodified siNAs. Unmodified siNA breaks down rapidly in thebody, thereby restricting the duration of its potential therapeutic activity.Effective drugs need to be resistant to breaking down in the human body andcells to ensure a sustained therapeutic response. Over the past 10 years, wehave developed chemical and pharmacological expertise and a portfolio ofpatents in the area of nucleic acid research. This capability allows informeddesign and rapid synthesis of chemically modified and stabilized siNAderivatives that retain all the properties required for recognizing theirtarget but also have increased resistance to degradation. Recently, RPI hasshown in cell culture that it can use its stabilized siNAs to reduce theexpression of several genes without affecting expression of other genes. Ourchemically modified and stabilized siNAs are stable in human serum for severaldays in serum stability assays. This is in contrast to unmodified siNAs thathave human serum stability of no more than a few minutes. We have madestabilized siNAs against a number of targets and successfully tested them incell culture, and in some cases, with animal experiments. These targets wereselected to cover the therapeutic fields of oncology, metabolic, inflammatory,central nervous system, renal and infectious diseases. Finally, we have filedfor patent protection of our siNAs against these targets. We believe thisprovides us with a competitive advantage in developing RNAi-based therapeutics.

 

**RNAi HasPotentially Significant Advantages Over Traditional Drugs**

 

RNAi-based therapeutics have potentially significantadvantages over traditional approaches to treating diseases, including thefollowing:

 

•                                  BroadTherapeutic Application. All diseases for which an abnormal gene function canbe identified as a cause or as an essential contributing factor are potentiallytreatable with RNAi-based drugs.

 

•                                  TherapeuticPrecision. Side effects associated with traditional drugs may be reduced oravoided by using RNAi-based drugs designed to destroy only disease associatedand targeted RNA.

 

•                                  TargetRNA Destruction. Compared to most drugs that only temporarily prevent targetedgene function, RNAi-based drugs should destroy the target RNA and stop theassociated undesirable protein production required for disease progression.

 

**We areDeveloping Drugs that Address Significant and Unmet Medical Needs**

 

•                                  ANGIOZYME:ANGIOZYME is a ribozyme-based product we are developing in collaboration withChiron  to treat solid tumorcancers.  We will present the results ofa Phase II metastatic colorectal trial as an abstract at the American Societyof Clinical Oncology (ASCO) for presentation at its annual meeting in Chicagoin May 2003.

 

•                                  HepatitisC Virus (HCV): We are developing chemically stabilized siNAs that target theHCV viral RNA to treat HCV infection. This program is in the leadidentification phase of development.

 

•                                  MacularDegeneration: We are developing chemically stabilized siNAs that target theVascular Endothelial Growth Factor (VEGF) pathway to treat maculardegeneration. This program is in the lead identification phase of development.

 

•                                  Weare also developing HERZYME in collaboration with Elan Corporation plc and itsaffiliates (Elan) to treat breast and other solid tumor cancers. A Phase Iclinical trial has been completed and we will present the clinical trial dataat the American Association for Cancer Research (AACR) meeting in Toronto inApril 2003.  Elan has indicated publiclythat they do not intend to pursue further development of oncologyproducts.  We do not intend to pursueindependent development of HERZYME.

 

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**OurBusiness Strategy**

 

Our strategy is to use our nucleic acid technologyexpertise and patent position to create value by:

 

•                                  Developingstabilized siNA molecules for therapeutic applications in several diseaseareas.

 

•                                  Leveragingour nucleic acid expertise through licensing, process development and pilotmanufacturing. We believe that we have established one of the leading nucleicacid chemistry groups that can provide medicinal chemistry, process developmentand manufacturing to others in need of this expertise. We believe that we willbe able to capitalize on our continuing investment in nucleic acid technologyby entering into licensing, process development and pilot manufacturingarrangements with collaborators to generate revenues, while retaining thiscapability for our own drug development.

 

•                                  Maintainingand expanding our patent portfolio and proprietary technology. Currently, weown, or have exclusive licenses to, over 180 issued or allowed patentsworldwide and have more than 200 patent applications pending worldwide. Weaggressively pursue patent protection to maintain worldwide rights to controlthe development, manufacture and sale of ribozyme and RNAi-based therapeutics.

 

•                                  Spinningoff or selling our diagnostic technology. We have demonstratedproof-of-principle for the use of allosteric ribozymes for both diagnosticprotein and nucleic acid detection. We have decided not to develop further ourdiagnostic technology internally and, therefore, we intend to spin-off or sellthis technology.

 

•                                  Enteringinto partnerships with other pharmaceutical or biotechnology companies todevelop RNAi-based therapeutics.

 

**GeneExpression and Human Disease**

 

The undesirable production of certain proteins (geneexpression) directly causes many human diseases. The abnormality may be due toa defective gene, the over- or under-production of a protein by a “normal”gene, or the expression of genes from viruses or bacteria. This abnormalprotein production may have direct effects on cells within the body or mayinitiate a series of events involving other proteins, thereby producingdisease. Gene expression by viruses or bacteria causes replication and growthof infectious agents.

 

Protein production generally involves two steps. First,the information from the DNA sequence of the gene is “transcribed” to messengerRNA (mRNA). The second step involves “translation” of the mRNA and itsinformation into a protein. The process by which genetic information is“expressed” in the form of a protein is highly selective; production of aparticular protein generally requires its own specific DNA sequence that leadsto a corresponding mRNA sequence. Being able to identify any abnormalproduction of protein is an important tool in diagnosing human disease.Blocking a gene’s expression using RNAi once a protein has been identified is apromising therapeutic approach.

 

**OurNucleic Acid Technology**

 

Our approach to drug discovery and development beginsby either identifying a gene in humans causing or contributing to disease oridentifying an essential gene in a disease-causing infectious agent. We analyzethe nucleotide sequence of the mRNA corresponding to the target gene and createa complementary siNA nucleotide sequence. We then synthesize the siNA using ourproprietary processes.

 

Initially, we test the effectiveness of the siNA incell culture and, if possible, in animal models. If the siNA reduces or stopsproduction of the protein associated with the disease, or slows the associatedgrowth or spread of the disease, not only have we validated the diseasecontributing function of the gene, but we also have identified a drugcandidate.

 

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Once we identify a target gene and related siNA, weimprove the effectiveness of the siNA by varying its structure to increasefurther its stability and improve its pharmacokinetic properties in the humanbody.

To date, we have achieved a number of significant milestones in RNAtechnology development, including the following:

 

**Stability.**  To be useful as a therapeutic treatment, siNAs must remain stablein human serum and cells long enough to destroy the targeted RNA and, ideally,long enough to destroy several RNA molecules. Unmodified siNAs are stable inhuman serum for only a few minutes. We have successfully produced chemicallymodified siNAs that retain their activity in cell culture and are stable inhuman serum for several days in *ex vivo* assays, thereby overcoming thefirst barrier to making an effective drug. Another hurdle is reducing drugclearance from the blood stream and the site of action. One way to accomplishthis is to increase drug stability in a specific target organ and cell typethat will vary depending on the disease target. We have carried out proof-of-principleexperiments in an animal model that demonstrates the activity of our stabilizedsiNA molecules.

 

**Selectivity.**  Our siNA molecules should interact only with the target RNA, soas not to affect the functions of other genes. As a result, our siNA moleculeshave the potential to be less toxic than traditional drugs that interact withmany targets. We have demonstrated a high degree of selectivity with siNAs.Based on our work and the work of others, we believe that a binding region ofapproximately 19 nucleotides is optimal for siNA selectivity. We can compare tothe published human genome sequence data to ensure that only the desired genesequence is targeted.

 

**Delivery.**  Successful development of any drug requires that the drug bedelivered to the desired site in the body. We are exploring a number ofdelivery possibilities, including local (directly to the target area) andsystemic (directly into the blood stream) delivery. To date, we havedemonstrated that chemically stabilized ribozymes are present in thebloodstream after intravenous delivery and that exposure can be prolonged bysubcutaneous (into the skin) delivery. We have shown that ribozymes can bedelivered via single subcutaneous injection by patients with extended presenceof the ribozymes in the patient’s blood. We believe that our chemicallystabilized siNA molecules may be administered in a similar manner to that ofour ribozymes. We are working on improving the delivery of siNAs by coatingthese molecules with protective lipid molecules, such as liposomes, and byattaching molecules that target specific cells, called ligands, to increase thespecific delivery of these drugs *in vivo*.

 

**Safety.**  We have completed single and multiple dose animal safety studieswith several ribozymes that have confirmed the lack of significant toxicity atclinically relevant doses. ANGIOZYME has shown a lack of toxicity in rodentsand monkeys for periods of up to three months. In clinical trials forANGIOZYME, we have observed safety and tolerability for periods of up to 16months of daily subcutaneous injections in approximately 170 cancer patients.Ongoing clinical trials for ANGIOZYME are exploring even longer periods ofexposure. To date we have not assessed the safety of our chemically stabilizedsiNA drugs in humans.

 

**Effectiveness.**  We have demonstrated through internalresearch that RNAi can reduce the amount of target mRNA and the correspondinglevel of protein produced in cell culture, and that our siNAs inhibit thedevelopment of new blood vessels in an ocular animal model. In addition,internal and third party studies showing the effectiveness of RNAi to decreaseviral replication have been conducted in cell culture model systems.

 

**Manufacturing.**  To meet our needs for research, preclinicalstudies, clinical trials and the eventual commercialization of ANGIOZYME andRNAi-based therapeutics, we must be able to manufacture a sufficient amount ofdrug. We have developed proprietary technology allowing us to synthesizeseveral hundred stabilized siNA molecules in hundreds of microgram quantitiesper month. These quantities are sufficient to permit us to perform directcell-based screening of multiple potential target sites over short periods oftime. We also have developed the capability to manufacture kilogram quantitiesunder the FDA’s current good manufacturing practices, or cGMP. In early 2002,we expanded our internal manufacturing capabilities and increased our level ofcGMP compliance to enable the production of Phase III material. We believe thatwe can manufacture ANGIOZYME and siNA drugs currently under development insufficient quantities and at appropriate levels of quality and cost at leastthrough Phase II using our internal manufacturing capacity. We also have thecapability to manufacture diagnostic ribozymes for any potential partners.

 

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**OurProduct Programs**

 

The development process for our products starts withresearch and preclinical development. Research includes identifying a target proteinor viral sequence, synthesizing a panel of appropriate siNAs to blockexpression of the target protein or virus, and testing the activity of thesiNAs in a specific cell population. We will pursue preclinical and clinicaltesting only for those products that we believe have a high likelihood ofcommercial success based on identifying a disease-causing target, favorablepharmacokinetics and unmet medical need.

 

Preclinical testing includes pharmacology andtoxicology testing in animal models, product formulation, dosage studies andmanufacturing scale-up for submission of the data necessary to comply withregulatory requirements of the FDA and similar agencies in other countriesprior to commencing human trials.

 

**ANGIOZYME**

 

We are developing ANGIOZYME in collaboration withChiron primarily as a treatment for advanced solid tumors such as colorectal,lung and breast cancer. These cancers account for approximately 480,000 newcancer cases and over 250,000 deaths per year in the United States alone. In addition,ANGIOZYME may be used to treat other cancers and diseases in which angiogenesisis a contributor, such as macular degeneration and diabetic retinopathy.

 

For a cancerous tumor to grow, the body must generatenew blood vessels in the tumor to supply the blood necessary for tumor growth,a process known as angiogenesis. In many cases the proteins VascularEndothelial Growth Factor (VEGF) and its receptors (VEGFR-1 and VEGFR-2) areessential for angiogenesis. We developed ANGIOZYME to inhibit the production ofVEGFR-1, thereby slowing or stopping angiogenesis and related tumor growth andmetastasis. Independent third parties and we have conducted animal studies thathave shown significant reductions in tumor growth and metastasis usingANGIOZYME alone and in conjunction with existing cancer therapies, such aschemotherapy. In January 1999, we completed a Phase Ia clinical trial inhealthy volunteers. This trial, conducted on 14 healthy volunteers,demonstrated safety and tolerability and showed no drug related side effects.In 1999, we also completed a Phase Ib clinical trial to test for safety andtolerability in 16 cancer patients with a broad spectrum of solid tumors andmetastasis. No clinically significant drug related side effects were seen, andthe presence of ANGIOZYME in patients’ blood at levels exceeding those neededto show efficacy in animals was observed for up to 24 hours when ANGIOZYME wasadministered subcutaneously. In November 1999, we initiated a Phase I/IImulti-dose clinical trial in cancer patients. This trial examined the effectsof ANGIOZYME when given daily to cancer patients. The patientsself-administered ANGIOZYME *via*a subcutaneous injection once a day,at home. A total of 31 patients received ANGIOZYME. The drug was well toleratedwith minimal side effects consisting mostly of injection site reactions. Thepatients were on ANGIOZYME for a median of 90 days with a range of 2 days to505 days. The goal of these trials was to detect clinical activity in thesepatients with advanced solid tumors.

 

Based on these trial results, during 2001 we initiatedPhase II trials in patients with metastatic breast cancer and in patients withmetastatic colorectal cancer. During 2002, we completed a Phase II metastaticbreast cancer trial in patients with stage IV disease. A total of 45 patientswere treated with ANGIOZYME as a monotherapy for periods up to 213 days.ANGIOZYME was safe and well tolerated with no significant toxicities. As withmost other trials using monotherapy for antiangiogenic therapy, we did notobserve any tumor shrinkage; however, several patients had stable disease at 6weeks. We observed a statistically significant reduction in the soluble form ofour molecular target, VEGFR-1. This is clear evidence for activity of ANGIOZYMEin a clinical setting. The trial demonstrated that ANGIOZYME has specificbiological activity in patients with stage IV metastatic breast cancer, whichis one of the objectives this trial sought to verify.

 

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We have completed enrollment of 83 patients in ametastatic colorectal Phase II trial. In this study ANGIOZYME is being given incombination with the approved first-line therapy for metastatic colorectalcancer, 5-FU, Leucovorin and Irinotecan, also known as the Saltz regimen. Wehave completed our preliminary analysis of 12-24 week data and will bepresenting the results at the upcoming American Society of Clinical Oncologymeeting in May 2003.

 

We are developing ANGIOZYME in collaboration with Chiron.  We currently share development costs andprofits equally with Chiron and have retained the right to manufactureANGIOZYME.  However, given RPI’s newfocus on the the development of RNAi therapeutics and limited resources tofurther fund ANGIOZYME development, we believe that we will need to renegotiateour agreement with Chiron for further ANGIOZYME development activities beyondthe current Phase II colorectal clinical trial.

 

**Hepatitis C**

 

There are approximately 3.9 million infectedindividuals in the United States and over 170 million worldwide. Of the 3.9million infected individuals in the United States, 70% have chronic hepatitis Cand are potential candidates for treatment. Each year in the United States,hepatitis C infects between 250,000 to 500,000 new individuals and leads tobetween 8,000 to 10,000 deaths. It is one of the most common blood-borneinfections in the United States and has been identified as a “silent epidemic”and “a daunting challenge to public health” by the United States Congress.Current therapies for hepatitis C that include various interferons combinedwith Ribavarin are effective in approximately 50% of patients and have seriousside effects.

 

We are developing an siNA therapeutic targeting thehepatitis C virus (HCV). This program is in the lead identification phase ofdevelopment. We have identified several stabilized siNAs that we are currentlytesting in appropriate animal model systems. We are also screening these siNAsin a cell culture system of HCV infection.

 

**Macular Degeneration**

 

Age related macular degeneration, or AMD, is caused bythe deterioration of the central portion of the retina. This disease is theleading cause of irreversible vision loss among Americans over the age of 55.There are two different forms of AMD: dry AMD and wet AMD. The dry formaccounts for the majority of AMD cases but usually does not lead to visionloss. The wet form accounts for 10 to 15% of all AMD cases but is associatedwith severe vision loss. Approximately 1.2 million people in the United Stateshave wet AMD with 200,000 new cases per year that require treatment. Wet AMDresults from a proliferation of abnormal blood vessels beneath the retinacalled neovascularization. This neovascularization results in fragile bloodvessels that leak blood and fluid into the retina. The leakage occurs in themacula, the portion of the retina responsible for central vision. If leftuntreated, wet AMD can lead to rapid vision loss for most patients.

 

Current therapies for wet AMD include laser photocoagulationand Visudyne® (QLT/Novartis). In 2002, Visudyne had global sales of $287million. The most advanced new therapy under development for AMD is MacugenTM(Eyetech/Pfizer), which has completed enrollment for its Phase III clinicaltrial. Macugen is a nucleic acid drug that reportedly binds and neutralizesVascular Endothelial Growth Factor (VEGF). Both Visudyne and Macugen arereported to result in improved vision in about 25% of patients, although eachproduct utilizes a different mechanism of action. The clinical results fromthese two products suggest that there will be a need for better therapies totreat this serious disease.

 

We are developing siNAs that target the VEGF pathwayto treat macular degeneration. This program is in the lead identification phaseof development. To date, we have demonstrated that we can inhibit the formationof new blood vessels in a rat animal model system of corneal neovascularizationusing our stabilized siNAs targeting the VEGF pathway.

 

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**HERZYME**

 

We have a joint venture with Elan to develop HERZYME,a potential product to treat breast and other cancers. More than 180,000 newbreast cancer patients are diagnosed each year in the United States. Estimatesare 20% to 30% of these patients over-express the Her-2 gene indicating that regulationof the Her-2 gene could have a beneficial impact on the disease. HERZYMEspecifically targets and reduces Her-2 mRNA, and we expect it to have afavorable side effect profile similar to ANGIOZYME.

 

In January 2000, we formed a joint venture with Elanfor the development and commercialization of HERZYME, our product to treatbreast and other cancers. As part of this arrangement, we licensed HERZYME andElan licensed its MEDIPAD® drug delivery technology to the joint venture,Medizyme Pharmaceuticals, Ltd. (Medizyme). The MEDIPAD system is a disposablecontinuous subcutaneous drug delivery system that allows a patient toadminister the drug at home. We filed an IND for HERZYME in Canada in February2001, which was approved in April 2001. We have completed a Phase I clinicaltrial to evaluate HERZYME in patients with metastatic breast cancer whosetumors over express Her-2. We will present an analysis of the safety andtolerability data from this trial at the AACR meeting in Toronto in April 2003.

 

*ElanCollaboration*

 

Initial funding of Medizyme included $12.0 millionfrom us and $3.0 million from Elan. Elan provided us with a $12.0 millioncredit facility on a draw-down basis for us to use to fund our portion ofMedizyme operating costs. The credit facility has a 12% interest rate and thethen outstanding balance, including interest, at the end of May 2002 of $9.9million was converted into 9,905 shares of our Series B Convertible PreferredStock in June 2002. The Series B Convertible Preferred Stock has a nominalvalue of $1,000 per share, accrues dividends at an annual rate of 12%, andultimately is convertible into our common stock at a 50% premium to the averageprice of the common stock for the 60 trading days prior to the time of theapplicable draw-down on the credit facility. In aggregate, at December 31,2002, all of our outstanding convertible preferred stock, together with theaccreted dividends, with Elan were convertible into 2.7 million shares of ourcommon stock. We continue to have access to the credit facility and in October2002 drew down $597,000, which was recorded on our balance sheet under equityas preferred shares issuable. After the October draw-down, we still have $2.1million remaining through the facility; however, we currently have no plans todraw down any additional funds through the facility. As of December 31, 2002,the Series A and B Preferred Stock have liquidation preferences of $14.3million and $11.0 million, respectively.

 

While we own 80.1% of the outstanding stock ofMedizyme, Elan and its subsidiaries have retained significant minority investorrights that are considered “participating rights”, so therefore, we account forour investment in Medizyme under the equity method of accounting. In addition,we present our Series A Preferred Stock and related accreted preferred stockdividends outside of permanent stockholders’ equity as a result of the adoptionof Emerging Issues Task Force (EITF) Topic No. D-98, *Classification of and Measurement ofRedeemable Securities*(Topic No. D-98).  Our Series A Preferred Stock and accreted dividends can beredeemed by Elan for capital stock we own in Medizyme and therefore, areconsidered redeemable securities. During the twelve month period ended December 31, 2002, we recognized$1.1 million in contract revenue for research and development activitiesperformed for Medizyme. This amount is included in our revenues as“Collaborative agreements-joint venture” for the year ended December 31, 2002.

 

Elan has indicated that it is interested intransferring their 19.9% interest in Medizyme to us. Currently, we are indiscussions with Elan to complete this transaction; however, we intend toeither sell our interests in Medizyme or the technology, or, if we cannotcomplete a sale on favorable terms, wind down Medizyme’s operations.

 

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On February 11, 2003, we signed a letter agreementwith Elan in connection with our previously announced proposed investor stockpurchase transaction. At the closing of the financing transaction, Elan hasagreed to: (i) convert its Series A Preferred Stock and Series B PreferredStock into shares of our common stock; (ii) waive any voting rights it may haveas a holder of the Preferred Stock in connection with the transaction; (iii)waive its pre-emptive rights with respect to the transaction; and (iv) waiveany right it may have to nominate a director to our Board. In exchange, we haveagreed at closing to: (a) issue to Elan an additional 657,406 shares of common stock;(b) issue to Elan five-year warrants to purchase up to 514,310 shares of commonstock (subject to adjustment as provided below) at an exercise price per shareof $0.42; (c) cause the number of shares and the exercise price of the warrantsto be proportionately adjusted for any stock split or other recapitalization orreclassification of our securities occurring prior to or after the closing; and(d) grant Elan the same participation rights (on a pro rata basis) we grantedto the investors in the stock purchase transaction. Also, Elan will retaincertain registration and piggyback registration rights.

 

Elan may terminate the letter agreement if: (a) theclosing does not occur on or prior to June 30, 2003 or such later date as maybe agreed upon by the investors; or (b) there is (i) in Elan’s view a materialadverse change to the terms and conditions under which the transaction isconsummated compared to those set forth on a term sheet we provided to Elan; or(ii) a material adverse change to the interests of Elan (with the understandingthat the determination as to whether a change is material and/or adverse shallbe made by Elan reasonably and in good faith) that, in either case, has notbeen approved in writing by Elan, including, but not limited to, a decrease inthe amount of new money being raised by us in the transaction to less than $40million.

 

Upon closing, we will remain responsible for theperformance of our obligations and liabilities under our agreements with Elan.We will provide Elan at least five (5) business days’ prior written notice ofthe closing of the transaction and promptly notify Elan if, and when, theclosing has occurred. In addition, Elan agrees to use its reasonable bestefforts to review the signed transaction documents (the Transaction Documents)as soon as practicable after their having been filed by us with the SEC and tomake a good faith, reasonable determination as to whether the terms andconditions set forth therein differ materially and/or adversely from those setforth in the term sheet. We agree to provide Elan with written notice at leastthree (3) business days’ prior to the closing of the transaction and of changesmade to the Transaction Documents that differ from the terms and conditions ofthe term sheet reviewed by Elan so that Elan can assess whether such changesare of a material and adverse nature.

 

**Our Diagnostic Activities**

 

We and others have demonstrated that allostericribozymes can detect nucleic acids, proteins and small molecules. Allostericribozymes are ribozymes that are activated by the molecule to be detected. Onceactivated, the allosteric ribozyme catalyzes a chemical reaction that generatesa signal that can be measured. We have demonstrated an importantproof-of-principle for the development of a number of diagnostic tests that arecurrently done with monoclonal antibodies and polymerase chain reaction (PCR)or for which no current test has been developed.

 

Allosteric ribozymes have a number of potentialapplications, including detecting and quantifying a wide range of smallmolecules, ions, proteins and nucleic acids. As a result, we believe thisdiagnostic technology, which can indicate the presence of certain diseases,viruses and other abnormalities, will provide an opportunity for us to generaterevenue. We intend to spinout or sell our interest in this technology; however,we cannot be certain that we will be able to complete a spin-off or a sale onsatisfactory terms, or at all.

 

*Fujirebio.*  We have demonstrated the ability to detectlow copy number nucleic acids such as the hepatitis C virus, which could leadto an important blood-screening test. We are developing this test incollaboration with Fujirebio Inc. for Japan and Asia. In March 2002, weannounced an agreement with Fujirebio, the largest domestic diagnostic companyin Japan, to develop and commercialize ribozyme-based clinical diagnosticproducts. Under the terms of the agreement, Fujirebio will receive exclusivecommercialization rights for East Asia, including Japan, for any resultingproducts from the collaboration. Fujirebio will fund research for clinicaldiagnostic targets in the field of human viral diseases and cancer. If theprograms are successful, we will receive licensing fees, research funding,

 

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milestone payments, and royalties as well as retain certainmanufacturing rights. Recently we completed the first phase of our program withFujirebio and are in the process of analyzing the results. It is uncertain atthe present time if Fujirebio will continue with the collaboration.  We do not intend to pursue independentdevelopment of this technology.

 

**OurLicensing, Process Development and Pilot Manufacturing Activities**

 

*Archemix*.  In May 2001, we entered into a collaborativeagreement with Archemix, a privately held company. One of Archemix’stechnologies, RiboReportersTM, incorporates allosteric ribozymes. Thistechnology allows researchers to detect individual molecules in complexmixtures, for drug discovery and environmental monitoring. Under the terms ofour agreement with Archemix, we granted certain licenses and sublicenses to ourintellectual property covering the allosteric ribozyme technology. We alsoreceived a license to Archemix’s intellectual property covering allostericribozymes for use in molecular diagnostic applications. In exchange for thelicenses, we received an equity position in Archemix, a seat on Archemix’sBoard of Directors and a seat on the Scientific Advisory Board, if we retaineda certain ownership percentage in the company. In August 2002, Archemixcompleted a financing round that diluted our ownership interest below theagreed percentage. Therefore, we no longer have any participation on theseBoards.

 

*GeronCorporation*.  InDecember 2001, we announced a collaboration with Geron Corporation (Geron), abiopharmaceutical company focused on developing and commercializing therapeuticand diagnostic products for applications in oncology and regenerative medicineand research tools for drug discovery. Our first program was a processdevelopment partnership with Geron for GRN163, a nucleic acid based telomeraseagonist for cancer. Telomeres are believed to serve as a molecular “clock” forcellular aging and the activation of telomerase by cancer cells is a means bywhich cancer cells continue to proliferate. Inhibiting telomerase represents anovel approach to treat cancer with potentially broader utility and greaterselectivity against cancer cells than currently available cancer agents. Geronpaid us for consultation in nucleic acid technology process development andscale-up of the manufacturing process for GRN163. We successfully completedthis program and the arrangement was renewed in July 2002 to manufacture GMPclinical grade GRN163 for Geron’s Phase I clinical study.

 

In addition, we collaborated with Geron to explore thepotential for a ribozyme-based telomerase inhibitor, to which Geron retainedthe first right to commercialize. We completed this program and Geron decidednot to exercise its first right to commercialize the ribozyme lead compoundsthat resulted from the program.

 

*atugenAG*.  We have usedribozymes and other oligonucleotides for target discovery and validation, theprocess by which we identify genes that cause or contribute to human diseases.In 1998, we transferred our target discovery and validation technologies toatugen in exchange for a significant equity interest in atugen. atugen’sprimary goal is to accelerate the discovery and validation of human healththerapeutic targets through strategic collaborations. Currently we own 31.6% ofatugen’s outstanding voting stock and we have the right to name two designeesto atugen’s Board of Directors, so long as we own at least 30% of atugen’soutstanding stock. We are paid by atugen for a portion of our costs ofprosecuting patents applicable to atugen’s business. As part of its formation,atugen received exclusive royalty-free licenses to our extensive patents andtechnologies for target discovery and validation. We received a one-time $2.0million license payment in 1999 for a portion of the licensed technology.

 

**OurCompetition**

 

We are engaged in the rapidly changing business ofdeveloping treatments for human disease through the regulation of geneexpression. Competition among entities attempting to develop products to treatdiseases by regulating gene expression is intense and is expected to increase.In addition to competitors in the regulation of gene expression field, thereare other competitors using other technologies to target the same diseases thatwe are targeting. For example, our most advanced product, ANGIOZYME, will facecompetition from a number of other antiangiogenic compounds that are in variousstages of clinical development, including some that are in Phase III. In addition,there are a large number of anti-tumor compounds that are being tested to treatcolorectal cancer. In the

 

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fields of HCV and macular degeneration, in addition to currentlymarketed products, there are several compounds in preclinical and clinicaltesting.

 

We face direct competition from other companiesengaged in the research, development and commercialization of RNAi-basedtechnology, as well as competition from companies attempting other methods ofgene expression control. In addition, we compete with large pharmaceuticalcompanies and established biotechnology firms, many of whom are developing newproducts to treat the same diseases that we target. In some cases, thosecompanies have already commenced clinical trials for their products. Many ofthese companies have significantly greater financial resources and expertise inresearch and development, manufacturing, preclinical studies and clinicaltrials, obtaining regulatory approvals and marketing than we do. Ourcollaborators and licensees may be conducting research and development programsusing non-RNAi technologies directed at the same diseases that we aretargeting. Smaller companies also may prove to be significant competitors,particularly through collaborative arrangements with large pharmaceutical andbiotechnology companies. In addition, our competitors may complete clinicaltrials, obtain required regulatory approvals and commence commercial sales oftheir products before us, thus achieving a significant competitive advantage.

 

We are aware that a number of companies, includingbiotechnology companies and pharmaceutical companies, are pursuing research anddevelopment programs relating to the emerging area of RNAi. A number of thesecompanies have filed patents in the area of RNAi. It is difficult to predictwhether any of these companies will be successful in obtaining patentprotection, whether the patent protection sought will address important aspectsof the technology, and, to what extent, these companies will be successful intheir RNAi ventures.

 

Academic institutions, governmental agencies and otherpublic and private research organizations also conduct research, seek patentprotection and establish collaborative arrangements for products and clinicaldevelopment and marketing. These companies and institutions compete with us inrecruiting and retaining highly qualified scientific and management personnel.

 

**OurPatents and Proprietary Technology**

 

Protecting patents and other proprietary rights iscrucial to developing our business. In addition to patents, we rely upon tradesecrets, know-how and continuing technological innovations in the design,synthesis, and purification of nucleic acid molecules, such as RNA and innucleic acid chemistry. We also rely on licensing opportunities to develop andmaintain our competitive position. It is our policy to file patent applicationswhen appropriate to protect technology, inventions, and improvements that areconsidered important in the development of our business.

 

In the ribozyme field, we have rights to over 200issued, allowed or pending patents covering various aspects of the ribozymetechnology, including synthesis, delivery, methods of production and usesthereof, such as applications to human therapeutics and diagnostics,agriculture and animal health. These patents provide RPI with a broadintellectual property protection in the field of ribozyme research anddevelopment.

 

In the RNAi field, we have filed over fifty patentapplications covering various aspects of this technology, including chemicallystabilized RNAi constructs, method of synthesizing RNAi constructs, applicationof RNAi to specific therapeutic targets, and for target discovery. We are inthe process of filing additional patent applications to expand our coverage forthe RNAi technology, inventions, and improvements that are considered importantto the development of our business.

 

As part of our overall intellectual property strategy,we selectively enter into agreements with academic institutions either tolicense pre-existing technology or to support the development of newtechnologies. With these agreements we intend to gain the commercial rights tosuch new technologies, such as RNAi. It is our policy to file patent applicationswhen appropriate to protect technology, inventions, and improvements that areconsidered important in the development of our business.

 

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We have filed opposition documents against tworibozyme-related patents granted to a competitor in Europe. In one of theopposition proceedings in Europe, we were successful in invalidating variousclaims relating to the hammerhead ribozyme composition. Our competitorsinitiated opposition proceedings against two of our ribozyme-related Europeanand Japanese patents. The Japanese Opposition Division has rejected competitoroppositions and has issued a notification that it will maintain our Japanesepatent without change. The opposition proceedings against our ribozyme-relatedEuropean patent resulted in maintenance of the patent. In July 2000 theEuropean Opposition Division found no grounds for revoking the patent butdecided to clarify the scope of the claims. The decision is currently on appealat the European Patent Office Technical Board. The decision should have noimpact on our ability to commercialize ribozymes or RNAi technology, includingits ongoing clinical programs, and will not affect its relationship withpartner companies now engaged in ribozyme co-development. Our ability toenforce this patent remains in effect. We may not have identified all UnitedStates and foreign patents that pose a risk of infringement. In addition, weanticipate interference proceedings involving one of our ribozyme-related patentsin the United States. We are also involved in a re-examination proceedinginvolving one of our patents in the United States.

 

**GovernmentRegulation of our Drug Development Activities**

 

The development, manufacture and potential sale oftherapeutics are subject to extensive regulation by United States and foreigngovernmental authorities. In particular, pharmaceutical products undergorigorous preclinical and clinical testing and other approval requirements bythe FDA in the United States under the federal Food, Drug and Cosmetic Act andthe Public Health Service Act and by comparable agencies in most foreigncountries.

 

Before we may begin testing agents with potentialtherapeutic value in healthy human test subjects or patients, stringentgovernment requirements for preclinical data must be satisfied. The data,obtained from studies in several animal species, as well as from laboratorystudies, are submitted in an Investigational New Drug, or, IND, application orits equivalent in countries outside the United States where clinical studiesare to be conducted. Preclinical data must provide an adequate basis forevaluating both the safety and the scientific rationale for the initiation ofclinical trials.

 

Clinical trials are typically conducted in threesequential phases, although these phases may overlap. In Phase I, whichfrequently begins with initial introduction of the compound into healthy humansubjects prior to introduction into patients, the product is tested for safety,adverse affects, dosage, tolerance, absorption, metabolism, excretion andclinical pharmacology. Phase II typically involves studies in a small sample ofthe intended patient population to assess the efficacy of the compound for aspecific indication to determine dose tolerance and the optimal dose range aswell as to gather additional information relating to safety and potentialadverse effects. Phase III trials are undertaken to further evaluate clinicalsafety and efficacy in an expanded patient population at geographically dispersedstudy sites to determine the overall risk-benefit ratio of the compound and toprovide an adequate basis for product labeling. Each trial is conducted inaccordance with certain standards under protocols that detail the objectives ofthe study, the parameters to be used to monitor safety and the efficacycriteria to be evaluated. Each protocol must be submitted to the FDA as part ofthe IND.

 

Data from preclinical and clinical trials aresubmitted to the FDA as a New Drug Application, or NDA, for marketing approvaland to other health authorities as a marketing authorization application. Theprocess of completing clinical trials for a new drug is likely to take a numberof years and requires the expenditure of substantial resources. Preparing anNDA or marketing authorization application involves considerable datacollection, verification, analysis and expense. There can be no assurance thatFDA or any other health authority approval will be granted on a timely basis,if at all. The approval process is affected by a number of factors, primarilythe risks and benefits demonstrated in clinical trials as well as the severityof the disease and the availability of alternative treatments. The FDA or otherhealth authorities may deny an NDA or marketing authorization application ifthe authority’s regulatory criteria are not satisfied or may require additionaltesting or information.

 

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Even after initial FDA or other health authorityapproval has been obtained, further studies, including Phase IV post-marketingstudies, may be required to provide additional data on safety and will berequired to gain approval for the use of a product as a treatment for clinicalindications other than those for which the product was initially tested. Also,the FDA or other regulatory authorities may require post-marketing reporting tomonitor the side effects of the drug. Results of post-marketing programs maylimit or expand the further marketing of the products. Further, if there areany modifications to the drug, including changes in indication, manufacturingprocess or labeling or a change in manufacturing facility, an applicationseeking approval of such changes will be required to be submitted to the FDA orother regulatory authority.

 

Whether or not FDA approval has been obtained,approval of a product by regulatory authorities in foreign countries must beobtained prior to commencing commercial sales of the product in such countries.The requirements governing the conduct of clinical trials and product approvalsvary widely from country to country, and the time required for approval may belonger or shorter than that required for FDA approval. Although there are someprocedures for unified filings for certain European countries, in general, eachcountry at this time has its own procedures and requirements. Further, the FDAregulates the export of products produced in the United States and may prohibitthe export of such products even if they are approved for sale in other countries.

 

We are also subject to regulation under theOccupational Safety and Health Act, the Environmental Protection Act, the ToxicSubstances Control Act, the Resources Conservation and Recovery Act and otherpresent and potential future federal, state and local regulations.

 

Completing the multitude of steps necessary beforemarketing can begin requires the expenditure of considerable resources and alengthy period of time. Delay or failure in obtaining the required approvals,clearances or permits by us, our corporate partners or our licensees would havea material adverse affect on our ability to generate sales or royalty revenue.The impact of new or changed laws or regulations cannot be predicted with anyaccuracy.

 

**OurManufacturing and Marketing**

 

To support our research, preclinical and clinicaltrial manufacturing requirements, we constructed in our leased buildingsmanufacturing facilities that we believe comply with applicable regulatoryrequirements. We have also established operational quality assurance andquality control procedures. We believe that our existing facilities andcapability will be satisfactory for production of ANGIOZYME and siNAs neededfor clinical trials.

We do not currently have the internal facilities or means tomanufacture, market, distribute or sell on a commercial scale any products wemay develop. We have expanded our quality control and quality assurance programinternally, including adopting a set of standard operating procedures designedto assure that any products manufactured by or for us are made in accordancewith cGMP and other applicable domestic and foreign regulations.

 

We expect to market and sell most products developed,at least initially, directly and through co-promotion or other licensingarrangements with third parties, including our collaborators. In some markets,we may enter into distribution or partnership agreements with pharmaceutical orbiotechnology companies that have large, established sales organizations.

 

**OurEmployees**

 

As of December 31, 2002, we had 81 full-timeemployees, including a technical scientific staff of 51. Our future performancedepends significantly on the continued service of our key personnel. None ofour employees are covered by collective bargaining arrangements. We believe ouremployee relations are good.

 

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**AvailableInformation**

 

Our principal Internet address is www.rpi.com. We makeavailable free of charge on www.rpi.com our annual, quarterly and currentreports, and amendments to those reports, as soon as reasonably practicableafter we electronically file such material with, or furnish it to, the SEC.

 

 

**ITEM 2.**              **PROPERTIES**

 

We lease approximately 57,000 square feet oflaboratory, manufacturing and office space in two adjacent buildings inBoulder, Colorado, under operating leases that last through October 2007 andJune 2007. Our facilities are sufficient to meet our needs for the foreseeablefuture.

 

 

**ITEM3.**          **LEGALPROCEEDINGS**

 

We are a defendant in several class action lawsuitsbrought on behalf of purchasers of our common stock on November 16 and 17,1999. The lawsuits, which are substantially identical, allege that we violatedcertain federal securities laws based upon our having made an allegedlymisleading announcement on November 15, 1999. On November 7, 2002, we announcedthat an agreement has been reached with the plaintiffs to settle theshareholder class action lawsuit. At a hearing on March 27, 2003, the courtapproved the settlement as proposed and will issue an order confirming theapproval shortly. Our liability insurance policy has agreed to cover the fullamount of the settlement. 

 

 

**ITEM 4.**          **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

We have mailed to ourstockholders a proxy statement relating to a special meeting of stockholders tobe held on April 16, 2003, at which we will seek the favorable vote ofstockholders on a number of matters.  Wewill be seeking the favorable vote of our stockholders on the proposed privateplacement transaction, which we have described under Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” aswell as on a proposed reverse split.

 

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**PART II**

 

**ITEM 5.**         **MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our common stock istraded on the NASDAQ National Market under the symbol “RZYM.” The last saleprice of the common stock as reported on the NASDAQ National Market on March25, 2003, was $0.38 per share. At March 25, 2003, there were approximately 224holders of record of our common stock. The following table sets forth, for theperiods indicated, the high and low sales prices per share of our common stockas reported on the NASDAQ National Market.

 

 
|                                    |   | **High** |   | **Low** |   |
|-----------------------------------------|--------|----------|--------|---------|--------|
| Year  Ended December 31, 2000,          |   |     |   |    |   |
| First  Quarter                          |   | $        | 71.88  |    | $      | 9.50 |   |
| Second  Quarter                         |   | $        | 29.38  |    | $      | 12.00 |   |
| Third  Quarter                          |   | $        | 32.75  |    | $      | 20.25 |   |
| Fourth  Quarter                         |   | $        | 29.00  |    | $      | 6.50 |   |
| Year  Ended December 31, 2001,          |   |     |   |    |   |
| First  Quarter                          |   | $        | 13.69  |    | $      | 5.25 |   |
| Second  Quarter                         |   | $        | 10.21  |    | $      | 5.71 |   |
| Third  Quarter                          |   | $        | 9.99   |    | $      | 4.54 |   |
| Fourth  Quarter                         |   | $        | 6.98   |    | $      | 3.66 |   |
| Year  Ended December 31, 2002,          |   |     |   |    |   |
| First  Quarter                          |   | $        | 5.12   |    | $      | 2.84 |   |
| Second  Quarter                         |   | $        | 3.00   |    | $      | 0.71 |   |
| Third  Quarter                          |   | $        | 1.38   |    | $      | 0.36 |   |
| Fourth  Quarter                         |   | $        | 0.69   |    | $      | 0.20 |   |
| Year  Ended December 31, 2003,          |   |     |   |    |   |
| First  Quarter (through March 25, 2003) |   | $        | 0.76   |    | $      | 0.20 |   |

 

 

**Dividend Policy**

 

We have never declared orpaid cash dividends on our common stock and do not anticipate paying any cashdividends in the foreseeable future. We are also party to agreementsrestricting our ability to pay dividends.

 

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**ITEM 6.**         **SELECTEDFINANCIAL DATA**

 

The following selectedfinancial data are derived from our audited financial statements. Our financialstatements for 2002, 2001, 2000, 1999 and 1998 have been audited by Ernst &Young LLP, independent auditors. These historical results do not necessarilyindicate future results. When you read this data, it is important that you alsoread our financial statements and related notes, as well as the section“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 
|                                                                  |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                  |   | **(In  Thousands)**          |    |
|                                                                  |   | **2002**                     |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Statement  of Operations Data:**                                    |   |                         |    |   |   |   |   |   |   |   |   |
| Revenues                                                              |   |                         |    |   |   |   |   |   |   |   |   |
| Collaborative  agreements                                             |   | $                            | 3,488   |   | $ | 3,318 |   | $ | 8,302 |   | $ | 5,797 |   | $ | 8,963 |   |
| Collaborative  agreements-joint venture                               |   | 1,069                        |    | 3,960 |   | 6,052 |   | — |   | — |   |
| Collaborative  agreements-related parties                             |   | 591                          |    | 1,030 |   | 1,191 |   | 1,867 |   | — |   |
| Total  revenues                                                       |   | 5,148                        |    | 8,308 |   | 15,545 |   | 7,664 |   | 8,963 |   |
|                                                                  |   |                         |    |   |   |   |   |   |   |   |   |
| Expenses                                                              |   |                         |    |   |   |   |   |   |   |   |   |
| Research  and development                                             |   | 28,659                       |    | 56,689 |   | 21,721 |   | 15,395 |   | 16,941 |   |
| General  and administrative                                           |   | 5,505                        |    | 4,512 |   | 3,723 |   | 2,132 |   | 1,813 |   |
| Total  operating expenses                                             |   | 34,164                       |    | 61,201 |   | 25,444 |   | 17,527 |   | 18,754 |   |
| Operating  loss                                                       |   | (29,016                      | )       | (52,893 | ) | (9,899 | ) | (9,863 | ) | (9,791 | ) |
| Other  income (expense):                                              |   |                         |    |   |   |   |   |   |   |   |   |
| Interest  income                                                      |   | 389                          |    | 2,165 |   | 3,196 |   | 614 |   | 634 |   |
| Interest  expense                                                     |   | (803                         | )       | (820 | ) | (151 | ) | (552 | ) | (704 | ) |
| Other  income                                                         |   | —                       |    | 51 |   | 4 |   | — |   | 25 |   |
| Equity  in loss of unconsolidated affiliates                          |   | (5,276                       | )       | (8,341 | ) | (9,032 | ) | (860 | ) | (1,082 | ) |
| Total  other income (expense)                                         |   | (5,690                       | )       | (6,945 | ) | (5,983 | ) | (798 | ) | (1,127 | ) |
| Net  loss                                                             |   | (34,706                      | )       | (59,838 | ) | (15,882 | ) | (10,661 | ) | (10,918 | ) |
| Accretion  of dividends on preferred stock                            |   | 1,571                        |    | 775 |   | 716 |   | — |   | — |   |
| Net  loss applicable to common stock                                  |   | $                            | (36,277 | ) | $ | (60,613 | ) | $ | (16,598 | ) | $ | (10,661 | ) | $ | (10,918 | ) |
| Net  loss per share (basic and diluted)                               |   | $                            | (1.80   | ) | $ | (3.59 | ) | $ | (1.15 | ) | $ | (1.05 | ) | $ | (1.22 | ) |
| Shares  used in computing net loss per share (basic and diluted)      |   | 20,134                       |    | 16,883 |   | 14,390 |   | 10,158 |   | 8,978 |   |
|                                                                  |   |                         |    |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                              |   |                         |    |   |   |   |   |   |   |   |   |
| Cash,  cash equivalents and securities available-for-sale             |   | $                            | 8,821   |   | $ | 34,995 |   | $ | 64,475 |   | $ | 14,000 |   | $ | 6,512 |   |
| Working  capital                                                      |   | 5,027                        |    | 31,908 |   | 65,002 |   | 14,086 |   | 4,467 |   |
| Total  assets                                                         |   | 21,898                       |    | 52,023 |   | 83,897 |   | 25,092 |   | 19,224 |   |
| Capital  lease obligations and long-term debt, current portion        |   | 480                          |    | 169 |   | — |   | 200 |   | 498 |   |
| Capital  lease obligations and long-term debt, net of current portion |   | 6,489                        |    | 12,591 |   | 3,757 |   | 6,811 |   | 4,545 |   |
| Series  A preferred stock and accreted dividends                      |   | 14,329                       |    | 13,507 |   | 12,731 |   | — |   | — |   |
| Accumulated  deficit                                                  |   | (194,509                     | )       | (159,803 | ) | (99,965 | ) | (84,083 | ) | (73,422 | ) |
| Total  stockholders’ (deficit) equity                            |   | (3,953                       | )       | 20,398 |   | 63,263 |   | 14,881 |   | 11,034 |   |

 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

Statements in this Form 10-K, which are not strictlyhistorical are “forward-looking” statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934 that involve risks and uncertainties. These uncertainties, which include, but are not limited to, thefollowing: ability to obtain adequate financing in the future; businessabilities and judgment of personnel; availability of qualified personnel;general economic and business conditions; ability to obtain rights totechnology; ability to obtain and enforce patents; ability to developoligonucleotides in adequate amounts for our collaborations and clinicaltrials; ability to commercialize and manufacture products; ability to obtainand retain collaborators; results of clinical studies; results of research anddevelopment activities; competition; technological advances; changes in, orfailure to comply with, governmental regulations; and the like, are set forth inthe section titled “Risk Factors” herein. We undertake no obligation to release publicly the results of anyrevisions to these forward-looking statements to reflect events orcircumstances arising after the date hereof.

 

**Overviewof our Business**

 

Ribozyme Pharmaceuticals, Inc. is a leader in thefield of nucleic acid technology. We are using our proprietary technology andour expertise in molecular engineering to develop a new class of nucleic acidbased therapeutics based on RNA interference (RNAi). We plan to continue as amanufacturer of oligonucleotides (chains of nucleotides that can be chemicallysynthesized in specific sequences) for our use and for use by our collaboratorsand customers to generate revenue for the purpose of supporting our therapeuticdiscovery operations.

 

Since inception in 1992, we have dedicated ourselvesto engineering RNA-based molecules. Until recently, we focused on developingribozyme-based therapeutics and diagnostics. As a result, we advanced threeproduct candidates into clinical development. We continue to have a jointdevelopment program with Chiron Corporation (Chiron) for one of these products,ANGIOZYME. We own, or have exclusive licenses to use, over 180 issued orallowed patents relating to nucleic acid technology. Our expertise in nucleicacid technology enables us to now focus on the development of a new type ofnucleic acid based therapeutic based on RNA interference. We have redirectedour research to RNAi because we believe it will have the best prospects for commercialsuccess. We are using our expertise to design, stabilize, manufacture anddeliver small interfering nucleic acids (siNAs) that facilitate the process ofRNAi. We believe siNA-based drugs will become important therapeutics in thefuture.

 

We are developing drugs that address significant andunmet medical needs.  We have been inresearch and/or clinical development for the following product candidates:

 

•                                  ANGIOZYME:ANGIOZYME is a ribozyme-based product we are developing in collaboration withChiron to treat solid tumor cancers.  Wehave completed our preliminary analysis of 12-24 week data and will bepresenting the results at the ASCO meeting in Chicago in May 2003.

 

•                                  HepatitisC Virus (HCV): We are developing chemically stabilized siNAs that target theHCV viral RNA to treat HCV infection. This program is in the leadidentification phase of development.

 

•                                  MacularDegeneration: We are developing chemically stabilized siNAs that target theVascular Endothelial Growth Factor (VEGF) pathway to treat maculardegeneration. This program is in the lead identification phase of development.

 

•                                  Weare also developing HERZYME in collaboration with Elan Corporation plc and itsaffiliates (Elan) to treat breast and other solid tumor cancers. A Phase Iclinical trial has been completed and we are currently analyzing the data. Elanhas publicly indicated that they do not expect to continue development ofoncology drugs.  We do not intend topursue independent development of HERZYME.

 

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Our business strategy is to use our patented technology and molecularengineering expertise to create value by:

 

•                                  Developingstabilized siNA molecules for therapeutic applications in several diseaseareas;

 

•                                  Leveragingour nucleic acid expertise through licensing, process development and pilotmanufacturing;

 

•                                  Maintainingand expanding our patent portfolio and proprietary technology;

 

•                                  Spinningoff or selling our diagnostic technology, and;

 

•                                  Enteringinto partnerships with other pharmaceutical or biotechnology companies for thedevelopment of RNAi-based therapeutics.

 

**CriticalAccounting Policies**

 

*RevenueRecognition*.  To date,we have committed substantially all our resources to our research and productdevelopment programs. We have not generated any revenues from therapeuticproduct sales, nor do we anticipate generating any therapeutic product revenuesin the foreseeable future. Revenue recorded from our collaborative agreementsconsists of:

 

•                                  Up-frontrevenue. Up-front non-refundable fees are recognized upon signing an agreementwhen it represents the culmination of a separate earnings process.  All other up-front fees are deferred andrecognized systematically over the period the fees are earned.

 

•                                  Researchrevenue. Typically, research revenue is based on the fully burdened cost of aresearcher working on a collaboration. Rates are billed per employee for timeworked on a project. This revenue is typically invoiced on a monthly basis,either up front or in arrears. Revenue is recognized ratably over the period asservices are performed, with the balance reflected as deferred revenue untilearned. The revenue is typically recurring over the term of a collaboration.

 

•                                  Licenserevenue. License revenue is recognized ratably over the term of the license.Payments received in advance are recorded as deferred revenue until earned.

 

•                                  Milestonerevenue. Milestone revenue is recognized in full when the related milestoneperformance goal is achieved. Milestone revenue is typically not consistent orrecurring in nature.

 

Our revenue has consisted primarily of researchrevenue payments from our collaborators. All revenues are either deferred as aliability or recognized upon satisfying revenue criteria. As of December 31,2002, all revenues that have been recognized are earned, and no furtherobligation exists for recognized revenue. We depend upon funding from externalfinancing and corporate collaborations for our research and product developmentprograms and expect to depend upon this funding for the foreseeable future.

 

We have not been profitable since inception and havean accumulated deficit of $194.5 million as of December 31, 2002. Losses haveresulted primarily from expenses associated with our research and developmentprograms. We expect to incur additional losses as our current and potentialproduct candidates advance through development and commercialization. Inaddition, future milestone payments under some of our collaborations arecontingent upon our meeting particular research or development goals. Theamount and timing of future milestone payments are contingent upon the terms ofeach collaboration agreement.  In someinstances, we may forfeit milestone payments if we fail to accomplish apredetermined goal within a certain time frame. Therefore, we are subject tosignificant variation in the timing and amount of our revenues and results ofoperations from period to period.

 

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Our revenues are denominated in U.S. dollars.  Therefore, we have not been exposed toforeign currency translation risks and have not engaged in any hedging.

 

*DeferredPatent Costs*.  Wecapitalize legal costs directly incurred in pursuing patent applications asdeferred patent costs. When such applications result in an issued patent, therelated costs are amortized over the remaining legal life of the patents, whichis assumed to be 17 years, using the straight-line method. On a quarterlybasis, we review our issued patents and pending patent applications and if wedetermine to abandon a patent application, or an issued patent no longer haseconomic value, the unamortized balance in deferred patent costs relating tothat patent is immediately expensed.

 

It is possible the estimates of future economic life ofour commercialization revenues, the amount of anticipated futurecommercialization revenues, or both, will be reduced significantly in the nearterm due to alternative technologies developed by other biotechnology orpharmaceutical companies. As a result, the carrying amount of deferred patentcosts may be reduced in the future.

 

*Equityin loss of unconsolidated affiliates*. In January 2000, weformed a joint venture with Elan for the development and commercialization ofHERZYME.  As part of the joint venture,we licensed HERZYME and Elan licensed its MEDIPAD® drug delivery technology tothe joint venture, Medizyme Pharmaceuticals, Ltd.  While we own 100% of the outstanding common stock of Medizyme,Elan has retained significant minority investor rights that are considered“participating rights” as defined in EITF 96-16 *Investors Accounting for an InvesteeWhen the Investor Owns a Majority of the Voting Stock but the MinorityShareholder or Shareholders Have Certain Approval or Veto Rights*.Therefore, we do not consolidate the operations of Medizyme, but insteadaccount for our investment in Medizyme under the equity method.  As of December 31, 2002 we had absorbed ourentire cost basis in our equity investment through our share of Medizyme’s netlosses; however, we are committed to fund future losses incurred by Medizymeand therefore may continue to invest in Medizyme and recognize our portion ofongoing losses.

 

In 1998, we invested $2.0 million and transferred ourgene identification and target validation technology to atugen AG, a Germanprivately-owned biotechnology company. Upon formation in 1998, we owned amajority of common stock outstanding in atugen; however, similar to the abovediscussion on Medizyme about “participating rights”, minority investors ofatugen retained significant investor rights and therefore we did notconsolidate operations but instead accounted for our investment in atugen underthe equity method.  In 1999, we hadabsorbed our entire cost basis in our equity investment through our share ofatugen’s net losses. We currently own 31.6% of atugen and will record our shareof any future profits.

 

*Redeemable preferred stock.*  Our balance sheets as of December 31, 2002and 2001 present our Series A Preferred Stock and related accreted preferredstock dividends outside of permanent stockholders’ equity, as a result of theadoption of Emerging Issues Task Force (EITF) Topic No. D-98, *Classificationof and Measurement of Redeemable Securities*. We issued the Series APreferred Stock in January 2000 in connection with the formation of our jointventure, Medizyme Pharmaceuticals, Ltd. (Medizyme), with Elan Corporation,plc.  Shares of the Series A PreferredStock issued to Elan are exchangeable for a portion of our investment inMedizyme. The right of Elan to exchange the Series A Preferred Stock isapplicable for the period October 2002 through May 2003.  If the exchange feature expires unexercised,the Series A Preferred Stock and accreted dividends will be reclassified topermanent equity.  We have agreed withElan that upon consummation of our proposed investor financing, all of theirshares of Series A Preferred Stock will be converted into shares of our commonstock.

 

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**Results of Operations for Twelve Months Ended December 31,2002, 2001 and 2000**

 

Revenues

 

Generally, revenue fluctuations result from changes inthe number and activity level of funded research projects as well as the timingand completion of contract milestones. Our revenues are split into threecategories: (1) collaborative agreements, (2) collaborative agreements-jointventure, and (3) collaborative agreements-related parties.  Collaborative agreement revenues primarilyincludes revenues recorded from our arrangements with Chiron, Fujirebio andGeron.  Chiron revenues are related toour collaboration on ANGIOZYME. Collaborative agreements-joint venture includesrevenues from Medizyme.  Collaborativeagreements-related parties includes revenues recorded from atugen.

 

Collectively, collaborative revenues decreased to $5.1million for the year ended December 31, 2002, from $8.3 million for thecorresponding period in 2001. This decrease is due primarily to lower researchrevenues associated with Medizyme, our joint venture for the development ofHERZYME with Elan, and with ANGIOZYME, our collaboration with Chiron.  As HERZYME and ANGIOZYME move forward inclinical trials, less time is required of our researchers and more third-partyexpenses are incurred.  Reimbursementsfrom our collaborators for third-party expenses are credited against expensesand not recognized as revenue.  Medizymerevenues decreased to $1.1 million for the year ended December 31, 2002,compared to $4.0 million for the same period in 2001.  In addition, Chiron revenues decreased to $2.2 million in 2002compared to $3.1 million in 2001. Our revenues from atugen have decreased byapproximately $440,000 because atugen USA ceased operations during 2002.However, revenue from other sources and projects increased for the sameperiod.  During the first quarter of2002, we signed an agreement with Fujirebio, a Japanese diagnostic company, forthe use of allosteric ribozymes that resulted in revenues of $556,000 for thetwelve months ended December 31, 2002. In addition, for the twelve months endedDecember 31, 2002, we recognized $718,000 from Geron for our processdevelopment and manufacturing scale-up for Geron’s anti-cancer drug, GRN163.

 

Collaborative revenues decreased to $8.3 million forthe year ended December 31, 2001 compared to $15.5 million for the year endedDecember 31, 2000. The decrease of $7.2 million in 2001 compared to 2000 wasprimarily due to $3.8 million recorded from Lilly in 2000 for the Hepatitis Ccollaboration which terminated in 2000. The 2000 Lilly revenues included $1.5 million in milestone payments and$2.3 million in research revenues.  Inaddition, revenues recorded from Chiron decreased $1.4 million during 2001 fromthe year ended December 31, 2000.  Thedecrease was due to the progression of ANGIOZYME in clinical trials and asANGIOZYME progressed,  it required fewerresearchers working on the project which, in turn, resulted in lower researchrevenues.  Also, because of theprogression of HERZYME in clinical trials, and therefore fewer researchersworking on the project, revenues from Medizyme decreased in 2001 compared to2000 by $2.1 million.

 

However, while revenues decreased in 2001 compared to2000, reimbursements that offset manufacturing and clinical trial expenses inconnection with Chiron increased. Reimbursements from our collaborators for outside expenses are recordedas credits against expenses.  For theyear ended December 31, 2001, reimbursements from Chiron were $8.9 millioncompared to $1.3 million for the corresponding period in 2000.  Approximately $8.4 million of thereimbursement in 2001 was related to third party contract manufacturing costsof ANGIOZYME.

 

We expect our research revenues related to ANGIOZYMEand HERZYME to decrease because of a reduction in activities.  However, we will be actively pursuingpartnerships and collaborations to fund our other research and developmentprograms.

 

Expenses

 

*Researchand Development. *Researchand development expense for the year ended December 31, 2002 was $28.7 million,compared to $56.7 million  and $21.7million during the years ended December 31, 2001 and 2000, respectively.  The decrease in 2002 of $28.0 million wasprimarily due to $28.9 million of expenses, net of partner reimbursements, weincurred in 2001 for third-party manufacturing costs for ANGIOZYME and our HCVdrug to

 

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support our clinical trials, compared to $3.3 million, net, we incurredin 2002. The third-party manufacturing costs incurred in 2001, as well as anincrease in clinical trial activities, were also reasons that research anddevelopment expenses increased $35.0 million from the prior year ended December31, 2000.  Clinical and preclinicaltrial expenses increased $3.5 million to $5.8 million in 2001, compared to $2.2million in 2000. Over the next year, we expect certain research and developmentexpenses, including preclinical studies, clinical trials and manufacturingexpenses, to decrease as we complete current phases of clinical development programsfor ANGIOZYME and HERZYME.  However, aswe move forward in our RNAi research and preclinical development, we expectexpenses related to such research and development to increase.

 

Our research and development expenses currentlyinclude costs of scientific personnel, supplies, equipment, outsourced clinicaland other research activities, consultants, patent filing, depreciation,utilities, administrative expenses and an allocation of corporate costs.  We cannot predict the scope or magnitude offuture research and development expenses at this time for our productcandidates in the early phases of research and development as it is notpossible to determine the nature, timing and extent of clinical trials andstudies,  the FDA’s  requirements for a particular drug and therequirement and level of participation, if any, by potential partners.  As potential products proceed through thedevelopment process, each step typically is more extensive, and therefore moreexpensive, than the previous step. Success in development therefore results, generally, in increasingexpenditures.  Furthermore, our businessstrategy involves licensing certain of our drug candidates to collaborativepartners.  Depending upon when suchcollaborative arrangements are executed, the costs incurred solely by us willbe impacted.

 

We have incurred the following expenses, net ofpartner reimbursements, related to our three major research and developmentprojects (in thousands):

 

|      |   | **December  31,** |   |
|-----------|--------|-------------------|--------|
|      |   | **2002**          |   | **2001** |   | **2000** |   |
| ANGIOZYME |   | 5,194             |   | 13,844 |   | 5,852 |   |
| HCV       |   | 7,153             |   | 30,396 |   | 979 |   |
| HERZYME   |   | 1,433             |   | 4,084 |   | 5,049 |   |
| Total     |   | $                 | 13,780 |   | $ | 48,324 |   | $ | 11,880 |   |
|           |        |                   |        |  |  |  |  |  |  |  |

 

Research and development project costs include costsof salaries, benefits, clinical trial site costs, outside services, materialsand supplies incurred to support the clinical programs.  Indirect costs allocated to projects includefacility and occupancy costs, intellectual property-related expenses, includingpatent prosecution and maintenance, and license and royalty payments.   For purposes of project tracking, wecapture the level of effort expended on a project through our projectmanagement system, which is based primarily on human resource time allocated toeach project, supplemented by an allocation of indirect costs and other specificallyidentifiable costs, if any.  As aresult, the costs we allocate to a project are not intended to, and do notnecessarily, reflect the precise actual incremental costs of the project.

 

Future costs related to the projects are difficult toestimate due to the nature of the technology and the inability to foreseeoutcomes of key milestones in the clinical development of each drug.  However, generally speaking in thebiotechnology industry, drug timelines track certain averages such as thefollowing:

 

•                                  *Preclinicalresearch* may last years depending on the technology.  In the case of ribozymes, which were anentirely new technology, the research phase for the first generation ribozymedrug lasted approximately six years and cost more than $70.0 million startingwith the formation of the company in 1992 until our first chemicallysynthesized ribozyme IND was filed in 1998. Preclinical research included development from a conceptual ribozyme tothe first chemically synthesized ribozymes, through the completion of animaltoxicity and pharmacokinetic studies necessary to file the ANGIOZYME IND, ourfirst chemically synthesized drug introduced in the clinic.

 

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•                                  *Phase Iclinical trials*are conducted with small groups of healthyvolunteers to determine the drug’s safety profile and its blood concentrationprofile over time.  Phase I trials maylast anywhere from a few months to two years and may cost several million dollarsdepending on the drug and indication targeted.

 

•                                  *Phase IIclinical trials* are generally expanded safety, optimal dosing andefficacy studies in small groups of patients afflicted with the targeteddisease.  Phase II trials can last up toseveral years and can cost several million dollars. Variances in cost and timebetween trials maybe due to the trial regimen, number of patients and length oftime patients are on trial.

 

•                                  *Phase IIIclinical trials,*are large-scale, multi-center, comparative trialswith patients afflicted with the target disease in order to provide enough datato demonstrate the efficacy and safety required by the FDA prior tocommercialization of the drug.  A PhaseIII trial may last anywhere from a year to several years and would cost manymillions of dollars.

 

The most significant costs associated with clinicaldevelopment are the Phase III trials as they tend to be the longest and largeststudies conducted during the drug development process.  The FDA closely monitors the progress ofeach phase of clinical testing. The FDA may, at its discretion, re-evaluate,alter, suspend or terminate testing based upon the data accumulated to thatpoint and the FDA’s assessment of the risk/benefit ratio to patients.  If Phase III trials are successful, thefinal step in a drug approval timeline is submission of a New Drug Application(NDA) with the Food and Drug Administration. The NDA process may last several years.

 

The above timelines and costs are estimates andgeneralizations and as such involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance or achievements tobe materially different from estimates. In addition, we intend to seek collaborations and corporate partners toassist in the cost and complexities of developing our drugs.  If we are successful in our drugdevelopment, we intend to rely on our corporate partners or third parties withestablished direct sales forces to market, distribute and sell our products.  These partners or third parties may havesignificant control over important aspects of the commercialization of ourproducts, including market identification, marketing methods, pricing, salesforce recruitment and management and promotional activities.

 

*Generaland Administrative.*General and administrative expenses forthe year ended December 31, 2002 was $5.5 million, compared to $4.5 million and$3.7 million for the years ended December 31, 2001 and 2000, respectively. Theincreases from year to year are the result of increased staffing and expensesnecessary to manage and support our expanding product and business developmentefforts. General and administrative expenses may continue to increase as aresult of increasing legal and other professional fees in connection withbusiness development efforts and patent protection.

 

Staffing levels for research, development and generaladministrative departments have fluctuated from a high of 138 during 2002 to alow of 70 as of March 2003.  Weincreased staffing significantly during 2000 and 2001 in order to support theclinical development of ANGIOZYME and our HCV drug.  During 2002, we discontinued our HCV clinical trials due to atoxicity issue, scaled back considerably the scope and number of ANGIOZYMEtrials and have redirected our efforts into the research and development ofRNAi therapeutics.  Our expenses in2002, 2001 and 2000 reflect the staffing fluctuation.  We anticipate remaining at our current staffing levels through2003 and do not currently expect to increase staffing significantly in the nextfew years.

 

*Interestincome. *Interestincome was $389,000 for the year ended December 31, 2002 compared to $2.2million and $3.2 million for the years ended December 31, 2001 and 2000,respectively.  The decrease from year toyear is primarily due to declining average balances in our cash, cashequivalents and securities available-for-sale. Interest income generally fluctuates as a result of the average amountof cash available for investment and prevailing interest rates.

 

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*Interestexpense. *Interestexpense was $803,000 for the year ended December 31, 2002 compared to $820,000and $151,000 for the years ended December 31, 2001 and 2000, respectively.  During 2000 interest expense was primarilyrelated to our Elan convertible note. In 2001, we increased our borrowings on the Elan convertible note andtherefore interest expense increased as well. In June 2002, Elan converted our convertible note to preferredstock.  The note accrued interest at a12% semi-annual rate through June 2002, but as of July 2002 the preferred stockaccrued dividends at a 12% semi-annual rate. Offsetting the decrease in accrued interest related to the Elan noteduring 2002, was interest expense related to additional borrowings fundingcapital equipment purchases through long-term debt established with a creditfacility in December 2001.  Interestexpense is expected to increase in the future as we arrange for additionalfinancing for operations.

 

*Equityin loss of unconsolidated affiliate. *Equityin loss of unconsolidated affiliate was $5.3 million for the period endedDecember 31, 2002, compared to $8.3 million and $9.0 million for the yearsended December 31, 2001 and 2000, respectively.  The expense is our 80.1% share of Medizyme’s 2002 expenses,limited to the cost of our investment. The decreases in the losses recognizedover the years are due to the decreases in Medizyme’s expenses related to thedevelopment of HERZYME.  The decreasesare the result of the transition of HERZYME from research to clinical trials.Medizyme’s 2002 expenses include $5.0 million amortized expense for a $15.0million license fee paid to Elan in January 2000, as well as $1.4 million weinvoiced Medizyme in 2002 for research we conducted and clinical trial expenseswe incurred with HERZYME.  Medizyme’s2001 expenses also include the $5.0 million in amortized license expense, aswell as  $5.0 million we invoiced in2001 for research we conducted and clinical trial expenses we incurred withHERZYME.

 

### Liquidity and CapitalResources

 

Since our inception, wehave financed our operations through sales of equity securities in publicofferings, private placements of preferred and common stock, funds receivedunder our collaborative agreements and financing under equipment and tenantimprovement loans. From inception through December 31, 2002, we have receivedapproximately:

 

•                  $29.0million in net proceeds from private placements;

 

•                  $97.6million in net proceeds from public offerings;

 

•                  $130.9million from our collaborations; and

 

•                  $11.5million from equipment financing.

 

We had cash, cashequivalents and securities available-for-sale of $8.8 million at December 31,2002 compared with $35.0 million at December 31, 2001. The $26.2 milliondecrease in cash, cash equivalents and securities available-for-sale isprimarily the result of $22.4 million used for operations, net of revenues of$5.1 million; $4.6 million used for investments in equipment, leaseholdimprovements, patents and additional investment in an unconsolidated affiliate;net $230,000 in loans to executives; $124,000 received in proceeds from equitytransactions; $2.9 million received in proceeds from credit facilities; and$1.9 million paid for debt obligations.  Loans totaling $450,000 were made to five members of senior managementprior to the passage of the Sarbanes-Oxley Act in July 2002.

 

We invest our cash, cashequivalents and securities available-for-sale in interest-bearing,investment-grade securities.

 

Accounts receivable at December 31, 2002 were $484,000compared to $1.5 million at December 31, 2001. Accounts receivable at December 31, 2002 included $157,000 duefrom Medizyme for research support for HERZYME and $138,000 due from Chiron forreimbursement of ANGIOZYME expenses, as well as $189,000 due from miscellaneousother sources.

 

Total additions for property, plant and equipment forthe year ended December 31, 2002 were $1.6 million.  As of December 31, 2002, we had borrowed $1.8 million on a $4.0million loan facility through a credit institution.

 

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The loan facility through the credit institution currently averages aninterest rate of 9.5%, and matures in 36 or 48 months depending on the type ofequipment collateralized.  Additionalborrowings through the loan facility are currently on hold pending animprovement in our cash position. We anticipate future property, plant andequipment needs to be financed through the existing loan facility andadditional credit facilities yet to be determined.

 

In the fourth quarter of 2002 we purchased on credit$3.6 million of drug from a contract manufacturer.  The terms of payment for the purchase were $1.6 million paid onOctober 30, 2002; $1.1 million to be paid on or before October 30, 2004; and$873,491 to be paid on or before June 30, 2005.  The future payments will accrue interest at the rate of 6%compounded annually, calculated from January 1, 2003 until payment.

 

The following table summarizes our debt obligations asof December 31, 2002:

 
|                    |   | **Payments  Due by Period** |      |
|-------------------------|--------|-----------------------------|-----------|
|                    |   | **2003**                    |      | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
| Long-term debt          |   | $                           | 479,782   |   | $ | 5,077,815 |   | $ | 1,279,089 |   | $ | 131,810 |   | $ | — |   | $ | — |   | $ | 6,968,496 |   |
| Operating leases        |   | 1,065,844                   |      | 1,080,621 |   | 1,100,179 |   | 1,120,421 |   | 777,204 |   | — |   | 5,144,269 |   |
| Total debt  obligations |   | $                           | 1,545,626 |   | $ | 6,158,436 |   | $ | 2,379,268 |   | $ | 1,252,231 |   | $ | 777,204 |   | $ | — |   | $ | 12,112,765 |   |

 

*Chiron. *In July 1994, we enteredinto an agreement with Chiron to collaborate exclusively on up to five specifictargets selected by Chiron. ANGIOZYME is being developed in collaboration withChiron and we share equally all development costs and future profits withChiron.  In March 2001, we issued 38,920shares of our common stock to Chiron in exchange for reacquiring all rights todevelop any product containing or utilizing an HIV target.  We recorded an expense of $275,000 in March2001 in connection with the issuance of the stock.  For the year ended December 31, 2002 we recorded $2.2 million and$395,000 in revenues and reimbursement of expenses, respectively, from Chironfor costs incurred for the clinical development of ANGIOZYME.

 

*ScheringAG. *In April 1997, weentered into a purchase agreement, subsequently amended, with Schering AG andSchering Berlin Venture Corporation, or SBVC, an affiliate of Schering AG, aspart of our target discovery and validation program.   SBVC made a $2.5 million equity investment in us in April 1997in exchange for 212,766 shares of our common stock and in April 1998 made anadditional equity investment of $2.5 million in exchange for 465,117 shares ofour common stock. Separately, Schering AG provided loans of $2.0 million ineach of 1997, 1998, 1999, 2000 and 2001. We received our final draw-down of$1.0 million from Schering AG in April 2001. The loans, which carry an interestrate of 8.0% per annum, are immediately convertible into equity at ScheringAG’s  option.  Additionally, 50.0% of any borrowings we make on the line ofcredit must be collateralized by equipment purchases.  In April 2000, after the completion of our public offering, werepaid $6.9 million of our outstanding borrowings to Schering AG.  In June 2000, Schering AG converted $997,000of the loan balance into 42,435 shares of our common stock at a conversionprice of $23.50. At December 31, 2002, the outstanding borrowings and accruedinterest of $3.5 million were convertible into approximately 14.4 millionshares of our common stock. Principal and interest payments are deferred untilmaturity of the loans in April 2004.  Asa result of the atugen formation in 1998, we now subcontract all of ourexisting target discovery and validation programs to atugen, which does notaffect the terms of our loan agreement with Schering AG. The agreement expiredin April 2002.  In connection with ourproposed new financing Schering AG has agreed to restructure our debtobligations as we describe below.

 

*Elan. *In January 2000, wecompleted a joint venture with Elan to develop and commercialize of HERZYME,our potential product to treat breast and other cancers.  In accordance with the collaboration, wesold to Elan our Series A Exchangeable Convertible Preferred Stock for $12.0million and, in turn, used those funds for initial funding of Medizyme.  As of December 31, 2002 the Series APreferred Stock and accrued stock dividends were convertible into approximately1.2 million shares of our common stock. Also, as part of the collaboration, Elan purchased 641,026 shares of ourcommon stock for a purchase price of $5.0 million.  In addition, Elan purchased 500,500 shares of common stock for$5.0 million in May 2001, which was at a premium to the market price.  In January 2000, we estimated that thedevelopment of HERZYME would require additional funds of up to

 

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$15 million and, therefore, Elan made available to us a $12.0 millioncredit facility, which was convertible into Series B Convertible PreferredStock, to fund our portion of Medizyme operating costs over a 42-month period.At December 31, 2002, we had utilized the credit facility and had borrowed $9.9million. The note carried an interest rate of 12% compounded on a semi-annualbasis.  Elan converted this debt andaccrued interest into shares of our Series B Convertible Preferred Stock inJune 2002.  In June 2002 and October2002, we completed draw-downs of $529,553 and $597,165, respectively, againstthe credit facility, which are recorded as preferred shares issuable underequity on our balance sheet.  At December31, 2002, the Series B Convertible Preferred Stock, which accrues dividends ata annual rate of 12%, is convertible into approximately 1.5 million shares ofour common stock.  In aggregate, atDecember 31, 2002, all of our outstanding preferred stock and accreteddividends with Elan are convertible into 2.7 million shares of our commonstock. As of December 31, 2002, the Series A and B Preferred Stock haveliquidation preferences of $14.3 million and $11.8 million, respectively.  In addition, Elan purchased 750,000 sharesof our common stock and a five-year warrant to purchase 75,000 shares of ourcommon stock at $5.00 per share in December 2001 for $3.0 million.

 

In mid-2002, Elan announced that it would limit thefocus of its clinical programs.  Elan’sannounced clinical programs do not include cancer programs.  While we have not received formal noticefrom Elan concerning our collaboration arrangement, based on Elan’s publicstatements, we believe that following completion of our Phase I study later thisyear, it is unlikely that Elan will continue to support HERZYMEdevelopment.  We do not intend to pursuedevelopment of HERZYME without a new corporate partner.

 

In August 2002, weannounced that we are realigning our research and development programs to focusour internal development on only those programs we believe have a highlikelihood of commercial success.  Wediscontinued our HEPTAZYME program and began leveraging our nucleic acidexpertise to develop RNAi based therapeutics and develop diagnostictechnologies for use by our collaborators and also plan to enter intolicensing, process development and manufacturing arrangements.  As a result, we reorganized certaindepartments and reduced staff.   Weexpect that these actions will reduce operating expenses by approximately 30%in 2003.   In October 2002, we committedto a minimum three-month severance agreement for all current employees fortermination without cause.  Along withother senior management severance agreements, company-wide severance if effected,would cost approximately $3.5 million.

 

*ProposedPrivate Placement. *InFebruary 2003, we entered into a definitive common stock and warrant purchaseagreement (the Stock Purchase Agreement) with Sprout Group, Oxford BiosciencePartners IV, Venrock Associates, TVM V Life Science Ventures GmbH & Co. KGand Granite Global Ventures (the Investors) pursuant to which we have agreed toissue and sell and the Investors have agreed to purchase shares of our commonstock and five-year warrants to purchase common stock for aggregate considerationof $48 million. The purchase price will be $0.33 per share; however, the priceis subject to reduction (if we breach representations and warranties made inthe Stock Purchase Agreement) to $0.28 per share. Based on the assumed $0.33per share purchase price, we will issue to the Investors 145,454,545 shares ofour common stock and warrants to purchase 30,090,909 shares of common stockexercisable at $0.42 per share.

 

As a result of their combined approximate 87%ownership (after giving effect to the exercise of the warrants and other stockissuances pursuant to the Stock Purchase Agreement), together with Boardrepresentation, the Investors will have control over RPI following consummationof the transactions contemplated by the Stock Purchase Agreement. The Investorswill have the right to designate four of our seven Board members.

 

Consummation of the transactions is subject to anumber of conditions, including, but not limited to:

 

•                            approvalof our stockholders;

•                            appointmentto the Board of the four Investor designees;

•                            adoptionof an amended and restated certificate of incorporation in order to effect areverse stock split;

•                            changethe Company’s name;

•                            increasethe number of authorized shares;

•                            adopta provision permitting shareholder action to be taken by written consent inlieu of a meeting;

 

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•                            executionby our officers, key employees and consultants of non-competition andnon-solicitation agreements;

•                            nomaterial adverse change prior to closing; and,

•                            amendmentof our bylaws.

 

In connection with the execution of the Stock PurchaseAgreement, we obtained certain waivers and amendments to the agreements withSchering AG and to our agreements with Elan. Schering has agreed to restructureour debt obligations to them. Among other things, Elan has agreed to convertall of the outstanding shares of our Series A and Series B Preferred Stock intoshares of our common stock immediately prior to the closing of the transaction,to waive certain pre-emptive rights, and to waive its right to nominate adirector for election to our board of directors. Each of Schering and Elangranted these waivers based on the condition that the transactions areconsummated without material changes from the terms that were presented tothem. As one of the conditions to the Investors’ obligation to close, thesewaivers, and other consents, must be in effect at closing.

 

The execution of the transactions contemplated by theStock Purchase Agreement will have a highly dilutive effect on currentstockholders in that the percentage ownership of our current stockholders willdecline significantly as a result of the additional shares issued pursuant tothe Stock Purchase Agreement.  Thenumber of shares issued pursuant to the Stock Purchase Agreement will increasesubstantially the number of shares of common stock currently outstanding.  This means that our current stockholderswill own a much smaller interest in us as a result of the completion of thetransactions contemplated by the Stock Purchase Agreement.  For purposes of example only, a stockholderwho owned 10% of our outstanding stock as of February 11, 2003, would own just1.0% of the shares outstanding immediately after the completion of thetransactions contemplated by the Stock Purchase Agreement.

 

We anticipate that, withthe consummation of the private placement transaction, our existing financialresources and expected revenues from collaborations, our cash should besufficient to meet our anticipated operating and capital requirements into2005. We expect to incur substantial additional costs, including costs relatedto:

 

•                  ourresearch, drug discovery and development programs;

 

•                  preclinicalstudies of our products, if developed;

 

•                  prosecutingand enforcing patent claims;

 

•                  generaladministrative and legal fees; and

 

•                  manufacturingand marketing of our products, if any.

 

We will continue to needto raise additional capital through any or all of the following:  public or private financing, merger oracquisition, new collaborative relationships, new credit facilities and/orother sources. If we raise funds by selling more stock, your ownership share inus will be diluted.  We may grant futureinvestors rights superior to those of existing shareholders.  In addition, we do not know if additionalfunding will be available or on acceptable terms when needed.

 

At December 31, 2002, we had available net operatingloss carryforwards and research and development credit carryforwards of $169.2million and $4.5 million, respectively, for income tax purposes. Our ability toutilize our net operating loss carryforwards is subject to an annual limitationin future periods pursuant to the “change in ownership” rules under Section 382of the Internal Revenue Code.

 

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**Risk Factors**

 

**We are abiotechnology company in the early stage of development and have only a limitedoperating history for you to review in evaluating our business and prospects.**

 

Our ribozyme and RNAi technologies are in an earlystage of development and will require further testing before we can apply themto developing RNA-based therapeutic products. There can be no assurance thatour technologies will enable us, or any of our collaborators, to discover anddevelop therapeutic products.

 

All of our products are in early stages ofdevelopment, have never generated any sales and require extensive testingbefore commercialization. We do not expect our most advanced drug ANGIOZYME tobe commercially available for several years, if at all. Furthermore ourRNAi-based drugs will require even longer development times.

 

You must consider, based on our limited history, ourability to:

 

•          Obtain the financial resourcesnecessary to develop, test, manufacture and market products;

 

•          Engage corporate partners to assist indeveloping, testing, manufacturing and marketing our products;

 

•          Satisfy the requirements of clinicaltrial protocols, including patient enrollment;

 

•          Establish and demonstrate the clinicalefficacy and safety of our products;

 

•          Obtain necessary regulatory approvals;and

 

•          Market our products to achieveacceptance and use by the medical community in general.

 

**If wecomplete the proposed stock purchase transaction, you may experiencesubstantial dilution.**

 

You may experience substantial dilution if we completethe proposed stock purchase transaction. The purchase price will equal either$0.28 or $0.33 per share. In addition to purchasing shares of our common stock,the investors will purchase warrants exercisable at $0.42 per share for sharesof our common stock. In conjunction with negotiating the stock purchaseagreement, we also negotiated an agreement with Elan as a result of which Elanwill, at closing of the proposed transaction, convert all of its outstandingSeries A and Series B Convertible Preferred Stock into shares of our commonstock and receive additional warrants to purchase shares of our commonstock.  As a result of all of thesechanges, your ownership stake in our company may be substantially diluted and weexpect that existing stockholders will own approximately 13% of our outstandingstock.

 

**We havea history of losses, expect future losses and cannot assure you that we willever become or remain profitable.**

 

We have incurred significant losses and have hadnegative cash flows from operations since inception. To date, we have dedicatedmost of our financial resources to research and development and general andadministrative expenses. We have funded our activities primarily from sales ofour stock, revenues we receive under research and development agreements, andlines of credit. As of December 31, 2002, our accumulated deficit was $194.5million. We expect that the use of our net operating loss will be significantlyrestricted in the future as a result of a change of control associated with theproposed stock purchase transaction.

 

We expect to incur losses for at least the nextseveral years because we plan to spend substantial amounts on research anddevelopment of our products, including preclinical studies and clinical trials,and, if we obtain necessary regulatory approvals, on sales and marketingefforts.

 

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**If wecannot obtain additional financing, we may curtail our research anddevelopment, relinquish our rights to some or all of our products or declarebankruptcy.**

 

Our existing financial resources and expected revenuesfrom our collaborations are insufficient to continue to meet our operating andcapital requirements at existing levels. We need to raise substantialadditional capital to pursue our business strategy, which requires significantexpenditures for research and development and preclinical and clinicaldevelopment. Our financing alternatives have proven to be limited. If we cannotcomplete the previously announced stock purchase transaction, we will berequired to consider:

 

•          Curtailing our research anddevelopment plans;

 

•          Selling some or all of ourintellectual property;

 

•          Selling our diagnostics business; or

 

•          Winding up our operations anddeclaring bankruptcy.

 

There can be no assurance that if we choose to attemptto sell some or all of our intellectual property, or if we choose to sell ourdiagnostic business, that we will be able to do so, or that if we are able tocomplete sales, that we will be able to complete sales on terms and conditionsthat are favorable to us.

 

**There isa significant degree of uncertainty relating to our patents that could cause usto incur substantial costs and delays as a result of proceedings and litigationregarding patents and other proprietary rights. The ultimate result of anypatent litigation could be the loss of some or all protection for the patentinvolved.**

 

We have filed patent applications on various aspectsof RNAi technology that have not yet been approved. We cannot guarantee thatany patents will issue from any pending or future patent applications owned byor licensed to us. The scope of our issued patents may not be sufficientlybroad to offer meaningful protection against competitive products. Our basicribozyme patents, the Cech patents, unless extended, expire in 2008 in theUnited States and in 2007 in Europe and Japan. Although our license to theseribozyme patents extends through the expiration of the Cech patents or anyextensions thereof, our licensor preserves the right to terminate our licensebefore such time under certain circumstances. We have received approval of someadditional patent applications covering various aspects of the nucleic acid andribozyme technology, and we have filed patent applications for other technologyimprovements and modifications that have not yet been approved.

 

**Wecannot be certain that the named inventors of subject matter claimed by ourpatents and patent applications were the first to invent or the first to filepatent applications for these inventions.**

 

We have filed documents in opposition of one ribozymerelated patent granted to a competitor in Europe. Competitors have fileddocuments in opposition of our Cech patents in Europe and Japan on ribozymetechnology. The patent opposition in Japan has been resolved in our favor. TheEuropean opposition proceeding is in progress. However, at the oral proceedingsin July 2000, the European Opposition Division found no grounds for revokingthe Cech patents but decided to clarify the scope of the claims to coverself-splicing intervening sequence derived ribozymes. This decision is onappeal at the European Patent Office Technical Board. We anticipateinterference proceedings involving one of our ribozyme-related patents in theUnited States. We are also involved in a re-examination proceeding involvingone of our patents in the United States.

 

**Themanufacture, use or sale of our products may infringe on the patent rights ofothers.**

 

If we are unable to avoid infringing another party’spatent rights, we may be required to seek a license, defend an infringementaction or challenge the validity of the patents in court. Patent litigation iscostly and time consuming. We may not have sufficient resources to bring theseactions to a successful conclusion. In addition, if

 

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we do not obtain a license, do not successfully defend an infringementaction or are unable to have infringed patents declared invalid, we may:

 

•          Incur substantial monetary damages;

 

•          Encounter significant delays inmarketing our products; and

 

•          Be unable to participate in themanufacture, use or sale of products or methods of treatment requiringlicenses.

 

In addition, we regularly enter into agreements toin-license technologies and patent rights. Should we fail to comply with theterms of those license agreements, including payment of any requiredmaintenance fees or royalties, we would lose the rights to those technologiesand patents.

 

**We maynot have identified all United States and foreign patents that pose a risk ofinfringement. We may be forced to litigate if an intellectual property disputearises.**

 

This litigation could be extremely expensive.Proceedings and litigation involving our patents or patent applications alsocould result in adverse findings about:

 

•          The patentability of our inventionsand product candidates; or

 

•          The enforceability, validity or scopeof protection provided by our patents.

 

As discussed above, our competitors have taken theposition in patent oppositions and elsewhere that our patents are invalid orthat our activities infringe on their ribozyme related patent rights. While wedo not believe we are infringing on the patent rights of our known competitors,we may have to incur substantial costs if litigation is brought against us bythese competitors.

 

**Wedepend upon our collaborative relationships and our collaborators have rightsunder these agreements which if exercised could impair our ability to developour products and our operating results.**

 

Engaging corporate partners and other third parties todevelop, test and manufacture our initial products has been, and is expected tocontinue to be, a key element of our strategy. Our current partners, Chiron andElan, have the right to terminate unilaterally our existing agreements or todiscontinue funding their share of product development expenses. Based onpublic statements made by Elan, we do not believe that Elan is likely tocontinue funding our collaboration for the development of HERZYME. We will notcontinue with independent development of this product. Generally, if any of ourcurrent partners were to terminate its funding of the development of aparticular product, we may not have the right or resources to continuedevelopment of that product on our own.

 

In addition, there are many aspects of ourcollaborations that have been and will continue to be outside of our controlincluding:

 

•          Decisions by our collaborators toextend or renew our agreements and relationships;

 

•          The pace of development of ourproducts including the achievement of performance milestones;

 

•          Development by our collaborators ofcompeting technologies or products;

 

•          Exercise by our collaborators ofmarketing or manufacturing rights; and

 

•          The loss of our rights to products orthe profits from our products if we are unable to fund our share of developmentcosts.

 

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**Becausewe must obtain regulatory approval to market our products in the United Statesand foreign jurisdictions, we cannot predict whether or when we will bepermitted to commercialize our products.**

 

The pharmaceutical industry is subject to stringentregulation by a wide range of authorities. We cannot predict whether regulatoryclearance will be obtained for any product we develop. A pharmaceutical productcannot be marketed in the United States until it has completed rigorouspreclinical testing and clinical trials and an extensive regulatory clearanceprocess implemented by the Food and Drug Administration, the FDA. Satisfactionof regulatory requirements typically takes many years, depends upon the type,complexity and novelty of the product, and requires the expenditure ofsubstantial resources. Of particular significance are the requirements coveringresearch and development, testing, manufacturing, quality control, labeling andpromotion of drugs for human use.

 

Before commencing clinical trials in humans, we mustsubmit and receive approval from the FDA for an IND. Clinical trials aresubject to oversight by institutional review boards and the FDA and:

 

•          Must be conducted in conformity withthe FDA’s good laboratory practice regulations;

 

•          Must meet requirements forinstitutional review board oversight;

 

•          Must meet requirements for informedconsent;

 

•          Must meet requirements for goodclinical practices;

 

•          Are subject to continuing FDAoversight;

 

•          May require large numbers of testsubjects; and

 

•                              Maybe suspended by the FDA or us at any time if it is believed that the subjectsparticipating in these trials are being exposed to unacceptable health risks orif the FDA finds deficiencies in the IND or the conduct of these trials.

 

Before receiving FDA clearance to market a product, wemust demonstrate that the product is safe and effective on the patientpopulation that will be treated. Data obtained from preclinical and clinicalactivities are susceptible to varying interpretations that could delay, limitor prevent regulatory clearances. In addition, delays or rejections may beencountered based upon additional government regulation from future legislationor administrative action or changes in FDA policy during the period of productdevelopment, clinical trials and FDA regulatory review.

 

Failure to comply with applicable FDA or otherapplicable regulatory requirements may result in criminal prosecution, civilpenalties, recall or seizure of products, total or partial suspension ofproduction or injunction, as well as other regulatory action against ourpotential products or us. Additionally, we have limited experience inconducting and managing the clinical trials necessary to obtain regulatoryapproval.

 

If regulatory clearance of a product is granted, thisclearance will be limited to those disease states and conditions for which theproduct is demonstrated through clinical trials to be safe and efficacious. Wecannot ensure that any compound developed by us, alone or with others, willprove to be safe and efficacious in clinical trials and will meet all the applicableregulatory requirements needed to receive marketing clearance.

 

Outside the United States, our ability to market aproduct is contingent upon receiving a marketing authorization from theappropriate regulatory authorities. This foreign regulatory approval processincludes all of the risks associated with FDA clearance described above.

 

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**Ourproducts require materials that may not be readily available or cost effective,which may reduce our competitiveness or reduce our profitability.**

 

The products we are developing are new chemicalentities that are not yet available in commercial quantities. Raw materialsnecessary for the manufacture of our products may not be available insufficient quantities or at a reasonable cost in the future. Therefore, ourproducts may not be available at a reasonable cost in the future.

 

**Disclosureof our trade secrets could reduce our competitiveness.**

 

Because trade secrets and other unpatented proprietaryinformation are critical to our business, we attempt to protect our tradesecrets by entering into confidentiality agreements with third parties,employees and consultants. However, these agreements can be breached and, ifthey are, there may not be an adequate remedy available to us. In addition,third parties may independently discover trade secrets and proprietaryinformation. Costly and time-consuming litigation could be necessary to enforceand determine the scope of our proprietary rights.

 

**We lacksales and marketing experience and will likely rely upon third parties tomarket our products that will result in a loss of control over the marketingprocess.**

 

We currently intend to rely on third parties withestablished direct sales forces to market, distribute and sell many of ourproducts. These third parties may have significant control over importantaspects of the commercialization of our products, including marketidentification, marketing methods, pricing, sales force recruitment andmanagement and promotional activities. We may be unable to control the actionsof these third parties. We may be unable to make or maintain arrangements withthird parties to perform these activities on favorable terms.

 

**Oursuccess may depend on third-party reimbursement of patients’ costs for ourproducts that could result in price pressure or reduced demand for ourproducts.**

 

Our ability to market products successfully willdepend in part on the extent to which various third parties are willing toreimburse patients for the costs of our products and related treatments. Thesethird parties include government authorities, private health insurers and otherorganizations, such as health maintenance organizations. Third-party payors areincreasingly challenging the prices charged for medical products and services.Accordingly, if less costly drugs are available, third party payers may notauthorize or may limit reimbursement for our products, even if our products aresafer or more effective than the alternatives. In addition, the trend towardmanaged healthcare and government insurance programs could result in lowerprices and reduced demand for our products. Cost containment measuresinstituted by healthcare providers and any general healthcare reform couldaffect our ability to sell our products and may have a material adverse effecton us. We cannot predict the effect of future legislation or regulationconcerning the healthcare industry and third-party coverage and reimbursementon our business.

 

**Followingcompletion of the proposed stock purchase transaction, a small number ofinvestors could control all of our activities.**

 

If we complete the proposed stock purchasetransaction, the investors will own approximately 87% of our outstanding stock(after giving effect to the exercise of the warrants and other stock issuancespursuant to the Stock Purchase Agreement). In addition, the investors will havethe right to select four of seven designees to our Board of Directors. Inconnection with the proposed stock purchase transaction, we also have agreed toseek stockholder approval for an amendment to our amended certificate ofincorporation that would permit stockholder action to be taken by writtenconsent instead of by means of an actual meeting. As a result of all of thesechanges, if we complete the proposed stock purchase transaction, the investorswill be able to take any action, even those actions that, under Delaware law,require the affirmative vote of a supermajority of the stockholders, by writtenconsent, without the need for a stockholders’ meeting. For example, if theinvestors were to act in concert, the

 

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investors could decide to take the company private, to sell some or allof its assets, or to effect a merger without holding a stockholder’s meeting.If the investors were to act in concert, they would have sufficient votingpower to effect these types of transactions, although they have not indicatedany present intent to do so.

 

**Ourcommon stock has limited trading volume and a history of volatility that couldimpair your investment.**

 

You may be unable to sell securities you purchase fromus at the time or price desired. The market price of our common stock hasfluctuated dramatically in recent years. The trading price of our common stockmay continue to fluctuate substantially due to:

 

•        Quarterly variations in our operating results;

 

•        Our ability to raise additional funds;

 

•        Completion of our proposed reverse stock split;

 

•        Ownership interest of the new investors;

 

•        Changes in the status of our corporatecollaborative agreements;

 

•        Changes in earnings estimates by marketresearch analysts;

 

•        Clinical trials of products;

 

•        Research activities, technological innovationsor new products by us or our competitors;

 

•        Developments or disputes concerning patents orproprietary rights;

 

•        Purchases or sales of our stock by ourexecutive officers, directors or substantial holders of our common stock;

 

•        Timing or denial by the FDA of clinical trialprotocols or marketing applications;

 

•        Securities class actions or other litigation;and

 

•        Changes in government regulations.

 

These fluctuations have sometimes been unrelated toour operating performance. As a result, the value of your shares could varysignificantly from time to time. The historical trading volume of our commonstock has been limited. After this offering, an active public market for thecommon stock may not develop or be sustained.

 

Both our corporate documents and Delaware law haveanti-takeover provisions that may discourage transactions involving actual orpotential changes of control at premium prices.

 

**Ourcorporate documents and provisions of Delaware law applicable to us includeprovisions that discourage change of control transactions. For example, ourcorporate documents:**

 

•                              Requireprocedures to be followed and specify time periods to be met for anystockholder to propose matters for consideration at annual stockholdermeetings, including the nomination of directors for election at those meetings;and

 

•                              Authorizeour Board of Directors to issue up to 5,000,000 shares of preferred stockwithout stockholder approval and to set the rights, preferences and otherdesignations of preferred stock, including the voting rights, at itsdiscretion.

 

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In addition, we are subject to provisions of DelawareGeneral Corporations Law that may make some business combinations moredifficult. As a result, transactions that otherwise could involve the premiumover prevailing market prices to holders of our common stock may be discouragedor may be more difficult for us to effect as compared to companies organized inother jurisdictions.

 

**We areinvolved in pending litigation and cannot at this time predict the ultimateoutcome or possible loss that could result from that litigation.**

 

We are a defendant in a lawsuit brought as a classaction on behalf of purchasers of our common stock on November 16 and 17, 1999.The lawsuit alleged the defendants violated certain federal securities lawsbased upon an allegedly misleading announcement made on November 15, 1999. OnNovember 7, 2002, we announced that an agreement has been reached with theplaintiffs to settle the shareholder class action lawsuit. At a hearing onMarch 27, 2003, the court approved the settlement as proposed and will issue anorder confirming the approval shortly. Our liability insurance policy hasagreed to cover the full amount of the settlement.

 

**Ourcommon stock may be delisted from The Nasdaq Stock Market.**

 

We were notified by The Nasdaq Stock Market, Inc. onMarch 18, 2003 that we had failed to comply with the Marketplace Rules forcontinued listing of our common stock on the Nasdaq National Market.  Specifically, we were advised that we failedto meet the minimum bid price requirement because our common stock has closedat less than $1.00 per share since September 2002 and we failed to comply withthe minimum $10 million stockholders’ equity requirement.  We have requested, and been granted, anappeal.  During the time leading up toour appeal later in April, the delisting of our common stock will bestayed.  Although we believe that theproposed private placement transaction, as well as our proposed reverse stocksplit, may permit us to meet Nasdaq’s requirements, there can be no assurancethat we will be successful in our appeal. If we are not successful and our common stock is delisted, the marketfor our securities will not be as liquid.

 

**ITEM 7A.**        **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to changesin interest rates primarily from our investments in certain short-terminvestments.  We invest our excess cashin highly liquid short-term investments that are typically held for theduration of the term of the respective instrument.  We do not utilize derivative financial instruments, derivativecommodity instruments or other market risk sensitive instruments to manageexposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subjectto changes in the financial standing of the issuer of such securities, we arenot subject to any material risks arising from changes in interest rates,foreign currency exchange rates, commodity prices, equity prices or othermarket changes that affect market risk sensitive instruments.

 

 

**ITEM 8.**            **FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Submitted as part of Item15(a) of this Form 10-K and incorporated herein by reference.

 

 

**ITEM 9. **                               **CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

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**PART III**

 

**ITEM 10.**         **DIRECTORSAND EXECUTIVE OFFICERS OF REGISTRANT**

 

The directors, executiveofficers and key employees of Ribozyme Pharmaceuticals, Inc. are as follows:

 
| **Name**                                 |   | **Age** |   | **Position**                                                             |
|------------------------------------------|--------|---------|--------|--------------------------------------------------------------------------|
|                                     |   |    |   |                                                                     |
| Howard W. Robin (1)                      |   | 50      |   | Chief Executive  Officer, President and Director                         |
|                                     |   |    |   |                                                                     |
| Marvin Tancer                            |   | 52      |   | Chief Financial Officer  and Vice President of Operations                |
|                                     |   |    |   |                                                                     |
| Nassim Usman, Ph.D                       |   | 43      |   | Chief Scientific  Officer and Vice President of Research and Development |
|                                     |   |    |   |                                                                     |
| Lawrence E. Bullock                      |   | 47      |   | Vice President of  Finance and Administration and Secretary              |
|                                     |   |    |   |                                                                     |
| Jeremy L. Curnock Cook  (1) (2) (3) (4). |   | 53      |   | Director                                                                 |
|                                     |   |    |   |                                                                     |
| John Groom (2) (4)                       |   | 64      |   | Director                                                                 |
|                                     |   |    |   |                                                                     |
| Samuel R. Saks, M.D.(3)                  |   | 48      |   | Director                                                                 |
|                                     |   |    |   |                                                                     |
| Anders P. Wiklund (2)  (3) (4).          |   | 62      |   | Director                                                                 |

 

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(1)        Member of the ExecutiveCommittee

(2)        Member of the CompensationCommittee

(3)        Member of the AuditCommittee

(4)        Member of Nominating andGovernance Committee

 

Howard W. Robin hasserved as Chief Executive Officer, President and Director since July 2001.  From January 2001 to June 2001, Mr. Robinwas Chief Operating Officer, President and Director.  From 1991 to 2001 Mr. Robin was Corporate Vice President andGeneral Manager at Berlex Laboratories, Inc. and from 1987 to 1991 he served asVice President of Finance and Business Development and Chief FinancialOfficer.  From 1984 to 1987 Mr. Robinwas Director of Business Planning & Development at Berlex.  He was a Senior Associate with ArthurAnderson & Company prior to joining Berlex.  He received his BS in Accounting & Finance from FarleighDickinson University in 1974.

 

Marvin Tancer has served as Chief Financial Officerand Vice President of Operations since June 2001. Prior to joining RPI in 2001,Mr. Tancer served as National Sales Director of Oncology and Area SalesDirector for the Western United States for Berlex Labs, Inc. from 1999 to 2000.From 1992 to 1998 he held the position of Director of Finance andAdministration and Chief Financial Officer at Berlex Biosciences.  From 1986 to 1992 he held the position ofCorporate Controller for Berlex Labs, Inc. and from 1982 to 1986 wasPharmaceutical Division Controller and Director of Financial Analysis.  He earned his BS in Business Administrationfrom the Wharton School of Business.

 

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Nassim Usman, Ph.D., has served as Chief ScientificOfficer since February 2002 and Vice President of Research and Developmentsince August 2000. From December 1999 to July 2000, Dr. Usman served as SeniorVice President of Research. From May 1996 to December 1999, Dr. Usman served asVice President of Research at Ribozyme Pharmaceuticals. From April 1994 untilMay 1996, Dr. Usman served as Director of Chemistry and Biochemistry Researchand from September 1992 until April 1994 Dr. Usman served as Senior Scientistin Chemistry and Biochemistry. Dr. Usman is also a director of atugen AG.  From January 1987 to September 1992, Dr.Usman was a Postdoctoral Fellow and Scientist in the Departments of Biology andChemistry at the Massachusetts Institute of Technology. Dr. Usman received hisPh.D. in chemistry from McGill University.

 

Lawrence E. Bullock hasserved as Vice President of Administration and Finance and Secretary since January1996. From December 1990 to January 1996, Mr. Bullock was Chief FinancialOfficer, Director of Finance and Administration and Secretary of La JollaPharmaceutical Company, a biopharmaceutical company. Mr. Bullock received hisM.B.A. from the University of Utah.  Mr.Bullock terminated his employment with RPI in February 2003.

 

Jeremy L. Curnock Cookhas served as a director since July 1995. Mr. Cook was a director of RothschildAsset Management, an investment management company, where he was responsiblefor the Rothschild Bioscience Unit from 1987 until his retirement in 2000. Mr.Cook founded the International Biochemicals Group in 1975, which hesubsequently sold to Royal Dutch Shell in 1985, remaining as Managing Directoruntil 1987. He is Executive Chairman of Bioscience Managers Ltd., a corporateadvisory company, and Non-Executive Chairman of Targeted Genetics Inc.  He is also a director of Virogen Ltd., AMRADCorporation, GlycoDesign, Inc., Valigen, N.V., Inflazyme Pharmaceuticals, Inc.,autgen AG and Biocompatibles International plc. Mr. Cook received an M.A. inNatural Sciences from Trinity College Dublin.

 

John Groom has served asa director since April 2000.  Mr. Groomserved as President and Chief Operating Officer of Elan Corporation plc from1996 until his retirement in 2001. Mr. Groom continues as a director of ElanCorporation plc.  He served as Presidentand Chief Executive Officer of Athena Neurosceiences, Inc. from 1987 to 1996.  Mr. Groom is also a director of LigandPharmaceuticals, Inc., CV Therapeutics Inc. and Amarin Corporation Inc.  Mr. Groom is a Fellow of the Association ofCertified Accountants (UK).

 

Samuel R. Saks, M.D. hasserved as a director since April 2000. Dr. Saks is Company Group Chairman, ALZA Corporation, a operatingcompany of Johnson & Johnson.  In1992, Dr. Saks joined ALZA as the Vice President for Medical Affairs andsubsequently served as Senior Vice President, Medical Affairs and Group VicePresident, ALZA Pharmaceuticals.  Priorto joining ALZA, Dr. Saks was Vice President of Clinical Research at XOMACorporation and also worked in the clinical research departments ofSchering-Plough and Genentech.  Dr. Saksreceived his M.D. with honors from the University of Illinois and completed hisresidency in Internal Medicine at the University of Texas Southwestern MedicalCenter at Dallas and his fellowship in oncology at the University ofCalifornia, San Francisco.  Dr. Saks isboard certified in oncology and is a diplomat of the American Board of InternalMedicine.

 

Anders P. Wiklund hasserved as a director since August 1994. Since January 1997, Mr. Wiklund hasbeen the principal of Wiklund International, an advisory firm to thebiotechnology and pharmaceutical industries. From 1967 through 1996, Mr.Wiklund served in numerous executive positions for the Kabi and Pharmacia groupof companies, including President and CEO of Kabi Vitrum Inc. and KabiPharmacia, Incorporated. Mr. Wiklund is also a director of Glyco Design, Inc.,Medivir, A.B. and InSite Vision, Inc., as well as serving on private companyboards. Mr. Wiklund received a Master of Pharmacy degree from thePharmaceutical Institute in Stockholm.

 

All of our directors, except Howard Robin, havesubmitted to the Board their resignation letters indicating that they willresign from our Board upon consummation of the proposed private placement.  The Board will then fill the four vacancieswith four designees nominated by the investors.

 

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**ITEM11.**               **EXECUTIVECOMPENSATION**

 

The information required by this item is incorporatedby reference from the information under the caption “Executive Compensation”contained in the Proxy Statement.

 

**ITEM 12.**          **SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The information required by this item is incorporatedby reference to the information under the caption “Security Ownership ofCertain Beneficial Owners and Management” contained in the Proxy Statement forthe 2002 Annual Meeting of Stockholders which will be filed with the Securitiesand Exchange Commission not later than 120 days after December 31, 2002.

 

**ITEM 13.**        **CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required by this item is incorporatedby reference to the information under the caption “Compensation CommitteeInterlocks and Insider Participation” and “Certain Transactions” contained inthe Proxy Statement for the 2002 Annual Meeting of Stockholders which will befiled with the Securities and Exchange Commission not later than 120 days afterDecember 31, 2002.

 

**ITEM 14.**        **CONTROLS ANDPROCEDURES**

 

Based on their evaluationof our disclosure controls and procedures (as defined in Rule 13a-14(c) and15d-14 of the Rules promulgated under the Securities Exchange Act of 1934, asamended ) as of a date within 90 days of the filing date of this report, ourChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of our disclosure controls and procedures and have concluded thatthese disclosure controls and procedures are effective. This conclusion isbased on our evaluation as of the evaluation date.  There were no significant changes in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

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**PART IV**

 

**ITEM15.**        **EXHIBITS****, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)(1)                                             FINANCIALSTATEMENTS

 

 
| Report of Independent  Auditors                                                   |
|-----------------------------------------------------------------------------------|
| Balance Sheets                                                                    |
| Statements  of Operations                                                         |
| Statements  of Redeemable Preferred Stock and Stockholders’ (Deficit) Equity |
| Statements  of Cash Flows                                                         |
| Notes to Financial  Statements                                                    |

 

(a)(2)       FINANCIAL STATEMENTSCHEDULES

Schedules have been omitted since they are either notrequired or are not applicable.

 

(a)(3)                                             EXHIBITS

 
| **Number** |   | **Description**                                                                                                                                                                                                                                                                   |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |   | Amended and Restated  Certificate of Incorporation of Ribozyme Pharmaceuticals dated April 17,  1996(5)                                                                                                                                                                           |
| 3.2        |   | Bylaws of Ribozyme  Pharmaceuticals, as amended(1)                                                                                                                                                                                                                                |
| 3.3        |   | Certificate of  Correction to the Amended and Restated Certificate of Incorporation of  Ribozyme Pharmaceuticals dated September 15, 1997(23)                                                                                                                                     |
| 3.4        |   | Articles of Amendment to the Certificate of  Incorporation of Ribozyme Pharmaceuticals dated May 1, 2000(23)                                                                                                                                                                      |
| 4.1        |   | Specimen Stock  Certificate(1)                                                                                                                                                                                                                                                    |
| 4.2        |   | Certificate of  Designation, Preferences and Rights of Series L Preferred Shares (10)                                                                                                                                                                                             |
| 4.3        |   | Certificate of  Designations, Preferences and Rights of Series A Preferred Stock and Series B  Preferred Stock (11)                                                                                                                                                               |
| 4.4        |   | Rights Agreement, dated  November 22, 2000 between Ribozyme Pharmaceuticals, Inc., and American Stock  Transfer & Trust Company, which includes the form of Certificate of  Designation of Series AA Junior Participating Preferred Stock attached as Exhibit  A thereto (14) |
| 4.5        |   | Amendment to the Certificate of Designation,  Preferences and Rights of the Series L Preferred Stock of Ribozyme  Pharmaceuticals dated February 18, 2000(23)                                                                                                                     |
| 4.6        |   | Amendment to the  Certificate of Designation, Preferences and Rights of the Series L Preferred  Stock of Ribozyme Pharmaceuticals dated May 1, 2000(23)                                                                                                                           |
| 4.7        |   | Amendment to the  Certificate of Designations, Preferences, and Rights of Series A Preferred  Stock and Series B Preferred Stock of Ribozyme Pharmaceuticals(23)                                                                                                                  |
| 4.8        |   | Amendment dated  February 11, 2003 to Rights Agreement dated November 22, 2000 between  Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust  Company.(24)                                                                                                      |
| 10.1       |   | Form of Indemnity  Agreement entered into between Ribozyme Pharmaceuticals and its directors and  officers, with related schedule(1)                                                                                                                                              |
| 10.2       |   | Ribozyme  Pharmaceuticals’ Incentive Stock Option Plan, including form of Incentive  Stock Option Agreement(1)                                                                                                                                                               |
| 10.3       |   | Ribozyme  Pharmaceuticals’ Non-Qualified Stock Option Plan, including form of  Non-Qualified Stock Option Agreement(1)                                                                                                                                                       |
| 10.4       |   | Ribozyme  Pharmaceuticals’ 1996 Stock Option Plan, including forms of Incentive Stock  Option Nonstatutory Stock Option Agreements(1)                                                                                                                                        |
| 10.5       |   | Ribozyme  Pharmaceuticals’ 1996 Stock Employee Stock Purchase Plan (1)                                                                                                                                                                                                       |
| 10.6       |   | Employment Agreement  dated January 1, 1997 between Ribozyme Pharmaceuticals and Ralph E.  Christoffersen(5)                                                                                                                                                                      |

 

38

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| 10.7  |   | Incentive Stock Option  Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated  December 23, 1992(1)                                                                               |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Incentive Stock Option  Agreement between Ribozyme Pharmaceuticals and Ralph E. Christoffersen dated  September 23, 1994(1)                                                                              |
| 10.9  |   | Warrant Purchase  Agreement dated March 15, 1995, between Ribozyme Pharmaceuticals and Hambrecht  & Quist Guaranty Finance(1)                                                                        |
| 10.10 |   | Warrant to Purchase  Common Stock dated March 15, 1995, issued to Hambrecht & Quist Guaranty  Finance(1)                                                                                             |
| 10.11 |   | Warrant to Purchase  Common Stock dated February 22, 1993, issued to LINC Scientific Leasing(1)                                                                                                          |
| 10.12 |   | Warrant to Purchase  Common Stock dated July 30, 1993, issued to Douglas E. Olson(1)                                                                                                                     |
| 10.13 |   | Warrant to Purchase  Common Stock dated July 30, 1993, issued to Richard J. Warburg and Ruth P.  Warburg(1)                                                                                              |
| 10.14 |   | Warrant to Purchase  Common Stock dated December 28, 1994, issued to Competitive Technologies,  Inc.(1)                                                                                                  |
| 10.15 |   | Warrant to Purchase  Common Stock dated December 29, 1995, issued to Silicon Valley Bank(1)                                                                                                              |
| 10.16 |   | Warrant to Purchase  Common Stock dated July 26, 1996, issued to Silicon Valley Bank(1)                                                                                                                  |
| 10.17 |   | Warrant to Purchase  Common Stock dated April 17, 1996, issued to Chiron Corporation(1)                                                                                                                  |
| 10.18 |   | Collaborative Research,  Development and Commercialization Agreement dated July 15, 1994, between  Ribozyme Pharmaceuticals and Chiron Corporation(1)                                                    |
| 10.19 |   | Research Collaboration  and Licensing Agreement dated November 1, 1995, between Ribozyme  Pharmaceuticals and Pharmacia Biotech, AB(1)                                                                   |
| 10.20 |   | Research and  Development Collaboration Agreement dated April 19, 1993, between Ribozyme  Pharmaceuticals and Parke-Davis Division of Warner - Lambert Company(1)                                        |
| 10.21 |   | First Amendment to the  Research and Development Collaboration Agreement dated April 17, 1995,  between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert  Company(1)                  |
| 10.22 |   | Second Amendment to the  Research and Development Collaboration Agreement dated February 8, 1996,  between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-Lambert  Company(1)               |
| 10.23 |   | Financing Agreement  dated March 16, 1995, among Wilderness Place Holdings L.L.C., Hambrecht &  Quist Guaranty Finance, L.P. and Ribozyme Pharmaceuticals(1)                                         |
| 10.24 |   | Negotiable Promissory  Note dated October 7, 1992, between Ribozyme Pharmaceuticals and Ralph  Christoffersen and Addendum dated June 25, 1993(1)                                                        |
| 10.25 |   | Employment Agreement  dated January 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E.  Bullock(1)                                                                                                |
| 10.26 |   | Promissory Note dated  February 8, 1996, between Ribozyme Pharmaceuticals and Lawrence E. Bullock(1)                                                                                                     |
| 10.27 |   | Lease for Real Property  dated May 20, 1992, between Aero-Tech Investments and Ribozyme  Pharmaceuticals(1)                                                                                              |
| 10.28 |   | Non-Disturbance and  Attornment Agreement dated March 31, 1995, among General American Life  Insurance Company, Aero-Tech Investments, Wilderness Place Holdings L.L.C.  and Ribozyme Pharmaceuticals(1) |
| 10.29 |   | Master Lease Agreement  dated September 2, 1992, between Ribozyme Pharmaceuticals and LINC Scientific  Leasing(1)                                                                                        |
| 10.30 |   | Loan and Security  Agreement dated February 28, 1994, between Ribozyme Pharmaceuticals and  Silicon Valley Bank(1)                                                                                       |
| 10.31 |   | Loan Modification  Agreement dated December 21, 1994, between Ribozyme Pharmaceuticals and  Silicon Valley Bank(1)                                                                                       |
| 10.32 |   | Loan and Security  Agreement dated December 29, 1995, between Ribozyme Pharmaceuticals and  Silicon Valley Bank and MMC/GATX Partnership No. 1(1)                                                        |
| 10.33 |   | Warrant to Purchase  Common Stock dated December 29, 1995, issued to MMC/GATX Partnership No. 1(1)                                                                                                       |
| 10.34 |   | Agreement dated  February 29, 1996, between Ribozyme Pharmaceuticals and Chiron Corporation  relating to research and development funding(1)                                                             |

 

39

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| 10.35 |   | Amendments to original  Employment Agreements between Ribozyme Pharmaceuticals and Ralph E.  Christoffersen, Lawrence E. Bullock and Nassim Usman, pursuant to letters  dated November 14, 1996, November 22, 1996, and December 15, 1996(3) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.36 |   | Promissory Note dated  June 4, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(3)                                                                                                                                                    |
| 10.37 |   | Amendment to Lease for  Real Property dated March 13, 1997, between Aero - Tech Investments and  Ribozyme Pharmaceuticals(3)                                                                                                                 |
| 10.38 |   | Employment Agreement  dated May 2, 1996, between Ribozyme Pharmaceuticals and Nassim Usman(2)                                                                                                                                                |
| 10.39 |   | Collaboration Agreement  Regarding Use of Ribozymes to Determine Gene Function dated May 13, 1996,  between Ribozyme Pharmaceuticals and Chiron Corporation(2)                                                                               |
| 10.40 |   | Amended and Restated  License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals,  University Research Corporation, University of Colorado and United States  Biochemical Corporation(3.5)*                                 |
| 10.41 |   | Amended and Restated  Sublicense Agreement dated November 20, 1996, between Ribozyme  Pharmaceuticals and United States Biochemical Corporation(3.5)*                                                                                        |
| 10.42 |   | Amended and Restated  License Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals  and Competitive Technologies, Incorporated(3.5)*                                                                                          |
| 10.43 |   | Memorandum of  Understanding dated March 1, 1996, between Ribozyme Pharmaceuticals and  DowElanco(1)                                                                                                                                         |
| 10.44 |   | Stock Subscription  Agreement dated September 1996 between Ribozyme Pharmaceuticals and  University of Research Corporation(3.5)*                                                                                                            |
| 10.45 |   | Stock Subscription  Agreement dated November 20, 1996, between Ribozyme Pharmaceuticals and  United States Biochemical Corporation(3.5)*                                                                                                     |
| 10.46 |   | Assignment of License  and Restated License Agreement dated November 20, 1996, among Ribozyme Pharmaceuticals,  United States Biochemical Corporation and Competitive Technologies(3.5)*                                                     |
| 10.49 |   | License Agreement dated  February 14, 1997, between Ribozyme Pharmaceuticals and IntelliGene,  Ltd.(3.5)*                                                                                                                                    |
| 10.50 |   | Subscription Agreement  dated April 17, 1995, between Ribozyme Pharmaceuticals and Parke-Davis  Division of Warner-Lambert Company(1)                                                                                                        |
| 10.51 |   | Stock Purchase  Agreement dated June 28, 1995, among Ribozyme Pharmaceuticals and  investors(1)                                                                                                                                              |
| 10.52 |   | Agreement dated March  1, 1996, between Ribozyme Pharmaceuticals and DowElanco Corporation relating  to the conversion of preferred stock(1)                                                                                                 |
| 10.53 |   | Stock Subscription  Agreement dated October 30, 1995, between Ribozyme Pharmaceuticals and  Gewestelijke Investeringsmaatschappij voor Vlaanderon n.v.(1)                                                                                    |
| 10.54 |   | Research, License,  Supply and Royalty Agreement between Schering Aktiengesellschaft and Ribozyme  Pharmaceuticals dated April 9, 1997(4)*                                                                                                   |
| 10.55 |   | Purchase Agreement  dated April 9, 1997, among Ribozyme Pharmaceuticals, Schering Berlin Venture  Corporation and Schering Aktiengesellschaft(4)*                                                                                            |
| 10.56 |   | Employment Agreement  dated February 27, 1997, between Ribozyme Pharmaceuticals and Alene  Holzman(5)                                                                                                                                        |
| 10.57 |   | Employment Agreement  dated July 5, 1997, between Ribozyme Pharmaceuticals and Thomas Rossing(5)                                                                                                                                             |
| 10.58 |   | Executive Bonus Plan  dated March 27, 1998(6)                                                                                                                                                                                                |
| 10.59 |   | Research, Collaboration  and License Agreement dated May 19, 1998, between Ribozyme Pharmaceuticals  and Roche Bioscience, a division of Syntex (U.S.A.) Inc.(7)*                                                                            |
| 10.60 |   | Employment Agreement  dated September 8, 1998, between Ribozyme Pharmaceuticals and Nassim Usman(8)                                                                                                                                          |
| 10.61 |   | Participation Agreement  dated August 31, 1998, as amended, and related documents between Ribozyme  Pharmaceuticals and atugen Biotechnology GmbH(9)*                                                                                        |
| 10.62 |   | Research Collaboration  and License Agreement dated March 17, 1999, between Ribozyme Pharmaceuticals  and Eli Lilly and Company* (10.6)                                                                                                      |
| 10.63 |   | Stock Purchase  Agreement dated April 30, 1999, between Ribozyme Pharmaceuticals and Eli  Lilly and Company (10.5)                                                                                                                           |
| 10.64 |   | Employment Agreement  dated May 10, 1999 between Ribozyme Pharmaceuticals and Dr. Wayne Cowens  (10.7)                                                                                                                                       |

 

40

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| 10.65 |   | Securities Purchase  Agreement dated January 7, 2000, among Ribozyme Pharmaceuticals, Elan  International Services, Ltd. and Elan Corporation, plc (11)                                                                                                |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.66 |   | License Agreement dated  January 7, 2000 among Elan Pharmaceutical Technologies (a division of Elan  Corporation, plc), Elan Pharma International Limited and Medizyme  Pharmaceuticals, Ltd. (11)*                                                    |
| 10.67 |   | Warrant dated January  7, 2000, issued to Elan International Services, Ltd. to purchase up to  200,000 shares of Ribozyme Pharmaceuticals’ common stock (11)                                                                                      |
| 10.68 |   | Warrant dated January  7, 2000 issued to Elan International Services Ltd. to purchase up to 300,000  shares of Ribozyme Pharmaceuticals’ common stock (11)                                                                                        |
| 10.69 |   | Convertible Promissory  Note dated January 7, 2000, from Ribozyme Pharmaceuticals to Elan  International Services, Ltd. (11)                                                                                                                           |
| 10.70 |   | Subscription, Joint  Development and Operating Agreement dated January 7, 2000, among Ribozyme  Pharmaceuticals, Elan Corporation, plc, Elan Pharma International Limited,  Elan International Services, Ltd. and Medizyme Pharmaceuticals, Ltd. (11)* |
| 10.71 |   | Funding Agreement dated  January 7, 2000 among Ribozyme Pharmaceuticals, Elan Pharmaceutical  Technologies (a division of Elan Corporation, plc), Elan Pharma International  Limited and Elan International Services, Ltd. (11)                        |
| 10.72 |   | License Agreement dated  January 7, 2000, among Ribozyme Pharmaceuticals and Medizyme Pharmaceuticals,  Ltd. (11)*                                                                                                                                     |
| 10.73 |   | Registration Rights  Agreement dated January 7, 2000, between Ribozyme Pharmaceuticals and Elan  International Services, Ltd. (11)                                                                                                                     |
| 10.74 |   | Registration Rights  Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan  International Services, Ltd. and Medizyme Pharmaceuticals Ltd. (11)                                                                                         |
| 10.75 |   | Agreement dated January  31, 2000, between Ribozyme Pharmaceuticals and Avecia Limited (11)*                                                                                                                                                           |
| 10.76 |   | Employment Agreement  dated July 6, 2000 between Ribozyme Pharmaceuticals and Dr. Nassim Usman (12)                                                                                                                                                    |
| 10.77 |   | Employment Agreement  dated July 6, 2000, between Ribozyme Pharmaceuticals and Dr. Lawrence Blatt  (12)                                                                                                                                                |
| 10.78 |   | Repurchase of Ribozyme  Product agreement dated September 28, 2000 between Ribozyme Pharmaceuticals  and Eli Lilly and Company (13)*                                                                                                                   |
| 10.79 |   | Common Stock Purchase  Agreement dated December 29, 2000 by and between Ribozyme Pharmaceuticals,  Inc. and Acqua Wellington North America Equities Fund, Ltd. (15)                                                                                    |
| 10.80 |   | Employment Agreement  dated January 4, 2001 between Ribozyme Pharmaceuticals and Howard Robin (16)                                                                                                                                                     |
| 10.81 |   | Warrant to Purchase  Shares of Common Stock between the Company and Heidrick & Struggles dated  January 4, 2001(17)                                                                                                                                |
| 10.82 |   | Amendment to Chiron  Corporation - Ribozyme Pharmaceuticals, Inc. Collaborative Research,  Development and Commercialization Agreement dated March 20, 2001(17)                                                                                        |
| 10.83 |   | Employment Agreement  dated May 29, 2001 between Marvin Tancer and the Company(18)                                                                                                                                                                     |
| 10.84 |   | Amendment to Employment Agreement dated April 30,  2001 between Lawrence Blatt and the Company(18)                                                                                                                                                     |
| 10.85 |   | Amendment to Employment Agreement dated April 30,  2001 between Lawrence E. Bullock and the Company(18)                                                                                                                                                |
| 10.86 |   | Amendment to Employment  Agreement dated April 30, 2001 between Ralph E. Christoffersen and the  Company(18)                                                                                                                                           |
| 10.87 |   | Amendment to Employment  Agreement dated April 30, 2001 between J. Wayne Cowens and the Company(18)                                                                                                                                                    |
| 10.88 |   | Amendment to Employment  Agreement dated April 30, 2001 between Alene A. Holzman and the Company(18)                                                                                                                                                   |
| 10.89 |   | Amendment to Employment  Agreement dated April 30, 2001 between Nassim Usman and the Company(18)                                                                                                                                                       |
| 10.90 |   | Amendment to Employment  Agreement dated April 30, 2001 between Fran Wincott and the Company(18)                                                                                                                                                       |

 

41

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| 10.91  |   | Amendment to Employment  Agreement dated June 18, 2001 between Howard W. Robin and the Company(19)                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.92  |   | Amendment to Employment  Agreement dated July 1, 2001 between Ralph E. Christoffersen and the  Company(19)                                                   |
| 10.93  |   | Amendment to Employment  Agreement dated July 15, 2001 between Marvin Tancer and the Company(19)                                                             |
| 10.94  |   | Securities Purchase  Agreement dated December 21, 2001 by and between Ribozyme Pharmaceuticals and  Elan International Services, Ltd.(20)                    |
| 10.95  |   | Warrant Agreement dated  November 28, 2001 by and between Ribozyme Pharmaceuticals and ABN AMRO  Incorporated(21)                                            |
| 10.96  |   | Form of Warrant to  purchase Common Stock dated November 28, 2001 issued to selected  institutional investors(22)                                            |
| 10.97  |   | Common Stock and  Warrant Purchase Agreement dated as of February 11, 2003 by and among  Ribozyme Pharmaceuticals, Inc. and the Investors named therein.(24) |
| 10.98  |   | Form of Voting  Agreement between Ribozyme Pharmaceuticals, Inc. and each stockholder who is  a party thereto.(24)                                           |
| 10.99  |   | Schering AG Waiver Letter(24)                                                                                                                                |
| 10.100 |   | Elan Waiver and Conversion Letter(24)                                                                                                                        |
| 10.101 |   | Employment Agreement dated as of February 11, 2003  between Ribozyme Pharmaceuticals, Inc. and Howard Robin.(24)                                             |
| 10.102 |   | Employment Agreement dated as of February 11, 2003  between Ribozyme Pharmaceuticals, Inc. and Marvin Tancer.(24)                                            |
| 10.103 |   | Employment Agreement dated as of February 11, 2003  between Ribozyme Pharmaceuticals, Inc. and Dr. Nassim Usman.(24)                                         |
| 23.1   |   | Consent of Ernst &  Young LLP, Independent Auditors(25)                                                                                                  |
| 99.1   |   | Certification (25)                                                                                                                                           |

 

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*                                              RibozymePharmaceuticals has applied for and received confidential treatment with respectto portions of these exhibits.

 

(1)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form SB-2 Registration Statement, File No. 333-1908-D.

 

(2)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-QSB for the quarter ended June 30, 1996.

 

(3)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-KSB and amendment for the year ended December 31,1996.

 

(3.5)                              Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-KSB/A for the year ended December 31, 1996.

 

(4)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K dated June 12, 1997.

 

(5)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form SB-2 Registration Statement, File No. 333-34981.

 

(6)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-KSB for the year ended December 31, 1997.

 

(7)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-Q/A for the quarter ended June 30, 1998.

 

42

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(8)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-Q for the quarter ended September 30, 1998.

 

(9)                                       Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K/A dated June 16, 1999.

 

(10)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form S-1 Registration Statement and amendments, File No.333-75079.

 

(10.5)                        Documentsincorporated by reference herein to certain exhibitVs to RibozymePharmaceuticals’ Form S-1 Registration Statement, Amendment No. 3, File No.333-75079.

 

(10.6)                        Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form S-1 Registration Statement, Amendment No. 5, File No. 333-75079.

 

(10.7)                        Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form S-1 Registration Statement, Amendment No. 7, File No.333-75079.

 

(11)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K dated February 8, 2000.

 

(12)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-Q for the quarter ended June 30, 2000.

 

(13)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K dated October 10, 2000.

 

(14)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K dated December 5, 2000.

 

(15)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 8-K dated January 5, 2001.

 

(16)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-K for the year ended December 31, 2000.

 

(17)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form10-Q for the quarter ended March 31, 2001.

 

(18)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form10-Q for the quarter ended June 30, 2001.

 

(19)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form10-Q for the quarter ended September 30, 2001.

 

(20)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form8-K dated January 16, 2002.

 

(21)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form8-K dated February 25, 2002.

 

43

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(22)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form8-K dated December 11, 2001.

 

(23)                                 Documentsincorporated by reference herein to certain exhibits to RibozymePharmaceuticals’ Form 10-K for the year ended December 31, 2001.

 

(24)                                 Documentsincorporated by reference to certain exhibits to Ribozyme Pharmaceuticals’ Form8-K dated February 14, 2003.

 

(25)                                 Filedherewith.

 

(b)                                      REPORTSON FORM 8-K

 

A report on Form 8-K was filed on January 16, 2002announcing the sale in a private placement transaction of Common Stock andfive-year warrants to purchase additional shares of Common Stock.

 

A report on Form 8-K was filed on February 25, 2002announcing that ABN AMRO Incorporated, placement agent for the public offeringconducted on November 29, 2001, received as part of its compensation a warrantto purchase Common Stock.

 

A report on Form 8-K was filed on August 14, 2002announcing our second quarter results and the realignment of our businessstrategy. A press release including the second quarter results, as well as adiscussion of the company’s strategy was attached as an Exhibit to the8-K.  In addition, as another exhibit,we filed a revised discussion of our business together with associated riskfactors.

 

A report on Form 8-K was filed on February 25, 2003announcing that on February 11, 2003, we entered into a definitive common stockand warrant purchase agreement with select investors pursuant to which theCompany agreed to issue and sell and the investors agreed to purchase shares ofour common stock and five-year warrants to purchase common stock for aggregateconsideration of $48 million.

 

44

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized in Boulder, Colorado, on March 28, 2003.

 
|   | **RIBOZYME PHARMACEUTICALS, INC.**     |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ HOWARD W. ROBIN |
|   | Howard W. Robin                        |
|   | Chief Executive Officer  and President |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this Form 10-K has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Signature**         |   | **Title**                                                |   | **Date**       |   |
|-----------------------|--------|----------------------------------------------------------|--------|----------------|--------|
|                  |   |                                                     |   |           |   |
| /s/HOWARD W.  ROBIN   |   | Chief Executive Officer  and President                   |   | March 28, 2003 |   |
| Howard W. Robin       |   | (Principal Executive  Officer) and Director              |   |           |   |
|                  |   |                                                     |   |           |   |
| /s/ MARVIN  TANCER    |   | Chief Financial  Officer, Vice President of              |   | March 28, 2003 |   |
| Marvin Tancer         |   | Operations (Principal  Financial and Accounting Officer) |   |           |   |
|                  |   |                                                     |   |           |   |
| /s/ JEREMY C.  COOK   |   | Chairman of the Board  of Directors                      |   | March 28, 2003 |   |
| Jeremy C. Cook        |   |                                                     |   |           |   |
|                  |   |                                                     |   |           |   |
| /s/ JOHN GROOM        |   | Director                                                 |   | March 28, 2003 |   |
| John Groom            |   |                                                     |   |           |   |
|                  |   |                                                     |   |           |   |
| /s/ SAMUEL R.  SAKS   |   | Director                                                 |   | March 28, 2003 |   |
| Samuel R. Saks,  M.D. |   |                                                     |   |           |   |
|                  |   |                                                     |   |           |   |
| /s/ ANDERS  WIKLUND   |   | Director                                                 |   | March 28, 2003 |   |
| Anders Wiklund        |   |                                                     |   |           |   |

 

45

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**CERTIFICATIONS**

 

I, Howard Robin, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Ribozyme Pharmaceuticals;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 28, 2003 |   |                                  |
|----------------------|--------|---------------------------------------|
|                 |   |                                  |
|                 |   | /s/ Howard W. Robin                   |   |
|                 |   | President and Chief Executive Officer |

 

46

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I, Marvin Tancer, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Ribozyme Pharmaceuticals;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  March  28, 2003 |   |                                                      |
|-----------------------------|--------|-----------------------------------------------------------|
|                        |   |                                                      |
|                        |   | /s/ Marvin Tancer                                         |   |
|                        |   | Vice President of Operations and  Chief Financial Officer |

 

47

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**REPORT OF INDEPENDENT AUDITORS**

 

To the Stockholders andBoard of Directors

Ribozyme Pharmaceuticals,Inc.

 

We have audited theaccompanying balance sheets of Ribozyme Pharmaceuticals, Inc., as of December31, 2002 and 2001, and the related statements of operations, redeemablepreferred stock and stockholders’ (deficit) equity, and cash flows for each ofthe three years in the period ended December 31, 2002. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Ribozyme Pharmaceuticals, Inc. at December31, 2002 and 2001, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2002 in conformitywith accounting principles generally accepted in the United States.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern. As more fully described in Note 1, the Company has incurredsignificant operating losses since inception related to clinical trials and thecost of manufacturing drugs, has insufficient working capital to meet budgetedcash requirements for the next year without additional financing and has astockholders’ deficit. These conditions raise substantial doubt about theCompany’s ability to continue as a going concern. Management’s plans in regardto these matters are also described in Note 1. The financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classification ofliabilities that may result from the outcome of these uncertainties.

 
|                                                                             | /s/ Ernst &  Young LLP |
|----------------------------------------------------------------------------------|----------------------------|
|                                                                             |                       |
| Denver, Colorado                                                                 |                       |
| February 21, 2003,  except  for Note 13, as to which the   date is March 7, 2003 |                       |

 

F-1

----

 

**RIBOZYME PHARMACEUTICALS, INC.**

**BALANCESHEETS**

 
|                                                                                                                                                                                                                                                                                                                         |   | **December  31** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                                                                                                                                                                         |   | **2002**         |       | **2001** |   |
| **ASSETS**                                                                                                                                                                                                                                                                                                                   |   |             |       |   |   |
| Current  assets:                                                                                                                                                                                                                                                                                                             |   |             |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                                   |   | $                | 2,064,940  |   | $ | 23,497,986 |   |
| Securities  available-for-sale                                                                                                                                                                                                                                                                                               |   | 6,756,038        |       | 11,497,084 |   |
| Accounts  receivable                                                                                                                                                                                                                                                                                                         |   | 263,714          |       | 711,470 |   |
| Accounts  receivable—joint venture                                                                                                                                                                                                                                                                                      |   | 157,370          |       | 491,194 |   |
| Accounts  receivable—related parties                                                                                                                                                                                                                                                                                    |   | 62,561           |       | 340,533 |   |
| Notes  receivable—related parties                                                                                                                                                                                                                                                                                       |   | 214,000          |       | 324,000 |   |
| Prepaid  expenses and other                                                                                                                                                                                                                                                                                                  |   | 541,752          |       | 173,466 |   |
| Total  current assets                                                                                                                                                                                                                                                                                                        |   | 10,060,375       |       | 37,035,733 |   |
| Property,  plant, and equipment:                                                                                                                                                                                                                                                                                             |   |             |       |   |   |
| Machinery  and equipment                                                                                                                                                                                                                                                                                                     |   | 10,426,092       |       | 9,368,007 |   |
| Leasehold  improvements                                                                                                                                                                                                                                                                                                      |   | 5,227,380        |       | 4,799,381 |   |
| Office  furniture and equipment                                                                                                                                                                                                                                                                                              |   | 2,019,564        |       | 2,001,064 |   |
|                                                                                                                                                                                                                                                                                                                         |   | 17,673,036       |       | 16,168,452 |   |
| Accumulated  depreciation                                                                                                                                                                                                                                                                                                    |   | (13,149,227      | )          | (11,580,139 | ) |
|                                                                                                                                                                                                                                                                                                                         |   | 4,523,809        |       | 4,588,313 |   |
| Notes  receivable—related parties                                                                                                                                                                                                                                                                                       |   | 692,000          |       | 541,000 |   |
| Deferred  patent costs, net of accumulated amortization (2002—$993,058; 2001—$772,157)                                                                                                                                                                                                                             |   | 5,886,733        |       | 5,544,614 |   |
| Investment  in joint venture                                                                                                                                                                                                                                                                                                 |   | —           |       | 3,577,340 |   |
| Other  assets                                                                                                                                                                                                                                                                                                                |   | 735,208          |       | 736,208 |   |
| Total  assets                                                                                                                                                                                                                                                                                                                |   | $                | 21,898,125 |   | $ | 52,023,208 |   |
| **LIABILITIES  AND STOCKHOLDERS’ (DEFICIT) EQUITY**                                                                                                                                                                                                                                                                     |   |             | ** ** |   | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                                                                                        |   |             |       |   |   |
| Accounts  payable—trade                                                                                                                                                                                                                                                                                                 |   | $                | 943,091    |   | $ | 2,100,144 |   |
| Accrued  wages                                                                                                                                                                                                                                                                                                               |   | 1,136,610        |       | 810,922 |   |
| Accrued  liabilities                                                                                                                                                                                                                                                                                                         |   | 1,179,961        |       | 1,647,253 |   |
| Deferred  revenue, current portion—related parties                                                                                                                                                                                                                                                                      |   | 400,000          |       | 400,000 |   |
| Deferred  revenue, current portion                                                                                                                                                                                                                                                                                           |   | 893,752          |       | — |   |
| Current  portion of long-term debt                                                                                                                                                                                                                                                                                           |   | 479,782          |       | 169,117 |   |
| Total  current liabilities                                                                                                                                                                                                                                                                                                   |   | 5,033,196        |       | 5,127,436 |   |
| Deferred  revenue, long-term portion—related parties                                                                                                                                                                                                                                                                    |   | —           |       | 400,010 |   |
| Long  term debt                                                                                                                                                                                                                                                                                                              |   | 3,028,712        |       | 474,018 |   |
| Convertible  debt—joint venture                                                                                                                                                                                                                                                                                         |   | —           |       | 8,896,658 |   |
| Convertible  debt—related parties                                                                                                                                                                                                                                                                                       |   | 3,460,000        |       | 3,220,000 |   |
| Commitments  and contingencies                                                                                                                                                                                                                                                                                               |   |             |       |   |   |
| Preferred stock, $.01 par value; Series A  convertible exchangeable preferred stock, 25,000 shares authorized; 12,015  shares issued and outstanding at December 31, 2002 and 2001, respectively  (preference in liquidation, including accreted dividends, of $14,329,366 and  $13,506,802, in 2002 and 2001, respectively) |   | 12,015,000       |       | 12,015,000 |   |
| Accreted  preferred stock dividends                                                                                                                                                                                                                                                                                          |   | 2,314,366        |       | 1,491,802 |   |
|                                                                                                                                                                                                                                                                                                                         |   |             |       |   |   |
| Stockholders’  (deficit) equity:                                                                                                                                                                                                                                                                                        |   |             |       |   |   |
| Preferred stock,  $.01 par value; 5,000,000 shares authorized; Series B convertible preferred  stock, 9,905 and zero shares issued and outstanding at December 31, 2002 and  2001, respectively (preference in liquidation of $11,032,670 and zero, in  2002 and 2001, respectively)                                         |   | 99               |       | — |   |
| Preferred  stock issuable                                                                                                                                                                                                                                                                                                    |   | 1,126,718        |       | — |   |
| Accreted  preferred stock dividends                                                                                                                                                                                                                                                                                          |   | 747,841          |       | — |   |
| Common  stock, $.01 par value; 60,000,000 shares authorized; 20,285,356 and  20,012,608 shares issued and outstanding at December 31, 2002 and 2001, respectively                                                                                                                                                            |   | 202,854          |       | 200,126 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                  |   | 188,471,255      |       | 179,989,655 |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                         |   | (194,509,078     | )          | (159,802,790 | ) |
| Unrealized  gain on securities available-for-sale                                                                                                                                                                                                                                                                            |   | 7,162            |       | 11,293 |   |
| Total  stockholders’ (deficit) equity                                                                                                                                                                                                                                                                                   |   | (3,953,149       | )          | 20,398,284 |   |
| Total  liabilities and stockholders’ (deficit) equity                                                                                                                                                                                                                                                                   |   | $                | 21,898,125 |   | $ | 52,023,208 |   |

 

See accompanyingnotes.

 

F-2

----

** **

**RIBOZYME PHARMACEUTICALS, INC.**

 

**STATEMENTS OF OPERATIONS**

 
|                                           |   | **Year ended  December 31** |        |
|------------------------------------------------|--------|-----------------------------|-------------|
|                                           |   | **2002**                    |        | **2001** |   | **2000** |   |
| Revenues:                                      |   |                        |        |   |   |   |   |
| Collaborative  agreements                      |   | $                           | 3,488,088   |   | $ | 3,318,246 |   | $ | 8,301,545 |   |
| Collaborative  agreements—joint venture   |   | 1,069,295                   |        | 3,959,411 |   | 6,052,429 |   |
| Collaborative  agreements—related parties |   | 590,323                     |        | 1,030,226 |   | 1,191,338 |   |
| Total  revenues                                |   | 5,147,706                   |        | 8,307,883 |   | 15,545,312 |   |
| Expenses:                                      |   |                        |        |   |   |   |   |
| Research  and development                      |   | 28,659,341                  |        | 56,688,960 |   | 21,721,055 |   |
| General  and administrative                    |   | 5,505,035                   |        | 4,512,197 |   | 3,723,158 |   |
| Total  expenses                                |   | 34,164,376                  |        | 61,201,157 |   | 25,444,213 |   |
| Operating  loss                                |   | (29,016,670                 | )           | (52,893,274 | ) | (9,898,901 | ) |
| Other  income (expense):                       |   |                        |        |   |   |   |   |
| Interest  income                               |   | 389,155                     |        | 2,164,638 |   | 3,195,989 |   |
| Interest  expense                              |   | (802,631                    | )           | (819,576 | ) | (150,840 | ) |
| Other  income                                  |   | 69                          |        | 50,950 |   | 4,000 |   |
| Equity  in loss of unconsolidated affiliates   |   | (5,276,211                  | )           | (8,340,899 | ) | (9,031,805 | ) |
| Total  other expense                           |   | (5,689,618                  | )           | (6,944,887 | ) | (5,982,656 | ) |
| Net  loss                                      |   | (34,706,288                 | )           | (59,838,161 | ) | (15,881,557 | ) |
| Accretion  of dividends on preferred stock     |   | 1,570,407                   |        | 775,346 |   | 716,456 |   |
| Net  loss applicable to common stock           |   | $                           | (36,276,695 | ) | $ | (60,613,507 | ) | $ | (16,598,013 | ) |
| Net  loss per share (basic and diluted)        |   | $                           | (1.80       | ) | $ | (3.59 | ) | $ | (1.15 | ) |
| Shares  used in computing net loss per share   |   | 20,134,359                  |        | 16,883,324 |   | 14,390,068 |   |

 

See accompanyingnotes.

 

F-3

----

 

**RIBOZYME PHARMACEUTICALS, INC.**

**STATEMENTS OF REDEEMABLE PREFERREDSTOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY**

** **
|                                                                                            |   | **Convertible  Exchangeable Preferred Stock** |   | **Preferred  Stock** |       |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------|------------|
|                                                                                            |   | **Shares**                                    |   | **Amount**           |       | **Accreted  Preferred  Stock****Dividends** |   | **Shares** |   | **Amount** |   | **Preferred  Stock  Issuable****Amount** |   | **Accreted  Preferred  Stock****Dividends** |   |
| Balance  at December 31, 1999                                                                   |   | —                                        |   | —               |       | — |   | 5 |   | — |   | — |   | — |   |
| Issuance  of common stock for cash—public offering net of issuance costs of $3,886,887     |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock for cash—Elan Corporation, plc net of issuance costs of  $38,547 |   | —                                        |   | —               |       | — |   | — |   | — |   |   |   |   |   |
| Issuance  of preferred stock for cash                                                           |   | 12,015                                        |   | 12,015,000           |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock for cash—Eli Lilly                                               |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Conversion  of convertible preferred stock for common shares                                    |   | —                                        |   | —               |       | — |   | (5 | ) | — |   | — |   | — |   |
| Conversion  of convertible debt for common shares                                               |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock upon the exercise of warrants                                         |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock under stock option, employee stock purchase and 401(k) plans          |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Expense  for vesting of performance stock options                                               |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Compensation  for issuance of common stock options                                              |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Preferred  stock dividends accreted                                                             |   | —                                        |   | —               |       | 716,456 |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                       |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Change  in unrealized loss on securities                                                        |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                             |   |                                          |   |                 |       |   |   |   |   |   |   |   |   |   |   |
| Balance  at December 31, 2000                                                                   |   | 12,015                                        |   | 12,015,000           |       | 716,456 |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock and warrants for cash—public offering, net of costs of  $931,604 |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock and warrants for cash—Elan Corporation, net of costs of  $64,105 |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock in exchange for product rights—Chiron Corporation                |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock under stock option and employee stock purchase plan                   |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock under 401(k) plan                                                     |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Issuance  of warrants in exchange for professional services                                     |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Compensation  for issuance of common stock options                                              |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Preferred  stock dividends accreted                                                             |   | —                                        |   | —               |       | 775,346 |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                       |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Change  in unrealized gain on securities                                                        |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                             |   |                                          |   |                 |       |   |   |   |   |   |   |   |   |   |   |
| Balance  at December 31, 2001                                                                   |   | 12,015                                        |   | 12,015,000           |       | 1,491,802 |   | — |   | — |   | — |   | — |   |
| Issuance  of common stock under stock option and employee stock purchase plan                   |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Conversion  of convertible debt to preferred stock, Series B—Elan                          |   | —                                        |   | —               |       | — |   | 9,905 |   | 99 |   | — |   | — |   |
| Preferred  stock issuable to Elan for financing                                                 |   | —                                        |   | —               |       | — |   | — |   | — |   | 1,126,718 |   | — |   |
| Compensation  for issuance of stock options                                                     |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Preferred  stock dividends accreted                                                             |   | —                                        |   | —               |       | 822,564 |   | — |   | — |   | — |   | 747,841 |   |
| Net  loss                                                                                       |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Change  in unrealized gain on securities                                                        |   | —                                        |   | —               |       | — |   | — |   | — |   | — |   | — |   |
| Comprehensive  loss                                                                             |   |                                          |   |                 |       |   |   |   |   |   |   |   |   |   |   |
| Balance  at December 31, 2002                                                                   |   | 12,015                                        |   | $                    | 12,015,000 |   | $ | 2,314,366 |   | 9,905 |   | $ | 99 |   | $ | 1,126,718 |   | $ | 747,841 |   |
|                                                                                                 |        |                                               |        |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **
|                                                                                            |   | **Common  Stock** |   |       |   |                             |        |                     |         |                             |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------|--------|----------------------------------|-------------|--------------------------|--------------|----------------------------------|--------|
|                                                                                            |   | **Shares**        |   | **Amount** |   | **Additional  Paid-In  Capital** |        | **Accumulated  Deficit** |         | **(Loss)/  Gain on  Securities** |   | **Deferred  Compenstion** |   | **Total** |   |
| Balance at December 31,  1999                                                                   |   | 11,263,252        |   | 112,633    |   | 98,894,100                       |        | (84,083,072              | )            | (2,399                           | )      | (40,618 | ) | 14,880,644 |   |
| Issuance  of common stock for cash—public offering net of issuance costs of $3,886,887     |   | 3,150,000         |   | 31,500     |   | 52,841,653                       |        | —                   |         | —                           |   | — |   | 52,873,153 |   |
| Issuance  of common stock for cash—Elan Corporation, plc net of issuance costs of  $38,547 |   | 641,026           |   | 6,410      |   | 4,954,099                        |        | —                   |         | —                           |   | — |   | 4,960,509 |   |
| Issuance  of preferred stock for cash                                                           |   | —            |   | —     |   | —                           |        | —                   |         | —                           |   | — |   | — |   |
| Issuance  of common stock for cash—Eli Lilly                                               |   | 252,632           |   | 2,526      |   | 2,997,474                        |        | —                   |         | —                           |   | — |   | 3,000,000 |   |
| Conversion  of convertible preferred stock for common shares                                    |   | 636,640           |   | 6,366      |   | (6,366                           | )           | —                   |         | —                           |   | — |   | — |   |
| Conversion  of convertible debt for common shares                                               |   | 42,435            |   | 424        |   | 996,781                          |        | —                   |         | —                           |   | — |   | 997,205 |   |
| Issuance  of common stock upon the exercise of warrants                                         |   | 20,250            |   | 203        |   | (203                             | )           | —                   |         | —                           |   | — |   | — |   |
| Issuance  of common stock under stock option, employee stock purchase and 401(k) plans          |   | 255,242           |   | 2,553      |   | 1,394,358                        |        | —                   |         | —                           |   | — |   | 1,396,911 |   |
| Expense  for vesting of performance stock options                                               |   | —            |   | —     |   | 1,732,198                        |        | —                   |         | —                           |   | — |   | 1,732,198 |   |
| Compensation  for issuance of common stock options                                              |   | —            |   | —     |   | (2,749                           | )           | —                   |         | —                           |   | 26,142 |   | 23,393 |   |
| Preferred  stock dividends accreted                                                             |   | —            |   | —     |   | (716,456                         | )           | —                   |         | —                           |   | — |   | (716,456 | ) |
| Net  loss                                                                                       |   | —            |   | —     |   | —                           |        | (15,881,557              | )            | —                           |   | — |   | (15,881,557 | ) |
| Change  in unrealized loss on securities                                                        |   | —            |   | —     |   | —                           |        | —                   |         | (3,025                           | )      | — |   | (3,025 | ) |
| Comprehensive  loss                                                                             |   |              |   |       |   |                             |        |                     |         |                             |   |   |   | (15,884,582 | ) |
| Balance  at December 31, 2000                                                                   |   | 16,261,477        |   | 162,615    |   | 163,084,889                      |        | (99,964,629              | )            | (5,424                           | )      | (14,476 | ) | 63,262,975 |   |
| Issuance  of common stock and warrants for cash—public offering, net of costs of  $931,604 |   | 2,261,905         |   | 22,619     |   | 8,545,777                        |        | —                   |         | —                           |   | — |   | 8,568,396 |   |
| Issuance  of common stock and warrants for cash—Elan Corporation, net of costs of  $64,105 |   | 1,250,500         |   | 12,505     |   | 7,926,390                        |        | —                   |         | —                           |   | — |   | 7,938,895 |   |
| Issuance  of common stock in exchange for product rights—Chiron Corporation                |   | 38,920            |   | 389        |   | 274,611                          |        | —                   |         | —                           |   | — |   | 275,000 |   |
| Issuance  of common stock under stock option and employee stock purchase plan                   |   | 128,364           |   | 1,284      |   | 446,616                          |        | —                   |         | —                           |   | — |   | 447,900 |   |
| Issuance  of common stock under 401(k) plan                                                     |   | 71,442            |   | 714        |   | 288,804                          |        | —                   |         | —                           |   | — |   | 289,518 |   |
| Issuance  of warrants in exchange for professional services                                     |   | —            |   | —     |   | 197,914                          |        | —                   |         | —                           |   | — |   | 197,914 |   |
| Compensation  for issuance of common stock options                                              |   | —            |   | —     |   | —                           |        | —                   |         | —                           |   | 14,476 |   | 14,476 |   |
| Preferred  stock dividends accreted                                                             |   | —            |   | —     |   | (775,346                         | )           | —                   |         | —                           |   | — |   | (775,346 | ) |
| Net  loss                                                                                       |   | —            |   | —     |   | —                           |        | (59,838,161              | )            | —                           |   | — |   | (59,838,161 | ) |
| Change  in unrealized gain on securities                                                        |   | —            |   | —     |   | —                           |        | —                   |         | 16,717                           |   | — |   | 16,717 |   |
| Comprehensive  loss                                                                             |   |              |   |       |   |                             |        |                     |         |                             |   |   |   | (59,821,444 | ) |
| Balance  at December 31, 2001                                                                   |   | 20,012,608        |   | 200,126    |   | $                                | 179,989,655 |                     | (159,802,790 | )                                | 11,293 |   | — |   | 20,398,284 |   |
| Issuance  of common stock under stock option and employee stock purchase plan                   |   | 272,748           |   | 2,728      |   | 121,317                          |        | —                   |         | —                           |   | — |   | 124,045 |   |
| Conversion  of convertible debt to preferred stock, Series B—Elan                          |   | —            |   | —     |   | 9,905,853                        |        | —                   |         | —                           |   | — |   | 9,905,952 |   |
| Preferred  stock issuable to Elan for financing                                                 |   | —            |   | —     |   | —                           |        | —                   |         | —                           |   | — |   | 1,126,718 |   |
| Compensation  for issuance of stock options                                                     |   | —            |   | —     |   | 24,835                           |        | —                   |         | —                           |   | — |   | 24,835 |   |
| Preferred  stock dividends accreted                                                             |   | —            |   | —     |   | (1,570,405                       | )           | —                   |         | —                           |   | — |   | (822,564 | ) |
| Net  loss                                                                                       |   | —            |   | —     |   | —                           |        | (34,706,288              | )            | —                           |   | — |   | (34,706,288 | ) |
| Change  in unrealized gain on securities                                                        |   | —            |   | —     |   | —                           |        | —                   |         | (4,131                           | )      | — |   | (4,131 | ) |
| Comprehensive  loss                                                                             |   |              |   |       |   |                             |        |                     |         |                             |   |   |   | (34,710,419 | ) |
| Balance  at December 31, 2002                                                                   |   | 20,285,356        |   | 202,854    |   | $                                | 188,471,255 |                     | $            | (194,509,078                     | )      | $ | 7,162 |   | $ | — |   | $ | (3,953,149 | ) |
|                                                                                                 |        |                   |        |            |        |                                  |             |                          |              |                                  |        |  |  |  |  |  |  |  |  |  |

** **

See accompanyingnotes.

 

F-4

----

 

**RIBOZYME PHARMACEUTICALS, INC.**

 

**STATEMENTS OF CASH FLOWS**

 
|                                                                             |   | **Year ended  December 31** |        |
|----------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                             |   | **2002**                    |        | **2001** |   | **2000** |   |
| Operating  activities                                                            |   |                        |        |   |   |   |   |
| Net  loss                                                                        |   | $                           | (34,706,288 | ) | $ | (59,838,161 | ) | $ | (15,881,557 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities:     |   |                        |        |   |   |   |   |
| Depreciation                                                                     |   | 1,696,999                   |        | 1,756,186 |   | 1,626,197 |   |
| Amortization                                                                     |   | 276,555                     |        | 197,869 |   | 194,730 |   |
| Equity  in loss of unconsolidated affiliates                                     |   | 5,276,211                   |        | 8,340,899 |   | 9,031,805 |   |
| Financed  third party manufacturing cost                                         |   | 3,573,491                   |        | — |   | — |   |
| Write-off  of deferred patent costs                                              |   | 684,389                     |        | — |   | — |   |
| Compensation  related to common stock and options                                |   | 24,835                      |        | 303,994 |   | 1,975,189 |   |
| Compensation  for forgiveness of notes receivable—related parties           |   | 189,000                     |        | 201,187 |   | 136,466 |   |
| Stock  issued in exchange for product rights                                     |   | —                      |        | 275,000 |   | — |   |
| Expense  related to issuance of stock and warrants                               |   | —                      |        | 197,914 |   | — |   |
| Revenue  recognized for stock received in licensing agreement                    |   | —                      |        | (205,443 | ) | — |   |
| Loss  (gain) on disposal of equipment                                            |   | 6,285                       |        | (50,950 | ) | — |   |
| Accrued  interest included in convertible debt—related parties              |   | 688,687                     |        | 819,576 |   | 141,864 |   |
| Recognition  of deferred revenue—related parties                            |   | (400,010                    | )           | (399,996 | ) | (399,995 | ) |
| Changes  in operating assets and liabilities:                                    |   |                        |        |   |   |   |   |
| Accounts  receivable                                                             |   | 1,059,552                   |        | 2,052,686 |   | (1,565,990 | ) |
| Prepaid  expenses and other                                                      |   | (368,286                    | )           | 2,720 |   | (58,518 | ) |
| Other  assets                                                                    |   | 1,000                       |        | 5,345 |   | (79,519 | ) |
| Accounts  payable—trade                                                     |   | (1,157,053                  | )           | 1,014,947 |   | 110,888 |   |
| Accrued  wages and liabilities                                                   |   | (141,604                    | )           | 597,362 |   | 1,234,660 |   |
| Deferred  revenue                                                                |   | 893,752                     |        | — |   | — |   |
| Net  cash used by operating activities                                           |   | (22,402,485                 | )           | (44,728,865 | ) | (3,533,780 | ) |
|                                                                             |   |                        |        |   |   |   |   |
| Investing  activities                                                            |   |                        |        |   |   |   |   |
| Additions  to property, plant, and equipment                                     |   | (1,638,780                  | )           | (2,822,972 | ) | (1,388,657 | ) |
| Proceeds  from the disposition of property, plant and equipment                  |   | —                      |        | 95,788 |   | — |   |
| Additions  to deferred patent costs                                              |   | (1,303,063                  | )           | (884,445 | ) | (821,461 | ) |
| Net  sales (purchases) of securities available-for-sale                          |   | 4,736,915                   |        | 20,823,794 |   | (28,056,928 | ) |
| Initial  investment in unconsolidated affiliate                                  |   | —                      |        | — |   | (12,015,000 | ) |
| Additional  investment in joint venture                                          |   | (1,698,871                  | )           | (5,544,694 | ) | (3,390,350 | ) |
| Loan  repayments—related parties                                            |   | 220,000                     |        | 988,148 |   | — |   |
| Loan  advances—related parties                                              |   | (450,000                    | )           | (1,738,148 | ) | — |   |
| Net  cash provided (used) by investing activities                                |   | (133,799                    | )           | 10,917,471 |   | (45,672,396 | ) |
|                                                                             |   |                        |        |   |   |   |   |
| Financing  activities                                                            |   |                        |        |   |   |   |   |
| Net  proceeds from issuance of common and preferred stock and exercised warrants |   | 124,045                     |        | 16,955,191 |   | 74,025,976 |   |
| Payments  under loan facilities                                                  |   | (1,898,045                  | )           | — |   | (7,100,455 | ) |
| Draw  down on line of credit with Elan                                           |   | 1,687,325                   |        | 5,540,537 |   | 2,701,351 |   |
| Borrowings  under loan facilities                                                |   | 1,189,913                   |        | 2,643,134 |   | 2,000,000 |   |
| Net  cash provided by financing activities                                       |   | 1,103,238                   |        | 25,138,862 |   | 71,626,872 |   |
| Net  (decrease) increase in cash and cash equivalents                            |   | (21,433,046                 | )           | (8,672,532 | ) | 22,420,696 |   |
| Cash  and cash equivalents at beginning of year                                  |   | 23,497,986                  |        | 32,170,518 |   | 9,749,822 |   |
| Cash  and cash equivalents at end of year                                        |   | $                           | 2,064,940   |   | $ | 23,497,986 |   | $ | 32,170,518 |   |
|                                                                             |   |                        |        |   |   |   |   |   |   |   |
| Non-cash  activity Preferred stock dividends accreted                            |   | 1,570,407                   |        | 775,346 |   | 716,456 |   |
| Note  payable converted into Series B Preferred Stock                            |   | 9,905,952                   |        | — |   | — |   |

 

See accompanyingnotes.

 

F-5

----

 

**RIBOZYME PHARMACEUTICALS, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

December 31, 2002

 

**1.   Summary ofSignificant Accounting Policies**

 

**Description of Business**

 

Ribozyme Pharmaceuticals,Inc. (RPI or the Company) was founded in 1992 to capitalize on the broadpotential of ribozymes for use in the development of human therapeutics andtherapeutic target validation services. To date, the Company has engaged in theresearch and development of its ribozyme technology and has experiencedsignificant operating losses in each fiscal year since inception. The Companyhas not generated any revenue from the commercialization of its ribozymetechnology and it expects to continue to incur significant operating lossesover at least the next several years.

 

 

**Capital Requirements, Management’s Plans and Basis ofPresentation**

 

The accompanying consolidated financial statementshave been prepared on a going concern basis, which contemplates continuity ofoperations, realization of assets and liquidation of liabilities in theordinary course of business.   TheCompany incurred a net loss of $34,706,288 for the year ended December 31, 2002and has an accumulated deficit of $194,509,078 at December 31, 2002.  The Company incurred significant costsduring 2001 due to the scale up of clinical trials and the cost ofmanufacturing drugs.  Development of theCompany’s products will require a commitment of substantial additional funds toconduct the costly and time-consuming research, preclinical and clinicaltesting necessary to bring its proposed products to market and to establishmanufacturing and marketing capabilities. The Company’s future capitalrequirements will depend on many factors, including, among others, the progressof the Company’s research, development and drug discovery efforts, the abilityof the Company to establish collaborative arrangements for clinical testing,progress with preclinical studies and clinical trials, the time and costsinvolved in obtaining regulatory approvals, the costs involved in preparing,filing, prosecuting, maintaining, defending and enforcing patent claims,competing technological and market developments, changes in the Company’sexisting research relationships, determination as to the commercial potentialof the Company’s potential products, effective commercialization activities andarrangements, and the cost and availability of third-party financing forcapital expenditures.

 

On February 11, 2003, the Company entered into adefinitive common stock and warrant purchase agreement (SPA) with certaininvestors pursuant to which the Company has agreed to issue and sell to theinvestors the Company’s common stock and five-year warrants to purchase commonstock for aggregate consideration of $48 million. Consummation of thetransaction is subject to a number of conditions, including, but not limitedto, the approval of the Company’s stockholders; appointment to the Board of thefour investor designees; adoption of an amended and restated certificate ofincorporation in order to effect a reverse stock split, change the Company’sname, increase the number of authorized shares and adopt a provision permittingshareholder action to be taken by written consent in lieu of a meeting; therenot having occurred any material adverse change prior to closing; and amendmentof the Company’s bylaw, see Note 13.

 

F-6

----

 

Management intends to address the future requirementsof the Company through corporate partnerships, potential equity and debtfinancing and management of resources as required.  If the SPA is not approved by stockholders, or is not executedfor any other reason, the Company would likely be forced to ceaseoperations.  Management believes thatsubject to the execution of the SPA, its financial resources will be sufficientto allow the Company to sustain its operations into 2005.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**Stock Based Compensation**

 

The Company has electedto follow Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees* (“APB 25”), and related interpretations in accounting forits employee stock options. Under APB 25, because the exercise price of theCompany’s employee stock options equals the market price of the underlyingstock on the date of grant, no compensation expense is recorded. The Companyhas adopted the disclosure-only provisions of Financial Accounting StandardsBoard Statement No. 123, *Accounting and Disclosure of Stock Based Compensation(*“SFAS No. 123”).

 

For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period. The Company’s pro forma information follows:

 
|                                                                                                               |   | **2002**    |        | **2001**    |   | **2000**    |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| Net  loss as reported                                                                                              |   | $           | (34,706,288 | )           | $      | (59,838,161 | )      | $ | (15,881,557 | ) |
| Add: Stock-based  employee compensation expense included in reported income                                        |   | —      |        | 14,476      |   | 1,755,591   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |   | (2,908,094  | )           | (4,286,507  | )      | (3,573,469  | )      |
| Pro  forma net loss                                                                                                |   | (37,614,382 | )           | (64,110,192 | )      | (17,699,435 | )      |
| Pro  forma net loss applicable to common stock                                                                     |   | $           | (39,184,789 | )           | $      | (64,885,538 | )      | $ | (18,415,891 | ) |
| Pro  forma loss per share (basic and diluted)                                                                      |   | $           | (1.95       | )           | $      | (3.84       | )      | $ | (1.28 | ) |

 

**FinancialInstruments**

 

Financial instruments that potentially subject theCompany to concentrations of credit risk consist primarily of cash equivalentsand short-term investments. The Company places its cash equivalents andshort-term investments with high credit-quality financial institutions. TheCompany invests its excess cash primarily in money market instruments, andmunicipal and floating rate bonds. The Company has established guidelinesrelative to credit ratings, diversification and maturities that seek tomaintain safety and liquidity. To date, the Company has not experiencedsignificant losses on any of these investments.

 

**Cash andCash Equivalents**

 

The Company considers allhighly liquid investments purchased with a maturity of three months or less tobe cash equivalents. The Company’s cash equivalents are comprised ofcertificates of deposit, money market funds, and investment securities.

 

**Property, Plant, and Equipment**

 

Property, plant, andequipment is stated at cost. Depreciation is computed by the straight-linemethod over the estimated useful lives of the assets. Useful lives oflaboratory equipment and furniture are estimated at five years and all computerequipment is estimated at three years. Leasehold improvements and equipmentsubject to financing obligations are amortized on a straight-line basis overthe shorter of their estimated useful lives or the term of the lease.

 

F-7

----

 

**Deferred Patent Costs**

 

The Company capitalizeslegal costs directly incurred in pursuing patent applications as deferred patentcosts. When such applications result in an issued patent, the related costs areamortized over the remaining legal life of the patents, using the straight-linemethod. On a quarterly basis, the Company reviews its issued patents andpending patent applications, and if it determines to abandon a patentapplication or that an issued patent no longer has economic value, theunamortized balance in deferred patent costs relating to that patent isimmediately expensed.   During 2002 theCompany expensed $684,389 related to abandoned patents which is included inResearch and Development expense.

 

Below is an estimate ofpatent amortization expense for the next five years:

 
|                            |   | **2003** |    | **2004** |   | **2005** |   | **2006** |    | **2007** |   |
|---------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| Estimated  amortization expense |   | $        | 200,000 |     | $      | 247,059  |   | $        | 294,118 |     | $      | 341,176 |   | $ | 388,235 |   |
|                                 |        |          |         |          |        |          |        |          |         |          |        |  |  |  |  |  |

 

It is possible the aboveestimates of future economic life of the Company’s commercialization revenues,the amount of anticipated future commercialization revenues, or both, will bereduced significantly in the near term due to alternative technologiesdeveloped by other biotechnology or pharmaceutical companies. As a result, thecarrying amount of deferred patent costs may be reduced in the future.

 

**Revenue Recognition and Accounts Receivable**

 

Revenue from collaborativeagreements typically consists of nonrefundable up-front fees, ongoing researchand development funding milestones, license fees and other payments. Revenuefrom nonrefundable up-front fees is recognized upon signing of the agreementwhen it represents a culmination of a separate earnings process. All otherup-front fees are deferred and recognized systematically over the period thefees are earned. Revenue from ongoing research and development funding isrecorded as the expenses are incurred and is typically based on the fullyburdened cost of a researcher working on a collaboration. Revenue is recognizedratably over the period as services are performed, with the balance reflectedas deferred revenue until earned. Revenue from milestones, license fees andother payments will be recognized when earned. License revenue is recognizedratably over the term of the license and milestone revenue is recognized infull when the related milestone performance goal is achieved. Payments receivedin advance under these agreements are recorded as deferred revenue untilearned. The Company has no further research commitments from our collaboratorsfor any revenue recognized. The Company’s accounts receivable are predominatelycollaborative agreement receivables, and to date, the Company has notexperienced any losses with respect to the collection of its accountsreceivables.

 

In 2002, 2001 and 2000,Chiron accounted for approximately 42%, 37% and 29% of collaborative revenues,respectively. In 2002, 2001 and 2000 Medizyme accounted for approximately 21%,48% and 39% of collaborative revenues, respectively.  Revenues from Chiron and Medizyme were for nonrefundable, ongoingresearch and development fees.

 

**Research and Development Expenses**

 

Research and developmentcosts are expensed as incurred.

** **

F-8

----

 

## **Segment Information**

 

Statement of FinancialAccounting Standards No. 131, *DisclosureAbout Segments of an Enterprise and Related Information,* establishesstandards for the reporting of information about operating segments.  The Company’s operations are one operatingsegment.

** **

**Accountingfor Investments in Unconsolidated Affiliates**

 

The Company accounts forits investments in Medizyme Pharmaceuticals, Ltd. (Medizyme) and atugen underthe equity method.  The Company hasrecorded its share of Medizyme’s net losses against its cost basis. At December31, 2002 the Company had absorbed its entire cost basis in its investment inMedizyme; however, the Company is committed to fund future losses incurred byMedizyme and therefore may continue to invest in Medizyme and subsequentlyrecognize its portion of ongoing losses. In 1999, the Company had absorbed its entire cost basis in atugenthrough its share of atugen’s net losses and since the Company has no otherfunding commitments to atugen the Company has ceased recording it share ofatugen’s net losses.  The Company’sinvestment in Archemix is accounted for under the cost method.

 

**Impactof Recently issued Accounting Standards**

 

InJune 2001, the Financial Accounting Standards Board (FASB) issued Statements ofFinancial Accounting Standards (SFAS) No. 141, *Business Combinations*, andSFAS No. 142*,Goodwill and Other Intangible Assets*. SFAS No. 141 requires that thepurchase method of accounting be used for all business combinations initiatedafter June 30, 2001. SFAS No. 141 also includes guidance on the initialrecognition and measurement of goodwill and other intangible assets arisingfrom business combinations completed after June 30, 2001. SFAS No. 142prohibits the amortization of goodwill and intangible assets with indefiniteuseful lives. SFAS No. 142 requires that these assets be reviewed forimpairment at least annually. Intangible assets with finite lives will continueto be amortized over their estimated useful lives.  The Company adopted SFAS No. 142 beginning January 1, 2002.  The Company has not undergone any businesscombinations and therefore SFAS No. 141 and SFAS No. 142 has had no effect onthe Company’s financial statements.

 

InAugust 2001, the FASB issued SFAS No.144, *Accounting for the Impairment or Disposal ofLong-lived Assets,*that is applicable to financial statements issuedfor fiscal years beginning after December 15, 2001.  The FASB’s new rules on asset impairment supersede SFAS No. 121, *Accountingfor the Impairment of Long-lived Assets and for Long-lived Assets to beDisposed of,*and portions of Accounting Principles Bulletin Opinion30, *Reportingthe Results of Operations.* This standard provides a single accounting model for long-lived assetsto be disposed of and significantly changes the criteria that would have to bemet to classify an asset as held-for-sale. Assets held-for-sale are not depreciated and are stated at the lower offair value or carrying amount.  Thisstandard also requires expected future operating losses from discontinuedoperations to be displayed in the period(s) in which the losses are incurred,rather than as of the measurement date as presently required. The Companyadopted SFAS No. 144 beginning January 1, 2002.  The Company periodically reviews the carrying amounts of ourlong-lived assets to determine whether events or circumstances requireadjustments to the carrying amounts.  Insuch reviews, estimated undiscounted future cash flows associated withlong-lived assets or operations are compared with their carrying value todetermine if a write-down is required.

 

 

F-9

----

 

In July 2002, the FASB issued SFAS No. 146*, Accountingfor Costs Associated with Exit or Disposal Activities*.  SFAS 146 requires that a liability for acost that is associated with an exit or disposal activity be recognized whenthe liability is incurred. It nullifies the guidance in EITF Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)*.  Under EITF 94-3, an entity recognized aliability for an exit cost on the date that the entity committed itself to anexit plan. Under SFAS 146, an entity’s commitment to a plan does not, byitself, create a present obligation to other parties that meets the definitionof a liability. SFAS 146 will be effective for exit or disposal activities thatare initiated after December 31, 2002. The Company has not adopted theprovisions of SFAS 146 in the December 31, 2002 financial statements, or forany prior periods.

 

In December 2002, the FASB issued SFAS No. 148, *Accountingfor Stock Based Compensation—Transition and Disclosure*. SFAS 148provides two additional transition methods for entities that adopt thepreferable method of accounting for stock based compensation. Further, thestatement requires disclosure of comparable information for all companiesregardless of whether, when, or how an entity adopts the preferable, fair valuebased method of accounting. These disclosures are now required for interimperiods in addition to the traditional annual disclosure. SFAS is effective forfiscal periods ending after December 15, 2002. The disclosure requirements havebeen met.

 

**2.   SecuritiesAvailable-for-Sale**

 

At December 31, 2002 and2001 management determined that certain marketable securities held by theCompany were available-for-sale. Securities available-for-sale are carried atfair value, with unrealized gains and losses reported as a component ofstockholders’ equity. The amortized cost of debt securities in this category isadjusted for amortization of premiums and accretion of discounts to maturity.Such amortization is included in investment income or expense, as appropriate.Realized gains and losses and declines in value judged to beother-than-temporary on securities available-for-sale are included ininvestment income. Interest and dividends on securities available-for-sale areincluded in investment income. The cost of securities sold is based on thespecific identification method.   Thefollowing is a summary of securities available-for-sale:

** **
|                                               |   | **Amortized  Cost Basis** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair Value** |   |
|----------------------------------------------------|--------|---------------------------|------------|------------------------------|--------|-------------------------------|--------|---------------------------|--------|
| At  December 31, 2001:                        |   |                      |       |                         |   |                          |   |                      |   |
| U.S. Corporate  Debt Securities (maturing in 2002) |   | $                         | 11,485,791 |                         | $      | 11,293                        |   | $                         | — |   | $ | 11,497,084 |   |
| At  December 31, 2002:                        |   |                      |       |                         |   |                          |   |                      |   |
| U.S. Corporate  Debt Securities (maturing in 2003) |   | $                         | 6,748,876  |                         | $      | 7,162                         |   | $                         | — |   | $ | 6,756,038 |   |

 

F-10

----

 

**3.     Long-Term Debt**

 

Long-term debt as ofDecember 31, 2002 and 2001, consists of the following:

 
|                                        |   | **2002**  |      | **2001**   |   |
|---------------------------------------------|--------|-----------|-----------|------------|--------|
| Equipment  loan (I)                         |   | $         | 1,535,003 |       | $      | 643,135 |   |
| Convertible  debt—related parties (II) |   | 3,460,000 |      | 3,220,000  |   |
| Convertible  debt—joint venture (III)  |   | —    |      | 8,896,658  |   |
| Note payable  (IV)                          |   | 1,973,491 |      | —     |   |
|                                        |   | 6,968,494 |      | 12,759,793 |   |
| Current portion                             |   | (479,782  | )         | (169,117   | )      |
| Long-term debt                              |   | $         | 6,488,712 |       | $      | 12,590,676 |   |

 

----

| I.   |   | In December 2001, the  Company negotiated an equipment credit facility of $4,000,000 with a  financing company.  The agreement  requires monthly principal and interest payments for 36 or 48 months,  depending on the type of equipment financed. The interest rate fixed to each  draw down is 5.61% and 5.42% over the rates of 36 or 48 month treasury bills,  respectively, at the time of the draw down.   The facility expired in November 2002 and therefore no additional  amounts can be borrowed.  The interest  rate on these borrowings averaged 9.5% at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| II.  |   | In April 1997, the  Company entered into a collaboration agreement with a corporate partner  whereby, among other items, the Company borrowed from the corporate partner  up to $2.0 million annually through 2001. The loans are collateralized 50% by  equipment purchases. The loans carry an interest rate of 8% per annum and  under certain circumstances are convertible into equity, at the then current  market price, at the option of the corporate partner. Principal and interest  payments on the loans are deferred until their maturity which is in April  2004. In April 2000, the Company paid down $6.9 million of the outstanding  debt with proceeds from a public offering.   In June 2000, the corporate partner elected to convert the remaining  balance of approximately $997,205 into 42,435 shares of the Company’s common  stock.  Since the June 2000 conversion  of the balance, the Company has drawn down the final $3.0 million on the debt  facility, which as of December 31, 2002 remains outstanding.  See Note 7 on Schering AG. |
| III. |   | In January 2000, the  Company entered into a joint venture agreement with a corporate partner for  the development and commercialization of a potential product to treat breast  and other cancers.  The development of  the drug  required funds of up to $15  million and therefore the corporate partner made available to the Company a  convertible promissory note to fund up to $12,015,000 of development expenses  through January 2006.  The note  carried an interest rate of 12% compounded on a semi-annual basis. Pursuant  to the joint venture agreement, in June 2002 the note was converted into the  Company’s Series B Preferred Convertible Stock.  See Note 7 on Elan Corporation.                                                                                                                                                                                                                                                                                                                                                           |
| IV.  |   | In the fourth quarter  of 2002 the Company purchased on credit $3.6 million of drug from a contract  manufacturer.  The terms of payment  for the purchase were $1.6 million due paid October 30, 2002; $1.1 million to  be paid on or before October 30, 2004; and $873,491 to be paid on or before  June 30, 2005.  The future payments  will accrue interest at the rate of 6% compounded annually, calculated from  January 1, 2003 until payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

TheCompany did not pay cash but accrued interest for the year ended December 31,2001. Cash paid for interest for the years ended December 31, 2002, 2001 and2000 was $110,890, $0 and $892,199, respectively.  At December 31, 2002 the carrying amounts of the Company’slong-term debt approximates the fair value as all borrowings bear interestrates which are comparable to the current market rate for such borrowings.

 

F-11

----

 

As of December 31, 2002,maturities of long-term debt are as follows:

 
|   |   | **Amount** |      |
|--------|--------|------------|-----------|
| 2003   |   | $          | 479,782   |   |
| 2004   |   | 5,077,813  |      |
| 2005   |   | 1,279,089  |      |
| 2006   |   | 131,810    |      |
|   |   | $          | 6,968,494 |   |

 

**4.   Leases**

 

The Company leases officespace in two buildings under noncancelable operating leases that expire inOctober 2007 and June 2007. According to the terms of the leases, rent for thebuildings will increase each year based on Consumer Price Index increases, witha minimum of 3.5% and a maximum of 6.0%. Total rent expense, including miscellaneous laboratory equipmentrentals, was $853,108, $782,819 and $453,686 in 2002, 2001 and 2000,respectively.

 

The Company’s minimumoperating lease commitments at December 31, 2002 are as follows:

 
| 2003                 |   | $         | 1,065,844 |   |
|----------------------|--------|-----------|-----------|--------|
| 2004                 |   | 1,080,621 |      |
| 2005                 |   | 1,100,179 |      |
| 2006                 |   | 1,120,421 |      |
| 2007                 |   | 777,204   |      |
| 2008 and  thereafter |   | —    |      |
|                 |   | $         | 5,144,269 |   |

 

Under a separateagreement, the Company sublet a portion of their building to atugen, anunconsolidated affiliate. Rental income from atugen USA for 2002, 2001 and 2000was $105,062, $188,814 and $102,577, respectively.  The sublease expired in October 2002 and atugen USA has ceasedoperations.

 

**5.     Redeemable Preferred Stock andStockholders’ Equity**

 

**Series A Preferred Stock**

 

In January 2000, theCompany issued 12,015 shares of Series A Preferred Stock to Elan Corporation(Elan) to fund its 80.1% share of the initial capitalization of Medizyme (seeNote 7).  At Elan’s option, the Series APreferred Stock is convertible into the Company’s common stock or may beexchanged for a 30.1% interest in Medizyme. Because of this exchange feature, the Company has classified for theperiods presented $12,015,000 of its Series A Preferred Stock and relatedpreferred stock dividends of $2,314,366, $1,491,802 and $716,456 at December31, 2002, 2001 and 2000, respectively, outside of permanent equity inaccordance with EITF Topic No. D-98, *Classification of and Measurement of RedeemableSecurities.* The right of Elan to exchange the Series A PreferredStock is applicable for the period October 2002 through May 2003.  Subsequent to May 2003 and if the exchangeright expires unexercised, the Series A Preferred Stock will be reclassified topermanent equity.

 

F-12

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**Employee Stock Purchase Plan**  The Company adopted an Employee StockPurchase Plan (the Purchase Plan), authorizing the issuance of 600,000 sharespursuant to purchase rights granted to employees of the Company. The PurchasePlan provides a means by which employees purchase common stock of the Companythrough payroll deductions. The Purchase Plan is implemented by offerings ofrights to eligible employees. Generally, each offering is twenty-four months’duration with purchases occurring on each October 31 and April 30 during eachoffering. Common stock is purchased for accounts of employees participating inthe Purchase Plan at a price per share equal to the lower of (i) 85% of thefair market value of a share of common stock on the date of commencement ofparticipation in the offering or (ii) 85% of the fair market value of a shareof common stock on the date of purchase. Generally all regular employees,including executive officers, may participate in the Purchase Plan and mayauthorize payroll deduction of up to 15% of their base compensation for thepurchase of stock under the Purchase Plan. The Company’s Board of Directors hasthe authority to terminate the Purchase Plan at its discretion. Shares aredeemed issued for accounting purposes in the year the shares arepurchased.  As of December 31, 2002,572,553 shares have been issued under the Purchase Plan.  The Company will require stockholders toapprove additional shares for issuance under the Purchase Plan for the offeringperiod commencing November 1, 2002. Shares approved subsequent to the beginning of an offering may requirethe Company to recognize a compensation expense for the period in which theshares are approved.  The compensationexpense will likely be incurred during the second quarter of 2003.

 

**Stock Option Plans**  The Company has established a Non-QualifiedStock Option Plan and an Incentive Stock Option Plan (collectively, the Plans,as amended), under which it authorized stock option grants to purchase up to5,767,154 shares of the Company’s common stock to eligible employees,consultants, and other individuals, as defined in the Plans. Options topurchase the Company’s common stock are exercisable at a price as determined bythe Board of Directors at the time the option is granted, which shall not beless than 100% of the fair market value (110% in the case of 10 percentshareholders) at the date of grant. Vesting rights are determined by the Boardof Directors at the time the option is granted and generally past optionsbecame exercisable at twenty percent at the end of each of years one throughfive. However, in December 2000 the Board of Directors approved future vestingof grants at twenty-five percent at the end of each of years one throughfour.  If not exercised, the optionsexpire after ten years. The Board of Directors has also granted certainemployees options that accelerate vesting upon achievement of certaincontingent milestone events.

 

Changes in stock optionsfor the years ended December 31, 2002, 2001 and 2000 were as follows:

 
|                              |   | **Options** |   | **Exercise  Price** |                  |
|-----------------------------------|--------|-------------|--------|---------------------|-----------------------|
| Outstanding  at December 31, 1999 |   | 1,732,440   |   | $                   | .45-$12.78            |   |
| Options  granted                  |   | 619,510     |   | $                   | 9.13-$58.75           |   |
| Options  exercised/cancelled      |   | (276,037    | )      | $                   | .45-$58.75            |   |
| Outstanding  at December 31, 2000 |   | 2,075,913   |   | $                   | .45-$31.25            |   |
| Options  granted                  |   | 1,034,800   |   | $                   | 4.00-$10.50           |   |
| Options  exercised/cancelled      |   | (246,960    | )      | $                   | .45-$28.88            |   |
| Outstanding  at December 31, 2001 |   | 2,863,753   |   | $                   | .45-$31.25            |   |
| Options  granted                  |   | 1,909,005   |   | $                   | .27-$  4.97 |   |
| Options  exercised/cancelled      |   | (1,005,673  | )      | $                   | .45-$31.00            |   |
| Outstanding  at December 31, 2002 |   | 3,767,085   |   | $                   | .27-$31.25            |   |

 

The weighted averageexercise price of options outstanding at December 31, 2002, 2001 and 2000 was$4.55, $8.44 and $8.83, respectively.

 

F-13

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Stock options vest asfollows:

 
|                   |   | **Options** |   |
|------------------------|--------|-------------|--------|
| Currently  exercisable |   | 1,188,014   |   |
|                   |   |        |   |
| 2003                   |   | 931,948     |   |
| 2004                   |   | 826,881     |   |
| 2005                   |   | 510,569     |   |
| 2006                   |   | 309,673     |   |
| 2007 and  thereafter   |   | —      |   |
| Total                  |   | 3,767,085   |   |

 

 

The following tablesummarizes information concerning outstanding and exercisable options as ofDecember 31, 2002:

 
|                         |   |                    |   |                                               |   | **Options  Outstanding**              |      | **Options  Exercisable** |   |
|------------------------------|--------|-------------------------|--------|----------------------------------------------------|--------|---------------------------------------|-----------|--------------------------|--------|
| **Range of  Exercise Price** |   | **Number  outstanding** |   | **Weighted  Average  Remaining  Contractual Life** |   | **Weighted  Average  Exercise Price** |      | **Number  Exercisable**  |   | **Weighted  Average  Exercise Price** |   |
| $                            | 0.27   | —                  |   | $                                                  | 0.77   |                                  | 840,085   |                     | 9.72   |   | $ | 0.57 |   | 160 |   | $ | 0.35 |   |
| $                            | 0.78   | —                  |   | $                                                  | 1.12   |                                  | 791,109   |                     | 9.37   |   | $ | 0.85 |   | 13,309 |   | $ | 1.04 |   |
| $                            | 1.17   | —                  |   | $                                                  | 3.00   |                                  | 543,807   |                     | 6.20   |   | $ | 2.65 |   | 395,517 |   | $ | 2.95 |   |
| $                            | 3.01   | —                  |   | $                                                  | 5.63   |                                  | 564,744   |                     | 7.60   |   | $ | 4.67 |   | 280,309 |   | $ | 5.06 |   |
| $                            | 5.75   | —                  |   | $                                                  | 10.50  |                                  | 726,165   |                     | 7.88   |   | $ | 8.92 |   | 320,508 |   | $ | 8.76 |   |
| $                            | 10.88  | —                  |   | $                                                  | 20.02  |                                  | 198,675   |                     | 7.62   |   | $ | 13.98 |   | 122,691 |   | $ | 13.91 |   |
| $                            | 24.69  | —                  |   | $                                                  | 31.25  |                                  | 102,500   |                     | 7.63   |   | $ | 25.74 |   | 55,520 |   | $ | 25.80 |   |
|                         |   |                    |   |                                               |   |                                  |      |                     |   |   |   |   |   |   |
| $                            | 0.27   | —                  |   | $                                                  | 31.25  |                                  | 3,767,085 |                     | 8.30   |   | $ | 4.55 |   | 1,188,014 |   | $ | 7.20 |   |
|                              |        |                         |        |                                                    |        |                                       |           |                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Stock Based Compensation**  The Company has elected to follow AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25), and related Interpretations in accounting for its employee stock. UnderAPB 25, if the exercise price of the Company’s employee stock options equalsthe market price of the underlying stock on the date of grant, no compensationexpense is recognized. During 2002, 2001, and 2000, the Company recorded$24,835, $14,476, and $23,393, respectively, of compensation relating to thegrant of stock options and an anti-dilution agreement.   The expense recorded in 2001 and 2000relate to pre-IPO issuances that were deferred until vesting was completed. Inaddition, the Company recorded expense of $1.7 million during 2000 related toperformance stock options that vested due to achievement of specific performancecriteria during the year. The expense recorded in 2002 relates to optionsissued to consultants, which was accounted for under the requirements of SFAS123.

 

Pro forma informationregarding net loss and loss per share is required by SFAS 123, which alsorequires that the information be determined as if the Company has accounted forits employee stock options under the fair value method of SFAS 123. The fairvalue for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following weighted-averageassumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of4.75%, 4.3% and 5.6%; a dividend yield of 0%; volatility factors of the

 

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expected market price of the Company’s commonstock of 1.09, 1.04 and 1.08; and a weighted-average expected life of theoption of 6 years. The weighted average fair value of stock options grantedduring 2002, 2001 and 2000 was $0.84, $7.03 and $18.53, respectively.

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because theCompany’s employee stock options have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

**Shareholder Rights Plan**  In November 2000, the Company adopted aShareholder Rights Plan (the Rights Plan) designed to protect and maximizeshareholder value and to assist the Board of Directors in ensuring fair andequitable benefit to all shareholders in the event of a hostile bid to acquirethe Company.  The Rights Plan imposes a significantpenalty upon any person or group that acquires 15 percent or more of theCompany’s outstanding common stock without the approval of the RPI Board.  Under the Rights Plan, a dividend of onePreferred Stock Purchase Right was declared for each common share held ofrecord as of the close of business on December 8, 2000.  The rights generally will not becomeexercisable unless an acquiring entity accumulates or initiates a tender offerto purchase 15 percent or more of the Company’s common stock.  In that event, each right will entitle theholder, other than the unapproved acquirer and its affiliates, to purchaseeither the Company’s common stock or shares in an acquiring entity at one-halfof market value.  The rights expire onDecember 8, 2010.

 

**Common Stock Reserved **Below is a summary ofcommon stock reserved by the Company at December 31, 2002 for issuance upon theexercise of the various options, warrants, the 401(k) plan and Purchase Plan.

 
|                                                                             |   | **SHARES** |   |
|----------------------------------------------------------------------------------|--------|------------|--------|
| Stock  option plans                                                              |   | 5,309,224  |   |
| Employee  stock purchase plan                                                    |   | 27,447     |   |
| Employee  401(k) stock match                                                     |   | 140,156    |   |
| Warrants  at $5.00 per share (expires in 2006)                                   |   | 542,144    |   |
| Warrants  at $5.47 per share (expires in 2004)                                   |   | 9,000      |   |
| Warrants  at $9.94 per share (expires in 2004)                                   |   | 25,000     |   |
| Warrants  at $12.00 per share (expires in 2006)                                  |   | 350,000    |   |
| Warrants  at $15.75 per share (no expiration)                                    |   | 1,270      |   |
| Warrants  at $20.00 per share (expires in 2007)                                  |   | 300,000    |   |
| Warrants  at $22.50 per share (2,222 warrants expire in 2005, remainder in 2006) |   | 448,890    |   |
|                                                                             |   | 7,153,131  |   |

 

The Company’s ability topay dividends is restricted by the terms of its collaborative, convertible debtand equipment loan facility agreements.

 

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**6.   UnconsolidatedGerman Affiliate - atugen**

 

In 1998, the Companytransferred its gene function and target validation business and technology toatugen, a separately funded German affiliate. Financing for atugen wasaccomplished through an equity investment of $2.0 million in cash from theCompany in 1998, a venture capital investment of $7.0 million and a commitmentby the German government to provide grants and loans of up to $10.0 million. Asa result, at December 31, 1998, the Company retained a 49.5% ownership inatugen.  However, since formation,atugen has had additional rounds of financing and as a result, the Companyretained approximately 31% ownership in atugen at the end of 2002. The Companyaccounts for its investment in atugen under the equity method of accounting.  In connection with its formation, atugenreceived exclusive royalty-free licenses to the Company’s patents andtechnologies for target validation and discovery in exchange for a one-time$2.0 million payment which was received by the Company in January 1999. Theentire amount of this one-time payment was deferred at December 31, 1998 and isbeing amortized over the five-year term of the license agreement and isreflected in the Company’s equity in earnings. As of December 31, 1999 the Company had absorbed its entire cost basisin this equity investment through its share of atugen’s net losses.  The Company will retain rights to developribozyme therapeutic agents against targets validated by atugen.

 

**7.   CollaborativeAgreements**

 

**Chiron**

 

In July 1994, the Companyentered into a research and development collaboration agreement with Chiron toresearch, develop and market products directed towards five genetic targets,and all human clinical indications associated with those targets. The Companyand Chiron will share equally in the costs and profits of any jointly developedproducts. In addition, Chiron may, at its option, finance the Company’s portionof its Phase II and Phase III drug development costs for mutually approvedprograms. The Company retains the option to reacquire its rights by reimbursingChiron for such development costs plus a predetermined risk premium. As part ofthis agreement, Chiron made a $10,000,000 equity investment in the Company.

 

Chiron and the Companyare jointly collaborating in the development of ANGIOZYME, the Company’s leadproduct candidate for the treatment of solid tumor cancers.  The Company recorded revenues and credit toexpenses from Chiron of $2,582,260, $11,935,567 and $4,529,795, in 2002, 2001and 2000, respectively, for 50% of ANGIOZYME clinical development andmanufacturing expenses incurred by the Company. There are no future obligationsbetween the Company and Chiron related to revenues that were recognized in2002, 2001 and 2000.

 

F-16

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In March 2001, theCompany issued 38,920 shares of the Company’s common stock to Chiron inexchange to reacquire all rights to develop any ribozyme product containing orutilizing an HIV target.  An expense of$275,000 was recorded in 2001 in connection with the issuance of the stock.

 

F-17

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**Schering AG, Berlin**

 

On April 9, 1997, theCompany entered into a research collaboration with Schering AG, Berlin,(Schering AG) focusing on the use of ribozymes for therapeutic targetvalidation, as well as the development of ribozymes as therapeutic agents. Thecollaboration utilized the special selectivity of ribozymes to validate newmolecular therapeutic targets and to discover new therapeutic agents based onthose targets. The Company provided its expertise in ribozyme design, synthesisand delivery, and Berlex Laboratories, Inc., a U.S. subsidiary of Schering AG(Berlex) provided candidate targets, cell culture screens, animal models anddevelopment and commercialization expertise to the collaboration. Since theformation of atugen in 1998, the Company subcontracted the work related to thecollaboration to atugen.  Subsequently,all revenues related to the collaboration with Berlex have been transferred toatugen as well.

 

Schering AG made anequity investment in the Company in May 1997 of $2.5 million in exchange for212,766 shares of common stock, and made an additional equity investment of$2.5 million for 465,117 shares in April 1998. Separately, Schering AG providedloans of $2.0 million in each of years 1997, 1998, 1999, 2000 and 2001.According to the terms of the Company’s agreement with Schering AG, 50% ofborrowings on the line of credit were collateralized by equipment purchases.The loans, which carry an interest rate of 8% per annum, are convertible intoequity at the option of Schering AG under certain circumstances.  In April 2000, after the completion of apublic offering, the Company paid down $6.9 million of the outstandingborrowings from Schering AG.  In June2000, Schering AG converted the remaining balance of $997,205 into 42,435shares of the Company’s common stock at the market closing price on June 19,2000 of $23.50. At December 31, 2002, the outstanding borrowings and accruedinterest of $3.5 million were convertible into approximately 14.4 millionshares of the Company’s common stock. Principal and interest payments aredeferred until maturity of the loans which is in April 2004. The Company mayearn success fees upon product development milestones and will manufacturesynthetic ribozyme products and receive royalties on sales of both ribozyme andnon- ribozyme products resulting from the collaboration. All such payments aresubject to some restrictions, including receipt of certain third party consents.The agreement expired in April 2002.

 

**Eli Lilly and Company**

 

In March 1999, the Company entered into acollaboration with Eli Lilly and Company (Eli Lilly) to conduct research,development and commercialization of the Company’s ribozyme for the treatmentof Hepatitis C virus infection, HEPTAZYME. Under the terms of the agreement,the Company received approximately $9.2 million in 1999, which included $1.7million of funding for research and clinical trial expenses and a $7.5 millionequity investment purchasing five shares of the Company’s non-votingconvertible Series L preferred stock which was completed in April 1999. Eachshare of Series L Convertible Preferred Stock was convertible into shares ofthe Company’s common stock based upon milestones related to the development andcommercialization of HEPTAZYME.

 

In September 2000, the Company entered into anagreement with Eli Lilly to repurchase all rights to HEPTAZYME.  Eli Lilly had directed the clinical trialsfor HEPTAZYME to date under the licensing agreement.  According to the repurchase agreement, the Company reacquired theglobal rights to HEPTAZYME and will direct all subsequent clinical trials.  In addition, the Company agreed to payroyalties to Eli Lilly on future net sales of HEPTAZYME, as well as milestonepayments if the Company completes an agreement for the development or marketingrights to HEPTAZYME with a third party or if the Company files a New DrugApplication for HEPTAZYME, whichever comes first.  Pursuant to the repurchase agreement, Eli Lilly converted theoutstanding five shares of the Company’s Series L Convertible Preferred Stockinto 636,640 shares of common stock on December 28, 2000 (the TerminationDate). The conversion price was based on a preferred

 

F-18

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share value of $1.5 million for each of the five shares outstanding.The price per share of the common stock was based on the average closing priceof the Company’s common stock for the 30 days prior to the Termination Date.  In addition, the Company issued to Eli Lilly$3,000,000 of its common stock, which resulted in 252,632 shares, as paymentfor Eli Lilly’s efforts in generating and providing data.  The price per share was based on the closingmarket price of the Company’s common stock on the Termination Date.  In return, Eli Lilly paid the Company atermination fee of approximately $2.8 million. The Company recorded the $225,891 difference between the value of thestock issued and the termination fee as a collaboration expense in December2000.

 

**Elan Corporation**

 

In January 2000, theCompany formed a joint venture with Elan Corporation (Elan) for the developmentand commercialization of HERZYME, the Company’s product to treat breast andother cancers. As part of this arrangement, the Company licensed HERZYME andElan licensed its MEDIPAD® drug delivery technology to the joint venture,Medizyme Pharmaceuticals, Ltd. (Medizyme). The MEDIPAD® system is a disposablecontinuous subcutaneous drug delivery system that allows a patient toadminister the drug at home.

 

Initial funding ofMedizyme included $12.0 million from the Company and $3.0 million from Elan.The Company’s $12.0 million capital contribution was funded by the sale to Elanof (i) 12,015 shares of the Company’s Series A Convertible ExchangeablePreferred Stock (the Series A Preferred Stock), (ii) a warrant to purchase upto 200,000 shares of the Company’s common stock at an exercise price of $15.00per share, which expired unexercised in January 2002, and (iii) a warrant topurchase up to 300,000 shares of the Company’s common stock at an exerciseprice of $20.00 per share with a term of seven years. The Series A PreferredStock has a stated dividend rate of 6.0% which is payable semi-annually throughthe issuance of additional shares of Series A Preferred Stock at a nominalvalue of $1,000 per share.  The Series APreferred Stock has a liquidation preference of $12,015,000 plus accrued andunpaid dividends.  At December 31, 2002,the Company has recorded $2,314,366 as an accreted dividend related to thispreferred stock arrangement.

 

As a result of Medizyme’sinitial capitalization, the Company owns 80.1% of the outstanding capital stockof Medizyme and Elan owns 19.9%. However, Elan can exchange, at its option, allof its shares of the Company’s Series A Preferred Stock for 30.1% of RPI’sinterest in Medizyme. After such redemption, Elan would own 50% of the thenoutstanding capital stock of Medizyme. Elan also has the option of convertingits shares of the Company’s Series A Preferred Stock and any related accretedpreferred stock dividends into shares of RPI’s common stock at a fixedprice.   As of December 31, 2002, theSeries A Preferred Stock and accreted dividends were convertible into 1,194,114shares of the Company’s common stock.

 

Medizyme paid Elan incash a $15.0 million non-refundable license fee for the MEDIPAD® drug deliverytechnology. As a result of this licensing transaction, Medizyme capitalized theentire license fee and is amortizing the balance over the three-year term ofthe agreement since Medizyme’s license of the MEDIPAD® device was intended foruse with any ribozyme drug developed by Medizyme targeting a gene believedresponsible for certain breast cancers. The Company estimated that funding forMedizyme would require approximately $15.0 million in additional operating anddevelopment costs. In connection with expected funding requirements, Elanagreed to provide the Company with a $12.0 million credit facility to fund theCompany’s pro rata portion of Medizyme’s operating costs over the developmentperiod, which was 42 months. At the end of December 2002, the Company hadutilized the credit facility and had borrowed $9.9 million. The note carried aninterest rate of 12% compounded on a semi-annual basis.  In June 2002, Elan converted this debt andaccrued interest into 9,905 shares of our Series B Convertible Preferred Stock(the Series B Preferred Stock). The Series B Preferred Stock (the Series B PreferredStock), ultimately is convertible into shares of the Company’s common stock ata 50% premium to the average price of its common stock for the 60 days prior tothe time of the applicable draw down

 

F-19

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on the credit facility. The Series B Preferred Stock has a stateddividend rate of 12%, which is payable semi-annually through the issuance ofadditional shares of Series B Preferred Stock at a nominal value of $1,000 pershare. If converted at December 31, 2002, the Series B Preferred Stock, preferredstock issuable and the Series B accreted dividends would be convertible into1,488,106 shares of the Company’s common stock. For the year ended December 31,2002, the Company recorded $1.4 million in revenues and reimbursements fromMedizyme, of the total $6.7 million in research and development expensesrecorded by Medizyme.  The Companyrecorded $5.3 million as equity in the net loss of Medizyme.

 

Also in connection withthe Medizyme joint venture, Elan purchased 641,026 shares of the Company’s commonstock for a purchase price of $5.0 million in 2000. In addition, Elan purchased500,500 shares of the Company’s common stock for $5.0 million in May 2001 at apremium to the average closing price for the 45 trading days preceding thepurchase.  Elan also purchased 750,000shares of the Company’s common stock and a warrant to purchase 75,000 shares ofcommon stock in December 2001 for $3.0 million.

 

In January 2002, theCompany expanded its collaboration with Elan. Under the terms of the amended agreement, for no cost Medizyme willlicense Elan’s liposome technology for the development of HERZYME.  The purpose of the amendment is to assesstumor localization and pharmacokinetics with several liposome formulations inconjunction with HERZYME.

 

The joint ventureagreement provides for equal representation by the Company and Elan in theoperating and management decisions of Medizyme. Due to the significant minorityinvestor rights retained by Elan Corporation, and its subsidiaries, the Companyaccounts for its investment in Medizyme under the equity method ofaccounting.  Separate financialstatements for Medizyme are included in this Form 10-K. The following tablepresents unaudited summary financial information for Medizyme as of December31, 2002.

 

**Balance Sheet:**

 
| **Assets**                                                                                                                        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                              |       |   | ** ** |
| Cash  and cash equivalents                                                                                                        |       | $ | 828 |   |
| Total  Assets                                                                                                                     |       | $ | 828 |   |
|                                                                                                                              |       |   |   |
| **Liabilities and Stockholders’  (Deficit) Equity**                                                                          |       |
|                                                                                                                              |       |   |   |
| Accounts  payable and accrued liabilities to joint venture owners                                                                 |       | $ | 159,808 |   |
| Total  current liabilities                                                                                                        |       | 159,808 |   |
|                                                                                                                              |       |   |   |
| Convertible  preferred stock, $1.00 par value; 6,000 shares authorized, 6,000 shares  issued and outstanding at December 31, 2002 |       | 6,000 |   |
| Common  stock, $1.00 par value; 6,000 shares authorized, 6,000 shares issued and  outstanding at December 31, 2002                |       | 6,000 |   |
| Contributed  surplus                                                                                                              |       | 28,263,800 |   |
| Deficit  accumulated during the development stage                                                                                 |       | (28,434,780 | ) |
| Total  liabilities and stockholders’ (deficit) equity                                                                        |       | $ | 828 |   |

 

F-20

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**Results of Operations:**

 
| License  fee amortization   |   | $         | 5,000,000  |   |
|-----------------------------|--------|-----------|------------|--------|
| Research  and development   |   | 1,729,069 |       |
| General  and administrative |   | 16,035    |       |
| Total  operating expenses   |   | 6,745,104 |       |
|                        |   |      |       |
| Net  loss                   |   | $         | (6,745,104 | )      |

 

**ArchemixCorporation**

 

In May 2001, the Companyannounced the formation of a strategic alliance with Archemix Corporation, aMassachusetts privately held biotechnology company, that will allow bothcompanies to capitalize on reciprocal intellectual property in the field ofproteomics and molecular diagnostics. Under the terms of the agreement, Archemix received exclusive licensesand sublicenses to the Company’s intellectual property covering the allostericribozyme technology for use in detecting proteins in connection with drugdevelopment and in a wide range of molecular detection applications.  In exchange for the licenses, the Companyreceived an equity position in Archemix, a seat on Archemix’s Board ofDirectors and a seat on the Scientific Advisory Board.  The Company accounts for its investmentunder the cost method.  In addition, theCompany received a license to Archemix’s intellectual property coveringallosteric ribozymes for use in molecular diagnostic applications.  As of December 31, 2002, the Company nolonger holds a seat on either Archemix’s Board of Directors or ScientificAdvisory Board.

 

**GeronCorporation**

 

In December 2001, theCompany announced a collaboration with Geron Corporation, a biopharmaceuticalcompany focused on developing and commercializing therapeutic and diagnosticproducts for applications in oncology and regenerative medicine and researchtools for drug discovery. Initially, Geron paid the Company for consultation innucleic acid technology to improve process development, scale-up and themanufacturing process for GRN163.  InJuly 2002, the Company announced an agreement whereby the Company willmanufacture GRN163 for use in Geron’s preclinical studies.  Under the terms of the agreement, Geron willpay the Company approximately $2.2 million in non-refundable fees related tothe process development and manufacture of GRN163.  As of December 31, 2002, the Company had recognized $718,000 inrevenues related to the agreement.

 

**Fujirebio**

 

In March 2002, the Company announced an agreement withFujirebio to develop and commercialize ribozyme-based clinical diagnosticproducts. Under the terms of the agreement, Fujirebio will receive exclusivecommercialization rights for East Asia, including Japan, for any resultingproducts from the collaboration. During 2002, the Company received $556,000from Fujirebio related to the collaboration. If the programs are successful, the Company will receive licensing fees,research funding, milestone payments, and royalties as well as retain certainmanufacturing rights. Recently the Company completed the first phase of itsprogram with Fujirebio and are in the process of analyzing the results. It isuncertain at the present time if Fujirebio will continue with thecollaboration.

 

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**8.   Commitments andContingencies**

 

At the core of theCompany’s technology are inventions and patents of the University of Colorado(CU) which were developed by Dr. Thomas R. Cech and various associates of Dr.Cech. Pursuant to the policies of CU, these inventions and the patents issuedthereon, (the Cech Technology) became the property of CU. The Cech Technologywas assigned to CU’s affiliate, University Research Corporation (URC), which inturn assigned the rights to license certain of the Cech Technology toCompetitive Technologies, Inc. (CTI), formerly known as University Patents,Inc. United States Biochemical Corporation (USB) licensed the Cech Technologypursuant to two sublicenses. One of these sublicenses was for the CechTechnology held by CTI. In November 1996, USB assigned to the Company itsrights under the sublicense from CTI and the Company entered into an amendedand restated license with CTI. The Company also has obtained a license from URCand a sublicense from USB for other Cech Technology held by URC. The CTI license,URC license and USB sublicense together grant the Company the exclusive (exceptfor non-commercial academic research) worldwide right, among other things, tomake, use and sell RNA enzymes covered by licensed patents and productsincorporating them. The URC license and USB sublicense are fully paid. The CTIlicense provides for the payment of a royalty on sales of productsincorporating RNA enzymes, covered by licensed patents, and for certain minimumannual royalties. The Company may grant sublicenses to the licensed technologysubject to the payment to CTI of a share of royalty income from suchsublicenses or a royalty on sales from sublicensed products, methods orservices, depending on the particular licensed patents involved. In addition,the Company must pay CTI a share of any option fee, license fee, prepaidroyalty or other front-end fee other than research and development funding paidin connection with such sublicense. At the Company’s discretion, the paymentmay be in either cash or equity.

 

The Company, along with one or more of its officers ordirectors,  are defendants in severalclass action lawsuits brought on behalf of purchasers of the Company’s commonstock on November 16 and 17, 1999. The lawsuits, which are substantiallyidentical, allege that that the Company violated certain federal securitieslaws based upon the Company having made an allegedly misleading announcement onNovember 15, 1999. On November 7, 2002, the Company announced that an agreementwas reached with the plaintiffs to settle the shareholder class actionlawsuit.  At a hearing on March 27,2003, the court approved the settlement as proposed and will issue an orderconfirming the approval shortly. The Company’s liability insurance policy hasagreed to cover the full amount of the settlement.

 

**9.   Related PartyTransactions**

 

At December 31, 2002,2001 and 2000, the Company had a total of $906,000, $865,000 and $316,187,respectively, of non-interest bearing loans due from executive officers. Thebalances may be forgiven by the Company under certain employment agreementprovisions. The loan balances are forgivable or payable to the Company undervarious terms not to exceed 5 years. The Company forgave $189,000, $201,187 and$136,466, of these loans during each of the years ending December 31, 2002,2001 and 2000, respectively.

 

In 1998, the Company gaveto its officers and certain other employees stock in the newly formed atugen atno personal cost to the individuals, but which was expensed by theCompany.  As of December 31, 2002, theseofficers and other employees still retain an equity interest in atugen.  In addition, and related to the Archemixlicensing agreement, an executive served on the Archemix Board of Directorsduring 2002, and accordingly, received compensation in cash and stockoptions.  As of December 31, 2002, theexecutive no longer serves on the Archemix Board of Directors.

 

F-22

----

 

In August 2002, theCompany reached an agreement with Jeremy Curnock Cook, the Company’s Chairmanof the Board, whereby the Company utilized his consulting firm, BioscienceManagement, plc, for strategic planning.  During 2002, the Company paid $85,000 and $39,884 to BioscienceManagement and Mr. Cook, respectively, in fees for consulting servicesprovided.

 

**10.   Income Taxes**

 

The Company accounts forincome taxes in accordance with Statement of Financial Accounting Standard No.109, Accounting for Income Taxes (SFAS 109). Under the provisions of SFAS 109,a deferred tax liability or asset (net of a valuation allowance) is provided inthe financial statements by applying the provisions of applicable tax laws tomeasure the deferred tax consequences of temporary differences that will resultin net taxable or deductible amounts in future years as a result of eventsrecognized in the financial statements in the current or preceding years.

 

At December 31, 2002, theCompany has the following net operating loss and tax credit carryforwards forincome tax purposes:

 
| **Expiration Date** |   | **Net  Operating  Losses** |        | **Research  and  Development  Credits** |   | **State  Investment  Credits** |   |
|---------------------|--------|----------------------------|-------------|-----------------------------------------|--------|--------------------------------|--------|
| 2001                |   | $                          | —      |                                    | $      | —                         |   | $ | — |   |
| 2007                |   | 3,506,000                  |        | 101,000                                 |   | —                         |   |
| 2008                |   | 7,363,000                  |        | 185,000                                 |   | —                         |   |
| 2009                |   | 9,239,000                  |        | 316,000                                 |   | —                         |   |
| 2010                |   | 11,953,000                 |        | 139,000                                 |   | —                         |   |
| 2011                |   | 15,125,000                 |        | 181,000                                 |   | —                         |   |
| 2012                |   | 15,291,000                 |        | 296,000                                 |   | —                         |   |
| 2018                |   | 10,109,000                 |        | 475,000                                 |   | —                         |   |
| 2019                |   | 8,215,000                  |        | 405,000                                 |   | —                         |   |
| 2020                |   | 7,456,000                  |        | 710,000                                 |   | —                         |   |
| 2021                |   | 52,169,000                 |        | 646,000                                 |   | —                         |   |
| 2022                |   | 28,750,000                 |        | 1,095,000                               |   | —                         |   |
| Total               |   | $                          | 169,176,000 |                                    | $      | 4,549,000                      |   | $ | — |   |

 

The Tax Reform Act of1986 contains provisions that limit the utilization of net operating loss andtax credit carryforwards if there has been a change of ownership as describedin Section 382 of the Internal Revenue Code. Such a change of ownership maylimit the Company’s utilization of its net operating loss and tax creditcarryforwards, and could have been triggered by the Company’s initial publicoffering or by subsequent sales of securities by the Company or itsshareholders.  See Note 13 regardingpotential change in ownership.

 

The components of theCompany’s deferred tax assets and liabilities, net of taxes, as of December 31,2002 and 2001 are as follows:

 

F-23

----

 
|                                                                |   | **2002**    |       | **2001**    |   |
|---------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| Deferred  tax assets:                                               |   |        |       |        |   |
| Net  operating loss carryforwards                                   |   | $           | 63,054,000 |        | $      | 52,403,000 |   |
| Research  and development and state investment credit carryforwards |   | 4,548,000   |       | 5,677,000   |   |
| Depreciation                                                        |   | 1,081,000   |       | 967,000     |   |
| Equity  in loss of unconsolidated affiliate                         |   | 8,769,000   |       | 6,807,000   |   |
| Deferred  income                                                    |   | 483,000     |       | 298,000     |   |
| Other                                                               |   | (1,000      | )          | 53,000      |   |
|                                                                |   | 77,934,000  |       | 66,205,000  |   |
| Valuation  allowance                                                |   | (76,169,000 | )          | (64,443,000 | )      |
| Net  deferred tax assets                                            |   | 1,765,000   |       | 1,762,000   |   |
| Deferred  tax liabilities:                                          |   |        |       |        |   |
| Deferred  patent costs                                              |   | 1,678,000   |       | 1,632,000   |   |
| Deferred  income                                                    |   | —      |       | —      |   |
| Other                                                               |   | 87,000      |       | 130,000     |   |
| Total  deferred tax liabilities                                     |   | 1,765,000   |       | 1,762,000   |   |
|                                                                |   | $           | —     |        | $      | — |   |

 

A reconciliation betweenthe statutory federal income tax rate of 34% and the Company’s 0.0%, effectivetax rates for the years ended December 31, 2002, 2001, and 2000, respectively,is as follows:

 
|                                                                 |   | **2002**   |        | **2001**   |   | **2000**    |   |
|----------------------------------------------------------------------|--------|------------|-------------|------------|--------|-------------|--------|
| Expected benefit  from federal income taxes at statutory rate of 34% |   | $          | (11,800,138 | )          | $      | (20,319,164 | )      | $ | (5,399,729 | ) |
| Permanent differences                                                |   | 19,514     |        | 30,617     |   | 21,953      |   |
| State taxes, net  of federal benefit                                 |   | (1,067,948 | )           | (1,839,216 | )      | (487,517    | )      |
| Other                                                                |   | 6,426      |        | 1,064,237  |   | 421,723     |   |
| Valuation  allowance                                                 |   | 12,842,146 |        | 21,063,526 |   | 5,443,570   |   |
| Effective income  tax rate                                           |   | $          | —      |       | $      | —      |   | $ | — |   |

 

 

**11.   Employee SavingsPlan**

 

 

The Company has a 401(k)plan that allows participants to contribute 1% to 25% of their salary, subjectto eligibility requirements and annual limits. The Board may, at its solediscretion, approve matching contributions with the Company’s common stock. In2002, 2001 and 2000, the Board approved a 50% common stock match equal to totalparticipant deferrals made in each respective year.  Expense related to the stock match was $237,880, $289,518 and$219,598 for years ended 2002, 2001 and 2000, respectively.  The Company stock match is subject tovesting restrictions.

 

F-24

----

 

**12.  QuarterlyResults (Unaudited)**

 

 
|                                  |   | **1st  Quarter** |      | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |      |
|---------------------------------------|--------|------------------|-----------|------------------|--------|------------------|--------|------------------|-----------|
| 2002                                  |   |             |      |             |   |             |   |             |      |
| Total  revenues                       |   | $                | 1,578,636 |             | $      | 1,622,253        |   | $                | 1,307,689 |   | $ | 639,128 |   |
| Total  expenses                       |   | 8,223,224        |      | 9,175,992        |   | 6,733,627        |   | 10,031,533       |      |
| Other  expense                        |   | 1,650,075        |      | 1,703,601        |   | 1,386,889        |   | 949,053          |      |
| Accretion  of dividends               |   | 202,916          |      | 300,856          |   | 520,498          |   | 546,137          |      |
| Net  loss                             |   | (8,497,579       | )         | (9,558,196       | )      | (7,333,325       | )      | (10,887,595      | )         |
| Basic  and diluted net loss per share |   | $                | (0.42     | )                | $      | (0.48            | )      | $                | (0.36     | ) | $ | (0.54 | ) |
|                                  |   |             |      |             |   |             |   |             |      |
| 2001                                  |   |             |      |             |   |             |   |             |      |
| Total  revenues                       |   | $                | 2,117,262 |             | $      | 2,390,431        |   | $                | 2,029,181 |   | $ | 1,771,009 |   |
| Total  expenses                       |   | 12,159,553       |      | 11,085,040       |   | 17,693,655       |   | 20,262,909       |      |
| Other  expense                        |   | 1,870,069        |      | 1,652,032        |   | 1,720,299        |   | 1,702,486        |      |
| Accretion  of dividends               |   | 191,267          |      | 190,677          |   | 197,005          |   | 196,397          |      |
| Net  loss                             |   | (12,103,627      | )         | (10,537,318      | )      | (17,581,778      | )      | (20,390,783      | )         |
| Basic  and diluted net loss per share |   | $                | (0.74     | )                | $      | (0.64            | )      | $                | (1.04     | ) | $ | (1.14 | ) |

 

 

**13.  Subsequent Event**

 

On February 11, 2003, the Company entered into adefinitive common stock and warrant purchase agreement (the Stock PurchaseAgreement) with Sprout Group, Oxford Bioscience Partners IV, VenrockAssociates, TVM V Life Science Ventures GmbH & Co. KG and Granite GlobalVentures (the Investors) pursuant to which the Company has agreed to issue andsell and the Investors have agreed to purchase shares of the Company’s commonstock and five-year warrants to purchase common stock for aggregateconsideration of $48 million. The purchase price will be $0.33 per share;however, the price is subject to reduction (if the Company breachesrepresentations and warranties made in the Stock Purchase Agreement) to $0.28per share. Based on the assumed $0.33 per share purchase price, the Companywill issue to the Investors 145,454,545 shares of our common stock and warrantsto purchase 30,090,909 shares of common stock exercisable at $0.42 pershare.  On March 7, 2003 the Companymailed a Notice of Special Meeting of Stockholders to be held on April 16, 2003to vote on the terms of the Stock Purchase Agreement.  Pursuant to the Stock Purchase Agreement, if stockholders approvethe transaction, the Company and Investors will execute the Stock PurchaseAgreement within a few business days of the stockholder meeting.

 

As a result of their combined approximate 87%ownership (after giving effect to the exercise of the warrants and other stockissuances pursuant to the Stock Purchase Agreement), together with Boardrepresentation, the Investors will have control over the Company followingconsummation of the transactions contemplated by the Stock Purchase Agreement.The Investors will have the right to designate four of the Company’s sevenBoard members.

 

Consummation of the transactions is subject to anumber of conditions, including, but not limited to, the approval of theCompany’s stockholders; appointment to the Board of the four Investordesignees; adoption of an amended and restated certificate of incorporation inorder to effect a reverse stock split, change the Company’s

 

F-25

----

 

name, increase the number of authorized shares and adopt a provisionpermitting shareholder action to be taken by written consent in lieu of ameeting; the execution by the Company and its officers and consultants ofnon-competition and non-solicitation agreements; there not having occurred anymaterial adverse change prior to closing; and amendment of the Company’sbylaws.

 

In connection with the execution of the Stock PurchaseAgreement, the Company obtained certain waivers and amendments to theagreements with Schering AG and to the Company’s agreements with Elan. Scheringhas agreed to restructure the Company’s debt obligations to them. Among otherthings, Elan has agreed to convert all of the outstanding shares of theCompany’s Series A and Series B Preferred Stock into shares of the Company’scommon stock immediately prior to the closing of the transactions, to waivecertain pre-emptive rights, and to waive its right to nominate a director forelection to the Company’s board of directors. Each of Schering and Elan grantedthese waivers based on the condition that the transactions are consummatedwithout material changes from the terms that were presented to them. As one ofthe conditions to the Investors’ obligation to close, these waivers, and otherconsents, must be in effect at closing.

 

F-26

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

To the Stockholders andBoard of Directors

Medizyme Pharmaceuticals,Ltd.

 

 

We have audited theaccompanying balance sheets of Medizyme Pharmaceuticals, Ltd. (a developmentstage company) as of December 31, 2000, and the related statements ofoperations, stockholders’ (deficit) equity, and cash flows for the year endedDecember 31, 2000. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Medizyme Pharmaceuticals, Ltd. at December31, 2000, and the results of its operations and its cash flows for the yearended December 31, 2000 in conformity with accounting principles generallyaccepted in the United States.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern. As more fully described in Note 1, the Company has incurredsignificant operating losses since inception related to research, hasinsufficient working capital to meet budgeted cash requirements for the nextyear without additional financing and has a stockholders’ deficit. Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern. Management’s plans in regard to these matters are also describedin Note 1. The financial statements do not include any adjustments to reflectthe possible future effects on the recoverability and classification of assetsor the amounts and classification of liabilities that may result from theoutcome of these uncertainties.

 
|             | /s/ ERNST & YOUNG  LLP |
|------------------|----------------------------|
|             |
| Denver, Colorado |
| January 23, 2003 |

 

F-27

----

 

**MEDIZYME PHARMACEUTICALS, LTD.**

**(A Development Stage Company)**

**(Incorporated in Bermuda)**

 

**BALANCE SHEET**

**(expressed in United States dollars)**

 

** **
|                                                                                                |   | **December 31,** |    |
|-----------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                |   | **2002**         |    | **2001** |   | **2000** |   |
|                                                                                                |   | **(Unaudited)**  |    | **(Unaudited)** |   |   |   |
| **ASSETS**                                                                                          |   |             |    |   |   |   |   |
| **Current  assets**                                                                                 |   |             |    |   |   |   |   |
| Cash and equivalents                                                                                |   | $                | 828     |   | $ | 1,128 |   | $ | 10,449 |   |
| Interest receivable                                                                                 |   | —           |    | — |   | 247 |   |
| **Total current  assets**                                                                           |   | 828              |    | 1,128 |   | 10,696 |   |
|                                                                                                |   |             |    |   |   |   |   |
| License fee                                                                                         |   | —           |    | 5,000,000 |   | 10,000,000 |   |
| **Total assets**                                                                                    |   | $                | 828     |   | $ | 5,001,128 |   | $ | 10,010,696 |   |
|                                                                                                |   |             |    |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY**                                             |   |             |    |   |   |   |   |
|                                                                                                |   |             |    |   |   |   |   |
| **Current  liabilities**                                                                            |   |             |    |   |   |   |   |
| Accounts payable and accrued liabilities to joint venture owners                                    |   | $                | 159,808 |   | $ | 535,942 |   | $ | 2,044,015 |   |
| **Total current  liabilities**                                                                      |   | 159,808          |    | 535,942 |   | 2,044,015 |   |
|                                                                                                |   |             |    |   |   |   |   |
| **Stockholders’  (deficit) equity**                                                            |   |             |    |   |   |   |   |
| Preferred stock, $1.00 par value; 6,000 non-voting shares authorized;  6,000 issued and outstanding |   | 6,000            |    | 6,000 |   | 6,000 |   |
|                                                                                                |   |             |    |   |   |   |   |
| Common stock, $1.00 par value; 6,000 voting shares authorized; 6,000  issued and outstanding        |   | 6,000            |    | 6,000 |   | 6,000 |   |
|                                                                                                |   |             |    |   |   |   |   |
| Contributed surplus                                                                                 |   | 28,263,800       |    | 26,142,862 |   | 19,220,647 |   |
| Deficit accumulated during the development stage                                                    |   | (28,434,780      | )       | (21,689,676 | ) | (11,265,966 | ) |
| Total stockholders’ (deficit) equity                                                           |   | (158,980         | )       | 4,465,186 |   | 7,966,681 |   |
| **Total  Liabilities and Stockholders’ (Deficit) Equity**                                      |   | $                | 828     |   | $ | 5,001,128 |   | $ | 10,010,696 |   |

 

See accompanying notes.

 

F-28

----

 

**MEDIZYME PHARMACEUTICALS, LTD.**

**(A Development Stage Company)**

**(Incorporated in Bermuda)**

 

 

**STATEMENT OF OPERATIONS**

**(expressed in United States dollars)**

 
|                         |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   | **Period From  Inception  (December 21, 1999)  to  December 31,  2002** |        |
|------------------------------|--------|------------------------------------|------------|------------------------------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|-------------|
|                         |   | **(Unaudited)**                    |       | **(Unaudited)**                    |   |                               |   | **(Unaudited)**                                                         |        |
| **Expenses**                 |   |                               |       |                               |   |                               |   |                                                                    |        |
| License fee amortization     |   | $                                  | 5,000,000  |                               | $      | 5,000,000                          |   | $                                                                       | 5,000,000   |   | $ | 15,000,000 |   |
| Research and development     |   | 1,729,069                          |       | 5,408,952                          |   | 6,242,801                          |   | 13,380,822                                                              |        |
| General and administrative   |   | 16,035                             |       | 14,835                             |   | 23,636                             |   | 54,506                                                                  |        |
| Total operating expenses     |   | 6,745,104                          |       | 10,423,787                         |   | 11,266,437                         |   | 28,435,328                                                              |        |
|                         |   |                               |       |                               |   |                               |   |                                                                    |        |
| **Other income  (expense)**  |   |                               |       |                               |   |                               |   |                                                                    |        |
| Net investment income        |   | —                             |       | 77                                 |   | 471                                |   | 548                                                                     |        |
| Total other income (expense) |   | —                             |       | 77                                 |   | 471                                |   | 548                                                                     |        |
|                         |   |                               |       |                               |   |                               |   |                                                                    |        |
| **Net loss**                 |   | $                                  | (6,745,104 | )                                  | $      | (10,423,710                        | )      | $                                                                       | (11,265,966 | ) | $ | (28,434,780 | ) |

 

See accompanying notes.

 

F-29

----

 

**MEDIZYME PHARMACEUTICALS, LTD.**

**(A Development Stage Company)**

**(Incorporated in Bermuda)**

 

**STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY**

 

**Period from inception (December 21, 1999) to December 31,2001**

**(expressed in United States dollars)**

 

 
|                                            |   |                |   |             |   | **Contributed Surplus** |   | **Deficit** |   | **Total**                        |      |
|-------------------------------------------------|--------|---------------------|--------|------------------|--------|-------------------------|--------|-------------|--------|----------------------------------|-----------|
|                                            |   | **Preferred Stock** |   | **Common Stock** |   | **accumulated**         |   |        |
|                                            |   | **Shares**          |   | **Amount**       |   | **Shares**              |   | **Amount**  |   | **during the development stage** |      | **Stockholders’  Equity  (Deficit)** |   |
| Issuance of common shares on January 7, 2000    |   | —              |   | —           |   | 6,000                   |   | $           | 6,000  |                             | $         | 7,494,000 |   | — |   | $ | 7,500,000 |   |
| Issuance of preferred shares on January 7, 2000 |   | 6,000               |   | $                | 6,000  |                    | — |        | — |                             | 7,494,000 |   | — |   | 7,500,000 |   |
| Contributed surplus                             |   | —              |   | —           |   | —                  |   | —      |   | 4,232,647                        |      | — |   | 4,232,647 |   |
| Comprehensive and net loss                      |   | —              |   | —           |   | —                  |   | —      |   | —                           |      | (11,265,966 | ) | (11,265,966 | ) |
| Balances at December 31, 2000                   |   | 6,000               |   | 6,000            |   | 6,000                   |   | 6,000       |   | 19,220,647                       |      | (11,265,966 | ) | 7,966,681 |   |
| Contributed surplus (unaudited)                 |   | —              |   | —           |   | —                  |   | —      |   | 6,922,215                        |      | — |   | 6,922,215 |   |
| Comprehensive and net loss (unaudited)          |   | —              |   | —           |   | —                  |   | —      |   | —                           |      | (10,423,710 | ) | (10,423,710 | ) |
| Balances at December 31, 2001 (unaudited)       |   | 6,000               |   | 6,000            |   | 6,000                   |   | 6,000       |   | 26,142,862                       |      | (21,689,676 | ) | 4,465,186 |   |
| Contributed surplus (unaudited)                 |   | —              |   | —           |   | —                  |   | —      |   | 2,120,938                        |      | — |   | 2,120,938 |   |
| Comprehensive and net loss (unaudited)          |   | —              |   | —           |   | —                  |   | —      |   | —                           |      | (6,745,104 | ) | (6,745,104 | ) |
| Balances at December 31, 2002 (unaudited)       |   | 6,000               |   | $                | 6,000  |                    | 6,000  |        | $      | 6,000                            |      | $ | 28,263,800 |   | $ | (28,434,780 | ) | $ | (158,980 | ) |
|                                                 |        |                     |        |                  |        |                         |        |             |        |                                  |           |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

F-30

----

 

**MEDIZYME PHARMACEUTICALS, LTD.**

**(A Development Stage Company)**

**(Incorporated in Bermuda)**

 

 

**STATEMENT OF CASH FLOWS**

**(expressed in United States dollars)**

 
|                                                                        |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   | **Period From  Inception  (December 21, 1999)  to  December 31,  2002** |        |
|-----------------------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|-------------|
|                                                                        |   | **(Unaudited)**                    |       | **(Unaudited)**                    |   |                               |   | **(Unaudited)**                                                         |        |
| **Operating  Activities**                                                   |   |                               |       |                               |   |                               |   |                                                                    |        |
| Net Loss                                                                    |   | $                                  | (6,745,104 | )                                  | $      | (10,423,710                        | )      | $                                                                       | (11,265,966 | ) | $ | (28,434,780 | ) |
| Amortization of license fee                                                 |   | 5,000,000                          |       | 5,000,000                          |   | 5,000,000                          |   | 15,000,000                                                              |        |
| Adjustment to reconcile net loss to net cash used  in operating activities: |   |                               |       |                               |   |                               |   |                                                                    |        |
| Interest receivable                                                         |   | —                             |       | 247                                |   | (247                               | )      | —                                                                  |        |
| Accounts payable and accrued liabilities to joint venture owners            |   | (376,134                           | )          | (1,508,073                         | )      | 2,044,015                          |   | 159,808                                                                 |        |
| Net cash used in operating activities                                       |   | (2,121,238                         | )          | (6,931,536                         | )      | (4,222,198                         | )      | (13,274,972                                                             | )           |
|                                                                        |   |                               |       |                               |   |                               |   |                                                                    |        |
| **Investing Activities**                                                    |   |                               |       |                               |   |                               |   |                                                                    |        |
| Purchase of license                                                         |   | —                             |       | —                             |   | (15,000,000                        | )      | (15,000,000                                                             | )           |
| Net cash used in investing activities                                       |   | —                             |       | —                             |   | (15,000,000                        | )      | (15,000,000                                                             | )           |
|                                                                        |   |                               |       |                               |   |                               |   |                                                                    |        |
| **Financing  Activities**                                                   |   |                               |       |                               |   |                               |   |                                                                    |        |
| Proceeds from issuance of common shares                                     |   | —                             |       | —                             |   | 7,500,000                          |   | 7,500,000                                                               |        |
| Proceeds from issuance of preferred shares                                  |   | —                             |       | —                             |   | 7,500,000                          |   | 7,500,000                                                               |        |
| Increase in contributed capital                                             |   | 2,120,938                          |       | 6,922,215                          |   | 4,232,647                          |   | 13,275,800                                                              |        |
| Net cash provided by financing activities                                   |   | 2,120,938                          |       | 6,922,215                          |   | 19,232,647                         |   | 28,275,800                                                              |        |
|                                                                        |   |                               |       |                               |   |                               |   |                                                                    |        |
| Net (decrease) increase in cash and cash equivalents                        |   | (300                               | )          | (9,321                             | )      | 10,449                             |   | 828                                                                     |        |
|                                                                        |   |                               |       |                               |   |                               |   |                                                                    |        |
| Cash & cash equivalents at beginning of period                          |   | 1,128                              |       | 10,449                             |   | —                             |   | —                                                                  |        |
| Cash & cash equivalents at end of period                                |   | $                                  | 828        |                               | $      | 1,128                              |   | $                                                                       | 10,449      |   | $ | 828 |   |

 

See accompanying notes.

 

F-31

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**MEDIZYME PHARMACEUTICALS, LTD.**

**(A Development Stage Company)**

 

**NOTES TO THE FINANCIAL STATEMENTS**

**Information as of and for the years ended December 31, 2001and 2002 are unaudited**

 

**December 31, 2002**

 

**1.Organization and Basis of Presentation**

 

Medizyme Pharmaceuticals,Ltd. (the Company or Medizyme) was incorporated on December 21, 1999 inBermuda. The Company is owned jointly by Elan International Services, Ltd.(EIS), a wholly-owned subsidiary of Elan Corporation plc (Elan), and RibozymePharmaceuticals, Inc. (RPI), holding 19.9% (non-voting shares) and 80.1% of theshares, respectively. The primary objective of the Company is to carry on thebusiness of the development, testing, registration, manufacturing,commercialization, and licensing of “Products” (as defined in the Subscription,Joint Development and Operating Agreement (JDOA) dated January 7, 2000 betweenMedizyme, EIS, RPI and others). The focus of the collaborative venture is todevelop “Products” using the intellectual property of Elan, and RPI and theMedizyme technology pursuant to the JDOA.

 

The Company’s ability tocontinue as a going concern is entirely dependent upon the funds it receivesfrom its shareholders in connection with the shareholders’ respectiveobligations to fund the Company’s operations.

 

The financial information at December 31, 2001 and2002 and for the years then ended including the cumulative period frominception (December 21, 1999) to December 31, 2002 is unaudited but includesall adjustments (consisting of only normal recurring adjustments) that theCompany considers necessary for a fair presentation of its financial positionat such date and the operating results and cash flows for that period.

 

*Capital Requirements, Management’s Plans and Basis ofPresentation*

 

The accompanying consolidated financial statementshave been prepared on a going concern basis, which contemplates continuity ofoperations, realization of assets and liquidation of liabilities in theordinary course of business.   TheCompany incurred a net loss of $6,745,104 for the year ended December 31, 2002and has an accumulated deficit of $28,434,780 at December 31, 2002.  The Company relies upon funding from Elanand Ribozyme Pharmaceuticals to fund its expenses.  Elan and Ribozyme Pharmaceuticals are currently in negotiationsregarding the future of Medizyme and will likely cease operations during thesecond quarter of 2003.

 

**2.Significant Accounting Policies**

 

The Company follows accounting principles generallyaccepted in the United States. Significant accounting policies are as follows:

 

*Researchand Development Costs*

 

Research costs are charged as an expense of the periodin which they are incurred. Development costs are deferred to future periods ifcertain criteria relating to future benefits are satisfied and if the costs donot exceed the expected future benefits.

 

F-32

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*Use ofEstimates*

 

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amount ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amount of revenues andexpenses during the reporting period. Actual results could differ significantlyfrom those estimates.

 

*ComprehensiveIncome*

 

Comprehensive income (loss) approximates net loss forthe period ended December 31, 2002, 2001 and 2000.

 

**3.Related Party Transactions**

 

At the end of the period,the amount due to shareholders and companies related through common ownershiprepresents costs for research and development that are subcontracted to RPI andElan.  Research and development expense of $1,729,069, $5,408,952 and$6,242,801 represents costs under such agreements for the years ended December31, 2002, 2001 and 2000, respectively.  These transactions are in thenormal course of operations and are measured at the exchange amount, which isthe amount of consideration established and agreed to by the relatedparties.  Further, the amount due to shareholders is unsecured, andinterest free with no set terms of repayment.

 

**4.License**

 

In January 2000, the Company paid a license fee toElan Corporation plc in the amount of $15,000,000 to acquire rights to certainElan technology.  The licensed Elan technology, MEDIPAD®, is a disposablecontinuous subcutaneous drug delivery device, which allows a patient toadminister a drug at home.  Medizyme wasformed to develop multiple ribozyme based drug products targeted toward breastcancer application that used the MEDIPAD device as the drug deliverymechanism.  Pursuant to the licenseagreement between the Company and Elan, the MEDIPAD device is intended for usein the delivery of any ribozyme drug developed by the Company targeting a genebelieved responsible for certain breast cancers.  In accordance with FASB 2, *Accounting for Research and Development Costs,*thecost of intangibles that are purchased from others for use in research anddevelopment activities and have alternative future uses (in research anddevelopment projects or otherwise) should be capitalized and amortized asintangible assets.  Therefore, since theCompany’s license of the MEDIPAD device was intended for use with any ribozymedrug developed by the Company targeting a gene believed responsible for certainbreast cancers, the license fee was capitalized in 2000 and is being amortizedover the three-year term of the license agreement.

 

F-33

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**5.Shareholders’ Equity**

 

*PreferredShares*

 

In January 2000, the Company issued 6,000 non-votingconvertible preference shares (Preferred Shares) for $1,250 per share with apar value of $1.00 each.  3,612 Preferred Shares were issued to RPI and2,388 Preferred Shares were issued to EIS for net proceeds of $7,500,000. At any time after January 7, 2002, the holders of the Preferred Shares have theright to convert all, or a portion, of such Preferred Shares into common shareson a one-to-one basis.  Upon liquidation of the Company, the holders ofthe Preferred Shares will be entitled to be paid out of the assets of theCompany available for distribution to shareholders before any distribution orpayment is made to the holders of any other classes of stock.

 

*CommonShares*

 

In January 2000, the Company issued 6,000 voting commonshares to RPI for $1,250 per share with a par value of $1.00 each.  TheCompany received net proceeds of $7,500,000 related to this issuance.

 

*ContributedSurplus*

 

Contributed surplus of $28,263,800, $26,142,862 and$19,220,647 at December 31, 2002, 2001 and 2000, respectively, represents theshare premium of $14,988,000 on amounts initially contributed by shareholders,as well as additional amounts received from shareholders which representscapital contributions to fund the Company’s operating costs.

 

**6. Taxes**

 

Under current Bermuda law the Company is not requiredto pay any taxes in Bermuda on either income or capital gains. The Company hasreceived an undertaking from the Minister of Finance in Bermuda that in theevent of such taxes being imposed, the Company will be exempted from taxationuntil the year 2016.

 

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