<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 2)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
GENEMEDICINE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
MEGABIOS CORP./GENEMEDICINE, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$7,731.18
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Form S-4 (333-68013)
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(3) Filing Party:
MEGABIOS CORP.
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(4) Date Filed:
February 10, 1999
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[MEGABIOS LOGO]
863A MITTEN ROAD
BURLINGAME, CALIFORNIA 94010
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 18, 1999
------------------------
TO THE STOCKHOLDERS OF MEGABIOS CORP.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Megabios
will be held on Thursday, March 18, 1999, at 10:00 a.m. local time, at 863A
Mitten Road, Burlingame, California 94010 to consider and vote upon the
following:
1. To approve the issuance of shares of Megabios common stock, pursuant to
an agreement and plan of merger and reorganization between Megabios and
GeneMedicine, Inc. Pursuant to the reorganization agreement, GeneMedicine
will become a wholly-owned subsidiary of Megabios. A copy of the
reorganization agreement is attached as Appendix A to the joint proxy
statement/prospectus accompanying this notice.
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus.
Stockholders of record at the close of business on February 8, 1999 are
entitled to notice of, and to vote at, the Megabios special meeting and any
adjournments or postponements thereof. A list of Megabios stockholders entitled
to vote at the special meeting will be available for examination during normal
business hours, at 863A Mitten Road, Burlingame, CA 94010, for ten (10) days
prior to the meeting.
All stockholders are cordially invited to attend the Megabios special
meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
THE BOARD OF DIRECTORS OF MEGABIOS UNANIMOUSLY RECOMMENDS THAT MEGABIOS
STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF SHARES OF MEGABIOS COMMON STOCK IN
THE MERGER.
By Order of the Board of Directors,
/s/ Patrick A. Pohlen
Patrick A. Pohlen
SECRETARY
Burlingame, California
February 12, 1999
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, WE
REQUEST THAT YOU COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD USING
THE PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S. YOUR
PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF MEGABIOS.
<PAGE>
[LOGO]
8301 NEW TRAILS DRIVE
THE WOODLANDS, TX 77381
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 18, 1999
------------------------
TO THE STOCKHOLDERS OF GENEMEDICINE, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
GeneMedicine, Inc. will be held on Thursday, March 18, 1999, at 9:00 a.m., local
time, at Heller Ehrman White & McAuliffe, 525 University Avenue, Suite 1100,
Palo Alto, California 94301 to consider and vote upon the following:
1. To approve and adopt the agreement and plan of merger and reorganization
between GeneMedicine and Megabios Corp. and to approve the merger,
pursuant to which GeneMedicine will become a wholly-owned subsidiary of
Megabios. A copy of the reorganization agreement is attached as Appendix
A to the joint proxy statement/prospectus accompanying this notice.
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus.
Stockholders of record at the close of business on February 8, 1999 are
entitled to notice of, and to vote at, the GeneMedicine special meeting and any
adjournments or postponements thereof. A list of GeneMedicine stockholders
entitled to vote at the special meeting will be available for examination during
normal business hours, at Heller Ehrman White & McAuliffe, 525 University
Avenue, Suite 1100, Palo Alto, California 94301 for ten (10) days prior to the
meeting.
All stockholders are cordially invited to attend the GeneMedicine special
meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. FAILURE
TO RETURN A PROPERLY EXECUTED PROXY OR TO VOTE AT THE SPECIAL MEETING WILL
GENERALLY HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
THE BOARD OF DIRECTORS OF GENEMEDICINE UNANIMOUSLY RECOMMENDS THAT
GENEMEDICINE STOCKHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT AND THE
MERGER.
By Order of the Board of Directors,
/s/ Richard A. Waldron
Richard A. Waldron
SECRETARY
The Woodlands, Texas
February 12, 1999
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, WE
REQUEST THAT YOU COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD USING
THE ENCLOSED PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
U.S. YOUR PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF GENEMEDICINE.
<PAGE>
[MEGABIOS LOGO] [GENEMEDICINE LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Megabios Corp. and GeneMedicine, Inc. have agreed
to merge these two companies. In the merger, GeneMedicine stockholders will
receive 0.5710 of a share of Megabios common stock for each share of
GeneMedicine common stock that they own. We estimate that the shares of Megabios
common stock to be issued to GeneMedicine stockholders will represent
approximately 41% of the outstanding Megabios common stock immediately after the
merger.
The merger cannot be completed unless the holders of Megabios common stock
and GeneMedicine common stock approve the matters described in this document.
The Boards of Directors of the companies have unanimously approved the merger
and recommend that stockholders approve the matters described in this document
at the special meetings described below.
At the Megabios special meeting, Megabios stockholders will be asked to
approve the issuance of shares of Megabios common stock in the merger. At the
GeneMedicine special meeting, GeneMedicine stockholders will be asked to approve
and adopt the reorganization agreement and approve the merger of a subsidiary of
Megabios with and into GeneMedicine. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend your special meeting, please take the time
to vote by completing and mailing the enclosed proxy card. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will
count as a vote in favor of the proposal to be voted on.
You may vote at your special meeting if you own shares as of the close of
business on February 8, 1999. The dates, times and places of the special
meetings are as follows:
<TABLE>
<S> <C>
FOR MEGABIOS STOCKHOLDERS: FOR GENEMEDICINE STOCKHOLDERS:
Thursday, March 18, 1999 Thursday, March 18, 1999
10:00 a.m. local time 9:00 a.m. local time
Heller Ehrman White & McAuliffe
525 University Avenue, Suite 1100
Palo Alto, CA 94301
863A Mitten Road
Burlingame, CA 94010
</TABLE>
This joint proxy statement/prospectus provides you with detailed information
about the proposed merger. Megabios provided the information concerning
Megabios. GeneMedicine provided the information concerning GeneMedicine. Please
see "Where You Can Find More Information" on page 107 for additional information
on Megabios and GeneMedicine.
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING AT PAGE 11.
<TABLE>
<S> <C>
/s/ Benjamin F. McGraw /s/ Stanley T. Crooke
Benjamin F. McGraw III, Pharm.D. Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and Chairman of the Board
Chief Executive Officer GeneMedicine, Inc.
Megabios Corp.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THE
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
We are first mailing this joint proxy statement/prospectus dated February
11, 1999 and the forms of proxy on or about February 12, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MEGABIOS/GENEMEDICINE MERGER............................................. 1
SUMMARY.................................................................................................. 2
Megabios and GeneMedicine.............................................................................. 2
Our Reasons for the Merger............................................................................. 2
Opinions of Financial Advisors......................................................................... 2
Vote Required.......................................................................................... 2
Record Date; Voting Power.............................................................................. 2
Our Recommendation to Our Stockholders................................................................. 3
The Merger............................................................................................. 3
When the Merger Will Occur............................................................................. 3
Share Ownership of Directors and Executive Officers.................................................... 3
Interests of GeneMedicine's Employees and Directors in the Merger...................................... 3
Conditions to the Merger............................................................................... 4
Termination of the Reorganization Agreement............................................................ 5
Expenses and Termination Fees.......................................................................... 5
Ownership of Megabios Following the Merger............................................................. 5
Anticipated Accounting Treatment....................................................................... 5
Regulatory Approvals................................................................................... 5
Rights of Dissenting Stockholders...................................................................... 5
Forward-Looking Statements May Prove Inaccurate........................................................ 6
Markets and Market Prices.............................................................................. 6
MEGABIOS CORP. SELECTED HISTORICAL FINANCIAL INFORMATION................................................. 7
GENEMEDICINE, INC. SELECTED HISTORICAL FINANCIAL INFORMATION............................................. 8
MEGABIOS CORP. AND GENEMEDICINE, INC. UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................................................................ 9
COMPARATIVE PER SHARE DATA............................................................................... 10
RISK FACTORS............................................................................................. 11
Risks Related to the Merger............................................................................ 11
Risks Related to the Business of Megabios and GeneMedicine............................................. 12
THE MEGABIOS SPECIAL MEETING............................................................................. 20
Purpose of the Megabios Special Meeting................................................................ 20
Proxies................................................................................................ 20
Date, Time and Place of Meeting........................................................................ 20
Voting Rights and Outstanding Shares................................................................... 20
Solicitation........................................................................................... 20
Vote Required.......................................................................................... 21
Revocability Of Proxies................................................................................ 21
THE GENEMEDICINE SPECIAL MEETING......................................................................... 21
Purpose of the GeneMedicine Special Meeting............................................................ 21
Proxies................................................................................................ 21
Date, Time and Place of Meeting........................................................................ 22
Voting Rights and Outstanding Shares................................................................... 22
Solicitation........................................................................................... 22
Vote Required.......................................................................................... 22
Revocability of Proxies................................................................................ 22
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY.............................................. 23
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS.......................................................... 24
Background of the Merger............................................................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Joint Reasons for the Merger........................................................................... 27
GeneMedicine's Reasons for the Merger.................................................................. 27
Megabios' Reasons for the Merger....................................................................... 29
Opinion of Financial Advisor to GeneMedicine........................................................... 30
Opinion of Financial Advisor to Megabios............................................................... 36
Interests of GeneMedicine's Employees and Directors in the Merger...................................... 40
Material Federal Income Tax Consequences............................................................... 42
Anticipated Accounting Treatment....................................................................... 44
Regulatory Matters..................................................................................... 44
No Appraisal Rights.................................................................................... 45
Resale of Megabios Common Stock........................................................................ 45
THE REORGANIZATION AGREEMENT............................................................................. 46
General................................................................................................ 46
Merger Consideration................................................................................... 46
Stock Options, Warrants and Employee Stock Purchase Plan............................................... 46
Stock Ownership Following the Merger................................................................... 47
Conversion of Shares; Procedures for Exchange of Certificates.......................................... 47
Effect on Certificates................................................................................. 47
Corporate Matters...................................................................................... 47
Conditions to the Merger............................................................................... 48
Representations and Warranties......................................................................... 50
Covenants.............................................................................................. 51
Termination............................................................................................ 54
Expenses and Termination Fees.......................................................................... 56
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............................................. 57
INFORMATION RELATING TO MEGABIOS......................................................................... 64
MEGABIOS BUSINESS........................................................................................ 64
Overview............................................................................................... 64
Background............................................................................................. 64
Megabios' IN VIVO, Plasmid Delivery Approach........................................................... 65
Megabios' Gene Delivery Systems........................................................................ 68
Corporate Partners..................................................................................... 71
Technology Licenses.................................................................................... 73
Patents and Proprietary Technology..................................................................... 74
Manufacturing and Commercialization.................................................................... 75
Government Regulation.................................................................................. 76
Competition............................................................................................ 78
Product Liability Insurance............................................................................ 78
Employees.............................................................................................. 78
Facilities............................................................................................. 78
Legal Proceedings...................................................................................... 79
MEGABIOS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 80
Overview............................................................................................... 80
Results of Operations.................................................................................. 81
Liquidity and Capital Resources........................................................................ 82
Acquisition of GeneMedicine Research and Development Programs.......................................... 83
Impact of the Year 2000................................................................................ 85
MEGABIOS MANAGEMENT AFTER THE MERGER..................................................................... 87
Executive Officers and Directors....................................................................... 87
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Board Composition...................................................................................... 89
Board Committees....................................................................................... 90
Director Compensation.................................................................................. 90
Executive Compensation................................................................................. 91
Option Grants in Last Fiscal Year...................................................................... 92
Aggregate Option Exercises in Last Fiscal Year......................................................... 92
Limitation of Liability and Indemnification Matters.................................................... 93
CERTAIN TRANSACTIONS OF MEGABIOS......................................................................... 93
MEGABIOS PRINCIPAL STOCKHOLDERS.......................................................................... 94
INFORMATION RELATING TO GENEMEDICINE..................................................................... 96
GeneMedicine Business.................................................................................. 96
GENEMEDICINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 98
Results of Operations.................................................................................. 98
Liquidity and Capital Resources........................................................................ 100
Impact of Year 2000 on Information Systems............................................................. 101
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 102
DESCRIPTION OF MEGABIOS CAPITAL STOCK.................................................................... 103
COMPARISON OF STOCKHOLDERS' RIGHTS....................................................................... 105
Percentage of Voting Stock; Influence Over Affairs..................................................... 105
Power to Call Special Stockholders' Meetings........................................................... 105
Interested Stockholder Transactions.................................................................... 105
Amendment of Bylaws.................................................................................... 105
Rights Plan............................................................................................ 106
EXPERTS.................................................................................................. 106
LEGAL MATTERS............................................................................................ 106
MEGABIOS STOCKHOLDER PROPOSALS........................................................................... 106
GENEMEDICINE STOCKHOLDER PROPOSALS....................................................................... 107
WHERE YOU CAN FIND MORE INFORMATION...................................................................... 107
INCORPORATION OF DOCUMENTS BY REFERENCE.................................................................. 108
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................................................ 109
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
APPENDICES
Appendix A............................................................................................. A-1
Appendix A-1........................................................................................... A-1-1
Appendix A-2........................................................................................... A-2-1
Appendix B-1........................................................................................... B-1-1
Appendix B-2........................................................................................... B-2-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE MEGABIOS/GENEMEDICINE MERGER
Q: AS A GENEMEDICINE STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 0.5710 of a share of Megabios common stock in exchange for
each share of GeneMedicine common stock that you own. For example, if you
own 1000 shares of GeneMedicine common stock, you will receive 571 shares of
Megabios common stock in exchange for your shares. No fractional shares will
be issued. Instead, stockholders will be paid in cash the amount equal to
the fractional share multiplied by the price of Megabios common stock on the
date the merger is completed.
Q: IF I HAD OPTIONS OR WARRANTS TO PURCHASE GENEMEDICINE COMMON STOCK, WHAT
WILL I RECEIVE IN THE MERGER?
A: Each option and warrant to purchase GeneMedicine common stock will convert
into an option or warrant to purchase 57.10% as many shares of Megabios
common stock at an adjusted exercise price. The adjusted exercise price is
calculated by dividing the original exercise price by 0.5710. For example,
if you have an option or warrant to purchase 1000 shares of GeneMedicine
common stock at an exercise price of $5.71, after the merger you will have
an option or warrant to purchase 571 shares of Megabios common stock at an
exercise price of $10.00.
Q: AS A MEGABIOS STOCKHOLDER, WILL I RECEIVE ADDITIONAL SHARES OF MEGABIOS
COMMON STOCK IN THE MERGER?
A: No. You will continue to hold the same number of shares of Megabios common
stock after the merger. Additional shares of Megabios common stock will be
issued in the merger only to the GeneMedicine stockholders.
Q: WHAT ARE THE TAX CONSEQUENCES TO STOCKHOLDERS OF THE MERGER?
A: We intend that the merger will be treated as a tax-free reorganization for
federal income tax purposes. Generally, GeneMedicine stockholders will not
recognize gain or loss on the exchange of their stock, other than taxes on
cash received for a fractional share. Megabios stockholders will not
recognize any gain or loss in connection with the merger. Tax matters,
however, are very complicated and the tax consequences of the merger to you
will depend on the facts of your particular situation. We encourage you to
contact your tax advisors to determine the tax consequences of the merger to
you.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares according to your
directions. Without instructions, your broker will not vote your shares.
Q: IF I AM NOT GOING TO ATTEND THE STOCKHOLDER MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A: Yes. Please fill out and sign your proxy card and mail it to us in the
enclosed return envelope as soon as possible. Returning your proxy card
ensures that your shares will be represented at your special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later dated, signed proxy card to your company's corporate
secretary before your special meeting or attend your special meeting in
person and vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send GeneMedicine stockholders
written instructions for exchanging their stock certificates. Megabios
stockholders do not need to exchange their certificates.
1
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS DOCUMENT. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. WE URGE YOU TO READ THE ENTIRE DOCUMENT AND THE
DOCUMENTS INCORPORATED BY REFERENCE BEFORE YOU DECIDE HOW TO VOTE.
MEGABIOS AND GENEMEDICINE
Megabios develops gene delivery systems and provides preclinical and early
clinical development expertise to create gene-based therapeutics designed for
the treatment or prevention of genetic and acquired diseases.
GeneMedicine is engaged in the development of gene medicines for the
treatment of cancers and other diseases. Gene medicines are designed to deliver
instructions to targeted cells in the body and to cause these cells to produce
proteins or immune responses to treat or prevent a disease. GeneMedicine is also
engaged in the development of genetic vaccines which may be used for the
treatment or prevention of infectious diseases.
OUR REASONS FOR THE MERGER
We believe that the merger will create a combined company capable of:
- leveraging its collective scientific expertise, intellectual property and
product development efforts into additional collaborative partnerships in
the pharmaceutical and biotechnology industries;
- streamlining its product development efforts;
- responding more quickly and effectively to emerging opportunities in the
field of gene-based therapeutics; and
- developing products more efficiently than either company alone.
The combined company may also offer a greater range of career opportunities
for employees, may improve employee retention, and may operate with reduced
general and administrative expenses.
The Megabios Board of Directors believes that the merger will provide a
number of benefits to Megabios and its stockholders by resulting in a combined
company with greater financial and intellectual property resources, a more
diverse product base and enhanced collaborative partnership opportunities.
The GeneMedicine Board of Directors believes that the merger may provide a
number of benefits to GeneMedicine and its stockholders, by resulting in a
combined company with greater financial resources, greater research and
development capabilities and enhanced collaborative partnership opportunities.
OPINIONS OF FINANCIAL ADVISORS
In deciding to approve the merger, each Board of Directors considered the
opinion of its financial advisor. Megabios received an opinion from its
financial advisor, Hambrecht & Quist LLC, that the exchange ratio was fair to
Megabios from a financial point of view. GeneMedicine received an opinion from
its financial advisor, PaineWebber Incorporated, that the exchange ratio was
fair from a financial point of view to the holders of GeneMedicine common stock.
These opinions are attached as Appendices B-1 and B-2 to this document. We
encourage you to read these opinions carefully.
VOTE REQUIRED
A majority of shares of Megabios common stock present in person or
represented by proxy and entitled to vote at the Megabios special meeting must
vote to approve the issuance of shares of Megabios common stock in the merger.
A majority of the outstanding shares of GeneMedicine common stock as of the
record date must vote to approve and adopt the reorganization agreement and
approve the merger.
RECORD DATE; VOTING POWER
You are entitled to vote at the Megabios special meeting or the GeneMedicine
special meeting if you own shares as of the close of business on February 8,
1999. This date is referred to in this document as the "record date."
2
<PAGE>
At the close of business on the record date, 12,913,331 shares of Megabios
common stock were outstanding and entitled to vote at the Megabios special
meeting. You will have one vote at the Megabios special meeting for each share
of Megabios common stock you own as of the record date.
At the close of business on the record date, 14,683,875 shares of
GeneMedicine common stock were outstanding and entitled to vote at the
GeneMedicine special meeting. You will have one vote at the GeneMedicine special
meeting for each share of GeneMedicine common stock you own as of the record
date.
OUR RECOMMENDATION TO OUR STOCKHOLDERS
TO THE MEGABIOS STOCKHOLDERS:
The Megabios Board of Directors believes that the merger is fair to, and is
in the best interests of, both you and Megabios. The Megabios Board of Directors
unanimously recommends that you vote "FOR" the proposal to approve the issuance
of shares of Megabios common stock in the merger.
TO THE GENEMEDICINE STOCKHOLDERS:
The GeneMedicine Board of Directors believes that the merger is fair to you
and is in your best interests. The GeneMedicine Board of Directors unanimously
recommends that you vote "FOR" the proposal to approve and adopt the
reorganization agreement and approve the merger.
THE MERGER
THE REORGANIZATION AGREEMENT IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. WE
ENCOURAGE YOU TO READ THE REORGANIZATION AGREEMENT. IT IS THE LEGAL DOCUMENT
GOVERNING THE MERGER.
WHEN THE MERGER WILL OCCUR
The merger will take place on a date agreed to by Megabios and GeneMedicine.
This date will be no later than the second business day after all of the
conditions to closing contained in the reorganization agreement have been
satisfied or waived. Assuming that our companies satisfy or waive all of the
conditions in the reorganization agreement, we anticipate that the merger will
occur on or before March 31, 1999. After the completion of the merger, the
combined company will operate on an integrated basis.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
As of the record date, the directors and executive officers of Megabios, as
a group, beneficially owned approximately 14.1% of Megabios' common stock.
As of the record date, the directors and executive officers of GeneMedicine,
as a group, beneficially owned approximately 3.5% of GeneMedicine's common
stock.
INTERESTS OF GENEMEDICINE'S EMPLOYEES AND DIRECTORS IN THE MERGER
GeneMedicine's stockholders should note that members of GeneMedicine's
management and the GeneMedicine Board of Directors have interests in the merger
that are different from, or in addition to, your interest as a stockholder.
Employees and management will share in cash payments equal to a total of three
percent of the cash value of the Megabios common stock issued to GeneMedicine
stockholders in the merger. Employees and management may also be entitled to
additional cash payments, benefits and accelerated option vesting if they are
terminated after the merger is completed. The options of non-employee directors
will accelerate if the merger is completed and must be exercised prior to the
merger.
Indemnification arrangements for persons serving as directors and officers
of GeneMedicine at the time of the merger will be continued for at least six
years after the merger is completed. The combined company will also maintain a
policy of directors' and officers' liability insurance for the benefit of those
persons for three years after the merger. In addition, Megabios has agreed to
use reasonable efforts to nominate and appoint:
- Arthur M. Pappas to Class I of the Megabios Board of Directors to serve
3
<PAGE>
until the annual meeting of stockholders to be held in 2001;
- Stanley T. Crooke to Class II of the Megabios Board of Directors to serve
until the annual meeting of stockholders to be held in 1999; and
- Bert W. O'Malley to Class III of the Megabios Board of Directors to serve
until the annual meeting of stockholders to be held in 2000.
CONDITIONS TO THE MERGER
Megabios will complete the merger only if a number of conditions are either
satisfied or waived by Megabios, some of which include:
- the representations and warranties of GeneMedicine made in the
reorganization agreement, subject to limitations, are accurate;
- GeneMedicine performs the covenants and obligations contained in the
reorganization agreement in all material respects;
- the registration statement relating to the shares of Megabios common stock
to be issued in the merger becomes effective;
- the GeneMedicine stockholders approve the reorganization agreement and the
merger;
- the Megabios stockholders approve the issuance of Megabios common stock in
the merger;
- Megabios receives other consents, certificates, letters and legal
opinions;
- there is no material adverse change to the business, condition, assets,
liabilities or results of operations of GeneMedicine;
- the Megabios common stock to be issued in the merger is authorized for
listing on Nasdaq;
- there are no restraining orders, injunctions, or administrative actions or
proceedings preventing the completion of the merger; and
- all outstanding shares of GeneMedicine Series B preferred stock are
converted into GeneMedicine common stock.
GeneMedicine will complete the merger only if a number of conditions are
satisfied or waived by GeneMedicine, some of which include:
- the representations and warranties of Megabios made in the reorganization
agreement, subject to limitations, are accurate;
- Megabios performs the covenants and obligations contained in the
reorganization agreement in all material respects;
- the registration statement relating to the shares of Megabios common stock
to be issued in the merger becomes effective;
- the GeneMedicine stockholders approve the reorganization agreement and the
merger;
- the Megabios stockholders approve the issuance of Megabios common stock in
the merger;
- GeneMedicine receives other consents, certificates, letters and legal
opinions;
- there is no material adverse change to the business, condition, assets,
liabilities or results of operations of Megabios;
- the Megabios common stock to be issued in the merger is authorized for
listing on Nasdaq;
- there are no restraining orders, injunctions, litigation or administrative
actions or proceedings preventing the completion of the merger; and
- The Megabios Board of Directors appoints Mr. Pappas and Drs. Crooke and
O'Malley as directors of Megabios.
In the event any material condition is waived, Megabios and GeneMedicine
will amend this joint proxy statement/prospectus and resolicit the vote of
stockholders.
4
<PAGE>
TERMINATION OF THE REORGANIZATION AGREEMENT
The Boards of Directors of both companies can agree to terminate the
reorganization agreement at any time without completing the merger. Either
company can terminate the reorganization agreement if:
- the merger is not completed by March 31, 1999;
- a governmental authority or legal action permanently prohibits the merger;
- the GeneMedicine stockholders do not approve the merger or the Megabios
stockholders do not approve the issuance of Megabios common stock to
GeneMedicine stockholders in the merger; or
- the other party's representations and warranties are inaccurate, resulting
in a material adverse effect on the party or the other party breaches or
materially fails to comply with its obligations under the reorganization
agreement, resulting in the inability to satisfy a condition to the
completion of the merger.
In addition, Megabios can terminate the reorganization agreement if other
events occur prior to approval by the GeneMedicine stockholders. GeneMedicine
can terminate the merger if its Board of Directors withdraws, amends or modifies
its unanimous recommendation in favor of the merger and accepts or recommends to
GeneMedicine's stockholders a superior offer.
EXPENSES AND TERMINATION FEES
Each party will pay its own fees and expenses in connection with the merger,
whether or not the merger is completed, except that the parties will share
equally all fees and expenses, other than attorneys' fees, in connection with
the printing and filing of this document and the registration statement of which
this document is a part. GeneMedicine has agreed that if the reorganization
agreement is terminated in favor of an alternative acquisition transaction, it
will pay to Megabios either $1,400,000 or 3% of the aggregate consideration
received in the alternative acquisition transaction.
OWNERSHIP OF MEGABIOS FOLLOWING THE MERGER
Based upon the number of shares of GeneMedicine common stock issued and
outstanding on the record date, approximately 8,900,000 shares of Megabios
common stock will be issued in the merger. Based upon the number of shares of
Megabios common stock issued and outstanding on the record date, and the number
of additional shares of Megabios common stock that will be issued in the merger,
the former holders of GeneMedicine common stock will hold approximately 41.0% of
the total number of shares of the combined company. These numbers exclude
outstanding options, warrants or other rights to purchase GeneMedicine common
stock.
The total number of outstanding options to purchase GeneMedicine common
stock will become rights to purchase an aggregate of 1,722,941 shares of
Megabios common stock at a weighted average price of $7.77 per share in
connection with the merger. The total number of outstanding warrants to purchase
GeneMedicine common stock will become rights to purchase an aggregate of 687,919
shares of Megabios common stock at a weighted average price of $35.32 per share
in the merger.
ANTICIPATED ACCOUNTING TREATMENT
The merger is expected to be accounted for as a purchase.
REGULATORY APPROVALS
We are not required to notify the Federal Trade Commission or the Antitrust
Division of the U.S. Department of Justice before the merger can be completed.
However, the FTC or the Antitrust Division has the authority to challenge the
merger on antitrust grounds before or after the merger is completed.
RIGHTS OF DISSENTING STOCKHOLDERS
Megabios and GeneMedicine are organized under Delaware law. Under Delaware
law, the stockholders of GeneMedicine are not entitled
5
<PAGE>
to appraisal rights in connection with the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Both companies have made forward-looking statements in this document, and in
the documents that are incorporated by reference, that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Megabios, GeneMedicine or
the combined company. Also, when words such as "believes," "expects,"
"anticipates" or similar expressions are used, we are making forward-looking
statements.
You should note that the merger and an investment in securities of Megabios
involve risks and uncertainties that could affect the future financial results
of Megabios. Some of these risks include:
- risks related to the integration of Megabios and GeneMedicine;
- risks associated with a fixed exchange ratio;
- risks relating to the respective businesses of Megabios and GeneMedicine;
and
- other risks and uncertainties discussed under "Risk Factors" and elsewhere
in this document and in the documents GeneMedicine incorporates by
reference.
MARKETS AND MARKET PRICES
Megabios common stock is quoted on Nasdaq under the symbol "MBIO."
GeneMedicine common stock is quoted on Nasdaq under the symbol "GMED." Following
the completion of the merger, GeneMedicine common stock will no longer be quoted
on Nasdaq.
The following table sets forth the closing sale price per share of Megabios
and GeneMedicine common stock as reported on Nasdaq and the equivalent per share
price, as explained below, of GeneMedicine common stock on October 23, 1998 the
last trading day before the announcement of the merger, and on February 5, 1999.
<TABLE>
<CAPTION>
MEGABIOS COMMON GENEMEDICINE COMMON EQUIVALENT GENEMEDICINE
STOCK PRICE STOCK PRICE PER SHARE PRICE(1)
----------------- ----------------------- -----------------------
<S> <C> <C> <C>
October 23, 1998............................. $ 4.188 $ 2.000 $ 2.391
February 5, 1999............................. $ 5.563 $ 2.750 $ 3.176
</TABLE>
- ------------------------
(1) The equivalent GeneMedicine per share price represents 0.5710 of the price
of one share of Megabios common stock.
The actual prices of Megabios common stock or GeneMedicine common stock
prior to or at the time the merger is completed cannot be guaranteed or
predicted.
6
<PAGE>
MEGABIOS CORP.
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information set forth below with respect
to Megabios' statements of operations for the years ended June 30, 1994, 1995,
1996, 1997 and 1998, and the balance sheet data at June 30, 1994, 1995, 1996,
1997 and 1998, has been derived from the financial statements of Megabios
audited by Ernst & Young LLP, independent auditors. The selected financial
information of Megabios set forth below as of September 30, 1998 and for the
three-month periods ended September 30, 1997 and 1998 has been derived from the
unaudited financial statements included elsewhere herein, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of Megabios' financial
position and results of operations. The data set forth below should be read in
conjunction with Megabios' "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements, related notes
and independent auditors' report included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue................................. $ 500 $ 1,157 $ 1,890 $ 5,793 $ 8,083 $ 2,287 $ 773
Expenses:
Research and development....................... 1,922 4,691 6,487 8,593 15,111 2,758 3,429
General and administrative..................... 795 1,811 2,169 2,417 3,561 675 1,076
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..................... 2,718 6,502 8,656 11,015 18,672 3,433 4,505
--------- --------- --------- --------- --------- --------- ---------
Operating loss................................... (2,218) (5,345) (6,766) (5,222) (10,589) (1,146) (3,732)
Interest income (expense), net................... 65 (84) (135) 275 2,211 300 533
--------- --------- --------- --------- --------- --------- ---------
Net loss......................................... (2,153) (5,429) (6,901) (4,947) (8,378) (846) (3,199)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share--basic and diluted(1)......... $ (3.59) $ (8.72) $ (9.86) $ (4.40) $ (0.83) $ (0.29) $ (0.25)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing basic and diluted net
loss per share(1).............................. 601 622 700 1,126 10,088 2,902 12,736
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- AT SEPTEMBER 30,
1998
----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments......... $ 1,886 $ 282 $ 5,253 $ 24,269 $ 48,426 $ 44,931
Working capital (deficit)...................... 758 (873) 3,568 21,629 20,966 26,554
Total assets................................... 4,344 4,969 9,956 29,978 55,901 55,208
Long-term debt................................. 412 1,305 1,894 1,487 2,464 4,808
Accumulated deficit............................ (2,931) (8,360) (15,261) (20,208) (28,586) (31,785)
Total stockholders' equity..................... 2,436 2,219 6,086 25,223 50,282 47,506
</TABLE>
- ------------------------------
(1) See Note 1 to June 30, 1998 Financial Statements for information regarding
the calculation of net loss per share.
7
<PAGE>
GENEMEDICINE, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information set forth below with respect
to GeneMedicine's statements of operations for the years ended December 31,
1993, 1994, 1995, 1996 and 1997, and the balance sheet data at December 31,
1993, 1994, 1995, 1996 and 1997, has been derived from the financial statements
of GeneMedicine audited by Arthur Andersen LLP, independent public accountants.
The selected financial information set forth below as of September 30, 1998 and
for the nine month periods ended September 30, 1997 and 1998 is derived from the
unaudited financial statements included elsewhere herein, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position
and results of operations. The data set forth below should be read in
conjunction with GeneMedicine's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
related notes and accountants' report included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues and other income:
Contract revenue............... $ -- $ -- $ 3,680 $ 4,000 $ 4,500 $ 3,500 $ 3,068
Research and development grant
revenue...................... -- 125 -- 722 679 509 219
Interest income................ 105 713 1,384 1,862 1,634 1,273 967
--------- --------- --------- --------- --------- --------- ---------
Total revenues and other
income..................... 105 838 5,064 6,584 6,813 5,282 4,254
Expenses:
Research and development....... 2,269 7,042 11,338 13,727 14,125 10,068 11,511
General and administrative..... 1,497 2,881 3,736 3,406 4,380 3,385 3,435
Interest expense............... 82 88 140 104 62 50 21
--------- --------- --------- --------- --------- --------- ---------
Total expenses............... 3,848 10,011 15,214 17,237 18,567 13,503 14,967
--------- --------- --------- --------- --------- --------- ---------
Net loss....................... $ (3,743) $ (9,173) $ (10,150) $ (10,653) $ (11,754) $ (8,221) $ (10,713)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share--basic and
diluted(1)................... $ (0.91) $ (1.27) $ (1.10) $ (0.84) $ (0.86) $ (0.60) $ (0.74)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing basic
and diluted net loss per
share(1)..................... 4,119 7,238 9,195 12,753 13,703 13,656 14,469
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- AT SEPTEMBER 30,
1998
----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 4,410 $ 22,173 $ 35,197 $ 30,872 $ 24,582 $ 18,419
Total assets.................................. 5,344 25,004 38,760 34,049 27,987 21,443
Long-term liabilities......................... 1,019 410 1,588 2,179 2,975 3,700
Deficit accumulated during the development
stage....................................... (5,132) (14,305) (24,455) (35,108) (46,861) (57,574)
Total stockholders' equity.................... 3,561 23,383 35,667 29,929 23,198 16,707
</TABLE>
- ------------------------------
(1) Computed on the basis described in Note 2 of GeneMedicine Notes to Financial
Statements for the year ended
December 31, 1997.
8
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information set forth
below gives effect to the merger as a purchase, assuming that 0.5710 of a share
of Megabios common stock is issued in exchange for each share of GeneMedicine
common stock. The unaudited pro forma condensed combined statements of
operations for year ended June 30, 1998 and for the three-month period ended
September 30, 1998, combine the historical statements of operations of Megabios
and GeneMedicine as if the merger had occurred at the beginning of the earliest
period presented. The GeneMedicine financial information has been recast to
conform to the June 30 fiscal year end used by Megabios. The unaudited pro forma
condensed combined balance sheet data as of September 30, 1998 gives effect to
the merger as if it had occurred on September 30, 1998, and gives effect to the
allocation of the purchase price to the GeneMedicine assets acquired, including
in-process research and development, and liabilities assumed. This data should
be read in conjunction with the selected historical financial information, the
unaudited pro forma condensed combined financial statements and the separate
historical financial statements of Megabios and GeneMedicine included elsewhere
in this joint proxy statement/prospectus. The unaudited pro forma condensed
combined financial information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have been achieved had the merger been completed at the beginning of
the earliest period presented, and such information should not be construed as
representative of future operating results or financial position.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
Contract revenue............................................................ $ 12,106 $ 1,818
Research and development grant revenue...................................... 509 --
------------- -------
Total revenue............................................................. 12,615 1,818
EXPENSES:
Research and development.................................................... 30,189 7,218
General and administrative.................................................. 8,012 2,249
Amortization of purchased intangible assets................................. 1,055 264
------------- -------
Total operating expenses.................................................. 39,256 9,731
------------- -------
Operating loss................................................................ (26,641) (7,913)
Interest income (expense), net................................................ 3,619 814
------------- -------
Net loss...................................................................... (23,022) (7,099)
------------- -------
------------- -------
Net loss per share--basic and diluted......................................... $ (1.21) $ (0.33)
------------- -------
------------- -------
Shares used in computing basic and diluted net loss per share................. 19,024 21,672
------------- -------
------------- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments..................................................... $ 63,350
Working capital............................................................................ 37,110
Total assets............................................................................... 79,815
Long-term debt............................................................................. 4,808
Accumulated deficit........................................................................ (57,785)
Total stockholders' equity................................................................. 60,338
</TABLE>
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth historical per share data of Megabios and
GeneMedicine and combined per share data on an unaudited pro forma basis after
giving effect to the merger as a purchase. This data should be read in
conjunction with the selected historical financial information and unaudited pro
forma condensed combined financial information of Megabios and GeneMedicine and
notes thereto, included elsewhere in this joint proxy statement/prospectus. The
unaudited pro forma combined per share data are not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been completed at the beginning of the periods presented, nor is it
necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
Historical Megabios:
Net loss per basic and diluted share......................................... $ (0.83) $ (0.25)
Book value per share(1)...................................................... $ 3.90 $ 3.68
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- -------------------
<S> <C> <C>
Historical GeneMedicine
Net loss per basic and diluted share..................................... $ (0.86) $ (0.74)
Book value per share(1).................................................. $ 1.67 $ 1.15
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- -------------------
<S> <C> <C>
Pro Forma Combined Net Loss
Per Megabios basic and diluted share......................................... $ (1.21) $ (0.33)
Per equivalent GeneMedicine basic and diluted share(2)....................... $ (0.69) $ (0.19)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
<S> <C>
Pro Forma Combined Book Value per Share(3)
Per Megabios share.......................................................................... $ 2.71
Per equivalent GeneMedicine share(2)........................................................ $ 1.55
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period.
(2) The GeneMedicine Equivalent Pro Forma combined per share amounts are
calculated by multiplying the Megabios combined pro forma per share amounts
by the exchange ratio of 0.5710.
(3) The Pro Forma Combined Book Value per Share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of the period.
10
<PAGE>
RISK FACTORS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF
THE COMBINED COMPANY MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
BELOW, ELSEWHERE IN THIS DOCUMENT, AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE IN MAKING AN INVESTMENT DECISION. KEEP IN MIND THAT THE RISKS
DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING MEGABIOS, GENEMEDICINE OR THE
COMBINED COMPANY.
RISKS RELATED TO THE MERGER
IF MEGABIOS AND GENEMEDICINE ARE NOT SUCCESSFULLY INTEGRATED, THE COMBINED
COMPANY'S BUSINESS WILL BE ADVERSELY AFFECTED. Integrating Megabios and
GeneMedicine will be a complex, time-consuming and expensive process. Before the
merger, Megabios and GeneMedicine operated independently, each with its own
business, business culture, employees and systems. After the merger, Megabios
and GeneMedicine must operate as a combined organization utilizing common:
- information and communication systems;
- operating procedures;
- financial controls; and
- human resource practices, including benefit, training and professional
development programs.
There may be substantial difficulties, costs and delays involved in
integrating Megabios and GeneMedicine. These may include:
- distracting management from the business of the combined company;
- potential incompatibility of business cultures;
- perceived uncertainty in career opportunities, benefits and the long-term
return value of stock options available to employees;
- potential inability to coordinate research and development efforts
successfully;
- costs and delays in implementing common systems and procedures; and
- operating the combined company at two different sites, one in Burlingame,
CA and another in The Woodlands, TX.
Any one or all of these factors may increase operating costs or lower
anticipated financial performance. In addition, the combined company may lose
corporate partners and employees. Many of these factors are also outside the
control of either company. The failure to integrate Megabios and GeneMedicine
would have a material adverse effect on the business, financial condition and
results of operations of the combined company.
BECAUSE THE NUMBER OF SHARES OF MEGABIOS COMMON STOCK RECEIVED IN THE MERGER
WILL NOT INCREASE OR DECREASE DUE TO CHANGES IN THE PRICE OF EITHER COMPANY'S
STOCK, THE VALUE OF THE MERGER CONSIDERATION IS SUBJECT TO SUBSTANTIAL
VOLATILITY. At the effective time of the merger, each outstanding share of
GeneMedicine common stock will be converted into 0.5710 of a share of Megabios
common stock. This exchange ratio will not increase or decrease due to
fluctuations in the market price of either company's stock. Thus, the value of
the shares of Megabios common stock to be received by GeneMedicine stockholders
in the merger will depend upon the market price of Megabios common stock at the
effective time of the merger, which may be greater or less than the value at the
time a stockholder votes on the merger. Megabios common stock and GeneMedicine
common stock are subject to substantial price volatility and, therefore, the
value of the merger consideration to be received by GeneMedicine stockholders is
11
<PAGE>
subject to the same volatility. Recent market prices of Megabios common stock
and GeneMedicine common stock are set forth under the caption "Comparative Per
Share Market Price Data and Dividend Policy" on page 23. We encourage
GeneMedicine stockholders to obtain current market quotations for Megabios
common stock and GeneMedicine common stock.
RISKS RELATED TO THE BUSINESS OF MEGABIOS AND GENEMEDICINE
SINCE THE DEVELOPMENT OF ITS PRODUCTS WILL TAKE SEVERAL MORE YEARS, THE
COMBINED COMPANY CANNOT BE CERTAIN THESE PRODUCTS WILL EVER BE SUCCESSFULLY
MARKETED OR MANUFACTURED. Because substantially all of the products under
development by Megabios and GeneMedicine are in research or preclinical
development, revenues from the sale of any products will not be realized for at
least the next several years, if at all. Megabios and GeneMedicine cannot be
certain that any of the combined company's products will be safe and effective
or that the combined company or its corporate partners will obtain regulatory
approvals. In addition, any products developed by the combined company may not
be economical to manufacture on a commercial scale. Even if the combined company
develops a product that becomes available for commercial sale, it cannot be
certain that consumers will accept the product.
IF THE COMBINED COMPANY CANNOT SATISFY EXISTING CLINICAL AND REGULATORY
APPROVAL PROCEDURES, IT MAY BE UNABLE TO MARKET ITS PRODUCTS. The combined
company and its corporate partners may not obtain regulatory approval for the
commercial sale of any of their products, or be able to demonstrate that a
potential product is safe and effective for its intended use. Neither Megabios
nor GeneMedicine can be certain that it or its corporate partners will be
permitted to undertake clinical testing of its products. Both the combined
company and its corporate partners may also experience delays in conducting
clinical trials due to a variety of factors, including:
- unfavorable or delayed preclinical study results;
- inability to manufacture sufficient quantities of materials used for
clinical trials;
- delays or difficulties in patient enrollment; and
- delays in regulatory approvals.
While both Megabios and GeneMedicine have demonstrated some evidence of the
utility of their gene delivery systems in preclinical studies, these results do
not mean that they will be safe or effective in humans. The gene delivery
systems may have undesirable and unintended side effects or other
characteristics that may prevent or limit their use.
The gene delivery systems of both Megabios and GeneMedicine face risks in
addition to those common to all biotechnology or biopharmaceutical companies.
Gene-based therapy is a new and rapidly evolving technology that is expected to
undergo significant technological changes in the future. Many companies are
seeking to identify therapeutic genes and understand their function in the
development and progression of various diseases. However, there is limited
clinical data available regarding the safety and efficacy of gene-based
therapeutics. Neither company is aware of any gene-based therapeutics that have
received marketing approval from the FDA or foreign regulatory authorities. As a
result of the limited data available and other factors, clinical trials relating
to gene-based therapeutics may take longer to complete than clinical trials
involving more traditional pharmaceuticals.
THE COMBINED COMPANY EXPECTS TO OPERATE AT A LOSS FOR THE FORSEEABLE FUTURE
AND MAY NEVER ACHIEVE PROFITABILITY. Neither Megabios nor GeneMedicine can be
certain that the combined company will ever achieve and sustain profitability.
Since their inception, Megabios and GeneMedicine have engaged in research and
development activities. As a result, Megabios and GeneMedicine have generated
minimal revenues from operations and have experienced significant operating
losses. As of September 30, 1998, Megabios and GeneMedicine had accumulated
deficits of approximately $31.8 million and $57.6 million, respectively. The
process of developing the combined company's products will require significant
12
<PAGE>
additional research and development, preclinical testing, clinical trials and
regulatory approvals. These activities, together with general and administrative
expenses, are expected to result in operating losses for the foreseeable future.
THE BUSINESS OF THE COMBINED COMPANY MAY BE ADVERSELY AFFECTED IF IT CANNOT
ATTRACT AND RETAIN CORPORATE PARTNERS. The combined company may not be able to
retain the corporate partnerships of Megabios or GeneMedicine, or establish
additional collaborations. The combined company will rely on such corporate
partnerships to fund or conduct research and development, preclinical studies,
clinical trials, manufacturing, marketing and sales necessary to commercialize
its products. Even if it is able to establish and retain corporate partnerships,
the terms may not be favorable. The combined company's reliance on corporate
partners poses other risks, including:
- uncertainty that its current or future corporate partnerships will be
successful or that it will derive any revenue from such partnerships;
- corporate partners have considerable discretion in electing whether to
pursue the development of any product and may pursue alternative
technologies or products either on their own or in collaboration with the
combined company's competitors;
- disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
- disagreements with corporate partners could lead to delays or termination
in the research, development or commercialization of product candidates,
or result in litigation or arbitration; and
- if any corporate partner fails to develop or commercialize successfully
any product, the combined company's business, financial condition and
results of operations could be materially adversely affected.
THE COMBINED COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
PROTECT ITS PATENTS AND PROPRIETARY RIGHTS. The combined company's success will
depend to a significant degree on its ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
The patent positions of biotechnology and pharmaceutical companies are
uncertain and involve complex legal and factual questions. As a result, neither
Megabios nor GeneMedicine can predict how broad any claims in allowed patents
will be. In addition, there is a substantial backlog of biotechnology patent
applications at the U.S. Patent and Trademark Office that may delay the review
and the potential issuance of patents.
Both Megabios and GeneMedicine have rights to U.S. and foreign issued
patents and have filed or participated as a licensee in the filing of a number
of patent applications in the U.S. relating to their technologies, as well as
foreign counterparts of these applications in many countries. The combined
company will continue to file applications as appropriate for patents covering
both products and processes. There is a risk, however, that patents may not
issue from any of these applications or that claims allowed under issued patents
or patents that may issue from such applications may not be sufficient to
protect the combined company's technology.
Patent applications in the U.S. are maintained in secrecy until a patent
issues. As a result, neither Megabios nor GeneMedicine can be certain that
others have not filed patent applications for technology covered by their
pending applications. Megabios and GeneMedicine also cannot be certain that
either of them was the first to invent the technology that is the subject of
such patent applications. Competitors may have filed patent applications or
received patents and may obtain additional patents
13
<PAGE>
and proprietary rights that block or compete with those held by Megabios and
GeneMedicine. Both Megabios and GeneMedicine are aware of patent applications
filed and patents issued to third parties relating to gene delivery
technologies. Megabios and GeneMedicine currently are unable to verify that any
of these patent applications or patents held by third parties will have any
effect on the combined company's products.
Competitors of the combined company may file patent applications in the U.S.
that claim technology also invented by Megabios or GeneMedicine. If so, the
combined company may have to participate in interference proceedings or even
litigation to determine priority of invention and, thus, the right to a patent.
This could result in substantial cost to the combined company to determine its
rights or even potential loss of its rights.
The combined company's success depends in large part on its ability to
operate without infringing upon the patents the patents or other proprietary
rights of third parties. In the event of such infringement, the combined company
and its corporate partners may be enjoined from pursuing commercialization of
products or may be required to obtain licenses to these patents or other
proprietary rights. Megabios and GeneMedicine cannot be certain that the
combined company or its corporate partners will be able to obtain alternative
technologies or any required license. Even if the combined company or its
corporate partners were to obtain such technologies or licenses, Megabios and
GeneMedicine cannot be certain that the terms would be commercially reasonable.
If such licenses or alternative technologies are not obtained, the combined
company may be delayed or prevented from pursuing the development of some or all
of its products.
Megabios and GeneMedicine also rely on proprietary information and trade
secrets, including its proprietary database of preclinical IN VIVO experiments,
to develop and maintain their competitive positions. Third parties may
independently develop equivalent proprietary information or techniques or gain
access to the combined company's trade secrets. Both Megabios and GeneMedicine
typically require their employees, consultants, collaborators, advisors and
corporate partners to execute confidentiality agreements. However, these
agreements may not provide meaningful protection or adequate remedies in the
event of unauthorized use or disclosure of such information. Neither Megabios
nor GeneMedicine can be certain that the parties to such agreements will not
breach the agreements.
THE COMBINED COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
OBTAIN RIGHTS TO PROPRIETARY GENES OR OTHER TECHNOLOGIES. Both Megabios and
GeneMedicine and their corporate partners are investigating the use of gene
sequences in Megabios' and GeneMedicine's products. A number of these gene
sequences are, or may become, patented by others. As a result, the combined
company or its corporate partners may be required to obtain licenses to those
gene sequences or other technology. In addition, some of the products based on
Megabios' and GeneMedicine's gene delivery systems may require the use of
multiple proprietary technologies. Consequently, the combined company or its
corporate partners may be required to make cumulative royalty payments to
several third parties. These cumulative royalties would reduce amounts retained
by or paid to the combined company and could be commercially prohibitive.
Neither Megabios nor GeneMedicine can be certain that they or their corporate
partners will be able to obtain any required licenses.
IF THE COMBINED COMPANY IS UNABLE TO SATISFY GOVERNMENT REGULATIONS, IT MAY
NOT BE ALLOWED TO DEVELOP, MARKET AND MANUFACTURE ITS PRODUCTS IN THE U.S. The
combined company may not receive approval from regulatory authorities to market
any of its products. Prior to marketing any drug or biological product in the
U.S., the product must undergo rigorous preclinical studies and clinical trials.
In addition, the product must undergo an extensive regulatory approval process
implemented by the FDA. Satisfaction of these regulatory requirements typically
takes several years or more and a substantial commitment of resources. Neither
Megabios nor GeneMedicine can be certain that the combined company will obtain
regulatory approval even if it devotes substantial resources and time.
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<PAGE>
Megabios and GeneMedicine believe that the FDA will regulate the commercial
uses of the combined company's products as biologics. However, because
gene-based therapy is a relatively new technology, the regulatory requirements
are particularly uncertain. This uncertainty may result in excessive costs or
delays in the regulatory approval process.
In addition, manufacturing facilities in the U.S. must comply with the FDA's
good manufacturing process regulations. Such facilities are subject to periodic
inspection by the FDA and state authorities. Manufacturers of biologics also
must comply with the FDA's general biological product standards and also may be
subject to state regulation. Failure to comply with such regulatory requirements
may result in the following:
- withdrawal of marketing approval;
- civil penalties;
- recall or seizure of products or total or partial suspension of
production;
- FDA warning letters;
- refusal by the FDA to review applications or supplements to approved
applications;
- injunctions; or
- other legal or regulatory actions.
Even after a product is approved for marketing, the product, its
manufacturer and its manufacturing facilities are subject to continued
regulatory review, oversight and periodic FDA inspections. Discovery of
previously unknown problems with a product, manufacturer or facility may result
in penalties, including withdrawal of the product from the market.
IF THE COMBINED COMPANY IS UNABLE TO OBTAIN FOREIGN REGULATORY APPROVALS, IT
MAY NOT BE ALLOWED TO DEVELOP, MARKET AND MANUFACTURE ITS PRODUCTS IN FOREIGN
COUNTRIES. Neither Megabios nor GeneMedicine can be certain that the combined
company will obtain any regulatory approvals in other countries. In order to
market its products outside of the U.S., the combined company and its corporate
partners must comply with numerous and varying regulatory requirements of other
countries regarding safety and quality. The approval procedures vary among
countries and can involve additional testing. The time required obtaining
approval in other countries might differ from that required to obtain FDA
approval. The regulatory approval process in other countries includes all of the
risks associated with obtaining FDA approval set forth above. Approval by the
FDA does not ensure approval by the regulatory authorities of any other country.
THE COMBINED COMPANY'S SUCCESS MAY BE ADVERSELY AFFECTED BY INTENSE
COMPETITION IN THE GENE-BASED THERAPEUTICS MARKET. The pharmaceutical and
biotechnology industries are highly competitive. Megabios and GeneMedicine are
aware of several pharmaceutical and biotechnology companies that are pursuing
gene-based therapeutics. Many of these companies are addressing diseases that
have been targeted by Megabios and GeneMedicine or their corporate partners and
that will be targeted by the combined company. Megabios and GeneMedicine are
also aware that some of their corporate partners are developing gene-based
therapeutics with one or more of their competitors. These corporate partners may
devote more resources to products or technologies that will compete with those
of the combined company. The combined company may also experience competition
from companies that enter the field of gene-based therapeutics in the future. As
competitors develop their technologies, they may develop proprietary positions
in a particular aspect of gene delivery and gene-based therapeutics that could
prevent the combined company from developing its products.
In addition, the combined company will face intense competition from other
companies for corporate partnerships, for establishing relationships with
academic and research institutions and for licenses
15
<PAGE>
to proprietary technology. Moreover, many other companies are developing
non-gene-based therapies to treat these same diseases.
Most of Megabios' and GeneMedicine's competitors and potential competitors
of the combined company have substantially greater resources. Those resources
include superior product development capabilities and financial, scientific,
manufacturing, managerial and human resources. The combined company's
competitors may develop safer, more effective or less costly gene delivery
systems, gene-based therapeutics or non-gene-based therapies. In addition,
competitors may achieve superior patent protection or obtain regulatory approval
or product commercialization earlier than the combined company.
THE COMBINED COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
ATTRACT AND RETAIN QUALIFIED EMPLOYEES. The combined company's success will
depend on its ability to retain its executive officers and scientific staff, and
the consultants and advisors who assist the combined company in formulating its
research and development strategy. If the combined company loses any of these
persons, its corporate partnerships, business, financial condition and results
of operations could be adversely affected. Neither Megabios nor GeneMedicine
maintains key man life insurance on any of their executive officers or other key
employees.
In order to pursue its research and product development plans, the combined
company must attract and retain additional qualified scientific and other
personnel. Most of the individuals who will be sought by the combined company
are highly skilled in pharmaceutical product development or in particular
scientific fields. These individuals are generally in high demand by
pharmaceutical and biotechnology companies and by universities and other
research institutions. As a result, neither Megabios nor GeneMedicine can be
certain the combined company will be able to attract and retain qualified
individuals. The loss of key personnel or the inability to hire and retain
qualified personnel could adversely affect the combined company's product
development efforts.
IF THE COMBINED COMPANY IS UNABLE TO SECURE ADDITIONAL FINANCING, ITS
RESEARCH AND DEVELOPMENT EFFORTS MAY BE ADVERSELY AFFECTED. The combined
company may be unable to obtain the additional funding it will need in order to
continue its research and development activities. Megabios and GeneMedicine have
financed their operations primarily through the sale of equity securities and
through corporate partnerships. Megabios and GeneMedicine have generated no
royalty revenues from product sales. No such revenues for the combined company
are expected for the foreseeable future, if ever. Megabios and GeneMedicine
anticipate that their existing resources will enable the combined company to
maintain its operations through fiscal 2001. However, the combined company may
require additional funding prior to such time. The combined company's future
capital requirements will depend on many factors, including:
- scientific progress in its research and development programs;
- size and complexity of such programs;
- scope and results of preclinical studies and clinical trials;
- ability to establish and maintain corporate partnerships;
- time and costs involved in obtaining regulatory approvals;
- time and costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments; and
- the cost of manufacturing preclinical and clinical material.
Neither Megabios nor GeneMedicine can be certain that additional financing
to meet the combined company's funding requirements will be available. Even if
financing is available, the terms may
16
<PAGE>
not be attractive. Furthermore, any additional equity financing may be dilutive
to the combined company's stockholders. If the combined company is unable to
raise capital when needed, it may have to reduce operations to conserve cash or
cease operations entirely.
MEGABIOS' AND GENEMEDICINE'S FINANCIAL CONDITION AND OPERATIONS MAY BE
ADVERSELY AFFECTED IF THE MERGER IS NOT APPROVED. Megabios and GeneMedicine
have incurred considerable costs and expenses in connection with the merger,
including attorneys' and auditors' fees and the costs of filing, printing and
mailing this joint proxy statement/prospectus. In addition, each company's
senior management has devoted a substantial amount of time and effort to the
merger process. These costs and distractions could have a material adverse
effect on their future operations if the merger is not approved.
Furthermore, GeneMedicine has agreed to pay a significant termination fee to
Megabios in the event of a superior offer or other acquisition. The payment of
such termination fee, combined with the costs and expenses incurred by
GeneMedicine in connection with the merger, could make GeneMedicine less
attractive to a potential acquirer or strategic partner were the merger with
Megabios not approved.
THE COMBINED COMPANY'S PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL IF THEY
ARE NOT ACCEPTED BY PHYSICIANS AND INSURERS. Concerns have arisen regarding the
potential safety and efficacy of gene-based therapeutics using viral delivery
systems. While Megabios' and GeneMedicine's gene delivery systems are
lipid-based and do not contain viruses, these concerns could adversely affect
physicians' and health care payers' evaluations of the combined company's
products. Physicians and health care payers could conclude that the combined
company's products or technologies are not safe and effective. The combined
company's success is dependent on commercial acceptance of its products.
Megabios and GeneMedicine believe that recommendations by physicians and health
care payers will be essential for commercial acceptance of the combined
company's products. If products developed by the combined company and its
corporate partners are not commercially accepted by patients, physicians or
third-party payers, sales would be adversely affected.
THE COMBINED COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
EFFECTIVELY PRICE ITS PRODUCTS OR OBTAIN ADEQUATE REIMBURSEMENT. Even if the
combined company and its corporate partners succeed in bringing any products to
market, they cannot be certain that reimbursement will be available. Sales
volume and price of any products successfully developed by the combined company
will depend, in part, on the availability of third-party reimbursement for the
cost of such products and related treatments. Reimbursement is generally
provided by government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Even if reimbursement is available, payers' reimbursement policies may adversely
affect corporate partner's ability to sell such products on a profitable basis.
If these corporate partners are unable to profitably sell the combined company's
products, royalty revenue to the combined company will be reduced.
THE COMBINED COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
DEVELOP LARGE-SCALE
MANUFACTURING CAPABILITIES. Although Megabios has entered into a strategic
partnership with DSM Biologics for the manufacture and supply of systems for the
gene therapy industry, neither DSM nor any third party has demonstrated
successful large-scale manufacturing of gene delivery systems. The partnership
has the potential to create the first manufacturing facilities that can produce
high-quality, ultrapure material for plasmid-based therapeutics on every scale,
from preclinical toxicology studies to commercial products. DSM will have full
responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The combined company will
depend on DSM for commercial-scale manufacturing of its products. DSM may be
unable to develop adequate manufacturing capabilities for commercial-scale
quantities of gene-based therapeutic products. If DSM
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<PAGE>
or third parties are unable to establish and maintain large-scale manufacturing
capabilities, the combined company's commercialization of its products may be
delayed and sales of any products would be adversely affected.
DELAWARE LAW AND MEGABIOS' CHARTER COULD MAKE THE ACQUISITION OF MEGABIOS BY
ANOTHER COMPANY MORE DIFFICULT. Provisions of Delaware law applicable to
Megabios could delay a merger, tender offer or proxy contest involving Megabios
or make such a transaction more difficult. These provisions prohibit a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder unless a number of conditions are met. In addition, the
Megabios Board of Directors may issue shares of preferred stock without
stockholder approval on terms determined by the Board of Directors. The rights
of the holders of Megabios common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. In addition, the Megabios Certificate of Incorporation and
Megabios Bylaws contain the following provisions:
- classified board of directors;
- no right of stockholders to act by written consent without a meeting;
- advance stockholder notice required to nominate directors and raise
matters at the annual stockholders meeting;
- no cumulative voting in the election of directors; and
- removal of directors only for cause and with a two-thirds vote of
Megabios' outstanding shares.
These provisions could delay, defer or prevent a change in control of
Megabios or limit the price that investors might be willing to pay in the future
for shares of Megabios common stock.
THE COMBINED COMPANY'S BUSINESS MAY BE NEGATIVELY IMPACTED BY COMPUTER
FAILURES IN THE YEAR 2000 ("Y2K"). Many existing computer programs and systems,
including some of those used by Megabios and GeneMedicine and their suppliers
and vendors, use only two digits to identify the year in the date field. These
programs may be unable to process date/time information between the twentieth
and twenty-first centuries. This inability could cause the disruption or failure
of such computer systems. Megabios has identified two main areas of its Y2K
risk:
- Megabios' internal computer systems could be disrupted or fail, causing an
interruption or decrease in Megabios' ability to continue its operations;
and
- the computer systems of third parties with whom Megabios regularly deals,
including its suppliers, vendors, utilities and financial institutions,
could be disrupted or fail, causing an interruption or decrease in
Megabios' ability to continue its operations.
Megabios is currently evaluating the nature and extent of the Y2K issues for
its internal systems and has developed a plan to address the issue. If the
combined company does not achieve Y2K compliance for its internal systems on a
timely basis, the combined company's business could be adversely affected.
If the business of any third party, including suppliers, vendors, utilities
or financial institutions, is significantly disrupted because such party is not
Y2K compliant, such disruption could adversely affect the combined company's
business. These disruptions could include, among other things:
- a financial institution's inability to process checks drawn on the
combined company's bank accounts, accept deposits or process wire
transfers;
- a client's, supplier's, vendor's or financial institution's business
failure;
- an interruption in deliveries of equipment and supplies from vendors;
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<PAGE>
- a loss of voice and data connections the combined company will use to
share information;
- a loss of electric power to the combined company's facilities; or
- other interruptions to the normal conduct of business by the combined
company, the nature and extent of which Megabios and GeneMedicine cannot
foresee.
Megabios and GeneMedicine do not know whether any of the disruptions
described above will actually occur. Even if they do occur, Megabios and
GeneMedicine cannot predict the effect they will have on the combined company's
business.
THE COMBINED COMPANY'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF
ENVIRONMENTAL CLAIMS EXCEED INSURANCE LIMITS OR COSTS TO COMPLY TO ENVIRONMENTAL
LAWS BECOME EXCESSIVE. The combined company's research and development
processes will involve the controlled use of hazardous and radioactive
materials. The risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of an accident, the combined
company could be held liable for any damages, which could exceed its available
financial resources, including its insurance coverage.
The combined company will be subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous or radioactive materials and waste products. The combined company may
be required to incur significant costs to comply with environmental laws and
regulations in the future.
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<PAGE>
THE MEGABIOS SPECIAL MEETING
PURPOSE OF THE MEGABIOS SPECIAL MEETING
The purpose of the Megabios special meeting is to consider and vote upon a
proposal to approve the issuance of the Megabios common stock in connection with
the merger. Holders of Megabios common stock may also consider and vote upon
such other matters as may be properly brought before the Megabios special
meeting. The merger will occur only if the proposal is approved.
THE MEGABIOS BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE BY THE STOCKHOLDERS OF MEGABIOS
FOR APPROVAL OF THE ISSUANCE OF SHARES OF MEGABIOS COMMON STOCK PURSUANT TO THE
REORGANIZATION AGREEMENT.
PROXIES
The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the Megabios Board of Directors for use at the
Megabios special meeting. Each of the persons named in the Megabios proxy as a
proxy holder is an officer of Megabios. All shares of Megabios common stock that
are entitled to vote and are represented at the Megabios special meeting either
in person or by properly executed proxies received prior to or at the Megabios
special meeting and not duly and timely revoked will be voted at the Megabios
special meeting in accordance with the instructions indicated on such proxies.
If no instructions are indicated, proxies will be voted for the approval of the
issuance of shares of Megabios common stock pursuant to the reorganization
agreement.
If any other matters are properly presented for consideration at the
Megabios special meeting, unless otherwise indicated on a proxy, the person
named as proxy and acting thereunder will have the discretion to vote on such
matters in accordance with his best judgment.
DATE, TIME AND PLACE OF MEETING
The Megabios special meeting will be held at Megabios' executive offices,
located at 863A Mitten Road, Burlingame, California, on Thursday, March 18,
1999, at 10:00 a.m., local time.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Megabios common stock at the close of business on
the record date will be entitled to notice of and to vote at the Megabios
special meeting. At the close of business on the record date there were
12,913,331 shares of Megabios common stock outstanding and entitled to vote.
Each holder of record of Megabios common stock on the record date will be
entitled to one vote for each share held on all matters to be voted upon at the
Megabios special meeting.
SOLICITATION
This joint proxy statement/prospectus was mailed to all Megabios
stockholders of record as of the record date and constitutes notice of the
Megabios special meeting in accordance with Delaware law.
Regardless of whether the merger is completed, each of Megabios and
GeneMedicine will pay its own costs and expenses incurred in connection with the
reorganization agreement, except that fees and expenses, other than attorneys'
fees, incurred in connection with the printing, filing and mailing of the
registration statement and this joint proxy statement/prospectus will be shared
equally by Megabios and GeneMedicine. See "The Reorganization
Agreement--Expenses and Termination Fees" on page 56.
The cost of soliciting proxies from holders of Megabios common stock will be
borne by Megabios. In addition, Megabios may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of
Megabios. No additional compensation will be paid to directors, officers or
other regular employees for such services. In addition, Megabios has retained
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Corporate Investor Communications to assist in the solicitation of proxies from
brokers, nominees, institutions and individual stockholders at an estimated fee
of $2,000 plus reimbursement of its reasonable solicitation expenses.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Megabios common stock entitled to vote at
the Megabios special meeting is necessary to establish a quorum.
Approval of the proposal requires the approval of a majority of the shares
present in person or represented by proxy and entitled to vote at the Megabios
special meeting. All votes will be tabulated by the inspector of election
appointed for the meeting, who will separately tabulate affirmative and negative
votes, abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes on each proposal. Broker non votes are
counted towards a quorum, but are not counted for any purpose in determining
whether the proposal has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy to vote at the Megabios special meeting has the
power to revoke it at any time before it is voted. It may be revoked by filing
with the corporate secretary of Megabios at Megabios' principal executive
offices, a written notice of revocation or a duly executed proxy bearing a later
date, or it may be revoked by attending the meeting and voting in person.
Attendance at the meeting will not, by itself, revoke a proxy.
THE GENEMEDICINE SPECIAL MEETING
PURPOSE OF THE GENEMEDICINE SPECIAL MEETING
The purpose of the GeneMedicine special meeting is to consider and vote upon
the approval and adoption of the reorganization agreement and approval of the
merger. Holders of GeneMedicine common stock may also consider and vote upon
such other matters as may properly come before the GeneMedicine special meeting.
The merger will occur only if the proposal is approved.
THE GENEMEDICINE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE BY THE STOCKHOLDERS OF
GENEMEDICINE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND FOR
APPROVAL OF THE MERGER.
PROXIES
The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the GeneMedicine Board of Directors for use at the
GeneMedicine special meeting. Each of the persons named in the GeneMedicine
proxy as a proxy holder is an officer of GeneMedicine. All shares of
GeneMedicine common stock that are entitled to vote and are represented at the
GeneMedicine special meeting either in person or by properly executed proxies
received prior to or at the GeneMedicine special meeting and not duly and timely
revoked will be voted at the GeneMedicine special meeting in accordance with the
instructions indicated on such proxies. If no instructions are indicated,
proxies will be voted for the approval and adoption of the reorganization
agreement and approval of the merger.
If any other matters are properly presented for consideration at the
GeneMedicine special meeting, unless otherwise indicated on a proxy, the person
named as proxy and acting thereunder will have the discretion to vote on such
matters in accordance with his best judgment.
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DATE, TIME AND PLACE OF MEETING
The GeneMedicine special meeting will be held at Heller Ehrman White &
McAuliffe, 525 University Avenue, Suite 1100, Palo Alto, California 94301 on
Thursday, March 18, 1999, at 9:00 a.m., local time.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of GeneMedicine common stock at the close of business
on the record date will be entitled to notice of, and to vote at, the
GeneMedicine special meeting. At the close of business on the record date there
were 14,683,875 shares of GeneMedicine common stock outstanding and entitled to
vote.
Each holder of record of GeneMedicine common stock on the record date will
be entitled to one vote for each share held on all matters to be voted upon at
the GeneMedicine special meeting.
SOLICITATION
This joint proxy statement/prospectus was mailed to all GeneMedicine
stockholders of record as of the record date and constitutes notice of the
GeneMedicine special meeting in accordance with Delaware law.
Regardless of whether the merger is completed, each of Megabios and
GeneMedicine will pay its own costs and expenses incurred in connection with the
reorganization agreement, except that fees and expenses, other than attorneys'
fees, incurred in connection with the printing, filing and mailing of the
registration statement and this joint proxy statement/prospectus will be shared
equally by Megabios and GeneMedicine. See "The Reorganization
Agreement--Expenses and Termination Fees" on page 56.
The cost of soliciting proxies from holders of GeneMedicine common stock
will be borne by GeneMedicine. In addition, GeneMedicine may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation materials to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
telegram or personal solicitation by directors, officers or other regular
employees of GeneMedicine. No additional compensation will be paid to directors,
officers or other regular employees for such services. In addition, GeneMedicine
has retained Morrow & Co. to assist in the solicitation of proxies from brokers,
nominees, institutions and individual stockholders at an estimated fee of $6,000
plus reimbursement of its reasonable solicitation expenses.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of GeneMedicine common stock entitled to vote
at the GeneMedicine special meeting is necessary to establish a quorum.
Approval of the proposal requires approval of a majority of the outstanding
shares of GeneMedicine common stock as of the record date. All votes will be
tabulated by the inspector of election appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions and broker
non-votes. Abstentions and broker non-votes will be counted towards the
tabulation of votes cast on the proposal presented to the stockholders, but will
have the same effect as a vote against approval of the matters being voted upon.
REVOCABILITY OF PROXIES
Any person giving a proxy to vote at the GeneMedicine special meeting has
the power to revoke it at any time before it is voted. It may be revoked by
filing with the corporate secretary of GeneMedicine at the GeneMedicine
principal offices, a written notice of revocation or a duly executed proxy
bearing a later date, or it may be revoked by attending the meeting and voting
in person. Attendance at the meeting will not, by itself, revoke a proxy.
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COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY
Since September 15, 1997, Megabios common stock has been quoted on Nasdaq
under the symbol "MBIO." Since July 13, 1994, the GeneMedicine common stock has
been quoted on Nasdaq under the symbol "GMED." The table below sets forth, for
the quarters indicated, the reported high and low sale prices of Megabios common
stock and GeneMedicine common stock as reported on Nasdaq.
<TABLE>
<CAPTION>
MEGABIOS GENEMEDICINE
COMMON STOCK COMMON STOCK
--------------------- ---------------------
HIGH LOW HIGH LOW
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
1996 CALENDAR YEAR
First Quarter...................................................... $ -- $ -- $ 9.250 $ 5.875
Second Quarter..................................................... -- -- 7.375 5.375
Third Quarter...................................................... -- -- 5.750 3.375
Fourth Quarter..................................................... -- -- 5.688 3.125
1997 CALENDAR YEAR
First Quarter...................................................... -- -- 9.500 5.375
Second Quarter..................................................... -- -- 9.250 5.375
Third Quarter...................................................... 17.750 12.250 7.750 3.625
Fourth Quarter..................................................... 18.625 10.125 6.312 3.750
1998 CALENDAR YEAR
First Quarter...................................................... 14.125 8.500 5.562 2.625
Second Quarter..................................................... 9.250 6.125 4.250 2.250
Third Quarter...................................................... 8.000 2.875 3.438 1.562
Fourth Quarter..................................................... 7.125 3.812 3.125 1.656
1999 CALENDAR YEAR
First Quarter (through February 5, 1999)........................... 7.125 4.875 3.375 2.313
</TABLE>
As of the record date, there were approximately 1,000 record holders of
Megabios common stock. As of the record date, there were approximately 2,800
record holders of GeneMedicine common stock. Neither Megabios nor GeneMedicine
has ever paid cash dividends on its common stock. The policies of Megabios and
GeneMedicine are to retain earnings for use in their respective businesses.
The following table sets forth the closing sale price per share of Megabios
and GeneMedicine common stock as reported on Nasdaq and the equivalent per share
price of GeneMedicine common stock on October 23, 1998, the last trading day
preceding the announcement of the merger, and on February 5, 1999:
<TABLE>
<CAPTION>
EQUIVALENT
MEGABIOS COMMON GENEMEDICINE GENEMEDICINE PER
STOCK PRICE COMMON STOCK PRICE SHARE PRICE(1)
----------------- ------------------- --------------------
<S> <C> <C> <C>
October 23, 1998................................... $ 4.188 $ 2.000 $ 2.391
February 5, 1999................................... $ 5.563 $ 2.750 $ 3.176
</TABLE>
- ------------------------
(1) The equivalent GeneMedicine per share price represents 0.5710 of the price
of one share of Megabios common stock.
MEGABIOS STOCKHOLDERS AND GENEMEDICINE STOCKHOLDERS ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR MEGABIOS COMMON STOCK AND GENEMEDICINE COMMON
STOCK.
23
<PAGE>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
Beginning in early 1998, the Megabios Board of Directors evaluated Megabios'
long-term strategy and decided to explore a consolidation of technologies in the
gene therapy industry. The Megabios Board believed that the broader
biotechnology industry would increasingly consolidate. The Megabios Board also
believed that by hiring additional scientists and acquiring complementary
technologies it could expand its existing core competencies in plasmid-based
gene therapy. In May 1998, Megabios assigned a team of senior level management
and formed a committee of the Megabios Board to conduct a preliminary
investigation of the viability of expanding Megabios' scientific expertise,
intellectual property portfolio and product development efforts to enhance its
core platform technologies and attract additional corporate partnerships.
Megabios confirmed its strategic commitment to acquiring a complementary
biotechnology company to expand its core technologies in a series of meetings of
the Megabios Board and its acquisition committee held from May 1998 through July
1998. As a result of this commitment, Megabios contacted Hambrecht & Quist LLC
to discuss engaging the investment bank to provide financial services in
connection with a potential merger with a biotechnology company in targeted
industry segments, including gene therapy.
In January, 1998, the GeneMedicine Board formed a strategic opportunities
committee to explore and review strategic business opportunities for
GeneMedicine. This committee met several times during the ensuing months to
consider various possible business strategies and opportunities, and methods by
which to explore and evaluate various alternatives. On May 26, 1998,
GeneMedicine retained PaineWebber Incorporated to act as financial advisor to
the GeneMedicine Board in connection with a possible acquisition transaction
and, in the event of such a transaction, to render a fairness opinion to the
GeneMedicine Board regarding the consideration to be paid or issued to the
GeneMedicine stockholders. PaineWebber contacted 46 potential merger candidates,
including biotechnology and pharmaceutical companies of various sizes, and
distributed information packets to the 29 candidates which expressed an interest
in a transaction with GeneMedicine. Although GeneMedicine had preliminary
discussions with several such companies, these discussions were not actively
pursued for various reasons, including the perceived lack of potential operating
synergies and differences in research and development strategies.
During April and early May, 1998, Benjamin F. McGraw III, Chief Executive
Officer and Chairman of the Board of Megabios, placed telephone calls to members
of GeneMedicine's management with whom he had made prior acquaintance. Eric
Tomlinson, Vice Chairman of GeneMedicine's Board of Directors, subsequently
called Dr. McGraw. Dr. McGraw met with Dr. Tomlinson and other representatives
of GeneMedicine on May 6, 1998 to discuss consolidation in the biotechnology
industry and the potential strategic, cultural and operational synergies between
the two companies. Drs. McGraw and Tomlinson met on June 17, 1998 and discussed
strategic issues relating to a possible combination of the two companies. At the
conclusion of that meeting, Drs. McGraw and Tomlinson concluded that additional
discussions and due diligence were warranted and that a combination of
GeneMedicine and Megabios might potentially be in the best interests of the
stockholders and employees of both companies.
On July 31, 1998, Dr. Tomlinson reported to GeneMedicine's strategic
opportunities committee on his discussions with Dr. McGraw. The committee
considered, among other things:
- the possibility of a business combination with Megabios;
- the relative positions of GeneMedicine and Megabios in intellectual
property, management, cash and cash equivalents and market visibility; and
- the possible synergies resulting from, and the proposed terms of, a
transaction with Megabios.
The committee authorized its financial advisor to respond to and engage
Megabios in further discussions regarding the terms of a possible combination of
the two companies, while the committee continued to explore other potential
strategic opportunities.
24
<PAGE>
Representatives of Megabios conducted formal due diligence on GeneMedicine
from August 17 to 19, 1998. On August 24, 1998 and August 26, 1998, Dr. McGraw
met with Norman Hardman, GeneMedicine's President and Chief Operating Officer,
and Dr. Tomlinson, to further discuss due diligence and other matters relating
to a possible combination.
From August 7 to September 8, 1998, GeneMedicine's strategic opportunities
committee met weekly and reviewed potential merger candidates and the status of
discussions with Megabios. The strategic opportunities committee continued to
evaluate potential opportunities, while authorizing further discussions and
negotiations with Megabios over matters relating to:
- the management of the combined company;
- research and development focus, financing and corporate alliance
opportunities; and
- GeneMedicine stockholders' interest in the combined company.
On September 15, 1998, the GeneMedicine Board met to consider the status of
the strategic opportunities committee's activities. The strategic opportunities
committee reported to the GeneMedicine Board on the nature and extent of
discussions with various potential merger candidates and a proposed mutual
confidential disclosure agreement to be entered into between Megabios and
GeneMedicine. After receiving reports from senior management and members of its
strategic opportunities committee, the GeneMedicine Board:
- approved the mutual confidential disclosure agreement;
- authorized its senior management, legal counsel and financial advisor to
conduct extensive due diligence on Megabios' businesses, assets,
liabilities, financial condition, patent position, legal affairs and
prospects; and
- authorized senior management to continue further discussions and
negotiations with Megabios.
On September 16, 1998, the Megabios Board met for a regularly scheduled
meeting. During this meeting, members of management, including Dr. McGraw and
Rodney Pearlman, Senior Vice President, Research and Development of Megabios,
led a discussion regarding a potential acquisition of GeneMedicine. During this
meeting the Megabios Board approved the mutual confidential nondisclosure
agreement to be entered into between Megabios and GeneMedicine and authorized
and directed senior management to continue discussions and negotiations with
GeneMedicine. In addition, the Megabios Board ratified and approved the
engagement of Hambrecht & Quist as financial advisor to the Megabios Board in
connection with a possible acquisition of GeneMedicine and, in the event of such
a transaction, to render a fairness opinion to the Megabios Board regarding the
consideration to be paid or issued by Megabios to GeneMedicine stockholders. The
Megabios Board also directed senior management to begin the due diligence
process as soon as practicable. A mutual non-disclosure agreement, including a
"no shop" agreement effective through October 2, 1998, was executed on September
17, 1998.
On September 17, 1998, Cooley Godward LLP, counsel to Megabios, delivered
the initial draft of the reorganization agreement and related exhibits to Heller
Ehrman White & McAuliffe, counsel to GeneMedicine. Beginning on September 17 and
continuing through September 19, 1998, Drs. McGraw and Tomlinson and other
representatives of Megabios and GeneMedicine met in Texas. Representatives of
Hambrecht & Quist, PaineWebber and Heller Ehrman were also present at this
meeting. Drs. McGraw and Tomlinson discussed the historical and prospective
financial and operational performance of each company and outlined the key terms
of a potential transaction. Representatives of Megabios and GeneMedicine
conducted due diligence with respect to financial and operational matters.
During these meetings, numerous interviews and discussions took place among the
senior management of both companies. Drs. McGraw and Tomlinson agreed that any
transaction would be subject to the successful completion of comprehensive due
diligence and execution of a definitive merger agreement.
25
<PAGE>
Beginning on September 22, and continuing through October 12, 1998,
representatives of Cooley Godward and Heller Ehrman met at the Palo Alto,
California offices of Cooley Godward and Heller Ehrman to conduct due diligence.
During this period, representatives of Megabios, GeneMedicine, Heller Ehrman and
Cooley Godward also met to negotiate the reorganization agreement and related
exhibits. At the conclusion of these meetings, issues relating to the
representations and warranties, covenants and termination provisions in the
reorganization agreement remained unresolved.
On September 26, 1998, the Megabios Board held a special telephonic meeting
at which Megabios' senior management updated the Megabios Board on the status of
the potential transaction with GeneMedicine.
On September 28, 1998, the GeneMedicine Board met to discuss a potential
transaction with Megabios. At that meeting, the GeneMedicine Board reviewed the
terms of a draft reorganization agreement submitted by Megabios and various
aspects of Megabios' business, patent portfolio, research and development
efforts and focus, including the status its strategic alliances, financial
condition and management, as well as potential synergies with GeneMedicine.
After the GeneMedicine Board recessed for the day, Dr. McGraw made a scheduled
presentation to the directors of GeneMedicine regarding his plans for, and
vision of, a combined company. When the directors reconvened on September 29,
1998, the Board considered the potential for a merger with other candidates and
the prospects for remaining independent, and instructed senior management to
continue its due diligence efforts with respect to Megabios and to negotiate
various changes in the reorganization agreement delivered by Megabios.
On October 12, 1998, at a special meeting of the Megabios Board, members of
senior management and representatives of Hambrecht & Quist and Cooley Godward
reviewed the terms of the proposed merger and reported on the results of the due
diligence review of GeneMedicine. In particular, Hambrecht & Quist made a
presentation regarding the financial terms of the proposed merger. In addition,
the terms of the reorganization agreement and related exhibits were discussed in
detail with the Megabios Board. At the conclusion of these meetings, issues
relating to the representations and warranties and termination provisions in the
reorganization agreement remained unresolved. The meeting was concluded with the
expectation that the Megabios Board would meet again on October 23, 1998 to
consider and vote on the proposed merger with GeneMedicine.
From October 12 to October 21, members of senior management from Megabios
and GeneMedicine and representatives of Cooley Godward and Heller Ehrman engaged
in several discussions regarding the reorganization agreement and the terms of
the proposed merger. These discussions resulted in the resolution of outstanding
issues relating to the representations and warranties and termination provisions
of the reorganization agreement.
On October 23, 1998, at a special meeting of the Megabios Board, members of
senior management and representatives of Hambrecht & Quist and Cooley Godward
reviewed the terms of the definitive reorganization agreement and the proposed
merger and reported on the results of the due diligence review of GeneMedicine.
In particular, Hambrecht & Quist made a presentation regarding the analysis
described under "Approval of the Merger and Related Transactions--Opinion of
Financial Advisor to Megabios." In addition, the terms of the reorganization
agreement and related exhibits, the potential benefits of the proposed merger
and the financial and other effects the proposed merger would have on Megabios
and its stockholders were discussed in detail with the Megabios Board. After
these discussions, Hambrecht & Quist rendered its oral opinion, subsequently
confirmed in writing, that, as of such date, the exchange ratio was fair from a
financial point of view to Megabios. After such presentations and discussions,
the Megabios Board voted unanimously: (1) to approve the merger with
GeneMedicine, the reorganization agreement and related exhibits as presented to
them; and (2) to recommend that the Megabios stockholders vote to approve the
issuance of Megabios common stock in the merger.
26
<PAGE>
The GeneMedicine Board met on the morning of October 24, 1998, to consider
the definitive reorganization agreement and the proposed merger. At this
meeting, the GeneMedicine Board:
- reviewed the changes negotiated in the reorganization agreement;
- discussed the potential benefits of the proposed merger;
- discussed the financial and other effects the proposed merger would have
on GeneMedicine and its stockholders; and
- received the presentation of PaineWebber's fairness opinion.
The GeneMedicine Board unanimously approved the reorganization agreement and
the merger, and then unanimously recommended approval of the reorganization
agreement and the merger to the GeneMedicine stockholders.
Following the approval of the GeneMedicine Board and the Megabios Board, the
reorganization agreement in its definitive form was executed as of October 24,
1998, and jointly announced on the morning of October 26, 1998.
On November 24, 1998, an amendment to the reorganization agreement was
executed, amending covenants regarding the assumption of GeneMedicine warrants
and the treatment of the GeneMedicine employee stock purchase plan.
On February 8, 1999, a second amendment to the reorganization agreement was
executed, extending the date after which the parties may terminate the agreement
to March 31, 1999.
JOINT REASONS FOR THE MERGER
The Boards of Directors of Megabios and GeneMedicine believe that the
proposed merger will afford to each company the complementary strengths of the
two individual companies, will provide the combined company significant
potential advantages and better enable the combined company to address emerging
strategic opportunities more quickly and effectively.
The potential benefits to the combined company include principally the
following:
- enhanced ability to attract new corporate partners;
- stronger intellectual property position;
- improved financial resources;
- complementary core technologies and synergistic applications; and
- diversified product base through an increase in clinical programs.
GENEMEDICINE'S REASONS FOR THE MERGER
In the course of reaching its decision to approve the reorganization
agreement and the merger, the GeneMedicine Board considered and reviewed with
senior management a number of factors relevant to the merger, including the
strategic overview, prospects and finances of GeneMedicine. The GeneMedicine
Board also considered, among other matters:
- the GeneMedicine Board's view that the intellectual property of the
combined company would strengthen the combined company's ability to
compete in the plasmid gene therapy field;
- the GeneMedicine Board's view that the science of the combined company has
the potential to be highly competitive in plasmid-based gene therapy;
- the GeneMedicine Board's view that the combined company would be expected
to have a more diversified product base with seven potential products in
Phase I/Phase II clinical trials by the end of 1998 and 24 therapeutic
genes in research or pre-clinical development;
- the shared strategic thinking of GeneMedicine and Megabios of utilizing
genes as drugs;
- the GeneMedicine Board's view that the combined company would have greater
resources to pursue research in plasmid-based gene therapy;
27
<PAGE>
- the GeneMedicine Board's view that the combined company would have a
greater opportunity to attract new collaborative partners than either
company independently;
- the complementary core technologies of GeneMedicine and Megabios;
- the GeneMedicine Board's view that the merger would enable the companies
to combine their respective research and development programs and thereby
achieve greater diversification and operating synergies;
- the GeneMedicine Board's assessment of GeneMedicine's strategic
alternatives, including remaining an independent company or merging with a
party other than Megabios;
- financial analysis of the combined company, including the effect of the
merger and planned work force reductions on its cash position;
- financial impact of the manufacturing collaboration recently announced by
Megabios;
- the status of GeneMedicine's current research collaborations, current
negotiations with potential corporate partners and other possible
financing opportunities;
- information regarding historical market prices and other information with
respect to GeneMedicine's stock and Megabios' stock;
- the financial performance and condition, assets, liabilities, business
operations and prospects of each of GeneMedicine and Megabios;
- GeneMedicine's and Megabios' projected future values and prospects as
separate entities and on a combined basis;
- the presentation delivered by PaineWebber to the GeneMedicine Board and
the written opinion of PaineWebber that the exchange ratio was fair, from
a financial point of view, to the GeneMedicine stockholders;
- a comparison of selected recent acquisition and merger transactions in the
industry, as well as the trading performance for comparable companies in
the industry;
- the expected tax treatment of the merger;
- reports from management, financial advisors and legal advisors as to the
results of their investigation of Megabios; and
- the ability of the GeneMedicine Board to enter into discussions with
another party in response to an unsolicited superior offer to the merger
if, the GeneMedicine Board believes in good faith, after consultation with
its legal counsel, that such action is required in order for the
GeneMedicine Board to comply with its fiduciary obligations.
The GeneMedicine Board also considered a number of potentially negative
factors in its deliberations concerning the merger, including, but not limited
to:
- the loss of control over the future operations of GeneMedicine following
the merger;
- the risk that the benefits sought to be achieved in the merger will not be
achieved;
- the fixed nature of the exchange ratio and the resulting risk that, should
there be a decrease in the market value of Megabios common stock, the
value of the consideration to be received by GeneMedicine's stockholders
would be reduced;
- the probable loss of substantial net operating loss carryforwards for tax
purposes; and
- the other risks described above under "Risk Factors."
The GeneMedicine Board discussed with senior management the prospects for
combinations with companies other than Megabios, the possibility that the
benefits described above could be achieved through any such other combinations
and the risks and benefits of remaining an independent company.
The above discussion of information and factors considered by the
GeneMedicine Board is not intended to be exhaustive but is believed to include
all material factors considered by the
28
<PAGE>
GeneMedicine Board. In view of the complexity and the variety of factors
considered by the GeneMedicine Board, the GeneMedicine Board did not find it
practicable to quantify or otherwise assign relative weight to the specific
factors considered. However, after taking into account all of the factors set
forth above, the GeneMedicine Board unanimously agreed that the reorganization
agreement and the merger were fair to, and in the best interests of,
GeneMedicine and its stockholders and that GeneMedicine should proceed with the
merger.
MEGABIOS' REASONS FOR THE MERGER
At meetings convened on September 16, 1998, October 12, 1998 and October 23,
1998, the Megabios Board:
- determined that the terms of the reorganization agreement were in the best
interests of Megabios and its stockholders;
- approved and adopted the reorganization agreement and the merger; and
- unanimously recommended that the Megabios stockholders approve the
issuance of Megabios common stock in the merger.
In reaching these conclusions and recommendations, the Megabios Board
considered a number of factors, including the following:
- the Megabios Board's view that the combined company would have greater
opportunity to attract new collaborative partners than an independent
company;
- the Megabios Board's view that the intellectual property of the combined
company would strengthen the combined company's ability to compete in the
non-viral gene therapy field;
- the Megabios Board's view that the combined company would be expected to
have a more diversified product base with seven potential products in
Phase I/Phase II clinical trials by the end of 1998 and 24 therapeutic
genes in research or pre-clinical development;
- the Megabios Board's view that the combined company would have greater
financial resources to pursue research in plasmid-based gene therapy;
- the Megabios Board's view that the merger will enable the companies to
combine their research and development programs and should thereby enable
the companies to achieve greater diversification and operating synergies;
and
- the complementary core technologies of Megabios and GeneMedicine.
In addition to the factors set forth above, in the course of its meetings
during September and October 1998, the Megabios Board reviewed and considered a
wide variety of information relevant to the merger including:
- the Megabios Board's view that the science of the combined company has the
potential to be highly competitive in plasmid-based gene therapy;
- the shared strategic thinking of Megabios and GeneMedicine of utilizing
genes as drugs;
- financial analysis of the combined company, including the effect of the
merger and planned work force reductions on its cash position;
- the status of Megabios' current negotiations with potential corporate
partners and other possible financing opportunities;
- information regarding historical market prices and other information with
respect to Megabios' stock and GeneMedicine's stock;
- the financial performance and condition, assets, liabilities, business
operations and prospects of each of Megabios and GeneMedicine and their
projected future values and prospects as separate entities and on a
combined basis;
29
<PAGE>
- the presentation delivered by Hambrecht & Quist to the Megabios Board and
the written opinion of Hambrecht & Quist addressed to the Megabios Board
that the exchange ratio was fair, from a financial point of view, to
Megabios;
- a comparison of selected recent acquisition and merger transactions in the
industry as well as trading performance for comparable companies in the
industry;
- the expected tax treatment of the merger; and
- reports from management, financial advisors and legal advisors as to the
results of their investigation of GeneMedicine;
The Megabios Board also considered a number of potentially negative factors
in its deliberations concerning the merger, including, but not limited to:
- the possibility that the merger would not be completed;
- the potential disruption to the business of both companies following
announcement of the merger, including the effects of employee uncertainty,
the possibility that key employees may leave Megabios or GeneMedicine, and
the possibility that key corporate partners may not approve of the merger
or may decide to terminate their relationship with the combined company;
- the dilutive effects of the issuance of shares in the merger and the
higher level of expenses that will be borne by the combined company;
- additional potential problems and costs associated with the integration of
both companies into a single enterprise;
- cash payments to be made to key employees and management in connection
with the merger and cash payments, benefits and accelerated option vesting
employees and management may be entitled to if they are terminated after
the merger; and
- the other risks described above under "Risk Factors."
After due consideration, the Megabios Board concluded that the benefits of
the transaction to Megabios and its stockholders outweighed the risks associated
with the foregoing factors.
The foregoing discussion of the factors considered by the Megabios Board is
not intended to be exhaustive but is intended to include all of the material
factors considered by the Megabios Board. In view of the complexity and variety
of factors considered by the Megabios Board, the Megabios Board did not consider
it practical to quantify or otherwise attempt to assign any relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors.
OPINION OF FINANCIAL ADVISOR TO GENEMEDICINE
GeneMedicine retained PaineWebber as its financial advisor in connection
with the merger. In connection with such engagement, GeneMedicine requested
PaineWebber to render an opinion as to whether or not the exchange ratio is
fair, from a financial point of view, to the holders of GeneMedicine common
stock. PaineWebber has consented to the use of its opinion in this joint proxy
statement/prospectus.
THE FULL TEXT OF THE OPINION OF PAINEWEBBER, DATED OCTOBER 24, 1998, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B-1 TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. GENEMEDICINE STOCKHOLDERS ARE URGED TO READ SUCH
OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE PAINEWEBBER OPINION
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with the GeneMedicine Board's consideration of the
reorganization agreement, PaineWebber delivered its written opinion, dated
October 24, 1998, to the effect that, as of such date,
30
<PAGE>
and based upon its review and assumptions and subject to the limitations
summarized below, the exchange ratio is fair, from a financial point of view, to
the holders of GeneMedicine common stock. The opinion was directed to, and
prepared at the request and for the information of, the GeneMedicine Board and
does not constitute a recommendation to any holder of GeneMedicine common stock
as to how any such stockholder should vote with respect to the merger.
In arriving at its opinion, PaineWebber, among other things:
- reviewed, among other public information, GeneMedicine's Annual Reports,
Forms 10-K and related financial information for the three fiscal years
ended December 31, 1997 and GeneMedicine's Form 10-Q and the related
unaudited financial information for the six months ended June 30, 1998;
- reviewed, among other public information, Megabios' Form 10-K and related
financial information for the three fiscal years ended June 30, 1998 and
Registration Statement on Form S-1 dated September 15, 1997;
- reviewed information, including financial forecasts internally prepared by
management of GeneMedicine and Megabios, relating to the business,
earnings, cash flow, assets and prospects of GeneMedicine and Megabios,
furnished to PaineWebber by or on behalf of GeneMedicine and Megabios;
- conducted discussions with members of senior management of GeneMedicine
and Megabios concerning their businesses and prospects;
- conducted discussions with members of senior management of GeneMedicine
and Megabios concerning information relating to strategic, financial and
operational benefits anticipated by such management to result from the
merger;
- compared the historical market prices and trading activity for
GeneMedicine common stock and Megabios common stock with those of other
publicly traded companies which PaineWebber deemed relevant;
- compared the financial position and operating results of GeneMedicine and
Megabios with those of other publicly traded companies which PaineWebber
deemed relevant;
- compared the financial terms of the merger with the financial terms of
other business combinations which PaineWebber deemed relevant;
- reviewed a draft of the reorganization agreement in the form presented to
the GeneMedicine Board; and
- reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as
PaineWebber deemed necessary, including PaineWebber's assessment of
general economic, market and monetary conditions.
In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by or on behalf of GeneMedicine and
Megabios, and PaineWebber did not assume any responsibility to independently
verify such information. With respect to the financial forecasts internally
prepared by management of GeneMedicine and Megabios, PaineWebber assumed, with
GeneMedicine's and Megabios' consent, that they were reasonably prepared on
bases reflecting the best currently available estimates as to the future
performance of GeneMedicine and Megabios. PaineWebber did not undertake an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of GeneMedicine or Megabios, nor was PaineWebber furnished with any
such evaluations or appraisals. PaineWebber also assumed, with the consent of
GeneMedicine and Megabios, that:
- the merger will be a tax-free reorganization;
- all outstanding shares of GeneMedicine's Series B preferred stock will be
converted into GeneMedicine common stock; and
31
<PAGE>
- all material assets and liabilities, contingent or otherwise, of
GeneMedicine and Megabios are as set forth in their financial statements.
The PaineWebber opinion is based upon economic, monetary and market
conditions existing on the date thereof. Furthermore, PaineWebber expressed no
opinion as to the price or trading ranges at which the GeneMedicine common stock
or Megabios common stock will trade after the date of the opinion. The
PaineWebber opinion does not address the relative merits of the merger and any
other transactions or business strategies that may have been discussed by the
GeneMedicine Board as alternatives to the merger, or the decision of the
GeneMedicine Board to proceed with the merger. GeneMedicine did not place any
limitations upon PaineWebber with respect to the procedures followed or factors
considered in rendering the opinion.
The following paragraphs summarize the significant analyses performed by
PaineWebber in arriving at its opinion:
HISTORICAL STOCK PERFORMANCE. PaineWebber reviewed trading prices for the
shares of the GeneMedicine common stock. This stock performance review indicated
that for GeneMedicine's latest twelve months ended October 20, 1998, the low and
high closing prices were $1.75 and $5.94. PaineWebber also reviewed the
GeneMedicine common stock price on October 20, 1998 and averages over periods
prior to October 20, 1998 as set forth in the following table:
<TABLE>
<CAPTION>
TRADING PERIOD CLOSING PRICE
- -------------------------------------------------------------------------------- ---------------
<S> <C>
October 20, 1998................................................................ $ 2.00
<CAPTION>
TRADING PERIOD AVERAGE PRICE
- -------------------------------------------------------------------------------- ---------------
<S> <C>
Latest 10 days.................................................................. $ 1.96
Latest 20 days.................................................................. 2.15
Latest 30 days.................................................................. 2.11
Latest 60 days.................................................................. 2.20
Latest 90 days.................................................................. 2.47
Latest 180 days................................................................. 2.82
</TABLE>
PaineWebber also reviewed trading prices for the shares of Megabios common
stock. This stock performance review indicated that for Megabios' latest twelve
months ended October 20, 1998, the low and high closing prices were $4.25 and
$17.13. PaineWebber also reviewed the Megabios common stock price on October 20,
1998 and averages over periods prior to October 20, 1998 as set forth in the
following table:
<TABLE>
<CAPTION>
TRADING PERIOD CLOSING PRICE
- -------------------------------------------------------------------------------- ---------------
<S> <C>
October 20, 1998................................................................ $ 4.63
<CAPTION>
TRADING PERIOD AVERAGE PRICE
- -------------------------------------------------------------------------------- ---------------
<S> <C>
Latest 10 days.................................................................. $ 4.79
Latest 20 days.................................................................. 4.93
Latest 30 days.................................................................. 5.15
Latest 60 days.................................................................. 5.58
Latest 90 days.................................................................. 6.25
Latest 180 days................................................................. 7.85
</TABLE>
PaineWebber then applied the common stock price data listed above to
determine exchange ratios on October 20, 1998 and periods prior to October 20,
1998 as set forth under the caption "Exchange Ratio Analysis" below.
32
<PAGE>
EXCHANGE RATIO ANALYSIS. PaineWebber calculated exchange ratios based on
the trading price relationship between the GeneMedicine common stock and
Megabios common stock as described under the caption "Historical Stock
Performance" above. This calculated exchange ratio review indicated that for
GeneMedicine's and Megabios' latest twelve months ended October 20, 1998, the
low GeneMedicine/Megabios exchange ratio was 0.2188 and the high
GeneMedicine/Megabios exchange ratio was 0.5132. PaineWebber also reviewed the
GeneMedicine/Megabios exchange ratio on October 20, 1998 and averages over
periods prior to October 20, 1998 as set forth in the following table:
<TABLE>
<CAPTION>
TRADING PERIOD EXCHANGE RATIO
- ------------------------------------------------------------------------------ ---------------
<S> <C>
October 20, 1998.............................................................. 0.4324
<CAPTION>
AVERAGE
TRADING PERIOD EXCHANGE RATIO
- ------------------------------------------------------------------------------ ---------------
<S> <C>
Latest 10 days................................................................ 0.4090
Latest 20 days................................................................ 0.4365
Latest 30 days................................................................ 0.4098
Latest 60 days................................................................ 0.3943
Latest 90 days................................................................ 0.3958
Latest 180 days............................................................... 0.3593
</TABLE>
SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. Using publicly available
information, PaineWebber compared selected historical financial, operating and
stock market performance data of GeneMedicine and Megabios to the corresponding
data of publicly traded companies that PaineWebber deemed relevant for
GeneMedicine and Megabios. The GeneMedicine comparable companies consisted of:
<TABLE>
<S> <C>
Avigen Inc. Cell Genesys, Inc.
Megabios Corp. Targeted Genetics Corp.
Transgene, S.A. Vical Inc.
</TABLE>
The Megabios comparable companies consisted of:
<TABLE>
<S> <C>
Avigen Inc. Cell Genesys, Inc.
GeneMedicine, Inc. Targeted Genetics Corp.
Transgene, S.A. Vical Inc.
</TABLE>
With respect to both the GeneMedicine and the Megabios comparable companies,
PaineWebber analyzed a number of different data items including the market value
of the total outstanding equity and the market value of the total outstanding
equity plus debt and capitalized leases minus cash, cash equivalents and
marketable securities.
PaineWebber also examined the product portfolios and operations of
GeneMedicine relative to the GeneMedicine comparable companies and the product
portfolios and operations of Megabios relative to the Megabios comparable
companies. However, because of the inherent differences between the product
portfolios and operations of GeneMedicine and Megabios and the GeneMedicine and
Megabios comparable companies, PaineWebber believed that a purely quantitative
analysis would be insufficient and not adequately reliable to render a fairness
opinion. As PaineWebber informed the GeneMedicine Board, an appropriate use of
comparable company analysis in this instance would involve qualitative judgments
concerning differences between the financial and operating characteristics and
products under development which would effect the public trading values of
GeneMedicine and Megabios comparable companies and GeneMedicine and Megabios.
33
<PAGE>
SELECTED COMPARABLE TRANSACTION ANALYSIS. PaineWebber reviewed publicly
available financial information for selected mergers and acquisitions of
biotechnology companies by/with other biotechnology companies in two categories.
The categories analyzed by PaineWebber were acquisitions of selected smaller
public biotechnology companies and acquistions of selected larger public
biotechnology companies. The selected smaller public biotechnology mergers and
acquisitions PaineWebber analyzed included (acquiror/target):
<TABLE>
<S> <C>
T Cell Sciences, Inc./Virus Research Cell Genesys, Inc./Somatix Therapy
Institute, Inc. Corporation
Arris Pharmaceutical Corporation/Sequana Cytogen Corporation/CellCor, Inc.
Therapeutics, Inc. NeXagen Inc./Vestar Inc.
North American Biologicals, Inc./Univax Ligand Pharmaceuticals Inc./Glycomed Inc.
Biologicals, Inc. Genzyme Corp./Biosurface Technology Inc.
Ligand Pharmaceuticals Inc./Seragen, Inc.
</TABLE>
The selected larger public biotechnology mergers and acquisitions
PaineWebber analyzed included (acquiror/target):
<TABLE>
<S> <C>
Baxter International Inc./Somatogen, Inc. Chiron Corporation/Viagene, Inc.
Elan Corporation plc/Athena Neurosciences
Inc./DE
</TABLE>
With respect to both the selected smaller public biotechnology mergers and
acquisitions PaineWebber analyzed and the selected larger public biotechnology
mergers and acquisitions PaineWebber analyzed, PaineWebber reviewed a number of
different data items including the equity purchase price plus net debt.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of
GeneMedicine and Megabios compared to the businesses, operations and prospects
of the companies that were parties to the selected smaller public biotechnology
mergers and acquisitions PaineWebber analyzed and the selected larger public
biotechnology mergers and acquisitions PaineWebber analyzed, PaineWebber
believed it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly also made qualitative
judgments concerning differences between the characteristics of these
transactions. These qualitative judgments did not lead to specific conclusions
regarding the fairness of the merger consideration, but rather were part of
PaineWebber's evaluation of the relevance of this analysis under the particular
circumstances of the merger.
DISCOUNTED CASH FLOW ANALYSIS. PaineWebber analyzed GeneMedicine based on
an unleveraged discounted cash flow analysis of the financial forecasts
internally prepared by management of GeneMedicine. Such projected financial
performance was based upon a six-year forecast for GeneMedicine provided by
GeneMedicine management. The discounted cash flow analysis determined the
discounted present value of the unleveraged after-tax cash flows generated over
the six-year period and then added a terminal value based upon a range of net
income multiples from 20.0x to 35.0x. The unleveraged after-tax cash flows and
terminal value were discounted using a range of discount rates from 35.0% to
45.0%.
With respect to Megabios, PaineWebber analyzed Megabios based on an
unleveraged discounted cash flow analysis of the financial forecasts internally
prepared by management of Megabios. The discounted cash flow analysis determined
the discounted present value of the unleveraged after-tax cash flow generated
over the seven-year period and then added a terminal value based upon a range of
net income multiples from 20.0x to 35.0x. The unleveraged after-tax cash flows
and terminal value were discounted using a range of discount rates from 35.0% to
50.0%. PaineWebber derived an implied
34
<PAGE>
range of exchange ratios, based on diluted equity values per share for
GeneMedicine and Megabios, of 0.3300 to 0.3961.
PREMIUM PAID ANALYSIS. PaineWebber reviewed purchase price per share
premiums paid in publicly disclosed cash and stock mergers and acquisitions in
non-financial industries announced and completed since January 1, 1995,
including purchase of the entire target with market value between $25.0 million
and $100.0 million. This analysis indicated median premiums to the target's
closing stock prices on dates prior to the announcement as set forth in the
table below the following paragraph.
PaineWebber also reviewed purchase price per share premiums paid in
transactions involving smaller public biotechnology mergers as described under
the caption "Selected Comparable Transaction Analysis." This analysis indicated
median premiums to the target's closing stock prices on dates prior to the
announcement as set forth in the following table.
<TABLE>
<CAPTION>
MEDIAN PREMIUM PAID--
MEDIAN PREMIUM PAID-- SMALLER PUBLIC
SELECT NON-FINANCIAL BIOTECHNOLOGY MERGERS AND
PERIOD PRIOR TO ANNOUNCEMENT MERGERS AND ACQUISITIONS ACQUISITIONS
- -------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
One day..................................... 24.8% 33.0%
One week.................................... 28.0 31.4
One month................................... 36.8 28.6
</TABLE>
Using this information and applying the GeneMedicine common stock price one
day, one week and one month prior to October 21, 1998 and the Megabios common
stock price on October 20, 1998, indicated implied exchange ratios of 0.5397 to
0.5738 for the select non-financial mergers and acquisitions and 0.5384 to
0.5751 for the selected smaller public biotechnology mergers and acquisitions.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the opinion. In
its analyses, PaineWebber made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of GeneMedicine and Megabios. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and neither GeneMedicine nor
PaineWebber assume responsibility for the accuracy of such analyses and
estimates.
GeneMedicine selected PaineWebber to be its financial advisor in connection
with the merger because PaineWebber is a prominent investment banking and
financial advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
Pursuant to an engagement letter between GeneMedicine and PaineWebber dated
May 26, 1998, PaineWebber earned a fee of $350,000 for rendering its opinion. In
addition, PaineWebber will receive a fee, payable upon completion of the merger,
of $750,000 less the $350,000 paid upon rendering the opinion, and will be
reimbursed for related expenses. PaineWebber will not be entitled to any
additional fees or compensation in the event the merger is not approved or
otherwise completed. GeneMedicine also agreed, under separate agreement, to
indemnify PaineWebber, its affiliates and
35
<PAGE>
each of its directors, officers, agents and employees and each person, if any,
controlling PaineWebber or any of its affiliates against certain liabilities,
including liabilities under federal securities laws.
Prior to this engagement, PaineWebber has not provided investment banking
services to GeneMedicine.
In the ordinary course of PaineWebber's business, PaineWebber may actively
trade the securities of GeneMedicine and Megabios for its own account and for
the accounts of its customers and, accordingly, may at any time hold long or
short positions in such securities.
OPINION OF FINANCIAL ADVISOR TO MEGABIOS
Megabios engaged Hambrecht & Quist to act as its financial advisor in
connection with potential acquisitions and to render its opinion as to the
fairness to Megabios, from a financial point of view, of the consideration that
Megabios would pay in an acquisition. The Megabios Board selected Hambrecht &
Quist based on its qualifications, expertise and reputation. On October 23,
1998, at a meeting of the Megabios Board, Hambrecht & Quist rendered its oral
opinion, which was subsequently confirmed in writing, that, as of that date, the
consideration that Megabios would pay in the merger was fair to Megabios from a
financial point of view.
Hambrecht & Quist has consented to the use of its opinion in this joint
proxy statement/prospectus. A copy of Hambrecht & Quist's written opinion dated
October 23, 1998, which sets forth the assumptions made, matters considered, the
scope and limitations of the review undertaken and the procedures it followed,
is attached as Appendix B-2 to this joint proxy statement/prospectus. Megabios
stockholders should read the opinion in its entirety. The Megabios Board placed
no limitations on Hambrecht & Quist's investigation or the procedures it
followed in preparing and rendering its opinion.
In reviewing the merger and arriving at its opinion, Hambrecht & Quist,
among other things:
- reviewed Megabios' publicly available historical financial statements for
recent periods and other relevant financial and operating data that
Hambrecht & Quist obtained from published sources and from Megabios'
management;
- discussed Megabios' business, financial condition and prospects with
Megabios' senior management;
- reviewed GeneMedicine's publicly available historical financial statements
for recent periods and other relevant financial and operating data that
Hambrecht & Quist obtained from published sources and from GeneMedicine's
management;
- discussed GeneMedicine's business, financial condition and prospects with
GeneMedicine's senior management;
- reviewed the recent reported prices and trading activity for the common
stocks of Megabios and GeneMedicine and compared this and other Megabios
and GeneMedicine financial information with similar information for
companies engaged in businesses that Hambrecht & Quist considered
comparable;
- reviewed the financial terms, to the extent publicly available, of
comparable merger and acquisition transactions;
- reviewed the reorganization agreement and discussed the tax and accounting
treatment of the merger with Megabios and Cooley Godward; and
- performed other analyses and examinations and considered other
information, financial studies, analyses and investigations and financial,
economic and market data that Hambrecht & Quist deemed relevant.
36
<PAGE>
Hambrecht & Quist did not independently verify any of the information about
Megabios or GeneMedicine that it considered in connection with its review of the
merger. For purposes of its opinion, Hambrecht & Quist assumed and relied upon
the accuracy and completeness of all this information. In connection with its
opinion, Hambrecht & Quist did not prepare or obtain any independent evaluation
or appraisal of any of the assets or liabilities of Megabios or GeneMedicine,
nor did it conduct a physical inspection of their properties and facilities. In
connection with its analysis, Hambrecht & Quist used financial forecasts
prepared by the management of both Megabios and GeneMedicine. Hambrecht & Quist
assumed that these financial forecasts reflected the best available estimates
and judgments of the expected future financial performance of Megabios and the
pro forma combined company. Hambrecht & Quist also assumed that neither Megabios
nor GeneMedicine was a party to any pending transactions, including external
financings, recapitalizations or merger discussions, other than the merger and
those in the ordinary course of conducting their respective businesses. For
purposes of its opinion, Hambrecht & Quist assumed that the merger would be
accounted for as a purchase. Hambrecht & Quist's opinion was based upon market,
economic, financial and other conditions as they existed on the date of the
opinion. Any subsequent change in conditions would require a reevaluation of the
opinion.
The preparation of a fairness opinion is a complex process. It is not
necessarily susceptible to partial analysis or summary description. The
following summary of Hambrecht & Quist's analysis is not a complete description
of its presentation to the Megabios Board. In arriving at its opinion, Hambrecht
& Quist did not attribute any particular quantitative weight to any analyses or
factors that it considered. Rather, it made qualitative judgments about the
significance and relevance of each analysis and factor. Hambrecht & Quist
believes that these analyses and the following summary must be considered as a
whole. Selecting portions of these analyses, without considering all of them, or
considering only the following summary, without considering all factors and
analyses, could create an incomplete view of the processes underlying these
analyses in Hambrecht & Quist's presentation to the Megabios Board and its
opinion.
In performing its analyses, Hambrecht & Quist made numerous assumptions
about industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Megabios and GeneMedicine. The
analyses that Hambrecht & Quist performed are not necessarily indicative of
actual values or actual future results, which may be significantly different
than those suggested by the analyses. Additionally, analyses about the values of
a business for purposes of a fairness opinion are not appraisals and do not
reflect the prices at which the business may actually be acquired.
The following is a brief summary of some of the financial analyses that
Hambrecht & Quist performed in connection with providing its oral and written
opinion to the Megabios Board on October 23, 1998:
PREMIUM ANALYSIS/ANALYSIS OF SELECTED MERGER AND ACQUISITION
TRANSACTIONS. Hambrecht & Quist compared the merger with selected comparable
merger and acquisition transactions. This analysis included 25 comparable public
company biotechnology transactions since June 1993. The selected transactions
analyzed included comparable biotechnology transactions such as:
- Oncormed, Inc./Gene Logic Inc. (July 1998)
- Virus Research Institute, Inc./T Cell Sciences, Inc. (May 1998)
- Elan Corp. plc/Neurex Corporation (April 1998)
- Somatogen, Inc./Baxter International Inc. (February 1998)
- Sequana Therapeutics, Inc./Arris Pharmaceutical Corporation (November
1997)
- Somatix Therapy Corporation/Cell Genesys, Inc. (January 1997)
- Genetic Therapy/Sandoz (July 1995)
- Viagene, Inc./Chiron Corporation (April 1995)
37
<PAGE>
Purchase price premiums to historical market value and "technology value,"
which is equal to equity value plus debt, less cash and cash equivalents, are
useful measures in evaluating an offer for a company. An acquiror's offer price
premium is ideal if it is comparable to or below purchase price premiums in
similar transactions. Traditionally, premiums paid to market value one day and
one month prior to announcement of a transaction and premiums paid to technology
value one day prior to announcement of a transaction are used in evaluating
proposed offers.
In reviewing the selected comparable merger and acquisition transactions,
Hambrecht & Quist observed the purchase price premiums to market value and the
purchase price premiums to technology value. The analysis indicated average
premiums to the target's closing market value and technology value on dates
prior to the announcement as set forth in the table below. In this case,
Megabios' offer to acquire GeneMedicine implied premiums below the average
premiums paid in comparable transactions.
<TABLE>
<CAPTION>
AVERAGE MEGABIOS'
PREMIUM PAID PREMIUM
IN COMPARABLE OFFERED TO
DAYS PRIOR TO ANNOUNCEMENT TRANSACTIONS GENEMEDICINE
- ----------------------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
PREMIUM TO MARKET VALUE
One day............................................................................ 38% 14%
One month.......................................................................... 45% 7%
PREMIUM TO TECHNOLOGY VALUE
One day............................................................................ 82% 44%
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. Discounted cash flow analyses are often used
in valuing a company because they generate a range of theoretical valuations
based on different projected earnings scenarios, discount rates, and other
factors. These analyses attempt to value the company by combining (1) the net
present value of the cash flows generated by the company with (2) the present
value of the company upon liquidation in the final year of the projected cash
flows. The liquidation value of the company in the final year is calculated by
(1) applying industry exit multiples, based on cash flow or net income
multiples, to the final year's cash flow or net income and (2) discounting back
to a present value applying an assumed discount rate.
Hambrecht & Quist analyzed Megabios' theoretical valuation based on an
unleveraged discounted cash analysis in three different scenarios:
- Megabios as a stand-alone entity based on its management's projection;
- Megabios as a stand-alone entity based on Hambrecht & Quist's projection;
and
- Megabios in a combination with GeneMedicine. Each of these analyses used
terminal multiples from 25.0x to 30.0x and had varying discount rates.
Each analysis generated a value as set forth below and was compared to
Megabios' current equity value of $52.4 million. In this case, the discounted
cash flow generated theoretical median valuations that were greater for Megabios
in a combination with GeneMedicine than as a stand-alone entity.
<TABLE>
<CAPTION>
DISCOUNT MEDIAN
DISCOUNTED CASH FLOW ANALYSIS RATE RANGE VALUE
- ----------------------------------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Megabios as a stand-alone entity based on its management's projections....... 40.0% to 45.0% $ 59.5 million
Megabios as a stand-alone entity based on Hambrecht & Quist's projection..... 40.0% to 45.0% $ 32.3 million
Megabios in a combination with GeneMedicine.................................. 30.0% to 35.0% $ 99.5 million
</TABLE>
38
<PAGE>
PUBLICLY TRADED COMPARABLE COMPANY ANALYSIS. Historical financial,
operating and stock performance of publicly traded companies can demonstrate the
public market's metrics in valuing companies. Such metrics can be helpful in
determining implied valuations of companies with respect to their comparable
companies.
Using publicly available information, Hambrecht & Quist compared selected
historical financial, operating and stock market performance information of
GeneMedicine and Megabios to three publicly traded gene therapy companies that
Hambrecht & Quist considered comparable. The gene therapy companies that
Hambrecht & Quist considered comparable consisted of:
- Targeted Genetics Corporation
- Transgene S.A.
- Vical Incorporated
With respect to the comparable companies, Hambrecht & Quist analyzed a
number of different data items, including:
- market value;
- discount to 52-week high stock price;
- cash;
- technology value;
- net income for the latest available twelve month period;
- net revenues for the latest available twelve month period; and
- their "survival index," calculated as cash divided by net income for the
latest available twelve month period in order to determine the number of
consecutive annual periods that such company could continue to fund losses
at the rate experienced in the latest available twelve month period from
the most recently available reported cash without obtaining additional
capital.
This analysis indicated discounts to 52-week high stock prices and survival
indicies as set forth in the table below. Both Megabios and GeneMedicine had
discounts to 52-week high stock prices higher than the comparable companies,
indicating lower valuations with respect to the comparable companies. Megabios'
survival index exceeded those of GeneMedicine and the comparable companies,
indicating a stronger cash to operating position.
<TABLE>
<CAPTION>
COMPARABLE
MEGABIOS GENEMEDICINE COMPANIES
---------- ------------- -----------
<S> <C> <C> <C>
Discount to 52-week high stock price..................................... 79% 68% 51%
Survival index........................................................... 5.8 years 1.6 years 3.9 years
</TABLE>
None of the companies or transactions that Hambrecht & Quist used in its
analyses are identical to GeneMedicine or Megabios or the merger. Accordingly,
an analysis of the foregoing results is not purely mathematical. It involves
complex considerations and judgments about differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies used in the comparisons.
Megabios stockholders should read this description of Hambrecht & Quist's
opinion along with the full text of its opinion that is attached as Appendix B-2
to this joint proxy statement/prospectus.
Hambrecht & Quist, as part of its investment banking services, regularly
conducts valuations of businesses and securities in connection with mergers and
acquisitions, corporate restructurings, strategic alliances, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private
39
<PAGE>
placements and for corporate and other purposes. In the ordinary course of
business, Hambrecht & Quist acts as a market maker and broker in Megabios and
GeneMedicine common stock and receives customary compensation for these
activities. It also provides research coverage on both Megabios and
GeneMedicine. In the ordinary course of business, Hambrecht & Quist also
actively trades for its own account and for the accounts of its customers in the
equity and derivative securities of Megabios. Accordingly, it may at any time
hold a long or short position in such securities. In the past, Hambrecht & Quist
acted as financial adviser to GeneMedicine and made an investment in
GeneMedicine before it went public. At the time Megabios engaged Hambrecht &
Quist to act as its financial advisor for this transaction, Hambrecht & Quist no
longer held any of the securities that comprised this investment.
Upon completion of the merger, Megabios will pay Hambrecht & Quist a fee
equal to $750,000. Megabios paid Hambrecht & Quist a $25,000 retainer fee at the
time of the initial engagement. A $250,000 fee for the fairness opinion became
payable to Hambrecht & Quist when it delivered the opinion. These amounts are
not contingent upon the completion of the merger but they will be credited
against the fee that is payable upon completion of the merger. Megabios also has
agreed to reimburse Hambrecht & Quist for its reasonable out-of-pocket expenses
and to indemnify Hambrecht & Quist against certain liabilities, including
liabilities under the federal securities laws or relating to or arising out of
Hambrecht & Quist's engagement as financial advisor.
Prior to this engagement, Hambrecht & Quist served as co-manager of
Megabios' initial public offering in November 1997 pursuant to which Hambrecht &
Quist received approximately $1,043,000 in underwriters fees and commissions.
INTERESTS OF GENEMEDICINE'S EMPLOYEES AND DIRECTORS IN THE MERGER
Members of GeneMedicine's management and the GeneMedicine Board may have
interests in the merger that are in addition to their interests as stockholders
of GeneMedicine generally. The GeneMedicine Board was aware of these interests
and considered them in approving the reorganization agreement and the
transactions contemplated thereby.
THE 1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. GeneMedicine's 1994
Non-Employee Directors' Stock Option Plan, as amended, provides that upon the
merger, the vesting of options outstanding under this plan will be accelerated
to permit the optionee to exercise all such options in full prior to the merger.
The names of those directors whose options are accelerated and the number of
underlying shares accelerated for each are set forth below:
<TABLE>
<CAPTION>
OPTION
SHARES
DIRECTOR ACCELERATED
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Edward L. Cahill.................................................................. 16,250
Stanley T. Crooke................................................................. 12,500
David F.J. Leathers............................................................... 12,500
Bert W. O'Malley.................................................................. 30,000
Arthur M. Pappas.................................................................. 11,250
</TABLE>
CHANGE OF CONTROL SEVERANCE PLAN. In May 1996, GeneMedicine adopted a
Change of Control Severance Plan, as amended January 30, 1998 and December 16,
1998. Under the plan, upon termination of employment following the merger,
eligible employees are entitled to severance benefits which include severance
pay, COBRA benefits, a moving expense allowance and acceleration of options
based upon the position held by the employee at GeneMedicine and the number of
years employed. In addition, the exercise period for options with exercise
prices of $2.281 per share or higher held by executive officers will be extended
to twelve months. Members of GeneMedicine's management are also entitled to
receive severance benefits as set forth below in the event their employment with
40
<PAGE>
GeneMedicine is terminated, either voluntarily with good reason or involuntarily
without cause, within twelve months following the effective date of the merger:
<TABLE>
<CAPTION>
OPTION
PAYROLL OTHER SHARES
OFFICER SEVERANCE TAXES BENEFITS ACCELERATED
- ------------------------------------------------------------ ----------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Norman Hardman.............................................. $310,650 $11,491 $ 27,473 184,005
Alain Rolland............................................... 201,400 9,033 7,473 96,414
Richard A. Waldron.......................................... 198,748 8,973 7,473 90,921
Josef F. Bossart............................................ 198,550 8,969 7,473 100,349
Kathryn N. Stankis.......................................... 147,404 7,818 2,566 41,691
John M. Dodson.............................................. 128,293 7,388 7,473 39,548
</TABLE>
ERIC TOMLINSON'S EMPLOYMENT AGREEMENT. The Amended and Restated Employment
Agreement between GeneMedicine and Eric Tomlinson, dated June 11, 1998, provides
that, upon the voluntary or involuntary termination of Dr. Tomlinson's
employment with GeneMedicine, Dr. Tomlinson will receive 18 months salary equal
to $465,192 and all of his unvested options to purchase up to 82,865 shares of
GeneMedicine common stock will vest and become exercisable. In addition, Dr.
Tomlinson's options to purchase up to 210,000 shares of GeneMedicine common
stock will remain exercisable for two years from the date of termination and Dr.
Tomlinson will be paid a sum of $765.07 per month for 18 months for reasonable
health benefits. Dr. Tomlinson also will receive $30,000 for moving costs and
taxes related thereto, and country club dues for the severance period.
MANAGEMENT CHANGE OF CONTROL INCENTIVE PLAN. On July 1, 1998, GeneMedicine
adopted the Management Change of Control Incentive Plan for the purpose of
retaining key employees through the date of closing in the event of a change in
control transaction. The plan provides that upon a change in control, some key
employees of GeneMedicine and Dr. Tomlinson will share in an acquisition pool
equal to three percent of the net proceeds received by GeneMedicine or its
stockholders in connection with such transaction. Based on the aggregate value
of Megabios common stock to be issued in the merger, which as of February 5,
1999 is estimated at $49.5 million, the amount each person listed in the plan is
entitled to receive upon completion of the merger is set forth below:
<TABLE>
<CAPTION>
PAYMENT UNDER
MANAGEMENT CHANGE OF CONTROL
NAME INCENTIVE PLAN
- ---------------------------------------------------------------- ----------------------------
<S> <C>
Eric Tomlinson.................................................. $ 445,500
Norman Hardman.................................................. 311,850
Alain Rolland................................................... 163,350
Josef F. Bossart................................................ 118,800
Richard A. Waldron.............................................. 118,800
Kathryn N. Stankis.............................................. 103,950
</TABLE>
One or more of the persons identified in the above table may be awarded
additional amounts from the balance of $222,750 that has not been allocated as
of the date of this joint proxy statement/ prospectus.
INDEMNIFICATION AND INSURANCE. Pursuant to Section 6.7 of the
reorganization agreement, all rights to indemnification existing in favor of the
current directors and officers of GeneMedicine for acts and omissions occurring
prior to the effective date of the merger, as provided in GeneMedicine's Amended
and Restated Certificate of Incorporation and Bylaws and as provided in any
indemnification agreements between GeneMedicine and said officers and directors
as of October 24, 1998, will survive the merger and will be observed for a
period of not less than six years from the effective date of the merger. For a
period of not less than three years from the effective date of the merger, the
surviving corporation or Megabios will maintain, for the benefit of the current
officers and directors of GeneMedicine with respect to acts or omissions
occurring prior to the effective date of the merger, the
41
<PAGE>
lesser of (1) the existing amount of coverage of the existing policy of
directors' and officers' liability insurance maintained by GeneMedicine as of
the date of the reorganization agreement, and (2) the amount of coverage
purchased by 150% of the amount of the last annual premium paid by GeneMedicine
prior to the date of the reorganization agreement for the existing policy;
provided, however, that GeneMedicine may substitute for the existing policy a
policy or policies of comparable coverage. Any successors or assigns of the
surviving corporation will assume the obligations of the surviving corporation
set forth in Section 6.7 of the reorganization agreement.
BOARD OF DIRECTORS SEATS. Under the reorganization agreement, Megabios has
agreed to appoint Arthur M. Pappas, Stanley T. Crooke and Bert W. O'Malley to
the Megabios Board as members of Class I, Class II and Class III, respectively,
to serve until the annual meeting of stockholders to be held in the years 2001,
1999, and 2000, respectively.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the merger that are generally applicable to holders of
GeneMedicine common stock. This discussion is based on currently existing
provisions of the Internal Revenue Code, existing and proposed U.S. Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to Megabios, GeneMedicine or the
GeneMedicine stockholders as described below.
GeneMedicine stockholders should be aware that this discussion does not deal
with all U.S. federal income tax considerations that may be relevant to
particular GeneMedicine stockholders in light of their particular circumstances,
such as stockholders who:
- are dealers in securities, banks, insurance companies or tax-exempt
organizations;
- are subject to the alternative minimum tax provisions of the Internal
Revenue Code;
- are non-U.S. persons, who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions; or
- hold their shares as a hedge or as part of a hedging, straddle, conversion
or other risk reduction transaction.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws or the tax consequences of
transactions made prior to or after the merger, whether or not such transactions
are in connection with the merger.
GeneMedicine stockholders are urged to consult their own tax advisors as to
the specific consequences to them of the merger in their particular
circumstances, including the applicable federal, state, local and foreign tax
consequences.
Neither Megabios nor GeneMedicine has requested or will request a ruling
from the IRS with regard to any of the U.S. federal income tax consequences of
the merger. It is the opinion of Heller Ehrman and Cooley Godward that the
merger will constitute a reorganization pursuant to Section 368(a) of the
Internal Revenue Code (collectively, the "reorganization opinions"). In
addition, GeneMedicine's obligation to complete the merger is conditioned on the
receipt by GeneMedicine of an opinion from Heller Ehrman, and Megabios'
obligation to complete the merger is conditioned on the receipt by Megabios of
an opinion from Cooley Godward, confirming that the merger will constitute a
reorganization (collectively, the "closing opinions"). Such conditions will not
be waived without resolicitation of consent by the stockholders of GeneMedicine
and the stockholders of Megabios. Heller Ehrman and Cooley Godward have advised
GeneMedicine and Megabios, respectively, that they currently expect to be able
to deliver such closing opinions. See "The Merger Agreement--Conditions to
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the Merger--Megabios" and "--GeneMedicine." The reorganization opinions and
closing opinions (the "tax opinions"):
- will not be binding on the IRS nor preclude the IRS from adopting a
contrary position;
- will be based on the assumptions discussed below, as well as
representations received from GeneMedicine and Megabios;
- will be based on the assumption that the merger will be completed in
accordance with the terms of the reorganization agreement; and
- will be subject to the limitations discussed below.
The tax opinions assume and are conditioned upon:
- the truth and accuracy of the statements, covenants, representations and
warranties contained in the reorganization agreement, in the tax
representations received from Megabios, Merger Sub and GeneMedicine to
support the tax opinions and in all other instruments and documents
related to the formation, organization and operation of Megabios, Merger
Sub and GeneMedicine examined by and relied upon by Cooley Godward and
Heller Ehrman in connection with the merger;
- that original documents submitted to such counsel are authentic, documents
submitted to such counsel as copies conform to the original documents;
- that all such documents have been, or will be by the effective time, duly
and validly executed and delivered;
- that all convenants contained in the reorganization agreement and the tax
representations, described above, are performed without waiver or breach
of any material provision;
- that the merger will be reported by Megabios and GeneMedicine on their
respective federal income tax returns in a manner consistent with the tax
opinions; and
- that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Subject to the limitations and qualifications described in this section and
in the tax opinions, and assuming the merger is treated as a reorganization in
accordance with the tax opinions, the following U.S. federal income tax
consequences will result:
- no gain or loss will be recognized for federal income tax purposes by the
holders of GeneMedicine common stock upon the receipt of Megabios common
stock solely in exchange for such GeneMedicine common stock in the merger,
except to the extent, if any, of cash received instead of fractional
shares;
- the aggregate tax basis of the Megabios common stock so received by
GeneMedicine stockholders in the merger, including any fractional share of
Megabios common stock not actually received, will be the same as the
aggregate tax basis of the GeneMedicine common stock surrendered;
- the holding period of Megabios common stock so received by each
GeneMedicine stockholder in the merger will include the period for which
the GeneMedicine common stock surrendered in exchange therefor was
considered to be held, provided that the GeneMedicine common stock so
surrendered is held as a capital asset at the effective time;
- cash payments received by holders of GeneMedicine common stock instead of
fractional shares will be treated as if such fractional shares of Megabios
common stock had been issued in the merger and then redeemed by Megabios;
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- a GeneMedicine stockholder receiving such cash will recognize gain or loss
upon such payment, measured by the difference, if any, between the amount
of cash received and the basis in such fractional share;
- the gain or loss should be capital gain or loss provided that each share
of GeneMedicine common stock surrendered in exchange for such fractional
share of Megabios common stock was held as a capital asset at the
effective time; and
- neither Megabios nor GeneMedicine will recognize gain solely as a result
of the merger.
A successful IRS challenge to the reorganization status of the merger would
result in significant adverse tax consequences to the GeneMedicine stockholders.
A GeneMedicine stockholder would recognize gain or loss with respect to each
share of GeneMedicine common stock surrendered equal to the difference between
(1) the stockholder's basis in such share and (2) the fair market value of the
Megabios common stock received in exchange for such share plus any cash received
instead of a fractional share. In such event, a stockholder's aggregate basis in
the Megabios common stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
closing date of the merger.
Even if the merger qualifies as a reorganization, a recipient of Megabios
common stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the GeneMedicine
common stock surrendered. In addition, to the extent that a GeneMedicine
stockholder were treated as receiving, directly or indirectly, consideration
other than Megabios common stock in exchange for such stockholder's GeneMedicine
common stock, gain, if any, would have to be recognized.
Non-corporate GeneMedicine stockholders may be subject to backup withholding
at a rate of 31% on cash payments received instead of a fractional share of
Megabios common stock. Backup withholding will not apply, however, to a
stockholder who:
- furnishes a correct taxpayer identification number and certifies that he,
she or it is not subject to backup withholding on the substitute Form W-9
included in the letter of transmittal;
- provides a certificate of foreign status on Form W-8; or
- is otherwise exempt from backup withholding. A stockholder who fails to
provide the correct taxpayer identification number on Form W-9 may be
subject to a $50 penalty imposed by the IRS.
Each GeneMedicine stockholder will be required to retain records and file
with such holder's U.S. federal income tax return a statement setting forth
facts relating to the merger.
ANTICIPATED ACCOUNTING TREATMENT
The merger will be accounted for as a purchase for financial reporting
purposes. Under such accounting method, the purchase price will be allocated
based on the fair value of the GeneMedicine assets acquired, including
in-process research and development, and liabilities assumed. See "Unaudited Pro
Forma Condensed Combined Financial Statements" on page 57 for further
discussion.
REGULATORY MATTERS
ANTITRUST. The merger is not subject to the premerger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
However, the FTC or the Antitrust Division of the U.S. Department of Justice
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin completion of the
merger or seeking to cause divestiture of significant assets of Megabios or
GeneMedicine or their subsidiaries. There can be no
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assurance that a challenge to the merger on antitrust grounds will not be made,
or, if such challenge is made, of what the result would be. Completion of the
merger is conditioned upon, among other things, the absence of any temporary
restraining order, preliminary or permanent injunction, or other order issued by
any federal or state court in the U.S. which prevents the completion of the
merger.
FILING WITH THE DELAWARE SECRETARY OF STATE. A Certificate of Merger must
be filed with the Secretary of State of the State of Delaware in order to
complete the merger.
SECURITIES LAWS. Megabios and GeneMedicine must comply with the federal
securities laws and applicable securities laws of various states.
NO APPRAISAL RIGHTS
Under Delaware law, stockholders who do not vote in favor of or consent to a
merger are not entitled to appraisal rights if (1) the stock subject to such
merger is designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc., and
(2) the consideration to be received in such merger consists of stock listed on
a national securities exchange or designated as a National Market System
Security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. Because the Nasdaq National Market is designated as
such a system and the GeneMedicine common stock and Megabios common stock are
quoted on the Nasdaq National Market, holders of GeneMedicine common stock are
not entitled to appraisal rights with respect to the merger.
Holders of Megabios common stock are not entitled to appraisal rights under
Delaware law because Megabios is not a constituent corporation to the merger
under Delaware law.
RESALE OF MEGABIOS COMMON STOCK
Megabios common stock issued in connection with the merger will be freely
transferable, except that shares issued to any GeneMedicine stockholder who is
an affiliate of GeneMedicine or who becomes an affiliate of Megabios are subject
to restrictions on resale under federal securities laws. An "affiliate" is
defined generally as including, without limitation, directors, certain executive
officers and other persons who control a company.
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THE REORGANIZATION AGREEMENT
GENERAL
The following is a summary of the material provisions of the reorganization
agreement, a copy of which is attached as Appendix A to this joint proxy
statement/prospectus. This summary is not complete and stockholders are urged to
read the reorganization agreement in its entirety.
The reorganization agreement provides for the merger of Montana Acquisition
Sub, Inc ("Merger Sub") with and into GeneMedicine. As a result of the merger,
GeneMedicine will become a wholly-owned subsidiary of Megabios and the former
stockholders of GeneMedicine will become stockholders of Megabios. Merger Sub
has been formed solely for the purpose of effecting the merger, and there will
be no other activity in Merger Sub. The merger will become effective upon the
filing of a certificate of merger with the Delaware Secretary of State or such
later time as may be specified in the certificate of merger. The effective time
of the merger will occur no later than the second day after all the conditions
to closing have been met or waived. It is currently anticipated that the
effective time will occur on or before March 31, 1999. There can be no
assurance, however, that the required approvals will be obtained, that the other
conditions to the merger will be satisfied by such date, or at all, or that the
reorganization agreement will not be terminated. See "--Conditions to the
Merger."
MERGER CONSIDERATION
GENEMEDICINE COMMON STOCK. At the effective time, each outstanding share of
GeneMedicine common stock will be converted at the exchange ratio into 0.5710 of
a share of Megabios common stock, subject to adjustment for any subsequent stock
split, stock dividend, reverse stock splits, reclassification, recapitalization
or similar transaction.
NO FRACTIONAL SHARES. No fractional shares of Megabios common stock will be
issued in connection with the merger. Each holder of GeneMedicine common stock
who would otherwise be entitled to a fraction of a share of Megabios common
stock will receive an amount in cash based on the closing price of Megabios
common stock on Nasdaq on the closing date of the merger.
STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTIONS AND WARRANTS. At the effective time, all outstanding options
with respect to GeneMedicine common stock under GeneMedicine's 1993 Stock Option
Plan and 1994 Non-Employee Directors' Stock Option Plan and all outstanding
warrants to purchase GeneMedicine common stock will be assumed by Megabios. From
and after the effective time:
- each GeneMedicine option and warrant assumed by Megabios may be exercised
solely for shares of Megabios common stock;
- the number of shares of Megabios common stock subject to each such
GeneMedicine option and warrant and the exercise price of each option and
warrant will be adjusted to reflect the exchange ratio;
- any restriction on the exercise of any such GeneMedicine option or warrant
will continue in full force and effect; and
- the term, exercisability, vesting schedule and other provisions of such
GeneMedicine option or warrant will remain unchanged unless amended or
modified by existing severance or employment agreements in connection with
the merger.
EMPLOYEE STOCK PURCHASE PLAN. At the effective time of the merger, all
outstanding rights to purchase GeneMedicine common stock under the GeneMedicine
Employee Stock Purchase Plan will
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be settled and all participants' rights in offerings under the GeneMedicine
Employee Stock Purchase Plan will terminate.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of GeneMedicine common stock issued and
outstanding as of the record date, an aggregate of approximately 8.9 million
shares of Megabios common stock will be issued to holders of GeneMedicine common
stock. Based upon the number of shares of Megabios common stock issued and
outstanding as of the record date, assuming no exercise of outstanding options
or other rights to purchase Megabios common stock, the former holders of
GeneMedicine common stock would hold approximately 41.0% of Megabios' total
outstanding shares immediately after the merger.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
After the effective time, the exchange agent will mail to the registered
holders of GeneMedicine common stock a letter of transmittal and instructions
for use in effecting the exchange of GeneMedicine stock certificates. Each
holder of a GeneMedicine stock certificate will receive a certificate
representing the number of shares of Megabios common stock into which his shares
have been converted, plus cash for any fractional shares when the stockholder
surrenders a GeneMedicine stock certificate to the exchange agent, together with
an executed letter of transmittal and such other documents. See "--Merger
Consideration--No Fractional Shares."
If any GeneMedicine stock certificate has been lost, stolen or destroyed,
Megabios may require the owner of such lost, stolen or destroyed GeneMedicine
stock certificate to provide an appropriate affidavit and to deliver a bond as
indemnity against any claim that may be made against the exchange agent,
Megabios or GeneMedicine.
GENEMEDICINE STOCKHOLDERS SHOULD NOT SURRENDER THEIR GENEMEDICINE STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT.
EFFECT ON CERTIFICATES
At the effective time, (1) all outstanding shares of GeneMedicine common
stock will automatically be canceled and retired, and all holders of
GeneMedicine stock certificates will have no further rights as stockholders of
GeneMedicine except the right to receive Megabios common stock and cash instead
of fractional shares, if any, and (2) the stock transfer books of GeneMedicine
will be closed. If, after the effective time, a GeneMedicine stock certificate
is presented to the exchange agent, GeneMedicine or Megabios, such stock
certificate will be canceled and will be exchanged as provided above under the
caption "--Conversion of Shares; Procedure for Exchange of Certificates," and
"--Merger Consideration."
CORPORATE MATTERS
As of the effective time, the Certificate of Incorporation and Bylaws of the
surviving corporation will be amended and restated to conform to the Certificate
of Incorporation and Bylaws of Merger Sub. Immediately after the effective time,
the directors and officers of the surviving corporation will be the directors
and officers of Merger Sub immediately prior to the effective time.
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CONDITIONS TO THE MERGER
MEGABIOS AND MERGER SUB. The obligations of Megabios and Merger Sub to
complete the merger are subject to the following conditions, among others:
- the representations and warranties of GeneMedicine shall be accurate in
all material respects as of the date of the reorganization agreement and
as of the closing date except, among other things, that any inaccuracies
shall be disregarded if they do not have a material adverse effect on
GeneMedicine;
- each covenant or obligation that GeneMedicine is required to comply with
or to perform at or prior to the closing shall have been complied with and
performed in all material respects;
- the registration statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been
issued by the SEC with respect to the registration statement;
- the reorganization agreement and the merger shall have been approved by
the stockholders of GeneMedicine, and the issuance of Megabios common
stock in the merger shall have been approved by the stockholders of
Megabios;
- GeneMedicine shall have obtained all third party consents identified in
the reorganization agreement;
- Megabios shall have received: (1) a statement from GeneMedicine conforming
to the requirements of Section 1.897-2(h)(1)(i) of the Treasury
Regulations; (2) a legal opinion of Cooley Godward that the merger will
constitute a reorganization under the Internal Revenue Code; and (3) a
certificate executed on behalf of GeneMedicine by one of its executive
officers confirming the satisfaction of various conditions;
- there shall have been no material adverse change in the business, assets,
liabilities, financial condition or results of operations of GeneMedicine
since the date of the reorganization agreement;
- GeneMedicine shall have filed with the IRS a notification required under
Section 1.897-2(h)(2) of the Treasury Regulations;
- the shares of Megabios common stock to be issued in the merger shall have
been authorized for listing on Nasdaq;
- there shall not be pending or threatened any action, suit or litigation
brought by any governmental entity:
- challenging or seeking to restrain or prohibit the completion of the
merger;
- relating to the merger and seeking to obtain from Megabios or any of
its subsidiaries any material damages;
- seeking to prohibit or limit Megabios' ability to vote, receive
dividends or otherwise exercise ownership rights with respect to the
stock of the surviving corporation; or
- which would materially and adversely affect the right of Megabios, the
surviving corporation or any subsidiary of Megabios to own the assets
or operate the business of GeneMedicine.
- no restraining order, permanent injunction or other order preventing the
completion of the merger shall have been issued by any court of competent
jurisdiction; and
- all outstanding shares of GeneMedicine Series B preferred stock shall have
been converted into GeneMedicine common stock.
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GENEMEDICINE. The obligations of GeneMedicine to complete the merger are
subject to the following conditions, among others:
- the representations and warranties of Megabios and Merger Sub shall be
accurate in all material respects as of the date of the reorganization
agreement and as of the closing date, except, among other things, that any
inaccuracies shall be disregarded if they do not have a material adverse
effect on Megabios;
- all of the covenants and obligations that Megabios and Merger Sub are
required to comply with or to perform at or prior to the closing shall
have been complied with and performed in all material respects;
- the registration statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been
issued by the SEC with respect to the registration statement;
- the reorganization agreement and the merger shall have been approved by
the stockholders of GeneMedicine, and the issuance of Megabios common
stock in the merger shall have been approved by the stockholders of
Megabios;
- GeneMedicine shall have received: (1) a legal opinion of Heller Ehrman
that the merger will constitute a reorganization under the Internal
Revenue Code; and (2) a certificate executed on behalf of Megabios by its
Chief Executive Officer, confirming the satisfaction of various
conditions;
- there shall have been no material adverse change in the business, assets,
liabilities, financial condition or results of operations of Megabios
since the date of the reorganization agreement;
- the shares of Megabios common stock to be issued in the merger shall have
been authorized for listing on Nasdaq;
- there shall not be pending or threatened any action, suit or litigation
brought by any governmental entity:
- challenging or seeking to restrain or prohibit the completion of the
merger;
- relating to the merger and seeking to obtain from GeneMedicine any
material damages;
- seeking to prohibit or limit Megabios' ability to vote, receive
dividends or otherwise exercise ownership rights with respect to the
stock of the surviving corporation; or
- which would materially and adversely affect the right of Megabios, the
surviving corporation or any subsidiary of Megabios to own the assets
or operate the business of GeneMedicine.
- no temporary restraining order, preliminary or permanent injunction or
other order preventing the completion of the merger shall have been issued
by any court of competent jurisdiction; and
- Megabios shall have increased the size of its Board to nine and appointed
Mr. Pappas and Drs. Crooke and O'Malley to its Board.
An event, violation, inaccuracy, circumstance or other matter will be deemed
to have a "material adverse effect" on GeneMedicine if it would have a material
adverse effect on:
- the business, financial condition, assets, liabilities or results of
operations of GeneMedicine, taken as a whole;
- the ability of GeneMedicine to complete the merger; or
- Megabios' ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the surviving
corporation.
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An event, violation, inaccuracy, circumstance or other matter will be deemed
to have a "material adverse effect" on Megabios if it would have a material
adverse effect on:
- on the business, financial condition, assets, liabilities or results of
operations of Megabios and its subsidiaries taken as a whole;
- the ability of Megabios to complete the merger; or
- Megabios' ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the surviving
corporation.
REPRESENTATIONS AND WARRANTIES
The reorganization agreement contains customary representations and
warranties of Megabios and GeneMedicine, including the following relating to:
- due organization and subsidiaries;
- certificate of incorporation and the bylaws;
- capitalization;
- filings with the SEC and financial statements;
- absence of changes;
- real property, equipment and leaseholds;
- payments under corporate partnering agreements;
- proprietary assets;
- material contracts;
- governmental authorizations;
- tax matters;
- employee and labor matters and benefit plans;
- environmental matters;
- legal proceedings and orders;
- the authority and binding nature of the reorganization agreement; and
- financial advisor fees or commissions.
The reorganization agreement contains further representations and warranties
by GeneMedicine as to:
- the absence of existing discussions or negotiations concerning other
acquisition proposals;
- the vote required to approve the merger and reorganization agreement;
- the receipt of a fairness opinion from PaineWebber; and
- the GeneMedicine rights agreement.
The reorganization agreement contains further representations and warranties
by Megabios and Merger Sub as to:
- the vote required to approve the issuance of Megabios common stock in the
merger;
- valid issuance of the Megabios common stock to be issued in the merger;
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- receipt of a fairness opinion from Hambrecht & Quist; and
- interim operations of Merger Sub.
COVENANTS
CONDUCT OF GENEMEDICINE'S BUSINESS. The reorganization agreement requires
that during the pre-closing period, GeneMedicine shall conduct its business and
operations:
- in the ordinary course;
- in a commercially reasonable manner; and
- in material compliance with all applicable legislation and regulations.
The reorganization agreement also requires the officers of GeneMedicine to
report regularly to Megabios concerning the status of GeneMedicine's business.
Until the closing, without the prior written consent of Megabios,
GeneMedicine may not:
- declare or pay any dividend or make any other distribution;
- repurchase or redeem any shares of capital stock or other securities;
- sell, issue or grant (1) any capital stock or other security, (2) any
option, call, warrant or right to acquire any capital stock or other
security, or (3) any instrument convertible into or exchangeable for any
capital stock or other security;
- amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of GeneMedicine's stock option plans or any stock
option or restricted stock purchase agreement, or otherwise modify any
outstanding option, warrant or other security or any related contract;
- amend the GeneMedicine Certificate of Incorporation or GeneMedicine Bylaws
or become a party to any merger, consolidation, business combination,
recapitalization or similar transaction;
- form any subsidiary or acquire any interest in any other entity;
- make any capital expenditures in excess of $100,000 in the aggregate;
- enter into or become bound by, or waive or exercise any material right
under, a material contract;
- acquire or sell any material contract or intellectual property right,
except in the ordinary course of business, or waive or amend such material
rights, other than non-exclusive licenses and distribution rights in the
ordinary course of business;
- subject to limitations, incur any indebtedness for borrowed money;
- adopt or amend any employee benefit plan, pay any bonus except in
accordance with existing plans or commitments, or make any profit-sharing
or similar payment to, or increase the amount of the salary or other
compensation payable to, any director, officer or employee except for
normal periodic increases made in the ordinary course of business;
- grant any severance or termination pay to any officer or employee except
in accordance with existing policies, agreements or past practices, or
adopt any new severance plan;
- hire any new employee having an annual base salary in excess of $120,000,
or engage any consultant or independent contractor for a period exceeding
60 days;
- change the status, title or responsibilities of any officer, or promote
any employee to an officer position;
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- change any of its methods of accounting or accounting practices in any
respect;
- make any material election with respect to taxes;
- commence or settle any legal proceeding;
- enter into any material transaction or take any other material action
outside the ordinary course of business;
- enter into any agreement requiring the consent or approval of any third
party with respect to the merger; or
- agree or commit to take any of the actions described above.
Until the closing, each of GeneMedicine and Megabios is required to promptly
notify the other of any event or circumstance that would make the timely
satisfaction of any condition to closing impossible or unlikely or that has or
could be expected to have a material adverse effect on GeneMedicine or Megabios,
respectively. No such notification will limit or otherwise affect any
representations, warranties, covenants or obligations of GeneMedicine or
Megabios contained in the reorganization agreement.
CONDUCT OF MEGABIOS' BUSINESS. Until the closing, without the prior written
consent of GeneMedicine, Megabios shall not:
- declare or pay any dividend or make any other distribution;
- repurchase or redeem any shares of its capital stock or other securities;
- sell, issue or grant (1) any capital stock or other security, (2) any
option, call, warrant or right to acquire any capital stock or other
security, or (3) any instrument convertible into or exchangeable for any
capital stock or other security;
- amend the Megabios certificate of incorporation or Megabios bylaws or
become a party to any merger, consolidation, business combination,
recapitalization or similar transaction;
- subject to limitations, incur any indebtedness for borrowed money;
- acquire or sell any material contract or intellectual property right,
except in the ordinary course of business, or waive or amend any such
material rights, other than non-exclusive licenses and distribution rights
in the ordinary course of business; or
- agree or commit to take any of the actions described above.
NON-SOLICITATION. GeneMedicine has agreed that it will not, directly or
indirectly, and will not authorize or permit any representative of GeneMedicine
to:
- solicit, initiate, encourage or induce the making, submission or
announcement of any acquisition proposal;
- furnish any nonpublic information to any person in connection with or in
response to an acquisition proposal;
- engage in discussions with any person with respect to any acquisition
proposal;
- approve, endorse or recommend any acquisition proposal; or
- enter into any letter of intent or any contract relating to any
acquisition transaction.
GeneMedicine is not prevented, however, from furnishing nonpublic
information to, or entering into discussions with, any person in response to a
superior offer if:
- neither GeneMedicine nor any representative of GeneMedicine has breached
its obligations concerning non-solicitation;
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- the GeneMedicine Board determines in good faith, after consultation with
its outside legal counsel, that such action is required in order for the
GeneMedicine Board to comply with its fiduciary duties;
- prior to furnishing any nonpublic information to, or entering discussions
with, such person, GeneMedicine gives Megabios written notice;
- GeneMedicine receives from such person an executed confidentiality
agreement that is at least as restrictive as that between GeneMedicine and
Megabios; and
- prior to furnishing any such nonpublic information to such person,
GeneMedicine furnishes such nonpublic information to Megabios.
In addition to the foregoing, GeneMedicine is required to:
- provide Megabios with at least 24 hours prior notice of any meeting of the
GeneMedicine Board at which the GeneMedicine Board is expected to consider
a superior offer; and
- not recommend a superior offer to its stockholders for a period of not
less than the greater of two business days or 48 hours after Megabios
receives a copy of such superior offer.
GeneMedicine must promptly advise Megabios of any acquisition proposal and
of any modification to such proposal.
An "acquisition proposal" is any offer or proposal relating to any
"acquisition transaction." An "acquisition transaction" is any transaction or
series of related transactions involving:
- any merger, consolidation, share exchange, business combination, issuance
of securities, acquisition of securities, tender offer, exchange offer or
other similar transaction:
- in which GeneMedicine is a constituent corporation;
- in which a person or group of persons acquires GeneMedicine or more
than 50% of GeneMedicine's business or acquires beneficial or record
ownership of securities representing more than 20% of the outstanding
securities of any class of voting securities of GeneMedicine; or
- in which GeneMedicine issues securities representing more than 20% of
the outstanding securities of any class of voting securities.
- any sale, lease, exchange, transfer, license, acquisition or disposition
of more than 50% of the assets of GeneMedicine; or
- any liquidation or dissolution of GeneMedicine.
A "superior offer" is an unsolicited written offer made by a third party to
purchase more than 50% of the outstanding shares of GeneMedicine common stock or
all or substantially all of its assets, on terms that the GeneMedicine Board
determines to be more favorable to the GeneMedicine stockholders than the
merger; PROVIDED, HOWEVER, that any such offer will not be a "superior offer" if
any financing required to complete the transaction is not committed or is not
likely to be obtained by such third party on a timely basis.
MEETINGS OF STOCKHOLDERS. GeneMedicine has agreed to convene and hold the
GeneMedicine special meeting to vote upon the approval of the reorganization
agreement and the merger; provided, however, that GeneMedicine is not required
to hold such meeting if the GeneMedicine Board withdraws or amends its unanimous
recommendation in favor of the merger and accepts or recommends a superior
offer. Megabios has agreed to convene and hold the Megabios special meeting to
vote upon the issuance of Megabios common stock in the merger.
53
<PAGE>
Neither the board of directors of GeneMedicine or Megabios nor any committee
thereof is permitted to withdraw or amend, in a manner adverse to the other
party, its recommendations in favor of the reorganization agreement and the
merger in the case of GeneMedicine, and the issuance of Megabios common stock in
the case of Megabios. However, the GeneMedicine Board is not prevented from
withdrawing or amending its unanimous recommendation in favor of the merger if:
- a superior offer is made to GeneMedicine;
- neither GeneMedicine nor any of its representatives has violated the
non-solicitation covenant; and
- the GeneMedicine Board concludes in good faith, that such action is
required to comply with its fiduciary duties.
FORM S-8. Megabios has agreed to file a registration statement on Form S-8
for the shares of Megabios common stock issuable with respect to assumed
GeneMedicine options after the effective time.
TAX-FREE REORGANIZATION. Each of GeneMedicine and Megabios has agreed not
to take any action either prior to or after the effective time that would
reasonably be expected to cause the merger to fail to qualify as a tax-free
reorganization.
INDEMNIFICATION AND INSURANCE. All existing rights to indemnification of
directors or officers of GeneMedicine will survive the merger for a period of
not less than six years from the effective time. In addition, for a period of
three years, the surviving corporation will renew GeneMedicine's existing
directors' and officers' liability insurance policy or provide comparable
coverage. If at any time during that period the cost of such policy exceeds 150%
of the last annual premium paid by GeneMedicine, Megabios may reduce the
coverage to that which can be obtained for a premium equal to 150% of the last
annual premium paid by GeneMedicine.
OTHER COVENANTS. The reorganization agreement contains other covenants
including covenants relating to:
- information and access;
- preparation and filing of the registration statement;
- obtaining regulatory approvals;
- tax qualification and opinion back-up certificates;
- resignation of the officers and directors of GeneMedicine;
- FIRPTA;
- financial statements;
- listing of the Megabios common stock to be issued in the merger on Nasdaq;
and
- appointment of Mr. Pappas and Drs. Crooke and O'Malley to the Megabios
Board.
TERMINATION
The reorganization agreement may be terminated prior to the effective time,
whether before or after approval of the reorganization agreement and the merger
by GeneMedicine stockholders, under the following circumstances:
- by mutual written consent of the Boards of Directors of Megabios and
GeneMedicine;
- by either Megabios or GeneMedicine if the merger is not completed by March
31, 1999;
54
<PAGE>
- by either Megabios or GeneMedicine if a court or other governmental body
takes any non-appealable action permanently restraining, enjoining or
otherwise prohibiting the merger;
- by either Megabios or GeneMedicine if (1) the GeneMedicine special meeting
has been held and (2) the reorganization agreement and the merger were not
approved and adopted at such meeting;
- by Megabios at any time prior to the approval and adoption of the
reorganization agreement by the GeneMedicine stockholders if a triggering
event has occurred;
- by GeneMedicine at any time prior to the approval and adoption of the
reorganization agreement and the merger by the GeneMedicine stockholders
if the GeneMedicine Board withdraws or amends its recommendation in favor
of the merger and accepts or recommends to its stockholders a superior
offer;
- by either Megabios or GeneMedicine if the Megabios special meeting has
been held and the issuance of the Megabios common stock in the merger was
not approved; or
- by Megabios or GeneMedicine if the other party's representations and
warranties shall be or become materially inaccurate, or if any of the
other party's covenants shall have been breached in any material respect
and such inaccuracy or breach will cause a material adverse effect on the
other party.
A "triggering event" shall be deemed to occur if:
- the GeneMedicine Board withdraws or amends, in a manner adverse to
Megabios, its unanimous recommendation in favor of the approval and
adoption of the reorganization agreement and the merger;
- GeneMedicine fails to include in this joint proxy statement/prospectus the
unanimous recommendation of the GeneMedicine Board in favor of the
approval and adoption of the reorganization agreement and the merger;
- the GeneMedicine Board fails to reaffirm its unanimous recommendation in
favor of the approval and adoption of the reorganization agreement and the
merger within five business days after a request in writing by Megabios;
- the GeneMedicine Board approves or publicly recommends another acquisition
proposal;
- GeneMedicine enters into any letter of intent or similar document or any
contract accepting another acquisition proposal;
- GeneMedicine fails to hold the GeneMedicine special meeting as promptly as
practicable and in any event within 45 days after the registration
statement is declared effective under the Securities Act;
- a tender or exchange offer relating to securities of GeneMedicine is
commenced and GeneMedicine has not sent to its securityholders within five
business days, a statement disclosing that GeneMedicine recommends
rejection of such tender or exchange offer;
- an acquisition proposal is publicly announced and GeneMedicine (1) fails
to issue a press release announcing its opposition to such acquisition
proposal within five business days, or (2) otherwise fails actively to
oppose such acquisition proposal; or
- GeneMedicine breaches in any material respect any of its obligations
regarding non-solicitation.
55
<PAGE>
EXPENSES AND TERMINATION FEES
All fees and expenses incurred in connection with the reorganization
agreement will be paid by the party incurring such expenses, whether or not the
merger is completed. However, Megabios and GeneMedicine will share equally all
fees and expenses, other than attorneys' fees, incurred in connection with the
filing, printing and mailing of the registration statement and this joint proxy
statement/ prospectus and any amendments or supplements.
If the reorganization agreement is terminated by Megabios because a
triggering event has occurred, then GeneMedicine will be required to pay to
Megabios a nonrefundable termination fee of $1,400,000.
If the reorganization agreement is terminated by GeneMedicine or Megabios
because the GeneMedicine stockholders did not approve the reorganization
agreement and the merger, and an acquisition transaction is publicly announced
within six months after the date of termination and completed within twelve
months after such date, GeneMedicine will pay to Megabios a nonrefundable
termination fee equal to three percent of the aggregate consideration received
by GeneMedicine or its stockholders in such transaction.
If the reorganization agreement is terminated by GeneMedicine because the
GeneMedicine Board accepts, or recommends to its stockholders, a superior offer,
then GeneMedicine shall pay to Megabios a $1,400,000 termination fee.
56
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the merger using the purchase method of
accounting.
The unaudited pro forma condensed combined balance sheet as of September 30,
1998 gives effect to the merger as if it had occurred on such date, and reflects
the allocation of the purchase price to the GeneMedicine assets acquired,
including in-process research and development, and liabilities assumed. The
unaudited pro forma condensed combined balance sheet includes an adjustment for
severance related liabilities of approximately $2.3 million.
The unaudited pro forma condensed combined statements of operations combine
the historical statements of operations of Megabios and GeneMedicine as if the
merger had occurred at the beginning of the earliest period presented. The
historical statements of operations for GeneMedicine have been recast to conform
to the June 30 fiscal year end used by Megabios. The unaudited pro forma
condensed combined statement of operations for the three-month period ended
September 30, 1998 combines the historical unaudited statements of operations of
Megabios and GeneMedicine for such period. It is expected that following the
merger, Megabios will incur additional costs, which are not expected to be
significant to the combined results of operations, in connection with
integrating the operations of the two companies. Integration-related costs are
not included in the accompanying unaudited pro forma condensed combined
financial statements.
The Megabios statement of operations for the period in which the merger
occurs will include a significant charge for acquired in-process research and
development, currently estimated to be approximately $26 million, or 65% of the
purchase price. This amount represents the values determined by management,
using a discounted cash flow methodology, to be attributable to the in-process
research and development programs of GeneMedicine based on a preliminary
valuation of such programs. Such amount is subject to significant change pending
completion of the final valuation analysis. The charge relates to seven specific
on-going research and development programs. Assuming each of these research
programs continues through all stages of clinical development, the projected
future research and development expenditures related to these programs,
excluding the cost of research and development which may be performed by
corporate collaborators, is approximatetely $75 million. The programs are
forecasted to be completed at various times between 2004-2008. If Megabios would
have allocated less of the purchase price to these programs, the value would
have been recorded as goodwill on the balance sheet and amortized over the
expected benefit period, resulting in increased amortization expense during that
period.
Management of Megabios believes that the allocation of the purchase price to
these programs is appropriate given the future potential of these programs to
contribute to the operations of Megabios. If, at a later date, management of
Megabios decides to no longer pursue one or all of these in-process programs,
decides to indefinitely postpone the research effort related to one or all of
the programs or determines that the discounted cash flows will no longer meet
the projections underlying the valuations, it will disclose that fact to
investors in the appropriate Form 10-K or 10-Q--explaining why it will not
pursue commercialization or why research has been postponed and when research is
expected to resume. In addition, should Megabios revise its estimate of the
anticipated date of regulatory approval for a particular product, this fact will
be disclosed in the appropriate Form 10-K or 10-Q and the reasons for, and
potential implications of, the change in estimate will be explained.
Unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of Megabios and
GeneMedicine and do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company.
57
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
MEGABIOS GENEMEDICINE, PRO FORMA REFERENCES PRO FORMA
CORP. INC. ADJUSTMENTS (NOTE 2) COMBINED
---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 10,657 $ 1,201 $ -- $ 11,858
Short-term investments....................... 17,033 17,218 -- 34,251
Other receivables............................ 1,004 -- -- 1,004
Prepaid expenses and other current assets.... 754 242 -- 996
---------- -------------- ----------- -----------
Total current assets........................... 29,448 18,661 -- 48,109
Property and equipment, net.................... 8,350 2,778 -- 11,128
Long-term investments.......................... 17,241 -- -- 17,241
Other receivables.............................. 130 -- -- 130
Intangible assets.............................. -- -- 3,164 (A) 3,164
Deposits and other assets...................... 39 4 -- 43
---------- -------------- ----------- -----------
Total Assets................................... $ 55,208 $ 21,443 $ 3,164 $ 79,815
---------- -------------- ----------- -----------
---------- -------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities..... $ 2,089 $ 958 $ 2,989 (B) $ 6,036
Obligations due upon close of merger......... -- -- 4,050 (C) 4,050
Current portion of long-term debt and capital
lease obligations.......................... 805 108 -- 913
---------- -------------- ----------- -----------
Total current liabilities...................... 2,894 1,066 7,039 10,999
Deferred contract revenue...................... -- 3,670 -- 3,670
Long-term debt................................. 4,808 -- -- 4,808
Commitments....................................
Stockholders' Equity:..........................
Preferred stock.............................. -- 4 (4) (D) --
Common stock................................. 13 14 (14) (D),(E)
-- -- 9 (F) 22
Additional paid-in capital................... 80,041 74,263 (74,263) (E)
38,823 (F) 118,864
Deferred compensation, net of amortization... (899) -- -- (899)
Accumulated other comprehensive income....... 136 -- -- 136
Accumulated deficit.......................... (31,785) (57,574) 57,574 (E)
(26,000) (G) (57,785)
---------- -------------- ----------- -----------
Total stockholders' equity..................... 47,506 16,707 (3,875) 60,338
---------- -------------- ----------- -----------
Total liabilities and stockholders' equity..... $ 55,208 $ 21,443 $ 3,164 $ 79,815
---------- -------------- ----------- -----------
---------- -------------- ----------- -----------
</TABLE>
The accompanying notes to the unaudited pro forma condensed combined
balance sheet are an integral part of this statement.
58
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MEGABIOS GENEMEDICINE ADJUSTMENTS COMBINED
---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Contract revenue.......................................... $ 8,083 $ 4,023 $ -- $ 12,106
Research and development grant revenue.................... -- 509 -- 509
---------- -------------- ----------- -----------
Total revenue......................................... 8,083 4,532 -- 12,615
EXPENSES:
Research and development.................................. 15,111 15,078 -- 30,189
General and administrative................................ 3,561 4,451 -- 8,012
Amortization of purchased intangible assets............... -- -- 1,055 1,055
---------- -------------- ----------- -----------
Total operating expenses.............................. 18,672 19,529 1,055 39,256
---------- -------------- ----------- -----------
Operating loss.............................................. (10,589) (14,997) (1,055) (26,641)
Interest income............................................. 2,651 1,449 -- 4,100
Interest expense............................................ (440) (41) -- (481)
---------- -------------- ----------- -----------
Net loss.................................................... $ (8,378) $ (13,589) $ (1,055) $ (23,022)
---------- -------------- ----------- -----------
---------- -------------- ----------- -----------
Net loss per share--basic and diluted....................... $ (0.83) $ (0.96) $ (1.21)
---------- -------------- -----------
---------- -------------- -----------
Shares used in computing basic and diluted net loss per
share..................................................... 10,088 14,115 19,024
---------- -------------- -----------
---------- -------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
59
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MEGABIOS GENEMEDICINE ADJUSTMENTS COMBINED
----------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Contract revenue........................................... $ 773 $ 1,045 $ -- 1,818
EXPENSES:
Research and development................................... 3,429 3,789 -- 7,218
General and administrative................................. 1,076 1,173 -- 2,249
Amortization of purchased intangible assets................ -- -- 264 264
----------- ------- ----- -----------
Total operating expenses................................. 4,505 4,962 264 9,731
----------- ------- ----- -----------
Operating loss............................................... (3,732) (3,917) (264) (7,913)
Interest Income.............................................. 679 286 -- 965
Interest expense, net........................................ (146) (5) -- (151)
----------- ------- ----- -----------
Net loss..................................................... $ (3,199) $ (3,636) $ (264) $ (7,099)
----------- ------- ----- -----------
----------- ------- ----- -----------
Net loss per share--basic and diluted........................ $ (0.251) $ (0.25) $ (0.33)
----------- ------- -----------
----------- ------- -----------
Shares used in computing basic and diluted net loss per
share...................................................... 12,736 14,579 21,672
----------- ------- -----------
----------- ------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
60
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1
The unaudited pro forma condensed combined financial statements reflect the
conversion of all of the outstanding shares of GeneMedicine common stock and
preferred stock into approximately 8,936,500 shares of Megabios common stock
pursuant to the merger. This calculation is based on GeneMedicine's
capitalization at September 30, 1998 using the conversion ratio of 0.5710 of a
share of Megabios common stock for each share of GeneMedicine common stock
Options and warrants to purchase approximately 4,222,173 shares of
GeneMedicine common stock with a weighted average exercise price of $8.92 will
be assumed by Megabios pursuant to the merger and converted into options and
warrants to purchase approximately 2,410,860 shares of Megabios common stock.
The total cost of the proposed merger is estimated to be approximately $40.2
million, determined as follows (in thousands):
<TABLE>
<CAPTION>
Fair value of Megabios shares (calculated using the per share
fair value at the date of the merger agreement).............. $ 37,980
<S> <C>
Value of GeneMedicine warrants and options assumed............. 852
Megabios transaction costs, consisting primarily of financial
advisory, legal and accounting fees.......................... 1,400
-----------
$ 40,232
-----------
-----------
</TABLE>
Based upon a preliminary valuation of tangible and intangible assets
acquired and liabilities assumed, Megabios has allocated the total cost of the
merger to the net assets of GeneMedicine as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Tangible assets acquired....................................................... $ 21,443
In-process research and development............................................ 26,000
Intangible assets--assembled workforce and goodwill............................ 3,164
Liabilities assumed (including GeneMedicine transaction costs and other
obligations due upon the close of the merger)................................ (10,375)
-------------
$ 40,232
-------------
-------------
</TABLE>
GeneMedicine is engaged in the discovery and development of a new class of
pharmaceutical products that incorporate genes for the treatment or prevention
of serious diseases. GeneMedicine's business focus is in the development of gene
medicines for treating cancers, cardiovascular disease and neuromuscular
disorders, as well as in the development of genetic vaccines. GeneMedicine's
research and development programs in these areas are in various stages from
pre-clinical development to early clinical trials. GeneMedicine's strategy has
been to develop and commercialize its products through alliances with major
pharmaceutical and biotechnology companies. No products utilizing
61
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
GeneMedicine's proprietary technologies have been approved for marketing to
date. The GeneMedicine research and development programs currently in process
were valued as follows:
<TABLE>
<CAPTION>
Cancer Gene Medicines (IL2, IFN-a, IL-12).......................... $ 9,900
<S> <C>
Hemophilia Gene Medicines (Factor XIII and IX)..................... 2,000
Growth Factor Gene Medicines (IGF-1)............................... 5,400
Pulmonary Gene Medicines (AAT GM).................................. 1,800
Vascular Growth Factor Gene Medicines.............................. 3,400
GeneSwitch Technology.............................................. 1,900
Nucleic Acid Programs (APC)........................................ 1,600
---------
$ 26,000
---------
---------
</TABLE>
The in-process research and development has been written off against the
combined retained earnings. Because the charge is nonrecurring, it has not been
reflected in the pro forma condensed combined statements of operations. Such
charge will be included in the Megabios statement of operations in the quarter
in which the merger is completed. The intangible assets will be amortized over
their estimated useful lives of 3 years.
NOTE 2
The pro forma condensed combined balance sheet includes the adjustments
necessary to give effect to the merger as if it had occurred on September 30,
1998 and to reflect the allocation of the acquisition cost to the fair value of
tangible and intangible assets acquired and liabilities assumed as noted above,
including a charge to retained earnings for acquired in-process research and
development and the elimination of GeneMedicine's equity accounts. Adjustments
included in the pro forma condensed combined balance sheet are summarized as
follows (in thousands except share and per share amounts):
(A) Valuation of assembled work force and goodwill of $3,614.
(B) Accrual of transaction-related costs of approximately $1,400 for
Megabios and $1,589 for GeneMedicine, principally for investment banking,
legal and accounting services.
(C) Accrual for severance and other payouts associated with severance plans
($2,315) and incentive plans ($1,735) of GeneMedicine of $4,050.
(D) Conversion of GeneMedicine preferred stock into 1,071,428 shares of
GeneMedicine common stock at the exchange ratio prescribed in the
preferred stock agreement.
(E) Elimination of the GeneMedicine equity accounts.
(F) Issuance of Megabios common stock, $0.001 par value, and assumption of
options and warrants to purchase common stock, as discussed in Note 1.
The value of Megabios common stock is equal to the product of 8,936,500
shares multiplied by approximately $4.25 per share, while the options and
warrants have been assigned a value of approximately $852.
(G) Charge to operations for in-process research and development of
approximately $26,000.
62
<PAGE>
MEGABIOS CORP. AND GENEMEDICINE, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3
The pro forma condensed combined statements of operations include the
adjustments necessary to give effect to the merger as if it had occurred on July
1, 1997. Adjustments consist of the amortization of acquired intangible assets
using the following estimated useful lives:
<TABLE>
<CAPTION>
Assembled workforce......................................... 3 years
<S> <C>
Goodwill.................................................... 3 years
</TABLE>
NOTE 4
Pro forma basic and diluted net loss per share amounts for the year ended
June 30, 1998 and the three-month period ended September 30, 1998, are based
upon the historical weighted-average number of Megabios common stock outstanding
adjusted to reflect the issuance, as of July 1, 1997, of approximately 8,936,500
shares of Megabios common stock, which amount excludes outstanding shares
subject to repurchase in accordance with SFAS No. 128. The impact of outstanding
options and warrants, including GeneMedicine options and warrants assumed, is
not included in the calculation of basic and diluted net loss per share as the
effect would be antidilutive.
63
<PAGE>
INFORMATION RELATING TO MEGABIOS
MEGABIOS BUSINESS
OVERVIEW
Megabios develops proprietary gene delivery systems and provides preclinical
and early clinical development expertise to create gene-based therapeutics
designed for the treatment or prevention of genetic and acquired diseases.
Megabios has developed several in vivo, plasmid delivery systems to address a
number of potential therapeutic applications using a variety of therapeutic
genes. Plasmids are circular segments of DNA that contain a therapeutic gene and
components that regulate its expression. Megabios' delivery systems consist
primarily of these negatively charged DNA plasmids that are combined with
positively-charged cationic lipids and/or non-lipid agents to form tight
complexes that facilitate the delivery of the DNA plasmids into target cells.
Megabios' clinical development and commercialization strategy is to enter into
collaborative research and development agreements or "corporate partnerships"
with pharmaceutical and biotechnology companies. Megabios has corporate
partnerships with Glaxo Wellcome plc to develop a treatment for cystic fibrosis
using the CFTR gene and with Eli Lilly & Co. to develop treatments for breast
and ovarian cancer using the BRCA1 gene.
BACKGROUND
GENES AND GENE-BASED THERAPEUTICS
Genes provide the "code" for proteins, which determine the nature and
function of cells and tissues in all living organisms. Genomics, the study of
genes and their function, provides the fundamental basis for understanding human
health and disease and has led to the identification of many genes with
potential therapeutic utility.
The entire genetic content of an organism is known as its genome. In humans,
the genome is believed to contain approximately 100,000 genes, each of which is
composed of a unique sequence of DNA molecules that encode genetic instructions.
These genetic instructions enable cells to carry out their normal biological
functions. The process by which an organism utilizes genetic instructions and
produces proteins is known as gene expression. The expression of a defective
gene, or the over- or under-expression of a normal gene, is responsible for
certain disease conditions. For example, the expression of a single defective
gene is known to cause cystic fibrosis and sickle cell anemia, and the defective
expression of multiple genes is believed to be involved in the progression of
diseases such as cancer and diabetes, as well as cardiovascular, neurological
and other diseases.
The worldwide effort to decipher the human genome and to understand the
function of its constituent genes is yielding important insights into the roles
that genes play in disease conditions, as well as how genes may be useful in the
treatment of such diseases. It is estimated that there are at least 5,000 genes
of known function, many of which have been identified as potential therapeutic
genes. Various companies and academic institutions are investing substantial
financial and human resources to identify additional therapeutic genes, and the
Company believes that this process will create opportunities for gene-based
therapeutics.
Gene-based therapy is an approach to the treatment or prevention of diseases
in which therapeutic genes are introduced into target cells to cause the
production of specific proteins needed to bring about a therapeutic effect. For
gene-based therapy to be effective, the therapeutic gene must be delivered to
the target cell, transported across the outer membrane and into the cell, where
it can be expressed. The expressed protein may remain with the cell for an
intracellular effect, be transported to the cell membrane to exert a cell
surface effect or be secreted into the bloodstream to have a systemic effect.
Most gene-based therapies utilize a delivery system, or vector, into which the
therapeutic gene is incorporated to facilitate its delivery to, and uptake by,
the target cell.
64
<PAGE>
GENE DELIVERY APPROACHES
To date, a limiting factor in gene-based therapy has been the lack of safe,
effective gene delivery systems. A number of gene delivery approaches are being
developed, each of which has exhibited certain limitations. These approaches may
by categorized (1) by their mode of administration: EX VIVO, meaning outside the
body, or IN VIVO, meaning inside the body; and (2) by the nature of the gene
delivery system: viral or non-viral.
Many clinical trials of potential gene-based therapeutics have used EX VIVO,
viral gene delivery. EX VIVO gene-based therapies involve procedures in which
selected cells are removed from the patient, transduced with the therapeutic
gene, expanded in number, cleansed of contaminants and then reintroduced into
the same patient. This lengthy and labor-intensive process significantly differs
from traditional pharmaceutical administration and may result in a complex,
high-cost procedure.
In an effort to overcome these limitations, companies are developing IN VIVO
gene delivery systems that employ viruses to deliver the therapeutic gene into
target cells. Although IN VIVO, viral gene delivery approaches may be suitable
for some applications, the Company believes that several issues resulting from
the use of viruses may limit their broad application. Certain types of viral
gene delivery systems permanently alter the DNA of the target cell due to
integration of the virus carrying the therapeutic gene into the DNA of the cell.
This permanent and potentially random integration may result in the inability to
regulate the gene-based therapeutic, the inactivation of a beneficial gene or
the unintended activation of a harmful gene. In addition, viral gene delivery
systems have been shown to cause immune reactions, limiting their use for
chronic diseases that may require repeat dosing. Viral gene delivery systems may
also have limitations as to the size of the therapeutic gene that can be
delivered. Furthermore, the Company believes that it may be difficult and
expensive to manufacture and purify the desired viral strain due to the risks
associated with handling viruses.
To overcome the concerns associated with the use of viruses, IN VIVO,
non-viral gene delivery methods are being developed. Such methods typically
include the insertion of a therapeutic gene into a circular segment of DNA known
as a DNA plasmid, which is designed to control expression of the therapeutic
gene in the cell. The plasmid is packaged with a carrier, often a lipid-based
formulation, and delivered into the target cell by various modes of
administration, including inhalation, intravenous administration, direct
injection and introperitoneal administration. These traditional modes of
administration are familiar to physicians and may be more convenient and cost
effective than EX VIVO approaches. In addition, DNA plasmids degrade over time
and do not integrate into the host genome. Therefore, plasmid-based systems
avoid the potentially random integration associated with some viral approaches
and allow for more flexible treatment since the gene is not permanently
expressed. In spite of the advantages of IN VIVO, non-viral delivery approaches,
their development has been limited by a number of considerations, including:
- low levels and short duration of gene expression;
- non-specific cell targeting;
- inflammation or other adverse effects; and
- manufacturing difficulties.
MEGABIOS' IN VIVO, PLASMID DELIVERY APPROACH
Megabios' IN VIVO, plasmid delivery systems are designed to avoid the
significant limitations of viral or non-viral EX VIVO and IN VIVO, viral gene
delivery. Megabios' proprietary gene delivery systems consist primarily of two
components: (1) DNA plasmids that contain and control the proper expression of a
therapeutic gene; and (2) lipids and other agents that facilitate the delivery
of the DNA plasmids into target cells. In most of its gene delivery systems,
Megabios combines negatively charged DNA with novel, positively charged lipids
and neutral lipids to form DNA:lipid complexes. These complexes are
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the active ingredients in Megabios' gene delivery systems. Some of Megabios'
other gene delivery systems may utilize polymers or peptides to facilitate the
delivery of DNA plasmids.
Megabios believes its proprietary, plasmid delivery systems may have the
following benefits:
THERAPEUTICALLY RELEVANT GENE EXPRESSION. Megabios has developed DNA
plasmids that, following their formulation with lipids and administration to
animals, produce therapeutically relevant protein levels. Following
intravenous administration to mice of the gene for a commercially available
cytokine, the cytokine was detected in the blood at levels consistent with
those required for therapeutic effect. Similarly, following aerosol
administration to primates of the therapeutic gene to treat cystic fibrosis,
the resulting protein was produced in the correct cell type (lung epithelial
cells) at levels believed to be therapeutic.
TISSUE-SPECIFIC GENE DELIVERY AND EXPRESSION. Megabios believes that
its gene delivery systems can target specific tissues and cell types. In
preclinical studies, Megabios has demonstrated that various formulations are
taken up selectively by:
- ciliated epithelial cells lining the airways of the lungs following
aerosol administration;
- vascular endothelial cells lining the blood vessels of several tissues,
including lung, heart, spleen and lymphatic tissues, following
intravenous administration;
- delivery to angiogenic endothelial cells;
- solid tumors following direct administration into the tumor;
- circulating macrophages following intravenous administration;
- cells in the central nervous system following direct injection;
- solid tumor cells following intraperitoneal administration; and
- corrective tissue cells following intra-articular administration.
In a preclinical study to test the pattern of uptake of two intravenous
formulations, one formulation resulted in over 90% of observable gene
expression in the vascular endothelial cells of the lungs, while the other
formulation resulted in over 90% of observable gene expression in the
spleen. In addition, following direct injection in animals, Megabios'
formulations have been demonstrated to result in transfection of solid
tumors, muscle and brain tissue.
EASE OF HANDLING AND ADMINISTRATION, STABILITY AND SCALABLE
MANUFACTURING METHODS. Megabios' gene delivery systems are designed to be
handled and administered like traditional pharmaceuticals. These gene
delivery systems are also designed to be stable when refrigerated and are
intended to be distributed like other pharmaceuticals. Megabios has
demonstrated that it can produce clinical-grade DNA plasmids, DNA:lipid
complexes and formulations under controlled conditions without the expense
and handling requirements associated with viral gene delivery systems. In
addition, Megabios has developed manufacturing and production methods
designed to be scaled to meet commercial requirements and has produced DNA
plasmids at a contract manufacturer at the 1,000 liter scale.
IMPROVED SAFETY PROFILE. Megabios has tested its gene delivery systems
in hundreds of IN VIVO, preclinical experiments. In animal models, Megabios'
aerosol gene delivery systems do not appear to cause the same inflammation
that has been seen following the aerosol administration of other companies'
lipid-based gene delivery systems. As a result, Megabios believes that its
gene delivery systems may allow for repeat administration of gene-based
therapeutics for the treatment of chronic diseases, such as asthma and other
inflammatory conditions.
Megabios has also developed techniques that allow it to screen genes for
potential therapeutic utility. Because Megabios believes that IN VITRO gene
expression experiments do not correlate well with IN VIVO results, Megabios
tests its gene delivery systems in animals. Megabios has developed a
methodology to test therapeutic genes IN VIVO in rapid succession. For
example, Megabios can
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prepare plasmids containing different therapeutic genes, formulate them in
an appropriate lipid-based delivery system and administer the formulations
to animals. By testing several different genes, Megabios can facilitate the
development and selection of the gene-based therapeutic to be developed. In
addition, Megabios has expertise in the selection of appropriate animal
models, as well as in the development of various assays and analytical
techniques, to assess the performance of gene-based formulations. While, the
results of preclinical animal studies may not predict safety or efficacy in
humans, when, and if, further clinical trials are conducted, Megabios
believes that its gene screening capability and its experience in
preclinical and early clinical development will enable it to accelerate the
development of gene-based therapeutics and thereby attract corporate
partners.
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MEGABIOS' GENE DELIVERY SYSTEMS
Megabios has developed several gene delivery systems and has identified a
number of potential therapeutic applications for each of these systems using a
variety of therapeutic genes. Megabios classifies its portfolio of gene delivery
systems by the mode of administration and the cell type to which the gene-based
therapeutic is delivered, with each formulation within a series having distinct
specifications and potential applications. For example, one gene delivery system
in the MB100 Series has been optimized for the aerosol delivery of the CFTR gene
to ciliated epithelial cells in the lungs. In addition, the MB100 Series is also
being investigated for use in delivering genes for other pulmonary applications
such as the treatment of asthma. To date, Megabios has developed nine series of
gene delivery systems. Megabios expects to design additional gene delivery
systems to expand the scope of its commercial opportunities. The table below
summarizes Megabios' gene delivery systems, potential applications and
agreements with corporate partners:
<TABLE>
<CAPTION>
DELIVERY SYSTEM (MODE OF
ADMINISTRATION) CELL TYPE(S) TRANSFECTED POTENTIAL APPLICATIONS STATUS(1)
<S> <C> <C> <C>
MB100 Series (Inhalation) Ciliated epithelial cells Cystic fibrosis Phase I/II with Glaxo
in the lungs and Wellcome
respiratory tract Asthma Research
Inflammation of the lungs Research
Mucosal immunization Research
Infectious diseases of the Research
lungs
MB200 Series (Intravenous Vascular endothelial cells Angiogenesis inhibition Preclinical
injection) in the lungs, heart, spleen (cancer)
and lymph nodes Angiogenesis inhibition Preclinical
(non-cancer)
Metastatic cancer Preclinical
Protein replacement therapy Research
Cardiovascular diseases Research
Inflammatory diseases Research
MB300 Series (Direct Solid tumor cells Cancer (two-gene Phase I/II with University
injection) combination) of Colorado Health Sciences
Center
Cancer (other genes) Preclinical
MB400 Series Various cells involved in Preventive vaccines Research
(Intramuscular, antigen presentation Therapeutic vaccines Research
intradermal, subcutaneous Immunotherapy (cancer, Research
and intravenous injection) infectious diseases,
autoimmune diseases)
MB500 Series (Intravenous Circulating macrophages Infectious diseases Research
injection) Hyperlipidemia Research
MB600 Series (Direct Cells in the central Neurodegenerative diseases Research
injection) nervous system Cancer Research
MB700 Series Solid tumor cells Cancer (using BRCA1) Preclinical with Lilly
(Intraperitoneal injection) Cancer (other genes) Research
MB800 Series Connective tissue cells Rheumatoid arthritis Preclinical
(Intraarticular injection) Osteoarthritis Research
Cartilage repair Research
MB900 Series (Intramuscular Skeletal muscle Ischemia Preclinical
injection) Cardiac muscle
</TABLE>
(1) "Phase I/II" indicates that the compound is being tested in humans for
safety and preliminary indications of biological activity in a limited
patient population.
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"Preclinical" indicates that Megabios is conducting efficacy, pharmacology
and/or toxicology testing of a gene delivery system in animal models or
biochemical or cell culture assays.
"Research" includes the development of animal models and assay systems,
discovery of prototype gene delivery systems and evaluation and refinement
of prototype gene delivery systems IN VITRO and IN VIVO testing.
MB100 SERIES
Megabios has developed a class of gene delivery systems, the MB100 Series,
which, following aerosol administration to animals, results in genes being taken
up and expressed primarily by ciliated epithelial cells in the lungs and
respiratory tract. Megabios believes that the MB100 Series may be useful in the
delivery of therapeutic genes for the treatment of:
- cystic fibrosis;
- asthma;
- inflammatory conditions;
- infectious diseases of the lungs; and
- mucosal immunization.
One of these gene delivery systems is the subject of Megabios' corporate
partnership with Glaxo Wellcome to develop a gene-based therapeutic for the
treatment of cystic fibrosis. See "--Corporate Partners-- Glaxo Wellcome."
Megabios is seeking a corporate partnership to develop the MB100 Series for
the treatment of asthma. Asthma, characterized by obstruction of airways in the
lung, is estimated to affect 5% of the population in the U.S., or approximately
13 million people. Certain genes believed to be associated with the onset and
progression of asthma have been identified. Various companies are investing
heavily in further understanding the genetic cause of asthma.
MB200 SERIES
The MB200 Series, for intravenous administration, delivers genes which are
taken up preferentially by vascular endothelial cells in the lungs and other
tissues. Megabios believes that gene delivery systems in the MB200 Series, in
combination with various genes, may be useful in the treatment of several
diseases that are associated with angiogenesis, including:
- non-small cell lung cancer;
- macular degeneration;
- diabetic retinopathy;
- rheumatoid arthritis; and
- psoriasis.
In addition, Megabios believes that gene delivery systems in the MB200
Series may be useful for protein replacement therapy and to treat other medical
disorders such as cardiovascular and inflammatory diseases.
In preclinical studies, administration of a gene delivery system in the
MB200 Series in animals resulted in expression levels of a therapeutic protein
consistent with those required for a therapeutic effect. This suggests that the
MB200 Series could be used for protein replacement therapy, in which the gene
coding for a therapeutic protein is administered rather than the protein itself.
Megabios believes that the use of gene-based therapeutics in this manner may be
a viable alternative when therapeutic levels of a protein are difficult to
sustain or when a therapeutic protein is difficult or expensive to manufacture.
Megabios also believes that the ability to target cell types with gene
delivery systems in the MB200 Series may be useful in developing gene-based
therapeutics for cardiovascular diseases such as restenosis and atherosclerosis,
both of which may result in the blockage of blood vessels, leading to heart
attacks and strokes.
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MB300 SERIES
Megabios has developed a class of gene delivery systems, the MB300 Series,
which, following direct injection into tumors, are taken up by cancer cells.
Megabios believes that gene delivery systems in the MB300 Series may be useful
for the treatment of certain solid tumors. In preclinical studies involving a
canine model of spontaneously occurring oral melanoma, a gene delivery system in
the MB300 Series was used to deliver a combination of two therapeutic genes. The
data from this study indicated that a majority of the dogs that received the
treatment regimen exceeded their expected median survival period. These dogs
also had a higher number of activated white blood cells compared to untreated
animals. This effect suggests that the therapeutic genes augmented the immune
response to the tumor cells resulting in an increased survival rate for these
animals. Megabios believes that these results support the potential utility of
the gene delivery systems in the MB300 Series to facilitate immunotherapy
approaches for the treatment of multiple forms of cancer.
In June 1998 Megabios began a Phase I/II clinical study with the University
of Colorado Health Sciences Center for evaluation of a MB300 Series and a
two-gene combination as a treatment for melanoma. The Phase I/II trial is
underway to examine the safety of a gene-based therapeutic, injected directly
into tumors and will evaluate preliminary indications of biological activity.
MB400 SERIES
Megabios is developing a class of gene delivery systems, the MB400 Series,
designed to administer genetic immunotherapeutics by intramuscular, intradermal,
subcutaneous or intravenous injection. To date, the use of DNA for
immunotherapeutic purposes has been limited by inadequate levels of expression
of the antigen in the appropriate cell type. Megabios has designed and screened
many delivery systems, some of which may have improved targeting and expression
characteristics. If successful, these efforts could result in novel formulations
that may allow for the treatment or prevention of diseases, including:
- infections;
- autoimmune diseases; and
- certain forms of cancer.
OTHER GENE DELIVERY SYSTEMS
Megabios is developing five other classes of gene delivery systems. Megabios
believes that the MB500 Series, which is designed to deliver genes to
circulating macrophages, has potential utility in various infectious diseases
and hyperlipidemia. The MB600 Series is designed to deliver genes to cells in
the central nervous system for the potential treatment of neurodegenerative
diseases, including Parkinson's and Alzheimer's disease. The MB700 Series is
designed to deliver genes to solid tumor cells following intraperitoneal
administration. Megabios has entered into a corporate partnership with Lilly to
develop gene-based therapeutics using the MB700 Series as well as other gene
delivery systems, to deliver the BRCA1 gene to treat ovarian cancer. See "--
Corporate Partners--Lilly." Megabios intends to pursue additional corporate
partnerships to develop gene-based therapeutics to treat cancer using other,
non-BRCA1 therapeutic genes. The MB800 Series is designed to result in the
delivery of genes to connective tissue cells after injection into a joint. The
MB800 Series is the subject of a collaboration with researchers at the
University of Pittsburgh Medical Center for the research and development of
gene-based therapeutics for rheumatoid arthritis, osteoarthritis and cartilage
repair. The MB900 Series is designed for intramuscular injection, in particular,
for injection into skeletal and cardiac muscle, for delivery of angiogenic genes
for treating ischemia associated with peripheral vascular disease and coronary
artery disease, respectively.
Megabios cannot be certain that its gene delivery systems will have the
performance attributes to justify their further development or to attract
corporate partners. While Megabios has demonstrated some evidence of the utility
of its gene delivery systems in preclinical animal studies, these results do not
predict safety or efficacy in humans, when and if further clinical trials are
conducted. Megabios' products may prove to have undesirable and unintended side
effects or other characteristics that may
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prevent or limit their use. Megabios' products may not obtain FDA or other
regulatory or foreign marketing approval for any indication. Megabios' products
are also subject to risks particular to the development of gene-based
therapeutics. Gene-based therapy is a new and rapidly evolving technology and is
expected to undergo significant technological changes in the future. As a result
of the limited clinical data available regarding the safety and efficacy of
gene-based therapeutics and other factors, clinical trials relating to
gene-based therapeutics may take longer to complete than clinical trials
involving traditional pharmaceuticals. In addition, Megabios or its corporate
partners may be unable to manufacture such gene-based therapeutics on a
commercial scale or in an economical manner.
CORPORATE PARTNERS
Megabios has two ongoing collaborative research and development agreements
or "corporate partnerships." Megabios is actively seeking additional
partnerships with pharmaceutical and biotechnology companies. Many of these
potential partners have identified therapeutic genes, but Megabios believes many
such companies do not possess the technology or the know-how to develop
gene-based therapeutics. Megabios seeks license fees, equity investments,
funding for research and development, milestone payments and royalties on
product sales in exchange for commercial licenses to Megabios' gene delivery
technologies and access to its development expertise.
GLAXO WELLCOME
In April 1994, Megabios entered into a corporate partnership with Glaxo
Wellcome to develop a gene-based therapeutic for the treatment of cystic
fibrosis. Cystic fibrosis is the most common fatal genetic disease in
Caucasians, occurring in about 1 in 3,000 live births. The disease is believed
to afflict approximately 55,000 patients in the U.S. and Europe. Cystic fibrosis
is caused by a defect in the CFTR gene. This defect results in production of
defective CFTR protein, leading to the build-up of mucus in the lungs that often
results in infection, loss of lung function and premature death. The median life
expectancy of a patient with cystic fibrosis is approximately 30 years. Patients
with cystic fibrosis typically incur annual medical costs ranging from $15,000
to $55,000. Megabios believes that a gene-based therapeutic which results in
increased levels of normal CFTR protein on the surface of ciliated epithelial
cells may slow or halt the progression of this disease while reducing the total
cost of patient care.
Megabios has conducted preclinical testing of a gene delivery system in the
MB100 Series as a carrier for the CFTR gene. Data from these studies, including
the administration of the gene to primates via inhalation, have demonstrated
expression of the human form of the CFTR gene in the lungs in the appropriate
cell type with no evidence of inflammation. In addition, approximately 20% of
the target cells were shown to produce CFTR protein six weeks after a single
administration. This exceeds the level believed to be required for achieving a
therapeutic effect. Megabios believes these results suggest that this product
may be useful in the treatment of cystic fibrosis. In June 1997, Glaxo Wellcome
commenced a Phase I/II clinical trial in cystic fibrosis patients using a gene
delivery system in the MB100 Series as a carrier for the CFTR gene. The results
of this trial were presented in the fourth calendar quarter of 1998 and
demonstrated no evidence of inflammation associated with the delivery system.
The terms of the Glaxo Wellcome agreement provide Glaxo Wellcome with the
exclusive rights to manufacture, market and sell gene-based therapeutics
incorporating Megabios' gene delivery systems for the treatment of cystic
fibrosis. Glaxo Wellcome is responsible for clinical trials, large-scale
clinical and commercial manufacturing, and sales and marketing of any potential
gene-based therapeutics resulting from the corporate partnership. Glaxo Wellcome
provided funding for Megabios to conduct research and preclinical development
activities for a three-year period ended April 1997. In addition to having
received $5.3 million in research funding, Megabios is entitled to receive a
milestone payment from Glaxo Wellcome upon the commencement of a Phase III
clinical trial. A portion of this milestone payment will be credited against
future royalties. Megabios is also entitled to receive royalties on the
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sales of products resulting from the corporate partnership. Megabios has
completed all of its obligations under the Glaxo Wellcome agreement and will
receive future payments, if any, only through the achievement of the milestone
and royalties earned on sales of the resulting products.
LILLY
In May 1997, Megabios entered into a corporate partnership with Lilly to
develop gene-based therapeutics using BRCA1, a gene that has been identified as
a putative tumor suppressor. In normal cells, tumor suppressor genes act to
inhibit cell division. When a tumor suppressor gene, such as BRCA1, is missing
or defective, a cell may replicate uncontrollably, resulting in the formation of
a tumor. Various scientific publications have associated defects in BRCA1 with
breast, ovarian and prostate cancers. Increased expression of the BRCA1 gene in
diseased tissue may inhibit or prevent the uncontrolled cell growth associated
with cancer, without causing any adverse effect in normal cells. BRCA1 will be
developed as a gene-based therapeutic using gene delivery systems in the MB300
Series, which are administered via direct injection. BRCA1 will also be
developed using gene delivery systems in the MB700 Series, which are
administered into the intraperitoneal cavity. Megabios' gene-based therapeutic
under development with Lilly is initially focused on the delivery and expression
of BRCA1 in diseased cells in breast and ovarian tissue.
Under the agreement, Lilly receives the exclusive rights to develop, make,
use and sell the gene-based therapeutics incorporating BRCA1 that result from
the corporate partnership. Lilly will be responsible for clinical trials,
large-scale clinical and commercial manufacturing, and sales and marketing of
any gene-based therapeutics resulting from the corporate partnership. Megabios
will conduct research and preclinical development activities and will be
entitled to receive at least $7.0 million in research and development funding
during the first two years of the agreement. As of January 20, 1999, $6.6
million in research and development funding has been received.
Lilly has the right to extend the program for up to two additional years
from May 1999, provided Lilly gives notice to Megabios prior to February 24,
1999 of its intention to do so and the parties agree to the activities to be
undertaken during the extension period. In addition, Megabios may receive up to
an additional $27.5 million in payments upon the achievement of preclinical and
clinical milestones. These milestones include:
- the first allowances of investigational new drug applications or the
European equivalent,
- the completion of Phase III clinical trials;
- approval of biological license applications; and
- completion of process development.
If a product receives marketing approval from the FDA or an equivalent
foreign agency, Megabios is entitled to receive royalties on sales of products
resulting from the corporate partnership.
In connection with the execution of the agreement, Lilly purchased 285,714
shares of Megabios' Series F preferred stock for $3.0 million in 1997. Such
shares converted into 285,714 shares of common stock upon Megabios' initial
public offering, representing approximately 2 2/10% of Megabios' outstanding
common stock at September 30, 1998. The agreement permits Lilly to terminate the
program for any reason, including reasons unrelated to the program, after May
1999 upon three months prior notice. If Lilly terminates the program after May
1999, all licenses granted under the agreement shall terminate and Megabios will
have no rights, exclusive or otherwise, to develop, make, use or sell the
gene-based therapeutics incorporating BRCA1.
PFIZER INC.
In May 1996, Megabios entered into a corporate partnership with Pfizer Inc.
to develop a gene-based therapeutic for the treatment of solid tumors using gene
delivery systems of the MB200 Series which are designed to deliver genes that
inhibit angiogenesis. In December 1997, Pfizer decided to discontinue its
research and development program to develop gene-based therapeutics to treat
cancer via angiogenesis inhibition. Under the terms of the agreement with
Pfizer, Pfizer continued funding
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the program through May 31, 1998. Megabios intends to continue to advance the
anti-angiogenesis program and is actively seeking a new corporate partner.
Megabios is highly dependent upon its corporate partnerships with Glaxo
Wellcome and Lilly. Megabios cannot be certain that the Lilly agreement will be
extended. Research funds under the Lilly agreement or milestone payments
contemplated by any of Megabios' corporate partnerships may not be received.
Megabios cannot be certain that any of these corporate partnerships will result
in successfully commercialized products and that Megabios will receive related
royalty revenues. Should Megabios fail to receive research funds or should
milestones not be achieved, or should Glaxo Wellcome or Lilly breach or
terminate their respective agreements, Megabios' business, financial condition
and results of operations will be materially adversely affected. See "Risk
Factors--Risks Relating to the Business of Megabios After the Merger."
TECHNOLOGY LICENSES
Megabios actively investigates technologies under development at academic
and other research institutions. Megabios believes that such institutions are an
important source of breakthrough technologies and has entered into, and intends
to enter into, additional licensing arrangements to expand its core
technologies.
Megabios has an exclusive license to certain patents and patent applications
held by The Regents of the University of California related to in vivo,
non-viral delivery of genes using positively charged lipids, including delivery
by various modes of administration and for use in the treatment of cystic
fibrosis. Three patents have issued in the U.S. with respect to these patent
applications and two patents have issued in a foreign country. Under the terms
of The Regents license, Megabios paid a license fee to the Regents and is
obligated to make payments upon the achievement of clinical milestones. Megabios
is also required to make royalty payments on sales of products, if any. Megabios
has obligations regarding the process and timing of clinical activities and
seeking FDA approval for the development, manufacture and sale of products based
on the claims contained in such patent applications. The exclusive license
terminates upon the expiration of the last of the patents covered by the Regents
license, unless (1) terminated earlier by Megabios, or (2) terminated, or
converted to a non-exclusive license, earlier by the Regents. The Regents may
terminate the license or convert it to a nonexclusive license upon 60 days
notice if Megabios fails to meet certain milestones. However, the date by which
such milestones must be completed may be extended by Megabios for up to three
years upon payment of a specified fee for each year the date is extended. In
addition, the Regents may also terminate the license upon 60 days notice for a
material violation or material failure to perform any covenant under the
license.
Megabios has obtained an exclusive license from the National Jewish Medical
Research Center ("NJMRC") for patent rights related to the non-plasmid delivery
of a cytokine gene and a superantigen gene for the treatment of cancer. One
patent has issued in the U.S. and related applications are pending in the U.S.
and worldwide. Under the terms of the NJMRC license, Megabios has paid a license
fee and is obligated to make payments upon the completion of clinical
milestones. Megabios is also required to make royalty payments on sales of
products, if any. Megabios has obligations regarding the process and timing of
clinical activities and seeking FDA approval in the pursuit of development,
manufacture and sale of products based on the claims contained in such patent
applications. The exclusive license terminates upon the expiration of the last
of the patents covered by the NJMRC license, unless (1) terminated earlier by
Megabios, or (2) terminated, or converted to a non-exclusive license, earlier by
NJMRC. NJMRC may terminate the license or convert it to a nonexclusive license
if Megabios fails to meet certain milestones. However, the date by which such
milestones must be completed may be extended by Megabios for up to 3 years upon
payment of a specified fee for each year a date is extended. In addition, NJMRC
may also terminate the license for a material violation or material failure to
perform any covenant under the license.
In March of 1998, Megabios entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which Megabios obtained an exclusive license to
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certain patent rights held by UPMC in the field of viral and plasmid-based
therapy for rheumatology. Of these patent rights, one patent has issued in the
U.S., and related applications are pending in the U.S. and worldwide. Under the
terms of the UPMC license and collaboration agreement, Megabios issued 117,555
shares of common stock in exchange for the exclusive license to these patent
rights. Under the terms of the UPMC license and collaboration agreement,
Megabios is obligated to make payments upon the completion of certain
milestones. Megabios is not obligated to pay additional royalty payments upon
the sale of products, if any, in the field of plasmid-based therapy. Megabios is
required to share revenue with UPMC at a specified rate upon sublicense of
rights in the field of viral gene therapy. Certain of the license rights may
revert back to UPMC in the event that Megabios fails to commit resources to the
development of products in the field of rheumatology. In addition, the UPMC
license and collaboration agreement established collaborations between Megabios
and several researchers at UPMC for the research and development of gene-based
therapies in the field of rheumatology. Intellectual property developed by UPMC
under the collaboration will be included in the exclusive license to Megabios
described above at no additional cost to Megabios. The exclusive license
terminates upon the expiration of the last of the patents covered by the UPMC
license and collaboration Agreement, unless (1) terminated earlier by Megabios,
or (2) terminated, or converted to a non-exclusive license, earlier by UPMC.
Megabios has obtained an option to exclusively license patent rights from
Stanford University relating to the use of a nitric oxide synthetase gene for
certain cardiovascular applications. Under the terms of the Stanford option,
Megabios has paid an option fee. In November 1998, Megabios exercised the
Stanford option. Megabios will be obligated to pay a license fee, milestone fees
upon completion of clinical milestones and to make royalty payments on sales of
products, if any. Megabios will have obligations regarding the process and
timing of clinical activities and seeking FDA approval in the pursuit of
development, manufacture and sale of products based on the claims contained in
such patent applications. In addition, Stanford will have the ability to
terminate the license for a material violation or material failure to perform
any covenant under the license.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to Megabios' business.
Megabios' policy is to file patent applications to protect technology,
inventions and improvements to inventions that are commercially important to the
development of its business. Megabios also relies on trade secrets,
confidentiality agreements and other measures to protect its technology and
proposed products. Megabios' failure to obtain patent protection or otherwise
protect its proprietary technology or proposed products may have a material
adverse effect on Megabios' competitive position and business prospects.
Megabios has rights under its licenses with The Regents, NJMRC, and UPMC to
five issued U.S. patents and several U.S. and foreign pending patent
applications. In addition, Megabios itself has six issued patents in the U.S. as
well as several pending patent applications in the U.S. and worldwide. The
patents Megabios currently holds or licenses will expire as follows: one in
2010, one in 2012, one in 2013, four in 2014, and four in 2015. The patent
application process takes several years and entails considerable expense.
Megabios cannot be certain that additional patents will issue from these
applications or, if patents do issue, that the claims allowed will be sufficient
to protect Megabios' technology.
A number of the gene sequences that Megabios and its corporate partners are
investigating or may use in its products are or may become patented by others.
As a result, Megabios or its corporate partners may be required to obtain
licenses to such gene sequences or other technology in order to use or market
such products. In addition, some of the products based on Megabios' gene
delivery systems may require the use of multiple proprietary technologies.
Consequently, Megabios or its corporate partners may be required to make
cumulative royalty payments to several third parties, which payments could
reduce amounts paid to Megabios or be commercially prohibitive.
The patent positions of pharmaceutical and biotechnology firms are often
uncertain and involve complex legal and factual questions. As a result, Megabios
cannot predict the breadth of any claims in
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allowed patents. Further, competitors may have filed applications for, or may
have received patents and may obtain additional proprietary rights relating to,
compounds, products or processes that block or compete with those of Megabios.
Megabios cannot be certain what effect, if any, third party patents and patent
applications will have on products Megabios or its corporate partners are
developing or may seek to develop in the future.
Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to Megabios, to protect trade secrets or
know-how owned or licensed by Megabios, or to determine the scope and validity
of the proprietary rights of third parties. Although no third party has asserted
that Megabios is infringing such third party's patent rights or other
intellectual property, Megabios cannot be certain that litigation asserting such
claims will not be initiated. Megabios may not prevail in any such litigation.
Regardless of the outcome, any such litigation is costly and may inhibit or
prevent Megabios' ability to practice its technology. If other companies prepare
and file patent applications in the U.S. that claim technology also claimed by
Megabios, Megabios may have to participate in interference proceedings to
determine priority of invention, which is costly.
Megabios also relies on proprietary information and trade secrets, including
its proprietary database of preclinical in vivo experiments, to develop and
maintain its competitive position. Third parties may independently develop
equivalent proprietary information or techniques, gain access to Megabios' trade
secrets or disclose such technology to the public. Megabios typically enters
into confidentiality agreements with employees, consultants and collaborators.
However, such agreements may not adequately protect Megabios' technology. The
parties to such agreements may breach such agreements or Megabios' trade secrets
may otherwise become known or be discovered independently by its competitors. It
is anticipated that Megabios' current form of proprietary information and
inventions agreement will continue to be used after completion of the merger.
See "Risk Factors--Risks Relating to the Business of Megabios After the Merger."
MANUFACTURING AND COMMERCIALIZATION
Megabios' focused commercialization strategy is based on entering corporate
partnerships with pharmaceutical and biotechnology companies. Under these
corporate partnerships, Megabios will primarily pursue preclinical and early
clinical development of gene-based therapeutics, while corporate partners will
be responsible for late stage clinical trials, sales, marketing, and large-scale
clinical and commercial manufacturing. Under the terms of the Glaxo Wellcome
agreement and Lilly agreement, Megabios' corporate partners have received
exclusive rights for large-scale, clinical and commercial manufacturing of the
gene-based therapeutics for use in the areas covered by these agreements.
Megabios has demonstrated that its DNA plasmids, DNA:lipid complexes and
formulations can be produced at pilot scale. Megabios believes that commercial
quantities of material may be prepared using conventional and proprietary
fermentation and purification processes. Megabios currently operates a pilot
manufacturing facility and has produced DNA plasmids at a contract manufacturer
at the 1,000 liter scale. The lipid components of Megabios' gene delivery
systems can be synthesized using readily scalable, organic synthesis procedures.
To date, Megabios has obtained access to lipid manufacturing through
arrangements with contract manufacturers. Preparation of DNA:lipid complexes has
been carried out at Megabios' pilot manufacturing facility.
Megabios has supplied clinical-grade material to Glaxo Wellcome for use in a
Phase I/II clinical trial of a gene-based therapeutic to treat cystic fibrosis.
Glaxo Wellcome is in the process of scaling up its production capabilities using
Megabios' proprietary processes and methods to meet clinical requirements. Under
the Lilly agreement, Megabios is obligated to provide material used in
preclinical testing and may supply material for clinical trials.
Under the terms of the Glaxo Wellcome agreement and Lilly agreement, the
corporate partners have received exclusive rights to market and sell Megabios'
gene-based therapeutics that are developed pursuant to these corporate
partnerships. Megabios is highly dependent upon each of its corporate
partnerships with Glaxo Wellcome and Lilly. Megabios cannot control whether
Glaxo Wellcome or Lilly will devote sufficient resources to the
commercialization of Megabios' potential products on a timely
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basis, and such resources could vary due to factors unrelated to Megabios'
products. If such corporate partners fail to conduct these activities in a
timely manner or at all, the commercialization of Megabios' products could be
delayed or terminated. Failure of Megabios' corporate partners to manufacture
successfully the potential products for large-scale clinical trials or
commercial use, or to commercialize successfully the potential products, would
have a material adverse effect on Megabios' business, financial condition and
results of operations.
In September 1998, Megabios and DSM Biologics announced the formation of a
broad, strategic partnership focused on the manufacture and supply of DNA
plasmids and lipid:DNA complexes to the entire gene therapy industry. Plasmids
are circular pieces of DNA that contain a therapeutic gene and instructional
elements that regulate the activity of the gene. The manufacturing process can
be used to produce any plasmid. Under the agreement, Megabios has exclusively
licensed its proprietary manufacturing technology to DSM for use in its facility
in Montreal, Canada and may be extended to include DSM's facility in Groningen,
The Netherlands. In return, DSM will pay license and milestone fees to Megabios,
and DSM and Megabios will share in the profits generated by the sale of material
produced using Megabios' process. The term of the exclusive partnership is at
least three years, after which either party has the option to terminate if the
venture is not profitable.
The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Glaxo Wellcome,
and a Phase I/II study for metastatic melanoma, conducted by Megabios and its
academic collaborators at the University of Colorado Health Sciences Center. The
partnership has the potential to create the first manufacturing facility that
can produce high-quality, ultrapure material for plasmid-based therapeutics on
every scale, from preclinical toxicology studies to commercial products. DSM
will have full responsibility for manufacturing material to be marketed to any
company or institution working in the field of gene therapy. The partnership
will use Megabios' proprietary methods for the manufacture of DNA plasmids and
complexing that DNA with lipids.
Megabios will be dependent on DSM for commercial-scale manufacturing of its
products. Successful large-scale manufacturing of gene-based therapeutics has
not been demonstrated by DSM or any third parties. Megabios cannot be certain
that DSM will be able to develop adequate manufacturing capabilities for
production of commercial-scale quantities of gene-based therapeutics. In
addition Megabios cannot be certain that, in the event DSM cannot provide such
quantities of gene-based therapeutics, Megabios will be able to obtain the
products from a third party. See "Risk Factors--Risks Relating to the Business
of Megabios After the Merger."
GOVERNMENT REGULATION
The production and marketing of Megabios' products and its research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous governmental authorities in the U.S. and other
countries. In the U.S., pharmaceutical products are subject to rigorous
regulation by the FDA. Megabios believes that the FDA and comparable foreign
regulatory bodies will regulate the commercial uses of its products as
biologics. Biologics are regulated under provisions of the Public Health Service
Act and the Federal Food, Drug, and Cosmetic Act. These laws and the related
regulations govern, among other things, testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, and the promotion, marketing and
distribution of biological products. At the FDA, the Center for Biologics
Evaluation and Research is responsible for the regulation of biological products
and has handled FDA's regulation of most gene-based therapeutics to date.
Gene-based therapy, however, is a relatively new technology and the regulatory
requirements governing gene-based therapeutics are uncertain. Megabios is not
aware of any gene-based therapeutics that have received marketing approval from
the FDA or any comparable foreign authorities.
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The necessary steps before a new biological product may be marketed in the
U.S. include:
- preclinical laboratory tests and in vivo preclinical studies;
- the submission to the FDA of an IND for clinical testing, which must
become effective before clinical trials commence;
- in some cases, approval by a special advisory committee convened to review
INDs involving gene-based therapeutics;
- adequate and well-controlled clinical trials to establish the safety and
efficacy of the product;
- the submission to the FDA of a product license application and
establishment license application ("PLA/ELA"); and
- FDA approval of the PLA/ELA prior to any commercial sale or shipment of
the biologic.
The FDA has eliminated the requirement of a separate ELA for some categories
of biotechnology products, including, for example, therapeutic recombinant
DNA-derived products and gene-based therapeutics. Furthermore, the FDA has
announced that it will review all new biologic products under a single biologics
license application.
Clinical trials are conducted in three sequential phases, but the phases may
overlap. In Phase I, the initial introduction of the product into healthy human
subjects or patients, the drug is tested to assess safety, metabolism,
pharmacokinetics and pharmacological actions associated with increasing doses.
Phase II usually involves studies in a limited patient population to:
- determine the efficacy of the potential product for specific, targeted
indications;
- determine dosage tolerance and optimal dosage; and
- further identify possible adverse effects and safety risks.
If a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
further clinical efficacy and to test further for safety within a broader
patient population at geographically dispersed clinical sites. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
Megabios' or its corporate partners' products subject to such testing. In
addition, after marketing approval is granted, the FDA may require
post-marketing clinical studies which typically entail extensive patient
monitoring and may result in restricted marketing of the product for an extended
period of time.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biological product.
The testing and approval process is likely to require substantial time, effort
and financial and human resources. Megabios cannot be certain that any approval
will be granted on a timely basis, or at all. Data obtained from preclinical
studies and clinical trials are subject to interpretations that could delay,
limit or prevent regulatory approval. The FDA may deny the PLA/ ELA if
applicable regulatory criteria are not satisfied or require additional testing
or information. Moreover, if regulatory approval of a biological product is
granted, such approval may include limitations on the indicated uses for which
it may be marketed. Finally, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing.
For clinical investigation and marketing outside the U.S., Megabios and its
corporate partners may be subject to FDA as well as regulatory requirements of
other countries. The FDA regulates the export of biological products, whether
for clinical investigation or commercial sale. In Europe, the approval process
for the commencement of clinical trials varies from country to country. The
regulatory approval
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process in other countries includes requirements similar to those associated
with FDA approval set forth above. Approval by the FDA does not ensure approval
by the regulatory authorities of other countries.
COMPETITION
Gene delivery and gene-based therapies are relatively new, rapidly evolving
areas of science in which significant and unexpected technological advances are
likely. Rapid technological development could result in Megabios' products or
technologies becoming obsolete before Megabios recovers a significant portion of
its related research, development and capital expenditures. Megabios is aware
that several pharmaceutical and biotechnology companies are actively engaged in
research and development in areas related to gene-based therapy, or have
commenced clinical trials of gene-based therapeutics. Many of these companies
are addressing diseases that have been targeted by Megabios or its corporate
partners.
Megabios also may experience competition from companies that have acquired
or may acquire gene-based technology from universities and other research
institutions. As competitors develop their technologies, they may develop
proprietary positions in a particular aspect of gene delivery and gene-based
therapeutics that may materially and adversely affect Megabios.
Many of Megabios' competitors and potential competitors have substantially
greater product development capabilities and financial, scientific,
manufacturing, managerial and human resources than Megabios. Research and
development by others may render Megabios' delivery systems or the products
developed by corporate partners using Megabios' delivery systems obsolete or
non-competitive. See "Risk Factors--Risks Relating to the Business of Megabios
After the Merger."
PRODUCT LIABILITY INSURANCE
The manufacture and sale of human therapeutic products involve an inherent
risk of product liability claims and associated adverse publicity. Megabios
currently has only limited product liability insurance. Megabios cannot be
certain that it will be able to maintain existing or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. An inability to obtain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of products by Megabios. A
product liability claim brought against Megabios in excess of its insurance
coverage, if any, or a product withdrawal, could have a material adverse effect
upon Megabios' business, financial condition and results of operations.
EMPLOYEES
As of February 5, 1999 Megabios employed 57 individuals full-time, including
17 who hold doctoral degrees. Of Megabios' total work force, 42 employees are
engaged in or directly support research and development activities, and 15 are
engaged in business development, finance and administrative activities.
Megabios' employees are not represented by a collective bargaining agreement.
Megabios believes its relationships with its employees are good.
FACILITIES
Megabios' currently leases approximately 45,300 square feet in Burlingame,
California, all of which is occupied or under construction. This facility has
been built to Megabios' specifications to accommodate Megabios' laboratory,
support and administrative needs and includes a pilot manufacturing facility
designed to supply material required for preclinical research and development.
The term of the lease for the 34,700 square feet in use expires in 2004, at
which time Megabios has the option to renew the lease. Approximately 10,600
square feet is being built-out for use as a pilot manufacturing facility. The
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term of the lease for this portion of the facility expires in 2007, at which
time Megabios has the option to renew the lease. Megabios believes that the
facility and its expansion will be adequate to meet Megabios' needs for the
foreseeable future.
LEGAL PROCEEDINGS
From time to time, Megabios may be involved in claims or litigation that
arise in the normal course of business. As of the date of this prospectus,
Megabios is not a party to any legal proceedings which, if decided adversely to
Megabios, would have a material adverse effect on Megabios' business, financial
condition or results of operations.
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MEGABIOS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Megabios Corp. Selected Historical Financial Information" and the consolidated
financial statements and notes thereto. Except for the historical information
contained herein, the discussion in this joint proxy statement/prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of Megabios' plans, objectives, expectations and intentions. The
cautionary statements made in this joint proxy statement/prospectus should be
read as being applicable to all related forward-looking statements wherever they
appear in this prospectus. Megabios' actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include those discussed in this section and the sections entitled "Risk Factors"
on page 11 and "Information Relating to Megabios-- Megabios Business" on page
64, as well as those discussed elsewhere in this joint proxy statement/
prospectus.
OVERVIEW
Megabios develops proprietary gene delivery systems and provides preclinical
development expertise to create gene-based therapeutics designed for the
treatment or prevention of genetic and acquired diseases. Megabios has developed
several IN VIVO, non-viral gene delivery systems to address a number of
potential therapeutic applications using a variety of therapeutic genes.
Megabios' clinical development and commercialization strategy is to enter into
corporate partnerships with pharmaceutical and biotechnology companies. Megabios
has established corporate partnerships with Glaxo Wellcome, Pfizer and Lilly. In
December 1997, Pfizer decided to discontinue its research and development
program to develop gene-based therapeutics to treat cancer via angiogenesis
inhibition. Under the terms of the agreement with Pfizer, Pfizer continued
funding the program through May 31, 1998. Megabios intends to continue to
advance the angiogenesis inhibition program and is actively seeking a new
corporate partner. The corporate partnerships with Glaxo Wellcome and Lilly are
ongoing.
In March 1998, Megabios acquired patent rights and a technology portfolio in
the area of rheumatology via an exclusive license agreement with the University
of Pittsburgh Medical Center and established a collaboration with key scientists
at the University.
To date, substantially all revenue has been generated by collaborative
research and development agreements from corporate partners, and no revenue has
been generated from product sales. Under the terms of its corporate partnerships
Megabios receives research and development funding on a quarterly basis in
advance of associated research and development costs. Megabios expects that
future revenue will be derived in the short-term from research and development
agreements and milestone payments and in the long-term from royalties on product
sales.
Megabios has incurred significant losses since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
expansion of its research and development programs and because Megabios does not
expect to generate revenue from the sale of products in the foreseeable future,
if at all. Megabios expects that operating results will fluctuate from quarter
to quarter and that such fluctuations may be substantial. As of September 30,
1998, Megabios' accumulated deficit was approximately $31.8 million.
On January 18, 1999, Megabios announced a reduction in its research and
development staff in anticipation of the integration of Megabios and
GeneMedicine upon the closing of the merger. The expected costs related to this
reduction in force are expected to be approximately $250,000. At present,
Megabios anticipates that additional costs to integrate GeneMedicine's
operations will not be significant to the combined company's financial position
or results of operations.
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RESULTS OF OPERATIONS
REVENUE
Megabios' collaborative research and development revenue totaled
approximately $8.1 million, $5.8 million, and $1.9 million for the years ended
June 30, 1998, 1997 and 1996, respectively. Megabios' collaborative research and
development revenue totaled approximately $773,000 and $2.3 million for the
quarters ended September 30, 1998 and 1997, respectively. The revenue for the
year ended June 30, 1998 was attributable to amounts earned for research and
development performed under Megabios' corporate partnerships with Pfizer and
Lilly, totalling approximately $4.0 million each. The revenue for the year ended
June 30, 1997 was primarily attributable to amounts earned for research and
development performed under Megabios' corporate partnerships with Glaxo
Wellcome, Pfizer and Lilly totalling approximately $2.0 million, $3.4 million
and $270,000, respectively. The revenue for the year ended June 30, 1996 was
primarily attributable to amounts earned for research and development performed
under Megabios' corporate partnerships with Glaxo Wellcome and Pfizer of
approximately $1.6 million and $265,000, respectively. Revenue for the three
months ended September 30, 1998 was attributable to amounts earned for research
and development performed under the Company's corporate collaboration with
Lilly. Revenue for the three months ended September 30, 1997 was primarily
attributable to amounts earned for research and development performed under the
Company's corporate collaborations with Pfizer and Lilly totaling approximately
$1.2 million and $1.1 million, respectively. No revenue from milestones or
royalties from product sales have been earned under any corporate partnership to
date.
EXPENSES
Research and development expenses increased to $15.1 million for the year
ended June 30, 1998 from $8.6 million in 1997 and $6.5 million in 1996. Research
and development expenses increased to $3.4 million for the three months ended
September 30, 1998 from $2.8 million for the same period in 1997. The increases
in each period were primarily attributable to increased headcount expenses,
increased purchases of laboratory supplies and materials, increased depreciation
from additional equipment and leasehold improvements and the increased use of
consultants and other services to support Megabios' research and development
activities. In addition, in March 1998, Megabios purchased patent rights and an
exclusive license to certain technology from the University of Pittsburgh. In
partial consideration for this exclusive license, Megabios issued 117,555 shares
of its common stock to the University of Pittsburgh. The value of the common
stock issued in the transaction was $1.5 million, which was expensed to research
and development during the period. Megabios expensed the value of this common
stock as the technology was under development and had not reached technological
feasibility at the date of acquisition. Megabios expects research and
development expenses to increase as Megabios continues to expand its independent
and collaborative research and development programs.
General and administrative expenses increased to $3.6 million for the year
ended June 30, 1998 from $2.4 million in 1997 and $2.2 million in 1996. General
and administrative expenses increased to $1.1 million for the three months ended
September 30, 1998 from $675,000 in the corresponding period of 1997. The
increase in 1998 compared to 1997 was primarily attributable to increased
administrative headcount and costs associated with being a newly public company.
The increase in 1997 compared to 1996 was primarily attributable to increased
headcount and expenses associated with increased business development
activities. Megabios expects general and administrative expenses to increase due
to business development activities and to expenses incurred as a publicly traded
company.
INTEREST INCOME(EXPENSE), NET
Interest income(expense), net increased to $2.2 million in 1998 compared
with $0.3 million in 1997 and ($0.1) million in 1996. Interest income increased
to $679,000 for the three months ended September 30, 1998 compared with $398,000
for the same period in 1997. The increase in interest income(expense), net in
1998 compared to 1997 resulted primarily from the increase in average cash
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and investment balances as a result of $31.4 million in net proceeds from
Megabios' initial public offering in September 1997 partially offset by higher
outstanding balances on an equipment financing line of credit. The increase in
interest income(expense), net in 1997 compared to 1996 resulted from the
increase in average cash and investment balances as a result of sales of equity
securities of Megabios partially offset by a bank term loan acquired in 1997 and
higher outstanding balances on an equipment financing line of credit.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, Megabios had $44.9 million in cash, cash
equivalents and investments compared to $48.4 million at June 30, 1998, $24.3
million at June 30, 1997 and $5.3 million at June 30, 1996.
Net cash used in Megabios' operations was $5.6 million in 1998, $3.0 million
in 1997, and $5.5 million in 1996. Net cash used in Megabios' operations was
$3.3 million for the quarter ended September 30, 1998, compared to $1.3 million
for the same period in 1997. This cash was used primarily to fund increasing
levels of research and development and the general and administrative
activities. Megabios' capital expenditures were $2.7 million in 1998, $1.7
million in 1997 and $1.1 million in 1996.
As of December 31, 1998, Megabios had commitments for capital expenditures
of approximately $1.0 million. These capital expenditures relate primarily to
equipment for the Megabios manufacturing facility currently under construction
and will be paid for either by additional draws on existing capital lease lines
or from working capital.
In June 1998, Megabios obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, Megabios had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $2.5 million was drawn from the line of credit in
the quarter ended September 30, 1998. Interest on this amount is accrued and
paid monthly and will be converted into a term loan bearing interest at the
prime rate plus 0.5% on December 31, 1998. The $2.5 million draw will be payable
in 42 monthly installments beginning January 31, 1998. The remaining $4.5
million is available to Megabios through December 31, 1998.
On September 15, 1997, Megabios completed an initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on September
29, 1997, Megabios' underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of Megabios' common stock at $12.00 per
share. The combined net proceeds raised from the initial public offering and the
exercise of the over-allotment option were approximately $31.4 million.
In May 1996, Megabios entered into an equipment financing agreement for up
to $2.7 million. As of September 30, 1998 Megabios had borrowed approximately
$2.7 million under this agreement for equipment purchases structured as loans.
These loans are being repaid over 48 months at interest rates ranging from 15.2%
to 16.2% per annum.
In December 1993, Megabios entered into a financing agreement for up to $2.3
million with a financing company. As of September 30, 1998, Megabios had
borrowed $1.9 million under the agreement for equipment purchases and tenant
improvements structured as loans. These loans are being repaid over 42 months at
interest rates ranging from 13.8% to 16.2% per annum.
Megabios anticipates that its cash and cash equivalents, committed funding
from existing corporate partnerships, lines of credit and projected interest
income, will enable Megabios to maintain its current and planned operations
through fiscal 2001. However, there can be no assurance that Megabios will not
require additional funding prior to such time. Megabios' future capital
requirements will depend on many factors, including scientific progress in its
research and development programs, the size and complexity of such programs, the
scope and results of preclinical studies and clinical trials, the ability of
Megabios to establish and maintain corporate partnerships, the time and costs
involved in obtaining regulatory approvals, the time and costs involved in
filing, prosecuting and enforcing patent claims,
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competing technological and market developments, the cost of manufacturing
preclinical and clinical materials and other factors not within Megabios'
control.
Megabios is seeking additional collaborative agreements with corporate
partners and may seek additional funding through public or private equity or
debt financing. There can be no assurance, however, that any such agreements may
be entered into or that they will reduce Megabios' funding requirements or that
additional funding will be available. Megabios expects that additional equity or
debt financing may be required to fund its operations. There can be no assurance
that additional financing to meet Megabios' funding requirements will be
available on acceptable terms or at all.
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require
Megabios to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than Megabios would
otherwise seek to obtain, which could materially adversely affect Megabios'
business, financial condition and results of operations.
ACQUISITION OF GENEMEDICINE RESEARCH AND DEVELOPMENT PROGRAMS
There are seven primary GeneMedicine R&D programs that Megabios is
acquiring. Megabios' management is primarily responsible for estimating the fair
value of the purchased in-process research and development. Each of the programs
have been valued based on a discounted probable future cash flow analysis using
a discount rate of 40%, which management believes adequately reflects the
substantial risk of gene therapy research and development. In the valuation
model, it is assumed that for each program preclinical studies and clinical
trials are successfully completed, regulatory approval to market the product is
obtained, a marketing partner is secured and Megabios is able to manufacture the
product in commercial quantities. Each of these activities is subject to
significant risks as described in "Risk Factors" and elsewhere in this joint
proxy statement/prospectus. The seven R&D programs were valued as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Cancer gene medicines (IL-2, IFN-a, IL-12);.............................................. $ 9,900
Hemophilia gene medicines (Factor VIII and IX);.......................................... 2,000
Growth Factor gene medicines (IGF-I);.................................................... 5,400
Pulmonary gene medicines (AAT GM);....................................................... 1,800
Vascular Growth Factor gene medicines (VEGF);............................................ 3,400
Drug-controlled GeneSwitch-TM- technology;............................................... 1,900
Nucleic Acid Programs/(APC).............................................................. 1,600
-------------
$ 26,000
-------------
-------------
</TABLE>
Each of the programs and their relative stage of development, including key
assumptions used in the valuation, are described in greater detail below.
CANCER GENE MEDICINES. GeneMedicine is currently working on three cancer
gene medicines, including IL-2, IFN-a and IL-12.
GeneMedicine recently completed Phase I clinical trials for IL-2, and
expects to begin Phase II trials early in the first calendar quarter of 1999.
Phase I/II trials for IFN-a and IL-12 are planned for the first quarter of 1999
and second quarter of 1999, respectively.
Before a product can be successfully marketed, Megabios' corporate partner
must fund clinical studies and, if successfully completed, the market
introduction of the cancer gene medicines. Product efficacy and dose
responsiveness must be proven in Phase II and Phase III human clinical trials
and FDA approval is required before market introduction. Megabios currently
estimates, and the valuation reflects, that these activities could be completed
and revenues could begin to accrue to Megabios with the projected introduction
of a product in 2004.
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Management estimates that GeneMedicine has incurred approximately $17
million in research and development expenses directly related to this program
and expects that the remaining R&D efforts will total more than $8 million over
the next five years.
HEMOPHILIA GENE MEDICINES (FACTOR VIII & IX). Management estimates that
GeneMedicine has incurred approximately $10 million in research and development
expenses directly related to this program and expects that the remaining R&D
efforts related to the hemophilia program will total approximately $5 million
over the next four years.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical studies and market
introduction. Megabios needs to complete preclinical animal studies and human
Phase I safety studies. Product efficacy and dose responsiveness must be proven
in Phase II and Phase III human clinical trials and FDA approval is required
before market introduction. Megabios currently estimates, and the valuation
reflects, that these activities could be completed and revenues could begin to
accrue to Megabios with the projected introduction of a product in 2005.
GROWTH FACTOR GENE MEDICINES (IGF-I). GeneMedicine is developing the IGF-I
gene medicine for the treatment of post-menopausal female incontinence.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical studies and market
introduction. Megabios needs to complete human Phase I safety studies. Product
efficacy and dose responsiveness must be proven in Phase II and Phase III human
clinical trials and FDA approval is required before market introduction.
Megabios currently estimates, and the valuation reflects, that these activities
could be completed and revenues could begin to accrue to Megabios with the
projected introduction of a product in 2007.
Management estimates that GeneMedicine has incurred approximately $10
million in research and development expenses directly related to this program
and expects that the remaining R&D efforts related to the IGF-I program will
total approximately $12 million over the next six years.
PULMONARY GENE MEDICINES (AAT GM). GeneMedicine is working on the
development of a gene medicine intended to treat alpha-1 antitrypsin deficiency,
a significant contributor to the development of emphysema.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical studies and market
introduction. Product efficacy and dose responsiveness must be proven in Phase
II and Phase III human clinical trials and FDA approval is required before
market introduction. Megabios currently estimates, and the valuation reflects,
that these activities could be completed and revenues could begin to accrue to
Megabios with the projected introduction of a product in 2007.
Management estimates that GeneMedicine has incurred approximately $1 million
in research and development expenses directly related to this program and
expects that the remaining R&D efforts related to the IGF-I program will total
approximately $16 million over the next seven years.
VASCULAR GROWTH FACTOR GENE MEDICINES (VEGF). GeneMedicine is developing a
vascular endothelium growth factor gene medicine to prevent proliferation of
smooth muscle cells and reclosure of the vessels in patients who are undergoing
either coronary angioplasty or peripheral angioplasty.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical studies and market
introduction. Product efficacy and dose responsiveness must be proven in Phase
II and Phase III human clinical trials and FDA approval is required before
market introduction. Megabios currently estimates, and the valuation reflects,
that these activities could be completed and revenues could begin with the
projected introduction of a product in 2007.
Management estimates that GeneMedicine has incurred approximately $6 million
in research and development expenses directly related to this program and
expects that the remaining R&D efforts related to the VEGF program will total
approximately $11 million over the next seven years.
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DRUG-CONTROLLED GENESWITCH-TM- TECHNOLOGY. GeneMedicine is developing
proprietary systems designed to control the level, duration, fidelity and
reproducibility of expression of administered genes.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical trials, and market
introduction. Megabios needs to complete Phase I human safety studies. Product
efficacy and dose responsiveness must be proven in Phase II and Phase III human
clinical trials and FDA approval is required before market introduction.
Megabios currently estimates, and the valuation reflects, that these activities
could be completed and revenues could begin with the projected introduction of a
product in 2008.
Management estimates that GeneMedicine has incurred approximately $2 million
in research and development expenses directly related to this program and
expects that the remaining R&D efforts related to the GeneSwitch technology
development program will total approximately $10 million over the next seven
years.
NUCLEIC ACID PROGRAMS (APC). GeneMedicine is performing research related to
opportunities in the field of nucleic acid vaccines.
Before a product can be successfully marketed, Megabios needs to attract a
corporate partner to fund product development, clinical studies and market
introduction. Megabios needs to complete preclinical animal studies and Phase I
human safety studies. Product efficacy and dose responsiveness must be proven in
Phase II and Phase III human clinical trials and FDA approval is required before
market introduction. Megabios currently estimates, and the valuation reflects,
that these activities could be completed and revenues could begin with the
projected introduction of a product in 2008.
Management estimates that GeneMedicine has incurred approximately $4 million
in research and development expenses directly related to this program.
Management expects that the remaining R&D efforts related to the GeneSwitch
technology development program will total approximately $13 million over the
next eight years.
SUMMARY. Over the past five years, GeneMedicine has incurred more than $50
million of R&D expenses in the development of its current R&D programs. Costs to
complete these projects could aggregate approximately $75 million over the next
five to seven years. GeneMedicine currently expects that gene medicines which
utilize its proprietary developmental-stage technologies will obtain FDA
approval beginning at various times beginning in 2005 through 2008. If such gene
medicines are successfully completed, GeneMedicine will receive a royalty on the
product sales.
The nature of the efforts required to develop the acquired in-process R&D
into technologically feasible and commercially viable products principally
relate to the successful performance of additional preclinical studies and
clinical trials. Though GeneMedicine currently expects that the acquired in-
process technology will be successfully developed, there can be no assurance
that commercial or technical viability of these products will be achieved. While
the expectations and promise of gene therapy are great, clinical efficacy has
not yet been demonstrated. Many approaches to gene therapy are being pursued by
pharmaceutical and biotechnology companies, but there are currently no marketed
gene therapy products and none are expected for the next several years.
IMPACT OF YEAR 2000
A major issue currently faced by all industries is the Y2K computer issue.
The problem arises from the use in computer hardware and software of the last
two digits rather than four digits to define the year. As a result, computer
programs are unable to distinguish a year which begins with "20" or "19". This
can then cause failures in computer systems and applications, or create
erroneous results unless steps are taken to prevent such failures and errors.
The Y2K problem is also compounded by the fact that many computer and
telecommunication systems are interdependent, both within the United States and
throughout the world. Thus, the failure of one system may lead other systems to
fail, even if these systems are themselves Y2K compliant.
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<PAGE>
In order to address this issue, Megabios has put a Y2K plan in place to
identify, evaluate and modify its current systems or purchase and implement new
systems. Megabios is reviewing and assessing the potential systems within
Megabios and at key third party vendors that would be affected by the Y2K issue.
A Y2K committee, comprised of members of all of Megabios' departments and senior
management, has been established to evaluate, assess and prioritize Megabios'
internal systems and key vendors' systems.
Megabios is in the evaluation stage and has determined that it will be
required to upgrade or replace a portion of its accounting software. A program
is underway to evaluate existing or new financial software and applications.
Completion of Megabios' Y2K plan is targeted for the calendar fourth quarter
of 1999. Megabios believes that, with upgrades of existing software and/or
conversions to new software, the Y2K issue will not pose significant operational
problems for its business activities. However, if such upgrades or conversions
are not made, or are not completed in a timely fashion, the Y2K issue could have
a material impact on the operations of Megabios, the precise degree of which
cannot be known at this time. For example, a failure of the Company's accounting
systems would require that some accounting functions be performed manually. Such
failure could result in delays of payments to employees, vendors and other
suppliers. Moreover, failure of internal systems may result in delays in work
being conducted in the Company's laboratories, or even the loss of work and the
delay of completion of research projects. Megabios currently has no contingency
plans to deal with major Y2K failures, though such plans will be developed over
the coming quarters.
Megabios has also contacted its significant suppliers to determine the
extent to which Megabios' operations are vulnerable to those third parties' Y2K
issues. When evaluation is completed, Megabios will modify or replace internal
systems and enter into new business relationships with Y2K compliant vendors in
the ordinary course of business. Megabios plans to establish contingency plans
by the end of the calendar third quarter of 1999 to utilize vendors whose
systems are Y2K compliant. However, if such suppliers or other third parties
experience failures in their computer systems or equipment due to Y2K
non-compliance, it could effect Megabios' ability to process transactions or
engage in ordinary business activities.
The financial impact of the required upgrades and/or conversion of computer
software relating to the Y2K issue cannot be known precisely at this time, but
Megabios currently anticipates that the cost will be less than $100,000. The
actual financial impact could, however, exceed this estimate. Also, the
estimated costs of implementing the Y2K plan do not take into account the costs,
if any, that might be incurred as a result of Y2K related failures that occur
despite Megabios' implementation of its Y2K plan.
Megabios is not aware of any material operational issues associated with
preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of third party systems. However, Megabios could
experience material unanticipated negative consequences and/or material costs
caused by undetected errors or defects in such systems or by Megabios' failure
to adequately prepare for the results of such errors or defects. The impact of
such consequences could have a material adverse effect on Megabios' business,
financial condition or results of operations.
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MEGABIOS MANAGEMENT AFTER THE MERGER
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Megabios, including directors to be
appointed after completion of the merger, and their ages as of November 19,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>
Benjamin F. McGraw III, Pharm.D. .................. 49 Chairman of the Board, Chief Executive Officer and
President,
Rodney Pearlman, Ph.D. ............................ 47 Senior Vice President, Research and Development
Bennet L. Weintraub................................ 44 Vice President, Finance and Chief Financial Officer
Frank J. Caufield(1)............................... 59 Director
Patrick G. Enright................................. 36 Director
A. Grant Heidrich(2)............................... 46 Director
Russell C. Hirsch, M.D., Ph.D.(1).................. 36 Director
Raju Kucherlapati, Ph.D.(2)........................ 55 Director
Arthur M. Pappas(3)................................ 50 Director
Stanley T. Crooke, M.D., Ph.D.(3).................. 53 Director
Bert W. O'Malley, M.D.(3).......................... 61 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Under the terms of the reorganization agreement, as soon as practicable
after the closing date, Megabios shall use reasonable efforts to nominate
and appoint (a) Mr. Pappas to Class I of the Megabios Board to serve until
the annual meeting of stockholders to be held in 2001; (b) Dr. Crooke to
Class II of the Megabios Board to serve until the annual meeting of
stockholders to be held in 1999; and (c) Dr. O'Malley to Class III of the
Megabios Board to serve until the annual meeting of stockholders to be held
in 2000.
BENJAMIN F. MCGRAW, III, PHARM.D., joined Megabios as President, Chief
Executive Officer and director in September 1994 and became Chairman of the
Board of Directors in February 1997. From April 1993 to September 1994, Dr.
McGraw was Corporate Vice President for Corporate Development for Allergan,
Inc., a pharmaceutical company. From November 1990 to April 1993, he served as
President of MedTech Trends, Inc., an investment advisory company. From November
1991 to April 1993, Dr. McGraw was President of Carerra Capital Management,
Inc., an investment company, where he was the fund manager for a limited
partnership that invested in health care companies. From July 1989 to November
1990, Dr. McGraw was Vice President, Development at Marion Merrell Dow, Inc., a
pharmaceutical company. From November 1987 to July 1989, he was Vice President,
Development at Marion Laboratories, Inc., a pharmaceutical company. Dr. McGraw
received his Doctor of Pharmacy from the University of Tennessee Center for the
Health Sciences.
RODNEY PEARLMAN PH.D., has served as Megabios' Senior Vice President,
Research and Development since July 1998. From January 1995 until the time of
this appointment, Dr. Pearlman served as Megabios' Vice President, Research and
Development. From January 1988 to December 1994, Dr. Pearlman was Director of
Pharmaceutical Research Development and at Genentech, Inc., a biotechnology
company. At Genentech, he was a Project Team Leader for Human Growth Hormone
from
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March 1992 to June 1994. From September 1987 to December 1994, Dr. Pearlman was
a senior scientist at Genentech. Dr. Pearlman joined Genentech as a scientist in
September 1984. Prior to joining Genentech, he was an Assistant Professor of
Pharmaceutics at the University of Texas at Austin. From 1978 to 1981, Dr.
Pearlman was a Senior Scientist at Lilly. Dr. Pearlman received his Ph.D. in
Pharmaceutical Chemistry from the University of Kansas.
BENNET L. WEINTRAUB, has served as Megabios' Chief Financial Officer and
Vice President Finance since May 1998. From March 1996 to May 1998, Mr.
Weintraub was Chief Financial Officer and Vice President Finance and
Administration for Technology Modeling Associates, a software company. From
September 1993 to March 1996, he was employed as Director of Finance by Metra
Biosystems, a bone diagnostics company, and from September 1987 to September
1993, he was Controller at Advanced Polymer Systems, a drug delivery company.
Mr. Weintraub received his M.B.A. from Harvard Business School and his B.A. from
Pomona College, and is a CPA in California.
FRANK J. CAUFIELD, has served as a director of Megabios since November 1992.
Since 1978 he has held the position of partner of Kleiner Perkins Caufield &
Byers, a venture capital partnership. He serves on the Board of Directors of
America Online, Inc., an internet service company. He received his M.B.A. from
the Harvard Business School and his B.S. in engineering from the United States
Military Academy.
PATRICK G. ENRIGHT, is a partner at Diaz & Altschul Group, LLC, a privately
held merchant bank, and has been a director of Megabios since March 1998. From
March 1995 to February 1998, Mr. Enright served in various executive positions
at Megabios, including Senior Vice President, Corporate Development and Chief
Financial Officer. From September 1993 to June 1994, Mr. Enright was Senior Vice
President of Finance and Business Development for Boehringer Mannheim
Therapeutics, a pharmaceutical company and a subsidiary of Corange Ltd. From
September 1989 to September 1993, Mr. Enright was employed at PaineWebber
Incorporated, an investment banking firm, where he became a Vice President in
January 1992. Mr. Enright received his M.B.A. from The Wharton School of
Business at the University of Pennsylvania and his B.S. in biological sciences
from Stanford University.
A. GRANT HEIDRICH, III, has served as a director of Megabios since August
1993. Mr. Heidrich joined Mayfield Fund, a venture capital firm, in 1982 and has
been a general partner or managing member of several venture capital funds
affiliated with Mayfield Fund since 1983. Mr. Heidrich serves on the Board of
Directors of Millennium Pharmaceuticals, Inc., a biopharmaceutical company and
Vivus, Inc. a biotechnology company. Mr. Heidrich received his M.B.A. from
Columbia University Graduate School of Business and his B.A. in human biology
from Stanford University.
RUSSELL C. HIRSCH, M.D., PH.D., has served as a director of Megabios since
August 1993. He joined Mayfield Fund, a venture capital firm, in 1992, and has
been a managing member of several venture capital funds affiliated with Mayfield
Fund since 1995. From 1984 to 1992, Dr. Hirsch conducted research in the
laboratories of Nobel Laureate Harold Varmus, M.D., and Don Ganem, M.D., at the
University of California, San Francisco. Dr. Hirsch received his M.D. and Ph.D.
in biochemistry from the University of California, San Francisco.
RAJU KUCHERLAPATI, PH.D., has served as a director of Megabios since March
1995 and also serves on Megabios' Scientific Advisory Board. Dr. Kucherlapati
has served as the Lola and Saul Kramer Professor and Chairman of the Department
of Molecular Genetics at Albert Einstein College of Medicine since 1989. He was
a founder of and serves on the Board of Directors of both Cell Genesys, Inc., a
biotechnology company and Millennium Pharmaceuticals, Inc., a biopharmaceutical
company. Dr. Kucherlapati received his Ph.D. from the University of Illinois.
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ARTHUR M. PAPPAS, has served as a director of GeneMedicine since January
1995. Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas &
Associates, LLC., an international management and consulting services company
and investor in the high technology life science industries. From 1989 until
1994, Mr. Pappas held executive and board positions with Glaxo Holdings plc, a
pharmaceutical company, where his most recent position was as a member of the
main Board of Directors with responsibilities for operations in Asia Pacific,
Latin America and Canada. Mr. Pappas' 27 years of experience in the health care
industry also includes positions with the pharmaceutical companies of Merrell
Dow Pharmaceuticals and Abbott Laboratories International, Inc. Mr. Pappas is a
member of the Board of Directors of Quintiles Transnational Corp., KeraVision,
Inc., Embrex, Inc., and one private company. Mr. Pappas received a B.S. degree
in Biology from the Ohio State University and a M.B.A. degree in Finance from
Xavier University.
STANLEY T. CROOKE, M.D., PH.D., has served as a director of GeneMedicine
since March 1992 and its Chairman of the Board since March 1996. Dr. Crooke has
been Chief Executive Officer and a director of Isis Pharmaceuticals, Inc., a
biotechnology company, since he co-founded Isis in January 1989, and he has
served as Chairman of the Board of Isis since February 1991. From 1980 until
January 1989, Dr. Crooke was employed by SmithKline Beckman Corporation, a
pharmaceutical company, most recently as President of Research and Development
of SmithKline & French Laboratories. Prior to joining SmithKline, he served as
Vice President and Associate Research Director of Bristol Laboratories, a
subsidiary of Bristol-Myers Squibb Company, a pharmaceutical company. Dr. Crooke
is a member of the Board of Directors of SIBIA Neurosciences, Inc., EPIX Medical
Inc., Idun Pharmaceuticals, Inc., and Biotechnology Industry Organization. Dr.
Crooke received a Ph.D. degree in Pharmacology and an M.D. degree from Baylor
College of Medicine, where he served for a number of years as Adjunct Professor
of Pharmacology. He currently serves as Adjunct Professor of Pharmacology at the
University of California, San Diego.
BERT W. O'MALLEY, M.D., one of GeneMedicine's founders, has served as a
director of GeneMedicine since April 1998. Dr. O'Malley has been Chairman of the
Department of Cell Biology at Baylor College of Medicine and a Director of the
Baylor Center for Population Research and Reproductive Biology since 1973. He is
a member of the National Academy of Science and the Institute of Medicine and
the author of more than 500 scientific publications. Dr. O'Malley's scientific
work has included major achievements in the areas of medical endocrinology and
reproduction with potentially broad application to the diagnosis of human
genetic diseases and the treatment of breast and prostatic cancer. His work
includes the invention of GeneMedicine's proprietary GeneSwitch-TM- technology
that allows for the greater control of the level and duration of the expression
of the therapeutic protein produced by a gene medicine. Dr. O'Malley holds a
B.S. and a M.D. degree from the University of Pittsburgh.
BOARD COMPOSITION
Megabios currently has authorized eight directors. Under the terms of the
reorganization agreement, Megabios shall, prior to the closing date of the
merger, cause the number of authorized directors to be increased to nine to
accommodate the appointment of Mr. Pappas and Drs. Crooke and O'Malley to the
Megabios Board, as described below. In accordance with the terms of the Megabios
Certificate of Incorporation, the terms of office of the Megabios Board are
divided into three classes:
- Class I, whose term will expire at the annual meeting of stockholders to
be held in 2001;
- Class II, whose term will expire at the annual meeting of stockholders to
be held in 1999; and
- Class III, whose term will expire at the annual meeting of stockholders to
be held in 2000.
The Class I directors are Benjamin F. McGraw, III and Frank J. Caufield, the
Class II directors are A. Grant Heidrich and Patrick G. Enright, and the Class
III directors are Raju Kucherlapati and Russell C. Hirsch.
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As a condition to the merger, Megabios shall have nominated and appointed
the following individuals to the Megabios Board:
- Mr. Pappas to Class I of the Megabios Board to serve until the annual
meeting of stockholders to be held in 2001;
- Dr. Crooke to Class II of the Megabios Board to serve until the annual
meeting of stockholders to be held in 1999; and
- Dr. O'Malley to Class III of the Megabios Board to serve until the annual
meeting of stockholders to be held in 2000.
At each annual meeting of stockholders, the successors to directors whose
term will then expire will be elected to serve from the time of election until
the third annual meeting following election. In addition, the Megabios
Certificate of Incorporation provides that the authorized number of directors
may be changed only by resolution of the Megabios Board. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Megabios
Board may have the effect of delaying or preventing changes in control or
management of Megabios. Although directors of Megabios may be removed for cause
by the vote of the holders of a majority of the Megabios common stock, the
Megabios Certificate of Incorporation provides that holders of two-thirds of the
Megabios common stock must vote to approve the removal of a director without
cause.
BOARD COMMITTEES
The Audit Committee of the Megabios Board:
- reviews the results of the annual audit;
- discusses the financial statements;
- recommends to the Megabios Board the independent auditors to be retained;
and
- receives and considers the accountants' comments as to controls, adequacy
of staff and management performance and procedures in connection with
audit and financial controls.
The Audit Committee is composed of two non-employee directors: Mr. Caufield
and Dr. Hirsch.
The Compensation Committee of the Megabios Board makes recommendations
concerning salaries and incentive compensation, awards stock options to
employees and consultants and otherwise determines compensation levels and
performs such other functions regarding compensation as the Megabios Board may
delegate. The Compensation Committee is composed of two non-employee directors:
Mr. Heidrich and Dr. Kucherlapati.
DIRECTOR COMPENSATION
During fiscal year ended June 30, 1998, Megabios did not have a compensation
program for its non-employee directors. Megabios could at its discretion grant
non-statutory stock options under Megabios' 1997 Equity Incentive Plan to the
non-employee directors.
At the May 27, 1998 Megabios Board meeting, a compensation program for
non-employee directors of Megabios was approved. Under such compensation
program, and beginning on January 1, 1999 each non-employee director of Megabios
receives a quarterly retainer of $3,000 and a per meeting fee of $1,000. The
members of the Megabios Board are also eligible for reimbursement for their
expenses incurred in connection with attendance at Board of Directors' meetings
in accordance with Megabios' policies.
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Under the new compensation program, on the date of the annual stockholders'
meeting of each year, each member of Megabios Board who is not an employee of
Megabios will automatically be granted under Megabios' 1998 Non-Employee
Directors' Stock Option Plan, an option to purchase 10,000 shares of common
stock of Megabios. In addition, each new non-employee director will receive a
one time grant to purchase 25,000 shares of Megabios common stock upon the date
of his or her initial election or appointment to be a non-employee director by
the Megabios Board or stockholders of Megabios. The exercise price of the
options granted to the non-employee directors is 100% of the fair market value
of the Megabios common stock subject to the option on the date of the option
grant.
In February 1998, Patrick Enright entered into a consulting agreement with
Megabios. Under the agreement, Mr. Enright performs consulting services of at
least five hours per month in consideration of the continued vesting of his
unvested stock options over the term of his consulting agreement.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows for the fiscal year ended June 30, 1998, the
compensation awarded or paid to, or earned by, Megabios' its Chief Executive
Officer and its other two most highly compensated executive officers whose total
annual salary and bonus exceeded $100,000, including one former executive
officer who departed from Megabios during fiscal year 1998 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
- -------------------------------------------------------- ---------- ----------- -------------------
<S> <C> <C> <C>
Benjamin F. McGraw III, Pharm.D.
Chairman, Chief Executive
Officer and President................................. $ 275,002 -- $ 656
Patrick G. Enright(3)
Former Senior Vice President
and Chief Financial Officer........................... 138,564 -- 76
Rodney Pearlman, Ph.D.
Senior Vice President, Research and Development....... 179,999 -- 279
</TABLE>
- ------------------------
(1) In accordance with SEC rules, other annual compensation in the form of
perquisites and other personal benefits has been omitted where the aggregate
amount of such perquisites and other personal benefits constitutes less than
the lesser of $50,000 or 10% of the total annual salary and bonus for the
Named Executive Officer for the fiscal year.
(2) Represents insurance premiums paid by Megabios with respect to group life
insurance for the benefit of the Named Executive Officers.
(3) Mr. Enright resigned as Senior Vice President and Chief Financial Officer in
February 1998.
Megabios grants options to its executive officers under its 1997 Equity
Incentive Plan. As of November 19, 1998, options to purchase a total of 974,367
shares were outstanding under this plan and options to purchase 171,249 shares
remained available for grant thereunder.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table shows for the fiscal year ended June 30, 1998,
information regarding options granted to stock options granted to Named
Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------- AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION OF
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM(1)
OPTIONS FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) YEAR(2) ($/SH)(#)(3) DATE 5%($) 10%($)
- ------------------------------------ ------------- ------------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Benjamin F. McGraw III, Pharm. D.... -- -- -- -- -- --
Patrick G. Enright(4)............... 50,000 9.1% 15.50 11/03/07 488,250 1,232,250
Rodney Pearlman, Ph.D............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Reflects the value of the stock option on the date of grant assuming (a) for
the 5% column, a five-percent annual rate of appreciation in Megabios common
stock over the ten-year term of the option and (b) for the 10% column, a
ten-percent annual rate of appreciation in the Megabios' common stock over
the ten-year term of the option, in each case without discounting to net
present value and before income taxes associated with the exercise. The 5%
and 10% assumed rates of appreciation are based on the rules of the SEC and
do not represent Megabios' estimate or projection of the future common stock
price. The amounts in this table may not necessarily be achieved.
(2) Based on options to purchase 550,722 shares of Megabios' common stock
granted in the fiscal year ended June 30, 1998.
(3) All options were granted at the fair market value at the date of grant.
(4) Options vest over a four year period with 25% of the total vesting after one
year and one thirty-sixth (1/36) of the remaining 75% vesting at the end of
each additional one-month period thereafter. Mr. Enright resigned as Senior
Vice President and Chief Financial Officer of Megabios in February 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options, the
number of shares underlying unexercised stock options and the value of
unexercised in-the-money stock options during the fiscal year ended June 30,
1998:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES VALUE AT JUNE 30, 1998(#) IN-THE-MONEY OPTIONS
ACQUIRED ON REALIZED EXERCISABLE/ AT JUNE 30, 1998(2)($)
NAME EXERCISE(#) ($)(1) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- ------------- --------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Benjamin F. McGraw III, Pharm.D....... 73,333 689,937 0/0 0/0
Patrick G. Enright.................... -- -- 80,000/0 183,750/0
Rodney Pearlman, Ph.D................. -- -- 25,000/0 153,125/0
</TABLE>
- ------------------------
(1) Fair market value of Megabios common stock on date of exercise minus the
exercise price.
(2) Fair market value of Megabios common stock on June 30, 1998 ($7.625) minus
the exercise price of the options.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Megabios Bylaws provide that Megabios will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. Under the Megabios
Bylaws Megabios may also enter into indemnification contracts with its directors
and officers and to purchase insurance on behalf of any person it is required or
permitted to indemnify. Megabios expects to enter into indemnification
agreements with each of its directors and executive officers.
Megabios has also obtained officer and director liability insurance. This
insurance covers liabilities that may arise from the performance of the
directors' and officers' duties, including liabilities arising under the
Securities Act. In addition, the Megabios Certificate of Incorporation provides
that, to the fullest extent permitted by Delaware law, Megabios' directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to Megabios and its stockholders. This provision in the Megabios
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances, equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. Under
current Delaware law, a director's liability to Megabios or its stockholders may
not be limited for:
- any breach of the director's duty of loyalty to Megabios or its
stockholders;
- acts or omissions not in good faith or involving intentional misconduct;
- knowing violations of law;
- any transaction from which the director derived an improper personal
benefit;
- improper transactions between the director and Megabios; and
- improper distributions to stockholders and loans to directors and
officers.
This provision also does not affect a director's responsibilities under any
other laws such as the federal securities laws or state or federal environmental
laws.
There is no pending litigation or proceeding involving a director or officer
of Megabios as to which indemnification is being sought, nor is Megabios aware
of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
CERTAIN TRANSACTIONS OF MEGABIOS
On May 18, 1998, Megabios entered into an employment agreement with Bennet
L. Weintraub to employ Mr. Weintraub as Vice President and Chief Financial
Officer. Under the terms of this agreement, Mr. Weintraub receives an annual
salary of $170,000. In addition, the agreement provides that Mr. Weintraub will
receive a cash incentive bonus in the amount of $70,000 upon the achievement of
performance criteria established by Megabios. This bonus is in addition to any
bonus Mr. Weintraub may be eligible for under other Megabios bonus programs, Mr.
Weintraub also received two stock option grants covering an aggregate of 80,000
shares of Megabios common stock, subject to standard employee stock option
requirements. Megabios also committed to extend a loan to Mr. Weintraub in the
amount of $160,000 for the purpose of exercising his stock options.
On April 22, 1998, Megabios entered into an employment agreement with John
F. Warner, Ph.D. to employ Dr. Warner as Vice President, Research Technology.
Under the terms of the employment agreement, Dr. Warner receives an annual
salary of $170,000. In addition, this agreement provides that Dr. Warner be paid
a one time bonus in the amount of $30,000 for joining Megabios. Dr. Warner also
received a stock option to purchase 65,000 shares of Megabios common stock,
subject to standard employee stock option requirements. Megabios also paid Dr.
Warner's relocation expenses, paid for six
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months of temporary housing, covered medical and dental insurance costs for up
to six months and provided Dr. Warner with an additional two weeks of paid time
off during 1998.
On May 22, 1998, Megabios entered into a loan agreement with Dr. Warner in
connection with a $130,000 promissory note for the purpose of purchasing a new
principal residence.
Megabios has entered into indemnity agreements with its officers and
directors. These agreements provide that Megabios will indemnify such officers
or directors for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings by reason of his position as a
director, officer or other agent of Megabios. These agreements provide
indemnification to the full extent permitted under Delaware law and the Megabios
Bylaws.
MEGABIOS PRINCIPAL STOCKHOLDERS
The following table sets forth information, based on review of information
on file with the SEC and Megabios stock records, with respect to beneficial
ownership of Megabios' voting stock as of November 19, 1998 by:
- each person (or group of affiliated persons) who is known by Megabios to
own beneficially more than five percent of Megabios' voting stock;
- by each of Megabios' directors;
- by the Named Executive officers; and
- by all directors and executive officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of
Megabios common stock shown as beneficially owned by them, subject to community
property laws where applicable. Applicable percentages are based on 12,895,650
shares outstanding on November 19, 1998, adjusted as required by rules
promulgated by the SEC. Unless otherwise indicated, the stockholder's address is
c/o Megabios Corp., 863A Mitten Road, Burlingame, California 94010.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-----------------------
BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Entities Affiliated with Mayfield Fund(1)
2800 Sand Hill Road
Menlo Park, CA 94025...................................................................... 848,668 6.58%
Lombard Odier & Cie
11 Rue de la Corraterie
1211 Geneva Switzerland................................................................... 693,332 5.38
Frank J. Caufield........................................................................... 335,289 2.60
Patrick G. Enright(2)....................................................................... 194,499 1.50
A. Grant Heidrich(3)........................................................................ 852,776 6.61
Russell C. Hirsch, M.D., Ph.D............................................................... 1,633 *
Raju Kucherlapati(4)........................................................................ 26,666 *
Benjamin F. McGraw, III, Pharm. D.(5)....................................................... 406,703 3.15
Rodney Pearlman, Ph.D.(6)................................................................... 137,499 1.06
All executive officers and directors as a group (8 persons)(7).............................. 1,955,065 15.01
</TABLE>
- ------------------------
* Less than one percent.
(1) Includes 817,505 shares held by Mayfield VII and 31,163 shares held by
Mayfield Associates Fund II.
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(2) Includes 2,000 shares held by Enright Capital Advisors, an investment
partnership of which Mr. Enright is a partner. Mr. Enright disclaims
beneficial ownership of all such shares owned by the foregoing partnership
except to the extent of his proportionate pecuniary interest therein. Also
includes 80,000 shares Mr. Enright has the right to acquire pursuant to an
option exercisable within 60 days, 61,130 of which will be subject to
repurchase by Megabios at such date, if issued.
(3) Includes 210 shares held by A. Grant Heidrich III Trustee of the A. Grant
Heidrich III Separate Property Trust U/A 5/31/84, 3,898 shares held by the
Heidrich Family Partners I Mayfield Fund, 817,505 held by Mayfield VII and
31,163 shares held by Mayfield Associates Fund II. Mr. Heidrich is a member
of Mayfield Fund, the general partner of Mayfield Associates Fund II and
Mayfield VII. Mr. Heidrich disclaims beneficial ownership of all of such
shares held by Mayfield VII or Mayfield Associates Fund II, except to the
extent of his proportionate pecuniary interest therein
(4) Includes 26,666 shares Dr. Kucherlapati has the right to acquire pursuant to
options exercisable within 60 days, 7,223 of which will be subject to
repurchase by Megabios at such date, if issued.
(5) Includes 373,333 shares Dr. McGraw acquired pursuant to the exercise of
stock options, 53,265 of which will be subject to repurchase by Megabios as
of January 18, 1999.
(6) Includes 112,499 shares Dr. Pearlman acquired pursuant to the exercise of
stock options, 7,900 of which will be subject to repurchase by Megabios as
of January 18, 1999. Also includes 25,000 shares Dr. Pearlman has the right
to acquire pursuant to option exercisable within 60 days, 13,542 which will
be subject to repurchase by Megabios on such date, if issued.
(7) Includes 848,668 shares held by entities affiliated with directors of
Megabios as described in footnote (1) above and 131,666 shares subject to
options exercisable within 60 days.
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INFORMATION RELATING TO GENEMEDICINE
GENEMEDICINE BUSINESS
GeneMedicine is engaged in the discovery and development of a new class of
pharmaceutical products, called "gene medicines," that incorporate genes for the
treatment or prevention of serious diseases. These gene medicines are designed
to be well-characterized pharmaceutical products that are directly administered
to patients through convenient and conventional routes, including intramuscular
injection, inhalation and intravenous injection. Gene medicines are designed to
deliver genetic instructions to targeted cells in the body and to cause these
cells to produce proteins or immune responses to treat or prevent a disease.
Gene medicines may also incorporate novel DNA sequences that may be used to
control the tissue-specificity, duration and level of functioning of
administered genes.
GeneMedicine's business focus is the development of gene medicines for
treating cancers, cardiovascular disease, pulmonary diseases and neuromuscular
disorders, as well as in the development of genetic vaccines to treat or prevent
viral and bacterial infections. GeneMedicine's strategy has been to develop and
commercialize its products through corporate alliances with major pharmaceutical
and biotechnology companies.
GeneMedicine has established a broad proprietary position in non-viral gene
therapy that includes:
- several key gene delivery and gene expression technologies;
- technology related to the manufacture of gene medicines; and
- the use of genes to treat disease indications.
In October 1997, GeneMedicine announced issuance both in the U.S. and in
Europe of a patent that covers the use for gene therapy of any cationic lipid
combined with DNA and administered by injection or inhalation, the most common
routes of administration. GeneMedicine has an exclusive worldwide license to the
technology covered by this patent. GeneMedicine has also developed patented
GeneSwitch-TM- technology that may be used to activate or to deactivate the
expression of previously administered therapeutic genes in specific cells.
GeneMedicine has created high-yield, low-cost and scaleable integrated
manufacturing processes for the production of its gene medicines for clinical
use.
GeneMedicine's current efforts in the development of gene medicines for the
treatment of cancer are focused on its Interleukin-2 ("IL-2"), Interferon-alpha
("IFN-a"), and Interleukin-12 ("IL-12") gene medicines. These three gene
medicines are being developed through a corporate alliance with Boehringer
Mannheim subsidiaries of Corange International Ltd., which was acquired by Roche
Holding Ltd. in March 1998. The IL-2 Gene Medicine has been shown to be safe and
well-tolerated in head and neck cancer patients at all dose levels studied in
the Phase I human clinical trials. Phase II clinical trials on its IL-2 gene
medicine are expected to commence by first quarter 1999. Phase I/II clinical
trials with GeneMedicine's IFN-a gene medicine and IL-12 gene medicine are
expected to commence in the first quarter and second quarter of 1999,
respectively.
In March 1998, GeneMedicine announced that a vascular endothelial growth
factor ("VEGF") gene medicine employing GeneMedicine's proprietary cationic
lipid gene delivery system is the subject of two physician initiated Phase II
angioplasty clinical trials, one for treating peripheral vascular disease and
one for treating coronary artery disease. In May 1998, GeneMedicine announced
positive results of a physician initiated Phase I clinical trail for an alpha-1
antitrypsin ("AAT") gene medicine. The AAT gene medicine was well tolerated and
all five participants in the study had sustained elevated levels of the AAT
protein following administration of the gene medicine by nasal instilation.
In January 1998, GeneMedicine announced that it was re-examining potential
target indications for its Insulin-like Growth Factor-I ("IGF-I") gene medicine
and would not start a previously scheduled Phase I clinical trial for this
product. GeneMedicine received clearance from the FDA late in the
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fourth quarter of 1996 to commence the Phase I clinical trial to study the
safety and tolerability of the IGF-I gene medicine, but no healthy volunteers
had been enrolled in the trial. The reasons for GeneMedicine's decision not to
proceed with the trial were the restrictive criteria placed on the participants'
qualifications for enrollment in this trial and GeneMedicine's assessment of the
relative market opportunities for the product. Subsequently, GeneMedicine has
identified female urinary incontinence as the primary target indication for the
IGF-I gene medicine. GeneMedicine intends to proceed with clinical trials with
the IGF-I gene medicine only if it can find a corporate partner to undertake
those trials. The IGF-I gene medicine may also have broad application in the
treatment of muscle disorders and neuropathies that afflict large patient
populations and are not adequately addressed by current therapies, if at all.
GeneMedicine is developing gene delivery systems based on three broad
classes of materials: lipids, polymers and peptides. GeneMedicine has shown that
gene delivery systems containing cationic lipid combined with neutral lipids
enhance the cellular uptake of plasmid-based gene expression systems in animals.
These lipid-based gene delivery systems have been demonstrated to enhance the
entry of genes into tumor cells after intratumoral administration and also to
deliver genes to the endothelium and epithelium of the lung after intravenous
administration and inhalation, respectively. GeneMedicine is using its
proprietary cationic lipid gene delivery systems in its three gene medicines
intended for the treatment of cancer. In addition, GeneMedicine's academic
collaborators are employing cationic lipid gene delivery systems in three
physician-initiated clinical trials: a completed Phase I clinical trial to
deliver genes to cells lining the airways; and two Phase II clinical trials to
deliver genes to endothelium cells lining the blood vessels of muscle tissue and
of the heart. GeneMedicine also is pursuing the discovery and development of
several novel classes of lipid molecules for enhancing gene delivery to a
variety of tissues.
GeneMedicine has also developed gene delivery systems that employ polymers
which, in certain formulations for conventional drugs, are approved for human
use. GeneMedicine has shown that these polymers interact with plasmids and
facilitate the delivery of genes into muscle cells in vivo after intramuscular
administration. GeneMedicine is employing its proprietary polymeric PINC-TM-,
for protective, interactive, non-condensing gene delivery system, in its IGF-I
gene medicine. GeneMedicine's scientists have demonstrated in animal models that
the use of polymeric PINC gene delivery systems can lead to a significant
increase in both the level and the reproductability of proteins produced in
muscle compared to the administration of plasmids formulated in saline, or
"naked" DNA.
GeneMedicine is also creating and developing gene delivery systems made up
of short synthetic peptides and peptides containing simple sugars or
glycopeptides. The peptides are designed to bind to gene expression systems to
form a tightly compacted complex, which GeneMedicine believes is important for
gene expression systems to gain access to certain types of cells. The
glycopeptides are designed to interact specifically with natural receptors
present on the surfaces of target cells and to effect the entry of the gene
expression system through the membrane and into those cells.
GeneMedicine has also developed gene delivery systems designed to enhance
the movement of the gene expression system to the cell nucleus where gene
expression occurs. GeneMedicine is developing glycopeptide gene delivery systems
for gene medicines targeting the hepatocyte cells in the liver after intravenous
administration. In addition, GeneMedicine's peptides can be utilized in
combination with other materials such as cationic lipids. GeneMedicine has
exclusive and co-exclusive rights to materials in each of the foregoing classes
used for gene delivery systems.
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GENEMEDICINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"GeneMedicine, Inc. Selected Financial Information" and related notes contained
elsewhere in this joint proxy statement/ prospectus.
RESULTS OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, the early stage of GeneMedicine's development and technological
uncertainty, dependence on collaborative partners and licenses, the failure of
existing or future partnerships to be successful, future capital needs and
uncertainty of additional funding, uncertainty of patent protection, uncertainty
of government regulatory requirements, level of competition and rapid
technological change, as well as those set forth in this section and in the
section entitled "Risk Factors."
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. GeneMedicine has been
unprofitable since inception and to date has not received any revenues from the
sale of products. No assurance can be given that GeneMedicine will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. GeneMedicine expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At September 30,
1998, GeneMedicine's accumulated deficit was approximately $57.6 million.
On January 18, 1999, GeneMedicine announced a company-wide reduction in
staff of approximately 25%, affecting 26 employees, to conserve cash and in
anticipation of the merger with Megabios.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues of $4.3 million were recorded for the nine months ended September
30, 1998, which consisted of contract revenue of $3.1 million, interest income
of $1.0 million and research and development grant revenue of $0.2 million.
These results compare with revenues of $5.3 million for the nine months ended
September 30, 1997, which consisted of contract revenue of $3.5 million,
interest income of $1.3 million and research and development grant revenue of
$0.5 million. Contract revenues in respective periods primarily resulted from a
corporate partnership with Boehringer Mannheim subsidiaries of Corange, which
was acquired by Roche Holding Ltd. in March 1998, to develop non-viral gene
medicines using specific genes to treat human cancer indications. The decrease
in contract revenue for the first nine months of 1998 compared to the same
period in 1997 was due to the recognition in 1997 of a $0.5 million milestone
payment from Boehringer Mannheim for achieving clearance from the FDA to
commence a Phase I clinical trial using GeneMedicine's IL-2 Gene Medicine, which
GeneMedicine is developing for the treatment of head and neck cancer.
GeneMedicine's research and development expenses for the nine months ended
September 30, 1998 increased to $11.5 million from $10.1 million for the same
period in 1997. This increase was generally due to the expansion of
GeneMedicine's research and development activities, resulting in staffing
increases and the related salary and benefit costs, as well as additional
laboratory supplies and other support costs. The expansion of GeneMedicine's
research and development activities has been driven primarily by the progression
of research in the field of genetic vaccines and clinical development efforts in
the field of cancer. GeneMedicine anticipates that research and development
expenditures
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will increase over the next several years as it continues to expand its research
and product development efforts.
General and administrative expenses remained relatively unchanged at $3.4
million for the nine months ended September 30, 1998, compared to the same
period in 1997.
Loss per share for the nine months ended September 30, 1998 was $0.74, as
compared to a loss per share of $0.60 for the same period in 1997. The increase
in GeneMedicine's net loss per share for the nine months ended September 30,
1998 was primarily the result of decreased contract revenue and increased
research and development expenses as described above.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues and other income for the year ended December 31, 1997 were $6.8
million, which consisted of contract revenue of $4.5 million, interest income of
$1.6 million and research and development grant revenue of $0.7 million. This
compares with revenues and other income of $6.6 million in 1996 and $5.1 million
in 1995. The contract revenues in each period resulted from a corporate
partnership with Boehringer Mannheim, which was acquired by Roche Holding Ltd.
in March 1998, to develop non-viral gene medicines for application in the field
of cancer. As a component of contract revenues, in February 1997 GeneMedicine
received a milestone payment of $500,000 from Boehringer Mannheim for
achievement of FDA clearance to commence a Phase I clinical trial for
GeneMedicine's IL-2 Gene Medicine. Higher interest income for 1996, as compared
to 1995 and 1997, was primarily the result of higher average cash, cash
equivalents and short-term investments balances due to GeneMedicine's follow-on
public offering in October 1995.
Research and development expenses for the year ended December 31, 1997 were
$14.1 million, compared to $13.7 million in 1996 and $11.3 million in 1995. The
year-to-year increases in research and development expense were generally due to
the expansion of GeneMedicine's research and development activities, staffing
increases and the related salary and benefit costs as well as additional
laboratory supplies and other support costs. The expansion of research and
development activities resulted primarily from the commencement and continued
expansion of research in the field of cancer, offset in 1997 by decreased
research and development activities in the fields of asthma and arthritis
following termination of GeneMedicine's corporate alliance with Syntex, which
ended in accordance with its terms in April 1997. In February 1995, GeneMedicine
commenced research and development efforts in the field of cancer, which is the
focus of a multi-year corporate partnership with Boehringer Mannheim.
GeneMedicine anticipates that expenditures will increase over the next several
years as it expands its research and product development efforts.
General and administrative expenses were approximately $4.4 million in 1997,
compared to $3.4 million and $3.7 million in 1996 and 1995, respectively. The
increase from 1996 to 1997 was primarily due to:
- expanded efforts focused on corporate development to obtain new corporate
and strategic alliances, including costs for additional personnel and
related recruiting, relocation and salary and benefit costs;
- legal and consulting costs associated with expanded corporate development
efforts; and
- enhancement of technology systems and increased efforts for investor
relations.
The slight decrease in 1996 from 1995 was due primarily to lower legal costs
in 1996. GeneMedicine expects that general and administrative expenses will
increase in the future as a result of additional corporate development
activities.
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GeneMedicine has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1997, GeneMedicine has
generated net operating loss (NOL) carryforwards of approximately $39 million
and approximately $1.2 million of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2007. For
financial reporting purposes, a valuation allowance has been established as of
December 31, 1996 and 1997, to offset fully GeneMedicine's net deferred tax
assets, including those relating to its carryforwards. GeneMedicine's ability to
utilize these carryforwards to reduce future taxable income may be limited due
to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, GeneMedicine has financed its operations primarily
through private and public sales of its equity securities, interest income on
invested funds and revenues from corporate alliances. Through September 30,
1998, GeneMedicine had received approximately $70.6 million in net proceeds from
sales of its equity securities. At September 30, 1998, GeneMedicine had working
capital of $17.6 million and cash, cash equivalents and short-term investments
of $18.4 million. In addition, in October 1998 GeneMedicine received a $1.25
million, scheduled contract research payment from Boehringer Mannheim.
GeneMedicine expects its cash requirements to increase significantly in
future periods. GeneMedicine will require substantial funds to conduct research
and development programs, preclinical studies and clinical trials of its
potential products and to market with its partners any products that are
developed. In addition, GeneMedicine currently plans to manufacture clinical
scale quantities of its products, which will require GeneMedicine to expend
substantial additional capital.
GeneMedicine's future capital requirements will depend on many factors,
including:
- the ability to maintain existing and establish additional corporate
partnerships;
- continued scientific progress in its research and development programs;
- the scope and results of preclinical testing and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing;
- prosecuting and enforcing patent claims;
- competing technological developments;
- the cost of manufacturing; and
- scale-up and effective commercialization activities and arrangements.
Based on its current plans, GeneMedicine believes that its available cash,
including proceeds from projected interest income and anticipated funding from
its corporate alliance with Boehringer Mannheim, will enable GeneMedicine to
maintain its current and planned operations into the second quarter of 2000.
There can be no assurance, however, that changes in GeneMedicine's research and
development plans or other changes affecting GeneMedicine's operating expenses
will not result in the expenditure of such resources before such time.
If the merger with Megabios is not completed, GeneMedicine intends to seek
additional funding through public or private financing, research and development
arrangements with potential corporate partners, or from other sources to augment
its current cash position. There can be no assurance that additional financing
will be available on favorable terms, if at all. In the event that adequate
funding is not available, GeneMedicine may be required to delay, reduce or
eliminate one or more of its research or development programs or obtain funds
through arrangements with corporate collaborators or others
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that may require GeneMedicine to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
GeneMedicine would otherwise seek. Insufficient financing may also require
GeneMedicine to relinquish rights to technologies that GeneMedicine would
otherwise develop or commercialize itself.
GeneMedicine's business is subject to significant risks, including:
- uncertainties associated with the length and expense of the regulatory
approval process;
- uncertainty associated with obtaining and enforcing patents; and
- risks associated with dependence on corporate partners.
Although GeneMedicine's products may appear promising at an early stage of
development, they may not be successfully commercialized for a number of
reasons, such as the possibility that the potential products will:
- be determined to be ineffective during clinical trials;
- fail to receive necessary approvals;
- be uneconomical to manufacture or market; or
- be precluded from commercialization by proprietary rights of third
parties.
In addition, the failure by GeneMedicine to obtain patent protection for its
products may make some of its products commercially unattractive. There can be
no assurance that any collaboration will be continued or result in successful
commercialized products.
IMPACT OF YEAR 2000
Y2K exposure is the result of computer programs using two instead of four
digits to represent the year. These computer programs may erroneously interpret
dates beyond the year 1999, which could cause system failures or other computer
errors, leading to disruptions in operations.
GeneMedicine is currently developing and executing a plan to ensure that its
system and software infrastructure are Y2K compliant. GeneMedicine is in the
process of conducting an internal review to identify financial information and
operations systems and applications from which it has exposure to Y2K
disruptions in operations. Given the relatively small size of GeneMedicine's
information systems and GeneMedicine's predominantly new hardware, software and
operating systems, management expects to be Y2K compliant by the end of the
fourth quarter of 1999.
Additionally, GeneMedicine has contacted key vendors and other third-parties
with which GeneMedicine has a significant relationship to determine their
readiness with respect to Y2K issues. GeneMedicine has been assured that such
third parties are either Y2K compliant or will be compliant by the end of the
fourth quarter of 1999. GeneMedicine is unable to control whether its current
and future strategic partners' and vendors' systems are or will be Y2K
compliant.
GeneMedicine has prepared a preliminary estimate of total Y2K remediation
expenses of $10,000. These anticipated expenses are primarily for training and
education of information systems personnel and software upgrades.
GeneMedicine has not yet evaluated the consequences of its most reasonably
likely worst case Y2K scenario nor has GeneMedicine completed Y2K contingency
planning to address the question of what GeneMedicine will do if Y2K compliance
is not achieved. However, at this time, management does not believe that any
systems, applications or third-party relationships will have a material impact
on GeneMedicine's business, financial condition or results of operations if
GeneMedicine is not Y2K compliant prior to the end of the fourth quarter of
1999.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
In April 1998, GeneMedicine appointed a new director who had a familial
relationship with an accountant at Arthur Andersen LLP. After discussion and
analysis of the relationship, it was determined that Arthur Andersen could no
longer continue to serve as GeneMedicine's independent accountants. Accordingly,
GeneMedicine's audit committee on July 21, 1998 formally dismissed Arthur
Andersen as GeneMedicine's independent accountants and engaged KPMG LLP as
GeneMedicine's independent accountants.
The reports of Arthur Andersen on GeneMedicine's financial statements as of
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. During GeneMedicine's two most recent fiscal years and through July
21, 1998, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Arthur Andersen would have caused it to make a reference to the subject matter
of the disagreements in connection with its report. Furthermore, during such
period there were no reportable events, as defined in Item 304(a)(1) (v) of
Regulation S-K.
During the two most recent fiscal years and through July 21, 1998,
GeneMedicine has not consulted with KPMG LLP regarding (1) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on GeneMedicine's financial
statements, or (2) the subject matter of a disagreement or reportable event with
Arthur Andersen.
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DESCRIPTION OF MEGABIOS CAPITAL STOCK
The authorized capital stock of Megabios consists of 30,000,000 shares of
common stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001
par value. As of the record date, there were 12,913,331 shares of Megabios
common stock outstanding held of record by approximately 1,000 stockholders. No
shares of preferred stock were outstanding.
MEGABIOS COMMON STOCK.
The holders of Megabios common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of Megabios common stock are entitled to receive dividends as declared
by the Megabios Board. In the event of a liquidation, dissolution or winding up
of Megabios, holders of Megabios common stock are entitled to share in all
assets remaining after payment of liabilities. Holders of Megabios common stock
have no preemptive rights and no right to convert their Megabios common stock
into any other securities. There are no redemption or sinking fund provisions
applicable to the Megabios common stock. All outstanding shares of Megabios
common stock are, and all shares of Megabios common stock to be outstanding
after the merger will be, fully-paid and nonassessable.
MEGABIOS PREFERRED STOCK.
The Megabios Board has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Megabios preferred stock, in
one or more series and to fix the rights, preferences, privileges and
restrictions of such preferred stock, including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption;
- liquidation preferences;
- sinking fund terms; and
- the number of shares constituting any series or the designation of such
series.
The issuance of Megabios preferred stock could adversely affect the voting
power of holders of Megabios common stock and the likelihood that such holders
will receive dividends and liquidation payments and could have the effect of
delaying, deferring or preventing a change in control of Megabios. Megabios has
no present plan to issue any shares of Megabios preferred stock.
DELAWARE LAW AND CHARTER PROVISIONS.
Megabios is subject to the provisions of Delaware's anti-takeover law. In
general, this law prohibits a publicly held Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. For purposes of this law, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and employees, owns or owned within three years 15% or
more of the corporation's voting stock.
The Megabios Certificate of Incorporation and Megabios Bylaws also require
that any action required or permitted to be taken by stockholders of Megabios
must be approved at a duly called
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annual or special meeting of the stockholders and may not be approved by written
consent. In addition, special meetings of the stockholders of Megabios may be
called only by the Megabios Board, the Chairman of the Megabios Board, the
President of Megabios, or by any person or persons holding 10% of the
outstanding stock of Megabios. The Megabios Certificate of Incorporation also
provides for a classified board and specifies that the authorized number of
directors may be changed only by resolution of the Megabios Board. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Megabios. See "Megabios Management After the
Merger--Board Composition" on page 89.
TRANSFER AGENT AND REGISTRAR.
Boston Equiserve L.P. has been appointed as the transfer agent and registrar
for the Megabios common stock.
104
<PAGE>
COMPARISON OF STOCKHOLDERS' RIGHTS
After the merger, the holders of GeneMedicine common stock will become
holders of Megabios common stock. Although both companies are incorporated in
Delaware, there are material differences between the rights and privileges of
the holders of GeneMedicine common stock and the holders of Megabios common
stock.
PERCENTAGE OF VOTING STOCK; INFLUENCE OVER AFFAIRS
After the merger, the percentage ownership of Megabios by each former
GeneMedicine stockholder will be substantially less than such stockholder's
current percentage ownership of GeneMedicine. Former GeneMedicine stockholders
will have a significantly smaller voting influence over the affairs of Megabios
than they currently enjoy over the affairs of GeneMedicine.
POWER TO CALL SPECIAL STOCKHOLDERS' MEETINGS
Under GeneMedicine's Bylaws, special meetings of stockholders may only be
called by the Chairman of GeneMedicine Board, the President, the GeneMedicine
Board or by written order of a majority of the GeneMedicine Board. Megabios'
Bylaws, on the other hand, provide that special meetings of stockholders may be
called by the Chairman of the Megabios Board, the Chief Executive Officer, the
Megabios Board or by the holders of ten percent of the voting shares of the
company. After the merger former GeneMedicine stockholders will have the
opportunity to call special meetings of stockholders of Megabios, a right they
do not have as GeneMedicine stockholders.
INTERESTED STOCKHOLDER TRANSACTIONS
GeneMedicine's Certificate of Incorporation provides that mergers, asset
sales or other business combinations with third parties who beneficially own 10%
or more of the voting stock of GeneMedicine require the approval of at least
66 2/3% of the voting stock of GeneMedicine unless:
- such business combination is approved by a majority vote of the directors
who are unaffiliated with the beneficial holder and who were members of
the GeneMedicine Board prior to the time that the beneficial holder
acquired his interest; or
- the aggregate consideration per share to be received in the business
combination is at least equal to the greater of
- the highest price per share paid by the beneficial holder;
- the fair market value per share on given dates; or
- the highest preferential amount per share to which the holders of
shares of any class of voting stock would be entitled to receive in any
voluntary or involuntary liquidation, dissolution or winding up of the
corporation.
Megabios does not have similar provisions in its Certificate of
Incorporation, but is subject to the antitakeover provisions of Delaware Law.
See "Description of Megabios Capital Stock--Delaware Law and Charter Provisions"
on page 103.
AMENDMENT OF BYLAWS
The Megabios Bylaws may be altered or amended or new Bylaws adopted by
holders of at least 66 2/3% of the shares of Megabios common stock or by the
Megabios Board. The GeneMedicine Bylaws may be altered or repealed by a majority
of the number of directors constituting the GeneMedicine Board at any regular
meeting or at any special meeting of the GeneMedicine Board if notice of such
alteration, amendment or repeal is contained in the notice of such special
meeting. After the merger,
105
<PAGE>
former GeneMedicine stockholders will have the opportunity to alter or amend the
Bylaws of Megabios, a right they do not currently have as GeneMedicine
stockholders.
RIGHTS PLAN
GeneMedicine has adopted a Stockholder Preferred Stock Purchase Rights Plan,
commonly known as a poison pill. Each right represents the right to purchase, at
the stated exercise price, one one-hundredth of a share of Series A Junior
Participating preferred stock. The rights plan provides that:
- if a third party acquires more than 15% of the outstanding shares of
GeneMedicine common stock, each holder of a right, other than such third
party, would have the right to purchase for the exercise price that number
of shares of GeneMedicine common stock having a market value equal to two
times the exercise price; and
- if a third party acquires GeneMedicine in a merger or other business
combination transaction or 50% or more of its consolidated assets or
earning power are sold to a third party, each holder of a right, other
than such third party, would have the right to acquire for the exercise
price that number of shares of common stock of the acquiring company
having a value equal to two times the exercise price.
In contemplation of the merger, GeneMedicine amended its stockholder rights
plan in October 1998 to exclude Megabios and the merger.
Megabios does not have a stockholder rights plan.
EXPERTS
The financial statements of Megabios as of June 30, 1998 and 1997 and for
each of the three years in the period ended June 30, 1998, included in the joint
proxy statement of Megabios and GeneMedicine which is referred to and made a
part of this prospectus and registration statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon and
included elsewhere herein, and are included in reliance upon such report, given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of GeneMedicine as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, included
in this joint proxy statement/prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance and upon the authority of said firm
as experts in accounting and auditing in giving said report.
LEGAL MATTERS
The validity of the shares of Megabios common stock offered hereby and other
legal matters, including the federal income tax consequences of the merger, will
be passed upon for Megabios by Cooley Godward LLP, Palo Alto, California. Cooley
Godward LLP and certain members and associates in such firm own an aggregate of
approximately 650 shares of Megabios common stock.
Certain legal matters in connection with the merger, including the federal
income tax consequences, will be passed upon for GeneMedicine by Heller Ehrman
White & McAuliffe, Palo Alto, California.
MEGABIOS STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in the proxy statement of Megabios to be
issued in connection with the 1999 annual meeting of Megabios stockholders must
be delivered to or mailed and received at the principal executive offices of
Megabios not later than the close of business on the sixtieth day, nor
106
<PAGE>
earlier than the close of business on the ninetieth day, prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event public announcement of the date of such annual meeting is first made
by Megabios fewer than seventy days prior to the date of such annual
meeting, the close of business on the tenth day following the day on which
public announcement is first made by Megabios.
GENEMEDICINE STOCKHOLDER PROPOSALS
GeneMedicine will hold a 1999 annual meeting of stockholders only if the
merger is not completed. In the event that such a meeting is held, any proposal
of a GeneMedicine stockholder intended to be presented at the 1999 annual
meeting of stockholders must be received by the corporate secretary of
GeneMedicine no later than January 3, 1999, in order to be included in the proxy
materials. Any such proposal will be subject to Rule 14a-8 of the Rules and
Regulations under the Exchange Act.
WHERE YOU CAN FIND MORE INFORMATION
Megabios Corp. is a Delaware corporation. Megabios' principal executive
offices are located at 863A Mitten Road, Burlingame, California 94010, and its
telephone number is (650) 697-1900.
GeneMedicine, Inc. is a Delaware corporation. GeneMedicine's principal
executive offices are located at 8301 New Trails Drive, The Woodlands, Texas
77381, and its telephone number is (281) 364-1150.
Megabios and GeneMedicine each file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may inspect and copy
such material at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. You may also
obtain copies of such material from the SEC at prescribed rates by writing to
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find our SEC filings at the SEC's website at
www.sec.gov.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS RELATING TO
GENEMEDICINE BY REFERENCE. THESE DOCUMENTS ARE AVAILABLE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO GENEMEDICINE, INC.,
8301 NEW TRAILS DRIVE, THE WOODLANDS, TEXAS 77381-4248 (TELEPHONE NUMBER (281)
364-1150), ATTENTION: INVESTOR RELATIONS. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY MARCH 1, 1999.
107
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC's rules permit GeneMedicine to "incorporate by reference" the
information it files with the SEC which means that GeneMedicine can disclose
important information to you by referring you to documents GeneMedicine has
previously filed with the SEC. The information incorporated by reference is
considered to be a part of this joint proxy statement/prospectus, and any later
information that GeneMedicine files with the SEC will automatically update and
supersede this information. GeneMedicine incorporates by reference the documents
listed below, and any further filings made with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until the offering of the securities is
terminated. This joint proxy statement/prospectus is part of a registration
statement on Form S-4 filed by Megabios with the SEC (Registration No.
333-68013). The documents GeneMedicine incorporates by reference are:
1. GeneMedicine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. Those portions of GeneMedicine's definitive proxy statement, dated April
30, 1998, incorporated by reference in Part III of GeneMedicine's Annual
Report on Form 10-K for the year ended December 31, 1997;
3. GeneMedicine's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998;
4. GeneMedicine's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998;
5. GeneMedicine's Current Report on Form 8-K dated July 27, 1998;
6. GeneMedicine's Current Report on Form 8-K dated October 26, 1998; and
7. GeneMedicine's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
108
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains and incorporates by reference
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include all statements regarding the intent, belief or current
expectations regarding the matters discussed or incorporated by reference in
this joint proxy statement/ prospectus, including statements as to beliefs,
expectations, anticipations, intentions or similar words, and all statements
which are not statements of historical fact. Such statements are subject to
risks, uncertainties and assumptions, including, but not limited to:
- risks related to the realization of anticipated revenues, profitability
and cost synergies of the combined companies;
- risks related to the business and operations of Megabios and GeneMedicine,
including trends affecting their continued growth, the development and
regulatory approval of products; and
- other risks and uncertainties described in "Risk Factors" or in the other
SEC filings of GeneMedicine and Megabios. Should one or more of these
risks or uncertainties affect the business of the companies or should
underlying assumptions prove incorrect, Megabios' or GeneMedicine's actual
results, performance or achievements in 1999 and beyond could differ
materially from those expressed in, or implied by, such forward-looking
statements.
The Megabios common stock and the GeneMedicine common stock are each quoted
on the Nasdaq National Market ("Nasdaq"). The trading symbol for Megabios is
"MBIO." The trading symbol for GeneMedicine is "GMED." You may inspect reports
and other information concerning Megabios and GeneMedicine at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE AUTHORIZED NO ONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT COVER OF THIS DOCUMENT.
This joint proxy statement/prospectus contains separate trademarks of
Megabios and GeneMedicine as well as trademarks of other companies.
109
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MEGABIOS CORP.
Report of Independent Auditors............................................................................. F-2
Financial Statements
Balance Sheets as of June 30, 1998 and 1997.............................................................. F-3
Statements of Operations for the years ended June 30, 1998, 1997 and 1996................................ F-4
Statement of Stockholders' Equity for the three years ended June 30, 1998................................ F-5
Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996................................ F-6
Notes to Financial Statements............................................................................ F-7
Interim Financial Statements (Unaudited)
Condensed Balance Sheets as of September 30 and June 30, 1998............................................ F-20
Condensed Statements of Operations for the three months ended September 30, 1998 and 1997................ F-21
Condensed Statements of Cash Flows for the three months ended September 30, 1998 and 1997................ F-22
Notes to Condensed Financial Statements.................................................................. F-23
GENEMEDICINE, INC.
Report of Independent Public Accountants................................................................... F-26
Financial Statements
Balance Sheets as of December 31, 1996 and 1997.......................................................... F-27
Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and the period from
Inception (January 2, 1992) through December 31, 1997.................................................. F-28
Statements of Stockholders' Equity for the period from Inception (January 2, 1992) through December 31,
1997................................................................................................... F-29
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and the period from
Inception (January 2, 1992) through December 31, 1997.................................................. F-31
Notes to Financial Statements............................................................................ F-32
Interim Financial Statements (Unaudited)
Balance Sheets as of September 30, 1998 and December 31, 1997............................................ F-43
Statements of Operations for the three- and nine-month periods ended September 30, 1998 and 1997 and for
the period from Inception (January 2, 1992) through December 31, 1997.................................. F-44
Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 and for the period from
Inception (January 2, 1992) through December 31, 1997.................................................. F-45
Notes to Financial Statements............................................................................ F-46
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Megabios Corp.
We have audited the accompanying balance sheets of Megabios Corp. as of June
30, 1998 and 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Megabios Corp. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
Palo Alto, California
July 31, 1998
F-2
<PAGE>
MEGABIOS CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 15,172 $ 9,044
Short-term investments.................................................................... 7,794 15,225
Other receivables......................................................................... 616 238
Prepaid expenses and other current assets................................................. 539 390
---------- ----------
Total current assets.................................................................. 24,121 24,897
Property and equipment, net............................................................... 6,151 4,733
Long-term investments..................................................................... 25,460 --
Other receivables......................................................................... 130 27
Deposits and other assets................................................................. 39 321
---------- ----------
$ 55,901 $ 29,978
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 898 $ 694
Accrued compensation...................................................................... 595 170
Accrued construction-in-progress.......................................................... 589 249
Other accrued liabilities................................................................. 56 35
Deferred revenue.......................................................................... -- 887
Current portion of long-term debt......................................................... 1,017 1,233
---------- ----------
Total current liabilities............................................................. 3,155 3,268
Long-term debt............................................................................ 2,464 1,487
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series; 10,000,000 shares authorized; none and
8,420,720 convertible shares issued and outstanding at June 30, 1998 and 1997,
respectively............................................................................ -- 44,700
Common stock, $.001 par value, 30,000,000 shares authorized; 12,880,978 and 1,567,727
shares issued and outstanding at June 30, 1998 and 1997, respectively................... 13 1,410
Additional paid-in capital................................................................ 79,838 --
Deferred compensation, net of amortization................................................ (976) (679)
Net unrealized loss on available-for-sale securities...................................... (7) --
Accumulated deficit....................................................................... (28,586) (20,208)
---------- ----------
Total stockholders' equity............................................................ 50,282 25,223
---------- ----------
$ 55,901 $ 29,978
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
MEGABIOS CORP.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Collaborative research and development revenue.................................. $ 8,083 $ 5,793 $ 1,890
Operating expenses:
Research and development...................................................... 15,111 8,598 6,487
General and administrative.................................................... 3,561 2,417 2,169
---------- --------- ---------
Total operating expenses.................................................... 18,672 11,015 8,656
---------- --------- ---------
Loss from operations............................................................ (10,589) (5,222) (6,766)
Interest income................................................................. 2,651 656 230
Interest expense and other...................................................... (440) (381) (365)
---------- --------- ---------
Net loss........................................................................ $ (8,378) $ (4,947) $ (6,901)
---------- --------- ---------
---------- --------- ---------
Basic and diluted net loss per share............................................ $ (0.83) $ (4.40) $ (9.86)
---------- --------- ---------
---------- --------- ---------
Shares used in computing net loss per share..................................... 10,088 1,126 700
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
MEGABIOS CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995.................. 3,441,501 $ 10,342 682,105 $ 237 $ -- $ --
Issuance of Series C convertible preferred
stock, net of issuance costs of $36..... 1,827,871 7,063 -- -- -- --
Issuance of Series D convertible preferred
stock................................... 484,697 3,500 -- -- -- --
Exercise of stock options................. -- -- 693,543 208 -- --
Repurchase of common stock from employee.. -- -- (7,500) (3) -- --
Net loss.................................. -- -- -- -- -- --
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1996.................. 5,754,069 20,905 1,368,148 442 -- --
Issuance of Series E convertible preferred
stock, net of issuance costs of $15..... 1,333,325 9,985 -- -- -- --
Issuance of Series F convertible preferred
stock, net of issuance costs of $11..... 1,333,326 13,989 -- -- -- --
Issuance of common stock in lieu of cash
payment of Series E and F stock offering
commissions............................. -- (179) 119,046 179 -- --
Exercise of stock options................. -- -- 116,517 56 -- --
Repurchase of common stock from
employees............................... -- -- (35,984) (17) -- --
Deferred compensation related to grant of
certain stock options, net of
amortization............................ -- -- -- 750 -- (750)
Amortization of deferred compensation..... -- -- -- -- -- 71
Net loss.................................. -- -- -- -- -- --
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1997.................. 8,420,720 44,700 1,567,727 1,410 -- (679)
Reincorporation in Delaware with par
value................................... -- -- -- (1,408) 1,408 --
Issuance of common stock in initial public
offering, September 1997, net of
offering costs of $3,124................ -- -- 2,875,000 3 31,373 --
Conversion of convertible preferred stock
into common stock....................... (8,420,720) (44,700) 8,154,779 8 44,692 --
Issuance of common stock for technology
license................................. -- -- 117,555 -- 1,500 --
Exercise of stock options and warrants.... -- -- 184,346 -- 237 --
Repurchase of common stock from
employees............................... -- -- (18,429) -- (8) --
Deferred compensation related to grant of
certain stock options, net of
amortization............................ -- -- -- -- 636 (636)
Amortization of deferred compensation..... -- -- -- -- -- 339
Net unrealized loss on available-for-sale
securities.............................. -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1998.................. -- -- 12,880,978 $ 13 $ 79,838 $ (976)
--------- --------- --------- ----------- ----------- -----
--------- --------- --------- ----------- ----------- -----
<CAPTION>
NET
UNREALIZED TOTAL
LOSS ON ACCUMULATED STOCKHOLDERS'
SECURITIES DEFICIT EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Balance at June 30, 1995.................. $ -- $ (8,360) $ 2,219
Issuance of Series C convertible preferred
stock, net of issuance costs of $36..... -- -- 7,063
Issuance of Series D convertible preferred
stock................................... -- -- 3,500
Exercise of stock options................. -- -- 208
Repurchase of common stock from employee.. -- -- (3)
Net loss.................................. -- (6,901) (6,901)
--- ------------ -------------
Balance at June 30, 1996.................. -- (15,261) 6,086
Issuance of Series E convertible preferred
stock, net of issuance costs of $15..... -- -- 9,985
Issuance of Series F convertible preferred
stock, net of issuance costs of $11..... -- -- 13,989
Issuance of common stock in lieu of cash
payment of Series E and F stock offering
commissions............................. -- -- --
Exercise of stock options................. -- -- 56
Repurchase of common stock from
employees............................... -- -- (17)
Deferred compensation related to grant of
certain stock options, net of
amortization............................ -- -- --
Amortization of deferred compensation..... -- -- 71
Net loss.................................. -- (4,947) (4,947)
--- ------------ -------------
Balance at June 30, 1997.................. -- (20,208) 25,223
Reincorporation in Delaware with par
value................................... -- -- --
Issuance of common stock in initial public
offering, September 1997, net of
offering costs of $3,124................ -- -- 31,376
Conversion of convertible preferred stock
into common stock....................... -- -- --
Issuance of common stock for technology
license................................. -- -- 1,500
Exercise of stock options and warrants.... -- -- 237
Repurchase of common stock from
employees............................... -- -- (8)
Deferred compensation related to grant of
certain stock options, net of
amortization............................ -- -- --
Amortization of deferred compensation..... -- -- 339
Net unrealized loss on available-for-sale
securities.............................. (7) -- (7)
Net loss.................................. -- (8,378) (8,378)
--- ------------ -------------
Balance at June 30, 1998.................. $ (7) $ (28,586) $ 50,282
--- ------------ -------------
--- ------------ -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
MEGABIOS CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss..................................................................... $ (8,378) $ (4,947) $ (6,901)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization.............................................. 2,044 1,294 1,101
Amortization of deferred compensation...................................... 339 71 --
Purchase of in-process research and development............................ 1,500 -- --
Changes in operating assets and liabilities:
Other receivables........................................................ (481) (214) 93
Prepaid expenses and other assets........................................ (149) (115) (87)
Deferred revenue......................................................... (887) 356 281
Accounts payable......................................................... 204 546 (33)
Accrued liabilities...................................................... 197 (23) 95
---------- ---------- ---------
Net cash used in operating activities.................................. (5,611) (3,032) (5,451)
---------- ---------- ---------
Cash flows from investing activities
Purchase of property and equipment........................................... (2,719) (1,687) (1,111)
Deposits and other assets.................................................... 282 (35) (12)
Purchases of available-for-sale investments.................................. (41,890) (15,725) --
Maturities of available-for-sale investments................................. 23,700 500 --
---------- ---------- ---------
Net cash used in investing activities.................................. (20,627) (16,947) (1,123)
---------- ---------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt..................................... 2,128 894 1,683
Payments on long-term debt................................................... (1,367) (1,137) (906)
Proceeds from issuance of convertible preferred stock, net of issuance
costs...................................................................... -- 23,974 10,563
Proceeds from issuance of common stock, net of repurchases................... 31,605 39 205
---------- ---------- ---------
Net cash provided by financing activities.............................. 32,366 23,770 11,545
---------- ---------- ---------
Net increase in cash and cash equivalents...................................... 6,128 3,791 4,971
Cash and cash equivalents, beginning of year................................... 9,044 5,253 282
---------- ---------- ---------
Cash and cash equivalents, end of year......................................... $ 15,172 $ 9,044 $ 5,253
---------- ---------- ---------
---------- ---------- ---------
Interest paid.................................................................. $ 423 $ 381 $ 357
---------- ---------- ---------
---------- ---------- ---------
Construction-in-progress included in accrued liabilities..................... $ 589 $ 249 $ --
---------- ---------- ---------
---------- ---------- ---------
Net exercise of warrants to purchase 14,629 shares of common stock........... $ 84 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Megabios Corp. ("Megabios" or the "Company") develops proprietary gene
delivery systems and provides preclinical development expertise to create
gene-based therapeutics designed for the treatment or prevention of genetic and
acquired diseases. The Company has developed several IN VIVO, non-viral gene
delivery systems to address a number of potential therapeutic applications using
a variety of therapeutic genes. The Company's clinical development and
commercialization strategy is to enter into collaborative research and
development agreements or "corporate partnerships" with pharmaceutical and
biotechnology companies.
In September 1997, the Company completed its initial public offering and
reincorporation in the State of Delaware. The Company may require additional
financial resources to complete development and commercialization of its
products. Management plans to continue to finance the Company primarily through
issuances of equity securities, collaborative research and development
arrangements and debt financing. Prior to product commercialization, if the
financing arrangements contemplated by management are not completed, the Company
may have to seek other sources of capital or re-evaluate its operating plans.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The payments
received under each respective agreement are not refundable. The Company is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceeds the revenue recognized under such agreements over the
term of the respective agreements. Deferred revenue may result when the Company
does not incur the required level of effort during a specific period in
comparison to funds received under the respective contracts. Milestone payments,
if any, will be recognized pursuant to collaborative agreements upon the
achievement of specified milestones, such as the filing of Investigational New
Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments with maturities from
date of purchase of 90 days or less. Short-term investments consist of
investments with original maturities greater than three months, but less than
one year, while long-term investments have maturities greater than one year.
The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities"
F-7
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS 115"). Under the provisions of SFAS 115, the Company has classified its
cash equivalents and investments as "available-for-sale." Such investments are
recorded at fair value, determined based on quoted market prices, and unrealized
gains and losses, which are considered to be temporary, are recorded as a
separate component of stockholders' equity until realized.
At June 30, 1997, all investments were classified as held-to-maturity.
However, in fiscal year 1998, the Company reassessed its investment portfolio
and determined it is more appropriate to classify all investments as
available-for-sale. The difference between the amortized cost and the estimated
fair value of the investments on the date of the redesignation was immaterial.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets (generally five years). Leasehold
improvements are amortized over the shorter of five years or the estimated
useful life of the assets.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121"). In accordance with
SFAS 121, the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such events have occurred with respect to the Company's
long-lived assets, which consist primarily of machinery and equipment and
leasehold improvements.
STOCK-BASED COMPENSATION
The Company generally grants stock options to employees for a fixed number
of shares with an exercise price equal to the fair value of the shares at the
date of grant. In accordance with the provisions of Statements of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"), the Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for option grants to employees under its employee
stock option plan and to adopt the pro forma disclosure alternative as described
in SFAS 123 (see Note 9). Option grants to all others are accounted for using
the fair value method prescribed by SFAS 123.
COMPREHENSIVE INCOME
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for the Company's
fiscal year 1999. The Company believes that adoption of SFAS 130 will not have a
material impact on the Company's financial statements.
F-8
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128") and Securities
and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if dilutive, for all periods presented. Basic
earnings per share is computed by dividing income or loss applicable to common
stockholders by the weighted-average number of common shares outstanding for the
period net of certain common shares outstanding which are subject to continued
vesting and the Company's right of repurchase. Basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
net loss per share has not been presented separately as, given the Company's net
loss position, the result would be anti-dilutive. SAB 98 eliminates the
inclusion in the calculation of net loss per share of common and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock) issued during the 12 month period prior to an initial public offering at
prices below the initial public offering price as if they were outstanding for
all periods presented. All loss per share amounts for all periods presented have
been presented and, where appropriate, restated to conform to SFAS 128 and SAB
98.
The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 220,455
common shares which are outstanding but are subject to the Company's right of
repurchase which expires ratably over 4 years; and options to purchase
approximately 808,100 shares of common stock at a weighted average price of
$5.72 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss.................................................... $ (8,378) $ (4,947) $ (6,901)
BASIC AND DILUTED
Weighted average shares of common stock outstanding used in
computing net loss per share.............................. 10,088 1,126 700
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share........................ $ (0.83) $ (4.40) $ (9.86)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-9
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
2. INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED ESTIMATED
COST GAIN/(LOSS) FAIR VALUE
---------- ------------- -----------
<S> <C> <C> <C>
JUNE 30, 1998
Money market funds....................................... $ 15,509 $ -- $ 15,509
Corporate debt securities................................ 7,766 28 7,794
---------- ----- -----------
Total.................................................. 23,275 28 23,303
Less amounts classified as cash equivalents.............. (15,509) -- (15,509)
---------- ----- -----------
Total short-term investments............................. 7,766 28 7,794
---------- ----- -----------
Long-term investments (corporate debt securities)........ 25,495 (35) 25,460
---------- ----- -----------
Total investments........................................ $ 33,261 $ (7) $ 33,254
---------- ----- -----------
---------- ----- -----------
JUNE 30, 1997
Money market funds....................................... $ 8,041 $ -- $ 8,041
Corporate debt securities................................ 15,225 (8) 15,217
---------- ----- -----------
Total.................................................. 23,266 (8) 23,258
Less amounts classified as cash equivalents.............. (8,041) -- (8,041)
---------- ----- -----------
Total short-term investments............................. $ 15,225 $ (8) $ 15,217
---------- ----- -----------
---------- ----- -----------
</TABLE>
Unrealized gains were not material and have therefore been netted against
unrealized losses.
At June 30, 1998, the contractual maturities of short-term investments were
all due in one year or less, while all long-term investments have contractual
maturities of one to two years.
3. COLLABORATIVE AGREEMENTS
ELI LILLY AND COMPANY
In May 1997, the Company entered into a two-year collaborative research
agreement with Eli Lilly and Company ("Lilly") to develop gene-based
therapeutics using BRCA1, a gene that has been identified as a putative tumor
suppressor. The agreement provides for research and development funding as well
as funding to support manufacturing and process development efforts. If Lilly
and the Company agree on an appropriate level of research and development
efforts, funding may be extended for up to an additional two years. However,
after 21 months from the commencement date of the collaborative research
agreement, Lilly can, at its options, cancel the collaborative research
agreement upon three-months advance notice to the Company. The agreement
provides for certain royalty and milestone payments to the Company upon the
occurrence of specified events as set forth in the agreement. Lilly will be
responsible for clinical development and regulatory functions, as well as
large-scale clinical and commercial manufacturing and sales and marketing.
Revenue recognized under the collaborative research agreement with Lilly was
$4,041,000 (50% of total revenues) and $270,000 (5% of total revenues) for the
years ended June 30, 1998 and 1997, respectively.
F-10
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
3. COLLABORATIVE AGREEMENTS (CONTINUED)
In June 1997, in connection with the Lilly agreement, Lilly purchased
285,714 shares of the Company's Series F convertible preferred stock at $10.50
per share.
PFIZER INC
In May 1996, the Company entered into a four-year collaborative research
agreement, as well as a license and royalty agreement, with Pfizer Inc
("Pfizer") to develop a gene-based therapeutic for the treatment of solid tumors
via angiogenesis inhibition. Under the terms of the collaborative research
agreement, the Company conducted research and preclinical development
activities. In December 1997, Pfizer exercised the option as stated in the
agreement to discontinue its research and development program. Under the terms
of the agreement, Pfizer continued funding the program through May 31, 1998.
Megabios intends to continue to advance the angiogenesis inhibition program and
is actively seeking a new corporate partner. Revenue recognized under the
collaborative research agreement with Pfizer was $4,042,000 (50% of total
revenues), $3,352,000 (58% of total revenues) and $265,000 (14% of total
revenues) for the years ended June 30, 1998, 1997 and 1996, respectively.
In May 1996, in connection with the above agreements, Pfizer purchased
484,697 shares of the Company's Series D convertible preferred stock at $7.22
per share.
GLAXO WELLCOME PLC
In April 1994, the Company entered into a five-year collaborative agreement
with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. In May 1996, the agreement was amended
such that the research and development portion of the agreement expired as of
April 1, 1997. The agreement provided for quarterly nonrefundable research and
development fees. The Company has completed all of its obligations under the
Glaxo Wellcome agreement and will receive future payments, if any, only through
the achievement of a certain clinical milestone and the payment of royalties.
Revenue for research and development was recorded as earned in accordance with
the agreement. For the years ended June 30, 1997 and 1996, respectively, revenue
recognized under agreement with Glaxo Wellcome was $1,971,000 (34% of total
revenues), and $1,625,000 (86% of total revenues). No revenue was recognized
under the agreement for the fiscal year ended June 30, 1998.
4. LICENSE AND RESEARCH AGREEMENTS
The Company has entered into several research agreements with universities
and other organizations. These agreements are generally cancelable by either
party upon written notice and may be extended by mutual consent of both parties.
Research and development expenses are recognized as the related services are
performed, generally ratably over the period of service. Expenses under these
agreements were approximately $1,077,000, $865,000, and $1,100,000 for the years
ended June 30, 1998, 1997 and 1996, respectively.
In March of 1998 the Company entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which the Company obtained an exclusive license to certain patent rights held by
UPMC in the field of viral and non-viral gene-based therapy for
F-11
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
rheumatology. Of these patent rights, one patent has issued in the United States
and related applications are pending in the U.S. and worldwide. Under the terms
of the license and collaboration agreement the Company issued 117,555 shares of
common stock in payment for the exclusive license to these patent rights. The
value of the common stock issued in the transaction was $1.5 million, which was
expensed to research and development during the period. The Company expensed the
value of this common stock as the technology was not complete at the date of
acquisition. Under the terms of the license agreement, the Company is not
obligated to pay additional royalty payments upon the sale of products, if any,
in the field of non-viral gene therapy, but is required to share revenue with
UPMC at a specified rate upon sub-license of rights in the field of viral gene
therapy. Megabios is obligated to make payments upon the completion of certain
milestones. Certain of the license rights may revert back to UPMC in the event
that the Company fails to commit resources to the development of products in the
field of rheumatology. In addition, the license and collaboration agreement with
UPMC established exclusive collaborations between the Company and several
researchers at UPMC for the research and development of gene-based therapies in
the field of rheumatology. Intellectual property developed by UPMC under the
collaboration will be included in the exclusive license to the Company described
above at no additional cost to the Company.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................. $ 4,417 $ 3,239
Furniture and fixtures................................................... 836 481
Leasehold improvements................................................... 5,121 3,235
Construction-in-progress................................................. 818 954
--------- ---------
11,192 7,909
Less accumulated depreciation............................................ (5,041) (3,176)
--------- ---------
Property and equipment, net.............................................. $ 6,151 $ 4,733
--------- ---------
--------- ---------
</TABLE>
6. LONG-TERM DEBT
OPERATING LINES OF CREDIT
In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank. As of June 30, 1998, the Company had drawn $1,016,000 under the
line of credit. In accordance with the terms of the agreement, the entire
balance was converted into a term loan bearing interest at prime plus 1/2% (9%
at June 30, 1998) due in 42 equal monthly installments. Additional draws under
the credit line will be converted into a term loan on December 31, 1998. The
loan is secured by all tangible personal property, accounts receivable and funds
on deposit, other than the assets securing the equipment financing. As a
condition of the credit line, the Company must maintain a minimum cash and
short-term investments balance of not less than the greater of the prior two
quarters net cash usage or 90% of the total principal drawn under the line of
credit.
F-12
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
6. LONG-TERM DEBT (CONTINUED)
In 1995, the Company established a line of credit for $1,500,000 with a
commercial bank which was fully utilized by August 1995, and, in accordance with
the terms of the agreement, the Company elected to convert the entire balance to
a term loan bearing interest at prime plus 2% due in 36 equal monthly
installments. The loan is secured by all tangible personal property, accounts
receivable and funds on deposit, other than the assets securing the equipment
financing. As a condition of the term loan, the Company must maintain a minimum
net worth of $3,000,000 and is prohibited from paying dividends. In conjunction
with this financing arrangement, the Company issued the bank a warrant to
purchase 24,140 shares of the Company's common stock at $3.88 per share (see
Note 9).
The carrying amounts of these obligations approximate their fair value
determined using a discounted cash flow model and the Company's current
incremental borrowing rate.
EQUIPMENT FINANCING
In May 1996, the Company entered into an equipment financing agreement for
up to $2,700,000 with a financing company. As of June 30, 1998 and 1997, the
Company had financed $2,700,000 and $1,587,000, respectively, in equipment
purchases under this agreement structured as loans. The equipment loans are to
be repaid over 48 months at interest rates ranging from 15.2% to 16.2% and are
secured by the related equipment. In conjunction with this equipment financing
agreement, the Company issued a warrant to purchase 38,238 shares of common
stock at $3.88 per share (see Note 9).
In December 1993, the Company entered into an equipment financing agreement
for up to $2,300,000 with a financing company. As of June 30, 1998 and 1997, the
Company had financed $1,922,000 in equipment purchases under this agreement
structured as loans. The equipment loans are to be repaid over 42 months at
interest rates ranging from 13.8% to 16.2% and are secured by the related
equipment. In conjunction with the original agreement, the Company issued the
financing company a warrant to purchase 21,630 shares of Company's common stock
at $3.88 per share (see Note 9).
Following is a schedule of future minimum principal payments under the term
loans and equipment financing arrangements at June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30,
1999................................................................................. $ 1,017
2000................................................................................. 1,084
2001................................................................................. 935
2002................................................................................. 445
---------
$ 3,481
---------
---------
</TABLE>
F-13
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
7. FACILITY LEASE
The Company leases its facilities under two operating leases. These leases
expire in November 2004 and October 2007 with renewal options at the end of the
initial terms of the leases. Minimal annual rental commitments under the
operating leases at June 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ended June 30,
1999................................................................................. $ 512
2000................................................................................. 527
2001................................................................................. 540
2002................................................................................. 544
2003................................................................................. 567
Thereafter........................................................................... 1,547
---------
$ 4,237
---------
---------
</TABLE>
Rent expense for the years ended June 30, 1998, 1997 and 1996 was
approximately $526,000, $295,000, and $273,000, respectively.
8. RELATED PARTY TRANSACTIONS
The Company has issued loans to certain employees, of which $130,000 was
outstanding at June 30, 1998 and $27,500 as of June 30, 1997. The loan
outstanding as of June 30, 1998 bears an interest rate of 5.68%. The loan is due
and payable on the fifth anniversary of the date of the loan. Accrued interest
is forgiven annually and recorded as income to the employee. The loan amount
outstanding as of June 30, 1997 has been repaid. Both loans were classified as
other receivables on the balance sheet.
9. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On September 15, 1997, the Company completed its initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on September
29, 1997, the Company's underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of the Company's common stock at $12.00
per share. The combined net proceeds raised from the offering was approximately
$31.4 million. Upon the completion of the initial public offering, all of the
Series A, B, C, D, E and F preferred stock outstanding were converted into
8,154,779 shares of common stock. Also, upon the completion of the offering, the
Company's Certificate of Incorporation was amended to authorize 10,000,000
shares of preferred stock, none of which are issued or outstanding and
30,000,000 of common stock.
WARRANTS
In connection with the equipment financing agreement entered into in
December 1993, the Company issued a warrant to purchase 21,630 shares of common
stock at an exercise price of $3.88 per share. In September 1997, the Company
issued 14,629 shares of its common stock upon the exercise of the warrant, in
accordance with the terms stated in the warrant agreement.
F-14
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
The Company issued a warrant to purchase 28,969 shares of common stock at
$3.88 per share to the commercial bank providing a line of credit to the
Company. In accordance with the terms of the warrant, the number of shares
subject to the warrant was reduced from 28,969 to 24,140 in July 1995. The
warrant provided for a reduction in the number of shares upon securing a
commitment of at least $7,000,000 in sales of Series C preferred stock. The
warrant is exercisable immediately and expires at the earlier of June 1, 2000,
or in the event of a merger or sale of substantially all of the assets of the
Company.
In connection with the equipment financing agreement in May 1996, the
Company issued a warrant to purchase 38,238 shares of common stock at $3.88 per
share. The warrant is exercisable immediately and expires at the earlier of ten
years from the date of issuance or five years after the Company's initial public
offering.
The value ascribed to warrants issued by the Company as noted above, both
individually and in the aggregate, was immaterial.
1997 STOCK PURCHASE PLAN
In July 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of
common stock. The Purchase Plan was approved by shareholders in September 1997.
The Purchase Plan is designed to allow eligible employees of the Company to
purchase shares of common stock through periodic payroll deductions. The price
of common stock purchased under the Purchase Plan must be equal to at least 85%
of the lower of the fair market value of the common stock on the commencement
date of each offering period or the specified purchase date. At June 30, 1998,
no shares had been issued under the Purchase Plan.
EQUITY INCENTIVE PLAN
In July 1997, the Board of Directors amended and restated the 1993 Stock
Option Plan, renamed it as the 1997 Equity Incentive Plan (the "Incentive Plan")
and reserved 2,100,000 shares of the Company's common stock for issuance under
the Incentive Plan. The Incentive Plan was approved by shareholders in September
1997. The Incentive Plan provides for grants to employees, directors and
consultants of the Company. The exercise price of options granted under the
Incentive Plan is determined by the Board of Directors but cannot be less than
100% of the fair market value of the common stock on the date of the grant.
Options under the Incentive Plan generally vest 25% one year after the date of
grant and on a pro rata basis over the following 36 months.
F-15
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under all option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS WEIGHTED
SHARES -------------------------- AVERAGE
AVAILABLE NUMBER OF PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1995................... 141,682 556,814 $ 0.30 $ 0.30
Additional authorization................... 320,000 -- -- --
Options granted............................ (387,329) 387,329 $ 0.30 $ 0.30
Options exercised.......................... -- (693,543) $ 0.30 $ 0.30
Options canceled........................... 16,582 (16,582) $ 0.30 $ 0.30
Shares repurchased......................... 7,500 -- $ 0.30 $ 0.30
---------- ---------- -------------- -----
Balance at June 30, 1996................... 98,435 234,018 $ 0.30 $ 0.30
Additional authorization................... 353,333 -- -- --
Options granted............................ (388,680) 388,680 $ 1.50 $ 1.50
Options exercised.......................... -- (116,517) $ 0.30-$1.50 $ 0.45
Options canceled........................... 26,566 (26,566) $ 0.30-$1.50 $ 0.51
Shares repurchased......................... 32,045 -- $ 0.30-$1.50 $ 0.39
---------- ---------- -------------- -----
Balance at June 30, 1997................... 121,699 479,615 $ 0.30-$1.50 $ 1.22
Additional authorization................... 770,985 -- -- --
Options granted............................ (550,722) 550,722 $ 2.70-$15.50 $ 8.15
Options exercised.......................... -- (169,719) $ 0.30-$2.88 $ 1.28
Options canceled........................... 52,518 (52,518) $ 0.30-$15.50 $ 4.12
Shares repurchased......................... 18,429 -- $ 0.30-$1.50 $ 0.43
---------- ---------- -------------- -----
Balance at June 30, 1998................... 412,909 808,100 $ 0.30-$15.50 $ 5.72
---------- ---------- -------------- -----
---------- ---------- -------------- -----
</TABLE>
The options outstanding and exercisable at June 30, 1998 have been
segregated into ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING AND WEIGHTED AVERAGE WEIGHTED
EXERCISABLE REMAINING AVERAGE
EXERCISE PRICE AT JUNE 30, CONTRACTUAL LIFE EXERCISE
PER SHARE 1998 (IN YEARS) PRICE
- -------------- --------------- ----------------- -----------
<S> <C> <C> <C>
$ 0.30 69,562 7.11 $ 0.30
$ 1.50 220,164 8.62 $ 1.50
$ 2.70-$2.88 88,624 9.14 $ 2.86
$ 7.63-$15.50 429,750 9.76 $ 9.35
-------
808,100
-------
-------
</TABLE>
The weighted average fair value of options granted in fiscal 1998, 1997 and
1996 was $8.15, $0.199 and $0.037 respectively.
F-16
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
At June 30, 1998, 225,486 shares of common stock at a weighted average price
of $0.76 per share were subject to repurchase.
The Company recorded deferred compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's common stock, as determined by the board
of directors, for options granted through the year ended June 30, 1997. Deferred
compensation of $750,000 was recorded on these options based on the deemed fair
value of the common stock at the dates of grant at prices ranging from $1.50 to
$3.75 per share, respectively. In July and August 1997, the Company granted
options to purchase a total of 59,949 shares at exercise prices ranging from
$2.70 to $2.88 per share. Additional deferred compensation of approximately
$636,000 was recorded based on the deemed fair values of common stock ranging
from $9.00 to $9.60 per share. The deferred compensation is being amortized to
expense over the vesting period of the options, generally four years.
Amortization of $339,000 and $71,000 was recorded in 1998 and 1997,
respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires use of valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: risk free interest rate range of 5.3% to 6.2%, 5.7% to 6.5% and
4.8% to 6.4%, respectively; volatility factors of the expected market price of
the Company's common stock of 70%, 0%, and 0%, respectively; no expected
dividends; and a weighted-average expected life of the option of 2.5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plans have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and shares issued pursuant to the employee stock purchase plan.
F-17
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss-as reported.......................................... $ (8,378) $ (4,947) $ (6,901)
Net loss-pro forma............................................ $ (8,708) $ (4,965) $ (6,903)
Net loss per share-as reported................................ $ (0.83) $ (4.40) $ (9.86)
Net loss per share-pro forma.................................. $ (0.86) $ (4.41) $ (9.86)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to June
30, 1995, its pro forma effect will not be fully reflected until fiscal 1999.
10. INCOME TAXES
As of June 30, 1998, the Company had federal net operating loss
carryforwards and federal research credit carryforwards of approximately
$23,900,000 and $600,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 2007 through 2012, if
not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal income taxes as of June 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................ $ 8,200 $ 5,425
Research and development credits........................................ 600 625
Manufacturing and research equipment credit carryforward................ 200 --
Capitalized research and development.................................... 1,600 724
Depreciation............................................................ 1,300 840
Other, net.............................................................. (600) 467
---------- ---------
Net deferred tax assets................................................. 11,300 8,081
Valuation allowance..................................................... (11,300) (8,081)
---------- ---------
$ -- $ --
---------- ---------
---------- ---------
</TABLE>
The net valuation allowance increased by $3,219,000 and $2,005,000 during
the years ended June 30, 1998 and 1997, respectively.
F-18
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
11. SUBSEQUENT EVENTS (UNAUDITED)
DSM BIOLOGICS AGREEMENT
In September, 1998, Megabios and DSM Biologics ("DSM") announced the
formation of a broad, strategic partnership focused on the manufacture and
supply of DNA plasmids and lipid:DNA complexes to the entire gene therapy
industry. Plasmids are circular pieces of DNA that contain a therapeutic gene
and instructional elements that regulate the activity of the gene. The
manufacturing process can be used to produce any plasmid.
Under the agreement, Megabios has exclusively licensed its proprietary
manufacturing technology to DSM for use in its facility in Montreal, Canada and
may be extended to include DSM's facility in Gronigen, The Netherlands. In
return, DSM will pay license and milestone fees to Megabios, and DSM and
Megabios will share in the profits generated by the sale of material produced
using Megabios' process. The term of the exclusive partnership is at least three
years, and will continue for as long as the venture is profitable.
The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Megabios'
partner, Glaxo Wellcome, and a Phase I/II study for metastatic melanoma,
conducted by Megabios and its academic collaborators at the University of
Colorado Health Sciences Center.
The partnership will create the first manufacturing facility that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. DSM will have
full responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The partnership will use
Megabios' proprietary methods for the manufacture of DNA plasmids and complexing
that DNA with lipids. This arrangement could provide revenue for Megabios in
advance of the launch of commercial gene-based products.
PROPOSED MERGER WITH GENEMEDICINE
On October 26, 1998, Megabios and GeneMedicine Inc. announced the signing of
a definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of
0.5710, for newly issued shares of common stock of Megabios. This will result in
the issuance of approximately 8.9 million additional Megabios shares, valued at
about $38 million based on Megabios' closing price on Friday, October 23, 1998.
In addition, all outstanding warrants and employee stock options of GeneMedicine
will convert into Megabios warrants and options at the same exchange ratio. The
Board of Directors of the combined company will consist of nine directors, three
of whom will be current directors of GeneMedicine, and Benjamin F. McGraw III
will remain as chairman, president and CEO of the combined entity.
The proposed transaction will be accounted for as a purchase. A significant
portion of the excess purchase price is expected to be charged to in-process
research and development in the Company's statement of operations for the
quarter in which the transaction is completed. The merger is subject to the
approval of stockholders of both companies. The transaction is expected to close
in the first calendar quarter of 1999.
F-19
<PAGE>
MEGABIOS CORP.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ----------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 10,657 $ 15,172
Short-term investments............................................................... 17,033 7,794
Other receivables.................................................................... 1,004 616
Prepaid expenses and other current assets............................................ 754 539
------------- ----------
Total current assets............................................................... 29,448 24,121
Property and equipment, net.......................................................... 8,350 6,151
Long-term investments................................................................ 17,241 25,460
Other receivables.................................................................... 130 130
Deposits and other assets............................................................ 39 39
------------- ----------
$ 55,208 $ 55,901
------------- ----------
------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 564 $ 898
Accrued compensation................................................................. 573 595
Accrued construction-in-progress..................................................... 766 589
Other accrued liabilities............................................................ 186 56
Current portion of long-term debt.................................................... 805 1,017
------------- ----------
Total current liabilities.......................................................... 2,894 3,155
Long-term debt......................................................................... 4,808 2,464
Commitments
Stockholders' equity:
Common stock......................................................................... 13 13
Additional paid-in capital........................................................... 80,041 79,838
Deferred compensation................................................................ (899) (976)
Accumulated other comprehensive income (loss)........................................ 136 (7)
Accumulated deficit.................................................................. (31,785) (28,586)
------------- ----------
Total stockholders' equity......................................................... 47,506 50,282
------------- ----------
$ 55,208 $ 55,901
------------- ----------
------------- ----------
</TABLE>
See accompanying notes
F-20
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Collaborative research and development revenue.......................................... $ 773 $ 2,287
Operating expenses:
Research and development.............................................................. 3,429 2,758
General and administrative............................................................ 1,076 675
----------- -----------
Total operating expenses............................................................ 4,505 3,433
----------- -----------
Loss from operations.................................................................... (3,732) (1,146)
Interest income......................................................................... 679 398
Interest expense and other.............................................................. (146) (98)
----------- -----------
Net loss................................................................................ $ (3,199) $ (846)
----------- -----------
----------- -----------
Basic and diluted net loss per share.................................................... $ (0.25) $ (0.29)
----------- -----------
----------- -----------
Shares used in computing basic and diluted net loss per share........................... 12,736 2,902
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
F-21
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss.............................................................................. $ (3,199) $ (846)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization....................................................... 584 425
Amortization of deferred compensation............................................... 78 73
Changes in operating assets and liabilities:
Other receivables................................................................. (388) (155)
Prepaid expenses and other........................................................ (215) (116)
Deferred revenue.................................................................. -- (186)
Accounts payable.................................................................. (334) (607)
Accrued liabilities............................................................... 108 105
----------- -----------
Net cash used in operating activities........................................... (3,366) (1,307)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment.................................................... (2,544) (1,163)
Deposits and other assets............................................................. -- (2)
Purchase of available-for-sale investments............................................ (2,010) (4,073)
Maturities of available-for-sale investments.......................................... 1,070 5,500
----------- -----------
Net cash provided by (used in) investing activities............................. (3,484) 262
----------- -----------
Cash flows from financing activities
Proceeds from issuance of long-term debt.............................................. 2,502 872
Payments on long-term debt............................................................ (370) (334)
Proceeds from issuance of common stock, net of repurchases............................ 203 31,770
----------- -----------
Net cash provided by financing activities....................................... 2,335 32,308
----------- -----------
Net increase (decrease) in cash and cash equivalents.................................... (4,515) 31,263
Cash and cash equivalents, beginning of period.......................................... 15,172 9,044
----------- -----------
Cash and cash equivalents, end of period................................................ $ 10,657 $ 40,307
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid......................................................................... $ 143 $ 98
Schedule of non-cash transactions:
Construction in progress included in accrued liabilities.............................. $ 177 $ --
</TABLE>
See accompanying notes
F-22
<PAGE>
MEGABIOS CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by Megabios Corp. (the "Company") in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Certain information and footnote disclosures normally
included in the Company's annual financial statements as required by generally
accepted accounting principles have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair statement of the
results for the interim periods ended September 30, 1998 and 1997. The balance
sheet at June 30, 1998 is derived from the audited financial statements at that
date but does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year,
although the Company expects to incur a substantial loss for the year ended June
30, 1999. These interim financial statements should be read in conjunction with
the audited financial statements for the year ended June 30, 1998, which are
contained elsewhere herein and in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The payments
received under each respective agreement are not refundable. The Company is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceed the revenue recognized under such agreements over the term
of the respective agreements. Deferred revenue may result when the Company does
not incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. Milestone payments, if any, will
be recognized pursuant to collaborative agreements upon the achievement of
specified milestones, such as the filing of Investigational New Drug
Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
3. NET LOSS PER SHARE
Basic earnings per share is computed by dividing income or loss applicable
to common stockholders by the weighted-average number of common shares
outstanding for the period net of certain common shares outstanding which are
subject to continued vesting and the Company's right of repurchase. Basic
earnings per share excludes any dilutive effects of options.
Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.
The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 136,418
common shares which are outstanding but are
F-23
<PAGE>
MEGABIOS CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. NET LOSS PER SHARE (CONTINUED)
subject to the Company's right of repurchase which expires ratably over 4 years,
and options to purchase approximately 1,068,408 shares of common stock at a
weighted average price of $5.93 per share. The repurchasable shares and options
will be included in the calculation at such time as the effect is no longer
antidilutive, as calculated using the treasury stock method.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net loss................................................................ $ (3,199) $ (846)
--------- ---------
--------- ---------
BASIC AND DILUTED
Weighted average shares of common stock................................. 12,872 3,248
Common shares subject to repurchase..................................... (136) (346)
--------- ---------
Weighted average shares of common stock used in computing net loss per
share................................................................. 12,736 2,902
--------- ---------
--------- ---------
Basic and diluted net loss per share.................................... $ (0.25) $ (0.29)
--------- ---------
--------- ---------
PRO FORMA
Shares used in computing net loss per share............................. 2,902
Adjustment to reflect the effect of the assumed conversion from the date
of issuance of preferred stock which automatically converted to common
stock upon the Company's initial public offering...................... 7,180
---------
Shares used in computing pro forma net loss per share................... 10,082
---------
---------
Pro forma net loss per share............................................ $ (0.08)
---------
---------
</TABLE>
4. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS
In September 1998, Megabios and DSM Biologics ("DSM") announced the
formation of a broad, strategic partnership focused on the manufacture and
supply of DNA plasmids and DNA:lipid complexes. Plasmids are circular pieces of
DNA that contain a therapeutic gene and instructional elements that regulate the
activity of the gene. The manufacturing process can be used to produce any
plasmid.
The partnership will create the first manufacturing facilities that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. DSM will have
full responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The partnership will use
Megabios' proprietary methods for the manufacture of plasmid DNA and complexing
that DNA with lipids. This arrangement could provide revenue for Megabios in
advance of the launch of commercial gene-based products.
F-24
<PAGE>
MEGABIOS CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
Under the agreement, Megabios has exclusively licensed its proprietary
manufacturing technology to DSM for use in its facility in Montreal, Canada. The
agreement may be extended to include DSM's facility in Gronigen, The
Netherlands. In return, DSM will pay license and milestone fees to Megabios, and
DSM and Megabios will share in the profits generated by the sale of material
produced using Megabios' process. The initial term of the exclusive partnership
is at least three years and maybe extended.
The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Megabios'
partner, Glaxo Wellcome plc ("Glaxo Wellcome"), and a Phase I/II study for
metastatic melanoma, conducted by Megabios and its academic collaborators at the
University of Colorado Health Sciences Center.
5. SUBSEQUENT EVENT
On October 26, 1998, Megabios and GeneMedicine, Inc. announced the signing
of a definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of
0.5710, for newly issued shares of common stock of Megabios. This will result in
the issuance of approximately 8.9 million additional Megabios shares, valued at
about $38 million based on Megabios' closing price on Friday, October 23, 1998.
In addition, all outstanding warrants and employee stock options of GeneMedicine
will convert into Megabios warrants and options at the same exchange ratio. The
Board of Directors of the combined company will consist of nine directors, three
of whom will be current directors of GeneMedicine, and Benjamin F. McGraw III
will remain as chairman, president and CEO of the combined entity.
The proposed transaction will be accounted for as a purchase. A significant
portion of the excess purchase price is expected to be charged to in-process
research and development in the Company's statement of operations for the
quarter in which the transaction is completed. The merger is subject to the
approval of stockholders of both companies. The transaction is expected to close
in the first calendar quarter of 1999.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GeneMedicine, Inc.
We have audited the accompanying balance sheets of GeneMedicine, Inc. (a
Delaware corporation in the development stage) as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. As audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GeneMedicine, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
The Woodlands, Texas
February 17, 1998
F-26
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 2,145,404 $ 873,180
Short-term investments.......................................................... 28,726,602 23,708,845
Prepaid expenses and other...................................................... 170,453 175,128
-------------- --------------
Total current assets.......................................................... 31,042,459 24,757,153
-------------- --------------
Equipment, furniture and leasehold improvements, net.............................. 2,998,416 3,220,987
Deposits and other assets......................................................... 8,395 9,195
-------------- --------------
Total Assets...................................................................... $ 34,049,270 $ 27,987,335
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........................................ $ 1,352,762 $ 1,454,986
Deferred grant revenue.......................................................... 179,489 89,737
Current portion of capital lease obligations.................................... 408,387 270,166
-------------- --------------
Total current liabilities..................................................... 1,940,638 1,814,889
-------------- --------------
Long-term Liabilities:
Deferred contract revenue....................................................... 1,919,970 2,919,970
Capital lease obligations, net of current portion............................... 259,393 54,814
-------------- --------------
Total long-term liabilities................................................... 2,179,363 2,974,784
-------------- --------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares authorized;
3,750,000 issued and outstanding.............................................. 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized; 13,077,369 and
13,911,422 shares issued and outstanding...................................... 13,077 13,911
Additional paid-in capital...................................................... 65,485,846 70,097,651
Deferred compensation........................................................... (465,803) (56,348)
Deficit accumulated during the development stage................................ (35,107,601) (46,861,302)
-------------- --------------
Total stockholders' equity.................................................... 29,929,269 23,197,662
-------------- --------------
Total Liabilities and Stockholders' Equity........................................ $ 34,049,270 $ 27,987,335
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 2,
FOR THE YEAR ENDED DECEMBER 31, 1992) THROUGH
---------------------------------------------- DECEMBER 31,
1995 1996 1997 1997
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues and other income:
Contract revenue............................. $ 3,680,000 $ 4,000,000 $ 4,500,000 $ 12,180,000
Research and development grant revenue....... -- 722,644 678,753 1,526,397
Interest income.............................. 1,383,546 1,861,818 1,634,392 5,698,071
-------------- -------------- -------------- ----------------
5,063,546 6,584,462 6,813,145 19,404,468
Expenses:
Research and development..................... 11,337,688 13,727,587 14,124,813 49,487,748
General and administrative................... 3,735,918 3,405,660 4,379,730 16,281,966
Interest expense............................. 139,651 104,187 62,303 496,056
-------------- -------------- -------------- ----------------
Total expenses............................... 15,213,257 17,237,434 18,566,846 66,265,770
-------------- -------------- -------------- ----------------
Net loss..................................... $ (10,149,711) $ (10,652,972) $ (11,753,701) $ (46,861,302)
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
Loss per share............................... $ (1.10) $ (0.84) $ (0.86)
Shares used in computing basic and diluted loss
per share.................................... 9,195,489 12,753,301 13,702,835
</TABLE>
F-28
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- --------- ------
<S> <C> <C> <C> <C>
Balance at inception, January 2,1992.............. -- $ -- -- $--
Issuance of stock for cash, January and October
1992 ($.04 per share)........................... -- -- 272,268 273
Issuance of stock for license agreement rights,
September 1992 ($.04 per share)................. -- -- 600,000 600
Issuance of stock for services rendered, September
and November 1992 ($.04 per share).............. -- -- 6,471 6
Net loss.......................................... -- -- -- --
---------- ------- --------- ------
Balance, December 31, 1992........................ -- -- 878,739 879
---------- ------- --------- ------
Issuance of stock for cash, January through May
1993 ($.04 per share)........................... -- -- 1,334,286 1,334
Issuance of Series A Preferred Stock, May 1993,
for cash ($2.15 per share), net of issuance
costs of $65,406................................ 3,600,462 3,600 -- --
Issuance of Series A Preferred Stock, May 1993,
for conversion of debt ($2.15 per share)........ 409,291 410 -- --
Issuance of stock, July 1993, for cash ($.18 per
share).......................................... -- -- 11,429 11
Exercise of stock options, December 1993, ($.18
per share)...................................... -- -- 4,857 5
Deferred compensation............................. -- -- -- --
Amortization of deferred compensation............. -- -- -- --
Net loss.......................................... -- -- -- --
---------- ------- --------- ------
Balance at December 31, 1993...................... 4,009,753 4,010 2,229,311 2,229
---------- ------- --------- ------
Issuance of Series B Preferred Stock, April 1994,
for cash ($4.00 per share), net of issuance
costs of $420,123............................... 3,750,000 3,750 -- --
Issuance of stock upon conversion of debt, April
1994 ($10.56 per share)......................... -- -- 85,714 86
Issuance of stock in initial public offering, July
1994 ($7.50 per share), net of offering costs of
$1,705,625...................................... -- -- 1,933,333 1,933
Conversion of Series A Preferred Stock into common
stock upon the closing of the initial public
offering, July 1994............................. (4,012,610) (4,013 ) 4,012,610 4,013
Exercise of stock options and warrants, January
through December 1994 ($.18 - $2.15 per
share).......................................... 2,857 3 74,285 74
Issuance of stock under employee stock purchase
plan, December 1994 ($2.66 per share)........... -- -- 9,426 9
Deferred compensation............................. -- -- -- --
Amortization of deferred compensation............. -- -- -- --
Net loss.......................................... -- -- -- --
---------- ------- --------- ------
Balance at December 31,1994....................... 3,750,000 $3,750 8,344,679 $8,344
---------- ------- --------- ------
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEVELOPMENT DEFERRED STOCKHOLDERS'
CAPITAL STAGE COMPENSATION EQUITY
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at inception, January 2,1992.............. $ -- $ -- $ -- $ --
Issuance of stock for cash, January and October
1992 ($.04 per share)........................... 9,256 -- -- 9,529
Issuance of stock for license agreement rights,
September 1992 ($.04 per share)................. 20,400 -- -- 21,000
Issuance of stock for services rendered, September
and November 1992 ($.04 per share).............. 221 -- -- 227
Net loss.......................................... -- (1,389,275 ) -- (1,389,275)
----------- ------------ ------------ -------------
Balance, December 31, 1992........................ 29,877 (1,389,275 ) -- (1,358,519)
----------- ------------ ------------ -------------
Issuance of stock for cash, January through May
1993 ($.04 per share)........................... 45,366 -- -- 46,700
Issuance of Series A Preferred Stock, May 1993,
for cash ($2.15 per share), net of issuance
costs of $65,406................................ 7,680,988 -- -- 7,684,588
Issuance of Series A Preferred Stock, May 1993,
for conversion of debt ($2.15 per share)........ 880,590 -- -- 881,000
Issuance of stock, July 1993, for cash ($.18 per
share).......................................... 1,989 -- -- 2,000
Exercise of stock options, December 1993, ($.18
per share)...................................... 845 -- -- 850
Deferred compensation............................. 210,600 -- (210,600) --
Amortization of deferred compensation............. -- -- 47,220 47,220
Net loss.......................................... -- (3,742,700 ) -- (3,742,700)
----------- ------------ ------------ -------------
Balance at December 31, 1993...................... 8,850,255 (5,131,975 ) (163,380) 3,561,139
----------- ------------ ------------ -------------
Issuance of Series B Preferred Stock, April 1994,
for cash ($4.00 per share), net of issuance
costs of $420,123............................... 14,576,127 -- -- 14,579,877
Issuance of stock upon conversion of debt, April
1994 ($10.56 per share)......................... 904,914 -- -- 905,000
Issuance of stock in initial public offering, July
1994 ($7.50 per share), net of offering costs of
$1,705,625...................................... 12,792,439 -- -- 12,794,372
Conversion of Series A Preferred Stock into common
stock upon the closing of the initial public
offering, July 1994............................. -- -- -- --
Exercise of stock options and warrants, January
through December 1994 ($.18 - $2.15 per
share).......................................... 26,159 -- -- 26,236
Issuance of stock under employee stock purchase
plan, December 1994 ($2.66 per share)........... 25,129 -- -- 25,138
Deferred compensation............................. 1,755,400 -- (1,755,400) --
Amortization of deferred compensation............. -- -- 664,246 664,246
Net loss.......................................... -- (9,172,943 ) -- (9,172,943)
----------- ------------ ------------ -------------
Balance at December 31,1994....................... $38,930,423 $(14,304,918) $(1,254,534) $23,383,065
----------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DURING THE
---------------------- ---------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
--------- ----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,1994......................... 3,750,000 $ 3,750 8,344,679 $ 8,344 $38,930,423 ($14,304,918)
Exercise of stock options, January through December
1995
($.18 - $7.50 per share).......................... -- -- 157,588 158 257,286 --
Issuance of stock under employee stock purchase
plan, June and December 1995 ($2.66 - $6.48 per
share)............................................ -- -- 69,677 70 218,553 --
Issuance of stock, July 1995, for cash ($9.00 per
share), net of issuance costs of $411,454......... -- -- 444,444 444 3,588,102 --
Exercise of warrants, July 1995 ($1.73 per share)... -- -- 20,027 20 34,573 --
Issuance of stock, October 1995, for cash ($6.50 per
share), net of offering costs of $1,560,325....... -- -- 3,000,000 3,000 17,936,675 --
Amortization of deferred compensation............... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- (10,149,711)
--------- ----------- --------- ----------- ---------- ------------
Balance at December 31, 1995........................ 3,750,000 3,750 12,036,415 12,036 60,965,612 (24,454,629)
--------- ----------- --------- ----------- ---------- ------------
Exercise of stock options, January through December
1996
($.18 - $5.88 per share).......................... -- -- 250,676 251 212,204 --
Issuance of stock under employee stock purchase
plan, June and December 1996 ($2.66 - $6.48 per
share)............................................ -- -- 108,751 109 311,379 --
Issuance of stock, February 1996, for cash ($9.56
per share) net of issuance costs of $8,818........ -- -- 418,629 418 3,990,764 --
Exercise of warrants, March and May 1996 (Note 6)... -- -- 262,898 263 5,887 --
Amortization of deferred compensation............... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- (10,652,972)
--------- ----------- --------- ----------- ---------- ------------
Balance at December 31, 1996........................ 3,750,000 3,750 13,077,369 13,077 65,485,846 (35,107,601)
--------- ----------- --------- ----------- ---------- ------------
Exercise of stock options, January through December
1997
($.18 - $6.63 per share).......................... -- -- 197,065 197 470,384 --
Issuance of stock under employee stock purchase
plan, June and December 1997 ($3.51 - $4.83 per
share)............................................ -- -- 62,259 62 282,036 --
Issuance of stock, February 1997, for cash ($7.50
per share) net of issuance costs of $10,667....... -- -- 533,333 534 3,988,799 --
Exercise of warrants, September 1997 ($.04 per
share) (Note 6)................................... -- -- 24,291 24 826 --
Issuance of stock under employee 401(k) plan,
December 1997
($5.06 per share)................................. -- -- 17,105 17 86,577 --
Amortization of deferred compensation............... -- -- -- -- -- --
Cancellation of stock options....................... -- -- -- -- (216,817) --
Net loss............................................ -- -- -- -- -- (11,753,701)
--------- ----------- --------- ----------- ---------- ------------
Balance at December 31, 1997........................ 3,750,000 $ 3,750 13,911,422 $ 13,911 $70,097,651 ($46,861,302)
--------- ----------- --------- ----------- ---------- ------------
--------- ----------- --------- ----------- ---------- ------------
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- ------------
<S> <C> <C>
Balance at December 31,1994......................... $(1,254,534) $23,383,065
Exercise of stock options, January through December
1995
($.18 - $7.50 per share).......................... -- 257,444
Issuance of stock under employee stock purchase
plan, June and December 1995 ($2.66 - $6.48 per
share)............................................ -- 218,623
Issuance of stock, July 1995, for cash ($9.00 per
share), net of issuance costs of $411,454......... -- 3,588,546
Exercise of warrants, July 1995 ($1.73 per share)... -- 34,593
Issuance of stock, October 1995, for cash ($6.50 per
share), net of offering costs of $1,560,325....... -- 17,939,675
Amortization of deferred compensation............... 394,977 394,977
Net loss............................................ -- (10,149,711)
------------- ------------
Balance at December 31, 1995........................ (859,557) 35,667,212
------------- ------------
Exercise of stock options, January through December
1996
($.18 - $5.88 per share).......................... -- 212,455
Issuance of stock under employee stock purchase
plan, June and December 1996 ($2.66 - $6.48 per
share)............................................ -- 311,488
Issuance of stock, February 1996, for cash ($9.56
per share) net of issuance costs of $8,818........ -- 3,991,182
Exercise of warrants, March and May 1996 (Note 6)... -- 6,150
Amortization of deferred compensation............... 393,754 393,754
Net loss............................................ -- (10,652,972)
------------- ------------
Balance at December 31, 1996........................ (465,803) 29,929,269
------------- ------------
Exercise of stock options, January through December
1997
($.18 - $6.63 per share).......................... -- 470,581
Issuance of stock under employee stock purchase
plan, June and December 1997 ($3.51 - $4.83 per
share)............................................ -- 282,098
Issuance of stock, February 1997, for cash ($7.50
per share) net of issuance costs of $10,667....... -- 3,989,333
Exercise of warrants, September 1997 ($.04 per
share) (Note 6)................................... -- 850
Issuance of stock under employee 401(k) plan,
December 1997
($5.06 per share)................................. -- 86,594
Amortization of deferred compensation............... 192,638 192,638
Cancellation of stock options....................... 216,817 --
Net loss............................................ -- (11,753,701)
------------- ------------
Balance at December 31, 1997........................ $ (56,348) $23,197,662
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
FOR THE YEAR ENDED DECEMBER 31, (JANUARY 2, 1992)
---------------------------------------- THROUGH
1995 1996 1997 DECEMBER 31, 1997
------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss........................................ $(10,149,711) $(10,652,972) $(11,753,701) $(46,861,302)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 644,544 808,409 962,212 2,777,977
Issuance of convertible debt for noncash
consideration............................... -- -- -- 905,000
Issuance of stock for noncash consideration... -- -- 86,594 107,644
Compensation expense related to stock plans... 423,502 393,754 192,638 1,721,360
Loss on equipment retirements................. -- 1,313 2,272 7,565
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and
other assets.............................. 41,290 248,151 (5,474) (181,195)
Increase in accounts payable and accrued
liabilities............................... 254,623 235,519 102,224 1,454,986
Increase in deferred revenue and deferred
contract revenue.......................... 919,970 1,179,489 910,249 3,009,708
------------ ------------ ------------ -------------------
Net cash used in operating activities..... (7,865,782) (7,786,337) (9,502,986) (37,058,257)
------------ ------------ ------------ -------------------
Cash flows used in investing activities:
Purchase of equipment, furniture and leasehold
improvements................................ (1,417,523) (672,441) (1,187,057) (6,009,658)
Net sales (purchases) of short-term
investments................................. (15,779,552) (8,949,879) 5,017,757 (23,708,845)
------------ ------------ ------------ -------------------
Net cash (used in) provided by investing
activities................................ (17,197,075) (9,622,320) 3,830,700 (29,718,503)
------------ ------------ ------------ -------------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease
obligations................................. 723,991 -- -- 2,030,823
Repayment of notes payable and capital lease
obligations................................. (426,074) (387,986) (342,800) (1,574,843)
Advance on line of credit..................... -- -- -- 750,000
Proceeds from issuance of preferred stock,
net......................................... -- -- -- 22,264,465
Proceeds from issuance of common stock, net... 22,010,356 4,521,275 4,742,862 44,179,495
------------ ------------ ------------ -------------------
Net cash provided by financing activities... 22,308,273 4,133,289 4,400,062 67,649,940
------------ ------------ ------------ -------------------
Net increase (decrease) in cash and cash
equivalents..................................... (2,754,584) (13,275,368) (1,272,224) 873,180
Cash and cash equivalents, beginning of period.... 18,175,356 15,420,772 2,145,404 --
------------ ------------ ------------ -------------------
Cash and cash equivalents, end of period.......... $ 15,420,772 $ 2,145,404 $ 873,180 $ 873,180
------------ ------------ ------------ -------------------
------------ ------------ ------------ -------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...... $ 139,651 $ 104,187 $ 59,132 $ 492,185
Supplemental schedule of noncash financing
activity:
Conversion of debt to preferred and common
stock....................................... $ -- $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BUSINESS:
GeneMedicine, Inc. (the "Company") is a Delaware corporation in the
development stage. The Company is developing non-viral gene therapies that may
provide unique clinical benefits in the treatment of a number of human diseases.
The Company intends to develop its products through alliances with major
pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale of
products, nor is there any assurance of future product revenues. In addition,
the Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, technological
uncertainty, the need for additional financing, the reliance on collaborative
arrangements for research and contractual agreements with corporate partners,
and the ability to develop or access manufacturing, sales and marketing
experience. Additional factors include uncertainties as to patents and
proprietary technologies, technological change and risk of obsolescence,
development of products, competition, government regulations and regulatory
approval, and product liability exposure. As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of the
Company's future success. See "Risk Factors," elsewhere herein.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of less than three months when purchased to be cash equivalents.
Short-term investments have maturities greater than three months at the date of
purchase. At December 31, 1996 and 1997 cash equivalents and short-term
investments consisted primarily of U.S. Government obligations. All cash
equivalents and short-term investments have been classified as held-to-maturity
at December 31, 1996 and 1997. Investments in debt securities classified as
held-to-maturity at December 31, 1997, have various maturity dates which do not
exceed one year. These securities are carried at amortized cost which
approximates fair value.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other are mainly comprised of prepayments for
contracted research, building rent, and insurance.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are carried at cost and are
depreciated on a straight-line basis over the estimated useful economic lives of
the assets involved. The estimated useful lives employed in computing
depreciation are 3 years for computer software, 5 years for equipment, 7 years
for furniture and the remaining life of the building lease for leasehold
improvements (refer to Note 11). When property is retired or otherwise disposed
of, the cost and accumulated depreciation are
F-32
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
removed from the accounts and any resulting gain or loss is included in income.
Maintenance and repairs that do not extend the life of assets are charged to
expense when incurred.
RESEARCH AND DEVELOPMENT
Contract revenue and research and development grant revenue consist of
payments from Boehringer Mannheim and a government agency, respectively, for
research and development performed by the Company. Contract revenue and research
and development grant revenues are recognized as the related work is performed.
Any revenue contingent upon future performance by the Company is deferred and
recognized as the performance is completed. Contract revenue and research and
development grant revenues are received under best efforts contracts and are
nonrefundable. Any revenues resulting from the achievement of milestones are
recognized when the milestones are achieved. Under the terms of its research
agreement with Boehringer Mannheim, the Company may be obligated, upon certain
circumstances, to conduct research and development in an amount not to exceed $5
million at the end of the five-year agreement. The Company has deferred 20
percent of research funding received to allow for this obligation.
Research and development costs are expensed when incurred. These costs
include personnel costs, materials consumed, depreciation on equipment and the
cost of facilities used for research and development. Payments related to the
acquisition and patenting of technology rights, for which development work is in
process, are expensed and considered a component of research and development
costs.
LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The Company
adopted the provisions of SFAS No. 128, changing from its previous method of
accounting for net loss per share as set forth in APB Opinion No. 15. Adoption
of Statement No. 128 required retroactive revision of the presentation of net
loss per share in historical financial statements. Net loss per share amounts as
presented herein have remained unchanged from the adoption of SFAS No. 128 since
the Company's outstanding stock options would not have been included in the
calculation because their effect would have been anti-dilutive. Net loss per
share has been computed by dividing the net loss by the weighted average number
of shares of Common Stock outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-33
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Laboratory equipment............................................ $ 3,292,122 $ 3,915,425
Office equipment................................................ 338,657 386,107
Furniture....................................................... 350,803 383,338
Computer software............................................... 29,434 63,072
Leasehold improvements.......................................... 799,318 1,219,084
------------- -------------
4,810,334 5,967,026
Less accumulated depreciation and amortization.................. (1,811,918) (2,746,039)
------------- -------------
$ 2,998,416 $ 3,220,987
------------- -------------
------------- -------------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Professional fees................................................. $ 200,920 $ 402,511
Research contracts................................................ 334,556 282,329
Compensation and benefits......................................... 162,677 236,941
Other accounts payable and accrued liabilities.................... 654,609 533,205
------------ ------------
$ 1,352,762 $ 1,454,986
------------ ------------
------------ ------------
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
In March 1994, the Company entered into an equipment leasing arrangement
with a financing company. Equipment has been financed over forty-two and
forty-eight month periods at implicit interest rates of 8.4 percent and 11.2
percent, respectively. Equipment purchases financed through this agreement are
recorded as capital leases in the accompanying financial statements.
Future principal payments under capital lease obligations as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 270,166
1999.............................................................. 54,814
---------
$ 324,980
---------
---------
</TABLE>
F-34
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY:
In January 1996, the Board of Directors of GeneMedicine adopted a Preferred
Share Purchase Rights Plan in which preferred share purchase rights ("Rights")
were distributed for each share of common stock held as of the close of business
on February 1, 1996. The rights will expire on February 1, 2006. Each Right will
entitle stockholders to buy one one-hundredth of a share of a new series of
Series A Junior Preferred Stock at an exercise price of $60.00 per one
one-hundredth of a Preferred Share. Upon the occurrence of certain events, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, shares of the Company's Common Stock having a market value of two times
the exercise price of the Right.
COMMON STOCK
In July 1994, the Company completed an initial public offering of 1,933,333
shares of Common Stock at $7.50 per share, with the Company receiving net
proceeds of approximately $13,500,000, before payment of offering expenses.
In October 1995, the Company completed a follow-on public offering of
3,000,000 shares of Common Stock at $6.50 per share, with the Company receiving
net proceeds of $18,225,000, before payment of offering expenses.
SERIES A CONVERTIBLE PREFERRED STOCK
On May 17, 1993, the Company issued 3,948,894 shares of Series A Preferred
Stock (the "Series A Preferred"), at a price of $2.1525 per share, for aggregate
consideration of approximately $8,435,000, net of offering costs of
approximately $65,000. The consideration received consisted of cash proceeds of
approximately $7,685,000 and conversion of advances of $750,000. No dividends
were declared or paid to holders of Series A Convertible Stock. Upon completion
of the Company's initial public offering, in July 1994, all Series A Convertible
Stock was converted, on a one for one basis, into 4,012,610 shares of Common
Stock.
SERIES B CONVERTIBLE PREFERRED STOCK/SYNTEX WARRANTS
Upon execution of the Syntex Collaborative Agreement (refer to Note 9),
Syntex Corporation, the then parent company of Syntex (U.S.A.) Inc., purchased
3,750,000 shares of the Company's Preferred Series B Stock (the "Series B
Preferred") and a warrant to purchase 1,071,428 shares of the Company's Common
Stock (the "Common Warrant") for an aggregate purchase price of $15 million. The
Series B Preferred will convert into 1,071,428 shares of Common Stock at the
Company's option (i) upon the Company's Common Stock trading at an average price
of $14.00 per share or more for 30 consecutive days, (ii) upon completion of a
public offering with minimum aggregate proceeds of $10 million and minimum price
of $14.00 per share or (iii) after April 8, 1998. Syntex Corporation may elect
to convert the Series B Preferred into Common Stock at any time. The holders of
the Series B Preferred are entitled to receive a liquidation preference of $4.00
per share, after which remaining assets would be distributed ratably to the
holders of Common Stock. The Common Warrant is exercisable for five years at
$21.00 per share for an aggregate purchase price of $22.5 million. The warrants
have been recorded at zero in the accompanying financial statements as the value
was DE MINIMIS upon issuance. The Company has the right to accelerate the
expiration of the Common Warrant at any time.
F-35
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY: (CONTINUED)
WARRANTS
In connection with the Company's initial public offering in July 1994, the
Company issued a warrant to the underwriter and stockholder to purchase 133,333
shares of Common Stock at an exercise price of $13.50 per share. The warrant
became exercisable for four years beginning July 12, 1995, and has been recorded
at zero in the accompanying financial statements as the value was DE MINIMIS
upon issuance.
In connection with the issuance of the Series A Preferred, the Company
issued warrants to acquire 413,705 shares at $2.1525 per share. These warrants
have been recorded at zero in the accompanying financial statements as the value
was DE MINIMIS upon issuance. The warrants were exercisable over an 18-month
period beginning May 17, 1993, however, in November 1994, in return for the pro
rata expiration of a cashless exercise provision of the warrants, the exercise
provision was extended to November 17, 1995. In July 1995, 21,428 warrants were
exercised of which 16,071 shares were issued for cash and 5,357 warrants were
exercised under a cashless provision, netting to an issuance of 3,956 shares. On
July 11, 1995, in return for an agreement to not sell or otherwise dispose of
any shares of the Company's Common Stock held by the remaining warrant holders,
the exercise provision was extended to May 17, 1996 and the pro rata expiration
of the cashless exercise provision was rescinded. In March and May 1996, the
remaining 392,277 warrants were exercised under a cashless provision, netting to
an issuance of 260,041 shares.
In connection with the advances from D. Blech & Company Incorporated ("D.
Blech"), the Company issued D. Blech and a related party warrants to purchase
28,571 shares of the Company's Common Stock at $.035 per share, exercisable over
a five year period beginning January 1993. The warrants have been recorded at
zero in the accompanying financial statements as the value was DE MINIMIS upon
issuance. In September 1997, 24,291 warrants were exercised for cash and the
remaining warrants expired in December 1997.
In connection with loans from two directors of BCM Technologies, Inc., the
Company issued warrants to purchase 5,714 shares of Series A Preferred Stock at
$2.1525 per share. The warrants have been recorded at zero in the accompanying
financial statements as the value was DE MINIMIS upon issuance. One warrant for
2,857 shares was exercised in 1994 and the remaining warrant for 2,857 shares
was exercised in May 1996.
F-36
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
The Company adopted a 401(k) plan in 1994. Under the plan, employees can
contribute up to 15 percent of their compensation subject to limitations as
defined by the Internal Revenue Service. The Company has the option to match an
employee's contribution as determined each year by the Company. An employee
vests in the Company's matching contribution based on years of service. No
matching contribution had been made through December 31, 1996. In 1997, the
Company implemented a 25% match of employee contributions to be made with shares
of the Company's Common Stock at year end based on the year end closing price
per share.
In March 1994, the Board of Directors adopted, and the stockholders
subsequently approved, the 1994 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan, as amended in 1997, reserved 390,000
shares of common stock for issuance thereunder. The plan permits each director
of the Company who is not otherwise employed by the Company who (i) was a
director on July 12, 1994 or (ii) is first elected as a director after the date
of adoption of the Directors' Plan, automatically will be granted an option to
purchase 10,000 and 30,000 shares of common stock, respectively. In addition,
annually on April 26th , each non-employee director who has been a non-employee
director for at least six months shall be granted an option to purchase 5,000
shares of Common Stock of the Company. All options under this plan vest in four
equal annual installments commencing on the date of grant.
In April 1993, the Board of Directors approved the 1993 Stock Option Plan
(the "Option Plan"). The Option Plan, as amended in 1997, provides for the grant
of up to 3,945,714 incentive and nonstatutory options to acquire the Company's
common stock. The option prices for the incentive and nonstatutory options shall
be not less than 100 percent and 85 percent, respectively, of the fair market
value of the stock as determined by the Company's Board of Directors.
In March 1994, the Board of Directors adopted the Employee Stock Purchase
Plan and reserved 857,142 shares of Common Stock for issuance thereunder. The
plan permits full-time employees to purchase Common Stock through payroll
deductions (which cannot exceed 15 percent of each employee's compensation) at
the lower of 85 percent of fair market value at the beginning of each offering
period, as defined, or the fair market value at the end of each six-month
purchase period. In 1996 and 1997, 108,751 and 62,259 shares, respectively, were
purchased by employees under this plan at $2.66 to $6.48 per share.
The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25 and the related Interpretations. Accordingly,
deferred compensation is recorded for stock options based on the excess of the
deemed value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is amortized
over the vesting period of each option. For certain stock options granted prior
to its initial public offering, the Company recorded deferred compensation. Such
deferred compensation totals approximately $2 million, of which $394,977,
$393,754 and $192,638 was recognized as expense during the years ended December
31, 1995, 1996 and 1997, respectively, and the remaining amount at December
31,1997 , $56,348, will be amortized to expense in 1998. As the exercise price
of all options issued since the Company's initial public offering in July 1994
has been equal to or greater than the market price of the Company's stock on the
date of grant, no further deferred compensation was recorded. In 1997, $216,817
of previously recorded deferred compensation was reversed due to the
cancellation of
F-37
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
(CONTINUED)
certain options upon termination of the employees. No compensation cost has been
recognized under the Company's stock purchase plan.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" which, if fully adopted, requires the Company to record stock
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected not to record related compensation
expense in accordance with this statement. Had compensation expense for its
stock option and stock purchase plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below. The compensation costs disclosed here may
not be representative of the effects of pro forma net income in future years.
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss: As reported $ 10,149,711 $ 10,652,972 $ 11,753,701
Pro forma $ 11,028,844 $ 12,449,641 $ 14,218,819
Basic and diluted net loss per
share: As reported $1.10 $0.84 $0.86
Pro forma $1.20 $0.98 $1.04
</TABLE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
1993 STOCK OPTION PLAN DIRECTORS PLAN
--------------------------- ---------------------------
WEIGHTED-AVG. WEIGHTED-AVG.
OPTIONS PRICE ($) OPTIONS PRICE ($)
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 1,230,612 1.76 50,000 7.50
---------- ----------
Granted............................. 477,250 6.54 140,000 4.91
Exercised........................... (155,088) 1.54 (2,500) 7.50
Canceled............................ (74,978) 3.66 (37,500) 7.07
---------- ----------
Balance at December 31, 1995.......... 1,477,796 3.23 150,000 5.19
---------- ----------
Granted............................. 784,349 4.92 20,000 6.25
Exercised........................... (250,676) 0.85 -- --
Canceled............................ (278,204) 5.80 (30,000) 3.63
---------- ----------
Balance at December 31, 1996.......... 1,733,265 3.94 140,000 5.68
---------- ----------
Granted............................. 755,943 6.55 25,000 6.88
Exercised........................... (197,065) 2.39 -- --
Canceled............................ (192,237) 5.08 -- --
---------- ----------
Balance at December 31, 1997.......... 2,099,906 4.91 165,000 5.86
---------- ----------
---------- ----------
Exercisable at December 31, 1995...... 645,065 2.15 5,000 7.50
Exercisable at December 31, 1996...... 774,465 2.94 35,000 5.86
Exercisable at December 31, 1997...... 1,059,727 4.02 70,000 5.77
</TABLE>
F-38
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
(CONTINUED)
At December 31, 1997, 1,163,837 and 222,500 options were available for
future grant under the 1993 Stock Option Plan and Directors Plan, respectively.
The exercise price of options outstanding under the 1993 Stock Option Plan and
Directors' Plan at December 31, 1997 range from $0.18 to $9.88 and $3.63 to
$7.50, respectively. The weighted average contractual life of options
outstanding at December 31, 1997 was nine years for both the 1993 Stock Option
Plan and Directors Plan.
The weighted average fair value of options granted in 1995, 1996 and 1997
was $4.78, $3.45 and $4.90, respectively, under the 1993 Stock Option Plan. The
weighted average fair value of options granted in 1995, 1996 and 1997 was $3.70,
$4.30 and $5.28, respectively, under the Directors' Plan. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1995, 1996 and 1997, respectively: risk-free interest rates of 6.5 percent for
all years; no expected dividend yields for all years; expected lives of 6 years
for all years and expected volatility of 82, 72 and 85 percent.
The weighted average fair value of purchase rights granted in 1995, 1996 and
1997 was $1.33, $1.37 and $3.20, respectively, under the Employee Stock Purchase
Plan. The fair value of employee purchase rights was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
5.8, 5.6 and 5.8 percent; no expected dividend yields for all years; expected
lives of 1.5 years for all years and expected volatility of 77, 72 and 72
percent.
8. FEDERAL INCOME TAXES:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of liabilities and assets using exacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation should be provided.
As of December 31, 1997, the Company has generated net operating loss
("NOL") carryforwards of approximately $39 million and research and development
credits of approximately $1.2 million available to reduce future income taxes.
These carryforwards begin to expire in 2007. A change in ownership, as defined
by federal income tax regulations, could significantly limit the Company's
ability to utilize its carryforwards. The Company's ability to utilize its
current and future NOLs to reduce future taxable income and tax liabilities may
be limited. Additionally, because Federal tax regulations limit the time during
which these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes. As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset at December 31, 1997 and 1996. The valuation
allowance increased $4,443,779 and $3,834,402 for the years ended December 31,
1997 and 1996,
F-39
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. FEDERAL INCOME TAXES: (CONTINUED)
respectively, primarily due to the Company's losses. The components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards.............................. $ 9,714,245 $ 13,487,189
Research and development tax credits.......................... 645,000 1,172,825
Capitalized start-up costs.................................... 363,735 205,014
Technology license............................................ 298,168 278,223
Tax basis of equipment, furniture and leasehold
improvements................................................ 97,498 123,720
Contract revenue.............................................. 652,790 975,734
Other......................................................... 27,490 --
-------------- --------------
Total deferred tax assets................................... 11,798,926 16,242,705
Less valuation allowance...................................... (11,798,926) (16,242,705)
-------------- --------------
Net deferred tax assets..................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS:
Effective February 1995, the Company and Corange International Ltd., the
parent company of the Boehringer Mannheim entered into a multi-year alliance
agreement to develop gene therapy products to treat selected cancer indications.
Under the terms of the agreement, Boehringer Mannheim has agreed to fund $25
million, plus certain amounts for achievement of milestones, for research and
development at the Company, with payments to the Company of $5 million per year,
plus milestones, for five years. Research and development funding of $4.6, $5.0
and $5.5 million, including a $0.5 million milestone payment in 1997, were
received in 1995, 1996 and 1997, respectively. Because the Company may be
obligated, upon certain circumstances, to conduct research and development in an
amount not to exceed $5 million at the end of the five-year agreement, the
Company has recognized contract revenue at 80 percent of research funding. In
addition, Boehringer Mannheim has agreed to invest $20 million in the common
equity of the Company at $4 million per year. The first four $4 million equity
investments were made in July 1995, February 1996, February 1997 and February
1998 in which 444,444, 418,629, 533,333 and 533,333 common shares were issued at
$9.00, $9.56, $7.50 and $7.50 per share, respectively. The price per share for
common equity investments by Boehringer Mannheim for the years 1996 through 1999
is based upon the 15 consecutive trading days immediately preceding February 1
for each year, with the purchase in 1996 at a 20 percent premium. In no case
shall the purchase price be less than $7.50 per share. All payments to the
Company beginning in 1997 are subject to the achievement of certain milestones.
The Company also granted Boehringer Mannheim a three-year option to expand the
collaboration to include additional cancer indications.
In April 1994, the Company entered into a collaborative agreement with
Syntex (U.S.A.) Inc., now a subsidiary of Roche Holding Ltd. to develop gene
medicines for certain inflammatory and immunological disorders. The
collaborative agreement ended in accordance with its terms in April 1997. Upon
F-40
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS: (CONTINUED)
execution of the collaborative agreement, Syntex Corporation purchased 3,750,000
shares of the Company's Preferred Series B Stock and a warrant to purchase
1,071,428 shares of the Company's Common Stock. Refer to Note 6.
In 1992, the Company entered into license agreements with Baylor whereby the
Company has exclusive noncancelable worldwide licenses to use certain
technology. In exchange for the grant of this exclusive license, the Company
issued 600,000 shares of its common stock to Baylor. Pursuant to the license
agreement, the Company will pay Baylor, for the longer of 10 years or the life
of the patent, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of the such technologies.
Effective May 7, 1993, the Company obtained a worldwide, exclusive license
for the gene-switch technology initially developed by Baylor in exchange for
14,286 shares of common stock and future royalty payments on net sales by the
Company of any products incorporating the licensed technologies.
The Company has entered into several sponsored research agreements with a
number of research institutes. During 1995, 1996 and 1997, the Company paid
$1,340,000, $1,442,100 and $1,055,000 respectively, pursuant to these agreements
and has committed to pay an additional $446,000 and $148,000 in 1998 and 1999,
respectively under these research agreements.
In addition, the Company has entered into other licensing agreements with
various universities and research organizations. Under the terms of these
agreements, the Company has received exclusive and nonexclusive licenses to
technology or technology claimed, in certain patents or patent applications. The
Company is required to make payments of nonrefundable license fees and royalties
on future sales of products employing the technology. In 1995, 1996 and 1997,
the Company paid license fees of $250,000, $362,000 and $238,000, respectively,
under these agreements, which have been recorded as a research and development
expense. To retain these licenses in future years the Company has committed to
pay approximately $120,000 through 1998.
10. CONSULTING AND RELATED AGREEMENTS:
In 1995, in connection with the execution of the Boehringer Mannheim
alliance agreement, the Company paid a fee of $350,000 to a former chairman and
stockholder of the Company pursuant to a finder's agreement.
The Company has entered into consulting agreements with certain individuals
to assist its clinical and research and development efforts. Pursuant to these
agreements, the Company paid $494,000, $447,000 and $384,000 in 1995, 1996 and
1997, respectively. The fees are recorded as research and development expense as
incurred. In 1996, the Company paid a director of the Company $20,300 under a
consulting agreement.
11. COMMITMENTS:
The Company has entered into employment agreements with its chief executive
and other key employees which have initial expiration dates ranging from 1996 to
1999. The agreements are thereafter automatically renewed for successive
twelve-month terms, unless terminated by the Company or
F-41
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. COMMITMENTS: (CONTINUED)
employee. Such agreements provide that, in the case of termination without
cause, the employees are entitled to payments ranging from 25 percent to 85
percent of their annual salaries. The aggregate amount charged to expense during
1995, 1996 and 1997 pursuant to these agreements totaled $848,000, $872,000 and
$821,000, respectively.
On October 29, 1993, the Company entered into an agreement to lease building
facilities from a real estate company. This operating lease commenced in January
1995 and continues for a lease term of 10 years. The obligations under this
lease along with other operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 855,000
1999.............................................................. 854,000
2000.............................................................. 906,000
2001.............................................................. 906,000
2002.............................................................. 906,000
2003.............................................................. 906,000
2004.............................................................. 906,000
</TABLE>
F-42
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 1,201,190 $ 873,180
Short-term investments.......................... 17,218,089 23,708,845
Prepaid expenses and other...................... 242,307 175,128
------------- -------------
Total current assets.......................... 18,661,586 24,757,153
------------- -------------
Equipment, furniture and leasehold improvements,
net............................................. 2,777,353 3,220,987
Deposits and other assets......................... 3,707 9,195
------------- -------------
Total Assets...................................... $ 21,442,646 $ 27,987,335
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........ $ 957,654 $ 1,454,986
Deferred grant revenue.......................... -- 89,737
Current portion of capital lease obligations.... 108,079 270,166
------------- -------------
Total current liabilities..................... 1,065,733 1,814,889
------------- -------------
Long-term Liabilities:
Deferred contract revenue....................... 3,669,970 2,919,970
Capital lease obligations, net of current
portion....................................... -- 54,814
------------- -------------
Total long-term liabilities................... 3,669,970 2,974,784
------------- -------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value;
20,000,000 shares authorized; 3,750,000 issued
and outstanding............................... 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares
authorized;
14,579,376 and 13,911,422 shares issued and
outstanding................................... 14,579 13,911
Additional paid-in capital...................... 74,262,669 70,097,651
Deferred compensation........................... -- (56,348)
Deficit accumulated during the development
stage......................................... (57,574,055) (46,861,302)
------------- -------------
Total stockholders' equity.................... 16,706,943 23,197,662
------------- -------------
Total Liabilities and Stockholders' Equity........ $ 21,442,646 $ 27,987,335
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 2,
THREE MONTHS ENDED NINE MONTHS ENDED 1992)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
---------------------------- ----------------------------- SEPTEMBER 30,
1998 1997 1998 1997 1998
------------- ------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue................ $ 1,045,000 $ 1,000,000 $ 3,067,500 $ 3,500,000 $ 15,247,500
Research and development grant
revenue....................... -- 120,000 219,181 509,000 1,745,578
Interest income................. 286,369 406,143 967,288 1,272,552 6,665,359
------------- ------------- -------------- ------------- ----------------
Total revenues................ 1,331,369 1,526,143 4,253,969 5,281,552 23,658,437
Expenses:
Research and development........ 3,788,791 3,299,805 11,510,386 10,068,103 60,998,134
General and administrative...... 1,172,758 1,192,736 3,435,071 3,384,489 19,717,037
Interest expense................ 5,758 13,394 21,265 50,186 517,321
------------- ------------- -------------- ------------- ----------------
Total expenses................ 4,967,307 4,505,935 14,966,722 13,502,778 81,232,492
------------- ------------- -------------- ------------- ----------------
Net loss.......................... $ (3,635,938) $ (2,979,792) $ (10,712,753) $ (8,221,226) $ (57,574,055)
------------- ------------- -------------- ------------- ----------------
------------- ------------- -------------- ------------- ----------------
Loss per share.................... $ (0.25) $ (0.22) $ (0.74) $ (0.60)
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Shares used in computing loss per
share........................... 14,578,666 13,800,544 14,469,110 13,656,360
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
NINE MONTHS ENDED (JANUARY 2,
SEPTEMBER 30, 1992) THROUGH
----------------------------- SEPTEMBER 30,
1998 1997 1998
-------------- ------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (10,712,753) $ (8,221,226) $ (57,574,055)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 799,702 727,924 3,577,679
Issuance of convertible debt for noncash consideration........... -- -- 905,000
Issuance of stock for noncash consideration...................... -- -- 107,644
Compensation expense related to stock plans...................... 56,348 290,866 1,777,708
Loss on equipment retirements.................................... -- -- 7,565
Changes in assets and liabilities:
(Increase) in prepaid expenses and other assets................ (61,691) (156,235) (242,886)
Increase (decrease) in accounts payable and accrued
liabilities.................................................. (497,332) (432,627) 957,654
Increase in deferred revenue and deferred contract revenue..... 660,263 710,000 3,669,971
-------------- ------------- ----------------
Net cash provided by (used in) operating activities.......... (9,755,463) (7,081,298) (46,813,720)
-------------- ------------- ----------------
Cash flows from investing activities:
Purchase of equipment, furniture and leasehold improvements........ (356,068) (1,102,548) (6,365,726)
Net sales (purchases) of short-term investments.................... 6,490,756 4,010,769 (17,218,089)
-------------- ------------- ----------------
Net cash used in investing activities........................ 6,134,688 2,908,221 (23,583,815)
-------------- ------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations.......... -- -- 2,030,823
Repayment of notes payable and capital lease obligations........... (216,901) (289,434) (1,791,744)
Advance on line of credit.......................................... -- -- 750,000
Proceeds from issuance of preferred stock, net..................... -- -- 22,264,465
Proceeds from issuance of common stock, net........................ 4,165,686 4,575,466 48,345,181
-------------- ------------- ----------------
Net cash provided by financing activities.................... 3,948,785 4,286,032 71,598,725
-------------- ------------- ----------------
Net increase in cash and cash equivalents............................ 328,010 112,955 1,201,190
Cash and cash equivalents, beginning of period....................... 873,180 2,145,404 --
-------------- ------------- ----------------
Cash and cash equivalents, end of period............................. $ 1,201,190 $ 2,258,359 $ 1,201,190
-------------- ------------- ----------------
-------------- ------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................... $ 21,265 $ 50,186 $ 454,318
Supplemental schedule of noncash financing activity:
Issuance of convertible debt for technology........................ $ -- $ -- $ 905,000
Conversion of debt to preferred and common stock................... $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GeneMedicine, Inc. ("GeneMedicine" or the "Company") is a Delaware
corporation in the development stage. The Company is developing non-viral gene
therapies that may provide unique clinical benefits in the treatment of a number
of human diseases. The Company intends to develop its products through alliances
with major pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale of
products, nor is there any assurance of future product revenues. In addition,
the Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, the need for additional
financing, the ability to establish and maintain collaborative arrangements for
research, development and commercialization of products with corporate partners,
and the ability to develop or access manufacturing, sales and marketing
experience. Additional factors include uncertainties as to patents and
proprietary technologies, technological change and risk of obsolescence,
development of products, competition, government regulations and regulatory
approval, and product liability exposure. As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of the
Company's future success.
The accompanying interim financial statements are unaudited and reflect all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. Results for interim periods are not necessarily indicative of
the results to be expected for the entire year ending December 31, 1998. These
financial statements should be read in conjunction with the Company's audited
financial statements included with the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and its
components. Comprehensive income is the total of net income and all other
non-owner changes in equity. For the period from inception (January 2, 1992)
through September 30, 1998, the only component of comprehensive income for the
Company is net income. Adopting Statement No. 130 had no effect on the Company's
financial position or results of operation.
2. COLLABORATIVE AGREEMENTS:
Effective February 1995, the Company and Corange International Ltd.
("Corange"), the parent company of Boehringer Mannheim entered into a multi-year
alliance agreement to develop gene therapy products to treat selected cancer
indications. Under the terms of the agreement, Corange agreed to, among other
things, invest $20 million in the common equity of the Company at $4 million per
year. The first four $4 million equity investments were made in July 1995,
February 1996, February 1997 and February 1998 in which 444,444, 418,629,
533,333 and 533,333 common shares were issued at $9.00, $9.56, $7.50 and $7.50
per share, respectively. In August 1998, the agreement was amended to extend the
field of the alliance and to extend the research term of the collaboration to
February 3,
F-46
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
2. COLLABORATIVE AGREEMENTS: (CONTINUED)
2002. In connection with this amendment, GeneMedicine agreed to forgo the final
$4 million equity purchase by Corange due February 1, 1999, and Corange agreed
to pay a $2 million milestone payment no later than February 1, 2000 and to pay
an additional $2 million milestone payment upon the commencement of a Phase III
clinical trial.
As a result of the amendment to the Corange agreement, GeneMedicine will
receive research payments over a 6 year period, totaling $27 million ($5 million
per year for the first 5 years and $2 million no later than February 1, 2000).
Because the Company may be obligated, upon certain circumstances, to conduct
research and development in an amount not to exceed $5 million at the end of the
original five year term, the Company will continue to recognize contract revenue
at 80 percent of research funding.
3. SUBSEQUENT EVENTS
On October 24, 1998, GeneMedicine entered into a definitive merger agreement
(the "Merger Agreement") with Megabios Corp. ("Megabios") pursuant to which the
Company will become a wholly-owned subsidiary of Megabios in a stock for stock
merger (the "Merger") intended to qualify as a tax-free reorganization. Under
the terms of the Merger agreement, which was unanimously approved by the boards
of directors of both companies, each share of GeneMedicine Common Stock
outstanding at the time of the Merger will be exchanged, at a fixed exchange
ratio of 0.5710, for newly issued shares of Common Stock of Megabios. This will
result in the issuance of approximately 8.9 million additional Megabios shares.
In addition, all outstanding employee stock options and warrants of GeneMedicine
will convert into Megabios options and warrants at the same exchange ratio. The
proposed transaction will be accounted for as a purchase, and is subject to the
approval of the stockholders of both companies, as well as the satisfaction or
waiver of customary closing conditions. The transaction is expected to close in
the first calendar quarter of 1999.
Pursuant to its Amended and Restated Certificate of Incorporation, the
Company has provided Syntex Corporation written notice of the Company's
intention to convert all outstanding shares of its Series B Preferred Stock into
1,071,428 shares of its Common Stock, effective November 10, 1998.
F-47
<PAGE>
APPENDIX A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
AND
REORGANIZATION
AMONG
MEGABIOS CORP.,
A DELAWARE CORPORATION;
MONTANA ACQUISITION SUB, INC.,
A DELAWARE CORPORATION;
AND
GENEMEDICINE, INC.
A DELAWARE CORPORATION
DATED AS OF OCTOBER 24, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
SECTION 1. DESCRIPTION OF TRANSACTION..................................................................... A-1
1.1 Merger of Merger Sub into the Company........................................................ A-1
1.2 Effect of the Merger......................................................................... A-1
1.3 Closing; Effective Time...................................................................... A-1
1.4 Certificate of Incorporation and Bylaws; Directors and Officers.............................. A-1
1.5 Conversion of Shares......................................................................... A-2
1.6 Stock Options and Warrants................................................................... A-2
1.7 Closing of the Company's Transfer Books...................................................... A-2
1.8 Exchange of Certificates..................................................................... A-3
1.9 Tax Consequences............................................................................. A-4
1.10 Further Action............................................................................... A-4
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................. A-4
2.1 Due Organization; Subsidiaries; Etc.......................................................... A-4
2.2 Certificate of Incorporation and Bylaws...................................................... A-5
2.3 Capitalization, Etc.......................................................................... A-5
2.4 SEC Filings; Financial Statements............................................................ A-6
2.5 Absence of Changes........................................................................... A-7
2.6 Leasehold; Equipment......................................................................... A-8
2.7 Title to Assets.............................................................................. A-8
2.8 Payments Under Corporate Partnering Agreements............................................... A-8
2.9 Proprietary Assets........................................................................... A-9
2.10 Contracts.................................................................................... A-10
2.11 Year 2000 Liabilities........................................................................ A-11
2.12 Compliance with Legal Requirements........................................................... A-12
2.13 Certain Business Practices................................................................... A-12
2.14 Governmental Authorizations.................................................................. A-12
2.15 Tax Matters.................................................................................. A-12
2.16 Employee and Labor Matters; Benefit Plans.................................................... A-13
2.17 Environmental Matters........................................................................ A-15
2.18 Insurance.................................................................................... A-15
2.19 Transactions with Affiliates................................................................. A-15
2.20 Legal Proceedings; Orders.................................................................... A-15
2.21 Authority; Binding Nature of Agreement....................................................... A-16
2.22 No Existing Discussions...................................................................... A-16
2.23 Vote Required................................................................................ A-16
2.24 Non-Contravention; Consents.................................................................. A-16
2.25 Fairness Opinion............................................................................. A-17
2.26 Financial Advisor............................................................................ A-17
2.27 Full Disclosure.............................................................................. A-17
2.28 Rights Agreement............................................................................. A-18
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB........................................
A-18
3.1 Due Organization; Subsidiaries; Etc.......................................................... A-18
3.2 Certificates of Incorporation and Bylaws..................................................... A-18
3.3 Capitalization, Etc.......................................................................... A-18
3.4 SEC Filings; Financial Statements............................................................ A-20
3.5 Absence of Changes........................................................................... A-20
3.6 Leasehold; Equipment......................................................................... A-21
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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PAGE
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3.7 Title to Assets.............................................................................. A-22
3.8 Payments Under Corporate Partnering Agreements............................................... A-22
3.9 Proprietary Assets........................................................................... A-22
3.10 Contracts.................................................................................... A-23
3.11 Year 2000 Liabilities........................................................................ A-25
3.12 Compliance with Legal Requirements........................................................... A-25
3.13 Certain Business Practices................................................................... A-25
3.14 Governmental Authorizations.................................................................. A-25
3.15 Tax Matters.................................................................................. A-25
3.16 Employee and Labor Matters; Benefit Plans.................................................... A-26
3.17 Environmental Matters........................................................................ A-27
3.18 Insurance.................................................................................... A-27
3.19 Transactions with Affiliates................................................................. A-28
3.20 Legal Proceedings; Orders.................................................................... A-28
3.21 Authority; Binding Nature of Agreement....................................................... A-28
3.22 Non-Contravention; Consents.................................................................. A-28
3.23 Vote Required................................................................................ A-29
3.24 Valid Issuance............................................................................... A-29
3.25 Fairness Opinion............................................................................. A-29
3.26 Full Disclosure.............................................................................. A-29
3.27 Financial Advisor............................................................................ A-30
3.28 Interim Operations of Merger Sub............................................................. A-30
SECTION 4. CERTAIN COVENANTS OF THE COMPANY............................................................... A-30
4.1 Operation of the Company's Business.......................................................... A-30
4.2 No Solicitation.............................................................................. A-32
4.3 Conversion of Series B Preferred Stock....................................................... A-33
SECTION 5. CERTAIN COVENANTS OF PARENT.................................................................... A-33
5.1 Operation of the Parent's Business........................................................... A-33
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES............................................................ A-33
6.1 Registration Statement; Joint Proxy Statement/Prospectus..................................... A-33
6.2 Company Stockholders' Meeting................................................................ A-34
6.3 Parent Stockholders' Meeting................................................................. A-35
6.4 Regulatory Approvals......................................................................... A-35
6.5 Stock Options................................................................................ A-36
6.6 Form S-8..................................................................................... A-36
6.7 Indemnification of Officers and Directors.................................................... A-37
6.8 Tax Free Reorganization...................................................................... A-37
6.9 Additional Agreements........................................................................ A-37
6.10 Confidentiality.............................................................................. A-38
6.11 Disclosure................................................................................... A-38
6.12 Tax Matters.................................................................................. A-38
6.13 Resignation of Officers and Directors........................................................ A-38
6.14 Nasdaq Listing............................................................................... A-38
6.15 FIRPTA Matters............................................................................... A-38
6.16 Parent Board of Directors.................................................................... A-38
6.17 Access and Investigation..................................................................... A-39
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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<C> <S> <C>
6.18 Operation of Business........................................................................ A-39
6.19 Financial Statements......................................................................... A-40
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB...................................
A-40
7.1 Accuracy of Representations.................................................................. A-40
7.2 Performance of Covenants..................................................................... A-40
7.3 Effectiveness of Registration Statement...................................................... A-41
7.4 Stockholder Approval......................................................................... A-41
7.5 Consents..................................................................................... A-41
7.6 Agreements and Documents..................................................................... A-41
7.7 No Material Adverse Change................................................................... A-41
7.8 FIRPTA Compliance............................................................................ A-41
7.9 Listing...................................................................................... A-41
7.10 No Governmental Litigation................................................................... A-41
7.11 No Other Litigation.......................................................................... A-41
7.12 Conversion of Series B Preferred Stock....................................................... A-42
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY............................................. A-42
8.1 Accuracy of Representations.................................................................. A-42
8.2 Performance of Covenants..................................................................... A-42
8.3 Effectiveness of Registration Statement...................................................... A-42
8.4 Stockholder Approval......................................................................... A-42
8.5 Documents.................................................................................... A-42
8.6 No Material Adverse Change................................................................... A-42
8.7 Listing...................................................................................... A-42
8.8 No Governmental Litigation................................................................... A-43
8.9 No Other Litigation.......................................................................... A-43
8.10 Directors.................................................................................... A-43
SECTION 9. TERMINATION.................................................................................... A-43
9.1 Termination.................................................................................. A-43
9.2 Notice of Termination; Effect of Termination................................................. A-44
9.3 Expenses; Termination Fees................................................................... A-44
SECTION 10. MISCELLANEOUS PROVISIONS...................................................................... A-45
10.1 Amendment.................................................................................... A-45
10.2 Waiver....................................................................................... A-45
10.3 No Survival of Representations and Warranties................................................ A-45
10.4 Entire Agreement; Counterparts............................................................... A-45
10.5 Applicable Law; Jurisdiction................................................................. A-45
10.6 Disclosure Schedule.......................................................................... A-46
10.7 Attorneys' Fees.............................................................................. A-46
10.8 Assignability................................................................................ A-46
10.9 Notices...................................................................................... A-46
10.10 Cooperation.................................................................................. A-47
10.11 Construction................................................................................. A-47
</TABLE>
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<PAGE>
AGREEMENT AND PLAN
OF
MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("AGREEMENT") is made
and entered into as of October 24, 1998, by and among: MEGABIOS CORP., a
Delaware corporation ("PARENT"); MONTANA ACQUISITION SUB, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("MERGER SUB"); and
GENEMEDICINE, INC., a Delaware corporation (the "COMPANY"). Certain capitalized
terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger (the
"MERGER") of Merger Sub with and into the Company in accordance with this
Agreement and the Delaware General Corporation Law, as amended (the "DGCL").
Upon consummation of the Merger, Merger Sub will cease to exist, and the Company
will become a wholly-owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "CODE").
C. The respective Boards of Directors of Parent, Merger Sub and the Company
have approved this Agreement and the Merger.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION.
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "SURVIVING CORPORATION").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on a date to be agreed by Parent and the Company (the
"CLOSING DATE"), which shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Sections 7 and 8.
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed certificate of merger conforming to the requirements of the
DGCL shall be filed with the Secretary of State of the State of Delaware. The
Merger shall take effect at the later of (a) the time the certificate of merger
is accepted for filing by the Secretary of State of the State of Delaware and
(b) at such later time as may be specified in the certificate of merger (the
"EFFECTIVE TIME").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
otherwise determined by Parent prior to the Effective Time:
(a) the certificate of incorporation and bylaws of the Surviving
Corporation shall be amended and restated as of the Effective Time to
conform to the certificate of incorporation and bylaws substantially in the
form attached hereto as Exhibits B-1 and B-2, respectively; PROVIDED,
HOWEVER,
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that at the Effective Time the certificate of incorporation of the Surviving
Corporation shall be amended so that the name of the Surviving Corporation
shall be GeneMedicine, Inc.; and
(b) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the directors and officers of Merger Sub
immediately prior to the Effective Time, until their respective successors
are elected and qualified or duly appointed, as the case may be.
1.5 CONVERSION OF SHARES.
(a) Subject to Section 1.5(d), at the Effective Time, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub, the
Company or any stockholder of the Company:
(i) any shares of Company Common Stock then held by the Company or any
subsidiary of the Company (or held in the Company's treasury) shall be
canceled;
(ii) any shares of Company Common Stock then held by Parent, Merger Sub
or any other subsidiary of Parent shall be canceled;
(iii) except as provided in clauses "(i)" and "(ii)" above and subject to
Section 1.5(b), each share of Company Common Stock then outstanding shall be
automatically converted into 0.5710 of a fully paid and non-assessable share
of Parent Common Stock; and
(iv) each share of the common stock, no par value per share, of Merger
Sub then outstanding shall be converted into one share of common stock of
the Surviving Corporation.
(b) The fraction of a share of Parent Common Stock into which each
outstanding share of Company Common Stock is to be converted pursuant to Section
1.5(a)(iii) (as such fraction may be adjusted in accordance with this Section
1.5(b)) is referred to as the "EXCHANGE RATIO." If, between the date of this
Agreement and the Effective Time, the outstanding shares of Company Common Stock
or Parent Common Stock are changed into a different number or class of shares by
reason of any stock split, stock dividend, reverse stock split,
reclassification, recapitalization or other similar transaction, then the
Exchange Ratio shall be appropriately adjusted.
(c) If any shares of Company Common Stock outstanding immediately prior to
the Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock purchase
agreement or other agreement with the Company, then the shares of Parent Common
Stock issued in exchange for such shares of Company Common Stock will also be
unvested and subject to the same repurchase option, risk of forfeiture or other
condition, and the certificates representing such shares of Parent Common Stock
may accordingly be marked with appropriate legends. The Company shall take all
action that may be necessary to ensure that, from and after the Effective Time,
Parent is entitled to exercise any such repurchase option or other right set
forth in any such restricted stock purchase agreement or other agreement.
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, upon surrender of such holder's Company Stock
Certificate(s) (as defined in Section 1.7), be paid in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
such fraction by the closing price of a share of Parent Common Stock on Nasdaq
on the Effective Time.
1.6 STOCK OPTIONS AND WARRANTS. At the Effective Time, all Company Options
(as defined in Section 2.3(b)) shall be assumed by Parent in accordance with
Section 6.5.
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time shall automatically be
A-2
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canceled and retired and shall cease to exist, and all holders of certificates
representing shares of Company Common Stock that were outstanding immediately
prior to the Effective Time shall cease to have any rights as stockholders of
the Company; and (b) the stock transfer books of the Company shall be closed
with respect to all shares of Company Common Stock outstanding immediately prior
to the Effective Time. No further transfer of any such shares of Company Common
Stock shall be made on such stock transfer books after the Effective Time. If,
after the Effective Time, a valid certificate previously representing any of
such shares of Company Common Stock (a "COMPANY STOCK CERTIFICATE") is presented
to the Exchange Agent (as defined in Section 1.8) or to the Surviving
Corporation or Parent, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) Prior to the Closing Date, Parent shall select a reputable bank or trust
company reasonably acceptable to the Company to act as exchange agent in the
Merger (the "EXCHANGE AGENT"). At the Effective Time, Parent shall deposit with
the Exchange Agent (i) certificates representing the shares of Parent Common
Stock issuable pursuant to this Section 1 and (ii) cash sufficient to make
payments in lieu of fractional shares in accordance with Section 1.5(d). The
shares of Parent Common Stock and cash amounts so deposited with the Exchange
Agent, together with any dividends or distributions received by the Exchange
Agent with respect to such shares, are referred to collectively as the "EXCHANGE
FUND."
(b) As soon as practicable after the Effective Time, the Exchange Agent will
mail to the registered holders of Company Stock Certificates (i) a letter of
transmittal in customary form and containing such provisions as Parent may
reasonably specify (including a provision confirming that delivery of Company
Stock Certificates shall be effected, and risk of loss and title to Company
Stock Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Subject to Section 1.5(d), upon surrender of a
Company Stock Certificate to the Exchange Agent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (A) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of shares of Parent Common Stock that such
holder has the right to receive pursuant to the provisions of Section
1.5(a)(iii) together with any cash in lieu of fractional share(s) pursuant to
the provisions of Section 1.5(d) and any dividends or distributions to which
such holder is entitled, and (B) the Company Stock Certificate so surrendered
shall be canceled. Until surrendered as contemplated by this Section 1.8(b),
each Company Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive shares of Parent Common Stock (and
cash in lieu of any fractional share of Parent Common Stock and any dividends or
distributions to which such holder is entitled) as contemplated by Section 1.5.
If any Company Stock Certificate shall have been lost, stolen or destroyed,
Parent may, in its discretion and as a condition precedent to the issuance of
any certificate representing Parent Common Stock, require the owner of such
lost, stolen or destroyed Company Stock Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as Parent may reasonably direct) as
indemnity against any claim that may be made against the Exchange Agent, Parent
or the Surviving Corporation with respect to such Company Stock Certificate.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, until such holder surrenders
such Company Stock Certificate in accordance with this Section 1.8 (at which
time such holder shall be entitled to receive all such dividends and
distributions, without interest).
A-3
<PAGE>
(d) Any portion of the Exchange Fund that remains undistributed to holders
of Company Stock Certificates as of the date 365 days after the date on which
the Merger becomes effective shall be delivered to Parent upon demand, and any
holders of Company Stock Certificates who have not theretofore surrendered their
Company Stock Certificates in accordance with this Section 1.8 shall thereafter
look only to Parent for satisfaction of their claims for Parent Common Stock,
cash in lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock.
(e) Each of the Exchange Agent, Parent and the Surviving Corporation shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of Company
Common Stock such amounts as may be required to be deducted or withheld
therefrom under the Code or under any provision of state, local or foreign tax
law or under any other applicable Legal Requirement. To the extent such amounts
are so deducted or withheld, such amounts shall be treated for all purposes
under this Agreement as having been paid to the Person to whom such amounts
would otherwise have been paid.
(f) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock with respect to any shares of
Parent Common Stock (or dividends or distributions with respect thereto), or for
any cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar Legal Requirement.
1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to Parent and Merger Sub that, except as
set forth in the disclosure schedule that has been prepared by the Company in
accordance with the requirements of Section 10.6 and that has been delivered by
the Company to Parent on the date of this Agreement and signed by the President
of the Company (the "COMPANY DISCLOSURE SCHEDULE"):
2.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) The Company has no Subsidiaries, and does not own any capital stock of,
or any equity interest of any nature in, any other Entity. The Company has not
agreed, is not obligated to make, and is not bound by any Contract under which
it may become obligated to make, any future investment in or capital
contribution to any other Entity. The Company has not, at any time, been a
general partner of any general partnership, limited partnership or other Entity.
(b) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
A-4
<PAGE>
(c) The Company is not and has not been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 2.1(c) of the
Company Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Company. The Company is in good standing as a foreign
corporation in each of the respective jurisdictions identified in Part 2.1(c) of
the Company Disclosure Schedule.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has delivered to
Parent accurate and complete copies of its certificate of incorporation, bylaws
and other charter and organizational documents, including all amendments
thereto. The Company is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Company consists of: (i) Forty
Million (40,000,000) shares of Company Common Stock, $0.001 par value per share,
of which, as of September 30, 1998, 14,579,376 shares (which amount does not
materially differ from the amount issued and outstanding as of the date of this
Agreement) have been issued and are outstanding; and (ii) Twenty Million
(20,000,000) shares of preferred stock, $0.001 par value per share, of which (A)
Six Hundred Thousand (600,000) shares have been designated Series A Junior
Participating Preferred Stock, none of which are outstanding as of the date of
this Agreement, and (B) Three Million Seven Hundred Fifty Thousand (3,750,000)
shares have been designated Series B Preferred Stock, all of which are
outstanding as of the date of this Agreement. All of the outstanding shares of
the Company's capital stock have been duly authorized and validly issued, and
are fully paid and nonassessable. As of the date of this Agreement, no shares of
Company Common Stock were held in treasury by the Company. None of the
outstanding shares of the Company's capital stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right. Except for the shares of Series B Preferred Stock, none of the
outstanding shares of the Company's capital stock is subject to any right of
first refusal in favor of the Company. Except as provided in Part 2.3(a) of the
Company Disclosure Schedule, there is no Company Contract relating to the voting
or registration of, or restricting any Person from purchasing, selling, pledging
or otherwise disposing of (or granting any option or similar right with respect
to), any shares of Company Common Stock. Upon consummation of the Merger, (A)
the shares of Parent Common Stock issued in exchange for any shares of Company
Common Stock that are subject to a Contract pursuant to which the Company has
the right to repurchase, redeem or otherwise reacquire any shares of Company
Common Stock will, without any further act of Parent, the Company or any other
Person, become subject to the restrictions, conditions and other provisions
contained in such Contract, and (B) Parent will automatically succeed to and
become entitled to exercise the Company's rights and remedies under any such
Contract. The Company is not under any obligation to repurchase, redeem or
otherwise acquire any outstanding shares of the Company's capital stock.
(b) As of September 30, 1998, 3,017,412 shares (which amount does not
materially differ from the amount subject to options outstanding as of the date
of this Agreement) of Company Common Stock are subject to issuance pursuant to
outstanding options to purchase Company Common Stock. (Stock options granted by
the Company pursuant to the Company's stock option plans are referred to in this
Agreement as "COMPANY OPTIONS."). Part 2.3(b)(i) of the Company Disclosure
Schedule sets forth the following information with respect to each Company
Option outstanding as of September 30, 1998: (i) the particular plan pursuant to
which such Company Option was granted; (ii) the name of the optionee; (iii) the
number of shares of Company Common Stock subject to such Company Option; (iv)
the exercise price of such Company Option; (v) the date on which such Company
Option was granted; (vi) the applicable vesting schedule and the extent to which
such Company Option is vested and exercisable as of the date of this Agreement;
and (vii) the date on which such Company Option expires. The Company has
delivered to Parent accurate and complete copies of all stock option plans
pursuant to which the Company has ever granted stock options and the form of all
stock option
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<PAGE>
agreements evidencing such options. Except as set forth in Part 2.3(b) of the
Company Disclosure Schedule, there are no commitments or agreements of any
character to which the Company is bound obligating the Company to accelerate the
vesting of any Company Option.
(c) As of September 30, 1998, 1,204,761 shares (which amount does not
materially differ from the amount subject to warrants outstanding as of the date
of this Agreement) of Company Common Stock are subject to issuance pursuant to
outstanding warrants to purchase Company Common Stock. (Warrants issued by the
Company are referred to in this Agreement as "COMPANY WARRANTS.") Part 2.3(c)(i)
of the Company Disclosure Schedule sets forth the following information with
respect to each Company Warrant outstanding as of September 30, 1998: (i) the
name of the Warrant holder; (ii) the number of shares of Company Common Stock
subject to such Company Warrant; (iii) the exercise price of such Company
Warrant; (iv) the date on which such Company Warrant was issued; (v) the
applicable exercise period and the extent to which such Company Warrant is
exercisable as of the date of this Agreement; and (vi) the date on which such
Company Warrant expires. The Company has delivered to Parent accurate and
complete copies of all agreements and other documents evidencing such Company
Warrants. Except as set forth in Part 2.3(c) of the Company Disclosure Schedule,
there are no commitments or agreements of any character to which the Company is
bound obligating the Company to amend or extend exercisability or term of any
Company Warrant.
(d) Except as set forth in Part 2.3(d) of the Company Disclosure Schedule
there is no: (i) outstanding subscription, option, call, warrant or right
(whether or not currently exercisable) to acquire any shares of the capital
stock or other securities of the Company; (ii) outstanding security, instrument
or obligation that is or may become convertible into or exchangeable for any
shares of the capital stock or other securities of the Company; (iii)
stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which the Company is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities; or (iv)
condition or circumstance that may give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is entitled to
acquire or receive any shares of capital stock or other securities of the
Company.
(e) All outstanding shares of Company Common Stock, all outstanding shares
of Series B Preferred Stock, all outstanding Company Options, all outstanding
Company Warrants and any securities disclosed in Part 2.3(d) of the Company
Disclosure Schedule have been issued and granted in compliance in all material
respects with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
2.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent accurate and complete copies
(excluding copies of exhibits) of all registration statements, definitive proxy
statements and other statements, reports, schedules, forms and other documents
filed by the Company with the SEC between July 14, 1994 and the date of this
Agreement and will deliver to Parent accurate and complete copies of all such
registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed after the date of this Agreement and
prior to the Effective Time (collectively, the "COMPANY SEC DOCUMENTS"), which
are all of the forms, reports and documents required to be filed by the Company
with the SEC since July 14, 1994. As of the time it was filed with the SEC (or,
if amended or superseded by a later filing, then on the date of such filing):
(i) each of the Company SEC Documents filed with the SEC complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be) as of the date of such filing and any Company
SEC Documents filed after the date hereof will so comply; and (ii) none of the
Company SEC Documents contained any untrue statement of material fact or omitted
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
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(b) The financial statements (including any related notes) contained in the
Company SEC Documents filed with the SEC (the "COMPANY FINANCIAL STATEMENTS"):
(i) complied as to form in all material respects with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted by
Form 10-Q of the SEC, and except that the unaudited financial statements may not
contain footnotes and are subject to normal and recurring year end adjustments
which will not, individually or in the aggregate, be material in amount), and
(iii) fairly present the financial position of the Company as of the respective
dates thereof and the results of operations of the Company and its subsidiaries
for the periods covered thereby. All adjustments (consisting of recurring
accruals) considered necessary for a fair presentation of the financial
statements have been included. The audited balance sheet of the Company included
in the Company's Annual Report on Form 10-K for the year ended December 31, 1997
is sometimes referred to herein as the "COMPANY BALANCE SHEET" and the unaudited
balance sheet of the Company as of June 30, 1998 included in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 is sometimes
referred to herein as the "COMPANY UNAUDITED INTERIM BALANCE SHEET."
2.5 ABSENCE OF CHANGES. Since the date of the Company Unaudited Interim
Balance Sheet:
(a) there has not been any material adverse change in the business,
assets, liabilities, financial condition or results of operations of the
Company taken as a whole, and no event has occurred that could reasonably be
expected to have a Material Adverse Effect on the Company;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of the Company
(whether or not covered by insurance);
(c) the Company has not (i) declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(d) the Company has not sold, issued, granted or authorized the issuance
or grant of (i) any capital stock or other security (except for Company
Common Stock issued upon the exercise of outstanding Company Options), (ii)
any option, call, warrant or right to acquire any capital stock or any other
security (except for Company Options set forth in Parts 2.3(b)(i), 2.3(d)
and 2.5(d) of the Company Disclosure Schedule), or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
(e) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of the
Company's stock option plans, (ii) any provision of any agreement evidencing
any outstanding Company Option, or (iii) any restricted stock purchase
agreement;
(f) there has been no amendment to the certificate of incorporation,
bylaws or other charter or organizational documents of the Company, and the
Company has not effected or been a party to any merger, consolidation, share
exchange, business combination, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(g) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(h) the Company has not made any capital expenditures which exceed
$100,000 in the aggregate, except as set forth in Part 2.5(h);
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(i) except in the ordinary course of business and consistent with past
practices, the Company has not (i) entered into or permitted any of the
assets owned or used by it to become bound by any Company Material Contract
(as defined in Section 2.10), or (ii) amended or prematurely terminated, or
waived any material right or remedy under, any Company Material Contract,
except as set forth in Part 2.5(i);
(j) the Company has not (i) acquired, leased or licensed any material
right or other material asset from any other Person, (ii) sold or otherwise
disposed of, or leased or licensed, any material right or other material
asset to any other Person, or (iii) waived or relinquished any right, except
for rights or other assets acquired, leased, licensed or disposed of in the
ordinary course of business and consistent with past practices;
(k) the Company has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness in excess of $25,000 with respect to any single matter, or in
excess of $50,000 in the aggregate;
(l) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for Permitted Encumbrances;
(m) the Company has not (i) lent money to any Person except as set forth
on Part 2.5(m) of the Company Disclosure Schedule, or (ii) incurred or
guaranteed any indebtedness for borrowed money other than payroll, travel
and other advances made in the ordinary course of business;
(n) the Company has not (i) established or adopted any Company Plan (as
defined in Section 2.16(a)), (ii) caused or permitted any Company Plan to be
amended in any material respect, or (iii) paid any bonus or made any
profit-sharing or similar payment to, or materially increased the amount of
the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees except
as set forth in Part 2.15(n);
(o) the Company has not changed any of its methods of accounting or
accounting practices in any material respect;
(p) the Company has not made any material election with respect to
Taxes;
(q) the Company has not commenced or settled any Legal Proceeding;
(r) the Company has not entered into any material transaction or taken
any other material action that has had, or could reasonably be expected to
have, a Material Adverse Effect on the Company; and
(s) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(r)" above.
2.6 LEASEHOLD; EQUIPMENT.
(a) The Company does not own any real property or any interest in real
property, except for the leaseholds created under the real property leases
identified in Part 2.6 of the Company Disclosure Schedule. All such real
property is being leased pursuant to lease agreements that are in full force and
effect, are valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event of default
(or event which with notice or lapse of time, or both, would constitute a
default) that would result in a Material Adverse Effect on the Company.
(b) Part 2.6 of the Company Disclosure Schedule accurately identifies all
material items of equipment leased by the Company. All material items of
equipment and other tangible assets owned by or leased to the Company are
adequate for the uses to which they are being put, are in good condition and
repair (ordinary wear and tear excepted) and are adequate for the conduct of the
business of the Company in the manner in which such business is currently being
conducted.
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2.7 TITLE TO ASSETS. The Company owns, and has good, valid and marketable
title to, or in the case of leased properties and assets, valid leasehold
interests in, all of their respective tangible properties and assets, real,
personal and mixed, used or held for use in their business, including: (i) all
assets reflected on the Company Unaudited Interim Balance Sheet; and (ii) all
other assets reflected in the books and records of the Company as being owned or
leased by the Company. All of said assets are owned or leased by the Company
free and clear of any Encumbrances, except for Permitted Encumbrances.
2.8 PAYMENTS UNDER CORPORATE PARTNERING AGREEMENTS.
(a) The Company has received all amounts that are owed and due to be paid to
the Company under agreements with Syntex (USA) Inc. and Corange International
Limited (the "COMPANY CORPORATE PARTNERS") prior to the date of this Agreement.
For each such payment received by the Company under any such agreement, any
revenue that the Company recognized with respect to such payment was recognized
in accordance with GAAP.
(b) The Company has no knowledge that a Company Corporate Partner is
considering, intending or planning to terminate any of the agreements between
any such Company Corporate Partner and the Company, or any research program
under such agreement.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9 of the Company Disclosure Schedule sets forth, with respect to
each Proprietary Asset owned or licensed by the Company and registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Assets, and (ii)
the names of the jurisdictions covered by the applicable registration or
application. Part 2.9 of the Company Disclosure Schedule identifies and provides
a brief description of, and identifies any ongoing royalty or payment
obligations in excess of $50,000 per year with respect to, each Proprietary
Asset that is licensed or otherwise made available to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public), and identifies
the Contract under which such Proprietary Asset is being licensed or otherwise
made available to the Company. Excluding the payments required under the Company
Contracts set forth in the Company Disclosure Schedule, the aggregate amounts
payable by the Company for ongoing royalty or license payments do not exceed
$100,000 per year. The Company has good, valid and marketable title to all of
the Company Proprietary Assets (except for licensed assets), free and clear of
all Encumbrances, except (i) as set forth in Part 2.9(a) of the Company
Disclosure Schedule, (ii) for any lien for current taxes not yet due and
payable, and (iii) minor liens that have arisen in the ordinary course of
business and that do not (individually or in the aggregate) materially detract
from the value of the assets subject thereto or materially impair the operations
of the Company. To the Company's knowledge, the Company has a valid right to
use, license and otherwise exploit all Company Proprietary Assets. The Company
has not developed jointly or does not jointly own or have joint rights with any
other Person any Company Proprietary Asset that is material to the business of
the Company. Except as set forth in Part 2.9(a) of the Disclosure Schedule,
there is no Company Contract pursuant to which any Person has any right (whether
or not currently exercisable) to use, license or otherwise exploit any Company
Proprietary Asset.
(b) The Company has taken all commercially reasonable measures and
precautions to protect and maintain the confidentiality and secrecy of all
Company Proprietary Assets (except Company Proprietary Assets whose value would
be unimpaired by public disclosure) and otherwise to maintain and protect the
value of all Company Proprietary Assets.
(c) To the knowledge of the Company, the Company is not misappropriating or
making any unlawful use of, and the Company has not at any time misappropriated
or made any unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible
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or potential infringement, misappropriation or unlawful use of, any Proprietary
Asset owned or used by any other Person.
(d) The Company Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable the Company to conduct its business in the manner
in which such business has been and is being conducted. Except as set forth in
Part 2.9(d) of the Company Disclosure Schedule, the Company has not licensed any
of the Company Proprietary Assets to any Person on an exclusive basis.
(e) All current and former employees have executed and delivered an
agreement to the Company (containing no exceptions to or exclusions from the
scope of its coverage) that is substantially identical to the form of
Confidential Information and Invention Assignment Agreement previously delivered
to Parent by the Company. All current and former consultants and independent
contractors to the Company have executed and delivered to the Company an
agreement that contains provisions appropriately restricting the use and
disclosure of Company Proprietary Assets.
(f) The Company has taken reasonably adequate steps to ensure that all
software (and related Company Proprietary Assets) used in its operations will be
Year 2000 Compliant (as defined below) by December 31, 1999. For purposes of
this Section 2, "YEAR 2000 COMPLIANT" shall mean that software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the twenty
first century when used in accordance with the documentation relating to all
such software (and related Company Proprietary Assets), including being able to,
before, on and after January 1, 2000 substantially conform to the following: (i)
use logic pertaining to dates which allow users to identify and/or use the
century portion of any date fields without special processing; and (ii) respond
to all date elements and date input so as to resolve any ambiguity as to century
in a disclosed, defined and pre-determined manner and provide date information
in ways which are unambiguous as to century, either by permitting or requiring
the century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.
2.10 CONTRACTS.
(a) Part 2.10 of the Company Disclosure Schedule identifies each Company
Contract that constitutes a "Company Material Contract." For purposes of this
Agreement, each of the following shall be deemed to constitute a "COMPANY
MATERIAL CONTRACT":
(i) (A) any Contract or outstanding offer relating to the employment of,
or the performance of services by, any employee, and (B) any Contract
pursuant to which the Company is required to make any severance, termination
or similar payment, bonus or relocation payment or any other payment (other
than payments in respect of salary) to any current or former employee or
director of the Company;
(ii) any Contract (A) relating to the acquisition, transfer,
development, sharing, license (to or by the Company), or use of any
Proprietary Asset (except for any Contract pursuant to which any Proprietary
Asset is licensed to the Company under any third party software license
generally available to the public); or (B) with respect to the distribution
or marketing of any products of the Company;
(iii) any Contract which provides for indemnification of any officer,
director, employee or agent of the Company;
(iv) any Contract imposing any restriction on the right or ability of
the Company (A) to compete in any market or geographic area with any other
Person, (B) to acquire any product or other asset or any services from any
other Person, to sell any product or other asset to or perform
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any services for any other Person or to transact business or deal in any
other manner with any other Person, or (C) to develop or distribute any
technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities (other than the issuance of
Company Common Stock upon the valid exercise of Company Options outstanding
as of the date of this Agreement), (B) providing any Person with any
preemptive right, right of participation, right of maintenance or any
similar right with respect to any securities, or (C) providing the Company
with any right of first refusal with respect to, or right to repurchase or
redeem, any securities;
(vi) any Contract requiring that the Company give any notice or provide
any information to any Person prior to accepting any Acquisition Proposal;
(vii) any Contract that (A) contemplates or involves payment or delivery
of cash or other consideration in an amount or having a value in excess of
$20,000 per month and (B) has a term of more than 90 days and that may not
be terminated by the Company within 90 days after the delivery of a
termination notice by the Company;
(viii) any Contract that contemplates or involves payment or delivery of
cash or other consideration by the Company in an amount or having a value in
excess of $75,000 in the aggregate;
(ix) any Contract or Company Plan (including, without limitation, any
stock option plan, stock appreciation plan or stock purchase plan), any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the execution of this Agreement or the consummation
of any of the transactions contemplated by this Agreement or the value of
any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
(x) any Contract (not otherwise identified in clauses "(i)" through
"(ix)" of this sentence) that is or would be material to the Company, to the
business, condition, capitalization or operations of the Company or to any
of the transactions contemplated by this Agreement; and
(xi) any other Contract, if a breach of such Contract could reasonably
be expected to have a Material Adverse Effect on the Company.
(b) Each Company Material Contract is valid and in full force and effect,
and is enforceable by an Acquired Corporation in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies
(c) Except where the following would not have a Material Adverse Effect on
the Company: (i) the Company has not violated or breached, or committed any
default under, any Company Contract, and, to the knowledge of the Company, no
other Person has violated or breached, or committed any default under, any
Company Contract; (ii) to the knowledge of the Company, no event has occurred,
and no circumstance or condition exists, that (with or without notice or lapse
of time) will, or could reasonably be expected to, (A) result in a violation or
breach of any of the provisions of any Company Contract, (B) give any Person the
right to declare a default or exercise any remedy under any Company Contract,
(C) give any Person the right to a rebate, chargeback, penalty or change in
delivery schedule under any Company Contract, (D) give any Person the right to
accelerate the maturity or performance of any Company Contract, or (E) give any
Person the right to cancel, terminate or modify any Company Contract; and (iii)
neither the Company, nor any of its Representatives, has received any notice or
other communication regarding any actual or possible violation or breach of, or
default under any Company Contract.
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(d) There is no Company Contract to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or directly
or indirectly benefiting any Governmental Body (including any subcontract or
other Contract between the Company and any contractor or subcontractor to any
Governmental Body).
(e) No Person is renegotiating, or has a right pursuant to the terms of any
Company Material Contract to renegotiate, any amount paid or payable to the
Company under any Company Material Contract or any other material term or
provision of any Company Material Contract.
2.11 YEAR 2000 LIABILITIES. The Company does not have any accrued,
contingent or other liabilities of any nature, either matured or unmatured,
including, without limitation, any liabilities relating to costs associated with
insuring that all software (and related Company Proprietary Assets) utilized by
the Company or other components of the Company's information technology
infrastructure are Year 2000 Compliant (whether or not required to be reflected
in financial statements in accordance with GAAP, and whether due or to become
due), except for: (a) liabilities identified as such in the "liabilities" column
of the Company Unaudited Interim Balance Sheet; and (b) normal and recurring
liabilities that have been incurred by the Company since the date of the Company
Unaudited Interim Balance Sheet in the ordinary course of business and
consistent with past practices.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since July 14, 1994 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Since
July 14, 1994, the Company has not received any notice or other communication
from any Governmental Body regarding any actual or possible violation of, or
failure to comply with, any Legal Requirement.
2.13 CERTAIN BUSINESS PRACTICES. Neither the Company nor any director,
officer, agent or employee of the Company has, on behalf of the Company, (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
2.14 GOVERNMENTAL AUTHORIZATIONS. The Company holds all Governmental
Authorizations necessary to enable it to conduct its business in the manner in
which such business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. The Company is, and at
all times since July 14, 1994 has been, in substantial compliance with the terms
and requirements of such Governmental Authorizations. Since July 14, 1994, the
Company has not received any notice or other communication from any Governmental
Body regarding (a) any actual or possible violation of or failure to comply with
any term or requirement of any Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any Governmental Authorization.
2.15 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the Company with
any Governmental Body with respect to any taxable period ending on or before the
Closing Date (the "COMPANY RETURNS") (i) have been or will be filed on or before
the applicable due date (including any extensions of such due date if properly
obtained), and (ii) have been, or will be when filed, prepared in all material
respects in compliance with all applicable Legal Requirements. All amounts shown
on the Company Returns to be due on or before the Closing Date have been or will
be paid on or before the Closing Date.
(b) The Company Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with GAAP. The Company will
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establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period from
June 30, 1998 through the Closing Date.
(c) Except as set forth in Part 2.15(c) of the Company Disclosure Schedule,
the Company Returns have never been examined or audited by any Governmental
Body. No extension or waiver of the limitation period applicable to any of the
Company Returns has been granted (by the Company or any other Person), and no
such extension or waiver has been requested from the Company.
(d) No claim or Legal Proceeding is pending or, to the knowledge of the
Company, has been threatened against or with respect to the Company in respect
of any material Tax. There are no unsatisfied liabilities for material Taxes
(including liabilities for interest, additions to tax and penalties thereon and
related expenses) with respect to any notice of deficiency or similar document
received by the Company with respect to any material Tax (other than liabilities
for Taxes asserted under any such notice of deficiency or similar document which
are being contested in good faith by the Company and with respect to which
adequate reserves for payment have been established). There are no liens for
material Taxes upon any of the assets of the Company except liens for current
Taxes not yet due and payable. The Company has not entered into or become bound
by any agreement or consent pursuant to Section 341(f) of the Code. The Company
has not been, and it will not be, required to include any material adjustment in
taxable income for any tax period (or portion thereof) pursuant to Section 481
of the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing.
(e) Except as set forth in Part 2.15(e) of the Company Disclosure Schedule,
there is no agreement, plan, arrangement or other Contract covering any employee
or independent contractor or former employee or independent contractor of the
Company that, considered individually or considered collectively with any other
such Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. The Company is not and has never been,
a party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.
2.16 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.16(a) of the Company Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "COMPANY PLANS")
sponsored, maintained, contributed to or required to be contributed to by the
Company for the benefit of any current or former employee of the Company.
(b) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
the Company does not maintain, sponsor or contribute to, and it has not at any
time in the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of the Company (a "COMPANY PENSION PLAN"). None of
the Plans identified in Part 2.16(a) of the Company Disclosure Schedule is
subject to Title IV of ERISA or Section 412 of the Code.
(c) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
the Company does not maintain, sponsor or contribute to any employee welfare
benefit plan (as defined in Section 3(1) of ERISA, whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of any
employees or former employees of the Company including any self-funded medical,
dental, or other similar Company Plan (a "COMPANY WELFARE PLAN"). None of the
Company Plans identified in Part 2.16(a) of the Company Disclosure Schedule is a
multi-employer plan (within the meaning of Section 3(37) of ERISA).
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(d) With respect to each Company Plan, the Company has delivered to Parent:
(i) an accurate and complete copy of such Company Plan (including all amendments
thereto); (ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last two years; (iii) an accurate
and complete copy of the most recent Summary Plan Description, together with
each Summary of Material Modifications, if required under ERISA, with respect to
such Company Plan, (iv) if such Company Plan is funded through a trust or any
third party funding vehicle, an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and complete
copies of the most recent financial statements thereof; (v) accurate and
complete copies of all Contracts relating to such Company Plan, including
service provider agreements, insurance contracts, minimum premium contracts,
stop-loss agreements, investment management agreements, subscription and
participation agreements and recordkeeping agreements; and (vi) an accurate and
complete copy of the most recent determination letter received from the Internal
Revenue Service with respect to such Company Plan (if such Company Plan is
intended to be qualified under Section 401(a) of the Code).
(e) The Company is not and has never been required to be treated as a single
employer with any other Person under Section 4001(b)(1) of ERISA or Section
414(b), (c), (m) or (o) of the Code. The Company has never made a complete or
partial withdrawal from a multiemployer plan, as such term is defined in Section
3(37) of ERISA, resulting in "withdrawal liability," as such term is defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
(f) The Company has no plans or commitment to create any additional Company
Plan, or to modify or change any existing Company Plan (other than to comply
with applicable law) in a manner that would affect any employee of the Company.
(g) No Company Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee of the Company after
any such employee's termination of service (other than (i) benefit coverage
mandated by applicable law, including coverage provided pursuant to Section
4980B of the Code, (ii) deferred compensation benefits accrued as liabilities on
the Company Balance Sheet, and (iii) benefits the full cost of which are borne
by current or former employees of the Company (or the employees'
beneficiaries)).
(h) With respect to any Company Plan constituting a group health plan within
the meaning of Section 4980B(g)(2) of the Code, the provisions of Section 4980B
of the Code ("COBRA") have been complied with in all material respects. Part
2.16(h) of the Company Disclosure Schedule describes all obligations of the
Company as of the date of this Agreement under any of the provisions of COBRA.
(i) Each of the Company Plans complies with and has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
(j) Each of the Company Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such determination
letter should be revoked.
(k) Part 2.16(k) of the Company Disclosure Schedule sets forth each plan and
arrangement of the Company including (i) the aggregate amount of payments
thereunder (including any bonus, golden parachute or severance payment), (ii)
any material increase in benefits payable thereunder and (iii) acceleration of
the time of payment or vesting any such benefits referred to in (ii), which may
result in any payment to any current or former employee or director of the
Company as a result of the execution, delivery or performance of this Agreement,
the consummation of the Merger or any other transactions contemplated by this
Agreement, or the termination of any employee.
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(l) Part 2.16(l) of the Company Disclosure Schedule contains a list of all
salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their base salaries, their
targeted annual bonus amounts, their dates of employment and their positions.
The Company is not a party to any collective bargaining contract or other
Contract with a labor union involving any of its employees. All of the employees
of the Company are "at will" employees.
(m) Part 2.16(m) of the Company Disclosure Schedule identifies each employee
who is not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return to
full service.
(n) The Company is in compliance in all material respects with all Contracts
relating to employment, employment practices, wages, bonuses and terms and
conditions of employment, including employee compensation matters.
(o) The Company has good labor relations, and it has no knowledge of any
facts indicating that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the labor relations of the Company, or (ii) any of the employees of the
Company intends to terminate his or her employment with the Company with which
such employee is employed.
2.17 ENVIRONMENTAL MATTERS. The Company is in compliance with all
applicable Environmental Laws, except where failure to comply would not have a
Material Adverse Effect on the Company. The Company possesses all permits and
other Governmental Authorizations required under applicable Environmental Laws
to conduct its current operations. The Company has not received any notice or
other communication (in writing or otherwise) from a Governmental Body or
citizens group that alleges that the Company is not in compliance with any
Environmental Law. To the knowledge of the Company, there are no circumstances
that may prevent or interfere with the compliance by the Company with any
Environmental Law in the future, except where failure to comply would not have a
Material Adverse Effect on the Company. To the knowledge of the Company without
further inquiry, no current or prior owner of any property leased or controlled
by the Company has received any notice or other communication (in writing or
otherwise) from a Governmental Body or citizens group that alleges that such
current or prior owner or the Company is not in compliance with any
Environmental Law. To the knowledge of the Company, all property that is leased
to, controlled by or used by the Company, and all surface water, groundwater and
soil associated with or adjacent to such property is in clean and healthful
condition and is free of environmental contamination of any nature.
2.18 INSURANCE. Part 2.18 of the Company Disclosure Schedule sets forth
each insurance policy relating to the business, assets or operations of the
Company and with respect to each such policy, the insurer, the amount of
coverage, the type of insurance and the period of coverage. Each such insurance
policy is in full force and effect. Part 2.18 of the Company Disclosure Schedule
also sets forth each self insurance program relating to the business, assets or
operations of the Company. Since July 14, 1994, the Company has not received any
notice or other communication regarding any actual or possible (a) cancellation
or invalidation of any insurance policy, (b) refusal of any coverage or
rejection of any material claim under any insurance policy, or (c) material
adjustment in the amount of the premiums payable with respect to any insurance
policy. There is no pending claim (including any workers' compensation claim)
under or based upon any insurance policy of the Company; and, to the knowledge
of the Company, no event has occurred that could reasonably be expected to (with
or without notice or lapse of time) directly or indirectly give rise to or serve
as a basis for any such claim.
2.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Company SEC
Documents, since the date of the Company's last proxy statement filed with the
SEC, no event has occurred that would be required to be reported by the Company
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 2.19 of the
Company Disclosure Schedule identifies each person who is
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an "affiliate" (as that term is used in Rule 145 promulgated under the
Securities Act) of the Company as of the date of this Agreement.
2.20 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.20(a) of the Company Disclosure Schedule,
there is no pending Legal Proceeding and, to the knowledge of the Company, no
Person has threatened to commence any Legal Proceeding: (i) that involves the
Company or any of the assets owned or used by the Company, including, without
limitation, Company Proprietary Assets; or (ii) that challenges, or that may
have the effect of preventing, delaying, making illegal or otherwise interfering
with, the Merger or any of the other transactions contemplated by this
Agreement. To the knowledge of the Company, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that will, or that could
reasonably be expected to, give rise to or serve as a basis for the commencement
of any such Legal Proceeding. To the knowledge of the Company, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
will, or that could reasonably be expected to, cause or provide a basis for a
director, officer or other Representative of the Company to seek indemnification
from, or commence a Legal Proceeding against or involving, the Company.
(b) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. To the
knowledge of the Company, no officer or other employee of the Company is subject
to any order, writ, injunction, judgment or decree that prohibits such officer
or other employee from engaging in or continuing any conduct, activity or
practice relating to the business of the Company.
2.21 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has the absolute
and unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of the Company (at a
meeting duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of the Company and its
stockholders, (b) unanimously approved the execution, delivery and performance
of this Agreement by the Company and has unanimously approved the Merger, and
(c) unanimously recommended the adoption and approval of this Agreement and the
Merger by the holders of Company Common Stock and directed that this Agreement
and the Merger be submitted for consideration by the Company's stockholders at
the Company Stockholders' Meeting (as defined in Section 6.2). This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
2.22 NO EXISTING DISCUSSIONS. As of the date hereof, neither the Company
nor any Representative of the Company is engaged, directly or indirectly, in any
discussions or negotiations with any other Person relating to any Acquisition
Proposal.
2.23 VOTE REQUIRED. Upon the conversion of the Company's Series B
Preferred Stock, the affirmative vote of the holders of a majority of the shares
of Company Common Stock outstanding on the record date for the Company
Stockholder Meeting (the "REQUIRED COMPANY STOCKHOLDER VOTE") is the only vote
of the holders of any class or series of the Company's capital stock necessary
to adopt and approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
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2.24 NON-CONTRAVENTION; CONSENTS. Neither (i) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (ii) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the certificate of incorporation, bylaws or other charter or
organizational documents of the Company, or (ii) any resolution adopted by
the stockholders, the Board of Directors or any committee of the Board of
Directors of the Company;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
business of the Company or to any of the assets owned or used by the
Company;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Company Material Contract or
(except as set forth in Part 2.24(d) of the Company Disclosure Schedule),
give any Person the right to (i) declare a default or exercise any remedy
under any such Company Material Contract, (ii) a rebate, chargeback, penalty
or change in delivery schedule under any such Company Material Contract,
(iii) accelerate the maturity or performance of any such Company Material
Contract, or (iv) cancel, terminate or modify any term of such Company
Material Contract; or
(e) result in the imposition or creation of any Encumbrance upon, or
with respect to any asset owned or used by the Company (except for Permitted
Encumbrances).
Except as set forth in Part 2.24(d) of the Company Disclosure Schedule, or
except as may be required by the Exchange Act, the DGCL and the rules of the
National Association of Securities Dealers, Inc. ("NASD") (as they relate to the
S-4 Registration Statement and the Joint Proxy Statement/Prospectus, as defined
in Section 2.27(b)), the Company was not, is not and will not be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
2.25 FAIRNESS OPINION. The Company's Board of Directors has received the
written opinion of PaineWebber Incorporated, financial advisor to the Company,
dated the date of this Agreement, to the effect that the Exchange Ratio is fair
to the stockholders of the Company from a financial point of view. The Company
has furnished an accurate and complete copy of said written opinion to Parent.
2.26 FINANCIAL ADVISOR. Except for PaineWebber Incorporated, or any Person
set forth on Part 2.26 of the Company Disclosure Schedule no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The Company has disclosed to Parent the fee formula pursuant to
which fees, commissions and other payments will be paid by the Company to
PaineWebber Incorporated and any such other Person if the Merger is consummated.
The Company furnished to Parent accurate and complete copies of all agreements
under which any such fees, commissions or other amounts have been paid or may
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become payable and all indemnification and other agreements relating to the
engagement of PaineWebber Incorporated or any such other Person.
2.27 FULL DISCLOSURE.
(a) This Agreement (including the Company Disclosure Schedule) does not, and
the certificate referred to in Section 7.6(c) will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact necessary in order
to make the representations, warranties and information contained and to be
contained herein and therein (in the light of the circumstances under which such
representations, warranties and information were or will be made or provided)
not false or misleading.
(b) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the registration
statement on Form S-4 to be filed with the SEC by Parent in connection with the
issuance of Parent Common Stock in the Merger (the "S-4 REGISTRATION STATEMENT")
will, at the time the S-4 Registration Statement is filed with the SEC or at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus
to be filed with the SEC as part of the S-4 Registration Statement (the "JOINT
PROXY STATEMENT/PROSPECTUS"), will, at the time the Joint Proxy
Statement/Prospectus is mailed to the stockholders of the Company, at the time
of the Company Stockholders' Meeting or as of the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. The
Joint Proxy Statement/Prospectus will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated by the SEC thereunder.
2.28 RIGHTS AGREEMENT. The Company has taken all action necessary to
provide that the execution and delivery of this Agreement and the consummation
of the transactions contemplated by this Agreement will not enable or require
any Rights (as such term is defined in the Rights Agreement) to be exercised or
distributed.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents (as defined in Section 3.4(a)) or in the
disclosure schedule delivered to the Company on the date of this Agreement and
signed by an executive officer of Parent (the "PARENT DISCLOSURE SCHEDULE"):
3.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) Parent has no Subsidiaries, except for the corporations identified in
Part 3.1(a) of the Parent Disclosure Schedule; and neither the Parent nor any of
the other corporations identified in Part 3.1(a) of the Parent Disclosure
Schedule owns any capital stock of, or any equity interest of any nature in, any
other Entity. (Parent and each of its Subsidiaries are referred to collectively
in this Agreement as the "PARENT CORPORATIONS".) None of the Parent Corporations
has agreed to or is obligated to make, or is bound by any Contract under which
it may become obligated to make, any future investment in or capital
contribution to any other Entity. None of the Parent Corporations has, at any
time, been a general partner of any general partnership, limited partnership or
other Entity.
(b) Each of the Parent Corporations is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all corporate power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted; (ii)
to
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own and use its assets in the manner in which its assets are currently owned and
used; and (iii) to perform its obligations under all Contracts by which it is
bound.
(c) None of the Parent Corporations is or has been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 3.1(c) of the
Parent Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Parent Corporations. Each of the Parent Corporations is in
good standing as a foreign corporation in each of the respective jurisdictions
identified in Part 3.1(c) of the Parent Disclosure Schedule.
3.2 CERTIFICATES OF INCORPORATION AND BYLAWS. The Parent has delivered to
the Company accurate and complete copies of the certificates of incorporation,
bylaws and other charter and organizational documents of the respective Parent
Corporations, including all amendments thereto. None of the Parent Corporations
is in violation of any of the provisions of its respective certificate of
incorporation or bylaws.
3.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of Parent consists of: (i) thirty million
(30,000,000) shares of Parent Common Stock, $.001 par value per share, of which,
as of September 30, 1998, 12,895,163 shares (which amount does not materially
differ from the amount issued and outstanding as of the date of this Agreement)
were issued and outstanding; and (ii) ten million (10,000,000) shares of
preferred stock, $.001 par value per share, of which no shares are outstanding
as of the date of this Agreement. As of the date of this Agreement, there are no
outstanding subscriptions, options, calls, warrants or rights to acquire shares
of Parent Common Stock other than pursuant to stock issuance or stock option
plans or other arrangements disclosed in the Parent SEC Documents. The
authorized capital stock of Merger Sub consists of one hundred (100) shares of
Common Stock ("MERGER SUB COMMON STOCK"), $.001 par value per share, all of
which have been issued and are outstanding as of the date of this Agreement and
are held by Parent. As of the date of this Agreement, there are no shares of
Parent Common Stock held in treasury by Parent. None of the outstanding shares
of Parent Common Stock is entitled or subject to any preemptive right, right of
participation, right of maintenance or any similar right. None of the
outstanding shares of the Parent's capital stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right. None of the outstanding shares of the Parent's capital stock is subject
to any right of first refusal in favor of the Parent. Except as provided in Part
3.3(a) of the Parent Disclosure Schedule, there is no Parent Contract relating
to the voting or registration of, or restricting any Person from purchasing,
selling, pledging or otherwise disposing of (or granting any option or similar
right with respect to), any shares of Parent Common Stock. The Parent is not
under any obligation to repurchase, redeem or otherwise acquire any outstanding
shares of the Parent's capital stock.
(b) As of September 30, 1998, 1,068,408 shares (which amount does not
materially differ from the amount subject to options outstanding as of the date
of this Agreement) of Parent Common Stock are subject to issuance pursuant to
outstanding options to purchase Parent Common Stock. (Stock options granted by
the Parent pursuant to Parent's stock option plans are referred to in this
Agreement as "PARENT OPTIONS"). Part 3.3(b) of the Parent Disclosure Schedule
sets forth the following information with respect to each Parent Option
outstanding as of September 30, 1998: (i) the particular plan pursuant to which
such Parent Option was granted; (ii) the name of the optionee; (iii) the number
of shares of Parent Common Stock subject to such Parent Option; (iv) the
exercise price of such Parent Option; (v) the date on which such Parent Option
was granted; (vi) the applicable vesting schedule and the extent to which such
Parent Option is vested and exercisable as of the date of this Agreement; and
(vii) the date on which such Parent Option expires. Parent has delivered to the
Company accurate and complete copies of all stock option plans pursuant to which
the Company has ever granted stock options and the form of all stock option
agreements evidencing such options. Except as set forth in
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Part 3.3(b) of the Parent Disclosure Schedule, there are no commitments or
agreements of any character to which Parent is bound obligating Parent to
accelerate the vesting of any Parent Option.
(c) As of September 30, 1998, 62,378 shares (which amount does not
materially differ from the amount subject to warrants outstanding as of the date
of this Agreement) of Parent Common Stock are subject to issuance pursuant to
outstanding warrants to purchase Parent Common Stock. (Warrants issued by Parent
are referred to in this Agreement as "PARENT WARRANTS.") Part 3.3(c) of Parent
Disclosure Schedule sets forth the following information with respect to each
Parent Warrant outstanding as of September 30, 1998: (i) the name of the warrant
holder; (ii) the number of shares of Parent Common Stock subject to such Parent
Warrant; (iii) the exercise price of such Parent Warrant; (iv) the date on which
such Parent Warrant was issued; (v) the applicable exercise period and the
extent to which such Parent Warrant is exercisable as of the date of this
Agreement; and (vi) the date on which such Parent Warrant expires. Parent has
delivered to Parent accurate and complete copies of all agreements and other
documents evidencing such Parent Warrants. Except as set forth in Part 3.3(c) of
Parent Disclosure Schedule, there are no commitments or agreements of any
character to which Parent is bound obligating Parent to amend or extend
exercisability or term of any Parent Warrant.
(d) Except as set forth in this Section 3.3 there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire any shares of the capital stock or other securities of
Parent; (ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock or
other securities of Parent; (iii) stockholder rights plan (or similar plan
commonly referred to as a "poison pill") or Contract under which Parent is or
may become obligated to sell or otherwise issue any shares of its capital stock
or any other securities; or (iv) condition or circumstance that may give rise to
or provide a basis for the assertion of a claim by any Person to the effect that
such Person is entitled to acquire or receive any shares of capital stock or
other securities of Parent.
(e) All outstanding shares of Parent Common Stock, all outstanding shares of
Preferred Stock, all outstanding Parent Options, all outstanding Parent Warrants
and all outstanding shares of capital stock of Parent have been issued and
granted in compliance in all material respects with (i) all applicable
securities laws and other applicable Legal Requirements, and (ii) all
requirements set forth in applicable Contracts.
3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of all registration statements, definitive proxy
statements and other statements, reports, schedules, forms and other documents
filed by Parent with the SEC between September 15, 1997 and the date of this
Agreement and will deliver to the Company accurate and complete copies of all
such registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed after the date of this Agreement and
prior to the Effective Time (collectively, the "PARENT SEC DOCUMENTS"), which
are all of the forms, reports and documents required to be filed by Parent with
the SEC since September 15, 1997. As of the time it was filed with the SEC (or,
if amended or superseded by a later filing, then on the date of such filing):
(i) each of Parent SEC Documents filed with the SEC was timely filed and
complied in all material respects with the applicable requirements of the
Securities Act or the Exchange Act (as the case may be) as of the date of such
filing and any Parent SEC Documents filed after the date hereof and prior to the
Effective Time will so comply; and (ii) none of Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
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(b) The financial statements (including any related notes) contained in the
Parent SEC Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered (except as may be indicated in the notes to such financial
statements and, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC, and except that unaudited financial statements may not contain
footnotes and are subject to normal and recurring year end adjustments which
will not, individually or in the aggregate, be material in amount); and (iii)
fairly present the financial position of Parent and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of Parent
and its subsidiaries for the periods covered thereby. All adjustments
(consisting of recurring accruals) considered necessary for a fair presentation
of the financial statements have been included. The audited balance sheet of
Parent and its subsidiaries for the year ended June 30, 1998 is sometimes
referred to herein as the "PARENT BALANCE SHEET."
3.5 ABSENCE OF CHANGES. Since the date of the Parent Balance Sheet:
(a) there has not been any material adverse change in the business, assets,
liabilities, financial condition or results of operations of Parent taken as a
whole, and no event has occurred that could reasonably be expected to have a
Material Adverse Effect on Parent;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the assets of Parent (whether or not
covered by insurance);
(c) Parent has not (i) declared, accrued, set aside or paid any dividend or
made any other distribution in respect of any shares of capital stock, or (ii)
repurchased, redeemed or otherwise reacquired any shares of capital stock or
other securities;
(d) except for formation of Merger Sub, Parent has not sold, issued, granted
or authorized the issuance or grant of (i) any capital stock or other security
(except for Parent Common Stock issued upon the exercise of outstanding Parent
Options), (ii) any option, call, warrant or right to acquire any capital stock
or any other security (except for Parent Options described in Part 3.3(b)(i) and
3.5(d) of the Parent Disclosure Schedule), or (iii) any instrument convertible
into or exchangeable for any capital stock or other security;
(e) Parent has not amended or waived any of its rights under, or permitted
the acceleration of vesting under, (i) any provision of Parent's stock option
plans, (ii) any provision of any agreement evidencing any outstanding Parent
Option, or (iii) any restricted stock purchase agreement;
(f) there has been no amendment to the certificate of incorporation, bylaws
or other charter or organizational documents of Parent, and Parent has not
effected or been a party to any merger, consolidation, share exchange, business
combination, recapitalization, reclassification of shares, stock split, reverse
stock split or similar transaction;
(g) Parent has not formed any subsidiary or acquired any equity interest or
other interest in any other Entity;
(h) except as set forth on Part 3.5(h) of the Parent Disclosure Schedule,
Parent has not made any capital expenditures which exceed $100,000 in the
aggregate;
(i) except in the ordinary course of business and consistent with past
practices, Parent has not (i) entered into or permitted any of the assets owned
or used by it to become bound by any Parent Material Contract (as defined in
Section 3.10), or (ii) amended or prematurely terminated, or waived any material
right or remedy under, any Parent Material Contract;
(j) Parent has not (i) acquired, leased or licensed any material right or
other material asset from any other Person, (ii) sold or otherwise disposed of,
or leased or licensed, any material right or other material asset to any other
Person, or (iii) waived or relinquished any right, except for rights or other
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assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with past practices;
(k) Parent has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness in excess of $25,000 with respect to any single matter, or in
excess of $50,000 in the aggregate;
(l) Parent has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance, except for
Permitted Encumbrances;
(m) Parent has not (i) lent money to any Person, or (ii) incurred or
guaranteed any indebtedness for borrowed money other than payroll, travel and
other advances made in the ordinary course of business;
(n) Parent has not (i) established or adopted any Parent Plan (as defined in
Section 3.16(a)), (ii) caused or permitted any Parent Plan to be amended in any
material respect, or (iii) paid any bonus or made any profit-sharing or similar
payment to, or materially increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable to,
any of its directors, officers or employees;
(o) Parent has not changed any of its methods of accounting or accounting
practices in any material respect;
(p) Parent has not made any material election with respect to Taxes;
(q) Parent has not commenced or settled any Legal Proceeding;
(r) Parent has not entered into any material transaction or taken any other
material action that has had, or could reasonably be expected to have, a
Material Adverse Effect on Parent; and
(s) Parent has not agreed or committed to take any of the actions referred
to in clauses "(c)" through "(r)" above.
3.6 LEASEHOLD; EQUIPMENT.
(a) Parent does not own any real property or any interest in real property,
except for the leaseholds created under the real property leases identified in
Part 3.6(a) of the Parent Disclosure Schedule. All such real property is being
leased pursuant to lease agreements that are in full force and effect, are valid
and effective in accordance with their respective terms, and there is not, under
any of such leases, any existing default or event of default (or event which
with notice or lapse of time, or both, would constitute a default) that would
result in a Material Adverse Effect on Parent.
(b) Part 3.6(b) of Parent Disclosure Schedule accurately identifies all
material items of equipment leased by Parent. All material items of equipment
and other tangible assets owned by or leased to Parent are adequate for the uses
to which they are being put, are in good condition and repair (ordinary wear and
tear excepted) and are adequate for the conduct of the business of Parent in the
manner in which such business is currently being conducted.
3.7 TITLE TO ASSETS. Parent owns, and has good, valid and marketable title
to, or in the case of leased properties and assets, valid leasehold interests
in, all of their respective tangible properties and assets, real, personal and
mixed, used or held for use in their business, including: (i) all assets
reflected on the Parent Balance Sheet; and (ii) all other assets reflected in
the books and records of Parent as being owned or leased by Parent. All of said
assets are owned or leased by Parent free and clear of any Encumbrances, except
for Permitted Encumbrances.
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3.8 PAYMENTS UNDER CORPORATE PARTNERING AGREEMENTS.
(a) All amounts charged to Glaxo Wellcome PLC and Eli Lilly and Company (the
"PARENT CORPORATE PARTNERS") and Pfizer, Inc. for reimbursement or payments in
accordance with the agreements between Parent and such Persons represent amounts
due to Parent under the terms of such agreements for actual work or services
performed or, in the case of advance payments, work or services to be performed
or milestones met.
(b) Parent has received all amounts that are owed and due to be paid to
Parent under such agreements prior to the date of this Agreement. For each such
payment received by Parent under any such agreement, any revenue that Parent
recognized with respect to such payment was recognized in accordance with GAAP.
(c) Parent has no knowledge that a Parent Corporate Partner is considering,
intending or planning to terminate any of the agreements between any such Parent
Corporate Partner and Parent, or any research program under such agreement.
3.9 PROPRIETARY ASSETS.
(a) Part 3.9(a) of Parent Disclosure Schedule sets forth, with respect to
each Proprietary Asset owned or licensed by Parent and registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Assets, and (ii)
the names of the jurisdictions covered by the applicable registration or
application. Part 3.9(a) of Parent Disclosure Schedule identifies and provides a
brief description of, and identifies any ongoing royalty or payment obligations
in excess of $50,000 per year with respect to, each Proprietary Asset that is
licensed or otherwise made available to Parent by any Person (except for any
Proprietary Asset that is licensed to Parent under any third party software
license generally available to the public), and identifies the Contract under
which such Proprietary Asset is being licensed or otherwise made available to
Parent. Excluding the payments required under the Parent Contracts set forth in
the Parent Disclosure Schedule, the aggregate amounts payable by Parent for
ongoing royalty or license payments do not exceed $100,000 per year. Parent has
good, valid and marketable title to all of Parent Proprietary Assets (except for
licensed assets), free and clear of all Encumbrances, except (i) as set forth in
Part 3.9(a) of the Parent Disclosure Schedule, (ii) for any lien for current
taxes not yet due and payable, and (iii) for minor liens that have arisen in the
ordinary course of business and that do not (individually or in the aggregate)
materially detract from the value of the assets subject thereto or materially
impair the operations of Parent. To Parent's knowledge, Parent has a valid right
to use, license and otherwise exploit all Parent Proprietary Assets. Except as
set forth in Part 3.9(a) of Parent Disclosure Schedule, Parent has not developed
jointly or does not jointly own or have joint rights with any other Person any
Parent Proprietary Asset that is material to the business of Parent. Except as
set forth in Part 3.9(a) of the Disclosure Schedule, there is no Parent Contract
pursuant to which any Person has any right (whether or not currently
exercisable) to use, license or otherwise exploit any Parent Proprietary Asset.
(b) Parent has taken all commercially reasonable measures and precautions to
protect and maintain the confidentiality and secrecy of all Parent Proprietary
Assets (except Parent Proprietary Assets whose value would be unimpaired by
public disclosure) and otherwise to maintain and protect the value of all Parent
Proprietary Assets.
(c) To the knowledge of Parent, Parent is not misappropriating or making any
unlawful use of, and Parent has not at any time misappropriated or made any
unlawful use of, or received any notice or other communication (in writing or
otherwise) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful use of, any Proprietary Asset owned or used by any
other Person.
(d) Parent Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable Parent to conduct its business in the manner in
which such business has been and is being conducted.
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Except as set forth in Part 3.9(d) of the Parent Disclosure Schedule, Parent has
not licensed any of the Company Proprietary Assets to any Person on an exclusive
basis.
(e) All current and former employees have executed and delivered an
agreement to Parent (containing no exceptions to or exclusions from the scope of
its coverage) that is substantially identical to the form of Confidential
Information and Invention Assignment Agreement previously delivered to the
Company by Parent. All current and former consultants and independent
contractors to Parent have executed and delivered to Parent an agreement that
contains provisions appropriately restricting the use and disclosure of Parent
Proprietary Assets.
(f) Parent has taken reasonably adequate steps to ensure that all software
(and related Proprietary Assets) used in its operations will be Year 2000
Compliant (as defined below) by December 31, 1999. For purposes of this Section
3, "YEAR 2000 COMPLIANT" shall mean that software that can individually, and in
combination and in conjunction with all other systems, products or processes
with which they are required or designed to interface, continue to be used
normally and to operate successfully (both in functionality and performance in
all material respects) over the transition into the twenty first century when
used in accordance with the documentation relating to all such software (and
related Parent Proprietary Assets), including being able to, before, on and
after January 1, 2000 substantially conform to the following: (i) use logic
pertaining to dates which allow users to identify and/or use the century portion
of any date fields without special processing; and (ii) respond to all date
elements and date input so as to resolve any ambiguity as to century in a
disclosed, defined and pre-determined manner and provide date information in
ways which are unambiguous as to century, either by permitting or requiring the
century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.
3.10 CONTRACTS.
(a) Part 3.10 of the Parent Disclosure Schedule identifies each Parent
Contract that constitutes a "Parent Material Contract." For purposes of this
Agreement, each of the following shall be deemed to constitute a "PARENT
MATERIAL CONTRACT":
(i) (A) any Contract or outstanding offer relating to the employment of,
or the performance of services by, any employee, and (B) any Contract
pursuant to which the Company is required to make any severance, termination
or similar payment, bonus or relocation payment or any other payment (other
than payments in respect of salary) to any current or former employee or
director of the Company;
(ii) any Contract (A) relating to the acquisition, transfer,
development, sharing, license (to or by Parent), or use of any Proprietary
Asset (except for any Contract pursuant to which any Proprietary Asset is
licensed to the Company under any third party software license generally
available to the public); or (B) with respect to the distribution or
marketing of any products of Parent;
(iii) any Contract which provides for indemnification of any officer,
director, employee or agent of Parent;
(iv) any Contract imposing any restriction on the right or ability of
Parent (A) to compete in any market or geographic area with any other
Person, (B) to acquire any product or other asset or any services from any
other Person, to sell any product or other asset to or perform any services
for any other Person or to transact business or deal in any other manner
with any other Person, or (C) to develop or distribute any technology;
(v) any Contract (A) relating to the acquisition, issuance, voting,
registration, sale or transfer of any securities (other than the issuance of
Parent Common Stock upon the valid exercise of Parent Options outstanding as
of the date of this Agreement), (B) providing any Person with any preemptive
right, right of participation, right of maintenance or any similar right
with respect to
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any securities, or (C) providing Parent with any right of first refusal with
respect to, or right to repurchase or redeem, any securities;
(vi) any Contract that (A) contemplates or involves payment or delivery
of cash or other consideration in an amount or having a value in excess of
$20,000 per month and (B) has a term of more than 90 days and that may not
be terminated by such Parent within 90 days after the delivery of a
termination notice by such Parent;
(vii) any Contract that contemplates or involves payment or delivery of
cash or other consideration by Parent in an amount or having a value in
excess of $75,000 in the aggregate;
(viii) any Contract or Plan (including, without limitation, any stock
option plan, stock appreciation plan or stock purchase plan), any of the
benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the execution of this Agreement or the completion of
any of the transactions contemplated by this Agreement or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement;
(ix) any Contract (not otherwise identified in clauses "(i)" through
"(viii)" of this sentence) that is or would be material to Parent, to the
business, condition, capitalization or operations of Parent or to any of the
transactions contemplated by this Agreement; and
(x) any other Contract, if a breach of such Contract could reasonably be
expected to have a Material Adverse Effect on Parent.
(b) Each Parent Material Contract is valid and in full force and effect, and
is enforceable by an Acquired Corporation in accordance with its terms, subject
to (i) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies
(c) Except where the following would not have a Material Adverse Effect on
Parent: (i) Parent has not violated or breached, or committed any default under,
any Parent Contract, and, to the knowledge of Parent, no other Person has
violated or breached, or committed any default under, any Parent Contract; (ii)
to the knowledge of Parent, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) will, or could
reasonably be expected to, (A) result in a violation or breach of any of the
provisions of any Parent Contract, (B) give any Person the right to declare a
default or exercise any remedy under any Parent Contract, (C) give any Person
the right to a rebate, chargeback, penalty or change in delivery schedule under
any Parent Contract, (D) give any Person the right to accelerate the maturity or
performance of any Parent Contract, or (E) give any Person the right to cancel,
terminate or modify any Parent Contract; and (iii) neither Parent, nor any of
its Representatives, has received any notice or other communication regarding
any actual or possible violation or breach of, or default under any Parent
Contract.
(d) There is no Parent Contract to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations, or directly or
indirectly benefiting any Governmental Body (including any subcontract or other
Contract between Parent and any contractor or subcontractor to any Governmental
Body).
(e) No Person is renegotiating, or has a right pursuant to the terms of any
Parent Material Contract to renegotiate, any amount paid or payable to Parent
under any Parent Material Contract or any other material term or provision of
any Parent Material Contract.
3.11 YEAR 2000 LIABILITIES. Parent does not have any accrued, contingent
or other liabilities of any nature, either matured or unmatured, including,
without limitation, any liabilities relating to costs associated with insuring
that all software (and related Parent Proprietary Assets) utilized by Parent or
other components of Parent's information technology infrastructure are Year 2000
Compliant (whether or not required to be reflected in financial statements in
accordance with GAAP, and whether
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due or to become due), except for: (a) liabilities identified as such in the
"liabilities" column of the Parent Balance Sheet; and (b) normal and recurring
liabilities that have been incurred by Parent since the date of the Parent
Balance Sheet in the ordinary course of business and consistent with past
practices.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Parent is, and has at all times
since September 15, 1997 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on Parent. Since
September 15, 1997, Parent has not received any notice or other communication
from any Governmental Body regarding any actual or possible violation of, or
failure to comply with, any Legal Requirement.
3.13 CERTAIN BUSINESS PRACTICES. Neither Parent nor any director, officer,
agent or employee of Parent has, on behalf of Parent, (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
3.14 GOVERNMENTAL AUTHORIZATIONS. Parent holds all Governmental
Authorizations necessary to enable it to conduct its business in the manner in
which such business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. Parent is, and at all
times since September 15, 1997 has been, in substantial compliance with the
terms and requirements of such Governmental Authorizations. Since September 15,
1997, Parent has not received any notice or other communication from any
Governmental Body regarding (a) any actual or possible violation of or failure
to comply with any term or requirement of any Governmental Authorization, or (b)
any actual or possible revocation, withdrawal, suspension, cancellation,
termination or modification of any Governmental Authorization.
3.15 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of Parent with any
Governmental Body with respect to any taxable period ending on or before the
Closing Date ("PARENT RETURNS") (i) have been or will be filed on or before the
applicable due date (including any extensions of such due date if properly
obtained), and (ii) have been, or will be when filed, prepared in all material
respects in compliance with all applicable Legal Requirements. All amounts shown
on Parent Returns to be due on or before the Closing Date have been or will be
paid on or before the Closing Date.
(b) Parent Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with GAAP. Parent will establish, in the ordinary course of business
and consistent with its past practices, reserves adequate for the payment of all
Taxes for the period from June 30, 1998 through the Closing Date.
(c) Except as set forth in Part 3.15(c) of Parent Disclosure Schedule,
Parent Returns have never been examined or audited by any Governmental Body. No
extension or waiver of the limitation period applicable to any Parent Returns
has been granted (by Parent or any other Person), and no such extension or
waiver has been requested from Parent.
(d) No claim or Legal Proceeding is pending or, to the knowledge of Parent,
has been threatened against or with respect to Parent in respect of any material
Tax. There are no unsatisfied liabilities for material Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by Parent with respect to any material Tax (other than liabilities for Taxes
asserted under any such notice of deficiency or similar document which are being
contested in good faith by Parent and with respect to which adequate reserves
for payment have been established). There are no liens for material Taxes upon
any of the
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assets of Parent except liens for current Taxes not yet due and payable. Parent
has not entered into or become bound by any agreement or consent pursuant to
Section 341(f) of the Code. Parent has not been, and it will not be, required to
include any material adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 of the Code or any comparable provision under
state or foreign Tax laws as a result of transactions or events occurring, or
accounting methods employed, prior to the Closing.
(e) Except as set forth in Part 3.15(e) of Parent Disclosure Schedule, there
is no agreement, plan, arrangement or other Contract covering any employee or
independent contractor or former employee or independent contractor of Parent
that, considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. Parent is not and has never been, a
party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.
3.16 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 3.16(a) of Parent Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "PARENT PLANS")
sponsored, maintained, contributed to or required to be contributed to by Parent
for the benefit of any current or former employee of Parent.
(b) Except as set forth in Part 3.16(a) of Parent Disclosure Schedule,
Parent does not maintain, sponsor or contribute to, and it has not at any time
in the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of Parent (a "PARENT PENSION PLAN"). None of the
Parent Plans identified in Part 3.16(a) of Parent Disclosure Schedule is subject
to Title IV of ERISA or Section 412 of the Code.
(c) Except as set forth in Part 3.16(a) of Parent Disclosure Schedule,
Parent does not maintain, sponsor or contribute to any employee welfare benefit
plan (as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA) for the benefit of any employees or
former employees of Parent including any self-funded medical, dental, or other
similar Parent Plan (a "PARENT WELFARE PLAN"). None of the Parent Plans
identified in Part 3.16(a) of Parent Disclosure Schedule is a multiemployer plan
(within the meaning of Section 3(37) of ERISA).
(d) With respect to each Parent Plan, Parent has delivered to the Company:
(i) an accurate and complete copy of such Parent Plan (including all amendments
thereto); (ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Parent Plan for the last two years; (iii) an
accurate and complete copy of the most recent Summary Plan Description, together
with each Summary of Material Modifications, if required under ERISA, with
respect to such Parent Plan, (iv) if such Parent Plan is funded through a trust
or any third party funding vehicle, an accurate and complete copy of the trust
or other funding agreement (including all amendments thereto) and accurate and
complete copies of the most recent financial statements thereof; (v) accurate
and complete copies of all Contracts relating to such Parent Plan, including
service provider agreements, insurance contracts, minimum premium contracts,
stop-loss agreements, investment management agreements, subscription and
participation agreements and recordkeeping agreements; and (vi) an accurate and
complete copy of the most recent determination letter received from the Internal
Revenue Service with respect to such Parent Plan (if such Parent Plan is
intended to be qualified under Section 401(a) of the Code).
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(e) Each of the Parent Plans complies with and has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
(f) Each of the Parent Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and Parent is not aware of any reason why any such determination letter
should be revoked.
(g) Part 3.16(g) of Parent Disclosure Schedule contains a list of all
salaried employees of Parent as of the date of this Agreement, and correctly
reflects, in all material respects, their base salaries, their targeted annual
bonus amounts, their dates of employment and their positions. Parent is not a
party to any collective bargaining contract or other Contract with a labor union
involving any of its employees. All of the employees of Parent are "at will"
employees.
(h) Parent is in compliance in all material respects with all Contracts
relating to employment, employment practices, wages, bonuses and terms and
conditions of employment, including employee compensation matters.
(i) Parent has good labor relations, and it has no knowledge of any facts
indicating that (i) the completion of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the labor relations of Parent, or (ii) any of the employees of Parent intends
to terminate his or her employment with Parent with which such employee is
employed.
3.17 ENVIRONMENTAL MATTERS. Parent is in compliance with all applicable
Environmental Laws, except where failure to comply would not have a Material
Adverse Effect on Parent. Parent possesses all permits and other Governmental
Authorizations required under applicable Environmental Laws to conduct its
current operations. Parent has not received any notice or other communication
(in writing or otherwise) from a Governmental Body or citizens group that
alleges that Parent is not in compliance with any Environmental Law. To the
knowledge of Parent, there are no circumstances that may prevent or interfere
with the compliance by Parent with any Environmental Law in the future, except
where failure to comply would not have a Material Adverse Effect on Parent. To
the knowledge of Parent without further inquiry, no current or prior owner of
any property leased or controlled by Parent has received any notice or other
communication (in writing or otherwise) from a Governmental Body or citizens
group that alleges that such current or prior owner or Parent is not in
compliance with any Environmental Law. To the knowledge of Parent, all property
that is leased to, controlled by or used by Parent, and all surface water,
groundwater and soil associated with or adjacent to such property is in clean
and healthful condition and is free of environmental contamination of any
nature.
3.18 INSURANCE. Parent has delivered to the Company a copy of each
insurance policy relating to the business, assets or operations of Parent and
with respect to each such policy, the insurer, the amount of coverage, the type
of insurance and the period of coverage. Each such insurance policy is in full
force and effect. Part 3.18 of the Parent Disclosure Schedule also sets forth
each self insurance program relating to the business, assets or operations of
Parent. Since September 15, 1997, Parent has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any
material claim under any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance policy. There is no
pending claim (including any workers' compensation claim) under or based upon
any insurance policy of Parent; and, to the knowledge of Parent, no event has
occurred that could reasonably be expected to (with or without notice or lapse
of time) directly or indirectly give rise to or serve as a basis for any such
claim.
3.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Parent SEC
Documents no event has occurred that would be required to be reported by Parent
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 3.19 of the
Parent Disclosure Schedule identifies each
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person who is an "affiliate" (as that term is used in Rule 145 promulgated under
the Securities Act) of Parent as of the date of this Agreement.
3.20 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 3.20(a) of the Parent Disclosure Schedule,
there is no pending Legal Proceeding and, to the knowledge of Parent, no Person
has threatened to commence any Legal Proceeding: (i) that involves Parent or any
of the assets owned or used by Parent, including, without limitation, Parent
Proprietary Assets; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the
knowledge of Parent, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding. To the knowledge of Parent, no event has occurred, and no
claim, dispute or other condition or circumstance exists, that will, or that
could reasonably be expected to, cause or provide a basis for a director,
officer or other Representative of Parent to seek indemnification from, or
commence a Legal Proceeding against or involving, Parent.
(b) There is no order, writ, injunction, judgment or decree to which Parent,
or any of the assets owned or used by Parent, is subject. To the knowledge of
Parent, no officer or other employee of Parent is subject to any order, writ,
injunction, judgment or decree that prohibits such officer or other employee
from engaging in or continuing any conduct, activity or practice relating to the
business of Parent.
3.21 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of Parent (at a meeting
duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of Parent and its stockholders, (b)
unanimously approved the execution, delivery and performance of this Agreement
by Parent and has unanimously approved the Merger, and (c) unanimously
recommended the adoption and approval of a proposal to issue shares of Parent
Common Stock in the Merger by the holders of Parent Common Stock and directed
that such proposal be submitted for consideration by Parent's stockholders at
the Parent Stockholders' Meeting (as defined in Section 6.3). This Agreement
constitutes the legal, valid and binding obligation of Parent, enforceable
against Parent in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.22 NON-CONTRAVENTION; CONSENTS. Neither (i) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (ii) the completion of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the certificate of incorporation, bylaws or other charter or
organizational documents of Parent, or (ii) any resolution adopted by the
stockholders, the Board of Directors or any committee of the Board of
Directors of Parent;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any
of the other transactions contemplated by this Agreement or to exercise any
remedy or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which Parent, or any of the assets owned
or used by Parent, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or
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modify, any Governmental Authorization that is held by Parent or that
otherwise relates to the business of Parent or to any of the assets owned or
used by Parent;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Parent Material Contract or
(except as set forth in Part 3.22(d) of Parent Disclosure Schedule), give
any Person the right to (i) declare a default or exercise any remedy under
any such Parent Material Contract, (ii) a rebate, chargeback, penalty or
change in delivery schedule under any such Parent Material Contract, (iii)
accelerate the maturity or performance of any such Parent Material Contract,
or (iv) cancel, terminate or modify any term of such Parent Material
Contract; or
(e) result in the imposition or creation of any Encumbrance upon or with
respect to any asset owned or used by Parent (except for Permitted
Encumbrances).
Except as set forth in Part 3.22(d) of the Parent Disclosure Schedule or except
as may be required by the Exchange Act, the DGCL and the rules of NASD (as they
relate to the S-4 Registration Statement and the Joint Proxy
Statement/Prospectus, as defined in Section 2.27(b)), Parent was not, is not and
will not be required to make any filing with or give any notice to, or to obtain
any Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, or (y) the completion of the Merger or any of the other transactions
contemplated by this Agreement.
3.23 VOTE REQUIRED. The only vote of Parent's stockholders required to
approve the issuance of Parent Common Stock in the Merger is the vote of a
majority of votes cast in person or by proxy as prescribed by rules of the NASD
(the "REQUIRED PARENT STOCKHOLDER VOTE").
3.24 VALID ISSUANCE. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be duly
authorized, validly issued, fully paid and nonassessable.
3.25 FAIRNESS OPINION. Parent's Board of Directors has received the
written opinion of Hambrecht & Quist LLC, financial advisor to Parent, dated as
of the date of this Agreement, to the effect that the Exchange Ratio is fair to
Parent from a financial point of view. Parent has furnished an accurate and
complete copy of said written opinion to the Company.
3.26 FULL DISCLOSURE.
(a) This Agreement (including the Parent Disclosure Schedule) does not, and
the certificate referred to in Section 8.5(b) will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact necessary in order
to make the representations, warranties and information contained and to be
contained herein and therein (in the light of the circumstances under which such
representations, warranties and information were or will be made or provided)
not false or misleading.
(b) None of the information supplied or to be supplied by or on behalf of
Parent for inclusion or incorporation by reference in the S-4 Registration
Statement to be filed with the SEC by Parent in connection with the issuance of
Parent Common Stock in the Merger will, at the time the S-4 Registration
Statement is filed with the SEC or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. None of the information supplied or to be supplied by or
on behalf of Parent for inclusion or incorporation by reference in the Joint
Proxy Statement/Prospectus to be filed with the SEC as part of the S-4
Registration Statement, will, at the time the Joint Proxy Statement/Prospectus
is mailed to the stockholders of the Parent, at the time of the Parent
Stockholders' Meeting or as of the Effective Time, contain any untrue statement
of a material fact or omit to
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state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading. The Joint Proxy Statement/Prospectus will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated by the SEC thereunder.
3.27 FINANCIAL ADVISOR. Except for Hambrecht & Quist LLC, no broker,
finder, investment banker or other Person is entitled to any brokerage, finder's
or other fee or commission in connection with the Merger or any of the other
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent. Parent has disclosed to the Company the fees, commissions
and other payments which will be paid by Parent to Hambrecht & Quist LLC if the
Merger is completed. Parent furnished to the Company accurate and complete
copies of all agreements under which any such fees, commissions or other amounts
have been paid or may become payable and all indemnification and other
agreements relating to the engagement of Hambrecht & Quist LLC.
3.28 INTERIM OPERATIONS OF MERGER SUB. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activity and has conducted its operations only as contemplated
hereby.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY.
4.1 OPERATION OF THE COMPANY'S BUSINESS. During the period from the date
of this Agreement through the Effective Time (the "PRE-CLOSING PERIOD"), the
Company shall not (without the prior written consent of Parent), except as
contemplated by this Agreement:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(ii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security, (B) any option, call, warrant or right to
acquire any capital stock or other security except as set forth on Part
4.1(ii) of the Company Disclosure Schedule, or (C) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company may issue Company Common Stock upon the valid
exercise of Company Options and pursuant to Company Plans;
(iii) amend or waive any of its rights under, or accelerate the vesting
under, any provision of any of the Company's stock option plans, any
provision of any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement, or otherwise modify any of the terms of
any outstanding option, warrant or other security or any related Contract,
except pursuant to written agreements outstanding, or policies existing, on
the date hereof and as previously disclosed in writing or made available to
Parent;
(iv) amend or permit the adoption of any amendment to its certificate of
incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(v) form any Subsidiary or acquire any equity interest or other interest
in any other Entity;
(vi) make any capital expenditure (except that the Company may make
capital expenditures that, when added to all other capital expenditures made
on behalf of the Company during the Pre-Closing Period, do not exceed
$25,000 with respect to any single capital expenditure or $100,000 in the
aggregate);
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(vii) enter into or become bound by, or permit any of the assets owned or
used by it to become bound by, any Company Material Contract, or amend or
prematurely terminate, or waive or exercise any material right or remedy
(including any right to repurchase shares of Company Common Stock) under,
any Company Material Contract;
(viii) acquire, lease or license any material right or other asset from
any other Person or sell or otherwise dispose of, or lease or license or
encumber, any material right or other asset to any other Person (except in
each case for material rights or assets acquired, leased, licensed or
disposed of by the Company in the ordinary course of business and consistent
with past practices), or waive or relinquish any material right or otherwise
extend the term of any agreement with respect to, amend or modify in any
material respect any material rights, including rights to material
Proprietary Assets of the Company, or enter into assignments of future
rights, including rights to material Proprietary Assets of the Company,
other than non-exclusive licenses and distribution rights in the ordinary
course of business consistent with past practices;
(ix) incur any indebtedness for borrowed money (other than (i) in
connection with the financing of ordinary trade payables; (ii) pursuant to
existing credit facilities; (iii) in connection with leasing activities in
the ordinary course of business; or (iv) for tax planning purposes in the
ordinary course of business) or guarantee any indebtedness of any Person for
borrowed money, or issue or sell any debt securities or warrants or right to
acquire debt securities of the Company or guarantee any debt securities of
others.
(x) establish, adopt or amend any employee benefit plan, pay any bonus
except in accordance with the terms of existing Company Plans or pursuant to
commitments made prior to the date of this Agreement, or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees, except for normal
periodic increases in wages and salaries made in the ordinary course of
business and consistent with past practices;
(xi) grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to
Parent, or adopt any new severance plan;
(xii) hire any new employee having an annual salary in excess of $120,000
or as an officer of the Company or engage any consultant or independent
contractor for a period exceeding sixty (60) days;
(xiii) change the status, title or responsibilities, including without
limitation, termination or promotion, of any officer of the Company or
promote any employee to an officer position in the Company;
(xiv) change any of its methods of accounting or accounting practices in
any respect;
(xv) make any election with respect to Taxes;
(xvi) commence or settle any Legal Proceeding;
(xvii) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practices;
(xviii) enter into any agreement requiring the consent or approval of any
third party with respect to the Merger; or
(xix) agree or commit to take any of the actions described in clauses
"(i)" through "(xviii)" of this Section 4.1.
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4.2 NO SOLICITATION.
(a) From the date of this Agreement until the earlier of the Effective Time
or termination of this Agreement pursuant to Section 9, the Company shall not
directly or indirectly, and shall not authorize or permit any subsidiary of the
Company or any Representative of the Company directly or indirectly to, (i)
solicit, initiate, encourage or induce the making, submission or announcement of
any Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding the
Company to any Person in connection with or in response to an Acquisition
Proposal, (iii) engage in discussions with any Person with respect to any
Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
Contract contemplating or otherwise relating to any Acquisition Transaction;
PROVIDED, HOWEVER, that prior to the approval of this Agreement by the Required
Company Stockholder Vote, this Section 4.2(a) shall not prohibit the Company
from (A) furnishing nonpublic information regarding the Company to, or entering
into discussions with, any Person in response to a Superior Offer submitted by
such Person (and not withdrawn) if (1) neither the Company nor any
Representative of the Company shall have violated any of the restrictions set
forth in this Section 4.2, (2) the Board of Directors of the Company concludes
in good faith, after consultation with its outside legal counsel, that such
action is required in order for the Board of Directors of the Company to comply
with its fiduciary obligations to the Company's stockholders under applicable
law, (3) prior to furnishing any such nonpublic information to, or entering into
discussions with, such Person, the Company gives Parent written notice of the
identity of such Person and of the Company's intention to furnish nonpublic
information to, or enter into discussions with, such Person, and the Company
receives from such Person an executed confidentiality agreement that is at least
as restrictive as the Confidentiality Agreement (as hereinafter defined) with
respect to the use and disclosure of all nonpublic written and oral information
furnished to such Person by or on behalf of the Company, and (4) prior to
furnishing any such nonpublic information to such Person, the Company furnishes
such nonpublic information to Parent (to the extent such nonpublic information
has not been previously furnished by the Company to Parent) or (B) taking and
disclosing to its stockholders a position contemplated by Rules 14(d)(9) and
14e-2(a) promulgated under the Exchange Act. Without limiting the generality of
the foregoing, the Company acknowledges and agrees that any violation of any of
the restrictions set forth in the preceding sentence by any Representative of
the Company, whether or not such Representative is purporting to act on behalf
of the Company, shall be deemed to constitute a breach of this Section 4.2 by
the Company. In addition to the foregoing, the Company shall (i) provide Parent
with at least twenty-four (24) hours prior notice of any meeting of the
Company's Board of Directors at which the Company's Board of Directors is
reasonably expected to consider a Superior Offer and (ii) not recommend a
Superior Offer to its stockholders for a period of not less than the greater of
two (2) business days or forty-eight (48) hours after Parent's receipt of a copy
of such Superior Offer (pursuant to Section 4.2(b) below).
(b) The Company shall promptly advise Parent orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. The Company shall keep Parent fully
informed with respect to the status of any such Acquisition Proposal and any
modification or proposed modification thereto.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
4.3 CONVERSION OF SERIES B PREFERRED STOCK. The Company shall take all
actions necessary to effect the conversion of all of the outstanding Series B
Preferred Stock into shares of Company Common Stock in accordance with its
certificate of incorporation no later than twenty (20) days after the date of
this Agreement.
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SECTION 5. CERTAIN COVENANTS OF PARENT.
5.1 OPERATION OF THE PARENT'S BUSINESS. During the Pre-Closing Period,
Parent shall not (without the prior written consent of the Company) (i) declare,
accrue, set aside or pay any dividend or make any other distribution in respect
of any shares of its capital stock, (ii) repurchase, redeem or otherwise
reacquire any shares of its capital stock or other securities, (iii) sell,
issue, grant or authorize the issuance or grant of (A) any capital stock or
other security, (B) any option, call, warrant or right to acquire any capital
stock or other security except as set forth on Part 5.1(iii) of the Parent
Disclosure Schedule or (C) any instrument convertible into or exchangeable for
any capital stock or other security (except that Parent may issue Parent Common
Stock upon the valid exercise of Parent Options outstanding as of the date of
this Agreement), (iv) amend or permit the adoption of any amendments to its
certificate of incorporation or bylaws or other charter or organizational
documents or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization of shares, stock split, reverse
stock split or similar transaction, (v) incur any indebtedness for borrowed
money (other than (A) in connection with the financing of ordinary trade
payables; (B) pursuant to existing credit facilities; (C) in connection with
leasing activities in the ordinary course of business; or (D) for tax planning
purposes in the ordinary course of business) in excess of $5,000,000, (vi)
acquire, lease or license any material right or other asset from any other
Person or sell or otherwise dispose of, or lease or license or encumber any
material right or other asset to any other Person (except in each case for
material rights or assets acquired, leased, licensed or disposed of by Parent in
the ordinary course of business and consistent with past practices), or waive or
relinquish any material right or otherwise extend the term of any agreement with
respect to, amend or modify in any material respect any material rights,
including rights to material Proprietary Assets of Parent, or enter into
assignments of future rights, including rights to material Proprietary Assets of
Parent, other than non-exclusive licenses and distribution rights in the
ordinary course of business consistent with past practice, or (vii) agree or
commit to take any of the actions described in clauses "(i)" through "(vi)" of
this Section 5.1.
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES.
6.1 REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS.
(a) As promptly as practicable after the date of this Agreement, the Company
and Parent shall prepare and cause to be filed with the SEC the S-4 Registration
Statement, together with the Joint Proxy Statement/Prospectus and any other
documents required by the Securities Act, the Exchange Act or any other Federal,
foreign or Blue Sky or related laws in connection with the Merger and the
transactions contemplated by this Agreement ("OTHER FILINGS"). Each of Parent
and the Company will notify the other promptly upon the receipt of any comments
from the SEC or its staff or any other government officials and of any request
by the SEC or its staff or any other government officials for amendments or
supplements to the S-4 Registration Statement, the Joint Proxy
Statement/Prospectus or any Other Filings or for additional information and will
supply the other with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the S-4 Registration
Statement, the Joint Proxy Statement/Prospectus, any Other Filings or the
Merger. Each of Parent and the Company shall use all reasonable efforts to cause
the S-4 Registration Statement (including the Joint Proxy Statement/Prospectus)
and any Other Filings to comply with the rules and regulations promulgated by
the SEC, to respond promptly to any comments of the SEC or its staff and to have
the S-4 Registration Statement declared effective under the Securities Act as
promptly as practicable after it is filed with the SEC. Parent will use all
reasonable efforts to cause the Joint Proxy Statement/Prospectus to be mailed to
Parent's stockholders and the Company will use all reasonable efforts to cause
the Joint Proxy Statement/Prospectus to be mailed to the Company's stockholders,
as promptly as practicable after the Form S-4 Registration Statement is declared
effective under the Securities Act. The Company shall
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promptly furnish to Parent all information concerning the Company and the
Company's stockholders that may be required or reasonably requested in
connection with any action contemplated by this Section 6.1. If any event
relating to the Company occurs, or if the Company becomes aware of any
information, that should be set forth in an amendment or supplement to the S-4
Registration Statement or the Joint Proxy Statement/Prospectus, then the Company
shall promptly inform Parent thereof and shall cooperate with Parent in filing
such amendment or supplement with the SEC and, if appropriate, in mailing such
amendment or supplement to the stockholders of the Company and the stockholders
of Parent.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock to
be issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Common Stock has an address of record on the record date for determining
the stockholders entitled to notice of and to vote at the Company Stockholders'
Meeting; PROVIDED, HOWEVER, that Parent shall not be required (i) to qualify to
do business as a foreign corporation in any jurisdiction in which it is not now
qualified or (ii) to file a general consent to service of process in any
jurisdiction.
6.2 COMPANY STOCKHOLDERS' MEETING.
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of Company Common Stock (the "COMPANY STOCKHOLDERS' MEETING") to consider, act
upon and vote upon the adoption of this Agreement and approval of the Merger.
The Company Stockholders' Meeting will be held as promptly as practicable and in
any event within forty-five (45) days after the S-4 Registration Statement is
declared effective under the Securities Act; PROVIDED, HOWEVER, that
notwithstanding anything to the contrary contained in this Agreement, the
Company may adjourn or postpone the Company Stockholders' Meeting to the extent
necessary to ensure that any necessary supplement or amendment to the Joint
Proxy Statement/Prospectus is provided to the Company's stockholders in advance
of a vote on the Merger and this Agreement or, if as of the time for which
Company Stockholders' Meeting is originally scheduled (as set forth in the Joint
Proxy Statement/Prospectus) there are insufficient shares of Company Common
Stock represented (either in person or by proxy) to constitute a quorum
necessary to conduct the business of the Company Stockholders' Meeting. The
Company shall ensure that the Company Stockholders' Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited in connection with
the Company Stockholders' Meeting are solicited, in compliance with all
applicable Legal Requirements; PROVIDED, HOWEVER that the Company shall not be
obligated to call, give notice of, convene and hold the Company Stockholders'
Meeting in accordance with this Section 6.2(a) if in accordance with Section
6.2(c) the Board of Directors of the Company withdraws, amends or modifies its
unanimous recommendation in favor of the Merger and accepts or recommends to the
stockholders of the Company a Superior Offer.
(b) Subject to Section 6.2(c): (i) the Board of Directors of the Company
shall unanimously recommend that the Company's stockholders vote in favor of and
adopt and approve this Agreement and the Merger at the Company Stockholders'
Meeting; (ii) the Joint Proxy Statement/Prospectus shall include a statement to
the effect that the Board of Directors of the Company has unanimously
recommended that the Company's stockholders vote in favor of and adopt and
approve this Agreement and the Merger at the Company Stockholders' Meeting; and
(iii) neither the Board of Directors of the Company nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify, in a manner adverse to Parent, the unanimous recommendation of the Board
of Directors of the Company that the Company's stockholders vote in favor of and
adopt and approve this Agreement and the Merger. For purposes of this Agreement,
said recommendation of the Board of Directors shall be deemed to have been
modified in a manner adverse to Parent if said recommendation shall no longer be
unanimous.
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(c) Nothing in Section 6.2(b) shall prevent the Board of Directors of the
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Offer is made to the Company and is not
withdrawn, (ii) neither the Company nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.2, and (iii) the Board
of Directors of the Company concludes in good faith, after consulting with its
outside counsel, that, in light of such Superior Offer, the withdrawal,
amendment or modification of such recommendation is required in order for the
Board of Directors of the Company to comply with its fiduciary obligations to
the Company's stockholders under applicable law.
6.3 PARENT STOCKHOLDERS' MEETING.
(a) Parent shall take all action necessary to call, give notice of, convene
and hold a meeting of the holders of Parent Common Stock to consider and vote
upon the issuance of Parent Common Stock in the Merger (the "PARENT
STOCKHOLDERS' MEETING"). The Parent Stockholders' Meeting will be held as
promptly as practicable and in any event within forty-five (45) days after the
S-4 Registration Statement is declared effective under the Securities Act;
PROVIDED, HOWEVER, that notwithstanding anything to the contrary contained in
this Agreement, Parent may adjourn or postpone the Parent Stockholders' Meeting
to the extent necessary to ensure that any necessary supplement or amendment to
the Joint Proxy Statement/Prospectus is provided to Parent's stockholders in
advance of a vote on the issuance of Parent Common Stock in the Merger or, if as
of the time for which the Parent Stockholders' Meeting is originally scheduled
(as set forth in the Joint Proxy Statement/Prospectus) there are insufficient
shares of Parent Common Stock represented (either in person or by proxy) to
constitute a quorum necessary to conduct the business of the Parent
Stockholders' Meeting. Parent shall ensure that the Parent Stockholders' Meeting
is called, noticed, convened, held and coordinated, and that all proxies
submitted in connection with the Parent Stockholders' Meeting are solicited, in
compliance with all applicable Legal Requirements.
(b) Subject to Section 6.3(c): (i) The Board of Directors of Parent shall
unanimously recommend that Parent's stockholders vote in favor of the issuance
of Parent Common Stock in the Merger; (ii) the Joint Proxy Statement/Prospectus
shall include a statement to the effect that the Board of Directors of Parent
has unanimously recommended that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger; and (iii) neither the Board of
Directors of Parent nor any committee thereof shall withdraw, amend or modify,
or propose or resolve to withdraw, amend or modify, in a manner adverse to the
Company, the unanimous recommendation of the Board of Directors of Parent that
Parent's stockholders vote in favor of the issuance of Parent Common Stock in
the Merger. For purposes of this Agreement, said recommendation of Parent's
Board of Directors shall be deemed to have been modified in a manner adverse to
the Company if said recommendation shall no longer be unanimous.
(c) Nothing in Section 6.3(b) shall prevent the Board of Directors of Parent
from withdrawing, amending or modifying its unanimous recommendation in favor of
the issuance of Parent Common Stock in the Merger if the Board of Directors of
Parent concludes in good faith, based upon the advice of its outside counsel,
that the withdrawal, amendment or modification of such recommendation is
required in order for the Board of Directors of Parent to comply with its
fiduciary obligations to Parent's stockholders under applicable law.
6.4 REGULATORY APPROVALS. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. The Company and Parent shall respond as promptly as
practicable to (i) any inquiries or requests received from any Governmental Body
(including any state attorney general) in connection with antitrust or related
matters. Each of the Company and Parent shall (1) give the other
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party prompt notice of the commencement of any Legal Proceeding by or before any
Governmental Body with respect to the Merger or any of the other transactions
contemplated by this Agreement, (2) keep the other party informed as to the
status of any such Legal Proceeding, and (3) promptly inform the other party of
any communication to or from any Governmental Body regarding the Merger. The
Company and Parent will consult and cooperate with one another, and will
consider in good faith the views of one another, in connection with any
analysis, appearance, presentation, memorandum, brief, argument, opinion or
proposal made or submitted in connection with any Legal Proceeding under or any
other federal or state antitrust or fair trade law. In addition, except as may
be prohibited by any Governmental Body or by any Legal Requirement, in
connection with any Legal Proceeding under or any other federal or state
antitrust or fair trade law or any other similar Legal Proceeding, each of the
Company and Parent agrees to permit authorized Representatives of the other
party to be present at each meeting or conference relating to any such Legal
Proceeding and to have access to and be consulted in connection with any
document, opinion or proposal made or submitted to any Governmental Body in
connection with any such Legal Proceeding.
6.5 STOCK OPTIONS.
(a) At the Effective Time, all rights with respect to Company Common Stock
under each Company Option then outstanding shall be converted into and become
rights with respect to Parent Common Stock, and Parent shall assume each such
Company Option in accordance with the terms (as in effect as of the date of this
Agreement) of the stock option plan under which it was issued and the stock
option agreement by which it is evidenced as same may be amended or modified by
the Company's employment agreements and severance agreements, plans and
arrangements. From and after the Effective Time, (i) each Company Option assumed
by Parent may be exercised solely for shares of Parent Common Stock, (ii) the
number of shares of Parent Common Stock subject to each such Company Option
shall be equal to the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounding down to the nearest whole share (with cash, less the
applicable exercise price, being payable for any fraction of a share), (iii) the
per share exercise price under each such Company Option shall be adjusted by
dividing the per share exercise price under such Company Option by the Exchange
Ratio and rounding up to the nearest cent and (iv) any restriction on the
exercise of any such Company Option shall continue in full force and effect and
the term, exercisability, vesting schedule and other provisions of such Company
Option as may have been amended or modified by the Company's employment
agreements and severance agreements, plans and arrangements shall otherwise
remain unchanged; PROVIDED, HOWEVER, that each Company Option assumed by Parent
in accordance with this Section 6.5(a) shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split, stock
dividend, reverse stock split, reclassification, recapitalization or other
similar transaction subsequent to the Effective Time.
(b) Notwithstanding anything to the contrary contained in this Section 6.5,
in lieu of assuming outstanding Company Options in accordance with Section
6.5(a), Parent may, at its election, cause such outstanding Company Options to
be replaced by issuing reasonably equivalent replacement stock options in
substitution therefor; provided however, that such replacement options shall in
any event comply with the provisions of the second sentence of Section 6.5(a).
(c) The Company shall take all action that may be necessary (under the plans
pursuant to which Company Options are outstanding and otherwise) to effectuate
the provisions of this Section 6.5 and to ensure that, from and after the
Effective Time, holders of Company Options have no rights with respect thereto
other than those specifically provided in this Section 6.5.
6.6 FORM S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as reasonably practical (and in any event within sixty (60)
days) after the Effective Time.
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6.7 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) All rights to indemnification existing in favor of the current directors
and officers of the Company for acts and omissions occurring prior to the
Effective Time, as provided in the Company's bylaws (as in effect as of the date
of this Agreement) and as provided in any indemnification agreements between the
Company and said officers and directors (as in effect as of the date of this
Agreement), shall survive the Merger and shall be observed by the Surviving
Corporation for a period of not less than six (6) years from the Effective Time.
(b) From the Effective Time until the third anniversary of the date on which
the Merger becomes effective, the Surviving Corporation shall maintain in
effect, for the benefit of the current directors and officers of the Company
with respect to acts or omissions occurring prior to the Effective Time, the
lesser of (i) the existing amount of coverage of the existing policy of
directors' and officers' liability insurance maintained by the Company as of the
date of this Agreement (the "EXISTING POLICY") and (ii) the amount of coverage
purchased by 150% of the amount of the last annual premium paid by the Company
prior to the date of this Agreement for the Existing Policy; PROVIDED, HOWEVER,
that the Surviving Corporation may substitute for the Existing Policy a policy
or policies of comparable coverage.
(c) In the event that Parent (i) causes the Surviving Corporation to
consolidate with or merge into any other Person and the Surviving Corporation is
not the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) causes the Surviving Corporation to transfer or convey all or
substantially all of Surviving Corporation's properties and assets to any
Person, then, and in each such case, to the extent necessary to effectuate the
purposes of this Section 6.7, proper provision shall be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 6.7 and none of the actions described in clause (i) or
(ii) shall be taken until such provision is made.
6.8 TAX FREE REORGANIZATION. Each of the Company and Parent agrees not to
take any action either prior to or after the Effective Time that could
reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code.
6.9 ADDITIONAL AGREEMENTS.
(a) Subject to Section 6.9(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject to
Section 6.9(b), each party to this Agreement (i) shall make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, (ii) shall use all reasonable efforts to obtain each Consent (if any)
required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) shall use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger.
(b) Notwithstanding anything to the contrary contained in this Agreement,
Parent shall not have any obligation under this Agreement: (i) to dispose or
cause any of its subsidiaries to dispose of any assets, or to commit to cause
the Company to dispose of any assets; (ii) to license or otherwise make
available, or cause any of its subsidiaries to license or otherwise make
available, to any Person, any technology or other Proprietary Asset, or to
commit to cause the Company to license or otherwise make available to any Person
any technology or other Proprietary Asset; (iii) to hold separate any assets or
operations (either before or after the Closing Date), or to commit to cause the
Company to hold separate any assets or operations; or (iv) to make any
commitment (to any Governmental Body or otherwise) regarding its future
operations or the future operations of the Company.
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6.10 CONFIDENTIALITY. The parties acknowledge that the Company and Parent
have previously executed a Mutual Confidential Disclosure Agreement, dated as of
September 17, 1998 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality
Agreement, excluding Section 7 thereof, will continue in full force and effect
in accordance with its terms.
6.11 DISCLOSURE. Parent and the Company have agreed to the text of a joint
press release announcing the signing of this Agreement and shall consult with
each other before issuing any other press release or otherwise making any public
statement with respect to the Merger or any of the other transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, neither Parent nor the Company shall, and neither shall permit any of
its Representatives to, make any disclosure regarding the Merger or any of the
other transactions contemplated by this Agreement unless (a) the other party
shall have approved such disclosure or (b) the disclosing party shall have been
advised by its outside legal counsel that such disclosure is required by
applicable law.
6.12 TAX MATTERS.
(a) At or prior to the filing of the S-4 Registration Statement, Parent and
Merger Sub and the Company shall execute and deliver to Cooley Godward LLP and
to Heller Ehrman White & McAuliffe LLP tax representation letters in the forms
attached as Exhibit C-1 and C-2, as applicable;
(b) Parent, Merger Sub and the Company shall each confirm to Cooley Godward
LLP and to Heller Ehrman White & McAuliffe LLP the accuracy and completeness as
of the Effective Time of the tax representation letters delivered pursuant to
Section 6.12(a);
(c) Parent, Merger Sub and the Company shall use all reasonable efforts to
cause the Merger to qualify as a tax free reorganization under Section 368(a)(1)
of the Code; and
(d) Following delivery of the tax representation letters pursuant to Section
6.12(a), each of Parent and the Company shall use its reasonable efforts to
cause Cooley Godward LLP and Heller Ehrman White & McAuliffe LLP, respectively,
to deliver promptly to it a legal opinion satisfying the requirements of Item
601 of Regulation S-K promulgated under the Securities Act. In rendering such
opinions, each of such counsel shall be entitled to rely on the tax
representation letters delivered pursuant to Section 6.12(a).
6.13 RESIGNATION OF OFFICERS AND DIRECTORS. The Company shall use all
reasonable efforts to obtain and deliver to Parent prior to the Closing the
resignation of each officer and director of the Company.
6.14 NASDAQ LISTING. Parent shall use all reasonable efforts to have the
shares of Parent Common Stock issuable to the stockholders of the Company
pursuant to the Agreement and such other shares required to be reserved for
issuance in connection with the Merger authorized for listing on Nasdaq upon
official notice of issuance.
6.15 FIRPTA MATTERS. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section 1.897-2(h)(2)
of the United States Treasury Regulations.
6.16 PARENT BOARD OF DIRECTORS. On or prior to the Closing Date, Parent
shall take all actions necessary to nominate and appoint (i) Arthur M. Pappas to
Class I of its Board of Directors to serve until the annual meeting of
stockholders to be held in 2001; (ii) Stanley T. Crooke to Class II of its Board
of Directors to serve until the annual meeting of stockholders to be held in
1999; and (iii) Bert W. O'Malley to Class III of its Board of Directors to serve
until the annual meeting of stockholders to be held in 2000.
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6.17 ACCESS AND INVESTIGATION. During the Pre-Closing Period, the Company
and Parent shall, and shall cause their respective Representatives to: (a)
provide the Company and Parent and the Company's and Parent's Representatives
with reasonable access to the other party's Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to the Company and Parent; and (b) provide
Company and Parent and Company's and Parent's Representatives with such copies
of the existing books, records, Tax Returns, work papers and other documents and
information relating to the other party, and with such additional financial,
operating and other data and information regarding the other party, as such
party may reasonably request. Without limiting the generality of the foregoing,
during the Pre-Closing Period, the Company and Parent shall promptly provide the
other party with copies of:
(a) any written materials or communications sent by or on behalf of the
other party to its stockholders;
(b) any material notice, document or other communication sent by or on
its behalf to any party to any Company Material Contract or Parent Material
Contract, respectively, or sent to the Company or Parent by any party to any
Company Material Contract or Parent Material Contract, respectively, (other
than any communication that relates solely to commercial transactions
between the Company or Parent and the other party to any such Company
Material Contract or Parent Material Contract, respectively, and that is of
the type sent in the ordinary course of business and consistent with past
practices);
(c) any notice, report or other document filed with or sent to any
Governmental Body in connection with the Merger or any of the other
transactions contemplated by this Agreement; and
(d) any material notice, report or other document received by either the
Company or Parent from any Governmental Body.
6.18 OPERATION OF BUSINESS.
(a) During the Pre-Closing Period: (i) both the Company and Parent shall
ensure that each of the Company and Parent, respectively, conducts its business
and operations (A) in the ordinary course of business and in accordance with
past practices and (B) in compliance with all applicable Legal Requirements and
the requirements of all Company Material Contracts and Parent Material
Contracts, respectively; (ii) each of the Company and Parent shall use all
reasonable efforts to ensure that each of the Company and Parent preserves
intact its respective business organization, keeps available the services of its
respective officers and employees and maintains its respective relations and
goodwill with all suppliers, landlords, creditors, licensors, licensees,
employees and other Persons having business relationships with it; (iii) the
Company and Parent, respectively, shall keep in full force all insurance
policies referred to in Sections 2.18 and 3.18, respectively, or replace such
policies that terminate with comparable policies; (iv) the Company and Parent
shall provide all notices, assurances and support required by any Company
Contract or Parent Contract, respectively, relating to any Proprietary Asset in
order to ensure that no condition under such Company Contract or Parent
Contract, respectively, occurs which could result in, or could increase the
likelihood of, any transfer or disclosure by the Company or Parent,
respectively, of any Proprietary Asset; and (v) each of the Company and Parent
shall (to the extent requested by the other party) cause its officers to report
regularly to the other party concerning the status of the other party's
business.
(b) During the Pre-Closing Period, each of the Company and Parent shall
promptly notify the other party in writing of: (i) the discovery by the Company
or Parent, respectively, of any circumstance that occurred or existed on or
prior to the date of this Agreement and that caused or constitutes a material
inaccuracy in any representation or warranty made by the Company or Parent,
respectively, in this Agreement; (ii) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that would
cause or constitute a material inaccuracy in any representation or
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warranty made by the Company or Parent, respectively, in this Agreement if (A)
such representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or (B)
such event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement; (iii) any event, condition, fact or
circumstance hereafter arising which, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
Company Disclosure Schedule or Parent Disclosure Schedule, respectively; (iv)
any material breach of any covenant or obligation of the Company or Parent,
respectively; and (v) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely or that has had or could reasonably be expected
to have a Material Adverse Effect on the Company or Parent, respectively. No
notification given to the Company or Parent, respectively, pursuant to this
Section 6.18(b) shall limit or otherwise affect any representations, warranties,
covenants or obligations of the Company or Parent, respectively, contained in
this Agreement.
(c) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 6.18(b) requires any change in the Company
Disclosure Schedule or Parent Disclosure Schedule, or if any such event,
condition, fact or circumstance would require such a change assuming that the
Company Disclosure Schedule or Parent Disclosure Schedule were dated as of the
date of the occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company or Parent, respectively, shall deliver to the
other party an update to the Company Disclosure Schedule or Parent Disclosure
Schedule, respectively, at least three (3) days prior to the Effective Time,
specifying such change. No such update shall be deemed to supplement or amend
the Company Disclosure Schedule or Parent Disclosure Schedule, respectively, for
the purpose of (i) determining the accuracy of any of the representations and
warranties made by the Company or Parent, respectively, in this Agreement, or
(ii) determining whether any of the conditions set forth in Section 7 or Section
8 has been satisfied.
6.19 FINANCIAL STATEMENTS. All financial statements (including any related
notes) contained in Company SEC Documents and Parent SEC Documents filed after
the date hereof shall meet the conditions set forth in (i), (ii) and (iii) of
Sections 2.4(b) or 3.4(b), respectively.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
and upon consummation of the Closing, all conditions herein shall be deemed
satisfied and any liability for failure to satisfy any condition herein shall be
precluded:
7.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of the
Company contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement and shall be accurate in all material
respects as of the Closing Date, as if made on and as of the Closing Date,
except representations and warranties that refer specifically to "the date of
this Agreement" or a specific date prior to the date of this Agreement, and
except that any inaccuracies in such representations and warranties shall be
disregarded if the circumstances giving rise to such inaccuracies (individually
and collectively) do not constitute a Material Adverse Effect on the Company (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect" or other
materiality qualifications and (ii) any update or modification to the Company
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded).
7.2 PERFORMANCE OF COVENANTS. Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
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7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
7.4 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the Required Company Stockholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
7.5 CONSENTS. The Consents identified in Part 2.24(d) of the Company
Disclosure Schedule shall have been obtained and shall be in full force and
effect.
7.6 AGREEMENTS AND DOCUMENTS. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) the statement referred to in Section 6.15(a), executed by the
Company;
(b) a legal opinion of Cooley Godward LLP, dated as of the Closing Date
and addressed to Parent in a form substantially similar to the opinion
delivered pursuant to Section 8.5(a), to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Code
(it being understood that, in rendering such opinion, Cooley Godward LLP may
rely upon the tax representation letters referred to in Section 6.12);
(c) a certificate executed on behalf of the Company by an executive
officer of the Company confirming that the conditions set forth in Sections
7.1, 7.2, 7.4 (with respect to the Company only), 7.5, 7.7, 7.8, 7.10 (with
respect to the Company only), 7.11 (with respect to the Company only) and
7.12 have been duly satisfied; and
(d) the written resignations of all officers and directors of the
Company, effective as of the Effective Time.
7.7 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business, assets, liabilities, financial condition or results of
operations performance of the Company since the date of this Agreement.
7.8 FIRPTA COMPLIANCE. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 6.15(b).
7.9 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
7.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the completion of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would materially and adversely affect the right of Parent, the Surviving
Corporation or any subsidiary of Parent to own the assets or operate the
business of the Company.
7.11 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Company or on Parent: (a) challenging or seeking
to restrain or prohibit the completion of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from Parent or any of its subsidiaries any damages that may be
material to Parent; (c) seeking to prohibit or limit in any material respect
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation;
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or (d) which would affect adversely the right of Parent, the Surviving
Corporation or any subsidiary of Parent to own the assets or operate the
business of the Company.
7.12 CONVERSION OF SERIES B PREFERRED STOCK. All outstanding shares of
Series B Preferred Stock shall be converted into Company Common Stock in
accordance with the provisions of Section 4.3 and the Company's certificate of
incorporation.
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.
The obligation of the Company to effect the Merger and otherwise complete
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions, and upon completion of
the Closing, all conditions herein shall be deemed satisfied and any liability
for failure to satisfy any condition herein shall be precluded:
8.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall have been accurate in
all material respects as of the date of this Agreement and shall be accurate in
all material respects as of the Closing Date, except representations and
warranties that refer specifically to "the date of this Agreement" or a specific
date prior to the date of this Agreement, and except that any inaccuracies in
such representations and warranties shall be disregarded if the circumstances
giving rise to such inaccuracies (individually and collectively) do not
constitute a Material Adverse Effect on Parent (it being understood that, for
purposes of determining the accuracy of such representations and warranties, (i)
all "Material Adverse Effect" or other materiality qualifications and (ii) any
update or modification to the Company Disclosure Schedule made or purported to
have been made after the date of this Agreement shall be disregarded).
8.2 PERFORMANCE OF COVENANTS. Each covenant and obligation that the Parent
are required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
8.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
8.4 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the Required Company Stockholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
8.5 DOCUMENTS. The Company shall have received the following documents:
(a) a legal opinion of Heller Ehrman White & McAuliffe LLP, dated as of
the Closing Date and addressed to the Company in a form substantially
similar to the opinion delivered pursuant to Section 7.6(b), to the effect
that the Merger will constitute a reorganization within the meaning of
Section 368 of the Code (it being understood that, in rendering such
opinion, Heller Ehrman White & McAuliffe LLP may rely upon tax
representation letters including those referred to in Section 6.12);
(b) a certificate executed on behalf of Parent by its Chief Executive
Officer, confirming that conditions set forth in Sections 8.1, 8.2, 8.3, 8.4
(with respect to Parent only), 8.6, 8.7, 8.8 (with respect to Parent only),
8.9 (with respect to Parent only) and 8.10 have been duly satisfied.
8.6 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in Parent's business, assets, liabilities, financial condition or results
of operations since the date of this Agreement (it being understood that a
decline in the price of Parent Common Stock shall not constitute, in and of
itself, a material adverse change).
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8.7 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
8.8 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the completion of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from the Company any damages that may be material to the Company; or (c) seeking
to prohibit or limit in any material respect Parent's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect to
the stock of the Surviving Corporation; or (d) which would materially and
adversely affect the right of Parent, the Surviving Corporation or any
subsidiary of Parent to own the assets or operate the business of the Company.
8.9 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on Parent or on the Company: (a) challenging or seeking
to restrain or prohibit the completion of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from the Company or any of its subsidiaries any damages that
may be material to the Company; (c) seeking to prohibit or limit in any material
respect Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect adversely the right of Parent, the
Surviving Corporation or any subsidiary of Parent to own the assets or operate
the business of the Company.
8.10 DIRECTORS. Parent shall have taken all actions necessary to cause the
number of authorized directors to be nine and Board of Directors of Parent to
include Drs. Pappas, Crooke and O'Malley in accordance with the procedures set
forth in Section 6.16.
SECTION 9. TERMINATION.
9.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the stockholders of the
Company:
(a) by mutual written consent of the Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
completed by February 28, 1999 (unless the failure to complete the Merger is
attributable to a failure on the part of the party seeking to terminate this
Agreement to perform any material obligation required to be performed by
such party at or prior to the Effective Time);
(c) by either Parent or the Company if a court of competent jurisdiction
or other Governmental Body shall have issued a final and non-appealable
order, decree or ruling, or shall have taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger;
(d) by either Parent or the Company if (i) the Company Stockholders'
Meeting shall have been held (either on the date for which such Meeting was
originally scheduled or pursuant to any permissible adjournment or
postponement) and (ii) this Agreement and the Merger shall not have been
adopted and approved at such meeting by the Required Company Stockholder
Vote (PROVIDED that the right to terminate this Agreement under this Section
9.1(d) shall not be available to the Company where the failure to obtain
Company stockholder approval shall have been caused by the action or failure
to act of the Company and such action or failure to act constitutes a
material breach by the Company of this Agreement);
(e) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the Required Company Stockholder Vote) if a
Triggering Event shall have occurred;
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(f) by the Company if in accordance with Section 6.2(c) hereof the Board
of Directors of the Company withdraws, amends or modifies its unanimous
recommendation in favor of the Merger and accepts or recommends to the
Stockholders of the Company a Superior Offer.
(g) by either Parent or Company if (i) the Parent Stockholders' Meeting
shall have been held (either on the date for which such Meeting was
originally scheduled or pursuant to any permissible adjournment or
postponement) and (ii) issuance of the Parent Common Stock in the Merger
shall not have been approved at such meeting by the Required Parent
Stockholder Vote (provided that the right to terminate this Agreement under
this Section 9.1(g) shall not be available to Parent where the failure to
obtain Parent stockholder approval shall have been caused by the action or
failure to act of Parent and such action or failure to act constitutes a
material breach by Parent of this Agreement);
(h) by Parent if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of the Company's covenants contained in this Agreement
shall have been breached in any material respect and such inaccuracy or
breach (individually and collectively) will cause a Material Adverse Effect
on the Company; PROVIDED, HOWEVER, that if an inaccuracy in the Company's
representations and warranties or a breach of a covenant by the Company is
curable by the Company and the Company is continuing to exercise all
reasonable efforts to cure such inaccuracy or breach, then Parent may not
terminate this Agreement under this Section 9.1(h) on account of such
inaccuracy or breach; or
(i) by the Company if any of Parent's representations and warranties
contained in this Agreement shall be or shall have become materially
inaccurate, or if any of Parent's covenants contained in this Agreement
shall have been breached in any material respect and such inaccuracy or
breach (individually and collectively) will cause a Material Adverse Effect
on Parent; PROVIDED, HOWEVER, that if an inaccuracy in Parent's
representations and warranties or a breach of a covenant by Parent is
curable by Parent and Parent is continuing to exercise all reasonable
efforts to cure such inaccuracy or breach, then the Company may not
terminate this Agreement under this Section 9.1(i) on account of such
inaccuracy or breach.
9.2 NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination under
Section 9.1 above will be effective immediately upon the delivery of written
notice of the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 9.1, this Agreement shall
be of no further force or effect; PROVIDED, HOWEVER, that (i) this Section 9.2,
Section 9.3 and Section 10 shall survive the termination of this Agreement and
shall remain in full force and effect, (ii) the termination of this Agreement
shall not relieve any party from any liability for any breach of this Agreement
and (iii) no termination of this Agreement shall affect the obligations of the
parties contained in the Confidentiality Agreement, all of which obligations
shall survive termination of this Agreement in accordance with their terms.
9.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 9.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is completed; PROVIDED, HOWEVER, that Parent and the Company shall share
equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of the S-4 Registration Statement and
the Joint Proxy Statement/Prospectus and any amendments or supplements thereto.
(b) If this Agreement is terminated by Parent pursuant to Section 9.1(e),
then the Company shall pay to Parent, in cash, a nonrefundable fee equal to one
million four hundred thousand dollars ($1,400,000) (the "TERMINATION FEE") in
cash within three (3) business days of such termination.
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(c) If this Agreement is terminated by Company or Parent pursuant to Section
9.1(d) and an Acquisition Transaction is publicly announced at any time within
six (6) months after the date of termination and completed within twelve (12)
months after the date of termination, the Company shall pay to Parent a
nonrefundable fee equal to three percent (3%) of the aggregate consideration
received by the Company in such Acquisition Transaction contemporaneously with
the completion of such Acquisition Transaction.
(d) If this Agreement is terminated by the Company pursuant to Section
9.1(f), then the Company shall pay to Parent the Termination Fee
contemporaneously with the written notice of termination.
SECTION 10. MISCELLANEOUS PROVISIONS.
10.1 AMENDMENT. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after approval of this Agreement and the Merger by the stockholders of
the Company; and whether before or after approval of the issuance of Parent
Common Stock in the Merger by Parent's stockholders); PROVIDED, HOWEVER, that
(i) after any such approval of this Agreement and the Merger by the Company's
stockholders, no amendment shall be made which by law or NASD regulation
requires further approval of the stockholders of the Company without the further
approval of such stockholders, and (ii) after any such approval of the issuance
of Parent Company Stock in the Merger by Parent's stockholders, no amendment
shall be made which by law or NASD regulation requires further approval of
Parent's stockholders without the further approval of such stockholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
10.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any certificate
(except as provided in the Tax Representation Letters attached as Exhibits C-1
and C-2 hereto) delivered pursuant to this Agreement shall survive the Merger.
10.4 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement and the other
agreements referred to herein constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among or between any
of the parties with respect to the subject matter hereof and thereof. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original and all of which shall constitute one and the same instrument.
10.5 APPLICABLE LAW; JURISDICTION. THIS AGREEMENT IS MADE UNDER, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. In any action between
or among any of the parties, whether arising out of this Agreement or otherwise,
(a) each of the parties irrevocably and unconditionally consent in the State of
California; (b) if any
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such action is commenced in a state court, then, subject to applicable law, no
party shall object to the removal of such action to any federal court located in
the law, no party shall object to the removal of such action to any federal
court located in the State of California; (c) each of the parties irrevocably
waivers the right to trial by jury; and (d) each of the parties irrevocably
consents to service of process by first class certified mail, return receipt
requested, postage prepaid, to the address at which such party is to receive
notice in accordance with Section 10.9.
10.6 DISCLOSURE SCHEDULE. Each of the Company Disclosure Schedule and the
Parent Disclosure Schedule shall be arranged in separate parts corresponding to
the numbered and lettered sections contained in Sections 2 and 3, respectively,
and the information disclosed in any numbered or lettered part shall be deemed
to relate to and to qualify only the particular representation or warranty set
forth in the corresponding numbered or lettered section in Section 2 or 3,
respectively, and shall not be deemed to relate to or to qualify any other
representation or warranty.
10.7 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
10.8 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that neither this
Agreement nor any of the other party's rights hereunder may be assigned by any
party without the prior written consent of the other party, and any attempted
assignment of this Agreement or any of such rights by a party without such
consent shall be void and of no effect. Except as set forth in Section 6.7 with
respect to the current directors and officers of the Company, nothing in this
Agreement, express or implied, is intended to or shall confer upon any Person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
10.9 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
<TABLE>
<S> <C>
if to Parent: Megabios Corp.
863A Mitten Road
Burlingame, CA 94010
Attn: Benjamin F. McGraw III, Pharm.D.
Facsimile: (650) 652-1990
with a copy to: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Patrick A. Pohlen
Facsimile: (650) 849-7400
if to Merger Sub: Montana Acquisition Sub, Inc.
863A Mitten Road
Burlingame, CA 94010
Attn: Benjamin F. McGraw III, Pharm.D.
Facsimile: (650) 652-1990
</TABLE>
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<TABLE>
<S> <C>
if to the Company: GeneMedicine, Inc.
8301 New Trails Drive
The Woodlands, TX 77381-4248
Attn: Eric Tomlinson
Facsimile: (281) 419-0795
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attn: Stephen C. Ferruolo
Facsimile: (650) 324-0638
</TABLE>
10.10 COOPERATION. The Company agrees to cooperate fully with Parent and
to execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
Parent to evidence or reflect the transactions contemplated by this Agreement
and to carry out the intent and purposes of this Agreement.
10.11 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include masculine
and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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IN WITNESS WHEREOF, the parties have caused this AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION to be executed as of the date first above written.
<TABLE>
<S> <C> <C>
MEGABIOS CORP.
By: /s/ BENJAMIN F. MCGRAW, III
-----------------------------------------
Printed Name: Benjamin F. McGraw, III
Title: Chairman, President & CEO
MONTANA ACQUISITION SUB, INC.
By: /s/ BENJAMIN F. MCGRAW, III
-----------------------------------------
Printed Name: Benjamin F. McGraw, III
Title: Chairman, President & CEO
GENEMEDICINE, INC.
By: /s/ ERIC TOMLINSON
-----------------------------------------
Printed Name: Eric Tomlinson
Title: Vice Chairman, Board of Directors
</TABLE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
SIGNATURE PAGE
EXECUTION COPY
A-49
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit A......... Certain Definitions
Exhibit B-1....... Form of Surviving Corporation Certificate of Incorporation
Exhibit B-2....... Form of Surviving Corporation Bylaws
Exhibit C-1....... Form of Tax Representation Letter to be delivered by Parent and Merger
Sub
Exhibit C-2....... Form of Tax Representation Letter to be delivered by Company
</TABLE>
A-50
<PAGE>
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION PROPOSAL. "ACQUISITION PROPOSAL" shall mean any offer or
proposal (other than an offer or proposal by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
ACQUISITION TRANSACTION. "ACQUISITION TRANSACTION" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which the Company is a constituent
corporation, (ii) in which a Person or "group" (as defined in the Exchange
Act and the rules promulgated thereunder) of Persons directly or indirectly
acquires the Company or more than fifty percent (50%) of the Company's
business or directly or indirectly acquires beneficial or record ownership
of securities representing more than twenty percent (20%) of the outstanding
securities of any class of voting securities of the Company, or (iii) in
which the Company issues securities representing more than twenty percent
(20%) of the outstanding securities of any class of voting securities of the
Company;
(b) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 50% of the assets of the Company; or
(c) any liquidation or dissolution of the Company.
AGREEMENT. "AGREEMENT" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
COMPANY COMMON STOCK. "COMPANY COMMON STOCK" shall mean the Common Stock,
$.001 par value per share, of the Company.
COMPANY CONTRACT. "COMPANY CONTRACT" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any asset of the Company is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
COMPANY PROPRIETARY ASSET. "COMPANY PROPRIETARY ASSET" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
CONSENT. "CONSENT" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "CONTRACT" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
ENCUMBRANCE. "ENCUMBRANCE" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
A-A-1
<PAGE>
ENTITY. "ENTITY" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association,
organization or entity.
ENVIRONMENTAL LAW. "ENVIRONMENTAL LAW" means any federal, state, local or
foreign Legal Requirement relating to pollution or protection of human health or
the environment (including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
EXCHANGE ACT. "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
GOVERNMENTAL AUTHORIZATION. "GOVERNMENTAL AUTHORIZATION" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
GOVERNMENTAL BODY. "GOVERNMENTAL BODY" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
LEGAL PROCEEDING. "LEGAL PROCEEDING" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "LEGAL REQUIREMENT" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the Company
if such event, violation, inaccuracy, circumstance or other matter (considered
together with all other matters that would constitute exceptions to the
representations and warranties set forth in the Agreement but for the presence
of "Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, in such representations and warranties) would have a material
adverse effect on (i) the business, assets, liabilities, financial condition or
results of operations of the Company taken as a whole, (ii) the ability of the
Company to complete the Merger or any of the other transactions contemplated by
the Agreement or to perform any of its obligations under the Agreement, or (iii)
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "Material Adverse Effect" on Parent if such event,
violation, inaccuracy, circumstance or other matter (considered together with
all other matters that would constitute exceptions to the representations and
warranties set forth in the Agreement but for the presence of "Material Adverse
Effect" or other materiality qualifications, or any similar qualifications, in
such representations and warranties) would have a material adverse effect on (i)
the business, assets, liabilities, financial condition or results of
A-A-2
<PAGE>
operations of Parent and its subsidiaries taken as a whole, (ii) the ability of
Parent to complete the Merger or any of the other transactions contemplated by
the Agreement or to perform any of its obligations under the Agreement, or (iii)
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation.
MATERIALS OF ENVIRONMENTAL CONCERN. "MATERIALS OF ENVIRONMENTAL CONCERN"
include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products and any other substance regulated by any Environmental
Law.
NASDAQ. "NASDAQ" shall mean the Nasdaq National Market.
PARENT COMMON STOCK. "PARENT COMMON STOCK" shall mean the Common Stock,
$.001 par value per share, of Parent.
PARENT CONTRACT. "PARENT CONTRACT" shall mean any Contract: (a) to which
Parent is a party; (b) by which Parent or any asset of Parent is or may become
bound or under which Parent has, or may become subject to, any obligation; or
(c) under which Parent has or may acquire any right or interest.
PARENT PROPRIETARY ASSET. "PARENT PROPRIETARY ASSET" shall mean any
Proprietary Asset owned by or licensed to Parent or otherwise used by Parent.
PERSON. "PERSON" shall mean any individual, Entity or Governmental Body.
PERMITTED ENCUMBRANCES. "PERMITTED ENCUMBRANCES" means such of the
following as to which no enforcement, collection, execution, levy or foreclosure
proceeding shall have been commenced: (a) liens for taxes, assessments and
governmental charges or levies not yet due and payable which are not in excess
of $50,000 in the aggregate; (b) Encumbrances imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's liens and other
similar liens arising in the ordinary course of business securing obligations
that (i) are not overdue for a period of more than 30 days and (ii) are not in
excess of $5,000 in the case of a single property or $50,000 in the aggregate at
any time; (c) pledges or deposits to secure obligations under workers'
compensation laws or similar legislation or to secure public or statutory
obligations; and (d) minor survey exception, reciprocal easement agreements and
other customary Encumbrances on title to real property that (i) were not
incurred in connection with any indebtedness, (ii) do not render title to the
property encumbered thereby unmarketable and (iii) do not, individually or in
the aggregate, materially adversely affect the value or use of such property for
its current and anticipated purposes.
PROPRIETARY ASSET. "PROPRIETARY ASSET" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program (in source and executable form), algorithm,
invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset in any jurisdiction in the world; or (b) right to use or exploit any of
the foregoing in any jurisdiction in the world.
REPRESENTATIVES. "REPRESENTATIVES" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
RIGHTS AGREEMENT. "RIGHTS AGREEMENT" shall mean the Rights Agreement by and
between the Company and American Stock Transfer & Trust Company dated as of
January 16, 1996, as amended January 31, 1998 (or similar plan commonly referred
to as a "poison pill").
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
A-A-3
<PAGE>
SECURITIES ACT. "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
SUBSIDIARY. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities of other interests in such Entity that is sufficient
to enable such Person to elect at leased a majority of the members of such
Entity's Board of Directors or other governing body.
SUPERIOR OFFER. "SUPERIOR OFFER" shall mean an unsolicited, bona fide
written offer made by a third party to complete any of the following
transactions: (i) the purchase of more than 50% of the outstanding shares of
Company Common Stock or (ii) a sale or other disposition by the Company of all
or substantially all of its assets, on terms that the Board of Directors of the
Company determines, in its reasonable judgment, after consultation with its
financial advisor, to be more favorable to the Company's stockholders than the
terms of the Merger; PROVIDED, HOWEVER, that any such offer shall not be deemed
to be a "Superior Offer" if any financing required to complete the transaction
contemplated by such offer is not committed or is not likely to be obtained by
such third party on a timely basis.
TAX. "TAX" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, AD
VALOREM tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "TAX RETURN" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
TRIGGERING EVENT. A "TRIGGERING EVENT" shall be deemed to have occurred if:
(i) the Board of Directors of the Company shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Parent its unanimous recommendation in favor of, the adoption
and approval of the Agreement or the approval of the Merger; (ii) the Company
shall have failed to include in the Joint Proxy Statement/Prospectus the
unanimous recommendation of the Board of Directors of the Company in favor of
the adoption and approval of the Agreement and the approval of the Merger; (iii)
the Board of Directors of the Company fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the Agreement and the
approval of the Merger within five (5) business days after the Parent request in
writing that such recommendation be reaffirmed; (iv) the Board of Directors of
the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (v) the Company shall have entered into any letter of intent or
similar document or any Contract relating to any Acquisition Proposal; (vi) the
Company shall have failed to hold the Company Stockholders' Meeting as promptly
as practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act; (vii) a tender or
exchange offer relating to securities of the Company shall have been commenced
and the Company shall not have sent to its securityholders, within five (5)
business days after the commencement of such tender or exchange offer, a
statement disclosing that the Company recommends rejection of such tender or
exchange offer; (viii) an Acquisition Proposal is publicly announced, and the
Company (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five business days after such Acquisition Proposal
is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal; or (ix) the Company shall have breached in any material respect any of
its obligations under Section 4.2 of the Agreement.
A-A-4
<PAGE>
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
AND
REORGANIZATION
THIS AMENDMENT NO. 1 ("Amendment") to Agreement and Plan of Merger and
Reorganization is made and entered into as of November 24, 1998, by and among
Megabios Corp., a Delaware corporation ("Megabios"), Montana Acquisition Sub,
Inc., a Delaware corporation, and GeneMedicine, Inc., a Delaware corporation
("GeneMedicine").
R E C I T A L S:
WHEREAS, the parties hereto entered into that certain Agreement and Plan of
Merger, dated as of October 24, 1998 (the "Merger Agreement"); and
WHEREAS, the parties hereto desire to amend the Merger Agreement to provide
for the assumption of GeneMedicine's outstanding warrants and the assumption and
cancellation of the GeneMedicine Employee Stock Purchase Plan by Megabios;
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 1.6 of the Merger Agreement is hereby amended in its entirety to
read as follows:
"1.6 STOCK OPTIONS AND WARRANTS. At the Effective Time, all
Company Options (as defined in Section 2.3(b)) and Company
Warrants (as defined in Section 2.3(c)) shall be assumed by Parent
in accordance with Section 6.5."
2. The parenthetic phrase at the end of Section 4.1(ii) of the Merger
Agreement is hereby amended in its entirety to read as follows:
"(except that the Company may issue Company Common Stock upon the
valid exercise of Company Options or Company Warrants and pursuant
to Company Plans);"
3. Section 6.5 of the Merger Agreement is hereby amended in its entirety to
read as follows:
"6.5 STOCK OPTIONS AND WARRANTS.
(A) At the Effective Time, all rights with respect to
Company Common Stock under each Company Option and each Company
Warrant then outstanding shall be converted into and become rights
with respect to Parent Common Stock. Parent shall assume each
Company Option in accordance with the terms (as in effect as of
the date of this Agreement) of the stock option plan under which
it was issued and the stock option agreement by which it is
evidenced as same may be amended or modified by the Company's
employment agreements and severance agreements, plans and
arrangements. Parent shall assume each Company Warrant in
accordance with the terms (as in effect as of the date of this
Agreement) of the agreement under which it was issued and the
warrant agreement by which it is evidenced. From and after the
Effective Time, (i) each Company Option and Company Warrant
assumed by Parent may be exercised solely for shares of Parent
Common Stock, (ii) the number of shares of Parent Common Stock
subject to each such Company Option or Company Warrant shall be
equal to the number of shares of Company Common Stock subject to
such Company Option or Company Warrant immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounding down to
the nearest whole share (with cash, less the applicable exercise
price, being payable for any fraction of a share), (iii) the per
share exercise price under each such Company Option or Company
Warrant shall be adjusted by dividing the respective per share
exercise price
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<PAGE>
under such Company Option or Company Warrant by the Exchange Ratio
and rounding up to the nearest cent and (iv) any restriction on
the exercise of any such Company Option or Company Warrant shall
continue in full force and effect and the term, exercisability,
vesting schedule and other provisions of such Company Option or
Company Warrant as may have been amended or modified by the
Company's employment agreements and severance agreements, plans
and arrangements shall otherwise remain unchanged; PROVIDED,
HOWEVER, that each Company Option and each Company Warrant assumed
by Parent in accordance with this Section 6.5(a) shall, in
accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend, reverse
stock split, reclassification, recapitalization or other similar
transaction subsequent to the Effective Time.
(B) Notwithstanding anything to the contrary contained in
this Section 6.5, in lieu of assuming outstanding Company Options
in accordance with Section 6.5(a), Parent may, at its election,
cause such outstanding Company Options to be replaced by issuing
reasonably equivalent replacement stock options in substitution
therefor; PROVIDED, HOWEVER, that such replacement options shall
in any event comply with the provisions of the fourth sentence of
Section 6.5(a).
(C) The Company shall take all action that may be necessary
(under the plans or agreements pursuant to which Company Options
or Company Warrants are outstanding and otherwise) to effectuate
the provisions of this Section 6.5 and to ensure that, from and
after the Effective Time, holders of Company Options or Company
Warrants have no rights with respect thereto other than those
specifically provided in this Section 6.5."
4. A new Section 6.20, reading in its entirety as follows, is hereby added
to the Merger Agreement:
"6.20 COMPANY EMPLOYEE STOCK PURCHASE PLAN. Prior to January 1,
1999, the Company shall amend the Company's Employee Stock
Purchase Plan (the "Company ESPP") to provide that no new
offerings or purchase periods will commence under the Company ESPP
after December 31, 1998. Prior to the Effective Time, the Company
shall take all corporate action necessary to (a) provide that the
participants' accumulated payroll deductions made under the
Company ESPP will be used to purchase Company Common Stock
immediately prior to the Effective Time and (b) amend the Company
ESPP to provide that all offerings that have commenced under the
Company ESPP and all of participants' rights in such offerings
will terminate immediately prior to the Effective Time."
5. All references in the Merger Agreement to the term "Agreement" shall be
deemed to refer to the Merger Agreement, as amended by this Amendment.
6. Except as specifically modified by this Amendment, the terms of the
Merger Agreement shall remain in full force and effect.
7. This Amendment is made under, and shall be construed and enforced in
accordance with, the laws of the State of California applicable to agreements
made and to be performed solely therein, without giving effect to principles of
conflicts of law.
8. This Amendment may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and the same
instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
the undersigned, thereunto duly authorized, as of the date first set forth
above.
MEGABIOS CORP.
By: /s/ BENNET WEINTRAUB
--------------------------------------
Printed Name: Bennet Weintraub
--------------------------------------------------------------------------
Title: Vice President, Finance and
Chief Financial Officer
--------------------------------------
MONTANA ACQUISITION SUB, INC.
By: /s/ BENNET WEINTRAUB
--------------------------------------
Printed Name: Bennet Weintraub
--------------------------------------------------------------------------
Title: Chief Financial Officer
--------------------------------------
GENEMEDICINE, INC.
By: /s/ RICHARD A. WALDRON
--------------------------------------
Printed Name: Richard A. Waldron
--------------------------------------------------------------------------
Title: Vice President and Chief
Financial Officer
--------------------------------------
A-1-3
<PAGE>
AMENDMENT NO. 2
TO AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION
THIS AMENDMENT NO. 2 to Agreement and Plan of Merger and Reorganization
("Amendment") is made and entered into as of February 8, 1999, by and among
Megabios Corp., a Delaware corporation ("Megabios"), Montana Acquisition Sub,
Inc., a Delaware corporation ("Merger Sub"), and GeneMedicine, Inc., a Delaware
corporation ("GeneMedicine").
R E C I T A L S
WHEREAS, the parties hereto entered into that certain Agreement and Plan of
Merger, dated as of October 24, 1998 (the "Merger Agreement"), as amended on
November 24, 1998 (the "Prior Amendment"), pursuant to which Merger Sub will be
merged with and into GeneMedicine, with GeneMedicine surviving the Merger and
remaining as a wholly-owned subsidiary of Megabios (the "Merger"); and
WHEREAS, the parties hereto desire to amend the Merger Agreement to provide
that the Merger Agreement may be terminated prior to the Effective Time (as such
term is defined in the Merger Agreement), whether before or after approval of
the Merger by the stockholders of GeneMedicine, by either Megabios or
GeneMedicine if the Merger shall not have been consummated by March 31, 1999;
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 9.1(b) of the Merger Agreement is hereby amended in its
entirety to read as follows:
"(b) by either Parent or the Company if the Merger shall not have been
consummated by March 31, 1999 (unless the failure to consummate the Merger is
attributable to a failure on the part of the party seeking to terminate this
Agreement to perform any material obligation required to be performed by such
party at or prior to the Effective Time);"
2. All references in the Merger Agreement to the term "Agreement" shall be
deemed to refer to the Merger Agreement, as amended by the Prior
Amendment and this Amendment.
3. Except as specifically modified by this Amendment, the terms of the
Merger Agreement, as amended by the Prior Amendment, shall remain in
full force and effect.
4. This Amendment is made under, and shall be construed and enforced in
accordance with, the laws of the State of California applicable to
agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
5. This Amendment may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and
the same instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
A-2-1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
the undersigned, thereunto duly authorized, as of the date first set forth
above.
<TABLE>
<S> <C>
MEGABIOS CORP.
By: /s/ Benjamin F. McGraw, III
-------------------------------------------
Printed Name: Benjamin F. McGraw, III
-------------------------------------------
Title: Chairman, President & CEO
-------------------------------------------
MONTANA ACQUISITION SUB, INC.
By: /s/ Benjamin F. McGraw, III
-------------------------------------------
Printed Name: Benjamin F. McGraw, III
-------------------------------------------
Title: Chairman, President & CEO
-------------------------------------------
GENEMEDICINE, INC.
By: /s/ Richard A. Waldron
-------------------------------------------
Printed Name: Richard A. Waldron
-------------------------------------------
Title: Vice President and Chief Financial Officer
-------------------------------------------
</TABLE>
A-2-2
<PAGE>
APPENDIX B-1
[LOGO]
October 24, 1998
CONFIDENTIAL
Board of Directors
GeneMedicine, Inc.
8301 New Trails Drive
The Woodlands, TX 77381-4248
Gentlemen:
GeneMedicine, Inc. (the "Company"), Megabios Corp. ("Megabios") and Montana
Acquisition Sub, Inc. ("Sub"), a wholly-owned subsidiary of Megabios, propose to
enter into an Agreement and Plan of Merger and Reorganization (the "Agreement")
pursuant to which Sub will be merged with and into the Company and the Company
will survive as a wholly-owned subsidiary of Megabios (the "Merger"). At the
Effective Time of the Merger (as defined in the Agreement), each outstanding
share of common stock, par value $.001 per share, of the Company (other than
shares owned by the Company, Megabios or any of their respective subsidiaries)
(the "Common Stock") will be automatically converted into .5710 (the "Exchange
Ratio") of a fully paid and non-assessable share of common stock, $.001 par
value per share of Megabios. The Merger is expected to be considered by the
stockholders of the Company and Megabios respectively at special meetings and
consummated shortly thereafter.
You have asked us whether or not, in our opinion, the proposed Exchange
Ratio is fair to the holders of Common Stock of the Company from a financial
point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
information for the three fiscal years ended December 31, 1997 and the
Company's Form 10-Q and the related unaudited financial information for
the six months ended June 30, 1998;
(2) Reviewed Megabios' Registration Statement on Form S-1 (including the
prospectus contained therein) dated September 15, 1997 and Form 10-K and
related financial information for the fiscal year ended June 30, 1998;
(3) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Company
and Megabios, furnished to us by the Company and Megabios, respectively;
(4) Conducted discussions with members of senior management of the Company
and Megabios concerning their respective businesses and prospects;
(5) Reviewed the historical market prices and trading activity for the
shares of common stock of the Company and Megabios and compared them with
those of certain publicly traded companies which we deemed to be
relevant;
B-1-1
<PAGE>
(6) Compared the results of operations of the Company and Megabios with
those of certain companies which we deemed to be relevant;
(7) Compared the proposed financial terms of the Merger with the financial
terms of certain other mergers and acquisitions which we deemed to be
relevant;
(8) Reviewed a draft of the Agreement dated October 21, 1998; and
(9) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have relied upon the accuracy and completeness
of all information supplied or otherwise made available to us by the Company and
Megabios, and we have not assumed any responsibility to independently verify
such information. With respect to the financial forecasts examined by us, we
have assumed that they were reasonably prepared and reflect the best currently
available estimates and good faith judgments of the management of the Company
and Megabios, respectively, as to the future performance of the Company and
Megabios. We have also relied upon assurances of the management of the Company
and Megabios, respectively, that they are unaware of any facts that would make
the information or financial forecasts provided to us incomplete or misleading.
We have not made any independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or Megabios nor have we
been furnished with any such evaluations or appraisals. We have also assumed
with your consent, that (i) the Merger will be a tax-free reorganization, (ii)
the Company's Preferred Series B Stock will be converted into Common Stock and
(iii) any material liabilities (contingent or otherwise) of the Company and
Megabios are as set forth in the consolidated financial statements of the
Company and Megabios, respectively. No opinion is expressed herein as to the
price at which the securities to be issued in the Merger to the holders of
Common Stock may trade at any time. Our opinion is based on economic, monetary
and market conditions existing on the date hereof.
Our Opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder as to how any such
stockholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of the Company as alternatives to the Merger
or the decision of the Board of Directors of the Company to proceed with the
Merger.
In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and Megabios for our own account and for the
accounts of our customers and, accordingly, may at any time hold long or short
positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Company in connection with the Merger and will receive a fee in connection with
the rendering of this opinion and upon consummation of the Merger.
This opinion has been prepared for the information of the Board of Directors
of the Company in connection with the Merger and shall not be reproduced,
summarized, described or referred to, provided to any person or otherwise made
public or used for any other purpose without the prior written consent of
PaineWebber Incorporated, PROVIDED, HOWEVER, that this letter may be reproduced
in full in the Proxy Statement/Prospectus related to the Merger.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Exchange Ratio is fair to the holders of Common Stock of the
Company from a financial point of view.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/ PAINEWEBBER INCORPORATED
--------------------------------------
B-1-2
<PAGE>
APPENDIX B-2
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA
94104
(415) 439-3000
October 23, 1998
CONFIDENTIAL
The Board of Directors
Megabios Corp.
863A Mitten Road
Burlingame, CA 94010
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Megabios Corp. ("Megabios" or the "Company") of the Exchange Ratio (as
defined below) in connection with the proposed merger of a wholly-owned
subsidiary of Megabios with and into GeneMedicine, Inc. ("GeneMedicine")
pursuant to the Agreement and Plan of Merger to be dated as of October 24, 1998,
among Megabios, Montana Acquisition Sub, Inc., and GeneMedicine (the
"Agreement").
We understand that the terms of the Agreement provide, among other things,
that each issued and outstanding share of GeneMedicine Common Stock shall be
converted into the right to receive 0.571 shares of Megabios common stock (the
"Exchange Ratio"), as more fully set forth in the Agreement. For purposes of
this opinion, we have assumed that the Proposed Transaction will qualify as a
tax-free reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be accounted
for as a purchase.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Megabios in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the ordinary course of business, Hambrecht & Quist may trade in the
equity and derivative securities of Megabios and GeneMedicine for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. Hambrecht & Quist
SAN FRANCISCO - NEW YORK - BOSTON - NEWPORT BEACH - SAN DIEGO - LONDON
MEMBERS NEW YORK STOCK EXCHANGE - AMERICAN STOCK EXCHANGE - PACIFIC STOCK
EXCHANGE
B-2-1
<PAGE>
The Board of Directors
Megabios Corp.
Page 2
may in the future provide additional investment banking or other financial
advisory services to Megabios.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
GeneMedicine for recent years and interim periods to date and certain
other relevant financial and operating data of GeneMedicine made
available to us from published sources and from the internal records of
GeneMedicine;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to GeneMedicine prepared by the
management of GeneMedicine;
(iii) discussed the business, financial condition and prospects of
GeneMedicine with certain of its officers;
(iv) reviewed the publicly available financial statements of Megabios for
recent years and interim periods to date and certain other relevant
financial and operating data of Megabios made available to us from
published sources and from the internal records of Megabios;
(v) reviewed certain internal financial and operating information, including
certain projections, relating to Megabios prepared by the management of
Megabios;
(vi) discussed the business, financial condition and prospects of Megabios
with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of Megabios and GeneMedicine and compared such information
and certain financial information for Megabios and GeneMedicine with
similar information for certain other companies engaged in businesses we
consider comparable;
(viii)reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement; and
(x) performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Megabios or GeneMedicine
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of the assets or liabilities of Megabios or GeneMedicine; nor have we conducted
a physical inspection of the properties and facilities of either company. With
respect to the financial forecasts and projections made available to us and used
in our analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of Megabios
and GeneMedicine. For purposes of this opinion, we have assumed that neither
Megabios nor GeneMedicine is a party to any pending transactions, including
external financings, recapitalizations or material merger discussions, other
than the Proposed Transaction and those activities undertaken in the ordinary
course of conducting their respective businesses. Our opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of this letter and any change in
B-2-2
<PAGE>
The Board of Directors
Megabios Corp.
Page 3
such conditions would require a reevaluation of this opinion. We express no
opinion as to the price at which Megabios common stock will trade subsequent to
the Effective Time (as defined in the Agreement).
It is understood that this letter is for the information of the Board of
Directors in connection with their evaluation of the Proposed Transaction and
may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the proxy
statement/prospectus relating to the Proposed Transaction. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that, as of the date hereof,
the Exchange Ratio is fair to the Company from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ David G. Golden
------------------------------------
David G. Golden
Managing Director
B-2-3
<PAGE>
GENEMEDICINE, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of GeneMedicine, Inc., a Delaware corporation
("GeneMedicine"), hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and Joint Proxy Statement/Prospectus, each dated
November [__], 1998, and hereby appoints Stanley T. Crooke, M.D., Ph.D. and
Richard A. Waldron, and each of them, proxies and attorneys-in-fact, with
full power to each of substitution, on behalf of and in the name of the
undersigned, to vote as designated on the reverse side, all shares of Common
Stock of GeneMedicine that the undersigned is entitled to vote at the special
meeting of stockholders of GeneMedicine to be held on January __, 1999, at
10:00 a.m., local time, at _______________ and at any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1 TO APPROVE THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION AND THE MERGER, AND THE PROXIES, IN THEIR DISCRETION, WILL
VOTE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN
IT PROMPTLY IN THE ENCLOSED ENVELOPE
--------------
See
Reverse
Side
--------------
<PAGE>
/ X / Please mark your
choices like this
THE GENEMEDICINE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
FOLLOWING PROPOSAL.
<TABLE>
<S> <C> <C>
FOR ABSTAIN AGAINST
1. Proposal to approve / / / / / / 2. In their discretion, to
and adopt the Agreement vote upon such other
and Plan of Merger and business as may properly
Reorganization, dated as come before the Special
of October 24, 1998, and Meeting or any adjournment
amended as of November 24, 1998, thereof, including, among
by and among Megabios Corp., a other things, a motion to
Delaware corporation ("Megabios"), adjourn the Special Meeting
Montana Acquisition Sub, Inc., to another time and/or place
a Delaware corporation and a for, among other things, the
wholly-owned subsidiary of purpose of soliciting
Megabios ("Acquisition Sub"), additional proxies.
and GeneMedicine, and to
approve the merger of
Acquisition Sub with and
into GeneMedicine.
</TABLE>
_____________________ _______________________________ _____________, 199__
Signature (Signature if held jointly) Dated
(Please sign exactly as name appears on your stock certificate. When shares
are held by joint tenants, both should sign. When signing as attorney,
executor administrator, trustee, guardian or corporate officer or partner,
please give full title as such. If a corporation, please sign in corporate
name by President or other authorized officer. If a partner, please sign
partnership name by authorized person.)
