<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use of the
/ / Definitive Proxy Statement Commission only
/ / Definitive Additional Materials (as permitted by Rule
14a-6(e)(2))
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TARGETED GENETICS CORPORATION
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
CALCULATION OF FILING FEE
<TABLE>
<S> <C> <C> <C> <C>
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- -------------------------------------------------------------------------------------------------
PER UNIT PRICE OR
OTHER UNDERLYING
VALUE OF
TRANSACTION
TITLE OF EACH CLASS AGGREGATE NUMBER OF COMPUTED PURSUANT
OF SECURITIES TO SECURITIES TO WHICH TO PROPOSED MAXIMUM
WHICH TRANSACTION TRANSACTION EXCHANGE ACT AGGREGATE VALUE OF
APPLIES APPLIES(1) RULE 0-11(2) TRANSACTION(2) TOTAL FEE PAID(2)
- -------------------------------------------------------------------------------------------------
Common Stock 3,636,364 N/A N/A $125
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</TABLE>
(1) Plus a currently undetermined number of shares of Common Stock, par value
$.01 per share, of Targeted Genetics Corporation issuable if certain
milestones are achieved on or before December 31, 1998.
(2) The fee required by Exchange Act Rule 14a-6(i)(2) is being paid as it is
greater than the fee payable pursuant to Exchange Act Rules 14a-6(i)(4) and
0-11.
/X/ Fee paid previously with preliminary materials.
/ / 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 date of its filing.
Amount previously paid: Filing party:
Form, schedule or
registration statement no.: Date filed:
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<PAGE> 2
PRELIMINARY PROXY MATERIALS
[TARGETED GENETICS LETTERHEAD]
May , 1996
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Targeted Genetics Corporation ("Targeted Genetics" or the
"Company"), which will be held on , , 1996, at 8:00 a.m.,
local time, at the Company's headquarters, 1100 Olive Way, Suite 100, Seattle,
Washington 98101.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the issuance of common stock of the Company (the "Company
Common Stock") pursuant to the terms of the Agreement and Plan of Merger, dated
as of April 16, 1996 (the "Merger Agreement"), by and among Targeted Genetics,
TGC Acquisition Corporation, a Delaware corporation and wholly owned subsidiary
of Targeted Genetics (the "Subsidiary"), and RGene Therapeutics, Inc., a
Delaware corporation ("RGene"), pursuant to which the Subsidiary will be merged
with and into RGene (the "Merger"), with RGene being the surviving corporation,
and whereby, at the closing of the Merger, all outstanding shares of capital
stock of RGene will be converted into an aggregate of 3,636,364 shares of
Company Common Stock. Additional shares of Company Common Stock, having an
aggregate value of up to $5,000,000, may be issued upon the achievement of
certain clinical and business-related milestones, provided that such milestones
are achieved on or before December 31, 1998. The issuance of all shares of
Company Common Stock pursuant to the Merger Agreement, including any additional
shares, is referred to as the "Issuance."
TARGETED GENETICS' BOARD OF DIRECTORS HAS DETERMINED THE MERGER AND THE
ISSUANCE TO BE FAIR TO AND IN THE BEST INTERESTS OF TARGETED GENETICS AND ITS
SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE ISSUANCE AND THE MERGER AGREEMENT AND
RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE.
You should read carefully the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement for details of the Merger Agreement and
additional related information.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the enclosed proxy card and return it promptly in the enclosed
postage-prepaid envelope. Your stock will be voted in accordance with the
instructions you have given in your proxy. If you attend the Special Meeting,
you may vote in person if you wish, even though you previously returned your
proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
H. STEWART PARKER
President and Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE> 3
PRELIMINARY PROXY MATERIALS
TARGETED GENETICS CORPORATION
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1996
TO THE SHAREHOLDERS OF TARGETED GENETICS CORPORATION:
A Special Meeting of Shareholders (the "Special Meeting") of Targeted
Genetics Corporation, a Washington corporation ("Targeted Genetics" or the
"Company"), will be held on , , 1996, at 8:00 a.m.,
local time, at the Company's headquarters, 1100 Olive Way, Suite 100, Seattle,
Washington 98101, to consider and vote upon a proposal to approve the issuance
of common stock, par value $.01 per share, of the Company (the "Company Common
Stock") pursuant to the terms of the Agreement and Plan of Merger, dated as of
April 16, 1996 (the "Merger Agreement"), by and among Targeted Genetics, TGC
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of
Targeted Genetics (the "Subsidiary"), and RGene Therapeutics, Inc., a Delaware
corporation ("RGene"), pursuant to which the Subsidiary will be merged with and
into RGene (the "Merger"), with RGene being the surviving corporation, and
whereby, at the closing of the Merger, all outstanding shares of capital stock,
par value $.001 per share, of RGene will be converted into an aggregate of
3,636,364 shares of Company Common Stock. Additional shares of Company Common
Stock, having an aggregate value of up to $5,000,000, may be issued upon the
achievement of certain clinical and business-related milestones, provided that
such milestones are achieved on or before December 31, 1998. The issuance of all
shares of Company Common Stock pursuant to the Merger Agreement, including any
additional shares, is referred to as the "Issuance."
Only holders of record of shares of Company Common Stock at the close of
business on April 23, 1996, the record date for the Special Meeting, are
entitled to notice of and to vote at the Special Meeting and any adjournments or
postponements thereof.
The affirmative vote of a majority of all votes cast, whether in person or
by proxy, at the Special Meeting is required to approve the Issuance. Holders of
shares of Company Common Stock will not be entitled to dissenters' rights as a
result of the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY. YOUR PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH RESPECT TO
THE SAME SHARES, BY DELIVERING A WRITTEN NOTICE OF REVOCATION TO THE SECRETARY
OF TARGETED GENETICS AT ANY TIME PRIOR TO SUCH VOTE OR BY ATTENDING AND VOTING
IN PERSON AT THE SPECIAL MEETING.
By Order of the Board of Directors
JAMES A. JOHNSON
Secretary
Seattle, Washington
May , 1996
<PAGE> 4
TARGETED GENETICS CORPORATION
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
(206) 623-7612
------------------------
PROXY STATEMENT
This Proxy Statement is being furnished to holders of shares of common
stock, par value $.01 per share (the "Company Common Stock" or "Targeted
Genetics Common Stock"), of Targeted Genetics Corporation, a Washington
corporation ("Targeted Genetics" or the "Company"), in connection with the
solicitation of proxies by Targeted Genetics' Board of Directors (the "Targeted
Genetics Board") for use at a Special Meeting of Shareholders to be held on
, , 1996, at the Company's headquarters, 1100 Olive Way,
Suite 100, Seattle, Washington 98101, commencing at 8:00 a.m., local time (the
"Special Meeting") and at any adjournments or postponements thereof.
SPECIAL MEETING
At the Special Meeting, shareholders of record of Targeted Genetics at the
close of business on April 23, 1996, will consider and vote upon a proposal to
approve the issuance of Company Common Stock pursuant to the terms of the
Agreement and Plan of Merger, dated as of April 16, 1996 (the "Merger
Agreement"), by and among Targeted Genetics, TGC Acquisition Corporation, a
Delaware corporation and wholly owned subsidiary of Targeted Genetics (the
"Subsidiary"), and RGene Therapeutics, Inc., a Delaware corporation ("RGene"),
pursuant to which the Subsidiary will be merged with and into RGene (the
"Merger").
CONVERSION OF SHARES
Upon the closing of the Merger (the "Closing"), (i) each issued and
outstanding share of common stock, par value $.001 per share, of RGene (the
"RGene Common Stock") (other than shares held by RGene stockholders who perfect
dissenters' rights with respect thereto) will be converted (subject to the
provisions with respect to fractional shares described below) into the right to
receive that number of shares of Company Common Stock (the "Common Share
Equivalent Consideration") determined by dividing (a) 2,909,091 by (b) the
aggregate number of shares of RGene Common Stock and preferred stock, par value
$.001 per share, of RGene (the "RGene Preferred Stock" and, together with the
RGene Common Stock, the "RGene Capital Stock") outstanding at the effective time
of the Merger (the "Effective Time") and (ii) each issued and outstanding share
of RGene Preferred Stock (other than shares held by RGene stockholders who
perfect dissenters' rights with respect thereto) will be converted into the
right to receive (a) that number of shares of Company Common Stock determined by
dividing (1) 727,273 by (2) the number of shares of RGene Preferred Stock
outstanding at the Effective Time and (b) the Common Share Equivalent
Consideration. Additional shares of Company Common Stock, having an aggregate
value of up to $5,000,000, may be issued upon the achievement of certain
milestones relating to (y) the enrollment of at least one patient in a Phase II
clinical trial for RGene's E1A tumor suppressor gene therapy in the United
States and the enrollment of at least one patient in a similar clinical trial in
a member country of the European Economic Union (the "First Milestone") and (z)
the execution of a definitive collaboration agreement with a third party for the
development of genetic vaccines using RGene's technology that will result in
minimum revenues to the Company of $2,000,000 during the first year following
its execution, of which a minimum of $1,500,000 may not be subject to any
specific funding commitment under any license or research agreement (the "Second
Milestone" and, together with the First Milestone, the "Milestones"). See "The
Merger -- Terms of the Merger -- Additional Consideration." The issuance of all
shares of Company Common Stock pursuant to the Merger Agreement, including any
additional shares, is referred to as the "Issuance."
No fractional shares of Company Common Stock will be issued in connection
with the Merger Agreement. In lieu of any such fractional shares, each holder of
RGene Capital Stock who otherwise would be entitled to receive a fractional
share of Company Common Stock pursuant to the Merger Agreement will be paid an
amount in cash equal to such fraction multiplied by the closing sales price per
share of Company Common Stock on the Nasdaq National Market on the trading day
immediately preceding the effective date of the Merger (the "Effective Date") or
the date either of the Milestones is achieved, as the case may be. See "The
Merger -- Terms of the Merger -- Fractional Shares."
This Proxy Statement is first being mailed to shareholders of Targeted
Genetics on or about May , 1996.
------------------------
The date of this Proxy Statement is May , 1996.
<PAGE> 5
AVAILABLE INFORMATION
Targeted Genetics is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy or information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy or information statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy or
information statements and other information concerning Targeted Genetics may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................... 2
SUMMARY................................. 4
SPECIAL MEETING OF SHAREHOLDERS......... 8
General............................... 8
Matters to Be Considered at the
Special Meeting.................... 8
Record Date; Shares Entitled to Vote;
Vote Required...................... 8
Proxies; Proxy Solicitation........... 8
BACKGROUND OF AND REASONS FOR THE
MERGER................................ 10
Background of the Merger.............. 10
Consideration Issuable in the
Merger............................. 11
Reasons for the Merger................ 11
Advantages and Disadvantages of the
Merger............................. 12
Recommendation of the Targeted
Genetics Board..................... 12
Opinion of Targeted Genetics'
Financial Advisor.................. 12
BUSINESS OF TARGETED GENETICS........... 16
Development Programs.................. 16
Core Technologies..................... 21
Research Collaborations and Licensing
Agreements......................... 24
Patents and Proprietary Rights........ 25
Competition........................... 26
Governmental Regulation............... 26
Human Resources....................... 28
Facilities............................ 28
TARGETED GENETICS SELECTED FINANCIAL
DATA.................................. 29
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS.................. 30
TARGETED GENETICS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS... 33
Overview.............................. 33
Results of Operations................. 33
Liquidity and Capital Resources....... 35
BUSINESS OF RGENE....................... 36
Non-Viral Vectors..................... 36
EIA Tumor Suppressor Gene Therapy..... 36
Tumor Suppressor Genes................ 37
Antisense Oligonucleotides............ 37
Collaborations and Agreements......... 37
<CAPTION>
PAGE
----
<S> <C>
RGENE SELECTED FINANCIAL DATA........... 39
RGENE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................. 40
Overview.............................. 40
Results of Operations................. 40
Liquidity and Capital Resources....... 41
COMPARATIVE PER SHARE DATA.............. 42
PRICE RANGE OF COMPANY COMMON STOCK..... 43
THE MERGER.............................. 44
Terms of the Merger................... 44
Closing............................... 45
Exchange of Certificates.............. 45
Effect on RGene Employee Benefit and
Stock Plans........................ 45
Agreement of Significant RGene
Stockholders to Vote in Favor of
the Merger......................... 46
Restrictions on Resale of Company
Common Stock Issued in the
Merger............................. 46
Escrow................................ 46
Registration Rights................... 46
Representations and Warranties........ 47
Conduct of Business Pending the
Closing............................ 47
No Solicitation....................... 47
Conditions to Closing................. 47
Amendment and Termination............. 48
Certain Federal Income Tax
Consequences of the Merger......... 49
Level of Integration.................. 50
Indemnification of Directors and
Officers Pursuant to the Merger
Agreement.......................... 51
Accounting Treatment.................. 51
Expenses and Fees..................... 51
Dissenters' Rights.................... 51
Effect of Merger on Rights of Targeted
Genetics Shareholders.............. 51
PRINCIPAL TARGETED GENETICS
SHAREHOLDERS.......................... 52
LEGAL OPINION........................... 54
TAX OPINION............................. 54
INDEPENDENT AUDITORS.................... 54
PROPOSALS BY TARGETED GENETICS
SHAREHOLDERS.......................... 54
INDEX TO FINANCIAL STATEMENTS........... F-1
</TABLE>
Appendix A -- Agreement and Plan of Merger, dated as of April 16, 1996, by and
among Targeted Genetics Corporation, TGC Acquisition Corporation
and RGene Therapeutics, Inc.
Appendix B -- Opinion of Vector Securities International, Inc.
3
<PAGE> 7
SUMMARY
SPECIAL MEETING
At the Special Meeting, shareholders of record of Targeted Genetics at the
close of business on April 23, 1996, will consider and vote upon a proposal to
approve the issuance of Company Common Stock pursuant to the terms of the Merger
Agreement.
THE FOLLOWING SUMMARY, WHICH IS PRESENTED HEREIN SOLELY TO FURNISH LIMITED
INTRODUCTORY INFORMATION REGARDING THE PROPOSED MERGER AND THE PARTIES THERETO,
IS BASED ON THE MORE DETAILED INFORMATION CONTAINED, OR INCORPORATED BY
REFERENCE, IN THIS PROXY STATEMENT, INCLUDING THE APPENDICES HERETO, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE THERETO. SHAREHOLDERS ARE URGED TO READ
THIS PROXY STATEMENT AND THE APPENDICES HERETO IN THEIR ENTIRETIES.
TERMS OF THE MERGER
Conversion of Shares at the Closing. At the Closing, an aggregate of
3,636,364 shares of Company Common Stock having an aggregate value of $20
million, based on a value of $5.50 per share, the closing sale price of the
Company Common Stock as reported on the Nasdaq National Market on May 17, 1996,
will be issuable to the holders of RGene Capital Stock. Each issued and
outstanding share of RGene Common Stock (other than shares held by RGene
stockholders who perfect dissenters' rights with respect thereto) will be
converted (subject to the provisions with respect to fractional shares described
below) into the Common Share Equivalent Consideration, which is determined by
dividing (i) 2,909,091 by (ii) the aggregate number of shares of RGene Capital
Stock outstanding at the Effective Time. Each issued and outstanding share of
RGene Preferred Stock (other than shares held by RGene stockholders who perfect
dissenters' rights with respect thereto) will be converted into the right to
receive (a) that number of shares of Company Common Stock determined by dividing
(1) 727,273 by (2) the number of shares of RGene Preferred Stock outstanding at
the Effective Time and (b) the Common Share Equivalent Consideration. Based on
the number of shares outstanding on May 17, 1996, there will be approximately
16,037,248 shares of Company Common Stock outstanding immediately following the
Merger, and the former RGene stockholders will hold approximately 23% of such
shares.
Additional Consideration. After the Effective Time, additional
consideration (the "Additional Consideration") may be issuable to the former
holders of RGene Capital Stock (other than holders who perfect dissenters'
rights with respect thereto) if either of the Milestones is achieved prior to
certain dates. Achievement of the First Milestone would result in the issuance
of $1 million, $2 million or $3 million of Company Common Stock, depending upon
whether the First Milestone is achieved on or before December 31, 1997 or
December 31, 1998, and depending upon whether the First Milestone is achieved in
the United States only or in the United States and Europe, as set forth in the
following table:
<TABLE>
<CAPTION>
GEOGRAPHIC TERRITORY MILESTONE ACHIEVEMENT DEADLINE COMMON STOCK ISSUABLE
- ------------------------- ------------------------------- ---------------------
<S> <C> <C>
United States only December 31, 1997 $2 million
Europe only December 31, 1997 $0
United States and Europe December 31, 1997 $3 million
United States only December 31, 1998 $1 million
Europe only December 31, 1998 $1 million(1)
United States and Europe December 31, 1998 $2 million(2)
</TABLE>
- ---------------
(1) To be issued only if the First Milestone is achieved in the United States
during calendar year 1998. If the First Milestone is achieved in the United
States prior to January 1, 1998, or if it is not achieved at all in the
United States, then no Company Common Stock will be issued for achieving the
First Milestone in Europe during 1998.
(2) The maximum amount of Company Common Stock that may be issued in the event
that the First Milestone is not achieved in the United States until 1998 is
$2 million.
4
<PAGE> 8
Achievement of the Second Milestone on or before December 31, 1997 would
result in the issuance of $2 million of Company Common Stock.
The aggregate number of shares of Company Common Stock issued upon
achievement of a Milestone will equal the applicable aggregate value of such
shares divided by the average closing sale price for Company Common Stock for
the 30 trading days preceding the date of achievement of the Milestone (the
"Milestone Average Trading Price"). Such shares will be issued pro rata, based
upon the number of shares of RGene Capital Stock outstanding at the Effective
Time, to the former RGene stockholders as promptly as practicable, but in no
event later than 20 days after the achievement of the applicable Milestone.
Assuming the Milestone Average Trading Price equals $5.50 (the closing sale
price per share of Company Common Stock as reported on the Nasdaq National
Market on May 17, 1996), achievement of both Milestones would result in the
issuance of a maximum of 909,091 shares of Company Common Stock. Based upon the
number of shares outstanding as of May 17, 1996, and assuming the issuance of
3,636,364 shares of Company Common Stock at the Closing, upon issuance, such
shares of Additional Consideration would represent approximately 6% of the
outstanding Company Common Stock.
Fractional Shares. No fractional shares of Company Common Stock will be
issued in connection with the Merger. In lieu of any such fractional shares,
each holder of RGene Capital Stock who otherwise would be entitled to receive a
fractional share of Company Common Stock will be paid an amount in cash equal to
such fraction multiplied by the closing sale price per share of Company Common
Stock as reported on the Nasdaq National Market on the trading day immediately
preceding the Effective Date or the date either of the Milestones is achieved,
as the case may be. With respect to each RGene stockholder, all fractional
shares of Company Common Stock will be aggregated in order to determine the
number of shares of Company Common Stock issuable to such stockholders and the
amount of the related cash payment. Due to the small number of RGene
stockholders, such cash payment will not be material to the Company.
AGREEMENT OF SIGNIFICANT RGENE STOCKHOLDERS TO VOTE IN FAVOR OF THE MERGER
Certain significant stockholders of RGene have entered into irrevocable
proxy and voting agreements pursuant to which each of such stockholders has
granted to Targeted Genetics an irrevocable proxy to vote such stockholder's
shares of RGene Capital Stock in favor of the Merger. As of April 16, 1996,
assuming the exercise of all outstanding options and warrants to purchase RGene
Common Stock and the conversion of all bridge loans to RGene Common Stock as
contemplated in the Merger Agreement, the RGene stockholders who executed such
irrevocable proxy and voting agreements had the power to vote shares
representing an aggregate of approximately 66% of the outstanding shares of
RGene Capital Stock, which is sufficient to approve the Merger.
RESTRICTIONS ON RESALE OF COMPANY COMMON STOCK ISSUED IN THE MERGER
All shares of Company Common Stock issuable in the Merger will be subject
to lock-up agreements to be executed by each RGene stockholder (the "Lock-Up
Agreements"). The Lock-Up Agreements will provide that the RGene stockholders
may not transfer or dispose of any Company Common Stock received by them in the
Merger during the 30-month period beginning with the Effective Date; provided,
however, that shares of Company Common Stock will be released from the
restrictions of the Lock-Up Agreements in increments of 20% for each full
six-month period following the Effective Date. If either of the Milestones is
achieved, 20% of the shares issued as Additional Consideration will be
immediately released from the restrictions of the Lock-Up Agreements for each
full six-month period following the Effective Date.
ESCROW
Upon the Closing, 363,636 shares of Company Common Stock issuable at the
Closing (the "Escrow Shares") will be pledged by the former stockholders of
RGene to Targeted Genetics to be held in escrow for payment of claims resulting
from RGene's breach of the representations, warranties or covenants contained in
the Merger Agreement. Any Escrow Shares which are not retransferred to the
Company in respect of such claims, or which are not retained by the Company
pending resolution of unresolved claims, will be released to the former RGene
stockholders as soon as practicable following the first anniversary of the
Effective Date. The Escrow
5
<PAGE> 9
Shares will not be released from the restrictions of the Lock-Up Agreements
until 30 months following the Effective Date.
REGISTRATION RIGHTS
The shares of Company Common Stock to be issued to RGene stockholders have
not been registered with the Commission or approved for trading on the Nasdaq
National Market. The Merger Agreement provides that Targeted Genetics will (i)
prior to the first anniversary of the Effective Date, prepare and file with the
Commission a registration statement covering the sale of up to 50% of the shares
of Company Common Stock held by the former RGene stockholders and (ii) use
commercially reasonable best efforts, subject to receipt of necessary
information from the former RGene stockholders, to cause such registration
statement to become effective on or before the first anniversary of the
Effective Date and to remain effective (subject to provisions described below)
for a period ending 24 months following the Effective Date. If the registration
statement has not become effective prior to the expiration of the two-week
period beginning on the first anniversary of the Effective Date, the Company
will be required to pay as liquidated damages to the former RGene stockholders
an aggregate amount of $250,000.
After the registration statement becomes effective, the Company may elect,
upon written notice to the former RGene stockholders, to suspend use of the
prospectus forming part of the registration statement (i) by any former RGene
stockholder upon the failure of such stockholder to provide information in order
to make the prospectus true, complete and correct in all material respects or
(ii) for additional periods that do not in the aggregate exceed 60 days during
the course of the calendar year, as a result of business developments or other
transactions involving the Company, the existence of which would make the
registration statement materially inaccurate or misleading.
LEVEL OF INTEGRATION
Targeted Genetics Board. Promptly following the Closing, the Targeted
Genetics Board will be increased from five to seven members, and Austin M. Long,
III and Martin P. Sutter, currently members of RGene's Board of Directors, will
be appointed to fill the resulting vacancies. No other individuals will be named
to the Targeted Genetics Board as a result of the Merger, and the structure of
the Targeted Genetics Board will remain unchanged. Targeted Genetics will have
no commitment to renominate either Mr. Long or Mr. Sutter to serve as a member
of the Targeted Genetics Board beyond the initial term for which either
individual may be elected by the shareholders of Targeted Genetics. As
nonemployee directors of Targeted Genetics, Messrs. Long and Sutter will each
receive, under the Company's Stock Option Plan for Nonemployee Directors, an
option to purchase 15,000 shares of Company Common Stock. Such options shall
vest in three annual installments beginning on the first anniversary of the date
of grant. In addition, each continuing nonemployee director receives an annual
grant of options to purchase 5,000 shares of Company Common Stock for each year
following the year such director is initially elected or appointed to the
Targeted Genetics Board.
RGene Employees. Following the Merger, the operations of RGene will be
consolidated with those of Targeted Genetics in Seattle, Washington. Any RGene
employees continuing with the combined company will relocate accordingly.
Currently, RGene has seven employees. Each officer and other employee of RGene
will be given the opportunity to continue his or her employment for a minimum
transition period of three months following the Effective Date. Upon the
expiration of the transition period any such employee who is not offered
continuing employment will receive severance payments equal to six months' base
salary at the rate in effect for such terminated employee as of the Effective
Date.
It is a condition to the Closing that the Employment Agreement, dated
February 24, 1994, between RGene and Martin Lindenberg shall have terminated.
Such termination will trigger severance provisions pursuant to which RGene will
be required to pay Dr. Lindenberg one year's base salary and to continue Dr.
Lindenberg's employee benefits for one year following termination.
All potential severance obligations to Dr. Lindenberg and other RGene
employees will be funded from $550,000 to be contributed to RGene prior to the
Closing by certain holders of RGene Preferred Stock, which
6
<PAGE> 10
contribution is a condition to the Closing. See "The Merger -- Conditions to
Closing -- Conditions to the Obligations of Targeted Genetics and the
Subsidiary."
Consulting Agreements; Advisory Boards. Upon the Closing, Targeted Genetics
will enter into consulting and scientific advisory board agreements with each of
Drs. Leaf Huang and Mien-Chie Hung, currently members of RGene's Scientific
Advisory Board. Pursuant to such agreements, Drs. Huang and Hung will provide
consulting services to the Company and will serve on the Company's Scientific
Advisory Board for a term of five years, unless the Company chooses to terminate
either of the agreements following the fourth anniversary of the Effective Date.
In addition, Dr. Gabriel Lopez-Berestein, currently a member of RGene's
Scientific Advisory Board, has agreed to serve on a Clinical Advisory Board to
be established by the Company by December 31, 1996.
INDEMNIFICATION OF DIRECTORS AND OFFICERS PURSUANT TO THE MERGER AGREEMENT
To the fullest extent permitted by law, from and after the Effective Time,
all rights to indemnification now existing in favor of RGene's employees,
agents, directors or officers with respect to their activities as such prior to
the Effective Time, as provided in RGene's Certificate of Incorporation, Bylaws
or any agreement in effect with respect to RGene, will survive the Merger and
continue in full force and effect in accordance with the terms of any such
arrangement.
ACCOUNTING TREATMENT
For financial reporting purposes, it is expected that the Merger will be
accounted for by the purchase method of accounting in accordance with generally
accepted accounting principles.
EFFECT OF MERGER ON RIGHTS OF TARGETED GENETICS SHAREHOLDERS
The Merger will not affect the substantive rights of holders of currently
outstanding Company Common Stock. However, following the Merger (assuming the
issuance of 3,636,364 shares of Company Common Stock pursuant to the Merger
Agreement), approximately 23% of the shares of Company Common Stock will consist
of the unregistered shares issued in exchange for RGene Capital Stock, and the
percentage ownership interests of current Targeted Genetics shareholders will
decline accordingly. Such percentage may increase if Additional Consideration is
issued upon achievement of the Milestones. See "-- Terms of the
Merger -- Additional Consideration."
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<PAGE> 11
SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement is being furnished to holders of shares of Company
Common Stock in connection with the solicitation of proxies by the Targeted
Genetics Board for use at the Special Meeting to be held on ,
, 1996, at the Company's headquarters, 1100 Olive Way, Suite 100,
Seattle, Washington 98101, commencing at 8:00 a.m., local time, and at any
adjournments or postponements thereof.
This Proxy Statement and the accompanying form of proxy are first being
mailed to shareholders of Targeted Genetics on or about May , 1996.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, shareholders of record of Targeted Genetics as of
the close of business on April 23, 1996, will consider and vote upon the
Issuance. Holders of shares of Company Common Stock will not be entitled to
dissenters' rights as a result of the Merger.
THE TARGETED GENETICS BOARD HAS UNANIMOUSLY APPROVED THE ISSUANCE AND THE
MERGER AGREEMENT AND RECOMMENDS THAT TARGETED GENETICS SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE ISSUANCE. SEE "BACKGROUND OF AND REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on April 23, 1996 (the "Record Date") has been fixed
as the record date for determining the holders of shares of Company Common Stock
who are entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were 12,398,284 shares of Company Common Stock outstanding
and entitled to vote. The holders of record on the Record Date of shares of
Company Common Stock are entitled to one vote per share of Company Common Stock.
The presence in person or by proxy of the holders of shares representing a
majority of the voting power of shares of Company Common Stock entitled to vote
on a matter is necessary to constitute a quorum for action on such matter at the
Special Meeting.
The affirmative vote of a majority of all votes cast, whether in person or
by proxy, at the Special Meeting is required to approve the Issuance. As of the
Record Date, directors and executive officers of the Company and their
affiliates may be deemed to be beneficial owners of approximately 12% of the
outstanding voting shares of Company Common Stock. Each of the directors and
executive officers of the Company plans to vote or direct the vote of all shares
of Company Common Stock over which he or she has voting control in favor of the
Issuance.
Abstention from voting and broker nonvotes will have no effect on the
proposal to approve the Issuance, since they will not represent votes cast at
the Special Meeting for the purpose of voting on such matter.
PROXIES; PROXY SOLICITATION
Shares of Company Common Stock represented by properly executed proxies
received at or prior to the Special Meeting that have not been revoked will be
voted at the Special Meeting in accordance with the instructions contained
therein. Shares of Company Common Stock represented by properly executed proxies
for which no instructions are given will be voted "FOR" approval of the
Issuance. Targeted Genetics shareholders are requested to complete, sign, date
and return promptly the enclosed proxy card in the postage-prepaid envelope
provided for this purpose to ensure that their shares are voted. A shareholder
may revoke a proxy by submitting at any time prior to the vote on the Issuance a
later-dated proxy with respect to the same shares, by delivering written notice
of revocation to the Secretary of Targeted Genetics at any time prior to such
vote or by attending and voting in person at the Special Meeting. Mere
attendance at the Special Meeting will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the
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<PAGE> 12
original convening of the Special Meeting (except for any proxies that have
theretofore effectively been revoked or withdrawn), notwithstanding that they
may have been effectively voted on the same or any other matter at a previous
meeting.
Targeted Genetics will bear the cost of soliciting proxies from its
shareholders. In addition to solicitation by mail, directors, officers and
employees of Targeted Genetics may solicit proxies by telephone, telegram or
otherwise. Such directors, officers and employees of Targeted Genetics will not
be additionally compensated for such solicitation, but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. Brokerage firms,
fiduciaries and other custodians who forward soliciting material to the
beneficial owners of shares of Company Common Stock held of record by them will
be reimbursed for their reasonable expenses incurred in forwarding such
material.
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<PAGE> 13
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
An element of the Company's business strategy is the continued expansion of
its technology base through its in-house development efforts, in-licensing and
acquisitions. In addition, in light of the continued consolidation experienced
by the biotechnology industry in general, and the fragmented nature of the gene
therapy field in particular, Targeted Genetics has considered a combination with
a gene therapy company with complementary technology to be a priority.
Accordingly, in late December 1995, when the Targeted Genetics Board learned
that RGene might be seeking a corporate partner, the Company's Chief Executive
Officer, H. Stewart Parker, contacted RGene and arranged for a preliminary
meeting in early January.
On January 10, 1996, Ms. Parker and Dr. Martin Lindenberg, RGene's Chief
Executive Officer, met to brief each other on their respective company's
activities and focus. The discussions were positive, and on January 16, 1996,
the Targeted Genetics Board met and agreed to consider a transaction, subject to
appropriate due diligence review.
In late January 1996, Ms. Parker and Dr. Barrie Carter, Targeted Genetics'
Director of Research and Development, met with RGene's senior management to
review the companies' respective research and development programs and examine
areas of potential synergy. Following this meeting, Ms. Parker and Dr.
Lindenberg had several discussions that focused on specific ways in which the
two companies might combine their research and development efforts.
On February 12, 1996, Targeted Genetics' senior management and a member of
its scientific advisory board met in Seattle with Dr. Lindenberg, Martin P.
Sutter, RGene's Chairman of the Board, and Dr. Leaf Huang, one of RGene's
founding scientists. Following this meeting, Ms. Parker continued discussions
with Dr. Lindenberg and Mr. Sutter regarding the details of a possible
transaction, including the possible acquisition of RGene by Targeted Genetics.
On February 27, Ms. Parker met with Mr. Sutter and Dr. Lindenberg in Houston to
discuss key issues relating to, among other things, valuation, personnel and
Targeted Genetics' commitment to RGene's E1A program.
On February 28, 1996, Ms. Parker telephonically discussed with the members
of the Targeted Genetics Board various issues relating to a proposed
transaction. Targeted Genetics then submitted a preliminary proposal to RGene.
On March 5, Ms. Parker discussed the preliminary proposal with Dr. Lindenberg.
Following this discussion, and after further discussing the key issues with
members of the Targeted Genetics Board, Ms. Parker delivered a revised
preliminary proposal to RGene which introduced the concept of providing for an
increased merger consideration in the event of the achievement of significant
milestones tied to the development of RGene's key technologies. On March 21,
RGene accepted the preliminary proposal and the companies agreed to begin to
negotiate the specific terms of the proposed transaction.
On March 26, 1996, members of Targeted Genetics' senior management met with
RGene's Board of Directors at RGene's headquarters and began negotiating key
issues. On March 28, RGene's senior management traveled to Seattle to provide a
presentation to Targeted Genetics' management, legal counsel and other advisors
on RGene's technology and potential products. Following RGene's presentation,
the senior management of both companies met to discuss further the specific
terms of the proposed transaction.
From April 1 through April 15, 1996, senior management of Targeted Genetics
and RGene, assisted by legal counsel, continued negotiating the terms of the
Merger Agreement. In the course of these discussions, the parties negotiated the
merger consideration and the final details with respect to the proposed
transaction. During this period, Ms. Parker advised the members of the Targeted
Genetics Board as to the progress of the negotiations and sought their advice
with respect to the resolution of specific issues.
On April 16, 1996, the Targeted Genetics Board met to consider all aspects
of the proposed transaction. At the meeting, the Targeted Genetics Board
received the oral and written opinion of Vector Securities International, Inc.
("Vector Securities") that, as of such date, the consideration to be paid
pursuant to the Merger Agreement by Targeted Genetics was fair to Targeted
Genetics from a financial point of view. See "-- Opinion of Targeted Genetics'
Financial Advisor." At the conclusion of the meeting, the Targeted Genetics
Board unanimously
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<PAGE> 14
approved the Merger Agreement and resolved to recommend to the shareholders that
they vote to approve the Issuance. Thereafter, the Merger Agreement was executed
by Targeted Genetics, the Subsidiary and RGene and the companies jointly
announced the transaction.
CONSIDERATION ISSUABLE IN THE MERGER
At the Closing, an aggregate of 3,636,364 shares of Company Common Stock
having an aggregate value of $20 million, based on a value of $5.50 per share,
the closing sale price of the Company Common Stock as reported on the Nasdaq
National Market on May 17, 1996, will be issuable to the holders of RGene
Capital Stock. Each issued and outstanding share of RGene Common Stock (other
than shares held by RGene stockholders who perfect dissenters' rights with
respect thereto) will be converted (subject to the provisions with respect to
fractional shares described below) into the right to receive the Common Share
Equivalent Consideration, which is determined by dividing (i) 2,909,091 by (ii)
the aggregate number of shares of RGene Capital Stock outstanding at the
Effective Time. Each issued and outstanding share of RGene Preferred Stock
(other than shares held by RGene stockholders who perfect dissenters' rights
with respect thereto) will be converted into the right to receive (a) that
number of shares of Company Common Stock determined by dividing (1) 727,273 by
(2) the aggregate number of shares of RGene Preferred Stock outstanding at the
Effective Time and (b) the Common Share Equivalent Consideration. Based upon the
number of shares of Company Common Stock outstanding on May 17, 1996, there will
be approximately 16,037,248 shares of Company Common Stock outstanding
immediately following the Merger, and the former RGene stockholders will hold
approximately 23% of such shares.
The aggregate number of shares of Targeted Genetics Common Stock to be
issued in connection with the Merger has been fixed at 3,636,364 through
negotiations between the parties and is not subject to change. Similarly, the
dollar amount of shares to be issued upon achievement of the Milestones is fixed
and is not subject to change. The parties did not negotiate separate exchange
ratios for individual shares of RGene Capital Stock. Actual allocation of the
shares of Targeted Genetics Common Stock issuable in the Merger among the RGene
stockholders has been separately determined by RGene.
In addition, the Company will pay cash amounts to each RGene stockholder
which will represent the value of any fractional share of Company Common Stock
to which such RGene stockholder would otherwise be entitled. With respect to
each RGene stockholder, all fractional shares of Company Common Stock will be
aggregated in order to determine the number of shares of Company Common Stock
issuable to such RGene stockholder and the amount of the related cash payment.
Due to the small number of RGene stockholders, such cash payment will not be
material to the Company. See "The Merger -- Terms of the Merger -- Fractional
Shares."
In connection with the Merger, Targeted Genetics will issue shares of
Company Common Stock to the RGene stockholders in an amount in excess of 20% of
the shares of Company Common Stock outstanding prior to the Merger. Accordingly,
the Company's shareholders must approve the issuance of such shares under the
applicable provisions of Schedule D to the Bylaws of the National Association of
Securities Dealers, Inc. (the "NASD").
REASONS FOR THE MERGER
In reaching the conclusions and recommendations described below, the
Targeted Genetics Board considered, without assigning relative weights to, the
following factors, which include all factors the Targeted Genetics Board
considered to be material:
(i) A significant element of the Company's long-term business strategy
is the development of a broad base of gene delivery technology in order to
provide the Company with the flexibility necessary to address a broader
range of acquired and inherited diseases than would be possible with a
single gene delivery system.
(ii) The technologies and product development programs of the Company
and RGene are complementary from the perspective of gene delivery systems
and potential oncology products. The combination of the Company's
established viral vectors and RGene's non-viral systems provides a more
diversified technology base. RGene's E1A cancer clinical trial provides an
approach focused on the treatment of tumors that would complement the
Company's cytotoxic T lymphocyte ("CTL") immunotherapy approach, which is
focused on the treatment of minimal residual diseases.
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<PAGE> 15
(iii) Because the field of gene therapy has become fragmented, with a
number of relatively small companies focused on the development of
relatively narrow technologies, the Company believes that gene therapy
companies that take the lead in consolidating significant technologies
within a single organization will be able to distinguish themselves from
other companies and be more likely to attract the resources necessary to
develop a successful business on a long-term basis.
(iv) The "virtual" nature of RGene's business is characterized by a
small number of employees, no owned research and development laboratories
and exclusive relationships with academic researchers that provide access
to important discoveries, making integration more likely to be successful
in the long term and less likely to distract the Company's management from
the day-to-day issues that are important to managing the Company's existing
business.
(v) The terms and conditions of the Merger Agreement, including the
agreement of RGene to conduct its business in the ordinary course with no
material changes in operations, together with the execution of voting
agreements by holders of a number of shares of RGene Capital Stock
sufficient to approve the Merger, reduce the risk that Targeted Genetics
will invest considerable management time and incur significant expenses
without consummating a transaction.
(vi) Vector Securities delivered its oral opinion to the Targeted
Genetics Board at its meeting on April 16, 1996, confirmed by its written
opinion of the same date, that on such date and based on various
assumptions and considerations set forth in such opinion, the aggregate
consideration to be paid by Targeted Genetics pursuant to the Merger
Agreement was fair to Targeted Genetics from a financial point of view.
ADVANTAGES AND DISADVANTAGES OF THE MERGER
Targeted Genetics believes that the primary advantages of the Merger to
Targeted Genetics and its shareholders are reflected in the reasons for the
Merger described above. These advantages include (i) the creation of a more
comprehensive technology base, (ii) the addition of complementary product
opportunities, and (iii) potentially rendering the Company more attractive to
potential investors and collaborators.
Targeted Genetics believes that the primary disadvantages of the Merger to
Targeted Genetics and its shareholders are (i) the resulting dilution of the
ownership interest of the Company's existing shareholders, (ii) increased
capital requirements relating to the need to continue developing the RGene
technology, including costs associated with RGene's ongoing clinical trial, and
(iii) distraction of Targeted Genetics' management from the day-to-day business
of the Company as they concentrate on effecting the Merger and, following the
Merger, successfully integrating the operations of the two companies.
RECOMMENDATIONS OF THE TARGETED GENETICS BOARD
The Targeted Genetics Board has determined the Merger and the Issuance to
be fair to and in the best interests of Targeted Genetics and its shareholders.
ACCORDINGLY, THE TARGETED GENETICS BOARD HAS UNANIMOUSLY APPROVED THE ISSUANCE
AND THE MERGER AGREEMENT AND RECOMMENDS THAT TARGETED GENETICS SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE ISSUANCE.
OPINION OF TARGETED GENETICS' FINANCIAL ADVISOR
Targeted Genetics retained Vector Securities to render an opinion as to the
fairness, from a financial point of view, to Targeted Genetics of the aggregate
consideration to be paid by Targeted Genetics in the Merger for the issued and
outstanding RGene Capital Stock. Vector Securities was selected by the Targeted
Genetics Board, after discussions between representatives of Vector Securities
and the management of Targeted Genetics regarding the services to be rendered
and the fees to be paid for providing those services, in light of Vector
Securities' overall qualifications and its familiarity with Targeted Genetics
and Targeted Genetics' business. No limitations were imposed by Targeted
Genetics with respect to the opinion to be rendered by Vector Securities. The
amount and type of the consideration to be paid by Targeted Genetics to the
RGene stockholders was determined by the Targeted Genetics Board in the course
of negotiations with RGene, based on the Targeted Genetics Board's review of
considerations pertinent to the Merger. Although Vector Securities evaluated the
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<PAGE> 16
fairness from a financial point of view of the aggregate consideration to be
paid by Targeted Genetics in the Merger, Vector Securities was not asked to
recommend, and did not recommend, the specific consideration payable in
connection therewith.
Vector Securities has delivered to the Targeted Genetics Board its written
opinion, dated the date of the Merger Agreement, to the effect that, as of such
date and based upon the matters described therein, the aggregate consideration
to be paid by Targeted Genetics in the Merger is fair to Targeted Genetics from
a financial point of view. The opinion of Vector Securities was prepared for the
use of the Targeted Genetics Board in connection with its consideration of the
Merger Agreement and did not constitute a recommendation to the Targeted
Genetics Board with respect to the approval of the Merger Agreement or the
Merger nor does it constitute a recommendation to any shareholder with respect
to whether to approve the matters to be considered at the Special Meeting. The
complete text of the opinion dated as of the date of the Merger Agreement is
attached to this Proxy Statement as Appendix B and is incorporated by reference
herein. The summary of Vector Securities' opinion in this Proxy Statement is
qualified in its entirety by reference to the full text of such opinion.
TARGETED GENETICS' SHAREHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS
ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE AND MATTERS CONSIDERED BY
VECTOR SECURITIES.
In connection with its opinion, Vector Securities, among other things, (i)
reviewed an April 16, 1996 draft of the Merger Agreement; (ii) held discussions
with certain members of the management of Targeted Genetics and RGene concerning
the business, operations and prospects of Targeted Genetics and RGene,
respectively; (iii) reviewed certain business and financial information with
respect to Targeted Genetics and RGene, including financial forecasts prepared
and provided by the respective managements of Targeted Genetics and RGene; (iv)
reviewed certain financial statistics of publicly traded companies deemed
reasonably comparable to Targeted Genetics and RGene; (v) compared the financial
terms of the Merger with certain transactions which were deemed comparable; (vi)
reviewed the price and trading history of the Company Common Stock; and (vii)
performed such other studies, analyses and investigations as it considered
appropriate. Vector Securities assumed and relied upon the accuracy and
completeness of all financial and other information supplied or otherwise made
available by Targeted Genetics and RGene and neither attempted independently to
verify or assumed any responsibility for verifying such information. Vector
Securities did not make or obtain or assume any responsibility for making or
obtaining any independent evaluations or appraisals of the assets of Targeted
Genetics or RGene, nor was it furnished with any such evaluations or appraisals.
With respect to the financial projections of Targeted Genetics and RGene
referred to above, Vector Securities assumed, and the managements of Targeted
Genetics and RGene have represented, that they had been reasonably prepared on
bases reflecting the best available estimates and judgments of the respective
managements of Targeted Genetics and RGene as to the future financial
performance of such companies and that Targeted Genetics and RGene will perform
substantially in accordance with such projections. Vector Securities assumes no
responsibility for and expresses no view as to such projections or the
assumptions under which they were prepared. In rendering its opinion, Vector
Securities assumed that the transactions contemplated by the Merger will be
consummated on the terms described in the April 16, 1996 draft of the Merger
Agreement, without any material waiver of or modification of Targeted Genetics
or RGene, and that obtaining any necessary regulatory approvals for the
transaction will not have an adverse effect.
In preparing its opinion to the Targeted Genetics Board, Vector Securities
performed a variety of financial and comparative analyses, including those
described below. The summary of certain of Vector Securities' analyses set forth
below does not purport to be a complete description of the analyses underlying
Vector Securities' opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. In arriving at its opinion Vector
Securities did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Vector Securities
believes that its analysis must be considered as a whole and selecting portions
of its analysis and the factors considered by it, without considering all
analyses and factors could create a misleading and incomplete view of the
processes underlying such analyses and the opinion. In its analysis, Vector
Securities made numerous assumptions with respect to RGene and industry
performance, as well as general business, economic, market and
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<PAGE> 17
financial conditions, many of which are beyond the control of Targeted Genetics,
RGene or Vector Securities. No company utilized as a comparison is identical to
RGene, and none of the precedent transactions is identical to the Merger. Any
estimates contained in such analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. Accordingly,
because such estimates are inherently subject to uncertainty, none of Targeted
Genetics, RGene, Vector Securities or any other person assumes responsibility
for their accuracy.
The following is a summary of certain of the analyses performed by Vector
Securities in connection with its fairness opinion dated as of April 16, 1996:
Comparable Publicly Traded Company Analysis. Vector Securities
reviewed and compared certain financial and operating information of the
following ten public companies determined by Vector Securities to be
engaged in businesses comparable to those of RGene (the "Comparable
Companies"): Applied Immune Sciences, Inc.; Cell Genesys, Inc.; Cytel
Corporation; GeneMedicine, Inc.; Immune Response Corporation; Somatix
Therapy Corporation; Systemix, Inc.; Viagene, Inc.; and Vical, Inc. Using
publicly available information, Vector Securities analyzed, among other
things, the market capitalization of the Comparable Companies and derived
multiples of the Comparable Companies' net cash, book value and technology
value (defined as market capitalization less net cash) and applied such
multiples to similar financial data relating to RGene. Vector Securities
then applied a 40% acquisition premium to the resulting values to derive an
imputed aggregate valuation range for RGene.
Comparable Merger and Acquisition Transaction Analysis. Using publicly
available information, Vector Securities analyzed the purchase prices paid
in the following six selected acquisition transactions in the biotechnology
industry (the "Comparable Transactions"): Viagene, Inc./Chiron Corp.;
Glycomed, Inc./Ligand Pharmaceuticals; CytoRad Incorporated/Cytogen
Corporation; Sphinx Pharmaceutical Corp./Eli Lilly and Company; Genetic
Therapy, Inc./Sandoz AG; and Athena Neurosciences, Inc./Elan Corporation.
In performing its comparable merger and acquisition transaction analysis,
Vector Securities compared purchase prices paid in the Comparable
Transactions as multiples of net cash, book value and technology value and
compared acquisition premiums paid in the Comparable Transactions (based on
market value one month prior to the announcement of the transaction).
Vector Securities then applied the resulting multiples and acquisition
premiums to comparable data for RGene. All multiples for the Comparable
Transactions were based on information available at the time of the
opinion.
Because of the inherent differences between the businesses, operations
and prospects of RGene and the Comparable Companies and the companies
included in the comparable merger and acquisition transaction analysis, and
due to the early stage of development of RGene's technology and product
candidates, RGene's lack of profitability to date, and its prospects for
profitability, if any, during the next several years, Vector Securities
believes that a purely quantitative analysis would not be particularly
meaningful in the context of the Merger. Therefore, Vector Securities
applied its qualitative judgment to the quantitative results obtained from
the comparable publicly traded company and comparable merger and
acquisition transaction analyses described above, as well as the other
analyses performed in connection with its fairness opinion, to derive an
imputed aggregate valuation range for RGene of approximately $15 million to
$30 million. Based upon the foregoing factors, Vector Securities then
rendered its opinion that the aggregate consideration to be paid by
Targeted Genetics in the Merger was, as of the date of Vector Securities'
opinion, fair from a financial point of view.
Pursuant to an engagement letter between Targeted Genetics and Vector
Securities, Targeted Genetics has agreed to pay Vector Securities a fee of
$100,000 for the rendering of its opinion. Targeted Genetics also agreed to
reimburse Vector Securities for its reasonable out-of-pocket expenses and agreed
to indemnify Vector Securities against certain liabilities arising out of the
rendering of such opinion. Vector Securities served as co-managing underwriter
in connection with Targeted Genetics' initial public offering in May 1994 and is
serving currently as a co-managing underwriter in connection with Targeted
Genetics' pending offering of Company Common Stock. Vector Securities has in the
past provided, and may from time to time provide, investment banking services to
Targeted Genetics for which Vector Securities may be paid customary investment
banking fees. In the course of its normal trading activities, Vector Securities
may from time to time effect transactions and hold positions in the securities
of Targeted Genetics.
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<PAGE> 18
Vector Securities is a nationally recognized investment banking firm. As
part of its investment banking business, Vector Securities is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
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BUSINESS OF TARGETED GENETICS
Targeted Genetics is focused on the development of gene and cell therapies
for the treatment of certain acquired and inherited diseases. The Company is
developing a broad base of core technologies that it believes will allow it to
address a variety of such diseases. These technologies include proprietary viral
and non-viral gene delivery systems, as well as novel techniques for CTL
immunotherapy. The Company is using its core technology platform to develop
potential treatments for various genetic disorders, cancer and infectious
diseases, and is currently conducting clinical trials in certain of these
indications.
The Company believes that in the area of gene therapy, different disease
targets will require different methods of gene delivery, depending on the target
cell to be modified, the duration of gene expression required and the need for
ex vivo or in vivo delivery. Accordingly, the Company is developing gene
delivery systems based on three different vector technologies: adeno-associated
viral ("AAV") and retroviral and non-viral. The Company believes these systems
will provide it with the flexibility necessary to develop gene therapies for a
broader range of diseases than would be possible using a single gene delivery
system. Targeted Genetics was the first company to initiate clinical trials
using AAV vectors and is not aware of any other company conducting clinical
trials using these vectors. In addition, the Company has exclusive rights to an
improved type of retroviral vector which has been shown in preclinical
experiments to be more efficient than earlier retroviral vectors at delivering
genes into certain types of blood cells. The Company is also developing
non-viral gene delivery systems which may provide greater flexibility relative
to the size and sequence of transferred genes and allow targeted delivery in
vivo.
In the area of cell therapy, the Company's expertise with CTLs enables it
to isolate from patients and efficiently multiply antigen-specific CTLs, which
are immune cells that target and kill specific diseased cells. This expertise
forms the basis for a series of potential immunotherapies for the treatment of
cancer and infectious diseases. The CTL immunotherapy program is based on the
Company's proprietary Rapid Expansion Method ("REM") technology, which is used
to grow CTLs ex vivo prior to infusion into the patient. REM allows the Company
to grow billions of CTLs from individual cloned cells over several weeks, while
preserving the cells' specific disease-fighting capabilities. This represents a
significant improvement over other methods of expanding CTL clones, which
generally require several months.
Targeted Genetics is currently conducting multiple clinical trials
utilizing its viral gene delivery systems as well as its CTL immunotherapy
technology. The Company is conducting a Phase I and a Phase I/II clinical trial
examining the use of AAV vectors to deliver in vivo the cystic fibrosis
transmembrane regulator ("CFTR") gene for the treatment of cystic fibrosis. The
Phase II part of the latter trial is expected to begin in late 1996. In
addition, the Company is conducting a Phase I clinical trial examining the use
of HIV-specific CTLs to prevent the onset of full-blown AIDS in HIV-infected
patients. The Company also is collaborating on two physician-sponsored Phase I
clinical trials examining gene therapies for the treatment of Gaucher disease
and melanoma. Patient accrual for all these Phase I clinical trials is expected
to be completed by the end of 1996.
DEVELOPMENT PROGRAMS
Targeted Genetics is utilizing its core technologies to develop potential
products for the treatment of single-gene disorders, cancer and infectious
diseases. As part of its product development strategy, Targeted Genetics is
using early clinical trials to assess product opportunities and determine the
effectiveness of using its vector technologies to administer genes to patients,
as well as to support its overall development activities. The most advanced
product-directed development programs are the AAV gene therapy for the treatment
of cystic fibrosis
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and CTL immunotherapy for HIV infection. The following table summarizes the
Company's development programs and related technologies:
<TABLE>
<CAPTION>
TECHNOLOGY
-------------------------------------------------------
DEVELOPMENT PROGRAM TYPE OF THERAPY DELIVERY SYSTEM GENE STATUS
- -------------------- ------------------------ ------------------ ----- ------------
<S> <C> <C> <C> <C>
SINGLE-GENE
DISORDERS
Cystic Fibrosis Gene Therapy AAV Vector CFTR Phase I/II
Gaucher Disease Stem Cell Gene Therapy Retroviral Vector GC Phase I
CANCER
Melanoma Tumor Vaccine Retroviral Vector IL-7 Phase I
Breast/Colon CTL Immunotherapy -- -- Preclinical
(Tumor-Specific CTLs)
INFECTIOUS DISEASES
HIV CTL Immunotherapy -- -- Phase I
(HIV-Specific CTLs)
</TABLE>
SINGLE-GENE DISORDERS
CYSTIC FIBROSIS. Cystic fibrosis is the most common single-gene deficiency
affecting the Caucasian population, afflicting approximately 30,000 people in
the United States and 60,000 people worldwide. The disease is caused by a
dysfunctional CFTR gene, which results in a buildup of mucus in the lungs,
infections and early death. Current treatments for cystic fibrosis offer only
symptomatic relief and cannot cure or halt the progression of the disease.
Based on preclinical findings by the Company and its scientific
collaborators, the Company believes that the persistence of expression and lack
of toxicity obtained with its AAV-based gene delivery vector potentially make it
better suited for delivery of the CFTR gene to the lung than other vectors. In
preclinical studies in rabbits, the Company and its collaborators at The Johns
Hopkins University ("Johns Hopkins") were able to detect expression of the CFTR
gene for periods of up to six months with no observed side effects when single
doses of an AAV-CFTR vector were administered directly into the right lower lobe
of the rabbit lung via bronchoscopy. These results were confirmed in similar
studies in rhesus monkeys, in which gene transfer occurred in up to 50% of
target airway cells, and gene expression, which was confirmed in all animals,
persisted for up to six months. In these studies, there was no evidence of
toxicity, as indicated by the absence of any significant changes in clinical
parameters and levels of inflammatory cytokines. Furthermore, histopathology
examination showed no evidence of any cellular immune response. In addition, the
monkeys used in the study were seropositive for AAV, and thus a preexisting
humoral immune response did not prevent gene transfer. The studies compare
favorably to preclinical studies with other delivery systems in which only
short-term gene expression was observed in the lung. Based on these preclinical
data, the Company began two clinical trials in late 1995 to evaluate the safety
and feasibility of in vivo gene therapy for the treatment of cystic fibrosis by
direct delivery of the CFTR gene using an AAV vector.
The first clinical trial, which began in November 1995, is a Phase I
clinical trial at Johns Hopkins in which an AAV vector containing the CFTR gene
is being delivered to the nose and lung of adult cystic fibrosis patients having
mild lung disease. The trial is designed as an interpatient dose escalation
trial and will enroll a total of 12 patients. Two patients are being treated at
each of six escalating dose levels. An AAV-CFTR vector will be administered in
an open-label single dose to the right lower lobe of the lung via bronchoscopy.
Additionally, each patient will be randomized to receive a single dose of an
AAV-CFTR vector administered to one nostril and a placebo to the other. Patients
will be monitored for, among other things, safety and assessment of gene
transfer and expression. The nasal administration is intended to determine if
physiologic measurement of CFTR function can be obtained in the nasal
epithelium. The Company expects to complete this clinical trial in late 1996. If
the results of the trial confirm the Company's preclinical findings of safety
and gene transfer, the Company intends to
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conduct subsequent clinical trials in 1997 involving aerosol delivery of an
AAV-CFTR vector to the whole lung. The Company is currently developing aerosol
formulations for testing in preclinical models.
The second clinical trial began in December 1995 at Stanford University.
This trial is designed as a Phase I/II trial, pursuant to which an AAV-CFTR
vector will be administered to the maxillary sinuses of cystic fibrosis patients
with chronic sinusitis. The Phase I part of this trial is designed as a dose
escalation study. Six patients will be enrolled, and each patient will initially
receive one dose in one maxillary sinus and a subsequent dose in the
contralateral maxillary sinus approximately one to two months later. The trial
will assess safety and efficacy of gene transfer and also may provide an initial
assessment of the effect of repeat delivery on gene transfer and expression.
Additionally, the dose level will be established for the Phase II part of the
trial, in which up to 50 patients will receive an AAV-CFTR vector in one sinus
and a placebo in the other. Patients in the Phase II trial will be monitored to
assess the ability of an AAV-CFTR vector to prevent the relapse of chronic
sinusitis. The Company expects to complete patient accrual for the Phase I trial
in mid-1996 and to initiate the Phase II trial in late 1996.
There can be no assurance that clinical trials will proceed or be completed
as indicated, or that the AAV-CFTR gene therapy will prove safe and effective,
receive applicable regulatory approvals or be successfully developed or
marketed.
GAUCHER DISEASE. Gaucher disease results from the deficiency of a gene
that produces an enzyme called glucocerebrosidase ("GC"), which normally
metabolizes a lipid called glucocerebroside. The enzyme deficiency results in
accumulation of this lipid in cells in the spleen, liver and bone marrow.
Symptoms of the disease include hematologic disorders, enlargement of the liver
and spleen, bone erosion and pain. The estimated annual incidence of Gaucher
disease in the United States is 5,000 severe cases and 15,000 mild to moderate
cases. Current therapies for Gaucher disease include bone marrow transplantation
from sibling-matched donors and enzyme replacement therapy. Only 25% of patients
are candidates for bone marrow transplantation due to lack of appropriate
donors. Furthermore, the risk of transplant-related morbidity and mortality
restricts this therapy to severely affected individuals. Although enzyme
replacement therapy appears to be effective, this therapy is currently extremely
expensive.
Targeted Genetics selected Gaucher disease as an initial disease target for
the assessment of its stem cell gene therapy technology based on the scientific
theory that genetic correction in as little as 5% of a Gaucher disease patient's
blood cells may be adequate to achieve reversal of the disease. The Company
believes that although stem cell transduction techniques, including its own, may
not provide adequate levels of gene transfer and expression, current clinical
trials will provide baseline data that are necessary to facilitate the
development of improved methods for stem cell transduction. The Company is
collaborating on a physician-sponsored Phase I clinical trial at the Fred
Hutchinson Cancer Research Center (the "Hutchinson Center") in which peripheral
blood stem cells are being reinfused into Gaucher disease patients after ex vivo
transduction with a retroviral vector containing the GC gene. Patients
undergoing this therapy will be monitored for safety and long-term persistence
of the genetically modified cells. The Company believes that a series of Phase I
trials to test potentially improved techniques for stem cell gene transfer will
be required prior to initiation of a Phase II Gaucher disease clinical trial.
See "-- Core Technologies."
CANCER
Cancer is the second leading cause of death in the United States, with over
one million new cases diagnosed each year. The Company and its collaborators are
investigating the uses of CTL-based immunotherapy to enhance the immune system's
natural ability to eliminate cancer cells selectively.
CTL IMMUNOTHERAPY. The objective of the Company's cancer CTL immunotherapy
program is to restore an effective immune response through the infusion of large
numbers of antigen-specific CTLs, immune cells that target and kill specific
tumor cells. The CTL immunotherapy program is based on the Company's proprietary
REM, which is used to grow CTLs prior to infusion. The program involves
isolating antigen-specific CTLs, multiplying them ex vivo and reinfusing them
into the patient. The Company believes that therapies based on antigen-specific
CTLs may be more effective and have fewer side effects than other types of cell
therapies that utilize broader classes of T cells or lymphocytes.
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The first clinical trial using antigen-specific CTLs was conducted by the
Company's scientific collaborators at the Hutchinson Center in an examination of
a CTL immunotherapy for the prevention of cytomegalovirus ("CMV") disease in
patients undergoing bone marrow transplants for the treatment of certain
cancers. CMV is a virulent infection that occurs frequently in immunocompromised
patients and causes severe illness that may lead to death. In this trial, 14
patients were administered donor-derived CMV-specific CTLs. None of the patients
who received the CTLs developed CMV viremia or disease. Based on this Hutchinson
Center trial, the Company believes that CTL immunotherapy may be useful in
treating or preventing a number of diseases, such as cancer, that may occur due
to a lack of adequate T cell response.
The Company is conducting preclinical studies directed to the isolation and
ex vivo multiplication of tumor-specific CTLs against certain types of cancer,
including breast and colon cancers. The Company plans to use the data generated
by these preclinical studies to design clinical trials of CTL immunotherapy for
the treatment of these cancers. To date, the Company has been able to generate
CTLs specific to peptides associated with human prostate and melanoma tumors,
multiply these CTLs in the REM process and use them to kill cancer cells in
vitro.
IL-7 TUMOR VACCINE. The Company is collaborating with clinicians at the
University of California at Los Angeles on an investigator-sponsored Phase I
clinical trial involving the administration of an IL-7 gene to nine patients
with metastatic melanoma in an attempt to stimulate CTL responses against the
tumor. The Company is collaborating in this investigator-sponsored study to
determine whether antigen-specific CTLs can be isolated and then multiplied
using the Company's REM process and retain their potency. IL-7 is an
immunomodulatory protein that has been demonstrated to activate antigen-specific
CTLs in in vivo preclinical studies and cause them to infiltrate tumor cells. In
connection with this trial, a melanoma tumor cell line was genetically modified
to produce IL-7. These modified cells are mixed with the patient's own tumor
cells and the cell mixture is injected into the patient. These modified tumor
cells may act to enhance the immune system's ability to recognize cancer cells
as foreign and to generate a potent CTL response against the tumor. As part of
this trial the Company has been able to isolate melanoma-specific CTLs from
blood samples of patients who have received the therapy and is currently
examining these CTLs to assess their ability to kill cancer cells.
INFECTIOUS DISEASES: HUMAN IMMUNODEFICIENCY VIRUS ("HIV")
CTL IMMUNOTHERAPY. HIV is a retrovirus that is the cause of AIDS, a
condition that is characterized by loss of CD4 cells and progressive immunologic
impairment and death. Currently there is no effective treatment for AIDS, and no
effective way to prevent an HIV-infected person from developing AIDS. According
to the Centers for Disease Control and Prevention, approximately one million
people in the United States have been infected with HIV. The World Health
Organization estimates that approximately 17 million people worldwide have been
infected with HIV and projects that the worldwide incidence of HIV infection
will grow to 30 million to 40 million people by the end of the century.
The Company and certain other researchers believe that the key to
successful HIV therapy may lie in manipulating and harnessing the cell-mediated
arm of the immune response. Researchers have found that HIV-infected people who
remain symptom-free for prolonged periods have high levels of CTLs that suppress
viral proliferation in CD4 cells. In addition, uninfected partners of
HIV-infected people, and uninfected infants born to HIV-infected mothers, have
been found to have high levels of HIV-specific CTLs, which appear to have kept
them HIV-free. The Company believes that the provision of large quantities of
cloned HIV-specific CTLs may provide a means of allowing HIV-infected people to
maintain an effective immune response, thereby delaying the onset of full-blown
AIDS.
In 1995, the Company completed a Phase I clinical trial of HIV-specific
CTLs modified with a HyTK safety gene at the Hutchinson Center. Individual
clones of these CTLs specific for the HIV gag protein were isolated, modified
with a retroviral vector containing the HyTK gene and multiplied to more than
one billion cells. The HyTK gene was used to mark the cells and allow for
ablation of the cells by administration of ganciclovir if undesirable side
effects resulted from the therapy. After ex vivo expansion, the autologous
HyTK-transduced gag-specific CTL clones were reinfused intravenously in four
ascending doses administered at 14-day intervals. Based on the six patients
tested, the CTLs were shown to engraft, and the therapy appeared to be safe and
well tolerated,
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with no significant side effects. No patients required ablation with
ganciclovir. Once reinfused, the HIV-specific CTLs did not persist as long as
anticipated, apparently because of a primary CTL response directed against the
HyTK gene. Since the CTL immunotherapy appears to be safe, however, the use of
the HyTK gene for the original reason of safety will no longer be required.
In early 1996, the Company began a follow-up Phase I clinical trial, also
at the Hutchinson Center, in which up to eight HIV-infected patients are being
administered five escalating doses of HIV gag-specific CTLs. The first three
doses will consist of unmarked cells and the last two will consist of cells
modified with a retroviral vector containing the neo gene, a marking gene that
has not been shown to be immunogenic. Patients in the trial will be monitored
for safety, persistence of the infused CTLs and changes in viral burden. Patient
accrual in this trial is expected to be complete in late 1996.
There can be no assurance that the clinical trials will proceed or be
completed as indicated or that the CTL immunotherapy will prove safe and
effective, receive applicable regulatory approvals, or be successfully developed
or marketed.
INTRACELLULAR VACCINE IN CD4 CELLS. As a complementary approach to its CTL
immunotherapy for the treatment of HIV, the Company is collaborating on the
preclinical and clinical development of intracellular vaccines for HIV with Dr.
Philip Greenberg of the Hutchinson Center. In the planned physician-sponsored
Phase I trial, HIV-infected patients will be treated with genetically modified
CD4 helper cells. Two subgroups of these CD4 cells will be modified with
retroviral vectors expressing two different intracellular vaccine candidates for
which preclinical data indicate potential utility as protective agents against
HIV replication. These candidates are genes that express RNA molecules that can
act as decoys to bind HIV proteins essential for HIV replication. A third
subgroup of CD4 cells will be unmodified except for a marking gene. The trial's
goal is to provide general safety data and comparative data as to which of the
intracellular vaccine constructs may be more promising, based on length of cell
persistence in vivo versus the marked cells.
Since only a small fraction of the patient's CD4 cells will be modified to
resist HIV in this trial, it is unlikely that long-term therapeutic benefit will
result. To generate larger numbers of HIV-resistant CD4 cells, it will be
necessary to introduce the intracellular vaccine gene into stem cells from which
CD4 cells are derived. The Company believes that continued improvement in the
efficiency of stem cell gene transfer and expression will be necessary to
provide the rationale for future clinical testing of intracellular vaccines for
HIV in stem cells. See "-- Core Technologies -- Gene Therapy -- Stem Cell Gene
Therapy."
OTHER THERAPEUTIC AREAS
In addition to the development program for cystic fibrosis, the Company is
conducting research to assess the potential for delivery of genes to other
target cells using AAV vectors.
CARDIOVASCULAR. The Company is collaborating with researchers at the
Bowman Gray School of Medicine in Winston-Salem, North Carolina to examine, in
animal models, the ability of AAV vectors to deliver genes in vivo to certain
cardiovascular cells. These studies are investigating in vivo delivery of AAV
vectors in monkeys exhibiting arteriosclerotic disease. AAV vectors are being
used to deliver genes via a balloon catheter inserted into a monkey artery. To
date, these studies have demonstrated that certain vascular endothelial cells
can be targeted for gene expression with AAV vectors, indicating that AAV
vectors may be feasible delivery systems for gene therapy treatments directed at
various cardiovascular disorders, including the inhibition of cell growth
associated with restenosis or the treatment of vascular disease with angiogenic
factors.
MUCOSAL IMMUNITY. The Company is evaluating the feasibility of using AAV
vectors to deliver genes for applications relating to mucosal immunity. Certain
inflammatory and immune-related diseases may be treated by delivery of
anti-inflammatory or immune stimulating genes to mucosal surfaces such as the
gastrointestinal tract. In initial studies using in vivo animal models, the
Company is assessing the ability of AAV vectors to deliver genes directly to
cells of the intestinal epithelium.
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CORE TECHNOLOGIES
The Company is developing a broad range of core technologies that it
believes will allow it to address issues specific to a variety of diseases. The
Company believes that in the area of gene therapy, different disease targets
will require different methods of gene delivery, depending on the target cell to
be modified, the duration of gene expression required and the need for ex vivo
or in vivo delivery. Accordingly, the Company is developing multiple gene
delivery systems based on three different vector technologies: AAV, retroviral
and non-viral. In certain treatments, for which in vivo modification of slowly
dividing or nondividing target cells is required or preferred, such as
modification of lung cells to treat cystic fibrosis, the Company is utilizing
its AAV vector technology. The Company uses its retroviral vector technology in
therapeutic areas where permanent modification of rapidly dividing cells may be
necessary. For therapeutic indications where the use of AAV and retroviral
vectors is not desirable or feasible, the Company is developing non-viral
delivery systems.
In the area of cell therapy, the Company's CTL immunotherapy expertise
enables it to efficiently isolate and multiply CTLs, immune cells that target
and kill only specific diseased cells, and forms the basis for a series of
potential immunotherapies.
GENE THERAPY
OVERVIEW. Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases that involves the insertion of genetic information
into target cells to produce specific proteins needed to correct or modulate
disease conditions. Proteins are the fundamental components of all living cells
and are essential to cellular structure, growth and function. Proteins are
produced by cells from a set of genetic instructions encoded in DNA, which
contains all the information necessary to control cellular biological processes.
DNA is organized into segments called genes, with each gene containing the
information required to express, or produce, a specific protein.
An alteration in the function of, or absence of, specific genes is
responsible for causing some diseases, including inherited diseases such as
cystic fibrosis and Gaucher disease and certain types of cancer. Gene therapy
may be used to treat such diseases by replacing a missing or defective gene to
facilitate the normal protein production capabilities of cells. In addition,
gene therapy may be used to enable cells to perform additional roles in the
body, such as enhancing the function of the immune system to fight infectious
diseases or cancer. Gene therapy may also be used to inhibit production of
undesirable proteins or viruses within cells.
A key factor in the progress of gene therapy is the development of safe and
efficient methods of transferring genes into cells. For transfer into cells, the
gene is incorporated into a delivery system called a vector. Vectors may be
derived from either viral or non-viral systems. The most common gene delivery
approach to date relies on viral gene transfer, whereby modified viruses are
used to transfer the desired genetic material into host cells. The process of
gene transfer can be accomplished ex vivo (outside the body), in which cells are
removed from the patient, genetically modified, and then reinfused into the
patient, or in vivo (inside the body), in which vectors are introduced directly
into the patient's body.
The use of viruses takes advantage of their natural ability to introduce
genes into host cell and use the host's metabolic machinery to produce proteins
essential for the survival and function of the virus. In gene therapy
applications, viruses are genetically modified to contain the desired genes and
to inhibit the ability of the virus to reproduce. Successful application of
viral gene transfer to indications requiring long-term gene expression entails a
number of essential technical requirements, including the ability of the viral
vector to carry desired segments of genes, to transfer genes into a sufficient
number of target cells and to enable genes contained in the viral vector to
persist in the host cell. A number of different viral vectors, including AAV and
retroviral vectors, are being used for potential gene therapy applications
requiring long-term gene expression.
Current non-viral vector systems generally consist of DNA incorporating the
desired gene, combined with various compounds aimed at enabling the DNA to be
taken up by the host cell. These in vivo gene delivery approaches include
encapsulating genes into lipid carriers such as liposomes, which facilitate the
entry of DNA into cells; ionically binding negatively charged DNA to the surface
of cationic lipids which are positively
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charged prior to infusion; injecting pure plasmid or "naked" DNA in an aqueous
solution; and directing DNA to receptors on target cells by combining the gene
with protein carriers that are taken up by the cell.
AAV VECTORS. Targeted Genetics and its scientific collaborators have
developed significant expertise with respect to the design and use of AAV
vectors in gene therapy. The Company believes that certain features of AAV
vectors make them particularly well suited for the treatment of a number of
diseases: (i) AAV has never been associated with causing any human disease; (ii)
AAV generally cannot replicate without the presence of a helper virus; (iii) AAV
vectors contain no viral genes that, if present, might produce unwanted immune
responses leading to side effects or reduced efficacy; (iv) unlike some other
types of viral systems, AAV vectors can introduce genes into nondividing or
slowly dividing cells, such as cells lining the airway of the lung; (v) AAV
vectors may persist in the host cell to provide relatively long-term expression;
and (vi) AAV vectors can be purified and concentrated, thereby allowing for more
efficient manufacturing.
The Company is building a proprietary position in AAV through the
development or acquisition of exclusive rights to inventions that (i) provide
important enhancements to AAV vectors; (ii) demonstrate novel approaches to the
use of AAV vectors for gene therapy; and (iii) establish new and improved
methods for large-scale production of AAV vectors. The Company has exclusive
rights from the National Institutes of Health (the "NIH") to a patent for use of
a novel AAV vector for cystic fibrosis. Notice of allowance has been granted
with respect to this patent.
RETROVIRAL VECTORS. The Company is using retroviral vectors to modify T
cells and stem cells. These cells multiply to generate large numbers of progeny
(daughter) cells and are well suited as targets for retroviral vectors that can
modify only rapidly dividing cells. The Company believes that it has positioned
itself at the forefront of retroviral gene delivery technology through its
exclusive relationship with Dr. A. Dusty Miller, a leader in the development of
packaging cell lines for retroviral vectors. One of Dr. Miller's more recent
inventions in this area is a new type of retroviral vector packaging cell line
called PG13, which the Company has licensed exclusively from the Hutchinson
Center. Vectors produced in this cell line have been shown to have improved
efficiency for ex vivo transduction of human blood cells such as T cells and
stem cells. Hematopoietic stem cells are the progenitor cells from which all
circulating blood cells are derived. Thus, a large number of genetic diseases
might be treated using stem cell gene therapy. However, Targeted Genetics
believes that many of these diseases cannot be successfully treated using
currently available gene delivery technologies. Increased efficiency of gene
transfer and expression will be required to achieve the level of genetically
modified cells necessary to result in modulation of many such diseases.
Accordingly, the Company's effort in stem cell gene therapy is directed to
improving the efficiency of gene transfer and expression in stem cells using the
PG13 retroviral vector together with an internally developed proprietary stem
cell transduction protocol.
NON-VIRAL VECTORS. In addition to the development of retroviral and AAV
vector systems, Targeted Genetics is using its expertise in molecular biology
and virology to develop proprietary non-viral gene delivery systems that will
have the advantages of high-efficiency gene transfer, combined with the ability
to achieve such transfer to specific target cells in vivo. These systems are
being designed to contain elements that are functionally analogous to viral
proteins, but without the use of mammalian viruses. In addition to its in-house
efforts in the program, the Company is collaborating with scientists at the Fox
Chase Cancer Center in Philadelphia, Pennsylvania.
CTL IMMUNOTHERAPY
OVERVIEW. The immune system is the body's major defense mechanism
responsible for protecting against disease. It functions through a complex
interplay of components and allows the body to detect foreign agents and thereby
defend against infections and diseases. The immune system recognizes parts of
proteins called antigens that are present on the surface of diseased cells but
are not present on normal cells. The immune response to an antigen involves the
integrated action of various classes of white blood cells, including
lymphocytes. Lymphocytes comprise two major classes: B cells, which produce
antibodies that mediate humoral immunity, and T cells, which direct
cell-mediated immunity.
T cells direct cell-mediated immunity by recognizing antigens on diseased
cells. The two main classes of T cells are CD4 cells and CD8 cells. In general,
CD8 cells are CTLs that recognize, contact and kill the diseased
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cells. CD4 cells are primarily helper cells that coordinate the function of
other immune cells, including CTLs, by secreting growth factors known as
cytokines. CTLs are disease-specific, i.e., they individually recognize and bind
to only a single, specific antigen. Furthermore, only in the presence of CD4
helper cells do these specific CTLs proliferate to produce the large population
of antigen-specific CTLs required to elicit an effective immune response.
In some disease states, the immune system fails to mount or maintain an
effective immune response. For certain diseases, including HIV and cancer, it is
believed such failure may be associated with an inadequate CTL response. For
example, HIV infects and kills CD4 cells, which leads to subsequent loss of CTL
function and, thus, to destruction of the immune system by the virus. One
approach to the treatment of immune deficiencies, adoptive immunotherapy, has
been demonstrated in animal models to be effective against certain cancers and
infectious diseases. Adoptive immunotherapy is designed to harness and bolster
the body's natural immune capabilities to fight or prevent disease. In adoptive
immunotherapy, cells are harvested from the patient, multiplied ex vivo and
reinfused. However, the efficacy of adoptive immunotherapies has been limited to
date, due in part to the lack of uniform antigen specificity in the expanded
cell population and side effects resulting from the activation of a broad-based
immune response. Targeted Genetics believes that the more uniform specificity
obtained by expanding individual clones of antigen-specific CTLs may potentially
enhance the efficacy and reduce the side effects of adoptive immunotherapies.
CTL IMMUNOTHERAPY PROGRAM. Targeted Genetics is working to develop a
highly targeted form of cell therapy, which is intended to produce a powerful,
disease-specific immune response through the infusion of large numbers of
antigen-specific CTLs. The Company's CTL immunotherapy program involves
isolating antigen-specific CTLs from a small sample of the patient's blood,
multiplying them to large numbers ex vivo and reinfusing them into the patient.
In essence, the Company's CTL immunotherapy is intended to amplify the natural
disease-fighting function of the immune system relating to specific infected or
cancerous cells.
The Company believes that its CTL immunotherapy represents an improvement
over other approaches to immunotherapy because it is based on cloned,
antigen-specific CTLs. The Company believes that the efficacy of its CTL
immunotherapy may be improved over other immunotherapy approaches because
virtually all of the reinfused cells will be CTLs targeting the specific
diseased cells. The Company also believes that the safety and side effect
profile may be improved over other immunotherapy approaches because of the
uniformity and consistency of the reinfused cells.
The Company's focus on antigen-specific CTLs as a basis for immunotherapy
originated from research conducted by its collaborators at the Hutchinson
Center, Drs. Philip Greenberg and Stanley Riddell. These researchers conducted a
Phase I clinical trial to evaluate the safety of infusing donor-derived,
CMV-specific CTLs to bone marrow transplant patients, and the potential of this
approach for providing an immune response against CMV during the short period in
which transplant patients have a high probability of developing CMV. This trial,
which was published in New England Journal of Medicine in October 1995, was the
first clinical trial in which cloned, antigen-specific CTLs had been used in a
clinical trial. None of the 14 patients receiving the CTLs developed CMV viremia
or disease.
RAPID EXPANSION METHOD ("REM"). The CTL immunotherapy program is based on
the Company's proprietary REM technology, which is used to rapidly grow CTLs
prior to infusion into the patient. REM represents a significant improvement
over other methods of multiplying T cell clones. Using REM, CTL clones can be
multiplied over a thousandfold in less than two weeks. Accordingly, REM allows
the Company to grow billions of CTLs from a small pool of individual cloned
cells over a relatively short period of time, while preserving the cells'
disease-fighting capabilities. The Company has seen consistent results from REM
in both CD8 and CD4 T cells and for all disease specificities tested to date.
The Company has shown that REM is effective for growing CTLs specific for HIV,
CMV, malignant melanoma and prostate tumor peptides. The Company has filed
patent applications, on a worldwide basis, relating to the original process and
to process improvements.
GENETIC MODIFICATION OF CTLS. The Company believes that, on a long-term
basis, the effectiveness of CTL immunotherapy may be further improved through
genetic modification of the CTL clones. Currently, the
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Company is developing methods to genetically modify CTLs to give them the
capability of producing their own cytokines, which are required for CTL
proliferation and activation.
RESEARCH COLLABORATIONS AND LICENSING AGREEMENTS
Targeted Genetics has entered into a number of research collaboration and
licensing agreements. Generally, under the license agreements, the Company has
agreed to pay (i) an initial fee upon execution of the agreement; (ii) annual
maintenance or royalty fees; (iii) milestone payments upon realization of
certain benchmarks; and (iv) a royalty on sales of products, if any,
incorporating the underlying technology. Under the research collaboration
agreements, the Company is generally obligated to pay research fees and receives
options to obtain exclusive licenses to technology developed under these
agreements. The following is a summary of the principal agreements of the
Company.
FRED HUTCHINSON CANCER RESEARCH CENTER -- ADOPTIVE TRANSFER OF IMMUNE
CELLS. Between January 1994 and February 1995, Targeted Genetics entered into
research and license agreements with the Hutchinson Center and the University of
Washington in connection with the Company's CTL-based immunotherapy product
development program. The Company agreed to pay the Hutchinson Center and the
University of Washington annual research support until December 1996 and July
1996, respectively, for research to be conducted by Drs. Philip Greenberg and
Stanley Riddell at the University of Washington and the Hutchinson Center,
respectively, in the area of methods of conferring immunity in humans by
adoptive transfer of genetically modified CTLs. These agreements replaced other
contractual arrangements that had been entered into by Targeted Genetics with
the Hutchinson Center and the University of Washington between 1991 and 1993 in
this area. Pursuant to these agreements, Targeted Genetics has acquired an
exclusive worldwide license to inventions previously licensed by Targeted
Genetics or developed under these prior agreements, and has a continuing right,
effective until termination of this program, to incorporate and add new
inventions arising from this program to the research and license agreements.
FRED HUTCHINSON CANCER RESEARCH CENTER -- RETROVIRAL VECTORS. In November
1991, the Company entered into an agreement with the Hutchinson Center pursuant
to which the Company obtained a nonexclusive license to develop and market
products utilizing the PG13 packaging cell line technology for retroviral
vectors. In addition, in March 1994, Targeted Genetics entered into an agreement
with the Hutchinson Center pursuant to which the Company obtained an exclusive
license to develop and market products utilizing a second packaging cell line
technology for retroviral vectors. A patent covering this technology was issued
by the United States Patent and Trademark Office (the "USPTO") in November 1995.
THE JOHNS HOPKINS UNIVERSITY. In April 1993, Targeted Genetics entered
into a sponsored research agreement with Johns Hopkins pursuant to which the
Company agreed to pay Johns Hopkins an annual fee for a one-year period for
research to be conducted under the direction of Dr. Terence Flotte in the area
of developing AAV vectors for in vivo gene delivery. In March 1994, Targeted
Genetics entered into an agreement with Johns Hopkins for technology relating to
methods for producing AAV vectors co-invented by scientists at Johns Hopkins and
Targeted Genetics under this research program, pursuant to which Johns Hopkins
granted the Company an exclusive license to its interest in such technology.
MEDICAL COLLEGE OF OHIO. In March 1994, Targeted Genetics entered into an
agreement with the Medical College of Ohio pursuant to which the Company
obtained an exclusive worldwide license to develop and market products utilizing
technology relating to methods for producing AAV vectors.
NATIONAL INSTITUTES OF HEALTH. In March 1994, Targeted Genetics entered
into an agreement with the NIH pursuant to which the Company obtained an
exclusive worldwide license to a patent application covering an AAV vector
capable of expression from a novel promoter for the field of viral vector-based
gene therapy for the treatment of cystic fibrosis. In February 1996, the USPTO
issued a notice of allowance for this patent application.
UNIVERSITY OF MICHIGAN. In March 1994, the Company entered into a
nonexclusive license agreement with the University of Michigan and HSC (Hospital
for Sick Children) Research and Development Limited Partnership for a patent
application covering the CFTR gene used in the Company's AAV therapy for the
treatment of cystic fibrosis.
24
<PAGE> 28
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's business. The Company's
policy is to file patent applications to protect technology, inventions and
improvements to inventions that are considered important to the development of
its business. The Company also relies on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. To date, the Company has filed or exclusively licensed
24 patent applications relating to its product and vector development programs
with the USPTO, as well as foreign counterparts of certain of these applications
in Europe, Japan and certain other countries, as follows: CTL immunotherapy
program, nine; AAV vector program, seven; other vector development programs,
eight. No U.S. or foreign patent has been issued to the Company to date.
However, four patents licensed exclusively to the Company have issued or been
allowed by the USPTO. One of the issued patents, in the CTL immunotherapy field,
covers a method for generating helper-independent CTLs. With respect to the
Company's AAV program, a notice of allowance has been received for the patent
application covering the vector being used in the Company's cystic fibrosis
program. Two patents have issued relating to Targeted Genetics' other vector
development programs, including one covering PG13, the novel retrovirus
packaging cell line exclusively licensed from the Hutchinson Center.
Among Targeted Genetics' 24 patent applications relating to development
programs are three key patent applications relating to the Company's proprietary
REM technology. In addition, the Company has filed or exclusively licensed three
patent applications relating to proprietary methods for manufacturing AAV
vectors. A patent application has also been filed by Targeted Genetics relating
to an improved method of delivering genes to hematopoietic stem cells.
In addition to the intellectual property that Targeted Genetics owns or has
exclusively licensed, the Company has licensed several issued and pending
patents that relate to its development programs on a nonexclusive basis. Among
these are the two key patents that relate to the use of AAV vectors for gene
therapy licensed from the NIH and the University of Florida Research Foundation.
In addition, the Company has acquired nonexclusive rights to the cystic fibrosis
gene being delivered in an AAV vector.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any patent applications will
result in the issuance of patents or, if any patents are issued, whether the
patents will be subjected to further proceedings limiting their scope, whether
they will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue and patent applications in certain other countries
generally are not published until more than 18 months after they are filed, and
since publication of discoveries in scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it or any licensor
was the first creator of inventions covered by pending patent applications or
that it or such licensor was the first to file patent applications for such
inventions. Moreover, the Company is currently involved in one patent
interference proceeding declared by the USPTO to determine priority of invention
relating to certain components that may be useful in retroviral vectors, and may
have to participate in additional interference proceedings. Participation in
such interference proceedings could result in substantial cost to the Company,
even if the eventual outcome were favorable to it. If the outcome were
unfavorable, the Company may be unable to obtain rights to the invention
involved. There can be no assurance that the Company's patents, if issued, would
be held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe such patents. Litigation, which could result
in substantial cost to the Company, may be necessary to enforce the Company's
patents or to determine the scope and validity of other parties' proprietary
rights. If the outcome of any such litigation were adverse, the Company's
business could be materially adversely affected. The Company is unable to
predict how courts will resolve any future issues relating to the validity and
scope of its patents should they be challenged.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's
25
<PAGE> 29
technologies or patent applications. Such conflict could limit the scope of the
patents, if any, that the Company may be able to obtain or result in denial of
the Company's patent applications. In addition, if patents that cover the
Company's activities are issued to other companies, there can be no assurance
that the Company would be able to develop or obtain alternative technology.
Furthermore, as the biotechnology industry expands and more patents are
issued, the risk increases that the Company's processes and potential products
may give rise to claims that they infringe the patents of others. Such other
persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the affected
product or use of the affected process. Litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others. If the Company becomes involved in such litigation, it could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. If there were an adverse
outcome of any such litigation, the Company's business could be materially
adversely affected. In addition to any potential liability for significant
damages, the Company could be required to obtain a license to continue to
manufacture or market the affected product or use the affected process. Costs
associated with any licensing arrangement may be substantial and could include
ongoing royalties. There can be no assurance that any license required under any
such patent would be made available to the Company on acceptable terms, if at
all.
In addition to patent protection, the Company also relies upon trade secret
protection for its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology. To protect its trade secrets, the
Company requires its employees, consultants, scientific advisors and parties to
collaborative agreements to execute confidentiality agreements upon the
commencement of employment, the consulting relationship or the collaboration
with the Company. In the case of employees, the agreements also provide that all
inventions resulting from work performed by them while in the employ of the
Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information.
COMPETITION
The Company is aware of a number of companies and institutions that are
developing or considering the development of potential gene therapy and cell
therapy treatments, including early-stage gene therapy companies, fully
integrated pharmaceutical companies, universities, research institutions,
governmental agencies and other healthcare providers. In addition, the Company's
potential products will be required to compete with existing pharmaceutical
products, or products developed in the future, that are based on established
technologies. Many of the Company's competitors have substantially more
financial and other resources, larger research and development staffs, and more
experience and capabilities in researching, developing and testing products in
clinical trials, in obtaining Food and Drug Administration ("FDA") and other
regulatory approval, and in manufacturing, marketing and distribution than the
Company. In addition, the competitive positions of other early-stage companies
may be enhanced significantly through their collaborative arrangements with
large pharmaceutical companies or academic institutions. The Company's
competitors may succeed in developing, obtaining patent protection for,
receiving FDA and other regulatory approval for, or commercializing products
more rapidly than the Company. If the Company is successful in commercializing
its products, it will be required to compete with respect to manufacturing
efficiency and marketing capabilities, areas in which it has no experience. The
Company also competes with others in acquiring products or technology from
research institutions or universities. Furthermore, rapid technological
development could result in actual or proposed technologies, products or
processes of the Company becoming obsolete prior to successful
commercialization.
GOVERNMENTAL REGULATION
All of the Company's potential products will require regulatory approval by
U.S. and foreign governmental agencies prior to commercialization in such
countries. Human therapeutic products are subject to rigorous preclinical and
clinical testing and other premarket approval procedures administered by the FDA
and similar
26
<PAGE> 30
authorities in foreign countries. The FDA exercises regulatory authority over
the development, testing, formulation, manufacture, labeling, storage, record
keeping, reporting, quality control, advertising, promotion, export and sale of
the Company's products. Similar requirements are imposed by foreign regulators.
In some cases, state requirements also apply.
Gene therapy and cell therapy are relatively new technologies and have not
been extensively tested in humans. The regulatory requirements governing gene
and cell therapy products and related clinical procedures are uncertain and are
subject to change. Obtaining approval from the FDA and other regulatory
authorities for a new therapeutic product is likely to take several years, if
ever, and involve substantial expenditures. Moreover, ongoing compliance with
applicable requirements can entail the expenditure of substantial resources.
Difficulties or unanticipated costs may be encountered by the Company in its
efforts to secure necessary governmental approvals, which could delay or
preclude the Company from marketing its products.
The activities required before a new therapeutic agent may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation and may require animal studies to assess the product's
potential safety and efficacy. Animal safety studies must be conducted in
accordance with the FDA's Good Laboratory Practice regulations. The results of
these studies must be submitted to the FDA as part of an Investigational New
Drug application ("IND"), which must be reviewed and cleared by the FDA before
proposed clinical testing can begin. Clinical trials must be conducted in
accordance with Good Clinical Practices under protocols that detail the
objectives of the trial, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND. The FDA's review or approval of a study protocol does not
necessarily mean that, if the trial is successful, it will constitute proof of
efficacy or safety. Further, each clinical trial must be approved by and
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution at which the trial will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. The IRB is also responsible for
continuing oversight of the approved protocols in active trials. An IRB may
require changes in a protocol, and there can be no assurance that an IRB will
permit any given trial to be initiated or completed. Before conducting a human
gene therapy trial, research groups at institutions that receive funding from
the NIH must submit their protocol to the NIH's Recombinant DNA Advisory
Committee for NIH approval. This process can be conducted in parallel with the
IND approval process, but may add considerable time and expense to the early
regulatory review process.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, gene therapy clinical trials
generally are conducted with a small number of patients, who may or may not be
afflicted with a specific disease, to determine the preliminary safety profile.
In Phase II, clinical trials are conducted with larger groups of patients
afflicted with a specific disease in order to determine preliminary efficacy and
optimal dosages and to obtain expanded evidence of safety. In Phase III,
large-scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others for
market approval. The FDA receives reports on the progress of each phase of
clinical testing, and it may require the modification, suspension or termination
of clinical trials if an unwarranted risk is presented to patients. Because gene
therapy products are a new category of therapeutics, there can be no assurance
as to the length of the clinical trial period or the number of patients the FDA
will require to be enrolled in the clinical trials in order to establish to its
satisfaction the safety and efficacy of such products.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. The Company expects that its products will be
regulated as biologic drugs. According to the FDA's 1993 notice outlining its
regulatory approach to somatic and gene therapy products, these products are
also subject to the drug provisions of the Federal Food, Drug and Cosmetic Act.
This notice also stated, however, that the FDA's regulatory approach may evolve
as scientific knowledge increases in the area of somatic and gene therapy.
Current regulations relating to biologic drugs will require the Company to
submit to the FDA both a Product License Application ("PLA") and an
Establishment License Application ("ELA"), which must be approved by the FDA
before commercial marketing is permitted. The PLA/ELA must include results of
product development activities, preclinical studies and clinical trials, in
addition to detailed manufacturing information. FDA approval of PLA/ELAs
generally takes at least one year. The process may take substantially longer if
the FDA has
27
<PAGE> 31
questions or concerns about a product. The FDA may also request additional data
relating to safety or efficacy. Notwithstanding the submission of relevant data,
the FDA may ultimately decide that a PLA/ELA does not satisfy its regulatory
criteria for approval. The FDA may also modify the scope of the desired claims
or require the addition of warnings or other safety-related information and
require additional clinical tests following approval to confirm product safety
and efficacy (Phase IV trials). Even if FDA regulatory clearances are obtained,
a marketed product is subject to continual review, and later discovery of
previously unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on marketing a product or in withdrawal
of the product from the market, as well as possible civil or criminal sanctions.
The FDA requires that manufacturers of a product comply with Good
Manufacturing Practice ("GMP") requirements, both as a condition of product
approval and on a continuing basis. In complying with GMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing facilities are
subject to periodic inspections by the FDA to ensure compliance. Failure to pass
such inspections may subject the manufacturer to possible FDA action such as the
suspension of manufacturing, seizure of the product, withdrawal of approval or
other regulatory sanctions. The FDA may also require the manufacturer to recall
a product.
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state and local regulations. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages, and any such liability
could exceed the Company's resources.
HUMAN RESOURCES
At March 31, 1996, Targeted Genetics had 77 employees; 62 of these
employees were directly involved in research and development, of whom 18 had
Ph.D. or M.D. degrees. A significant number of the Company's management and
professional employees have prior experience with other biotechnology or
pharmaceutical companies. The Company considers its relations with its employees
to be good.
The Company's success will depend in large part on its ability to attract
and retain key employees and scientific advisors. Competition among
biotechnology and pharmaceutical companies for highly skilled scientific and
management personnel is intense. There can be no assurance that the Company will
be successful in retaining its existing personnel or advisors, or in attracting
additional qualified employees.
FACILITIES
Targeted Genetics currently occupies approximately 33,000 square feet of
laboratory and office space in a single facility in Seattle, Washington. Rental
payments in 1995 totaled $396,220. The lease expires on April 1, 1999 and
includes options to extend the lease term for three consecutive five-year
periods. The Company believes this facility, together with approximately 2,000
square feet of expansion space and space available in an adjoining office
complex, will be adequate to meet its projected needs for the next two to three
years. Within that time frame, the Company may be required to locate alternative
facilities, depending on the Company's growth and development.
28
<PAGE> 32
TARGETED GENETICS SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995 and balance sheet at December 31, 1994 and 1995 are derived
from the Company's financial statements that have been audited by Ernst & Young
LLP, independent auditors, which are included elsewhere herein, and are
qualified by reference to such financial statements and notes related thereto.
The selected financial data with respect to the Company's statements of
operations for the years ended December 31, 1991 and 1992 and the balance sheets
at December 31, 1992 and 1993 are derived from the audited financial statements
of the Company that have been audited by Ernst & Young LLP, independent
auditors, which are not included herein. The financial data at March 31, 1996
and for the three months ended March 31, 1995 and 1996 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for those periods. The selected financial data should be
read in conjunction with "Targeted Genetics Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of Targeted Genetics and notes thereto included elsewhere in this Proxy
Statement. The pro forma financial statement data as of March 31, 1996, and for
the year ended December 31, 1995 and the three months ended March 31, 1996 are
unaudited.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(2)
------- ------- ------- ------- -------- --------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ -- $ 549 $ 412 $ 449 $ 842 $ 1,195 $ 132 $ 183 $ 206
Expenses:
Research and development...... 1,084 1,477 4,261 6,763 8,195 11,268 1,978 2,366 4,636
General and administrative.... 299 466 1,217 1,892 2,267 3,020 701 617 888
Interest...................... -- -- -- 193 302 302 75 92 92
------- ------- ------- ------- ------- -------- -------- -------- --------
Total expenses............ 1,383 1,943 5,478 8,848 10,764 14,590 2,754 3,075 5,616
------- ------- ------- ------- ------- -------- -------- -------- --------
Net loss........................ $(1,383) $(1,394) $(5,066) $(8,399) $ (9,992) $(13,395 ) $(2,622) $ (2,892) $ (5,410)
======= ======= ======= ======= ======= ======== ======== ======== ========
Net loss per share.............. $ (0.94) $ (0.95 ) $ (0.29) $ (0.23) $ (0.34)
======= ======== ======== ======== ========
Shares used in computation of
net loss per share............ 10,533 14,169 8,966 12,343 15,979
======= ======== ======== ======== ========
Pro forma, assuming conversion
of Preferred Stock to Company
Common Stock (3):
Net loss per share............ $ (1.03)
=======
Shares used in computation of
net loss per share.......... 8,152
=======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------
---------------------------------------- PRO FORMA
1992(4) 1993 1994 1995 1996 1996(5)
-------- ------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available for
sale.................................................... $ 15,266 $ 6,797 $ 11,475 $ 14,443 $ 11,878 $ 14,105
Working capital........................................... 14,776 6,021 10,178 12,856 10,408 11,017
Total assets.............................................. 15,877 12,115 17,046 19,960 17,381 19,930
Long-term obligations..................................... 15 1,015 2,253 2,405 2,634 5,134
Deficit accumulated during development stage.............. (4,202) (9,267) (17,667) (27,589) (30,481) (48,132)
Total shareholders' equity................................ 15,297 10,231 13,242 15,773 13,119 11,404
</TABLE>
- ---------------
(1) Gives effect to the Merger as if it had occurred on January 1, 1995.
(2) Gives effect to the Merger as if it had occurred on January 1, 1996.
(3) Computed on the basis described in Note 2 of the notes to the financial
statements of Targeted Genetics.
(4) Prior to 1992, the Company was a wholly owned subsidiary of Immunex
Corporation ("Immunex") and, accordingly, balance sheet data did not exist.
(5) Gives effect to the Merger as if it had occurred on March 31, 1996.
29
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Consolidated Financial Statements as of March 31,
1996, and for the year ended December 31, 1995 and for the three months ended
March 31, 1996 are unaudited. The Unaudited Pro Forma Consolidated Balance Sheet
was prepared as if the Merger was effective at March 31, 1996. The Unaudited Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1995
was prepared as if the Merger was effective as of January 1, 1995. The Unaudited
Pro Forma Consolidated Statement of Operations for the three months ended March
31, 1996 was prepared as if the Merger was effective as of January 1, 1996. The
Unaudited Pro Forma Consolidated Financial Statements do not purport to
represent what Targeted Genetics' financial position or results of operations
would actually have been if the Merger had in fact occurred on such dates or to
project Targeted Genetics' financial position or results of operations as of any
future date or for any future period. The Unaudited Pro Forma Consolidated
Financial Statements are based on the historical financial statements of
Targeted Genetics and RGene and give effect to the Merger under the purchase
method of accounting. The Unaudited Pro Forma Consolidated Financial Statements
should be read in conjunction with the Targeted Genetics and RGene audited
financial statements and notes thereto included elsewhere herein.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA PRO
GENETICS RGENE ADJUSTMENTS FORMA
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,526 $ 1,677 $ 550(1) $ 3,753
Securities available for sale...................... 10,352 -- -- 10,352
Deposits, prepaid expenses and other............... 158 146 -- 304
-------- ------- -------- --------
Total current assets....................... 12,036 1,823 550 14,409
Property, plant and equipment, net................... 4,991 176 -- 5,167
In-process research and development.................. -- -- 17,651(1) --
(17,651)(2)
Other assets......................................... 354 -- -- 354
-------- ------- -------- --------
$ 17,381 $ 1,999 $ 550 $ 19,930
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 403 $ 264 $ -- $ 667
Notes payable to related parties................... -- 1,000 (1,000)(3) --
Accrued payroll and other liabilities.............. 229 -- -- 229
Payable to related parties......................... -- 1,500 -- 1,500
Current portion of long-term obligations........... 996 -- -- 996
-------- ------- -------- --------
Total current liabilities.................. 1,628 2,764 (1,000) 3,392
Long-term obligations................................ 2,634 -- -- 2,634
Deferred revenue..................................... -- 2,500 -- 2,500
Shareholders' equity (deficit):
Preferred stock.................................... -- 4,000 (4,000)(4) --
Common stock....................................... 43,605 360 1,000(3) 59,541
(1,360)(4)
15,936(5)
Unrealized losses on securities available
for sale........................................ (5) -- -- (5)
Deficit accumulated during development stage....... (30,481) (7,625) (17,651)(2) (48,132)
7,625(4)
-------- ------- -------- --------
Total shareholders' equity (deficit)....... 13,119 (3,265) 1,550 11,404
-------- ------- -------- --------
$ 17,381 $ 1,999 $ 550 $ 19,930
======== ======= ======== ========
</TABLE>
30
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA
GENETICS RGENE ADJUSTMENTS PRO FORMA
----------------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Investment income........................ $ 668 $ 53 $ -- $ 721
Other.................................... 174 300 -- 474
------- ------- ---- --------
Total revenues................... 842 353 -- 1,195
------- ------- ---- --------
Expenses:
Research and development................. 8,195 3,073 -- 11,268
General and administrative............... 2,267 753 -- 3,020
Interest................................. 302 22 (22)(3) 302
------- ------- ---- --------
Total expenses................... 10,764 3,848 (22) 14,590
------- ------- ---- --------
Net loss................................... $ (9,922) $(3,495) $ 22 $(13,395)
======= ======= ==== ========
Net loss per share......................... $ (0.94) $ (0.95)
======= ========
Shares used in computation of net loss
per share................................ 10,533(6) 14,169(7)
======= ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA
GENETICS RGENE ADJUSTMENTS PRO FORMA
----------------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Investment income........................ $ 183 $ 23 $ -- $ 206
Expenses:
Research and development................. 2,366 2,270 -- 4,636
General and administrative............... 617 271 -- 888
Interest................................. 92 32 (32)(3) 92
------- ------- ---- --------
Total expenses................... 3,075 2,573 (32) 5,616
------- ------- ---- --------
Net loss................................... $ (2,892) $(2,550) $ 32 $ (5,410)
======= ======= ==== ========
Net loss per share......................... $ (0.23) $ (0.34)
======= ========
Shares used in computation of net loss
per share................................ 12,343(6) 15,979(7)
======= ========
</TABLE>
31
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Consolidated Financial Statements give
effect to the Merger using the purchase method of accounting. Amounts allocated
to RGene assets and liabilities will be based on the estimated fair values at
the actual time of the Merger. The allocation of the purchase price in the
accompanying Unaudited Pro Forma Consolidated Financial Statements is based on
the Company's estimates and is subject to revision based on the value of the
Company Common Stock at the Effective Date. The consideration to be paid for
RGene consists of 3,636,364 shares of Company Common Stock. These shares are
unregistered and, accordingly, cannot be freely traded until such shares are
registered or an exemption from registration is available. The Company is
obligated to register 50% of such shares for resale under the Securities Act of
1933, as amended, prior to the one-year anniversary of the Effective Date.
Additionally, all of such shares are restricted pursuant to lock-up agreements
under which the shares are released in 20% increments every six months beginning
six months after the Effective Date. For purposes of the Unaudited Pro Forma
Consolidated Financial Statements, the shares have been valued at an average
price of approximately $4.38 per share. This valuation was calculated using the
closing price of the Company Common Stock on May 17, 1996 discounted at rates
that reflect the varying periods of restriction. The resulting total
consideration of $20,200,000 includes liabilities assumed totaling $4,264,000.
Such liabilities include $1.5 million payable to related parties under the
existing terms of certain license agreements. Under the terms of the Merger
Agreement, prior to the Closing, RGene is required to negotiate changes to a
license agreement such that this liability and future payments under the
agreement will be substantially reduced. The amount of the reduction cannot be
estimated at this time. The total consideration does not reflect the additional
$5 million of Company Common Stock which may be issuable to RGene stockholders
upon the achievement of certain milestones. At the time any such Company Common
Stock becomes issuable, the Company will be required to record additional
noncash expense, representing in-process research and development, equal to the
value of such Company Common Stock. See "The Merger."
The pro forma adjustments are described in the following notes:
(1) Allocates the estimated purchase price to identifiable assets acquired
and liabilities assumed as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
TOTAL RGENE BALANCE SHEET
PURCHASE PRICE BALANCE SHEET ADJUSTMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents................... $ 2,227 $ 1,677 $ 550
Deposits, prepaid expenses and other........ 146 146 --
Property, plant and equipment............... 176 176 --
In-process research and development......... 17,651 -- 17,651
------- ---- -------
$ 20,200 $ 1,999 $18,201
======= ==== =======
</TABLE>
The amount allocated to cash and cash equivalents reflects $550,000 of
additional capital being contributed by RGene's existing investors under the
terms of the Merger Agreement.
(2) Records the write-off of in-process research and development acquired
by the Company. This adjustment has not been reflected in the Unaudited Pro
Forma Statement of Operations as the charge is considered nonrecurring.
(3) Reflects the conversion of notes payable into shares of RGene Common
Stock prior to the Merger and eliminates interest expense thereon.
(4) Eliminates the historical stockholders' equity accounts of RGene.
(5) Reflects the issuance of 3,636,364 shares of Company Common Stock to
the stockholders of RGene, valued as described above.
(6) Computed on the basis described in Note 2 of the notes to the financial
statements of Targeted Genetics.
(7) Reflects the issuance of 3,636,364 shares of Company Common Stock to
the stockholders of RGene.
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<PAGE> 36
TARGETED GENETICS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Targeted Genetics, a development stage company, was incorporated in March
1989 as a wholly owned subsidiary of Immunex. The Company's activities were
carried out as a project within Immunex through December 31, 1991. In 1992, the
Company began to operate independently of Immunex and raised $16.6 million, net
of expenses, in a private placement of Preferred Stock. The Company subsequently
raised an additional $23.8 million in two public offerings of Company Common
Stock. The Company has recently filed with the Commission a registration
statement in connection with the public offering of 3.5 million shares of
Company Common Stock. Currently, the Company has no significant revenue sources
other than interest income earned on investments, and it has generated an
accumulated deficit of $30.5 million through March 31, 1996.
It is not anticipated that the Company will have any product-related
revenues for a number of years. Accordingly, the Company expects to generate
substantial additional losses in the future attributable to the continuation of
preclinical and clinical research programs, development of manufacturing
capabilities and the preparation for commercialization of its products under
development. The Company's ability to achieve profitability depends in part on
its ability alone and/or with others to complete the development of product
candidates, obtain regulatory approvals, comply with applicable regulatory
requirements and manufacture and market such products, of which there can be no
assurance.
In April 1996, the Company entered into the Merger Agreement with RGene,
another development stage company, pursuant to which it agreed to complete the
Merger, subject to, among other things, final approval of the shareholders of
both companies. The effect of the Merger on the Company's results of operations
is discussed in "-- Results of Operations -- Pro Forma -- Year Ended December
31, 1995." The effect of the Merger on the Company's liquidity and capital
resources is also discussed below.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 and 1996
Over the past several years, the Company's net loss has grown, consistent
with the growth in the Company's scope and size of operations. In the near term,
the Company plans additional moderate growth in employee head count necessary to
address increasing requirements in the areas of manufacturing, quality control,
clinical and regulatory affairs. Assuming capital is available to finance such
growth, the Company's operating expenses will continue to increase as a result.
Until such time as the Company enters into an arrangement providing research and
development funding, the net loss will continue to increase as well.
For the three months ended March 31, 1996, interest income increased to
$183,000 compared to $132,000 during the three months ended March 31, 1995. The
increase was attributable to a higher average investment balance and higher
rates of return on those balances compared to the same period in 1995.
Research and development expenses were $1,978,000 and $2,366,000 for the
three-month periods ended March 31, 1995 and 1996, respectively. Factors that
contributed to this increase were: additional employees and related expenses in
preclinical immunology and clinical affairs; a moderate increase in the level of
expenses related to development, manufacturing, quality control and regulatory
activities; and increased employee benefits costs.
General and administrative expenses were $701,000 and $617,000 for the
three months ended March 31, 1995 and 1996, respectively. The decrease reflected
a one-time expense of $185,000 related to certain corporate development
activities in the quarter ended March 31, 1995. Otherwise during the first
quarter of 1996, higher expenses related to corporate communications,
shareholder reporting and employee benefits contributed to the increase compared
to the first quarter of 1995.
Interest expense was $75,000 and $92,000 for the three months ended March
31, 1995 and 1996, respectively. The increase was attributable to additional
equipment leases entered into by the Company.
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<PAGE> 37
Years Ended December 31, 1993, 1994 and 1995
Revenues were $412,000, $449,000 and $842,000 for the years ended December
31, 1993, 1994 and 1995, respectively. The significant increase in 1995 was
attributable to a higher average investment balance during the year and higher
rates of return on those balances. In 1995, the Company earned other income of
$175,000 from research and development arrangements.
Research and development expenses were $4,261,000, $6,763,000 and
$8,195,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
For the year ended December 31, 1994, the increase in research and development
expenses was largely due to the increased emphasis on supporting the advancement
of clinical, manufacturing process development and regulatory programs. The
increase in research and development expenses in 1995 was largely attributable
to the continued expansion of manufacturing process development expertise and
other nominal increases in research, clinical and regulatory expenses, including
staffing. Research and development expenses will continue to increase in the
future, especially as related to clinical trials. Continued growth in expenses,
however, is dependent on the availability of capital.
General and administrative expenses were $1,217,000, $1,892,000 and
$2,267,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The increase in general and administrative expenses in 1994 was attributable to
the addition of administrative staff in the areas of business development,
finance, human resources and facility management to support research and
development activities. During 1994, the Company also experienced an increase in
expenses associated with being a publicly traded company. For the year ended
December 31, 1995, the Company experienced modest growth in general and
administrative expenses compared with 1994. The growth was related to an
increase in corporate development activities and, to a lesser extent, additional
administrative staffing. Over the three years presented, the increase in general
and administrative expenses has roughly tracked the rate of increase in research
and development spending. The Company expects this relationship to continue in
future years.
The Company began incurring interest expense in 1994 related to equipment
financing transactions. The substantial increase for the year ended December 31,
1995 versus 1994 is due to an increased level of equipment financing. It is
expected that the Company will continue to finance equipment purchases if
favorable terms are available.
Pro Forma -- Year Ended December 31, 1995 and Three Months Ended March 31,
1996
On a pro forma basis, after giving effect to the Merger as if it had
occurred on January 1, 1995, the net loss for the year ended December 31, 1995
would have been $13.4 million. The increase over the Company's actual net loss
of $9.9 million for such period is primarily attributable to added research and
development expenses of $3.1 million and general and administrative expenses of
$753,000, offset by $300,000 of license fee revenues. The Company expects that
such 1995 expense additions are generally indicative of the increases in the
Company's operating expenses that, going forward, will result from the Merger,
in that (i) RGene's research and clinical programs, and the related costs, are
expected to be maintained and (ii) there are no significant savings expected
from the elimination of duplicative expenses. The pro forma results of
operations for the three months ended March 31, 1996 do not reflect the level of
increase in operating expenses, going forward, expected to result from the
Merger, due to the inclusion of (i) $157,000 of noncash compensation expense
related to RGene stock purchase agreements and stock options, and (ii) $1.5
million payable to related parties related to option fees received by RGene
during the quarter. Future license and related milestone revenues under an
existing RGene license agreement or any other agreements under negotiation
cannot be predicted.
Upon completion of the Merger and based on the value of the Company Common
Stock at that time, the Company will calculate the actual purchase price and
allocate it to the various assets acquired. It is expected that the Company will
allocate a substantial portion of the purchase price to in-process research and
development, which will be immediately expensed. Furthermore, the Company may be
required to issue up to $5,000,000 of additional Company Common Stock to RGene
stockholders based on the achievement of certain clinical and business
Milestones. At the time any such Company Common Stock becomes issuable, the
Company will be required to record additional noncash expense equal to the value
of such Company Common Stock.
34
<PAGE> 38
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash, cash equivalents and securities
available for sale totaling $14.4 million, compared to $11.5 million at December
31, 1994. The increase was primarily attributable to the completion of a
self-managed stock and warrant offering, which resulted in net proceeds of $12.2
million in July 1995. The Company also completed equipment financing
transactions totaling $1.1 million during 1995. Offsetting these increases, the
Company used $8.5 million to fund its operations, $1.4 million for purchases of
equipment, laboratory expansion and acquisition of technology and patent rights
and $657,000 for payments under equipment leases and notes.
The Company had cash, cash equivalents and securities available for sale
totaling $11.9 million at March 31, 1996, compared to $14.4 million at December
31, 1995. The decrease was primarily attributable to the Company's using $2.6
million to fund its operations during the first three months of 1996.
The Company expects that its cash needs will continue to increase in future
periods, in part because of the Merger, due to expansion of research and
development programs, increased clinical trial activity, growth of
administrative staff and expansion of its facilities to accommodate increased
numbers of employees. Accordingly, the Company will need to raise substantial
additional funds to continue development and commercialization of its products.
The Company's future cash requirements will depend on many factors, including
the successful consolidation of RGene with the Company; continued scientific
progress in its research and development programs; the results of research and
development, preclinical studies and clinical trials; acquisition of products or
technology, if any; relationships with corporate collaborators; competing
technological and market developments; the time and costs involved in obtaining
regulatory approvals; the costs involved in filing, prosecuting and enforcing
patent claims; the time and costs of manufacturing scale-up and
commercialization activities; and other factors.
The Company estimates that, at its planned rate of spending adjusted to
reflect the increased expenses expected to result from the Merger, its existing
cash, cash equivalents and securities available for sale, together with the
projected amount of cash or investments expected to be obtained as a result of
the Merger, the net proceeds from a proposed public offering of Company Common
Stock and the interest income thereon and up to approximately $3.6 million of
additional capital which would be provided upon the exercise of outstanding
warrants, will be sufficient to meet its capital requirements until early 1998.
There can be no assurance that the underlying assumed levels of revenue and
expense will prove accurate. In order to further strengthen its cash position,
the Company is aggressively pursuing agreements with corporate partners that
would provide research and development funding and equity investments. If the
Company is successful in these efforts, funding received under such arrangements
would extend the period during which the aforementioned resources would fund the
Company's capital requirements. The Company also intends to seek additional
funding through public or private financing, including equity financing. There
can be no assurance, however, that adequate funds will be available when needed
or will be available on terms favorable to the Company.
35
<PAGE> 39
BUSINESS OF RGENE
RGene, incorporated in Delaware in August 1993, is developing gene therapy
to treat certain acquired diseases such as cancer. RGene is focused on
developing a core technology platform of non-viral gene delivery systems using
cationic lipids to deliver genes, including certain tumor suppressor genes, to
diseased cells. RGene is using one of its core non-viral gene delivery
technologies to deliver its proprietary E1A tumor suppressor gene to treat
certain cancers, including ovarian and breast cancers. An initial Phase I
clinical trial using non-viral delivery of the E1A tumor suppressor gene to
treat ovarian and breast cancers has opened for enrollment. RGene also is
developing a liposomal delivery system to deliver antisense molecules to treat
certain cancers, including certain leukemias and lymphomas.
RGene's headquarters are located at 2170 Buckthorne Place, Suite 230, The
Woodlands, Texas 77380 and its telephone number is (713) 367-5443.
NON-VIRAL VECTORS
RGene is developing proprietary non-viral delivery systems which use
cationic lipids to promote uptake of DNA or genes into cells. Non-viral delivery
systems may have certain favorable characteristics for gene delivery to cells,
including more flexibility with respect to the size and sequence of the
transferred genes and the potential to include the ability to target specific
cells in vivo. These non-viral delivery systems consist of the transferred gene
or DNA complexed with a cationic lipid. Complexing DNA, which is negatively
charged, with cationic lipids, which are positively charged, promotes DNA uptake
by cells. Such complexes have good safety profiles and can be used for ex vivo
as well as in vivo gene delivery. For in vivo use, these complexes may be
delivered by a variety of routes, such as topically, intravenously,
intraperitoneally, intrapleurally or by aerosol. DNA-lipid delivery systems do
not have an inherent ability to target specific cells or tissues, but RGene is
developing such targeting ability by incorporating specific targeting ligands
into the delivery system.
RGene is employing four types of non-viral delivery systems based on
technology developed by Dr. Leaf Huang of the University of Pittsburgh, who is a
pioneer in this field and an exclusive consultant to RGene. His original system
using the lipid DC cholesterol ("DC Chol"), which has a favorable toxicity
profile, is being used in RGene's current E1A tumor suppressor trial. Several
additional systems are under development. A second system under development
employs additional lipid analogs which may have an even more favorable toxicity
profile. In a third system, the DNA is condensed into particles of defined size
which have a gene transfer efficiency that is 50- to 80-fold higher than the
first and second systems. An alternate version of the third system is being
developed that includes specific ligands to enhance delivery to specific target
cells and to increase stability when delivered intravenously. A fourth system
being developed also has increased efficiency of gene transduction and higher
stability in serum for intravenous delivery.
E1A TUMOR SUPPRESSOR GENE THERAPY
In its E1A program, RGene is testing the feasibility of treating certain
cancers by introducing the proprietary E1A tumor suppressor gene into cancer
cells using RGene's proprietary non-viral delivery system. Overexpression of the
Her-2/neu oncogene occurs in approximately 30% of a number of cancers, including
ovarian, breast, head and neck, stomach, pancreatic, liver, cervical and
prostate cancer, and has been associated with enhanced metastatic potential,
drug resistance and poor survival rates. The E1A tumor suppressor gene has been
shown to inhibit the overexpression of the Her-2/neu oncogene in certain tumor
cells in vitro. In addition, in preclinical mouse studies, the E1A tumor
suppressor gene was shown to inhibit the intraperitoneal growth of ovarian
cancer cells that were overexpressing the Her-2/neu oncogene, and significantly
increase the long-term survival of the mice. A Phase I clinical trial of the E1A
tumor suppressor gene therapy in patients with metastatic ovarian or breast
cancer that overexpresses the Her-2/neu oncogene is now open for enrollment at
M.D. Anderson Cancer Center/University of Texas ("M.D. Anderson") in Houston,
Texas.
In the Phase I trial, 12 patients with ovarian cancer and 12 patients with
breast cancer that overexpress the Her-2/neu oncogene will be administered
weekly doses of the E1A tumor suppressor gene for a six-month period. The doses
will be administered using RGene's proprietary non-viral delivery system. This
trial will be conducted as an interpatient, ascending dose study with doses of
the E1A tumor suppressor gene delivered intraperitoneally
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<PAGE> 40
in the ovarian cancer patients and intrapleurally in the breast cancer patients.
The objectives of the trial are to assess safety, levels of gene transfer and
expression and tumor response. It is expected that this clinical trial will be
completed in mid-1997.
TUMOR SUPPRESSOR GENES
Many pathways of gene regulation control cell growth and division, and
cancer arises from disruption of these pathways. Certain of these pathways are
regulated by cellular oncogenes or tumor suppressor genes. Cancer may result
from the structural alteration and abnormal expression of cellular oncogenes or
from mutation or deletion of the tumor suppressor genes. Certain genes,
including Her-2/neu, abl, bcr, crkl and bcl-2, function as parts of signal
transduction pathways that promote cell growth and division. Tumor suppressor
genes function by inhibiting cell growth and the expression of cellular growth
factors. Malfunctioning oncogenes and tumor suppressor genes represent targets
through which the growth of malignant cancer cells may be regulated. Thus,
introduction of tumor suppressor genes may be a viable approach to down-regulate
the expression of oncogenes or to replace functions lost by mutation or deletion
of the tumor suppressor gene.
Some viruses have evolved genes that may mimic functions normally exhibited
by cellular genes. One such example is the E1A gene of the adenovirus type 5.
The E1A gene was shown by Dr. Mien-Chie Hung, in experiments conducted at M.D.
Anderson, to function as a tumor suppressor and to suppress expression of the
Her-2/neu oncogene, which is known to be overexpressed in certain cancers. RGene
is taking advantage of this expertise to investigate the delivery and short-term
expression of tumor suppressor genes in cancer cells using RGene's non-viral
lipid delivery systems. An open Phase I clinical trial is evaluating the ability
of the E1A tumor suppressor gene to down-regulate the Her-2/neu oncogene in
ovarian and breast cancers. Preclinical research is also being conducted to
assess the feasibility of using non-viral delivery systems to deliver a variety
of other cellular tumor suppressor genes to treat certain cancers. RGene is also
investigating the ability to target cancer treatments via certain other
oncogenes to which it has proprietary rights.
ANTISENSE OLIGONUCLEOTIDES
RGene is investigating the potential treatment of cancer by using antisense
molecules to inhibit the activity of certain oncogenes. Antisense molecules can
prevent expression of the protein product of a gene by binding to the messenger
RNA copied from the DNA coding for that gene. These antisense molecules are
composed of oligonucleotides, which are short pieces of DNA. Antisense molecules
can be incorporated into liposomes for delivery to target cells.
Chronic myelogenous leukemia ("CML") is a cancer associated with the
presence of an aberrant chromosome, the Philadelphia chromosome, which results
in generation of an oncogene, the bcr-abl fusion gene. The protein product of
the bcr-abl oncogene is believed to be involved in the pathogenesis of CML by
promoting selective proliferation of the myeloid cells. The bcr-abl oncogene is
present only in the leukemia cells and may be selectively targeted with
antisense oligonucleotides.
RGene plans to test a proprietary liposomal anti-bcr-abl oligonucleotide
for treatment of CML, in collaboration with Dr. Gabriel Lopez-Berestein at M.D.
Anderson. In in vitro experiments this formulation was shown to selectively
inhibit proliferation of the cancer cells. An initial Phase I/II dose escalation
study to test the safety and efficacy of repeated intravenous injections of the
liposomal/antisense complex is being planned in chronic-phase CML patients who
are not candidates for bone marrow transplants and who have received no benefit
from standard therapy.
COLLABORATIONS AND AGREEMENTS
Aronex Pharmaceuticals, Inc. In April 1994, RGene and Argus
Pharmaceuticals, Inc. (now Aronex Pharmaceuticals, Inc. ("Aronex")) entered into
a Development Agreement, an Assignment and Assumption Agreement and a Sublicense
Agreement. As part of the exchange for 642,307 shares of RGene Common Stock,
Aronex licensed to RGene, on a nonexclusive, royalty-free basis, certain of
Aronex's technology, including technology in the area of liposomal drug delivery
and manufacturing, which may be useful or necessary in the development of
certain products. Aronex also assigned to RGene certain rights in an exclusive
license agreement
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<PAGE> 41
between the University of Texas Board of Regents, M.D. Anderson and Aronex for a
patent relating to liposomal methylphosphonate oligonucleotides for the
treatment of cancer. In addition, Aronex granted to RGene an exclusive worldwide
sublicense to patent applications and technology relating to delivery of genes
into cells using novel cationic cholesterol derivatives for use in certain
fields, including lung, colon, breast, ovarian and hematological cancers. This
technology was licensed exclusively by Aronex from the University of Tennessee
Research Corporation ("UTRC") for use in certain fields in November 1993.
Under the Development Agreement, Aronex and RGene agreed to conduct certain
research and experiments and to develop certain products incorporating Aronex
technology, the costs of which are borne by RGene. The patent rights to jointly
conduct research are governed by the Assignment and Assumption Agreement and the
Sublicense Agreement. The Development Agreement expires in April 1997, and can
be extended by mutual agreement of the parties.
M.D. Anderson Cancer Center/University of Texas. In March 1994, RGene
entered into an agreement with the University of Texas Board of Regents and M.D.
Anderson pursuant to which RGene obtained an exclusive worldwide license to
develop and market products utilizing the E1A tumor suppressor gene for
Her-2/neu targeted cancer therapy. This agreement was amended in December 1994
to provide RGene an exclusive worldwide license to develop and market products
utilizing lipid technology to deliver oligonucleotides for the treatment of CML.
In addition to the license agreement, in March 1994, RGene entered into a
sponsored research agreement with M.D. Anderson pursuant to which RGene agreed
to pay M.D. Anderson an annual fee for three years for research to be performed
under the supervision of Dr. Mien-Chie Hung in the area of Her-2/neu targeted
cancer therapy. RGene entered into a second sponsored research agreement with
M.D. Anderson in March 1994 pursuant to which RGene agreed to pay M.D. Anderson
an annual fee for two years for research to be performed under the supervision
of Dr. Lopez-Berestein in the area of targeting and delivery of oligonucleotides
to leukemic cells.
University of Tennessee Research Corporation. In October 1995, RGene
entered into an agreement with UTRC pursuant to which RGene obtained an
exclusive worldwide license to develop and market products utilizing technology
relating to delivery of genes into cells using DC Chol for certain cancers,
including, among others, breast, ovarian and lung.
University of Pittsburgh. In October 1994, RGene entered into an exclusive
worldwide license agreement with the University of Pittsburgh of the
Commonwealth System of Higher Education ("Pittsburgh") to develop and market
products utilizing technology related to non-viral delivery systems for cancer
treatment (the "Field of Research") developed by Dr. Leaf Huang. Also in October
1994, RGene entered into a sponsored research agreement with Pittsburgh pursuant
to which RGene agreed to pay Pittsburgh an annual fee for four years for
research to be performed under the supervision of Dr. Huang in the area of
developing gene therapy products to treat cancer. Dr. Huang's research program
includes developing novel cationic lipids and the bacteriophage T-7-based
expression system. Any inventions made under this agreement in the Field of
Research will be incorporated into the October 1994 exclusive license agreement.
In addition, RGene has a right of first refusal to acquire an exclusive license
to any inventions developed under the sponsored research agreement outside of
the Field of Research. RGene is currently engaged in negotiations with
Pittsburgh to expand the Field of Research to other areas of interest to RGene.
There can be no assurance that such negotiations will be successful.
Pasteur Merieux. In December 1995, RGene entered into an agreement with
Pasteur Merieux Serums & Vaccins S.A. ("Pasteur Merieux") pursuant to which
RGene granted to Pasteur Merieux an exclusive worldwide license and sublicense
to certain technology and patent rights relating to DC Chol as an immunoadjuvant
in traditional vaccines. In consideration of such grant, RGene was paid a
process development fee and an upfront license fee. In addition, it may receive
milestone payments upon realization of certain benchmarks and a royalty on sales
of the products, if any, incorporating the underlying technology.
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RGENE SELECTED FINANCIAL DATA
The selected financial data presented below with respect to RGene's
statements of operations for the years ended December 31, 1994 and 1995 and
balance sheets at December 31, 1994 and 1995 are derived from the audited
financial statements of RGene that have been audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere herein and are
qualified by reference to such financial statements of RGene and notes related
thereto. The financial data at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of the financial position and results of operations for those
periods. The selected financial data should be read in conjunction with "RGene
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of RGene and notes thereto included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
1994(1) 1995 1995 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License and other fees.................. $ -- $ 300 $ -- $ --
Interest income......................... 56 53 26 23
------- ------- ------- -------
56 353 26 23
Expenses:
Research and development................ 977 3,073 448 2,270
General and administrative.............. 659 753 195 271
Interest expense........................ -- 22 -- 32
------- ------- ------- -------
Total expenses................... 1,636 3,848 643 2,573
------- ------- ------- -------
Net loss................................... $(1,580) $(3,495) $ (617) $(2,550)
======= ======= ======= =======
Loss per share............................. $ (0.61) $ (1.06) $ (0.19) $ (0.75)
======= ======= ======= =======
Weighted average shares used in computing
loss per share.......................... 2,598 3,290 3,264 3,394
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 2,300 $ 239 $ 1,677
Working capital.................................. 2,273 (1,048) (941)
Total assets..................................... 2,558 500 1,999
Deficit accumulated during development stage..... (1,580) (5,075) (7,625)
Total stockholders' equity (deficit)............. 2,447 (872) (3,265)
</TABLE>
- ---------------
(1) RGene was incorporated on August 27, 1993 and effectively commenced
operations in 1994.
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<PAGE> 43
RGENE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
RGene was incorporated in August 1993 and commenced operations in early
1994. RGene is developing gene therapy products, initially for certain cancers,
using non-viral gene delivery systems based on cationic lipids. In 1994, RGene
raised $4 million of venture capital through a private placement of Series A
Preferred Stock. In late 1995, $1 million of bridge loans were received from the
same group of investors. RGene is a development stage company and, accordingly,
has used these funds primarily for raising capital and paying research and
development costs. As of December 31, 1995, RGene has generated an accumulated
deficit of $5.1 million and has cash and cash equivalents of $239,000.
In April 1996, RGene announced that it had entered into the Merger
Agreement. Under the terms of the Merger Agreement, RGene's stockholders will
receive 3,636,364 shares of Targeted Genetics Common Stock, with the possibility
of receiving up to an additional $5,000,000 of Targeted Genetics Common Stock if
certain clinical and business-related milestones are achieved.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 and 1996
Research and development expenses were $448,000 and $2,270,000 for the
three months ended March 31, 1995 and 1996, respectively. Generally, the
increase was attributable to the advancement of RGene's product development
activities. Specifically, the following factors contributed to the increase in
research and development expenses: (i) payroll and related expenses were higher
in 1996 due to an increase in the number of employees and the recording of
noncash compensation expense related to stock options; (ii) expenses related to
the manufacture of the Company's E1A product for clinical trials were incurred
in 1996 but not in 1995; (iii) license maintenance fees increased in 1996 over
1995; and (iv) $1.5 million payable to related parties related to option fees
received by RGene in 1996.
General and administrative expenses were $195,000 and $271,000 for the
three months ended March 31, 1995 and 1996, respectively. The increase in 1996
was primarily attributable to recognition of noncash compensation expense
related to stock purchase agreements and stock options.
Interest expense was $32,000 in 1996 and was related to bridge loans
advanced by RGene's investors in September 1995.
Years Ended December 31, 1994 and 1995
RGene received license and other fees of $300,000 in 1995 under an
agreement with Pasteur Merieux for rights to RGene technology for use as an
immunoadjuvant. Under this agreement, RGene may earn additional revenues in the
future based on the achievement of development milestones, but such revenues
cannot be predicted.
Interest income was $56,000 and $53,000 for the years ended December 31,
1994 and 1995, respectively. Although RGene had large cash balances in 1994, the
initial proceeds of its venture capital financing were not received until April
and, therefore, RGene had significant amounts invested for only part of the
year. Furthermore, interest rates were higher in 1995 than in 1994.
Research and development expenses were $977,000 and $3.1 million for the
years ended December 31, 1994 and 1995, respectively. There were a number of
factors that contributed to the significant increase in research and development
expenses in 1995, including: (i) RGene did not begin operations until April 1994
and, therefore, 1994 does not include a full year of expenses; (ii) a much
greater amount was expended for process development and manufacturing in 1995 in
order to prepare for the start of E1A clinical trials in 1996; (iii) payroll and
related expenses were higher in 1995 due to an increase in the number of
employees and the
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<PAGE> 44
recording of noncash compensation expense related to stock options; and (iv)
$250,000 of license fees were paid to the University of Tennessee in 1995 for
expansion of RGene's rights to the DC Chol delivery technology.
General and administrative expenses were $659,000 and $753,000 for the
years ended December 31, 1994 and 1995, respectively. Although RGene only
operated for part of 1994, it incurred start-up expenses that had the effect of
raising general and administrative expenses closer to the level incurred for a
full year in 1995. Noncash compensation expenses related to stock purchase
agreements and stock options represented much of the increase in 1995.
RGene began incurring interest expense in 1995 related to bridge loans
advanced by its venture capital investors. The expense of $22,000 represented
interest at prime rate for approximately three months.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, RGene had cash and cash equivalents of $239,000,
compared to $2.3 million at December 31, 1994. The decrease during 1995 resulted
from RGene expending $3.0 million to fund its operating expenses and $48,000 to
purchase fixed assets. These expenditures were offset by $1.0 million of
proceeds from the bridge loans provided by RGene's investors. The principal
amounts of these loans are intended to be converted to equity upon completion of
the Merger.
At March 31, 1996, RGene had cash and cash equivalents of $1.7 million,
compared to $239,000 at December 31, 1995. The increase was attributable to the
receipt of $2.5 million in connection with the granting of an exclusive option
to a pharmaceutical company to enter into a European license and development
agreement for RGene's E1A tumor suppressor gene product. This receipt was offset
by the expenditure of approximately $1.0 million to fund operating expenses and
$13,000 to purchase fixed assets.
In general, RGene expects that its cash requirements will continue to
increase over the next several years as its products progress through clinical
trials and as additional product development candidates emerge from preclinical
research and development. Specifically, RGene has committed to pay a minimum of
approximately $900,000 through 1998 to continue funding research and clinical
activities conducted by M.D. Anderson and Pittsburgh. Furthermore, significant
capital would be required if RGene were to develop its own internal research,
development and manufacturing capabilities. Accordingly, RGene will be required
to raise substantial additional capital if it is to continue to operate as an
independent company.
In the first quarter of 1996, RGene received $2.5 million in connection
with the granting of an exclusive option to a pharmaceutical company to enter
into a European license for RGene's E1A tumor suppressor gene product. An
additional $2.5 million may be received during the second quarter upon execution
of a definitive license agreement or, if such agreement is not executed, to
extend the exclusive option. Such amounts are nonrefundable and are creditable
toward the license fee due upon execution of a license agreement. The Company
may be required to pay certain sums to certain related parties in the event that
a definitive agreement is consummated with the pharmaceutical company. As of
March 31, 1996, $1.5 million has been recorded as a payable to related parties.
On April 16, 1996, RGene announced that it had agreed to be acquired by
Targeted Genetics pursuant to the Merger Agreement. The Merger is subject to the
approval by the shareholders of both companies and, assuming the Merger is
approved, is expected to be completed by the end of the second quarter of 1996.
If the Merger were not to occur, RGene would need to raise additional capital
during the next several months in order to continue its operations. There can be
no assurance that such funding would be available or that it would be available
on terms favorable to RGene. Pursuant to the Merger Agreement and prior to the
Merger, an additional $550,000 shall be advanced under the promissory notes from
certain stockholders of RGene (see Note 4 of notes to the financial statements
of RGene). Such advances, together with the $1.0 million in promissory notes
from certain stockholders of RGene, shall be converted at or prior to the Merger
into Company Common Stock at a conversion price of $1.40 per share.
41
<PAGE> 45
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for Targeted
Genetics (on a historical and pro forma basis) and for RGene (on a historical
and pro forma equivalent basis) based on the historical financial statements of
Targeted Genetics and RGene. Neither company has paid any cash dividends. The
pro forma information is not necessarily indicative of actual or future
operating results or the financial position that would have occurred or will
occur upon consummation of the Merger. The information presented below should be
read in conjunction with the Unaudited Pro Forma Consolidated Financial
Statements included elsewhere in this Proxy Statement and the Targeted Genetics
and RGene financial statements and notes thereto.
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE FISCAL YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
------------------------------- ------------------
(UNAUDITED)
<S> <C> <C>
TARGETED GENETICS:
Historical:
Net loss......................... $ (0.94) $ (0.23)
Book value....................... 1.28 1.06
Pro Forma:
Net loss......................... $ (0.95) $ (0.34)
Book value....................... 1.19 0.71
RGENE:
Historical:
Net loss......................... $ (1.06) $ (0.75)
Book value....................... (0.26) (0.96)
Pro Forma Equivalent(1):
Net loss......................... $ (0.39) $ (0.14)
Book value....................... 0.48 0.29
</TABLE>
- ---------------
(1) The pro forma equivalent per share data of RGene was calculated by
multiplying the pro forma net income and book value per share by the
exchange ratio of 1 to .4059. The exchange ratio was determined by dividing
(i) 3,636,364, the number of shares of Company Common Stock to be issued to
RGene stockholders by (ii) 8,959,320, the estimated aggregate number of
shares of RGene Capital Stock to be outstanding at the Effective Time.
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<PAGE> 46
PRICE RANGE OF COMPANY COMMON STOCK
Company Common Stock has traded under the symbol "TGEN" on the Nasdaq
National Market tier of the Nasdaq Stock Market since May 20, 1994. The
following table sets forth, for the periods indicated, the high and low closing
sales prices for the Company Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ----- -----
<S> <C> <C>
Second Quarter (beginning May 20, 1994).............................. $7.13 $5.63
Third Quarter........................................................ 6.13 3.81
Fourth Quarter....................................................... 5.75 3.75
</TABLE>
<TABLE>
<CAPTION>
1995
----
<S> <C> <C>
First Quarter........................................................ $6.38 $3.88
Second Quarter....................................................... 5.63 3.50
Third Quarter........................................................ 6.50 3.63
Fourth Quarter....................................................... 5.63 3.75
</TABLE>
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
First Quarter........................................................ $7.25 $4.00
Second Quarter (through May 17, 1996)................................ 6.25 5.00
</TABLE>
On April 16, 1996, the last full trading day prior to announcement of the
execution of the Merger Agreement, the closing sales price per share of Company
Common Stock as reported by Nasdaq was $5.06. On May 17, 1996, the most recent
available date prior to printing this Proxy Statement, the reported closing
sales price per share of Company Common Stock on Nasdaq was $5.50. There were
approximately 1,500 holders of Company Common Stock on such date.
Targeted Genetics has never paid cash dividends on the Company Common
Stock, and RGene has never paid cash dividends on the RGene Capital Stock. The
Merger Agreement prohibits RGene from paying cash dividends prior to the
Closing. It is not anticipated that any cash dividends will be paid on shares of
Company Common Stock in the foreseeable future.
There is no established public trading market for the RGene Capital Stock.
As of April 16, 1996, there were 12 holders of RGene Common Stock and six
holders of RGene Preferred Stock.
43
<PAGE> 47
THE MERGER
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement and
incorporated by reference herein.
TERMS OF THE MERGER
Conversion of Shares at the Closing. At the Closing, an aggregate of
3,636,364 shares of Company Common Stock having an aggregate value of $20
million, based on a value of $5.50 per share, the closing sale price of the
Company Common Stock as reported on the Nasdaq National Market on May 17, 1996,
will be issuable to the holders of RGene Capital Stock. Each issued and
outstanding share of RGene Common Stock (other than shares held by RGene
stockholders who perfect dissenters' rights with respect thereto) will be
converted (subject to the provisions with respect to fractional shares described
below) into the right to receive the Common Share Equivalent Consideration,
which is determined by dividing (i) 2,909,091 by (ii) the aggregate number of
shares of RGene Capital Stock outstanding at the Effective Time. Each issued and
outstanding share of RGene Preferred Stock (other than shares held by RGene
stockholders who perfect dissenters' rights with respect thereto) will be
converted into the right to receive (a) that number of shares of Company Common
Stock determined by dividing (1) 727,273 by (2) the number of shares of RGene
Preferred Stock outstanding at the Effective Time and (b) the Common Share
Equivalent Consideration. Based on the number of shares outstanding on May 17,
1996, there will be approximately 16,037,248 shares of Company Common Stock
outstanding immediately following the Merger, and the former RGene stockholders
will hold approximately 23% of such shares.
Additional Consideration. After the Effective Time, additional
consideration (the "Additional Consideration") will be issuable to the former
holders of RGene Capital Stock (other than holders who perfect dissenters'
rights with respect thereto) if either of the Milestones is achieved prior to
certain dates. The First Milestone is the enrollment of at least one patient in
a Phase II clinical trial for RGene's E1A tumor suppressor gene therapy in the
United States and the enrollment of at least one patient in a similar clinical
trial in a member country of the European Economic Union. Achievement of the
First Milestone would result in the issuance of $1 million, $2 million or $3
million of Company Common Stock, depending upon whether the First Milestone is
achieved on or before December 31, 1997 or December 31, 1998, and depending upon
whether the First Milestone is achieved in the United States only or in the
United States and Europe, as set forth in the following table:
<TABLE>
<CAPTION>
GEOGRAPHIC TERRITORY MILESTONE ACHIEVEMENT DEADLINE COMMON STOCK ISSUABLE
- -------------------------- ------------------------------- ----------------------
<S> <C> <C>
United States only December 31, 1997 $ 2 million
Europe only December 31, 1997 $ 0
United States and Europe December 31, 1997 $ 3 million
United States only December 31, 1998 $ 1 million
Europe only December 31, 1998 $ 1 million(1)
United States and Europe December 31, 1998 $ 2 million(2)
</TABLE>
- ---------------
(1) To be issued only if the First Milestone is achieved in the United States
during calendar year 1998. If the First Milestone is achieved in the United
States prior to January 1, 1998, or if it is not achieved at all in the
United States, then no Company Common Stock will be issued for achieving the
First Milestone in Europe during 1998.
(2) The maximum amount of Company Common Stock that may be issued in the event
that the First Milestone is not achieved in the United States until 1998 is
$2 million.
The Second Milestone is the execution of a definitive collaboration
agreement with a third party for the development of genetic vaccines using
RGene's technology which will result in minimum revenues to the Company of
$2,000,000 during the first year following its execution, of which a minimum of
$1,500,000 may not be subject to any specific funding commitment under any
license or research agreement. Achievement of the Second Milestone on or before
December 31, 1997 would result in the issuance of $2 million of Company Common
Stock.
44
<PAGE> 48
The aggregate number of shares of Company Common Stock issued upon
achievement of a Milestone will equal the applicable aggregate value of such
shares divided by the Milestone Average Trading Price, which is the average
closing sale price for Company Common Stock for the 30 trading days preceding
the date of achievement of the Milestone. Such shares will be issued pro rata,
based upon the number of shares of RGene Capital Stock outstanding at the
Effective Time, to the former RGene stockholders as promptly as practicable, but
in no event later than 20 days after the achievement of the applicable
Milestone.
Assuming the Milestone Average Trading Price equals $5.50 (the closing sale
price per share of Company Common Stock as reported on the Nasdaq National
Market on May 17, 1996), achievement of both Milestones would result in the
issuance of a maximum of 909,091 shares of Company Common Stock. Based upon the
number of shares outstanding as of May 17, 1996, and assuming the issuance of
3,636,364 shares of Company Common Stock at the Closing, upon issuance, such
shares of Additional Consideration would represent approximately 6% of
outstanding Company Common Stock.
Fractional Shares. No fractional shares of Company Common Stock will be
issued in connection with the Merger Agreement. In lieu of any such fractional
shares, each holder of RGene Capital Stock who otherwise would be entitled to
receive a fractional share of Company Common Stock pursuant to the Merger
Agreement will be paid an amount in cash equal to such fraction multiplied by
the closing sale price per share of Company Common Stock as reported on the
Nasdaq National Market on the trading day immediately preceding the Effective
Date or the date the Milestones is achieved, as the case may be. With respect to
each RGene stockholder, all fractional shares of Company Common Stock will be
aggregated in order to determine the number of shares of Company Common Stock
issuable to such stockholders and the amount of the related cash payment. Due to
the small number of RGene stockholders, such cash payment will not be material
to the Company.
CLOSING
The Closing will take place on the earliest practicable business day after
the conditions specified in the Merger Agreement have been satisfied or waived,
or at such other time as Targeted Genetics and RGene agree. On the date of
Closing, a certificate of merger will be filed with the Secretary of State of
the State of Delaware. The Merger will become effective on the date and at the
time of filing such certificate of merger or at such other time as may be
specified therein. The Merger Agreement may be terminated by either Targeted
Genetics or RGene if, among other things, the Merger has not been consummated by
June 30, 1996. See "-- Amendment and Termination."
EXCHANGE OF CERTIFICATES
The Merger Agreement provides that as soon as practicable after the
Effective Date, Targeted Genetics will make available to each holder of record
of RGene Capital Stock (other than holders who have perfected dissenters'
rights) a certificate or certificates representing the Company Common Stock that
such holder is entitled to receive at the Closing. Prior to receiving such
Company Common Stock, each such holder of RGene Capital Stock is required to
surrender to Targeted Genetics the certificates representing such holder's
shares of RGene Capital Stock and deliver to Targeted Genetics an executed
Lock-Up Agreement (as defined below) and a properly completed and executed
investor questionnaire. As soon as practicable, but in no event later than 20
days, following the date on which either of the Milestones is achieved, Targeted
Genetics shall make available to each former RGene stockholder (assuming such
stockholder complied previously with the requirements described above)
certificates representing that number of shares of Company Common Stock that
such holder is entitled to receive upon the occurrence of the applicable
Milestone. See "-- Terms of the Merger."
All shares of Company Common Stock issued and cash in lieu of fractional
shares paid upon surrender for exchange of RGene Capital Stock will be deemed to
have been issued in full satisfaction of all rights pertaining to such RGene
Capital Stock.
EFFECT ON RGENE EMPLOYEE BENEFIT AND STOCK PLANS
At the Effective Time, any options, warrants or other rights to purchase or
subscribe for RGene Capital Stock which have not been exercised on or before the
second business day prior to the Effective Date will be cancelled to the extent
RGene has the power or ability to cancel such options, warrants or other rights.
Cancellation of all such unexercised options, warrants or rights is a condition
to the Company's obligation to consummate the Merger.
45
<PAGE> 49
Targeted Genetics intends to grant to key employees of RGene whose
employment continues following a transition period after the Merger, options to
purchase shares of Company Common Stock commensurate with those granted to key
employees of Targeted Genetics. In addition, such employees will be eligible to
participate in Targeted Genetics' employee benefits plans to the same extent as
the Company's current employees.
AGREEMENT OF SIGNIFICANT RGENE STOCKHOLDERS TO VOTE IN FAVOR OF THE MERGER
Certain significant stockholders of RGene have entered into irrevocable
proxy and voting agreements pursuant to which each of such stockholders has
granted to Targeted Genetics an irrevocable proxy to vote such stockholder's
shares of RGene Capital Stock in favor of the Merger. As of April 16, 1996,
assuming the exercise of all outstanding options and warrants to purchase RGene
Common Stock and the conversion of all bridge loans to RGene Common Stock as
contemplated in the Merger Agreement, the RGene stockholders who executed such
irrevocable proxy and voting agreements had the power to vote shares
representing an aggregate of approximately 66% of the outstanding shares of
RGene Capital Stock, which is sufficient to approve the Merger.
RESTRICTIONS ON RESALE OF COMPANY COMMON STOCK ISSUED IN THE MERGER
All shares of Company Common Stock issuable in the Merger will be subject
to lock-up agreements to be executed by each RGene stockholder (the "Lock-Up
Agreements"). The Lock-Up Agreements will provide that the RGene stockholders
may not transfer or dispose of any Company Common Stock received by them in the
Merger during the 30-month period beginning with the Effective Date; provided,
however, that shares of Company Common Stock will be released from the
restrictions of the Lock-Up Agreements in increments of 20% for each full
six-month period following the Effective Date. If either of the Milestones is
achieved, 20% of the shares issued as Additional Consideration will be
immediately released from the restrictions of the Lock-Up Agreements for each
full six-month period following the Effective Date.
ESCROW
Upon the Closing, 363,636 shares of Company Common Stock issuable at the
Closing (the "Escrow Shares") will be pledged by the former stockholders of
RGene to Targeted Genetics to be held in escrow for payment of claims resulting
from RGene's breach of the representations, warranties or covenants contained in
the Merger Agreement. Any Escrow Shares which are not retransferred to the
Company in respect of such claims, or which are not retained by the Company
pending resolution of unresolved claims, will be released to the former RGene
stockholders as soon as practicable following the first anniversary of the
Effective Date. The Escrow Shares will not be released from the restrictions of
the Lock-Up Agreements until 30 months following the Effective Date.
REGISTRATION RIGHTS
The shares of Company Common Stock to be issued to RGene stockholders have
not been registered with the Commission or approved for trading on the Nasdaq
National Market. The Merger Agreement provides that Targeted Genetics will (i)
prior to the first anniversary of the Effective Date, prepare and file with the
Commission a registration statement covering the sale of up to 50% of the shares
of Company Common Stock held by the former RGene stockholders and (ii) use
commercially reasonable best efforts, subject to receipt of necessary
information from the former RGene stockholders, to cause such registration
statement to become effective on or before the first anniversary of the
Effective Date and to remain effective (subject to provisions described below)
for a period ending 24 months following the Effective Date. If the registration
statement has not become effective prior to the expiration of the two-week
period beginning on the first anniversary of the Effective Date, the Company
will be required to pay as liquidated damages to the former RGene stockholders
an aggregate amount of $250,000.
After the registration statement becomes effective, the Company may elect,
upon written notice to the former RGene stockholders, to suspend use of the
prospectus forming part of the registration statement (i) by any former RGene
stockholder upon the failure of such stockholder to provide information in order
to make the prospectus true, complete and correct in all material respects or
(ii) for additional periods that do not in the
46
<PAGE> 50
aggregate exceed 60 days during the course of the calendar year, as a result of
business developments or other transactions involving the Company, the existence
of which would make the registration statement materially inaccurate or
misleading.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto, including, among other things, the absence
since December 31, 1995 of any material adverse change in the business,
operations, assets, liabilities (absolute, accrued, contingent or otherwise) or
condition (financial or otherwise) of either party.
CONDUCT OF BUSINESS PENDING THE CLOSING
RGene. RGene has agreed that, prior to the Closing or earlier termination
of the Merger Agreement, it will carry on its business in the ordinary course
and consistent with past practice and in accordance with applicable law, and use
its best efforts to preserve substantially intact its current business
organization, keep available the services of its current officers, employees and
consultants and preserve its relationships with third parties. RGene has also
agreed that prior to the Closing, unless Targeted Genetics agrees in writing or
as otherwise permitted by the Merger Agreement, it will not, among other things:
(i) declare or pay any dividends or other distributions on shares of the RGene
Capital Stock or split, combine or reclassify any of the RGene Capital Stock or
purchase, redeem or otherwise acquire any shares of the RGene Capital Stock or
any options, warrants or other rights therefor; (ii) issue or agree to issue any
shares of the RGene Capital Stock; (iii) amend its Certificate of Incorporation
or Bylaws; (iv) make any material acquisition or enter into any merger; (v)
dispose of or encumber any material assets other than sales in the ordinary
course of business consistent with past practice; (vi) incur any additional
indebtedness, except in the ordinary course of business or consistent with past
practice; (vii) make any capital expenditures that, individually, are in excess
of $10,000 or, in the aggregate, are in excess of $25,000; or (viii) authorize
or agree to take any of the foregoing actions.
Targeted Genetics. Targeted Genetics has agreed that, prior to the Closing
or earlier termination of the Merger Agreement, it will carry on its business in
a manner consistent, in all material respects, with the description of such
business in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
NO SOLICITATION
The Merger Agreement provides that, unless it is terminated, RGene shall
not directly or indirectly, through any officer, director, agent or otherwise,
solicit, initiate or encourage the submission of any proposal or offer for the
purchase of all or (except in the ordinary course of business) any portion of
its assets or stock or any business combination with it or participate in any
negotiations regarding, furnish any information with respect to, or otherwise
cooperate or negotiate in any way with, or facilitate or encourage, any effort
by any third party to do any of the foregoing. RGene has agreed to notify
Targeted Genetics promptly of any such offers, proposals, inquiries or contact
and not to release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which RGene is a party.
CONDITIONS TO CLOSING
Conditions to Each Party's Obligations. The respective obligations of
RGene, Targeted Genetics and the Subsidiary to effect the Merger are subject to
the satisfaction or waiver of the following conditions: (i) the Issuance shall
have been approved by the holders of a majority of the votes cast at the Special
Meeting; (ii) there shall not be in effect any order of any court or
administrative agency which enjoins, restrains, conditions or prohibits
consummation of the Merger, and no litigation, investigation or administrative
proceeding shall be pending or threatened which would enjoin, restrain,
condition or prohibit consummation of the Merger; (iii) consummation of the
Merger shall be legally permitted by all applicable laws and regulations; and
(iv) all necessary transfers, consents, approvals and notices shall have been
obtained.
47
<PAGE> 51
Conditions to the Obligations of Targeted Genetics and the Subsidiary. In
addition to the foregoing conditions, the obligations of Targeted Genetics and
the Subsidiary are further subject to satisfaction or waiver of the following
conditions, among others: (i) the representations and warranties of RGene shall
have been true and correct, in all material respects, when made and shall be
true and correct, in all material respects, as of the date of Closing; (ii)
RGene shall have performed, in all material respects, all obligations, and
complied with all covenants and conditions, required to be performed and
complied with by it under the Merger Agreement; (iii) all directors and officers
of RGene shall have submitted resignations effective as of the Closing; (iv)
Drs. Mien-Chie Hung and Leaf Huang shall have executed consulting and scientific
advisory board agreements with Targeted Genetics, and Dr. Gabriel
Lopez-Berestein shall have agreed to join a Clinical Advisory Board to be
established by Targeted Genetics by December 31, 1996; (v) Targeted Genetics
shall have received a certificate relating to the fulfillment of all conditions
to the obligations of Targeted Genetics and the Subsidiary; (vi) Targeted
Genetics shall have received an opinion of its counsel, Perkins Coie, that the
Merger will constitute a reorganization that does not result in taxable gain or
loss to Targeted Genetics or the Subsidiary, an opinion from Morgan & Finnegan,
L.L.P., patent counsel for RGene, concerning the effect, if any, of the Merger
on certain agreements related to RGene's intellectual property, and a further
legal opinion of Mayor, Day, Caldwell & Keeton, L.L.P., counsel to RGene, as to
other matters; (vii) the Merger shall have been duly and validly approved by the
requisite number of holders of RGene Common Stock and RGene Preferred Stock;
(viii) RGene shall have terminated certain agreements, including the employment
agreement with Martin Lindenberg, and shall have obtained written waivers of any
repurchase obligations, rights of first refusal or other similar provisions
existing in favor of any RGene stockholder; (ix) all options or warrants to
purchase RGene Capital Stock shall have been exercised in full or canceled
without liability to RGene; (x) outstanding bridge loans, pursuant to which
RGene is indebted to certain holders of RGene Preferred Stock, shall have been
converted to RGene Common Stock, and, prior to such conversion, an additional
$550,000 shall have been advanced under the outstanding balance of the bridge
loans; (xi) RGene shall have obtained the written agreement (reasonably
satisfactory to Targeted Genetics) of UTRC resolving any and all outstanding
contract issues between UTRC, RGene and Aronex; and (xii) Targeted Genetics
shall have received a certificate of RGene's secretary regarding RGene's
corporate actions authorizing the Merger.
Conditions to the Obligations of RGene. In addition to the foregoing
conditions, the obligations of RGene are further subject to satisfaction or
waiver of the following conditions, among others: (i) the representations and
warranties of Targeted Genetics shall have been true and correct, in all
material respects, when made and shall be true and correct, in all material
respects, as of the date of Closing; (ii) Targeted Genetics shall have
performed, in all material respects, all obligations, and complied with all
covenants and conditions, required to be performed and complied with by it under
the Merger Agreement; (iii) RGene shall have received an opinion of its counsel,
Mayor, Day, Caldwell & Keeton, L.L.P., that the Merger will constitute a
reorganization that does not result in taxable gain or loss to RGene or its
stockholders (except to the extent cash is received in lieu of fractional or
dissenting shares) and a legal opinion of Perkins Coie; (iv) RGene shall have
received a certificate relating to the fulfillment of all conditions to the
obligations of RGene; and (v) RGene shall have received a certificate of
Targeted Genetics' secretary regarding Targeted Genetics' corporate actions
authorizing the Merger.
AMENDMENT AND TERMINATION
The Merger Agreement may be terminated and the Merger abandoned prior to
the Effective Time (notwithstanding the approval of the RGene stockholders) (i)
by mutual written consent of the Boards of Directors of Targeted Genetics and
RGene; (ii) by either Targeted Genetics or RGene if the Merger is not
consummated by June 30, 1996 (provided, however, that no party shall be entitled
to so terminate the Merger Agreement if the failure of the Merger to occur by
June 30, 1996 resulted from the failure of such party to perform its obligations
under the Merger Agreement); (iii) by either Targeted Genetics or RGene if the
Merger is illegal or otherwise prohibited under any law or regulation or any
final and nonappealable judgment, injunction, order or decree; (iv) by either
Targeted Genetics or RGene in the event of a material breach by the other party
of any representation, warranty or agreement contained in the Merger Agreement
(if such breach is not cured or curable by the Effective Date); (v) by Targeted
Genetics if RGene's stockholders fail to approve the Merger; or (vi) by RGene if
the Company's shareholders fail to approve the Issuance. If either party
terminates the Merger
48
<PAGE> 52
Agreement as a result of a material breach by the other or the failure of the
other party's shareholders to approve the Merger or the Issuance, as the case
may be, the other party will pay a termination fee of $350,000.
The Merger Agreement may be amended in writing by Targeted Genetics, the
Subsidiary or RGene prior to the Effective Time; provided, however, that no
amendment may be made that would reduce the amount or change the type of
consideration into which each share of RGene Capital Stock will be converted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary describes the material federal income tax
consequences of the Merger to Targeted Genetics, RGene and holders of RGene
Capital Stock who are citizens or residents of the United States. It does not
discuss all the tax consequences that may be relevant to RGene stockholders in
special tax situations (such as insurance companies, financial institutions,
dealers in securities, tax-exempt organizations or non-U.S. persons) or to
RGene's stockholders who acquired their shares of RGene Capital Stock pursuant
to the exercise of employee stock options or warrants, or otherwise as
compensation. The summary also does not discuss tax consequences to holders of
outstanding RGene warrants or options.
Neither Targeted Genetics nor RGene has requested a ruling from the
Internal Revenue Service (the "IRS") with regard to any of the federal income
tax consequences of the Merger, and the discussion as to the federal income tax
consequences of the Merger set forth in the next paragraph will not be binding
on the IRS. Under the Merger Agreement, it is a condition precedent to RGene's
and Targeted Genetics' obligations to consummate the Merger (which condition may
be waived) that opinions to the effect that the Merger will constitute a
reorganization for tax purposes be delivered to both parties by their respective
legal counsels prior to the Effective Time. Such opinions are not binding on the
IRS.
Under present federal income tax law and assuming (i) the receipt prior to
the Effective Time of certain representations of Targeted Genetics, the
Subsidiary, RGene and certain significant stockholders of RGene; (ii) that the
Merger will qualify as a merger under applicable state law; (iii) that the
Merger and related transactions will occur as described in the Merger Agreement;
and (iv) that RGene stockholders owning no more than 20% of the shares of RGene
Capital Stock outstanding perfect dissenters' rights with respect to the Merger,
the Merger will constitute a reorganization for federal income tax purposes
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
Under the reorganization provisions of the Code, no gain or loss will be
recognized by RGene's stockholders upon the conversion of their shares of RGene
Capital Stock into shares of Company Common Stock pursuant to the terms of the
Merger (except to the extent cash is received in lieu of fractional shares). The
tax basis of the shares of Company Common Stock into which shares of RGene
Capital Stock are converted pursuant to the Merger (including any fractional
shares of Company Common Stock deemed received) will be the same as the tax
basis of such RGene Capital Stock exchanged therefor. The holding period for
shares of Company Common Stock into which shares of RGene Capital Stock are
converted pursuant to the Merger will include the period that such shares of
RGene Capital Stock were held by the holder, provided such shares were held as a
capital asset by the holder. In addition, neither Targeted Genetics, the
Subsidiary nor RGene will recognize any taxable gain or loss as a result of the
Merger.
Any RGene stockholder who receives cash in lieu of a fractional share of
Company Common Stock will be treated for federal income tax purposes as if the
cash was received in payment for a fractional share, and such RGene stockholder
will therefore recognize gain or loss equal to the difference between the cash
received and such stockholder's tax basis in the fractional share. If such RGene
Capital Stock was held as a capital asset, the gain or loss will be capital gain
or loss if the payment is considered substantially disproportionate or not
essentially equivalent to a dividend under Section 302(b) of the Code.
A dissenting RGene stockholder who receives cash pursuant to the exercise
of dissenters' rights will be treated as having had the RGene Capital Stock
redeemed in exchange for cash. Generally, such dissenting stockholder will
recognize gain or loss measured by the difference between the amount of cash
received and the tax basis of the shares of RGene Capital Stock redeemed. If
such RGene Capital Stock was held as a capital asset, such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if such stock
was held for
49
<PAGE> 53
more than one year as of the Effective Time. However, any such dissenting
stockholder that constructively owns shares of RGene Capital Stock that are
exchanged for Company Common Stock in the Merger or actually or constructively
owns Company Common Stock after the Merger may, in unusual circumstances, be
required to treat the cash received as dividend income if the receipt of cash by
such dissenting stockholder has the effect of a dividend distribution. Whether
the receipt of cash has the effect of a dividend distribution would depend upon
the dissenting stockholder's particular circumstances. The IRS has indicated in
published rulings that a distribution that results in any actual reduction in
interest of a small, minority stockholder in a publicly held corporation will
not constitute a dividend if the stockholder exercises no control with respect
to corporate affairs.
If any of the assumptions described above as a basis for the conclusion
that the Merger will constitute a reorganization under the Code proves to be
incorrect (e.g., RGene stockholders owning more than 20% of the shares exercise
their dissenters' rights), the Merger could be taxable to all the RGene
stockholders as if they had sold their stock to Targeted Genetics for cash. The
Merger could be taxable to RGene only if the Merger is treated as a taxable
transaction to the RGene stockholders and the Merger is treated as an
acquisition of the assets of RGene (because, for example, contrary to
representations by Targeted Genetics, Targeted Genetics liquidates RGene after
the Merger pursuant to a plan in existence at the Effective Time of the Merger).
In that event, Targeted Genetics could have liability as a result of assuming
the obligations of RGene.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING
AND PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL THE FOREGOING ARE SUBJECT TO CHANGE, AND ANY SUCH
CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. NO INFORMATION
IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF ANY, OF THE MERGER
UNDER APPLICABLE FOREIGN, STATE AND LOCAL LAWS.
LEVEL OF INTEGRATION
Targeted Genetics Board. Promptly following the Closing, the Targeted
Genetics Board will be increased from five to seven members, and Austin M. Long,
III and Martin P. Sutter, currently members of RGene's Board of Directors, will
be appointed to fill the resulting vacancies. No other individuals will be added
to the Targeted Genetics Board as a result of the Merger, and the structure of
the Targeted Genetics Board will remain unchanged. Targeted Genetics will have
no commitment to renominate either Mr. Long or Mr. Sutter to serve as a member
of the Targeted Genetics Board beyond the initial term for which either
individual may be elected by the shareholders of Targeted Genetics. As
nonemployee directors of Targeted Genetics, Messrs. Long and Sutter will each
receive, under the Company's Stock Option Plan for Nonemployee Directors, an
option to purchase 15,000 shares of Company Common Stock. Such options shall
vest in three annual installments beginning on the first anniversary of the date
of grant. In addition, each continuing nonemployee director receives an annual
grant of options to purchase 5,000 shares of Company Common Stock for each year
following the year such director is initially elected or appointed to the
Targeted Genetics Board.
RGene Employees. Following the Merger, the operations of RGene will be
consolidated with those of Targeted Genetics in Seattle, Washington. Any RGene
employees continuing with the combined company will relocate accordingly.
Currently, RGene has seven employees. Each officer and other employee of RGene
will be given the opportunity to continue his or her employment for a minimum
transition period of three months following the Effective Date. Upon the
expiration of the transition period any such employee who is not offered
continuing employment will receive severance payments equal to six months' base
salary at the rate in effect for such terminated employee as of the Effective
Date.
It is a condition to the Closing that the Employment Agreement, dated
February 24, 1994, between RGene and Martin Lindenberg shall have terminated.
Such termination will trigger severance provisions pursuant to which RGene will
be required to pay Dr. Lindenberg one year's base salary and to continue Dr.
Lindenberg's employee benefits for one year following termination.
50
<PAGE> 54
All potential severance obligations to Dr. Lindenberg and other RGene
employees will be funded from $550,000 to be contributed to RGene prior to the
Closing by certain holders of RGene Preferred Stock, which contribution is a
condition to the Closing. See "-- Conditions to Closing -- Conditions to the
Obligations of Targeted Genetics and the Subsidiary."
Consulting Agreements; Advisory Boards. Upon the Closing, Targeted Genetics
will enter into consulting and scientific advisory board agreements with each of
Drs. Leaf Huang and Mien-Chie Hung, currently members of RGene's Scientific
Advisory Board. Pursuant to such agreements, Drs. Huang and Hung will provide
consulting services to the Company and will serve on the Company's Scientific
Advisory Board for a term of five years, unless the Company chooses to terminate
either of the agreements following the fourth anniversary of the Effective Date.
In addition, Dr. Gabriel Lopez-Berestein, currently a member of RGene's
Scientific Advisory Board, has agreed to serve on a Clinical Advisory Board to
be established by the Company by December 31, 1996.
INDEMNIFICATION OF DIRECTORS AND OFFICERS PURSUANT TO THE MERGER AGREEMENT
To the fullest extent permitted by law, from and after the Effective Time,
all rights to indemnification now existing in favor of RGene's employees,
agents, directors or officers with respect to their activities as such prior to
the Effective Time, as provided in RGene's Certificate of Incorporation, Bylaws
or any agreement in effect with respect to RGene, will survive the Merger and
continue in full force and effect in accordance with the terms of any such
arrangement.
ACCOUNTING TREATMENT
For financial reporting purposes, it is expected that the Merger will be
accounted for by the purchase method of accounting in accordance with generally
accepted accounting principles.
EXPENSES AND FEES
Whether or not the Merger is consummated, all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such fees or expenses; provided, however,
that should any action be brought under the Merger Agreement, the attorneys'
fees and expenses of the prevailing party will be paid by the other party to
such action.
DISSENTERS' RIGHTS
Under the Washington Business Corporation Act (the "WBCA"), a shareholder
is entitled to dissent from the consummation of a plan of merger to which a
corporation is a party if shareholder approval of the merger is required under
the WBCA. Although Targeted Genetics shareholders are required to approve the
issuance of the shares in the Merger under the applicable provisions of Schedule
D to the NASD Bylaws, such shareholders are not required to approve the Merger
under the WBCA. Accordingly, the shareholders of the Company do not have
dissenters' rights with respect to the Merger.
EFFECT OF MERGER ON RIGHTS OF TARGETED GENETICS SHAREHOLDERS
The Merger will not affect the substantive rights of holders of currently
outstanding Company Common Stock. However, following the Merger (assuming the
issuance of 3,636,364 shares of Company Common Stock pursuant to the Merger
Agreement), approximately 23% of the shares of Company Common Stock will consist
of the unregistered shares issued in exchange for RGene Capital Stock, and the
percentage ownership interests of current Targeted Genetics shareholders will
decline accordingly. Such percentage may increase if Additional Consideration is
issued upon achievement of the Milestones. See "-- Terms of the
Merger -- Additional Consideration."
51
<PAGE> 55
PRINCIPAL TARGETED GENETICS SHAREHOLDERS
The following table sets forth, as of March 31, 1996, certain information
with respect to the beneficial ownership of shares of Company Common Stock by
(i) each person known by Targeted Genetics to own beneficially more than 5% of
the shares of Company Common Stock, (ii) each director of Targeted Genetics,
(iii) each of the principal executive officers of Targeted Genetics, and (iv)
all directors and executive officers of Targeted Genetics as a group. Except as
otherwise noted, Targeted Genetics believes that the beneficial owners of the
shares of Company Common Stock listed below, based on information furnished by
such owners, have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
NUMBER OF OWNED
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED MERGER MERGER
- -------------------------------------------------------------- ------------ ------ ------
<S> <C> <C> <C>
5% OWNERS:
Immunex Corporation......................................... 2,613,122 21.1% 16.3%
51 University Street
Seattle, WA 98101
International Biotechnology Trust plc....................... 1,500,000(1) 11.8% 9.2%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithin's Lane
London EC4N 8NR, England
State of Wisconsin Investment Board......................... 1,112,500(2) 8.9% 6.9%
121 East Wilson Street
P.O. Box 7842
Madison, WI 53707
T. Rowe Price Associates, Inc. ............................. 670,000(3) 5.3% 4.1%
100 East Pratt Street
Baltimore, MD 21202
Oracle Partners, L.P. and affiliates........................ 651,000(4) 5.2% 4.0%
712 Fifth Avenue, 45th Floor
New York, NY 10019
DIRECTORS AND EXECUTIVE OFFICERS:
H. Stewart Parker........................................... 178,502(5) 1.4% 1.1%
Barrie J. Carter, Ph.D. .................................... 140,061(6) 1.1% *
Richard Daifuku, M.D., Ph.D. ............................... 8,000(7) * *
James A. Johnson............................................ 28,008(8) * *
Jeremy Curnock Cook......................................... 1,500,000(1) 11.8% 9.2%
Stephen A. Duzan............................................ 16,130(9) * *
James D. Grant.............................................. 10,200(7) * *
Donald E. O'Neill........................................... 20,200(10) * *
All directors and executive officers
as a group (8 persons)................................... 1,901,101(11) 14.8% 11.6%
</TABLE>
- ---------------
* Less than 1%.
(1) Represents 1,200,000 shares of Company Common Stock and warrants to
purchase 300,000 shares of Company Common Stock owned by International
Biotechnology Trust plc ("IBT"), an investment trust the shares of which
are traded on the London Stock Exchange. Mr. Cook is a managing director of
Rothschild Asset Management Limited, the investment manager and secretary
of IBT. Mr. Cook disclaims beneficial ownership of the securities owned by
IBT.
(2) Includes warrants to purchase 100,000 shares of Company Common Stock.
52
<PAGE> 56
(3) Represents 535,000 shares of Company Common Stock and warrants to purchase
135,000 shares of Company Common Stock owned by T. Rowe Price New Horizons
Fund, Inc. T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. Although for purposes of the Exchange Act Price
Associates is deemed to be a beneficial owner of such securities, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of
such securities.
(4) Represents 551,000 shares of Company Common Stock and warrants to purchase
100,000 shares of Company Common Stock owned by Oracle Partners, L.P. and
affiliated investment limited partnerships, of which Mr. Larry N. Feinberg
is the managing general partner and over which Mr. Feinberg has investment
discretion. Mr. Feinberg has the power to vote, direct the vote, dispose of
or direct the disposition of all such securities.
(5) Includes warrants to purchase 3,333 shares of Company Common Stock and
41,837 shares subject to options that may be exercised within 60 days.
(6) Includes warrants to purchase 1,333 shares of Company Common Stock and
13,396 shares subject to options that may be exercised within 60 days.
(7) Represents shares subject to options that may be exercised within 60 days.
(8) Includes warrants to purchase 600 shares of Company Common Stock and 25,008
shares subject to options that may be exercised within 60 days.
(9) Includes warrants to purchase 1,666 shares of Company Common Stock and
7,800 shares subject to options that may be exercised within 60 days.
(10) Includes warrants to purchase 2,000 shares of Company Common Stock and
10,200 shares subject to options that may be exercised within 60 days.
(11) Includes 1,200,000 shares of Company Common Stock and warrants to purchase
300,000 shares of Company Common Stock owned by IBT; also includes
additional warrants to purchase 8,932 shares of Company Common Stock and
116,441 shares subject to options that may be exercised within 60 days.
53
<PAGE> 57
LEGAL OPINION
The legality of the shares of Company Common Stock to be issued in
connection with the Merger is being passed upon for Targeted Genetics by Perkins
Coie, Seattle, Washington.
TAX OPINION
The material federal income tax consequences of the Merger to Targeted
Genetics and the Subsidiary will be passed upon at the Closing, as a condition
to the Merger, by Perkins Coie, counsel to Targeted Genetics. See "The
Merger -- Certain Federal Income Tax Consequences of the Merger."
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP are expected to attend the Special
Meeting and will have an opportunity to make a statement and to respond to
appropriate questions from shareholders.
PROPOSALS BY TARGETED GENETICS SHAREHOLDERS
Shareholder proposals intended to be presented at Targeted Genetics' 1997
Annual Meeting of Shareholders must be received by Targeted Genetics not later
than November 25, 1996 for inclusion in the proxy materials for such meeting.
54
<PAGE> 58
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TARGETED GENETICS CORPORATION
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Shareholders' Equity................................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
RGENE THERAPEUTICS, INC.
Report of Independent Public Accountants............................................. F-13
Balance Sheets....................................................................... F-14
Statements of Operations............................................................. F-15
Statements of Stockholders' Equity................................................... F-16
Statements of Cash Flows............................................................. F-17
Notes to Financial Statements........................................................ F-18
</TABLE>
F-1
<PAGE> 59
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Targeted Genetics Corporation
We have audited the accompanying balance sheets of Targeted Genetics
Corporation (a development stage company) as of December 31, 1994 and 1995, and
the related statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995 and the period
from March 9, 1989 (date of inception) through December 31, 1995. 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 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 Targeted Genetics
Corporation (a development stage company) at December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 and the period from March 9, 1989 (date of
inception) through December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
February 9, 1996, except for Note 9
as to which the date is April 16, 1996
F-2
<PAGE> 60
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,306,979 $ 2,154,814 $ 1,526,073
Securities available for sale....................... 9,167,808 12,287,748 10,352,493
Deposits, prepaid expenses and other................ 254,225 196,150 157,800
------------ ------------ ------------
Total current assets............................. 11,729,012 14,638,712 12,036,366
Property, plant and equipment, net.................... 5,038,812 4,959,502 4,990,602
Other assets.......................................... 278,057 362,246 354,176
------------ ------------ ------------
$ 17,045,881 $ 19,960,460 $ 17,381,144
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 704,804 $ 564,403 $ 402,510
Accrued payroll and other liabilities............... 261,562 336,713 229,447
Current portion of long-term obligations............ 584,371 881,210 995,919
------------ ------------ ------------
Total current liabilities........................ 1,550,737 1,782,326 1,627,876
Long-term obligations................................. 2,252,999 2,405,298 2,633,765
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares
authorized, none outstanding..................... -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 8,958,831, 12,317,183 and 12,397,484
outstanding at December 31, 1994 and 1995, and
March 31, 1996, respectively..................... 31,024,884 43,295,436 43,605,225
Unrealized gains (losses) on securities available
for sale......................................... (116,104) 66,319 (5,064)
Deficit accumulated during development stage........ (17,666,635) (27,588,919) (30,480,658)
------------ ------------ -----------
Total shareholders' equity....................... 13,242,145 15,772,836 13,119,503
------------ ------------ -----------
$ 17,045,881 $ 19,960,460 $ 17,381,144
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 61
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 9, MARCH 9,
1989 1989
(DATE OF (DATE OF
INCEPTION) THREE MONTHS ENDED INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------------------- DECEMBER 31, --------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Investment
income........ $ 412,076 $ 448,822 $ 667,835 $ 2,077,282 $ 132,537 $ 183,536 $ 2,260,818
Other........... -- -- 174,625 174,625 -- -- 174,625
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total
revenues.... 412,076 448,822 842,460 2,251,907 132,537 183,536 2,435,443
----------- ----------- ----------- ------------ ----------- ----------- ------------
Expenses:
Research and
development... 4,261,154 6,763,549 8,194,913 22,771,120 1,978,316 2,366,032 25,137,152
General and
administrative 1,216,434 1,891,947 2,267,516 6,574,720 701,013 616,862 7,191,582
Interest........ -- 192,671 302,315 494,986 74,840 92,381 587,367
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total
expenses.... 5,477,588 8,848,167 10,764,744 29,840,826 2,754,169 3,075,275 32,916,101
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss.......... $(5,065,512) $(8,399,345) $(9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658)
========== ========== ========== =========== ========== ========== ===========
Net loss per
share........... $ (3.73) $ (1.40) $ (0.94) $ (0.29) $ (0.23)
========== ========== ========== ========== ==========
Shares used in
computation of
net loss per
share........... 1,359,840 6,005,141 10,532,950 8,966,194 12,342,748
========== ========== ========== ========== ==========
Pro forma,
assuming
conversion of
preferred stock
to common stock:
Net loss per
share......... $ (0.73) $ (1.03) $ (0.94)
========== ========== ==========
Shares used in
computation of
net loss per
share......... 6,955,826 8,151,547 10,532,950
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 62
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAINS DEFICIT
(LOSSES) ON ACCUMULATED
ADVANCES SECURITIES DURING TOTAL
PREFERRED COMMON FROM AVAILABLE FOR DEVELOPMENT SHAREHOLDERS'
STOCK STOCK IMMUNEX SALE STAGE EQUITY
------------ ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss from March 9, 1989
(date of inception) through December
31, 1991............................. $ -- $ -- $ 2,807,316 $ -- $(2,807,316) $ --
Sale of 1,080,000 shares of common
stock.............................. -- 27,600 -- -- -- 27,600
Issuance of 1,920,000 shares of
Series A convertible preferred
stock to Immunex in repayment of
advances........................... 2,807,316 -- (2,807,316) -- -- --
Sale of 3,675,986 shares of Series B
preferred stock, net of issuance
costs of $772,415.................. 16,597,399 -- -- -- -- 16,597,399
Issuance of 120,000 shares of common
stock as compensation.............. -- 66,000 -- -- -- 66,000
Net loss -- 1992..................... -- -- -- -- (1,394,462) (1,394,462)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1992........... 19,404,715 93,600 -- -- (4,201,778) 15,296,537
Net loss -- 1993..................... -- -- -- -- (5,065,512) (5,065,512)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1993........... 19,404,715 93,600 -- -- (9,267,290) 10,231,025
Sale of 2,154,345 shares of common
stock in initial public offering,
net of issuance costs of
$1,404,056......................... -- 11,522,014 -- -- -- 11,522,014
Conversion of Series A and B
preferred stock to 5,595,986 shares
of common stock.................... (19,404,715) 19,404,715 -- -- -- --
Exercise of stock options............ -- 4,555 -- -- -- 4,555
Unrealized losses on securities
available for sale................. -- -- -- (116,104) -- (116,104)
Net loss -- 1994..................... -- -- -- -- (8,399,345) (8,399,345)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1994........... -- 31,024,884 -- (116,104) (17,666,635) 13,242,145
Sale of 3,322,392 shares of common
stock and 830,598 warrants, net of
issuance costs of $214,509......... -- 12,244,461 -- -- -- 12,244,461
Exercise of stock options............ -- 26,091 -- -- -- 26,091
Unrealized gains on securities
available for sale................. -- -- -- 182,423 -- 182,423
Net loss -- 1995..................... -- -- -- -- (9,922,284) (9,922,284)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1995........... -- 43,295,436 -- 66,319 (27,588,919) 15,772,836
Exercise of stock options
(unaudited)........................ -- 11,809 -- -- -- 11,809
Exercise of 61,000 warrants
(unaudited)........................ -- 285,480 -- -- -- 285,480
Expenses paid with 2,461 shares of
common stock (unaudited)........... -- 12,500 -- -- -- 12,500
Unrealized loss on securities
available for sale (unaudited)..... -- -- -- (71,383) -- (71,383)
Net loss -- 1996 (unaudited)......... -- -- -- -- (2,891,739) (2,891,739)
------------ ----------- ----------- --------- ------------ -----------
Balance at March 31, 1996
(unaudited).......................... $ -- $43,605,225 $ -- $ (5,064) $(30,480,658) $13,119,503
============ =========== =========== ========= ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 63
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 9, 1989 MARCH 9, 1989
(DATE OF (DATE OF
INCEPTION) THREE MONTHS ENDED INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
----------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
----------- ------------ ------------ ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss................ $(5,065,512) $ (8,399,345) $ (9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Expenses paid with
common stock........ -- -- -- 66,000 -- 12,500 78,500
Depreciation and
amortization........ 411,652 1,264,848 1,484,549 3,162,881 340,023 446,855 3,609,736
(Increase) decrease in
deposits, prepaid
expenses and
other............... (8,610) (161,827) (49,865) (295,290) (26,850) 3,350 (291,940)
(Increase) decrease in
accrued interest on
securities available
for sale............ 124,180 (29,750) (9,287) (82,928) (14,931) 11,038 (71,890)
Increase (decrease) in
current
liabilities......... 133,735 88,493 (17,955) 769,991 (114,941) (184,562) 585,429
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash used in
operating
activities...... (4,404,555) (7,237,581) (8,514,842) (23,968,265) (2,438,331) (2,602,558) (26,570,823)
Investing activities:
Purchases of property,
plant and equipment... (4,546,933) (885,604) (1,335,876) (7,170,597) (272,764) (519,482) (7,690,079)
Purchases of securities
available for sale.... (8,770,199) (12,990,428) (13,047,852) (55,090,522) (1,972,886) (1,513,869) (56,604,391)
Sales of securities
available for sale.... 14,049,110 9,369,127 10,119,622 42,952,020 2,838,299 3,366,703 46,318,723
Increase in other
assets................ (199,749) (177,500) (76,500) (574,179) (30,000) -- (574,179)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash provided
by (used in)
investing
activities...... 532,229 (4,684,405) (4,340,606) (19,883,278) 562,649 1,333,352 (18,549,926)
Financing activities:
Advances from Immunex... -- -- -- 2,807,316 -- -- 2,807,316
Net proceeds from sale
of capital stock...... -- 11,526,569 12,270,552 40,422,120 8,295 297,289 40,719,409
Proceeds from equipment
financing............. 806,114 1,950,391 1,089,789 3,846,294 237,459 554,063 4,400,357
Payments under capital
leases and installment
loans................. -- (412,315) (657,058) (1,069,373) (140,826) (210,887) (1,280,260)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash provided
by financing
activities...... 806,114 13,064,645 12,703,283 46,006,357 104,928 640,465 46,646,822
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in
cash and cash
equivalents............. (3,066,212) 1,142,659 (152,165) 2,154,814 (1,770,754) (628,741) 1,526,073
Cash and cash equivalents,
beginning of period..... 4,230,532 1,164,320 2,306,979 -- 2,306,979 2,154,814 --
----------- ------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents,
end of period........... $ 1,164,320 $ 2,306,979 $ 2,154,814 $ 2,154,814 $ 536,225 $ 1,526,073 $ 1,526,073
=========== ============ ============ ============ ============ ============ ============
Supplemental disclosures
of noncash investing and
financing activities:
Deferred sales tax on
leasehold improvements
and equipment......... $ 363,933 $ 114,589 $ 16,407 $ 509,588 $ 9,256 $ -- $ 509,588
=========== ============ ============ ============ ============ ============ ============
Preferred stock issued
to Immunex in payment
of advances........... $ -- $ -- $ -- $ 2,807,316 $ -- $ -- $ 2,807,316
=========== ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 64
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
Targeted Genetics Corporation (the "Company") is developing gene therapy
products for the treatment of certain acquired and inherited diseases. As a
development stage company, the Company has devoted substantially all of its
efforts to date to conducting research and development activities, recruiting
personnel and raising capital.
The Company was incorporated in the state of Washington in March 1989 as a
wholly owned subsidiary of Immunex Corporation ("Immunex"). In February 1992,
the Company issued 1,920,000 shares of Series A convertible preferred stock to
Immunex in exchange for the grant of a license to certain technology, settlement
of advances from Immunex and cancellation of 40,000 shares of common stock
issued by the Company to Immunex on March 28, 1989. At December 31, 1995,
Immunex held 21% of the outstanding stock of the Company.
The Company estimates that, at its current rate of expenditures, its
existing cash, cash equivalents and securities available for sale will be
sufficient to meet operating requirements through the end of 1996. Accordingly,
the Company is pursuing one or more collaborative arrangements with corporate
partners, with the intent of generating both research and development funding
and equity capital. The Company may also elect to seek additional equity capital
via the public or private markets, depending on market conditions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The financial information at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Operating results for the March 31,
1996 period are not necessarily indicative of the results that may be expected
for the entire year.
Cash Equivalents
The Company considers all short-term investments with a purchased maturity
of three months or less to be cash equivalents. Cash equivalents, valued at cost
which approximates market, consist principally of money market accounts and
short-term government obligations.
Securities Available for Sale
Securities available for sale consist primarily of corporate debt
securities and U.S. Government notes, all of which mature within two years.
Management currently classifies the Company's entire investment portfolio, other
than cash equivalents, as securities available for sale. Such securities are
stated at market value, with the unrealized gains and losses included in
shareholders' equity. The cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity, which are
included in investment income. Realized gains and losses and declines in value
judged to be other than temporary on securities available for sale are also
included in investment income. The cost of securities sold is calculated using
the specific identification method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of furniture
and equipment is provided using the straight-line method over the assets'
estimated useful lives, ranging from five to seven years. Furniture and
F-7
<PAGE> 65
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment under capitalized leases are amortized over the life of the lease.
Leasehold improvements are amortized over the life of the improvements or the
term of the lease, whichever is shorter.
Net Loss Per Share
Net loss per share is computed based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares are not
included in the computation because the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange Commission
requirements, common equivalent shares issued during the twelve months prior to
the Company's initial public offering have been included in the calculation as
if they were outstanding for all periods through March 31, 1994.
Upon completion of the Company's initial public offering, all 5,595,986
shares of preferred stock converted to common stock. Unaudited pro forma net
loss per share reflects the assumption that all such shares had converted to
common stock as of the beginning of the periods reported.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic value method, as prescribed by Accounting
Principles Board Opinion No. 25, or the fair value method described in Statement
No. 123. Companies choosing the intrinsic value method will be required to
disclose the pro forma impact of the fair value method on net income and
earnings per share. The Company plans to implement Statement No. 123 in 1996
using the intrinsic value method.
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 may differ from those estimates.
F-8
<PAGE> 66
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. corporate securities............. $ 3,349,999 $ 2,961 $ 34,653 $ 3,318,307
U.S. Government obligations........... 5,933,913 -- 84,412 5,849,501
----------- ------- -------- -----------
$ 9,283,912 $ 2,961 $119,065 $ 9,167,808
=========== ======= ======== ===========
December 31, 1995:
U.S. corporate securities............. $ 2,473,549 $ 8,803 $ -- $ 2,482,352
U.S. Government obligations........... 9,747,880 57,516 -- 9,805,396
----------- ------- -------- -----------
$12,221,429 $66,319 $ -- $12,287,748
=========== ======= ======== ===========
March 31, 1996:
U.S. corporate securities............. $ 2,398,777 $ 3,584 $ 191 $ 2,402,170
U.S. Government obligations........... 7,958,780 7,714 16,171 7,950,323
----------- ------- -------- -----------
$10,357,557 $11,298 $ 16,362 $10,352,493
=========== ======= ======== ===========
</TABLE>
The gross realized gains on sales of securities available for sale totaled
$15,901 and $25,047, and the gross realized losses totaled $55,576 and $48,013
in 1994 and 1995, respectively. For the three months ended March 31, 1995, the
gross realized gains on sales of securities available for sale totaled $18,158
and there were no gross realized losses.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment............................ $2,835,223 $3,862,632 $4,241,598
Leasehold improvements............................. 3,608,599 3,948,678 4,004,597
---------- ---------- ----------
6,443,822 7,811,310 8,246,195
Less accumulated depreciation and amortization..... 1,405,010 2,851,808 3,255,593
---------- ---------- ----------
$5,038,812 $4,959,502 $4,990,602
========== ========== ==========
</TABLE>
The Company has leased furniture and equipment, primarily laboratory
equipment, under three capital leases. The total cost of furniture and equipment
leased at December 31, 1994 and 1995 was $2,009,604 and $2,655,998,
respectively, with related accumulated depreciation of $489,541 and $1,076,712
at December 31, 1994 and 1995, respectively. At March 31, 1996, the total cost
of furniture and equipment leased was $3,298,545, and the related accumulated
depreciation was $1,238,622.
At December 31, 1994 and 1995, the Company had pledged furniture and
equipment, having a total cost of $616,441 and $853,900, respectively, as
collateral under an installment loan agreement. Accumulated depreciation related
to these assets was $63,911 and $221,410 at December 31, 1994 and 1995,
respectively. At March 31, 1996, the total cost of pledged furniture and
equipment was $853,900, and the related accumulated depreciation was $260,924.
F-9
<PAGE> 67
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred state sales tax.......................... $ 493,181 $ 509,588 $ 509,588
Installment note payable, effective rate of 16.73%
due in monthly installments through 1999........ 741,004 822,214 778,190
Capitalized lease obligations (see note 7)........ 1,603,185 1,954,706 2,341,906
---------- ---------- ----------
2,837,370 3,286,508 3,629,684
Less current portion.............................. 584,371 881,210 995,919
---------- ---------- ----------
$2,252,999 $2,405,298 $ 2,633,765
========== ========== ==========
</TABLE>
The state of Washington granted the Company a deferral of state sales tax
on new construction and equipment used in research and development activities.
The related obligation is payable over six years beginning in 1996.
Principal payments related to long-term obligations for each of the five
years ending December 31, 2000 are $881,210, $1,024,238, $658,800, $430,932 and
$162,539, respectively.
6. SHAREHOLDERS' EQUITY
Common Stock
The Company sold 1,200,000 shares of common stock to its scientific
advisors and founders in February and November 1992. The Company has the right
to repurchase certain of these shares in the event the holder's relationship
with the Company terminates. The repurchase rights expire in annual increments
ending in 1996. The shares were sold at prices ranging from $0.03 to $0.55 per
share. At December 31, 1995, 216,000 shares were subject to repurchase at the
original sales price. At March 31, 1996, 24,000 shares were subject to
repurchase at the original sales price.
Stock Options
The Company has adopted two stock option plans under which 1,520,000 shares
of common stock were reserved for issuance. Generally, options vest in annual
increments over a three- or five-year period. All options expire ten years from
date of grant. Options have been granted at market value or, prior to the
Company's initial public offering, at fair value at the date of grant as
established by the Company's Board of Directors and, accordingly, no
compensation expense has been recorded. As of December 31, 1995, options on
268,620 shares were exercisable and 443,123 shares were available for future
grant. As of March 31, 1996, options on 312,126 shares were exercisable and
281,686 shares were available for future grant.
F-10
<PAGE> 68
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of activity related to the Company's stock option plans follows:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION OPTION PRICE
------------ ------------
<S> <C> <C>
Balance, January 1, 1995................................... 838,000 $0.50 - 6.25
Cancelled................................................ (22,860) 0.55 - 6.25
Granted.................................................. 253,237 4.00 - 5.13
Exercised................................................ (35,960) 0.50 - 5.00
--------- ----------
Balance, December 31, 1995................................. 1,032,417 0.50 - 6.25
Cancelled................................................ (6,920) 0.55 - 5.00
Granted.................................................. 168,357 5.00
Exercised................................................ (16,840) 0.50 - 5.00
------------ ------------
Balance, March 31, 1996.................................... 1,117,014 $0.50 - 6.25
========== ===========
</TABLE>
Warrants
In July 1995, the Company issued warrants to purchase 830,598 shares of
common stock in conjunction with an offering of its common stock. The warrants
are immediately exercisable at a price of $4.68 per share, expiring July 1997.
The Company has issued a total of 62,016 warrants related to equipment financing
agreements. The warrants have a weighted average exercise price of $6.00 per
share and expire from May 1999 to December 2003. At December 31, 1995 and March
31, 1996, 892,614 shares and 831,614 shares, respectively, of common stock were
reserved for these warrants.
7. LEASE COMMITMENTS
The Company leases its research and office facility under a noncancellable
operating lease that expires April 1, 1999. The lease may be extended under
three five-year renewal options at the then prevailing fair market value rental
rate.
Future minimum rental payments under noncancellable leases at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ----------
<S> <C> <C>
Year ending December 31:
1996....................................................... $ 433,880 $ 873,814
1997....................................................... 457,446 873,814
1998....................................................... 474,233 303,740
1999....................................................... 119,607 358,866
2000....................................................... -- --
---------- ----------
Total minimum lease payments................................. $1,485,166 2,410,234
==========
Less amount representing interest............................ 455,528
----------
Present value of minimum capitalized lease payments.......... $1,954,706
==========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1996 was $256,354, $321,307,
$396,220 and $101,923, respectively.
F-11
<PAGE> 69
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $24.2 million and research and experimental credit carryforwards
of approximately $817,000. The carryforwards are available to offset future
federal income taxes and begin to expire in 2007. At December 31, 1994 and 1995,
the Company recognized a valuation allowance to offset deferred tax assets due
to the uncertainty of realizing the related benefits.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $5,162,000 $8,223,000
Research and experimental credit carryforwards............. 654,000 817,000
Depreciation............................................... 29,000 156,000
Other...................................................... 55,000 54,000
---------- ----------
Total deferred tax assets.................................... $5,900,000 $9,250,000
========== ==========
Valuation allowance for deferred tax assets.................. $5,900,000 $9,250,000
========== ==========
</TABLE>
9. SUBSEQUENT EVENTS
On April 16, 1996, the Company entered into a definitive merger agreement
with RGene Therapeutics, Inc. ("RGene") to acquire 100% of the outstanding stock
of RGene. The Company will issue to the RGene stockholders 3,636,364 shares of
its common stock. The RGene stockholders will have the right to receive an
additional $5 million of the Company's common stock if certain milestones
relating to RGene's potential products are achieved prior to December 31, 1998.
Completion of the RGene acquisition is subject to customary conditions,
including the approval of the shareholders of both companies.
On April 16, 1996, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell up to 4,025,000 shares of common stock
in a public offering.
F-12
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RGene Therapeutics, Inc.:
We have audited the accompanying balance sheets of RGene Therapeutics, Inc.
(a Delaware corporation in the development stage), as of December 31, 1994 and
1995, and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1994 and 1995, and the period from
inception (August 27, 1993) through December 31, 1995. 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 RGene Therapeutics, Inc., as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1995, and the period from
inception (August 27, 1993) through December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has operated as a development stage enterprise
since its inception, devoting substantially all of its efforts to financial
planning, raising capital and performing research and development. Consequently,
as shown in the accompanying financial statements, the Company has not realized
any revenues from product sales and has a cumulative loss of $5,075,183 since
its inception, all of which raises substantial doubt about its ability to
continue as a going concern. Accordingly, the Company's continued existence is
dependent upon its ability to obtain additional financing to develop,
manufacture and market its products and to attain successful future operations.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts of other current
assets and property and equipment or the amount of liabilities that might result
should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
April 10, 1996
F-13
<PAGE> 71
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- ----------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 2,300,235 $ 239,361 $ 1,677,083
Other current assets............................... 83,473 84,700 146,235
----------- ----------- -----------
Total current assets............................ 2,383,708 324,061 1,823,318
Furniture, equipment and leasehold improvements, net
of accumulated depreciation of $10,839, $56,828 and
$70,263, respectively.............................. 174,332 176,370 176,179
----------- ----------- -----------
Total assets.................................... $ 2,558,040 $ 500,431 $ 1,999,497
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 36,458 $ 152,138 $ 149,028
Payable to contract manufacturer................... 74,057 154,997 115,131
Payable to related parties......................... -- 65,000 1,500,000
Notes payable to related parties................... -- 1,000,000 1,000,000
----------- ----------- -----------
Total current liabilities....................... 110,515 1,372,135 2,764,159
Deferred revenue..................................... -- -- 2,500,000
Commitments and contingencies (Note 9)
Stockholders' equity:
Undesignated serial preferred stock, $.001 par
value; 4,196,428 shares authorized; none issued
and outstanding at December 31, 1994 and 1995
and March 31, 1996.............................. -- -- --
Series A convertible preferred stock, $.001 par
value; 5,803,572 shares authorized; 3,571,430
issued and outstanding at December 31, 1994 and
1995 and March 31, 1996......................... 3,571 3,571 3,571
Common stock, $.001 par value; 15,000,000 shares
authorized; 3,264,176, 3,394,176 and 3,394,176
issued and outstanding at December 31, 1994 and
1995 and March 31, 1996, respectively........... 3,264 3,394 3,394
Additional paid-in capital......................... 4,020,884 4,196,514 4,353,314
Deficit accumulated during the development stage... (1,580,194) (5,075,183) (7,624,941)
----------- ----------- -----------
Total stockholders' equity (deficit)............ 2,447,525 (871,704) (3,264,662)
----------- ----------- -----------
Total liabilities and stockholders'
equity................................... $ 2,558,040 $ 500,431 $ 1,999,497
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 72
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(AUGUST 27, 1993) THREE MONTHS (AUGUST 27, 1993)
YEAR ENDED DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
------------------------- DECEMBER 31, ------------------------- MARCH 31,
1994 1995 1995 1995 1996 1996
----------- ----------- ----------------- ----------- ----------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and other
fees................. $ -- $ 300,000 $ 300,000 $ -- $ -- $ 300,000
Interest income......... 56,266 53,277 109,543 26,092 23,048 132,591
----------- ----------- ----------- ----------- ----------- -----------
Total
revenues...... 56,266 353,277 409,543 26,092 23,048 432,591
Expenses:
Research and
development.......... 976,786 3,073,268 4,050,054 447,902 2,269,934 6,319,988
General and
administrative....... 659,674 752,943 1,412,617 194,708 270,772 1,683,389
Interest expense........ -- 22,055 22,055 -- 32,100 54,155
----------- ----------- ----------- ----------- ----------- -----------
Total
expenses...... 1,636,460 3,848,266 5,484,726 642,610 2,572,806 8,057,532
----------- ----------- ----------- ----------- ----------- -----------
Net loss.................. $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $(2,549,758) $(7,624,941)
=========== =========== =========== =========== =========== ===========
Loss per share............ $ (0.61) $ (1.06) $ (0.19) $ (0.75)
=========== =========== =========== ===========
Weighted average shares
used in computing loss
per share............... 2,598,449 3,289,820 3,264,176 3,394,176
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 73
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1993) THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
DEFICIT
SERIES A ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING TOTAL
------------------ ------------------ PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL STAGE EQUITY
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, August 27, 1993....... -- $ -- -- $ -- $ -- $ -- $ --
Warrants issued to purchase shares of common
stock in conjunction with bridge loan on
September 27, 1993........................ -- -- -- -- -- -- --
Issuance of common stock for cash, February
14, 1994, through April 4, 1994 ($.001 per
share).................................... -- -- 1,763,462 1,763 -- -- 1,763
Issuance of common stock for cash, February
24, 1994 ($.01 per share)................. -- -- 215,000 215 1,935 -- 2,150
Issuance of common stock for license
agreement rights, April 6, 1994, through
April 8, 1994 ($.001 per share)........... -- -- 1,284,614 1,285 -- -- 1,285
Issuance of Series A preferred stock for
cash, April 8, 1994, through September 22,
1994 ($1.12 per share).................... 3,571,430 3,571 -- -- 3,996,429 -- 4,000,000
Issuance of common stock for services,
August 17, 1994 ($.11 per share).......... -- -- 1,100 1 120 -- 121
Compensation expense related to stock
purchase agreements....................... -- -- -- -- 22,400 -- 22,400
Net loss.................................... -- -- -- -- -- (1,580,194) (1,580,194)
--------- ------- --------- ------- --------- ----------- ----------
Balance, December 31, 1994.................. 3,571,430 3,571 3,264,176 3,264 4,020,884 (1,580,194) 2,447,525
Warrants issued to purchase shares of common
stock in conjunction with bridge loan on
September 29, 1995........................ -- -- -- -- -- -- --
Issuance of common stock for license
agreement rights, October 20, 1995 ($.11
per share)................................ -- -- 130,000 130 14,170 -- 14,300
Compensation expense related to stock
purchase agreements and stock options..... -- -- -- -- 161,460 -- 161,460
Net loss.................................... -- -- -- -- -- (3,494,989) (3,494,989)
--------- ------- --------- ------- --------- ----------- ----------
Balance, December 31, 1995.................. 3,571,430 3,571 3,394,176 3,394 4,196,514 (5,075,183) (871,704)
Compensation expense related to stock
purchase agreements and stock options
(unaudited)............................... -- -- -- -- 156,800 -- 156,800
Net loss (unaudited)........................ -- -- -- -- -- (2,549,758) (2,549,758)
--------- ------- --------- ------- ---------- ----------- ----------
Balance, March 31, 1996..................... 3,571,430 $3,571 3,394,176 $3,394 $4,353,314 $(7,624,941) $(3,264,662)
========= ======= ========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 74
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(AUGUST 27, 1993) THREE MONTHS (AUGUST 27, 1993)
DECEMBER 31, THROUGH ENDED MARCH 31, THROUGH
------------------------- DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1995 1995 1996 1996
----------- ----------- ----------------- ---------- ----------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $(2,549,758) $(7,624,941)
Adjustments to reconcile net
loss to net cash used in
operating activities --
Depreciation............... 10,839 45,989 56,828 10,063 13,435 70,263
Issuance of common stock
for license agreement
rights................... 1,285 14,300 15,585 -- -- 15,585
Compensation expense
related to stock purchase
agreements and stock
options.................. 22,400 161,460 183,860 -- 156,800 340,660
Changes in assets and
liabilities --
(Increase) decrease in
other current
assets................ (83,473) (1,227) (84,700) 54,983 (61,536) (146,236)
Increase (decrease) in
accounts payable,
accrued liabilities
and payable to
contract
manufacturer.......... 110,515 196,620 307,135 (776) (42,975) 264,161
Increase in payable to
related parties....... -- 65,000 65,000 -- 1,435,000 1,500,000
Increase in deferred
revenue............... -- -- -- -- 2,500,000 2,500,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities.......... (1,518,628) (3,012,847) (4,531,475) (552,248) 1,450,966 (3,080,508)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchase of fixed assets...... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Issuance of common stock...... 4,034 -- 4,034 -- -- 4,034
Issuance of Series A preferred
stock...................... 4,000,000 -- 4,000,000 -- -- 4,000,000
Proceeds from notes payable... -- 1,000,000 1,000,000 -- -- 1,000,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities.......... 4,004,034 1,000,000 5,004,034 -- -- 5,004,034
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in
cash.......................... 2,300,235 (2,060,874) 239,361 (570,595) 1,437,722 1,677,083
Cash and cash equivalents,
beginning of period........... -- 2,300,235 -- 2,300,235 239,361 --
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end
of period..................... $ 2,300,235 $ 239,361 $ 239,361 $1,729,640 $ 1,677,083 $ 1,677,083
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 75
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
1. ORGANIZATION AND BUSINESS
RGene Therapeutics, Inc. (the Company), a Delaware corporation in the
development stage, was incorporated on August 27, 1993, and effectively
commenced operations in 1994. The Company is developing gene therapy products to
deliver genes that may provide unique clinical benefits in the treatment of a
number of human diseases. The Company's initial research and drug discovery
programs are based on inventions by leading scientists at The University of
Texas M. D. Anderson Cancer Center (MDACC) and the University of Pittsburgh
(UP).
The Company is a development stage company and has not yet generated
revenue from product sales or other sources, nor is there any assurance that the
Company will generate significant revenue in the future. 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,
attracting and retaining key personnel and consultants, dependence on licenses,
patents and know-how, and successfully developing manufacturing, sales and
marketing operations. The Company's ability to develop these operations may be
immensely impacted by uncertainties related to patents and proprietary
technologies, technological change and obsolescence, product development,
competition, government regulations and approvals, healthcare reform 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 Company believes that its current cash balance will be sufficient to
satisfy its funding needs through mid-1996. The Company must raise additional
funds during the next 12 months to maintain its research and development
activities. The Company's future funding requirements will depend on many
factors, including the progress of the Company's research and development and
the establishment of other collaborative relationships. Accordingly, the Company
is considering all of its financing alternatives, including corporate partnering
relationships with pharmaceutical companies to license some of its technology
and/or jointly develop products or the combination of the Company with another
entity (see Note 10). As a result of the aforementioned factors and the related
uncertainties, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts of other current assets and furniture, equipment and leasehold
improvements or the amount and classification of liabilities that might result
from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim financial statements
The interim financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited, and certain information and
footnote disclosures, normally included in such financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows for the interim periods then ended, have been
F-18
<PAGE> 76
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the entire year.
Cash and cash equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less are considered to be cash equivalents.
Furniture, equipment and leasehold improvements
Furniture, equipment and leasehold improvements are carried at cost and
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 three to seven years. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are 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.
Revenue recognition
Option, license and milestone payments under collaborative agreements are
recorded as earned based on the provisions of each agreement. Payments received
which have not met the appropriate criteria are recorded as deferred revenue.
Research and development costs
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company. 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
Loss per share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the periods. During
the noted periods, all common stock equivalents were antidilutive.
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- -------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment............................ $ 31,094 $ 72,087 $ 85,331
Lab equipment...................................... 146,985 146,706 146,706
Leasehold improvements............................. 7,092 14,405 14,405
-------- -------- --------
185,171 233,198 246,442
Less -- Accumulated depreciation and
amortization..................................... 10,839 56,828 70,263
-------- -------- --------
$174,332 $176,370 $ 176,179
======== ======== ========
</TABLE>
F-19
<PAGE> 77
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
4. NOTES PAYABLE
On September 29, 1995, the Company executed $1,000,000 in promissory notes
from certain stockholders of the Company. The promissory notes bear interest at
prime (8.5 percent at December 31, 1995) and are secured by the Company's
patents. The notes matured on December 31, 1995; the principal amount of
$1,000,000 and accrued interest of $22,055 and $54,155 are included in current
liabilities in the accompanying financial statements as of December 31, 1995 and
March 31, 1996, respectively. Management believes that the principal and accrued
interest on the notes will be converted into the Company's common stock in
conjunction with the contemplated merger (see Note 10).
5. STOCKHOLDERS' EQUITY
Series A convertible preferred stock
For the period from April 1994 through September 1994, the Company issued
3,571,430 shares of Series A convertible preferred stock, at a price of $1.12
per share, for cash proceeds of $4,000,000.
Series A convertible preferred shares are convertible at the option of the
holder into common stock as determined by dividing $1.12 by the conversion price
($1.12 at December 31, 1995) in effect at the time of conversion. At December
31, 1995, the Company reserved 3,571,430 shares of common stock for the
conversion of Series A convertible preferred stock. Series A convertible
preferred stock shall automatically be converted into common stock upon the
closing of a public offering with total proceeds of at least $7,500,000. The
holders of Series A convertible preferred stock have the right to vote on all
stockholder matters on an as-if-converted basis.
Series A convertible preferred stockholders may receive dividends at the
discretion of the Company's board of directors. To date, no dividends have been
declared.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A convertible preferred stock are entitled to receive
preference over any distribution to the holders of common stock in the amount of
$1.12 per share. The holders of Series A convertible preferred stock have
registration rights as defined in the stock purchase agreement.
Warrants
In connection with the bridge loans provided by two stockholders of the
Company, the Company issued each of the two stockholders warrants to purchase
50,000 shares of common stock at a price of $.10 per share. In April 1994, the
bridge loans were converted to Series A preferred stock. At the date of
issuance, the warrants were estimated to have a de minimis value and,
accordingly, the warrants were recorded at zero in the financial statements. The
warrants expire if not exercised before September 27, 1998.
During 1995, the Company issued warrants to purchase $250,000 of common
stock in conjunction with the $1,000,000 bridge loans provided by certain
stockholders of the Company. The number of shares of common stock to be issued
upon exercise of the warrants is to be determined by dividing $250,000 by the
price of the next equity financing. The warrants are exercisable at a price per
share equal to the price of the next equity financing. In connection with the
contemplated merger (see Note 10), the Company and the warrant holders have
agreed that the warrants to purchase $250,000 of common stock shall be exercised
at a price of $1.40 per share (unaudited) in exchange for 178,571 shares of the
Company's common stock. The warrants expire on September 28, 2000. At the date
of issuance, the warrants were estimated to have a de minimis value and,
accordingly, the warrants have been recorded at zero in the financial
statements.
F-20
<PAGE> 78
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Options
During 1995, the board of directors approved the expansion of the incentive
stock option pool to a total of the greater of (a) 750,000 shares of common
stock or (b) 10 percent of the total common stock issued of the Company. The
options under the 1994 Stock Option Plan (the Plan) have a term of 10 years.
Options to purchase 388,000 shares of common stock vest upon the achievement of
specific milestones. Options to purchase 168,000 shares of common stock vest
over a period of five years for each year of employment with the Company. At
December 31, 1995 and March 31, 1996, 144,216 and 152,566 options, respectively
were exercisable. The Company has recorded $74,100 and $156,800 of compensation
expense for the difference between the grant price and the deemed fair value, as
of December 31, 1995 and March 31, 1996, respectively, for financial statement
presentation purposes related to options which vest based upon the successful
completion of milestones.
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Balance at inception (August 27, 1993)...................... -- $ --
Granted................................................... 52,000 $ .10
-------
Balance at December 31, 1994................................ 52,000 $ .10
Granted................................................... 505,000 $.10 to .11
Forfeited................................................. (1,000) $ .11
-------
Balance at December 31, 1995................................ 556,000 $.10 to .11
Granted (unaudited)....................................... -- $ --
Forfeited (unaudited)..................................... -- $ --
-------
Balance at March 31, 1996 (unaudited)....................... 556,000 $.10 to .11
=======
</TABLE>
6. FEDERAL INCOME TAXES
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1995, the Company has
generated net operating loss (NOL) carryforwards of approximately $3.2 million
and approximately $70,000 of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation following
certain ownership changes on the use of NOL and credit carryforwards that 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 United
States tax laws 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.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109), requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, an NOL requires the
recognition of a deferred tax asset. 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
F-21
<PAGE> 79
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
6. FEDERAL INCOME TAXES (CONTINUED)
assets at December 31, 1994 and 1995. The components of the Company's deferred
tax assets are as follows at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 306,000 $ 1,088,000
Research and development tax credits........................ 27,000 70,000
--------- ----------
Total deferred tax assets......................... 333,000 1,158,000
Less -- Valuation allowance................................. (333,000) (1,158,000)
--------- ----------
Net deferred tax assets........................... $ -- $ --
========= ==========
</TABLE>
7. LICENSE AND RESEARCH AGREEMENTS
In March 1994, the Company entered into a license agreement with the Board
of Regents of The University of Texas System (the System) and MDACC, a component
institution of the System, whereby the Company has an exclusive noncancelable
worldwide license to certain technology rights. In exchange for the grant of
this exclusive license, the Company issued 642,307 shares of its common stock
pursuant to the stockholder agreement entered into in April 1994. The Company
will pay MDACC for 15 years, beginning with the first commercial sale of a
product incorporating the licensed technologies, a royalty based on net sales by
the Company or its affiliates or by sublicense agreement of products
incorporating any of such technologies. The Company is obligated by the
agreement to reimburse any of MDACC's costs that may be incurred in connection
with obtaining necessary patents. Failure by the Company to make all
commercially reasonable efforts to commercialize a licensed product could result
in termination of the license agreement rights.
In April 1994, the Company entered into an assignment agreement and
development agreement with Aronex Pharmaceuticals, Inc. (Aronex), formerly Argus
Pharmaceuticals, Inc. The assignment agreement transfers to the Company all
rights and obligations with respect to certain technology rights and related
patent applications invented by a research scientist licensed under an exclusive
license agreement between Aronex and the System. The development agreement
provides that the Company bear all costs in funding the research and development
of the technology and patent rights assigned above that is performed by Aronex.
The development agreement has an initial term of three years. In connection with
the above agreements and the sublicense agreement mentioned below, the Company
issued 321,154 shares of its common stock at a price of $.001 per share to the
research scientist referred to above. In addition, in exchange for the
sublicense agreement and assignment agreement described below, the Company
issued to Aronex 642,307 shares of its common stock pursuant to a stock purchase
agreement.
In April 1994, the Company entered into a sublicense agreement with Aronex,
whereby the Company has an exclusive worldwide sublicense to the technology
licensed under Aronex's license agreement with the University of Tennessee
Research Corporation (UTRC) dated May 25, 1992. Under the original license
agreement between Aronex and UTRC, any sales of licensed products by a
sublicensee are subject to royalties based on net sales.
In October 1995, the Company entered into a license agreement with UTRC. In
consideration for the license granted, the Company paid a license fee of
$250,000 to UTRC. As additional consideration, the Company issued 130,000 shares
of its common stock at a price of $.11 per share to UTRC, three research
scientists and McMaster University. The Company has committed to pay royalties
to UTRC in an amount based on net sales of the
F-22
<PAGE> 80
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
7. LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
licensed technology and on any sublicense of the licensed technology. As of
December 31, 1995, royalties of $65,000 are payable to UTRC. In addition,
pursuant to the agreement, the Company has commitments to UTRC for annual
license maintenance fees as follows: $30,000 per year for 1996 through 1999;
$40,000 per year for 2000 through 2004; and $50,000 per year for 2005 and each
year thereafter during the term of the agreement. As of March 31, 1996, the
Company paid $30,000 pertaining to this annual license maintenance fee.
In October 1994, the Company entered into a license agreement with UP
whereby the Company has an exclusive worldwide license to certain technology
rights. Upon execution of the agreement, the Company paid UP an initial license
fee of $15,000. The Company has committed to pay an additional $35,000
immediately upon the filing of the first patent application with respect to the
licensed technology. The Company has committed to pay royalties to UP in an
amount based on net sales of the licensed technology.
In August 1995, the Company entered into a nonexclusive license agreement
with QIAGEN GmbH (Qiagen). Under the license agreement, the Company has the
right to produce or sell a product made with Qiagen technology. As consideration
for the license agreement, the Company is committed to pay a royalty on net
sales.
In December 1995, the Company entered into a license agreement with Pasteur
Merieux Serums & Vaccins S.A. (PMSV). Under the terms of the agreement, the
Company is to receive license and milestone fees upon the completion of certain
performance milestones. In 1995, the Company received $300,000 in license and
other fees in accordance with the agreement. In addition, as consideration of
the license granted, the Company will receive royalties on net sales from PMSV.
The Company has sponsored research agreements with MDACC and UP to fund
research and clinical studies. During fiscal 1994 and 1995 and the three months
ended March 31, 1996, the Company paid $375,741, $771,214 and $193,164,
respectively, pursuant to those agreements and has committed to pay a minimum of
approximately $900,000 through 1998 to continue funding research and clinical
activities. The payments are recorded as research and development expense.
8. CONSULTING AND RELATED AGREEMENTS
The Company has consulting agreements with research scientists associated
with the System and UP, to provide technical know-how, expertise and other
assistance. Pursuant to these agreements, the Company has commitments through
1998 with remaining payments through that date totaling $153,000. In connection
with these two consulting agreements, the Company issued 1,121,154 shares of
common stock for a purchase price of $.001 per share. Pursuant to these
stockholder agreements, the Company has certain repurchase rights.
The Company has stock purchase agreements with an officer of the Company.
Under the stock purchase agreements, the Company issued 321,154 shares of common
stock at a price of $.001 per share. In the event the officer is terminated, the
Company can elect to repurchase a specified number of shares at a price of $.001
per share, based on the length of employment prior to termination. The Company
also issued 215,000 shares of common stock at a price of $.01 per share, of
which, 200,000 shares are subject to repurchase by the Company if certain
performance milestones are not met by the officer. The Company recorded
compensation expense of $20,000, $78,000, and $80,000 for fiscal 1994 and 1995
and for the three months ended March 31, 1996, respectively, in connection with
these agreements. In addition, if the Company terminates the officer before the
term of the employment agreement has expired, the officer shall have the option
to require the Company to repurchase 24,000 shares at a price per share based on
the fair value at the date of termination. The Company
F-23
<PAGE> 81
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
8. CONSULTING AND RELATED AGREEMENTS (CONTINUED)
recorded compensation expense of $2,400, $9,360, and $9,600 in 1994, 1995 and
the three months ended March 31, 1996, respectively, in connection with this
aspect of the officer's employment agreement.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its principal office under a lease which expires on
December 31, 1996. Monthly rental under the lease is $2,331. Lease expense
totaled $4,662, $27,972 and $5,439 for 1994 and 1995 and the three months ended
March 31, 1996, respectively.
10. SUBSEQUENT EVENTS
License, research and marketing agreement
On December 28, 1995, the Company granted a pharmaceutical company an
exclusive option to enter into a license agreement. In connection with the
execution of the option agreement, in January 1996 the pharmaceutical company
paid the Company $2,000,000 to maintain the option until February 16, 1996. On
February 22, 1996, the Company agreed to an outline of principal terms in
contemplation of a license agreement with the pharmaceutical company. In
consideration for the outline of principal terms, the pharmaceutical company
paid $500,000 to the Company in March 1996. The $2.5 million received from the
pharmaceutical company has been recorded as deferred revenue as of March 31,
1996. The pharmaceutical company agreed to make an additional nonrefundable
payment to the Company for $2.5 million on or before April 30, 1996, if a
definitive agreement had not been executed by both parties on or before such
date. In the event a definitive agreement is entered into on or before April 30,
1996, all of the nonrefundable payments would be credited toward a license fee
contemplated in the outline of principal terms. In the event the $2.5 million
payment has not been paid or the definitive agreement has not been executed on
or before April 30, 1996, the Company may terminate the outline of principal
terms. On April 30, 1996, the option was extended to May 17, 1996. Although the
extension period has expired, the Company is continuing to negotiate with the
pharmaceutical company. The Company may be required to pay certain sums to
certain related parties in the event that a definitive agreement is consummated
with the pharmaceutical company. As of March 31, 1996, $1.5 million has been
recorded as a payable to related parties.
Merger (unaudited)
On April 16, 1996, the Company entered into a definitive merger agreement
(the Merger Agreement) with Targeted Genetics Corporation (Targeted). Pursuant
to the Merger Agreement, Targeted will acquire the Company by merging the
Company with and into TGC Acquisition Corporation (TGC), a wholly owned
subsidiary of Targeted. Under the Merger Agreement, Targeted will issue
3,636,364 shares of common stock in exchange for 100 percent of the outstanding
stock of the Company. The Company stockholders will have the right to receive up
to an additional $5 million of Targeted's common stock if certain milestones are
achieved. Pursuant to the Merger Agreement and prior to the merger, an
additional $550,000 shall be advanced under the promissory notes from certain
stockholders of the Company (see Note 4). Such advances, together with the
$1,000,000 in promissory notes from certain stockholders of the Company, shall
be converted at or prior to the merger into common stock of the Company at a
conversion price of $1.40 per share.
F-24
<PAGE> 82
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
TARGETED GENETICS CORPORATION,
TGC ACQUISITION CORPORATION
AND
RGENE THERAPEUTICS, INC.
DATED AS OF APRIL 16, 1996
<PAGE> 83
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I -- THE MERGER............................................................... A-1
1.1 The Merger................................................................ A-1
1.2 The Closing............................................................... A-1
1.3 Effective Date and Time................................................... A-1
1.4 Certificate of Incorporation of the Surviving Corporation................. A-2
1.5 Bylaws of the Surviving Corporation....................................... A-2
1.6 Directors and Officers of the Surviving Corporation....................... A-2
1.7 Conversion of Shares...................................................... A-2
1.8 Dissenting Shares......................................................... A-2
1.9 Exchange of Certificates.................................................. A-3
1.10 No Fractional Shares...................................................... A-3
1.11 No Further Transfers...................................................... A-3
1.12 Merger Consideration...................................................... A-3
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... A-5
2.1 Organization.............................................................. A-5
2.2 Enforceability............................................................ A-5
2.3 Capitalization............................................................ A-5
2.4 Subsidiaries and Affiliates............................................... A-6
2.5 No Approvals; No Conflicts................................................ A-6
2.6 Financial Statements...................................................... A-6
2.7 Absence of Certain Changes or Events...................................... A-7
2.8 Taxes..................................................................... A-9
2.9 Property.................................................................. A-9
2.10 Contracts................................................................. A-10
2.11 Claims and Legal Proceedings.............................................. A-10
2.12 Labor and Employment Matters.............................................. A-10
2.13 Employee Benefit Plans.................................................... A-11
2.14 Patents, Trademarks, etc.................................................. A-12
2.15 Corporate Books and Records............................................... A-14
2.16 Licenses, Permits, Authorizations, etc.................................... A-14
2.17 Compliance With Laws...................................................... A-14
2.18 Insurance................................................................. A-14
2.19 Brokers or Finders........................................................ A-15
2.20 Absence of Questionable Payments.......................................... A-15
2.21 Bank Accounts............................................................. A-15
2.22 Insider Interests......................................................... A-15
2.23 Full Disclosure........................................................... A-15
2.24 Exemption from HSR Act.................................................... A-16
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF TARGETED
AND ACQUISITION...................................................... A-16
3.1 Organization.............................................................. A-16
3.2 Enforceability............................................................ A-16
3.3 Targeted Common Stock..................................................... A-16
3.4 No Approvals; No Conflicts................................................ A-16
3.5 Capitalization............................................................ A-17
3.6 SEC Documents............................................................. A-17
3.7 Exemption from HSR Act.................................................... A-17
3.8 Subsidiaries and Affiliates............................................... A-18
3.9 Absence of Certain Changes or Events...................................... A-18
</TABLE>
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<TABLE>
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PAGE
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<S> <C> <C> <C>
3.10 Taxes..................................................................... A-19
3.11 Property.................................................................. A-20
3.12 Contracts................................................................. A-20
3.13 Claims and Legal Proceedings.............................................. A-21
3.14 Labor and Employment Matters.............................................. A-21
3.15 Employee Benefit Plans.................................................... A-21
3.16 Patents, Trademarks, etc.................................................. A-22
3.17 Licenses, Permits, Authorizations, etc.................................... A-24
3.18 Compliance With Laws...................................................... A-24
3.19 Insurance................................................................. A-24
3.20 Brokers or Finders........................................................ A-24
3.21 Absence of Questionable Payments.......................................... A-24
3.22 Full Disclosure........................................................... A-25
ARTICLE IV -- COVENANTS............................................................... A-25
4.1 Conduct of Business by the Company Pending the Merger..................... A-25
4.2 Conduct of Business by Targeted Pending the Merger........................ A-26
4.3 Access to Information; Confidentiality.................................... A-26
4.4 No Alternative Transactions............................................... A-27
4.5 Notification of Certain Matters........................................... A-27
4.6 Further Action; Reasonable Best Efforts................................... A-27
4.7 Publicity................................................................. A-27
4.8 Registration Statement.................................................... A-28
4.9 Board of Directors........................................................ A-28
Consulting Agreements; Scientific Advisory Board; Clinical Advisory
4.10 Board..................................................................... A-28
4.11 Severance Agreements...................................................... A-28
4.12 Conversion of Outstanding Bridge Loan..................................... A-29
4.13 Development of Technology................................................. A-29
4.14 Survival of Indemnification............................................... A-29
4.15 Company Stockholders' Meeting; Targeted Shareholders' Meeting............. A-29
4.16 Private Placement Memorandum.............................................. A-30
4.17 Lock Up Agreements........................................................ A-30
4.18 Investor Questionnaire.................................................... A-30
ARTICLE V -- CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUISITION
AND TARGETED.......................................................... A-30
5.1 Accuracy of Representations and Warranties................................ A-30
5.2 Performance of Agreements................................................. A-30
5.3 Opinions of Counsel for the Company....................................... A-30
5.4 Company Stockholder Approval.............................................. A-31
5.5 Targeted Shareholder Approval............................................. A-31
5.6 Resignations.............................................................. A-31
5.7 Termination of Agreements................................................. A-31
5.8 Compliance Certificate.................................................... A-31
5.9 Approvals and Consents.................................................... A-31
5.10 Proceedings and Documents; Secretary's Certificate........................ A-31
5.11 Compliance With Laws...................................................... A-31
5.12 Legal Proceedings......................................................... A-32
5.13 Tax-Free Reorganization................................................... A-32
5.14 Delivery of Audited Financial Statements.................................. A-32
5.15 Exercise or Cancellation of Options and Warrants.......................... A-32
5.16 Consulting Agreements; Advisory Boards.................................... A-32
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
5.17 Bridge Loans.............................................................. A-32
5.18 University of Tennessee License Agreement................................. A-32
ARTICLE VI -- CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY...................... A-32
6.1 Accuracy of Representations and Warranties................................ A-33
6.2 Performance of Agreements................................................. A-33
6.3 Opinion of Counsel........................................................ A-33
6.4 Compliance Certificate.................................................... A-33
6.5 Legal Proceedings......................................................... A-33
6.6 Approvals and Consents.................................................... A-33
6.7 Compliance With Laws...................................................... A-33
6.8 Tax-Free Reorganization................................................... A-33
6.9 Targeted Shareholder Approval............................................. A-33
6.10 Proceedings and Documents; Secretary's Certificate........................ A-34
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER...................................... A-34
7.1 Termination............................................................... A-34
7.2 Effect of Termination..................................................... A-34
7.3 Amendment................................................................. A-34
7.4 Waiver.................................................................... A-35
ARTICLE VIII -- SURVIVAL AND INDEMNIFICATION.......................................... A-35
8.1 Survival.................................................................. A-35
8.2 Indemnification........................................................... A-35
8.3 Threshold and Limitations................................................. A-35
8.4 Procedure for Indemnification............................................. A-36
8.5 Escrow.................................................................... A-37
8.5.1 Escrowed Shares.................................................... A-37
8.5.2 Pledge............................................................. A-37
8.5.3 Release of Escrowed Shares......................................... A-37
8.5.4 Claims Procedure................................................... A-38
8.5.5 Voting............................................................. A-38
8.5.6 Merger or Recapitalization......................................... A-38
8.5.7 Taxation of Dividends.............................................. A-39
8.5.8 Disposition of Escrowed Shares..................................... A-39
8.6 Remedies.................................................................. A-39
ARTICLE IX -- GENERAL................................................................. A-39
9.1 Expenses.................................................................. A-39
9.2 Notices................................................................... A-39
9.3 Severability.............................................................. A-40
9.4 Entire Agreement.......................................................... A-40
9.5 Assignment................................................................ A-40
9.6 Parties in Interest....................................................... A-41
9.7 Headings.................................................................. A-41
9.8 Counterparts.............................................................. A-41
9.9 Governing Law............................................................. A-41
9.10 Knowledge................................................................. A-41
</TABLE>
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<TABLE>
<CAPTION>
EXHIBITS
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<S> <C> <C>
1.4 -- Certificate of Incorporation of the Surviving Corporation
4.10 -- Form of Consulting and Scientific Advisory Board Agreement
4.18 -- Investor Questionnaire
5.3 -- Form of Opinion of Counsel for the Company
5.7 -- Agreements to Be Terminated
6.3 -- Form of Opinion of Counsel for Targeted and Acquisition
</TABLE>
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<PAGE> 87
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 16, 1996, by and among
TARGETED GENETICS CORPORATION, a Washington corporation ("Targeted"), TGC
ACQUISITION CORPORATION, a Delaware corporation and wholly owned subsidiary of
Targeted ("Acquisition"), and RGENE THERAPEUTICS, INC., a Delaware corporation
(the "Company").
RECITALS
A. The Company, Targeted and Acquisition believe it advisable and in the
best interests of their respective shareholders and stockholders to effect a
merger of the Company and Acquisition pursuant to this Agreement (the "Merger").
B. The Board of Directors of the Company has approved the Merger as
required by applicable law.
C. The Board of Directors of Targeted and the Board of Directors and the
sole shareholder of Acquisition have approved the Merger as required by
applicable law.
D. For federal income tax purposes, the parties hereto intend to treat the
Merger as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code").
AGREEMENT
In consideration of the terms hereof, the parties hereto agree as follows:
ARTICLE I -- THE MERGER
1.1 THE MERGER
Upon the terms and subject to the conditions hereof, (a) at the Effective
Time (as defined in Section 1.3 hereof) the separate existence of Acquisition
shall cease and Acquisition shall be merged with and into the Company (the
Company is sometimes referred to herein as the "Surviving Corporation") and (b)
from and after the Effective Time, the Merger shall have all the effects of a
merger under the laws of the state of Delaware and other applicable law.
1.2 THE CLOSING
The closing of the Merger pursuant to this Agreement (the "Closing") shall
take place on the earliest practicable business day after the conditions to the
Closing of the Merger set forth in Articles V and VI hereof are satisfied or
waived (the "Closing Date") at 10:00 a.m. local time at the offices of Perkins
Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, or such other time or
location as Targeted and the Company shall agree. At the Closing, each of the
parties hereto shall deliver all such documents, instruments, certificates and
other items as may be required under this Agreement or otherwise.
1.3 EFFECTIVE DATE AND TIME
On the Closing Date and subject to the terms and conditions hereof, a
certificate of merger (the "Certificate of Merger") complying with the
applicable provisions of the Delaware General Corporation Law ("Delaware Law"),
in such form and executed in such manner as required by Delaware Law, shall be
delivered for filing to the Secretary of State of the State of Delaware (the
"Delaware Secretary of State"). The Merger shall become effective on the date
(the "Effective Date") and at the time (the "Effective Time") of filing of the
Certificate of Merger or at such other time as may be specified in the
Certificate of Merger as filed. If the Delaware Secretary of State requires any
changes in the Certificate of Merger as a condition to its filing or to issuing
its certificate to the effect that the Merger is effective, Targeted,
Acquisition and the Company shall execute any necessary revisions incorporating
such changes; provided, however, that such changes are not inconsistent with and
do not result in any substantial change in the terms of this Agreement.
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1.4 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Certificate of Incorporation of Acquisition
shall be in the form attached hereto as Exhibit 1.4 and shall be the Certificate
of Incorporation of the Surviving Corporation. Thereafter, the Certificate of
Incorporation of the Surviving Corporation may be amended in accordance its
terms and as provided by law.
1.5 BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, the Bylaws of Acquisition shall be the Bylaws of the
Surviving Corporation. Thereafter, the Bylaws may be amended or repealed in
accordance with their terms, the Certificate of Incorporation of the Surviving
Corporation and as provided by law.
1.6 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
At the Effective Time, the directors and officers of Acquisition shall
become the directors and officers, with equivalent titles, of the Surviving
Corporation.
1.7 CONVERSION OF SHARES
As of the Effective Time, by virtue of the Merger and without any action on
the part of the holders thereof:
(a) All shares of any class of capital stock of the Company held by
the Company as treasury shares shall be canceled.
(b) Each share of Common Stock of the Company, $.001 par value per
share ("Company Common Stock"), and each share of Preferred Stock of the
Company, $.001 par value per share, convertible into Company Common Stock
(the "Preferred Stock," and together with the Company Common Stock, the
"Company Capital Stock") that is issued and outstanding as of the Effective
Time other than the Dissenting Shares (as defined in Section 1.8 hereof),
shall be converted into the right to receive from Targeted the Merger
Consideration (as defined in Section 1.12 hereof) in accordance with the
terms of Section 1.12 hereof. All shares of Company Common Stock and
Preferred Stock, when so converted, shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease to
have any rights with respect thereto, except the right to receive the
Merger Consideration payable in respect of such shares upon the surrender
of such certificate. The holders of such shares of Company Common Stock and
Preferred Stock are collectively referred to herein as the "Stockholders"
and individually as a "Stockholder."
(c) Each issued and outstanding share of capital stock of Acquisition
shall be converted into one share of common stock of the Surviving
Corporation.
(d) Each issued and outstanding Option (as defined in Section 2.3(c)
hereof), Warrant (as defined in Section 2.3(c) hereof), performance share
agreement or other right to purchase or subscribe for any capital stock or
other securities of the Company, including, but not limited to any shares
of Company Common Stock, not exercised in writing on or before the second
business day before the Effective Date shall be canceled to the extent the
Company has the power or ability to cancel such Option, Warrant or other
right. To the extent that the Company does not have such power or ability,
the Company shall use its commercially reasonable best efforts to have such
instruments so canceled.
1.8 DISSENTING SHARES
Shares of Company Common Stock or Preferred Stock held by any Stockholder
entitled to and seeking relief as a dissenting shareholder under Delaware Law
("Dissenting Shares") shall not be converted into the right to receive the
Merger Consideration but shall be converted in such consideration as may be due
with respect to such shares pursuant to applicable provisions of Delaware Law,
unless and until the right of such holder to receive the fair cash value for
such Dissenting Shares terminates in accordance with Delaware Law. If such right
is terminated otherwise than by the purchase of such shares by the Company, then
such shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Consideration.
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1.9 EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Date, Targeted shall make
available, and each Stockholder will be entitled to receive, upon surrender to
Targeted of one or more certificates representing Company Common Stock or
Preferred Stock for cancellation, and delivery to Targeted of (i) an executed
Lock Up Agreement (as defined in Section 4.17 hereof) and (ii) a properly
completed and executed investor questionnaire in the form of Exhibit 4.18
hereto, certificates representing the number of shares of Targeted Common Stock
that such Stockholder is entitled to receive at the Closing pursuant to Section
1.9 hereof. The shares of Targeted Common Stock that each Stockholder shall be
entitled to receive pursuant to the Merger shall be deemed to have been issued
at the Effective Time, the date the First Milestone (as defined in Section 1.12
hereof) is achieved, or the date the Second Milestone (as defined in Section
1.12 hereof) is achieved, as the case may be. No interest shall accrue on the
Merger Consideration. If the Merger Consideration (or any portion thereof) is to
be delivered to any person other than the person in whose name the certificate
or certificates representing shares of Company Common Stock or Preferred Stock
surrendered in exchange therefor is registered, it shall be a condition to such
exchange that the person requesting such exchange shall pay to Targeted any
transfer or other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the certificate or
certificates so surrendered, or shall establish to the satisfaction of Targeted
that such tax has been paid or is not applicable. Notwithstanding the foregoing,
neither Targeted nor any other party hereto shall be liable to a holder of
shares of Company Common Stock or Preferred Stock for any Merger Consideration
delivered to a public official pursuant to, and in accordance with the mandatory
terms of, applicable abandoned property, escheat and similar laws.
1.10 NO FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Targeted Common
Stock shall be issued pursuant to the Merger, and no dividend, stock split or
other distribution with respect to Targeted Common Stock shall relate to any
such fractional interest, and any such fractional interest shall not entitle the
owner thereof to vote or to any rights of a security holder. In lieu of each
such fractional share, Targeted shall pay to the holder thereof, as soon as
practicable after the Effective Date or the date Additional Consideration (as
defined in Section 1.12 hereof) shall become issuable, an amount in cash equal
to such fraction multiplied by the closing price of Targeted Common Stock on the
Nasdaq National Market on the trading day immediately preceding the Effective
Date or the date Additional Consideration (as defined in Section 1.12 hereof)
shall become issuable.
1.11 NO FURTHER TRANSFERS
After the Effective Time, there shall be no transfers of any shares of
Company Common Stock on the stock transfer books of the Surviving Corporation.
If, after the Effective Time, certificates formerly representing shares of
Company Common Stock or Preferred Stock are presented to the Surviving
Corporation, they shall be canceled and exchanged in accordance with this
Article I.
1.12 MERGER CONSIDERATION
The merger consideration (the "Merger Consideration") shall consist of and
be payable as follows:
(a) With respect to each share of Preferred Stock (other than
Dissenting Shares), a preference (the "Preference") equal to that number of
shares of Common Stock of Targeted, $.01 par value per share ("Targeted
Common Stock") determined by dividing (i) Seven Hundred Twenty-Seven
Thousand Two Hundred Seventy-Three (727,273) by (ii) the number of shares
of Preferred Stock outstanding as of the Effective Time, shall be payable
with respect to each such share. The Preference shall be issuable at the
Closing.
(b) With respect to each share of Company Common Stock and Preferred
Stock (other than Dissenting Shares), that number of shares of Targeted
Common Stock (the "Common Equivalent Closing Consideration") determined by
dividing (i) Two Million Nine Hundred Nine Thousand Ninety-One (2,909,091),
by (ii) the number of shares of Company Capital Stock outstanding as of the
Effective Time shall be payable with respect to each such share; provided,
however, that an aggregate of Three Hundred Sixty-Three
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<PAGE> 90
Thousand Six Hundred Thirty-Six (363,636) shares of the Common Equivalent
Closing Consideration shall be held by, and pledged by the Stockholders on
a pro rata basis to, Targeted pursuant to Section 8.5 hereof. The Common
Equivalent Closing Consideration shall be issuable at the Closing.
(c) With respect to each share of Company Common Stock and Preferred
Stock (other than Dissenting Shares), additional consideration (the
"Additional Consideration") shall be issued in accordance with this Section
1.12(c):
(i) Additional Consideration shall be issued upon the achievement
of the First Milestone as set forth below. The "First Milestone" shall
mean, as it pertains to the United States, the enrollment of at least
one patient in a Phase II clinical trial for the Company's E1A product
and, as it pertains to Europe, the enrollment of at least one patient in
a clinical trial for such product meeting substantially the same
standards as are established for Phase II clinical trials in the United
States. "Europe" shall mean any member country of the European Economic
Union. Additional Consideration in the amount of up to Three Million
Dollars ($3,000,000) of Targeted Common Stock shall be issuable as
follows if the First Milestone is achieved in the following areas on or
before the following dates:
<TABLE>
<CAPTION>
AREA DATE TARGETED COMMON STOCK
------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------------------------
United States only December 31, 1997 $2,000,000
------------------------------------------------------------------------------------
Europe only December 31, 1997 $ 0
------------------------------------------------------------------------------------
United States and Europe December 31, 1997 $3,000,000
------------------------------------------------------------------------------------
United States only December 31, 1998 $1,000,000
------------------------------------------------------------------------------------
Europe only December 31, 1998 $1,000,000(1)
------------------------------------------------------------------------------------
United States and Europe December 31, 1998 $2,000,000(2)
------------------------------------------------------------------------------------
</TABLE>
(1) To be issued only if the First Milestone is achieved in the United
States after December 31, 1997. If the First Milestone is achieved
in the United States prior to January 1, 1998, or if it is not
achieved at all in the United States, then no Targeted Common Stock
will be issued for achieving the First Milestone in Europe during
1998.
(2) The maximum amount of Targeted Common Stock issuable in the event
that the First Milestone is not achieved in the United States prior
to January 1, 1998 is $2,000,000.
As promptly as practicable, but in no event later than twenty (20)
days, after achievement of the First Milestone, each Stockholder shall
be issued for each share of Company Capital Stock held as of the
Effective Time that number of shares of Targeted Common Stock determined
by dividing (A) the quotient of the dollar amount set forth above by the
First Milestone Average Trading Price by (B) the number of shares of
Company Capital Stock outstanding as of the Effective Time. The "First
Milestone Average Trading Price" shall equal the average of the closing
sale prices for Targeted Common Stock as reported on the Nasdaq National
Market for the thirty (30) trading days ending on the last trading day
immediately preceding the date the First Milestone shall have been
achieved.
(ii) As promptly as practicable, but in no event later than twenty
(20) days, after achievement of the Second Milestone, provided that such
milestone is achieved on or before December 31, 1997, each Stockholder
shall be issued for each share of Company Capital Stock held as of the
Effective Time that number of shares of Targeted Common Stock determined
by dividing (A) the quotient of Two Million Dollars ($2,000,000) divided
by the Second Milestone Average Trading Price by (B) the number of
shares of Company Capital Stock outstanding as of the Effective Time.
The "Second Milestone Average Trading Price" shall equal the average of
the closing sale prices for Targeted Common Stock as reported on the
Nasdaq National Market for the thirty (30) trading days ending on the
last trading day immediately preceding the date the Second Milestone
shall have been achieved. The "Second Milestone" shall mean the
execution of a definitive collaboration agreement with a third party,
which
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<PAGE> 91
agreement shall provide for (x) the development of genetic vaccines
using the Company's technology and (y) minimum revenue to Targeted of at
least Two Million Dollars ($2,000,000) during the first year following
execution of the agreement, of which a minimum of One Million Five
Hundred Thousand Dollars ($1,500,000) shall not be subject to any prior
commitment under any license or research agreement.
ARTICLE II -- REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
To induce Targeted and Acquisition to enter into and perform this Agreement
and except as is otherwise set forth in the Disclosure Memorandum of the
Company, delivered to Targeted on the date hereof (the "Company Disclosure
Memorandum"), which shall specifically identify or cross-reference the paragraph
or paragraphs of this Article II to which the exceptions therein relate, and
which shall constitute in its entirety a representation and warranty under this
Article II, the Company represents and warrants to Targeted and Acquisition as
of the date of this Agreement and as of the Closing as follows in this Article
II.
2.1 ORGANIZATION
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the state of Delaware. The Company has all requisite
corporate power and authority to own, operate and lease its properties and
assets, to carry on its business as now conducted and as proposed to be
conducted, to enter into and perform its obligations under this Agreement, and
to consummate the transactions contemplated hereby. The Company is duly
qualified and licensed as a foreign corporation to do business and is in good
standing in each jurisdiction listed on Schedule 2.1 to the Company Disclosure
Memorandum, which jurisdictions constitute all jurisdictions where the character
of the Company's properties occupied, owned or held under lease or the nature of
the business conducted by the Company makes such qualification necessary, except
(a) as set forth on Schedule 2.1 to the Company Disclosure Memorandum or (b)
where such failure to qualify or be licensed would not result in a Material
Adverse Effect (as defined in Section 2.7 hereof).
2.2 ENFORCEABILITY
All corporate action on the part of the Company and its officers, directors
and Stockholders necessary for the authorization, execution, delivery and
performance of this Agreement, the consummation of the Merger and the
performance of all of the Company's obligations under this Agreement has been
taken or will be taken as of or prior to the Effective Time. This Agreement has
been duly executed and delivered by the Company, and this Agreement is a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
2.3 CAPITALIZATION
(a) The authorized capital stock of the Company consists of 15,000,000
shares of Company Common Stock, par value $.001 per share, and 10,000,000 shares
of Preferred Stock, par value $.001 per share.
(b) The issued and outstanding capital stock of the Company consists solely
of 3,394,176 shares of Company Common Stock and 3,571,430 shares of Preferred
Stock (the "Outstanding Shares"), which are and as of the Closing will be held
of record by the Stockholders as set forth on Schedule 2.3(b) to the Company
Disclosure Memorandum. The Outstanding Shares are, and immediately prior to the
Closing will be, duly authorized and validly issued, fully paid and
nonassessable, and issued in compliance with all applicable federal, state and
foreign securities laws. True and correct copies of the stock records of the
Company, showing all issuances and transfers of shares of capital stock of the
Company since inception, have been provided to Targeted.
(c) Except for the (i) issued and outstanding options to purchase up to
608,000 shares of Company Common Stock listed on Schedule 2.3(c) to the Company
Disclosure Memorandum, all of which options were duly and validly granted, and
the rights of the University of Texas M.D. Anderson Cancer Center to acquire
shares of
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<PAGE> 92
Company Common Stock, as listed on Schedule 2.3(c) to the Company Disclosure
Memorandum (collectively, the "Options"), (ii) issued and outstanding warrants
to purchase up to 1,207,143 shares of Company Common Stock listed on Schedule
2.3(c)(ii) to the Company Disclosure Memorandum, all of which warrants were duly
and validly granted (the "Warrants"), and (iii) the bridge loans listed on
Schedule 2.3(c)(ii) to the Company Disclosure Memorandum, which are to be
converted into shares of Company Common Stock as described in Section 5.18
hereof, there are no outstanding rights of first refusal, preemptive rights,
options, warrants, conversion rights or other agreements, either directly or
indirectly, for the purchase or acquisition from the Company of any shares of
the Company's capital stock. Such Schedule 2.3(c) sets forth the name of each
holder of an Option or a Warrant and the exercise prices, vesting schedules and
termination dates thereof. The Company will take all necessary action, to the
extent the Company has the power or ability to do so, to ensure that all Options
and Warrants that have not been exercised to acquire Company Common Stock on or
before the second business day before the Closing shall have been canceled prior
to the Closing without liability to the Company.
(d) Except as set forth in Schedule 2.3 to the Company Disclosure
Memorandum, (i) no Stockholder or any affiliate thereof is indebted to the
Company, (ii) the Company is not indebted to any Stockholder or any affiliate
thereof, and (iii) the Company is not under any contractual or other obligation
to register any of its presently outstanding securities or any of its securities
which may hereafter be issued.
2.4 SUBSIDIARIES AND AFFILIATES
Except as set forth on Schedule 2.4 to the Company Disclosure Memorandum,
the Company does not own, directly or indirectly, any ownership, equity, profits
or voting interest in, or otherwise control, any corporation, partnership, joint
venture or other entity, and has no agreement or commitment to purchase any such
interest.
2.5 NO APPROVALS; NO CONFLICTS
Except as set forth on Schedule 2.5 to the Company Disclosure Memorandum,
the execution, delivery and performance of its obligations pursuant to this
Agreement by the Company and the consummation of the transactions contemplated
hereby will not (a) constitute a violation (with or without the giving of notice
or lapse of time, or both) of (i) any judgment, decree, or order of any court or
other governmental authority or (ii) in any material respect, any law, rule or
regulation applicable to the Company, (b) require any consent, approval or
authorization of, or declaration, filing or registration with, any person,
corporation, partnership, joint venture, association, organization, other entity
or governmental or regulatory authority (a "Person"), except compliance with
applicable securities laws, the approval of the Stockholders and the filing of
all documents necessary to consummate the Merger with the Delaware Secretary of
State (the consent of all such Persons to be duly obtained by the Company at or
prior to the Closing), (c) result in a default (with or without the giving of
notice or lapse of time, or both) under, acceleration or termination of, or the
creation in any party of the right to accelerate, terminate, modify or cancel,
any material agreement, lease, note or other restriction, encumbrance,
obligation or liability to which the Company is a party or by which it is bound
or to which any assets of the Company are subject, (d) result in the creation of
any lien or encumbrance upon the assets of the Company or upon any Outstanding
Shares or other securities of the Company, (e) conflict with or result in a
breach of or constitute a default under any provision of the Certificate of
Incorporation or Bylaws of the Company, or (f) invalidate or adversely affect
any material permit, license, authorization or status used in the conduct of the
business of the Company.
2.6 FINANCIAL STATEMENTS
The Company has delivered to Targeted (a) balance sheets, statements of
income and expenses, statements of cash flow, and statements of stockholders'
equity of the Company as of or for the fiscal year ended December 31, 1994, as
audited by and together with the report thereon of Arthur Andersen & Co.,
independent certified public accountants, (b) an unaudited balance sheet and
statement of income and expenses of the Company as of or for the fiscal year
ended December 31, 1995, and (c) a balance sheet and statement of income and
expenses of the Company as of and for the two (2) month period ended February
29, 1996. All of the foregoing financial statements, including any notes
thereto, are herein referred to as the "Financial Statements." The unaudited
balance sheet of the Company as of February 29, 1996 is herein referred to as
the "Company
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<PAGE> 93
Balance Sheet." The Financial Statements have been prepared in conformity with
generally accepted accounting principles in the United States ("GAAP"),
consistently applied throughout the periods covered thereby, and fairly present
the financial position, results of operations and changes in financial position
of the Company as of the dates and for the periods indicated, subject, in the
case of unaudited statements, to normal recurring period-end audit adjustments
which will not exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate.
Except as set forth in Schedule 2.6 of the Company Disclosure Memorandum, the
Company has no liabilities or obligations of any type required to be set forth
on a balance sheet, or required to be disclosed in the footnotes to financial
statements, in accordance with GAAP, which are not fully reflected or reserved
against in the Company Balance Sheet or disclosed in the Financial Statements,
except liabilities or obligations incurred since the date of the Company Balance
Sheet in the ordinary course of business and consistent with the Company's
operating budget for 1996. The Company maintains standard systems of accounting
which are adequate for its business. Except as set forth on Schedule 2.6 to the
Company Disclosure Memorandum, the Company has not agreed to be a guarantor,
indemnitor, surety or other obligor of any indebtedness of any other Person.
2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth on Schedule 2.7 to the Company Disclosure
Memorandum and except for transactions specifically contemplated in this
Agreement, since December 31, 1995, neither the Company nor any of its officers
or directors in their representative capacities on behalf of the Company has:
(a) taken any action or entered into or agreed to enter into any
material transaction, agreement or commitment other than in the ordinary
course of business;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness
owing by any Stockholder or any officer, director, employee or affiliate of
the Company);
(c) granted, other than in the ordinary course of business and
consistent with past practice, any increase in the compensation of
directors, officers, employees or consultants (including any such increase
pursuant to any employment agreement or bonus, pension, profit-sharing,
lease payment or other plan or commitment) or any increase in the
compensation payable or to become payable to any director, officer,
employee or consultant;
(d) suffered any Material Adverse Effect. "Material Adverse Effect"
means any change or effect that, when taken together with all other adverse
changes and effects (including, without limitation, such changes and
effects that are within the scope of the representations and warranties
made by a party in this Agreement but which are not individually or in the
aggregate deemed to constitute a Material Adverse Effect), is or is
reasonably likely to be materially adverse to the business, operations,
properties, condition (financial or otherwise), assets or liabilities
(including, without limitation, contingent liabilities) of a party taken as
a whole; provided, however, that the term Material Adverse Effect shall not
include (i) the results of any matter affecting the party's industry in
general, or general economic conditions or (ii) net cash expenditures
consistent with the party's annual operating budget or a monthly cash flow
forecast that has been disclosed to the other party hereto. Notwithstanding
the foregoing, a Material Adverse Effect shall include any termination of
the strategic relationship currently under negotiation with respect to the
development of the E1A product in Europe, or any announcement by the
Company's proposed licensee of revised terms of its proposed license that
are materially adverse to the Company with regard to the proposed license
agreement;
(e) borrowed or agreed to borrow any money, incurred or become subject
to, whether directly or by way of assumption or guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise) in
excess of Twenty-Five Thousand Dollars ($25,000), except liabilities and
obligations incurred in the ordinary course of business and consistent with
past practice, or increased, or experienced any change in any assumptions
underlying or methods of calculating, any bad debt, contingency or other
reserves;
(f) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of claims, liabilities and obligations
reflected or reserved against in the Company's
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balance sheet as of December 31, 1995 or incurred or which became payable
in the ordinary course of business and consistent with past practice since
December 31, 1995, or prepaid any obligation having a fixed maturity of
more than ninety (90) days from the date such obligation was issued or
incurred;
(g) permitted or allowed any of its material properties or assets
(real, personal or mixed, tangible or intangible) to be subjected to any
mortgage, pledge, lien, security interest, encumbrance, restriction or
charge, except (i) assessments for current taxes not yet due and payable,
(ii) landlord's liens for rental payments not yet due and payable, and
(iii) mechanics', materialmen's, carriers' and other similar statutory
liens securing indebtedness that was incurred in the ordinary course of
business and is not yet due and payable;
(h) sold, transferred or otherwise disposed of any of its material
properties or assets (real, personal or mixed, tangible or intangible);
(i) disposed of or permitted to lapse any rights to the use of any
trademark, trade name, patent or copyright, or disposed of or disclosed to
any Person, other than representatives of Targeted or other persons subject
to confidentiality agreements set forth on Schedule 2.14 to the Company
Disclosure Memorandum, any trade secret, formula, process or know-how not
theretofore a matter of public knowledge;
(j) made any single capital expenditure or commitment in excess of
Twenty-Five Thousand Dollars ($25,000) for additions to property, plant,
equipment or intangible capital assets or made aggregate capital
expenditures in excess of Twenty-Five Thousand Dollars ($25,000) for
additions to property, plant, equipment or intangible capital assets;
(k) made any material change in any method of accounting or accounting
practice or internal control procedure;
(l) issued any capital stock or other securities, or declared, paid or
set aside for payment any dividend or other distribution in respect of its
capital stock, or redeemed, purchased or otherwise acquired, directly or
indirectly, any shares of capital stock or other securities of the Company,
or otherwise permitted the withdrawal by any of the holders of capital
stock of the Company of any cash or other assets (real, personal or mixed,
tangible or intangible), in compensation, indebtedness or otherwise, other
than payments of compensation in the ordinary course of business and
consistent with past practice;
(m) paid, loaned or advanced any material amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement
with, any Stockholder or any of the Company's officers, directors or
employees or any affiliate of any Stockholder or any of the Company's
officers, directors or employees, except compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year last ended, and except for compensation increased in the
ordinary course of business and consistent with past practice;
(n) received notice of, or otherwise obtained knowledge of: (i) any
claim, action, suit, arbitration, proceeding or investigation involving,
pending against or threatened against the Company or any employee of the
Company before or by any court or governmental or nongovernmental
department, commission, board, bureau, agency or instrumentality, or any
other Person; (ii) any outstanding or unsatisfied judgments, orders,
decrees or stipulations to which the Company or any employee of the Company
is a party and where such items in subparagraphs (i) and (ii) above relate
directly to the transactions contemplated herein;
(o) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of the Company or any amendment or change to any existing
license or other agreement relating to intellectual property, other than in
the ordinary course of business; or
(p) agreed, whether in writing or otherwise, to take any action
described in this Section 2.7.
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2.8 TAXES
Except as described on Schedule 2.8 to the Company Disclosure Memorandum,
(a) the Company has duly and timely filed, including valid extensions, with the
appropriate governmental agencies (domestic and foreign) all tax returns,
information returns and reports ("Returns") for all Taxes (as defined below)
required to have been filed with respect to the Company and its business, (b)
the deductions giving rise to net operating loss carryovers showing on the
Returns will be upheld by the applicable taxing authority in the amount so
reported, and (c) except as set forth on Schedule 2.9 to the Company Disclosure
Memorandum, the Company has paid in full or provided for all Taxes that are due
or claimed to be due by any governmental agency (whether or not shown as due on
the Returns). "Taxes" shall mean all taxes, charges, fees, levies or other
assessments, including, but not limited to, income, excise, gross receipts,
property, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, severance, stamp, occupation, windfall
profits, social security and unemployment or other taxes imposed by the United
States or any agency or instrumentality thereof, any state, county, local or
foreign government, or any agency or instrumentality thereof, and any interest
or fines, and any and all penalties or additions relating to such taxes,
charges, fees, levies or other assessments. Except as described on Schedule 2.8
to the Company Disclosure Memorandum, (i) the reserves and provisions for Taxes
reflected in the Financial Statements are adequate, in all material respects,
for the payment of Taxes not yet due and payable or not yet assessed for the
period covered by such Financial Statements; (ii) no unresolved claim for
assessment or collection of Taxes has been asserted or threatened against the
Company, and no audit or investigation by any governmental authority is under
way with respect to Taxes, interest or other governmental charges; (iii) the
Company has not filed or entered into any election, consent or extension
agreement or any waiver that extends any applicable statute of limitations; and
(iv) the Company has not filed any consent to the application of Section
341(f)(2) of the Code to any assets held, acquired or to be acquired by it. The
Company has furnished Targeted with complete and correct copies of all Returns.
There are no tax liens on any property or assets of the Company other than liens
for current taxes not yet payable. To the Company's knowledge, no claim has been
made by an authority in any jurisdiction where the Company does not file Returns
that the Company is or may be subject to taxation by that jurisdiction. The
Company has not made any payments, is not obligated to make any payments, and is
not a party to any agreement that could obligate it to make any payments that
will not be deductible under Section 280G of the Code.
2.9 PROPERTY
(a) The Company owns no real property and leases no real property other
than as set forth in Schedule 2.9(a) to the Company Disclosure Memorandum, which
contains a complete and accurate list, in all material respects, of all real
property of the Company which is leased, rented or used by the Company (the
"Company Real Property"). The Company has delivered to Targeted true and
complete copies of all written leases, subleases, rental agreements, contracts
of sale, tenancies or licenses relating to the Company Real Property and written
summaries of the terms of any oral leases, subleases, rental agreements,
contracts of sale, tenancies or licenses relating to the Company Real Property.
(b) The Company's leasehold interest in each parcel of the Company Real
Property is free and clear of all material liens, mortgages, pledges, deeds of
trust, security interests, charges, encumbrances and other adverse claims or
interests of any kind. Each material lease of the Company Real Property, or any
part thereof, is valid, binding and enforceable in accordance with its terms
against the parties thereto and any other Person with an interest in such
Company Real Property, the Company has performed in all material respects all
obligations imposed upon it thereunder, and neither the Company nor any other
party thereto is in default thereunder nor is there any event which with notice
or lapse of time, or both, would constitute a default thereunder. Except as set
forth on Schedule 2.5 to the Company Disclosure Memorandum, no consent is
required from any Person under any lease or other agreement or instrument
relating to the Company Real Property in connection with the consummation of the
transactions contemplated by this Agreement and the Company has not received
notice that any party to any such lease or other agreement or instrument intends
to cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder. The Company has not granted any
lease, sublease, tenancy or license of, or entered into any rental agreement or
contract of sale with respect to, any portion of the Company Real Property.
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(c) Except as described on Schedule 2.9(c) to the Company Disclosure
Memorandum, the offices, laboratories and laboratory equipment owned by, or used
under the control and supervision of, the Company are of quality consistent with
industry standards, are in good operating condition and repair, normal wear and
tear excepted, are adequate for the uses to which they are being put, and comply
in all material respects with applicable safety, health, environmental, Food and
Drug Administration ("FDA"), and other laws, regulations, and guidelines.
(d) Except as set forth on Schedule 2.9(d) to the Company Disclosure
Memorandum, and except for (i) assessments for current taxes not yet due and
payable, (ii) lessor's liens for rental payments incurred in the ordinary course
of business and not yet due and payable, and (iii) mechanics', materialmen's,
carriers' and other similar statutory liens securing indebtedness that was
incurred in the ordinary course of business and is not yet due and payable, the
Company's personal property is free and clear of all material liens.
(e) Except as set forth on Schedule 2.9(e) to the Company Disclosure
Memorandum, the Company has not granted any lease, sublease, tenancy or license
of any portion of its personal property.
(f) Neither the whole nor any portion of the leaseholds or any other assets
or property of the Company is subject to any currently outstanding governmental
decree or order to be sold or is being condemned, expropriated or otherwise
taken by any public authority with or without payment of compensation therefor,
nor, to the Company's Knowledge (as defined in Section 9.10 hereof), has any
such condemnation, expropriation or taking been proposed.
2.10 CONTRACTS
Schedule 2.10 to the Company Disclosure Memorandum contains a complete and
accurate list (other than the Company Intellectual Property Licenses (as defined
in Section 2.14 hereof)) of all material contracts, agreements and
understandings, oral or written, to which the Company is currently a party or by
which the Company is currently bound, including, without limitation, security
agreements, license agreements, joint venture agreements, credit agreements,
instruments relating to the borrowing of money, research contracts and
scientific collaboration or cooperation agreements. Except as set forth on
Schedule 2.10 to the Company Disclosure Memorandum, all contracts set forth in
such Schedule are valid, binding and enforceable in accordance with their terms
against each party thereto, are in full force and effect, the Company has
performed in all material respects all obligations imposed upon it thereunder,
and neither the Company nor, to the best of the Company's Knowledge, any other
party thereto is in default thereunder, nor has any event occurred which with
notice or lapse of time, or both, would constitute a default by the Company or,
to the best of the Company's Knowledge, any other party thereunder. To the
extent requested by Targeted, true and complete copies of each such written
contract (or written summaries of the terms of any such oral contract) have been
heretofore delivered to Targeted. The Company has not received notice, nor does
the Company otherwise have Knowledge, that any party to any such contract
intends to cancel, terminate or refuse to renew such contract or to exercise or
decline to exercise any option or right thereunder.
2.11 CLAIMS AND LEGAL PROCEEDINGS
Except as set forth on Schedules 2.11 and 2.14 to the Company Disclosure
Memorandum, there are no claims, actions, suits, arbitrations, investigations or
proceedings pending against or involving or, to the Company's best knowledge,
threatened against the Company before or by any court or governmental or
nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person. There are no outstanding or unsatisfied
judgments, orders, decrees or stipulations to which the Company is a party which
involve the transactions contemplated herein. Schedule 2.11 to the Company
Disclosure Memorandum sets forth a description of any material disputes which
have been settled or resolved by litigation or arbitration since inception.
2.12 LABOR AND EMPLOYMENT MATTERS
(a) Except as set forth on Schedule 2.12 to the Company Disclosure
Memorandum, the Company is in compliance, in all material respects, with all
Federal, state or other applicable laws, domestic or foreign,
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respecting employment and employment practices, terms and conditions of
employment and wages and hours, and has not, and is not, engaged in any unfair
labor practice;
(b) No unfair labor practice complaint against the Company is pending
before the National Labor Relations Board;
(c) There is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against or involving the Company; and
(d) Except as provided on Schedule 2.12 of the Company Disclosure
Memorandum, no claim in respect of the Company's obligations arising in
connection with the employment of any employee is pending or, to the knowledge
of the Company, threatened, against the Company.
2.13 EMPLOYEE BENEFIT PLANS
(a) Employee Benefit Plans. Schedule 2.13(a) to the Company Disclosure
Memorandum sets forth an accurate and complete list of each employee benefit
plan, policy, program, contract or material arrangement, whether formal or
informal, written or unwritten and whether legally binding or not, covering or
benefiting any officer, employee, former employee, director or former director
of the Company or any dependents or beneficiaries of any such person, or with
respect to which the Company has (or could have) any obligation or liability,
including, but not limited to, each "employee benefit plan," within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and specifically including, but not limited to, all
retirement, pension, profit sharing, stock bonus, savings, bonus, cafeteria,
medical, dental, vision, life insurance, disability, accident insurance, medical
expense reimbursement, dependent care expense reimbursement, or tuition
reimbursement plan, policy or program, each sick pay, holiday and vacation
policy or program, each executive or deferred compensation plan or contract,
each stock purchase, stock option or stock appreciation rights plan or
arrangement, each severance agreement or plan and each employment, consulting or
personal services contract with any officer, director or employee (or any person
who prior to entering into such contract was an officer, director or employee)
(such items are hereinafter referred to collectively as "Employee Benefit Plans"
and each individually as an "Employee Benefit Plan") of the Company.
(b) Documents Provided. The Company has delivered to Targeted true,
correct and complete copies of all of its Employee Benefit Plans (including all
amendments thereto), along with, to the extent applicable to the particular
Employee Benefit Plan, the following information: (i) copies of the annual
reports (Form 5500 series) filed with respect to the Employee Benefit Plan for
the last three (3) years; (ii) copies of the most recent summary plan
descriptions, summary annual reports, summaries of material modifications and
all material employee manuals or communications filed or distributed with
respect to the Employee Benefit Plan; (iii) copies of any insurance contracts or
trust agreements through which the Employee Benefit Plan is funded; (iv) copies
of all contracts relating to the Employee Benefit Plan, including, but not
limited to, service provider agreements, insurance contracts, investment
management agreements, subscription and prescription agreements and record
keeping agreements; (v) a copy of the most recent Internal Revenue Service
("IRS") determination letter issued with respect to the Employee Benefit Plan;
and (vi) notice of any material adverse change occurring with respect to the
Employee Benefit Plan since the date of the most recently completed and filed
annual report.
(c) Compliance With Laws. Except as provided in Schedule 2.13 to the
Company Disclosure Memorandum, with respect to each Employee Benefit Plan of the
Company:
(i) the Company is, and at all times has been, in compliance in all
material respects with, and such Employee Benefit Plan is, and at all times
has been, maintained and operated in all material respects in compliance
with, the terms of such Employee Benefit Plan and all applicable laws,
rules and regulations, including, but not limited to, ERISA and the Code;
(ii) neither the Company nor any other fiduciary of such Employee Benefit
Plan has engaged in any transaction or acted or failed to act in a manner
that violates the fiduciary requirements of Section 404 of ERISA with
respect to such Employee Benefit Plan; and (iii) no event has occurred or,
to the best knowledge of the Company, is threatened or about to occur which
would constitute a prohibited transaction under Section 406 of ERISA or
under Section 4975 of the Code.
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(d) Pension Plans. Neither the Company nor any ERISA Affiliate (as defined
below) has ever maintained or contributed to, or had an obligation to contribute
to, (i) any multiemployer plan within the meaning of Section 3(37) or Section
4001(a)(3) of ERISA or (ii) any employee benefit plan, fund program, contract or
arrangement that is subject to Section 412 of the Code, Section 302 of ERISA or
Title IV of ERISA or (iii) any plan that is intended to be qualified under
Section 401(a) of the Code. "ERISA Affiliate," as used in Article II hereof,
means any entity, whether or not incorporated, that is part of a group that
includes the Company and that is treated as a single employer under Section
414(b), (c), (m), or (o) of the Code with the Company.
(e) Welfare Plans. Each Employee Benefit Plan of the Company that
constitutes a "group health plan," within the meaning of Section 4980B(g)(2) of
the Code or Section 607(1) of ERISA, has been operated at all times in all
material respects in compliance with the requirements of Section 4980B of the
Code and Part 6 of Title I of ERISA. No Employee Benefit Plan of the Company
that is an "employee welfare benefit plan," within the meaning of Section 3(1)
of ERISA, provides or has any obligation to provide benefits with respect to
current or former employees of the Company or any other entity beyond their
retirement or other termination of service, including, without limitation,
post-retirement (or post-termination) medical, dental, life insurance, severance
or any other similar benefit, whether provided on an insured or self-insured
basis, other than benefits mandated by applicable law, including, but not
limited to, continuation coverage required to be provided under Section 4980B of
the Code or Part 6 of Subtitle B of Title I of ERISA.
(f) Contributions. All contributions and other payments required to have
been made by the Company (including any pre-tax or post-tax contributions or
payments by employees or their dependents) to any Employee Benefit Plan of the
Company (or to any person pursuant to the terms thereof) have been so made or,
if not yet due, the amount of any such payment or contribution obligation has
been properly reflected in the Financial Statements (except for obligations
accrued in the ordinary course of business after the date of such Financial
Statements).
(g) Other Claims and Investigations. There are no actions, suits or claims
(other than routine claims for benefits) pending or, to the best knowledge of
the Company, threatened with respect to any Employee Benefit Plan of the Company
or against the assets of any such Employee Benefit Plan. None of the Employee
Benefit Plans of the Company is currently under investigation, audit or review,
directly or indirectly, by the IRS or the Department of Labor (the "DOL"), and,
to the best knowledge of the Company, no such action is contemplated or under
consideration by the IRS or DOL.
(h) Other Binding Commitments. The Company has no agreement, arrangement,
commitment or obligation, whether formal or informal, whether written or
unwritten, and whether legally binding or not, to create any plan, policy,
program, contract or arrangement not identified in Schedule 2.13 to the Company
Disclosure Memorandum or to modify or amend any of its existing Employee Benefit
Plans.
(i) ERISA Affiliates. The Company has no liability or potential liability
to participants, beneficiaries or any other person or entity under any employee
benefit plan, policy, program, practice, contract or arrangement currently (or
previously) maintained or contributed to by any ERISA Affiliate.
(j) Payments Resulting From Transactions. Except as set forth in Schedule
2.13 to the Company Disclosure Memorandum, the consummation of any transaction
contemplated by this Agreement will not result in any (i) payment (whether of
severance pay or otherwise) becoming due from the Company to any officer,
employee, former employee or director thereof or to the trustee under any "rabbi
trust" or similar arrangement; (ii) benefit under any Employee Benefit Plan of
the Company being established or becoming accelerated, vested or payable; or
(iii) payment or series of payments by the Company, directly or indirectly, to
any person that would constitute a "parachute payment" within the meaning of
Section 280G of the Code.
2.14 PATENTS, TRADEMARKS, ETC.
Set forth on Schedule 2.14 to the Company Disclosure Memorandum is a true
and complete list of all patents, trademarks, service marks, trade names, brand
names, and registered copyrights, and any applications for any of the foregoing
(collectively, the "Company Intellectual Property") of any kind used now or
within the two (2) year period immediately preceding the date of this Agreement
in the business of the Company. Such
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Schedule 2.14 contains a complete and accurate list of all licenses or
agreements that in any way affect the rights of the Company to any of the
Company Intellectual Property or any trade secret material to the Company (the
"Company Intellectual Property Licenses"). No claim with respect to the Company
Intellectual Property, any trade secret material to the Company, or any Company
Intellectual Property License is currently pending or, to the best knowledge of
the Company, overtly threatened by any Person, nor does the Company know of any
valid grounds for any bona fide claim, except as set forth on such Schedule
2.14, (a) to the effect that any Company operation, Company Intellectual
Property, trade secret material to the Company, or Company Intellectual Property
License infringes or misappropriates any copyright, patent, trademark, service
mark or trade secret; (b) to the effect that any other Person infringes on the
Company Intellectual Property or misappropriates any trade secret material to
the Company; (c) challenging the ownership, validity or effectiveness of any of
the Company Intellectual Property or trade secret material to the Company; or
(d) challenging the Company's license under, or other legally enforceable right
under, any Company Intellectual Property License. The consummation of the
transactions contemplated hereby will not alter or impair the Company's rights
to any of the Company Intellectual Property, any trade secret material to the
Company or under any Company Intellectual Property License. With respect to any
Company Intellectual Property or trade secret material to the Company, the
Company owns or has the right to use such Company Intellectual Property or trade
secret in its business. Except as set forth on such Schedule 2.14 in respect of
the Company Intellectual Property Licenses or otherwise, and except where the
failure to so own or be licensed would not have a Material Adverse Effect upon
the Company, the Company is the sole and exclusive owner or the exclusive
licensee pursuant to the Company Intellectual Property Licenses of the Company
Intellectual Property.
Except as set forth on such Schedule 2.14, each of the Company Intellectual
Property Licenses is valid, binding and enforceable in accordance with its terms
against the parties thereto; the Company has performed all obligations imposed
upon it under each of the Company Intellectual Property Licenses; and neither
the Company nor any other party thereto is in default thereunder, nor, to the
Company's best knowledge, is there any event that with notice or lapse of time,
or both, would constitute a default thereunder. Except as set forth on such
Schedule 2.14, the Company has not received notice that any party to any of the
Company Intellectual Property Licenses intends to cancel, terminate or refuse to
renew the same or to exercise or decline to exercise any option or other right
thereunder. Except as set forth on such Schedule 2.14, no licenses, sublicenses,
covenants or agreements have been granted or entered into by the Company in
respect of any of the Company Intellectual Property or any trade secret material
to the Company except the Company Intellectual Property Licenses. No director,
officer, Stockholder or employee of the Company owns, directly or indirectly, in
whole or in part, any of the Company Intellectual Property or any trade secret
material to the Company. To the Company's best knowledge, none of the Company's
officers, employees, consultants, distributors, agents, representatives or
advisors have entered into any agreement relating to the Company's business
regarding know-how, trade secrets, assignment of rights in inventions, or
prohibition or restriction of competition or solicitation of customers, or any
other similar restrictive agreement or covenant, whether written or oral, with
any Person other than the Company.
Except as set forth on such Schedule 2.14, to the Company's best knowledge,
no Person has asserted any claim of infringement or other interference with
third-party rights with respect to the Company Intellectual Property or any
trade secret material to the Company. Except as set forth on such Schedule 2.14,
(a) during the two (2) year period immediately preceding the date of this
Agreement, the Company has not disclosed other than in the ordinary course
consistent with past practice any proprietary information relating to the
Company Intellectual Property, any trade secret material to the Company or the
Company Intellectual Property Licenses to any person other than to Targeted or
Acquisition; (b) the Company has at all times maintained reasonable procedures
to protect and have enforced all trade secrets of the Company; (c) the Company
has disclosed trade secrets to other Persons solely as required for the conduct
of the Company's business and solely under nondisclosure agreements that are
enforceable by the Company and, upon the Closing, will be enforceable by
Acquisition or Targeted in accordance with their terms; and (d) the Company is
not under any contractual or other obligation to disclose any proprietary
information relating to the Company Intellectual Property, any trade secret
material to the Company or the Company Intellectual Property Licenses except
pursuant to the nondisclosure agreements listed on such Schedule 2.14, nor, to
the best knowledge of the Company, is any other party to the Company
Intellectual Property Licenses under any such obligation to disclose proprietary
information included in or relating to Company Intellectual Property, any trade
secret material to the Company or
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the Company Intellectual Property Licenses to any person or entity, and no event
has taken place, including the execution of this Agreement or any related change
in the Company's business activities, that would give rise to such obligation.
2.15 CORPORATE BOOKS AND RECORDS
The Company has furnished to Targeted or its representatives for their
examination true and complete copies of (a) the Certificate of Incorporation and
Bylaws of the Company as currently in effect, including all amendments thereto,
(b) the minute books of the Company, and (c) the stock transfer books of the
Company. Such minutes reflect all meetings of the Company's Stockholders, Board
of Directors and any committees thereof since the Company's inception, and such
minutes accurately reflect in all material respects the events of and actions
taken at such meetings. Such stock transfer books accurately reflect all
issuances and transfers of shares of capital stock of the Company since its
inception.
2.16 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in Schedules 2.1 and 2.5 to the Company Disclosure
Memorandum and except where the failure to have any of the following would not
result in a Material Adverse Effect, the Company has received all governmental
approvals, authorizations, consents, licenses, orders, registrations and permits
of all agencies, whether federal, state, local or foreign that are currently
required in order for the Company to conduct its business as it is currently
conducted. The Company has not received any notifications of any asserted
present failure by it to have obtained any such governmental approval,
authorization, consent, license, order, registration or permit, or past and
unremedied failure to obtain such items.
2.17 COMPLIANCE WITH LAWS
Except as described on Schedule 2.17 to the Company Disclosure Memorandum
and except where the failure to have any of the following would not result in a
Material Adverse Effect, the Company has at all times complied, and is in
compliance, with all federal, state, local and foreign laws, rules, regulations,
ordinances, decrees and orders applicable to it, to its employees, or to the
Company Real Property and the Company's personal property, including, without
limitation, all such laws, rules, ordinances, decrees and orders relating to
intellectual property protection, antitrust matters, consumer protection,
currency exchange, environmental protection, equal employment opportunity,
health and occupational safety, pension and employee benefit matters, securities
and investor protection matters, labor and employment matters, and
trading-with-the-enemy matters. The Company has not received any notification of
any asserted present or past unremedied failure by the Company to comply with
any of such laws, rules, ordinances, decrees or orders.
2.18 INSURANCE
The Company maintains (a) insurance on all of its property that insures
against loss or damage by fire or other casualty and (b) insurance against
liabilities, claims and risks of a nature and in such amounts as are normal and
customary in its industry for companies of similar size and financial condition.
All insurance policies of the Company are in full force and effect, all premiums
with respect thereto covering all periods up to and including the date this
representation is made have been paid, and no notice of cancellation or
termination has been received with respect to any such policy. Such policies are
sufficient for compliance with all requirements of law currently applicable to
the Company and of all agreements to which the Company is a party, will remain
in full force and effect through the respective expiration dates of such
policies without the payment of additional premiums, and will not in any way be
affected by, or terminate or lapse by reason of, the transactions contemplated
by this Agreement. The Company has not been refused any insurance with respect
to its assets or operations, nor has its coverage been limited, by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance.
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2.19 BROKERS OR FINDERS
Except as set forth on Schedule 2.19 to the Company Disclosure Memorandum,
the Company has not incurred, and will not incur, directly or indirectly, as a
result of any action taken by or on behalf of the Company, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Merger, this Agreement or any transaction contemplated
hereby.
2.20 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Company, nor, to the Company's knowledge, any director,
officer, agent, employee or other Person acting on behalf of the Company, has
used any Company funds for improper or unlawful contributions, payments, gifts
or entertainment, or made any improper or unlawful expenditures relating to
political activity to domestic or foreign government officials or others. The
Company has adequate financial controls to prevent such improper or unlawful
contributions, payments, gifts, entertainment or expenditures. Neither the
Company nor, to the Company's Knowledge, any current director, officer, agent,
employee or other Person acting on behalf of the Company, has accepted or
received any improper or unlawful contributions, payments, gifts or
expenditures. The Company has at all times complied, and is in compliance, in
all material respects with the Foreign Corrupt Practices Act and, to its
Knowledge, in all material respects with all foreign laws and regulations
relating to prevention of corrupt practices.
2.21 BANK ACCOUNTS
Schedule 2.21 to the Company Disclosure Memorandum sets forth the names and
locations of all banks, trust companies, savings and loan associations and other
financial institutions at which the Company maintains safe deposit boxes or
accounts of any nature and the names of all Persons authorized to draw thereon,
make withdrawals therefrom or have access thereto.
2.22 INSIDER INTERESTS
Except as set forth on Schedule 2.22 to the Company Disclosure Memorandum,
no Stockholder or officer or director or other representative of the Company has
any interest (other than as a Stockholder) (a) in any property, real or
personal, tangible or intangible, used in or directly pertaining to the business
of the Company, including, without limitation, inventions, patents, trademarks
or trade names, or (b) in any agreement, contract, arrangement or obligation
relating to the Company, its present or prospective business or its operations.
Except as set forth on Schedule 2.22 to the Company Disclosure Memorandum, there
are no agreements, understandings or proposed transactions between the Company
and any of its officers, directors, holders, affiliates or any affiliate
thereof. The Company and its officers and directors have no interest, either
directly or indirectly, in any entity, including, without limitation, any
corporation, partnership, joint venture, proprietorship, firm, licensee,
business or association (whether as an employee, officer, director, shareholder,
agent, independent contractor, security holder, creditor, consultant or
otherwise) that presently (i) provides any services, produces or sells any
products or product lines, or engages in any activity which is the same, similar
to or competitive with any activity or business in which the Company is now
engaged or proposes to engage; (ii) is a supplier, customer or creditor, or has
an existing contractual relationship with any of the Company's employees (or
persons performing similar functions); or (iii) has any direct or indirect
interest in any asset or property, real or personal, tangible or intangible, of
the Company or any property, real or personal, tangible or intangible, that is
necessary or desirable for the present or anticipated future conduct of the
Company's business.
2.23 FULL DISCLOSURE
No information furnished by the Company to Targeted or its representatives
in this Agreement (including, but not limited to, all information in the Company
Disclosure Memorandum and the other Exhibits hereto) or by the Company to the
Stockholders in connection with their approval of the Merger and execution and
delivery of this Agreement, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements so made
or information so delivered not misleading.
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2.24 EXEMPTION FROM HSR ACT
The Company is not a "person," nor does it "control," nor is it "controlled
by" or "under common control with" or otherwise part of any "ultimate parent
entity" that has total assets or net sales of One Hundred Million Dollars
($100,000,000) or more (in each case as such terms are defined and amounts
calculated under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, together with the regulations thereunder (collectively, the "HSR
Act")); and, assuming the accuracy of Targeted's representation set forth in
Section 3.7 hereof, the consummation of the transactions contemplated hereby
will not give rise to any requirement on the part of any party to file any
notification or other report pursuant to the HSR Act.
ARTICLE III -- REPRESENTATIONS AND WARRANTIES
OF TARGETED AND ACQUISITION
To induce the Company to enter into and perform this Agreement, Targeted
and Acquisition jointly and severally represent and warrant to the Company, as
of the date of this Agreement and as of the Closing as follows in this Article
III:
3.1 ORGANIZATION
Targeted is a corporation organized, validly existing and in good standing
under the laws of the state of Washington. Acquisition is a corporation duly
organized and validly existing under the laws of the state of Delaware. Each of
Targeted and Acquisition has full corporate power and authority to own, operate
and lease its properties and assets and to carry on its business as now
conducted and as proposed to be conducted, to execute, deliver and perform this
Agreement, and to carry out the transactions contemplated hereby. Targeted is
duly qualified and licensed as a foreign corporation to do business and is in
good standing in each jurisdiction where the character of Targeted's properties
occupied, owned or held under lease or the nature of the business conducted by
Targeted makes such qualification necessary, except where such failure to
qualify or be licensed would not result in a Material Adverse Effect.
3.2 ENFORCEABILITY
All corporate action on the part of Targeted and Acquisition and their
respective officers, directors and shareholders necessary for the authorization,
execution, delivery and performance of this Agreement the consummation of the
Merger and the performance of all of their respective obligations under this
Agreement have been taken or will be taken prior to the Effective Time. This
Agreement has been duly executed and delivered by Targeted, and this Agreement
is a legal, valid and binding obligation of Targeted, enforceable against
Targeted in accordance with its terms. This Agreement has been duly executed and
delivered by Acquisition and this Agreement is a legal, valid and binding
obligation of Acquisition, enforceable against Acquisition in accordance with
its terms.
3.3 TARGETED COMMON STOCK
The Targeted Common Stock to be issued pursuant to this Agreement has been
duly authorized for issuance, and such Targeted Common Stock, when issued and
delivered to the Stockholders in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable.
3.4 NO APPROVALS; NO CONFLICTS
The execution, delivery and performance of this Agreement by Acquisition
and Targeted and the consummation by them of the transactions contemplated
hereby will not (a) constitute a violation (with or without the giving of notice
or lapse of time, or both) of (i) any judgment, decree or order of any court or
other governmental authority or (ii) in any material respect, any law, rule or
regulation applicable to Targeted or Acquisition, (b) require any consent,
approval or authorization of, or declaration, filing or registration with, any
Person, except compliance with applicable securities laws, the approval of
Targeted's shareholders and the filing of all documents necessary to consummate
the Merger with the Delaware Secretary of State (the consent of all
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such Persons to be duly obtained at or prior to the Closing), (c) result in a
default (with or without the giving of notice or lapse of time, or both) under,
acceleration or termination of, or the creation in any party of the right to
accelerate, terminate, modify or cancel, any agreement, lease, note or other
restriction, encumbrance, obligation or liability to which Targeted or
Acquisition is a party or by which either of them is bound or to which any of
their assets are subject, (d) result in the creation of any lien or encumbrance
upon the assets of Targeted or upon any outstanding shares of Targeted Common
Stock or other securities of Targeted, (e) conflict with or result in a breach
of or constitute a default under any provision of the Articles of Incorporation
or Bylaws of Targeted or the Certificate of Incorporation or Bylaws of
Acquisition, or (f) invalidate or adversely affect any material permit, license,
authorization or status used in the conduct of the business of Targeted.
3.5 CAPITALIZATION
The authorized capital stock of Targeted consists of Forty Million
(40,000,000) shares of common stock, $.01 par value per share, of which
12,317,183 shares were issued and outstanding as of December 31, 1995, and Six
Million (6,000,000) shares of preferred stock, $.01 par value per share, none of
which are issued and outstanding. Such issued and outstanding shares of Targeted
Common Stock are duly authorized, validly issued, fully paid and nonassessable
and issued in compliance with all applicable securities laws. The total number
of outstanding options and warrants to purchase Targeted Common Stock, as of
December 31, 1995, were 1,032,417 and 892,614, respectively.
3.6 SEC DOCUMENTS
(a) Targeted has furnished the Company with true and complete copies of its
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, its
Proxy Statement relating to its 1996 Annual Meeting of shareholders on May 2,
1996, its Annual Report to Shareholders for the fiscal year ended December 31,
1995, the prospectus relating to its initial public offering and the prospectus
relating to its public offering of units completed in July 1995 (collectively,
the "SEC Documents"). As of their respective filing dates, (i) each of the SEC
Documents complied in all material respects with the requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the SEC promulgated thereunder, and (ii) none of the SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements contained in the SEC
Documents not misleading.
(b) Each of the financial statements (including, in each case, any notes
thereto) contained in the SEC Documents was prepared in conformity with GAAP,
consistently applied throughout the periods covered thereby, and fairly presents
the financial position, results of operations and changes in financial position
of Targeted as of the dates and for the periods indicated, subject, in the case
of unaudited statements, to normal recurring period-end audit adjustments which
will not exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Except
as set forth on Schedule 3.6(b) to the Targeted Disclosure Memorandum, Targeted
has no liabilities or obligations of any type required to be set forth on a
balance sheet, or disclosed in the footnotes thereto, in accordance with GAAP as
of the date of such balance sheet, which are not fully reflected or reserved
against in Targeted's balance sheet dated as of December 31, 1995 or the notes
thereto, except liabilities or obligations incurred since December 31, 1995 in
the ordinary course of business and consistent with Targeted's operating budget
for 1996. Targeted maintains standard systems of accounting which are adequate
for its business. Except as set forth on Schedule 3.6(b) to the Disclosure
Memorandum of Targeted, delivered to the Company on the date hereof (the
"Targeted Disclosure Memorandum"), Targeted has not agreed to be a guarantor,
indemnitor, surety or other obligor of any indebtedness of any other Person.
(c) Except as disclosed in the SEC Documents, Targeted has not been a party
to, nor has there otherwise been, any transaction of a type required to be
reported pursuant to Item 404 of Regulation S-K (Certain Relationships and
Related Transactions).
3.7 EXEMPTION FROM HSR ACT
Targeted is not a "person," nor does it "control," nor is it "controlled
by" or "under common control with" or otherwise part of any "ultimate parent
entity" that has total assets or net sales of One Hundred Million
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Dollars ($100,000,000) or more (in each case as such terms are defined and
amounts calculated under the HSR Act); and, assuming the accuracy of the
Company's representation set forth in Section 2.24 hereof, the consummation of
the transactions contemplated hereby will not give rise to any requirement on
the part of any party to file any notification or other report pursuant to the
HSR Act.
3.8 SUBSIDIARIES AND AFFILIATES
Except for Acquisition, Targeted does not own, directly or indirectly, any
ownership, equity, profits or voting interest in, or otherwise control, any
corporation, partnership, joint venture or other entity, and has no agreement or
commitment to purchase any such interest.
3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth on Schedule 3.9 to the Targeted Disclosure
Memorandum, or as disclosed in the SEC Documents, and except for transactions
specifically contemplated in this Agreement, since December 31, 1995, neither
Targeted nor any of its officers or directors in their representative capacities
on behalf of Targeted has:
(a) taken any action or entered into or agreed to enter into any
material transaction, agreement or commitment other than in the ordinary
course of business;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness
owing by any shareholder, officer, director, employee or affiliate of
Targeted);
(c) granted, other than in the ordinary course of business and
consistent with past practice, any increase in the compensation of
directors, officers, employees or consultants (including any such increase
pursuant to any employment agreement or bonus, pension, profit-sharing,
lease payment or other plan or commitment) or any increase in the
compensation payable or to become payable to any director, officer,
employee or consultant;
(d) suffered any Material Adverse Effect;
(e) borrowed or agreed to borrow any money, incurred or become subject
to, whether directly or by way of assumption or guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise) in
excess of One Hundred Thousand Dollars ($100,000), except liabilities and
obligations incurred in the ordinary course of business and consistent with
past practice, or increased, or experienced any change in any assumptions
underlying or methods of calculating, any bad debt, contingency or other
reserves;
(f) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of claims, liabilities and obligations
reflected or reserved against in the financial statements contained in the
SEC Documents or incurred or which became payable in the ordinary course of
business and consistent with past practice since December 31, 1995, or
prepaid any obligation having a fixed maturity of more than ninety (90)
days from the date such obligation was issued or incurred;
(g) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge, except
(i) assessments for current taxes not yet due and payable, (ii) landlord's
liens for rental payments not yet due and payable, and (iii) mechanics',
materialmen's, carriers' and other similar statutory liens securing
indebtedness that was incurred in the ordinary course of business and is
not yet due and payable;
(h) sold, transferred or otherwise disposed of any of its material
properties or assets (real, personal or mixed, tangible or intangible);
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(i) disposed of or permitted to lapse any rights to the use of any
trademark, trade name, patent or copyright, or disposed of or disclosed to
any Person, other than representatives of the Company or other persons
subject to confidentiality agreements with Targeted, any trade secret,
formula, process or know-how not theretofore a matter of public knowledge;
(j) except for capital expenditures reflected in Targeted's 1996
capital expenditure budget (a copy of which has been provided to the
Company), made any single capital expenditure or commitment in excess of
One Hundred Thousand Dollars ($100,000) for additions to property, plant,
equipment or intangible capital assets or made aggregate capital
expenditures in excess of One Hundred Thousand Dollars ($100,000) for
additions to property, plant, equipment or intangible capital assets;
(k) made any material change in any method of accounting or accounting
practice or internal control procedure;
(l) issued any capital stock or other securities, or declared, paid or
set aside for payment any dividend or other distribution in respect of its
capital stock (except for (i) grants of options to purchase Targeted Common
Stock under the 1992 Restated Stock Option Plan or the 1994 Stock Option
Plan for Nonemployee Directors (together, the "Targeted Stock Option
Plans") or (ii) the issuance of Targeted Common Stock upon the exercise of
options granted under the Targeted Stock Option Plans), or redeemed,
purchased or otherwise acquired, directly or indirectly, any shares of
capital stock or other securities of Targeted, or otherwise permitted the
withdrawal by any of the holders of capital stock of Targeted of any cash
or other assets (real, personal or mixed, tangible or intangible), in
compensation, indebtedness or otherwise, other than payments of
compensation in the ordinary course of business and consistent with past
practice;
(m) paid, loaned or advanced any material amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement
with, any Targeted shareholder or any of Targeted's officers, directors or
employees or any affiliate of any Targeted shareholder or any of Targeted's
officers, directors or employees, except compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year last ended, and except for compensation increased in the
ordinary course of business and consistent with past practice;
(n) received notice of, or otherwise obtained knowledge of: (i) any
claim, action, suit, arbitration, proceeding or investigation involving,
pending against or threatened against Targeted or any employee of Targeted
before or by any court or governmental or nongovernmental department,
commission, board, bureau, agency or instrumentality, or any other Person;
(ii) any outstanding or unsatisfied judgments, orders, decrees or
stipulations to which Targeted or any employee of Targeted is a party and
where such items in subparagraphs (i) and (ii) above relate directly to the
transactions contemplated herein;
(o) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of Targeted or any amendment or change to any existing
license or other agreement relating to intellectual property, other than in
the ordinary course of business; or
(p) agreed, whether in writing or otherwise, to take any action
described in this Section 3.9.
3.10 TAXES
Except as described on Schedule 3.10 to the Targeted Disclosure Memorandum,
(a) Targeted has duly and timely filed, including valid extensions, with the
appropriate governmental agencies (domestic and foreign) all Returns for all
Taxes required to have been filed with respect to Targeted and its business, (b)
the deductions giving rise to net operating loss carryovers showing on the
Returns will be upheld by the applicable taxing authority in the amount so
reported, and (c) except as set forth on Schedule 3.10 to the Targeted
Disclosure Memorandum, Targeted has paid in full or provided for all Taxes that
are due or claimed to be due by any governmental agency (whether or not shown as
due on the Returns). Except as described on Schedule 3.10 to the Targeted
Disclosure Memorandum, (i) the reserves and provisions for Taxes reflected in
the financial statements included in the SEC Documents are adequate, in all
material respects, for the payment of Taxes not yet due and payable or not yet
assessed for the period covered by such financial statements; (ii) no unresolved
claim for
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assessment or collection of Taxes has been asserted or threatened against
Targeted, and no audit or investigation by any governmental authority is under
way with respect to Taxes, interest or other governmental charges; (iii)
Targeted has not filed or entered into any election, consent or extension
agreement or any waiver that extends any applicable statute of limitations; and
(iv) Targeted has not filed any consent to the application of Section 341(f)(2)
of the Code to any assets held, acquired or to be acquired by it. There are no
tax liens on any property or assets of Targeted other than liens for current
taxes not yet payable. To Targeted's knowledge, no claim has been made by an
authority in any jurisdiction where Targeted does not file Returns that Targeted
is or may be subject to taxation by that jurisdiction. Targeted has not made any
payments, is not obligated to make any payments, and is not a party to any
agreement that could obligate it to make any payments that will not be
deductible under Section 280G of the Code.
3.11 PROPERTY
(a) Targeted owns no real property and leases no real property other than
as set forth in the SEC Documents, which contain a complete and accurate
description, in all material respects, of all real property of Targeted which is
leased, rented or used by Targeted (the "Targeted Real Property").
(b) Except as set forth on Schedule 3.11(b) of the Targeted Disclosure
Memorandum, Targeted's leasehold interest in each parcel of the Targeted Real
Property is free and clear of all material liens, mortgages, pledges, deeds of
trust, security interests, charges, encumbrances and other adverse claims or
interests of any kind. Each material lease of the Targeted Real Property, or any
part thereof, is valid, binding and enforceable in accordance with its terms
against the parties thereto and any other Person with an interest in such
Targeted Real Property, Targeted has performed in all material respects all
obligations imposed upon it thereunder, and neither Targeted nor any other party
thereto is in default thereunder nor is there any event which with notice or
lapse of time, or both, would constitute a default thereunder. Except as set
forth on Schedule 3.4 to the Targeted Disclosure Memorandum, no consent is
required from any Person under any lease or other agreement or instrument
relating to the Targeted Real Property in connection with the consummation of
the transactions contemplated by this Agreement and Targeted has not received
notice that any party to any such lease or other agreement or instrument intends
to cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder. Targeted has not granted any
lease, sublease, tenancy or license of, or entered into any rental agreement or
contract of sale with respect to, any portion of the Targeted Real Property.
(c) Except as described on Schedule 3.11(c) to the Targeted Disclosure
Memorandum, Targeted's offices, laboratories and laboratory equipment are of
quality consistent with industry standards, are in good operating condition and
repair, normal wear and tear excepted, are adequate for the uses to which they
are being put, and comply in all material respects with applicable safety,
health, environmental, Food and Drug Administration ("FDA"), and other laws,
regulations, and guidelines.
(d) Except as set forth on Schedule 3.11(d) to the Targeted Disclosure
Memorandum or as disclosed in the SEC Documents, and except for (i) assessments
for current taxes not yet due and payable, (ii) lessor's liens for rental
payments incurred in the ordinary course of business and not yet due and
payable, and (iii) mechanics', materialmen's, carriers' and other similar
statutory liens securing indebtedness that was incurred in the ordinary course
of business and is not yet due and payable, Targeted's personal property is free
and clear of all material liens.
(e) Targeted has not granted any lease, sublease, tenancy or license of any
portion of its personal property.
(f) Neither the whole nor any portion of the leaseholds or any other assets
or property of Targeted is subject to any currently outstanding governmental
decree or order to be sold or is being condemned, expropriated or otherwise
taken by any public authority with or without payment of compensation therefor,
nor, to Targeted's knowledge, has any such condemnation, expropriation or taking
been proposed.
3.12 CONTRACTS
The SEC Documents contain a complete and accurate list of all material
contracts, agreements and understandings, oral or written, to which Targeted is
currently a party or by which Targeted is currently bound,
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including, without limitation, security agreements, license agreements, joint
venture agreements, credit agreements, instruments relating to the borrowing of
money, research contracts and scientific collaboration or cooperation
agreements. Except as listed in the SEC Documents and except as set forth on
Schedule 3.12 to the Targeted Disclosure Memorandum, all contracts set forth in
the SEC Documents are valid, binding and enforceable in accordance with their
terms against each party thereto, are in full force and effect, Targeted has
performed in all material respects all obligations imposed upon it thereunder,
and neither Targeted nor, to the best of Targeted's Knowledge, any other party
thereto is in default thereunder, nor has any event occurred which with notice
or lapse of time, or both, would constitute a default by Targeted or, to the
best of Targeted's Knowledge, any other party thereunder. To the extent
requested by the Company, true and complete copies of each such written contract
(or written summaries of the terms of any such oral contract) have been
heretofore delivered to the Company. Targeted has not received notice, nor does
Targeted otherwise have Knowledge, that any party to any such contract intends
to cancel, terminate or refuse to renew such contract or to exercise or decline
to exercise any option or right thereunder.
3.13 CLAIMS AND LEGAL PROCEEDINGS
Except as disclosed in the SEC Documents, there are no claims, actions,
suits, arbitrations, investigations or proceedings pending against or involving
or, to Targeted's best knowledge, threatened against Targeted before or by any
court or governmental or nongovernmental department, commission, board, bureau,
agency or instrumentality, or any other Person. There are no outstanding or
unsatisfied judgments, orders, decrees or stipulations to which Targeted is a
party which involve the transactions contemplated herein. Schedule 3.13 to the
Targeted Disclosure Memorandum sets forth a description of any material disputes
which have been settled or resolved by litigation or arbitration within the last
five (5) years.
3.14 LABOR AND EMPLOYMENT MATTERS
(a) Except as set forth on Schedule 3.14 to the Targeted Disclosure
Memorandum, Targeted is in compliance, in all material respects, with all
Federal, state or other applicable laws, domestic or foreign, respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and has not, and is not, engaged in any unfair labor practice;
(b) No unfair labor practice complaint against Targeted is pending before
the National Labor Relations Board;
(c) There is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against or involving Targeted; and
(d) Except as provided on Schedule 3.14 of the Targeted Disclosure
Memorandum, no claim in respect of the Company's obligations arising in
connection with the employment of any employee is pending or, to the knowledge
of Targeted, threatened, against Targeted.
3.15 EMPLOYEE BENEFIT PLANS
(a) Employee Benefit Plans. Schedule 3.15(a) to the Targeted Disclosure
Memorandum sets forth an accurate and complete list of each of Targeted's
Employee Benefits Plans.
(b) Compliance With Laws. Except as provided in Schedule 3.15 to the
Targeted Disclosure Memorandum, with respect to each Employee Benefit Plan of
Targeted:
(i) Targeted is, and at all times has been, in compliance in all
material respects with, and such Employee Benefit Plan is, and at all times
has been, maintained and operated in all material respects in compliance
with, the terms of such Employee Benefit Plan and all applicable laws,
rules and regulations, including, but not limited to, ERISA and the Code;
(ii) neither Targeted nor any other fiduciary of such Employee Benefit Plan
has engaged in any transaction or acted or failed to act in a manner that
violates the fiduciary requirements of Section 404 of ERISA with respect to
such Employee Benefit Plan; and (iii) no event has occurred or, to the best
knowledge of Targeted, is threatened or about to occur which would
constitute a prohibited transaction under Section 406 of ERISA or under
Section 4975 of the Code.
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(c) Pension Plans. Neither Targeted nor any ERISA Affiliate (as defined
below) has ever maintained or contributed to, or had an obligation to contribute
to, (i) any multiemployer plan within the meaning of Section 3(37) or Section
4001(a)(3) of ERISA or (ii) any employee benefit plan, fund program, contract or
arrangement that is subject to Section 412 of the Code, Section 302 of ERISA or
Title IV of ERISA or (iii) any plan that is intended to be qualified under
Section 401(a) of the Code. "ERISA Affiliate," as used in Article III hereof,
means any entity, whether or not incorporated, that is part of a group that
includes Targeted and that is treated as a single employer under Section 414(b),
(c), (m), or (o) of the Code with Targeted.
(d) Welfare Plans. Each Employee Benefit Plan of Targeted that constitutes
a "group health plan," within the meaning of Section 4980B(g)(2) of the Code or
Section 607(1) of ERISA, has been operated at all times in all material respects
in compliance with the requirements of Section 4980B of the Code and Part 6 of
Title I of ERISA. No Employee Benefit Plan of Targeted that is an "employee
welfare benefit plan," within the meaning of Section 3(1) of ERISA, provides or
has any obligation to provide benefits with respect to current or former
employees of Targeted or any other entity beyond their retirement or other
termination of service, including, without limitation, post-retirement (or
post-termination) medical, dental, life insurance, severance or any other
similar benefit, whether provided on an insured or self-insured basis, other
than benefits mandated by applicable law, including, but not limited to,
continuation coverage required to be provided under Section 4980B of the Code or
Part 6 of Subtitle B of Title I of ERISA.
(e) Contributions. All contributions and other payments required to have
been made by Targeted (including any pre-tax or post-tax contributions or
payments by employees or their dependents) to any Employee Benefit Plan (or to
any person pursuant to the terms thereof) have been so made or, if not yet due,
the amount of any such payment or contribution obligation has been properly
reflected in Targeted's financial statements (except for obligations accrued in
the ordinary course of business after December 31, 1995).
(f) Other Claims and Investigations. There are no actions, suits or claims
(other than routine claims for benefits) pending or, to the best knowledge of
Targeted, threatened with respect to any Employee Benefit Plan of Targeted or
against the assets of any such Employee Benefit Plan. None of the Employee
Benefit Plans of Targeted is currently under investigation, audit or review,
directly or indirectly, by the IRS or the DOL, and, to the best knowledge of
Targeted, no such action is contemplated or under consideration by the IRS or
DOL.
(g) Other Binding Commitments. Targeted has no agreement, arrangement,
commitment or obligation, whether formal or informal, whether written or
unwritten, and whether legally binding or not, to create any plan, policy,
program, contract or arrangement not identified in Schedule 3.15 to the Targeted
Disclosure Memorandum or to modify or amend any of its existing Employee Benefit
Plans.
(h) ERISA Affiliates. Targeted has no liability or potential liability to
participants, beneficiaries or any other person or entity under any employee
benefit plan, policy, program, practice, contract or arrangement currently (or
previously) maintained or contributed to by any ERISA Affiliate.
(i) Payments Resulting From Transactions. The consummation of any
transaction contemplated by this Agreement will not result in any (i) payment
(whether of severance pay or otherwise) becoming due from Targeted to any
officer, employee, former employee or director thereof or to the trustee under
any "rabbi trust" or similar arrangement; (ii) benefit under any Employee
Benefit Plan of Targeted being established or becoming accelerated, vested or
payable; or (iii) payment or series of payments by Targeted, directly or
indirectly, to any person that would constitute a "parachute payment" within the
meaning of Section 280G of the Code.
3.16 PATENTS, TRADEMARKS, ETC.
Set forth on Schedule 3.16 to the Targeted Disclosure Memorandum is a true
and complete list of all patents, trademarks, service marks, trade names, brand
names, and registered copyrights, and any applications for any of the foregoing
(collectively, the "Targeted Intellectual Property") of any kind used now or
within the two (2) year period immediately preceding the date of this Agreement
in the business of Targeted. Such Schedule 3.16 contains a complete and accurate
list of all licenses or agreements that in any way affect the rights of Targeted
to any of the Targeted Intellectual Property or any trade secret material to
Targeted (the "Targeted Intellectual Property Licenses"). No claim with respect
to the Targeted Intellectual Property, any trade secret material to
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Targeted, or any Intellectual Property License is currently pending or, to the
best knowledge of Targeted, overtly threatened by any Person, nor does Targeted
know of any valid grounds for any bona fide claim, except as set forth on such
Schedule 3.16, (a) to the effect that any Targeted operation, Targeted
Intellectual Property, trade secret material to Targeted, or Targeted
Intellectual Property License infringes or misappropriates any copyright,
patent, trademark, service mark or trade secret; (b) to the effect that any
other Person infringes on the Targeted Intellectual Property or misappropriates
any trade secret material to Targeted; (c) challenging the ownership, validity
or effectiveness of any of the Targeted Intellectual Property or trade secret
material to Targeted; or (d) challenging Targeted's license under, or other
legally enforceable right under, any Targeted Intellectual Property License. The
consummation of the transactions contemplated hereby will not alter or impair
Targeted's rights to any of the Targeted Intellectual Property, any trade secret
material to Targeted or under any Targeted Intellectual Property License. With
respect to any Targeted Intellectual Property or trade secret material to
Targeted, Targeted owns or has the right to use such Targeted Intellectual
Property or trade secret in its business. Except as set forth on such Schedule
3.16 in respect of the Targeted Intellectual Property Licenses or otherwise, and
except where the failure to so own or be licensed would not have a Material
Adverse Effect upon Targeted, Targeted is the sole and exclusive owner or the
exclusive licensee pursuant to the Targeted Intellectual Property Licenses of
the Targeted Intellectual Property.
Except as set forth on such Schedule 3.16, each of the Targeted
Intellectual Property Licenses is valid, binding and enforceable in accordance
with its terms against the parties thereto; Targeted has performed all
obligations imposed upon it under each of the Targeted Intellectual Property
Licenses; and neither Targeted nor any other party thereto is in default
thereunder, nor, to Targeted's best knowledge, is there any event that with
notice or lapse of time, or both, would constitute a default thereunder. Except
as set forth on such Schedule 3.16, Targeted has not received notice that any
party to any of the Targeted Intellectual Property Licenses intends to cancel,
terminate or refuse to renew the same or to exercise or decline to exercise any
option or other right thereunder. Except as set forth on such Schedule 3.16, no
licenses, sublicenses, covenants or agreements have been granted or entered into
by Targeted in respect of any of the Targeted Intellectual Property or any trade
secret material to Targeted except the Targeted Intellectual Property Licenses.
No director, officer, shareholder or employee of Targeted owns, directly or
indirectly, in whole or in part, any of the Targeted Intellectual Property or
any trade secret material to Targeted. To Targeted's best knowledge, none of its
officers, employees, consultants, distributors, agents, representatives or
advisors have entered into any agreement relating to Targeted's business
regarding know-how, trade secrets, assignment of rights in inventions, or
prohibition or restriction of competition or solicitation of customers, or any
other similar restrictive agreement or covenant, whether written or oral, with
any Person other than Targeted.
Except as set forth on such Schedule 3.16, to Targeted's knowledge, no
Person has asserted any claim of infringement or other interference with
third-party rights with respect to the Targeted Intellectual Property or any
trade secret material to Targeted. Except as set forth on such Schedule 3.16,
(a) during the two (2) year period immediately preceding the date of this
Agreement, Targeted has not disclosed other than in the ordinary course
consistent with past practice any proprietary information relating to the
Targeted Intellectual Property, any trade secret material to Targeted or the
Targeted Intellectual Property Licenses to any person other than to the Company;
(b) Targeted has at all times maintained reasonable procedures to protect and
have enforced all trade secrets of Targeted; (c) Targeted has disclosed trade
secrets to other Persons solely as required for the conduct of Targeted's
business and solely under nondisclosure agreements that are enforceable by
Targeted and, upon the Closing, will be enforceable by Acquisition or Targeted
in accordance with their terms; and (d) Targeted is not under any contractual or
other obligation to disclose any proprietary information relating to the
Targeted Intellectual Property, any trade secret material to Targeted or the
Targeted Intellectual Property Licenses except pursuant to the nondisclosure
agreements listed on such Schedule 3.16, nor, to the best knowledge of Targeted,
is any other party to the Targeted Intellectual Property Licenses under any such
obligation to disclose proprietary information included in or relating to
Targeted Intellectual Property, any trade secret material to Targeted or the
Targeted Intellectual Property Licenses to any person or entity, and no event
has taken place, including the execution of this Agreement or any related change
in Targeted's business activities, that would give rise to such obligation.
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3.17 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in Schedule 3.4 to the Targeted Disclosure Memorandum,
and except where the failure to have any of the following would not result in a
Material Adverse Effect, Targeted has received all governmental approvals,
authorizations, consents, licenses, orders, registrations and permits of all
agencies, whether federal, state, local or foreign that are currently required
in order for Targeted to conduct its business as it is currently conducted.
Targeted has not received any notifications of any asserted present failure by
it to have obtained any such governmental approval, authorization, consent,
license, order, registration or permit, or past and unremedied failure to obtain
such items.
3.18 COMPLIANCE WITH LAWS
Except as described on Schedule 3.18 to the Targeted Disclosure Memorandum,
and except where the failure to have any of the following would not result in a
Material Adverse Effect, Targeted has at all times complied, and is in
compliance, with all federal, state, local and foreign laws, rules, regulations,
ordinances, decrees and orders applicable to it, to its employees, or to the
Targeted Real Property and Targeted's personal property, including, without
limitation, all such laws, rules, ordinances, decrees and orders relating to
intellectual property protection, antitrust matters, consumer protection,
currency exchange, environmental protection, equal employment opportunity,
health and occupational safety, pension and employee benefit matters, securities
and investor protection matters, labor and employment matters, and
trading-with-the-enemy matters. Targeted has not received any notification of
any asserted present or past unremedied failure by Targeted to comply with any
of such laws, rules, ordinances, decrees or orders.
3.19 INSURANCE
Targeted maintains (a) insurance on all of its property that insures
against loss or damage by fire or other casualty and (b) insurance against
liabilities, claims and risks of a nature and in such amounts as are normal and
customary in its industry for companies of similar size and financial condition.
All insurance policies of Targeted are in full force and effect, all premiums
with respect thereto covering all periods up to and including the date this
representation is made have been paid, and no notice of cancellation or
termination has been received with respect to any such policy. Such policies are
sufficient for compliance with all requirements of law currently applicable to
Targeted and of all agreements to which Targeted is a party, will remain in full
force and effect through the respective expiration dates of such policies
without the payment of additional premiums, and will not in any way be affected
by, or terminate or lapse by reason of, the transactions contemplated by this
Agreement. Targeted has not been refused any insurance with respect to its
assets or operations, nor has its coverage been limited, by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance.
3.20 BROKERS OR FINDERS
Except as set forth on Schedule 3.20 to the Targeted Disclosure Memorandum,
Targeted has not incurred, and will not incur, directly or indirectly, as a
result of any action taken by or on behalf of Targeted, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Merger, this Agreement or any transaction contemplated
hereby.
3.21 ABSENCE OF QUESTIONABLE PAYMENTS
Neither Targeted nor, to Targeted's knowledge, any director, officer,
agent, employee or other Person acting on behalf of Targeted, has used any
Company funds for improper or unlawful contributions, payments, gifts or
entertainment, or made any improper or unlawful expenditures relating to
political activity to domestic or foreign government officials or others.
Targeted has adequate financial controls to prevent such improper or unlawful
contributions, payments, gifts, entertainment or expenditures. Neither Targeted
nor, to Targeted's Knowledge, any current director, officer, agent, employee or
other Person acting on behalf of Targeted, has accepted or received any improper
or unlawful contributions, payments, gifts or expenditures. Targeted has at all
times complied, and is in compliance, in all material respects with the Foreign
Corrupt Practices Act and, to its
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Knowledge, in all material respects with all foreign laws and regulations
relating to prevention of corrupt practices.
3.22 FULL DISCLOSURE
No information furnished by Targeted to the Company or its representatives
in this Agreement (including, but not limited to, all information in the
Targeted Disclosure Memorandum and the other Exhibits hereto) contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements so made or information so delivered not
misleading. Targeted has provided to the Company all information requested by
the Company or its representatives in the course of their due diligence
investigation of Targeted.
ARTICLE IV -- COVENANTS
The parties further covenant and agree as set forth in this Article IV.
4.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER
Except as set forth on Schedule 4.1 of the Company Disclosure Memorandum,
unless Targeted shall otherwise agree in writing, the business of the Company
shall be conducted in and only in, and the Company shall not take any action
except in, the ordinary course of business and in a manner consistent with past
practice and in accordance with applicable law; and the Company shall use its
commercially reasonable best efforts to preserve substantially intact the
business organization of the Company, to keep available the services of the
current officers, employees and consultants of the Company and to preserve the
current relationships of the Company with persons with which the Company has
significant business relations. By way of amplification and not limitation,
except as otherwise contemplated by this Agreement, the Company shall not,
between the date of this Agreement and the Effective Time, directly or
indirectly do, or propose to do, any of the following without the prior written
consent of Targeted:
(a) amend or otherwise change its Certificate of Incorporation or
Bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares
of capital stock of any class of the Company (except for issuances of
Company Common Stock upon exercise of options or warrants outstanding on
the date hereof), or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom
interest), of the Company or (ii) any assets of the Company, except for
sales in the ordinary course of business and in a manner consistent with
past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e)(i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation,
partnership, other business organization or division thereof or any
material amount of assets; (ii) incur any indebtedness for borrowed money
or issue any debt securities or assume, guarantee or endorse, or otherwise
as an accommodation become responsible for, the obligations of any Person,
or make any loans or advances, in each case except in the ordinary course
of business and consistent with past practice; (iii) enter into any
contract or agreement other than in the ordinary course of business,
consistent with past practice; (iv) authorize any single capital
expenditure which is in excess of Ten Thousand Dollars ($10,000) or capital
expenditures which are, in the aggregate, in excess of Twenty-Five Thousand
($25,000) for the Company taken as a whole; or (v) enter into or amend any
contract, agreement, commitment or arrangement with respect to any matter
set forth in this paragraph (e);
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(f) enter into any employment, consulting or agency agreement, or
increase the compensation payable or to become payable to its officers,
employees or consultants, except as disclosed in Schedule 4.1(f) to the
Company Disclosure Memorandum and except for increases in accordance with
existing agreements or past practices for employees of the Company who are
not officers of the Company, or grant any severance or termination pay to,
or enter into any employment or severance agreement with, any director,
officer or other employee of the Company, or establish, adopt, enter into
or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer
or employee;
(g) take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice, with respect
to accounting policies or procedures (including, without limitation,
procedures with respect to the payment of accounts payable and collection
of accounts receivable);
(h) make any tax election or settle or compromise any material
federal, state, local or foreign income tax liability;
(i) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business and consistent with past practice, of liabilities reflected or
reserved against in the Company Balance Sheet or which subsequently become
payable in the ordinary course of business and consistent with past
practice;
(j) take any action that would or is reasonably likely to result in
any of the representations and warranties of the Company set forth in this
Agreement being untrue, or in any covenant of the Company set forth in this
Agreement being breached, or in any of the conditions to the Merger
specified in Article V hereof not being satisfied; or
(k) take or agree to take any action specified in Section 2.7 hereof,
or enter into any other material transaction other than those specified
above, or agree to do any of the foregoing.
4.2 CONDUCT OF BUSINESS BY TARGETED PENDING THE MERGER
Except as set forth on Schedule 4.2 of the Targeted Disclosure Memorandum,
unless the Company shall otherwise agree in writing, the business of Targeted
shall be conducted in a manner consistent, in all material respects, with the
description of such business in Targeted's Annual Report on Form 10-K for the
year ended December 31, 1995.
4.3 ACCESS TO INFORMATION; CONFIDENTIALITY
From the date hereof to the Effective Time, each party to this Agreement
(for purposes of this Section 4.3, the "Disclosing Party") shall, and shall
cause the officers, directors, employees, auditors and agents of the Disclosing
Party to, afford the officers, employees and agents of any of the other parties
to this Agreement (for purposes of this Section 4.3, the "Receiving Party")
complete access at all reasonable times to the officers, employees, agents,
properties, offices, plants and other facilities, books and records of the
Disclosing Party and shall furnish the Receiving Party with all financial,
operating and other data and information as the Receiving Party, through its
officers, employees or agents, may reasonably request. From the date hereof
until the Effective Time, upon request the Disclosing Party shall provide the
Receiving Party with monthly and other financial statements of the Disclosing
Party as they become available internally at the Disclosing Party, all of which
financial statements shall fairly present the financial position and results of
operations of the Disclosing Party as of the dates and for the periods therein
specified. No investigation pursuant to this Section 4.3 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto. The parties shall continue
to comply with and to perform their respective obligations under the Mutual
Confidential Disclosure Agreement between Targeted and the Company entered into
as of January 22, 1996 (the
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"Confidentiality Agreement"), which shall be deemed terminated without any
further action by the parties hereto at the Effective Time.
4.4 NO ALTERNATIVE TRANSACTIONS
Unless this Agreement shall have been terminated in accordance with its
terms, the Company shall not, directly or indirectly, through any officer,
director, agent or otherwise, solicit, initiate or encourage the submission of
any proposal or offer from any Person relating to any acquisition or purchase of
all or (other than in the ordinary course of business) any portion of the assets
of, or any equity interest in, the Company or any business combination with the
Company or participate in any negotiations regarding, or furnish to any other
Person any information with respect to, or otherwise cooperate or negotiate in
any way with, or assist or participate in, facilitate or encourage, any effort
or attempt by any other Person to do or seek any of the foregoing. The Company
immediately shall cease and cause to be terminated any existing discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. The Company shall notify Targeted promptly if any such proposal or
offer, or any inquiry or contact with any Person with respect thereto, is made
and shall, in any such notice to Targeted, indicate in reasonable detail the
identity of the Person making such proposal, offer, inquiry or contact and the
terms and conditions of such proposal, offer, inquiry or contact. The Company
agrees not to release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which the Company is a party.
4.5 NOTIFICATION OF CERTAIN MATTERS
Each party to this Agreement shall give prompt notice to the other of (a)
the occurrence or nonoccurrence of any event which would be likely to cause any
representation or warranty of such party contained in this Agreement to be
untrue or inaccurate and (b) any failure of such party to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 4.5 shall not limit or otherwise affect the remedies available to any
party hereunder.
4.6 FURTHER ACTION; REASONABLE BEST EFFORTS
Upon the terms and subject to the conditions hereof, each of the parties
hereto shall use its commercially reasonable best efforts to take, or cause to
be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, including,
without limitation, using its commercially reasonable best efforts to obtain all
waivers, licenses, permits, consents, approvals, authorizations, qualifications
and orders of governmental authorities and parties to contracts with the Company
as are necessary for the consummation of the transactions contemplated hereby
and to fulfill the conditions to the Merger. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, each party to this Agreement shall use its
commercially reasonable best efforts to take all such action. No party to this
Agreement will take any action that would result in disqualification of the
Merger as a tax-free reorganization under Section 368(a) of the Code. After the
Closing Date, each party hereto, at the request of and without any further cost
or expense to the other parties, will take any further action necessary or
desirable to carry out the purposes of this Agreement to vest in the Surviving
Corporation full title to all properties, assets and rights of the Company and
to effect the issuance of the Targeted Common Stock to the Stockholders pursuant
to the terms and conditions hereof.
4.7 PUBLICITY
Targeted and the Company shall consult with each other before issuing any
press release or otherwise making any public statements with respect to this
Agreement and shall not issue any such press release or make any such public
statement prior to such consultations, except as may be required by law or any
listing agreement with the Nasdaq Stock Market.
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4.8 REGISTRATION STATEMENT
(a) Targeted shall (i) prior to the first anniversary of the Effective
Date, prepare and file with the SEC a registration statement (the "Registration
Statement") covering the sale (subject to Section 4.17 hereof), on the Nasdaq
National Market, of fifty percent (50%) of the shares of Targeted Common Stock
issued as the Merger Consideration and (ii) use its commercially reasonable best
efforts, subject to receipt of necessary information from the Stockholders, to
cause the Registration Statement to become effective on or before the first
anniversary of the Effective Date and to remain effective (subject to the
provisions of Section 4.8(b) hereof) for a period ending twenty-four (24) months
after the Effective Date. If for any reason the Registration Statement shall not
become effective prior to the expiration of the two (2) week period beginning on
the first anniversary of the Effective Date, Targeted shall pay as liquidated
damages to the Stockholders an aggregate amount in cash of Two Hundred Fifty
Thousand Dollars ($250,000). Notwithstanding any other provision in this
Agreement, such payment shall be the Stockholders' exclusive remedy for any
damages relating to any delay in the effective date of the Registration
Statement.
(b) Upon written notice given to the Stockholders, Targeted may elect to
suspend the use of the prospectus forming part of the Registration Statement (i)
by any Stockholder, upon the failure of such Stockholder to provide information
necessary in order to make the prospectus true, complete and correct in all
material respects as to sales by such Stockholder or (ii) for additional periods
that do not in the aggregate exceed sixty (60) days during the course of the
calendar year (each sixty (60) days is hereinafter referred to as a "Suspension
Period") as a result of business developments or other transactions involving
Targeted the existence of which would make the Registration Statement inaccurate
or misleading in any material respect. Targeted agrees in good faith to seek to
minimize any need to invoke the provisions of this Section 4.8(b). The
Stockholders hereby covenant that they will not sell any Targeted Common Stock
pursuant to such prospectus during the period commencing at the time at which
Targeted gives the Stockholders written notice of such suspension and ending at
the earliest to occur of any of the following: (i) seventy-two (72) hours after
the time at which the aforementioned business developments or other transactions
are disclosed by Targeted to the public generally, if the Stockholders first
make written inquiry to Targeted, and Targeted does not respond within
forty-eight (48) hours of such inquiry as to whether the matter disclosed was
the reason for suspending the prospectus; (ii) the time Targeted gives the
Stockholders written notice that the Stockholders may thereafter effect sales
pursuant to such prospectus; or (iii) the completion of a Suspension Period.
4.9 BOARD OF DIRECTORS
Promptly following the Closing, the Board of Directors of Targeted (the
"Board") shall appoint Austin M. Long, III and Martin P. Sutter to the Board.
Targeted shall have no commitment to maintain either such Board seat beyond the
initial term for which either of such individuals may be elected by the
shareholders of Targeted.
4.10 CONSULTING AGREEMENTS; SCIENTIFIC ADVISORY BOARD; CLINICAL ADVISORY BOARD
Each of Targeted and the Company shall use its commercially reasonable best
efforts to obtain (a) consulting agreements between Targeted and each of Drs.
Leaf Huang and Mien-Chie Hung (the "Consulting and Scientific Advisory Board
Agreements"), each such agreement to be substantially in the form attached
hereto as Exhibit 4.10, and pursuant to which, among other things, such
individuals shall agree to provide consulting services to Targeted, at their
current compensation levels, for a term of five (5) years, subject to Targeted's
right to terminate any such agreement after four (4) years, and to serve as
members of Targeted's Scientific Advisory Board, and (b) the commitment of Dr.
Gabriel Lopez-Berestein to serve as a member of a Clinical Advisory Board to be
established by Targeted no later than December 31, 1996.
4.11 SEVERANCE AGREEMENTS
(a) Except as may be agreed to by Targeted, the Company shall not enter
into any agreement, plan or arrangement covering any director, officer or
employee of the Company that provides for the making of any payments, the
acceleration of vesting of any benefit or right or any other entitlement upon
the termination of such individual's employment with the Company.
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(b) Neither Targeted nor the Surviving Corporation shall be under any
obligation to employ any employee of the Company; provided, however, that each
employee of the Company will be asked to continue employment for at least three
(3) months following the Effective Date (the "Transition Period"). Upon the
expiration of the Transition Period, if such employee is not offered employment
beyond the Transition Period, Targeted shall make severance payments to such
employee equal to six (6) months' base salary at the rate in effect for such
terminated employee as of the Effective Date.
4.12 CONVERSION OF OUTSTANDING BRIDGE LOAN
The Company shall use its commercially reasonable best efforts to cause the
loans described on Schedule 2.3(c)(ii) to the Company Disclosure Memorandum (the
"Bridge Loans") attached hereto to be converted into shares of Company Common
Stock on or before the Effective Date.
4.13 DEVELOPMENT OF TECHNOLOGY
Targeted or its licensee shall use its commercially reasonable best efforts
to develop (a) the E1A product consistent with the provisions of the Option
Agreement, dated December 28, 1995, and the Outline of Principal Terms dated
February 22, 1996, for development of the E1A product in Europe, (including
continuing the current collaborative relationships, at current levels of
funding, with Drs. Leaf Huang and Mien-Chie Hung for a period of not less than
four (4) years; provided, however, that if either of such individuals shall
terminate his Consultant and Scientific Advisory Board Agreement prior to the
end of such four (4) year term, Targeted shall be entitled to discontinue all
such funding) and (b) the nucleic acid-based CML product (including continuing
the current collaborative relationship, at current levels of funding, with Dr.
Gabriel Lopez-Berestein for a period of not less than four (4) years).
Notwithstanding the foregoing, if Targeted shall decide after the Effective Time
to discontinue commercial development of the CML product, it shall seek to
negotiate a sublicensing agreement with a third party with respect thereto;
provided however, that upon the first anniversary of the determination to
discontinue such commercial development, if Targeted shall have failed to
procure a sublicensing agreement, it shall negotiate a return of the rights to
develop the CML product to the University of Texas.
4.14 SURVIVAL OF INDEMNIFICATION
To the fullest extent permitted by law, from and after the Effective Time,
all rights to indemnification now existing in favor of the employees, agents,
directors or officers of the Company with respect to their activities as such
prior to the Effective Time, as provided in the Company's Certificate of
Incorporation or Bylaws, or any agreement in effect in respect of the Company,
in each case as in effect on the date hereof, shall survive the Merger and shall
continue in full force and effect in accordance with the terms of any such
arrangement.
4.15 COMPANY STOCKHOLDERS' MEETING; TARGETED SHAREHOLDERS' MEETING
(a) The Company, acting through its Board of Directors, shall, in
accordance with applicable law and the Company's Certificate of Incorporation
and Bylaws, (i) duly call, give notice of, convene and hold an annual or special
meeting of its stockholders as soon as practicable for the purpose of
considering and taking action on this Agreement (the "Company Stockholders'
Meeting"), (ii) include in such notice the recommendation of the Board of
Directors that the Stockholders approve and adopt this Agreement and the
transactions contemplated hereby, and (iii) use its commercially reasonable best
efforts to obtain such approval and adoption. Except as provided by applicable
law, the Company shall not postpone, adjourn or otherwise reschedule the date of
the Company Stockholders' Meeting without the prior written consent of Targeted.
(b) Targeted, acting through its Board of Directors, shall, in accordance
with applicable law and Targeted's Articles of Incorporation and Bylaws, (i)
with the cooperation of the Company, prepare and file with the SEC a proxy
statement in connection with the Merger, (ii) duly call, give notice of, convene
and hold a special meeting of its shareholders as soon as practicable for the
purpose of considering and taking action on this Agreement, (iii) include in
such notice the recommendation of the Board of Directors that the shareholders
approve and adopt this Agreement and the transactions contemplated hereby, and
(iv) use its commercially reasonable best efforts to obtain such approval and
adoption.
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4.16 PRIVATE PLACEMENT MEMORANDUM
As promptly as practicable following the execution of this Agreement,
Targeted shall prepare for delivery to each of the Stockholders, a private
placement memorandum relating to the issuance of the Merger Consideration (the
"Private Placement Memorandum"). The Private Placement Memorandum shall not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made in the Private Placement
Memorandum not misleading.
4.17 LOCK UP AGREEMENTS
The Company shall use its commercially reasonable best efforts to cause
each Stockholder to execute a Lock Up Agreement (the "Lock Up Agreement")
pursuant to which such Stockholder shall agree not to sell or otherwise transfer
or dispose of any Targeted Common Stock received in the Merger during the thirty
(30) month period beginning with the Effective Date; provided, however, that
such shares of Targeted Common Stock shall be released from the restrictions of
the Lock Up Agreement in increments of twenty percent (20%) for each full six
(6) month period following the Effective Date; provided further, that the last
installment of twenty percent (20%) of the shares of Targeted Common Stock to be
released from such Lock Up Agreement shall include all of the Escrowed Shares
(as defined in Section 8.5.1 hereof). Upon issuance of any Additional
Consideration after shares have been released from the restrictions of the Lock
Up Agreements, twenty percent (20%) of the shares issued as Additional
Consideration shall be immediately released from the restrictions of the Lock Up
Agreements for each full six (6) month period which shall have elapsed since the
Effective Date.
4.18 INVESTOR QUESTIONNAIRE
The Company shall use its commercially reasonable best efforts to cause
each Stockholder to execute and deliver to Targeted an investor questionnaire in
the form of Exhibit 4.18 hereto.
ARTICLE V -- CONDITIONS PRECEDENT TO OBLIGATIONS OF
ACQUISITION AND TARGETED
The obligations of Acquisition and Targeted to perform and observe the
covenants, agreements and conditions hereof to be performed and observed by them
at or before the Closing shall be subject to the satisfaction of the following
conditions, which may be expressly waived only in writing signed by Targeted:
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained herein
(including applicable Exhibits or Schedules to the Company Disclosure
Memorandum) shall have been true and correct, in all material respects, when
made and shall be true and correct, in all material respects, as of the Closing
Date as though made on that date.
5.2 PERFORMANCE OF AGREEMENTS
The Company shall have performed, in all material respects, all obligations
and agreements and complied with all covenants and conditions contained in this
Agreement to be performed and complied with by the Company at or before the
Closing.
5.3 OPINIONS OF COUNSEL FOR THE COMPANY
Targeted shall have received (a) the opinion letter of Mayor, Day, Caldwell
& Keeton, L.L.P., counsel for the Company, dated the Closing Date, substantially
in the form attached hereto as Exhibit 5.3 and (b) an opinion from Morgan &
Finnegan, L.L.P., patent counsel for the Company, concerning the effect, if any,
of this Agreement on the rights granted to the Company by the agreements listed
in "Licensing and Related Agreements" of Schedule 2.10.
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5.4 COMPANY STOCKHOLDER APPROVAL
The holders of Company Common Stock and the holders of Company Preferred
Stock shall have duly and validly approved the Merger by a vote in accordance
with Delaware Law and all other applicable laws and regulations and the
Company's Certificate of Incorporation and Bylaws.
5.5 TARGETED SHAREHOLDER APPROVAL
The shareholders of Targeted shall have duly and validly approved the
issuance of the Targeted Common Stock to be issued in connection with the Merger
by a vote in accordance with all applicable laws and regulations.
5.6 RESIGNATIONS
Targeted shall have received copies of resignations effective as of the
Closing Date of all persons who are officers or directors of the Company
immediately prior to the Effective Time.
5.7 TERMINATION OF AGREEMENTS
(a) The Company shall have terminated that certain employment agreement
between the Company and Martin H. Lindenberg dated as of February 24, 1994,
without liability to the Company other than the payment of severance benefits
pursuant to the terms of such agreement.
(b) The Company shall have terminated each of the agreements set forth on
Exhibit 5.7 hereof without liability to the Company and, with respect to the
Targeted Common Stock to be issued in the Merger, shall have received written
waivers of any repurchase obligations, rights of first refusal or other similar
provisions existing in favor of any of the Stockholders.
5.8 COMPLIANCE CERTIFICATE
Targeted shall have received a certificate of the Company, executed by its
President and the Treasurer, dated the Closing Date, in form and substance
satisfactory to Targeted, certifying that the conditions to the obligations of
Targeted and Acquisition have been fulfilled.
5.9 APPROVALS AND CONSENTS
All transfers of permits or licenses, and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby
or for the continued operation of the Company, shall have been obtained, and all
waiting periods specified by law shall have passed. All other consents,
approvals and notices referred to in this Agreement shall have been obtained or
delivered.
5.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and all documents and instruments incident to such
transactions, shall have been approved by Targeted's counsel (which approval
shall not be unreasonably withheld), and Targeted shall have received a
certificate of the Secretary of the Company, in form and substance satisfactory
to Targeted, as to the authenticity and effectiveness of the actions of the
Board of Directors and Stockholders of the Company authorizing the Merger and
the transactions contemplated by this Agreement and such other documents as are
specified by Targeted's counsel.
5.11 COMPLIANCE WITH LAWS
The consummation of the transactions contemplated by this Agreement shall
be legally permitted by all laws and regulations to which Targeted or the
Company is subject.
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5.12 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect which
enjoins, restrains, conditions or prohibits consummation of this Agreement and
no litigation, investigation or administrative proceeding shall be pending or
threatened which would enjoin, restrain, condition or prevent consummation of
this Agreement.
5.13 TAX-FREE REORGANIZATION
Targeted shall have received an opinion of Perkins Coie that the Merger
will constitute a reorganization under Section 368(a)(1) and (a)(2)(E) of the
Code and that neither Targeted nor Acquisition will recognize any gain or loss
with respect to the Merger. Such opinion will be based on certain
representations and warranties contained in a certificate supplied by Targeted
and the Company and certain significant Stockholders.
5.14 DELIVERY OF AUDITED FINANCIAL STATEMENTS
The Company shall have delivered to Targeted balance sheets, statements of
income and expense, statements of cash flow, and statements of stockholders'
equity of the Company as of and for the fiscal year ended December 31, 1995, as
audited by, and together with the report of, Arthur Andersen & Co., independent
certified public accountants. Stockholders' equity and net working capital, as
reflected in the unaudited balance sheet as of December 31, 1995, shall not be
materially different from stockholders' equity and net working capital,
reflected in the unaudited financial statements as of and for the fiscal year
ended December 31, 1995.
5.15 EXERCISE OR CANCELLATION OF OPTIONS AND WARRANTS
All Options and Warrants shall have been exercised in full or canceled
without liability to the Company.
5.16 CONSULTING AGREEMENTS; ADVISORY BOARDS
Targeted shall have received (a) executed Consulting and Scientific
Advisory Agreements from Drs. Leaf Huang and Mien-Chie Hung, and (b) the
commitment of Dr. Gabriel Lopez-Berestein to serve as a member of a Clinical
Advisory Board to be established by Targeted by December 31, 1996.
5.17 BRIDGE LOANS
(a) The Company shall have received from the holders of the Bridge Loans an
aggregate amount in cash equal to Five Hundred Fifty Thousand Dollars
($550,000), which amount shall be added to the outstanding balance of the Bridge
Loans prior to the conversion of such loans into shares of Company Common Stock.
(b) The Bridge Loans (including the amount described in Section 5.17(a)
hereof) shall have been converted into shares of Company Common Stock.
5.18 UNIVERSITY OF TENNESSEE LICENSE AGREEMENT
The Company shall have obtained the written agreement, which shall be
reasonably satisfactory to Targeted, of the University of Tennessee Research
Corporation ("UTRC") that will resolve any and all outstanding contract issues
between UTRC, the Company and Aronex Pharmaceuticals, Inc.
ARTICLE VI -- CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE COMPANY
The obligations of the Company to perform and observe the covenants,
agreements and conditions hereof to be performed and observed by them at or
before the Closing shall be subject to the satisfaction of the following
conditions, which may be expressly waived only in writing signed by the Company.
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6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Targeted and Acquisition contained
herein shall have been true and correct, in all material respects, when made and
shall be true and correct, in all material respects, as of the Closing Date as
though made on that date.
6.2 PERFORMANCE OF AGREEMENTS
Targeted and Acquisition shall have performed, in all material respects,
all obligations and agreements and complied with all covenants and conditions
contained in this Agreement to be performed and complied with by them at or
before the Closing.
6.3 OPINION OF COUNSEL
The Stockholders shall have received the opinion letter of Perkins Coie,
counsel for Targeted and Acquisition, dated the Closing Date, substantially in
the form attached hereto as Exhibit 6.3.
6.4 COMPLIANCE CERTIFICATE
The Company shall have received a certificate of Targeted, executed by an
officer of Targeted, dated the Closing Date, substantially in form and substance
satisfactory to the Company, certifying that the conditions to the obligations
of the Company have been fulfilled.
6.5 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect which
enjoins, restrains, conditions or prohibits consummation of this Agreement and
no litigation, investigation or administrative proceeding shall be pending or
threatened which would enjoin, restrain, condition or prevent consummation of
this Agreement.
6.6 APPROVALS AND CONSENTS
All transfers of permits or licenses, and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby
or for the continued operation of the Company, shall have been obtained, and all
waiting periods specified by law shall have passed. All other consents,
approvals and notices referred to in this Agreement shall have been obtained or
delivered.
6.7 COMPLIANCE WITH LAWS
The consummation of the transactions contemplated by this Agreement shall
be legally permitted by all laws and regulations to which Targeted or the
Company is subject.
6.8 TAX-FREE REORGANIZATION
The Company shall have received an opinion of Mayor, Day, Caldwell &
Keeton, L.L.P. that the Merger will constitute a reorganization under Section
368(a)(1) and (a)(2)(E) of the Code, that the Company will not recognize any
gain or loss and that the Stockholders will recognize no gain or loss with
respect to shares of Company Common Stock converted into the Merger
Consideration, except with respect to cash received in lieu of fractional shares
of Targeted Common Stock and a portion of the Additional Consideration
representing imputed interest under the Code. Such opinion will be based on
certain representations and warranties by Targeted and the Company, and certain
significant Stockholders.
6.9 TARGETED SHAREHOLDER APPROVAL
The shareholders of Targeted shall have duly and validly approved the
issuance of the Targeted Common Stock to be issued in connection with the Merger
by a vote in accordance with all applicable laws and regulations.
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6.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and all documents and instruments incident to such
transactions, shall have been approved by the Company's counsel (which approval
shall not be unreasonably withheld), and the Company shall have received a
certificate of the Secretary of Targeted and a certificate of the Secretary of
Acquisition, in form and substance satisfactory to the Company, as to the
authenticity and effectiveness of the actions of the Board of Directors and
shareholders of Targeted and the Board of Directors and stockholder of
Acquisition authorizing the Merger and the transactions contemplated by this
Agreement and such other documents as are specified by the Company's counsel.
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time (notwithstanding any approval of this Agreement
by the Stockholders of the Company):
(a) by mutual written consent duly authorized by the Boards of
Directors of the Company and Targeted;
(b) by either the Company or Targeted, if the Merger has not been
consummated by June 30, 1996; provided, however, that the right to
terminate this Agreement under this paragraph (b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Effective Time to
occur on or before such date;
(c) by either the Company or Targeted, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining
Targeted, Acquisition or the Company from consummating the Merger is
entered and such judgment, injunction, order or decree shall become final
and nonappealable; provided, however, that the party seeking to terminate
this Agreement pursuant to this paragraph (c) shall have used all
reasonable efforts to remove such judgment, injunction, order or decree;
(d) by the Company, in the event of a material breach by Targeted of
any representation, warranty or agreement contained herein which has not
been cured or is not curable by the Effective Date;
(e) by Targeted, in the event of a material breach by the Company of
any representation, warranty or agreement contained herein which has not
been cured or is not curable by the Effective Date;
(f) by Targeted, in the event the Company's Stockholders fail to
approve the Merger; or
(g) by the Company, in the event Targeted's shareholders fail to
approve the issuance of Targeted Common Stock pursuant to the Merger.
7.2 EFFECT OF TERMINATION
(a) Except as specifically provided in this Section 7.2, in the event of
the termination of this Agreement pursuant to Section 7.1 hereof, there shall be
no further obligation on the part of any party hereto, except that nothing
herein shall relieve any party from liability for any willful breach hereof.
(b) If Targeted shall terminate this Agreement pursuant to Section 7.1(e)
or 7.1(f) hereof, the Company shall pay a fee of Three Hundred Fifty Thousand
Dollars ($350,000) to Targeted.
(c) If the Company shall terminate this Agreement pursuant to Section
7.1(d) or 7.1(g) hereof, Targeted shall pay a fee of Three Hundred Fifty
Thousand Dollars ($350,000) to the Company.
7.3 AMENDMENT
This Agreement may be amended by Targeted and the Company at any time prior
to the Effective Time; provided, however, that no amendment may be made which
would reduce the amount or change the type of
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consideration into which each share of Company Common Stock and Preferred Stock
shall be converted upon consummation of the Merger. This Agreement may not be
amended except by an instrument in writing signed by Targeted, Acquisition and
the Company.
7.4 WAIVER
At any time prior to the Effective Time, any party hereto may (a) extend
the time for the performance of any obligation or other act of any other party
hereto, (b) waive any inaccuracy in the representations and warranties contained
herein or in any document delivered pursuant hereto, or (c) waive compliance
with any agreement or condition contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
or parties to be bound thereby.
ARTICLE VIII -- SURVIVAL AND INDEMNIFICATION
8.1 SURVIVAL
All representations and warranties contained in this Agreement or in any
certificate delivered pursuant hereto shall survive the Closing for a period of
one (1) year, and, except as set forth in Section 8.3(e) hereof, shall not be
deemed waived or otherwise affected by any investigation made or any knowledge
acquired with respect thereto, or by any notice delivered pursuant to Section
6.4 hereof. The covenants and agreements contained in this Agreement shall
survive the Closing and shall continue until all obligations with respect
thereto shall have been performed or satisfied or shall have been terminated in
accordance with their terms.
8.2 INDEMNIFICATION
(a) Subject to Section 8.3 hereof, from and after the Closing Date, the
Stockholders shall jointly and severally indemnify and hold Targeted and its
officers, directors and affiliates (the "Targeted Indemnified Parties") harmless
from and against, and shall reimburse the Targeted Indemnified Parties for, any
and all losses, damages, debts, liabilities, obligations, judgments, orders,
awards, writs, injunctions, decrees, fines, penalties, taxes, costs or expenses
(including, but not limited to, any legal or accounting fees or expenses)
("Losses") arising out of or in connection with:
(i) any breach of any representation or warranty made by the Company
in this Agreement or in any certificate delivered pursuant hereto or
thereto; and
(ii) any failure by the Company to perform or comply, in whole or in
part, with any covenant or agreement in this Agreement, except as provided
in Section 8.3(d) hereof.
(b) Subject to Section 8.3 hereof, from and after the Closing Date,
Targeted shall indemnify and hold the Stockholders and their affiliates (the
"Stockholder Indemnified Parties," together with the Targeted Indemnified
Parties, the "Indemnified Parties") harmless from and against, and shall
reimburse the Stockholder Indemnified Parties for Losses arising out of or in
connection with:
(i) any breach of any representation or warranty made by Targeted in
this Agreement or in any certificate delivered pursuant hereto or thereto;
and
(ii) any failure by Targeted to perform or comply, in whole or in
part, with any covenant or agreement in this Agreement, except as provided
in Section 8.3(d) hereof.
8.3 THRESHOLD AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any indemnification
payment with respect to any Losses until the aggregate Losses for which such
Indemnified Parties would be otherwise entitled to receive indemnification
exceed One Hundred Fifty Thousand Dollars ($150,000) (the "Threshold");
provided, however, that once such aggregate Losses exceed the Threshold, such
Indemnified Parties shall be entitled to indemnification for the aggregate
amount of all Losses.
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(b) In no event shall the liability of any of the Stockholders hereunder
for Losses incurred by Targeted Indemnified Parties exceed an amount equal to
such Stockholder's pro-rata interest in the escrow.
(c) In no event shall the liability of Targeted hereunder for Losses
incurred by Stockholder Indemnified Parties exceed, in the aggregate, Two
Million Dollars ($2,000,000).
(d) No claim for indemnification may be made by an Indemnified Party if
notice of such claim is made under Section 8.4(a) or Section 8.4(d) after one
year from the Effective Date.
(e) If any Indemnified Party has actual knowledge of the breach of this
Agreement by another party at or prior to the Closing Date and fails to notify
the breaching party of such breach in writing at or prior to the Closing Date,
the party with such actual knowledge shall be deemed to have waived all rights
of indemnification with respect to such breach.
8.4 PROCEDURE FOR INDEMNIFICATION
(a) A Targeted Indemnified Party shall notify Austin M. Long III and Martin
P. Sutter as representatives for the Stockholders (the "Representatives"), and a
Stockholder Indemnified Party shall notify Targeted, in writing reasonably
promptly after the assertion against the Indemnified Party of any claim by a
third party (a "Third Party Claim") in respect of which the Indemnified Party
intends to base a claim for indemnification hereunder, but the failure or delay
so to notify the Representatives or Targeted, as the case may be, shall not
relieve the indemnifying party of any obligation or liability that they may have
to the Indemnified Party except to the extent that the Representatives or
Targeted, as the case may be, demonstrate that the indemnifying party's ability
to defend or resolve such Third Party Claim is adversely affected thereby.
(b)(i) Subject to the rights of or duties to any insurer or other third
party having potential liability therefor, the Representatives or Targeted, as
the case may be, shall have the right, upon written notice given to the
Indemnified Party within thirty (30) days after receipt of the notice from the
Indemnified Party of any Third Party Claim, to assume the defense or handling of
such Third Party Claim, at the sole expense of the Representatives or Targeted,
as the case may be, in which case the provisions of Section 8.4(b)(ii) hereof
shall govern.
(ii) The Representatives or Targeted, as the case may be, shall select
counsel reasonably acceptable to the Indemnified Party in connection with
conducting the defense or handling of such Third Party Claim, and the
Representatives or Targeted, as the case may be, shall defend or handle the same
in consultation with the Indemnified Party and shall keep the Indemnified Party
timely apprised of the status of such Third Party Claim. The indemnifying party
shall not, without the prior written consent of the Indemnified Party, agree to
a settlement of any Third Party Claim, unless (A) the settlement provides an
unconditional release and discharge of the Indemnified Party and the Indemnified
Party is reasonably satisfied with such discharge and release and (B) in the
case of indemnification by the Stockholders, Targeted shall not have reasonably
objected to any such settlement on the ground that the circumstances surrounding
the settlement could result in an adverse impact on the business, operations,
assets, liabilities (absolute, accrued, contingent or otherwise), condition
(financial or otherwise) or prospects of Targeted or the business conducted by
the Company. The Indemnified Party shall cooperate with the Representatives or
Targeted, as the case may be, and shall be entitled to participate in the
defense or handling of such Third Party Claim with its own counsel and at its
own expense.
(c)(i) If the Representatives or Targeted, as the case may be, do not give
written notice to the Indemnified Party within thirty (30) days after receipt of
the notice from the Indemnified Party of any Third Party Claim of the election
by the Representatives or Targeted, as the case may be, to assume the defense or
handling of such Third Party Claim, the provisions of Section 9.4(c)(ii) hereof
shall govern.
(ii) The Indemnified Party may, at the expense of the Representatives or
Targeted, as the case may be, (which shall be paid from time to time by such
party or parties as such expenses are incurred by the Indemnified Party), select
counsel in connection with conducting the defense or handling of such Third
Party Claim and defend or handle such Third Party Claim in such manner as it may
deem appropriate, provided, however, that the Indemnified Party shall keep the
Representatives or Targeted, as the case may be, timely apprised of the status
of such Third Party Claim and shall not settle such Third Party Claim without
the prior written consent of the Representatives or Targeted, as the case may
be, which consent shall not be unreasonably withheld. If the
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Indemnified Party defends or handles such Third Party Claim, the Representatives
or Targeted, as the case may be, shall cooperate with the Indemnified Party and
shall be entitled to participate in the defense or handling of such Third Party
Claim with its own counsel and at its own expense.
(d) If the Indemnified Party intends to seek indemnification hereunder,
other than for a Third Party Claim, then it shall notify the Representatives or
Targeted, as the case may be, in writing ninety (90) days after its discovery of
facts upon which it intends to base its claim for indemnification hereunder, but
the failure or delay so to notify the Representatives or Targeted, as the case
may be, shall not relieve the indemnifying party of any obligation or liability
that the indemnifying party may have to the Indemnified Party except to the
extent that the Representatives or Targeted, as the case may be, demonstrate
that the ability to defend or resolve such claim is adversely affected thereby.
(e) The Indemnified Party may notify the Representatives or Targeted, as
the case may be, of a claim even though the amount thereof plus the amount of
other claims previously notified by the Indemnified Party aggregate less than
the Threshold.
8.5 ESCROW
8.5.1 ESCROWED SHARES
At the Effective Time, the Stockholders shall be deemed to have pledged
three hundred sixty three thousand six hundred thirty six (363,636) shares of
the aggregate Common Equivalent Closing Consideration ("Escrowed Shares") to
Targeted as the sole and exclusive mechanism (subject to the provisions of
Section 8.6 hereof) to satisfy potential claims for indemnification by Targeted
and its affiliates under this Article VIII. Any liability of the Stockholders
for indemnification under this Article VIII will be set off against the Escrowed
Shares.
8.5.2 PLEDGE
The Escrowed Shares (which shall include for purposes of this Section 8.5
any distributions accrued or made thereon after the date of this Agreement and
any other securities or property which may be issued after the date hereof in
exchange for such shares in any merger or recapitalization or similar
transaction involving Targeted) shall be deemed as of the Effective Time to be
pledged by the Stockholders to, and shall be held by, Targeted pursuant to this
Agreement. The Stockholders shall deliver to Targeted at the Closing appropriate
stock powers endorsed in blank and such other documentation as Targeted may
reasonably prescribe to carry out the purposes of this Section 8.5. So long as
any Escrowed Shares are held by Targeted hereunder, Targeted shall have, and the
Stockholders hereby grant, effective as of the Effective Time, a perfected,
first-priority security interest in such Escrowed Shares to secure payment of
amounts payable by the Stockholders in respect of indemnification claims for any
Losses.
8.5.3 RELEASE OF ESCROWED SHARES
Targeted shall hold the Escrowed Shares in accordance with this Agreement
and shall transfer the Escrowed Shares only as follows:
(a) Escrowed Shares shall be retransferred to Targeted in respect of
indemnification claims made by Targeted under this Article VIII when, and
to the extent, authorized under Section 8.5.4 hereof.
(b) On the Escrow Termination Date (as defined below), any Escrowed
Shares then remaining pledged to Targeted (which shall exclude shares
re-retransferred to Targeted under Section 8.5.3(a)) shall be released to
the Stockholders pro rata in accordance with their percentage ownership of
the Escrowed Shares.
Except as otherwise set forth in Section 8.5.4 hereof, for purposes of this
Agreement, the "Escrow Termination Date" shall mean the date one year after the
Effective Date.
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8.5.4 CLAIMS PROCEDURE
The procedure for payment from the Escrowed Shares of indemnification
amounts to which Targeted or other Indemnified Parties may become entitled under
this Article VIII shall be as follows:
(a) Subject to the limitation that written notice of any claim for
indemnification hereunder must be given to the Representatives not later
than the Escrow Termination Date, from time to time as Targeted determines
that it or another Indemnified Party is entitled to an indemnification
payment under this Article VIII, Targeted may give written notice of the
claim for a Loss to the Representatives describing in such notice the
nature of the claim, the amount thereof if then ascertainable and, if not
then ascertainable, the estimated maximum amount thereof, and the
provisions in this Agreement on which the claim is based. Such loss or
claim must be reasonably likely to be incurred or asserted at the time such
notice is given.
(b) If Targeted has not received written objection to a claim for a
Loss in accordance with Section 8.5.4(a) from the Representatives within
thirty (30) days after notice of such claim is delivered (the "Response
Period"), the claim stated in such notice shall be deemed, for purposes of
delivering Escrowed Shares to Targeted, to be approved by the
Representatives, and Targeted shall promptly thereafter transfer to the
Indemnified Party from the Escrowed Shares an amount of Escrowed Shares
equal in value to the amount of such claim. The Escrowed Shares to be
transferred shall be rounded to the nearest whole share and shall be valued
on the basis of the last reported sale price of Targeted's Common Stock on
the Nasdaq National Market on the date the notice of claim was delivered.
(c) If within the Response Period Targeted shall have received from
the Representatives a written objection to the claim specifying the nature
of and grounds for such objection, then such claim shall be deemed to be an
"Open Claim," and Targeted shall reserve within the Escrowed Shares an
amount of Escrowed Shares equal to the amount of such Open Claim (which
amount designated for each Open Claim is referred to herein as the "Claim
Reserve Amount"). The number of Escrowed Shares to be reserved shall be
determined (rounded to the nearest whole share) by dividing the amount of
the Open Claim by the average of the last reported sale price of Targeted
Common Stock on the Nasdaq National Market over the twenty (20) trading
days preceding such written objection. The number of Escrowed Shares
included in the Claim Reserve Amount shall be increased or reduced, as the
case may be, on a quarterly basis based on the average of the last reported
sale prices of Targeted Common Stock on the Nasdaq National Market over the
then preceding twenty (20) trading days.
(d) The Claim Reserve Amount for each Open Claim shall be transferred
by Targeted from the Escrowed Shares only in accordance with either (i) a
mutual agreement among Targeted and the Representatives, which shall be
memorialized in writing, or (ii) a final and binding arbitration decision
or order pertaining to the Open Claim, except that on the Escrowed
Termination Date all Escrowed Shares not previously distributed or then
required to be distributed to Targeted in accordance with this Section 8.5
shall be released to the Stockholders pro rata in accordance with Schedule
2.4(b) to the Company Disclosure Memorandum, whether or not all Open Claims
have then been resolved.
8.5.5 VOTING
The Escrowed Shares shall be held of record by the Stockholders, who shall
have full right to vote the Escrowed Shares on all matters coming before the
shareholders of Targeted.
8.5.6 MERGER OR RECAPITALIZATION
In the event of any merger or recapitalization or similar transaction
involving Targeted prior to the time when all Escrowed Shares have been
transferred or released in accordance with the terms of this Section 8.5, such
Escrowed Shares shall be converted or exchanged in accordance with such
transaction in the same manner as other shares of Targeted Common Stock, and any
securities or property issued in conversion or exchange thereof shall then be
included within the definition of Escrowed Shares and shall otherwise become
subject to this Agreement in lieu of such shares of Targeted Common Stock. If as
a result of any such transaction the shareholders of Targeted immediately before
the transaction will not own in excess of fifty percent (50%) of the
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voting capital stock of Targeted immediately after the transaction, the Escrow
Termination Date shall be deemed to be the closing date of such transaction and
the Escrowed Shares shall be retransferred to Targeted or released to the
Stockholders, as the case may be, as provided herein.
8.5.7 TAXATION OF DIVIDENDS
Each Stockholder hereby acknowledges that, for federal and state income tax
purposes, any dividends or other distributions with respect to the Escrowed
Shares shall be income of the Stockholders.
8.5.8 DISPOSITION OF ESCROWED SHARES
Subject to the provisions of Section 5.15 of this Agreement, upon delivery
of written instructions to Targeted, a Stockholder may elect to sell some or all
of such Stockholder's Escrowed Shares. The instructions shall specify the number
of Escrowed Shares to be sold and shall consist of a written direction to
Targeted to deliver to the broker executing such sale, as specified in such
instructions, (i) certificates representing the Escrowed Shares to be sold, (ii)
stock powers, endorsed in blank in proper form for transfer, for such Escrowed
Shares, (iii) an irrevocable order (not a limit order or other order imposing
restrictions or conditions on the sale) to such broker to sell such Escrowed
Shares at the market, and (iv) written instructions to Targeted and the broker
executing such sale to deliver the net proceeds of such sale directly to
Targeted for deposit into escrow in accordance with this Agreement. Such
instructions shall include a specific direction to Targeted to invest the net
proceeds received upon any such sale in specified securities in one or more of
the following categories: (w) investment grade United States municipal
obligations, (x) direct obligations of the United States government or agencies
thereof, (y) investment grade United States corporate bonds, or (z) rated no
load mutual funds consisting of one or more of the foregoing categories of
securities. Returns on such investments shall be added to the proceeds held in
escrow.
8.6 REMEDIES
The indemnification provisions of this Article VIII are the sole and
exclusive remedy of any party to this Agreement for a breach of any
representation, warranty or covenant contained herein, except with respect to
any claim based on fraud in the inducement or a similar theory (including,
without limitation, claims based upon Rule 10b-5 under the Securities Exchange
Act of 1934, as amended), and provided that nothing in this Agreement shall
preclude a Stockholder from seeking any remedy otherwise available to such
Stockholder as a shareholder of Targeted. Notwithstanding the preceding
sentence, each of the parties acknowledges and agrees that the other parties
hereto would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties hereto agrees the other parties
hereto shall be entitled to an injunction to prevent breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the terms and
provisions hereof (including the indemnification provisions hereof) in any
competent court having jurisdiction over the parties, in addition to any other
remedy to which they may be entitled at law or in equity.
ARTICLE IX -- GENERAL
9.1 EXPENSES
Regardless of whether the transactions contemplated by this Agreement are
consummated each party shall pay its own fees and expenses incident to the
negotiation, preparation and execution of this Agreement (including legal and
accounting fees and expenses); provided, however, that, should any action be
brought hereunder, the attorneys' fees and expenses of the prevailing party
shall be paid by the other party to such action.
9.2 NOTICES
Any notice or demand desired or required to be given hereunder shall be in
writing given by personal delivery, certified or registered mail, confirmed
facsimile transmission, or overnight courier service, in each case addressed as
respectively set forth below or to such other address as any party shall have
previously designated
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by such a notice. The effective date of any notice or request shall be the date
of personal delivery, four (4) days after the date of mailing by certified or
registered mail, the date on which successful facsimile transmission is
confirmed, or the date undertaken for delivery by a reputable overnight courier
service, as the case may be, in each case properly addressed as provided herein
and with all charges prepaid.
TO TARGETED OR ACQUISITION:
Targeted Genetics Corporation
1100 Olive Way, Suite 100
Seattle, Washington 98101
Fax: (206) 521-7872
Attention: Chief Executive Officer
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Fax: (206) 583-8500
Attention: Stephen M. Graham
TO THE COMPANY:
RGene Therapeutics, Inc.
2170 Buckhorne Place, Suite 230
The Woodlands, Texas 77380
Fax: (713) 367-1661
Attention: President
with a copy to:
Mayor, Day, Caldwell & Keeton
700 Louisiana
Nations Bank Building, 19th Floor
Houston, Texas 77002
Fax: (713) 225-7047
Attention: Richard Mayor
9.3 SEVERABILITY
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the fullest extent possible.
9.4 ENTIRE AGREEMENT
This Agreement and the Confidentiality Agreement constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and undertakings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and thereof.
9.5 ASSIGNMENT
This Agreement shall not be assigned by operation of law or otherwise,
except that Targeted may assign all or any of its rights and obligations
hereunder to any of its affiliates; provided, however, that no such assignment
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shall relieve the assigning party of its obligations hereunder if such assignee
does not perform such obligations, and further provided that any such assignment
shall not change the consideration due to the Stockholders hereunder.
9.6 PARTIES IN INTEREST
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person (other than the Stockholders
upon consummation of the Merger) any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
9.7 HEADINGS
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.8 COUNTERPARTS
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
9.9 GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the state of Delaware applicable to contracts executed in and to be
performed in that state.
9.10 KNOWLEDGE
"Knowledge," "Know," "best of Knowledge" and similar terms shall mean the
actual knowledge, after a reasonable amount of investigation, of the most senior
managerial employee of a party with responsibility for the matter as to which
knowledge is imputed.
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IN WITNESS WHEREOF, the parties hereto have entered into and signed this
Agreement as of the date and year first above written.
TARGETED GENETICS CORPORATION
By /s/ H. STEWART PARKER
------------------------------------
Its President and Chief Executive
Officer
TGC ACQUISITION CORPORATION
By /s/ H. STEWART PARKER
------------------------------------
Its President and Chief Executive
Officer
RGENE THERAPEUTICS, INC.
By /s/ MARTIN H. LINDENBERG, M.D.
------------------------------------
Its President and Chief Executive
Officer
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APPENDIX B
[VECTOR SECURITIES INTERNATIONAL LETTERHEAD]
April 16, 1996
Board of Directors
Targeted Genetics Corporation
1100 Olive Way
Suite 100
Seattle, WA 98101
Ladies and Gentlemen:
We understand that Targeted Genetics Corporation, a Washington corporation
("Targeted"), TGC Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of Targeted ("Acquisition"), and RGene Therapeutics,
Inc., a Delaware corporation ("RGene"), intend to enter into an Agreement and
Plan of Merger substantially in the form of a draft dated April 16, 1996 (the
"Agreement"), pursuant to which Acquisition will be merged with and into RGene,
whereby RGene will be the surviving corporation and a wholly-owned subsidiary of
Targeted (the "Merger").
As more specifically set forth in the April 16 draft of the Agreement, upon
consummation of the Merger, among other things, all of the issued and
outstanding shares of RGene Common Stock, $0.001 par value per share ("RGene
Common Stock"), and all of the issued and outstanding shares of RGene Preferred
Stock, $0.001 par value per share ("RGene Preferred Stock"), will be converted
into the right to receive 3,636,364 shares of Targeted Common Stock (the
"Aggregate Merger Consideration"). In addition to the consideration discussed
above, holders of RGene Common Stock and RGene Preferred Stock will be entitled
to receive an indeterminate number of shares of Targeted Common Stock having a
value (as determined pursuant to the Agreement) of up to an additional
$5,000,000 upon the achievement of certain milestones during various periods
through December 31, 1998 (the "Additional Merger Consideration").
You have requested our opinion with respect to the fairness, from a
financial point of view as of the date hereof, to Targeted of the Aggregate
Merger Consideration and Additional Merger Consideration to be paid by Targeted
pursuant to the Agreement. In arriving at the opinion set forth herein, we have,
among other things: (i) reviewed the draft of the Agreement, dated April 16,
1996; (ii) held discussions with certain members of the management of Targeted
and RGene concerning the business, operations and prospects of each company;
(iii) reviewed certain business and financial information with respect to
Targeted and RGene, including financial forecasts prepared and provided by the
respective managements of Targeted and RGene; (iv) reviewed certain financial
statistics of publicly-traded companies we deemed reasonably comparable to
Targeted and RGene; (v) compared the financial terms of the Merger with those of
other transactions which we deemed comparable; (iv) reviewed the price and
trading history of the Targeted Common Stock; and (vii) performed such other
studies, analyses, and investigations as we deemed appropriate.
In connection with our opinion, we have assumed and relied upon the
accuracy and completeness of all financial and other information supplied or
otherwise made available by Targeted and RGene and we have neither attempted
independently to verify nor have we assumed any responsibility for verification
of such information. We have not made or obtained or assumed any responsibility
for making or obtaining independent evaluations or appraisals of the assets of
Targeted or RGene, nor have we been furnished with any such evaluations or
appraisals. With respect to the financial projections referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
available estimates and judgments of the respective managements of Targeted and
RGene as to the future financial performance of Targeted and RGene,
respectively, and
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that Targeted and RGene will perform substantially in accordance with such
projections. We assume no responsibility for and express no view as to such
forecasts or the assumptions on which they are based. We have also assumed that
the Merger will be consummated on the terms described in the April 16, 1996
draft of the Agreement without any waiver of or modification to any of the
material terms and conditions relating to Targeted. Our conclusions are based
solely on information available to us on or before the date hereof and reflect
economic, market and other conditions as of such date.
As you are aware, we are acting as a managing underwriter in connection
with Targeted's pending common stock offering. In addition, Targeted has agreed
to indemnify us for certain liabilities which may arise out of the rendering of
this opinion. Vector Securities International, Inc. is a full service securities
firm focused on the healthcare industry, and has in the past, and may from time
to time, provide investment banking services to Targeted for which Vector may be
paid customary investment banking fees; further, in the course of its normal
trading activities, Vector may from time to time effect transactions and hold
positions in securities of Targeted.
This opinion has been prepared for the benefit and use of the Board of
Directors of Targeted in connection with its consideration of the Agreement.
Notwithstanding the foregoing, this opinion may be included in its entirety in
the proxy statement sent to shareholders of Targeted with respect to approval of
the issuance of the shares of Targeted Common Stock in connection with the
Merger as required by the rules of the Nasdaq National Market.
On the basis of and subject to the foregoing, and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof,
the Aggregate Merger Consideration and the Additional Consideration paid by
Targeted under the Agreement is fair to Targeted from a financial point of view.
This letter does not constitute a recommendation to the Board of Directors of
Targeted with respect to any approval of the Agreement or the Merger nor does it
constitute a recommendation to any shareholder with respect to whether to vote
in favor of the issuance of shares of Targeted Common Stock in connection with
the Merger.
Very truly yours,
/s/ VECTOR SECURITIES INTERNATIONAL, INC.
VECTOR SECURITIES INTERNATIONAL, INC.
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TARGETED GENETICS CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS -- , 1996
The undersigned hereby appoint(s) H. Stewart Parker and James A. Johnson
and each of them as proxies, with full power of substitution, to represent and
vote as designated all shares of Common Stock of Targeted Genetics Corporation
held of record by the undersigned on , 1996 at the Special Meeting
of Shareholders of the Company to be held at the Company's headquarters, located
at 1100 Olive Way, Suite 100, Seattle, Washington, at 8:00 a.m. on ,
, 1996, with authority to vote upon the matter listed below.
<TABLE>
<S> <C> <C> <C>
APPROVAL OF ISSUANCE OF COMMON STOCK (THE "ISSUANCE")
PURSUANT TO THE AGREEMENT AND PLAN OF MERGER, DATED
AS OF APRIL 16, 1996, BY AND AMONG TARGETED GENETICS
CORPORATION, TGC ACQUISITION CORPORATION AND RGENE FOR AGAINST ABSTAIN
THERAPEUTICS, INC. / / / / / /
</TABLE>
IMPORTANT -- PLEASE DATE AND SIGN ON THE OTHER SIDE
<PAGE> 132
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER IN THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED "FOR" THE ISSUANCE.
The Board of Directors unanimously recommends a vote "FOR" the Issuance.
Date ________________________________
Signature ___________________________
Date ________________________________
Signature ___________________________
Please sign exactly as your name
appears hereon. Attorneys, trustees,
executors and other fiduciaries acting
in a representative capacity should
sign their names and give their titles.
An authorized person should sign on
behalf of corporations, partnerships,
associations, etc. and give his or her
title. If your shares are held by two
or more persons, each person must sign.
Receipt of the notice of meeting and
proxy statement is hereby acknowledged.
/ / I plan to attend the Special
Meeting.
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