<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
September 19, 2000
(Date of Report)
TARGETED GENETICS CORPORATION
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Washington 0-23930 91-1549568
(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
1100 Olive Way, Suite 100, Seattle, WA 98101
(Address of Principal Executive Offices, including Zip Code)
(206) 623-7612
(Registrant's Telephone Number, Including Area Code)
None
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
This Amendment No. 1 to Targeted Genetics Corporation's Current Report on
Form 8-K filed October 2, 2000 relates to Targeted Genetics' acquisition of
Genovo, Inc. pursuant to an Agreement and Plan of Merger, dated August 8, 2000,
by and among Targeted Genetics, TGC Acquisition Corporation, Genovo, and Biogen,
Inc. The purpose of this amendment is to provide the financial statements of
Genovo required by Item 7(a) of Form 8-K and the pro forma financial statements
required by Item 7(b) of Form 8-K, which financial statements were excluded from
the original filing in reliance upon Items 7(a)(4) and 7(b)(2) of Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Financial Statements
June 30, 2000 and 1999
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Genovo, Inc.:
We have audited the accompanying balance sheets of Genovo, Inc. (A Development
Stage Company) as of June 30, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended and for the period from September 12, 1992 (inception) to June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Genovo, Inc. (A Development
Stage Company) as of June 30, 2000 and 1999, and the results of its operations
and its cash flows for the years then ended and for the period from September
12, 1992 (inception) to June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Princeton, New Jersey
August 4, 2000, except as to the
first paragraph of note 12 which
is as of September 19, 2000, the
second paragraph of note 12 which
is as of September 17, 2000 and
the third paragraph of note 12
which is as of October 30, 2000
F-2
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Balance Sheets
June 30, 2000 and 1999
<TABLE>
<CAPTION>
Assets 2000 1999
<S> <C> <C>
----------------- -----------------
Cash $ 1,333,198 1,900,628
Prepaid expenses and other current assets 84,539 42,135
----------------- -----------------
Total current assets 1,417,737 1,942,763
Security deposit 300,000 300,000
Loan receivable - related party - 50,000
Fixed assets, net 788,471 404,552
----------------- -----------------
Total assets $ 2,506,208 2,697,315
================= =================
Liabilities and Stockholders' Equity
Capital lease obligation - current $ 20,122 46,404
Demand notes and loan payable - related party 650,000 600,000
Accounts payable 473,748 357,578
Accrued liabilities 944,533 621,961
----------------- -----------------
Total current liabilities 2,088,403 1,625,943
----------------- -----------------
Capital lease obligation, less current portion - 20,126
Loan payable - related party - 250,000
----------------- -----------------
Total long-term liabilities - 270,126
----------------- -----------------
Commitments
Stockholders' equity:
Series A Convertible Preferred stock, par $.001, 2,000,000
shares authorized; 408,254 and 380,000 outstanding
at June 30, 2000 and 1999, respectively 408 380
Series E Convertible Preferred stock, par $.001, 300,000
shares authorized; 175,000 outstanding at June 30, 2000
and 1999 175 175
Series F Convertible Preferred stock, par $.001, 519,861 shares
authorized; 122,750 and none outstanding at June 30,
2000 and 1999, respectively 123 -
Class A Common stock, par $.001, 5,770,989 shares authorized;
229,010 issued and outstanding at June 30, 2000 and 1999 229 229
Class B Common stock, par $.001, 1,000,000 shares authorized;
93,000 issued and outstanding at June 30, 2000 and 1999 93 93
Class C Common stock, par $.001, 1,000,000 shares authorized;
297,990 issued and outstanding at June 30, 2000 and 1999 298 298
Class D Common stock, par $.001, 229,011 shares authorized;
none issued and outstanding at June 30, 2000 and 1999 - -
Additional paid-in capital 19,394,512 8,305,143
Deferred compensation (3,323,359) (462,265)
Deficit accumulated during the development stage (15,654,674) (7,042,807)
----------------- -----------------
Total stockholders' equity 417,805 801,246
----------------- -----------------
Total liabilities and stockholders' equity $ 2,506,208 2,697,315
================= =================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GENOVO, INC.
( A Development Stage Company)
Statements of Operations
Years ended June 30, 2000 and 1999 and
period from September 12, 1992 (inception) to June 30, 2000
<TABLE>
<CAPTION>
Period from
September 12,
1992
(inception) to
2000 1999 June 30, 2000
------------------ ----------------- --------------------
<S> <C> <C> <C>
Research revenue - related party $ 7,717,684 6,786,244 31,584,349
------------------ ----------------- --------------------
Operating expenses incurred during the
development stage:
Research and development 12,986,451 6,851,625 35,052,131
General and administrative 3,738,084 2,300,154 11,688,181
Impairment loss on property - - 1,259,632
------------------ ----------------- --------------------
Total operating expenses 16,724,535 9,151,779 47,999,944
------------------ ----------------- --------------------
Interest income 194,289 64,212 560,226
Other income 200,695 - 200,695
------------------ ----------------- --------------------
Net loss $ (8,611,867) (2,301,323) (15,654,674)
================== ================= ====================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Period from September 12, 1992 (inception) to June 30, 1993 and
years ended June 30, 1994, 1995, 1996, 1997, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Series A Convertible Series E Convertible Series F Convertible
Preferred Stock Preferred Stock Preferred Stock
-------------------- -------------------- --------------------
Number Number Number
of shares Amount of shares Amount of shares Amount
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
September 12, 1992 (inception) - $ - - $ - - $ -
Loan receivable for founder stock - - - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1993 - - - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1994 - - - - - -
Proceeds from loan receivable - - - - - -
Overpayment of stock loan payable - - - - - -
Cancellation of stock - - - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1995 - - - - - -
Issuance of Class B stock in exchange
for technology and licensing
agreement - - - - - -
Issuance of Series A Convertible
Preferred Stock 380,000 380 - - - -
Class C and D common stock split and
exchange (552 to 1) - - - - - -
Payment of stock loan payable - - - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1996 380,000 380 - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1997 380,000 380 - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1998 380,000 380 - - - -
Deferred compensation resulting from
grant of stock options - - - - - -
Amortization of deferred compensation - - - - - -
Issuance of Series E Convertible
Preferred Stock - - 175,000 175 - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 1999 380,000 380 175,000 175 - -
Deferred compensation resulting from
grant of stock options - - - - - -
Issuance of Series A Convertible
Preferred Stock in exchange for
certain technology rights 28,254 28 - - - -
Amortization of deferred compensation - - - - - -
Issuance of Series F Convertible
Preferred Stock - - - - 122,750 123
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
Balance, June 30, 2000 408,254 $ 408 175,000 $ 175 122,750 123
========= ====== ========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION> Deficit
Common Stock Loan accumulated
------------------ Additional receivable during the
Number paid-in Deferred from development
of shares Amount capital compensation stockholder stage Total
--------- ------ ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
September 12, 1992 (inception) - $ - - - - - -
Loan receivable for founder stock 955 1 9,999 - (10,000) - -
Net loss - - - - - (129,765) (129,765)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1993 955 1 9,999 - (10,000) (129,765) (129,765)
Net loss - - - - - (193,372) (193,372)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1994 955 1 9,999 - (10,000) (323,137) (323,137)
Proceeds from loan receivable - - - - 10,000 - 10,000
Overpayment of stock loan payable - - - - (4,160) - (4,160)
Cancellation of stock - - (450) - - - (450)
Net loss - - - - - (863,567) (863,567)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1995 955 1 9,549 - (4,160) (1,186,704) (1,181,314)
Issuance of Class B stock in exchange
for technology and licensing
agreement 93,000 93 278,907 - - - 279,000
Issuance of Series A Convertible -
Preferred Stock - - 4,510,763 - - - 4,511,143
Class C and D common stock split and
exchange (552 to 1) 526,045 526 (526) - - - -
Payment of stock loan payable - - - - 4,160 - 4,160
Net loss - - - - - (2,120,138) (2,120,138)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1996 620,000 620 4,798,693 - - (3,306,842) 1,492,851
Net loss - - - - - (1,260,750) (1,260,750)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1997 620,000 620 4,798,693 - - (4,567,592) 232,101
Net loss - - - - - (173,892) (173,892)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1998 620,000 620 4,798,693 - - (4,741,484) 58,209
Deferred compensation resulting from
grant of stock options - - 506,625 (506,625) - - -
Amortization of deferred compensation - - - 44,360 - - 44,360
Issuance of Series E Convertible -
Preferred Stock - - 2,999,825 - - - 3,000,000
Net loss - - - - - (2,301,323) (2,301,323)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 1999 620,000 620 8,305,143 (462,265) - (7,042,807) 801,246
Deferred compensation resulting from
grant of stock options - - 6,614,455 (6,614,455) - - -
Issuance of Series A Convertible -
Preferred Stock in exchange for
certain technology rights - - 1,075,037 - - - 1,075,065
Amortization of deferred compensation - - - 3,753,361 - - 3,753,361
Issuance of Series F Convertible
Preferred Stock - - 3,399,877 - - - 3,400,000
Net loss - - - - - (8,611,867) (8,611,867)
--------- ------ ---------- ------------ ----------- ----------- ----------
Balance, June 30, 2000 620,000 $ 620 19,394,512 (3,323,359) - (15,654,674) 417,805
========= ====== ========== ============ =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GENOVO, INC.
( A Development Stage Company)
Statements of Cash Flows
Years ended June 30, 2000 and 1999 and
period from September 12, 1992 (inception) to June 30, 2000
<TABLE>
<CAPTION>
Period from
September 12,
1992
(inception) to
2000 1999 June 30, 2000
---------------- ----------------- --------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net loss $ (8,611,867) (2,301,323) (15,654,674)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation expense 3,753,361 44,360 3,797,721
Depreciation and amortization 267,220 218,970 703,467
Impairment loss of property - - 1,259,632
Issuance of stock for technology license and rights 1,075,065 - 1,354,065
Forgiveness of demand notes and loan payable -
related party (200,000) - (200,000)
(Increase) decrease in prepaid expenses and other
current assets (42,404) 78,044 (84,539)
Increase in security deposit - - (300,000)
Decrease in loan receivable - related party 50,000 - -
Increase in accounts payable and accrued liabilities 438,742 158,328 1,418,281
---------------- ----------------- --------------------
Net cash used in operating activities (3,269,883) (1,801,621) (7,706,047)
---------------- ----------------- --------------------
Net cash flows from investing activities:
Proceeds from sale of building - 1,265,123 1,265,123
Purchase of fixed assets (651,139) (175,916) (4,016,693)
---------------- ----------------- --------------------
Net cash provided by (used in) investing activities (651,139) 1,089,207 (2,751,570)
---------------- ----------------- --------------------
Net cash flows from financing activities:
Proceeds from demand notes payable - related party - - 600,000
Proceeds from loan payable - related party - - 1,919,490
Repayment of loan payable - related party - (1,200,000) (1,269,490)
Proceeds from loan receivable - - 10,000
Cancellation of common stock - - (450)
Proceeds from issuance of preferred stock 3,400,000 3,000,000 10,511,143
Capital lease obligation, net (46,408) (43,839) 20,122
---------------- ----------------- --------------------
Net cash provided by financing activities 3,353,592 1,756,161 11,790,815
---------------- ----------------- --------------------
Net increase (decrease) in cash (567,430) 1,043,747 1,333,198
Cash, beginning of period 1,900,628 856,881 -
---------------- ----------------- --------------------
Cash, end of period $ 1,333,198 1,900,628 1,333,198
================ ================= ====================
Supplemental schedule of noncash financing activities:
Deferred compensation from the issuance of
stock options $ 6,614,455 506,625 7,121,080
Founders' stock issued for loan receivable - - 10,000
Conversion of promissory note to
preferred stock - - 400,000
================ ================= ====================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
GENOVO, INC.
(A Development State Company)
Notes to Financial Statements
June 30, 2000 and 1999
(1) Organization and Business Activities
Genovo, Inc. (A Development Stage Company) (the "Company") was incorporated
on September 12, 1992 (inception) and began operations in Philadelphia,
Pennsylvania in March 1993. The Company is a biotechnology company engaged
in the discovery, development and commercialization of gene therapy
technology and products. The Company was acquired by Targeted Genetics
Corporation on September 19, 2000 (see note 12).
The Company has licensed its core technology from certain universities and
research institutions in exchange for present and future cash payments and,
in certain instances, common stock. The cost of obtaining such technology
has been charged to research and development expense as incurred in the
accompanying statements of operations.
The Company is currently in the development stage and is devoting
substantially all of its efforts toward conducting product research, drug
discovery and drug development, licensing technology, obtaining regulatory
approval for products under development, negotiating strategic corporate
relationships, recruiting personnel and raising capital. In the course of
its activities, the Company has sustained operating losses and management
expects such losses to continue for at least the next several years.
The Company plans to finance its operations primarily with a combination of
license payments, strategic research, development and marketing
arrangements, advances from Targeted and the incurrence of debt through
loan or credit agreements and revenues from future product sales, if any.
The Company has not generated positive cash flows from operations, and
there are no assurances that the Company will be successful in obtaining an
adequate level of financing for the long-term development and
commercialization of its planned products.
The Company has not yet achieved profitable operations to date, and there
are no assurances that profitable operations, if ever achieved, could be
sustained on a continuing basis. In addition, drug development activities
and clinical and pre-clinical testing and commercialization of the
Company's proprietary technology will require significant future additional
financing. The Company's deficit accumulated during the development stage
was $15,654,674 in the aggregate, through June 30, 2000, and it expects to
incur substantial and increasing losses in future periods. Further, the
Company's future operations are dependent on the success of the Company's
research, development and licensing efforts and, ultimately, upon
regulatory approval and market acceptance of the Company's proposed future
products (see note 12).
(Continued)
F-7
<PAGE>
GENOVO, INC.
(A Development State Company)
Notes to Financial Statements
June 30, 2000 and 1999
(2) Basis of Accounting and Summary of Significant Accounting Policies
Fixed Assets
Equipment and furniture and fixtures is recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of
the assets, generally three to seven years for equipment and furniture and
fixtures. Leasehold improvements are stated at cost and are amortized using
the straight-line method over the estimated life of the asset or the
estimated lease term, whichever is shorter. Expenditures for repairs and
maintenance are expensed as incurred.
Revenue Recognition
Revenue from research contracts is recognized in accordance with the terms
of the respective contracts and upon the satisfaction of the Company's
significant obligations under such contracts. Such revenue is recognized
over periods commensurate with the incurrence of related research contract
costs. Amounts received that are related to future performance under such
research contracts are deferred and recognized as revenue in the period
when earned.
Research and Development
Research and development costs are expensed as incurred.
Licensed Technology
Costs incurred in obtaining the license rights to technology in the
research and development stage are expensed as incurred and in accordance
with the specific contractual terms of such license agreements.
Stock-based Compensation
The Company accounts for equity instruments issued to employees in
accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations. As such, deferred compensation is recorded to the extent
that the current fair value of the underlying stock exceeds the grant or
exercise price on the date of grant. Such deferred compensation is
amortized over the respective vesting periods of such equity instruments.
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which allows entities to continue to apply
the provision of APB No. 25 for financial reporting purposes and provide
pro forma net income (loss) footnote disclosure for equity instruments
issued to employees made as if the fair-value based method defined in SFAS
No. 123 had been applied. Transactions with non-employees, in which goods
and services are the consideration received for the issuance of equity
instruments, are accounted for under the fair-value based method defined in
SFAS No. 123.
(Continued)
F-8
<PAGE>
GENOVO, INC.
(A Development State Company)
Notes to Financial Statements
June 30, 2000 and 1999
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when such differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the period that such tax rate changes are enacted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
(3) Fixed Assets
Fixed assets is comprised of the following at June 30, 2000 and 1999:
2000 1999
---------------- ----------------
Furniture and fixtures $ 99,767 90,535
Equipment 1,323,082 688,364
Leasehold improvements 63,582 4,534
Construction-in-progress -- 51,859
---------------- ----------------
1,486,431 835,292
Accumulated depreciation
and amortization 697,960 430,740
---------------- ----------------
$ 788,471 404,552
================ ================
(Continued)
F-9
<PAGE>
GENOVO, INC.
(A Development State Company)
Notes to Financial Statements
June 30, 2000 and 1999
(4) Accrued Liabilities
Accrued liabilities consist of the following at June 30, 2000 and 1999:
2000 1999
--------------- --------------
Professional fees $ 299,039 34,562
Patent maintenance costs -- 130,323
Payroll costs 57,870 182,025
Research agreement costs 559,000 165,454
Other 28,624 109,597
--------------- --------------
$ 944,533 621,961
=============== ==============
(5) Demand Notes Payable - Related Party
In December 1994, the Company received an advance in the form of a demand
note from Biogen in the amount of $400,000, which note was secured by the
then outstanding shares of common stock owned by certain principals of the
Company. This amount was paid in full in August 1995, in conjunction with
the Master License Option and Development Agreement entered into with
Biogen (see note 8).
On August 8, 1996, the Company purchased an equitable interest in land and
a building in Philadelphia from the University of Pennsylvania ("Penn") for
$1,450,000. The acquisition was financed by an interest-free advance from
Biogen, Inc. ("Biogen") of $1,450,000. The Company subsequently decided not
to occupy the building and sold the property on March 11, 1999. During
fiscal 1999, the Company repaid Biogen $1,200,000 from the proceeds
received from the sale. Approximately $100,000 of the remaining $250,000
payable to Biogen was forgiven in fiscal 2000 and is recorded as other
income in the accompanying statement of operations. The remaining balance
is due on demand.
In February 1998, the Company received a $250,000 loan in the form of a
demand note from Biogen. In June 1998, the Company received an additional
$350,000 loan in the form of a demand note from Biogen. These loans do not
bear interest and are unsecured and due upon demand by Biogen. In May 2000,
Biogen exchanged $100,000 in outstanding debt in consideration of a certain
license granted Biogen by the Company. The forgiveness of debt has been
recorded as other income in the accompanying statement of operations.
(6) Loan Receivable - Related Party
In January 1996 the Company loaned $50,000 to a former executive officer
and stockholder of the Company for the purchase of a personal residence.
This loan was repaid in fiscal 2000.
(Continued)
F-10
<PAGE>
GENOVO, INC.
(A Development State Company)
Notes to Financial Statements
June 30, 2000 and 1999
(7) Income Taxes
As of June 30, 2000, the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $10.5 million.
Such carryforwards, which expire beginning in 2010, are available to reduce
future federal taxable income, if any. The Company also has available for
state income tax purposes net operating loss carryforwards of approximately
$10.3 million. The state tax carryforwards, which expire beginning in 2005,
are available to offset future state taxable income, if any. The Company
also has research and development tax credit carryforwards of approximately
$900,000, which expire beginning in 2011, available to offset future
Federal income taxes.
Based on "change in ownership" provisions of the Tax Reform Act of 1986,
net operating loss carryforwards may be subject to annual limitations that
could reduce the Company's ability to fully utilize these carryforwards.
The significant components of the Company's deferred tax assets and
liabilities as of June 30, 2000 and 1999 are shown below. As of June 30,
2000, a valuation allowance of $7,028,102 has been recorded to reduce the
deferred tax assets to an amount which is more likely than not to be
realized. The changes in the valuation allowance for 2000 and 1999 were
increases of $3,697,408 and $1,018,673, respectively.
2000 1999
--------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 4,249,865 2,285,990
Research and development credit 900,000 693,818
Cash to accrual adjustment -- 154,050
Deferred compensation 1,541,624 --
Capitalized start-up costs 27,832 55,664
Depreciation 15,981 11,722
Accruals and reserves 292,800 129,450
--------------- -------------
7,028,102 3,330,694
Valuation allowance (7,028,102) (3,330,694)
--------------- -------------
Net deferred taxes $ -- --
=============== =============
A reconciliation of the Federal statutory tax rate to the effective income
tax rate is as follows:
2000 1999
----------- ------------
Federal statutory rate 34.0 % 34.0 %
State taxes, net of Federal
income tax benefit 6.6 6.6
Tax credits and other 2.4 4.4
Valuation allowance (43.0) (45.0)
----------- ------------
-- % -- %
=========== ============
(Continued)
F-11
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
(8) Licensing and Research Agreements
University of Pennsylvania
On August 11, 1995, the Company entered into a five-year sponsored research
agreement ("SRA") with Penn pursuant to which Penn granted the Company,
subject to certain limitations, an exclusive, worldwide right and license
to certain technology. As consideration for this license, Penn received
93,000 shares of Class B (nonvoting) common stock with an aggregate fair
market value of $279,000, which the Company charged to expense in 1996. The
Company has also agreed to make sponsored research payments to Penn
aggregating approximately $21.1 million over a five year period to fund the
research of Dr. James M. Wilson (a significant stockholder and founder),
and will reimburse Penn for certain patent-related costs and will pay
future royalties on products produced by the Company, if any, relating to
the licensed technology. Through June 30, 2000, approximately $21.1 million
has been funded to Penn under the SRA.
Biogen
On August 14, 1995, the Company entered into a Master License Option and
Development Agreement (the "Agreement") with Biogen pursuant to which the
Company granted to Biogen an exclusive license for certain gene therapy
technology related to cystic fibrosis and familial hypercholesterolemia
products, and granted an option to Biogen on certain of the Company's
future technology for other diseases in the liver and lung. In connection
with this Agreement, Biogen acquired a 38% minority equity interest in the
Company in the form of 380,000 shares of Series A Convertible Preferred
Stock ("Series A").
Pursuant to the Agreement, Biogen will pay up to approximately $36.7
million in cash to the Company over a five-year period including the equity
investment of approximately $4.5 million for the 38% minority equity
interest discussed above. The proceeds from the Agreement are intended to
fund research and development costs, including the payments to be made by
the Company to Penn pursuant to the SRA discussed above, certain costs
relating to the Company's research facilities, and pilot manufacturing
facility and certain start-up costs. It is anticipated that approximately
$21.1 million of the Biogen funding will be used to make payments under the
SRA. In fiscal 2000 the Company received $7.7 million from Biogen under the
Agreement, of which approximately $4.7 million was utilized to fund the SRA
in fiscal 2000. As of June 30, 2000, a total of approximately $35.8 million
has been funded to the Company under the Agreement. In fiscal 2000, this
Agreement was amended to extend to January 1, 2001 (see note 12).
In July 1999, the Company issued 28,254 shares of Series A in exchange for
certain technology rights. The Company recorded a $1.1 million charge, the
fair value of the Series A, to research and development expense associated
with this transaction in fiscal 2000.
(Continued)
F-12
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
Ariad Gene Therapeutics, Inc.
On February 14, 1998, the Company entered into a joint venture agreement
with Ariad Gene Therapeutics, Inc. ("Ariad") for the purposes of further
developing their respective gene expression, regulation and apoptosis and
gene delivery technologies and of jointly commercializing such
technologies. Costs were shared between the Company and Ariad. The
agreement was terminated on February 14, 2000. During the years ended June
30, 2000 and 1999, the Company incurred $0 and $700,000, respectively, of
research and development expenses under the agreement.
Genzyme
On August 30, 1999, the Company also entered into a Development and License
Agreement with Genzyme Corporation ("Genzyme"). Under this agreement,
Genovo is obligated to perform at its own cost certain research and
development activities costing up to $2.9 million per year. Upon the
achievement of certain regulatory milestones, Genzyme would be required to
make milestone payments to the Company of up to $6.5 million in the
aggregate and pay royalties to the Company on sales of products developed
under the agreement. The initial term of the agreement is three years and
may be cancelled by Genzyme at any time with notice. None of the
aforementioned milestones were achieved in fiscal 2000.
(9) Capital Stock and Stock Options
In conjunction with the execution of the Agreement in August 1995, the
Company effected a stock split and exchange of the then outstanding common
stock of the Company whereby common stockholders received 551.83247 shares
(rounded to 552 for financial reporting purposes) for each share of common
stock owned.
On March 5, 1999, the Company sold 175,000 shares of the Company's Series E
Convertible Preferred Stock ("Series E") in a private placement for
$3,000,000.
On August 30, 1999, the Company sold 122,750 shares of the Company's Series
F convertible preferred stock ("Series F") in a private placement for
$3,400,000, in addition to granting options to purchase up to 144,404
shares on each of August 30, 2000 and 2001 for $27.70 per share, to
Genzyme.
Class A common stockholders are entitled to one vote for each share owned.
The Class B and C common stockholders are not entitled to a vote, and the
Class D common stockholders are entitled to 2.3 votes for each share held.
39,291 shares of Class A common stock and 29,799 shares of Class C common
stock are not vested as of June 30, 2000. These shares will vest through
August 14, 2000 according to the terms of the agreements. Shares of Class
B, C and D common stock automatically convert into shares of Class A common
stock upon the occurrence of certain events. Each share of Series A, Series
E and Series F entitles the holder thereof to such number of votes per
share as equals the number of shares of Class A common stock into which
such shares of Series A, Series E and Series F are then convertible,
respectively.
(Continued)
F-13
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
In July 1998 the Company adopted the 1998 Stock Option Plan (the "Plan")
which provided for the granting to employees, incentive stock options in
the aggregate of 200,000 options for Company's Class A common stock, and
for the granting of in the aggregate 180,000 options for Company's Class C
common stock to employees, non-employee directors and consultants. In
fiscal 2000, the board of directors approved an increase in the authorized
number of options available for issue under the Plan to a maximum of
940,447 options in the aggregate comprised of up to 517,947 options for
Class A common stock and up to 422,500 options for Class C common stock.
The incentive stock options and the nonqualified options may be granted at
any price as determined by the Board of Directors with the incentive stock
options being granted at no less than fair market value on the date of
grant. The options are generally exercisable for a period of ten years
after the grant date and generally vest over a six year period.
A summary of the activity in the Company's stock option plan for the two
years ended June 30, 2000 follows:
Weighted
average
exercise
Shares price
------------ --------------
Balance, July 1, 1998 -- $ --
Granted 705,557 1.00
Forfeited (2,050) 1.00
------------ --------------
Balance, June 30, 1999 703,507 1.00
Granted 229,984 2.72
Forfeited (17,850) 1.09
------------ --------------
Balance, June 30, 2000 915,641 $ 1.43
============ ==============
Stock options outstanding at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------- --------------------------------
Weighted
average Weighted Weighted
remaining average average
Exercise Number of contractual exercise Number or exercise
price shares life (years) price shares price
------------- --------------- ---------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.00 663,657 8.95 $ 1.00 139,371 $ 1.00
1.11 58,287 9.03 1.11 3,350 1.11
3.00 193,697 9.66 3.00 2,500 3.00
--------------- ---------------- ------------- --------------- ------------
915,641 9.11 $ 1.43 145,221 $ 1.04
=============== ================ ============= =============== ============
</TABLE>
(Continued)
F-14
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees under the Plan. The difference between the fair value
for financial reporting purposes and the respective exercise prices at the
grant dates has been recorded as deferred compensation of $1,305,249 and
$66,075 at June 30, 2000 and 1999, respectively. The amounts are being
amortized to expense over the respective vesting periods.
During fiscal 1999, the Company granted options to a certain non-employee
to purchase 411,657 shares of Class C common stock at an exercise price of
$1.00 per share. These options vest over a five year period based upon
future service requirements. The Company recorded deferred compensation of
$440,550 based on the fair value at the grant date as determined using a
Black-Scholes option pricing model. Such deferred compensation is being
amortized to expense using the methodology prescribed in FASB
Interpretation No. 28 over the respective vesting periods. In accordance
with EITF Issue 96-18, the amount of compensation expense to be recorded in
future periods related to the fiscal 1999 grants is subject to change each
reporting period based upon changes in the fair value of the Company's
common stock, estimated volatility and risk free interest rate until the
non-employee completes performance under the option agreement. Additional
deferred compensation in the amount of $5,309,206 was recorded in fiscal
2000 related to the remeasurement of the fiscal 1999 grants.
The per share weighted-average minimum value of stock options granted to
employees during fiscal 2000 and 1999 was $9.64 and $0.59 per share,
respectively, on the date of grant. The per share weighted-average fair
value of stock options granted to non-employees during fiscal 1999 was
$1.07 per share on the grant date. There were no options granted to non-
employees during fiscal 2000. Such values were determined using the minimum
value method for employees and the Black-Scholes option-pricing model for
non-employees with the following weighted-average assumptions for both
fiscal 2000 and 1999: expected dividend yield 0%; risk free interest rate
of 6.25%; volatility of 0% for employees and 88% for non-employees; and an
expected option life of 7 years.
Had the Company determined compensation cost for options granted to
employees based on the fair value at the grant date in accordance with the
provisions of SFAS No. 123, the Company's net loss for the years ended June
30, 2000 and 1999 would have been increased to the pro forma amount
indicated below:
2000 1999
---------------- ----------------
As reported $ (8,611,867) (2,301,323)
================ ================
Pro forma $ (8,759,436) (2,314,873)
================ ================
(Continued)
F-15
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
(10) Commitments
The Company leases its facility and certain equipment under various
noncancellable operating and capital leases. Rental expense charged to
operations for the years ended June 30, 2000 and 1999 was approximately
$345,000 and $389,000, respectively.
At June 30, 2000, future minimum lease payments under noncancelable long-
term leases are as follows:
Fiscal Operating Capital
Year leases leases
------ -------------- -------------
2001 $ 393,573 $ 20,415
2002 345,995 --
2003 345,575 --
2004 345,575 --
2005 345,575 --
Thereafter 143,989 --
-------------- -------------
Total minimum lease payments $ 1,920,282 20,415
==============
Less: Interest 293
-------------
Present value of future minimum
lease payments 20,122
Less: Current portion 20,122
-------------
Non-current portion $ --
=============
The Company has indemnified a stockholder for attorney fees related to a
lawsuit against that individual up to $100,000. Approximately $14,000 of
this was incurred and expensed by the Company in fiscal 2000.
(Continued)
F-16
<PAGE>
GENOVO, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2000 and 1999
(11) 401(k) Profit Sharing Plan
In January 1997 the Company adopted a 401(k) Profit Sharing Plan. Employees
who have been employed by the Company following 90 days are eligible to
participate in the Plan. The Plan had been funded solely by the
contributions made by participants, which are limited to the lower of 15%
of employee pay or $10,500 and $10,000 in fiscal 2000 and 1999,
respectively. In October 1999, the Board of Directors of the Company
amended the Plan whereby the Company would match employee contributions at
the rate of one dollar for every dollar of an employee contribution of up
to 3% of the individual employee's annual salary in any given calendar
year. The Company would then match employee contributions at the rate of
fifty cents for every dollar contributed by an employee on additional
employee contributions over 3% and up to 5% of the employee's annual salary
in any given calendar year. Plan expenses are paid by the Company. No
significant expenses were incurred in 2000 and 1999. Matching contributions
during the year ended June 30, 2000 totaled $64,225.
(12) Subsequent Events
On September 19, 2000, Targeted Genetics Corporation ("Targeted") acquired
all of the outstanding preferred and common stock of the Company in
exchange for Targeted common stock and all stock options to purchase Genovo
common stock, with several exceptions, were converted into stock options to
obtain Targeted common stock based on the exchange ratio of the
transaction. Also, in connection with the transaction, the Agreement with
Biogen was terminated. Targeted has agreed to fund operation of the
Company, as necessary, through fiscal 2001.
On September 17, 2000, an action was filed against the Company, the
University of Pennsylvania, a stockholder of the Company and several other
parties alleging that actions by the defendants caused the death of an
individual who was participating as a patient in a clinical trial which was
sponsored by the University of Pennsylvania.
On October 30, 2000, the plaintiffs and the defendants reached an agreement
in principle to settle the suit. The Company will contribute to the
financial portion of this settlement and will seek reimbursement from their
insurance carrier. Management of the Company believes that insurance
proceeds will largely offset the Company's contribution to the settlement.
However, it is uncertain how much, if any, will be reimbursed to the
Company by the insurance carrier.
F-17
<PAGE>
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements give
effect to the merger using the purchase method of accounting. The unaudited pro
forma consolidated balance sheet gives effect to the merger as if it had
occurred on June 30, 2000. The unaudited pro forma consolidated statements of
operations for the six months ending June 30, 2000 and for the year ending
December 31, 1999 give effect to the merger, as if it had occurred on January 1,
1999. The historical statements of operations for Genovo have been recast to
conform to our December 31 fiscal year. We expect that following the merger, we
will incur additional costs in connection with integrating the operations of the
two companies. These integration costs, which are not expected to be
significant to the combined results of operations, are not included in the
accompanying unaudited pro forma combined financial statements.
For pro forma purposes:
- We applied unaudited pro forma adjustments to the financial information we
derived from our financial statements and Genovo's financial statements to
account for the merger. We reflected the Genovo assets acquired and
liabilities assumed at their fair values. The following pro forma financial
statements are subject to further refinement, including appraisals and other
analyses.
- We prepared the unaudited pro forma consolidated financial information based
on the assumptions described in the accompanying notes, including assumptions
relating to the allocation of the consideration paid for the assets acquired
and liabilities assumed of Genovo based on preliminary estimates of their
fair value. In our opinion, all adjustments necessary to fairly present these
unaudited pro forma consolidated financial statements have been made, based
on the proposed terms and structure of the merger.
As a result of the merger, we recorded intangible assets related to adeno-
associated virus (AAV) vector know-how, goodwill, employment agreements and
assembled work force in place and a nonrecurring charge to operations for
acquired in-process research and development in the amount of $28.0 million.
Because the charge for acquired in-process research and development is non-
recurring, we included it in the unaudited pro forma consolidated balance sheet
but excluded it from the unaudited pro forma consolidated statements of
operations.
F-18
<PAGE>
The unaudited pro forma information should be used for illustrative
purposes only. We believe that the information is not necessarily indicative of
the operating results or financial position that would have actually resulted if
the merger had been consummated on June 30, 2000 or January 1, 1999. In
addition, we do not believe that this information necessarily projects our
potential operating results or financial position as of any future date or for
any future period.
You should read these unaudited pro forma consolidated financial statements
and accompanying notes in conjunction with our historical financial statements
and the related notes and other financial information contained elsewhere in
this filing or in the documents we have filed with the SEC, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in our annual report on Form 10-K for the year ending
December 31, 1999 and our quarterly reports on Form 10-Q for the quarters ending
June 30, 2000 and March 31, 2000.
F-19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA PRO FORMA
GENETICS GENOVO ADJUSTMENTS NOTE 2 COMBINED
--------- -------------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $27,941 $ 1,333 $ - $ 29,274
Securities available for sale.... 1,532 - - 1,532
Accounts receivable.............. 1,355 - - 1,355
Prepaid expenses and other....... 533 85 - 618
--------- -------------------- ------------ ---------
Total current assets............... 31,361 1,418 - 32,779
Property and equipment, net........ 3,613 788 - 4,401
Goodwill and other purchased
intangibles...................... - - 605 (i) 38,886
1,010 (ii)
37,271 (iii)
Other assets - net................. 374 300 - 674
--------- -------------------- ------------ ---------
Total assets..................... $ 35,348 $ 2,506 $ 38,886 $76,740
========= ==================== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................. $ 2,276 $ 474 $ 1,663 (iv) $ 4,413
Accrued payroll and other
liabilities................... 723 944 - 1,667
Deferred revenue................. 385 - - 385
Demand loan and notes
payable - related party....... - 650 (650) (v) -
Current portion of long-term
obligations................... 1,041 20 - 1,061
--------- -------------------- ------------ ---------
Total current liabilities.......... 4,425 2,088 1,013 7,526
Long-term obligations, less
current portion.................. 2,321 - 650 (v) 2,812
(159) (vi)
Stockholders' equity:
Preferred stock.................. 12,823 1 (1) (vii) 12,823
Common stock..................... 126,895 19,395 (19,395) (vii) 193,025
66,130 (viii)
Deferred compensation............ - (3,323) 3,323 (vii) (301)
(301) (viii)
Accumulated comprehensive loss... (3) - (3)
Accumulated deficit.............. (111,113) (15,655) 15,655 (vii) (139,142)
(28,029) (ix)
--------- -------------------- ------------ ---------
Total stockholders' equity....... 28,602 418 37,382 66,402
--------- -------------------- ------------ ---------
Total liabilities and
stockholders' equity............. $ 35,348 $ 2,506 $ 38,886 $76,740
========= ==================== ============ =========
</TABLE>
F-20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------
TARGETED PRO FORMA
GENETICS GENOVO ADJUSTMENTS NOTE 2 COMBINED
--------- -------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenue
Collaborative agreements............ $ 3,073 $ - $ - $ 3,073
Collaborative agreements
with affiliates.................. 854 3,859 - 4,713
------- ------- ------- --------
Total revenue................. 3,927 3,859 - 7,786
------- ------- ------- --------
Operating expenses:
Research and development............ 8,256 8,920 121 (x) 17,176
Amortization of goodwill and other
purchased intangibles............ - - 2,718 (x) 2,718
General and administrative.......... 2,198 2,335 207 (x) 4,740
------- ------- ------- --------
Total operating expenses............ 10,454 11,255 3,046 24,755
------- ------- ------- --------
Loss from operations.................. (6,527) (7,396) (3,046) (16,969)
Equity in loss of joint venture....... (1,172) - - (1,172)
Investment income..................... 679 93 - 772
Interest expense...................... (128) - (14) (x) (142)
Other income.......................... - 201 - 201
------- ------- ------- --------
Net loss.............................. (7,148) (7,102) (3,060) (17,310)
Accretion of dividend on
preferred stock..................... (432) - - (432)
------- ------- ------- --------
Net loss.............................. $(7,580) $(7,102) $(3,060) $(17,742)
======= ======= ======= ========
Basic and diluted net loss per
common share........................ $ (0.21) $(11.46) $ (0.43)
======= ======= ========
Shares used in computation of basic
and diluted net loss per share...... 35,619 620 40,870
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
TARGETED PRO FORMA
GENETICS GENOVO ADJUSTMENTS NOTE 2 COMBINED
---------- -------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative agreements............ $ 6,402 $ - $ - $ 6,402
Collaborative agreements
with affiliates................... 446 5,393 - 5,839
-------- -------- ------- --------
Total revenue................. 6,848 5,393 - 12,241
-------- -------- ------- --------
Operating expenses:
Research and development............ 14,290 7,363 336 (x) 21,989
Technology license fee.............. 3,200 - - 3,200
Amortization of goodwill and other
purchased intangibles............ - - 5,435 (x) 5,435
General and administrative.......... 3,594 3,545 621 (x) 7,760
-------- -------- ------- --------
Total operating expenses............ 21,084 10,908 6,392 38,384
-------- -------- ------- --------
Loss from operations.................. (14,236) (5,515) (6,392) (26,143)
Equity in loss of joint venture....... (12,610) - - (12,610)
Investment income..................... 426 146 - 572
Interest expense...................... (235) - (28) (x) (263)
-------- -------- ------- --------
Net loss.............................. (25,655) (5,369) (6,420) (38,444)
Accretion of dividend on
preferred stock..................... (376) - - (376)
-------- -------- ------- --------
Net loss.............................. $(27,031) $ (5,369) $(6,420) $(38,820)
======== ======== ======= ========
Basic and diluted net loss per
Common share........................ $ (0.84) $ (8.66) $ (1.04)
======== ======== ========
Shares used in computation of basic
and diluted net loss per share...... 32,174 620 37,424
======== ======= ========
</TABLE>
F-21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated financial statements give effect to
the merger using the purchase method of accounting. The unaudited pro forma
consolidated balance sheet gives effect to the merger as if it had occurred on
June 30, 2000. The unaudited pro forma consolidated statements of operations for
the six months ending June 30, 2000 and for the year ending December 31, 1999
give effect to the merger, as if it had occurred as of January 1, 1999. The
unaudited pro forma consolidated financial statements do not necessarily
represent what our financial position or results of operations would actually
have been if the merger or acquisition had in fact occurred on such dates, and
they do not necessarily project our financial position or results of operations
as of any future date or for any future period.
2. GENOVO -- UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS
(a) Under the terms of the merger agreement, Targeted Genetics is
exchanging 1.3777253 shares of Targeted Genetics common stock for each share of
Genovo common stock and common stock equivalent. In addition, Targeted Genetics
is assuming all options to purchase shares of Genovo common stock outstanding at
the effective time of the merger and converting them into options to purchase an
aggregate of 679,444 shares of Targeted Genetics common stock at a weighted
average exercise price of $1.30 per share.
The unaudited pro forma consolidated financial statements reflect the
conversion of all the outstanding shares of Genovo capital stock into 5,250,805
shares of Targeted Genetics common stock. The share amount includes 851,873
shares issued to Biogen, Inc. in exchange for Biogen releasing to Targeted
Genetics its rights to certain Genovo technologies. These shares represent the
negotiated value of the Genovo technology rights which were previously
transferred by Genovo to Biogen. The merger consideration also includes 550,872
shares of Targeted Genetics common stock that are being held in escrow.
Under two circumstances, subsequent to the merger of Targeted Genetics and
Genovo, Targeted Genetics may issue additional shares of its common stock as
merger consideration to the former Genovo common stockholders and stock-option-
plan optionholders as follows:
F-22
<PAGE>
. Because certain Genovo licensing arrangements were unresolved at the
time of the merger, Targeted Genetics and Genovo agreed to establish an
escrow of 700,000 shares of potential additional merger consideration
pending these resolution issues. These shares will be held in escrow for
the benefit of former Genovo stockholders. All or a portion of the
shares will be released to the stockholders if Targeted Genetics
successfully renegotiates these license terms no later than 18 months
after the merger.
. In connection with the merger and an August 1999 collaborative research
agreement between Genzyme Corporation and Genovo, Targeted Genetics
assumed Genzyme's outstanding option to purchase Genovo capital stock in
two tranches. Subsequent to the merger, Genzyme exercised the first
option tranche to purchase 311,295 shares of Targeted Genetics common
stock at $12.8495 per share. In August 2001, Genzyme may exercise the
second option tranche and acquire up to an additional 311,295 shares of
Targeted Genetics common stock (as successor company to Genovo) also at
a price of $12.8495 per share. If at that time Genzyme should elect to
purchase fewer than 311,295 shares of Targeted Genetics stock, the
former Genovo shareholders and optionholders will receive shares equal
to one-half the difference between the number of shares purchased by
Genzyme and the 311,295 shares purchasable by Genzyme.
The potential issuance of these escrowed shares is not included in the
calculation of the purchase price as it is contingent upon future events. Upon
resolution of these contingencies, Targeted Genetics will record adjustments to
the Genovo purchase price.
(b) The following table sets forth the total consideration for the merger
for pro-forma purposes (in thousands):
<TABLE>
<S> <C>
Total consideration:
Issuance of 5,250,805 shares of common stock $ 58,461
Fair value of options to purchase 1,302,034 shares
of common stock 7,668
Transaction costs 584
Less: intrinsic value of unvested stock options (301)
--------
$ 66,412
========
</TABLE>
The 5,250,805 shares issued as merger consideration were valued at $11.1337
per share based on the average share price of Targeted Genetics common stock for
the time period beginning four trading days before the announcement of the
acquisition through four trading days after the announcement.
F-23
<PAGE>
The fair value of the 1,302,034 options issued as merger consideration
include employee stock options to purchase 679,444 shares and Genzyme's option
to purchase 622,590 shares of common stock.
Transaction costs include attorney fees, accounting fees, valuation
advisory fees and printing costs.
The intrinsic value of certain stock options has been removed from the
merger consideration computation because they vest over future service periods.
The following table sets forth the allocation of the purchase price for pro
forma purposes(in thousands):
<TABLE>
<S> <C>
Allocation of purchase price as of the acquisition date:
In-process research and development $ 28,029
Assembled work force 605
Employment contracts 1,010
Assets acquired 2,506
Liabilities assumed (3,168)
Acquired AAV know-how 12,723
Purchased goodwill 24,707
--------
$ 66,412
========
</TABLE>
Targeted Genetics evaluated acquired in-process research and development
(IPR&D) for the merger utilizing the present value of the estimated after-tax
cash flows expected to be generated by the purchased technology, which had not
reached technological feasibility at the effective time of the merger. It based
the cash flow projections for revenues on estimates of growth rates and the
aggregate size of the markets for each product; the probability of technical
success given the stage of development at the time of acquisition; royalty rates
based on prior licensing agreements; projected product sales cycles; and the
estimated life of a product's underlying technology. It deducted estimated
operating expenses and income taxes from estimated revenue projections to arrive
at estimated after-tax cash flows. It discounted projected cash flows at rates
ranging from 30% to 45%, depending on the relative risk of each in-process
technology, based primarily on internal rates of return, cost of capital, rates
of return for research and development and the weighted average cost of capital
for Targeted Genetics at the time of the merger. Projected operating expenses
include general and administrative expenses and research and development costs.
The unaudited pro forma consolidated balance sheet reflects a noncash
charge for the acquired IPR&D of approximately $28.0
F-24
<PAGE>
million, representing the value attributed, after consultation with third-party
independent appraisers, to the IPR&D efforts associated with the technology
acquired in the acquisition of Genovo. Of this amount, approximately $19.6
million is related to AAV manufacturing platform projects, approximately $7.5
million is related to hyperlipidemia projects, approximately $500,000 is related
to hemophilia projects, approximately $200,000 is related to lysosomal storage
disorders projects and approximately $200,000 is related to glioma projects.
Targeted Genetics computed the values associated with these programs based on
the discounted cash flows currently expected from the technologies acquired. If
Targeted Genetics does not successfully develop these projects, its business,
operating results and financial condition may be adversely affected.
. Genovo's AAV manufacturing platform projects are efforts to apply AAV as a
stable gene therapy vector capable of delivering genes to a variety of
dividing and nondividing cells. Genovo has identified the patient population
of projects and potential partners as candidates for using its early-stage
manufacturing platform to develop specific AAV vectors to deliver candidate
genes. Genovo has estimated that the additional research and development
costs to complete its AAV manufacturing platform projects in 2007 will be
approximately $23.8 million. Additional AAV platform projects in early
development stages are currently scheduled for completion by the years 2008
and 2009. As of the acquisition date, Genovo had made progress in this field
in the areas of bench processes, GLP-grade processes and scale-up processes.
Significant risk for the AAV manufacturing platform projects remain with
respect to completing scale-up efforts and establishing, validating and
commercializing GMP-grade processes.
. Hyperlipidemia is an elevation of lipids in the bloodstream that are
transported as part of large molecules called lipoproteins. Genovo's
hyperlipidemia technology is targeted at patient populations requiring
treatment of elevated cholesterol and patients with existing cardiovascular
disease. Genovo plans to jointly develop with a partner a gene therapy
product to treat hyperlipidemia. Genovo has estimated that a hyperlipidemia
product using this technology will be completed in approximately 2007, at a
cost of an additional $16.0 million in research and development. As of the
acquisition date, Genovo had made progress in this field in the areas of
discovery, research and preclinical work.
. Lysosomal storage disorders (LSD) are a family of approximately 40 genetic
diseases, each of which typically affects fewer than 5,000 to 10,000 people
worldwide. These diseases are normally single-
F-25
<PAGE>
gene defects that affect the production of one or more lysosomal enzymes
leading to abnormal deposits of substrates within lysosomal vacuoles. Genovo
is jointly developing with a partner a gene therapy to treat LSD. Genovo has
estimated the additional costs to complete its LSD technologies at $9.0
million with a targeted completion date in 2007. As of the acquisition date,
Genovo had made progress in this field in the areas of discovery, research
and preclinical work.
. Genovo's glioma technology is intended to treat brain tumors in adults. These
tumors, which are highly malignant, are nearly always fatal and currently
have no known curative treatment. Genovo is jointly developing with a partner
a gene therapy product to treat glioma. Genovo has estimated the additional
costs to complete its glioma technologies at $750,000 with a targeted
completion date in 2006. As of the acquisition date, Genovo had made progress
in this field in the areas of discovery, research and preclinical work.
. Hemophilia, an x-linked recessive clotting disorder caused by a mutation in
one of the body's plasma proteins, results in prolonged external and/or
internal bleeding. Genovo plans to jointly develop with a partner a gene
therapy product to treat hemophilia. Genovo has estimated the additional
costs to complete its hemophilia technologies at $12.0 million with a
targeted completion date in 2009. As of the acquisition date, Genovo has made
progress in this field in the areas of discovery, research and preclinical
work.
As of the date it executed the merger agreement, Targeted Genetics
concluded that the technologies under development can be economically used only
for their specifically intended purposes and that, once completed, the in-
process technology has no alternative future use, after taking into
consideration the overall objectives of the project, progress toward the
objectives, and uniqueness of developments to these objectives.
In-process research and development charges resulting from the merger have
not been reflected in the pro forma consolidated statement of operations because
Targeted Genetics considers them to be nonrecurring charges.
At the time of the merger, Targeted Genetics entered into noncompete
agreements with two members of the Genovo executive management team. The value
of these employment contracts, $1.0 million, was computed by third-party
consultants based on the present value of the incremental revenue and
corresponding cash flow
F-26
<PAGE>
that could be lost in the absence of the noncompete agreements. The value of the
assembled work force was calculated based on the cost approach. Under this
approach, the workforce is valued by calculating the costs avoided by Targeted
Genetics through obtaining a pre-existing, trained and fully efficient team
rather than incurring the costs to assemble this workforce. The costs avoided
include recruiting costs, loss of productivity and training.
At the time of the merger, Targeted Genetics believed that the book value
of the tangible assets purchased reflected the fair value of the assets
acquired. The tangible assets purchased included leasehold improvements,
laboratory equipment, office equipment and security deposits.
Targeted Genetics recognized the liabilities assumed at book value.
Genovo's liabilities at the time of the merger included routine accounts
payable, accrued attorney fees, financial advisory fees and a note payable to a
related party.
Acquired AAV know-how was computed to be worth $12.7 million representing
the present value of the projected earnings that will be generated by Genovo's
core technology after taking into account the revenue and expenses of the
technology, the relative risk of the products associated with the core
technology, the contribution of other assets and an appropriate discount rate to
reflect the time value of the invested capital. The remaining portion of the
purchase price, $24.7 million, was attributed to goodwill.
(c) The unaudited pro forma consolidated balance sheet includes the
adjustments necessary to give effect to the merger as if it had occurred on June
30, 2000, and to reflect the allocation of the proposed acquisition to the fair
value of tangible and intangible assets acquired, including the charge to
expense for IPR&D acquired and the elimination of Genovo's equity accounts. Also
included are Targeted Genetics' transaction costs, including payments to
financial advisors, independent auditors and attorneys and other related costs.
Approximate adjustments included in the unaudited pro forma consolidated balance
sheet are summarized as follows:
(i) Workforce know-how acquired by Targeted Genetics valued at $605,000; four-
year life.
(ii) Employment agreements acquired by Targeted Genetics valued at $1.0 million;
two-year life.
F-27
<PAGE>
(iii) Goodwill and AAV know-how acquired by Targeted Genetics, valued at $24.7
million and $12.7 million, respectively; seven-year life.
(iv) Transaction costs associated with the merger of $584,000 and liabilities
assumed of $1.1 million.
(v) Demand notes and loans payable assumed by Targeted Genetics have been
converted to long-term obligations.
(vi) Discount for imputed interest on the long-term obligations assumed by
Targeted Genetics.
(vii) Elimination of Genovo equity accounts.
(viii) Issuance of Targeted Genetics common stock, par value $0.01, as discussed
in subsection 2(a) and 2(b) above.
(ix) Write-off of acquired IPR&D.
(x) Amortization of compensatory stock options, acquired goodwill, AAV know-how,
work force and debt discount for the periods indicated in 2(c)(i-viii) above (in
thousands):
<TABLE>
<CAPTION>
Six
Months Year
Ended Ended
6/30/00 12/31/99
--------- --------
<S> <C> <C>
Research and development portion of -
Compensatory stock options $ - $ 93
Assembled work force 69 138
Employment contracts 52 105
--------- ------
$ 121 $ 336
========= ======
Amortization of purchased goodwill
and AAV know-how $ 2,718 $5,435
========= ======
General and administrative portion of -
Compensatory stock options $ - $ 208
Assembled work force 200 400
Employment contracts 7 13
--------- ------
$ 207 $ 621
========= ======
Amortization of imputed discount on
assumed liabilities $ 14 $ 28
========= ======
</TABLE>
3. GENOVO -- UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE
F-28
<PAGE>
The pro forma combined share and net loss per share data was prepared using
an exchange ratio of 1.3777253 Targeted Genetics common shares for each share of
Genovo common stock and common stock equivalents and the assumed issuance of
5,250,805 shares of Targeted Genetics common stock on January 1, 2000 as
described in Note 2 above.
4. UNAUDITED PRO FORMA EFFECT ON CONSOLIDATED NET INCOME FOR EACH OF THE NEXT
FIVE YEARS
The proforma amortization of acquired goodwill, AAV know-how, work force
and debt discount will result in charges to pretax income as follows: $6.1
million in the year ending December 31, 2001; $6.0 million in the year ending
December 31, 2002; $5.6 million in the year ending December 31, 2003; $5.6
million in the year ending December 31, 2004 and $5.5 million in the year ending
December 31, 2005.
5. CALCULATION OF PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
Pro forma basic and diluted net loss per share amounts for the year ending
December 31, 1999 and the six-month period ending June 30, 2000 are based on the
historical weighted-average number of shares of Targeted Genetics common stock
outstanding, adjusted to reflect the issuance, as of January 1, 1999, of
5,250,805 shares of Targeted Genetics common stock. The impact of outstanding
options, including Genovo options assumed, is not included in the calculation of
basic and diluted net loss per share because the effect would be antidilutive.
The impact on the number of shares issued as consideration in connection with
the Genovo acquisition as a result of any purchase price adjustments or any
adjustments to the Genovo acquisition consideration as a result of Genzyme's
election not to fully exercise its option in August 2001 have not been included
in these amounts because they cannot be predicted.
c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No.
<C> <S>
2.1 Agreement and Plan of Merger dated August 8, 2000, by and among
Targeted Genetics, Genovo, Inc., TGC Acquisition Corporation and
Biogen, Inc. (incorporated by reference to Targeted Genetics'
Current Report on Form 8-K, filed August 23, 2000).*
23.1 Consent of KPMG, independent auditors
---------
* Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the SEC. The omitted
portions have been filed separately with the SEC.
</TABLE>
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TARGETED GENETICS CORPORATION
Date: November 9, 2000 By: /s/ James A. Johnson
-------------------------------------
James A. Johnson
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 8, 2000, by and among
Targeted Genetics Corporation, TGC Acquisition Corporation, Genovo,
Inc. and Biogen, Inc. (incorporated by reference of Exhibit 2.1 to
Targeted Genetics' Current Report on Form 8-K, filed with the SEC on
August 23, 2000).*
23.1 Consent of KPMG, independent auditors
</TABLE>
_______
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment filed with the SEC. The omitted portions have
been filed separately with the SEC.
