<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------
VALENTIS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 94-3156660
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
863A MITTEN ROAD, BURLINGAME, CA 94010, (650) 697-1900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
BENJAMIN F. MCGRAW III
863A MITTEN ROAD, BURLINGAME, CA 94010, (650) 697-1900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
PATRICK A. POHLEN, ESQ.
COOLEY GODWARD LLP
FIVE PALO ALTO SQUARE
3000 EL CAMINO REAL
PALO ALTO, CA 94306
TELEPHONE: (650) 843-5004
FACSIMILE: (650) 857-0663
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COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) OFFERING PRICE(3) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share..... 4,400,000 shares $0.6527 $23,897,650.20 $6,643.55
</TABLE>
(1) Represents 4,400,000 shares of Common Stock of the Registrant which may be
issued to former shareholders of PolyMASC Pharmaceuticals plc pursuant to
the acquisition described herein.
(2) The provisions of Rule 416 under the Securities Act of 1933, as amended,
shall apply to this Registration Statement and the number of shares
registered on the Registration Statement automatically shall increase or
decrease as a result of any future stock split, stock dividend, reverse
stock split, reclassification, recapitalization or other similar
transaction.
(3) The proposed maximum offering price is estimated solely for the purpose of
computing the amount of the registration fee and the value of the securities
to be received by the Registrant in exchange for its Common Stock, computed
pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of the PolyMASC Ordinary
Shares reported on the Alternative Investment Market of the London Stock
Exchange on June 30, 1999, and using an exchange rate of 21:$1.5727.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
AVAILABLE INFORMATION
Valentis, Inc. (formerly Megabios Corp.) ("Valentis") is subject to the
information requirements of the Exchange Act and in accordance therewith files
reports, proxy statements and other information with the SEC. The Registration
Statement, as well as such reports, proxy statements and other information, can
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the SEC's regional offices at Southwest Atrium Centre, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and at Seven World Trade Centre,
Suite 1300, New York, New York 10048. The SEC also maintains a WorldWide Web
site that contains reports, proxy and information statements, and other
information regarding registrants that file electronically with the SEC. The
site and this Registration Statement may be accessed at http:www.sec.gov.
Valentis common stock is traded on the Nasdaq National Market under the symbol
"VLTS." In addition, such materials and other information concerning Valentis
also can be inspected at the Nasdaq National Market at Nasdaq Operations, 1735 K
Street NW, Washington, D.C. 20006. The Registration Statement may also be
inspected at the offices of Taylor Joynson Garrett, Carmelite, 50 Victoria
Embankment, Blackfriars, London EC4Y ODX, England, during normal business hours
on any weekday (English public holidays excepted) while the offer remains open
for acceptance.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Registration Statement incorporates by reference certain documents that
are not presented herein or delivered herewith. Valentis hereby undertakes to
provide without charge to each person, including any beneficial owner, to whom a
copy of this Registration Statement is delivered, upon written or oral request
of such person, a copy of any and all documents and information that have been
incorporated by reference herein (not including exhibits thereto unless such
exhibits are specifically incorporated by reference into the information
incorporated herein). Such documents and information are available in the United
States upon request from Valentis, 863A Mitten Road, Burlingame, California
94010, USA, Attention: Mr Bennet Weintraub, telephone: 650-697-1900 and in the
United Kingdom upon request from Taylor Joynson Garrett, Carmelite, 50 Victoria
Embankment, Blackfriars, London EC4Y ODX, England, Attention: Mr. Simon Walker
or Mr. Tim Oldridge, telephone: (UK) 171-353-1234. In addition, such documents
and information may also be inspected at the offices of Taylor Joynson Garrett
(address as above), during normal business hours on any weekday (English public
holidays excepted) while the Offer remains open for acceptance.
The following documents filed by Valentis with the SEC are hereby
incorporated by reference in this Registration Statement: (1) Valentis' Annual
Report on Form 10-K for the year ended June 30, 1998; (2) Valentis' Quarterly
Reports on Form 10-Q for the quarters ended September 30, 1998, December 31,
1998 and March 31, 1999; and (3) Valentis' Definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders.
All documents filed by Valentis pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this registration statement and
prior to the date on which the registration statement becomes or is declared
effective shall be deemed to be incorporated by reference herein and to be a
part hereof from the date of filing thereof. Any statement contained herein or
in any document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this registration
statement to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed to constitute a part of this
registration statement except as so modified or superseded.
RULE 8 NOTICES
Any person who, alone or acting together with any other person(s) pursuant
to any agreement (formal or informal), owns or controls, or becomes the owner or
controller of, directly or indirectly, one per cent. or more of any relevant
securities (which term includes Valentis common stock and ordinary shares in
PolyMASC Pharmaceuticals plc ("PolyMASC")) is required, under the provisions of
Rule 8 of the UK City Code on Takeovers and Mergers, to notify the Company
Announcements Office of the London Stock Exchange, which will notify the UK
Panel on Takeovers and Mergers and the United Kingdom press, by no later than
12:00 noon (London time) on the business day following the date of the relevant
transaction of every dealing in any relevant securities until the first closing
date of the offer by Valentis for PolyMASC or (if later) such time as such offer
becomes or is declared unconditional in all respects or lapses, in accordance
with Rule 8. Dealings by "associates" (within the meaning of the UK City Code on
Takeovers and Mergers) of Valentis or PolyMASC in Valentis common stock or
ordinary shares until such time must also be disclosed. Certain very limited
categories of persons are exempt from, and The Panel on Takeovers and Mergers
may in limited circumstances waive compliance with, such disclosure obligations.
Please consult appropriate legal counsel immediately if you believe Rule 8 may
be applicable to you.
FINANCIAL INFORMATION
The extracts from the financial statements of, and other information about,
Valentis appearing in the formal document dated June 22, 1999 containing the
offer by Valentis for PolyMASC (the "Offer Document") are presented in US
dollars ($) and have been prepared in accordance with US generally acceptable
accounting principles ("GAAP"). The extracts from the financial statements of,
and other information about, PolyMASC appearing in the Offer Document which has
been included in this registration statement and prospectus are presented in
pounds sterling (L) and have been prepared in accordance with UK GAAP, US GAAP
and UK GAAP differ in certain respects. As a result, and for the convenience of
the reader, the financial information of
I
<PAGE>
PolyMASC used in the preparation of the pro forma information appearing in the
Offer Document which has been included in this registration statement and
prospectus has been adjusted to comply with US GAAP and contains translations of
pounds sterling amounts into US dollars. Such translations should not be
construed as representations that the pounds sterling amounts represent, or have
been, or could be converted into US dollars at that or any other rate. The
mid-point of the closing spread of the dollar to sterling spot rate, as shown in
the Wall Street Journal (CA edition) on May 24, 1999, the last dealing date
before the announcement of the offer, was L1:$1.59577 and on June 30, 1999, the
last practicable date prior to filing of this registration statement, was
L1:$1.5727. This information is provided for the convenience of the reader and
may differ from the actual rates in effect during the periods covered by the
PolyMASC financial information discussed herein.
SPECIAL NOTE:
This Registration Statement includes certain information which supplements
the information contained in the Offer Document, which has been included as part
of this registration statement and prospectus.
The Offer Document has been included in its entirety on pages 1 through 103
of this registration statement and prospectus without alteration, with the
exception of immaterial typographical errors.
POLYMASC PHARMACEUTICALS PLC ("POLYMASC")
SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The financial statements of PolyMASC are prepared in accordance with
generally accepted accounting principles applicable in the UK ("UK GAAP"), which
differ in certain respect from those applicable in the United States ("US
GAAP"). However, there were no material differences in the accounting treatment
in the PolyMASC financial information between UK GAAP and US GAAP.
II
<PAGE>
THE FOLLOWING REPORT OF BDO STOY HAYWARD, INDEPENDENT AUDITORS, REFERENCES
CERTAIN FINANCIAL INFORMATION BEGINNING ON PAGE 74 OF THE OFFER DOCUMENT:
REPORT OF BDO STOY HAYWARD, INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF POLYMASC PHARMACEUTICALS PLC
We have audited the financial statements on pages 74-86 of the Offer
Document, describing the recommended offer by Hambrecht & Quist LLC on behalf of
Valentis, Inc., to acquire the whole of the issued, and to be issued, ordinary
share capital of the company. The financial statements have been prepared under
the historical cost convention and the accounting policies set out on page 77 of
the Offer Document. These financial statements have not been prepared for the
purposes of section 226 of the Companies Act 1985 and are therefore not
statutory accounts.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board in the United Kingdom, which are substantially
consistent with generally accepted auditing standards in the United States. An
audit includes examination, on a test basis, of evidence relevant to the amounts
and disclosures in the financial statements. It also includes an assessment of
the significant estimates and judgements made by the directors in the
preparation of the financial statements, and of whether the accounting policies
are appropriate to the circumstances of the company, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we have also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the
state of affairs of the company at 31 December 1998, 31 December 1997 and 31
December 1996, and of the result of the company for each of the periods then
ended in accordance with generally accepted accounting principles in the United
Kingdom.
Accounting practices used by the company in preparing the financial
statements conform with generally accepted accounting principles in the United
Kingdom, but do not conform with accounting principles generally accepted in the
United States.
/S/ BDO STOY HAYWARD
REGISTERED AUDITORS
Reading
England
Date: July 1, 1999
III
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial
statements of Valentis, Inc. (formerly Megabios Corp.) included in its Annual
report on Form 10-K for the year ended June 30, 1998, as set forth in their
report which is incorporated by reference in this prospectus/registration
statement of Valentis, Inc. These financial statements are incorporated by
reference in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
The financial statements of GeneMedicine, Inc. (merged with Megabios Corp.
to form Valentis, Inc. in March 1999) as of and for the year ended December 31,
1997 included as an exhibit to this prospectus and registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
BDO Stoy Hayward, independent auditors, have audited the financial
statements of PolyMASC Pharmaceuticals plc as of December 31, 1998, 1997 and for
each of the periods ended December 31, 1998, 1997 and 1996, included in this
prospectus that is made part of the registration statement of Valentis, Inc.,
and are included herein in reliance and upon the authority of said firm as
experts in accounting and auditing in giving said report.
LEGAL MATTERS
The validity of the shares of Valentis Common Stock offered hereby and other
legal matters will be passed upon for Valentis by Cooley Godward LLP, Palo Alto,
California.
IV
<PAGE>
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT AS TO THE CONTENTS OF THIS DOCUMENT AND/OR THE ACTION YOU SHOULD TAKE,
YOU ARE RECOMMENDED TO SEEK IMMEDIATELY YOUR OWN PERSONAL FINANCIAL ADVICE FROM
YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER INDEPENDENT
FINANCIAL ADVISER DULY AUTHORISED UNDER THE FINANCIAL SERVICES ACT 1986.
The shareholders of PolyMASC are strongly urged to read and consider carefully
this document in its entirety, including the matters referred to under
"Information regarding Valentis--Risk factors" beginning on page 18. This
document should be read in conjunction with the accompanying Form of Acceptance.
Neither the United States Securities and Exchange Commission nor any securities
commission of any state of the United States has approved or disapproved of the
securities offered on behalf of Valentis or determined if this document is
truthful or complete. Any representation to the contrary is a criminal offence.
If you have sold or otherwise transferred all your PolyMASC Ordinary Shares,
please send this document, the accompanying Form of Acceptance and reply-paid
envelope as soon as possible to the purchaser or transferee, or to the
stockbroker, bank or agent through whom the sale or transfer was effected, for
transmission to the purchaser or transferee. HOWEVER, SUCH DOCUMENTS SHOULD NOT
BE FORWARDED OR TRANSMITTED IN OR INTO THE UNITED STATES, CANADA, AUSTRALIA OR
JAPAN.
The Ordinary Share Offer is not being made, directly or indirectly, in or into
the United States, Canada, Australia or Japan and this document and the Form of
Acceptance are not being, and must not be, mailed or otherwise distributed or
sent in or into the United States, Canada, Australia or Japan.
Application has been made for the New Valentis Common Stock to be admitted for
listing on the Nasdaq National Market. It is expected that the listing will be
effective on the first trading day following that on which the Ordinary Share
Offer becomes or is declared unconditional in all respects.
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RECOMMENDED OFFER
BY
HAMBRECHT & QUIST LLC
ON BEHALF OF
VALENTIS, INC.
TO ACQUIRE THE WHOLE OF THE ISSUED AND TO BE ISSUED ORDINARY SHARE CAPITAL OF
POLYMASC PHARMACEUTICALS PLC
----------------------------------------------------------------
TO ACCEPT THE ORDINARY SHARE OFFER, THE FORM OF ACCEPTANCE MUST BE COMPLETED AND
RETURNED, AS SOON AS POSSIBLE, AND IN ANY EVENT SO AS TO BE RECEIVED BY THE
RECEIVING AGENT, CONNAUGHT ST MICHAEL LIMITED, NOT LATER THAN 3.00 PM ON 13 JULY
1999. THE PROCEDURE FOR ACCEPTANCE OF THE ORDINARY SHARE OFFER IS SET OUT ON
PAGES 15 AND 16 OF THIS DOCUMENT AND IN THE ACCOMPANYING FORM OF ACCEPTANCE.
Hambrecht & Quist LLC, which is regulated in the United Kingdom by The
Securities and Futures Authority Limited, is acting for Valentis and no one else
in connection with the Ordinary Share Offer and will not be responsible to
anyone other than Valentis for providing the protections afforded to customers
of Hambrecht & Quist LLC or for providing advice in relation to the Ordinary
Share Offer.
Arthur Andersen Corporate Finance, a division of Arthur Andersen, which is
authorised to carry on investment business by The Institute of Chartered
Accountants in England and Wales, is acting for PolyMASC and no one else in
connection with the Ordinary Share Offer and will not be responsible to anyone
other than PolyMASC for providing the protections afforded to clients of Arthur
Andersen or for providing advice in relation to the Ordinary Share Offer.
The extracts from the financial statements of, and other information about,
Valentis appearing in this document are presented in Dollars and have been
prepared in accordance with US generally accepted accounting principles
("GAAP"). The extracts from the financial statements of, and other information
about, PolyMASC appearing in this document are presented in Sterling and have
been prepared in accordance with UK GAAP, US GAAP and UK GAAP differ in certain
significant respects. As a result, and for the convenience of the reader, the
unaudited financial information of PolyMASC used in the preparation of the pro
forma information appearing in this Offer Document has been adjusted to comply
with US GAAP.
<PAGE>
TABLE OF CONTENTS
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PAGE
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LETTER OF RECOMMENDATION FROM THE CHAIRMAN OF POLYMASC................................................................. 3
LETTER FROM HAMBRECHT & QUIST LLC...................................................................................... 7
Introduction........................................................................................................... 7
The Ordinary Share Offer............................................................................................... 7
Irrevocable undertakings............................................................................................... 8
New Valentis Common Stock.............................................................................................. 8
Information relating to Valentis....................................................................................... 8
Information relating to PolyMASC....................................................................................... 10
Background to and reasons for the Ordinary Share Offer................................................................. 11
Financial effects of acceptance........................................................................................ 13
Loan facility.......................................................................................................... 13
Management and employees............................................................................................... 13
PolyMASC Deferred Share Offer.......................................................................................... 14
PolyMASC Share Option Schemes.......................................................................................... 14
United Kingdom taxation................................................................................................ 14
Procedure for acceptance of the Ordinary Share Offer................................................................... 15
Listing and settlement................................................................................................. 16
Further information.................................................................................................... 17
Action to be taken..................................................................................................... 17
INFORMATION REGARDING VALENTIS......................................................................................... 18
1 Risk factors...................................................................................................... 18
2 Selected Valentis financial data.................................................................................. 26
3 Unaudited pro forma condensed combined financial statements....................................................... 27
INFORMATION REGARDING POLYMASC......................................................................................... 35
1 Selected PolyMASC financial data.................................................................................. 35
2 Management's discussions and analysis of financial condition and results of operations............................ 35
3 Nature of trading market.......................................................................................... 37
FURTHER INFORMATION REGARDING VALENTIS................................................................................. 38
APPENDICES
I Conditions and further terms of the Ordinary Share Offer.......................................................... 39
II Description of Valentis Common Stock and changes in the rights of PolyMasc Ordinary Shareholders.................. 51
III Financial information on Valentis................................................................................ 53
IV Financial information on PolyMASC................................................................................. 74
V Additional information............................................................................................. 87
VI Certain provisions of the Companies Act........................................................................... 95
VII Definitions....................................................................................................... 102
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2
<PAGE>
LETTER OF RECOMMENDATION FROM THE CHAIRMAN OF POLYMASC
[LOGO]
DIRECTORS:
James Thomas Rees (NON-EXECUTIVE CHAIRMAN)
Dr. Gillian Elizabeth Francis (CHIEF EXECUTIVE OFFICER)
Dr. Julian Clive Gilbert (COMMERCIAL DEVELOPMENT DIRECTOR)
David Martin Maxfield Dutton (NON-EXECUTIVE DIRECTOR)
Ralph Stephen Harris (NON-EXECUTIVE DIRECTOR)
22 June 1999
TO POLYMASC ORDINARY SHAREHOLDERS AND, FOR INFORMATION ONLY, TO HOLDERS OF
OPTIONS UNDER THE POLYMASC SHARE OPTION SCHEMES AND POLYMASC DEFERRED
SHAREHOLDERS.
Dear PolyMASC Ordinary Shareholder,
RECOMMENDED SHARE FOR SHARE OFFER FOR POLYMASC
It was announced on 25 May 1999 that the Boards of PolyMASC and Valentis had
reached agreement on the terms of a recommended share for share offer to be made
by Hambrecht & Quist LLC on behalf of Valentis, to acquire the whole of the
issued and to be issued ordinary share capital of PolyMASC.
I am writing to set out the background to the Ordinary Share Offer and to
explain the reasons why your Board unanimously recommends that PolyMASC Ordinary
Shareholders accept the Ordinary Share Offer.
You should also be aware that PolyMASC Ordinary Shareholders representing
52.8 per cent. of the PolyMASC Ordinary Shares have irrevocably agreed to accept
the Ordinary Share Offer.
TERMS OF THE ORDINARY SHARE OFFER
The Ordinary Share Offer is being made on the following basis:
FOR EACH POLYMASC ORDINARY SHARE 0.209 OF A SHARE OF NEW VALENTIS COMMON
STOCK AND THE DEFERRED CONSIDERATION
The Ordinary Share Offer (excluding the Deferred Consideration) values each
PolyMASC Ordinary Share at approximately 52.2p and the whole of PolyMASC's
issued ordinary share capital at approximately L10.97 million, based on the
Closing Price of $3.97 per Valentis Common Stock on 21 June 1999 (the last
practicable date prior to the issue of this document) and the Illustrative
Exchange Rate. This represents a premium of 12.19 per cent. to the Closing Price
of 46.5p per PolyMASC Ordinary Share on 24 May 1999 (the last practicable date
prior to the Announcement). It is also a premium of 21.17 per cent. to the
Closing Price of 46.5p per PolyMASC Ordinary Share on 24 May 1999 based on the
30 Day Moving Average Price of a Valentis Common Stock in the period ended 21
June 1999.
Because the number of shares of Valentis Common Stock to be received under
the Ordinary Share Offer will not increase or decrease due to changes in the
price of either company's share capital, the value of the Ordinary Share Offer
is subject to substantial volatility.
You should bear in mind that the Sterling value of any investment in
Valentis Common Stock and any dividend income from that investment (payable in
Dollars and subject to US withholding tax) will be affected by the Dollar to
Sterling exchange rate.
Other risks associated with Valentis, the holding of Valentis Common Stock
and the merger with PolyMASC are set out in the section on Valentis beginning on
page 18 of this document.
PolyMASC Pharmaceuticals plc Fleet Road London NW3 2EZ Telephone 0171 830 2800
Fax 0171 431 7594
Registered Office: 12 Gough Square London EC4A 3DE
3
<PAGE>
The full terms and conditions of the Ordinary Share Offer are set out in
Appendix I to this document.
THE DEFERRED CONSIDERATION
In view of the number of agreements for protoMASC-TM- and viraMASC-TM-
currently under negotiation and anticipated in the short to medium term, the
Board of PolyMASC has reviewed its policy with respect to the lipoMASC-TM-
Technology. In line with the statement released in October 1998, the Board now
intends, rather than seeking to license out the lipoMASC-TM- Technology on a
product by product or small field basis, to seek a single partner for disposal
of this technology. This disposal process will be managed by the current
management of PolyMASC in an orderly manner over the next 12 months. Valentis
will pay to PolyMASC Ordinary Shareholders in cash following the disposal, by
way of the Deferred Consideration, an amount equal to 20 per cent. of the
proceeds of the sale of the lipoMASC-TM- Technology, provided the sale is
concluded within 12 months of the date on which the Ordinary Share Offer becomes
or is declared unconditional in all respects or, within 15 months of that date
if it can be shown that negotiations were at an advanced stage by the end of
that the initial 12 month period.
BACKGROUND TO AND REASONS FOR RECOMMENDING THE ORDINARY SHARE OFFER
The strategic aims of the Board of PolyMASC are:
- To focus on further exploiting the PEGylation techniques, in particular
protoMASC-TM- and viraMASC-TM-;
- The development of PolyMASC's current key product opportunities through to
clinical applications;
- The expansion of PolyMASC's existing therapeutic range;
- To obtain access to pharmaceutical development and regulatory expertise;
- To achieve improved manufacturing capabilities;
- To increase management resource; and
- To improve financial leverage.
The Board believes that PolyMASC requires additional resources to achieve
these strategic aims, and that these aims may be best achieved through a merger
with a suitable candidate.
The Board further believes that the merger with Valentis represents a good
opportunity for both PolyMASC and Valentis and should provide the Company with
access to additional resources and capabilities, including:
- Cross fertilization--technical synergies should provide an increased range
of product opportunities and the complementary skills of both
organisations will assist in the translation of products from laboratory
bench to clinic;
- Financial resources--Valentis has made a loan facility of $3 million to
PolyMASC (further details of this loan are set out under the heading "Loan
facility" on page 13 of this document). In addition to this loan, Valentis
has significant other cash resources and access to further equity
financing through the US capital markets;
- Virology and gene therapy resources--Valentis has experience and resources
in the field of virology and gene therapy and this should be of benefit in
developing therapeutic agents using viraMASC-TM-;
- Regulatory capabilities--Valentis has a regulatory group experienced in
dealing with regulatory issues arising from the development of therapeutic
agents through pre-clinical and clinical trials; and
- Pharmaceutical development capabilities--Valentis has expertise in the
development of biopharmaceuticals. The merger should improve the Company's
ability to retain control of the development process to later stages and
thus to add more value to products before out-licensing.
The Directors believe that the merger with Valentis will provide PolyMASC
with greater financial security and leverage which should be of benefit when
negotiating with commercial partners, assisting the Company to achieve improved
terms and conditions.
4
<PAGE>
VALENTIS
Valentis is a US biotechnology company, formed in March 1999 following the
merger of Megabios Corp. and GeneMedicine, Inc.. The technological focus of
Valentis is gene delivery, to create gene medicines and carry them through pre-
clinical and early clinical development.
PRELIMINARY ANNOUNCEMENT OF POLYMASC RESULTS
The Company issued the full text of its preliminary results statement for
the year ended 31 December 1998 to the London Stock Exchange on 26 May 1999.
Extracts from the audited financial statements for the year ended 31 December
1998 are included in Appendix IV to this document.
MANAGEMENT AND EMPLOYEES
The PolyMASC Directors have been advised that Valentis attaches great
importance to the skills and experience of the existing management and employees
of PolyMASC and believes that they will benefit from greater opportunities
within the enlarged group created by the acquisition of PolyMASC by Valentis.
Accordingly, Valentis has given assurances to the Board of PolyMASC that the
existing rights of the employees of PolyMASC will be fully safeguarded.
Following the Ordinary Share Offer being declared unconditional in all respects,
Dr. Gillian Francis will be appointed to the Board of Valentis.
POLYMASC DEFERRED SHARE OFFER
Valentis has today made a separate offer to PolyMASC Deferred Shareholders
which is conditional only upon the Ordinary Share Offer becoming or being
declared unconditional in all respects. The Deferred Share Offer is 1p per
PolyMASC Deferred Share, valuing the whole of PolyMASC's issued deferred share
capital at L500.
The Ordinary Share Offer is not dependent in any way on the level of
acceptances under the Deferred Share Offer.
POLYMASC SHARE OPTION SCHEMES
As soon as practicable following the posting of this document, Valentis will
seek the agreement of the holders of options under the PolyMASC Share Option
Schemes to the exchange of those options for options over New Valentis Common
Stock. It is intended that such new options will be granted by the PolyMASC
Employee Benefit Trust.
TAXATION
Your attention is drawn to the paragraph headed "United Kingdom Taxation" in
the letter from Hambrecht & Quist LLC set out on pages 14 and 15 of this
document. Any PolyMASC Ordinary Shareholder who has any doubt about his own tax
position or who is subject to taxation in any jurisdiction, other than the UK,
is strongly recommended to consult an independent professional adviser
immediately.
ACTION TO BE TAKEN TO ACCEPT THE ORDINARY SHARE OFFER
Your attention is drawn to pages 15 and 16 of this document and to the
accompanying Form of Acceptance, which set out the procedure for acceptance of
the Ordinary Share Offer.
IN ORDER TO ACCEPT THE ORDINARY SHARE OFFER, YOU SHOULD COMPLETE AND RETURN
THE ENCLOSED FORM OF ACCEPTANCE IN ACCORDANCE WITH THE INSTRUCTIONS PRINTED
THEREON, SO AS TO BE RECEIVED BY THE RECEIVING AGENT, CONNAUGHT ST MICHAELS
LIMITED, AS SOON AS POSSIBLE, BUT IN ANY EVENT BY NO LATER THAN 3.00 PM ON 13
JULY 1999. A REPLY PAID ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR USE.
RECOMMENDATION
THE DIRECTORS OF POLYMASC, WHO HAVE BEEN SO ADVISED BY ARTHUR ANDERSEN
CORPORATE FINANCE, CONSIDER THE TERMS OF THE ORDINARY SHARE OFFER TO BE FAIR AND
REASONABLE. ACCORDINGLY, THE DIRECTORS OF POLYMASC UNANIMOUSLY RECOMMEND
POLYMASC ORDINARY SHAREHOLDERS TO ACCEPT THE ORDINARY SHARE OFFER. IN PROVIDING
ITS ADVICE TO THE BOARD OF POLYMASC, ARTHUR ANDERSEN CORPORATE FINANCE HAS TAKEN
INTO ACCOUNT THE COMMERCIAL ASSESSMENTS OF THE DIRECTORS OF POLYMASC.
THE DIRECTORS, TOGETHER WITH CERTAIN OTHER POLYMASC ORDINARY SHAREHOLDERS,
HAVE GIVEN IRREVOCABLE UNDERTAKINGS TO ACCEPT THE ORDINARY SHARE OFFER IN
RESPECT OF 3,301,658 AND 7,800,017 POLYMASC ORDINARY SHARES RESPECTIVELY,
REPRESENTING, IN AGGREGATE, 52.8 PER CENT. OF POLYMASC'S ISSUED ORDINARY SHARE
CAPITAL. THE TERMS OF THE IRREVOCABLE UNDERTAKINGS GIVEN BY THE DIRECTORS AND
CERTAIN OTHER
5
<PAGE>
SHAREHOLDERS IN RESPECT OF 6,175,558 POLYMASC ORDINARY SHARES REQUIRE ACCEPTANCE
OF THE ORDINARY SHARE OFFER EVEN IF A COMPETING OR HIGHER OFFER IS MADE BY A
THIRD PARTY. THE TERMS OF THE IRREVOCABLE UNDERTAKINGS GIVEN BY CERTAIN OTHER
SHAREHOLDERS IN RESPECT OF 4,926,117 POLYMASC ORDINARY SHARES REQUIRE ACCEPTANCE
OF THE ORDINARY SHARE OFFER EVEN IF A COMPETING OR HIGHER OFFER IS MADE BY A
THIRD PARTY, BUT THE UNDERTAKINGS WILL LAPSE IN THE EVENT THAT THE 30 DAY MOVING
AVERAGE PRICE OF VALENTIS COMMON STOCK FALLS BELOW $3.50 IN THE PERIOD FROM THE
UNDERTAKING BEING GIVEN TO THE ORDINARY SHARE OFFER BECOMING OR BEING DECLARED
UNCONDITIONAL AS TO ACCEPTANCES.
Yours sincerely
JAMES REES
Chairman
6
<PAGE>
LETTER FROM HAMBRECHT & QUIST LLC
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415) 439-3000
22 June 1999
TO POLYMASC ORDINARY SHAREHOLDERS AND, FOR INFORMATION ONLY, TO HOLDERS OF
OPTIONS UNDER THE POLYMASC SHARE OPTION SCHEMES AND POLYMASC DEFERRED
SHAREHOLDERS.
Dear PolyMASC Ordinary Shareholder,
RECOMMENDED SHARE FOR SHARE OFFER FOR POLYMASC
INTRODUCTION
The Boards of Valentis and PolyMASC announced on 25 May 1999 that they had
reached agreement on the terms of a recommended share for share offer, to be
made by Hambrecht Quist LLC on behalf of Valentis, to acquire the whole of the
issued and to be issued ordinary share capital of PolyMASC.
YOUR ATTENTION IS DRAWN TO THE LETTER FROM JAMES REES, THE CHAIRMAN OF
POLYMASC, SET OUT ON PAGES 3 TO 6 OF THIS DOCUMENT, WHICH STATES THAT THE BOARD
OF POLYMASC, WHO HAVE BEEN SO ADVISED BY ARTHUR ANDERSEN CORPORATE FINANCE,
CONSIDERS THE TERMS OF THE ORDINARY SHARE OFFER TO BE FAIR AND REASONABLE AND
UNANIMOUSLY RECOMMENDS POLYMASC ORDINARY SHAREHOLDERS TO ACCEPT THE ORDINARY
SHARE OFFER.
THE ORDINARY SHARE OFFER
The Ordinary Share Offer, which is subject to the conditions set out in
Appendix I to this document, will be made on the following basis:
FOR EACH POLYMASC ORDINARY SHARE 0.209 OF A SHARE OF NEW VALENTIS COMMON
STOCK AND THE DEFERRED CONSIDERATION
Based on the Closing Price of $3.97 per Valentis Common Stock on 21 June
1999 (the last practicable date before the issue of this document) and the
Illustrative Exchange Rate, the Sterling equivalent value of the Ordinary Share
Offer (excluding the Deferred Consideration) is approximately 52.2p per PolyMASC
Ordinary Share, valuing the whole of PolyMASC's issued ordinary share capital at
L10.97 million.
PolyMASC Ordinary Shares to be acquired by Valentis pursuant to the Ordinary
Share Offer are to be acquired fully paid and free from all liens, equities,
charges, encumbrances and other interests and together with all rights now or
hereafter attaching thereto, including the right to receive and retain all
dividends and other distributions declared, made or payable hereafter.
The Ordinary Share Offer will extend to any PolyMASC Ordinary Shares which
are unconditionally allotted or issued prior to the date on which the Ordinary
Share Offer closes (or such earlier date, not being earlier than the date on
which the Ordinary Share Offer becomes unconditional as to acceptances or, if
later, the first closing date of the Ordinary Share Offer, as Valentis may,
subject to the provisions of the City Code, decide) as a result of the exercise
of options under the PolyMASC Share Option Schemes or otherwise.
Your attention is drawn to the section headed "The Deferred Consideration"
on page 4 of this document. Valentis will pay to PolyMASC Ordinary Shareholders
in cash following the disposal of the lipoMASC-TM- Technology, by way of the
Deferred Consideration, an amount equal to 20 per cent. of the proceeds of the
sale of the lipoMASC-TM- Technology, provided the sale is concluded within 12
months of the date on which the Ordinary Share Offer becomes or is declared
unconditional in all respects or, within 15 months of that date if it can be
shown that negotiations were at an advanced stage by the end of the initial 12
months period.
SAN FRANCISCO - NEW YORK - BOSTON - NEWPORT BEACH - SAN
DIEGO - LONDON
MEMBERS NEW YORK STOCK EXCHANGE - AMERICAN STOCK EXCHANGE - PACIFIC STOCK
EXCHANGE
7
<PAGE>
If the Ordinary Share Offer becomes or is declared unconditional in all
respects, fractions of New Valentis Common Stock will not be issued to accepting
PolyMASC Ordinary Shareholders who will instead receive from Valentis an amount
in cash in lieu of any entitlements to a fraction of a share of New Valentis
Common Stock. However, individual entitlements of less than L3 will not be paid
to PolyMASC Ordinary Shareholders, but will be retained for the benefit of
Valentis.
The conditions and further terms of the Ordinary Share Offer are set out in
Appendix I to this document and in the Form of Acceptance.
IRREVOCABLE UNDERTAKINGS
Valentis has received irrevocable undertakings to accept the Ordinary Share
Offer from the Directors and certain other shareholders of PolyMASC in respect
of 11,101,675 PolyMASC Ordinary Shares in aggregate, representing 52.8 per cent.
of PolyMASC's issued ordinary share capital. The terms of the irrevocable
undertakings given by the Directors and certain other shareholders in respect of
6,175,558 PolyMASC Ordinary Shares require acceptance of the Ordinary Share
Offer even if a competing or higher offer is made by a third party. The terms of
the irrevocable undertakings given by certain other shareholders in respect of
4,926,117 PolyMASC Ordinary Shares require acceptance of the Ordinary Share
Offer even if a competing or higher offer is made by a third party, but the
undertakings will lapse in the event that the 30 Day Moving Average Price of
Valentis Common Stock falls below $3.50 in the period from the undertaking being
given to the Ordinary Share Offer being declared unconditional as to
acceptances.
Those giving the irrevocable undertakings have also agreed not to dispose of
any interest in the New Valentis Common Stock during the period 120 days
following the Ordinary Share Offer being declared unconditional in all respects.
NEW VALENTIS COMMON STOCK
The New Valentis Common Stock will be listed on the Nasdaq National Market
in the United States under the symbol VLTS and will be issued credited as fully
paid and will rank pari passu in all respects with the existing Valentis Common
Stock, including the right to any dividends and other distributions declared,
paid or made hereafter. The New Valentis Common Stock will be issued free from
all liens, equities, charges, encumbrances and other interests and will be
freely tradeable, save where a PolyMASC Ordinary Shareholder has entered into an
agreement with Valentis to restrict the transfer of New Valentis Common Stock or
otherwise as required by legislation.
Further details of the rights attaching to Valentis Common Stock are set out
in Appendix II to this document.
INFORMATION RELATING TO VALENTIS
Megabios Corp. recently merged with GeneMedicine, Inc. to form Valentis. The
goal of this merger was to create a leading company in plasmid-based
therapeutics or gene medicines. The technology focus of Valentis is gene
delivery and expression. Valentis uses its delivery and expression technologies
to create gene medicines and carry them through preclinical and early clinical
development.
With gene medicines, a gene is introduced into certain cells of the body
where it codes for the production of a therapeutic protein. The therapeutic
protein can have a local effect, or if secreted into the blood stream, a
systemic effect. Hence, genes are a highly specific method for the delivery of
proteins. These technologies are covered by a broad patent portfolio that
includes issued US and European claims.
The company's commercial strategy is to enter into corporate partnerships
for full-scale clinical development, marketing and sales of products. Valentis
currently has corporate partnerships with the following business partners:
F. HOFFMAN-LA ROCHE
Valentis is working with F. Hoffman-La Roche ("Roche") to develop gene-based
immunotherapeutics for cancer based on the IL-2, IL-12 and IFNa genes. Phase
I/II clinical trials in the US and Germany have been completed for the first
gene medicine from this collaboration, which incorporates the IL-2 gene in a
cationic lipid formulation. Valentis, in collaboration with Roche, will begin a
Phase II trial in the second quarter of 1999. Phase I/II trials of the IL-2 gene
medicine showed that the product was safe and well tolerated, with evidence of
IL-2 expression up to 11 days post-treatment. Clinical trials have been
initiated for the other products under this collaboration.
8
<PAGE>
DSM BIOLOGICS/QIAGEN N.V.
DSM Biologics/QIAGEN N.V. are Valentis' manufacturing partners. Valentis
contributed its process technologies and its expertise in DNA formulation and
manufacturing. DSM brings extensive manufacturing experience as one of the
leading supplier of contract manufacturing services serving the needs of the
pharmaceutical and biotechnology industry. Qiagen will contribute its experience
accumulated over a number of years in the industry, non-exclusive access to
certain of its technologies and the strength of its marketing team. This
manufacturing consortium is the exclusive vehicle by which Valentis, DSM and
Qiagen will produce cGMP plasmid DNA and formulated DNA for sale on a contract
basis. The parties will share in the profits from sales under the collaboration
that could result in revenue in advance of the FDA approval of gene medicine
products.
ELI LILLY
Valentis and Eli Lilly are working together to develop a gene-based
therapeutic for treating breast and ovarian cancer using the BRCA-1 gene.
Preclinical testing is ongoing.
GLAXO WELLCOME PLC
Valentis and Glaxo Wellcome are developing a gene medicine for the treatment
of cystic fibrosis using an aerosol-based delivery system as a carrier for the
CFTR gene. Results from the Phase I/II clinical trial show that the product is
safe and non-inflammatory in patients when delivered to the nose.
BIOJECT MEDICAL TECHNOLOGIES INC.
Valentis and Bioject Medical Technologies are working together in a research
collaboration to develop products that enhance the delivery and activity of
antigen-specific pharmaceutical agents, combining the proprietary technologies
of both Valentis and Bioject into one unique product that will advance the
development of gene-based vaccines.
MERCK CO.
Valentis is currently collaborating with Merck to incorporate the
GeneSwitch-TM-gene regulation system into Merck's proprietary viral gene
delivery system. The GeneSwitch-TM- gene regulation system is applicable to both
viral- and plasmid-based therapy products.
9
<PAGE>
Valentis has the following products in its pipeline. In each case, the
delivery and expression system developed for a specific product can be used in
combination with other thereapeutic genes to create multiple product
opportunities for the same indication.
<TABLE>
<CAPTION>
PRODUCT INDICATIONS DEVELOPMENT STAGE
- ------------------------------------ ----------------------------------------- -----------------------
<S> <C> <C>
CANCER
IL-2 Solid tumours and metastases Phase II
IFNa Solid tumours and metastases Phase I/II
IL-12 Solid tumours and metastases Phase I/II
IL-12/superantigen B Solid tumours and metastases Phase I/II
BRCA-1 Breast and ovarian cancer Preclinical
dnDel-1 (anti-angiogenesis) Solid tumours and metastases Preclinical
Anti-angiogenesis gene medicine Solid tumours and metastases Preclinical
Systemic (IV) cytokine Pulmonary metastases Preclinical
Superoxide dismutase Radioprotection/chemoprotection Preclinical
CARDIOVASCULAR DISEASE
VEGF Restenosis (CAD/PVD) Phase II
del-1 PVD/CAD Preclinical
eNOS Transplant rejection Preclinical
eNOS Restenosis Preclinical
LUNG DISEASE
CFTR Cystic fibrosis Phase I/II completed
AAT AAT deficiencies Phase I/II completed
RHEUMATOLOGY RA, OA, cartilage repair Preclinical
IMMUNOLOGY
Immunotherapy Prophylactic and therapeutic vaccines Preclinical
Infectious disease Prophylactic and therapeutic vaccines Research/Preclinical
NEUROMUSCULAR DISORDERS
IGF-1 "Xeragen-TM-" Urinary stress incontinence Preclinical
</TABLE>
The unaudited financial results as at 31 March 1999 show that Valentis had
$47.2 million in cash, cash equivalents and investments, $71.2 million in total
assets and stockholder's equity of $54.4 million. For the nine months ended 31
March 1999, excluding the non-recurring effects of the Megabios-GeneMedicine
merger, Valentis recorded a net loss of $9.6 million, or $0.73 per share on
revenue of $2.2 million.
The company operates at sites in Burlingame, California and The Woodlands,
Texas and employs approximately 130 people.
Valentis' stock trades on the Nasdaq National Market System under the symbol
VLTS. Valentis had a market capitalisation of $87.3 million (L54.9 million)
based on the Closing Price of $3.97 on 21 June 1999, the last practicable day
before the issue of this document.
INFORMATION RELATING TO POLYMASC
PolyMASC is a biotechnology company that concentrates on the development and
application of proprietary formulation technologies that are licensed out to
commercial partners. The company's focus is on the fields of protein and peptide
pharmaceuticals and biodiagnostic agents, gene delivery and the improvement of
liposomes for drug delivery and imaging.
The primary technological focus of PolyMASC is the creation of improved
biologics through the application of PEGylation technologies. PEGylation is an
established technology that involves the attachment of the polymer
polyethyleneglycol (PEG) to therapeutics to alter their pharmacokinetics
(distribution in the body, metabolism and excretion). The alteration of the
pharmacokinetics of biologics due to PEGylation can lead to improved dosing
intervals and may also have beneficial effects on safety and efficacy.
PEGylation also masks biologics from the immune system. Both recognition by
antibodies (antigenicity) and stimulation of immune responses (immunogenicity)
are reduced.
PolyMASC's proprietary technologies are based on novel patented Molecule
Altering Structural Chemistry (MASC) techniques for attaching polymers to other
molecules or to carrier systems for pharmaceuticals. The MASC family of
technologies are not restricted to use with PEG. However, current applications
are focused on
10
<PAGE>
PEG because it has an excellent safety record and is already approved for
administration to humans. The attachment of PEG chains has the potential to add
considerable value to many pharmaceuticals, particularly proteins and peptides.
As well as making them longer acting and less visible to the body's immune
system, PEGylation reduces wastage of the valuable active element of the
therapy. The technology can also be used to link molecules together. This has an
application for the assembly of new pharmaceutical agents.
PolyMASC's PEGylation differs from certain other methods in that it links
only PEG to the target and avoids damaging coupling conditions. The direct
linkage circumvents a range of problems introduced by linker groups. PolyMASC's
linkerless technique has what the Directors believe to be an excellent record in
the conservation of bioactivity (and hence therapeutic activity) of delicate
targets.
PolyMASC has developed a number of proprietary applications for its
technologies as follows:
- protoMASC-TM---a process of masking protein or peptide pharmaceuticals to
slow clearance from the body which gives excellent retention of biological
activity;
- viraMASC-TM---a process for coating viruses to increase efficacy in gene
therapy and the treatment of cancer;
- antiMASC-TM---a process for cloaking anti-tumour antibody fragments to
delay clearance by the body which provides improved tumour localisation
and penetration;
- combiMASC--a process for linking molecules via PEG-based linkers; and
- lipoMASC-TM---a process for coating liposomes, hollow lipid droplets,
which leads to significantly improved tumour localisation and has
application in the delivery of anti-cancer agents.
The technologies are contained in a family of patents and patent
applications in all major territories. Currently, none of the products using the
company's technologies have completed clinical trials.
In the year ended 31 December 1998, PolyMASC made a loss before tax of
L1,586,000 (1997: L975,000) on a turnover of L582,000 (1997: L528,000). At that
date, PolyMASC had shareholders' funds of L1,695,000 (1997: L2,535,000).
BACKGROUND TO AND REASONS FOR THE ORDINARY SHARE OFFER
In December 1998 and January 1999, Dr. McGraw placed telephone calls to
Steve Harris, a director of PolyMASC and arranged an initial meeting for
February 1999. On 8 February 1999, Dr. McGraw met in London with Dr. Gillian
Francis, Chief Executive Officer of PolyMASC, Steve Harris, and Richard
Trevillion and Allison Fleetwood (representatives of Arthur Andersen Corporate
Finance, Healthcare, who had been retained by PolyMASC on possible acquisition,
merger or other strategic transactions). At the meeting, Drs. McGraw and Francis
discussed corporate strategies of Valentis and PolyMASC and identified potential
corporate operating and partnership synergies. Both companies exchanged
information.
Discussions regarding potential operating and partnership opportunities and
the financial requirements of PolyMASC continued through to the end of March.
A potential merger between PolyMASC and Valentis was discussed at a PolyMASC
Board of Directors meeting on 30 March 1999. On that day, the Valentis Board
also met and discussed in detail the opportunity of a business combination
transaction with PolyMASC. The Board authorised the officers of Valentis to
further pursue a potential transaction with PolyMASC.
During April 1999, representatives of Hambrecht & Quist LLC, who had been
engaged by Valentis in March 1999 to help evaluate possible business
combinations with PolyMASC and Arthur Andersen Corporate Finance had discussions
on several occasions to negotiate the terms of a potential transaction between
Valentis and PolyMASC.
On 3 May 1999, Hambrecht & Quist LLC, on behalf of Valentis, made a verbal
indicative offer to Arthur Andersen Corporate Finance. A written indicative
offer was forwarded from Dr. McGraw to Richard Trevillion the same day,
contingent upon receiving approval from Valentis' Board.
PolyMASC convened a board meeting on 7 May 1999 to consider Valentis'
indicative offer. At this meeting, the PolyMASC Board authorised further
discussions with Valentis. After the PolyMASC Board meeting, negotiations
between the parties continued. During this time, the parties continued due
diligence.
On 10 May 1999, a meeting was convened at PolyMASC's facility. Present were
Richard Trevillion and Byron Griffin of Arthur Andersen Corporate Finance, Dr.
Francis, Julian Gilbert and Mike Snow from PolyMASC, Dr.
11
<PAGE>
McGraw from Valentis, and Vivek Jain and Dennis Purcell from Hambrecht & Quist
LLC. The terms and conditions of a possible transaction were discussed in detail
and additional due diligence materials were exchanged.
On 10 and 11 May 1999, Meg Snowden, intellectual property counsel for
Valentis, visited PolyMASC's facilities to perform intellectual property due
diligence. Both parties continued their due diligence review through 23 May
1999. On 24 May 1999, the Boards of both companies met independently and
approved the proposed transaction.
The goal of the merger of Valentis and PolyMASC is to create a leading
biologics delivery group. Both the PolyMASC Directors and the Valentis Directors
believe biologics delivery represents a significant commercial opportunity with
good growth potential.
Historically, human pharmaceuticals were predominately chemical-based
products. These therapeutics were synthesised from chemical elements to form
small molecules with distinct pharmacological activity. Biologics have been
responsible for only a very small portion of the total pharmaceutical market.
The emergence of biotechnology over the past couple of decades has led to an
ever-increasing number of marketed protein-based therapeutics, and this number
is expected to grow dramatically with the maturation of the biotechnology field.
Once the Ordinary Share Offer becomes wholly unconditional, PolyMASC will
become a wholly-owned subsidiary of Valentis and will continue to operate in its
current location in London. The focus of its operations will continue to be
research and preclinical development of PEGylation technologies and products.
Valentis' Burlingame, California site is the corporate headquarters for the
company and will focus on clinical development of products coming from PolyMASC
and Valentis' The Woodlands, Texas centre. A group will be established at the
Burlingame centre to develop the field of PEGylated viruses for gene delivery,
using the PolyMASC technology. The focus of operations at The Woodlands centre
will be research and preclinical development of gene medicines.
12
<PAGE>
FINANCIAL EFFECTS OF ACCEPTANCE
(a) CAPITAL VALUE
The following table illustrates the change in capital value under the
Ordinary Share Offer (excluding the Deferred Consideration) for a holder of
1000 PolyMASC Ordinary Shares who accepts the Ordinary Share Offer and the
Ordinary Share Offer becomes or is declared unconditional in all respects:
<TABLE>
<S> <C>
COMPARED TO THE DAY BEFORE THE ANNOUNCEMENT:
Sterling equivalent value of the New Valentis Common Stock issued in exchange for 1000
PolyMASC Ordinary Shares under the Ordinary Share Offer (i)................................ L 522
Market value of 1000 PolyMASC Ordinary Shares (ii)........................................... L 465
-------------
Increase in value (iii)...................................................................... L 57
-------------
-------------
12.19 per
Percentage (iii)............................................................................. cent.
COMPARED TO THE 30 DAY MOVING AVERAGE PRICE OF VALENTIS UP TO 21 JUNE 1999:
Sterling equivalent value based on the 30 day Moving Average of a New Valentis Common Stock
issued in exchange for 1,000 PolyMASC Ordinary Shares under the Ordinary Share Offer
(iv)....................................................................................... L 563
Market value of 1,000 PolyMASC Ordinary Shares (ii).......................................... L 465
-------------
Increase in value (iii)...................................................................... L 98
-------------
-------------
21.17 per
Percentage increase.......................................................................... cent.
</TABLE>
- --------------------------
Notes:
(i) The Sterling equivalent value of the New Valentis Common Stock is based on
the Closing Price of Valentis Common Stock of $3.97 on 21 June 1999, the
last practicable day before the issue of this document, and the
Illustrative Exchange Rate.
(ii) The market value attributed to PolyMASC Ordinary Shares is based on the
Closing Price of 46.5p on 24 May 1999, the last practicable day before the
Announcement.
(iii) No account has been taken of any liability to taxation or for the
treatment of fractional entitlements to New Valentis Common Stock.
(iv) The Sterling equivalent value of the Valentis Common Stock is based on the
30 Day Moving Average Price of a Valentis Common Stock in the 30 day
period up to 21 June 1999 of L2.50 and the Illustrative Exchange Rate.
(b) INCOME
Valentis does not anticipate paying any cash dividends or making any other
form of distribution of income for the foreseeable future. Neither Valentis
nor PolyMASC have paid or declared a cash dividend during the 12 months
preceding the date of this document.
LOAN FACILITY
On 25 May 1999, Valentis made a $3 million loan facility available to
PolyMASC for a term of approximately one year, available in four tranches of $1
million, $750,000, $750,000 and $500,000, each tranche bearing interest at the
three month LIBOR rate at the date of its drawdown. The loan facility is not
conditional upon the Ordinary Share Offer being declared unconditional in all
respects and is available for working capital purposes and is secured on the
lipoMASC-TM- Technology. No tranche may be drawn down within three months of the
previous tranche. The first tranche of this facility was drawn down on 1 June
1999.
MANAGEMENT AND EMPLOYEES
Valentis attaches great importance to the skills and experience of the
existing management and employees of PolyMASC and believes that they will
benefit from greater opportunities within the enlarged group created by the
acquisition of PolyMASC by Valentis. Accordingly, Valentis has given assurances
to the Board of PolyMASC
13
<PAGE>
that the existing rights of employees of PolyMASC will be fully safeguarded.
Following the Ordinary Share Offer being declared unconditional in all respects,
Dr. Gillian Francis will be appointed to the Board of Valentis.
POLYMASC DEFERRED SHARE OFFER
Valentis has today made a separate offer to PolyMASC Deferred Shareholders
which is conditional upon the Ordinary Share Offer becoming or being declared
unconditional in all respects. The Deferred Share Offer is 1p per PolyMASC
Deferred Share, valuing the whole of PolyMASC's issued deferred share capital at
L500.
The Ordinary Share Offer is not dependent in any way on the level of
acceptances under the Deferred Share Offer.
POLYMASC SHARE OPTION SCHEMES
As soon as practicable following the posting of this document, Valentis will
seek the agreement of the holders of options under the PolyMASC Share Option
Schemes to the exchange of those options for options over New Valentis Common
Stock. It is intended that such new options will be granted by the PolyMASC
Employee Benefit Trust.
The Trustees of the PolyMASC Employee Benefit Trust have advised Valentis
that, in the event that the Ordinary Share Offer is declared unconditional in
all respects, the Trustees intend to transfer New Valentis Common Stock to
certain PolyMASC Directors as follows:
<TABLE>
<CAPTION>
DIRECTOR NEW VALENTIS COMMON STOCK
- -------------------------------------------------------------------------------- ---------------------------
<S> <C>
J.T. Rees....................................................................... 7,090
R.S. Harris..................................................................... 12,094
D.M.M. Dutton................................................................... 6,717
</TABLE>
UNITED KINGDOM TAXATION
The following paragraphs, which are intended as a general guide only, are
based on current legislation and Inland Revenue practice. They summarise certain
limited aspects of the UK taxation treatment of the acceptance of the Ordinary
Share Offer, and they relate only to the position of PolyMASC Ordinary
Shareholders who hold their PolyMASC Ordinary Shares as an investment and who
are ordinarily resident in the UK for tax purposes (except insofar as express
reference is made to the treatment of non-UK residents). If you are in any doubt
as to your tax position or if you may be subject to tax in any jurisdiction
other than the UK, you should consult an appropriate professional adviser
immediately:
(a) TAXATION OF CAPITAL GAINS
The exchange of PolyMASC Ordinary Shares by a PolyMASC Ordinary Shareholder
in return for New Valentis Common Stock will not be treated as a disposal of
PolyMASC Ordinary Shares for the purposes of UK taxation of capital gains,
provided that the PolyMASC Ordinary Shareholder, together with persons connected
with him, owns not more than five per cent. of, or of any class of, shares in
PolyMASC. The New Valentis Common Stock will instead be treated as if it were
the same asset as the PolyMASC Ordinary Shares, acquired as and when the
PolyMASC Ordinary Shares were acquired.
A subsequent disposal of New Valentis Common Stock by a UK resident may give
rise to a liability to UK taxation of capital gains.
The PolyMASC Ordinary Shareholders who accept the Ordinary Share Offer will
(in addition to the New Valentis Common Stock) be entitled to the Deferred
Consideration. The value of the right to the Deferred Consideration will be
taxed at the time of the disposal of the PolyMASC Ordinary Shares. Future
amounts of Deferred Consideration may be taxed when received (depending on
whether the amounts received are greater than the amount originally brought into
tax or not).
The capital gains of PolyMASC Ordinary Shareholders who are individuals will
be charged at 20 per cent. where the gains added to their total income is below
the basic rate limit and 40 per cent. where they exceed that limit. Companies
pay corporation tax on their chargeable gains at their normal rate. The standard
rate of corporation tax for the year to 31 March 2000 is 30 per cent.
14
<PAGE>
(b) STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK stamp duty or stamp duty reserve tax will be payable by a PolyMASC
Ordinary Shareholder on the transfer of PolyMASC Ordinary Shares to Valentis.
Any liability to UK stamp duty or stamp duty reserve tax on the transfer of such
PolyMASC Ordinary Shares to Valentis will be borne by Valentis. No UK stamp duty
or stamp duty reserve tax will be payable on the issue of New Valentis Common
Stock.
(c) DIVIDENDS
A UK resident will generally be liable to income tax or corporation tax in
the UK on the aggregate of any dividend received from Valentis and any tax
withheld at source in the USA and any tax withheld in the UK (see below). In
computing that liability to taxation, credit will be given for any tax withheld
in the USA and any tax withheld in the UK. No repayment of the US tax credit
will be available to a UK resident. In the case of a corporate UK resident which
controls ten per cent. or more of the voting stock of Valentis, credit will also
be available for underlying tax against UK taxes in respect of the dividend.
Special rules apply to UK residents who are not domiciled in the UK.
An agent in the UK, who on behalf of a UK resident, collects a dividend paid
by Valentis, may be required to withhold a sum on account of UK income tax or
corporation tax, currently at the rate of 23 per cent. Regulations, however,
allow credit to be given for tax withheld in the USA, thereby reducing the
aggregate withholding.
(d) INHERITANCE TAX
Where an individual who is neither domiciled nor deemed to be domiciled in
the UK holds Valentis Common Stock he will not be subject to UK inheritance tax
on the value of the stock because the stock is a non-UK situs. Where an
individual who is either domiciled or deemed to be domiciled in the UK holds
Valentis Common Stock, the value of the stock will form part of that
individual's estate for UK Inheritance Tax and there might be a liability on the
death of, or on a gift (or on disposal at an undervalue) of the Valentis Common
Stock by, that individual.
PROCEDURE FOR ACCEPTANCE OF THE ORDINARY SHARE OFFER
This section should be read together with Part C of Appendix I and the notes
on the Form of Acceptance.
(a) COMPLETION OF FORM OF ACCEPTANCE TO ACCEPT THE ORDINARY SHARE OFFER
To accept the Ordinary Share Offer in respect of all or part of your
PolyMASC Ordinary Shares, you must complete Boxes 1 and 3, and, if relevant,
Boxes 4 and 5. In all cases, sign Box 2 of the enclosed Form of Acceptance IN
THE PRESENCE OF AN INDEPENDENT WITNESS, WHO SHOULD ALSO SIGN IN ACCORDANCE WITH
THE INSTRUCTIONS PRINTED THEREON.
(b) RETURN OF FORM OF ACCEPTANCE
A completed Form of Acceptance must be returned to accept the Ordinary Share
Offer. The completed Form of Acceptance should be returned by post or by hand to
Connaught St Michaels Limited, PO Box 30, Victoria Street, Luton, Bedfordshire,
LU1 2PZ together (subject to paragraph (c) below) with the relevant share
certificate(s) and/or other document(s) of title as soon as possible, BUT IN ANY
EVENT SO AS TO ARRIVE NO LATER THAN 3.00 PM ON 13 JULY 1999. A reply paid
envelope is enclosed for your convenience. No acknowledgement of receipt of
documents will be given by or on behalf of Valentis. The instructions printed on
the Form of Acceptance are deemed to form part of the terms of the Ordinary
Share Offer.
(c) DOCUMENTS OF TITLE
A completed and signed Form of Acceptance should be accompanied by the
relevant share certificate(s) and/or other document(s) of title. If, for any
reason, the relevant share certificate(s) and/or the other document(s) of title
is/are lost or not readily available, you should nevertheless complete, sign and
lodge the Form of Acceptance as stated above so as to be received by no later
than 3.00 pm on 13 July 1999. You should send with the Form of Acceptance, any
share certificate(s) and/or other document(s) of title which you may have
available and a letter stating that the remaining documents will follow as soon
as possible. No acknowledgement of receipt of documents will be given by or on
behalf of Valentis. If you have lost your share certificate and/or other
document(s) of title, you should contact PolyMASC's registrars, Connaught St
Michaels Limited, for a letter of indemnity for lost share certificate(s) which,
when completed in accordance with the instructions given, should be returned by
post to Connaught St Michaels Limited at the address specified in paragraph (b)
above.
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(d) VALIDITY OF ACCEPTANCE
Without prejudice to Part B of Appendix I of this document and subject to
the provisions of the City Code, Valentis and Hambrecht & Quist LLC reserve the
right to treat as valid in whole or in part any acceptance of the Ordinary Share
Offer which is not entirely in order or (as applicable) which is not accompanied
by the relevant share certificate(s) and/or other document(s) of title. In that
event, no allotment of New Valentis Common Stock pursuant to the terms of the
Ordinary Share Offer will be made until (as applicable) the relevant share
certificate(s) and/or other document(s) of title or letter(s) of indemnity
satisfactory to Valentis have been received.
(e) OVERSEAS SHAREHOLDERS
The attention of PolyMASC Ordinary Shareholders who are citizens or
residents of jurisdictions outside the UK is drawn to paragraph 6 of Part B and
paragraph (B) of Part C of Appendix I and to the relevant provisions of the Form
of Acceptance.
The availability of the Ordinary Share Offer to persons not resident in the
UK may be affected by the laws of the relevant jurisdictions. Persons who are
not resident in the UK should inform themselves about and observe any applicable
requirements.
The Ordinary Share Offer is not being made, directly or indirectly, in or
into the United States, Canada, Australia or Japan. Accordingly, any accepting
PolyMASC Ordinary Shareholder who is unable to give the warranties set out in
paragraph (B) of Part C of Appendix I of this document will be deemed not to
have accepted the Ordinary Share Offer.
IF YOU ARE IN ANY DOUBT AS TO THE PROCEDURE FOR ACCEPTANCE, PLEASE CONTACT
CONNAUGHT ST MICHAELS LIMITED, BY TELEPHONE ON 01582 405333 OR AT THE ADDRESS IN
PARAGRAPH (b) ABOVE.
LISTING AND SETTLEMENT
Application has been made for the New Valentis Common Stock to be admitted
for listing on the Nasdaq National Market. It is expected that the listing will
be effective on the first trading day following that on which the Ordinary Share
Offer becomes or is declared unconditional in all respects.
Subject to the Ordinary Share Offer becoming or being declared unconditional
in all respects (except as provided in paragraph 6 of Part B of Appendix I in
the case of certain overseas PolyMASC Ordinary Shareholders), settlement of the
consideration to which any PolyMASC Ordinary Shareholder is entitled under the
Ordinary Share Offer (other than the Deferred Consideration) will be effected:
(i) in the case of acceptances received, complete in all respects, by the date
on which the Ordinary Share Offer becomes or is declared unconditional in all
respects, within 14 days of such date; or (ii) in the case of acceptances of the
Ordinary Share Offer received, complete in all respects, after the date on which
the Ordinary Share Offer becomes or is declared unconditional in all respects
but while it remains open for acceptance, within 14 days of such receipt, in the
following manner:
(a) NEW VALENTIS COMMON STOCK
Definitive certificates for the New Valentis Common Stock and, where
applicable, cheques representing fractional entitlements will be dispatched to
PolyMASC Ordinary Shareholders. In the case of joint holders of PolyMASC
Ordinary Shares, these will be dispatched to the joint holder whose name appears
first in the register of members. Accepting PolyMASC Ordinary Shareholders will
receive their New Valentis Common Stock certificates without having to take any
further action. Pending dispatch of certificates, transfers of New Valentis
Common Stock will be certified by Valentis' transfer agent.
(b) DEFERRED CONSIDERATION
Cheques for the Deferred Consideration will be dispatched to the former
holders of PolyMASC Ordinary Shares within 14 days of the receipt by PolyMASC of
the proceeds (in cleared funds) of the sale of the lipoMASCTM Technology. The
Deferred Consideration (and all rights to it) is non-transferable and will be
paid to the same person to whom the consideration under the basic terms of the
Ordinary Share Offer will be paid.
(c) GENERAL
All documents will be sent by pre-paid post at the risk of the person
entitled thereto.
If the Ordinary Share Offer does not become or is not declared unconditional
in all respects, share certificate(s) and/or other document(s) of title will be
returned by post (or such other method as may be approved by the Panel)
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within 14 days of the Ordinary Share Offer lapsing to the person or agent whose
name and address (outside the United States, Canada, Australia and Japan) is set
out in Box 3, or, if completed, Box 5 of the Form of Acceptance or, if none is
set out, to the first named holder at his or her registered address (outside the
United States, Canada, Australia and Japan). All documents and remittances sent
by, to or from PolyMASC Ordinary Shareholders or their appointed agents will be
sent at their own risk. If sufficient acceptances are received Valentis shall
take such steps as may be necessary to entitle Valentis compulsorily to acquire
the PolyMASC Ordinary Shares of any members of PolyMASC who has not accepted the
Ordinary Share Offer pursuant to the provision of Sections 428 to 430 of the
Companies Act, following which the quotation on the Alternative Investment
Market of the PolyMASC Ordinary Shares will be cancelled.
FURTHER INFORMATION
The Ordinary Share Offer will remain open for acceptance until 3.00 pm on 13
July 1999 or such later time(s) and/or date(s) as Valentis may decide in
accordance with the provisions contained in paragraph 1 of Part B of Appendix I
of this document.
Your attention is drawn to the further information contained in the
Appendices to this document.
ACTION TO BE TAKEN
TO ACCEPT THE ORDINARY SHARE OFFER, THE FORM OF ACCEPTANCE MUST BE COMPLETED
AND RETURNED AS SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE RECEIVED BY POST
OR BY HAND BY CONNAUGHT ST MICHAELS LIMITED NO LATER THAN 3.00 PM ON 13 JULY
1999.
Yours sincerely,
DENNIS J. PURCELL
Managing Director
Head of Life Sciences
For Hambrecht & Quist LLC
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INFORMATION REGARDING VALENTIS
1. RISK FACTORS
This document contains forward-looking statements that involve risks and
uncertainties. Valentis' and PolyMASC's actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain risks and uncertainties, including risks relating to: (a) the
integration of Valentis and PolyMASC; (b) the integration by Valentis of other
prior acquisitions; (c) the respective businesses of Valentis and PolyMASC,
including risks relating to the research and development of products and product
candidates, regulatory and governmental approvals, the timing and scope of
technological advances and the overall condition of the biotechnology industry;
and (d) other matters set forth in this section and elsewhere in this document
and in the documents incorporated herein by reference. In addition to the other
information in this document, the following risk factors should be considered
carefully by the PolyMASC Ordinary Shareholders in determining whether or not to
accept the Ordinary Share Offer.
GENERAL RISKS RELATING TO VALENTIS' BUSINESS
SINCE THE DEVELOPMENT OF ITS PRODUCTS WILL TAKE SEVERAL MORE YEARS, VALENTIS
CANNOT BE CERTAIN THESE PRODUCTS WILL EVER BE SUCCESSFULLY MARKETED OR
MANUFACTURED.
Because substantially all of the products under development by Valentis are
in research or preclinical development, revenues from the sale of any products
will not be realised for at least the next several years, if at all. Valentis
cannot be certain that any of its products will be safe and effective or that it
or its corporate partners will obtain regulatory approvals. In addition, any
products developed by Valentis may not be economical to manufacture on a
commercial scale. Even if Valentis develops a product that becomes available for
commercial sale, it cannot be certain that consumers will accept the product.
If Valentis cannot satisfy existing clinical and regulatory approval
procedures, it may be unable to market its products. Valentis and its corporate
partners may not obtain regulatory approval for the commercial sale of any of
their products, or be able to demonstrate that a potential product is safe and
effective for its intended use. Valentis cannot be certain that it or its
corporate partners will be permitted to undertake clinical testing of its
products. Valentis and its corporate partners may also experience delays in
conducting clinical trials due to a variety of factors, including:
- unfavourable or delayed preclinical study results;
- inability to manufacture sufficient quantities of materials used for
clinical trials;
- delays or difficulties in patient enrollment; and
- delays in regulatory approvals.
While Valentis has demonstrated some evidence of the utility of its gene
delivery systems in preclinical studies, these results do not mean that they
will be safe or effective in humans. The gene delivery systems may have
undesirable and unintended side effects or other characteristics that may
prevent or limit their use.
The gene delivery systems of Valentis face risks in addition to those common
to all biotechnology or biopharmaceutical companies. Gene-based therapy is a new
and rapidly evolving technology that is expected to undergo significant
technological changes in the future. Many companies are seeking to identify
therapeutic genes and understand their function in the development and
progression of various diseases. However, there is limited clinical data
available regarding the safety and efficacy of gene-based therapeutics. Valentis
is not aware of any gene-based therapeutics that have received marketing
approval from the US Federal Drugs Administration ("FDA") or foreign regulatory
authorities. As a result of the limited data available and other factors,
clinical trials relating to gene-based therapeutics may take longer to complete
than clinical trials involving more traditional pharmaceuticals.
VALENTIS EXPECTS TO OPERATE AT A LOSS FOR THE FORESEEABLE FUTURE AND MAY NEVER
ACHIEVE PROFITABILITY.
Valentis cannot be certain that it will ever achieve and sustain
profitability. Since its inception, Valentis has engaged in research and
development activities. As a result, Valentis has generated minimal revenues
from operations and has experienced significant operating losses. As of 31 March
1999, Valentis had an accumulated deficit of approximately $64.7 million. The
process of developing Valentis' products will require significant additional
research and development, preclinical testing, clinical trials and regulatory
approvals. These activities,
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together with general and administrative expenses, are expected to result in
operating losses for the foreseeable future.
THE BUSINESS OF VALENTIS MAY BE ADVERSELY AFFECTED IF IT CANNOT ATTRACT AND
RETAIN CORPORATE PARTNERS.
Valentis may not be able to retain its corporate partnerships, or establish
additional collaborations. Valentis will rely on such corporate partnerships to
fund or conduct research and development, preclinical studies, clinical trials,
manufacturing, marketing and sales necessary to commercialise its products. Even
if it is able to establish and retain corporate partnerships, the terms may not
be favourable. Valentis' reliance on corporate partners poses other risks,
including:
- uncertainty that its current or future corporate partnerships will be
successful or that it will derive any revenue from such partnerships;
- corporate partners have considerable discretion in electing whether to
pursue the development of any product and may pursue alternative
technologies or products either on their own or in collaboration with
Valentis' competitors;
- disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
- disagreements with corporate partners could lead to delays or termination
in the research, development or commercialisation of product candidates,
or result in litigation or arbitration; and
- if any corporate partner fails to develop or commercialise successfully
any product, Valentis' business, financial condition and results of
operations could be materially adversely affected.
VALENTIS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO PROTECT ITS PATENTS AND
PROPRIETARY RIGHTS.
Valentis' success will depend to a significant degree on its ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
The patent positions of biotechnology and pharmaceutical companies are
uncertain and involve complex legal and factual questions. As a result, Valentis
cannot predict how broad any claims in allowed patents will be. In addition,
there is a substantial backlog of biotechnology patent applications at the US
Patent and Trademark Office that may delay the review and the potential issuance
of patents.
Valentis has rights to US and foreign issued patents and has filed or
participated as a licensee in the filing of a number of patent applications in
the US relating to their technologies, as well as foreign counterparts of these
applications in many countries. Valentis will continue to file applications as
appropriate for patents covering both products and processes. There is a risk,
however, that patents may not issue from any of these applications or that
claims allowed under issued patents or patents that may issue from such
applications may not be sufficient to protect Valentis' technology.
Patent applications in the USA are maintained in secrecy until a patent
issues. As a result, Valentis cannot be certain that others have not filed
patent applications for technology covered by their pending applications.
Valentis also cannot be certain that it was the first to invent the technology
that is the subject of such patent applications. Competitors may have filed
patent applications or received patents and may obtain additional patents and
proprietary rights that block or compete with those held by Valentis. Valentis
is aware of patent applications filed and patents issued to third parties
relating to gene delivery technologies. Valentis currently is unable to verify
that any of these patent applications or patents held by third parties will have
any effect on Valentis' products.
Competitors of Valentis may file patent applications in the USA that claim
technology also invented by Valentis. If so, Valentis may have to participate in
interference proceedings or even litigation to determine priority of invention
and, thus, the right to a patent. This could result in substantial cost to
Valentis to determine its rights or even potential loss of its rights.
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Valentis' success depends in large part on its ability to operate without
infringing upon the patents or other proprietary rights of third parties. In the
event of such infringement, Valentis and its corporate partners may be enjoined
from pursuing commercialisation of products or may be required to obtain
licenses to these patents or other proprietary rights. Valentis cannot be
certain that it or its corporate partners will be able to obtain alternative
technologies or any required license. Even if Valentis or its corporate partners
were to obtain such technologies or licenses, Valentis cannot be certain that
the terms would be commercially reasonable. If such licenses or alternative
technologies are not obtained, Valentis may be delayed or prevented from
pursuing the development of some or all of its products.
Valentis also relies on proprietary information and trade secrets, including
its proprietary database of preclinical in vivo experiments, to develop and
maintain its competitive positions. Third parties may independently develop
equivalent proprietary information or techniques or gain access to Valentis'
trade secrets. Valentis typically requires its employees, consultants,
collaborators, advisors and corporate partners to execute confidentiality
agreements. However, these agreements may not provide meaningful protection or
adequate remedies in the event of unauthorised use or disclosure of such
information. Valentis cannot be certain that the parties to such agreements will
not breach the agreements.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RIGHTS TO
PROPRIETARY GENES OR OTHER TECHNOLOGIES.
Valentis and its corporate partners are investigating the use of gene
sequences in Valentis' products. A number of these gene sequences are, or may
become, patented by others. As a result, Valentis or its corporate partners may
be required to obtain licenses to those gene sequences or other technology. In
addition, some of the products based on Valentis' gene delivery systems may
require the use of multiple proprietary technologies. Consequently, Valentis or
its corporate partners may be required to make cumulative royalty payments to
several third parties. These cumulative royalties would reduce amounts retained
by or paid to the combined company and could be commercially prohibitive.
Valentis cannot be certain that it or their corporate partners will be able to
obtain any required licenses.
IF VALENTIS IS UNABLE TO SATISFY GOVERNMENT REGULATIONS, IT MAY NOT BE ALLOWED
TO DEVELOP, MARKET AND MANUFACTURE ITS PRODUCTS IN THE US
Valentis may not receive approval from regulatory authorities to market any
of its products. Prior to marketing any drug or biological product in the US,
the product must undergo rigorous preclinical studies and clinical trials. In
addition, the product must undergo an extensive regulatory approval process
implemented by the FDA. Satisfaction of these regulatory requirements typically
takes several years or more and a substantial commitment of resources. Valentis
cannot be certain that it will obtain regulatory approval even if it devotes
substantial resources and time. Valentis believes that the FDA will regulate the
commercial uses of its products as biologics. However, because gene-based
therapy is a relatively new technology, the regulatory requirements are
particularly uncertain. This uncertainty may result in excessive costs or delays
in the regulatory approval process.
In addition, manufacturing facilities in the US must comply with the FDA's
good manufacturing process regulations. Such facilities are subject to periodic
inspection by the FDA and state authorities. Manufacturers of biologics also
must comply with the FDA's general biological product standards and also may be
subject to state regulation. Failure to comply with such regulatory requirements
may result in the following:
- withdrawal of marketing approval;
- civil penalties;
- recall or seizure of products or total or partial suspension of
production;
- FDA warning letters;
- refusal by the FDA to review applications or supplements to approved
applications;
- injunctions; or
- other legal or regulatory actions.
Even after a product is approved for marketing, the product, its
manufacturer and its manufacturing facilities are subject to continued
regulatory review, oversight and periodic FDA inspections. Discovery of
previously
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unknown problems with a product, manufacturer or facility may result in
penalties, including withdrawal of the product from the market.
IF VALENTIS IS UNABLE TO OBTAIN FOREIGN REGULATORY APPROVALS, IT MAY NOT BE
ALLOWED TO DEVELOP, MARKET AND MANUFACTURE ITS PRODUCTS IN FOREIGN COUNTRIES.
Valentis cannot be certain that it will obtain any regulatory approvals in
other countries. In order to market its products outside the US, Valentis and
its corporate partners must comply with numerous and varying regulatory
requirements of other countries regarding safety and quality. The approval
procedures vary among countries and can involve additional testing. The time
required obtaining approval in other countries might differ from that required
to obtain FDA approval. The regulatory approval process in other countries
involves similar risks to those associated with obtaining FDA approval set forth
above. Approval by the FDA does not ensure approval by the regulatory
authorities of any other country.
VALENTIS' SUCCESS MAY BE ADVERSELY AFFECTED BY INTENSE COMPETITION IN THE
GENE-BASED THERAPEUTICS MARKET.
The pharmaceutical and biotechnology industries are highly competitive.
Valentis is aware of several pharmaceutical and biotechnology companies that are
pursuing gene-based therapeutics. Many of these companies are addressing
diseases that have been targeted by Valentis or its corporate partners. Valentis
is also aware that some of its corporate partners are developing gene-based
therapeutics with one or more of their competitors. These corporate partners may
devote more resources to products or technologies that will compete with those
of Valentis. Valentis may also experience competition from companies that enter
the field of gene-based therapeutics in the future. As competitors develop their
technologies, they may develop proprietary positions in a particular aspect of
gene delivery and gene-based therapeutics that could prevent Valentis from
developing its products.
In addition, Valentis will face intense competition from other companies for
corporate partnerships, for establishing relationships with academic and
research institutions and for licenses to proprietary technology. Moreover, many
other companies are developing non-gene-based therapies to treat these same
diseases.
Most of Valentis' competitors and potential competitors have substantially
greater resources than Valentis. Those resources include superior product
development capabilities and financial, scientific, manufacturing, managerial
and human resources. Valentis' competitors may develop safer, more effective or
less costly gene delivery systems, gene-based therapeutics or non-gene-based
therapies. In addition, competitors may achieve superior patent protection or
obtain regulatory approval or product commercialisation earlier than Valentis.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO ATTRACT AND
RETAIN QUALIFIED EMPLOYEES.
Valentis' success will depend on its ability to retain its executive
officers and scientific staff, and the consultants and advisors who assist
Valentis in formulating its research and development strategy. If Valentis loses
any of these persons, its corporate partnerships, business, financial condition
and results of operations could be adversely affected. Valentis does not
maintain key man life insurance on any of its executive officers or other key
employees.
In order to pursue its research and product development plans, Valentis must
attract and retain additional qualified scientific and other personnel. Most of
the individuals who will be sought by Valentis are highly skilled in
pharmaceutical product development or in particular scientific fields. These
individuals are generally in high demand by pharmaceutical and biotechnology
companies and by universities and other research institutions. As a result,
Valentis cannot be certain it will be able to attract and retain qualified
individuals. The loss of key personnel or the inability to hire and retain
qualified personnel could adversely affect Valentis' product development
efforts.
IF VALENTIS IS UNABLE TO SECURE ADDITIONAL FINANCING, ITS RESEARCH AND
DEVELOPMENT EFFORTS MAY BE ADVERSELY AFFECTED.
Valentis may be unable to obtain the additional funding it will need in
order to continue its research and development activities. Valentis has financed
its operations primarily through the sale of equity securities and through
corporate partnerships. Valentis has generated no royalty revenues from product
sales. No such revenues for Valentis is expected for the foreseeable future, if
ever. Valentis anticipates that its existing resources will enable it to
maintain its operations through the financial year ending 31 December 2001.
However, Valentis may require additional funding prior to such time. Valentis'
future capital requirements will depend on many factors, including:
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- scientific progress in its research and development programs;
- size and complexity of such programs;
- scope and results of preclinical studies and clinical trials;
- ability to establish and maintain corporate partnerships;
- time and costs involved in obtaining regulatory approvals;
- time and costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments; and
- the cost of manufacturing preclinical and clinical material.
Valentis cannot be certain that additional financing to meet its funding
requirements will be available. Even if financing is available, the terms may
not be attractive. Furthermore, any additional equity financing may be dilutive
to Valentis' stockholders. If Valentis is unable to raise capital when needed,
it may have to reduce operations to conserve cash or cease operations entirely.
VALENTIS' FINANCIAL CONDITION AND OPERATIONS MAY BE ADVERSELY AFFECTED IF THE
ORDINARY SHARE OFFER IS NOT ACCEPTED.
Valentis and PolyMASC have incurred and will incur considerable costs and
expenses in connection with the Ordinary Share Offer, including lawyers' and
accountancy fees and the costs of filing, printing and mailing this document,
the Form of Acceptance, the documentation relating to the Deferred Share Offer
and the Registration Statement. In addition, each company's senior management
has devoted a substantial amount of time and effort to the process. These costs
and distractions could have a material adverse effect on their future operations
if the Ordinary Share Offer is not accepted.
VALENTIS' PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL IF THEY ARE NOT ACCEPTED
BY PHYSICIANS AND INSURERS.
Concerns have arisen regarding the potential safety and efficacy of
gene-based therapeutics using viral delivery systems. While Valentis' gene
delivery systems are lipid-based and do not contain viruses, these concerns
could adversely affect physicians' and health care payers' evaluations of
Valentis' products. Physicians and health care payers could conclude that
Valentis' products or technologies are not safe and effective. Valentis' success
is dependent on commercial acceptance of its products. Valentis believes that
recommendations by physicians and health care payers will be essential for
commercial acceptance of its products. If products developed by Valentis and its
corporate partners are not commercially accepted by patients, physicians or
third-party payers, sales would be adversely affected.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO EFFECTIVELY
PRICE ITS PRODUCTS OR OBTAIN ADEQUATE REIMBURSEMENT.
Even if Valentis and its corporate partners succeed in bringing any products
to market, they cannot be certain that reimbursement will be available. Sales
volume and price of any products successfully developed by the combined company
will depend, in part, on the availability of third-party reimbursement for the
cost of such products and related treatments. Reimbursement is generally
provided by government health administration authorities, private health
insurers and other organisations. Third-party payers are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Even if reimbursement is available, payers' reimbursement policies may adversely
affect corporate partner's ability to sell such products on a profitable basis.
If these corporate partners are unable to profitably sell Valentis' products,
royalty revenue to Valentis will be reduced.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO DEVELOP
LARGE-SCALE MANUFACTURING CAPABILITIES.
Although Valentis has entered into a strategic partnership with DSM
Biologics for the manufacture and supply of systems for the gene therapy
industry, neither DSM nor any third party has demonstrated successful
large-scale manufacturing of gene delivery systems. The partnership has the
potential to create the first manufacturing facilities that can produce
high-quality, ultrapure material for plasmid-based therapeutics on every scale,
from preclinical toxicology studies to commercial products. DSM will have full
responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. Valentis will depend
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on DSM for commercial-scale manufacturing of its products. DSM may be unable to
develop adequate manufacturing capabilities for commercial-scale quantities of
gene-based therapeutic products. If DSM or third parties are unable to establish
and maintain large-scale manufacturing capabilities, Valentis' commercialisation
of its products may be delayed and sales of any products would be adversely
affected.
DELAWARE LAW AND VALENTIS' CHARTER COULD MAKE THE ACQUISITION OF VALENTIS BY
ANOTHER COMPANY MORE DIFFICULT.
Provisions of Delaware law applicable to Valentis could delay a merger,
tender offer or proxy contest involving Valentis or make such a transaction more
difficult. These provisions prohibit a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
from the date the person became an interested stockholder unless a number of
conditions are met. In addition, the Valentis Board of Directors may issue
shares of preferred stock without Valentis stockholder approval on terms
determined by the Board of Directors. The rights of the holders of Valentis
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. In
addition, the Valentis Amended and Restated Certificate of Incorporation and the
Valentis Bylaws contain the following provisions:
- classified board of directors;
- no right of stockholders to act by written consent without a meeting;
- advance stockholder notice required to nominate directors and raise
matters at the annual stockholders meeting;
- no cumulative voting in the election of directors; and
- removal of directors only for cause and with a two-thirds vote of the
issued Valentis Common Stock.
These provisions could delay, defer or prevent a change in control of
Valentis or limit the price that investors might be willing to pay in the future
for shares of Valentis Common Stock.
VALENTIS' BUSINESS MAY BE NEGATIVELY IMPACTED BY COMPUTER FAILURES IN THE YEAR
2000 ("Y2K")
Many existing computer programs and systems, including some of those used by
Valentis and its suppliers and vendors, use only two digits to identify the year
in the date field. These programs may be unable to process date/time information
between the twentieth and twenty-first centuries. This inability could cause the
disruption or failure of such computer systems. Valentis has identified two main
areas of its Y2K risk:
- Valentis' internal computer systems could be disrupted or fail, causing an
interruption or decrease in Valentis' ability to continue its operations;
and
- the computer systems of third parties with whom Valentis regularly deals,
including its suppliers, vendors, utilities and financial institutions,
could be disrupted or fail, causing an interruption or decrease in
Valentis' ability to continue its operations.
Valentis is currently evaluating the nature and extent of the Y2K issues for
its internal systems and has developed a plan to address the issue. If Valentis
does not achieve Y2K compliance for its internal systems on a timely basis,
Valentis' business could be adversely affected.
If the business of any third party, including suppliers, vendors, utilities
or financial institutions, is significantly disrupted because such party is not
Y2K compliant, such disruption could adversely affect Valentis' business. These
disruptions could include, among other things:
- a financial institution's inability to process checks drawn on Valentis'
bank accounts, accept deposits or process wire transfers;
- a client's, supplier's, vendor's or financial institution's business
failure;
- an interruption in deliveries of equipment and supplies from vendors;
- a loss of voice and data connections Valentis will use to share
information;
- a loss of electric power to Valentis' facilities; or
23
<PAGE>
- other interruptions to the normal conduct of business by Valentis, the
nature and extent of which Valentis cannot foresee.
Valentis does not know whether any of the disruptions described above will
actually occur. Even if they do occur, Valentis cannot predict the effect they
will have on Valentis' business.
VALENTIS' RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF ENVIRONMENTAL
CLAIMS EXCEED INSURANCE LIMITS OR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS BECOME
EXCESSIVE.
Valentis' research and development processes will involve the controlled use
of hazardous and radioactive materials. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, Valentis could be held liable for any damages, which could exceed its
available financial resources, including its insurance coverage.
Valentis will be subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous or
radioactive materials and waste products. Valentis may be required to incur
significant costs to comply with environmental laws and regulations in the
future.
RISKS ASSOCIATED WITH ACCEPTANCE OF THE ORDINARY SHARE OFFER
IF VALENTIS AND POLYMASC ARE NOT SUCCESSFULLY INTEGRATED, THE COMBINED COMPANY'S
BUSINESS WILL BE ADVERSELY AFFECTED.
Integrating Valentis and PolyMASC will be a complex, time-consuming and
expensive process. Currently, Valentis and PolyMASC operate independently, each
with its own business, business culture, employees and systems. After the
Ordinary Share Offer becomes unconditional in all respects, Valentis and
PolyMASC must operate as a combined organisation utilising common:
- information and communication systems;
- operating procedures;
- financial controls; and
- human resource practices, including benefit, training and professional
development programs.
There may be substantial difficulties, costs and delays involved in
integrating Valentis and PolyMASC. These may include:
- distracting management from the business of the combined company;
- potential incompatibility of business cultures;
- perceived uncertainty in career opportunities, benefits and the long-term
return value of stock options available to employees;
- potential inability to coordinate research and development efforts
successfully;
- costs and delays in implementing common systems and procedures; and
- operating the combined company at three different sites, one in
Burlingame, California USA, one in The Woodlands, Texas and another in
London.
Any one or all of these factors may increase operating costs or lower
anticipated financial performance. In addition, the combined company may lose
corporate partners and employees. Many of these factors are also outside the
control of either company. The failure to integrate Valentis and PolyMASC would
have a material adverse effect on the business, financial condition and results
of operations of the combined company.
BECAUSE THE NUMBER OF SHARES OF VALENTIS COMMON STOCK TO BE RECEIVED IN THE
ORDINARY SHARE OFFER WILL NOT INCREASE OR DECREASE DUE TO CHANGES IN THE PRICE
OF EITHER COMPANY'S SHARE CAPITAL, THE VALUE OF THE ORDINARY SHARE OFFER IS
SUBJECT TO SUBSTANTIAL VOLATILITY.
In the Ordinary Share Offer, each PolyMASC Ordinary Share will be exchanged
for 0.209 of a share of Valentis Common Stock. This exchange ratio will not
increase or decrease due to fluctuations in the market price of either company's
stock. Thus, the value of the New Valentis Common Stock to be received by
holders of PolyMASC
24
<PAGE>
Ordinary Shares will depend upon the market price of Valentis Common Stock
following the time at which the Ordinary Share Offer becomes unconditional in
all respects, which may be greater or less than the value at the time of the
Announcement and/or a PolyMASC Ordinary Shareholder accepts the Ordinary Share
Offer. Valentis Common Stock and PolyMASC Ordinary Shares are subject to
substantial price volatility and, therefore, the value of the Ordinary Share
Offer consideration to be received by holders of PolyMASC Ordinary Shares is
subject to the same volatility. Recent market prices of Valentis Common Stock
are set out in paragraph 4 of Appendix V to this document.
Holders of PolyMASC Ordinary Shares are encouraged to obtain current market
quotations for Valentis Common Stock and PolyMASC Ordinary Shares.
EXCHANGE RATE RISK
You should bear in mind that the Sterling value of any investment in
Valentis Common Stock and any dividend income from that investment (payable in
Dollars and subject to US withholding tax) will be affected by the Dollar to
Sterling exchange rate.
INEXPERIENCE WITH INTEGRATION OF INTERNATIONAL SUBSIDIARIES COULD DECREASE
EFFECTIVENESS OF EUROPEAN OPERATIONS
The Ordinary Share Offer involves the integration of two companies that have
previously operated independently. Such integration will require significant
effort from each company, including the coordination of their operations,
research and development and sales and marketing efforts. There can be no
assurance that Valentis will integrate the operations of PolyMASC without
encountering difficulties or experiencing the loss of PolyMASC or Valentis
personnel or that the benefits expected from such integration will be realised.
The difficulties are exacerbated by the fact that the two companies are located
on different continents separated by economic, governmental and cultural
differences. Valentis has no prior experience integrating a European operation.
The diversion of the attention of management and any difficulties encountered in
the transition process could have an adverse impact on Valentis' ability to
realise anticipated synergies from the acquisition of PolyMASC. Such problems
may include:
- the interruption of, or a loss of momentum in, PolyMASC's activities;
- problems associated with integration of management information and
reporting systems; or
- delays in implementation of consolidation plans.
OPERATING LOSSES OF POLYMASC AND VALENTIS
Historically both PolyMASC and Valentis have been loss making and no
assurances can be made that the consolidated company will generate income in the
future.
CHANGE OF CONTROL OF POLYMASC COULD WEAKEN RELATIONSHIPS WITH CUSTOMERS AND
PARTNERS
Certain of PolyMASC's existing customers or strategic partners may take the
opportunity following a change of control to review their contractual
relationships. Such a review could result in delayed or lost sales to either
Valentis or PolyMASC.
FUTURE SALES OF NEW VALENTIS COMMON STOCK ISSUED UNDER THE ORDINARY SHARE OFFER
Assuming the Ordinary Share Offer becomes unconditional in all respects, up
to 4,400,000 of New Valentis Common Stock will be issued, all of which will be
immediately freely tradeable under US securities laws. Sales of a substantial
number of such New Valentis Common Stock could adversely affect the market price
of the Valentis Common Stock.
HOLDERS OF POLYMASC ORDINARY SHARES MAY HAVE LESS ADVANTAGEOUS RIGHTS AFTER THE
OFFERING
Following the Ordinary Share Offer, PolyMASC Ordinary Shareholders will
become holders of Valentis Common Stock. Differences exist between the rights of
PolyMASC Ordinary Shareholders under PolyMASC's Articles of Association and the
rights of Valentis Stockholders under Valentis' Certificate of Incorporation and
Bylaws. Details of these differences are set out in Appendix II to this
document, under the heading "Description of Valentis and changes in the rights
of PolyMASC Ordinary Shareholders."
25
<PAGE>
2. SELECTED VALENTIS FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements for Valentis and the notes thereto included in this
document and "Valentis' Management Discussion and Analysis of Financial
Condition and Results of Operations" incorporated herein by reference. The
following selected financial data for the 5 years ended 30 June 1998 are derived
from the audited financial statements of Valentis. The selected financial data
as at 31 March 1999 and for the nine month periods ended 31 March 1999 and 1998
are derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
and recurring accruals, which Valentis considers necessary for a fair
presentation of the financial position and the results of operations for these
periods.
SELECTED HISTORICAL FINANCIAL DATA
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED 30 JUNE, 31 MARCH,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1999 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Collaborative research and development revenue..... $ 500 $ 1,157 $ 1,890 $ 5,793 $ 8,083 $ 2,176 $ 6,615
Operating expenses:
Research and development........................... 1,922 4,691 6,487 8,598 15,111 10,287 10,741
General and administrative......................... 796 1,811 2,169 2,417 3,561 3,380 2,429
Acquired in-process research and development....... -- -- -- -- -- 25,870 --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses......................... 2,718 6,502 8,656 11,015 18,672 39,537 13,170
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................... (2,218) (5,345) (6,766) (5,222) (10,589) (37,361) (6,555)
Interest income (expense), net..................... 65 (84) (135) 275 2,211 1,275 1,611
--------- --------- --------- --------- --------- --------- ---------
Net loss........................................... $ (2,153) $ (5,429) $ (6,901) $ (4,947) $ (8,378) $ (36,086) $ (4,944)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share-basic and diluted(1)............ $ (3.59) $ (8.72) $ (9.86) $ (4.40) $ (0.83) $ (2.73) $ (0.54)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing basic and diluted net loss
per share(1)..................................... 601 622 700 1,126 10,088 13,236 9,208
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT 30 JUNE, AT
----------------------------------------------------- 31 MARCH,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments..................... $ 1,886 $ 282 $ 5,253 $ 24,269 $ 48,426 $ 47,226
Working capital............................................ 758 (873) 3,568 21,629 20,966 28,119
Goodwill and other intangible assets....................... -- -- -- -- -- 9,831
Total assets............................................... 4,344 4,969 9,956 29,978 55,901 71,161
Long-term debt............................................. 412 1,305 1,894 1,487 2,464 5,926
Accumulated deficit........................................ (2,931) (8,360) (15,261) (20,208) (28,586) (64,672)
Total stockholders' equity................................. 2,436 2,219 6,086 25,223 50,282 54,446
</TABLE>
- --------------------------
(1) See Note 1 to 30 June 1998 Financial Statements for information regarding
the calculation of net loss per share.
26
<PAGE>
3. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the Valentis merger with PolyMASC, as well
as the Valentis merger with GeneMedicine, Inc. (completed on 18 March 1999),
using the purchase method of accounting.
The unaudited pro forma condensed combined balance sheet as at 31 March 1999
gives effect to the merger with PolyMASC as if it had occurred on such date, and
reflects the allocation of the purchase price to the PolyMASC assets acquired,
including in-process research and development, and liabilities assumed.
The unaudited pro forma condensed combined statements of operations combine
the historical statements of operations of Valentis, GeneMedicine and PolyMASC
as if the mergers with GeneMedicine and PolyMASC had occurred at the beginning
of the earliest period presented. The historical statements of operations for
GeneMedicine and PolyMASC have been recast to conform to the 30 June 1998 fiscal
year end of Valentis, while the historical results of operations for
GeneMedicine and PolyMASC included in the pro forma condensed combined
statements of operations for the nine months ended 31 March 1999 reflect the
results of operations for the nine months ended 31 December 1998. Consequently,
operating results for GeneMedicine and PolyMASC for the three months ended 30
June 1998 are included in both pro forma condensed combined statements of
operations. Revenues and net loss for the three months ended 30 June 1998 were
$1.1 million and $3.8 million for GeneMedicine and $117,000 and $771,000 for
PolyMASC, respectively. It is expected that following the merger with PolyMASC,
Valentis will incur additional costs, which are not expected to be significant
to the combined results of operations, in connection with integrating the
operations of the two companies. Integration-related costs are not included in
the accompanying unaudited pro forma condensed combined financial statements.
The historical financial information for PolyMASC was expressed in Sterling
and prepared in accordance with accounting principles generally accepted in the
United Kingdom. There were no significant differences in accounting treatment in
the PolyMASC financial information between UK GAAP and those accounting
principles generally accepted in the United States. The PolyMASC financial
information has been translated into Dollars using the exchange rate of $1.66/L1
which equals the exchange rate as at 31 December 1998. This materially
approximated the average exchange rate for the periods presented.
The Valentis statement of operations for the period in which the merger with
PolyMASC occurs will include a significant charge for acquired in-process
research and development, currently estimated to be approximately $14.8 million.
This amount represents the value determined by management, using a discounted
cash flow methodology, to be attributable to the in-process research and
development of PolyMASC based on a preliminary valuation of such research and
development. Such amount is subject to significant change pending completion of
the final valuation analysis. The charge relates to specific on-going research
and development. Assuming this research continues through all stages of clinical
development, Valentis projects substantial future research and development
expenditures related to this technology. The research and development is
forecasted to be completed at various times between 2001 and 2005. If Valentis
would have allocated less of the purchase price to in-process research and
development, the value would have been recorded as goodwill on the balance sheet
and amortized over the expected benefit period, resulting in increased
amortization expense during that period.
Management of Valentis believes that the allocation of the purchase price to
in-process research and development is appropriate given the future potential of
this research and development to contribute to the operations of Valentis. If,
at a later date, management of Valentis decides to no longer pursue or
indefinitely postpone this research and development, or determines that the
discounted cash flows will no longer meet the projections underlying the
valuation, it will disclose that fact to investors in the appropriate Form 10-K
or 10-Q, explaining why it will not pursue commercialization or why research has
been postponed and when research is expected to resume. In addition, should
Valentis revise its estimate of the anticipated date of regulatory approval for
a particular product, this fact will be disclosed in the appropriate Form 10-K
or 10-Q and the reasons for, and potential implications of, the change in
estimate will be explained.
Unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the mergers occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of Valentis,
GeneMedicine and PolyMASC and do not incorporate, nor do they assume, any
benefits from cost savings or synergies of operations of the combined company.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
($ THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
VALENTIS POLYMASC
AT AT 31
31 MARCH DECEMBER PRO FORMA PRO FORMA
1999 1998 ADJUSTMENTS REFERENCES COMBINED
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 13,090 $ 2,285 $ -- $ 15,375
Short-term investments.......................................... 23,886 -- -- 23,886
Other receivables............................................... 1,235 20 -- 1,255
Prepaid expenses and other current assets....................... 697 202 -- 899
---------- ----------- ----------- -----------
Total current assets.............................................. 38,908 2,507 -- 41,415
Property and equipment, net....................................... 11,987 650 -- 12,637
Long-term investments............................................. 10,250 -- -- 10,250
Other receivables................................................. 130 -- -- 130
Deposits and other assets......................................... 55 -- -- 55
Goodwill and other intangible assets.............................. 9,831 433 4,126 (A) 14,390
---------- ----------- ----------- -----------
Total Assets...................................................... $ 71,161 $ 3,590 $ 4,126 $ 78,877
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........................ $ 4,056 $ 644 $ 2,000 (B) $ 6,700
Current portion of long-term debt and capital lease
obligations................................................... 2,246 80 -- 2,326
---------- ----------- ----------- -----------
Total current liabilities......................................... 6,302 724 2,000 9,026
Deferred contract revenue......................................... 4,487 -- -- 4,487
Long-term debt.................................................... 5,926 48 -- 5,974
Commitments
Stockholders' Equity:
Share capital................................................... 22 118 (118) (C)
4 (D) 26
Additional paid-in capital...................................... 119,610 8,783 (8,783) (C)
19,770 (D) 139,380
Deferred compensation, net of amortization...................... (555) -- -- (555)
Accumulated other comprehensive income.......................... 41 -- -- 41
Accumulated deficit............................................. (64,672) (6,083) 6,083 (C)
(14,830) (E) (79,502)
---------- ----------- ----------- -----------
Total stockholders' equity........................................ 54,446 2,818 2,126 59,390
---------- ----------- ----------- -----------
Total liabilities and stockholders' equity........................ $ 71,161 $ 3,590 $ 4,126 $ 78,877
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED 31 MARCH 1999
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- HISTORICAL
VALENTIS, POLYMASC
INC. GENEMEDICINE, VALENTIS/ 9 MONTHS
9 MONTHS INC. 9 MONTHS GENEMEDICINE ENDED 31
ENDED 31 ENDED 31 PRO FORMA PRO FORMA DECEMBER PRO FORMA PRO FORMA
MARCH 1999 DECEMBER 1998 ADJUSTMENTS COMBINED 1998 ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Contract revenue............... $ 2,176 $ 3,263 $ -- $ 5,439 $ 899 $ -- $ 6,338
Research and development grant
revenue...................... -- 129 -- 129 -- -- 129
------------- ------------- ----------- ------------- ----------- ------------- -----------
Total revenue................ 2,176 3,392 -- 5,568 899 -- 6,467
EXPENSES:
Research and development....... 10,287 11,577 -- 21,864 383 -- 22,247
General and administrative..... 3,380 4,103 -- 7,483 2,425 -- 9,908
Acquired in-process research
and development.............. 25,870 -- (25,870) -- -- -- --
Amortization of purchased
intangible assets............ -- -- 2,458 2,458 162 1,032 3,652
------------- ------------- ----------- ------------- ----------- ------------- -----------
Total operating expenses..... 39,537 15,680 (23,412) 31,805 2,970 1,032 35,807
------------- ------------- ----------- ------------- ----------- ------------- -----------
Operating loss................... (37,361) (12,288) 23,412 (26,237) (2,071) (1,032) (29,340)
Interest income.................. 1,893 849 -- 2,742 96 -- 2,838
Interest expense, net............ (618) (18) -- (636) (8) -- (644)
------------- ------------- ----------- ------------- ----------- ------------- -----------
Net loss......................... $ (36,086) $ (11,457) $ 23,412 $ (24,131) $ (1,983) $ (1,032) $ (27,146)
------------- ------------- ----------- ------------- ----------- ------------- -----------
------------- ------------- ----------- ------------- ----------- ------------- -----------
Net loss per share--basic and
diluted........................ $ (2.73) $ (1.11) $ (1.04)
------------- ------------- -----------
------------- ------------- -----------
Shares used in computing basic
and diluted net loss per
share.......................... 13,236 21,828 26,222
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED 30 JUNE 1998
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------
VALENTIS, HISTORICAL
INC. GENEMEDICINE, VALENTIS/ POLYMASC
12 MONTHS INC. 12 GENEMEDICINE 12 MONTHS
ENDED MONTHS ENDED PRO FORMA PRO FORMA ENDED 30 PRO FORMA
30 JUNE 1998 30 JUNE 1998 ADJUSTMENTS COMBINED JUNE 1998 ADJUSTMENTS
------------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Contract revenue................. $ 8,083 $ 4,023 $ -- $ 12,106 $ 721 $ --
Research and development grant
revenue........................ -- 509 -- 509 -- --
------------- ------------- ------------- ------------- ----------- -------------
Total revenue.................. 8,083 4,532 -- 12,615 721 --
EXPENSES:
Research and development......... 15,111 15,078 -- 30,189 301 --
General and administrative....... 3,561 4,451 -- 8,012 2,673 --
Amortization of purchased
intangible assets.............. -- -- 3,277 3,277 214 1,375
------------- ------------- ------------- ------------- ----------- -------------
Total operating expenses....... 18,672 19,529 3,277 41,478 3,188 1,375
------------- ------------- ------------- ------------- ----------- -------------
Operating loss..................... (10,589) (14,997) (3,277) (28,863) (2,467) (1,375)
Interest income.................... 2,651 1,449 -- 4,100 200 --
Interest expense................... (440) (41) -- (481) (12) --
------------- ------------- ------------- ------------- ----------- -------------
Net loss........................... $ (8,378) $ (13,589) $ (3,277) $ (25,244) $ (2,279) $ (1,375)
------------- ------------- ------------- ------------- ----------- -------------
------------- ------------- ------------- ------------- ----------- -------------
Net loss per share--basic and
diluted.......................... $ (0.83) $ (1.33)
------------- -------------
------------- -------------
Shares used in computing basic and
diluted net loss per share....... 10,088 19,024
------------- -------------
------------- -------------
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
REVENUE:
Contract revenue................. $ 12,827
Research and development grant
revenue........................ 509
-----------
Total revenue.................. 13,336
EXPENSES:
Research and development......... 30,490
General and administrative....... 10,685
Amortization of purchased
intangible assets.............. 4,866
-----------
Total operating expenses....... 46,041
-----------
Operating loss..................... (32,705)
Interest income.................... 4,300
Interest expense................... (493)
-----------
Net loss........................... $ (28,898)
-----------
-----------
Net loss per share--basic and
diluted.......................... $ (1.23)
-----------
-----------
Shares used in computing basic and
diluted net loss per share....... 23,418
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1
On 18 March 1999, Valentis (then called Megabios Corp.) completed its merger
with GeneMedicine, Inc. ("GeneMedicine"). Under the terms of the merger
agreement, each outstanding share of GeneMedicine common stock was converted
into 0.5710 of a share of Valentis' common stock. This resulted in the issuance
of approximately 9.1 million shares of Valentis' common stock, valued at $38.7
million. The purchase price also included approximately $850,000 related to
GeneMedicine's stock options and outstanding warrants assumed by Valentis and
$1.7million of transaction costs, for an aggregate purchase price of $41.3
million.
The merger transaction was accounted for as a purchase. As a result of the
purchase, $25.9 million of the purchase price was charged to in-process research
and development in Valentis' Condensed Consolidated Statement of Operations for
the quarter ended 31 March 1999.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired.................................................... $ 14,410
In-process research and development......................................... 25,870
Intangible assets-assembled workforce and goodwill.......................... 9,831
Liabilities assumed (including GeneMedicine transaction costs and other
obligations due upon the close of the merger)............................. (8,801)
---------
$ 41,310
---------
---------
</TABLE>
GeneMedicine is engaged in the discovery and development of a new class of
pharmaceutical products that incorporate genes for the treatment or prevention
of serious diseases. GeneMedicine's business focus is in the development of gene
medicines for treating cancers, cardiovascular disease and neuromuscular
disorders, as well as in the development of genetic vaccines. GeneMedicine's
research and development programs in these areas are in various stages from
pre-clinical development to early clinical trials. GeneMedicine's strategy has
been to develop and commercialize its products through alliances with major
pharmaceutical and biotechnology companies. No products utilizing GeneMedicine's
proprietary technologies have been approved for marketing to date. The
GeneMedicine research and development programs currently in process were valued
as follows:
<TABLE>
<S> <C>
Cancer gene Medicines (IL2, IFN-a, IL-12)................................... $ 8,100
Haemophilia Gene Medicines (factor XIII and IX)............................. 1,240
Growth Factor Gene Medicines (IGF-1)........................................ 5,180
Pulmonary Gene Medicines (ATT GM)........................................... 1,730
Vascular Growth Factor Gene Medicines....................................... 4,620
Gene Switch Technology...................................................... 3,930
Nucleic Acid Programs (APC)................................................. 1,070
---------
$ 25,870
---------
---------
</TABLE>
The in-process research and development has been written off against the
combined retained earnings. Such charge was included in the Valentis statement
of operations in the quarter ended March 31, 1999. Because the charge is
nonrecurring, it has not been reflected in the pro forma condensed combined
statements of operations. The intangible assets will be amortized over their
estimated useful lives of 3 years.
NOTE 2
The unaudited pro forma condensed combined financial statements reflect the
exchange of all the issued PolyMASC Ordinary Shares for 4,394,225 shares of
Valentis Common Stock pursuant to the Ordinary Share Offer. This calculation is
based on PolyMASC's capitalisation at 31 December 1998 using the conversion
ratio of 0.209 of Valentis Common Stock for each PolyMASC Ordinary Share.
31
<PAGE>
The total cost of the proposed merger is estimated to be approximately $20.8
million, determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of New Valentis Common Stock (calculated using the per share fair
value at the date of the Announcement--$4.50 per Valentis Common Stock)... $ 19,774
Valentis transaction costs, consisting primarily of financial advisory,
legal and accounting fees................................................. 1,000
---------
$ 20,774
---------
---------
</TABLE>
Based upon a preliminary valuation of tangible and intangible assets
acquired and liabilities assumed, Valentis has allocated the total cost of the
Ordinary Share Offer and the Deferred Share Offer to the net assets of PolyMASC
as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired.................................................... 3,157
In-process research and development......................................... 14,830
Intangible assets--assembled workforce and goodwill......................... 4,559
Liabilities assumed (including PolyMASC transaction costs).................. (1,772)
---------
$ 20,774
---------
---------
</TABLE>
The primary technological focus of PolyMASC is the creation of improved
biologics through the application of PEGylation technologies. PEGylation is an
established technology that involves the attachment of the polymer
polyethyleneglycol (PEG) to therapeutics to alter their pharmacokinetics
(distribution in the body, metabolism and excretion). The alteration of the
pharmacokinetics of biologics due to PEGylation can often lead to improved
dosing intervals and may also have beneficial effects on safety and efficacy.
PEGylation also masks biologics from the immune system. Both recognition by
antibodies (antigenicity) and stimulation of immune responses (immunogenicity)
are reduced. PolyMASC's technology is covered by a family of patents and patent
applications in all major territories.
PolyMASC's research and development programs in these areas are in various
stages of preclinical development. Currently, none of the products utilising
PolyMASC's proprietary technology have as yet entered any stage of human
clinical testing. PolyMASC's strategy has been to develop and commercialise its
products through alliances with pharmaceutical and biotechnology companies. No
products using PolyMASC's proprietary technology have been approved for
marketing to date.
The PolyMASC research and development currently in process has been assessed
at $14.83 million. The in-process research and development has been written of
against the combined retained earnings. Because the charge is nonrecurring, it
has not been reflected in the pro forma condensed combined statements of
operations. Such charge will be included in the Valentis statement of operations
in the quarter in which the merger is consummated. The intangible assets will be
amortized over their estimated useful lives of 3 years.
NOTE 3
The pro forma condensed combined balance sheet includes the adjustments
necessary to give effect to the PolyMASC merger as if it had occurred on 31
March 1999 and to reflect the allocation of the acquisition cost to the fair
value of tangible and intangible assets acquired and liabilities assumed as
noted above, including a charge to retained earnings for acquired in-process
research and development and the elimination of PolyMASC's equity accounts.
Adjustments included in the pro forma condensed combined balance sheet are
summarized as follows:
(A) Valuation of assembled work force, goodwill and other intangible assets of
$4,585,000 (less PolyMASC goodwill and intangible assets of $433,000
existing as at 31 December 1998).
(B) Accrual of transaction-related costs of approximately $1million for Valentis
and $1million for PolyMASC, principally for investment banking, legal and
accounting services.
(C) Elimination of PolyMASC equity accounts.
(D) Issuance of Valentis Common Stock.
(E) Charge to operations for in-process research and development of
approximately $14,830,000.
32
<PAGE>
NOTE 4
The pro forma condensed combined statements of operations include the
adjustments necessary to give effect to the merger as if it had occurred on 1
July 1997. Adjustments consist of the amortization of acquired intangible assets
using the following estimated useful lives:
<TABLE>
<S> <C>
Assembled workforce.......................................................... 3 years
Goodwill..................................................................... 3 years
</TABLE>
NOTE 5
Pro forma basic and diluted net loss per share amounts for the year ended 30
June 1998 and the nine-month period ended 31 March 1999, are based upon the
historical weighted-average number of Valentis Common Stock outstanding adjusted
to reflect the issuance, as of 1 July 1997, of approximately 4.4 million shares
of Valentis common stock, which amount excludes outstanding shares subject to
repurchase in accordance with SFAS No. 128.
33
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth historical per share data of Valentis and
PolyMASC and combined per share data on an unaudited pro forma basis after
giving effect to the merger as a purchase. This data should be read in
conjunction with the selected historical information and unaudited pro forma
condensed combined financial information of Valentis and PolyMASC and notes
thereto, included elsewhere herein. The unaudited pro forma combined per share
data are not necessarily indicative of the operating results or financial
position that would have occurred if the merger had been completed at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
30 JUNE 1998 ENDED
------------ 31 MARCH 1999
$ --------------
$
<S> <C> <C>
Historical Valentis:
Net loss per basic and diluted share.......................................................... (0.83) (2.73)
Book value per share(1)....................................................................... 3.90 2.47
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
31 DECEMBER ENDED
1998 31 DECEMBER
------------ 1998
$ --------------
$
<S> <C> <C>
Historical PolyMASC:
Net loss per basic and diluted share.......................................................... (0.13) (0.10)
Book value per share(1)....................................................................... 0.13 0.13
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
30 JUNE ENDED
1998(4) 31 MARCH
------------ 1999(4)
$ --------------
$
<S> <C> <C>
Pro Forma Combined Net Loss(2):
Per Valentis basic and diluted share.......................................................... (1.23) (1.04)
Per equivalent PolyMASC basic and diluted share(3)............................................ (0.26) (0.22)
</TABLE>
<TABLE>
<CAPTION>
31 MARCH
1999
--------------
$
<S> <C>
Pro Forma Combined Book Value per Share(5):
Per Valentis share.......................................................................................... 2.24
Per equivalent PolyMASC share(3)............................................................................ 0.47
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of Valentis Common Stock outstanding and PolyMASC
Ordinary Shares in issue at the end of each period.
(2) Includes the results of operations of GeneMedicine on a pro forma basis.
(3) The PolyMASC Equivalent Pro Forma combined per share amounts are calculated
by multiplying the Valentis combined pro forma per share amounts by the
exchange ratio of 0.209.
(4) The historical results of operations for GeneMedicine and PolyMASC included
in the pro forma condensed combined statements of operations for the nine
months ended 31 March 1999 reflect the results of operations for the nine
months ended 31 December 1998. Consequently, operating results for
GeneMedicine and PolyMASC for the three months ended 30 June 1998 are also
included in the pro forma condensed combined statements of operations for
the year ended 30 June 1998.
(5) The Pro Forma Combined Book Value per Share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of the period.
34
<PAGE>
INFORMATION REGARDING POLYMASC
1. SELECTED POLYMASC FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements of PolyMASC and the notes thereto included elsewhere herein
and PolyMASC's "Management Discussion and Analysis of Financial Condition and
Results of Operations" for the three financial periods ended 31 December 1998
which are derived from the audited financial statements of PolyMASC.
SELECTED HISTORICAL FINANCIAL DATA
($ THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FINANCIAL PERIOD ENDED 31
DECEMBER
-------------------------------
1997 1998
--------- ---------
L L
1996
---------
L
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Turnover...................................................................... 117 528 582
Cost of sales................................................................. (371) (661) (851)
--------- --------- ---------
Gross loss.................................................................... (254) (133) (269)
Net operating expenses--administrative expenses............................... (1,020) (981) (1,394)
--------- --------- ---------
Operating loss................................................................ (1,274) (1,114) (1,663)
Net interest receivable....................................................... 203 139 77
--------- --------- ---------
Loss for period............................................................... (1,071) (975) (1,586)
--------- --------- ---------
--------- --------- ---------
Loss per ordinary share (in pence)............................................ (7.0) (5.2) (8.4)
--------- --------- ---------
--------- --------- ---------
Shares used in computing per share amount..................................... 15,219 18,750 18,925
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT 31 DECEMBER
-------------------------------
1997 1998
--------- ---------
1996 L L
---------
L
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash at bank and in hand......................................................... 2,938 1,956 1,373
Working capital.................................................................. 2,805 1,845 1,072
Total assets..................................................................... 3,706 2,897 2,159
Creditors: amounts falling due after more than one year.......................... -- 48 29
Total shareholders' equity....................................................... 3,510 2,535 1,695
</TABLE>
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL YEAR ENDED 31 DECEMBER 1998 VS FINANCIAL YEAR ENDED 31 DECEMBER 1997
TURNOVER. Turnover increased by 10 per cent. from L528,000 to L582,000 in
the financial year ended 31 December 1998. The increase in revenue was
attributable to the increase in the number of collaborative agreements PolyMasc
entered into.
GROSS LOSS. Gross Loss increased by 102 per cent. from L133,000 to L269,000
in the financial year ended 31 December 1998.
ADMINISTRATIVE EXPENSES. Administrative Expenses increased by 42 per cent.
from L981,000 to L1,394,000 in the financial year ended 31 December 1998.
Research and Development costs increased by 197% from L99,000 for the financial
year ended 31 December 1997 to L294,000 in the financial year ended 31 December
1998 due to the increased research activity of PolyMASC.
NET INTEREST INCOME. Net Interest Income declined by 45 per cent. from
L139,000 receivable in the financial year ended 31 December 1997 to L77,000
receivable in the financial year ended 31 December 1998. This decrease was
reflected by the change in PolyMASC's net cash position over the two financial
years.
35
<PAGE>
TAXATION. There is no tax charge as PolyMASC has yet to report any profits.
PolyMASC has tax losses available for offset against future trading profits.
FINANCIAL YEAR ENDED 31 DECEMBER 1997 VS FINANCIAL PERIOD ENDED 31 DECEMBER 1996
TURNOVER. Turnover increased by 351 per cent. from L117,000 to L528,000 in
the financial year ended 31 December 1997. The increase in sales was
attributable to the increase in collaborative agreements PolyMASC has entered
into.
GROSS LOSS. Gross Loss decreased by 48 per cent. from L254,000 in the
financial period ended 31 December 1996 to L133,000 in the financial year ended
31 December 1997.
ADMINISTRATIVE EXPENSES. Administrative Expenses decreased by 4 per cent.
from L1,020,000 in the financial period ended 31 December 1996 to L981,000 in
the financial year ended 31 December 1997. Research and Development costs
decreased by 17 per cent. from L119,000 for the financial period ended 31
December 1996 to L99,000 in the financial year ended 31 December 1997.
NET INTEREST INCOME. Net Interest Income declined by 32 per cent. from
L203,000 receivable in the financial period ended 31 December 1996 to L139,000
receivable in the financial year ended 31 December 1997. This decrease was
reflected by the change in PolyMASC's net cash position over the two financial
years.
TAXATION. There is no tax charge as PolyMASC has yet to report any profits.
PolyMASC has tax losses available for offset against future trading profits.
LIQUIDITY AND CAPITAL RESOURCES
As at 31 December 1998, PolyMASC had cash at bank and in hand of L1,373,000
and working capital of L1,072,000. In December 1995, following the placing of
5,000,000 PolyMASC Ordinary Shares at 100p per share, PolyMASC Ordinary Shares
were admitted to the Alternative Investment Market of the London Stock Exchange.
PolyMASC received net proceeds of L4,581,000 in connection with the listing. In
November 1998 PolyMASC issued a further 1 million PolyMASC Ordinary Shares
generating L650,000 net proceeds. PolyMASC generated negative cash flow from
operations in the financial years ended 31 December 1996, 1997 and 1998.
Capital expenditures were approximately L859,000, L120,000 and L138,000 in
the financial years ended 31 December 1996, 1997 and 1998 respectively. PolyMASC
has used lease financing for equipment and expects to do so in the future.
PolyMASC has financed its operations, including net losses and capital
expenditures, over the last three financial years primarily from the net
proceeds of the two equity fundraisings noted above. PolyMASC's future capital
requirements will depend on many factors, including the nature and timing of
commercial contracts, the progress of research and development efforts and the
status of competitive products. The Directors of PolyMASC believe that PolyMASC
has adequate capital resources to fund its operations for at least twelve months
from the date of this document.
IMPACT OF INFLATION
During the periods under review, the business of PolyMASC was not materially
affected by inflation.
36
<PAGE>
3. NATURE OF TRADING MARKET
PolyMASC Ordinary Shares have been traded on the Alternative Investment
Market of the London Stock Exchange since December 1995. There is no trading
market for PolyMASC Ordinary Shares in the US.
As at 21 June 1999, there were no registered holders of PolyMASC Ordinary
Shares with registered addresses in the US. Certain US holdings may be held in
nominee accounts with registered addresses outside the US.
The following table sets out the historical high and low closing price of
PolyMASC for each quarter from 1 January 1997 to 31 March 1999:
<TABLE>
<CAPTION>
PER PER
ORDINARY ORDINARY
SHARE SHARE
QUARTER HIGH LOW
- -------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1 January 1997 to 31 March 1997....................................................... 136.5p 120.0p
1 April 1997 to 30 June 1997.......................................................... 126.5p 97.5p
1 July 1997 to 30 September 1997...................................................... 136.5p 108.5p
1 October 1997 to 31 December 1997.................................................... 136.5p 111.5p
1 January 1998 to 31 March 1998....................................................... 128.5p 106.5p
1 April 1998 to 30 June 1998.......................................................... 151.5p 115.0p
1 July 1998 to 30 September 1998...................................................... 146.5p 103.5p
1 October 1998 to 31 December 1998.................................................... 103.5p 58.5p
1 January 1999 to 31 March 1999....................................................... 58.5p 38.5p
</TABLE>
37
<PAGE>
FURTHER INFORMATION REGARDING VALENTIS
Valentis files annual, quarterly and special reports, proxy statements and
other information with the SEC. PolyMASC Ordinary Shareholders may read and copy
any reports, statements or other information Valentis files at the SEC's public
reference rooms in Washington D.C., New York, New York and Chicago, Illinois.
PolyMASC Shareholders should telephone the SEC at (001)-800-732-0330 for further
information on the public reference rooms. Valentis' filings with the SEC are
also available to the public from commercial document retrieval services and at
the web site maintained by the SEC at "http://www.sec.gov."
In addition, Valentis will file a Registration Statement on Form S-4 to
register with the SEC the Valentis Common Stock to be issued to PolyMASC
Ordinary Shareholders in exchange for their PolyMASC Ordinary Shares. This
document will form a part of that Registration Statement and constitutes a
prospectus of Valentis. As allowed by SEC rules, this document does not contain
all the information (being certain information additional to that required by
the City Code to be included in this document) PolyMASC Ordinary Shareholders
can find in the Registration Statement or the exhibits to the Registration
Statement.
Further, all of Valentis's reports and statements filed with the SEC,
including the Registration Statement on Form S-4 relating to the Ordinary Share
Offer, may be inspected at the Nasdaq National Market at Nasdaq Operations, 17th
35th Street NW, Washington D.C. 20006.
The SEC allows Valentis to "incorporate by reference" information (being
certain information additional to that required by the City Code to be included
in this document) into this document which means that Valentis can disclose
important information to PolyMASC Ordinary Shareholders by referring them to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this document, except for any information
superseded by information in this document. This document incorporates by
reference the documents set forth below that Valentis has previously filed with
the SEC. These documents contain important information about Valentis and its
finances.
<TABLE>
<CAPTION>
VALENTIS SEC FILINGS (FILE NO. 0-22987) PERIOD
- -------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
Annual Report on Form 10-K* Fiscal Year ended 30 June 1998
Quarterly Reports on Form 10-Q Quarter ended 30 September 1998*,
31 December 1998* and 31 March 1999
Definitive Proxy Statement* 1998 Annual Meeting of Stockholders
The description of Valentis Common Stock set forth in the
Registration Statement on Form 8-A* Filed on 15 August 1997
</TABLE>
- ------------------------
* Note: filed under the company name of Megabios Corp.
Valentis is also incorporating by reference additional documents that it
files with the SEC between the date of this document and the date the Ordinary
Share Offer becomes or is declared unconditional in all respects.
If you are a PolyMASC Ordinary Shareholder, you can obtain any of these
documents through Valentis or the SEC. Documents incorporated by reference are
available from Valentis without charge, excluding all exhibits unless Valentis
has specifically incorporated by reference an exhibit in this document. PolyMASC
Ordinary Shareholders also may obtain documents incorporated by reference in
this document by either inspecting them during normal business hours on any
weekday (public holidays excepted) while the Ordinary Share Offer remains open
for acceptance or requesting them in writing from Valentis or its legal counsel
in the United Kingdom at the following address:
<TABLE>
<S> <C>
Valentis Taylor Joynson Garrett
863A Mitten Road Carmelite
Burlinghame 50 Victoria Embankment
California 94010 Blackfriars
USA London EC4Y 0DX
Tel: (001) 650 697 1900 Tel: 0171 353 1234
</TABLE>
PolyMASC Ordinary Shareholders may rely only on the information concerning
Valentis contained or incorporated by reference in this document in determining
whether to accept the Offer. Valentis has not authorised anyone to provide
PolyMASC Ordinary Shareholders with information that is different from what is
contained in this document. This document is dated 22 June 1999. PolyMASC
Ordinary Shareholders should not assume that the information contained in the
document is accurate as of any date other than such date and neither the mailing
of this document to PolyMASC Ordinary Shareholders nor the issuance of Valentis
Common Stock in the exchange for the PolyMASC Ordinary Shares will create any
implication to the contrary.
38
<PAGE>
APPENDIX I
CONDITIONS AND FURTHER TERMS OF THE ORDINARY SHARE OFFER
PART A: CONDITIONS OF THE ORDINARY SHARE OFFER
The Ordinary Share Offer is subject to the following conditions:
(A) valid acceptances of the Ordinary Share Offer being received (and not, where
permitted, withdrawn) by not later than 3.00 pm on the 13 July 1999 (or such
later time(s) and/or date(s) as the Board of Valentis may, subject to the
rules of the City Code, decide) in respect of not less than 90 per cent. (or
such lesser percentage as the Board of Valentis may decide) of PolyMASC
Ordinary Shares to which the Ordinary Share Offer relates, provided that
this condition will not be satisfied unless Valentis shall have acquired, or
agreed to acquire, either pursuant to the Ordinary Share Offer or otherwise,
directly or indirectly PolyMASC Ordinary Shares carrying more than 50 per
cent. of the voting rights exercisable at a general meeting of PolyMASC
(including for this purpose, to the extent, if any, required by the Panel
any voting rights attaching to any PolyMASC Ordinary Shares allotted or
issued before the Ordinary Share Offer becomes or is declared unconditional
as to acceptances pursuant to the exercise of any outstanding conversion or
subscription rights or otherwise); and for this purpose the expression
"PolyMASC Ordinary Shares to which the Ordinary Share Offer relates" shall
mean the aggregate of (a) the PolyMASC Ordinary Shares allotted on or before
the date of this document and (b) the PolyMASC Ordinary Shares allotted
after that date but on or before the first closing date of the Ordinary
Share Offer (or such later dates(s) as the Board of Valentis may decide) but
excluding any PolyMASC Ordinary Shares held by Valentis or its associates at
the date of this document (as construed in accordance with sections 428 to
430F of the Companies Act 1985);
(B) the New Valentis Common Stock having been approved for listing upon notice
of issuance on the Nasdaq National Market;
(C) the New Valentis Common Stock being issued pursuant to an effective
Registration Statement, or an applicable exemption from the registration
requirements of the Securities Act such that the New Valentis Common Stock
to be issued will be freely tradeable save where a PolyMASC Ordinary
Shareholder has entered into an agreement with Valentis to restrict the
transfer of the New Valentis Common Stock or otherwise as required by
legislation;
(D) Valentis shall have received stockholder approval to amend its certificate
of incorporation to increase the authorised shares available for issuance
thereunder;
(E) no government or governmental, quasi-governmental, supranational or trade
agency, statutory or regulatory body or any court or any other body or
person in any jurisdiction having prior to the date when the Ordinary Share
Offer becomes otherwise unconditional, instituted or threatened any action,
proceedings, suit, investigation or enquiry or enacted, proposed or made any
statute or regulation or made any order or imposed any condition which
might:
(i) make the Ordinary Share Offer or its implementation or the acquisition
or proposed acquisition by Valentis of any or all shares or other
securities, directly or indirectly, in, or control of PolyMASC void,
illegal or unenforceable or otherwise restrain, restrict or prohibit or
otherwise materially hinder or interfere with the implementation of, or
impose additional conditions or obligations with respect to, or
otherwise challenge or materially interfere with the Ordinary Share
Offer or acquisition by Valentis of some or all of the PolyMASC Ordinary
Shares;
(ii) result in a material delay in the ability of Valentis or render
Valentis unable to acquire some or all of the PolyMASC Ordinary Shares;
(iii) require, as a result of the acquisition of PolyMASC by Valentis, the
divestiture by Valentis or PolyMASC or any other member of the Valentis
Group, of all or any material portion of their respective businesses,
assets or properties or impose any material limitation on the ability
of any of them to conduct their respective businesses and own their
respective assets or properties;
(iv) impose any limitation on, or result in a delay in, the ability of
Valentis to acquire or hold or to exercise effectively any rights of
ownership of the PolyMASC Ordinary Shares or loans or securities
convertible into securities or any other securities;
39
<PAGE>
(v) otherwise materially and adversely affect the business assets, profits
or prospects of Valentis or the Valentis Group taken as a whole, or of
PolyMASC;
and all waiting periods applicable to the acquisition of PolyMASC by
Valentis during which any such government, agency, body, court or person
could institute or threaten any such action, suit, proceedings or
investigation having expired or terminated;
(F) all necessary filings having been made in connection with the Ordinary Share
Offer and all statutory requirements, regulations and obligations in any
relevant jurisdiction having been complied with in connection with the
Ordinary Share Offer or the acquisition by Valentis of any shares or other
securities or control of PolyMASC and all appropriate waiting periods under
any applicable legislation or regulations of any relevant jurisdiction
having expired, lapsed or been terminated;
(G) all authorisations, orders, grants, confirmations, consents, licences,
permissions and approvals necessary for, or in respect of, the Ordinary
Share Offer and the proposed acquisition by Valentis of any PolyMASC
Ordinary Shares being obtained in a form satisfactory to Valentis from all
appropriate supranational or statutory or regulatory bodies, or trade
agencies and professional associations and all such authorisations, orders,
grants, confirmations, consents, licences, permissions and approvals
remaining in full force and effect and there being no intimation of any
intention to revoke any of the same at the time at which the Ordinary Share
Offer becomes otherwise unconditional;
(H) save as disclosed in writing to Valentis for the purposes of the Ordinary
Share Offer on 24 May 1999, there being no provision of any arrangement,
agreement, licence, permit or other instrument to which PolyMASC is a party
or by or to which PolyMASC or any of its assets may be bound or be subject
which could, as a result of the proposed acquisition or otherwise in
connection with the acquisition, result, to an extent which is material in:
(i) any monies borrowed by PolyMASC being or becoming repayable or any other
indebtedness (actual or contingent) being capable of being declared
repayable immediately or prior to their stated maturity or repayment
date or the ability of PolyMASC to borrow monies or incur any
indebtedness being withdrawn or inhibited or being capable of being
withdrawn or inhibited;
(ii) the rights, liabilities, obligations, interests or business of PolyMASC
in or with any person, firm or body or any arrangements relating to
such interest or business, being terminated or adversely modified or
affected;
(iii) any such arrangement, agreement, licence, permit or instrument being
terminated or adversely modified or any action being taken or any
obligation arising thereunder;
(iv) the creation of any mortgage, charge or other security interest over
the whole or any part of the business, property or assets of PolyMASC;
(v) the interest or business of PolyMASC in or with any firm or body or (in
the case of business) person (or any arrangement relating to such
interest or business) being terminated or adversely modified or
affected;
(vi) any assets of PolyMASC being disposed of other than in the ordinary
course of business;
(vii) PolyMASC's financial or trading position or prospects being prejudiced;
or
(viii) PolyMASC ceasing to be able to carry on business under the name
PolyMASC;
(I) Save as disclosed in writing to Valentis for the purposes of the Ordinary
Share Offer on 24 May 1999, prior to the date when the Ordinary Share Offer
becomes otherwise unconditional no material adverse change having occurred
in the financial or trading position or prospects of PolyMASC in the period
since 31 December 1998;
(J) Valentis not having discovered prior to the date that the Ordinary Share
Offer becomes otherwise unconditional that the financial or business
information publicly disclosed and/or disclosed verbally or in writing to
Valentis at any time on or prior to the first closing date of the Ordinary
Share Offer by PolyMASC contains a material misrepresentation of fact or
omits to state a fact necessary to make the information contained therein
not materially misleading the overall effect of which is adverse;
40
<PAGE>
(K) since 31 December 1998 except as publicly announced prior to the date hereof
or save as specifically disclosed in writing to Valentis for the purposes of
the Ordinary Share Offer on 24 May 1999, neither PolyMASC nor any of its
associates have to an extent which is material in the context of PolyMASC:
(i) issued or authorised or proposed or granted the issue of additional
shares of any class, or securities convertible into, or rights, warrants
or options to subscribe for or acquire, any shares or convertible
securities;
(ii) issued or entered into an agreement to issue any debentures or (save in
the ordinary course of trading) incurred any indebtedness or contingent
liability which is material to PolyMASC;
(iii) entered into any contract or commitment (whether in respect of capital
expenditure or otherwise) which is of a long term or unusual nature or
magnitude or which involves or could involve an obligation of a nature
or magnitude which is material to PolyMASC;
(iv) authorised or proposed or announced its intention to propose (i) any
change in its share or loan capital, or (ii) any merger or acquisition
or (save in the ordinary course of trading) disposal of assets or
shares which is material in the context of PolyMASC;
(v) declared, paid or made or proposed to declare, pay or make any dividend,
bonus or other distribution;
(vi) entered into any contract or other transaction or arrangement otherwise
than in the ordinary course of business;
(vii) entered into or varied the terms of any service agreement with any of
the Directors of PolyMASC;
(viii) entered into any agreement which consents to the restriction of the
scope of the business of PolyMASC or any member of the Valentis Group;
(ix) purchased, redeemed or repaid or announced any proposal to purchase,
redeem or repay any of its own shares or other securities or reduced or
made any other change to any part of its share capital;
(x) taken any corporate action or had any legal proceedings started or
threatened against it for its winding-up, dissolution or reorganisation
or for the appointment of a receiver, administrative receiver,
administrator, trustee or similar officer of all or any of its assets or
revenues or any analogous proceedings in any jurisdiction or had any
such person appointed; or
(xi) entered into any contract, commitment or agreement with respect to any
of the transactions or events referred to in this paragraph (K); or
(xii) made or proposed any change to the Memorandum or Articles of
Association of PolyMASC; and
(L) prior to the date when the Ordinary Share Offer becomes otherwise
unconditional no material litigation, arbitration, proceedings, prosecution
or other legal proceedings to which PolyMASC is a party (whether as
plaintiff or defendant or otherwise) having been instituted or threatened
and no contingent liability having arisen which might be likely materially
and adversely to affect PolyMASC.
Valentis reserves the right to waive, in whole or in part, all or any of the
conditions E to L (inclusive). Conditions B to D (inclusive) must be fulfilled
within 21 days after the later of the first closing date of the Ordinary Share
Offer and the date on which condition A is fulfilled and Conditions E to L
(inclusive) must be fulfilled or (if capable of waiver) waived no later than 21
days after the first closing date of the Ordinary Share Offer or after the date
on which condition A is satisfied, whichever is the later, or, in each case,
such later date as the Panel may agree. Valentis shall be under no obligation to
waive or treat as fulfilled any of the conditions E to L (inclusive) by a date
earlier than the latest date specified above for the fulfilment thereof
notwithstanding that the other conditions of the Ordinary Share Offer may at
such earlier date have been waived or fulfilled and that there are at such
earlier date no circumstances indicating that any such conditions may not be
capable of fulfilment.
If Valentis is required by the Panel to make an offer for PolyMASC Ordinary
Shares under the provisions of Rule 9 of the City Code, Valentis may make such
alterations to the conditions, including that in condition A above, as are
necessary to comply with the provisions of that rule.
41
<PAGE>
The Ordinary Share Offer will lapse if the Ordinary Share Offer is referred to
the Competition Commission or if the European Commission in respect thereof
either initiates proceedings under article 6(1)(c) of Council Regulation (EEC)
4064/89 or makes a referral to a competent authority of the United Kingdom under
article 9(1) of that Regulation, before (in any such case) the later of 13 July
1999 and the date when the Ordinary Share Offer becomes or is declared
unconditional as to acceptances.
PART B: FURTHER TERMS OF THE ORDINARY SHARE OFFER
The following further terms apply to the Ordinary Share Offer. Except where the
context otherwise requires, any reference in Parts B or C of this Appendix I and
in the Form of Acceptance:
(i) to the "Ordinary Share Offer" shall include any revision, variation or
renewal thereof or extension thereof;
(ii) to the "Ordinary Share Offer becoming unconditional" means the
acceptance condition becoming or being declared satisfied whether or
not any other condition of the Ordinary Share Offer remains to be
fulfilled;
(iii) to the "acceptance condition" means the condition set out in section A
of Part A of this Appendix I;
(iv) to "acceptances of the Ordinary Share Offer" shall include deemed
acceptances of the Ordinary Share Offer; and
(v) to the "Ordinary Share Offer Document" shall mean this document and any
other document containing the Ordinary Share Offer.
1. ACCEPTANCE PERIOD
(A) The Ordinary Share Offer will initially be open for acceptance until 3.00 pm
on 13 July 1999. Although no revision is envisaged, if the Ordinary Share
Offer is revised it will remain open for acceptance for a period of at least
14 days from the date of dispatching written notification of the revision to
PolyMASC Ordinary Shareholders. Except with the consent of the Panel, no
revision of the Ordinary Share Offer may be posted to PolyMASC Ordinary
Shareholders after 7 August 1999 or, if later, the date falling due 14 days
prior to the last date on which the Ordinary Share Offer can become
unconditional.
(B) The Ordinary Share Offer, whether revised or not, shall not (except with the
consent of the Panel) be capable of becoming unconditional after midnight on
21 August 1999 (or any earlier time and/or date announced (and not
withdrawn) by Valentis as the date beyond which the Ordinary Share Offer
will not be extended) nor of being kept open after that time unless it has
previously become unconditional, provided that Valentis reserves the right,
with the permission of the Panel, to extend the Ordinary Share Offer to a
later time(s) and/or date(s). Except with the consent of the Panel, Valentis
may not, for the purpose of determining whether the acceptance condition has
been satisfied, take into account acceptances received or purchases of
PolyMASC Ordinary Shares made after 1.00 pm on 21 August 1999 (or any
earlier time and/or date announced (and not withdrawn) by Valentis as the
date beyond which the Ordinary Share Offer will not be extended) or, if the
Ordinary Share Offer is so extended, any such later time and/or date as may
be agreed with the Panel. If the latest time at which the Ordinary Share
Offer may become unconditional is extended beyond midnight on 21 August
1999, acceptances received and purchases made in respect of which the
relevant documents are received by 21 August after 1.00 pm on the relevant
date may (except where the City Code otherwise permits) only be taken into
account with the agreement of the Panel.
(C) If the Ordinary Share Offer becomes or is declared unconditional, it will
remain open for acceptance for not less than 14 days from the date on which
it would otherwise have expired. If the Ordinary Share Offer has become
unconditional and it is stated that the Ordinary Share Offer will remain
open until further notice, then not less than 14 days' notice in writing
will be given prior to the closing of the Ordinary Share Offer.
(D) If a competitive situation arises after a "no increase" and/or "no
extension" statement has been made in relation to the Ordinary Share Offer,
Valentis may, if it specifically reserves the right to do so at the time
such statement is made, or otherwise with the consent of the Panel, withdraw
such statement provided that it complies with the requirements of the City
Code and, in particular, that:
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(i) it announces such withdrawal within four business days after the
announcement of the competing offer and notifies PolyMASC Ordinary
Shareholders in writing thereof at the earliest practicable opportunity
or, in the case of PolyMASC Ordinary Shareholders with registered
addresses outside the UK or whom Valentis knows to be nominees holding
PolyMASC Ordinary Shares for such persons, by announcement in the UK;
and
(ii) any PolyMASC Ordinary Shareholders who accepted the Ordinary Share
Offer after the date of the no extension or no increase statement are
given a right of withdrawal in accordance with paragraph 3(C) below.
Valentis may if it has reserved the right to do so, choose not to be bound
by the terms of a "no increase" or "no extension" statement if it would
otherwise prevent the posting of an increased or improved offer which is
recommended for acceptance by the Board of PolyMASC, or in other
circumstances permitted by the Panel.
(E) For the purpose of determining at any particular time whether the acceptance
condition has been satisfied, Valentis shall be entitled to take account
only of those PolyMASC Ordinary Shares carrying voting rights which have
been unconditionally allotted or issued before that time and written notice
of the allotment or issue of which, containing all the relevant details, has
been received by Connaught St Michaels Limited or its agents at the address
specified in paragraph 3(A) below. Telex or facsimile transmission will not
be sufficient.
2. ANNOUNCEMENTS
(A) By 8.30 am on the business day (the "relevant day") next following the day
on which the Ordinary Share Offer is due to expire or become or is declared
unconditional or is revised or extended, Valentis will make an appropriate
announcement and simultaneously inform the London Stock Exchange of the
position. Such announcements will (unless otherwise permitted by the Panel)
also state (as nearly as practicable) the total number of PolyMASC Ordinary
Shares and rights over PolyMASC Ordinary Shares:
(i) for which acceptances of the Ordinary Share Offer have been received
(showing the extent, if any, to which such acceptances have been
received from any person deemed to be acting in concert with Valentis);
(ii) acquired or agreed to be acquired by or on behalf of Valentis or any
person deemed to be acting in concert with Valentis during the course
of the Offer Period; and
(iii) held by or on behalf of Valentis or any person deemed to be acting in
concert with Valentis prior to the Offer Period, and
will specify the percentage of share capital represented by each of these
figures. Any decision to extend the time and/or date by which the acceptance
condition has to be fulfilled may be made at any time up to, and will be
announced not later than, 8.30 am on the relevant day (or such later time
and/or date as the Panel may agree) and the announcement will state the next
expiry date (unless the offer is conditional). In computing the number of
PolyMASC Ordinary Shares represented by acceptances and/or purchases, there
may be included or excluded for announcement purposes acceptances and
purchases not in all respects in order or subject to verification provided
that such acceptances or purchases shall not be included unless they could
be counted toward fulfilling the acceptance condition in accordance with
paragraphs 5(F) and (G) below.
(B) In this Appendix I, references to the making of an announcement by or on
behalf of Valentis include the release of an announcement to the press by
public relations consultants or by Hambrecht & Quist LLC and the delivery by
hand or telephone, telex or facsimile or other electronic transmission of an
announcement to the London Stock Exchange. An announcement made otherwise
than to the London Stock Exchange shall be notified simultaneously to the
London Stock Exchange.
3. RIGHT OF WITHDRAWAL
(A) If Valentis, having announced the Ordinary Share Offer has become
unconditional, fails to comply by 3.30 pm on the relevant day (or such later
time and/or date as the Panel may agree) with any of the other relevant
requirements specified in paragraph 2(A) above, an accepting PolyMASC
Ordinary Shareholder may immediately thereafter withdraw his acceptance of
the Ordinary Share Offer by written notice signed by such accepting PolyMASC
Ordinary Shareholder (or his agent duly appointed in writing and evidence
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of whose appointment in a form reasonably satisfactory to Valentis is
produced with the notice) given by post or by hand to Connaught St Michaels
Limited, PO Box 30, Victoria Street, Luton, Bedfordshire, LU1 2PZ. Subject
to paragraph 1(B) above, this right of withdrawal may be terminated not less
than 8 days after the relevant day by Valentis confirming, if such be the
case, that the Ordinary Share Offer is still unconditional, and complying
with the other requirements specified in paragraph 2(A) above. If any such
confirmation is given, the first period of 14 days referred to in paragraph
1(C) above will run from the date of such confirmation and compliance.
(B) If by 3.00 pm on 3 August 1999 (or such later time and/or date as the Panel
may agree) the Ordinary Share Offer has not become unconditional, an
accepting PolyMASC Ordinary Shareholder may withdraw his acceptance at any
time thereafter by written notice received by Connaught St Michaels Limited
on behalf of Valentis at the address and in the manner referred to in
paragraph 3(A) above, before the earlier of: (i) the time when the Ordinary
Share Offer becomes unconditional; and (ii) the final time for lodgement of
acceptances of the Ordinary Share Offer which can be taken into account in
accordance with paragraph 1(B) above.
(C) If a "no increase" and/or "no extension" statement has been withdrawn in
accordance with paragraph 1(D) above, any PolyMASC Ordinary Shareholder who
accepts the Ordinary Share Offer after such statement is made may withdraw
his acceptance thereafter in the manner referred to in paragraph 3(A) above
not later than the eighth day after the date on which notice of the
withdrawal of such statement is posted to PolyMASC Ordinary Shareholders.
(D) Except as provided by this paragraph 3, acceptances shall be irrevocable.
(E) In this paragraph 3, "written notice" (including any letter of appointment,
direction or authority) means notice in writing bearing the original
signature(s) of the relevant accepting PolyMASC Shareholder(s) or his/their
agents(s) duly appointed in writing (evidence of whose appointment in a form
reasonably satisfactory to Valentis is provided with the notice). Telex or
facsimile transmission or copies will not be sufficient to constitute
written notice. No notice which is postmarked in, or otherwise appears to
Valentis or its agents to have been sent from, the United States, Canada,
Australia or Japan will be treated as valid.
4. REVISED OFFER
(A) Although no such revision is envisaged, if the Ordinary Share Offer is
revised and any such revision represents, on the date on which such revision
is announced, (on such basis as Hambrecht & Quist LLC may consider
appropriate) an improvement (or no diminution) in the value of the Ordinary
Share Offer as so revised compared with the consideration on terms
previously offered or in the overall value received and/or retained by a
PolyMASC Ordinary Shareholder (under the Ordinary Share Offer or otherwise)
the benefit of the revised Ordinary Share Offer will, subject as provided in
paragraphs 4(B) and (C) and paragraph 6 below, be made available to PolyMASC
Ordinary Shareholders who have accepted the Ordinary Share Offer in its
original or previously revised form(s) hereinafter called "Previous
Acceptors"). The acceptance by or on behalf of a Previous Acceptor of the
Ordinary Share Offer in its original or any previously revised form(s)
shall, subject as provided in paragraphs 4(B) and (C) and paragraph 6 below:
be treated as an acceptance of the Ordinary Share Offer as so revised and
shall also constitute the separate appointment of any director of Valentis
or Hambrecht & Quist LLC as his attorney and/or agent with authority to
accept any such revised Ordinary Share Offer on behalf of such Previous
Acceptor and if such revised Ordinary Share Offer includes alternative forms
of consideration, to make elections and/or accept such alternative forms of
consideration in such proportions as such attorney and/or agent in his
absolute discretion thinks fit and to execute on behalf of and in the name
of such Previous Acceptor all such further documents (if any) as may be
required to give effect to such acceptances and/or elections. In making any
such election and/or acceptance, such attorney and/or agent shall take into
account the nature of any previous acceptances made by or on behalf of the
Previous Acceptor and such other facts or matters as he may reasonably
consider relevant.
(B) The deemed acceptance referred to in paragraph 4(A) above shall not apply
and the authority conferred by paragraph 4(A) above shall not be exercised
by any Directors of Valentis or partners of Hambrecht & Quist LLC if, as a
result thereof, the Previous Acceptor would (on such basis as Hambrecht &
Quist LLC may consider appropriate) thereby receive and/or retain (as
appropriate) less in aggregate under the Ordinary Share Offer or otherwise
than he would have received in aggregate as a result of acceptance of the
Ordinary Share Offer in the form in which it was previously accepted by him.
The authorities
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conferred by paragraph 4(A) above shall not be exercised in respect of any
election available under the revised Ordinary Share Offer save in accordance
with this paragraph.
(C) The deemed acceptance referred to in paragraph 4(A) above shall not apply
and the authority conferred by paragraph 4(A) above shall be ineffective to
the extent that a Previous Acceptor shall lodge with Connaught St Michaels
Limited, within 14 days of the posting of the document pursuant to which the
revision of the Ordinary Share Offer is made available to PolyMASC Ordinary
Shareholders, a Form of Acceptance or some other form issued by or on behalf
of Valentis in which he validly elects to receive the consideration
receivable by him under such revised offer in some other manner.
(D) The authorities conferred by this paragraph 4 and any acceptance of a
revised offer and any election pursuant thereto shall be irrevocable unless
and until the Previous Acceptor becomes entitled to withdraw his acceptance
under paragraph 3 above and duly does so.
(E) Valentis reserves the right to treat an executed Form of Acceptance relating
to the Ordinary Share Offer (in its original or any previously revised
form(s)) which is received after the announcement or issue of the Ordinary
Share Offer in any revised form as a valid acceptance of the revised offer
and such acceptance shall constitute an authority in the terms of paragraph
4(A) above mutatis mutandis on behalf of the relevant PolyMASC Ordinary
Shareholder.
5. GENERAL
(A) Save with the consent of the Panel, the Ordinary Share Offer will lapse
unless all the conditions have been fulfilled or (if capable of waiver)
waived or, where appropriate, have been determined by Valentis in its
reasonable opinion to be or remain satisfied by 3 August 1999 or within 21
days after the date on which the Ordinary Share Offer becomes unconditional,
whichever is the later, or such later date as Valentis may, with the consent
of the Panel, decide. If the Ordinary Share Offer lapses for any reason, the
Ordinary Share Offer shall cease to be capable of further acceptance, and
Valentis and PolyMASC Ordinary Shareholders shall cease to be bound by prior
acceptances.
(B) The expression "Offer Period" when used in this document means, in relation
to the Ordinary Share Offer, the period commencing on 25 May 1999 until
whichever of the following dates shall be the latest: (i) 3.00 pm on 13 July
1999; (ii) the date on which the Ordinary Share Offer becomes unconditional;
and (iii) the date on which the Ordinary Share Offer lapses.
(C) Except with the consent of the Panel, settlement of the consideration to
which any PolyMASC Shareholder is entitled under the Ordinary Share Offer
will be implemented in full in accordance with the terms of the Ordinary
Share Offer without regard to any lien, right of set-off, counterclaim or
other analogous right to which PolyMASC or Hambrecht & Quist LLC may
otherwise be, or claim to be, entitled as against such PolyMASC Ordinary
Shareholder and will be posted not later than 14 days after the date on
which the Ordinary Share Offer becomes unconditional in all respects or 14
days after receipt of a valid and complete acceptance, whichever is the
later.
(D) The terms, provisions, instructions and authorities contained in or deemed
to be incorporated in the Form of Acceptance constitute part of the terms of
the Ordinary Share Offer. Words and expressions defined in this document
will have the same meanings when used in the Form of Acceptance unless the
context otherwise requires.
(E) Notwithstanding the right reserved by Valentis to treat a Form of Acceptance
as valid even though not entirely in order or not accompanied by the
relevant share certificate(s) and/or other documents of title, except as
otherwise agreed with the Panel, an acceptance of the Ordinary Share Offer
will only be counted towards fulfilling the acceptance condition if the
requirements of Note 4 and, if applicable, Note 6 to Rule 10 of the City
Code are satisfied in respect of it.
(F) Except as otherwise agreed with the Panel, a purchase of PolyMASC Ordinary
Shares by Valentis or persons acting in concert with it or its nominee(s)
will only be counted towards fulfilling the acceptance condition if the
requirements of Note 5 and, if applicable, Note 6 to Rule 10 of the City
Code are satisfied in respect of it.
(G) Except with the consent of the Panel, the Ordinary Share Offer will not
become or be declared unconditional unless Connaught St Michaels Limited has
issued a certificate to Valentis or Hambrecht & Quist LLC which states the
number of PolyMASC Ordinary Shares in respect of which acceptances have
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been received which comply with paragraph 5(E) above and the number of
PolyMASC Ordinary Shares otherwise acquired, whether before or during the
Offer Period, which comply with the requirements of paragraph 5(F) above.
Copies of such certificate will be sent to the Panel and to PolyMASC's
financial adviser as soon as possible after it is issued.
(H) The Ordinary Share Offer and all acceptances thereof or pursuant thereto and
the relevant Form of Acceptance and all contracts made pursuant thereto and
action taken or made or deemed to be taken or made under any of the
foregoing shall be governed by and construed in accordance with English law.
Execution by or on behalf of a PolyMASC Ordinary Shareholder of a Form of
Acceptance will constitute his submission, in relation to all matters
arising out of or in connection with the Ordinary Share Offer and the Form
of Acceptance, to the jurisdiction of the Courts of England and Wales and
his agreement that nothing shall limit the right of Valentis or Hambrecht &
Quist LLC to bring any action, suit or proceeding arising out of or in
connection with the Ordinary Share Offer and the Form of Acceptance in any
other manner permitted by law or in any court of competent jurisdiction.
(I) Any reference in this document and in the Form of Acceptance to 13 July 1999
shall, except in the final paragraph of Part A of this Appendix 1 and
paragraphs 1(A) and 5(B) of this Part B of Appendix I and except where the
context otherwise requires, be deemed, if the expiry date of the Ordinary
Share Offer be extended, to refer to the expiry date of the Ordinary Share
Offer as so extended.
(J) Any omission to dispatch this document or the Form of Acceptance or any
notice required to be dispatched under the terms of the Ordinary Share Offer
to, or any failure to receive the same by any person to whom the Ordinary
Share Offer is made, or should be made, shall not invalidate the Ordinary
Share Offer in any way. Subject to paragraph 6 below, the Ordinary Share
Offer extends to all PolyMASC Ordinary Shareholders to whom this document,
the Form of Acceptance and any related documents may not be dispatched, and
such persons may collect copies of those documents from Connaught St
Michaels Limited at the address set out in paragraph 3(A) above.
(K) Without prejudice to any other provision in this Part B of Appendix I,
Valentis and Hambrecht & Quist LLC reserve the right to treat acceptance of
the Ordinary Share Offer as valid if received by or on behalf of either of
them at any place or places determined by them otherwise than as set out
herein or in the Form of Acceptance.
(L) All powers of attorney, appointments or agents and authorities on the terms
conferred by or referred to in this Appendix I or in the Form of Acceptance
are given by way of security for the performance of the obligations of the
PolyMASC Ordinary Shareholders concerned and are irrevocable in accordance
with section 4 of the Powers of Attorney Act 1971 except in the
circumstances where the donor of such power of attorney, appointment or
authority is entitled to withdraw his acceptance in accordance with section
3 above and duly does so.
(M) No acknowledgement of receipt of any Form of Acceptance, share
certificate(s) and/or other document(s) of title will be given. All
communications, notices, certificates, documents of title and remittances to
be delivered by or sent to or from PolyMASC Ordinary Shareholders (or their
designated agent(s)) will be delivered by or sent to or from such PolyMASC
Ordinary Shareholders (or their designated agent(s)) at their risk.
(N) If the Ordinary Share Offer does not become unconditional in all respects:
the Form of Acceptance and any share certificate(s) and/or other document(s)
of title will be returned by post (or by such other method as may be
approved by the Panel) within 14 days of the Ordinary Share Offer lapsing,
at the risk of the person entitled thereto, to the person or agent whose
name and address (outside the United States, Canada, Australia or Japan) is
set out in the relevant Box on the Form of Acceptance or, if none is set
out, to the first-named holder at his/her registered address (outside the
United States, Canada, Australia or Japan). No such documents will be sent
to an address in the United States, Canada, Australia or Japan.
(O) The Ordinary Share Offer is made on 22 June 1999 and is capable of
acceptance from and after that time. Copies of this document, the Form of
Acceptance and any related documents are available from Connaught St
Michaels Limited at the address set out in paragraph 3(A) above from that
time.
(P) If sufficient acceptances are received, Valentis intends to apply the
provisions of Section 428 to 430F of the Companies Act to acquire
compulsorily any outstanding PolyMASC Ordinary Shares.
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(Q) Valentis and Hambrecht & Quist LLC reserve the right to notify any matter
(including the making of the Ordinary Share Offer) to all or any PolyMASC
Ordinary Shareholder(s) with registered address(es) outside the UK or whom
Valentis or Hambrecht & Quist LLC know to be nominees for such persons by
announcement or paid advertisement in any daily newspaper published and
circulated in the UK. In which case, such notice shall be deemed to have
been sufficiently given, notwithstanding any failure by any such
shareholders to receive such notice, and all references in this document to
notice in writing (other than in paragraph 3 above) shall be construed
accordingly.
(R) If Valentis is required by the Panel to make an offer for PolyMASC Ordinary
Shares under the provisions of Rule 9 of the City Code, Valentis may make
such alterations to the conditions of the Ordinary Share Offer as are
necessary to comply with the provisions of that rule.
(S) All references in this Appendix to any statute or statutory provision shall
include a statute or statutory provision which amends, consolidates or
replaces the same (whether before or after the date hereof).
6. OVERSEAS SHAREHOLDERS
(A) The making of the Ordinary Share Offer in, or to citizens, residents or
nationals of, jurisdiction outside the United Kingdom ("overseas
shareholders") may be affected by the laws of the relevant jurisdiction.
Such overseas shareholders should inform themselves about and observe any
applicable legal requirements. It is the responsibility of any overseas
shareholder wishing to accept the Ordinary Share Offer to satisfy himself as
to the full observance of the laws of the relevant jurisdiction in
connection therewith, including the obtaining of any governmental, exchange
control or other consents which may be required or the compliance with other
necessary formalities and the payment of any issue, transfer or other taxes
or other requisite payments due in such jurisdiction. Any such PolyMASC
Ordinary Shareholder will be responsible for any such issue, transfer or
other taxes or other requisite payments by whomsoever payable and Valentis
shall be fully indemnified and held harmless by such shareholder for any
such issue, transfer of other taxes as Valentis may be required to pay.
In particular, the Ordinary Share Offer is not being made, directly, in or
into, or by use of the mails of, or by any means or instrumentality of
interstate or foreign commerce of, or any facility of a national securities
exchange of, the United States, Canada, Australia or Japan. This includes,
but is not limited to, facsimile transmission, telex and telephone.
Accordingly, copies of this document, the Form of Acceptance and any related
offering documents are not being, and must not be, mailed or otherwise
distributed or sent in, into or from the United States, Canada, Australia or
Japan including to PolyMASC Ordinary Shareholders or participants in the
PolyMASC Share Option Schemes with registered addresses in the United
States, Canada, Australia or Japan or to custodians, trustees or nominees
holding PolyMASC Ordinary Shares for such persons. Persons receiving such
documents (including, without limitation, custodians, trustees and nominees)
must not distribute, send or mail them in, into or from the United States,
Canada, Australia or Japan, use the United States, Canadian, Australian or
Japanese mails or any such means or instrumentality for any purpose,
directly or indirectly, in connection with the Ordinary Share Offer, and so
doing will invalidate any related purported acceptance of the Ordinary Share
Offer. Persons wishing to accept the Ordinary Share Offer must not use the
United States, Canadian, Australian or Japanese mails or any such means or
instrumentality for any purpose directly or indirectly related to acceptance
of the Ordinary Share Offer. Envelopes containing Forms of Acceptance should
not be postmarked in the United States, Canada, Australia or Japan or
otherwise dispatched from the United States, Canada, Australia or Japan and
all acceptors must provide addresses outside the United States, Canada,
Australia or Japan for the remittance of cash or for the return of Forms of
Acceptance, PolyMASC Ordinary Share certificates and/or other documents of
title.
A PolyMASC Ordinary Shareholder will be deemed not to have accepted the
Ordinary Share Offer if: (i) he puts "No" in Box 4 of the Form of Acceptance
and thereby does not give the representation and warranty set out in
paragraph (B) of Part C of this Appendix I to the effect that he has not
received or sent copies of this document, the Form of Acceptance or any
related offering documents in, into or from the United States, Canada,
Australia or Japan and has not otherwise utilised in connection with the
Ordinary Share Offer, directly or indirectly, the mails of, or any means or
instrumentality (including, without limitation, facsimile, telex and
telephone) of interstate or foreign commerce of, or any facility of a
national securities exchange of, the United States, Canada, Australia or
Japan; (ii) having completed Box 4 of the Form of Acceptance with a
registered address in the United States, Canada, Australia or Japan he does
not insert in Box 5 of the Form of Acceptance the name and address of a
person or agent outside the United States, Canada, Australia or Japan to
whom he wishes the consideration to which he is entitled
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under the Ordinary Share Offer to be sent; (iii) he inserts in Box 5 of the
Form of Acceptance the name and address of a person or agent in the United
States, Canada, Australia or Japan to whom he wishes the consideration to
which he is entitled under the Ordinary Share Offer to be sent; or (iv) in
any case, the Form of Acceptance received from him is received in an
envelope postmarked in, or which otherwise appears to Valentis or its agents
to have been sent from, the United States, Canada, Australia or Japan.
Valentis reserves the right, in its sole discretion, to investigate, in
relation to any acceptance, whether the representation and warranty set out
in paragraph (B) of Part C of this Appendix I could have been truthfully
given by the relevant PolyMASC Ordinary Shareholder and, if such
investigation is made and, as a result Valentis cannot satisfy itself that
such representation and warranty was true and correct, such acceptance shall
not be valid.
If, in connection with the making of the Ordinary Share Offer,
notwithstanding the restrictions described above, any person (including,
without limitation, custodians, nominees and trustees), whether pursuant to
a contractual or legal obligation or otherwise, forwards this document, the
Form of Acceptance or any related offering documents, in, into or from the
United States, Canada, Australia or Japan or uses the mails of, or any means
or instrumentality (including, without limitation, facsimile transmission,
telex and telephone) of interstate or foreign commerce of, or any facility
of a national securities exchange of, the United States, Canada, Australia
or Japan in connection with such forwarding, such person should: (i) inform
the recipient of such fact; (ii) explain to the recipient that such action
will invalidate any purported acceptance by the recipient; and (iii) draw
the attention of the recipient to this paragraph 6(A).
(B) The provisions of this section 6 and/or any other terms of the Ordinary
Share Offer relating to overseas shareholders may be waived, varied or
modified as regards specific PolyMASC Ordinary Shareholder(s) or, on a
general basis, by Valentis in its absolute discretion. Subject to this, the
provisions of this paragraph 6 supersede any terms of the offer inconsistent
therewith. Reference in this paragraph 6 to a PolyMASC Ordinary Shareholder
shall include the person or persons executing a Form of Acceptance and, in
the event of more than one person executing a Form of Acceptance, the
provisions of this section 6 shall apply to them jointly and to each of
them.
PART C: FORM OF ACCEPTANCE
Each PolyMASC Ordinary Shareholder by whom, or on whose behalf, a Form of
Acceptance is executed and received by Connaught St Michaels Limited, or by or
on behalf of Valentis or Hambrecht & Quist LLC irrevocably undertakes,
represents, warrants and agrees to and with Valentis and Hambrecht & Quist LLC
(so as to bind him, his personal representatives, heirs, successors and
assigns), to the following effect:
(A) that the execution of a Form of Acceptance, whether or not any other Boxes
are completed, shall constitute:
(i) an acceptance of the Ordinary Share Offer in respect of the relevant
PolyMASC Ordinary Shareholder's entire holding of PolyMASC Ordinary
Shares (or such lesser number as may have been inserted in Box 1 of the
Form of Acceptance), provided that if a number is inserted in Box 1
which exceeds such shareholder's holding of PolyMASC Ordinary Shares,
the acceptance will be deemed to have been made in respect of that
shareholder's entire holding of PolyMASC Ordinary Shares; and
(ii) an undertaking to execute any further documents and give any further
assurances which may be required to enable Valentis to obtain the full
benefit of this Part C and/or to perfect any of the authorities
expressed to be given hereunder;
on and subject to the terms and conditions set out or referred to in this
document and the Form of Acceptance and that, subject only to the rights of
withdrawal set out in paragraph 3 of Part B of this Appendix I, each such
acceptance shall be irrevocable;
(B) that, unless "No" has been put in Box 4 of the Form of Acceptance has been
completed, such PolyMASC Ordinary Shareholder has not received or sent
copies or originals of this document, the Form of Acceptance or any related
documents in, into or from the United States, Canada, Australia or Japan and
has not otherwise utilised in connection with the Ordinary Share Offer,
directly or indirectly, the mails of, or any means or instrumentality
(including, without limitation, the post, facsimile transmission, telex and
telephone) of interstate or foreign commerce or any facility of a national
securities exchange of the United States, Canada, Australia or Japan; was
outside the United States, Canada, Australia or Japan when the Form of
Acceptance was delivered; and, in respect of the PolyMASC Ordinary Shares to
which the Form
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of Acceptance relates, is not an agent or a fiduciary acting on a
non-discretionary basis for a principal, unless such agent or fiduciary is
an unauthorised employee of such principal or such principal has given any
instructions with respect to the Ordinary Share Offer from outside the
United States, Canada, Australia or Japan;
(C) that the PolyMASC Ordinary Shares in respect of which the Ordinary Share
Offer is accepted or deemed to be accepted are sold with full title
guarantee or (only in the case of the Trustees of the PolyMASC Employee
Benefit Trust) with limited title guarantee and (in all cases) free from all
liens, equities, charges, encumbrances and other interests and together with
all rights attaching thereto after 25 May 1999 including voting rights and
the right to all dividends and other distributions declared, made or paid
after 25 May 1999;
(D) that the execution of the Form of Acceptance and such receipt will
constitute, subject to the Ordinary Share Offer becoming unconditional in
all respects and to the person accepting the Ordinary Share Offer not having
validly withdrawn his acceptance, the irrevocable appointment of each of
Valentis and Hambrecht & Quist LLC and their respective directors and
partners as such shareholder's attorney and/or agent (the "attorney"), and
an irrevocable instruction to the attorney with the authority to complete
and execute all or any form(s) of transfer and/or other document(s) at the
discretion of the attorney in relation to the PolyMASC Ordinary Shares in
respect of which the Ordinary Share Offer has been accepted in favour of
Valentis or such other person or persons as Valentis or its agents may
direct and to deliver such form(s) of transfer and/or other document(s) at
the discretion of the attorney and/or agent together with the share
certificate(s) and/or other document(s) of title relating to such PolyMASC
Ordinary Shares for registration within six months of the Ordinary Share
Offer becoming or being declared unconditional in all respects and to do all
such other acts and things as may in the opinion of the attorney be
necessary or expedient for the purposes of, or in connection with, the
acceptance of the Ordinary Share Offer to vest in Valentis or its nominee(s)
the PolyMASC Ordinary Shares as aforesaid;
(E) that the execution of the Form of Acceptance and such receipt will
constitute, subject to the Ordinary Share Offer becoming unconditional in
all respects and to an accepting PolyMASC Ordinary Shareholder not having
validly withdrawn his acceptance, an irrevocable authority and request:
(i) to PolyMASC or its agents to procure the registration of the transfer of
the PolyMASC Ordinary Shares pursuant to the Ordinary Share Offer and
the delivery of the share certificate(s) and/or other document(s) of
title in respect thereof to Valentis or as it may direct; and
(ii) subject to the provisions of section 6 of Part B of this Appendix I, to
Valentis or its agents to procure the dispatch by post (or by such
other method as may be approved by the Panel) of a cheque drawn on a
branch of a UK clearing bank for the cash Deferred Consideration to
which an accepting PolyMASC Ordinary Shareholder becomes entitled
pursuant to his acceptance of the Ordinary Share Offer at the risk of
such PolyMASC Ordinary Shareholder to the person whose name and address
is set out in Box 3 (or Box 5, if that box has been completed) of the
Form of Acceptance or, if none is set out, to the first-named holder at
his registered address (outside the United States, Canada, Australia or
Japan);
(F) that the execution of the Form of Acceptance and such receipt will
constitute the irrevocable appointment of each of Valentis, Hambrecht &
Quist LLC and their respective directors and agents as such shareholder's
attorney and/or agent (the "attorney") within the terms of section 4 of Part
B of this Appendix I and this Part C and with authority to execute any
further documents and give any further assurances which may be required in
connection with the matters referred to in Parts B and C of this Appendix I
and an irrevocable undertaking to such attorney to execute any such further
documents and/or give any such further assurances as may be required;
(G) that Valentis shall be entitled, after the Ordinary Share Offer becomes
unconditional in all respects, or if the Ordinary Share Offer will become
unconditional in all respects, to direct the exercise of any proxies and any
or all other rights and privileges (including the right to requisition the
convening of a general or separate class meeting of PolyMASC) attaching to
any PolyMASC Ordinary Shares in respect of which the Ordinary Share Offer
has been accepted and not validly withdrawn, and the execution of the Form
of Acceptance will constitute an authority to PolyMASC from such shareholder
to send any notice, circular, warrant or other document of communication
which may be required to be sent to him as a member of PolyMASC in respect
of such shares to Valentis at its registered office, and an authority to
Valentis or any person nominated by Valentis to sign any consent to short
notice of a general or separate class meeting as
49
<PAGE>
his attorney and/or agent and on his behalf and/or to execute a form of
proxy in respect of such PolyMASC Ordinary Shares appointing any person
nominated by Valentis to attend general and separate class meetings of
PolyMASC and to exercise the votes attaching to such shares on his behalf,
where relevant, such votes to be cast so far as possible to satisfy any
outstanding condition of the Ordinary Share Offer, and will also constitute
the agreement of such shareholder not to exercise any such rights without
the consent of Valentis and the irrevocable undertaking of such shareholder
not to appoint a proxy for or to attend such general or separate class
meeting. This authority will cease to be valid if the acceptance is
withdrawn in accordance with section 3 of Part B of this Appendix I;
(H) that he will deliver or procure the delivery to Connaught St Michaels
Limited, at the address set out in paragraph 3(A) of Part B of this Appendix
I his share certificate(s) and/or other document(s) of title in respect of
the PolyMASC Ordinary Shares in respect of which the Ordinary Share Offer
has been accepted and not validly withdrawn held by him, or an indemnity
acceptable to Valentis in lieu thereof, as soon as possible and in any event
within six months of the offer becoming unconditional in all respects;
(I) that he agrees to ratify each and every act or thing which may be done or
effected by Valentis or Hambrecht & Quist LLC or any of their respective
directors or agents or PolyMASC or its agents, as the case may be, in the
proper exercise of any of its or his powers and/or authorities hereunder;
and
(J) that, if any provision of Part B of this Appendix I or this Part C shall be
unenforceable or invalid or shall not operate so as to afford Valentis or
Hambrecht & Quist LLC or any of their respective directors or partners the
benefit of the authority expressed to be given therein, he shall with all
practicable speed do all such acts and things and execute all such documents
that may be required to enable Valentis and/or Hambrecht & Quist LLC and/or
any of their respective directors or partners or agents to secure the full
benefits of Part B of this Appendix I and this Part C.
References in this Part C to a PolyMASC Ordinary Shareholder shall include
references to the person or persons executing a Form of Acceptance and in the
event of more than one person executing a Form of Acceptance the provisions of
this Part C shall apply to them jointly and to each of them.
50
<PAGE>
APPENDIX II
DESCRIPTION OF VALENTIS COMMON STOCK AND CHANGES IN THE RIGHTS OF POLYMASC
ORDINARY SHAREHOLDERS
1. DESCRIPTION OF THE CAPITAL STOCK OF VALENTIS
1.1 VALENTIS PREFERRED STOCK. The Valentis Board of Directors has the authority,
without further action by the stockholders, to issue up to 10,000,000 shares
of Valentis preferred stock, par value $.001 per share, in one or more
series and to fix the rights, preferences, privileges and restrictions of
such preferred stock, including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption;
- liquidation preferences;
- sinking fund terms; and
- the number of shares constituting any series or the designation of such
series.
The issuance of Valentis preferred stock could adversely affect the voting
power of holders of Valentis Common Stock and the likelihood that such
holders will receive dividends and liquidation payments and could have the
effect of delaying, deferring or preventing a change in control of Valentis.
There are currently no shares of preferred stock outstanding and Valentis
has no present plan to issue any shares of Valentis preferred stock.
1.2 VALENTIS COMMON STOCK. 30,000,000 shares of Valentis common stock, par value
$.001 per share, are currently authorised under Valentis' Amended and
Restated Certificate of Incorporation. In August 1999, Valentis stockholders
will vote to increase the number of authorized shares of Valentis Common
Stock to 45,000,000. As of April 30, 1999 there were 22,070,803 shares of
Valentis Common Stock outstanding. No shares of preferred stock are
outstanding.
2. DESCRIPTION OF VALENTIS COMMON STOCK
The following is a brief description of certain rights of holders of
Valentis Common Stock. For a complete understanding of these rights,
Valentis' stockholders are referred to the laws and applicable regulations
and listing requirements of the United States, the State of Delaware, the
Nasdaq National Market and Valentis' Amended and Restated Certificate of
Incorporation and Bylaws.
2.1 GENERAL. Valentis is incorporated in the State of Delaware, United States,
and operates in accordance with the Delaware General Corporation Law. The
rights of Valentis' stockholders are determined in accordance with the
Delaware General Corporation Law, the securities and other legislation of
the United States, Valentis' Amended and Restated Certificate of
Incorporation and Valentis' Bylaws, as amended. Valentis Common Stock is
traded on the Nasdaq National Market under the symbol "VLTS."
2.2 CERTIFICATES. Valentis Common Stock is issued in registered form. Every
holder of Valentis Common Stock is entitled to a share certificate.
2.3 DIVIDENDS. Subject to preferences applicable to any outstanding Valentis
preferred stock, holders of Valentis Common Stock are entitled to receive
rateably such dividends as may be declared by the Valentis Board of
Directors out of funds legally available for this purpose.
2.4 MEETINGS. Annual meetings of the Valentis' stockholders are held on the date
designated by the Valentis Board of Directors. Written notice must be mailed
to each stockholder entitled to vote not less than ten nor more than sixty
days before the date of the meeting. The presence of person or by proxy of
the holders of record of a majority of the issued and outstanding shares of
Valentis entitled to vote at such meeting constitutes a quorum for the
transaction of business at meetings of the stockholders. Valentis' Bylaws
provide that special meetings of stockholders may be called by the Chairman
of the Valentis Board of Directors, the Chief Executive Officer, the
Valentis Board of Directors or by the holders of ten per cent. of the voting
shares of Valentis.
2.5 VOTING RIGHTS. The holders of Valentis Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. Stockholders may vote by proxy.
51
<PAGE>
2.6 LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a liquidation,
dissolution or winding up of Valentis, holders of Valentis Common Stock are
entitled to share in all assets remaining after payment of liabilities.
2.7 TRANSFERS. The Valentis Bylaws do not allow the Valentis Board of Directors
to refuse to register transfers of stock.
2.8 OTHER RIGHTS. Holders of Valentis Common Stock have no preemptive rights and
no right to convert their Valentis Common Stock into any other securities.
There are no redemption or sinking fund provisions applicable to the
Valentis Common Stock. All outstanding Valentis Common Stock are fully paid
and nonassessable.
2.9 DELAWARE LAW AND CHARTER PROVISIONS. Valentis is subject to the provisions
of Delaware's anti-takeover law. In general, this law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
this law, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates
and employees, owns or owned within three years 15% or more of the
corporation's voting stock. Valentis' Amended and Restated Certificate of
Incorporation and Bylaws also require that any action required or permitted
to be taken by stockholders of Valentis must be approved at a duly called
annual or special meeting of the stockholders and may not be approved by
written consent. The Valentis Amended and Restated Certificate of
Incorporation also provides for a classified board and specifies that the
authorised number of directors may be changed only by resolution of the
Valentis Board. These provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of Valentis.
3. PRINCIPAL DIFFERENCES BETWEEN VALENTIS COMMON STOCK AND POLYMASC ORDINARY
SHARES
There are a number of differences between the rights attaching to Valentis
Common Stock, as detailed above, and those attaching to PolyMASC Ordinary
Shares. Certain rights attaching to PolyMASC Ordinary Shares, where those
differences exist, are identified below. Such differences may arise from the
differences between the legislation governing PolyMASC and Valentis as well
as between the constitutional documents of the two companies. The following
is not a complete description of the differences between the rights
associated with PolyMASC Ordinary Shares compared to Valentis Common Stock.
For a complete understanding of such differences, PolyMASC Ordinary
Shareholders are referred to the laws and applicable regulations of England
and Wales and the State of California, United States, the rules of the
London Stock Exchange applicable to the Alternative Investment Market, the
Nasdaq National Market and the constitutional documents of both PolyMASC and
Valentis.
A GENERAL
PolyMASC is incorporated in England and Wales and operates in accordance
with the Companies Act. Rules and norms governing trading of PolyMASC
Ordinary Shares differ from those relating to Valentis.
B DIVIDENDS
Pursuant to PolyMASC's Articles of Association and subject to the
restrictions of English law, dividends may be declared by the Board of
PolyMASC, or by PolyMASC on the recommendation of the Board of PolyMASC,
by ordinary resolution in an amount not to exceed that recommended by the
Board of PolyMASC.
C MEETINGS
The holders of not less than one tenth of the paid up voting capital of
PolyMASC have the right to require the Board of PolyMASC to convene
general meetings of PolyMASC Ordinary Shareholders.
D TRANSFERS
PolyMASC's Articles of Association allow the Board of PolyMASC, in its
absolute discretion, to refuse to register certain transfers of shares,
including those which are not fully paid up, are encumbered, involve more
than one class of shares, or are in favour of more than four joint
transferees.
52
<PAGE>
APPENDIX III
FINANCIAL INFORMATION ON VALENTIS
The Valentis financial information at 30 June 1998 and for the years ended
30 June 1998, 1997 and 1996 contained in this Appendix III has been extracted,
without material adjustment, from the audited financial statements of Valentis
included in its Form 10-K for the year ended 30 June 1998 filed with the SEC.
Such financial statements have been prepared in accordance with US generally
accepted accounting principles and the rules and regulations of the SEC. The
unqualified audit opinion of Ernst & Young LLP, independent auditors of
Valentis, is also included in such Form 10-K which is incorporated by reference.
The financial information at 31 March 1999 and for the three and nine month
periods ended 31 March 1999 and 1998 has been extracted, without material
adjustment, from the unaudited financial statements of Valentis included in its
Form 10-Q for the quarter ended 31 March 1999 filed with the SEC. Such financial
statements have been prepared in accordance with US GAAP and the rules and
regulations of the SEC.
53
<PAGE>
BALANCE SHEET
($ THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
30 JUNE
1998
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................................................... $ 15,172
Short-term investments............................................................................................. 7,794
Other receivables.................................................................................................. 616
Prepaid expenses and other current assets.......................................................................... 539
---------
Total current assets............................................................................................. 24,121
Property and equipment, net........................................................................................ 6,151
Long-term investments.............................................................................................. 25,460
Other receivables.................................................................................................. 130
Deposits and other assets.......................................................................................... 39
---------
$ 55,901
---------
---------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable................................................................................................... $ 898
Accrued compensation............................................................................................... 595
Accrued construction-in-progress................................................................................... 589
Other accrued liabilities.......................................................................................... 56
Deferred revenue................................................................................................... --
Current portion of long-term debt.................................................................................. 1,017
---------
Total current liabilities........................................................................................ 3,155
Long-term debt..................................................................................................... 2,464
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series; 10,000,000 shares authorised; none and 8,420,720 convertible
shares issued and outstanding at June 30, 1998 and 1997, respectively............................................ --
Common stock, $.001 par value, 30,000,000 shares authorised; 12,880,978 and 1,567,727 shares issued and outstanding
at June 30, 1998 and 1997, respectively.......................................................................... 13
Additional paid-in capital......................................................................................... 79,838
Deferred compensation, net of amortisation......................................................................... (976)
Net unrealized loss on available-for-sale securities............................................................... (7)
Accumulated deficit................................................................................................ (28,586)
---------
Total stockholders' equity....................................................................................... 50,282
---------
$ 55,901
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
54
<PAGE>
STATEMENTS OF OPERATIONS
($ THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED 30 JUNE
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Collaborative research and development revenue.............................................. $ 8,083 $ 5,793 $ 1,890
Operating expenses:
Research and development.................................................................. 15,111 8,598 6,487
General and administrative................................................................ 3,561 2,417 2,169
---------- --------- ---------
Total operating expenses................................................................ 18,672 11,015 8,656
---------- --------- ---------
Loss from operations........................................................................ (10,589) (5,222) (6,766)
Interest income............................................................................. 2,651 656 230
Interest expense and other.................................................................. (440) (381) (365)
---------- --------- ---------
Net loss.................................................................................... $ (8,378) $ (4,947) $ (6,901)
---------- --------- ---------
---------- --------- ---------
Basic and diluted net loss per share........................................................ $ (0.83) $ (4.40) $ (9.86)
---------- --------- ---------
---------- --------- ---------
Shares used in computing net loss per share................................................. 10,088 1,126 700
---------- --------- ---------
---------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
55
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY
($ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ----------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- --------- ---------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995........................ 3,441,501 $ 10,342 682,105 $ 237 $ -- $ --
Issuance of Series C convertible preferred
stock, net of issuance costs of $36........... 1,827,871 7,063 -- -- -- --
Issuance of Series D convertible preferred
stock......................................... 484,697 3,500 -- -- -- --
Exercise of stock options....................... -- -- 693,543 208 -- --
Repurchase of common stock from employee........ -- -- (7,500) (3) -- --
Net loss........................................ -- -- -- -- -- --
---------- --------- ---------- ----------- ----------- ------
Balance at June 30, 1996........................ 5,754,069 20,905 1,368,148 442 -- --
Issuance of Series E convertible preferred
stock, net of issuance costs of $15........... 1,333,325 9,985 -- -- -- --
Issuance of Series F convertible preferred
stock, net of issuance costs of $11........... 1,333,326 13,989 -- -- -- --
Issuance of common stock in lieu of cash payment
of Series E and F stock offering
commissions................................... (179) 119,046 179 -- --
---
Exercise of stock options....................... -- -- 116,517 56 -- --
Repurchase of common stock from employees....... -- -- (35,984) (17) -- --
Deferred compensation related to grant of
certain stock options, net of amortisation.... -- -- -- 750 -- (750)
Amortisation of deferred compensation........... -- -- -- -- -- 71
Net loss........................................ -- -- -- -- -- --
---------- --------- ---------- ----------- ----------- ------
Balance at June 30, 1997........................ 8,420,720 44,700 1,567,727 1,410 -- (679)
Reincorporation in Delaware with par value...... -- -- -- (1,408) 1,408 --
Issuance of common stock in initial public
offering, September 1997 ($12 per share), net
of offering costs of $3,124................... -- -- 2,875,000 3 31,373 --
Conversion of convertible preferred stock into
common stock.................................. (8,420,720) (44,700) 8,154,779 8 44,692 --
Issuance of common stock for technology
license....................................... -- -- 117,555 -- 1,500 --
Exercise of stock options and warrants.......... -- -- 184,346 -- 237 --
Repurchase of common stock from employees....... -- -- (18,429) -- (8) --
Deferred compensation related to grant of
certain stock options, net of amortisation.... -- -- -- -- 636 (636)
Amortisation of deferred compensation........... -- -- -- -- -- 339
Net unrealized loss on available-for-sale
securities.................................... -- -- -- -- --
---
Net loss........................................ -- -- -- -- -- --
---------- --------- ---------- ----------- ----------- ------
Balance at June 30, 1998........................ -- -- 12,880,978 $ 13 $ 79,838 $ (976)
---------- --------- ---------- ----------- ----------- ------
---------- --------- ---------- ----------- ----------- ------
<CAPTION>
NET
UNREALIZED TOTAL
LOSS ON ACCUMULATED STOCKHOLDERS'
SECURITIES DEFICIT EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
Balance at June 30, 1995........................ $ -- $ (8,360) $ 2,219
Issuance of Series C convertible preferred
stock, net of issuance costs of $36........... -- -- 7,063
Issuance of Series D convertible preferred
stock......................................... -- -- 3,500
Exercise of stock options....................... -- -- 208
Repurchase of common stock from employee........ -- -- (3)
Net loss........................................ -- (6,901) (6,901)
----- ------------- -------------
Balance at June 30, 1996........................ -- (15,261) 6,086
Issuance of Series E convertible preferred
stock, net of issuance costs of $15........... -- -- 9,985
Issuance of Series F convertible preferred
stock, net of issuance costs of $11........... -- -- 13,989
Issuance of common stock in lieu of cash payment
of Series E and F stock offering
commissions................................... -- -- --
Exercise of stock options....................... -- -- 56
Repurchase of common stock from employees....... -- -- (17)
Deferred compensation related to grant of
certain stock options, net of amortisation.... -- -- --
Amortisation of deferred compensation........... -- -- 71
Net loss........................................ -- (4,947) (4,947)
----- ------------- -------------
Balance at June 30, 1997........................ -- (20,208) 25,223
Reincorporation in Delaware with par value...... -- -- --
Issuance of common stock in initial public
offering, September 1997 ($12 per share), net
of offering costs of $3,124................... -- -- 31,376
Conversion of convertible preferred stock into
common stock.................................. -- -- --
Issuance of common stock for technology
license....................................... -- -- 1,500
Exercise of stock options and warrants.......... -- -- 237
Repurchase of common stock from employees....... -- -- (8)
Deferred compensation related to grant of
certain stock options, net of amortisation.... -- -- --
Amortisation of deferred compensation........... -- -- 339
Net unrealized loss on available-for-sale
securities.................................... (7) -- (7)
Net loss........................................ -- (8,378) (8,378)
----- ------------- -------------
Balance at June 30, 1998........................ $ (7) $ (28,586) $ 50,282
----- ------------- -------------
----- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
56
<PAGE>
STATEMENTS OF CASH FLOWS
($ THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
30 JUNE
1998
-----------
<S> <C>
Cash flows from operating activities
Net loss........................................................................................................ $ (8,378)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortisation................................................................................. 2,044
Amortisation of deferred compensation......................................................................... 339
Purchase of in-process research and development............................................................... 1,500
Changes in operating assets and liabilities:
Other receivables........................................................................................... (481)
Prepaid expenses and other assets........................................................................... (149)
Deferred revenue............................................................................................ (887)
Accounts payable............................................................................................ 204
Accrued liabilities......................................................................................... 197
-----------
Net cash used in operating activities............................................................................. (5,611)
-----------
Cash flows from investing activities
Purchase of property and equipment.............................................................................. (2,719)
Deposits and other assets....................................................................................... 282
Purchases of available-for-sale investments..................................................................... (41,890)
Maturities of available-for-sale investments.................................................................... 23,700
-----------
Net cash used in investing activities............................................................................. (20,627)
-----------
Cash flows from financing activities
Proceeds from issuance of long-term debt........................................................................ 2,128
Payments on long-term debt...................................................................................... (1,367)
Proceeds from issuance of convertible preferred stock, net of issuance costs.................................... --
Proceeds from issuance of common stock, net of repurchases...................................................... 31,605
-----------
Net cash provided by financing activities......................................................................... 32,366
-----------
Net increase in cash and cash equivalents......................................................................... 6,128
Cash and cash equivalents, beginning of year...................................................................... 9,044
-----------
Cash and cash equivalents, end of year............................................................................ $ 15,172
-----------
-----------
Interest paid..................................................................................................... $ 423
-----------
-----------
Schedule of noncash transactions
Construction-in-progress included in accrued liabilities........................................................ $ 589
-----------
-----------
Net exercise of warrants to purchase common stock............................................................... $ 84
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
57
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANISATION AND BASIS OF PRESENTATION
Valentis (formerly called Megabios Corp.) develops proprietary gene delivery
systems and provides preclinical development expertise to create gene-based
therapeutics designed for the treatment or prevention of genetic and acquired
diseases. Valentis has developed several in vivo, non-viral gene delivery
systems to address a number of potential therapeutic applications using a
variety of therapeutic genes. Valentis' clinical development and
commercialisation strategy is to enter into collaborative research and
development agreements or "corporate partnerships" with pharmaceutical and
biotechnology companies.
In September 1997, Valentis completed its initial public offering and
reincorporation in the State of Delaware. Valentis may require additional
financial resources to complete development and commercialisation of its
products. Management plans to continue to finance Valentis primarily through
issuances of equity securities, collaborative research and development
arrangements and debt financing. Prior to product commercialisation, if the
financing arrangements contemplated by management are not consummated, Valentis
may have to seek other sources of capital or re-evaluate its operating plans.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with Valentis'
corporate partners is recognised over the related funding periods for each
contract. Valentis is required to perform research and development activities as
specified in each respective agreement on a best-efforts basis. Valentis is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceeds the revenue recognised under such agreements over the
term of the respective agreements. Deferred revenue may result when Valentis
does not incur the required level of effort during a specific period in
comparison to funds received under the respective contracts. Milestone payments,
if any, will be recognised pursuant to collaborative agreements upon the
achievement of specified milestones, such as the filing of Investigational New
Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognised to date.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments with maturities from
date of purchase of 90 days or less. Short-term investments consist of
investments with original maturities greater than three months, but less than
one year, while long-term investments have maturities greater than one year.
Valentis accounts for its cash equivalents and investments under Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). Under the provisions of SFAS 115,
Valentis has classified its cash equivalents and investments as
"available-for-sale." Such investments are recorded at fair value, determined
based on quoted market prices, and unrealised gains and losses, which are
considered to be temporary, are recorded as a separate component of
stockholders' equity until realised.
At 30 June 1997, all investments were classified as held-to-maturity.
However, in fiscal year 1998, Valentis reassessed its investment portfolio and
determined it is more appropriate to classify all investments as
available-for-sale. The difference between the amortised cost and the estimated
fair value of the investments on the date of the redesignation was immaterial.
DEPRECIATION AND AMORTISATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets (generally five years). Leasehold
improvements are amortised over the shorter of five years or the estimated
useful life of the assets.
58
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Valentis accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121"). In accordance with
SFAS 121, Valentis identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such events have occurred with respect to Valentis's long-lived
assets, which consist primarily of machinery and equipment and leasehold
improvements.
STOCK-BASED COMPENSATION
Valentis generally grants stock options to employees for a fixed number of
shares with an exercise price equal to the fair value of the shares at the date
of grant. In accordance with the provisions of Statements of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"), Valentis has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for option grants to employees under its employee
stock option plan and to adopt the pro forma disclosure alternative as described
in SFAS 123 (see Note 9). Option grants to all others are accounted for using
the fair value method prescribed by SFAS 123.
COMPREHENSIVE INCOME
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for Valentis'
fiscal year 1999. Valentis believes that adoption of SFAS 130 will not have a
material impact on Valentis' financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Effective 31 December 1997, Valentis adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128") and Securities
and Exchange Commission Staff Accounting Bulletin No.98 ("SAB 98"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if dilutive, for all periods presented. Basic
earnings per share is computed by dividing income or loss applicable to common
stockholders by the weighted-average number of common shares outstanding for the
period net of certain common shares outstanding which are subject to continued
vesting and Valentis' right of repurchase. Basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted net
loss per share has not been presented separately as, given Valentis' net loss
position, the result would be anti-dilutive. SAB 98 eliminates the inclusion in
the calculation of net loss per share of common and common equivalent shares
(stock options, warrants, convertible notes and preferred stock) issued during
the 12 month period prior to an initial public offering at prices below the
initial public offering price as if they were outstanding for all periods
presented. All loss per share amounts for all periods presented have been
presented and, where appropriate, restated to conform to SFAS 128 and SAB 98.
The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 220,455
common shares which are outstanding but are subject to Valentis' right of
repurchase which expires ratably over 4 years; and options to purchase
approximately 808,100 shares of common stock at a weighted average price of
$5.72 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
For comparison purposes, the pro forma net loss per share amounts have been
presented for fiscal year 1998 and 1997 in the reconciliation below. Pro forma
net loss per share has been computed as described above and also gives effect to
the conversion of the convertible preferred stock that automatically converted
upon completion of Valentis' initial public offering (using the if converted
method) from the original date of issuance.
59
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANISATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
YEAR ENDED 30 JUNE
-------------------------------
1998 1997 1996
--------- --------- ---------
($ THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss..................................................................................... $ (8,378) $ (4,947) $ (6,901)
BASIC AND DILUTED
Weighted average shares of common stock outstanding used in computing net loss per share..... 10,088 1,126 700
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share......................................................... $ (0.83) $ (4.40) $ (9.86)
--------- --------- ---------
--------- --------- ---------
PRO FORMA
Shares used in computing net loss per share.................................................. 10,088 1,126
Adjusted to reflect the effect of the assumed conversion of preferred stock from the date of
issuance................................................................................... 1,810 6,650
Shares used in computing pro forma net loss per share........................................ 11,898 7,776
--------- ---------
--------- ---------
Pro forma net loss per share................................................................. $ (0.70) $ (0.64)
--------- ---------
--------- ---------
</TABLE>
2. INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
AMORTISED UNREALIZED ESTIMATED
COST GAIN/ (LOSS) FAIR VALUE
---------- ------------- ----------
<S> <C> <C> <C>
30 JUNE 1998
Money market funds........................................................................ $ 15,509 $ -- $ 15,509
Corporate debt securities................................................................. 7,766 28 7,794
---------- ----- ----------
Total..................................................................................... 23,275 28 23,303
Less amounts classified as cash equivalents............................................... (15,509) -- (15,509)
---------- ----- ----------
Total short-term investments.............................................................. 7,766 28 7,794
---------- ----- ----------
Long-term investments (corporate debt securities)......................................... 25,495 (35) 25,460
---------- ----- ----------
Total investments......................................................................... $ 33,261 $ (7) $ 33,254
---------- ----- ----------
---------- ----- ----------
30 JUNE 1997
Money market funds........................................................................ $ 8,041 $ -- $ 8,041
Corporate debt securities................................................................. 15,225 (8) 15,217
---------- ----- ----------
Total..................................................................................... 23,266 (8) 23,258
Less amounts classified as cash equivalents............................................... (8,041) -- (8,041)
---------- ----- ----------
Total short-term investments.............................................................. $ 15,225 $ (8) $ 15,217
---------- ----- ----------
</TABLE>
Unrealised gains were not material and have therefore been netted against
unrealised losses.
At June 30, 1998, the contractual maturities of short-term investments were
all due in one year or less, while all long-term investments have contractual
maturities of one to two years.
60
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COLLABORATIVE AGREEMENTS
ELI LILLY AND COMPANY
In May 1997, Valentis entered into a two-year collaborative research
agreement with Eli Lilly and Company ("Lilly") to develop gene-based
therapeutics using BRCA1, a gene that has been identified as a putative tumor
suppressor. The agreement provides for research and development funding as well
as funding to support manufacturing and process development efforts. If Lilly
and Valentis agree on an appropriate level of research and development efforts,
funding may be extended for up to an additional two years. However, after 21
months from the commencement date of the collaborative research agreement, Lilly
can, at its option, cancel the collaborative research agreement upon
three-months advance notice to Valentis. The agreement provides for certain
royalty and milestone payments to Valentis upon the occurrence of specified
events as set forth in the agreement. Lilly will be responsible for clinical
development and regulatory functions, as well as large-scale clinical and
commercial manufacturing and sales and marketing. Revenue recognised under the
collaborative research agreement with Lilly was $4,041,000 (50% of total
revenues) and $270,000 (5% of total revenues) for the years ended 30 June 1998
and 1997, respectively.
In June 1997, in connection with the Lilly agreement, Lilly purchased
285,714 shares of Valentis' Series F convertible preferred stock at $10.50 per
share.
PFIZER INC
In May 1996, Valentis entered into a four-year collaborative research
agreement, as well as a license and royalty agreement, with Pfizer Inc
("Pfizer") to develop a gene-based therapeutic for the treatment of solid tumors
via angiogenesis inhibition. Under the terms of the collaborative research
agreement, Valentis conducted research and preclinical development activities.
In December 1997, Pfizer exercised the option as stated in the agreement to
discontinue its research and development program. Under the terms of the
agreement, Pfizer continued funding the program through 31 May 1998. Valentis
intends to continue to advance the angiogenesis inhibition program and is
actively seeking a new corporate partner. Revenue recognized under the
collaborative research agreement with Pfizer was $4,042,000 (50% of total
revenues), $3,352,000 (58% of total revenues) and $265,000 (14% of total
revenues) for the years ended 30 June 1998, 1997 and 1996, respectively.
In May 1996, in connection with the above agreements, Pfizer purchased
484,697 shares of Valentis' Series D convertible preferred stock at $7.22 per
share.
GLAXO WELLCOME PLC
In April 1994, Valentis entered into a five-year collaborative agreement
with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. In May 1996, the agreement was amended
such that the research and development portion of the agreement expired as of 1
April 1997. The agreement provided for quarterly nonrefundable research and
development fees. Valentis has completed all of its obligations under the Glaxo
Wellcome agreement and will receive future payments, if any, only through the
achievement of a certain clinical milestone and the payment of royalties.
Revenue for research and development was recorded as earned in accordance with
the agreement. For the years ended 30 June 1997 and 1996, respectively, revenue
recognized under agreement with Glaxo Wellcome was $1,971,000 (34% of total
revenues), and $1,625,000 (86% of total revenues). No revenue was recognized
under the agreement for the fiscal year ended 30 June 1998.
4. LICENSE AND RESEARCH AGREEMENTS
Valentis has entered into several research agreements with universities and
other organisations. These agreements are generally cancellable by either party
upon written notice and may be extended by mutual consent of both parties.
Research and development expenses are recognized as the related services are
performed, generally ratably over the period of service. Expenses under these
agreements were approximately $1,077,000, $865,000, and $1,100,000 for the years
ended 30 June 1998, 1997 and 1996, respectively.
In March of 1998, Valentis entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which Valentis obtained an exclusive license to certain patent rights held by
UPMC in the field of viral and non-viral gene-based therapy for rheumatology. Of
these patent rights, one patent has issued in the United States and related
applications are pending in the USA and worldwide. Under the terms of the
license and collaboration agreement, Valentis issued 117,555 shares of common
stock in payment for the exclusive license to these patent rights. The value of
the common stock issued in the transaction was $1.5 million, which was expensed
to research and development during the period. Valentis expensed the value of
this common stock as the technology was not complete at the date of acquisition.
Under the terms of the license agreement,
61
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
Valentis is not obligated to pay additional royalty payments upon the sale of
products, if any, in the field of non-viral gene therapy, but is required to
share revenue with UPMC at a specified rate upon sub-license of rights in the
field of viral gene therapy. Valentis is obligated to make payments upon the
completion of certain milestones. Certain of the license rights may revert back
to UPMC in the event that Valentis fails to commit resources to the development
of products in the field of rheumatology. In addition, the license and
collaboration agreement with UPMC established exclusive collaborations between
Valentis and several researchers at UPMC for the research and development of
gene-based therapies in the field of rheumatology. Intellectual property
developed by UPMC under the collaboration will be included in the exclusive
license to Valentis described above at no additional cost to Valentis.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
30 JUNE
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Machinery and equipment.............................................................. $ 4,417 $ 3,239
Furniture and fixtures............................................................... 836 481
Leasehold improvements............................................................... 5,121 3,235
Construction-in-progress............................................................. 818 954
--------- ---------
11,192 7,909
Less accumulated depreciation........................................................ (5,041) (3,176)
--------- ---------
Property and equipment, net.......................................................... $ 6,151 $ 4,733
--------- ---------
--------- ---------
</TABLE>
6. LONG-TERM DEBT
OPERATING LINES OF CREDIT
In June 1998, Valentis established a line of credit for $8,000,000 with a
commercial bank. As of 30 June 1998, Valentis had drawn $1,016,000 under the
line of credit. In accordance with the terms of the agreement, the entire
balance was converted into a term loan bearing interest at prime plus 1/2% (9%
at 30 June 1998) due in 42 equal monthly installments. Additional draws under
the credit line will be converted into a term loan on 31 December 1998. The loan
is secured by all tangible personal property, accounts receivable and funds on
deposit, other than the assets securing the equipment financing. As a condition
of the credit line, Valentis must maintain a minimum cash and short-term
investments balance of not less than the greater of the prior two quarters net
cash usage or 90% of the total principal drawn under the line of credit.
In 1995, Valentis established a line of credit for $1,500,000 with a
commercial bank which was fully utilised by August 1995, and, in accordance with
the terms of the agreement, Valentis elected to convert the entire balance to a
term loan bearing interest at prime plus 2% due in 36 equal monthly
installments. The loan is secured by all tangible personal property, accounts
receivable and funds on deposit, other than the assets securing the equipment
financing. As a condition of the term loan, Valentis must maintain a minimum net
worth of $3,000,000 and is prohibited from paying dividends. In conjunction with
this financing arrangement, Valentis issued the bank a warrant to purchase
24,140 shares of Valentis' common stock at $3.88 per share (see Note 9).
The carrying amounts of these obligations approximate their fair value
determined using a discounted cash flow model and Valentis' current incremental
borrowing rate.
EQUIPMENT FINANCING
In May 1996, Valentis entered into an equipment financing agreement for up
to $2,700,000 with a financing company. As of June 30 1998 and 1997, Valentis
had financed $2,700,000 and $1,587,000, respectively, in equipment purchases
under this agreement structured as loans. The equipment loans are to be repaid
over 48 months at interest rates ranging from 15.2% to 16.2% and are secured by
the related equipment. In conjunction with this equipment financing agreement,
Valentis issued a warrant to purchase 38,238 shares of common stock at $3.88 per
share (see Note 9).
In December 1993, Valentis entered into an equipment financing agreement for
up to $2,300,000 with a financing company. As of 30 June 1998 and 1997, Valentis
had financed $1,922,000 in equipment purchases under this agreement structured
as loans. The equipment loans are to be repaid over 42 months at interest rates
ranging from
62
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
13.8 to 16.2 per cent. and are secured by the related equipment. In conjunction
with the original agreement, Valentis issued the financing company a warrant to
purchase 21,630 shares of Valentis' common stock at $3.88 per share (see Note
9).
Following is a schedule of future minimum principal payments under the term
loans and equipment financing arrangements at 30 June 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 30 JUNE
- -------------------------------------------------------------------------------------------------
<S> <C>
1999............................................................................................. $ 1,017
2000............................................................................................. 1,084
2001............................................................................................. 935
2002............................................................................................. 445
---------
$ 3,481
---------
---------
</TABLE>
7. FACILITY LEASE
Valentis leases its facilities under two operating leases. These leases
expire in November 2004 and October 2007 with renewal options at the end of the
initial terms of the leases. Minimal annual rental commitments under the
operating leases at 30 June 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 30 JUNE
- -------------------------------------------------------------------------------------------------
<S> <C>
1999............................................................................................. $ 512
2000............................................................................................. 527
2001............................................................................................. 540
2002............................................................................................. 544
2003............................................................................................. 567
Thereafter....................................................................................... 1,547
---------
$ 4,237
---------
---------
</TABLE>
Rent expense for the years ended 30 June 1998, 1997 and 1996 was
approximately $526,000, $295,000, and $273,000, respectively.
8. RELATED PARTY TRANSACTIONS
Valentis has issued loans to certain employees, of which $130,000 was
outstanding at 30 June 1998 and $27,500 as of 30 June 1997. The loan outstanding
as of 30 June 1998 bears an interest rate of 5.68%. The loan is due and payable
on the fifth anniversary of the date of the loan. Accrued interest is forgiven
annually and recorded as income to the employee. The loan amount outstanding as
of 30 June 1997 has been repaid. Both loans were classified as other receivables
on the balance sheet.
9. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On 15 September 1997, Valentis completed its initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on 29
September 1997, Valentis' underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of Valentis' common stock at $12.00 per
share. The combined net proceeds raised from the offering was approximately
$31.4 million. Upon the completion of the initial public offering, all of the
Series A, B, C, D, E and F preferred stock outstanding were converted into
8,154,779 shares of common stock. Also, upon the completion of the offering,
Valentis' Certificate of Incorporation was amended to authorise 10,000,000
shares of preferred stock, none of which are issued or outstanding and
30,000,000 of common stock.
WARRANTS
In connection with the equipment financing agreement entered into in
December 1993, Valentis issued a warrant to purchase 21,630 shares of common
stock at an exercise price of $3.88 per share. In September 1997, Valentis
issued 14,629 shares of its common stock upon the exercise of the warrant, in
accordance with the terms stated in the warrant agreement.
63
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Valentis issued a warrant to purchase 28,969 shares of common stock at $3.88
per share to the commercial bank providing a line of credit to Valentis. In
accordance with the terms of the warrant, the number of shares subject to the
warrant was reduced from 28,969 to 24,140 in July 1995. The warrant provided for
a reduction in the number of shares upon securing a commitment of at least
$7,000,000 in sales of Series C preferred stock. The warrant is exercisable
immediately and expires at the earlier of 1 June 2000, or in the event of a
merger or sale of substantially all of the assets of Valentis.
In connection with the equipment financing agreement in May 1996, Valentis
issued a warrant to purchase 38,238 shares of common stock at $3.88 per share.
The warrant is exercisable immediately and expires at the earlier of ten years
from the date of issuance or five years after Valentis' initial public offering.
The value ascribed to warrants issued by Valentis as noted above, both
individually and in the aggregate, was immaterial.
1997 STOCK PURCHASE PLAN
In July 1997, the Board of Directors of Valentis adopted the 1997 Employee
Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000
shares of common stock. The Purchase Plan was approved by shareholders in
September 1997. The Purchase Plan is designed to allow eligible employees of
Valentis to purchase shares of common stock through periodic payroll deductions.
The price of common stock purchased under the Purchase Plan must be equal to at
least 85 per cent. of the lower of the fair market value of the common stock on
the commencement date of each offering period or the specified purchase date. At
30 June 1998, no shares had been issued under the Purchase Plan.
EQUITY INCENTIVE PLAN
In July 1997, the Board of Directors of Valentis amended and restated the
1993 Stock Option Plan, renamed it as the 1997 Equity Incentive Plan (the
"Incentive Plan") and reserved 2,100,000 shares of Valentis' common stock for
issuance under the Incentive Plan. The Incentive Plan was approved by
shareholders in September 1997. The Incentive Plan provides for grants to
employees, directors and consultants of the Company. The exercise price of
options granted under the Incentive Plan is determined by the Board of Directors
but cannot be less than 100 per cent. of the fair market value of the common
stock on the date of the grant. Options under the Incentive Plan generally vest
25 per cent. one year after the date of grant and on a pro rata basis over the
following 36 months.
64
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under all option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
----------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at 30 June 1995................................ 141,682 556,814 $ 0.30 $ 0.30
Additional authorisation............................... 320,000 -- -- --
Options granted........................................ (387,329) 387,329 $ 0.30 $ 0.30
Options exercised...................................... -- (693,543) $ 0.30 $ 0.30
Options cancelled...................................... 16,582 (16,582) $ 0.30 $ 0.30
Shares repurchased..................................... 7,500 -- $ 0.30 $ 0.30
---------- ----------- -------------- -----
Balance at 30 June 1996................................ 98,435 234,018 $ 0.30 $ 0.30
Additional authorisation............................... 353,333 -- -- --
Options granted........................................ (388,680) 388,680 $ 1.50 $ 1.50
Options exercised...................................... -- (116,517) $ 0.30-$1.50 $ 0.45
Options cancelled...................................... 26,566 (26,566) $ 0.30-$1.50 $ 0.51
Shares repurchased..................................... 32,045 -- $ 0.30-$1.50 $ 0.39
---------- ----------- -------------- -----
Balance at 30 June 1997................................ 121,699 479,615 $ 0.30-$1.50 $ 1.22
Additional authorisation............................... 770,985 -- -- --
Options granted........................................ (550,722) 550,722 $ 2.70-$15.50 $ 8.15
Options exercised...................................... -- (169,719) $ 0.30-$2.88 $ 1.28
Options cancelled...................................... 52,518 (52,518) $ 0.30-$15.50 $ 4.12
Shares repurchased..................................... 18,429 -- $ 0.30-$1.50 $ 0.43
---------- ----------- -------------- -----
Balance at 30 June 1998................................ 412,909 808,100 $ 0.30-$15.50 $ 5.72
---------- ----------- -------------- -----
---------- ----------- -------------- -----
</TABLE>
The options outstanding and exercisable at 30 June 1998 have been segregated
into ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING AVERAGE
AND REMAINING WEIGHTED
EXERCISE EXERCISABLE CONTRACTUAL AVERAGE
PRICE PER AT JUNE 30, LIFE (IN EXERCISE
SHARE 1998 YEARS) PRICE
- -------------- ----------- --------------- -----------
<S> <C> <C> <C>
$0.30......... 69,562 7.11 $ 0.30
$1.50......... 220,164 8.62 $ 1.50
$2.70-$2.88... 88,624 9.14 $ 2.86
$7.63-$15.50.. 429,750 9.76 $ 9.35
-----------
808,100
-----------
-----------
</TABLE>
The weighted average fair value of options granted in fiscal 1998, 1997 and
1996 was $8.15, $0.199 and $0.037 respectively.
At 30 June 1998, 225,486 shares of common stock at a weighted average price
of $0.76 per share were subject to repurchase.
Valentis recorded deferred compensation expense for the difference between
the exercise price and the deemed fair value for financial statement
presentation purposes of the Valentis' common stock, as determined by the board
of directors, for options granted through the year ended 30 June 1997. Deferred
compensation of $750,000 was recorded on these options based on the deemed fair
value of the common stock at the dates of grant at prices ranging from $1.50 to
$3.75 per share, respectively. In July and August 1997, Valentis granted options
to purchase a total of 59,949 shares at exercise prices ranging from $2.70 to
$2.88 per share. Additional deferred compensation of approximately $636,000 was
recorded based on the deemed fair values of common stock
65
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ranging from $9.00 to $9.60 per share. The deferred compensation is being
amortised to expense over the vesting period of the options, generally four
years. Amortisation of $339,000 and $71,000 was recorded in 1998 and 1997,
respectively.
Valentis has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") requires use of valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, if the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognised.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: risk free interest rate range of 5.3 per cent. to 6.2 per cent.,
5.7 per cent. to 6.5 per cent. and 4.8 per cent. to 6.4 per cent., respectively;
volatility factors of the expected market price of the Company's common stock of
70 per cent., 0 per cent., and 0 per cent., respectively; no expected dividends;
and a weighted-average expected life of the option of 2.5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Valentis' employee stock options and employee stock purchase plans have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and shares issued pursuant to the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Valentis
pro forma information follows (in thousands except for net loss per share
information):
<TABLE>
<CAPTION>
YEAR ENDED 30 JUNE
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss-as reported...................................................... $ (8,378) $ (4,947) $ (6,901)
Net loss-pro forma........................................................ $ (8,708) $ (4,965) $ (6,903)
Net loss per share-as reported............................................ $ (0.83) $ (4.40) $ (9.86)
Net loss per share-pro forma.............................................. $ (0.86) $ (4.41) $ (9.86)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to 30 June
1995, its pro forma effect will not be fully reflected until fiscal 1999.
10. INCOME TAXES
As of 30 June 1998, Valentis had federal net operating loss carryforwards
and federal research credit carryforwards of approximately $23,900,000 and
$600,000, respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 2007 through 2012, if not utilised.
Utilisation of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilisation.
66
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Significant components of Valentis' deferred tax assets and liabilities for
federal income taxes as of 30 June are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Net operating loss carryforwards.................................................... $ 8,200 $ 5,425
Research and development credits.................................................... 600 625
Manufacturing and research equipment credit carryforward............................ 200 --
Capitalised research and development................................................ 1,600 724
Depreciation........................................................................ 1,300 840
Other, net.......................................................................... (600) 467
---------- ---------
Net deferred tax assets............................................................. 11,300 8,081
Valuation allowance................................................................. (11,300) (8,081)
---------- ---------
$ -- $ --
---------- ---------
---------- ---------
</TABLE>
The net valuation allowance increased by $3,219,000 and $2,005,000 during
the years ended June 30, 1998 and 1997, respectively.
11. SUBSEQUENT EVENTS
In September 1998, Valentis (then called Megabios Inc.) and DSM Biologics
("DSM") announced the formation of a broad, strategic partnership focused on the
manufacture and supply of DNA plasmids and lipid:DNA complexes to the entire
gene therapy industry. Plasmids are circular pieces of DNA that contain a
therapeutic gene and instructional elements that regulate the activity of the
gene. The manufacturing process can be used to produce any plasmid.
Under the agreement, Valentis has exclusively licensed its proprietary
manufacturing technology to DSM for use in its facility in Montreal, Canada and
may be extended to include DSM's facility in Gronigen, The Netherlands. In
return, DSM will pay license and milestone fees to Valentis, and DSM and
Valentis will share in the profits generated by the sale of material produced
using Valentis' process. The term of the exclusive partnership is at least three
years, and will continue for as long as the venture is profitable.
The Valentis--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Valentis'
partner, Glaxo Wellcome, and a Phase I/II study for metastatic melanoma,
conducted by Valentis and its academic collaborators at the University of
Colorado Health Sciences Center.
The partnership will create the first manufacturing facility that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. DSM will have
full responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The partnership will use
Valentis' proprietary methods for the manufacture of DNA plasmids and complexing
that DNA with lipids. This arrangement could provide revenue for Valentis in
advance of the launch of commercial gene-based products.
67
<PAGE>
INTERIM FINANCIAL STATEMENTS OF VALENTIS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN $ THOUSANDS)
<TABLE>
<CAPTION>
31 MARCH 30 JUNE
1999 1998
----------- ----------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 13,090 $ 15,172
Short-term investments............................................................................... 23,886 7,794
Other receivables.................................................................................... 1,235 616
Prepaid expenses and other current assets............................................................ 697 539
----------- ----------
Total current assets................................................................................. 38,908 24,121
Property and equipment, net.......................................................................... 11,987 6,151
Long-term investments................................................................................ 10,250 25,460
Other receivables.................................................................................... 130 130
Deposits and other assets............................................................................ 55 39
Goodwill and other intangible assets................................................................. 9,831 --
----------- ----------
$ 71,161 $ 55,901
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................................... $ 2,891 $ 898
Accrued compensation................................................................................. 608 595
Accrued construction-in-progress..................................................................... 243 589
Other accrued liabilities............................................................................ 314 56
Deferred revenue..................................................................................... 4,487 --
Current portion of long-term debt.................................................................... 2,246 1,017
----------- ----------
Total current liabilities............................................................................ 10,789 3,155
Long-term debt....................................................................................... 5,926 2,464
Commitments
Stockholders' equity:
Common stock......................................................................................... 13 13
Additional paid-in capital........................................................................... 119,619 79,838
Deferred compensation................................................................................ (555) (976)
Accumulated other comprehensive income(loss)......................................................... 41 (7)
Accumulated deficit.................................................................................. (64,672) (28,586)
----------- ----------
Total stockholders' equity........................................................................... 54,446 50,282
----------- ----------
$ 71,161 $ 55,901
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
68
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED 31 NINE MONTHS ENDED 31
MARCH MARCH
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Collaborative research and development revenue.................................. $ 790 $ 1,862 $ 2,176 $ 6,615
Operating expenses:
Research and development...................................................... 3,501 4,826 10,287 10,741
General and administrative.................................................... 1,286 1,002 3,380 2,429
Acquired in-process research and development.................................. 25,870 -- 25,870 --
---------- --------- ---------- ---------
Total operating expenses.................................................... 30,657 5,828 39,537 13,170
---------- --------- ---------- ---------
Loss from operations............................................................ (29,867) (3,966) (37,361) (6,555)
Interest income................................................................. 592 757 1,893 1,931
Interest and other expense...................................................... (274) (112) (618) (320)
Net loss........................................................................ $ (29,549) $ (3,321) $ (36,086) $ (4,944)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic and diluted net loss per share............................................ $ (2.09) $ (0.27) $ (2.73) $ (0.54)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Shares used in computing basic and diluted net loss per share................... 14,175 12,469 13,236 9,208
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
69
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
31 MARCH
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................................. $ (36,086) $ (4,944)
Adjustments to reconcile net loss to net cash used in operations
Depreciation........................................................................................ 1,570 1,355
Amortisation of deferred compensation............................................................... 422 309
Purchased in-process research and development....................................................... 25,870 1,500
Changes in operating assets and liabilities:
Other receivables................................................................................. (590) (890)
Prepaid expenses and other........................................................................ (1,772) (54)
Deferred revenue.................................................................................. 317 (254)
Accounts payable.................................................................................. (2,621) 159
Other accrued liabilities......................................................................... 273 355
--------- ---------
Net cash used in operations..................................................................... (12,617) (2,464)
--------- ---------
Cash flows from investing activities
Cash acquired in GeneMedicine merger.................................................................. 11,844 --
Purchase of property and equipment.................................................................... (5,312) (2,113)
Deposits and other assets............................................................................. (16) 282
Purchase of available-for-sale investments............................................................ (9,568) (35,324)
Maturities of available-for-sale investments.......................................................... 8,735 11,200
--------- ---------
Net cash provided by (used in) investing activities............................................. 5,683 (25,955)
--------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt.............................................................. 5,847 681
Payments on long-term debt............................................................................ (1,174) (636)
Proceeds from issuance of common stock, net........................................................... 179 31,509
--------- ---------
Net cash provided by financing activities....................................................... 4,852 31,554
--------- ---------
Net increase (decrease) in cash and cash equivalents.................................................... (2,082) 3,135
Cash and cash equivalents, beginning of period.......................................................... 15,172 9,044
--------- ---------
Cash and cash equivalents, end of period................................................................ $ 13,090 $ 12,179
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid......................................................................................... $ 560 $ 317
--------- ---------
--------- ---------
SCHEDULE OF NON-CASH TRANSACTIONS:
Accrued construction-in-progress...................................................................... $ (346) --
--------- ---------
--------- ---------
Assets acquired for shares of common stock, net of cash acquired and liabilities assumed.............. $ 3,596 --
--------- ---------
--------- ---------
Common stock issued and options assumed in business acquisition....................................... $ 39,603 --
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
70
<PAGE>
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORGANISATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Valentis in accordance with the rules and regulations
of the Securities and Exchange Commission for interim financial information and
in accordance with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Certain information and footnote disclosures normally included in Valentis'
annual financial statements as required by generally accepted accounting
principles have been condensed or omitted. The interim financial statements, in
the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results for the
interim periods ended 31 March 1999 and 1998. The balance sheet at 30 June 1998
is derived from the audited financial statements at that date but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For the purposes of the quarter ended, and the nine months ended, 31 March
1999, the balance sheet, statement of operations, and statement of cash flows
presented are consolidated financial statements, reflecting the operations of
Gene Medicine commencing 18 March 1995.
The results of operations for the three and nine months ended 31 March 1999
are not necessarily indicative of the results of operations to be expected for
the fiscal year, although Valentis expects to incur a substantial loss for the
year ended 30 June 1999. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended 30 June
1998, which are contained in Valentis' Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with Valentis'
corporate partners is recognised over the related funding periods for each
contract. Valentis is required to perform research and development activities as
specified in each respective agreement on a best-efforts basis. The payments
received under each respective agreement are not refundable. Valentis is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceed the revenue recognised under such agreements over the term
of the respective agreements. Deferred revenue may result when Valentis does not
incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. In addition, as a result of the
GeneMedicine merger, deferred revenue at 31 March 1999, include an obligation
related to a research agreement with Roche Holdings Ltd. ("Roche"). Under a
corporate partnership with Roche, Valentis may upon certain circumstances be
obligated to conduct research and development in an amount not to exceed $5
million at the end of the five year agreement. Valentis has therefore, deferred
a portion of research funding received from Roche under this agreement to
provide for this obligation.
Milestone payments are recognised pursuant to collaborative agreements upon
the achievement of specified milestones, such as the filing of Investigational
New Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. In the three months ended 31 March 1999, a milestone payment of
$250,000 was recognized from Valentis' manufacturing partnership with DSM upon
the successful technology transfer of Valentis' plasmid DNA technology to DSM,
following a successful 3,500 liter production run at DSM's facility in Montreal,
Quebec, Canada.
NET LOSS PER SHARE
Basic earnings per share is computed by dividing income or loss applicable
to common stockholders by the weighted-average number of common shares
outstanding for the period net of certain common shares outstanding which are
subject to continued vesting and Valentis' right of repurchase. Basic earnings
per share excludes any dilutive effects of options.
Diluted net loss per share has not been presented separately as, given
Valentis' net loss position, the result would be anti-dilutive.
The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 70,965
common shares which are outstanding but are subject to Valentis' right of
repurchase which expires ratably over 4 years, and options to purchase
approximately 2,704,709 shares of common stock at a weighted average price of
$7.02 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
71
<PAGE>
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 31 NINE MONTHS ENDED 31
MARCH MARCH
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss........................................................................ $ (29,549) $ (3,321) $ (36,086) $ (4,944)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
BASIC AND DILUTED
Weighted average shares of common stock outstanding............................. 14,246 12,743 13,339 9,513
Common shares subject to repurchase............................................. (71) (274) (103) (305)
---------- --------- ---------- ---------
Weighted average shares of common stock used in computing net loss per share.... 14,175 12,469 13,236 9,208
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic and diluted net loss per share............................................ $ (2.09) $ (0.27) $ (2.73) $ (0.54)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
MERGER WITH GENEMEDICINE, INC.
On 18 March 1999, Valentis (then called Megabios Inc.) completed its merger
with GeneMedicine, Inc. On 29 April 1999, the combined company was renamed
Valentis, Inc. Under the terms of the merger agreement, each outstanding share
of GeneMedicine common stock was converted into 0.571 of a share of Valentis'
common stock. This resulted in the issuance of approximately 9.1 million
additional shares of Valentis' common stock, valued at $38.7 million. The
purchase price also included approximately $850,000 related to GeneMedicine's
stock options and outstanding warrants assumed by Valentis and $1.7 million of
transaction costs, for an aggregate purchase price of $41.3 million.
The merger transaction was accounted for as a purchase. As a result of the
purchase, $25.9 million of the purchase price was charged to in-process research
and development in the Company's Condensed Consolidated Statements of Operations
for the quarter ended 31 March 1999.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired.................................................... $ 14,410
In-process research and development......................................... 25,870
Intangible assets-assembled workforce and goodwill.......................... 9,831
Liabilities assumed (including GeneMedicine transaction costs and other
obligations due upon close of the merger)................................. (8,801)
---------
$ 41,310
---------
---------
</TABLE>
The intangible assets--assembled workforce and goodwill will be amortised
over their estimated useful lives of three years.
The Board of Directors of the combined company consists of eight directors,
three of whom were directors of GeneMedicine. Benjamin F. McGraw III remains as
chairman, president and CEO of the combined entity.
CREDIT FACILITY
In June 1998, Valentis obtained an $8.0 million line of credit from a
commercial bank. As of 30 June 1998, Valentis had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
31 July 1998. An additional $5.9 million was drawn from the line of credit in
the nine months ended 31 March 1999. Interest on $4.6 million of this amount is
accrued and paid monthly and was converted into a term loan bearing interest at
the prime rate plus 0.5% on 31 December 1998, payable in 42 monthly installments
beginning 31 January 1999. On 28 January 1999, Valentis amended the terms of the
line of credit. Under the amended terms, Valentis extended its remaining credit
facility draws to 31 March 1999, from the original date of 31 December 1998,
making the remaining $2.4 million of credit available through 31 March 1999.
Draws of $1.3 million made after 31 December 1998 are
72
<PAGE>
payable in 39 monthly installments beginning 31 March 1999. Valentis fully
utilised its line of credit with a final draw of $1.1 million in April 1999.
COMPREHENSIVE INCOME (LOSS)
As of 1 July 1998, Valentis adopted Statement of Financial Accounting
Standards No.130, "Reporting of Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however the adoption of SFAS 130 had no impact on Valentis' net
loss or stockholders' equity. SFAS 130 requires unrealised gains or losses on
Valentis' available-for-sale securities which, prior to adoption, were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130. For the quarters ended March 31, 1999 and 1998, total
comprehensive loss amounted to $29.5 million and $3.4 million, respectively. For
the nine-month periods ended March 31, 1999 and 1998, total comprehensive losses
were $36.1 million and $5.0 million, respectively
NEW ACCOUNTING STANDARDS
Effective 1 July 1998, Valentis adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superceded SFAS 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS 131 establishes standards for the way
that public business enterprises report selected financial information about
operating segments in annual financial statements. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 will have no impact on Valentis'
results of operations, or financial position.
73
<PAGE>
APPENDIX IV
FINANCIAL INFORMATION ON POLYMASC
INTRODUCTION
The financial information contained in this Appendix IV is extracted without
material adjustment from the audited accounts of PolyMASC for the three
financial periods ended 31 December 1996, 1997 and 1998.
The information contained in this Appendix IV has been extracted from
previously published sources and does not constitute statutory accounts within
the meaning of the Companies Act. Audited statutory accounts have been delivered
to the Registrar of Companies for each of the three financial periods ended 31
December 1996, 1997 and 1998. Unqualified audit reports issued by Registered
Auditors, in accordance with the requirements of the Companies Act, have been
given by Coopers and Lybrand for the financial periods ended for 31 December
1996 and 1997, and BDO Stoy Hayward, for the financial period ended 31 December
1998.
PROFIT AND LOSS ACCOUNTS
The profit and loss accounts for the three financial periods ended 31
December 1998 are set out below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- 17 MONTHS
NOTES -----------
----- L000'S L000'S
L000'S
<S> <C> <C> <C> <C>
TURNOVER.............................................................. 1 582 528 117
Cost of sales......................................................... (851) (661) (371)
--------- --------- -----------
GROSS LOSS............................................................ (269) (133) (254)
Administrative expenses............................................... (1,394) (981) (1,020)
--------- --------- -----------
OPERATING LOSS........................................................ (1,663) (1,114) (1,274)
Interest receivable................................................... 86 143 203
Interest payable...................................................... (9) (4) --
--------- --------- -----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION........................... 4 (1,586) (975) (1,071)
Tax on ordinary activities............................................ 5 -- -- --
--------- --------- -----------
LOSS FOR THE PERIOD................................................... (1,586) (975) (1,071)
--------- --------- -----------
--------- --------- -----------
Loss per ordinary share (in pence).................................... 6 (8.4) (5.2) (7.0)
</TABLE>
All activities of PolyMASC are continuing operations.
There is no difference between the loss on ordinary activities before
taxation and the loss for the periods stated above, and their historical cost
equivalents.
PolyMASC has no recognised gains and losses other than those reported above
and therefore no separate statement of total recognised gains and losses has
been presented.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- 17 MONTHS
L000'S L000'S -----------
L000'S
<S> <C> <C> <C>
Loss for the financial period................................................................... (1,586) (975) (1,071)
New share capital issued........................................................................ 677 -- 5,214
Expenses of share issues........................................................................ -- -- (633)
VAT recovered on start up costs in previous years............................................... 69 -- --
--------- --------- -----------
Net (reduction) addition to shareholders' funds................................................. (840) (975) 3,510
Opening shareholders' funds..................................................................... 2,535 3,510 --
--------- --------- -----------
CLOSING SHAREHOLDERS' FUNDS..................................................................... 1,695 2,535 3,510
--------- --------- -----------
--------- --------- -----------
</TABLE>
74
<PAGE>
BALANCE SHEETS
The balance sheets for the three financial periods ended 31 December 1998
are set out below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
NOTES
----- L000'S L000'S L000'S
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets....................................................... 7 260 390 520
Tangible assets......................................................... 8 391 347 184
Own shares.............................................................. 9 1 1 1
--------- --------- ---------
652 738 705
CURRENT ASSETS
Stock................................................................... 10 16 19 22
Debtors: amounts falling due within one year............................ 11 118 184 41
Cash at bank and in hand................................................ 1,373 1,956 2,938
--------- --------- ---------
1,507 2,159 3,001
CREDITORS: amounts falling due within one year.......................... 12 435 314 196
--------- --------- ---------
NET CURRENT ASSETS...................................................... 1,072 1,845 2,805
--------- --------- ---------
Total assets less current liabilities................................... 1,724 2,583 3,510
CREDITORS: amounts falling due after more than one year................. 12 29 48 --
--------- --------- ---------
NET ASSETS.............................................................. 1,695 2,535 3,510
--------- --------- ---------
--------- --------- ---------
CAPITAL AND RESERVES
Called up share capital................................................. 14 71 70 70
Share premium account................................................... 15 5,256 4,511 4,511
Profit and loss account................................................. 15 (3,632) (2,046) (1,071)
Equity shareholders' funds.............................................. 1,645 2,485 3,460
Non-equity shareholders' funds.......................................... 50 50 50
--------- --------- ---------
TOTAL SHAREHOLDERS' FUNDS............................................... 1,695 2,535 3,510
--------- --------- ---------
--------- --------- ---------
</TABLE>
75
<PAGE>
CASH FLOW STATEMENTS
The cash flow statements for the three financial periods ended 31 December
1998 are set out below:
<TABLE>
<CAPTION>
1997 1998 1996
--------- --------- 17 MONTHS
NOTES -----------
--------- L000'S L000'S
L000'S
<S> <C> <C> <C> <C>
Cash outflow from operating activities................................ 16 (1,207) (971) (987)
Returns on investments and servicing of finance....................... 17 77 139 203
Capital expenditure and financial investment.......................... 17 (138) (120) (859)
--------- --------- -----------
Cash outflow before management of liquid resources and financing...... (1,268) (952) (1,643)
Management of liquid resources........................................ 17 880 1,020 (2,920)
Financing............................................................. 17 685 (30) 4,581
--------- --------- -----------
Increase in cash for the period....................................... 18,19 297 38 18
--------- --------- -----------
--------- --------- -----------
</TABLE>
All cash flows are from continuing activities
76
<PAGE>
NOTES TO THE ACCOUNTS
1. PRINCIPAL ACCOUNTING POLICIES
The financial statements have been prepared in accordance with applicable
Accounting Standards in the United Kingdom. A summary of the more important
accounting policies, which have been applied consistently, is set out below.
BASIS OF ACCOUNTING
The financial statements are prepared in accordance with the historical cost
convention.
TANGIBLE AND INTANGIBLE FIXED ASSETS
The cost of tangible and intangible fixed assets is their purchase cost,
together with any incidental costs of acquisition. Depreciation is calculated so
as to write off the cost of tangible and intangible fixed assets, less their
estimated residual values, on a straight line basis over the expected useful
economic lives of the assets concerned. The principal annual rates used for this
purpose are:
<TABLE>
<CAPTION>
%
---------
<S> <C>
Improvements to leasehold property................................................................. 25
Equipment and furniture............................................................................ 20
Computer equipment................................................................................. 33.3
Intellectual property rights....................................................................... 20
Know how........................................................................................... 20
Patents............................................................................................ 20
</TABLE>
RESEARCH AND DEVELOPMENT EXPENDITURE
Research and development expenditure is written off to the profit and loss
account as it is incurred.
FINANCE AND OPERATING LEASES
Costs in respect of operating leases are charged on a straight line basis
over the lease term. Leasing agreements which transfer to PolyMASC substantially
all the benefits and risks of ownership of an asset are treated as if the asset
had been purchased outright. The assets are included in fixed assets and the
capital element of the leasing commitments is shown as obligations under finance
leases. The lease rentals are treated as consisting of capital and interest
elements. The capital element is applied to reduce the outstanding obligations
and the interest element is charged against profit so as to give a constant
periodic rate of charge on the remaining balance outstanding at each accounting
period. Assets held under finance leases are depreciated over the shorter of the
lease terms and the useful lives of equivalent owned assets.
STOCKS
Stocks are stated at the lower of cost and net realisable value. Cost is
determined on a first in first out basis.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated into sterling at the rates
ruling when the transactions are incurred. At the end of the financial period
assets and liabilities denominated in foreign currencies are translated into
sterling at the rates of exchange ruling at the balance sheet date.
TURNOVER
Turnover, which excludes value added tax, represents the income receivable
under collaborative agreements.
PENSION COSTS
The amount charged in the profit and loss account represents contributions
payable to the pension schemes of certain directors and employees in respect of
the accounting period (Note 13).
SEGMENTED ANALYSIS
PolyMASC has only one class of business. Turnover consists principally of
sales made to North America originating from the United Kingdom. PolyMASC's loss
before taxation and its net assets employed arise entirely in the United
Kingdom.
77
<PAGE>
2. DIRECTORS' EMOLUMENTS
Details of the emoluments of the individual Directors of PolyMASC for the
three financial periods are as follows:
<TABLE>
<CAPTION>
MONEY PURCHASE
SALARY AND SHARE PENSION TOTAL YEAR TO
FEES AWARDS PREMIUMS 31 DEC 98
L000'S L000'S L000'S L000'S
----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
J T Rees.................................................... 25 5 -- 30
Dr G E Francis.............................................. 100 -- -- 100
P W C Lomax................................................. 16 -- -- 16
Dr S A Charles.............................................. 55 -- 6 61
R S Harris.................................................. 25 9 -- 34
D M M Dutton................................................ -- 4 -- 4
J A Batten.................................................. -- -- -- --
-- --
--- ---
221 18 6 245
-- --
-- --
--- ---
--- ---
<CAPTION>
TOTAL 17
TOTAL YEAR TO MONTHS TO 31
31 DEC 97 DEC 96
L000'S L000'S
------------- -------------
<S> <C> <C>
J T Rees.................................................... 25 34
Dr G E Francis.............................................. 84 65
P W C Lomax................................................. 16 16
Dr S A Charles.............................................. 83 18
R S Harris.................................................. 16 22
D M M Dutton................................................ -- --
J A Batten.................................................. -- 104
--- ---
224 259
--- ---
--- ---
</TABLE>
The share awards included above were made by the Trustees of the PolyMASC
Pharmaceuticals plc Employee Benefit Trust, and represent the market value of
the shares on the date of the award.
Dr Francis is employed by the Royal Free and University College Hospital
School of Medicine and seconded to the Company and an administration fee of
L9,099 (1997: L7,950; 1996 17 months: L7,733) which is not included in the above
was paid by PolyMASC to the Royal Free and University College Hospital School of
Medicine. The amounts shown for salary and fees for Dr Francis and Dr Charles
include L10,000 and L7,120 respectively (1997: L10,000 each 1996: L10,000 each)
for a car allowance which is not pensionable, and director's fees for Dr Francis
from the Company of L5,000 (1997: L4,000; 1996 L4,000) which are not
pensionable.
During the year ended 31 December 1998, L42,520 (including pension
contributions of L4,020) was paid in lieu of notice to Dr S A Charles, a former
director. This amount is not included within the emoluments disclosed above.
For the period ended 31 December 1996, L40,320 was paid in respect of inter
alia compensation for loss of office to J A Batten, a former director.
No director waived emoluments in respect of the year ended 31 December 1998
(1997: L0; 1996 17 months: L0).
On 9 June 1998 J T Rees exercised options over 25,000 ordinary shares at
100p each making a notional gain of L8,375.
PENSION ARRANGEMENTS
PolyMASC paid 12 per cent. of pensionable salary to a money purchase pension
scheme for Dr Charles. Dr Francis, the highest paid director, who is employed by
the Royal Free and University College Hospital School of Medicine and seconded
to PolyMASC, is a member of her employer's defined benefit pension scheme. The
Company is charged for the employer's contributions to the scheme. In the year
to 31 December 1998 the contributions were L11,900 (1997: L9,800; 1996 17
months: L11,231). The following disclosure for Dr Francis is based on the
accrued benefits method and the amounts shown represent the pension accrued in
the year and payable on retirement at 65, based on pensionable services to date,
current pensionable salary and benefits transferred from previous employers.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Age at 31 December..................................................................................... 51 years 50 years
Pensionable service at 31 December..................................................................... 20 years 19 years
Dr Francis' contributions in the year.................................................................. L5,398 L4,445
Increase in accrued pension during the year............................................................ L4,736 L3,548
Increase in the accrued lump sum during the year....................................................... L14,208 L10,644
Accumulated total accrued pension at 31 December....................................................... L21,789 L17,143
Accumulated total accrued lump sum at 31 December...................................................... L65,637 L51,429
</TABLE>
78
<PAGE>
3. EMPLOYEE INFORMATION
The average monthly number of persons (including executive directors)
employed by PolyMASC during the three financial periods was:
<TABLE>
<CAPTION>
1998 1997
NUMBER NUMBER
------------- -------------
<S> <C> <C>
By category
Scientists................................................................................... 15 9
Administrative............................................................................... 7 4
-- --
22 13
-- --
-- --
<CAPTION>
1996
(17 MONTHS)
NUMBER
-----------------
<S> <C>
By category
Scientists................................................................................... 7
Administrative............................................................................... 3
--
10
--
--
</TABLE>
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
----------- -----------
<S> <C> <C>
Staff costs (for the above persons) consist of
Wages and salaries........................................................................... 686 441
Social security costs........................................................................ 60 40
Other pensions costs (Note 13)............................................................... 44 41
--- ---
790 522
--- ---
--- ---
<CAPTION>
1996
L'000
---------------
<S> <C>
Staff costs (for the above persons) consist of
Wages and salaries........................................................................... 335
Social security costs........................................................................ 32
Other pensions costs (Note 13)............................................................... 42
---
409
---
---
</TABLE>
PolyMASC's policy is to appoint junior scientists and technicians from
agencies for evaluation prior to full time employment. The above staff do not
include agency staff and a part time Patents Executive and part time IT Manager
working with PolyMASC.
4. LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
----- -----
<S> <C> <C>
This is stated after charging:
Depreciation charge for the period:
Intangible fixed assets........................................................................... 130 130
Tangible fixed assets............................................................................. 120 67
Tangible fixed assets under finance leases........................................................ 15 11
Research and development expenditure.............................................................. 294 99
Auditors' remuneration for:
Audit............................................................................................. 13 14
Other services to PolyMASC........................................................................ -- 2
Hire of plant and machinery--operating leases..................................................... -- 15
Hire of other assets--operating leases............................................................ 70 56
Finance lease interest............................................................................ 9 4
<CAPTION>
1996
(17 MONTHS)
L'000
---------------
<S> <C>
This is stated after charging:
Depreciation charge for the period:
Intangible fixed assets........................................................................... 130
Tangible fixed assets............................................................................. 24
Tangible fixed assets under finance leases........................................................ --
Research and development expenditure.............................................................. 119
Auditors' remuneration for:
Audit............................................................................................. 8
Other services to PolyMASC........................................................................ 1
Hire of plant and machinery--operating leases..................................................... 1
Hire of other assets--operating leases............................................................ 53
Finance lease interest............................................................................ --
</TABLE>
5. TAX ON LOSS ON ORDINARY ACTIVITIES
There is no tax charge based on the result for the year (1997: L0, 1996 17
months: L0). PolyMASC has tax losses available for offset against future trading
profits.
6. LOSS PER ORDINARY SHARE
The loss per share has been calculated in accordance with FRS14. Prior year
figures have been restated to accord with the current year's presentation.
The 1998 loss per ordinary share has been calculated by dividing the loss of
L1,586,000 for the year by 18,925,000, being the weighted average number of
ordinary shares in issue and ranking for dividends, adjusted by the weighted
average number of own shares held of 1,233,000, during the year ended 31
December 1998.
79
<PAGE>
For 1997 the loss per ordinary share was calculated by dividing the loss of
L975,000 for the year by 18,750,000, being the weighted average number of
ordinary shares in issue and ranking for dividends, adjusted by the weighted
average number of own shares held of 1,250,000, during the year ended 31
December 1997.
The 1996 loss per ordinary share was calculated by dividing the loss of
L1,071,000 for the year by 15,194,049, being the weighted average number of
ordinary shares in issue and ranking for dividends during the period from 4
August 1995, (the date PolyMASC was incorporated) to 31 December 1996.
7. INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
KNOW HOW PATENTS TOTAL
------------- ----------- -----
INTELLECTUAL
PROPERTY RIGHTS L'000 L'000 L'000
-----------------
L'000
<S> <C> <C> <C> <C>
COST
At 1 January 1998 and at 31 December 1998....................... 100 50 500 650
--
--- --- ---
DEPRECIATION
At 1 January 1998............................................... 40 20 200 260
Charge for the year............................................. 20 10 100 130
--
--- --- ---
At 31 December 1998............................................. 60 30 300 390
--
--- --- ---
NET BOOK VALUE
At 31 December 1998............................................. 40 20 200 260
--
--
--- --- ---
--- --- ---
At 31 December 1997............................................. 60 30 300 390
--
--
--- --- ---
--- --- ---
COST
At 1 January 1997 and at 31 December 1997....................... 100 50 500 650
--
--- --- ---
DEPRECIATION
At 1 January 1997............................................... 20 10 100 130
Charge for year................................................. 20 10 100 130
--
--- --- ---
At 31 December 1997............................................. 40 20 200 260
--
--- --- ---
NET BOOK VALUE
At 31 December 1997............................................. 60 30 300 390
--
--
--- --- ---
--- --- ---
At 31 December 1996............................................. 80 40 400 520
--
--
--- --- ---
--- --- ---
COST
Additions....................................................... 100 50 500 650
--
--- --- ---
At 31 December 1996............................................. 100 50 500 650
--
--- --- ---
DEPRECIATION
Charge for period............................................... 20 10 100 130
--
--- --- ---
At 31 December 1996............................................. 20 10 100 130
--
--- --- ---
NET BOOK VALUE
At 31 December 1996............................................. 80 40 400 520
--
--
--- --- ---
--- --- ---
</TABLE>
80
<PAGE>
8. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
EQUIPMENT AND COMPUTER
FURNITURE EQUIPMENT TOTAL
--------------- ------------- -----
IMPROVEMENT TO
LEASEHOLD L'000 L'000 L'000
PROPERTY
-----------------
L'000
<S> <C> <C> <C> <C>
COST
At 1 January 1998.......................................... 29 358 61 448
Additions.................................................. 6 149 28 183
Disposals.................................................. -- (9) -- (9)
--
--- --- ---
At 31 December 1998........................................ 35 498 89 622
--
--- --- ---
DEPRECIATION
At 1 January 1998.......................................... 4 80 17 101
Charge for the year........................................ 8 101 26 135
Disposals.................................................. -- (5) -- (5)
--
--- --- ---
At 31 December 1998........................................ 12 176 43 231
--
--- --- ---
NET BOOK VALUE
At 31 December 1998........................................ 23 322 46 391
--
--
--- --- ---
--- --- ---
At 31 December 1997........................................ 25 278 44 347
--
--
--- --- ---
--- --- ---
COST
At 1 January 1997.......................................... 0 179 29 208
Additions.................................................. 29 182 32 243
Disposals.................................................. -- (3) -- (3)
--
--- --- ---
At 31 December 1997........................................ 29 358 61 448
--
--- --- ---
DEPRECIATION
At 1 January 1997.......................................... 0 21 3 24
Charge for the year........................................ 4 60 14 78
Disposals.................................................. -- (1) -- (1)
--
--- --- ---
At 31 December 1997........................................ 4 80 17 101
--
--- --- ---
NET BOOK VALUE
At 31 December 1997........................................ 25 278 44 347
--
--
--- --- ---
--- --- ---
At 31 December 1996........................................ -- 158 26 184
--
--
--- --- ---
--- --- ---
COST
Additions.................................................. 157 22 29 208
--
--- --- ---
At 31 December 1996........................................ 157 22 29 208
--
--- --- ---
DEPRECIATION
Charge for the period...................................... 18 3 3 24
--
--- --- ---
At 31 December 1996........................................ 18 3 3 24
--
--- --- ---
NET BOOK VALUE
At 31 December 1996........................................ 139 19 26 184
--
--
--- --- ---
--- --- ---
</TABLE>
The net book value of tangible fixed assets includes an amount of L104,969
(1997: L102,712, 1996: Nil) in respect of assets held under finance leases.
81
<PAGE>
9. EMPLOYEE SHARE OWNERSHIP PLAN
On 17 November 1995 the PolyMASC Pharmaceuticals plc Employee Benefit Trust
("the Trust") was established for the benefit of officers and employees of the
Company.
The trustees have the power, INTER ALIA, to invest trust monies in the
purchase or acquisition of such property as they see fit, and have discretion to
provide benefits to the beneficiaries of the Trust.
At 31 December 1998, PolyMASC had provided a loan to the Trust of L1,250
(1997 L1,250).
At 31 December 1998 the Trust held 1,231,117 (1997: 1,250,000; 1996:
1,250,000) ordinary shares of 0.1 pence each having a nominal value of L1,231
(1997: L1,250; 1996: L1,250) in PolyMASC. In accordance with UITF 13 this amount
is included in the balance sheet as a fixed asset in respect of own shares. The
market value of the Trust's shares at 31 December 1998 was L720,203 (1997:
L1,456,250; 1996: L1,518,750).
The cost of shares held by the Trust is written off to the profit and loss
account in the year to which the share award relates.
No dividends have been received or waived by the Trust and no costs have
been incurred by it.
10. STOCKS
<TABLE>
<CAPTION>
1997 1996
----- -----
1998
----- L'000 L'000
L'000
<S> <C> <C> <C>
Raw materials and consumables...................................................... 16 19 22
--- --- ---
--- --- ---
</TABLE>
The directors consider that the replacement value of stocks is not
materially different from the value stated above.
11. DEBTORS: amounts falling due within one year
<TABLE>
<CAPTION>
1997 1996
----- -----
1998
----- L'000 L'000
L'000
<S> <C> <C> <C>
Trade debtors...................................................................... 12 137 --
Other debtors...................................................................... 87 33 30
Prepayments and accrued income..................................................... 19 14 11
--- --- ---
118 184 41
--- --- ---
--- --- ---
</TABLE>
12. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1997 1996
----- -----
1998
----- L'000 L'000
L'000
<S> <C> <C> <C>
Trade creditors.................................................................... 130 194 122
Taxation and social security....................................................... 15 11 --
Obligations under finance leases................................................... 48 45 12
Accruals........................................................................... 242 64 62
--- --- ---
435 314 196
--- --- ---
--- --- ---
CREDITORS: amounts falling due after more than one year
Obligations under finance leases due within one to two years....................... 29 33 --
Obligations under finance leases due within two to five years...................... -- 15 --
--- --- ---
29 48 --
--- --- ---
--- --- ---
</TABLE>
13. PENSION COSTS
The total pension cost charge of L43,883 (1997: L41,392, 1996: L42,107) in
Note 3 represents contributions payable by PolyMASC during the year. PolyMASC
was charged L19,572 (1997: L16,787) in the year for the
82
<PAGE>
membership of defined benefit schemes for a director and two employees. No
contributions were outstanding at the year end (1997: L0, 1996: L1,726).
14. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1997 1996
----- -----
1998
----- L'000 L'000
L'000
<S> <C> <C> <C>
Authorised
27,000,000 (1997: 20,000,000; 1996: 20,000,000) ordinary shares of 0.1p each....... 27 20 20
50,000 deferred shares of L1 each.................................................. 50 50 50
--- --- ---
77 70 70
--- --- ---
--- --- ---
Allotted, called up and fully paid
21,025,000 (1997: 20,000,000; 1996: 20,000,000) ordinary shares of 0.1p each....... 21 20 20
50,000 deferred shares of L1 each.................................................. 50 50 50
--- --- ---
71 70 70
--- --- ---
--- --- ---
</TABLE>
On 26 March 1998, the authorised share capital of PolyMASC was increased to
L77,000 by the creation of 7,000,000 ordinary shares of 0.1p each.
On 9 June 1998, options over 25,000 ordinary shares of 0.1p each were
exercised at 100p per share.
On 10 November 1998, 1,000,000 ordinary shares of 0.1p each were allotted
for cash at 65.1605p per share to Nomura International plc.
The deferred shares are non-voting, with no rights to dividends and have a
right of return of capital after all ordinary share capital has been paid up on
a winding up. The deferred shares do not have any rights to participate in any
surplus remaining after such repayment of capital or any rights over the assets
of PolyMASC.
15. SHARE PREMIUM ACCOUNT AND RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS
ACCOUNT
SHARE -----------
PREMIUM
ACCOUNT L'000
-----------
L'000
<S> <C> <C>
At 1 January 1998.................................................................. 4,511 (2,046)
Premium on shares issued in the year............................................... 676 --
Loss for the year.................................................................. -- (1,586)
VAT recovered on start up costs in previous years.................................. 69 --
----- -----------
At 31 December 1998................................................................ 5,256 (3,632)
----- -----------
----- -----------
At 1 January 1997.................................................................. 4,511 (1,071)
Loss for the year.................................................................. 0 (975)
----- -----------
At 31 December 1997................................................................ 4,511 (2,046)
----- -----------
----- -----------
Premium on share issues............................................................ 5,144 --
Expenses of share issues........................................................... (633) --
Loss for the period................................................................ -- (1,071)
----- -----------
At 31 December 1996................................................................ 4,511 (1,071)
----- -----------
----- -----------
</TABLE>
83
<PAGE>
16. RECONCILIATION OF OPERATING LOSS TO CASH OUTFLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1996
1997 17 MONTHS
1998 --------- -----------
--------- L'000 L'000
L'000
<S> <C> <C> <C>
Operating loss................................................................................. (1,663) (1,114) (1,274)
Depreciation charges on intangible fixed assets................................................ 130 130 130
Depreciation charges on tangible fixed assets.................................................. 135 78 24
Loss on disposal of tangible fixed assets...................................................... 4 2 --
Decrease/(increase) in stocks.................................................................. 3 3 (22)
Decrease/(increase) in debtors................................................................. 66 (143) (41)
Increase in creditors.......................................................................... 118 73 196
--------- --------- -----------
Net cash outflow from operating activities..................................................... (1,207) (971) (987)
--------- --------- -----------
--------- --------- -----------
</TABLE>
17. NOTES TO THE CASH FLOW STATEMENT
Analysis of cash flows for headings netted in the cash flow statement
<TABLE>
<CAPTION>
1996
1997 17 MONTHS
1998 --------- -----------
--------- L'000 L'000
L'000
<S> <C> <C> <C>
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received.............................................................................. 86 143 203
Interest paid on finance leases................................................................ (9) (4) --
--------- --------- -----------
77 139 203
--------- --------- -----------
--------- --------- -----------
CAPITAL EXPENDITURE
Payments to acquire intangible fixed assets.................................................... -- -- (650)
Payments to acquire tangible fixed assets...................................................... (138) (120) (208)
Own shares..................................................................................... -- -- (1)
--------- --------- -----------
MANAGEMENT OF LIQUID RESOURCES................................................................. (138) (120) (859)
--------- --------- -----------
--------- --------- -----------
Cash from (placed on) deposit.................................................................. 880 1,020 (2,920)
--------- --------- -----------
--------- --------- -----------
FINANCING
Issue of ordinary shares and deferred shares................................................... 652 -- 5,214
Expenses paid in connection with share issues.................................................. -- -- (633)
Exercise of share options...................................................................... 25 -- --
VAT recovered on start up costs in previous years.............................................. 69 -- --
Repayment of principal under finance leases.................................................... (61) (30) --
--------- --------- -----------
685 (30) 4,581
--------- --------- -----------
--------- --------- -----------
</TABLE>
84
<PAGE>
18. ANALYSIS OF NET FUNDS
<TABLE>
<CAPTION>
OTHER NON AT 31
CASHFLOW CASH DECEMBER 1998
----------- CHANGES -------------
AT 1 -----------
JANUARY L'000 L'000
1998 L'000
-----------
L'000
<S> <C> <C> <C> <C>
Cash at bank and in hand....................................... 56 297 -- 353
Current asset investments...................................... 1900 (880) -- 1,020
Finance leases................................................. (93) 61 (45) (77)
----- ----------- --- -----
1,863 (522) (45) 1,296
----- ----------- --- -----
----- ----------- --- -----
</TABLE>
<TABLE>
<CAPTION>
OTHER NON AT 31
CASHFLOW CASH DECEMBER 1997
----------- CHANGES -------------
AT 1 -----------
JANUARY L'000 L'000
1997 L'000
-----------
L'000
<S> <C> <C> <C> <C>
Cash at bank and in hand....................................... 18 38 -- 56
Current asset investments...................................... 2,920 (1,020) -- 1,900
Finance leases................................................. -- 30 (123) (93)
----- ----------- --- -----
2,938 (952) (123) 1,863
----- ----------- --- -----
----- ----------- --- -----
</TABLE>
<TABLE>
<CAPTION>
AT 31
CASHFLOW DECEMBER 1996
----------- -------------
L'000 L'000
<S> <C> <C> <C> <C>
Cash in hand, at bank.......................................... 18 18
Current asset investments...................................... 2,920 2,920
----------- -----
2,938 2,938
----------- -----
----------- -----
</TABLE>
Current asset investments represent cash placed on treasury deposit.
19. RECONCILIATION OF NET CASH INFLOW TO MOVEMENT IN NET FUNDS
<TABLE>
<CAPTION>
1996
1997 17 MONTHS
1998 --------- -----------
--------- L'000 L'000
L'000
<S> <C> <C> <C>
INCREASE IN CASH IN THE PERIOD.................................................................. 297 38 18
Repayment of principal under finance leases..................................................... 61 30 --
Cash inflow from decrease in liquid resources................................................... (880) (1,020) 2,920
--------- --------- -----
Change in net funds resulting from cash flows................................................... (522) (952) 2,938
New finance leases.............................................................................. (45) (123) --
--------- --------- -----
Movement in net funds for the period............................................................ (567) (1,075) 2,931
Net funds at 1 January.......................................................................... 1,863 2,938 --
--------- --------- -----
Net funds at 31 December........................................................................ 1,296 1,863 2,938
--------- --------- -----
--------- --------- -----
</TABLE>
85
<PAGE>
20. RELATED PARTY TRANSACTIONS
At 1 January 1998, the Royal Free Hospital School of Medicine (RFHSM) owned
Freemedic plc which owned 18.48% of PolyMASC's shares. On 1 August 1998 RFHSM
merged with University College London (UCL) which then became the owner of
Freemedic plc and RFHSM became the Royal Free and University College Hospital
School of Medicine (RFUCHSM). At 31 December 1998, UCL owned Freemedic plc which
owned 17.57% of the Company's shares. During the year ended 31 December 1998,
RFUCHSM charged PolyMASC L104,268 (1997: L101,466; 17 months 1996: L103,543) for
rent and the provision of facilities. Dr G E Francis and two other persons are
employed by RFUCHSM but seconded to PolyMASC. During the year ended 31 December
1998, PolyMASC was charged for the salary and pension costs incurred by RFUCHSM
plus an administration charge, the total costs being L225,810 (1997: L198,650;
17 months 1996: L215,548). At 31 December 1998 PolyMASC owed RFUCHSM L167,906
(1997: L93,989; 17 months 1996: L30,347).
The Company Secretary is a partner in Withers, PolyMASC's Solicitors, who
were instructed in the ordinary course of business and at normal professional
rates. In the year to 31 December 1998 the fees and disbursements invoiced
amounted to L121,720 (1997: L56,458; 17 months 1996: L203,256).
Until 30 June 1998, P W C Lomax was an employee of Teather and Greenwood
Limited, PolyMASC's nominated broker for the whole year and nominated adviser
from 25 August 1998 which was instructed in the normal course of business and at
normal professional rates. In the year to 31 December 1998, these fees amounted
to L16,986 (1997: L10,000; 17 months 1996: L214,000).
21. FINANCIAL COMMITMENTS
At 31 December 1998 PolyMASC had annual commitments under non-cancelable
operating leases as follows:
<TABLE>
<CAPTION>
1997 1996
1998 -------------------------- -------------
-------------------------- LAND AND LAND AND
OTHER BUILDINGS OTHER BUILDINGS
----------- ------------- ----------- -------------
LAND AND L'000 L'000 L'000 L'000
BUILDINGS
-------------
L'000
<S> <C> <C> <C> <C> <C>
Expiring between two and five years inclusive.......... 79 55 60 53 50
-- -- -- -- --
-- -- -- -- --
<CAPTION>
OTHER
-----------
L'000
<S> <C>
Expiring between two and five years inclusive.......... 51
--
--
</TABLE>
At the year end PolyMASC had no capital commitments for which it had not
provided (1997: L45,000; 1996 17 months: L0).
22. POST BALANCE SHEET EVENT
Since 31 December 1998, an offer has been made to acquire the entire issued
share capital of PolyMASC. In addition to the offer, the offeror has agreed to
make available to PolyMASC a secured term loan facility not exceeding
$3,000,000, for working capital.
The first draw down against this facility must be made within five business
days of the loan agreement.
The loan is repayable within twelve months of the date of approval of the 31
December 1998 financial statements.
86
<PAGE>
APPENDIX V
ADDITIONAL INFORMATION
1. RESPONSIBILITY
1.1 The Directors of Valentis, whose names appear in paragraph 2.1 below, accept
responsibility for the information contained in this document other than
that relating to PolyMASC, the Directors of PolyMASC, their immediate
families and persons connected with the Directors of PolyMASC (but including
such information where it appears in the section headed "Information
regarding Valentis"). To the best of the knowledge and belief of the
Directors of Valentis (who have taken all reasonable care to ensure that
such is the case), the information contained in this document, other than
that relating to PolyMASC, the Directors of PolyMASC, their immediate
families and persons connected with the Directors of PolyMASC (but including
such information where it appears in the section headed "Information
regarding Valentis"), is in accordance with the facts and does not omit
anything likely to affect the import of such information.
1.2 The Directors of PolyMASC, whose names appear in paragraph 2.2 below, accept
responsibility for the information contained in this document relating to
PolyMASC, the Directors of PolyMASC, their immediate families and persons
connected with the Directors of PolyMASC (other than such information where
it appears in the section headed "Information regarding Valentis"). To the
best of the knowledge and belief of the Directors of PolyMASC (who have
taken all reasonable care to ensure that such is the case), the information
contained in this document relating to PolyMASC, the Directors of PolyMASC,
their immediate families and persons connected with the Directors of
PolyMASC (other than such information where it appears in the section headed
"Information regarding Valentis"), is in accordance with the facts and does
not omit anything likely to affect the import of such information.
2. DIRECTORS
2.1 Valentis:
<TABLE>
<S> <C>
Benjamin F. McGraw III -- Chairman, Chief Executive Officer and President
Patrick G. Enright -- Non-Executive Director
Stanley T. Crooke -- Non-Executive Director
Russell Hirsch -- Non-Executive Director
Raju Kucherlapati -- Non-Executive Director
Arthur M. Pappas -- Non-Executive Director
Bert W. O'Malley -- Non-Executive Director
Frank J. Caufield -- Non-Executive Director
</TABLE>
The business address of each of the Directors listed in this paragraph 2.1
is 863A Mitten Road, Burlingame, CA 94010, USA which is also the registered
address of Valentis.
2.2 Poly MASC:
<TABLE>
<S> <C>
James Thomas Rees -- Non-Executive Chairman
Dr. Gillian Elizabeth
Francis -- Chief Executive Officer
Dr. Julian Clive Gilbert -- Commercial Development Director
David Martin Maxfield
Dutton -- Non-Executive Director
Ralph Stephen Harris -- Non-Executive Director
</TABLE>
The business address of each of the Directors of PolyMASC is Fleet Road,
London NW3 2EZ.
3. IRREVOCABLE UNDERTAKINGS
Irrevocable undertakings to accept the Ordinary Share Offer have been given
by the following PolyMASC Ordinary Shareholders in respect of the following
holdings of PolyMASC Ordinary Shares:
<TABLE>
<CAPTION>
NUMBER OF POLYMASC
SHAREHOLDERS ORDINARY SHARES
- --------------------------------------------------------------------------------------------------- --------------------
<S> <C>
Freemedic plc...................................................................................... 3,695,000
Trustees of the PolyMASC Employee Benefit Trust.................................................... 1,231,117
Dr Derek Fisher.................................................................................... 1,593,300
Dr Cristina Delgado................................................................................ 1,280,600
</TABLE>
87
<PAGE>
In addition, irrevocable undertakings to accept the Ordinary Share Offer and
the Deferred Share Offer have been given by Directors of PolyMASC in respect
of the following holdings of PolyMASC Ordinary Shares and PolyMASC Deferred
Shares:
<TABLE>
<CAPTION>
NUMBER OF POLYMASC NUMBER OF POLYMASC
DIRECTORS ORDINARY SHARES DEFERRED SHARES
- ----------------------------------------------------------------------------- -------------------- -----------------------
<S> <C> <C>
J. T. Rees................................................................... 129,292 5,000
Dr G. E. Francis............................................................. 2,990,500 --
R. S. Harris................................................................. 153,433 7,500
D. M. M. Dutton.............................................................. 28,433 --
</TABLE>
Each of the irrevocable undertakings referred to above will be of no further
effect upon the withdrawal or lapsing of the Ordinary Share Offer or the
failure by Valentis to declare the Ordinary Share Offer unconditional in all
respects not later than 23July 1999. Each of the undertakings (other than
the one given by Dr. Gillian Francis) provides that the shareholder shall
lodge a duly completed Form of Acceptance, together with the appropriate
documents of title, by no later than the fifth business day of this document
being posted. The undertaking given by Dr. Francis provides for the lodging
of the Form of Acceptance and associated documents only upon three business
days of being required to do so by Valentis.
4. MARKET QUOTATIONS
The following table shows the middle market quotations for PolyMASC Ordinary
Shares and for Valentis Common Stock, in each case for the first dealing day
of each of the six months before the date of this document, on 21 and 24 May
1999 (being the last business day before the Announcement) and 21 June 1999
(the last practicable date prior to the posting of this document):
<TABLE>
<CAPTION>
DATE
- --------------------------------------------------------------------------------- MIDDLE MARKET QUOTATIONS
----------------------------------------------
VALENTIS COMMON STOCK POLYMASC ORDINARY
------------------------- SHARES
(IN DOLLARS) -------------------
(IN PENCE)
<S> <C> <C>
4 January 1999................................................................... 5.06 58.5
1 February 1999.................................................................. 5.88 56.0
1 March 1999..................................................................... 4.88 45.0
1 April 1999..................................................................... 4.50 41.5
3 May 1999....................................................................... 4.62 46.5
21 May 1999 (Valentis) and 24 May 1999 (PolyMASC)................................ 4.90 46.5
1 June 1999...................................................................... 4.13 48.5
21 June 1999..................................................................... 3.97 41.5
</TABLE>
5. DIVIDEND POLICY
No cash dividends have ever been paid on Valentis' Common Stock. Valentis'
current policy is to retain earnings for use in its business. Any payment of
cash dividends in the future will depend upon the financial condition,
capital requirements and earnings of Valentis, as well as other factors as
the Board of Valentis may deem relevant.
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6. DISCLOSURE OF INTERESTS AND DEALINGS IN SHARES
6.1 INTERESTS AND DEALINGS IN VALENTIS COMMON STOCK
(a) The interests of the Directors of Valentis and their immediate families,
all of which are beneficial unless the contrary is stated, in the issued
share capital of Valentis as at 21 June 1999 (the last practicable date
prior to the posting of this document) are set out below:
<TABLE>
<CAPTION>
NUMBER OF
VALENTIS COMMON
DIRECTOR STOCK
- --------------------------------------------------------------------------------------------------- -----------------
<S> <C>
B. F. McGraw....................................................................................... 373,333
P. G. Enright...................................................................................... 112,499
R. Hirsch.......................................................................................... 1,633
F. J. Caufield..................................................................................... 335,289
R. Kucherlapati.................................................................................... --
A. M. Pappas....................................................................................... 3,997
B. W. O'Malley..................................................................................... 33,914
S. T. Crooke....................................................................................... 10,604
</TABLE>
(b) As at 21 June 1999 (the last practicable date prior to the posting of
this document), the following options over Valentis Common Stock had been
granted to the Directors of Valentis under the Valentis Stock Option
Plans and remained outstanding:
<TABLE>
<CAPTION>
NUMBER OF
VALENTIS
DATE OF COMMON EXERCISE EXERCISE
NAME GRANT STOCK PRICE $ PERIOD
- -------------------------------------------------------------------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C>
F. J. Caufield............................................................ 8/12/98 10,000 5.25 8/12/08
S. T. Crooke.............................................................. 3/3/99 25,000 4.063 3/3/09
S. T. Crooke.............................................................. 17/5/96 17,130 11.814 17/5/06
P. G. Enright............................................................. 28/2/97 30,000 1.50 2/28/07
P. G. Enright............................................................. 4/11/97 50,000 15.50 4/11/07
P. G. Enright............................................................. 8/12/98 10,000 5.25 8/12/08
R. Hirsch................................................................. 8/12/98 10,000 5.25 8/12/08
R. Kucherlapati........................................................... 28/3/95 13,333 0.30 28/3/05
R. Kucherlapati........................................................... 28/2/97 13,333 1.50 28/2/07
R. Kucherlapati........................................................... 8/12/98 10,000 5.25 8/12/08
A. M. Pappas.............................................................. 3/3/99 25,000 4.063 3/3/09
B. W. O'Malley............................................................ 3/3/99 25,000 4.063 3/3/09
B. W. O'Malley............................................................ 13/7/93 33,444 .3065 13/7/03
B. W. O'Malley............................................................ 17/5/96 5,710 11.8214 17/5/06
B. W. O'Malley............................................................ 8/7/97 3,426 12.0403 8/7/07
B. F. McGraw.............................................................. 16/9/98 60,000 5.875 16/9/08
</TABLE>
(c) The Trustees of the PolyMASC Employee Benefit Trust have advised
Valentis that, in the event that the Ordinary Share Offer is declared
unconditional in all respects, the Trustees intend to transfer the
following number of New Valentis Common Stock to certain PolyMASC
Directors:
<TABLE>
<CAPTION>
NEW
VALENTIS
COMMON
DIRECTOR STOCK
- ----------------------------------------------------------------------------------------------------------- -----------
<S> <C>
J.T. Rees.................................................................................................. 7,090
R.S. Harris................................................................................................ 12,094
D.M.M. Dutton.............................................................................................. 6,717
</TABLE>
(d) Save as disclosed in this paragraph 6, none of the Directors of
Valentis, their families and persons deemed to be acting in concert with
Valentis for the purposes of the Ordinary Share Offer owns or controls or
(in the case of the Directors of Valentis) is interested in any relevant
securities of Valentis, nor has any such person dealt for value therein
during the disclosure period.
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(e) Neither PolyMASC nor the Directors of PolyMASC, nor any member of their
immediate families and nor any persons deemed to be acting in concert
with PolyMASC for the purposes of the Ordinary Share Offer, nor any
person who has irrevocably committed to accepting the Ordinary Share
Offer owns or controls or (in the case of the Directors of PolyMASC) is
interested in any relevant securities of Valentis, nor has any such
person dealt for value therein during the disclosure period.
(f) There are no arrangements in relation to relevant securities of Valentis
to which Valentis or, so far as the Directors of Valentis are aware, any
person acting in concert with Valentis or which is an associate of
Valentis for that purpose, is a party.
6.2 INTERESTS AND DEALINGS IN POLYMASC ORDINARY SHARES AND POLYMASC DEFERRED
SHARES
(a) The interests of the Directors of PolyMASC and their immediate families,
all of which are beneficial unless the contrary is stated, in the issued
share capital of PolyMASC as at 21 June 1999 (the last practicable date
prior to the issue of this document) which have been notified to PolyMASC
pursuant to sections 324 and 328 of the Companies Act as shown in the
register of such interests required to be maintained pursuant to section
325 of that Companies Act are set out below:
<TABLE>
<CAPTION>
NUMBER OF POLYMASC NUMBER OF POLYMASC
DIRECTOR ORDINARY SHARES DEFERRED SHARES
- ------------------------------------------------------------------------ -------------------- -----------------------
<S> <C> <C>
J.T. Rees............................................................... 129,292 5,000
Dr. G.E. Francis........................................................ 2,990,500 --
Dr. J.C. Gilbert........................................................ -- --
R.S. Harris............................................................. 178,433 7,500
D.M.M. Dutton........................................................... 28,433 --
</TABLE>
(b) As at 21 June 1999 (the last practicable date prior to the issue of this
document), no options over PolyMASC Ordinary Shares had been granted to
the Directors of PolyMASC under the PolyMASC Share Option Schemes.
PolyMASC has undertaken to grant the following options over PolyMASC
Ordinary Shares to Dr. J.C. Gilbert (such options had not, as at 21 June
1999, been granted):
<TABLE>
<CAPTION>
NUMBER OF
POLYMASC EXERCISE
ORDINARY SHARES EXERCISE PRICE PERIOD
- --------------- ----------------- --------------
<S> <C> <C>
190,475 42p 2002-2009
190,475 42p 2002-2009
</TABLE>
(c) The only dealing for value in PolyMASC Ordinary Shares (including the
exercise of options under the PolyMASC Share Option Schemes) by Directors
of PolyMASC, members of their immediate families and connected persons,
during the disclosure period was as follows:
<TABLE>
<CAPTION>
NUMBER OF
NATURE OF POLYMASC ORDINARY PRICE PER POLYMASC
DATE NAME TRANSACTION SHARES SHARE
- ------------ --------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
9 June 1998 J.T. Rees Exercise of options 25,000 100p
</TABLE>
(d) Neither Valentis nor the Directors of Valentis nor any member of their
immediate families and nor any persons deemed to be acting in concert
with Valentis for the purposes of the Ordinary Share Offer, owns or
controls or (in the case of the Directors of Valentis) is interested in
any relevant securities of PolyMASC, nor has any such person dealt for
value therein during the disclosure period.
(e) There are no arrangements in relation to the relevant securities of
PolyMASC to which PolyMASC or, so far as the Directors of PolyMASC are
aware, any person which is an associate of PolyMASC for that purpose is a
party.
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(f) Save as disclosed in this paragraph 6, neither PolyMASC nor the
Directors of PolyMASC, nor any member of their immediate families or
persons connected with them, nor any person who has irrevocably committed
to accepting the Ordinary Share Offer are interested in any relevant
securities nor has any such person dealt for value therein during the
disclosure period and neither any subsidiary of PolyMASC or any
associated company of PolyMASC, nor any pension fund of PolyMASC or of a
subsidiary of PolyMASC, nor any bank or financial or other professional
adviser of PolyMASC (including stockbrokers but excluding market makers),
including any person controlling, controlled by or under the same control
as any such bank or financial or other professional adviser; nor any
person whose investments are managed on a discretionary basis by a fund
manager (other than an exempt fund manager) which is controlled by,
controls or is under the same control as PolyMASC or any bank or
financial or other professional adviser to PolyMASC, owns or controls any
relevant securities nor has any such person dealt for value therein
during the disclosure period.
6.3 GENERAL
For the purposes of this paragraph 6:
(i) references to an "associate" are to:
(1) subsidiaries and associated companies of Valentis or PolyMASC and
companies of which any such subsidiaries or associated companies are
associated companies;
(2) banks, financial and other professional advisers (including
stockbrokers) to Valentis or PolyMASC or a company covered in (1)
above, including persons controlling, controlled by or under the same
control as such banks, financial or other professional advisers;
(3) the Directors of Valentis and PolyMASC and the directors of any
company covered in (1) above (together in each case with their close
relatives and related trusts);
(4) the pension funds of Valentis or PolyMASC or a company covered in (1)
above; and
(5) (in relation to Valentis) an investment company, unit trust or other
person whose investments an associate (as otherwise defined in this
sub-paragraph (i)) manages on a discretionary basis, in respect of the
relevant investment accounts;
(ii) references to a "bank" does not apply to a bank whose sole relationship
with Valentis or PolyMASC or a company covered in sub-paragraph (i)(1)
above is the provision of normal commercial banking services or such
activities in connection with the Ordinary Share Offer as handling
acceptances and other registration work;
(iii) references to "relevant securities" mean existing Valentis Common Stock
and PolyMASC Ordinary Shares and PolyMASC Deferred Shares and
securities convertible into, rights to subscribe for, options
(including traded options) in respect thereof and derivatives
referenced thereto;
(iv) ownership or control of 20 per cent. or more of the equity share
capital of a company is regarded as the test of associated company
status and "control" means a holding, or aggregate holdings, of shares
carrying 30 per cent. or more of the voting rights attributable to the
share capital of a company which are currently exercisable at a general
meeting, irrespective of whether the holding or aggregate holding gives
de facto control;
(v) "disclosure period" means the period commencing on 25 May 1998 (the date
12 months prior to the commencement of the Offer Period) and ending on
21 June 1999 (the last practicable date prior to the posting of this
document); and
(vi) references to "arrangements" in relation to relevant securities shall
have the meaning referred to in Note 6(b) on Rule 8 of the City Code.
7. BASES OF CALCULATIONS AND SOURCES OF INFORMATION
7.1 Unless otherwise stated, the information concerning Valentis is extracted
from the Valentis financial information set out in this document as at 30
June 1998 and for the years ended 30 June 1998, 1997 and
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1996 has been extracted, without material adjustment, from the audited
financial statements of Valentis included in its Form 10-K for the year
ended 30 June 1998 filed with the SEC. The unqualified audit opinion of
Ernst & Young LLP, independent auditors of Valentis, is also included in
such Form 10-K.
The Valentis information set out in this document at 31 March 1999 and for
the three and six month periods ended 31 March 1999 and 1998 has been
extracted, without material adjustment, from the unaudited financial
statements of Valentis included in its Form 10-Q for the quarter ended 31
March 1999 filed with the SEC.
7.2 Unless otherwise stated, the information concerning PolyMASC is extracted
from the Annual Reports for the periods ended 31 December 1996, 1997 and
1998 or has been supplied by PolyMASC.
7.3 The value of the Ordinary Share Offer is based on 21,025,000 PolyMASC
Ordinary Shares in issue.
7.4 The Closing Prices of PolyMASC Ordinary Shares and Valentis Common Stock are
derived from SEDOL and the Bloomberg Stock Quotation System, respectively,
for the relevant dates.
8. POLYMASC'S DIRECTORS' SERVICE AGREEMENTS
Dr. Julian Gilbert entered into a service agreement with PolyMASC on 29
March 1999, which provided that it could be terminated, following an initial
period of one year, on 6 months' notice by either party, at an initial
salary of L80,000 per annum. Save as aforesaid, there are no service
contracts between any director of PolyMASC and PolyMASC having more than 12
months to run and no such contract has been entered into or amended within
the six months prior to the date of this document.
9. MATERIAL CONTRACTS
A. VALENTIS
The following contracts (not being contracts entered into in the ordinary
course of business) have been entered into by Valentis and/or its
subsidiaries since 24 May 1997, being two years prior to the commencement of
the Offer Period and are or may be material:
(a) Agreement and Plan of Merger and Reorganisation dated as of 24 October,
1998, as amended, by and among Megabios Corp. (now called Valentis), a
Delaware corporation, Montana Acquisition Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of Megabios Corp., and
GeneMedicine, a Delaware corporation ("the Merger Agreement"). Pursuant
to the Merger Agreement, GeneMedicine agreed to merge with and into a
wholly-owned subsidiary of Megabios Corp. The merger was consummated in
March 1999. The combined entity has been renamed Valentis, Inc.
(b) Promissory Note for $8,000,000 from Valentis to Imperial Bank, dated 13
May 1998. In June 1998, Valentis obtained an $8.0 million line of credit
from a commercial bank. As at 30 June 1998, Valentis had drawn and
converted $1.0 million of this line of credit into a term loan bearing
interest at the prime rate plus 0.5%. An additional $5.9 million was
drawn from the line of credit in the nine months ended 31 March 1999.
Valentis fully utilised its line of credit with a final draw of $1.1
million in April 1999. The loan is secured by all tangible personal
property, accounts receivable and funds on deposit, other than the assets
securing the equipment financing. As a condition of the credit line,
Valentis must maintain a minimum cash and short-term investments balance
of not less than the greater of the prior two quarters net cash usage or
90% of the total principal drawn under the line of credit.
B. POLYMASC
The only contract (not being a contract entered into in the ordinary course
of business) entered into by PolyMASC since 25 May 1997, being two years
prior to the commencement of the Offer Period which is or may be material is
a loan agreement dated 25 May 1999 made between PolyMASC and Valentis
whereby a drawdown facility of $3 million was made available to PolyMASC for
a term of approximately one year available in four tranches of $1 million,
$750,000, $750,000 and $500,000, each tranche bearing interest at the three
month LIBOR rate at the date of its drawdown. The loan facility is not
conditional upon the Offer becoming or being declared fully unconditional in
all respects and is secured on the lipoMASC-TM- Technology. No tranche may
be drawn down within three months of the previous tranche.
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<PAGE>
10. COMPULSORY ACQUISITION
If, on or before the expiration of four months from the date of posting of
this document, Valentis has as a result of acceptances of the Ordinary Share
Offer, or, subject to certain conditions, acquired or contracted to acquire,
at least 90 per cent. in value of the PolyMASC Ordinary Shares to which the
Ordinary Share Offer relates then (i) Valentis will be entitled, and
intends, to acquire compulsorily the remainder of the outstanding PolyMASC
Ordinary Shares in accordance with sections 428 to 430F of the Companies
Act, and (ii) in such circumstances a holder of PolyMASC Ordinary Shares may
require Valentis to purchase his PolyMASC Ordinary Shares in accordance with
the procedures and time limits described in section 430A of the Companies
Act. A copy of sections 428-430F of the Companies Act is set out in Appendix
VI to this document.
11. LEGAL MATTERS
Certain matters with respect to UK tax consequences discussed under "United
Kingdom taxation" in the letter from Hambrecht & Quist LLC have been
reviewed by Taylor Joynson Garrett, London.
12. OTHER INFORMATION
12.1 The expenses of, and incidental to, the preparation and circulation of the
Ordinary Share Offer will be paid by Valentis. If the Ordinary Share Offer
does not become unconditional or is withdrawn each of PolyMASC and
Valentis will pay its own business and legal expenses incurred relating to
the Ordinary Share Offer, save that certain accountancy expenses of
PolyMASC have been agreed in certain circumstances to be borne by
Valentis.
12.2 Save in respect of the proposed transfer of Valentis Common Stock to
certain PolyMASC Directors described in paragraph 6.1 above, no proposal
exists in connection with the Ordinary Share Offer that any payment or
other benefit shall be made or given by Valentis to any director of
PolyMASC as compensation for loss of office or as consideration for or in
connection with his retirement from office.
12.3 There is no agreement, arrangement or understanding (including any
compensation arrangement) between Valentis or any person acting in concert
with them for the purposes of the Ordinary Share Offer and any of the
Directors or recent Directors, shareholders or recent shareholders of
PolyMASC having any connection with or dependence on, or which is
conditional on, the outcome of the Ordinary Share Offer.
12.4 There is no agreement, arrangement or understanding whereby the beneficial
ownership of the PolyMASC Ordinary Shares to be acquired by Valentis
pursuant to the Ordinary Share Offer will be transferred to any person,
save that Valentis reserves the right to transfer any such shares to any
member of the Valentis Group.
12.5 Valentis does not intend that the payment of interest on, repayment of, or
security for any liability (contingent or otherwise) in connection with
the Ordinary Share Offer will depend to any significant extent on the
business of PolyMASC.
12.6 Hambrecht & Quist LLC is satisfied that Valentis has available to it
sufficient cash resources necessary to satisfy the cash element of the
consideration payable under the Ordinary Share Offer.
12.7 The total emoluments of the Directors of Valentis will not be varied as a
consequence of the proposed acquisition of PolyMASC or by any other
associated transaction.
12.8 Except as disclosed in this document, the Directors of Valentis are not
aware of any material change in the financial or trading position of the
Valentis Group since 30 June 1998, the date to which the last published
audited consolidated accounts of Valentis were prepared.
12.9 Except as disclosed in PolyMASC's annual report for the year ended 31
December 1998 and in this document, the Directors of PolyMASC are not
aware of any material change in the financial or trading position of
PolyMASC since 31 December 1998, the date to which the last published
audited accounts of PolyMASC were prepared.
12.10 The contents of this document have been approved for the purposes of
Section 57 of the Financial Services Act 1986 by Hambrecht & Quist LLC.
Hambrecht & Quist LLC is regulated in the United Kingdom by The
Securities and Futures Authority Limited to carry on investment business.
12.11 Hambrecht & Quist LLC has given and not withdrawn its written consent to
the issue of this document with the inclusion of its letter and the
references to its name in the form and context in which they appear.
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12.12 Arthur Andersen Corporate Finance has given and not withdrawn its written
consent to the issue of this document with the inclusion of the
references to its name and recommendations in the form and context in
which they appear.
13. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection, during
normal business hours, on any week day (Saturdays, Sundays and public holidays
excepted) at the offices of Taylor Joynson Garrett, Carmelite, 50 Victoria
Embankment, Blackfriars, London, EC4Y ODX whilst the Ordinary Share Offer
remains open for acceptance:
(a) the Amended and Restated Certificates of Incorporation and Bylaws of
Valentis;
(b) the Memorandum and Articles of Association of PolyMASC;
(c) the Annual Report on Form 10-K of Valentis for the period ended 30 June
1998, as amended (File No. 0-22987);
(d) the Quarterly reports on Form 10-Q of Valentis for the quarters ended 30
September 1998, 31 December 1998 and 31 March 1999 (File No. 0-22987);
(e) the Definitive Proxy Statement of Valentis filed in connection with
Valentis' 1998 Annual Meeting of Stockholders (File No. 0-22987);
(f) the published audited accounts of PolyMASC for each of the last three
completed financial periods;
(g) the irrevocable undertakings referred to in paragraph 3 of this Appendix;
(h) the material contracts referred to in paragraph 9 of this Appendix;
(i) the letters of consent referred to in sub-paragraphs 12.11 and 12.12 of this
Appendix; and
(j) this document and the formal document containing the Deferred Share Offer.
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APPENDIX VI
CERTAIN PROVISIONS OF THE COMPANIES ACT
Set out below is an extract from the Companies Act:
"PART XIIIA
TAKEOVER OFFERS
428 TAKEOVER OFFERS
1. In this Part of this Act "takeover offer" means an offer to acquire all the
shares, or all the shares of any class or classes, in a company (other than
shares which at the date of the offer are already held by the offeror),
being an offer on terms which are the same in relation to all the shares to
which the offer relates or, where those shares include shares of different
classes, in relation to all the shares of each class.
2. In subsection (1) "shares" means shares which have been allotted on the dale
of the offer but a takeover offer may include among the shares to which it
relates all or ally shares that are subsequently allotted before a date
specified in or determined in accordance with the terms of the offer.
3. The terms offered in relation to any shares shall for the purposes of this
section be treated as being the same in relation to all the shares or, as
the case may be, all the shares of a class to which the offer relates
notwithstanding any variation permitted by subsection (4).
4. A variation is permitted by this clause where:
a. the law of a country or territory outside the United Kingdom precludes
an offer of consideration in the form or any of the forms specified in
the terms in question or precludes it except after compliance by the
offeror with conditions with which he is unable to comply or which he
regards as unduly onerous; and
b. the variation is such that the persons to whom an offer of consideration
in that form is precluded are able to receive consideration otherwise
than in that form but of substantially equivalent value.
5. The reference in subsection (1) to shares already held by the offeror
includes a reference to shares which he has contracted to acquire but that
shall not be construed as including shares which are the subject of a
contract binding the holder to accept the offer when it is made, being a
contract entered into by the holder either for no consideration and under
seal or for no consideration other than a promise by the offeror to make the
offer.
6. In the application of subsection (5) to Scotland, the words "and under seal"
shall be omitted.
7. Where the terms of an offer make provision for their revision and for
acceptances on the previous terms to be treated as acceptances on the
revised terms, the revision shall not be regarded for the purposes of this
Part of this Act as the making of a fresh offer and references in this Part
of this Act to the date of the offer shall accordingly be construed as
references to the date on which the original offer was made.
8. In this Part of this Act the "offeror" means, subject to section 430D, the
person making a takeover offer and the "company" means the company whose
shares are the subject of the offer.
429 RIGHT OF OFFEROR TO BUY OUT MINORITY SHAREHOLDERS
1. If, in a case in which a takeover offer does not relate to shares of
different classes, the offeror has by virtue of acceptance of the offer
acquired or contracted to acquire not less than nine-tenths in value of the
shares to which the offer relates he may give notice to the holder of any
shares to which the offer relates which the offeror has not acquired or
contracted to acquire that he desires to acquire those shares.
2. If, in a case in which a takeover offer relates to shares of different
classes, the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire not less than nine-tenths in value of the shares of
any class to which the offer relates, he may give notice to the holder of
any shares of that class which the offeror has not acquired or contracted to
acquire that he desires to acquire those shares.
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3. No notice shall be given under subsection (1) or (2) unless the offeror has
acquired or contracted to acquire the shares necessary to satisfy the
minimum specified in that clause before the end of the period of four months
beginning with the date of the offer; and no such notice shall be given
after the end of the period of two months beginning with the date on which
he has acquired or contracted to acquire shares which satisfy that minimum.
4. Any notice under this section shall be given in the prescribed manner, and
when the offeror gives the first notice in relation to an offer he shall
send a copy of it to the company together with a statutory declaration by
him in the prescribed form stating that the conditions for the giving of the
notice are satisfied.
5. Where the offeror is a company (whether or not a company within the meaning
of this Act) the statutory declaration shall be signed by a director.
6. Any person who fails to send a copy of a notice or statutory declaration as
required by subsection (4) or makes such a declaration for the purposes of
that clause knowing it to be false or without having reasonable grounds for
believing it to be true shall be liable to imprisonment or a fine, or both,
and for continued failure to send the copy or declaration, to a daily
default fine.
7. If any person is charged with an offence for failing to send a copy of a
notice as required by subsection (4) it is a defence for him to prove that
he took reasonable steps for securing compliance with that clause.
8. When during the period within which a takeover offer can be accepted the
offeror acquires or contracts to acquire any of the shares to which the
offer relates but otherwise than by virtue of acceptances of the offer,
then, if:
(a) the value of the consideration for which they are acquired or contracted
to be acquired (the "acquisition consideration") does not at that time
exceed the value of the consideration specified in the terms of the
offer; or
(b) those terms are subsequently revised so that when the revision is
announced the value of the acquisition consideration, at the time
mentioned in paragraph (a) above, no longer exceeds the value of the
consideration specified in those terms,
the offeror shall be treated for the purposes of this section as having
acquired or contracted to acquire those shares by virtue of acceptances of
the offer, but in any other case those shares shall be treated as excluded
from those to which the offer relates.
430 EFFECT OF NOTICE UNDER SECTION 429
1. The following provisions shall, subject to section 430C, have effect where a
notice is given in respect of any shares under section 429.
2. The offeror shall be entitled and bound to acquire those shares on the terms
of the offer.
3. Where the terms of an offer are such as to give the holder of any shares a
choice of consideration the notice shall give particulars of the choice and
state:
(a) that the holder of the shares may within six weeks from the date of the
notice indicate his choice by a written communication sent to the offeror
at an address specified in the notice; and
(b) which consideration specified in the offer is to be taken as applying in
default of his indicating a choice as aforesaid;
and the terms of the offer mentioned in subsection 2 shall be determined
accordingly.
4. Subsection (3) applies whether or not any time-limit or the other conditions
applicable to the choice under the terms of the offer can still be complied
with; and if the consideration chosen by the holders of the shares:
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound or
able to provide it,
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the consideration shall be taken to consist of an amount of cash payable by
the offeror which at the date of the notice is equivalent to the chosen
consideration.
5. At the end of six weeks from the date of the notice the offeror shall
forthwith:
(a) send a copy of the notice to the company; and
(b) pay or transfer to the company the consideration for the shares to which
the notice relates.
6. If the shares to which the notice relates are registered, the copy of the
notice sent to the company under subsection (5)(a) shall be accompanied by
an instrument of transfer executed on behalf of the shareholder by a person
appointed by the offeror; and on receipt of that instrument the company
shall register the offeror as the holder of those shares.
7. If the shares to which the notice relates are transferable by the delivery
of warrants or other instruments, the copy of the notice sent to the company
under subsection (5)(a) shall be accompanied by a statement to that effect;
and the company shall on receipt of the statement issue the offeror with
warrants or other instruments in respect of the shares and those already in
issue in respect of the shares shall become void.
8. Where the consideration referred to in paragraph (b) of subsection (5)
consists of shares or securities to be allotted by the offeror the reference
in that clause to the transfer of the consideration shall be construed as a
reference to the allotment of the shares or securities to the company.
9. Any sum received by a company under paragraph (b) of subsection (5) and any
other consideration received under that clause shall be held by the company
on trust for the person entitled to the shares in respect of which the sum
or other consideration was received.
10. Any sum received by a company under paragraph (b) of subsection (5), and any
dividend or other sum accruing from any other consideration received by a
company under that clause, shall be paid into a separate bank account, being
an account the balance on which bears interest at an appropriate rate and
can be withdrawn by such notice (if any) as is appropriate.
11. Where after reasonable enquiry made at such intervals as are reasonable the
person entitled to any consideration held on trust by virtue of subsection
(9) cannot be found and twelve years have elapsed since the consideration
was received or the company is wound up the consideration (together with any
interest, dividend or other benefit that has accrued from it) shall be paid
into court.
12. In relation to a company registered in Scotland, subsections (13) and (14)
shall apply in place of subsection (11).
13. Where after reasonable enquiry made at such intervals as are reasonable the
person entitled to any consideration held on trust by virtue of subsection
(9) cannot be found and twelve years have elapsed since the consideration
was received or the company is wound up:
(a) the trust shall terminate;
(b) the company or, as the case may be, the liquidator shall sell any
consideration other than cash and any benefit other than cash that has
accrued from the consideration; and
a sum representing:
(i) the consideration so far as it is cash;
(ii) the proceeds of any sale under paragraph (b) above; and
(iii) any interest, dividend or other benefit that has accrued from the
consideration,
shall be deposited in the name of the Accountant of Court in a bank account
such as is referred to in subsection (10) and the receipt for the deposit
shall be transmitted to the Accountant of Court.
14. Section 58 of the Bankruptcy (Scotland) Act 1985 (so far as consistent with
this Act) shall apply with any necessary modifications to sums deposited
under subsection (13) as that clause applies to sums deposited under section
57(1) of that Act.
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15. The expenses of any such enquiry as is mentioned in subsection (11) or (13)
may be defrayed out of the money or other property held on trust for the
person or persons to whom the enquiry relates.
430A RIGHT OF MINORITY SHAREHOLDER TO BE BOUGHT OUT BY OFFEROR
1. If a takeover offer relates to all the shares in a company and at any time
before the end of the period within which the offer can be accepted:
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares to which the offer
relates; and
(b) those shares, with or without any other shares in the company which he
has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares in the company, the holder of any
shares to which the offer relates who has not accepted the offer may by a
written communication addressed to the offeror require him to acquire
those shares.
2. If a takeover offer relates to shares of any class or classes and at any
time before the end of the period within which the offer can be accepted:
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares of any class to
which the offer relates; and
(b) those shares, with or without any other shares of that class which he
has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares of that class, the holder of any
shares of that class who has not accepted the offer may by a written
communication addressed to the offeror require him to acquire those
shares.
3. Within one month of the time specified in subsection (1) or, as the case may
be, subsection (2) the offeror shall give any shareholder who has not
accepted the offer notice in the prescribed manner of the rights that are
exercisable by him under that clause; and if the notice is given before the
end of the period mentioned in that clause it shall state that the offer is
still open for acceptance.
4. A notice under subsection (3) may specify a period for the exercise of the
rights conferred by this section and in that event the rights shall not be
exercisable after the end of that period; but no such period shall end less
than three months after the end of the period within which the offer can be
accepted.
5. Subsection (3) does not apply if the offeror has given the shareholder a
notice in respect of the shares in question under section 429.
6. If the offeror fails to comply with subsection (3) he and, if the offeror is
a company, every officer of the company who is in default or to whose
neglect the failure is attributable, shall be liable to a fine and for
continued contravention, to a daily default fine.
7. If an offeror other than a company is charged with an offence for failing to
comply with subsection (3) it is a defence for him to prove that he took all
reasonable steps for securing compliance with that subsection.
430B EFFECT OF REQUIREMENT UNDER SECTION 430A
1. The following provision shall, subject to section 430C, have effect where a
shareholder exercises his rights in respect of any shares under section
430A.
2. The offeror shall be entitled and bound to acquire those shares on the terms
of the offer or on such other terms as may be agreed.
3. Where the terms of an offer are such as to give the holder of shares a
choice of consideration the holder of the shares may indicate his choice
when requiring the offeror to acquire them and the notice given to the
holder under section 430A(3):
(a) shall give particulars of the choice and of the rights conferred by this
subsection; and
(b) may state which consideration specified in the offer is to be taken as
applying in default of his indicating a choice;
and the terms of the offer mentioned in subsection (2) shall be
determined accordingly.
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4. Subsection (3) applies whether or not any time-limit or other conditions
applicable to the choice under the terms of the offer can still he complied
with; and if the consideration chosen by the holder of the shares:
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound or
able to provide it;
the consideration shall be taken to consist of an amount of cash payable by
the offeror which at the date when the holder of the shares requires the
offeror to acquire them is equivalent to the chosen consideration.
430C APPLICATIONS TO THE COURT
1. Where a notice is given under section 429 to the holder of any shares the
court may, on an application made by him within six weeks from the date on
which the notice was given:
(a) order that the offeror shall not be entitled and bound to acquire the
shares; or
(b) specify terms or acquisition different from those of the offer.
2. If an application to the court under subsection (1) is pending at the end of
the period mentioned in subsection (5) of section 430 that clause shall not
have effect until the application has been disposed of.
3. Where the holder of any shares exercises his rights under section 430A the
court may, on an application made by him or the offeror, order that the
terms on which the offeror is entitled and bound to acquire the shares shall
be such as the court thinks fit.
4. No order for costs or expenses shall be made against a shareholder making an
application under subsection (1) or (3) unless the court considers:
(a) that the application was unnecessary, improper or vexatious; or
(b) that there has been unreasonable delay in making the application or
unreasonable conduct on his part in conducting the proceedings on the
application.
5. Where a takeover offer has not been accepted to the extent necessary for
entitling the offeror to give notices under subsection (1) or (2) of section
429 the court may, on the application of the offeror, make an order
authorising him to give notices under that subsection if satisfied:
(a) that the offeror has after reasonable enquiry been unable to trace one
or more of the persons holding shares to which the offer relates;
(b) that the shares which the offeror has acquired or contracted to acquire
by virtue of acceptances of the offer, together with the shares held by
the person or persons mentioned in paragraph (a), amount to not less than
the minimum specified in that subsection; and
(c) that the consideration offered is fair and reasonable;
but the court shall not make an order under this subsection unless it
considers that it is just and equitable to do so having regard, in
particular, to the number of shareholders who have been traced but who have
not accepted the offer.
430D JOINT OFFERS
1. A takeover offer may be made by two or more persons jointly and in that
event this Part of this Act has effect with the following modifications.
2. The conditions for the exercise of the rights conferred by sections 429 and
430A shall be satisfied by the joint offerors acquiring or contracting to
acquire the necessary shares jointly (as respects acquisitions by virtue of
acceptances of the offer) and either jointly or separately (in other cases);
and, subject to the following provisions, the rights and obligations of the
offeror under those sections and sections 430 and 430B shall be respectively
joint rights and joint and several obligations of the joint offerors.
3. It shall be a sufficient compliance with any provision of those sections
requiring or authorising a notice or other document to be given or sent by
or to the joint offerors that it is given or sent by or to any of them;
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but the statutory declaration required by section 429(4) shall be made by
all of them and, in the case of a joint offeror being a company, signed by a
director of that company.
4. In sections 428, 430(8) and 430E references to the offeror shall be
construed as references to the joint offerors or any of them.
5. In sections 430(6) and (7) references to the offeror shall be construed as
references to the joint offerors or such of them as they may determine.
6. In sections 430(4) (a) and 430(B)(4) (a) references to the offeror being no
longer able to provide the relevant consideration shall be construed as
references to none of the joint offerors being able to do so.
7. In section 430C references to the offeror shall be construed as references
to the joint offerors except that any application under subsection (3) or
(5) may be made by any of them and the reference in subsection (5)(a) to the
offeror having been unable to trace one or more of the persons holding
shares shall be construed as a reference to none of the offerors having been
able to do so.
430E ASSOCIATES
1. The requirement in section 428(1) that a takeover offer must extend to all
the shares, or all the shares of any class or classes, in a company shall be
regarded as satisfied notwithstanding that the offer does not extend to
shares which associates of the offeror hold or have contracted to acquire;
but, subject to subsection (2), shares which any such associate holds or has
contracted to acquire, whether at the time when the offer is made or
subsequently, shall be disregarded for the purposes of any reference in this
Part of this Act to the shares to which a takeover offer relates.
2. Where during the period within which a takeover offer can be accepted any
associate of the offeror acquires or contracts to acquire any of the shares
to which the offer relates, then, if the condition specified in subsection
8(a) or (b) of section 429 is satisfied as respects those shares they shall
be treated for the purposes of that section as shares to which the offer
relates.
3. In section 430(A)(1)(b) and (2)(b) the reference to shares which the offeror
has acquired or contracted to acquire shall include a reference to shares
which any associate of his has acquired or contracted to acquire.
4. In this clause "associate", in relation to an offeror, means:
(a) a nominee of the offeror;
(b) a holding company, subsidiary or fellow subsidiary of the offeror or a
nominee of such holding company, subsidiary or fellow subsidiary;
(c) a body corporate in which the offeror is substantially interested; or
(d) any person who is, or is a nominee of, a party to an agreement with the
offeror for the acquisition of, or of an interest in, the shares which
are the subject of the takeover offer, being an agreement which includes
provisions imposing obligations or restrictions such as are mentioned in
section 204(2)(a).
5. For the purposes of subsection (4)(b) a company is a fellow subsidiary of
another body corporate if both are subsidiaries of the same body corporate
but neither is a subsidiary of the other.
6. For the purposes of subsection (4) an offeror has a substantial interest in
a body corporate if:
(a) that body or its directors are accustomed to act in accordance with his
directions or instructions; or
(b) he is entitled to exercise or control the exercise of one-third or more
of the voting power at general meetings of that body.
7. Subsections (5) and (6) of section 204 shall apply to subsection (4)(d)
above as they apply to that section and subsections (3) and (4) of section
203 shall apply for the purposes of subsection (6) above as they apply for
the purposes of subsection (2)(b) of that section.
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8. Where the offeror is an individual his associates shall also include his
spouse and any minor child or step-child or his.
430F CONVERTIBLE SECURITIES
1. For the purposes of this Part of this Act securities of a company shall be
treated as shares in the company if they are convertible into or entitle the
holder to subscribe for such shares; and references to the holder of shares
or a shareholder shall be construed accordingly.
2. Subsection (1) shall not be construed as requiring any securities to be
treated:
(a) as shares of the same class as those into which they are convertible or
for which the holder is entitled to subscribe; or
(b) as shares of the same class as other securities by reason only that the
shares into which they are convertible or for which the holder is
entitled to subscribe are of the same class."
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APPENDIX VII
DEFINITIONS
The following definitions apply throughout this document unless the context
requires otherwise:
<TABLE>
<S> <C>
"30 Day Moving Average Price"......... means the simple moving average Closing Price of a Valentis Common Stock
or a PolyMASC Ordinary Share, as the case may be, over any 30 day
period;
"Announcement"........................ means the announcement of the Ordinary Share Offer on 25 May 1999;
"Board" or "Directors" or "Board of
Directors".......................... means the board of directors of PolyMASC or Valentis, as the case may
be;
"City Code"........................... means The City Code on Takeovers and Mergers;
"Closing Price"....................... means the closing middle market quotation of a Valentis Common Stock or
a PolyMASC Ordinary Share, as the case may be, as appears on the
Bloomberg Stock Quotation System and SEDOL, respectively;
"Companies Act"....................... means the Companies Act 1985 (as amended);
"Deferred Consideration".............. means the amount equal to 20 per cent. of the proceeds of sale of the
lipoMASC-TM- Technology receivable by the PolyMASC Ordinary Shareholders
pursuant to the Ordinary Share Offer in proportion to the number of
PolyMASC Ordinary Shares held by each of them;
"Deferred Share Offer"................ means the separate offer being made by Hambrecht & Quist LLC on behalf
of Valentis to acquire all of the PolyMASC Deferred Shares;
"Dollars" or "$"...................... means US Dollars;
"FDA"................................. means the US Food and Drug Administration;
"Form of Acceptance".................. means the form of acceptance for use in connection with the Ordinary
Share Offer;
"Illustrative Exchange Rate".......... means $1.590 : L1, being the mid-point at the closing spread of the
Dollar to Sterling spot rate, as shown on Reuters on 21 June 1999 being
the last practicable date prior to the issue of this document;
"lipoMASC-TM- Technology"............. means the patents and patent applications relating to the lipoMASC-TM-
intellectual property portfolio;
"Listing Rules"....................... means the Listing Rules of the London Stock Exchange made under section
142 of the Financial Services Act 1986;
"London Stock Exchange"............... means London Stock Exchange Limited;
"Nasdaq National Market".............. means the Nasdaq National Market tier of the Nasdaq Stock Market
affiliated with the United States National Association of Securities
Dealers, Inc;
"New Valentis Common Stock"........... means Valentis Common Stock to be issued pursuant to the terms of the
Ordinary Share Offer;
"Offer Period"........................ shall bear the meaning set out in paragraph 5(B) of Part B of Appendix I
to this document;
"Ordinary Share Offer"................ means the recommended offer by Hambrecht & Quist LLC on behalf of
Valentis to acquire all of the PolyMASC Ordinary Shares on the terms and
subject to the conditions set out in this document and where the context
admits, any subsequent revision, variation, extension or renewal
thereof;
"Ordinary Share Offer Document"....... means this document containing the terms and conditions of the Ordinary
Share Offer;
</TABLE>
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<TABLE>
<S> <C>
"Panel"............................... means the Panel on Takeovers and Mergers;
"PolyMASC"............................ means PolyMASC Pharmaceuticals plc;
"PolyMASC Deferred Shares"............ means the 50,000 deferred shares of L1.00 in the capital of PolyMASC;
"PolyMASC Deferred Shareholders"...... means the holders of PolyMASC Deferred Shares;
"PolyMASC Ordinary Shares"............ means the issued and to be issued, fully paid ordinary shares of 0.1p
each in the capital of PolyMASC;
"PolyMASC Share Option Schemes"....... means the PolyMASC Unapproved Share Option Scheme and the PolyMASC
Pharmaceuticals plc Employee Benefit Trust;
"PolyMASC Ordinary Shareholders"...... means holders of PolyMASC Ordinary Shares;
"Pounds" or "L" or "Sterling"......... means UK pounds sterling;
"Registration Statement".............. means the registration statement on Form S-4 relating to the Ordinary
Share Offer to be filed by Valentis with the SEC under the Securities
Act;
"SEC"................................. means United States Securities and Exchange Commission;
"Securities Act"...................... means United States Securities Act of 1933, as amended, and the rules
thereunder;
"SEDOL"............................... means London Stock Exchange Daily Official List;
"UK" or "United Kingdom".............. means the United Kingdom of Great Britain and Northern Ireland;
"US", "USA" or "United States"........ means United States of America, its territories and possessions, any
state of the United States and the District of Columbia;
"Valentis"............................ means Valentis, Inc;
"Valentis Common Stock"............... means $0.001 par value common stock of Valentis;
"Valentis Group"...................... means Valentis and its subsidiary undertakings; and
"Valentis Stock Option Plans"......... means the Valentis 1997 Equity Incentive Plan, as amended and the
Valentis 1998 Non-Employee Director Stock Option Plan.
</TABLE>
Unless otherwise stated references to times in this document are to British
Summer Time.
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INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by third parties and in connection
with actions or suits by or in the right of the corporation, by reason of the
fact that they were or are such directors, officers, employees and agents,
against expenses (including attorney's fees) and, in the case of actions, suits
or proceedings brought by third parties, against judgments, fines and amounts
paid in settlement actually and reasonably incurred in any action, suit or
proceeding.
The Registrant's Amended and Restated Certificate of Incorporation, as
amended, and Bylaws provide for indemnification to the fullest extent permitted
by the Delaware General Corporation Law. As permitted by the Delaware General
Corporation Law, the Registrant's Amended and Restated Certificate of
Incorporation, as amended, eliminates the personal liability of its directors to
the Registrant and its stockholders, in certain circumstances, for monetary
damages arising from a breach of the director's duty of care. Additionally, the
Registrant has entered into indemnification agreements with each of its
directors and officers. These agreements provide indemnification to the fullest
extent permitted by law. The agreements do not provide indemnification for,
among other things, conduct that is adjudged to be fraud, deliberate dishonesty
or willful misconduct.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Conditions and Further Terms of the Offer (contained in Appendix I).
2.1.2 Form of Acceptance.
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant's Form
S-1 Registration Statement (No. 333-32593) originally filed on July 31, 1997 (the "Form S-1")).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.5 to the Registrant's Form S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen common stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-1).
4.3 Amended and Restated Investor Rights Agreement, dated as of May 23, 1997 among the Registrant and the investors
named therein (incorporated by reference to Exhibit 10.7 to the Registrant's Form S-1).
4.4 Preferred Stock Warrant issued to Imperial Bank, dated June 1, 1995 (incorporated by reference to Exhibit 10.24 to
the Registrant's Form S-1).
4.5 Series C Preferred Stock Warrant issued to Phoenix Leasing Incorporated, dated April 30, 1996 (incorporated by
reference to Exhibit 10.25 to the Registrant's Form S-1).
4.6 Stock Purchase Agreement between the Registrant and Pfizer Inc., dated May 30, 1996 (incorporated by reference to
Exhibit 10.20 to the Registrant's Form S-1).
4.8 Share Purchase Agreement between GeneMedicine, Inc. and Corange International Ltd., dated July 17, 1995
(incorporated by reference to Exhibit 10.21 to GeneMedicine, Inc.'s Form 10-Q for the quarter ended September 30,
1995 (No. 000-24572)).
5.1 Legal Opinion of Cooley Godward LLP.
13.1 Annual Report of GeneMedicine, Inc. on Form 10-K for the year ended December 31, 1997.
13.2 Quarterly Report of GeneMedicine, Inc. for the period ended March 31, 1998.
13.3 Quarterly Report of GeneMedicine, Inc. for the period ended June 30, 1998.
13.4 Quarterly Report of GeneMedicine, Inc. for the period ended September 30, 1998.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Arthur Andersen LLP, independent public accountants.
23.3 Consent of BDO Stoy Hayward, independent auditors.
23.4 Consent of Cooley Godward LLP (See Exhibit 5.1).
23.5 Consent of Gillian Elizabeth Francis, MB, BS, MSc, DSc (MED), FRCPath
24.1 Power of Attorney (included on the signature page)
</TABLE>
II-1
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules relating to Valentis have been omitted because they are not
applicable or not required or the information required to be set forth therein
is included in the Financial Statements of Valentis included elsewhere in the
joint registration statement.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the joint proxy statement/prospectus
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(2) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Act"), each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Amended and Restated Certificate of Incorporation, as amended,
and the Bylaws of the Registrant and the Delaware General Corporation Law, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5)(A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Burlingame,
County of San Mateo, State of California on the 2nd day of July, 1999.
<TABLE>
<S> <C> <C>
BENJAMIN F. MCGRAW III
By: /s/ BENJAMIN F. MCGRAW III, PHARM.D.
------------------------------------------
Benjamin F. McGraw III, Pharm.D.
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benjamin F. McGraw III and Bennet L. Weintraub
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent Registration
Statement filed by the registrant pursuant to Securities and Exchange Commission
Rule 462, which relates to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------------------- --------------
<C> <S> <C>
/s/ BENJAMIN F. MCGRAW III Chairman, Chief Executive Officer and President
------------------------------------------------ Benjamin F. McGraw III, Pharm.D. (Principal July 2, 1999
Benjamin F. McGraw III Executive Officer)
/s/ BENNET L. WEINTRAUB
------------------------------------------------ Vice President, Finance, and Chief Financial Officer July 2, 1999
Bennet L. Weintraub (Principal Financial and Accounting Officer)
/s/ FRANK J. CAUFIELD
------------------------------------------------ Director July 2, 1999
Frank J. Caufield
/s/ STANLEY T. CROOKE
------------------------------------------------ Director July 2, 1999
Stanley T. Crooke, M.D., Ph.D.
------------------------------------------------ Director July , 1999
Patrick G. Enright
/s/ RUSSELL C. HIRSCH
------------------------------------------------ Director July 2, 1999
Russell C. Hirsch, M.D., Ph.D.
/s/ RAJU KUCHERLAPATI, PH.D.
------------------------------------------------ Director July 2, 1999
Raju Kucherlapati, Ph.D.
/s/ BERT W. O'MALLEY
------------------------------------------------ Director July 2, 1999
Bert W. O'Malley, M.D.
/s/ ARTHUR M. PAPPAS
------------------------------------------------ Director July 2, 1999
Arthur M. Pappas
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Conditions and Further Terms of the Offer (contained in Appendix I).
2.1.2 Form of Acceptance.
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant's Form
S-1 Registration Statement (No. 333-32593) originally filed on July 31, 1997 (the "Form S-1")).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.5 to the Registrant's Form S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen common stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-1).
4.3 Amended and Restated Investor Rights Agreement, dated as of May 23, 1997 among the Registrant and the investors
named therein (incorporated by reference to Exhibit 10.7 to the Registrant's Form S-1).
4.4 Preferred Stock Warrant issued to Imperial Bank, dated June 1, 1995 (incorporated by reference to Exhibit 10.24 to
the Registrant's Form S-1).
4.5 Series C Preferred Stock Warrant issued to Phoenix Leasing Incorporated, dated April 30, 1996 (incorporated by
reference to Exhibit 10.25 to the Registrant's Form S-1).
4.6 Stock Purchase Agreement between the Registrant and Pfizer Inc., dated May 30, 1996 (incorporated by reference to
Exhibit 10.20 to the Registrant's Form S-1).
4.8 Share Purchase Agreement between GeneMedicine, Inc. and Corange International Ltd., dated July 17, 1995
(incorporated by reference to Exhibit 10.21 to GeneMedicine, Inc.'s Form 10-Q for the quarter ended September 30,
1995 (No. 000-24572)).
5.1 Legal Opinion of Cooley Godward LLP.
13.1 Annual Report of GeneMedicine, Inc. on Form 10-K for the year ended December 31, 1997.
13.2 Quarterly Report of GeneMedicine, Inc. for the period ended March 31, 1998.
13.3 Quarterly Report of GeneMedicine, Inc. for the period ended June 30, 1998.
13.4 Quarterly Report of GeneMedicine, Inc. for the period ended September 30, 1998.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Arthur Andersen LLP, independent public accountants.
23.3 Consent of BDO Stoy Hayward, independent auditors.
23.4 Consent of Cooley Godward LLP (See Exhibit 5.1).
23.5 Consent of Gillian Elizabeth Francis, MB, BS, MSc, DSc (MED), FRCPath
24.1 Power of Attorney (included on the signature page)
</TABLE>
<PAGE>
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE
IN ANY DOUBT ABOUT THE ORDINARY SHARE OFFER DOCUMENT OR THE ACTION YOU SHOULD
TAKE, YOU ARE RECOMMENDED TO SEEK YOUR OWN PERSONAL FINANCIAL ADVICE
IMMEDIATELY FROM AN APPROPRIATELY AUTHORISED INDEPENDENT FINANCIAL ADVISER,
OR, IF YOU ARE IN THE UNITED KINGDOM, AN INDEPENDENT PROFESSIONAL ADVISER
UNDER THE FINANCIAL SERVICES ACT 1986.
TERMS USED IN THIS FORM OF ACCEPTANCE (THE "FORM") SHALL BEAR THE SAME MEANING
AS IN THE ACCOMPANYING OFFER DOCUMENT RELATING TO THE OFFER TO ORDINARY
SHAREHOLDERS IN POLYMASC PHARMACEUTICALS PLC DATED 22 JUNE 1999 (THE
"ORDINARY SHARE OFFER DOCUMENT"). THIS FORM SHOULD BE READ IN CONJUNCTION
WITH THE ORDINARY SHARE OFFER DOCUMENT. THE PROVISIONS OF PART C OF APPENDIX
I TO THE ORDINARY SHARE OFFER DOCUMENT ARE DEEMED TO BE INCORPORATED IN AND
FORM PART OF THIS FORM AND SHOULD BE READ CAREFULLY BY EACH HOLDER OF
POLYMASC ORDINARY SHARES.
IF YOU HAVE SOLD OR OTHERWISE TRANSFERRED ALL YOUR POLYMASC ORDINARY SHARES,
PLEASE PASS THIS FORM AND THE ACCOMPANYING ORDINARY SHARE OFFER DOCUMENT AS
SOON AS POSSIBLE TO THE PURCHASER OR TRANSFEREE, OR TO THE STOCKBROKER, BANK
OR OTHER AGENT THROUGH WHOM THE SALE OR TRANSFER WAS EFFECTED, FOR DELIVERY
TO THE PURCHASER OR TRANSFEREE. HOWEVER, THE ORDINARY SHARE OFFER IS NOT
BEING MADE DIRECTLY OR INDIRECTLY IN OR INTO THE UNITED STATES, CANADA,
AUSTRALIA OR JAPAN AND SUCH DOCUMENTS SHOULD NOT BE DISTRIBUTED, FORWARDED OR
TRANSMITTED INTO OR FROM UNITED STATES, CANADA, AUSTRALIA OR JAPAN BY ANY
MEANS WHATSOEVER INCLUDING WITHOUT LIMITATION MAIL, FACSIMILE, TRANSMISSION,
TELEX OR TELEPHONE. NO FORM WHICH IS RECEIVED IN ANY ENVELOPE POSTMARKED, OR
WHICH APPEARS TO VALENTIS OR ITS AGENTS TO HAVE BEEN SENT FROM THE UNITED
STATES, CANADA, AUSTRALIA OR JAPAN WILL BE TREATED AS VALID.
Hambrecht & Quist LLC, which is regulated in the United Kingdom by The
Securities and Futures Authority Limited, is acting exclusively for Valentis
and no one else in connection with the Ordinary Share Offer and will not be
responsible to anyone other than Valentis for providing the protections
afforded to customers of Hambrecht & Quist LLC in relation to the Ordinary
Share Offer nor for giving advice in relation to the Ordinary Share Offer.
Application has been made for the New Valentis Common Stock to be quoted on
Nasdaq, under the symbol "VLTS". IT is expected that the listings will
become effective and that dealings, for normal settlement, will commence on
Nasdaq in the New Valentis Common Stock on the first trading day following
the day on which the Ordinary Share Offer becomes or is declared unconditional
in all respects (except only, for the quotation of the New Valentis Common
Stock on Nasdaq becoming effective).
- --------------------------------------------------------------------------------
FORM OF ACCEPTANCE AND AUTHORITY
FOR USE IN CONNECTION WITH THE
RECOMMENDED ORDINARY SHARE OFFER BY
HAMBRECHT & QUIST LLC
ON BEHALF OF
VALENTIS, INC.
FOR
THE WHOLE OF THE ISSUED ORDINARY SHARE CAPITAL OF
POLYMASC PHARMACEUTICALS PLC
- --------------------------------------------------------------------------------
PROCEDURE FOR ACCEPTANCE
- - To accept the Ordinary Share Offer, you must complete and sign this Form
on page 3 by following the instructions set out on pages 2 and 4.
- - All holders of PolyMASC Ordinary Shares who are individuals must sign in
the presence of an independent witness, who must also sign where
indicated. If you hold PolyMASC Ordinary Shares jointly with others,
you must arrange for all joint holders to sign this Form.
- - The duly completed and signed Form, accompanied by your share
certificate(s) and/or other document(s) of title for PolyMASC Ordinary
Shares, should be sent by hand (during normal business hours) or by post
to Connaught St Michaels Limited, PO Box 30, Victoria Street, Luton,
Bedfordshire LU1 2PZ, as soon as possible but in any event so as to be
received NOT LATER THAN 3:00 PM, ON 13 JULY 1999. A first class
reply-paid envelope is enclosed for documents lodged by Post.
- - If your share certificate(s) and/or other document(s) of title is/are not
readily available (but is/are held by your bank, stockbroker or other
agent) or is/are lost, this Form should nevertheless be completed,
signed and returned as stated above so as to be received not later than
3:00 pm, on 13 July 1999, together with any share certificate(s)
and/or other document(s) of title that you may have available,
accompanied by a letter stating that the balance will follow, or that
you will obtain a letter of indemnity in respect of lost share
certificates and/or other documents of title, and the share
certificate(s), letter of indemnity and/or other document(s) of title
should be lodged as soon as possible thereafter with Connaught St
Michaels Limited at the address, and in the manner, set out above.
- - Your acceptance of the Ordinary Share Offer is on the terms and subject
to the conditions contained in the Ordinary Share Offer Document and in
this Form.
- - IF YOU HAVE ANY QUESTIONS AS TO HOW TO COMPLETE THIS FORM, PLEASE CONTACT
CONNAUGHT ST MICHAELS LIMITED ON 01582 405333.
<PAGE>
Page 2
PLEASE COMPLETE THIS FORM
THE PROVISIONS OF PART C OF APPENDIX 1 TO THE ORDINARY SHARE OFFER DOCUMENT
ARE INCORPORATED INTO AND FORM PART OF THIS FORM
1. THE ORDINARY SHARE OFFER COMPLETE HERE -->
To accept the Ordinary Share Offer, insert in Box [1] the total number of
PolyMASC Ordinary Shares for which you wish to accept the Ordinary Share
Offer. You must sign the Box [2] in accordance with the instructions set out
below, which will constitute your acceptance of the Ordinary Share Offer, and
complete Box [3] and, if appropriate, Box [4] and Box [5]. If no number or a
number greater than your registered holding of PolyMASC Ordinary Shares is
written in Box [1] and you have signed Box [2] you will be deemed to have
accepted the Ordinary Share Offer in respect of your entire registered
holding of PolyMASC Ordinary Shares (being your entire holding under the name
and address specified in Box [3])
2. SIGNATURES COMPLETE HERE -->
To accept the Ordinary Share Offer you must complete Box [2] and, in the case
of a joint holding, arrange for ALL joint holders to do likewise.
All registered holders, including joint holders, who are individuals must
sign Box [2] in the presence of an independent witness, who must also sign
Box [2] where indicated. If these instructions are not followed, the Form
will be invalid. The witness must be over 18 years of age and should not be
another joint holder signing the Form. The same witness may witness the
signature of each joint holder. The witness should also print his/her name
where indicated.
A corporation may execute this form under its common seal, the seal being
affixed and witnessed in accordance with its Articles of Association or other
equivalent regulations. Alternatively, a company to which s.36A of the
Companies Act 1985 applies may execute this Form as a deed by a director and
the company secretary or by two directors of the company signing the Form and
inserting the name of the company above their signatures. Each such person
signing the Form for a company should state the office which he/she holds. If
the form is not signed by the registered holder(s), insert the name(s) and
capacity (e.g. attorney or executor(s)) of the person(s) signing the Form.
You should also deliver evidence of your authority in accordance with the
notes on page 4.
Please note that if you sign Box [2] but do not put "No" in Box [4] you will
be deemed to have given the representations and warranties set out in the
paragraph 6 of Part B of Appendix 1 to the Ordinary Share Offer Document.
3. NAME(S) AND ADDRESS COMPLETE HERE -->
Complete Box [3] with the full name and address of the sole or first-named
registered holder together with the names of all other joint holders (if any)
in BLOCK CAPITALS. Unless you complete Box [5] this is the address to which
your consideration and/or other documents will be sent provided the address
inserted in Box [3] is not in the United States, Canada, Australia or Japan.
4. OVERSEAS PERSONS COMPLETE HERE -->
If you are unable to give the warranty required by paragraph 6 of Part B of
Appendix 1 to the Ordinary Share Offer Document, you must put "No" in Box
[4]. If you do not put "No" in Box [4], you will be deemed to have given such
warranty.
5. ALTERNATIVE ADDRESS COMPLETE HERE -->
If you wish the consideration payable under the Ordinary Share Offer and/or
other documents to be sent to someone (who must be outside the United States,
Canada, Australia or Japan) other than the sole or first-named registered
holder at the address set out in Box [3] (e.g. your bank manager or
stockholder) you should complete Box [5]. Box [5] must be completed with an
address outside the United States, Canada, Australia or Japan by holders with
registered addresses in the United States, Canada, Australia or Japan who
have completed Box [3] with an address in the United States, Canada,
Australia or Japan.
<PAGE>
Page 3
- --------------------------------------------------------------------------------
[1] TO ACCEPT THE ORDINARY SHARE OFFER
Complete Box [1] and Box [3] and, if appropriate, Box [4] and/or Box [5]
and sign Box [2] in the presence of an independent witness.
BOX [1] ______________________________________________________________________
Number of PolyMASC Ordinary Shares in respect of which
you are accepting the Ordinary Share Offer
- --------------------------------------------------------------------------------
[2] SIGN HERE TO ACCEPT THE ORDINARY SHARE OFFER
BOX [2]
<TABLE>
<S> <C>
EXECUTION BY INDIVIDUALS Witnessed by:
Signed and delivered as a deed by:
1. ______________________________ 1. Name ________________________ Address ________________
Signature ___________________ ________________________
2. ______________________________ 2. Name ________________________ Address ________________
Signature ___________________ ________________________
3. ______________________________ 3. Name ________________________ Address ________________
Signature ___________________ ________________________
4. ______________________________ 4. Name ________________________ Address ________________
Signature ___________________ ________________________
</TABLE>
NOTE: THE SIGNATURE OF EACH REGISTERED HOLDER SHOULD BE WITNESSED. IN THE CASE
OF JOINT HOLDERS, ALL MUST SIGN
EXECUTION BY A COMPANY
Executed and delivered as a deed under the seal of the company named below OR
Executed and delivered as a deed by the company named below.
Name of Company in the presence of/acting by
---------------------------------- -----------------------------------
Name of Director Signature
---------------------------------- -----------------------------------
Name of Director/Company Secretary Signature
(Affix Company Seal if appropriate)
- --------------------------------------------------------------------------------
[3] FULL NAME(S) AND ADDRESS(ES) (TO BE COMPLETED IN BLOCK CAPITALS)
BOX [3]
First-named registered holder
1. Forename(s) __________________________________________
(Mr/Mrs/Miss/Title)
Surname ___________________________________________________
Address ___________________________________________________
___________________________________________________________
___________________________________________________________
Postcode __________________________________________________
Second-named registered holder
2. Forename(s) __________________________________________
(Mr/Mrs/Miss/Title)
Surname ___________________________________________________
Third-named registered holder
3. Forename(s) __________________________________________
(Mr/Mrs/Miss/Title)
Surname ___________________________________________________
Fourth-named registered holder
4. Forename(s) __________________________________________
(Mr/Mrs/Miss/Title)
Surname ___________________________________________________
In case of query, please state your daytime telephone numbers __________________
- -------------------------------------------------------------------------------
[4] Please Put "No" in Box [4] if you are unable to give the warranty
relating to overseas shareholders in paragraph 6 of Part B of Appendix I
to the Ordinary Share Offer Document.
BOX [4] / /
- -------------------------------------------------------------------------------
[5] Address outside the United States, Canada, Australia or Japan to which
consideration and/or other document(s) is/are to be sent if not that set
out under "First-named registered holder" in Box [3] above.
BOX [5] Name _____________________________________________
Address __________________________________________
__________________________________________________
__________________________________________________
Postcode _________________________________________
<PAGE>
Page 4
FURTHER NOTES REGARDING THE COMPLETION AND LODGING OF THIS FORM
In order to be effective, this Form must, except as mentioned below, be signed
personally (or under a power of attorney, the original or certified copy of
which must be lodged with this Form) as a deed by the registered holder or,
in the case of a joint holder, by ALL the joint holders and each individual
signature must be independently witnessed. A corporation may execute this
Form under its common seal, the seal being affixed and witnessed in
accordance with its articles of association or other regulations.
Alternatively, a company to which section 36A of the Companies Act 1985
applies may execute this form by a director and the company secretary or by
two directors signing the form and inserting the name of the company above
their signatures. Each person signing this form for a company should state
the office which he/she holds.
In order to avoid inconvenience to yourself and delay in the processing of
your Form, the following points may assist you:
1.IF THE SOLE HOLDER HAS DIED.
If grant of probate or letters of administration has/have been registered
with PolyMASC (or its registrars, Connaught St Michaels Limited), this Form
must be signed by the personal representative(s) of the deceased and returned
with the share certificate(s) and/or other document(s) of title either by
post or by hand (during normal business hours) to Connaught St Michaels
Limited, PO Box 30, Victoria Street, Luton, Bedfordshire LU1 2PZ. If grant
of probate or letters of administration has not/have not been registered with
PolyMASC (or its registrars, Connaught St Michaels Limited), the personal
representatives or the prospective personal representatives or executors
should sign this Form and forward it with the share certificate(s) and/or
other document(s) of title to Connaught St Michaels Limited at the above
address. However, grant of probate or letters of administration must be
lodged with Connaught St Michaels Limited at the address set out above before
the consideration due can be forwarded to the personal representatives or
executors. All signatures must be witnessed.
2. IF ONE OF THE JOINT REGISTERED HOLDERS HAD DIED.
This form must be signed by all surviving holders in the presence of a
witness and lodged with Connaught St Michaels Limited in the manner set out
above with the share certificate(s) (and/or other document(s) of title) and
accompanied by the death certificate. Grant of probate or letters of
administration in respect of the deceased holder must also be lodged with
Connaught St Michaels Limited in the manner set out above before the
consideration due can be dispatched.
3. IF YOUR POLYMASC ORDINARY SHARE CERTIFICATE(S) ARE HELD BY YOUR BANK,
STOCKBROKER OR SOME OTHER AGENT.
If your share certificate(s) and/or other document(s) of title is/are not
readily available (but is/are held by your bank, stockbroker or other agent),
the completed Form should be lodged with Connaught St Michaels Limited in the
manner set out above together with a note saying e.g. "share certificates to
follow" and you should arrange for the share certificate(s) and/or other
document(s) of title to be forwarded to Connaught St Michaels Limited by your
bank, stockbroker or other agent as soon as possible thereafter.
4. IF YOUR POLYMASC ORDINARY SHARE CERTIFICATE(S) AND/OR OTHER DOCUMENT(S) OF
TITLE HAVE BEEN LOST.
The completed Form, and any share certificate(s) which you may have
available, should be lodged with Connaught St Michaels Limited in the manner
set out above accompanied by a letter stating that you have lost one or more
of your share certificates. At the time, you should write to, Connaught St
Michaels Limited, at the address set out in note 1 above, requesting that a
letter of indemnity for the lost share certificates be sent to you which,
when completed in accordance with the instructions, should be returned by
post or by hand (during the normal hours) to Connaught St Michaels Limited.
5. If THIS FORM HAS BEEN SIGNED UNDER POWER OF ATTORNEY.
The completed Form together with the share certificate(s) and/or other
document(s) of title should be lodged with Connaught St Michaels Limited in
the manner set out above accompanied by the original power of attorney (or a
copy thereof duly certified in accordance with the Powers of Attorney Act
1971). The power of attorney will be noted by Connaught St Michaels Limited
and returned as directed.
6. IF YOUR NAME OR OTHER PARTICULARS ARE SHOWN INCORRECTLY ON THE SHARE
CERTIFICATE E.G.
Name on the share certificate(s)................Richard Allen
Correct Name................................... Richard Allan
The form should be completed in your correct name and lodged with Connaught
St Michaels Limited in the manner set out above with your share
certificate(s) and accompanied by a letter from your bank, stockbroker or
solicitor confirming that the person in whose name PolyMASC Ordinary Shares
are registered is one and the same as the person who has signed the Form. If
an incorrect address is shown, the correct address should be written on this
Form. If you have changed your name, lodge your marriage certificate or deed
poll or, in the case of a company, a copy of the certificate of incorporation
or change of name with this Form for noting.
7. IF A HOLDER IS AWAY FROM HOME (E.G. BROAD OR ON HOLIDAY).
Send this Form by the quickest means (e.g. air mail) to the holder for
execution (provided that such documents may not be forwarded or transmitted,
by any means, in or into the United States, Canada, Australia or Japan) or,
if he/she has executed a power of attorney, the attorney should sign the Form
and the original power of attorney (or a copy thereof duly certified in
accordance with the Powers of Attorney Act 1971) must be lodged with this
Form for noting (see 6 above). No other signatures are acceptable.
8. IF YOU HAVE SOLD ALL, OR WISH TO SELL PART OF, YOUR HOLDING OF POLYMASC
ORDINARY SHARES.
You should at once hand this Form together with the accompanying Ordinary
Share Offer Document to the bank, stockbroker or other agent through whom you
made the sale for onward transmission to the purchaser or transferee.
However, such documents may not be forwarded or transmitted, by any means, in
or into the United States, Canada, Australia or Japan. If your PolyMASC
Ordinary Shares are in certificate form and you wish to sell part of your
holding of PolyMASC Ordinary Shares and also wish to accept the Ordinary
Share Offer in respect of the balance and are unable to obtain the balance
certificate, you should ensure that the stockbroker, bank or other agent
through whom you make the sale obtains the appropriate endorsement or
certification signed on behalf of PolyMASC by, Connaught St Michaels Limited,
at the address set out in note 1 above in respect of the balance of your
holding of PolyMASC Ordinary Shares.
9. IF YOU ARE NOT RESIDENT IN THE UK.
The attention of PolyMASC Ordinary Shareholders not resident in the UK is
drawn to paragraph 6 of Part B of Appendix I to the Ordinary Share Offer
Document.
10. PAYMENT OF CONSIDERATION
New Valentis Common Stock
The documents of title relating to the New Valentis Common Stock due to you
under the Ordinary Share Offer cannot be sent to you until all relevant
documents have been properly completed and lodged with Connaught St Michaels
Limited and in the manner set out above as soon as possible and in any event
so as to be received no later than 3.00 pm on 13 July 1999. Notwithstanding
that no share certificate(s) and/or other document(s) of title is/are
delivered with this Form, the Form, if otherwise valid, accompanied by an
appropriate endorsement of certification to the effect that PolyMASC Ordinary
Shares referred to therein are available for acceptance and signed on behalf
of PolyMASC by Connaught St Michaels Limited, at the address set out in note
1 above, will be treated as valid for all purposes.
Deferred Consideration
Cheque for the Deferred Consideration will be dispatched to the former
holders of PolyMASC Ordinary Shares within 14 days of the receipt by PolyMASC
of the proceeds of the sale of the lipoMASC-TM- Technology.
<PAGE>
EXHIBIT 5.1
July 2, 1999
Valentis, Inc.
863A Mitten Road
Burlingame, CA 94010
Dear Ladies and Gentlemen:
We have acted as counsel for Valentis, Inc., a Delaware corporation (the
"Company" or "Valentis"), in connection with the share for share offer (the
"Offer"), pursuant to that certain Ordinary Share Offer Document, dated June 22,
1999, to be made by Hambrecht & Quist LLC on behalf of the Company to acquire
the whole of the issued ordinary share capital of PolyMASC Pharmaceuticals PLC.
This opinion is being furnished in connection with a Registration Statement on
Form S-4 (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission covering the offer and sale of up to
4,400,000 shares (the "Shares") of common stock, par value $0.001 per share, of
the Company ("Common Stock"), to be issued in connection with the Offer.
In rendering this opinion, we have examined the following documents: (i) the
Company's Certificate of Incorporation and Bylaws, as amended and restated since
the inception of the Company; (ii) the resolutions adopted at a special meeting
of the Board of Directors of the Company on May 24, 1999; (iii) the Registration
Statement; and (iv) such other documents, legal opinions and precedents,
corporate and other records of the Company, and certificates of public officials
and officers of the Company that we have deemed necessary or appropriate to
provide a basis for the below opinion.
We are of the opinion that the Shares, which are being offered and sold by
the Company pursuant to the Registration Statement, when sold in the manner and
for the consideration contemplated by the Registration Statement, will be
validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters."
Sincerely,
/s/ COOLEY GODWARD LLP
Patrick A. Pohlen
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
281/364-1150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act: Common Stock,
Par Value $0.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation System on March
23, 1998 was $33,758,225*.
The number of shares of registrant's Common Stock outstanding as of March 23,
1998 was 14,513,775.
DOCUMENTS INCORPORATED BY REFERENCE: Registrant's Proxy Statement for the 1998
Annual Meeting of Stockholders is incorporated by reference in Part III, Items
10, 11, 12 and 13 of this Form 10-K.
* Excludes 3,490,681 shares of Common Stock held by directors, executive
officers and stockholders whose ownership exceeds ten percent of the shares
outstanding on March 23, 1998. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant or that such person is controlled by or under common control with the
registrant.
<PAGE>
GENEMEDICINE, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business............................................................................ 3
Overview..................................................................... 3
Scientific and Industry Background........................................... 4
GeneMedicine Non-Viral Gene Therapy Technology............................... 5
Product Development.......................................................... 7
Strategic Alliances.......................................................... 9
Licensing and Research Agreements............................................ 10
Patents and Proprietary Technology........................................... 11
Commercialization and Manufacturing.......................................... 12
Government Regulation........................................................ 12
Competition.................................................................. 14
Product Liability Insurance.................................................. 14
Risk Factors................................................................. 15
Human Resources.............................................................. 19
Executive Officers of the Registrant......................................... 20
Item 2. Properties.......................................................................... 21
Item 3. Legal Proceedings................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................. 21
PART II
Item 5. Marketfor Registrant's Common Equity and Related Stockholder Matters................ 22
Item 6. Selected Financial Information...................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 24
Item 8. Financial Statements and Supplementary Data......................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 25
PART III
Item 10. Directors and Executive Officers.................................................... 26
Item 11. Executive Compensation.............................................................. 26
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 26
Item 13. Certain Relationships and Related Transactions...................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 27
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
early stage of GeneMedicine, Inc.'s development and technological uncertainty,
future capital needs and uncertainty of additional funding, dependence on
collaborative partners and licenses, the failure of existing or future
partnerships to be successful, uncertainty of patent protection, uncertainty of
government regulatory requirements, level of competition and rapid technological
change, as well as those set forth in "Risk Factors" and elsewhere in this Form
10-K.
Overview
GeneMedicine, Inc. ("GeneMedicine" or the "Company") is engaged in the discovery
and development of a new class of pharmaceutical products that incorporate genes
("gene medicines") for the treatment or prevention of serious diseases. The
Company's gene medicines are designed to be well-characterized pharmaceutical
products that are directly administered to patients. Gene medicines are designed
to deliver genetic instructions to targeted cells in the body to produce
therapeutic proteins or desired immune responses. Gene therapy requires the safe
and convenient introduction of genes into specific cells of the body and the
achievement of suitably sustained therapeutic levels of the desired protein or
of the intended immune response. In addition, control of gene function is
necessary so that protein production or immune response can be modified based on
the patient's needs.
Gene medicines are intended for both acute and chronic use. They are designed to
be administered through convenient and conventional routes, including
intramuscular injection, inhalation and intravenous injection. The Company's
initial business focus is the development of gene medicines for treating
cancers, neuromuscular disorders, cardiovascular disease, and pulmonary
diseases, as well as in the development of nucleic acid vaccines for therapeutic
and prophylactic treatment of viral and bacterial infections. GeneMedicine
intends to develop and commercialize its products through corporate alliances
with major pharmaceutical and biotechnology companies.
GeneMedicine has established a broad proprietary position in non-viral gene
therapy that includes: several key gene delivery and gene expression
technologies; technology related to the manufacture of gene medicines; and, the
use of certain genes to treat certain disease indications. The Company's core
gene delivery technology includes lipid-, peptide-, and polymer-based systems,
each of which can be applied to specific clinical targets. In October 1997,
GeneMedicine announced issuance both in the U.S. and in Europe of a patent that
covers the use for gene therapy of any cationic lipid combined with
deoxyribonucleic acid ("DNA") and administered by injection or inhalation, the
most common routes of administration. GeneMedicine has an exclusive worldwide
license to the technology covered by this patent. Gene medicines also
incorporate novel DNA sequences that may be used to control the tissue-
specificity, duration and level of functioning of administered genes. The
Company has developed patented GeneSwitch(TM) technology that may be used to
turn off or to activate the expression of previously administered therapeutic
genes in specific cells. GeneMedicine has created high-yield, low-cost and
scaleable integrated manufacturing processes for the production of its gene
medicines for clinical use.
The Company's current efforts in the development of cancer gene medicines are
focused on its Interleukin-2 ("IL-2") Gene Medicine for the treatment of head
and neck cancer. The IL-2 Gene Medicine is the Company's first product being
developed through a corporate alliance with certain Boehringer Mannheim
subsidiaries ("Boehringer Mannheim") of Corange International Ltd. ("Corange")
which was acquired by Roche Holding Ltd. in March 1998. In August 1997,
GeneMedicine commenced a Phase I clinical trial to study the safety and
tolerability of its IL-2 Gene Medicine. An additional IL-2 Gene Medicine Phase I
clinical trial conducted in Germany in collaboration with Boehringer Mannheim
commenced shortly thereafter. In January 1998, GeneMedicine announced that it
was re-examining potential target indications for its Insulin-like Growth
Factor-I ("IGF-I") Gene Medicine and would not start a previously scheduled
Phase I clinical trial for this product. GeneMedicine received clearance from
the U.S. Food and Drug Administration ("FDA") late in the fourth quarter of 1996
to commence the Phase I clinical trial to study the safety and tolerability of
the IGF-I Gene Medicine, but no patients had been enrolled in the trial. The
reasons for the Company's decision not to
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proceed with the trial were the restrictive criteria placed on the patients'
qualifications for enrollment in this trial and the Company's assessment of the
relative market opportunities for the product. GeneMedicine is currently
conducting preclinical studies on the IGF-I Gene Medicine as part of the
Company's examination of clinical indications for the product. The IGF-I Gene
Medicine is intended for the treatment of focal motor neuropathy and has further
potential broad application in the treatment of muscle disorders and
neuropathies that afflict large patient populations and are not adequately
addressed by current therapies, if at all.
SCIENTIFIC AND INDUSTRY BACKGROUND
Gene therapy is a method for the treatment or prevention of disease that uses
genes to provide the patient's cells with the genetic instructions necessary to
produce specific therapeutic proteins needed to correct or to modulate disease.
In comparison, traditional pharmaceutical approaches have focused on the
development of small molecule drugs that work generally by interacting with
certain protein targets that are involved in the disease processes and either
enhance or inhibit the function of those proteins. However, many small molecule
drugs lack selectivity and cause side effects by interactions with unwanted
protein targets. Often the molecular mechanism of action of a small molecule
drug is unclear. The development of small molecule drugs typically takes a long
time and is costly. With protein-based therapeutics developed by biotechnology
companies, the therapeutic protein is directly administered to the patient, but
protein-based therapeutic products are very inefficient in entering cells and
are difficult to manufacture. The practical use of protein-based therapeutics
has been limited to a small number of "circulating proteins." Drug discovery and
development is increasingly benefiting from the intensive efforts by academic
groups and genomic companies to discover genes and understand their functions.
The human genome contains an estimated 100,000 genes. To date, research has
identified about 40,000 of these genes. Only approximately 5,000 genes have been
characterized as to their full function, however, it is estimated that the
elucidation of the human genome could be completed in the next five years. It is
expected that this genomic information will expand the opportunities for gene
therapy, provide more selective target proteins for small molecule drugs, and
reveal new candidates for protein-based therapeutic products.
Each cell in the body has the ability to produce thousands of the different
proteins that are essential for cellular structure, function and growth. Genes
are segments of DNA present in each cell in the body, which provide the
information the cells use to produce proteins. Protein production begins in the
nucleus of the cell when the gene is copied (transcribed) into a precursor
ribonucleic acid (called pre-mRNA) which is processed in the nucleus to
ribonucleic acid ("RNA") known as "messenger RNA." Messenger RNA then moves from
the nucleus of the cell into the cell's cytoplasm, where it is "translated" by
the cell into protein. The process of transcription and translation that results
in protein production by the cell is called gene expression. Different types of
cells express distinct sets of genes and, therefore, produce different sets of
proteins. The cells look different and perform different functions. Effective
gene therapy requires the delivery of the therapeutic gene to specific targeted
cells.
Gene therapy approaches currently in development may be distinguished by the
methods used to transfer or deliver therapeutic genes to the patient. These
methods include the use of (i) cells genetically altered ex vivo (outside the
body) with viruses or other gene-transfer methods, (ii) viruses (such as
retrovirus and adenovirus) which have been genetically modified so that they
cannot reproduce and infect other cells, and (iii) synthetic formulations of
plasmids. The Company believes that ex vivo and virus-based gene therapy
approaches have significant clinical and commercial limitations. Both viral and
non-viral ex vivo approaches involve complex procedures whereby the target cells
must be removed from the patient, modified with the therapeutic gene, expanded
in number, cleansed of contaminants and then reintroduced into the patient. In
addition, most ex vivo and some in vivo gene therapies result in a permanent
genetic alteration of the cell, which generally precludes the ability to
modulate treatment in response to therapeutic needs. While a number of viral
gene therapies currently in development can potentially be suitable for direct
administration, safety issues may limit their further development. These include
adverse immune responses, inflammation and the development of antibodies that
may block the activity of the virus-based gene therapy and prevent repeated
administration.
Non-viral methods are based on the direct administration to patients of
plasmid-based gene expression systems that contain a therapeutic gene as well as
genetic sequences that direct the cell to transcribe and translate this gene
into a therapeutic protein. Plasmids are closed loops of DNA that can be
produced in bacteria through fermentation. In the majority of cases, plasmid-
based gene therapy requires the use of a synthetic gene delivery system to
deliver the gene
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expression system to the nucleus of specific target cells within the body. Non-
viral gene therapy systems can be administered by conventional and convenient
methods such as intramuscular injection, inhalation or intravenous injection,
can provide increased safety over viral gene therapy approaches and can be
degraded from the body by natural processes allowing the gene medicine to be
administered repeatedly.
GENEMEDICINE NON-VIRAL GENE THERAPY TECHNOLOGY
GeneMedicine believes that gene medicines may provide a new quality of
pharmaceutical treatment that is not attainable through the use of small
molecule drugs or protein-based therapeutic products. In addition, the Company
believes that the non-viral plasmid-based gene medicines which it is developing
will have significant clinical and commercial advantages over other gene therapy
methods. These advantages include increased safety and direct administration
benefits; enhanced delivery of the therapeutic gene to specific target cells;
and the ability to control the level and site of therapeutic protein production.
The Company believes its gene medicines can provide cost-effective and
convenient treatments for a wide variety of diseases and disorders without the
safety concerns and practical limitations that accompany certain virus-based or
ex vivo gene therapies as well as small molecule drugs and protein based
therapeutic products.
A gene medicine contains three components: a therapeutic gene that codes for a
specific therapeutic protein; a gene delivery system that controls the location
of the gene within the body; and a plasmid-based gene expression system that may
serve to control the location, level and duration of expression of the
therapeutic gene as well as the location of the resultant protein.
Each biological target for gene therapy, such as muscle, solid tumors, the lungs
or the cells of the immune system, has a different structure and biochemistry.
The Company believes that for effective gene therapy each biological target
requires a specific gene delivery and gene expression system. GeneMedicine is
currently developing non-viral technology platforms, each consisting of a gene
delivery system and a gene expression system for several target tissues
including: muscle, solid tumors, tumor endothelium, antigen presenting cells,
lung airways, and liver hepatocyte cells.
The gene delivery system brings the plasmid into contact with the desired cell
and facilitates internalization of the plasmid across the cellular membrane.
This plasmid gene expression system then moves to the nucleus of the cell, where
gene expression begins, resulting in the production of a therapeutic protein
through the steps of transcription and translation. The Company can engineer the
gene expression system to control whether the resulting protein will remain
within the cell for an intracellular effect or whether it will be secreted from
the cell for either a local or systemic effect. The gene expression system can
also be adjusted to control the level of protein production, as well as the
location and duration of gene expression. The Company's gene medicines are
designed to produce therapeutic levels of protein over a period of several days
to several months.
GeneMedicine anticipates that its gene expression systems will remain separate
from the cells' chromosomal DNA and degrade from the body. Use of the Company's
gene medicines is intended to be analogous to conventional pharmaceuticals
because they are designed to be administered repetitively if necessary to a
patient according to a dosing schedule that matches the extent and severity of
the disease and can also be used to treat acute or chronic diseases.
GENE DELIVERY SYSTEMS
GeneMedicine is developing gene delivery systems based on three broad classes of
materials-lipids, polymers and peptides. The Company has certain rights to
materials in each of these classes.
Lipids
GeneMedicine has exclusive and co-exclusive licenses to in vivo gene therapy
uses of certain cationic lipid gene delivery technologies. In October 1997,
GeneMedicine announced issuance both in the U.S. and in Europe of a patent
that covers the use for gene therapy of any cationic lipid combined with DNA
and administered by injection or inhalation, the most common routes of
administration. GeneMedicine has an exclusive worldwide license to
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the technology covered by this patent. In 1994, GeneMedicine obtained a
worldwide co-exclusive license, with the right to sublicense, from Syntex
(U.S.A.) Inc. ("Syntex") its cationic lipid gene delivery technology (DOTMA)
for in vivo gene therapy uses. The Company has shown that gene delivery
systems containing cationic lipid combined with neutral lipids enhance the
cellular uptake of plasmid-based gene expression systems in animals. These
lipid-based gene delivery systems have been demonstrated to enhance the entry
of genes into tumor cells after intratumoral administration and also to
deliver genes to the endothelium and epithelium of the lung after intravenous
administration and inhalation, respectively. The Company is using one of its
proprietary cationic lipid gene delivery systems in its IL-2 Gene Medicine
product intended for the treatment of head and neck cancer. In addition, the
Company's academic collaborators are employing cationic lipid gene delivery
systems in three physician-initiated clinical trials: a Phase I clinical
trial to deliver genes to cells lining the airways; and two Phase II clinical
trials to deliver genes to endothelium cells lining the blood vessels of
muscle tissue and of the heart. The Company also is pursuing the discovery
and development of several novel classes of lipid molecules for enhancing
gene delivery to a variety of tissues.
Polymers
The Company has developed gene delivery systems that employ certain polymers
which, in certain formulations for conventional drugs, are approved for human
use. The Company has shown that these polymers interact with plasmids and
facilitate the delivery of genes into muscle cells in vivo after
intramuscular administration. The Company is employing its proprietary
polymeric PINC (Protective, Interactive, Non-Condensing) gene delivery system
in its IGF-I Gene Medicine. The Company's scientists have demonstrated in
animal models that the use of polymeric PINC gene delivery systems can lead
to a significant increase in both the level and the reproductabilty of
proteins produced in muscle compared to the administration of plasmids
formulated in saline (so-called "naked" DNA).
Peptides
GeneMedicine is creating and developing gene delivery systems made up of
short synthetic peptides and peptides containing simple sugars
(glycopeptides). The peptides are designed to bind to gene expression systems
to form a tightly compacted complex, which the Company believes is important
for gene expression systems to gain access to certain types of cells. The
glycopeptides are designed to interact specifically with natural receptors
present on the surfaces of target cells and to effect the entry of the gene
expression system through the membrane and into those cells. The Company also
has developed certain gene delivery systems designed to enhance the movement
of the gene expression system to the cell nucleus where gene expression
occurs. The Company is developing glycopeptide gene delivery systems for gene
medicines targeting the hepatocyte cells in the liver after intravenous
administration. In addition, the Company's peptides can be utilized in
combination with other materials such as cationic lipids.
GENE EXPRESSION SYSTEMS
The proprietary gene expression systems of GeneMedicine are designed to
provide therapeutic levels of protein expression at selected sites within the
body. These systems may incorporate cell-specific regulatory elements to
cause transcription in specific cells. The Company's gene expression systems
also can contain genetic elements that control the processing of the RNA
transcripts to messenger RNA, the stability of messenger RNA and the
efficiency of secretion of the gene product from the cell. Gene expression
systems may contain GeneSwitch(TM) technology to enable the expression of a
therapeutic protein to be regulated by administration of certain low
molecular weight drugs.
Cell-Specific Promoters
GENEMEDICINE is developing plasmids containing cell-specific promoters that
allow gene expression to be restricted to certain cells within the body.
Cell- specific gene expression systems are being developed for several
targets including certain tumors, muscle cells, the liver and the immune
system. The Company believes that cell-specific expression can enhance the
effectiveness, safety and reliability of gene therapy products.
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RNA Processing
The Company has demonstrated that certain DNA sequences, when incorporated
into gene expression systems, can increase the duration and level of gene
expression in vitro and in vivo. Such genetic elements increase the
efficiency and accuracy of RNA processing, which leads to an increase in the
amount of messenger RNA produced from the gene expression system. These
genetic elements increase the stability of the messenger RNA. Particular
genetic elements increase the ability of messenger RNA to direct the
synthesis of the protein product. The Company has also shown that other DNA
sequences, when incorporated into gene expression systems, can control the
secretion of a gene product from several types of cells.
Drug-Controlled GeneSwitch-TM-
The Company is developing gene-switch technology which has the capability to
turn off or activate the expression of previously administered therapeutic
genes in specific cells by means of certain low molecule weight drugs that
are used in humans for various therapeutic applications. Gene expression
continues for as long as the drug is present within the cell. Using a
prototype of the GeneSwitch-TM- technology, GeneMedicine has demonstrated
drug-controlled activation of therapeutic genes in animals in several
tissues. The Company has developed cell-specific gene switches that have been
shown in vivo to provide for both drug-activated and cell-specific gene
expression.
PRODUCT DEVELOPMENT
The Company's business focus is the development of gene medicines for treating
cancers, neuromuscular disorders, cardiovascular disease, and pulmonary
diseases, as well as in development of nucleic acid vaccines for the therapeutic
and prophylactic treatment of viral and bacterial infections. GeneMedicine
intends to develop and commercialize its products through corporate alliances
with major pharmaceutical and biotechnology companies.
CANCER GENE MEDICINES
GeneMedicine is developing cancer gene medicines that incorporate plasmids
encoding certain cytokine genes. The gene medicines are designed to provide
localized expression of the cytokines which result in potent anti-tumor
effects with minimal systemic exposure and which promote immune responses
against tumors. A corporate alliance with Boehringer Mannheim provides for
research and development of gene medicines to treat head and neck tumors and
melanoma. The Company's IL-2 Gene Medicine for the treatment of head and neck
cancer is the subject of early human clinical trials, and the Company's other
cancer gene medicines are at research and preclinical development stages.
In August 1997, GeneMedicine commenced a Phase I clinical trial to study the
safety and tolerability of its IL-2 Gene Medicine for the treatment of head and
neck cancer. An additional IL-2 Gene Medicine Phase I clinical trial conducted
in Germany in collaboration with Boehringer Mannheim commenced shortly
thereafter. There can be no assurance, however, that the Phase I clinical trials
of the IL-2 Gene Medicine will be completed successfully within any specific
time period, if at all. GeneMedicine has demonstrated using animal models of
head and neck cancer that its IL-2 Gene Medicine slows the rate of tumor
progression and increases animal survival. More than 40,000 patients in the
United States and 75,000 patients in Europe are diagnosed with head and neck
cancer each year. While head and neck cancers are slow to metastasize, current
therapies do not provide effective treatment in that recurrence of the tumor is
common and mortality in the first five years after diagnosis is approximately 30
percent. The IL-2 Gene Medicine is intended to be used initially in conjunction
with surgery and radiotherapy to reduce disease recurrence and to extend
survival.
The IL-2 Gene Medicine is comprised of a plasmid encoding the human IL-2 gene
and a proprietary cationic lipid gene delivery system that enhances uptake of
the gene into the target cells after direct intratumoral injection. This product
is designed to provide sustained, localized expression of the IL-2 protein and
to promote an immune response against the tumor. The use of a cationic lipid
gene delivery system is also intended to enable repeated administration of the
IL-2 gene in a safe and effective manner. IL-2 is an important human cytokine
that has multiple functions and which plays a major role in the body's immune
response to foreign pathogens and tumors. A recombinant IL-2 protein product has
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FDA approval for the treatment of renal cell carcinoma. In addition, the IL-2
protein has demonstrated clinical responses in several other types of cancer.
The application of the recombinant protein in the treatment of cancer is limited
by its short half-life and by significant toxicity when administered
systemically. In contrast, the IL-2 Gene Medicine is designed to control the
sustained production of the IL-2 protein in the tumor mass, thereby avoiding
potentially harmful systemic levels of the IL-2 protein. The technologies
developed for therapy of solid tumors of the head and neck may be applicable to
a wide range of solid tumors and systemic metastases. Additional candidate gene
medicine products for head and neck cancer are currently in research and
preclinical studies.
GROWTH FACTOR GENE MEDICINES
The Company believes that the controlled delivery and expression of growth
factor genes can have important benefits for the treatment of disease conditions
arising from inadequate repair and regeneration of tissue. The localized
delivery of certain gene medicines may cause the sustained production of growth
factor proteins that can induce the growth of local tissue to correct the
underlying condition. Current identified areas of opportunity for growth factor
gene medicines include: neurotrophic and myotrophic gene medicines for the
treatment of focal neuropathies, and angiogenic genes for the treatment of
critical ischemia in the heart or the peripheral circulation. Each of these
applications has separate demands with respect to the targeted cell.
IGF-I Gene Medicine
The Company believes that several muscle and peripheral nerve disorders can
be treated effectively with gene medicines that cause the localized
production of therapeutic proteins after intramuscular administration.
Furthermore, delivery of certain gene medicines to muscle cells could cause
the intended sustained production and secretion of therapeutic proteins
systemically. The Company has developed proprietary polymer gene delivery
systems that have been shown to enhance the in vivo level and reproducibility
of gene expression significantly over naked DNA. The Company's primary focus
in this product area is the development of its IGF-I Gene Medicine.
GeneMedicine received clearance from the FDA late in the fourth quarter of
1996 to commence a Phase I clinical trial to study the safety and
tolerability of the IGF-I Gene Medicine. In January 1998, GeneMedicine
announced that it is re-examining potential target indications for its IGF-I
Gene Medicine and would not start the previously scheduled Phase I clinical
trial. No patients had been enrolled in the clinical trial. The reasons for
the Company's decision not to proceed with the trial were the restrictive
criteria placed on the patients' qualifications for enrollment in this
clinical trial and the Company's assessment of the relative market
opportunities for the product. GeneMedicine is currently conducting
preclinical studies on the IGF-I Gene Medicine as part of the Company's
examination of clinical indications for the product. The IGF-I Gene Medicine
is intended for the treatment of focal motor neuropathy and has further
potential broad application in the treatment of muscle disorders and
neuropathies that afflict large patient populations and are not adequately
addressed by current therapies, if at all.
GeneMedicine has shown in a series of animal models that its IGF-I Gene
Medicine promotes nerve and muscle growth and provides sustained expression
of the IGF-I protein for several weeks after a single administration. The
IGF-I Gene Medicine incorporates the human IGF-I gene with one of the
Company's proprietary gene delivery systems, a polymeric PINC system that
enables gene delivery to skeletal muscle, and a proprietary muscle-specific
gene expression system. This product is designed to provide sustained,
localized expression of the IGF-I protein after direct intramuscular
injection to repair nerves and restore muscle mass and strength. The
product's non-viral gene delivery system is intended to reduce the likelihood
of an immunogenic response and thereby allows for repeat administration over
a prolonged period of time.
Vascular Growth Factor Gene Medicine
GeneMedicine has provided one of its proprietary lipid gene delivery systems
to scientists at Kuopio University in Finland for two Phase II, physician-
initiated clinical trials involving gene therapy following angioplasty. These
scientists are using the GeneMedicine delivery system to deliver a vascular
endothelium growth factor (`VEGF')
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gene medicine by catheter to prevent the proliferation of smooth muscle cells
and reclosure of the vessels in patients who are undergoing either a coronary
angioplasty or peripheral angioplasty. The coronary angioplasty trial will
involve up to 90 patients, one third of which will receive a VEGF gene
medicine using the GeneMedicine proprietary lipid gene delivery system. The
peripheral angioplasty trial will involve up to 75 patients, one third of
which will receive a VEGF gene medicine using the GeneMedicine proprietary
lipid gene delivery system.
PULMONARY GENE MEDICINES
GeneMedicine has provided one of its proprietary lipid gene delivery systems
and alpha-1 antitrypsin ("AAT") gene expression systems to scientists at
Vanderbilt University ("Vanderbilt"). Under a physician-initiated
Investigational New Drug Application ("IND"), researchers at Vanderbilt have
incorporated the AAT gene in these systems and are conducting Phase I human
clinical studies of this gene medicine as part of a study on the possible
treatment for AAT deficiency, a significant contributor to the development of
emphysema. Approximately 160,000 people in the United States have AAT
deficiency and about 23,000 of these people are at risk for hereditary
emphysema. GeneMedicine retains the right to commercialize this product.
NUCLEIC ACID VACCINES
GeneMedicine is adapting its expertise in the delivery and control of
expression of genes to opportunities in the field of nucleic acid vaccines.
The prospective advantages of nucleic acid vaccines include: more precise
control of expression of antigens in the body and greater specificity of the
immune response against the pathogen; the ability to express several antigens
for protection from the same or multiple disease causing organisms; and,
potentiation of long-term antigenic memory and more robust cellular and
humoral immune response.
In addition, nucleic acid vaccines may be created to provide immunization
against diseases where no vaccine currently exists, and with costs and
compliance potentially better than traditional vaccine approaches. The Company
has identified disease targets, gene candidates and appropriate animal models
and has begun to conduct its initial research in the field.
STRATEGIC ALLIANCES
The Company intends to develop and commercialize all of its products in
corporate partnerships with major pharmaceutical and biotechnology companies.
There can be no assurance, however, that the Company's current or future
partnership arrangements will be successful or established on favorable terms.
Should any corporate partner fail to develop or commercialize successfully any
product to which it has rights, or any of the partner's products to which
GeneMedicine has rights, the Company's business may be adversely affected. In
addition, there can be no assurance that any of these collaborations will be
continued or result in successfully commercialized products. Failure of a
corporate partner to continue funding any particular program could delay or halt
the development or commercialization of any product arising out of such program.
The Company's Syntex Alliance (defined below) ended in accordance with its terms
in April 1997. In addition, there can be no assurance that corporate partners
will not pursue alternative technologies or develop alternative products either
on their own or in collaboration with others, including the Company's
competitors, as a means for developing treatments for the diseases targeted by
the Company's programs.
Effective February 1995, GeneMedicine entered into a corporate partnership
agreement with Corange the parent company of Boehringer Mannheim, providing for
research and development of gene medicines to treat head and neck tumors and
melanoma (the "BM Alliance"). GeneMedicine also granted Boehringer Mannheim an
option, which expires May 3, 1998, to expand the collaboration to include
additional cancer indications. Boehringer Mannheim may exercise its option by
agreeing to fund additional research and development at GeneMedicine
commensurate with the initial BM Alliance. Pursuant to the BM Alliance,
Boehringer Mannheim agreed to fund $25 million of research and development at
GeneMedicine at the rate of $5 million a year and make an aggregate equity
investment in GeneMedicine of $20 million at the rate of $4 million a year. The
prices per share for common equity investments by Boehringer Mannheim for the
years 1996 through 1999 are based upon the average closing price for the 15
consecutive trading days immediately preceding February 1 for each year, with
the purchase in 1996 at a 20 percent premium. In no case are the
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purchase prices to be less than $7.50 per share. Research and development
funding of $4.6 million, $5 million and $5 million were received in 1995, 1996,
and 1997, respectively. The first four $4 million equity investments were made
in July 1995, February 1996, February 1997 and February 1998 in which 444,444,
418,629, 533,333 and 533,333 common shares were issued at $9.00, $9.56, $7.50
and $7.50 per share, respectively. All remaining payments to the Company are
subject to the achievement of certain milestones. In February 1997, the Company
received a milestone payment of $500,000 for achievement of FDA clearance to
commence the Phase I clinical trial for the IL-2 Gene Medicine. If GeneMedicine
continues to meet the milestones for the development of a gene medicine to treat
head and neck cancer under the BM Alliance, the Company may be entitled to
additional milestone payments of up to $3.25 million. If GeneMedicine fails to
reach certain milestones after the fifth anniversary of the agreement, it may
have to fund an additional year of research at its own expense, not to exceed $5
million. Under the BM Alliance, upon successful completion of Phase II clinical
testing, GeneMedicine may elect either to receive up to 50 percent of profits by
agreeing to share development and commercialization expenses or to receive
royalty payments based on worldwide product sales.
In April 1994, the Company and Syntex (U.S.A.) Inc., now a subsidiary of Roche
Holding Ltd., entered into a corporate partnership for the development of gene
medicines for certain inflammatory and immunological disorders (the "Syntex
Alliance") providing for a three-year research program. This alliance ended in
accordance with its terms in April 1997. Pursuant to the Syntex Alliance,
GeneMedicine obtained a worldwide co-exclusive license, with the right to
sublicense, from Syntex its cationic lipid gene delivery technology (DOTMA) for
in vivo gene therapy uses. The rights under this agreement continue even though
the Company's Syntex Alliance ended. In connection with the commencement of the
Syntex Alliance, Syntex purchased 3,750,000 shares of the Company's Series B
Preferred Stock. The Series B Preferred Stock is convertible into Common Stock
on a 3.5-to-one basis by the holder at any time and by the Company (i) upon the
Company's Common Stock trading at an average price of $14.00 or more per share
for 30 consecutive trading days, (ii) upon completion of a public offering with
minimum gross proceeds of $10 million at a minimum price of $14.00 per share or
(iii) after April 8, 1998. The 3,750,000 shares of Series B Preferred Stock are
convertible into an aggregate of 1,071,428 shares of Common Stock. The holders
of the Series B Preferred Stock are entitled to receive an aggregate liquidation
preference of $15 million, after which assets would be distributed ratably to
the holders of Common Stock. The liquidation preference also applies in the
event of a merger or sale of all or substantially all of the Company's assets.
In connection with the same transaction, Syntex also acquired a five-year
warrant to purchase 1,071,428 shares of the Company's Common Stock at an
exercise price of $21.00 per share. The Company has the right to accelerate the
termination of the warrant at any time.
LICENSING AND RESEARCH AGREEMENTS
SYNTEX
The Company has a worldwide co-exclusive license, with the right to
sublicense, from Syntex to its DOTMA technology for in vivo gene therapy
uses. The rights under this agreement continue even though the Company's
Syntex Alliance ended in accordance with its terms in April 1997.
BAYLOR COLLEGE OF MEDICINE
The Company has several agreements with Baylor College of Medicine ("Baylor")
pursuant to which the Company has exclusive rights to certain current and
future gene therapy technologies developed by the Company's founding
scientists and their collaborators, as well as access to certain additional
technology as it is developed by such individuals.
UNIVERSITY OF CALIFORNIA
GeneMedicine has an exclusive, worldwide license from the University of
California to certain gene delivery technologies and improvements developed
by Dr. Frank C. Szoka, Jr., one of the Company's founders, at the University
of California, San Francisco ("UCSF"). Dr. Szoka's laboratory at UCSF is
developing gene delivery systems to transport genes across membranes for
delivery to their targeted cells and organs. GeneMedicine also has an
exclusive consulting relationship with Dr. Szoka in the field of gene
therapy.
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VANDERBILT UNIVERSITY
The Company has an exclusive, worldwide license from Vanderbilt University to
certain gene delivery technologies and improvements developed by Dr. Kenneth
Brigham. The license pertains to rights under a patent covering formulations
of cationic lipid and DNA, including those containing additional components
such as neutral lipids, polymers or peptides, used for gene therapeutic
products and gene-based vaccines that are administered to patients by
injection or inhalation.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's business.
The Company's policy is to file patent applications and protect technology,
inventions and improvements to inventions that are commercially important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technology innovations and licensing opportunities to develop and
maintain its competitive position. To date, the Company has filed or
participated as a licensee in the filing of numerous patent applications in the
United States relating to the Company's technology, as well as foreign
counterparts of certain of these applications in many countries. The Company has
licensed from Syntex certain rights under certain United States and foreign
patents claiming the use of DOTMA for in vivo gene delivery. GeneMedicine has
licensed from Vanderbilt exclusive worldwide rights to certain United States and
European patent rights covering the gene therapy use of any cationic lipid
combined with DNA and administered by injection or inhalation. The Company also
has licensed from Baylor rights under a patent covering all gene therapy
applications of the Company's GeneSwitch(TM) technology and a patent claiming
the use of a muscle-specific gene expression system.
The Company presently has proprietary rights to only a limited number of genes,
and the Company may need to obtain licenses to other gene sequences or
technology to which it currently has no proprietary rights. There can be no
assurance that the Company will be able to obtain such licenses on commercially
reasonable terms, or at all. If required licenses are not available to the
Company, the Company may not be able to develop or market certain products.
The patent positions of pharmaceutical and biotechnology firms are generally
uncertain and involve complex legal and factual questions. To date, there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents. Consequently, although the Company is currently
prosecuting several patent applications in the United States and worldwide, the
Company does not know whether such applications will result in the issuance of
any patents, or, if issued, whether any such patents will provide sufficient
protection against competitors with similar technology, or whether such patents
will be challenged successfully or circumvented. Patent applications in the
United States are maintained in secrecy until a patent issues, and the Company
cannot be certain that others have not filed patent applications for technology
covered by the Company's or its licensors' pending applications or that the
Company or its licensors were the first to file patent applications for such
technology. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to,
compounds or processes that block or compete with those of the Company. The
Company is aware of patent applications filed or patents issued to third parties
relating to gene therapy technologies. The Company's development efforts are at
an early stage, however, and the Company presently is unable to evaluate whether
any such patent applications or patents will have any effect on its products in
development.
Patent litigation is becoming more widespread in the biotechnology industry and
it is not possible to predict how any such litigation will affect the Company.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the scope and validity of the proprietary
rights of third parties. Such litigation could result in substantial costs to
and diversion of resources by the Company and may have a material adverse impact
on the Company. There can be no assurance that any of the Company's issued or
licensed patents would be held valid by a court of competent jurisdiction or
that efforts to defend any of such patents by the Company will be successful.
The Company also relies on trade secrets, know-how, improvements to technology,
confidentiality agreements and the pursuit of collaborative and licensing
opportunities to develop and maintain its competitive position. There can be no
assurance that third parties will not independently develop equivalent
proprietary information or techniques, will not
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gain access to the Company's trade secrets or disclose such technology to the
public, or that the Company can maintain and protect unpatented proprietary
technology. The Company requires its employees, consultants, collaborators and
other advisors to execute confidentiality agreements upon commencement of
employment or other relationships with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's technology in the event of unauthorized use or
disclosure of such information, or that the parties to such agreements will not
breach such agreements.
COMMERCIALIZATION AND MANUFACTURING
GeneMedicine currently operates no manufacturing facilities for commercial
production. GeneMedicine intends to develop and commercialize its gene medicines
through alliances with major pharmaceutical and biotechnology companies.
Furthermore, the Company may rely on corporate partners, licensees or other
entities for commercial scale manufacturing and marketing of its products. There
can be no assurance, however, that the Company will be able to reach
satisfactory arrangements with such parties or that such arrangements will
continue and not be terminated. In addition, there can be no assurance that any
such arrangement will be successful or that its partners will be able to develop
adequate manufacturing capabilities for commercial scale quantities of gene
medicines. Furthermore, the large scale manufacturing of gene therapy products
has not been demonstrated by any party.
The Company has developed proprietary manufacturing processes for production of
plasmid and formulated gene medicine for use in early clinical trials. The
Company has manufactured under current Good Manufacturing Practices ("cGMP")
conditions the IL-2 Gene Medicine for Phase I clinical trials and plasmids for a
physician-initiated clinical trial at Vanderbilt. The Company's plasmids are
produced in bacterial cells utilizing traditional fermentation and purification
techniques. The Company believes that certain physical and physicochemical
characteristics of its gene expression systems will enable each of its products
to be produced and purified using consistent methods that will minimize the cost
and risk of the manufacturing process. The processes used by the Company are new
and there can be no assurance that such processes will be effective, accurate or
cost effective.
GOVERNMENT REGULATION
The production and marketing of the Company's proposed products and its research
and development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are subject to rigorous
regulation by the FDA. Such products are regulated under the Federal Food, Drug,
and Cosmetic Act, and biological products, in addition to being subject to
certain provisions of this act, are regulated under the Public Health Service
Act. These laws and the regulations promulgated thereunder govern, among other
things, testing, manufacturing, safety, efficacy, labeling, storage, record
keeping, and advertising and promotional practices involving drugs and
biological products. At the FDA, the Center for Biologics Evaluation and
Research is responsible for the regulation of biological products and has
handled the regulation of most gene therapy products to date. At the present
time, the Company believes that its products will be regulated by the FDA and
comparable foreign regulatory bodies as biologics.
In addition to the FDA requirements, the National Institutes of Health ("NIH")
has established guidelines for research involving recombinant DNA molecules,
which are utilized by the Company and certain of its collaborators in their
research. These guidelines apply to all recombinant DNA research which is
conducted at or supported by the NIH. Under current guidelines, proposals to
conduct clinical research involving gene therapy which is conducted at
institutions supported by the NIH must be filed with the Recombinant DNA
Advisory Committee and the NIH.
The steps required before a new pharmaceutical agent may be marketed in the
United States generally include (i) preclinical laboratory tests and in vivo
preclinical studies, (ii) the submission to the FDA of an IND for human clinical
testing, which must become effective before human clinical trials commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product, (iv) the submission to the FDA of a New Drug
Application ("NDA") for a drug or a Product License Application and
Establishment License Application ("PLA/ELA") for a biologic and (v) FDA
approval of the NDA or PLA/ELA prior to any commercial sale or shipment of the
drug or biologic, respectively. In the case of drugs, in addition to obtaining
FDA approval for each product, each domestic drug
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manufacturing establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with GMP regulations enforced by the FDA through its facilities
inspection program for both drugs and biologics. Manufacturers of pharmaceutical
products also may be subject to state regulations.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product.
Compounds must be produced according to applicable GMP and preclinical safety
tests must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practices. The results of the preclinical tests,
together with manufacturing information and analytical data, are submitted to
the FDA as part of an IND, which must become effective before human clinical
trials may be commenced. The IND will automatically become effective 30 days
after receipt by the FDA unless the FDA indicates prior to the end of the 30-day
period that it does not wish the trials to proceed as outlined in the IND. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns
before clinical trials can proceed. There can be no assurance that submission of
an IND will result in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational product to
healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, 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.
Further, each clinical study must be reviewed and approved by an independent
Institutional Review Board at the institution at which the study will be
conducted. The Institutional Review Board will consider, among other things,
ethical factors and the safety of human subjects.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
generally healthy volunteers, the drug is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacodynamics.
Phase II usually involves studies in a limited patient population to (i)
determine the efficacy of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specific time period, if
at all, with respect to any of the Company's products subject to such testing.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA or PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the drug or biologic.
The testing and approval process is likely to require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. The FDA may deny an NDA or PLA/ELA if applicable
regulatory criteria are not satisfied, require additional testing or information
or require postmarketing testing and surveillance to monitor the safety or
efficacy of a product. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for NDA or PLA/ELA approval is the requirement
that the prospective manufacturer's quality control and manufacturing procedures
conform to GMP, which must be followed at all times. In complying with standards
set forth in these regulations, manufacturers must continue to expend time,
monies and effort in the area of production and quality control to ensure full
compliance.
For clinical investigation and marketing outside the United States, the Company
is also subject to foreign regulatory requirements governing human clinical
trials and marketing approval for drugs. In Europe, the approval process for the
commencement of clinical trials varies from country to country. The Company's
approach to the European regulatory process involves the identification of
clinical investigators in Europe to conduct clinical studies. The Company
intends to design these studies to meet FDA standards as well as the standards
of such European countries. The foreign regulatory
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approval process includes all of the risks associated with FDA approval set
forth above.
The ability of GeneMedicine to commercialize its products successfully will
depend in part on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. If the Company succeeds in bringing one or
more products to market, there can be no assurance that these products will be
considered cost effective, that reimbursement will be available, or if
available, that the payor's reimbursement policies will not adversely affect the
Company's ability to sell its products on a profitable basis.
The Company's research and development processes involve the controlled use of
hazardous and radioactive materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposing of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such 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 damages that result and any such liability could exceed the resources of
the Company. Although the Company believes that it is in compliance in all
material respects with applicable environmental control facilities in the near-
term, there can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, or that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
COMPETITION
GeneMedicine is pursuing areas of product development in a field that is new and
rapidly evolving and in which significant technological changes are likely.
Rapid technological development could result in the Company's potential products
or technologies becoming obsolete before the Company recovers a significant
portion of its related research, development and capital expenditures. The
Company will experience competition from pharmaceutical and biotechnology
companies that have other forms of treatment for the diseases targeted by the
Company, as well as from other companies in the field of gene therapy. The
Company is aware of a large number of development stage and established
enterprises, including major pharmaceutical and biotechnology firms, that are
exploring the field of human gene therapy or are actively engaged in research
and development in areas related to gene therapy, including non-viral gene
therapy. The Company also may experience competition from companies that have
acquired or may acquire technology from universities and other research
institutions. As these companies develop their technologies, they may develop
proprietary positions in certain aspects of gene therapy that may materially and
adversely affect GeneMedicine. In addition, the Company may face competition
from other companies for limited opportunities to enter into collaborative
arrangements with pharmaceutical and biotechnology companies and academic
institutions and to obtain licenses to proprietary technology, including genes
and methods of gene use, from third parties.
Many competitors and potential competitors of the Company have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than the Company. Other companies may succeed in developing
products earlier than the Company, in obtaining FDA approvals for such products
more rapidly than the Company, or in developing products that are more effective
than those proposed to be developed by the Company. While the Company will seek
to expand its technological capabilities in order to remain competitive, there
can be no assurance that research and development by others will not render the
Company's technology or products obsolete or non-competitive or result in
treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies.
PRODUCT LIABILITY INSURANCE
Human therapeutic products involve an inherent risk of product liability claims
and associated adverse publicity. The Company currently carries insurance
against such claims for its clinical trials and for the supply of DNA materials
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for two other clinical trials. There can be no assurance that it will be able to
maintain product liability insurance on acceptable terms or with adequate
coverage against potential liabilities. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
An inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of the Company's potential products. A product
liability claim brought against the Company or a product withdrawal could have a
material adverse effect upon the Company and its financial condition.
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
Early Stage of Development; Technological Uncertainty
Gene therapy is a new and rapidly evolving technology. While many approaches to
gene therapy are being pursued by pharmaceutical and biotechnology companies and
academic institutions, there are currently no marketed gene therapy products,
and existing clinical data on the safety and efficacy of potential gene therapy
products are limited. Clinical and preclinical data relating to the Company's
specific gene therapy approach are also limited. Further, the results of
preclinical studies do not predict safety or efficacy in humans, and results
from such tests or studies are not necessarily indicative of the results that
will be obtained in human clinical trials. All of the potential products under
development by the Company are in research, preclinical or early clinical
development, and revenues from the sale of any such products will not be
realized for at least the next several years, if at all. The potential products
currently under development by the Company will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and the receipt of regulatory approval, prior to commercial use. In
addition, such products are subject to the risks of failure inherent in the
development of products based on innovative technologies. There can be no
assurance that the Company's research and development efforts will be
successful, that any of the potential products developed by the Company will
prove to be safe and effective in clinical trials, or that any commercially
successful products utilizing the Company's technology will be developed by the
Company or its collaborators. Even if successfully developed, these potential
products may not receive regulatory approval or be successfully introduced and
marketed at prices that would permit the Company to operate profitably. Due to
the early stage of development of the Company's potential products and the
extensive testing and regulatory review process required before marketing
approval can be obtained, the Company cannot predict with certainty when it will
be able to commercialize any of its potential products, if at all.
History of Operating Losses; Future Capital Needs; Uncertainty of Additional
Funding
The Company expects to incur operating losses over at least the next several
years, and there can be no assurance that the Company will ever achieve
profitability. The Company expects to have quarter-to-quarter fluctuations in
any contract revenues, expenses and losses, some of which could be significant.
The Company has generated no revenues from product sales, nor are any product
revenues expected for at least the next several years. The negative cash flow
from operations is expected to continue for the foreseeable future. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of preclinical studies and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing scale-up, effective commercialization
activities and arrangements, and other factors not within the Company's control.
Based on its current plans, the Company believes that its available cash,
including proceeds from projected interest income and anticipated funding from
its corporate alliance with Boehringer Mannheim, will enable the Company to
maintain its current and planned operations into the first quarter of 2000.
There can be no assurance, however, that changes in the Company's research and
development plans or other events affecting the Company's operating expenses
will not result in the expenditure of such resources before such time. The
Company will need to raise substantial additional funds to conduct the research
and development, preclinical studies and clinical trials necessary to bring such
products to market.
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The Company intends to seek additional funding through public or private equity
or debt financings or new corporate partnerships. There can be no assurance that
additional financing will be available on acceptable terms, or at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research or development programs or to obtain funds through
arrangements with third parties that may require the Company to relinquish
greater or all rights to product candidates at an earlier stage of development
or on less favorable terms than the Company would otherwise seek. Insufficient
funds may also require the Company to relinquish rights to certain of its
technologies that the Company would otherwise develop or commercialize itself.
Dependence on Collaborative Partners, Licenses and Others
The Company's strategy is to enter into various arrangements with corporate and
academic collaborators, licensors, licensees and others for the research,
development, clinical testing, manufacturing, marketing and commercialization of
its products. To date, the Company also has entered into corporate partnerships
for development and commercialization of its potential products with two
pharmaceutical firms, one of which (the Syntex Alliance) ended in accordance
with its terms in April 1997. The Company intends to enter into additional
corporate partnering agreements to develop and commercialize products based upon
its gene therapy technology. There can be no assurance, however, that the
Company will be able to establish such additional collaborations on favorable
terms, if at all, or that its current or future partnership arrangements will be
successful. Should any corporate partner fail to develop or commercialize
successfully any product to which it has rights, or any of the partner's
products to which GeneMedicine has rights, the Company's business may be
adversely affected. In addition, there can be no assurance that any
collaboration will be continued or result in successfully commercialized
products. Failure of a corporate partner to continue funding any particular
program could delay or halt the development or commercialization of any products
arising out of such program. In addition, there can be no assurance that the
corporate partners will not pursue alternative technologies or develop
alternative products either on their own or in collaboration with others,
including the Company's competitors, as a means for developing treatments for
the diseases targeted by the Company's programs. The Company also has licenses
(or options to obtain licenses) to technologies developed by other companies and
academic institutions. Pursuant to the terms of certain license agreements, the
Company is obligated to exercise diligence in bringing potential products to
market and to make certain milestone payments that, in some instances, are
substantial. The Company also is obligated to make royalty payments on the
sales, if any, of products resulting from such licensed technology and, in some
instances, is responsible for the costs of filing and prosecuting patent
applications. To date, the Company has licensed key technology from Syntex,
Baylor College of Medicine, the University of California, the University of
Texas and Vanderbilt University.
Uncertainty of Protection of Patents and Proprietary Rights; Access to
Proprietary Genes
The patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions, and the breadth of
claims allowed in biotechnology and pharmaceutical patents cannot be predicted.
In addition, there is a substantial backlog of biotechnology patent applications
at the U.S. Patent and Trademark Office (the "PTO") that may delay the review
and, if issued on the basis of such applications, the issuance of any patents.
The Company's success will depend to a significant degree on its ability to
obtain patents and licenses to patent rights, to maintain trade secrets and to
operate without infringing on the proprietary rights of others, both in the
United States and other countries. To date, the Company has rights to certain
U.S. and foreign issued patents and has filed or participated as a licensee in
the filing of a number of patent applications in the United States relating to
the Company's technology, as well as foreign counterparts of certain of these
applications in many countries. The Company intends to continue to file
applications as appropriate for patents covering both its products and
processes. There can be no assurance that patents will issue from any of these
applications or, that claims allowed under issued patents or patents that may
issue from such applications will be sufficient to protect the Company's
technology. Patent applications in the United States are maintained in secrecy
until a patent issues, and the Company cannot be certain that others have not
filed patent applications for technology covered by the Company or its
licensors' pending applications or that the Company or its licensors' were the
first to file patent applications for such technology. Competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes that block or
compete with those of the Company. The Company is aware of patent applications
filed or patents issued to third parties relating to gene therapy technologies.
The Company's development efforts are at an early stage, however, and the
Company presently is unable to evaluate whether any such patent applications or
patents will have any effect on its products in development. Should any of its
competitors have filed patent applications in the United States that claim
technology also invented by the Company, the Company may have to participate in
interference proceedings
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declared by the PTO in order to determine priority of invention and, thus, the
right to a patent for the technology in the United States, all of which could
result in substantial cost to the Company to determine its rights or potential
loss of rights. The commercial success of the Company will depend in part on the
Company not infringing patents issued to competitors and not breaching the
licenses that might cover technology used in the Company's products. It is
uncertain whether any third party patents will require the Company to alter its
products or processes, obtain licenses or cease certain activities. In addition,
litigation, which could result in substantial cost to the Company, also may be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of third party proprietary rights. In addition, there can be no
assurance that any patents issued to the Company or to licensors from whom the
Company has licensed rights to technology will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company.
A number of the genes that the Company uses in its research and development
programs or may use in its gene therapy products are or may become patented by
third parties. As a result, the Company may be required to obtain licenses under
such patents in order to test, use or market products that contain any such
proprietary genes. If such licenses are required, there can be no assurance that
the Company will be able to obtain any such license on commercially reasonable
terms, if at all. Failure by the Company to obtain a license to any technology
that it may require to commercialize its products could have a material adverse
effect on the Company.
The Company also relies on trade secrets, know-how, improvements to technology,
confidentiality agreements and collaborative and licensing opportunities to
develop and maintain its competitive position. Although the Company protects its
proprietary technology in part by confidentiality agreements with its licensors,
licensees, employees, consultants and certain contractors, there can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently discovered by its competitors. See
"Business-Patents and Proprietary Technology"
Uncertainty of Government Regulatory Requirements; Lengthy Approval Process
Because gene therapy is a new method of treatment that has not been extensively
tested in humans, the regulatory requirements governing gene therapy products
and related clinical procedures are uncertain and are subject to substantial
review by various governmental regulatory authorities. This uncertainty may
result in extensive delay in the regulatory approval process, adding to the
already lengthy review process for human therapeutic products in general.
Regulatory requirements ultimately imposed could adversely affect the ability of
the Company or its collaborative partners to clinically test, manufacture or
market products.
The commercial uses of any of the Company's products will be regulated by the
FDA and comparable foreign regulatory bodies as either biologics or drugs. Each
therapeutic product containing a particular gene will likely be regulated as
either a separate biologic or a drug, depending on its intended use and FDA
policies in effect at such time. In order to commercialize any products, the
Company must sponsor and file an IND for each proposed product and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety, efficacy and potency that are necessary to obtain FDA approval of
any such products. The regulatory process for new therapeutic products,
including the required preclinical studies and clinical testing, is lengthy and
expensive and there can be no assurance that necessary FDA clearances and
approvals will be obtained in a timely manner, if at all. 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 the safety, efficacy and potency of human gene therapy products. The
Company may encounter significant delays or excessive costs in its efforts to
secure necessary approvals, particularly because gene therapy is a novel method
of treatment, and regulatory requirements are evolving and uncertain. Future
U.S. or foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance that
the Company will be able to obtain the necessary clearances for clinical trials
or approvals for the manufacturing or marketing of any of its products under
development. Even if regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed. In addition, a marketed product is subject to continual FDA review.
Later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions. In addition, many academic institutions and
companies conducting research in the gene therapy field are using a variety of
approaches and technologies. Any adverse results
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obtained by such researchers in preclinical studies or clinical trials could
adversely affect the regulatory environment for gene therapy products generally,
possibly leading to delays in the approval process for the Company's potential
products or preventing approval altogether.
To market its products outside of the United States, the Company is also subject
to numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing the design and conduct of human clinical trials
and marketing approval. The approval procedure varies among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval set
forth above, and approval by the FDA does not ensure approval by the health
authorities of any other country. See "Business-Government Regulation".
Intense Competition; Rapid Technological Change
The gene therapy field is new and rapidly evolving, and it is expected to
continue to undergo significant technological change. Rapid technological
development could result in GeneMedicine's potential products or technologies
becoming obsolete before it recovers its related research, development and
capital expenditures. The Company will experience competition from
pharmaceutical and biotechnology companies that have other forms of treatment
for the diseases targeted by the Company, as well as from other companies in the
field of gene therapy. The Company is aware of a large number of development
stage and established enterprises, including major pharmaceutical and
biotechnology firms, which are exploring the field of human gene therapy or are
actively engaged in research and development in areas related to gene therapy.
GeneMedicine also may experience competition from companies that have acquired
or may acquire technology from universities and other research institutions. As
these companies develop their technologies, they may develop proprietary
positions in certain aspects of gene therapy that may materially and adversely
affect GeneMedicine. In addition, the Company may face competition from other
companies for limited opportunities to enter into collaborative arrangements
with pharmaceutical or biotechnology companies and academic institutions and to
obtain licenses to proprietary technology, including genes and methods of gene
use, from third parties.
Many of the Company's competitors and potential competitors have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than the Company. Other companies may succeed in developing
products earlier than the Company, obtaining approvals for such products from
the FDA more rapidly than the Company, or developing products that are more
effective than those proposed to be developed by the Company. While GeneMedicine
will seek to expand its technological capabilities in order to remain
competitive, there can be no assurance that research and development by others
will not render its technology or products obsolete or non-competitive or result
in treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies. In addition, there can be no assurance that the
Company's competitors will not develop more effective or more affordable
products, or achieve product development completion, patent protection,
regulatory approval or product commercialization earlier than the Company. See
"Business-Competition."
Need to Attract and Retain Key Employees and Consultants
GeneMedicine is highly dependent on the principal members of its scientific and
management staff. In addition, the Company relies on consultants and advisors to
assist the Company in formulating its research and development strategy.
Attracting and retaining qualified personnel, consultants and advisors is
critical to the Company's success. In order to pursue its product development
and marketing plans, GeneMedicine will be required to hire additional qualified
scientific personnel to perform research and development, as well as personnel
with expertise in clinical testing, government regulation, manufacturing and
marketing. Expansion in product development also is expected to require the
addition of management personnel and the development of additional expertise by
existing management personnel. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
or at all. See "Business-Human Resources."
Lack of Commercial Manufacturing or Marketing Capability
The Company currently does not have the resources or capability to manufacture
or market any of its proposed products by itself on a commercial scale. Large
scale manufacturing of gene therapy products has not been demonstrated
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by any third parties. GeneMedicine may be dependent to a significant extent on
collaborators, licensees or other entities for commercial scale manufacturing of
its products. The Company has a pilot manufacturing facility, which will require
ongoing funding and compliance with extensive regulations applicable to such a
facility. There can be no assurance that the Company will be able to develop
adequate commercial manufacturing capabilities either on its own or through
third parties. In addition, the Company does not anticipate establishing its own
sales and marketing capability in the foreseeable future, and will be dependent
on third parties for those functions. There can be no assurance that the Company
will be able to develop adequate marketing capabilities either on its own or
through third parties. See "Business-Commercialization and Manufacturing."
Uncertainty of Product Pricing, Reimbursement and Related Matters
The ability of GeneMedicine to commercialize its products successfully may
depend in part on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and if the Company succeeds in bringing one
or more products to market, there can be no assurance that these products will
be considered cost effective, that reimbursement will be available, or if
available, that the payor's reimbursement policies will not adversely affect the
Company's ability to sell its products on a profitable basis.
Hazardous and Radioactive Materials; Environmental Matters
The Company's research and development processes involve the controlled use of
hazardous and radioactive materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such 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 damages that result and any such liability could exceed the resources of
the Company. Although the Company believes that it is in compliance in all
material respects with applicable environmental laws and regulations and
currently does not expect to make material capital expenditures for
environmental control facilities in the near-term, there can be no assurance
that it will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations. See "Business-Government
Regulation."
Volatility of Stock Price; Absence of Dividends
The market price of the shares of Common Stock, like that of the common stock of
many other biotechnology companies, has been and is likely to continue to be
highly volatile. Factors such as developments in the Company's relationships
with collaborative partners, fluctuations in the Company's operating results,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, progress with clinical trials,
governmental regulation, health care legislation, changes in reimbursement
policies, developments in patent or other proprietary rights, developments
affecting the Company's collaborative partners, public concern as to the safety
and efficacy of products developed by the Company and market conditions for
biotechnology stocks in general may have a significant effect on the future
price of the Common Stock. The Company has never paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future.
HUMAN RESOURCES
As of March 23, 1998, GeneMedicine employed 109 individuals full-time, 75 of
whom hold advanced degrees in science and business, including 41 who hold Ph.D.
or D.V.M. degrees. Of the Company's total work force, 87 employees are engaged
or directly support research and development activities and 22 are engaged in
business development, finance and administrative activities. In addition,
GeneMedicine has contracting arrangements with several scientists at research
institutions for provision of full-time services, as well as part-time
consulting arrangements with other scientists. The success of GeneMedicine will
depend in large part upon its ability to retain its current employees and
consultants and to attract and retain future employees and consultants. A
significant number of the Company's management and scientific
19
<PAGE>
staff have had prior experience with large pharmaceutical, biotechnology or
medical products companies. None of the Company's employees is covered by
collective bargaining agreements and the Company considers its relationships
with its employees and consultants to be good. The Company faces competition for
qualified individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
or at all.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
--- --------
<S> <C> <C>
Eric Tomlinson, D.Sc., Ph.D.......... 50 President, Chief Executive Officer and Director
Norman Hardman, Ph.D................. 52 Senior Vice President and Chief Operating Officer
Josef F. Bossart, Ph.D............... 46 Vice President and Chief Business Officer
Richard A. Waldron................... 44 Vice President and Chief Financial Officer and Secretary
Alain Rolland, Pharm.D., Ph.D........ 38 Vice President, Research
Kathryn N. Stankis................... 39 Vice President, Human Resources
John M. Dodson....................... 36 Director, Finance & Accounting
</TABLE>
Dr. Tomlinson, one of the Company's founders, has been President, Chief
Executive Officer and a director of the Company since July 1992. Dr. Tomlinson
was President and Chief Executive Officer of Somatix Corporation from February
1990 until 1991, and served as a consultant there from April 1991 until March
1992. From 1984 to 1990, he was worldwide Head of Advanced Drug Delivery
Research for Ciba-Geigy Pharmaceuticals ("Ciba-Geigy", where he led its
multidisciplinary program in site-specific drug delivery. From 1979 to 1984, Dr.
Tomlinson was Professor of Pharmaceutical Chemistry at Amsterdam University. Dr.
Tomlinson received a Ph.D. and a D.Sc. degree from London University and an
honorary D.Sc. degree magna cum laude from the United Kingdom Council for
National Academic Awards. He was a Fulbright-Hays Scholar and has (co)-authored
more than 210 scientific publications. Dr. Tomlinson was the 1995 Sidney
Riegelman Lecturer at the University of California, San Francisco.
Dr. Hardman has been Senior Vice President and Chief Operating Officer since
January 1998 and prior to that was Senior Vice President, Research & Preclinical
Development and Chief Scientific Officer from April 1997 to January 1998. From
1996 to 1997, Dr. Hardman was with Novartis Pharmaceuticals UK where he was Head
of (UK) Research and Preclinical Development Operations and a member of the
Novartis Pharma UK Management Committee and of the Novartis Global Pharma R&D
Boards. From 1993 to 1996, Dr. Hardman was Head of UK Research and Member of the
International Research Management Committee for the Pharma Division of Ciba
Pharmaceuticals Ltd., a division of Ciba-Geigy. From 1990 to 1993, Dr. Hardman
was Head of Molecular Biology at the Biotechnology Section of Ciba-Geigy. Dr.
Hardman received a Ph.D. degree in Biochemistry from the University of
Manchester and a B.Sc. degree with First Class Honors in Chemistry from the
University of London.
Dr. Bossart was appointed Vice President and Chief Business Officer in March
1997. From 1982 to 1997, he held various positions involving marketing,
licensing and general management within the Rhone-Poulenc, and later Rhone-
Poulenc Rorer (RPR), groups. Most recently he was Vice President of Business and
Marketing development for RPR Gencell, the RPR division focused on the
development of gene therapy products. In this position, Dr. Bossart negotiated
numerous agreements and developed licensing strategies in the field of gene
therapy. Dr. Bossart holds a Ph.D. degree from The Ohio State University and a
B.Sc.(Hon.) from Carleton University.
Mr. Waldron has been Vice President and Chief Financial Officer since July 1995.
From 1990 to 1995, he was a managing director and the head of finance for
technology-based companies at Rauscher Pierce Refsnes, Inc., an investment
banking firm. From 1985 to 1990, he was a senior vice president responsible for
health care investment banking at Cowen & Company. Mr. Waldron received his
M.B.A. degree with honors from Harvard University and his A.B. degree magna cum
laude in Economics from Princeton University.
Dr. Rolland has been Vice President, Research since February 1998. Prior to
appointment to his current position, Dr. Rolland was Vice President, Gene
Delivery Sciences at the Company from November 1996 to February 1998 and
Director, Gene Delivery Sciences from June 1993 to November 1996 during which
time he directed the Company's efforts in the creation and development of novel
non-viral gene delivery systems. Prior to joining GeneMedicine in
20
<PAGE>
1993, Dr. Rolland worked in drug delivery research at Ciba-Geigy Pharmaceuticals
and more recently was Head of the Formulation Research Group at the
International Centre for Dermatological Research (CIRD Galderma) in France. Dr.
Rolland has received numerous international and national awards for scholarship.
Dr. Rolland holds a Pharm. D., and a Ph.D. degree in Pharmaceutical Sciences
from Rennes University in France.
Ms. Stankis has been Vice President, Human Resources since March 1994 and served
as the Company's Director of Administration and Human Resources from July 1993
to March 1994. From 1988 to July 1993, Ms. Stankis was employed at Korn/Ferry
International, an international executive search firm, most recently as
Principal and Health Care Products Consultant. Prior to 1988, Ms. Stankis held
various marketing and sales positions with Baxter International and MetPath
Laboratories. Ms. Stankis holds an M.B.A. degree from the University of Houston.
Mr. Dodson has been Director of Finance & Accounting since September 1994 and
prior to that was the Company's Controller from the time he joined the Company
in November 1993. From 1990 until 1993, Mr. Dodson was employed by Pepsi-Cola
South initially as Manager of Planning and Analysis and most recently as Manager
of Finance-CFO for the South Texas region. From 1985 until 1990, he was employed
by KPMG Peat Marwick, where his most recent position was Audit Manager. Mr.
Dodson holds a B.B.A. degree in Accounting from The University of Texas and is a
Certified Public Accountant.
ITEM 2. PROPERTIES
The Company currently leases a 38,000 square-foot building in The Woodlands,
Texas. This facility has been built to the Company's specifications to
accommodate the Company's laboratory, support and administrative needs, and
includes a production facility designed to support initial clinical trials.
Monthly rent is approximately $1.90 per square foot. The initial term of the
lease, which began in January 1995, is 10 years, after which time the Company
may renew the lease for an additional period of five years. The Company also has
an option to expand this facility by up to an additional 62,000 square feet
during the first six years of the initial term of the lease.
GeneMedicine believes that this facility and its available expansion will be
adequate to meet the Company's needs for the foreseeable future. Should the
Company need additional space, management believes it will be able to secure
such space on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was initially offered to the public on July 12, 1994
at an initial public offering price of $7.50 per share. The Common Stock is
traded on the Nasdaq National Market under the symbol "GMED." The following
table sets forth for the periods indicated the high and low sale prices for the
Common Stock as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
1997 ----- -----
<S> <C> <C>
Fourth Quarter................... $6 5/16 $3 3/4
Third Quarter.................... 7 3/4 3 5/8
Second Quarter................... 9 1/4 5 3/8
First Quarter.................... 9 1/2 5 3/8
1996
Fourth Quarter................... $ 5 11/16 $3 1/8
Third Quarter.................... 5 3/4 3 3/8
Second Quarter................... 7 3/8 5 3/8
First Quarter.................... 9 1/4 5 7/8
</TABLE>
On March 23, 1998, the last reported sale price of the Company's Common Stock on
the Nasdaq National Market was $3 1/16 per share. As of March 23, 1998, there
were approximately 198 stockholders of record of the Company's Common Stock with
14,513,775 shares outstanding. The market price of the shares of Common Stock,
like that of the common stock of many other biotechnology companies, has been
and is likely to continue to be highly volatile. The Company has never declared
or paid any dividends and does not expect to pay any dividends in the
foreseeable future. See "Business-Risk Factors."
22
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The selected financial information set forth below with respect to the Company's
statements of operations for each of the years ended December 31, 1993, 1994,
1995, 1996 and 1997, and the balance sheet data at December 31, 1993, 1994,
1995, 1996 and 1997, are derived from the financial statements of the Company
audited by Arthur Andersen LLP, independent public accountants. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
(in thousands, except share and per share data)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues and other income:
Contract revenue........................................... $--- $--- $3,680 $4,000 $4,500
Research and development grant revenue..................... --- 125 --- 722 679
Interest income............................................ 105 713 1,384 1,862 1,634
--- --- ----- ----- -----
Total revenues and other income................... 105 838 5,064 6,584 6,813
Expenses:
Research and development................................... 2,269 7,042 11,338 13,727 14,125
General and administrative................................. 1,497 2,881 3,736 3,406 4,380
Interest expense........................................... 82 88 140 104 62
-- -- --- --- --
Total expenses.................................... 3,848 10,011 15,214 17,237 18,567
-------------- ----- ------ ------ ------ ------
Net loss................................................... $(3,743) $(9,173) $(10,150) $(10,653) $(11,754)
======== ======== ========= ========= =========
Net loss per share(1)...................................... $(0.91) $(1.27) $(1.10) $(0.84) $(0.86)
Shares used in computing net loss per share (1)............ 4,118,953 7,237,914 9,195,489 12,753,301 13,702,835
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
(in thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $4,410 $22,173 $35,197 $30,872 $24,582
Total assets............................ 5,344 25,004 38,760 34,049 27,987
Long-term liabilities................... 1,019 410 1,588 2,179 2,975
Deficit accumulated during the development stage.......... (5,132) (14,305) (24,455) (35,108) (46,861)
Total stockholders' equity.............. 3,561 23,383 35,667 29,929 23,198
</TABLE>
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and has not received any revenues from the sale of
products. No assurance can be given that the Company will be able to generate
sufficient product revenues to attain profitability on a sustained basis or at
all. The Company expects to incur substantial losses for the next several years
as it continues to invest in product research and development, preclinical
studies, clinical trials and regulatory compliance. At December 31, 1997, the
Company's accumulated deficit was approximately $46.9 million.
RESULTS OF OPERATIONS
The Company does not anticipate revenues from product sales in the foreseeable
future. GeneMedicine expects its source of revenues and other income for the
next several years to be interest income and revenues under licensing and
collaborative research agreements, to the extent that the Company has such
agreements and meets any requirements for receipt of additional payments under
them.
Years ended December 31, 1995, 1996 and 1997
Revenues and other income for the year ended December 31, 1997 were $6.8
million, which consisted of contract revenue of $4.5 million, interest income of
$1.6 million and research and development grant revenue of $0.7 million. This
compares with revenues and other income of $6.6 million in 1996 and $5.1 million
in 1995. The contract revenues in each period resulted from a corporate
partnership with Boehringer Mannheim effective February 1995 to develop certain
non-viral gene medicines for application in the field of cancer. As a component
of contract revenues, in February 1997 the Company received a milestone payment
of $500,000 from Boehringer Mannheim for achievement of FDA clearance to
commence a Phase I clinical trial for the Company's IL-2 Gene Medicine. Higher
interest income for 1996, as compared to 1995 and 1997, was primarily the result
of higher average cash, cash equivalents and short-term investments balances due
to the Company's follow-on public offering in October 1995.
Research and development expenses for the year ended December 31, 1997 were
$14.1 million, compared to $13.7 million in 1996 and $11.3 million in 1995. The
year-to-year increases in research and development expense were generally due to
the expansion of the Company's research and development activities, staffing
increases and the related salary and benefit costs as well as additional
laboratory supplies and other support costs. The expansion of research and
development activities resulted primarily from the commencement and continued
expansion of research in the field of cancer, offset in 1997 by decreased
research and development activities in the fields of asthma and arthritis
following termination of the Company's corporate alliance with Syntex, which
ended in accordance with its terms in April 1997. In February 1995, the Company
commenced research and development efforts in the field of cancer, which is the
focus of a multi-year corporate partnership with Boehringer Mannheim. The
Company anticipates that expenditures will increase over the next several years
as it expands its research and product development efforts.
General and administrative expenses were approximately $4.4 million in 1997,
compared to $3.4 million and $3.7 million in 1996 and 1995, respectively. The
increase from 1996 to 1997 was primarily due to (i) expanded efforts focused on
corporate development to obtain new corporate and strategic alliances, including
costs for additional personnel and related recruiting, relocation and salary and
benefit costs, (ii) legal and consulting costs associated with expanded
corporate development efforts and (iii) enhancement of technology systems and
increased efforts for investor relations. The slight decrease in 1996 from 1995
was due primarily to lower legal costs in 1996. The Company expects that general
and administrative expenses will increase in the future as a result of
additional corporate development activities.
The Company has had losses since inception and, therefore, has not been subject
to federal income taxes. As of December 31, 1997, the Company has generated net
operating loss (NOL) carryforwards of approximately $39 million
24
<PAGE>
and approximately $1.2 million of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2007. For
financial reporting purposes, a valuation allowance has been established as of
December 31, 1996 and 1997, to offset fully the Company's net deferred tax
assets, including those relating to its carryforwards. The Company 's ability to
utilize these carryforwards to reduce future taxable income may be limited due
to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private sales of its equity securities, its initial and follow-on public
offerings, interest income on invested funds and revenues from corporate
alliances. Through December 31, 1997, the Company had received approximately
$66.4 million in net proceeds from sales of its equity securities. At December
31, 1997, the Company had working capital of $22.9 million and cash, cash
equivalents and short-term investments of $24.6 million. In addition, in
February 1998 the Company received $5.25 million in scheduled payments from
Corange, the corporate parent of Boehringer Mannheim, representing a $4 million
Common Stock equity investment and a $1.25 million quarterly research and
development payment.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the ability to maintain existing and establish additional corporate
partnerships, the scope and results of preclinical testing and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing, and scale-up and
effective commercialization activities and arrangements. Based on its current
plans, the Company believes that its available cash, including proceeds from
projected interest income and anticipated funding from its corporate alliance
with Boehringer Mannheim, will enable the Company to maintain its current and
planned operations into the first quarter of 2000. There can be no assurance,
however, that changes in the Company's research and development plans or other
changes affecting the Company's operating expenses will not result in the
expenditure of such resources before such time. The Company intends to seek
additional funding through public or private financing, research and development
arrangements with potential corporate partners, or from other sources. There can
be no assurance that additional financing will be available on favorable terms,
if at all. In the event that adequate funding is not available, the Company may
be required to delay, reduce or eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
collaborators or others that may require the Company to relinquish greater or
all rights to product candidates at an earlier stage of development or on less
favorable terms than the Company would otherwise seek. Insufficient financing
may also require the Company to relinquish rights to certain of its technologies
that the Company would otherwise develop or commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process and with obtaining and enforcing patents. Although
the Company's products may appear promising at an early stage of development,
they may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products commercially
unattractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from the
Financial Statements set forth on pages F-1 through F-16 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item with respect to Directors is incorporated
by reference from the information under the caption "Election of Directors"
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1998 Annual Meeting of Stockholders to be held on June 11, 1998 (the
"Proxy Statement").
The information required by this item with respect to Executive Officers of the
Company is contained in item 1 of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" in the Proxy
Statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Financial Statements are set forth on pages F-1 through F-16 hereof. The index
to the Financial Statements is found on page F-1.
2. Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements
or notes thereto.
3. Exhibits
See Exhibit Index in part (c) below. Each management contract or
compensatory plan or arrangement required to be filed is identified.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1997.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant.
Previously filed as Exhibit 4.1 to Registrant's Registration
Statement Form S-8 (File No. 333-38005) and incorporated herein by
reference.
3.2 By-laws of Registrant, as amended. Previously filed as Exhibit 4.2
to Registrant's Registration Statement on Form S-8 (File No.
333-38005) and incorporated herein by reference.
3.3** Certificate of Designation of Series A Junior Participating
Preferred Stock of Registrant
4.1* Specimen certificate of Common Stock of Registrant
4.2 Preferred Share Purchase Rights Plan dated January 16, 1996.
Previously filed with Registrant's Form 8-K with the Commission on
January 29, 1996 and incorporated herein by reference.
10.1(1) 1993 Stock Option Plan, as amended. Previously filed as Exhibit
10.1 to the Company's March 31, 1997 Form 10-Q and is incorporated
herein by reference.
10.2*(1) Forms of Nonstatutory and Incentive Stock Option Agreements under
the 1993 Stock Option Plan
10.3*(1) Employee Stock Purchase Plan
10.4(1) 1994 Non-Employee Directors' Stock Option Plan, as amended.
Previously filed as Exhibit 10.4 to the Company's March 31, 1997
Form 10-Q and is incorporated herein by reference.
10.5* Form of Indemnity Agreement between the Company and its directors
and executive officers
10.6+* First Amendment and Restatement of License Agreement between
Registrant and Baylor College of Medicine dated March 7, 1994
10.7+* First Amendment and Restatement of License Agreement--Woo between
Registrant and Baylor College of Medicine dated March 7, 1994
10.8+* First Amendment and Restatement of License Agreement--Gene Switch
between Registrant and Baylor College of Medicine dated March 7,
1994
10.9+* Limited Exclusive License Agreement between Registrant and the
Regents of the University of California dated October 26, 1993, as
amended January 21, 1994
10.11+* Patent License Agreement between Registrant and the University of
Texas System dated October 15, 1993
10.12*(1) Employment and Stock Purchase Agreement between Registrant and
Eric Tomlinson dated July 31, 1992
10.13***(1) Employment Letter between Registrant and Thomas Rossing, M.D.
dated June 11, 1996
10.14***(1) Change of Control Severance Plan
10.15* Lease Agreement between Registrant and The Woodlands Corporation
dated October 29, 1993
</TABLE>
27
<PAGE>
EXHIBITS (CONT.)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-----------------------
<S> <C>
10.16+* Collaborative Alliance Agreement between Registrant and Syntex
(U.S.A.) Inc.dated April 8, 1994
10.17+* License Agreement between Registrant and Syntex (U.S.A.) Inc.
dated April 8, 1994
10.18* Stock and Warrant Purchase Agreement between Registrant and
Syntex Corporation dated April 8, 1994
10.19++ Share Purchase Agreement between GeneMedicine, inc. and Corange
International Ltd. dated July 17, 1995. Previously filed as
Exhibit 10.21 to the Company's Form 10-Q for the quarter ended
September 30, 1995 and is incorporated herein by reference.
10.20++ Alliance Agreement between GeneMedicine, inc. and Corange
International Ltd. effective February 3, 1995. Previously filed
as Exhibit 10.22 to the Company's Form 10-Q for the quarter
ended September 30, 1995 and is incorporated herein by
reference.
10.21**(1) Employment Agreement between Registrant and Richard A. Waldron
dated June 30, 1995
11.1 Statement regarding calculation of net income (loss) per share
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney, reference is made to page 29
27.1 Financial Data Schedule
</TABLE>
* Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-77126) or amendments thereto and incorporated herein by
reference.
** Previously filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995 and is incorporated herein by reference.
*** Previously filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1996 and is incorporated herein by reference.
+ Confidential treatment has been afforded to certain portions of this
Exhibit pursuant to Order Granting Application Under the Securities Act
of 1933 and Rule 406 Thereunder Respecting Confidential Treatment dated
July 12, 1994.
++ Confidential treatment has been afforded to certain portions of this
Exhibit pursuant to Order Granting Application Under the Securities Act
of 1934 and Rule 24b-2 Thereunder Respecting Confidential Treatment dated
February 5, 1996.
(1) Executive compensation plans and arrangements of Registrant.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of The Woodlands, State of Texas, on March 26, 1998.
GENEMEDICINE, INC.
By: Eric Tomlinson
------------------
Eric Tomlinson, D.Sc., Ph.D. President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signatures appears below
constitutes and appoints Eric Tomlinson his attorney-in-fact, with the full
power of substitution, for him and in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Eric Tomlinson President, Chief Executive Officer March 26,1998
- -------------------------- and Director (Principal Executive
(Eric Tomlinson, D.Sc., Ph.D.) Officer)
Richard A. Waldron Vice President and Chief Financial Officer March 26,1998
- -------------------------- (Principal Financial Officer)
(Richard A. Waldron)
John M. Dodson Director, Finance & Accounting March 26,1998
- -------------------------- (Principal Accounting Officer)
(John M. Dodson)
Edward L. Cahill Director March 26,1998
- --------------------------
(Edward L. Cahill)
Stanley T. Crooke Director March 26,1998
- --------------------------
(Stanley T. Crooke, M.D., Ph.D.)
David F.J. Leathers Director March 26,1998
- --------------------------
(David F.J. Leathers)
Arthur M. Pappas Director March 26,1998
- --------------------------
(Arthur M. Pappas)
W. Leigh Thompson Director March 26,1998
- --------------------------
(W. Leigh Thompson, M.D., Ph.D.)
</TABLE>
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Balance Sheets at December 31, 1996 and 1997............................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and for the period from inception through December 31, 1997........... F-4
Statements of Stockholders' Equity for the period from inception through
December 31, 1997.......................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and for the period from inception through December 31, 1997........... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GeneMedicine, Inc.
We have audited the accompanying balance sheets of GeneMedicine, Inc. (a
Delaware corporation in the development stage) as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 GeneMedicine, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
February 17, 1998
F-2
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................................... $2,145,404 $873,180
Short-term investments......................................................... 28,726,602 23,708,845
Prepaid expenses and other..................................................... 170,453 175,128
----------- -----------
Total current assets................................................. 31,042,459 24,757,153
-------------------- ----------- -----------
Equipment, furniture and leasehold improvements, net........................... 2,998,416 3,220,987
Deposits and other assets...................................................... 8,395 9,195
----------- -----------
Total Assets................................................................... $34,049,270 $27,987,335
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities....................................... $1,352,762 $1,454,986
Deferred grant revenue......................................................... 179,489 89,737
Current portion of capital lease obligations................................... 408,387 270,166
----------- -----------
Total current liabilities............................................ 1,940,638 1,814,889
-------------------------- ----------- -----------
Long-term Liabilities:
Deferred contract revenue...................................................... 1,919,970 2,919,970
Capital lease obligations, net of current portion........................... 259,393 54,814
----------- -----------
Total long-term liabilities.......................................... 2,179,363 2,974,784
--------------------------- ----------- -----------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding....................... 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
13,077,369 and 13,911,422 shares issued and outstanding.............. 13,077 13,911
Additional paid-in capital..................................................... 65,485,846 70,097,651
Deferred compensation.......................................................... (465,803) (56,348)
Deficit accumulated during the development stage............................... (35,107,601) (46,861,302)
------------ -----------
Total stockholders' equity........................................... 29,929,269 23,197,662
------------ -----------
Total Liabilities and Stockholders' Equity..................................... $34,049,270 $27,987,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(January 2, 1992)
For the Years Ended December 31, through
---------------------------------- December 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and other income:
Contract revenue.................... $3,680,000 $4,000,000 $4,500,000 $12,180,000
Research and development
grant revenue....................... -- 722,644 678,753 1,526,397
Interest income..................... 1,383,546 1,861,818 1,634,392 5,698,071
------------ ------------ ------------ ------------
5,063,546 6,584,462 6,813,145 19,404,468
Expenses:
Research and development............ 11,337,688 13,727,587 14,124,813 49,487,748
General and administrative.......... 3,735,918 3,405,660 4,379,730 16,281,966
Interest expense.................... 139,651 104,187 62,303 496,056
------------ ------------ ------------ ------------
Total expenses...................... 15,213,257 17,237,434 18,566,846 66,265,770
------------ ------------ ------------ ------------
Net loss............................ $(10,149,711) $(10,652,972) $(11,753,701) $(46,861,302)
============ ============ ============ ============
Loss per share...................... $(1.10) $(0.84) $(0.86)
Shares used in computing basic
and diluted loss per share.......... 9,195,489 12,753,301 13,702,835
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (January 2, 1992) through December 31, 1997
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the
------------------- -------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at inception, January 2, 1992.......... - $- - $- $- $-
--------- ------ --------- ------ ----------- ------------
Issuance of stock for cash, January and
October 1992 ($.04 per share).................. - - 272,268 273 9,256 -
Issuance of stock for license agreement
rights, September 1992 ($.04 per share)........ - - 600,000 600 20,400 -
Issuance of stock for services rendered,
September and November 1992
($.04 per share)............................... - - 6,471 6 221 -
Net loss....................................... - - - - - (1,389,275)
--------- ------ --------- ------ ----------- ------------
Balance at December 31, 1992................... - - 878,739 879 29,877 (1,389,275)
--------- ------ --------- ------ ----------- ------------
Issuance of stock for cash, January through
May 1993 ($.04 per share)...................... - - 1,334,286 1,334 45,366 -
Issuance of Series A Preferred Stock,
May 1993, for cash ($2.15 per share),
net of issuance costs of $65,406............... 3,600,462 3,600 - - 7,680,988 -
Issuance of Series A Preferred Stock,
May 1993, for conversion of debt
($2.15 per share).............................. 409,291 410 - - 880,590 -
Issuance of stock, July 1993, for cash
($.18 per share)............................... - - 11,429 11 1,989 -
Exercise of stock options, December 1993,
($.18 per share)............................... - - 4,857 5 845 -
Deferred compensation.......................... - - - - 210,600 -
Amortization of deferred compensation.......... - - - - - -
Net loss....................................... - - - - - (3,742,700)
--------- ------ --------- ------ ----------- ------------
Balance at December 31, 1993................... 4,009,753 4,010 2,229,311 2,229 8,850,255 (5,131,975)
--------- ------ --------- ------ ----------- ------------
Issuance of Series B Preferred Stock, April
1994, for cash ($4.00 per share), net of
issuance costs of $420,123..................... 3,750,000 3,750 - - 14,576,127 -
Issuance of stock upon conversion of debt,
April 1994 ($10.56 per share).................. - - 85,714 86 904,914 -
Issuance of stock in initial public offering,
July 1994 ($7.50 per share), net of
offering costs of $1,705,625................... - - 1,933,333 1,933 12,792,439 -
Conversion of Series A Preferred Stock into
common stock upon the closing of the
initial public offering, July 1994.............(4,012,610) (4,013) 4,012,610 4,013 - -
Exercise of stock options and warrants,
January through December 1994
($.18 - $2.15 per share)....................... 2,857 3 74,285 74 26,159 -
Issuance of stock under employee stock
purchase plan, December 1994 ($2.66 per
share)......................................... - - 9,426 9 25,129 -
Deferred compensation.......................... - - - - 1,755,400
Amortization of deferred compensation.......... - - - - - -
Net loss....................................... - - - - - (9,172,943)
--------- ------ --------- ------ ----------- ------------
Balance at December 31, 1994................... 3,750,000 $3,750 8,344,679 $8,344 $38,930,423 $(14,304,918)
========= ====== ========= ====== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Deferred Stockholder's
Compensation Equity
------------ ------
<S> <C> <C>
Balance at inception, January 2, 1992.................. $- $-
----------- -----------
Issuance of stock for cash, January and
October 1992 ($.04 per share).......................... - 9,529
Issuance of stock for license agreement
rights, September 1992 ($.04 per share)................ - 21,000
Issuance of stock for services rendered,
September and November 1992
($.04 per share)....................................... - 227
Net loss............................................... - (1,389,275)
----------- -----------
Balance at December 31, 1992........................... - (1,358,519)
----------- -----------
Issuance of stock for cash, January through
May 1993 ($.04 per share).............................. - 46,700
Issuance of Series A Preferred Stock,
May 1993, for cash ($2.15 per share),
net of issuance costs of $65,406....................... - 7,684,588
Issuance of Series A Preferred Stock,
May 1993, for conversion of debt
($2.15 per share)...................................... - 881,000
Issuance of stock, July 1993, for cash
($.18 per share)....................................... - 2,000
Exercise of stock options, December 1993,
($.18 per share)....................................... - 850
Deferred compensation.................................. (210,600) -
Amortization of deferred compensation.................. 47,220 47,220
Net loss............................................... - (3,742,700)
----------- -----------
Balance at December 31, 1993........................... (163,380) 3,561,139
----------- -----------
Issuance of Series B Preferred Stock, April
1994, for cash ($4.00 per share), net of
issuance costs of $420,123............................. - 14,579,877
Issuance of stock upon conversion of debt,
April 1994 ($10.56 per share).......................... - 905,000
Issuance of stock in initial public offering,
July 1994 ($7.50 per share), net of
offering costs of $1,705,625........................... - 12,794,372
Conversion of Series A Preferred Stock into
common stock upon the closing of the
initial public offering, July 1994..................... - -
Exercise of stock options and warrants,
January through December 1994
($.18 - $2.15 per share)............................... - 26,236
Issuance of stock under employee stock
purchase plan, December 1994 ($2.66 per
share)................................................. - 25,138
Deferred compensation.................................. (1,755,400) -
Amortization of deferred compensation.................. 664,246 664,246
Net loss............................................... - (9,172,943)
----------- -----------
Balance at December 31, 1994........................... $(1,254,534) $23,383,065
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Period from Inception (January 2, 1992) through December 31, 1997
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the
------------------- -------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.................. 3,750,000 $3,750 8,344,679 $8,344 $38,930,423 $(14,304,918)
--------- ------ ---------- ------- ----------- ------------
Exercise of stock options, January
through December 1995 ($.18 - $7.50 per
share)........................................ - - 157,588 158 257,286 -
Issuance of stock under employee stock
purchase plan, June and December
1995 ($2.66 - $6.48 per share)................ - - 69,677 70 218,553 -
Issuance of stock, July 1995, for cash
($9.00 per share), net of issuance
costs of $411,454............................. - - 444,444 444 3,588,102 -
Exercise of warrants, July 1995
($1.73 per share)............................. - - 20,027 20 34,573 -
Issuance of stock, October 1995, for
cash ($6.50 per share), net of offering
costs of $1,560,325........................... - - 3,000,000 3,000 17,936,675 -
Amortization of deferred compensation......... - - - - - -
Net loss...................................... - - - - - (10,149,711)
--------- ------ ---------- ------- ----------- ------------
Balance at December 31, 1995.................. 3,750,000 $3,750 12,036,415 12,036 60,965,612 (24,454,629)
--------- ------ ---------- ------- ----------- ------------
Exercise of stock options, January
through December 1996
($.18 - $5.88 per share)...................... - - 250,676 251 212,204 -
Issuance of stock under employee stock
purchase plan, June and December
1996 ($2.66 - $6.48 per share)................ - - 108,751 109 311,379 -
Issuance of stock, February 1996, for
cash ($9.56 per share) net of
issuance costs of $8,818...................... - - 418,629 418 3,990,764 -
Exercise of warrants, March and May
1996 (Note 6)................................. - - 262,898 263 5,887 -
Amortization of deferred compensation......... - - - - - -
Net loss...................................... - - - - - (10,652,972)
--------- ------ ---------- ------- ----------- ------------
Balance at December 31, 1996.................. 3,750,000 3,750 13,077,369 13,077 65,485,846 (35,107,601)
--------- ------ ---------- ------- ----------- ------------
Exercise of stock options, January
through December 1997 ($.18 - $6.63 per
share)........................................ - - 197,065 197 470,384 -
Issuance of stock under employee stock
purchase plan, June and December
1997 ($3.51 - $4.83 per share)................ - - 62,259 62 282,036 -
Issuance of stock, February 1997, for
cash ($7.50 per share) net of
issuance costs of $10,667..................... - - 533,333 534 3,988,799 -
Exercise of warrants, September
1997 ($.04 per share) (Note 6)................ - - 24,291 24 826 -
Issuance of stock under employee 401(k)
plan, December 1997 ($5.06 per share)......... - - 17,105 17 86,577 -
Amortization of deferred compensation......... - - - - - -
Cancellation of stock options................. - - - - (216,817) -
Net loss...................................... - - - - - (11,753,701)
--------- ------ ---------- ------- ----------- ------------
Balance at December 31, 1997.................. 3,750,000 $3,750 13,911,422 $13,911 $70,097,651 $(46,861,302)
========= ====== ========== ======= =========== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Deferred Stockholder's
Compensation Equity
------------ ------
<S> <C> <C>
Balance at December 31,1994............................ $(1,254,534) $23,383,065
----------- -----------
Exercise of stock options, January
through December 1995 ($.18 - $7.50 per
share)................................................. - 257,444
Issuance of stock under employee stock
purchase plan, June and December
1995 ($2.66 - $6.48 per share)......................... - 218,623
Issuance of stock, July 1995, for cash
($9.00 per share), net of issuance
costs of $411,454...................................... - 3,588,546
Exercise of warrants, July 1995
($1.73 per share)...................................... - 34,593
Issuance of stock, October 1995, for
cash ($6.50 per share), net of offering
costs of $1,560,325.................................... - 17,939,675
Amortization of deferred compensation.................. 394,977 394,977
Net loss............................................... - (10,149,711)
----------- -----------
Balance at December 31, 1995........................... (859,557) 35,667,212
----------- -----------
Exercise of stock options, January
through December 1996 ($.18 -
$5.88 per share)....................................... - 212,455
Issuance of stock under employee stock
purchase plan, June and December
1996 ($2.66 - $6.48 per share)......................... - 311,488
Issuance of stock, February 1996, for
cash ($9.56 per share) net of
issuance costs of $8,818............................... - 3,991,182
Exercise of warrants, March and May
1996 (Note 6).......................................... - 6,150
Amortization of deferred compensation.................. 393,754 393,754
Net loss............................................... - (10,652,972)
----------- -----------
Balance at December 31, 1996........................... (465,803) 29,929,269
----------- -----------
Exercise of stock options, January
through December 1997
($.18 - $6.63 per share)............................... - 470,581
Issuance of stock under employee stock
purchase plan, June and December
1997 ($3.51 - $4.83 per share)......................... - 282,098
Issuance of stock, February 1997, for
cash ($7.50 per share) net of
issuance costs of $10,667.............................. - 3,989,333
Exercise of warrants, September
1997 ($.04 per share) (Note 6)......................... - 850
Issuance of stock under employee 401(k)
plan, December 1997 ($5.06 per share).................. - 86,594
Amortization of deferred compensation.................. 192,638 192,638
Cancellation of stock options.......................... 216,817 -
Net loss............................................... - (11,753,701)
----------- -----------
Balance at December 31, 1997........................... $(56,348) $23,197,662
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(January 2, 1992)
For the Year Ended December 31, through
------------------------------------------ December 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss............................................ $(10,149,711) $(10,652,972) $(11,753,701) $(46,861,302)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 644,544 808,409 962,212 2,777,977
Issuance of convertible debt for noncash
consideration....................................... - - - 905,000
Issuance of stock for noncash consideration......... - - 86,594 107,644
Compensation expense related to stock plans......... 423,502 393,754 192,638 1,721,360
Loss on equipment retirements....................... - 1,313 2,272 7,565
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses
and other assets.................................... 41,290 248,151 (5,474) (181,195)
Increase in accounts payable and accrued
liabilities......................................... 254,623 235,519 102,224 1,454,986
Increase in deferred revenue and deferred
contract revenue.................................... 919,970 1,179,489 910,249 3,009,708
------------ ------------ ------------ ------------
Net cash used in operating activities..... (7,865,782) (7,786,337) (9,502,986) (37,058,257)
------------ ------------ ------------ ------------
Cash flows used in investment activities:
Purchase of equipment, furniture and leasehold
improvements........................................ (1,417,523) (672,441) (1,187,057) (6,009,658)
Net sales (purchases) of short-term
investments......................................... (15,779,552) (8,949,879) 5,017,757 (23,708,845)
------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities..................... (17,197,075) (9,622,320) 3,830,700 (29,718,503)
-------------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease
obligations......................................... 723,991 - - 2,030,823
Repayment of notes payable and capital lease
obligations......................................... (426,074) (387,986) (342,800) (1,574,843)
Advance on line of credit........................... - - - 750,000
Proceeds from issuance of preferred stock, net...... - - - 22,264,465
Proceeds from issuance of common stock, net......... 22,010,356 4,521,275 4,742,862 44,179,495
------------ ------------ ------------ ------------
Net cash provided by financing
activities................................ 22,308,273 4,133,289 4,400,062 67,649,940
---------- ------------ --------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents......................................... (2,754,584) (13,275,368) (1,272,224) 873,180
Cash and cash equivalents, beginning of period...... 18,175,356 15,420,772 2,145,404 -
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period............ $15,420,772 $2,145,404 $873,180 $873,180
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $139,651 $104,187 $59,132 $492,185
Supplemental schedule of noncash financing
activity:
Conversion of debt to preferred and common
stock............................................... $- $- $- $1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BUSINESS:
GeneMedicine, Inc. (the "Company") is a Delaware corporation in the development
stage. The Company is developing non-viral gene therapies that may provide
unique clinical benefits in the treatment of a number of human diseases. The
Company intends to develop its products through alliances with major
pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and product
development and has not yet generated any revenues from the sale of products,
nor is there any assurance of future product revenues. In addition, the Company
expects to continue to incur losses for the foreseeable future, and there can be
no assurance that the Company will successfully complete the transition from a
development stage company to successful operations. The research and development
activities engaged in by the Company involve a high degree of risk and
uncertainty. The ability of the Company to successfully develop, manufacture and
market its proprietary products is dependent upon many factors. These factors
include, but are not limited to, technological uncertainty, the need for
additional financing, the reliance on collaborative arrangements for research
and contractual agreements with corporate partners, and the ability to develop
or access manufacturing, sales and marketing experience. Additional factors
include uncertainties as to patents and proprietary technologies, technological
change and risk of obsolescence, development of products, competition,
government regulations and regulatory approval, and product liability exposure.
As a result of the aforementioned factors and the related uncertainties, there
can be no assurance of the Company's future success. See "Risk Factors,"
elsewhere herein.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of less than three months when purchased to be cash equivalents.
Short-term investments have maturities greater than three months at the date
of purchase. At December 31, 1996 and 1997 cash equivalents and short-term
investments consisted primarily of U.S. Government obligations. All cash
equivalents and short-term investments have been classified as
held-to-maturity at December 31, 1996 and 1997. Investments in debt
securities classified as held-to-maturity at December 31, 1997, have various
maturity dates which do not exceed one year. These securities are carried at
amortized cost which approximates fair value.
Prepaid Expenses and Other
Prepaid expenses and other are mainly comprised of prepayments for
contracted research, building rent, and insurance.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are carried at cost and are
depreciated on a straight-line basis over the estimated useful economic
lives of the assets involved. The estimated useful lives employed in
computing depreciation are 3 years for computer software, 5 years for
equipment, 7 years for furniture and the remaining life of the building
lease for leasehold improvements (refer to Note 11). When property is
retired or otherwise disposed of, the cost and accumulated depreciation are
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.
F-8
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
Research and Development
Research and development costs are expensed when incurred. These costs
include personnel costs, materials consumed, depreciation on equipment and
the cost of facilities used for research and development. Payments related
to the acquisition and patenting of technology rights, for which development
work is in process, are expensed and considered a component of research and
development costs. Contract revenue and research and development grant
revenue include payments from a corporate partner and a government agency
for research and development performed by the Company and are recognized
ratably as the Company satisfies its obligation under the related
agreements. Payments received in excess of amounts earned are classified as
deferred contract revenue.
Loss Per Share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The
Company adopted the provisions of SFAS No. 128, changing from its previous
method of accounting for net loss per share as set forth in APB Opinion No.
15. Adoption of Statement No. 128 required retroactive revision of the
presentation of net loss per share in historical financial statements. Net
loss per share amounts as presented herein have remained unchanged from the
adoption of SFAS No. 128 since the Company's outstanding stock options would
not have been included in the calculation because their effect would have
been anti-dilutive. Net loss per share has been computed by dividing the net
loss by the weighted average number of shares of Common Stock outstanding.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Laboratory equipment....................................... $3,292,122 $3,915,425
Office equipment........................................... 338,657 386,107
Furniture.................................................. 350,803 383,338
Computer software.......................................... 29,434 63,072
Leasehold improvements..................................... 799,318 1,219,084
---------- ----------
4,810,334 5,967,026
Less accumulated depreciation and amortization............. (1,811,918) (2,746,039)
---------- ----------
$2,998,416 $3,220,987
========== ==========
</TABLE>
F-9
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Professional fees.......................................... $200,920 $402,511
Research contracts......................................... 334,556 282,329
Compensation and benefits.................................. 162,677 236,941
Other accounts payable and accrued
liabilities................................................ 654,609 533,205
---------- ----------
$1,352,762 $1,454,986
========== ==========
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
In March 1994, the Company entered into an equipment leasing arrangement with a
financing company. Equipment has been financed over forty-two and forty-eight
month periods at implicit interest rates of 8.4 percent and 11.2 percent,
respectively. Equipment purchases financed through this agreement are recorded
as capital leases in the accompanying financial statements.
Future principal payments under capital lease obligations as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998.......................................... $270,166
1999.......................................... 54,814
--------
$324,980
========
</TABLE>
6. STOCKHOLDERS' EQUITY:
In January 1996, the Board of Directors of GeneMedicine adopted a Preferred
Share Purchase Rights Plan in which preferred share purchase rights ("Rights")
were distributed for each share of common stock held as of the close of business
on February 1, 1996. The rights will expire on February 1, 2006. Each Right will
entitle stockholders to buy one one-hundredth of a share of a new series of
Series A Junior Preferred Stock at an exercise price of $60.00 per one
one-hundredth of a Preferred Share. Upon the occurrence of certain events, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, shares of the Company's Common Stock having a market value of two times
the exercise price of the Right.
Common Stock
In July 1994, the Company completed an initial public offering of 1,933,333
shares of Common Stock at $7.50 per share, with the Company receiving net
proceeds of approximately $13,500,000, before payment of offering expenses.
In October 1995, the Company completed a follow-on public offering of 3,000,000
shares of Common Stock at $6.50 per share, with the Company receiving net
proceeds of $18,225,000, before payment of offering expenses.
Series A Convertible Preferred Stock
On May 17, 1993, the Company issued 3,948,894 shares of Series A Preferred
Stock (the "Series A Preferred"), at a price of $2.1525 per share, for
aggregate consideration of approximately $8,435,000, net of offering costs
of
F-10
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
approximately $65,000. The consideration received consisted of cash proceeds of
approximately $7,685,000 and conversion of advances of $750,000. No dividends
were declared or paid to holders of Series A Convertible Stock. Upon completion
of the Company's initial public offering, in July 1994, all Series A Convertible
Stock was converted, on a one for one basis, into 4,012,610 shares of Common
Stock.
Series B Convertible Preferred Stock/Syntex Warrants
Upon execution of the Syntex Collaborative Agreement (refer to Note 9),
Syntex Corporation, the then parent company of Syntex (U.S.A.) Inc.,
purchased 3,750,000 shares of the Company's Preferred Series B Stock (the
"Series B Preferred") and a warrant to purchase 1,071,428 shares of the
Company's Common Stock (the "Common Warrant") for an aggregate purchase
price of $15 million. The Series B Preferred will convert into 1,071,428
shares of Common Stock at the Company's option (i) upon the Company's Common
Stock trading at an average price of $14.00 per share or more for 30
consecutive days, (ii) upon completion of a public offering with minimum
aggregate proceeds of $10 million and minimum price of $14.00 per share or
(iii) after April 8, 1998. Syntex Corporation may elect to convert the
Series B Preferred into Common Stock at any time. The holders of the Series
B Preferred are entitled to receive a liquidation preference of $4.00 per
share, after which remaining assets would be distributed ratably to the
holders of Common Stock. The Common Warrant is exercisable for five years at
$21.00 per share for an aggregate purchase price of $22.5 million. The
warrants have been recorded at zero in the accompanying financial statements
as the value was de minimus upon issuance. The Company has the right to
accelerate the expiration of the Common Warrant at any time.
Warrants
In connection with the Company's initial public offering in July 1994, the
Company issued a warrant to the underwriter and stockholder to purchase
133,333 shares of Common Stock at an exercise price of $13.50 per share. The
warrant became exercisable for four years beginning July 12, 1995, and has
been recorded at zero in the accompanying financial statements as the value
was de minimus upon issuance.
In connection with the issuance of the Series A Preferred, the Company issued
warrants to acquire 413,705 shares at $2.1525 per share. These warrants have
been recorded at zero in the accompanying financial statements as the value was
de minimus upon issuance. The warrants were exercisable over an 18-month period
beginning May 17, 1993, however, in November 1994, in return for the pro rata
expiration of a cashless exercise provision of the warrants, the exercise
provision was extended to November 17, 1995. In July 1995, 21,428 warrants were
exercised of which 16,071 shares were issued for cash and 5,357 warrants were
exercised under a cashless provision, netting to an issuance of 3,956 shares. On
July 11, 1995, in return for an agreement to not sell or otherwise dispose of
any shares of the Company's Common Stock held by the remaining warrant holders,
the exercise provision was extended to May 17, 1996 and the pro rata expiration
of the cashless exercise provision was rescinded. In March and May 1996, the
remaining 392,277 warrants were exercised under a cashless provision, netting to
an issuance of 260,041 shares.
In connection with the advances from D. Blech & Company Incorporated ("D.
Blech"), the Company issued D. Blech and a related party warrants to purchase
28,571 shares of the Company's Common Stock at $.035 per share, exercisable over
a five year period beginning January 1993. The warrants have been recorded at
zero in the accompanying financial statements as the value was de minimus upon
issuance. In September 1997, 24,291 warrants were exercised for cash and the
remaining warrants expired in December 1997.
In connection with loans from two directors of BCM Technologies, Inc., the
Company issued warrants to purchase 5,714 shares of Series A Preferred Stock at
$2.1525 per share. The warrants have been recorded at zero in the accompanying
financial statements as the value was de minimus upon issuance. One warrant for
2,857 shares was exercised in 1994 and the remaining warrant for 2,857 shares
was exercised in May 1996.
F-11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
The Company adopted a 401(k) plan in 1994. Under the plan, employees can
contribute up to 15 percent of their compensation subject to limitations as
defined by the Internal Revenue Service. The Company has the option to match an
employee's contribution as determined each year by the Company. An employee
vests in the Company's matching contribution based on years of service. No
matching contribution had been made through December 31, 1996. In 1997, the
Company implemented a 25% match of employee contributions to be made with shares
of the Company's Common Stock at year end based on the year end closing price
per share.
In March 1994, the Board of Directors adopted, and the stockholders subsequently
approved, the 1994 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). The Directors' Plan, as amended in 1997, reserved 390,000 shares of
common stock for issuance thereunder. The plan permits each director of the
Company who is not otherwise employed by the Company who (i) was a director on
July 12, 1994 or (ii) is first elected as a director after the date of adoption
of the Directors' Plan, automatically will be granted an option to purchase
10,000 and 30,000 shares of common stock, respectively. In addition, annually on
April 26th , each non-employee director who has been a non-employee director for
at least six months shall be granted an option to purchase 5,000 shares of
Common Stock of the Company. All options under this plan vest in four equal
annual installments commencing on the date of grant.
In April 1993, the Board of Directors approved the 1993 Stock Option Plan (the
"Option Plan"). The Option Plan, as amended in 1997, provides for the grant of
up to 3,945,714 incentive and nonstatutory options to acquire the Company's
common stock. The option prices for the incentive and nonstatutory options shall
be not less than 100 percent and 85 percent, respectively, of the fair market
value of the stock as determined by the Company's Board of Directors.
In March 1994, the Board of Directors adopted the Employee Stock Purchase Plan
and reserved 857,142 shares of Common Stock for issuance thereunder. The plan
permits full-time employees to purchase Common Stock through payroll deductions
(which cannot exceed 15 percent of each employee's compensation) at the lower of
85 percent of fair market value at the beginning of each offering period, as
defined, or the fair market value at the end of each six-month purchase period.
In 1996 and 1997, 108,751 and 62,259 shares, respectively, were purchased by
employees under this plan at $2.66 to $6.48 per share.
The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25 and the related Interpretations. Accordingly,
deferred compensation is recorded for stock options based on the excess of the
deemed value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is amortized
over the vesting period of each option. For certain stock options granted prior
to its initial public offering, the Company recorded deferred compensation. Such
deferred compensation totals approximately $2 million, of which $394,977,
$393,754 and $192,638 was recognized as expense during the years ended December
31, 1995, 1996 and 1997, respectively, and the remaining amount at December 31,
1997, $56,348, will be amortized to expense in 1998. As the exercise price of
all options issued since the Company's initial public offering in July 1994 has
been equal to or greater than the market price of the Company's stock on the
date of grant, no further deferred compensation was recorded. In 1997, $216,817
of previously recorded deferred compensation was reversed due to the
cancellation of certain options upon termination of the employees. No
compensation cost has been recognized under the Company's stock purchase plan.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" which, if fully adopted, requires the Company to record stock
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected not to record related compensation
expense in accordance with this statement. Had compensation expense for its
stock option and stock purchase plans been determined consistent with
F-12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below. The compensation costs
disclosed here may not be representative of the effects of pro forma net income
in future years.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net loss: As reported $10,149,711 $10,652,972 $11,753,701
Pro forma $11,028,844 $12,449,641 $14,218,819
Basic and diluted
net loss per share: As reported $1.10 $0.84 $0.86
Pro forma $1.20 $0.98 $1.04
</TABLE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
1993 STOCK OPTION PLAN DIRECTORS PLAN
---------------------- --------------
WEIGHTED-AVG. WEIGHTED-AVG.
OPTIONS PRICE ($) OPTIONS PRICE ($)
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.................. 1,230,612 1.76 50,000 7.50
--------- ---- ------- ----
Granted....................................... 477,250 6.54 140,000 4.91
Exercised..................................... (155,088) 1.54 (2,500) 7.50
Canceled...................................... (74,978) 3.66 (37,500) 7.07
--------- ---- ------- ----
Balance at December 31, 1995.................. 1,477,796 3.23 150,000 5.19
--------- ---- ------- ----
Granted....................................... 784,349 4.92 20,000 6.25
Exercised..................................... (250,676) 0.85 -- --
Canceled...................................... (278,204) 5.80 (30,000) 3.63
--------- ---- ------- ----
Balance at December 31, 1996.................. 1,733,265 3.94 140,000 5.68
--------- ---- ------- ----
Granted....................................... 755,943 6.55 25,000 6.88
Exercised..................................... (197,065) 2.39 -- --
Canceled...................................... (192,237) 5.08 -- --
--------- ---- ------- ----
Balance at December 31, 1997.................. 2,099,906 4.91 165,000 5.86
========= ==== ======= ====
Exercisable at December 31, 1995.............. 645,065 2.15 5,000 7.50
Exercisable at December 31, 1996.............. 774,465 2.94 35,000 5.86
Exercisable at December 31, 1997.............. 1,059,727 4.02 70,000 5.77
</TABLE>
At December 31, 1997, 1,163,837 and 222,500 options were available for future
grant under the 1993 Stock Option Plan and Directors Plan, respectively. The
exercise price of options outstanding under the 1993 Stock Option Plan and
Directors' Plan at December 31, 1997 range from $0.18 to $9.88 and $3.63 to
$7.50, respectively. The weighted average contractual life of options
outstanding at December 31, 1997 was nine years for both the 1993 Stock Option
Plan and Directors Plan.
The weighted average fair value of options granted in 1995, 1996 and 1997 was
$4.78, $3.45 and $4.90, respectively, under the 1993 Stock Option Plan. The
weighted average fair value of options granted in 1995, 1996 and 1997 was $3.70,
$4.30 and $5.28, respectively, under the Directors' Plan. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1995, 1996 and 1997, respectively: risk-free interest rates of 6.5 percent for
all years; no expected dividend yields for all years; expected lives of 6 years
for all years and expected volatility of 82, 72 and 85 percent.
F-13
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
The weighted average fair value of purchase rights granted in 1995, 1996 and
1997 was $1.33, $1.37 and $3.20, respectively, under the Employee Stock Purchase
Plan. The fair value of employee purchase rights was estimated using the Black-
Scholes option pricing model with the following weighted average assumptions for
1995, 1996 and 1997, respectively: risk-free interest rates of 5.8, 5.6 and 5.8
percent; no expected dividend yields for all years; expected lives of 1.5 years
for all years and expected volatility of 77, 72 and 72 percent.
8. FEDERAL INCOME TAXES:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of liabilities and assets using exacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation should be provided.
As of December 31, 1997, the Company has generated net operating loss ("NOL")
carryforwards of approximately $39 million and research and development credits
of approximately $1.2 million available to reduce future income taxes. These
carryforwards begin to expire in 2007. A change in ownership, as defined by
federal income tax regulations, could significantly limit the Company's ability
to utilize its carryforwards. The Company's ability to utilize its current and
future NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because Federal tax regulations limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for federal income tax purposes. As
the Company has had cumulative losses and there is no assurance of future
taxable income, a valuation allowance has been established to fully offset the
deferred tax asset at December 31, 1997 and 1996. The valuation allowance
increased $4,443,779 and $3,834,402 for the years ended December 31, 1997 and
1996, respectively, primarily due to the Company's losses. The components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards........................................ $9,714,245 $13,487,189
Research and development tax credits.................................... 645,000 1,172,825
Capitalized start-up costs.............................................. 363,735 205,014
Technology license...................................................... 298,168 278,223
Tax basis of equipment, furniture and
leasehold improvements.................................................. 97,498 123,720
Contract revenue........................................................ 652,790 975,734
Other................................................................... 27,490 --
----------- -----------
Total deferred tax assets............................................... 11,798,926 16,242,705
Less valuation allowance................................................ (11,798,926) (16,242,705)
----------- -----------
Net deferred tax assets................................................. $-- $--
=========== ===========
</TABLE>
F-14
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS:
Effective February 1995, the Company and Corange International Ltd., the parent
company of the Boehringer Mannheim entered into a multi-year alliance agreement
to develop gene therapy products to treat selected cancer indications. Under the
terms of the agreement, Boehringer Mannheim has agreed to fund $25 million, plus
certain amounts for achievement of milestones, for research and development at
the Company, with payments to the Company of $5 million per year, plus
milestones, for five years. Research and development funding of $4.6, $5.0 and
$5.5 million, including a $0.5 million milestone payment in 1997, were received
in 1995, 1996 and 1997, respectively. Because the Company may be obligated, upon
certain circumstances, to conduct research and development in an amount not to
exceed $5 million at the end of the five-year agreement, the Company has
recognized contract revenue at 80 percent of research funding. In addition,
Boehringer Mannheim has agreed to invest $20 million in the common equity of the
Company at $4 million per year. The first four $4 million equity investments
were made in July 1995, February 1996, February 1997 and February 1998 in which
444,444, 418,629, 533,333 and 533,333 common shares were issued at $9.00, $9.56,
$7.50 and $7.50 per share, respectively. The price per share for common equity
investments by Boehringer Mannheim for the years 1996 through 1999 is based upon
the 15 consecutive trading days immediately preceding February 1 for each year,
with the purchase in 1996 at a 20 percent premium. In no case shall the purchase
price be less than $7.50 per share. All payments to the Company beginning in
1997 are subject to the achievement of certain milestones. The Company also
granted Boehringer Mannheim a three-year option to expand the collaboration to
include additional cancer indications.
In April 1994, the Company entered into a collaborative agreement with Syntex
(U.S.A.) Inc., now a subsidiary of Roche Holding Ltd. to develop gene medicines
for certain inflammatory and immunological disorders. The collaborative
agreement ended in accordance with its terms in April 1997. Upon execution of
the collaborative agreement, Syntex Corporation purchased 3,750,000 shares of
the Company's Preferred Series B Stock and a warrant to purchase 1,071,428
shares of the Company's Common Stock. Refer to Note 6.
In 1992, the Company entered into license agreements with Baylor whereby the
Company has exclusive noncancelable worldwide licenses to use certain
technology. In exchange for the grant of this exclusive license, the Company
issued 600,000 shares of its common stock to Baylor. Pursuant to the license
agreement, the Company will pay Baylor, for the longer of 10 years or the life
of the patent, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of the such technologies.
Effective May 7, 1993, the Company obtained a worldwide, exclusive license for
the gene-switch technology initially developed by Baylor in exchange for 14,286
shares of common stock and future royalty payments on net sales by the Company
of any products incorporating the licensed technologies.
The Company has entered into several sponsored research agreements with a number
of research institutes. During 1995, 1996 and 1997, the Company paid $1,340,000,
$1,442,100 and $1,055,000 respectively, pursuant to these agreements and has
committed to pay an additional $446,000 and $148,000 in 1998 and 1999,
respectively under these research agreements.
In addition, the Company has entered into other licensing agreements with
various universities and research organizations. Under the terms of these
agreements, the Company has received exclusive and nonexclusive licenses to
technology or technology claimed, in certain patents or patent applications. The
Company is required to make payments of nonrefundable license fees and royalties
on future sales of products employing the technology. In 1995, 1996 and 1997,
the Company paid license fees of $250,000, $362,000 and $238,000, respectively,
under these agreements, which have been recorded as a research and development
expense. To retain these licenses in future years the Company has
F-15
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS-(Continued)
committed to pay approximately $120,000 through 1998.
10. CONSULTING AND RELATED AGREEMENTS:
In 1995, in connection with the execution of the Boehringer Mannheim alliance
agreement, the Company paid a fee of $350,000 to a former chairman and
stockholder of the Company pursuant to a finder's agreement.
The Company has entered into consulting agreements with certain individuals to
assist its clinical and research and development efforts. Pursuant to these
agreements, the Company paid $494,000, $447,000 and $384,000 in 1995, 1996 and
1997, respectively. The fees are recorded as research and development expense as
incurred. In 1996, the Company paid a director of the Company $20,300 under a
consulting agreement.
11. COMMITMENTS:
The Company has entered into employment agreements with its chief executive and
other key employees which have initial expiration dates ranging from 1996 to
1999. The agreements are thereafter automatically renewed for successive twelve-
month terms, unless terminated by the Company or employee. Such agreements
provide that, in the case of termination without cause, the employees are
entitled to payments ranging from 25 percent to 85 percent of their annual
salaries. The aggregate amount charged to expense during 1995, 1996 and 1997
pursuant to these agreements totaled $848,000, $872,000 and $821,000,
respectively.
On October 29, 1993, the Company entered into an agreement to lease building
facilities from a real estate company. This operating lease commenced in January
1995 and continues for a lease term of 10 years. The obligations under this
lease along with other operating leases are as follows:
<TABLE>
<S> <C>
1998.................................. $855,000
1999.................................. 854,000
2000.................................. 906,000
2001.................................. 906,000
2002.................................. 906,000
2003.................................. 906,000
2004.................................. 906,000
</TABLE>
F-16
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
GENEMEDICINE, INC.
Calculation of Weighted Average Shares Outstanding Period for the Twelve Months Ended Dec. 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
0 31-Dec-96 13,077,369 13,077,369 x 2 = 26,154,738
564 2-Jan-97 13,077,933 13,077,933 x 1 = 13,077,933
4,450 3-Jan-97 13,082,383 13,082,383 x 0 = 0
833 3-Jan-97 13,083,216 13,083,216 x 0 = 0
282 3-Jan-97 13,083,498 13,083,498 x 4 = 52,333,992
564 7-Jan-97 13,084,062 13,084,062 x 0 = 0
141 7-Jan-97 13,084,203 13,084,203 x 0 = 0
486 7-Jan-97 13,084,689 13,084,689 x 8 = 104,677,512
5,236 15-Jan-97 13,089,925 13,089,925 x 1 = 13,089,925
329 16-Jan-97 13,090,254 13,090,254 x 0 = 0
70 16-Jan-97 13,090,324 13,090,324 x 14 = 183,264,536
533,333 30-Jan-97 13,623,657 13,623,657 x 6 = 81,741,942
600 5-Feb-97 13,624,257 13,624,257 x 0 = 0
120 5-Feb-97 13,624,377 13,624,377 x 0 = 0
564 5-Feb-97 13,624,941 13,624,941 x 1 = 13,624,941
1,000 6-Feb-97 13,625,941 13,625,941 x 0 = 0
1,150 6-Feb-97 13,627,091 13,627,091 x 1 = 13,627,091
564 7-Feb-97 13,627,655 13,627,655 x 4 = 54,510,620
1,300 11-Feb-97 13,628,955 13,628,955 x 0 = 0
50 11-Feb-97 13,629,005 13,629,006 x 1 = 13,629,005
425 12-Feb-97 13,629,430 13,629,430 x 2 = 27,258,860
952 14-Feb-97 13,630,382 13,630,382 x 0 = 0
1,034 14-Feb-97 13,631,416 13,631,416 x 0 = 0
2,490 14-Feb-97 13,633,906 13,633,906 x 0 = 0
1,100 14-Feb-97 13,635,006 13,645,006 x 4 = 54,540,024
423 18-Feb-97 13,635,429 13,635,429 x 0 = 0
94 18-Feb-97 13,635,523 13,635,523 x 0 = 0
240 18-Feb-97 13,635,763 13,635,763 x 1 = 13,635,763
928 19-Feb-97 13,636,691 13,636,691 x 1 = 13,636,691
500 20-Feb-97 13,637,191 13,637,191 x 0 = 0
3,290 20-Feb-97 13,640,481 13,640,481 x 0 = 0
120 20-Feb-97 13,640,601 13,640,601 x 1 = 13,640,601
10,000 21-Feb-97 13,650,601 13,650,601 x 0 = 0
280 21-Feb-97 13,650,881 13,650,881 x 0 = 0
688 21-Feb-97 13,651,569 13,651,569 x 0 = 0
120 21-Feb-97 13,651,689 13,651,689 x 3 = 40,955,067
319 24-Feb-97 13,652,008 13,652,008 x 0 = 0
253 24-Feb-97 13,652,261 13,652,261 x 0 = 0
266 24-Feb-97 13,652,527 13,652,527 x 1 = 13,652,527
250 25-Feb-97 13,652,777 13,652,777 x 1 = 13,652,777
800 26-Feb-97 13,653,577 13,653,577 x 1 = 13,652,577
459 27-Feb-97 13,654,036 13,654,035 x 2 = 27,308,072
238 1-Mar-97 13,654,274 13,654,274 x 2 = 27,308,548
4,942 3-Mar-97 13,659,216 13,659,216 x 1 = 13,659,216
5,037 4-Mar-97 13,664,253 13,664,253 x 7 = 95,649,771
700 11-Mar-97 13,664,953 13,664,953 x 15 = 204,974,295
2,499 26-Mar-97 13,667,452 13,667,452 x 1 = 13,667,452
500 27-Mar-97 13,667,952 13,667,952 x 0 = 0
360 27-Mar-97 13,668,312 13,668,312 x 0 = 0
730 27-Mar-97 13,669,042 13,669,042 x 8 = 109,352,336
4,563 4-Apr-97 13,673,605 13,673,605 x 6 = 82,041,630
141 10-Apr-97 13,673,746 13,673,746 x 0 = 0
33 10-Apr-97 13,673,779 13,673,779 x 0 = 0
3,000 10-Apr-97 13,676,779 13,676,779 x 1 = 13,676,779
1,738 11-Apr-97 13,678,517 13,678,517 x 4 = 54,714,068
141 15-Apr-97 13,678,658 13,678,658 x 9 = 123,107,922
2,967 24-Apr-97 13,681,625 13,681,625 x 5 = 68,408,125
4,467 29-Apr-97 13,686,092 13,686,092 x 1 = 13,686,092
4,300 30-Apr-97 13,690,392 13,690,392 x 1 = 13,690,392
476 1-May-97 13,690,868 13,690,868 x 1 = 13,690,868
238 2-May-97 13,691,106 13,691,106 x 10 = 136,911,060
595 12-May-97 13,691,701 13,691,701 x 0 = 0
700 12-May-97 13,692,401 13,692,401 x 0 = 0
1,000 12-May-97 13,693,401 13,693,401 x 0 = 0
357 12-May-97 13,693,758 13,693,758 x 0 = 0
1,016 12-May-97 13,694,744 13,694,744 x 0 = 0
1,260 12-May-97 13,696,034 13,696,034 x 0 = 0
1,805 12-May-97 13,697,839 13,697,839 x 2 = 27,395,678
500 14-May-97 13,698,339 13,698,339 x 0 = 0
200 14-May-97 13,698,589 13,698,589 x 1 = 13,698,539
1,050 15-May-97 13,699,589 13,699,589 x 5 = 68,497,945
4,000 20-May-97 13,703,589 13,703,589 x 2 = 27,407,178
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
500 22-May-97 13,704,089 13,704,089 x 1 = 13,704,089
1,500 23-May-97 13,705,589 13,705,589 x 0 = 0
180 23-May-97 13,705,769 13,705,769 x 0 = 0
4,610 23-May-97 13,710,379 13,710,379 x 4 = 54,841,516
500 27-May-97 13,710,879 12,710,879 x 1 = 13,710,879
850 28-may-97 13,711,729 13,711,729 x 0 = 0
450 28,May-97 13,712,179 13,712,179 x 1 = 13,712,179
900 29-May-97 13,713,079 13,713,079 x 0 = 0
900 29-May-97 13,713,979 13,713,979 x 1 = 13,713,979
1,081 30-May-97 13,715,060 13,715,060 x 0 = 0
353 30-May-97 13,715,413 13,715,413 x 0 = 0
260 30-May-97 13,715,673 13,715,673 x 0 = 0
280 30-May-97 13,715,953 13,715,953 x 0 = 0
240 30-May-97 13,716,193 13,716,193 x 5 = 68,580,965
190 4-Jun-97 13,716,383 13,716,383 x 0 = 0
382 4-Jun-97 13,716,765 13,716,765 x 0 = 0
480 4-Jun-97 13,717,245 13,717,245 x 0 = 0
94 4-Jun-97 13,717,339 13,717,339 x 0 = 0
140 4-Jun-97 13,717,479 13,717,479 x 1 = 13,717,479
10,000 5-Jun-97 13,727,479 13,727,479 x 0 = 0
500 5-Jun-97 13,727,979 13,727,979 x 6 = 82,367,874
1,690 11-Jun-97 13,729,669 13,729,669 x 0 = 0
688 11-Jun-97 13,730,357 13,730,357 x 0 = 0
120 11-Jun-97 13,730,477 13,730,477 x 1 = 13,730,477
140 12-Jun-97 13,730,617 13,730,617 x 0 = 0
60 12-Jun-97 13,730,677 13,730,677 x 18 = 247,152,186
28,106 30-Jun-97 13,758,783 13,758,783 x 1 = 13,758,783
17,500 1-Jul-97 13,776,283 13,776,283 x 0 = 0
238 1-Jul-97 13,776,521 13,776,521 x 2 = 27,553,042
157 3-Jul-97 13,776,678 13,776,678 x 0 = 0
815 3-Jul-97 13,777,493 13,777,493 x 0 = 0
282 3-Jul-97 13,777,775 13,777,775 x 5 = 68,888,875
7,406 8-Jul-97 13,785,181 13,785,181 x 0 = 0
1,684 8-Jul-97 13,786,865 13,786,865 x 0 = 0
329 8-Jul-97 13,787,194 13,787,194 x 3 = 41,361,582
4,000 11-Jul-97 13,791,194 13,791,194 x 4 = 55,164,776
4,205 15-Jul-97 13,795,399 13,795,399 x 2 = 27,590,798
6,935 17-Jul-97 13,802,334 13,802,334 x 47 = 648,709,698
238 2-Sep-97 13,802,572 13,802,572 x 13 = 179,433,436
833 15-Sep-97 13,803,405 13,803,405 x 9 = 124,230,645
24,291 24-Sep-97 13,827,696 13,827,696 x 8 = 110,621,568
188 02-Oct-97 13,827,884 13,827,884 x 14 = 193,590,376
714 16-Oct-97 13,828,598 13,828,598 x 0 = 0
188 16-Oct-97 13,828,786 13,828,786 x 0 = 0
2,524 16-Oct-97 13,831,310 13,831,310 x 24 = 331,951,440
13,151 09-Nov-97 13,844,461 13,844,461 x 4 = 55,377,844
238 13-Nov-97 13,844,699 13,844,699 x 1 = 13,844,699
478 14-Nov-97 13,845,177 13,845,177 x 12 = 166,142,124
840 26-Nov-97 13,846,017 13,846,017 x 0 = 0
140 26-Nov-97 13,846,157 13,846,157 x 7 = 96,923,099
121 03-Dec-97 13,846,278 13,846,278 x 1 = 13,846,278
453 04-Dec-97 13,846,731 13,846,731 x 7 = 96,927,117
10,000 11-Dec-97 13,856,731 13,856,731 x 1 = 13,856,731
783 12-Dec-97 13,857,514 13,857,514 x 0 = 0
295 12-Dec-97 13,857,809 13,857,809 x 0 = 0
235 12-Dec-97 13,858,044 13,858,044 x 3 = 41,574,132
564 15-Dec-97 13,858,608 13,858,608 x 0 = 0
300 15-Dec-97 13,858,908 13,858,908 x 8 = 110,871,264
1,190 23-Dec-97 13,860,098 13,860,098 x 8 = 110,880,784
34,153 31-Dec-97 13,894,251 13,894,251 x 0 = 0
66 31-Dec-97 13,894,317 13,894,317 x 0 = 0
17,105 31-Dec-97 13,911,422 13,911,422 x 0 = 0
- --------- 31-Dec-97
834,053 365 day 5,001,534,802/ 365 13,702,835
======= ============== === ==========
Loss Per Share
---- ---------
11,753,701 $0.86
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8 dated September 6, 1994.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
March 25, 1998
<PAGE>
(ARTICLE) 5
(PERIOD-TYPE) 12-MOS
(FISCAL-YEAR-END) DEC-31-1997
(PERIOD-START) JAN-01-1997
(PERIOD-END) DEC-31-1997
(CASH) 873,180
(SECURITIES) 23,708,845
(RECEIVABLES) 0
(ALLOWANCES) 0
(INVENTORY) 0
(CURRENT-ASSETS) 24,757,153
(PP&E) 3,220,987
(DEPRECIATION) 0
(TOTAL-ASSETS) 27,987,335
(CURRENT-LIABILITIES) 1,814,889
(BONDS) 0
(PREFERRED-MANDATORY) 0
(PREFERRED) 3,750
(COMMON) 13,911
(OTHER-SE) 23,180,001
(TOTAL-LIABILITY-AND-EQUITY) 27,987,335
(SALES) 0
(TOTAL-REVENUES) 6,813,145
(CGS) 0
(TOTAL-COSTS) 18,566,846
(OTHER-EXPENSES) 0
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 0
(INCOME-PRETAX) (11,753,701)
(INCOME-TAX) 0
(INCOME-CONTINUING) 0
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) (11,753,701)
(EPS-PRIMARY) (.83)
(EPS-DILUTED) (.83)
<PAGE>
Exhibit 13.2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
(281) 364-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of May 11, 1998, there were outstanding 14,515,466 and 3,750,000 shares
of Common Stock and Series B Preferred Stock, par value $.001,
respectively, of the registrant.
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
COVER PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of March 31, 1998 and December 31, 1997 3
Statements of Operations for the three months ended March 31, 1998
and March 31, 1997, and for the period from inception (January 2,
1992) through March 31, 1998 4
Statements of Cash Flows for the three months ended March 31, 1998
and March 31, 1997, and for the period from inception (January 2,
1992) through March 31, 1998 5
Notes to Financial Statements 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
PART II. OTHER INFORMATION 9
SIGNATURES 10
Page 2 of 10
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................................... $ 124,237 $ 873,180
Short-term investments ........................................ 24,698,996 23,708,845
Prepaid expenses and other .................................... 164,489 175,128
------------ ------------
Total current assets .......................................... 24,987,722 24,757,153
------------ ------------
Equipment, furniture and leasehold improvements, net .......... 3,166,076 3,220,987
Deposits and other assets ..................................... 9,195 9,195
------------ ------------
Total Assets .................................................. $ 28,162,993 $ 27,987,335
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ...................... $ 734,548 $ 1,454,986
Deferred grant revenue ........................................ -- 89,737
Current portion of capital lease obligations .................. 275,956 270,166
------------ ------------
Total current liabilities .............................. 1,010,504 1,814,889
------------ ------------
Long-term Liabilities:
Deferred contract revenue ..................................... 3,169,970 2,919,970
Capital lease obligations, net of current portion ............. -- 54,814
------------ ------------
Total long-term liabilities ............................ 3,169,970 2,974,784
------------ ------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding .................. 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
14,514,077 and 13,911,422 shares issued and outstanding ....... 14,514 13,911
Additional paid-in capital .................................... 74,124,059 70,097,651
Deferred compensation ......................................... (28,173) (56,348)
Deficit accumulated during the development stage .............. (50,131,631) (46,861,302)
------------ ------------
Total stockholders' equity .................................... 23,982,519 23,197,662
------------ ------------
Total Liabilities and Stockholders' Equity .................... $ 28,162,993 $ 27,987,335
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 10
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
Three Months Ended (January 2, 1992)
March 31, through
------------------------------- March 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues and other income:
Contract revenue ................ $ 1,022,500 $ 1,500,000 $ 13,202,500
Research and development
grant revenue ................... 89,738 240,000 1,616,135
Interest income ................. 351,916 430,946 6,049
------------ ------------ ------------
1,464,154 2,170,946 20,868
Expenses:
Research and development ........ 3,730,450 3,279,329 53,218
General and administrative ...... 995,220 1,004,516 17,277
Interest expense ................ 8,807 19,839 504
------------ ------------ ------------
Total expenses .................. 4,734,477 4,303,684 71,000
------------ ------------ ------------
Net loss ........................ $ (3,270,323) $ (2,132,738) $(50,131,625)
============ ============ ============
Basic and diluted loss per share $ (0.23) $ (0.16)
Shares used in computing basic
and diluted loss per share ...... 14,306,044 13,462,240
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4 of 10
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCEPTION
MARCH 31, (JANUARY 2, 1992)
------------------------------ THROUGH
1998 1997 MARCH 31, 1998
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss ...................................................... $ (3,270,323) $ (2,132,738) $(50,131,625)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ................................. 267,219 221,026 3,045,196
Issuance of convertible debt for noncash consideration ........ -- -- 905,000
Issuance of stock for noncash consideration ................... -- -- 107,644
Compensation expense related to stock plans ................... 28,175 96,840 1,749,535
Loss on equipment retirements ................................. -- -- 7,565
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other assets ...... 10,634 (529,541) (170,561)
Increase (decrease) in accounts payable and accrued liabilities (720,438) (194,540) 734,548
Increase in deferred revenue and deferred contract revenue .... 160,262 110,000 3,169,970
------------ ------------ ------------
Net cash used in operating activities ......................... (3,524,471) (2,428,953) (40,582,728)
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of equipment, furniture and leasehold improvements ... (212,308) (686,799) (6,221,966)
Net sales (purchases) of short-term investments ............... (990,151) (896,048) (24,698,996)
------------ ------------ ------------
Net cash (used in) provided by investing activities ........... (1,202,459) (1,582,847) (30,920,962)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations ..... -- -- 2,030,823
Repayment of notes payable and capital lease obligations ...... (49,024) (83,374) (1,623,867)
Advance on line of credit ..................................... -- -- 750,000
Proceeds from issuance of preferred stock, net ................ -- -- 22,264,465
Proceeds from issuance of common stock, net ................... 4,027,011 4,144,203 48,206,506
------------ ------------ ------------
Net cash provided by financing activities ..................... 3,977,987 4,060,829 71,627,927
------------ ------------ ------------
(748,943) 49,029 124,237
Cash and cash equivalents, beginning of period ................ 873,180 2,145,404 --
------------ ------------ ------------
Cash and cash equivalents, end of period ...................... $ 124,237 $ 2,194,433 $ 124,237
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ...................... $ 8,807 $ 19,839 $ 500,992
Supplemental schedule of noncash financing activity:
Conversion of debt to preferred and common stock .............. $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 10
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GeneMedicine, Inc. ("GeneMedicine" or the "Company") is a Delaware
corporation in the development stage. The Company is developing non-viral
gene therapies that may provide unique clinical benefits in the treatment
of a number of human diseases. The Company intends to develop its products
through alliances with major pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale
of products, nor is there any assurance of future product revenues. In
addition, the Company expects to continue to incur losses for the
foreseeable future, and there can be no assurance that the Company will
successfully complete the transition from a development stage company to
successful operations. The research and development activities engaged in
by the Company involve a high degree of risk and uncertainty. The ability
of the Company to successfully develop, manufacture and market its
proprietary products is dependent upon many factors. These factors
include, but are not limited to, the need for additional financing, the
ability to establish and maintain collaborative arrangements for research,
development and commercialization of products with corporate partners, and
the ability to develop or access manufacturing, sales and marketing
experience. Additional factors include uncertainties as to patents and
proprietary technologies, technological change and risk of obsolescence,
development of products, competition, government regulations and
regulatory approval, and product liability exposure. As a result of the
aforementioned factors and the related uncertainties, there can be no
assurance of the Company's future success.
The accompanying interim financial statements are unaudited and reflect
all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented.
Results for interim periods are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1998. These
financial statements should be read in conjunction with the Company's
audited financial statements included with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income
and its components. Comprehensive income is the total of net income and
all other non-owner changes in equity. For the period from inception
(January 2, 1992) through March 31, 1998, the only component of
comprehensive income for the Company is net income. Adopting Statement No.
130 had no effect on the Company's financial position or results of
operation.
Page 6 of 10
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
early stage of GeneMedicine, Inc.'s development and technological uncertainty,
dependence on collaborative partners and licenses, the failure of existing or
future partnerships to be successful, future capital needs and uncertainty of
additional funding, uncertainty of patent protection, uncertainty of government
regulatory requirements, level of competition and rapid technological change, as
well as those set forth in this section and in the section entitled "Risk
Factors" and elsewhere in the Company's Form 10-K for the year ended December
31, 1997.
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and to date has not received any revenues from the
sale of products. No assurance can be given that the Company will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. The Company expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At March 31,
1998, the Company's accumulated deficit was approximately $50.1 million.
RESULTS OF OPERATIONS
Revenues and other income of $1.5 million were recorded for the quarter ended
March 31, 1998. Such revenues consisted of contract revenue of $1.0 million,
research and development grant revenue of $0.1 million and interest income of
$0.4 million. This compares with revenues of $2.2 million for the quarter ended
March 31, 1997, which consisted of contract revenue of $1.5 million, research
and development grant revenue of $0.3 million and interest income of $0.4
million. Contract revenues in each respective quarter primarily resulted from a
corporate partnership with certain Boehringer Mannheim subsidiaries ("Boehringer
Mannheim") of Corange International Ltd. ("Corange"), which was acquired by
Roche Holding Ltd. in March 1998, to develop certain non-viral gene medicines to
treat selected cancer indications. The decrease in contract revenue for the
first quarter of 1998 compared to the same period in 1997 was due to the
recognition in 1997 of a $0.5 million milestone payment from Boehringer Mannheim
for achieving clearance from the U.S. Food and Drug Administration to commence a
Phase I clinical trial using the Company's IL-2 Gene Medicine, which
GeneMedicine is developing for the treatment of head and neck cancer.
The Company's research and development expenses for the quarter ended March 31,
1998 were $3.7 million, compared to $3.3 million for the first quarter of 1997.
The increase in research and development expenses was generally due to the
expansion of the Company's research and development activities, staffing
increases and the related salary and benefit costs as well as additional
laboratory supplies and other support costs. The expansion of research and
development activities resulted primarily from the Company's continued expansion
of research in the field of cancer. The Company anticipates that expenditures
will increase over the next several years as it expands its research and product
development efforts.
General and administrative expenses remained relatively unchanged at $1.0
million for the quarter ended March 31, 1998 compared to the same period in
1997.
Page 7 of 10
<PAGE>
Net loss per share for the three months ended March 31, 1998 was $0.23 compared
to a net loss per share of $0.16 for the same period in 1997. The increase in
the Company's net loss per share was primarily the result of decreased contract
revenue and increased research and development expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private and public sales of its equity securities, interest income on invested
funds and revenues from corporate alliances. Through March 31, 1998, the Company
had received approximately $70.5 million in net proceeds from sales of its
equity securities. At March 31, 1998, the Company had working capital of $24.0
million and cash, cash equivalents and short-term investments of $24.8 million.
In addition, in April 1998 the Company received a $1.25 million, quarterly
scheduled, contract research payment from Boehringer Mannheim.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including the ability to maintain existing and establish additional corporate
partnerships, continued scientific progress in its research and development
programs, the scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing, and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and anticipated funding from its corporate alliance with
Boehringer Mannheim, will enable the Company to maintain its current and planned
operations into the first quarter of 2000. There can be no assurance, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the expenditure of
such resources before such time. The Company intends to seek additional funding
through public or private financing, research and development arrangements with
potential corporate partners, or from other sources. There can be no assurance
that additional financing will be available on favorable terms, if at all. In
the event that adequate funding is not available, the Company may be required to
delay, reduce or eliminate one or more of its research or development programs
or obtain funds through arrangements with corporate collaborators or others that
may require the Company to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise seek. Insufficient financing may also require the
Company to relinquish rights to certain of its technologies that the Company
would otherwise develop or commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. Although the
Company's products may appear promising at an early stage of development, they
may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products commercially
unattractive. There can be no assurance that any collaboration will be continued
or result in successful commercialized products.
Page 8 of 10
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds In February 1998, the
Company issued 533,333 shares of Common Stock, at a price per share of
$7.50, to Corange, the parent company of Boehringer Mannheim pursuant to
the Company's corporate partnership with Boehringer Mannheim. The Company
issued such shares in reliance on the exemption provided by section 4(2)
of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
-----------------------------------
10.4 1994 Non-Employee Directors' Stock Option Plan, as
amended
10.12 Employment Agreement between Registrant and Eric
Tomlinson dated January 1, 1998
10.22 First Amendment to the Change of Control Severance
Plan dated February 1, 1998
10.23 Amendment Agreement to Preferred Share Rights Plan
dated January 31, 1998
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
Page 9 of 10
<PAGE>
GENEMEDICINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEMEDICINE, INC.
Date: 5/11/1998 By: John M. Dodson
------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the
Registrant's Chief Accounting Officer)
Page 10 of 10
<PAGE>
GENEMEDICINE, INC. EXHIBIT 10.4
1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON MARCH 21, 1994
APPROVED BY STOCKHOLDERS ON JUNE 20, 1994;
AMENDED BY THE BOARD ON JANUARY 12, 1995 AND
APPROVED BY STOCKHOLDERS ON APRIL 26, 1995
AMENDED SEPTEMBER 4, 1996
AMENDED JANUARY 13, 1997
1. PURPOSE.
(a) The purpose of the 1994 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each director of GENEMEDICINE, INC.
(the "Company") who is not otherwise an employee of or consultant to the
Company or of any Affiliate of the Company (each such person being
hereafter referred to as a "Non-Employee Director") will be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company as those terms are defined in
Sections 424(e) and (f), respectively, of the Internal Revenue Code of
1986, as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure
and retain the services of persons capable of serving in such capacity,
and to provide incentives for such persons to exert maximum efforts for
the success of the Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration
to a committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of one (1) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time
to time by the Board.
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The Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate Three Hundred Ninety
Thousand (390,000) shares of the Company's common stock. If any option
granted under the Plan shall for any reason expire or otherwise terminate
without having been exercised in full, the stock not purchased under such
option shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(a) Upon the date of the approval of the Plan by the stockholders of the
Company (the "Adoption Date"), each person who is then a Non-Employee
Director automatically shall be granted an option to purchase Ten Thousand
(10,000) shares of common stock of the Company on the terms and conditions
set forth herein.
(b) Each person who, after the Adoption Date, is elected for the first
time to be a Non-Employee Director automatically shall, upon the date of
his initial election to be a Non-Employee Director by the Board or
stockholders of the Company, be granted an option to purchase Thirty
Thousand (30,000) shares of common stock of the Company on the terms and
conditions set forth herein; provided that such option shall not be
exercisable and shall automatically terminate with respect to Ten Thousand
(10,000) shares of common stock effective January 12, 1996 if the
amendment of this Section 5(b) is not approved by the stockholders of the
Company by such date.
(c) Upon the date of approval of this Section 5(c) by the stockholders of
the Company (the "Amendment Approval Date"), and thereafter upon each
anniversary of the Amendment Approval Date, each person who, as of the
applicable date, is then a Non-Employee Director and has been a
Non-Employee Director for at least six (6) months shall automatically be
entitled to
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receive an option to purchase Five Thousand (5,000) shares of common stock of
the Company on the terms and conditions set forth herein.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date
("Expiration Date") ten (10) years from the date of grant. If the
optionee's service as a Non- Employee Director or as an employee of or
consultant to the Company or any Affiliate terminates for any reason or
for no reason, the option shall terminate on the earlier of the Expiration
Date or the date three (3) months following the date of termination of
service; provided, however, that if such termination of service is due to
the optionee's death or disability, the option shall terminate on the
earlier of the Expiration Date or twelve (12) months following the date of
such optionee's death or disability. In any and all circumstances, an
option may be exercised following termination of the optionee's service as
a Non- Employee Director or as an employee of or consultant to the Company
or any Affiliate only as to that number of shares as to which it was
exercisable on the date of termination of such service under the
provisions of subparagraph 6(e).
(b) The exercise price of each option shall be equal to the fair market
value of the stock subject to such option on the date such option is
granted.
(c) Payment of the exercise price of each option is due in full in cash
upon any exercise when the number of shares being purchased upon such
exercise is less than One Thousand (1,000) shares; but when the number of
shares being purchased upon an exercise is One Thousand (1,000) or more
shares, the optionee may elect to make payment of the exercise price under
one of the following alternatives:
(i) Payment of the exercise price per share in cash at the
time of exercise; or
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in the
Wall Street Journal, payment by delivery of shares of common
stock of the Company already owned by the optionee, held for
the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens,
claims, encumbrances or security interest, which common stock
shall be valued at its fair
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market value on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve Board
which results in the receipt of cash (or check) by the Company prior to the
issuance of shares of the Company's common stock.
(d) An option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of
the person to whom the option is granted only by such person or by his
guardian or legal representative. The person to whom the option is granted
may, by delivering written notice to the Company, in a form satisfactory
to the Company, designate a third party who, in the event of death of the
optionee, shall thereafter be entitled to exercise the option.
(e) The option shall become exercisable over a period of four (4) years
from the date of grant in four (4) equal annual installments commencing on
the first anniversary of the date of grant of the option, provided that
the optionee has, during the entire period prior to such vesting date,
continuously served as a Non-Employee Director or as an employee of or
consultant to the Company or any Affiliate, whereupon such option shall
become fully exercisable in accordance with its terms with respect to that
portion of the shares represented by that installment.
(f) The Company may require any optionee, or any person to whom an option
is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as
to the optionee's knowledge and experience in financial and business
matters; and (ii) to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the option for
such person's own account and not with any present intention of selling or
otherwise distributing the stock. These requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise of the option has been registered
under a then-currently-effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to
any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under
the then-
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applicable securities laws.
(g) Notwithstanding anything to the contrary contained herein, an option
may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are
not then so registered, the Company has determined that such exercise and
issuance would be exempt from the registration requirements of the
Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required
to satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required
to issue and sell shares of stock upon exercise of the options granted
under the Plan; provided, however, that this undertaking shall not require
the Company to register under the Securities Act either the Plan, any
option granted under the Plan, or any stock issued or issuable pursuant to
any such option. If, after reasonable efforts, the Company is unable to
obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability
for failure to issue and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have
any of the rights of a holder with respect to, any shares subject to such
option unless and until such person has satisfied all requirements for
exercise of the option pursuant to its terms.
(b) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the
service of the Company or any Affiliate or shall affect any right of the
Company, its Board or stockholders or any Affiliate to terminate the
service of any Non- Employee Director with or without cause.
(c) No Non-Employee Director, individually or as a member of a group, and
no
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beneficiary or other person claiming under or through him, shall have any right,
title or interest in or to any option reserved for the purposes of the Plan
except as to such shares of common stock, if any, as shall have been reserved
for him pursuant to an option granted to him.
(d) In connection with each option made pursuant to the Plan, it shall be
a condition precedent to the Company's obligation to issue or transfer
shares to a Non-Employee Director, or to evidence the removal of any
restrictions on transfer, that such Non-Employee Director make
arrangements satisfactory to the Company to insure that the amount of any
federal or other withholding tax required to be withheld with respect to
such sale or transfer, or such removal or lapse, is made available to the
Company for timely payment of such tax.
(e) As used in this Plan, fair market value means, as of any date, the
value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or a national market system, including without
limitation the Nasdaq National Market, the fair market value
of a share of common stock shall be the closing sales price
for such stock (or the closing bid, if no sales were reported)
as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market
trading day prior to the day of determination, as reporting in
the Wall Street Journal or such other source as the Board
deems reliable;
(ii) If the common stock is quoted on the Nasdaq Stock Market
(but not on the Nasdaq National Market thereof) or is
regularly quoted by a recognized securities dealer but selling
prices are not reported, the fair market value of a share of
common stock shall be the mean between the bid and asked
prices for the common stock on the last market trading day
prior to the day of determination, as reported in the Wall
Street Journal or such other source as the Board deems
reliable;
(iii) In the absence of an established market for the common stock, the fair
market value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any option
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granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan and outstanding options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options.
(b) In the event of: (1) a disolution, liqidation or sale of substantially
all of the assets of the Company; (2) a merger or consolidation in which
the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form
of securities, cash or otherwise; or (4) any other capital reorganization
(including a sale of stock of the Company to a single purchaser or single
group of affiliated purchasers) after which less than fifty percent (50%)
of the outstanding voting shares of the new or continuing corporation are
owned by stockholders of the Company immediately before such transaction,
the time during which options outstanding under the Plan may be exercised
shall be accelerated to permit the optionee to exercise all such options
in full prior to such event, and the options shall terminate if not
exercised prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan,
provided, however, that the Board shall not amend the plan more than once
every six (6) months, with respect to the provisions of the Plan which
relate to the amount, price and timing of grants, other than to comport
with changes in the Code, the Employee Retirement Income Security Act, or
the rules thereunder. Except as provided in paragraph 10 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company within twelve (12) months
before or after the adoption of the amendment, where the amendment will
increase the number of shares which may be issued under the Plan.
(b) Rights and obligations under any option granted before any amendment
of the
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Plan shall not be altered or impaired by such amendment unless (i) the Company
requests the consent of the person to whom the option was granted and (ii) such
person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on March 20, 2004. No options may be
granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of
the Plan, except with the consent of the person to whom the option was
granted.
(c) The Plan shall terminate upon the occurrence of any of the events
described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved
by the stockholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
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EMPLOYMENT AGREEMENT EXHIBIT 10.12
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into effective
as of January 1, 1998 (the "Effective Date") by and between
GENEMEDICINE, INC., A Delaware corporation (the "Company") and Eric Tomlinson,
D.Sc. (the "Executive"). The Company and Executive are hereinafter collectively
referred to as the "Parties," and individually referred to as a "Party."
RECITALS
A. The Company hereby agrees to continue to employ Executive, and Executive
hereby accepts continued employment by the Company, upon the terms and
conditions set forth in this Agreement.
B. The Company and the Executive have previously entered into an Employment and
Stock Purchase Agreement, dated as of July 31, 1992 (the "Prior Agreement")
memorializing the terms of Executive's engagement by the Company.
C. The Company and the Executive desire to terminate the Prior Agreement and to
enter into this Agreement, the terms of which shall supersede in their entirety
the terms of the Prior Agreement.
AGREEMENT
In consideration of the foregoing recitals and the mutual promises and covenants
herein contained, and for other good and valuable consideration, the Parties,
intending to be legally bound, agree as follows:
1. EMPLOYMENT AND TERM
1.1 Executive shall remain the President and Chief Executive Officer of the
Company, and shall report to, and be subject to the general direction and
control of the Board of Directors of the Company (the "Board").
1.2 Except as otherwise provided for in this Agreement, the term of this
Agreement shall commence on the Effective Date and terminate six (6) months
after the Effective Date unless such term is extended by mutual written consent
(the "Term"); provided, however, that either party may terminate this Agreement
at any time, with or without cause subject to the terms and conditions of
Sections 4 and 5 herein.
1.3 Executive shall agree to resign from the Board upon his termination from the
Company, as set forth in Section 4 herein.
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2. LOYAL AND CONSCIENTIOUS PERFORMANCE
2.1 During the Term, Executive shall devote his full business energies,
interest, abilities and productive time to the proper and efficient performance
of his duties under this Agreement.
2.2 During the Term and for a period of eighteen (18) months thereafter,
Executive agrees to not, solicit, for himself or others, any person or entity
that is or was a customer of the Company during his employment with the Company,
or a potential customer with whom the Company had significant contacts during
his employment with the Company for any purpose or activity that is directly or
indirectly competitive with the business of the Company, or solicit the
employment or services of, or attempt to cause to leave the employment or
service of the Company, or any affiliate of the Company, or otherwise interfere
with the relationship of the Company or any affiliate of the Company, with any
person who is or was employed by, or otherwise engaged to perform services for,
the Company or any affiliate of the Company, whether such affiliation is in the
capacity of employee, consultant, independent contractor or otherwise.
2.3 Executive hereby acknowledges and agrees that the scope of the covenants set
forth in this Section 2 are reasonable and necessary to protect the interests of
the Company.
2.4 Although the restrictions set forth in this Section 2 are considered by the
Parties to be reasonable in all circumstances, it is recognized that
restrictions of the nature in question may fail for unforeseen reasons, and
accordingly it is hereby agreed and declared that if any of the restrictions set
forth in this Section 2 shall be adjudged to be void as going beyond what is
reasonable in all of the circumstances for the protection of the Company and of
the Executive or for any other reason, but would be valid if part of the wording
thereof were deleted or the periods (if any) thereof reduced or the range of
activities or area dealt with thereby reduced in scope, such restrictions shall
apply with such modifications as may be necessary to make them valid and
effective and such provisions shall be modified accordingly.
2.5 The provisions of this Section 2 shall survive any termination of this
Agreement.
3. COMPENSATION OF EXECUTIVE
3.1 During the Term, the Company shall pay Executive a salary (the "Base
Salary") of three hundred ten thousand one hundred twenty eight dollars
($310,128) per year, payable in regular periodic payments in accordance with
Company policy. Such salary shall be prorated for any partial year of employment
on the basis of a 365-day fiscal year.
3.2 During the Term, the Company agrees to pay Executive seven hundred sixty
five dollars and seven cents ($765.07) per month or such other reasonable amount
that the Executive is actually billed for reasonable health and medical benefits
chosen by the Executive.
3.3 The Company agrees to maintain Executive's membership at The Woodlands
Country Club (the "Club") during the Term.
3.4 If Executive sells the home in which he resides on the Effective Date before
the later of (i) December 31, 1999 or, (ii) the period of eighteen (18) months
from the Term, the
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Company agrees to reimburse Executive for reasonable closing costs up to a
maximum of thirty thousand dollars ($30,000), provided that Executive personally
incurs such closing costs in the sale of his home. Executive shall also be
entitled to receive from the Company an additional payment (the "gross-up
payment") in an amount that is equal to the taxes imposed upon the
reimbursement, if any. Executive shall not be entitled to any additional payment
on the gross-up payment. Executive must submit appropriate documentation in
accordance with the Company's expense reimbursement policy in order to receive
reimbursement for such costs.
3.5 During the Term, the Company agrees to reimburse the Executive for all
reasonable and necessary business expenses in accordance with the Company's
expense reimbursement policies.
3.6 All of Executive's compensation shall be subject to customary withholding
taxes and any other employment taxes as are commonly required to be collected or
withheld by the Company.
4. TERMINATION
Executive's employment with the Company may be terminated under the following
conditions:
4.1 Death or Disability. Executive's termination shall be effective upon the
date of Executive's death or, disability as defined under Section 4.1.1.
4.1.1 The term "disability" shall mean total mental or physical incapacity of
the Executive, which continues for not less than one (1) month and is based upon
a certification of such incapacity by Executive's physician or a duly licensed
physician selected by the Board.
4.2 Termination by the Company/Expiration of the Term. Executive shall be deemed
terminated upon the expiration of the Term of this Agreement; provided, however,
that the Company may terminate Executive's employment under this Agreement at
any time and for any reason by delivery of written notice to the Executive prior
to the expiration of the Term. Any notice of termination given pursuant to this
Section 4.2 shall effect termination as of the date specified in such notice or,
in the event no such date is specified, on the last day of the month in which
such notice is delivered or deemed delivered as provided in Section 9 below.
4.3 Termination by Executive. Executive may terminate his employment under this
Agreement at any time and for any reason prior to the expiration of the Term by
delivery of a written notice to the Company. Any notice of termination given
pursuant to this Section 4.3 shall effect termination as of the date specified
in such notice or, in the event no date is specified, on the last day of the
month in which such notice is delivered or deemed delivered as provided in
Section 9 below.
5. COMPENSATION UPON TERMINATION
5.1 Termination by the Company/Expiration of Term. Upon the termination of
Executive's employment as described in Section 4.2, and upon Executive's
furnishing to the Company and an executed waiver and release of claims (a form
of which is attached hereto as Exhibit A), Executive shall be entitled to the
following:
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5.1.1 Executive's Base Salary and accrued benefits through the date of
termination;
5.1.2 Continuation of Executive's annual Base Salary in effect at the time of
termination through the later of (i) December 31, 1999, or (ii) a period of
eighteen (18) months from the Term;
5.1.3 Each of the stock option grants set forth on Exhibit B are hereby amended
to reflect that: (i) the vesting of each outstanding stock option (the
"Options") shall be accelerated such that the Options shall be fully vested upon
termination, and (ii) each Option shall be exercisable up to and including two
(2) years from the termination date of Executive's employment. Pursuant to
applicable tax laws, the Options will lose potentially favorable tax treatment
afforded incentive stock options if not exercised within ninety (90) days of
Executive's termination date.
5.1.4 Seven hundred sixty five dollars and seven cents ($765.07) per month from
the Company for reasonable health benefits chosen by the Executive, plus
continued payment for Club membership, through (i) December 31, 1999, or (ii) a
period of eighteen (18) months from the Term. Executive shall be solely
responsible for all expenses arising from his use of the Club other than the
Club membership fee.
5.2 Death and Disability. If Executive's employment shall be terminated by death
or disability as provided in Section 4.1, the provisions of Section 5.1 shall
apply.
5.3 Termination by Executive. If Executive shall terminate Executive's
employment with the Company prior to the end of the Term of the Agreement, then
upon Executive's furnishing to the Company an executed waiver and release of
claims (a form of which is attached hereto as Exhibit A), Executive shall be
entitled to the following:
5.3.1 Executive's Base Salary and accrued benefits through the date of
termination;
5.3.2 Continuation of Executive's Base Salary in effect at the time of
termination for a period of eighteen (18) months;
5.3.3 Each of the stock option grants set forth on Exhibit B are hereby amended
to reflect that: (i) the Options shall be accelerated such that the number of
vested shares under the Options shall equal the number of shares that would have
vested under the Options had Executive remained an employee for an additional
eighteen (18) months, and (ii) each Option shall be exercisable up to and
including two (2) years from the termination date of Executive's employment;
5.3.4 Seven hundred sixty five dollars and seven cents ($765.07) per month from
the Company for reasonable health benefits chosen by the Executive, plus
continued payment for Club membership, for eighteen (18) months. Executive shall
be solely responsible for all expenses arising from his use of the Club other
than the Club membership fee.
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5.4 Change of Control. If, during the Term, a Change of Control occurs as
defined in Section 7.1.1, and the Executive's employment with the new company is
terminated by the new company for any reason whatsoever, the provisions of
Section 5.1 shall apply upon such termination.
6. Confidential Information; Executive's Duties Upon Termination
6.1 No Confidential Information shall be disclosed by the Executive to any third
party or used by the Executive for the benefit of the Executive or any third
party without the prior written consent of the Company.
6.2 Confidential information shall not include information that:
6.2.1 at the time of its disclosure, is publicly available through no fault of
the Parties;
6.2.2 at the time of its disclosure, is, without fault of the receiving party,
part of the public domain;
6.2.3 subsequent to its disclosure hereunder, is obtained by the Executive from
a third party not subject to a contractual or fiduciary obligation for
confidentiality to the disclosing party;
6.2.4 is required to be disclosed under court or governmental order, rule or
regulation; or
6.2.5 is disclosed pursuant to any research grant related to technology outside
of gene therapy.
6.3 Upon termination of the employment of Executive for any reason, Executive
will deliver to the Company all documents, notebooks, designs, specifications,
customer lists, drawings, manuals, reports, plans and other data of any nature
containing or relating to the Confidential Information, Technology or
Inventions, and Executive will not deliver to anyone else any of such documents
or data or any reproduction of such documents or data containing or relating to
the Confidential Information, Technology or Inventions of the Company.
6.4 Executive agrees to make prompt and complete disclosure to the Company of
every Invention. Executive agrees that the Company shall have sole ownership
rights to all Inventions and agrees to cooperate fully, at no expense to the
Executive, with the Company to secure and defend the Company's said ownership
rights. Executive hereby assigns to the Company any rights the Executive may
acquire in any such Inventions.
6.4.1 Exhibit C hereto contains a true, complete and accurate list of all
inventions, copyrights, patents or improvements of the Executive relevant to the
subject matter of the employment of the Executive by the Company that had been
made or conceived or first reduced to practice by the Executive alone or jointly
with others prior to the employment of the Executive and prior to Executive's
execution of this Agreement and which Executive desires to remove from the
operation of this Agreement.
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6.5 Executive represents that the performance of all the terms of this Agreement
by Executive and as an officer of the Company does not and, to the best
knowledge of the Executive, will not breach any agreement or duty to keep in
confidence proprietary information acquired by Executive in confidence or in
trust prior to the employment of the Executive by the Company. Executive
represents that the Executive has not entered into, and the Executive hereby
covenants that the Executive will not enter into, any agreement either written
or oral, in conflict herewith. Executive represents that at the present time
Executive is not restricted from entering into this Agreement.
6.6 Executive represents that Executive has not brought to the Company and
covenants that Executive will not bring to the Company or use in the performance
of the Executive's responsibilities at the Company any proprietary information,
materials or documents of a former or present employer that are not generally
available to the public, unless the Executive has obtained prior written
authorization from the former or present employer. Executive hereby covenants
that the Executive shall not breach any obligation of confidentiality or duty
that the Executive may have to former or present employers.
6.7 The provisions of this Section 6 shall survive any termination of this
Agreement.
7. Definitions
7.1 As used herein, the following terms shall have the following meanings:
7.1.1 Change of Control means the occurrence of one or more of the following
events: (i) a dissolution or liquidation of the Company; (ii) a merger or
consolidation in which the Company is not the surviving corporation in which the
Company's shareholders immediately prior to the transaction do not hold
beneficial ownership of a least fifty percent (50%) of the outstanding voting
shares of the new or continuing corporation; (iii) a reverse merger in which the
Company is the surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise; (iv) at least a majority of the outstanding corporate shares of the
Company are sold, exchanged or otherwise disposed of, in one transaction or
series of related transactions and the Company's shareholders immediately prior
to such transaction or transactions do not hold beneficial ownership of at least
fifty percent (50%) of the outstanding voting shares of the Company or of the
ownership interests of the entity for which shares of the Company were exchanged
(taking into account only such shareholders' ownership of the Company prior to
the time such transaction or transactions commenced); or (v) the Company sells
all or substantially all of its assets to a single purchaser or to a group of
associated purchasers.
7.1.2 Confidential Information shall mean, subject to Section 6.2, the
Technology in the field of gene therapy known by, or disclosed to, or learned
by, or developed by, the Executive in the course and scope of the performance of
this Agreement, which information is not generally known in the trade, science
or industry in which the Company and/or its affiliates are engaged.
6.
<PAGE>
7.1.3 Inventions shall mean all improvements, discoveries, inventions, whether
patentable or not, copyrightable works, copyrights, trade secrets, formulae,
processes techniques, and other developments and advances with respect to the
Technology in the field of gene therapy that are developed, conceived or reduced
to practice by the Executive in the course and scope of the performance of this
Agreement during the Term and for a period of one year thereafter that result
from the Executive's duties hereunder or result from the use of premises or
equipment owned, leased or contracted for by the Company.
7.1.4 Technology shall mean all know-how, information, ideas, concepts, designs,
specifications, suggestions, improvements, discoveries, inventions,
copyrightable works, uncopyrightable works, copyrights, patent rights,
unpatentable works, patents, trade secrets, formulae, processes, techniques,
methods, machines, devices, products, services, marketing plans, strategies,
forecasts and customer lists and other data, in each case that are included
within the field of gene therapy, and includes, without limiting the generality
of the foregoing, notebooks, drawings, computer software, manuals, reports,
specifications and other writings or compilations of information, engineering
and other scientific and practical information, models and records.
8. Assignment and Binding Effect
8.1 This Agreement, including Exhibits A, B and C shall be binding upon and
inure to the benefit of Executive and Executive's heirs, executors, personal
representatives, assigns, administrators and legal representatives. Because of
the unique and personal nature of Executive's duties under this Agreement,
neither this Agreement nor any rights or obligations under this Agreement shall
be assignable by Executive. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors, assigns and legal
representatives.
9. Notices
9.1 All notices or demands of any kind required or permitted to be given by the
Company or Executive under this Agreement shall be given in writing and shall be
personally delivered (and receipted for) or mailed by certified mail, return
receipt requested, postage prepaid, addressed as follows:
9.1.1 If to the Company:
Vice President, Human Resources GeneMedicine, inc. 8301 New Trails
Drive The Woodlands, Texas 77381-4248
If to Executive:
Eric Tomlinson, D.Sc. 7 Morning Arbor Place The Woodlands, Texas
77381-6628
7.
<PAGE>
Any such written notice shall be deemed received when personally delivered or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.
10. Choice of Law
10.1 This Agreement shall be construed and enforced in accordance with the laws
of the State of Texas without regard to the place of execution or the place for
performance thereof. This Agreement is to be at least partially performed in
Harris County, Texas, and, as such, the Company and the Executive agree that
personal jurisdiction and venue shall be proper with the state or federal courts
situated in Harris County, Texas, to hear such disputes arising under this
Agreement.
11. Integration
11.1 This Agreement contains the complete, final and exclusive agreement of the
Parties relating to the subject matter of this Agreement, and supersedes all
prior oral and written employment agreements or arrangements between the
Parties, including without limitation the Prior Agreement, and except for the
benefits Executive may be entitled to under the terms and conditions of the
GeneMedicine, inc. Cash Incentive Retention and Severance Plan.
12. Public Announcements
12.1 The Parties agree that no public announcements regarding the terms and
conditions of this Agreement, including Executive's termination of employment,
will be made by either party, except as is required in order to comply with all
applicable laws and regulations; provided that, the Company shall use reasonable
efforts to give Executive an opportunity to review and comment regarding any
such required public announcements.
13. Amendment
13.1 This Agreement cannot be amended or modified except by a written agreement
signed by Executive and the Company.
14. Waiver
14.1 No term, covenant or condition of this Agreement or any breach thereof
shall be deemed waived, except with the written consent of the Party against
whom the wavier in claimed, and any waiver or any such term, covenant, condition
or breach shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other term, covenant, condition or breach.
15. Severability
15.1 The finding by a court of competent jurisdiction of the unenforceability,
invalidity or illegality of any provision of this Agreement shall not render any
other provision of this Agreement unenforceable, invalid or illegal. Such court
shall have the authority to modify or replace the invalid or unenforceable term
or provision with a valid and enforceable term or
8.
<PAGE>
provision which most accurately represents the Parties' intention with respect
to the invalid or unenforceable term or provision.
16. Interpretation; Construction
16.1 The headings set forth in this Agreement are for convenience of reference
only and shall not be used in interpreting this Agreement. This Agreement has
been drafted by legal counsel representing the Company, but Executive has been
encouraged, and has consulted with, his own independent counsel and tax advisors
with respect to the terms of this Agreement. The Parties acknowledge that each
Party and its counsel has reviewed and revised, or had an opportunity to review
and revise, this Agreement, and the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
17. Representations and Warranties
17.1 Executive represents and warrants that he is not restricted or prohibited,
contractually or otherwise, from entering into and performing each of the terms
and covenants contained in this Agreement, and that his execution and
performance of this Agreement will not violate or breach any other agreements
between Executive and any other person or entity.
18. Counterparts
18.1 This Agreement may be executed in two counterparts, each of which shall be
deemed an original, all of which together shall contribute one and the same
instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
The Company:
GENEMEDICINE, INC.
a Delaware Corporation
By: Kathryn Stankis
-------------------
Date:______________________________
EXECUTIVE:
Eric Tomlinson
--------------
Date:______________________________
9.
<PAGE>
Waiver and Release Agreement - Exhibit A Stock Options Exhibit B
Inventions Exhibit C
10.
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in Sections 5.1
and 5.3 of the Employment Agreement dated January 1, 1998, to which this form is
attached, I hereby furnish GeneMedicine, inc. (the "Company") with the following
release and waiver.
I hereby release, and forever discharge the Company, its officers, directors,
agents, employees, stockholders, successors, assigns and affiliates, of and from
any and all claims, liabilities, demands, causes of action, costs, expenses,
attorneys' fees, damages, indemnities and obligations of every kind and nature,
in law, equity, or otherwise, known and unknown, suspected and unsuspected,
disclosed and undisclosed, arising at any time prior to and including my
employment termination date with respect to any claims relating to my employment
and the termination of my employment, including but not limited to, claims
pursuant to any federal, state or local law relating to employment, including,
but not limited to, discrimination claims, claims under the California Fair
Employment and Housing Act, and the Federal Age Discrimination in Employment Act
of 1967, as amended ("ADEA"), or claims for wrongful termination, breach of the
covenant of good faith, contract claims, tort claims, and wage or benefit
claims, including but not limited to, claims for salary, bonuses, commissions,
stock, stock options, vacation pay, fringe benefits, severance pay or any form
of compensation.
I acknowledge that, among other rights, I am waiving and releasing any rights I
may have under ADEA, that this waiver and release is knowing and voluntary, and
that the consideration given for this waiver and release is in addition to
anything of value to which I was already entitled as an employee of the Company.
I further acknowledge that I have been advised, as required by the Older Workers
Benefit Protection Act, that: (a) the waiver and release granted herein does not
relate to claims which may arise after this agreement is executed; (b) I have
the right to consult with an attorney prior to executing this agreement
(although I may choose voluntarily not to do so); (c) I have twenty-one (21)
days from the date I receive this agreement, in which to consider this agreement
(although I may choose voluntarily to execute this agreement earlier); (d) I
have seven (7) days following the execution of this agreement to revoke my
consent to the agreement; and (e) this agreement shall not be effective until
the seven (7) day revocation period has expired.
Date: __________________ By: Eric Tomlinson
------------------
<PAGE>
EXHIBIT B
STOCK OPTIONS
<TABLE>
<CAPTION>
Grant Date Type Shares Price Shares Exercised Outstanding Outstanding
Granted Un-Vested Exercisable
------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
30-Aug-94 ISO 50,000 8.375 0 7,217 42,713
--- ------ ----- - ------ ------
11-Jul-95 ISO 20,000 9.750 0 7,418 12,512
--- ------ ----- - ------ ------
1-Jul-96 ISO 40,000 3.813 0 24,990 15,050
--- ------ ----- - ------ ------
8-Jul-97 ISO 30,000 6.875 0 26,250 3,750
--- ------ ----- - ------ ------
8-Jul-97 ISO 20,000 6.875 0 17,472 2,521
--- ------ ----- - ------ ------
6-Jan-98 ISO 50,000 5.375 0 50,000 0
--- ------ ----- - ------ ------
</TABLE>
<PAGE>
EXHIBIT C
INVENTIONS
<PAGE>
FIRST AMENDMENT TO THE EXHIBIT 10.22
GENEMEDICINE, INC.
CHANGE OF CONTROL SEVERANCE PLAN
The GeneMedicine, inc. Change of Control Severance Plan (the "Plan") is hereby
amended, effective January 30, 1998, as set forth below:
1. Section 2(b)(i) is amended in its entirety to read as follows:
(i) The Eligible Employee has executed an individually negotiated
employment contract or agreement with the Company relating to severance
benefits that is in effect on his or her Termination Date and such
individually negotiated employment contract or agreement provides, in the
aggregate, for severance benefits that are more favorable, determined in
the sole discretion of the Company, than the severance benefits provided
under this Plan. Such Eligible Employee's severance benefit shall be
governed by the terms of such individually negotiated employment contract
or agreement. If, however such individually negotiated employment contract
or agreement provides, in the aggregate, for severance benefits that are
less favorable, determined in the sole discretion of the Company, than the
severance benefits provided under this Plan, then such Eligible Employee's
severance benefits shall be governed by the terms of this Plan. Under no
circumstances shall an Eligible Employee be entitled to receive benefits
both under this Plan and under an individually negotiated employment
contract.
2. Section 3 of the Plan is amended by the addition of a new paragraph (d)
at the end thereof, to read as follows:
(d) CERTAIN TAX PROVISIONS AFFECTING AMOUNT OF PAYMENTS. Anything in
the Plan to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for
the benefit of an Eligible Employee (whether paid or payable or
distributed or distributable pursuant to the terms of the Plan or
otherwise) (a "Payment") would be nondeductible by the Company for
federal income tax purposes because of Section 280G of the Internal
Revenue Code (the "Code") and would cause the Eligible Employee to
be liable for an excise tax pursuant to Section 4999 of the Code,
then the aggregate present value of amounts payable or distributable
as Benefits under this Plan may be reduced to the Reduced Amount.
The "Reduced Amount" shall be an amount expressed in present value
which maximizes the aggregate present value of Benefits without
causing any Payment to be nondeductible by the Company because of
Section 280G of the Code or to create an excise tax liability under
Section 4999 of the Code. For purposes of this Paragraph (d),
present value shall be determined in accordance with Section
280G(d)(4) of the Code. The decisions as to whether or not to reduce
the Severance Benefits to the Reduced Amount, and as to the manner
of any such reduction, shall be made by the Eligible Employee and
such decisions shall be binding upon the Company and the Eligible
Employee. However, in the event that the Eligible Employee fails to
make any decision within thirty (30) days of the date of
determination referred to above, the Company shall be entitled to
make these decisions.
<PAGE>
3. The Benefits Schedules for the Plan shall be amended by deleting in its
entirety the "Benefits Schedule for the Executive Officers and Vice Presidents"
and substituting in its place a "Benefits Schedule for the Executive Officers"
and a "Benefits Schedule for Vice Presidents", in the form attached hereto and
incorporated herein by this reference.
In Witness Whereof, this First Amendment is executed this 1st day of February,
1998.
GENEMEDICINE, INC.
Kathryn Stankis
---------------
Vice President, Human Resources
-------------------------------
<PAGE>
BENEFITS SCHEDULE
FOR THE
GENEMEDICINE INC.
CHANGE OF CONTROL SEVERANCE PLAN
EXECUTIVE OFFICERS
THE COMPANY SHALL DETERMINE IN ITS SOLE AND ABSOLUTE DISCRETION IN WHICH
CATEGORY AN ELIGIBLE EMPLOYEE SHALL BE PLACED FOR PURPOSES OF RECEIVING
SEVERANCE BENEFITS UNDER THIS PLAN. THE COMPANY'S DETERMINATION SHALL BE FINAL
AND SHALL BE BINDING AND CONCLUSIVE ON ALL PERSONS. THE COMPANY RETAINS THE
RIGHT TO RECLASSIFY AN ELIGIBLE EMPLOYEE PRIOR TO THE TIME OF THE OCCURRENCE OF
A CHANGE OF CONTROL, AND THEREAFTER TO THE EXTENT PERMITTED BY THE PLAN.
1. The cash severance benefit payable under this Plan for Executive Officers
shall be a lump sum payment equal to twelve (12) months of Pay.
2. An Eligible Employee who becomes eligible to receive benefits under this Plan
shall (i) become fully vested in the Eligible Employee's nonvested stock
options, if any, that were previously granted to the Eligible Employee under the
Company's discretionary stock compensation plans, including, without limitation,
the GeneMedicine, Inc. 1993 Stock Option Plan, upon termination of employment
and (ii) with respect to stock options having an exercise price in excess of
$3.063 per share (as adjusted for stock splits and the like subsequent to
January 30, 1998), be entitled to exercise such options until the earlier to
occur of (A) the date that is twelve (12) months after the date of termination
of employment or (B) the respective expiration date(s) of such stock options.
DEFINITIONS:
For purposes of this Benefits Schedules, the following definitions shall apply:
EXECUTIVE OFFICERS shall mean those Eligible Employees who are designated from
time to time as Executive Officers by the Board of Directors of the Company and
who are serving as Executive Officers of the Company as of the effective date of
a Change in Control.
<PAGE>
BENEFITS SCHEDULE
FOR THE
GENEMEDICINE INC.
CHANGE OF CONTROL SEVERANCE PLAN
VICE PRESIDENTS
The Company shall determine in its sole and absolute discretion in which
category an Eligible Employee shall be placed for purposes of receiving
severance benefits under this Plan. The Company's determination shall be final
and shall be binding and conclusive on all persons. The Company retains the
right to reclassify an Eligible Employee prior to the time of the occurrence of
a Change of Control, and thereafter to the extent permitted by the Plan.
1. The cash severance benefit payable under this Plan for Vice Presidents shall
be a lump sum payment equal to twelve (12) months of Pay.
2. An Eligible Employee who becomes eligible to receive benefits under this Plan
shall become vested in the Eligible Employee's nonvested stock options, if any,
that were previously granted to the Eligible Employee under the Company's
discretionary stock compensation plans, including, without limitation, the
GeneMedicine, Inc. 1993 Stock Option Plan, in accordance with the following
schedule based upon the number of years the Eligible Employee has been employed
by the Company:
YEARS EMPLOYED PERCENTAGE TO BE VESTED IN NONVESTED OPTIONS
0 to less than 2 50%
2 to less than 4 75%
4 plus 100%
3. For purposes of calculating years of employment with the Company for stock
option vesting, periods during which the Eligible Employee was not working but
was paid under the Company's paid time off policy ("Paid Time Off") will be
counted in calculating years of employment. Periods during which the Eligible
Employee was not working and was not paid under Paid Time Off, such as leave
without pay, leaves of absence or sabbaticals, will not be counted in
calculating years of employment.
DEFINITIONS:
For purposes of this Benefits Schedules, the following definitions shall apply:
VICE PRESIDENTS shall mean those Eligible Employees whose employment title is
Vice President as reflected on the personnel records of the Company as of the
effective date of a Change in Control and who are not designated by the Board of
Directors of the Company as Executive Officers.
<PAGE>
GENEMEDICINE, INC. EXHIBIT 10.23
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT (the "AMENDMENT AGREEMENT") is made as of January 31,
1998 between GeneMedicine, inc., a Delaware corporation (the "COMPANY"), and
American Stock Transfer & Trust Company ("RIGHTS AGENT").
WHEREAS, the Company and the Rights Agent entered into that certain Rights
Agreement dated as of January 16, 1996 (the "RIGHTS AGREEMENT") (capitalized
terms used but not defined herein shall have the meaning assigned to them in the
Agreement); and
WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement
as provided below.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and conditions set forth below, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties to this
Amendment Agreement hereby agree as follows:
AMENDMENT
1. The third and fourth paragraphs of Section 1(a) of the Rights Agreement are
amended in their entirety to read as follows:
"In addition, Corange International Limited, a Bermudan corporation
("Corange"), shall not be deemed to be an "Acquiring Person" for purposes
of this Agreement so long as Corange and any of its Affiliates or
Associates have acquired the Company's Common Shares solely in accordance
with the terms of (i) that certain Share Purchase Agreement between
Corange and the Company dated July 17, 1995 or any documents executed in
connection with or pursuant thereto (the "Share Purchase Agreement"),
including without limitation Section 6.1 thereof or (ii) the Stock and
Warrant Purchase Agreement (defined below); provided, however, that this
paragraph shall not apply in the event that Corange or any of its
Affiliates or Associates commences a tender or exchange offer to acquire
15% or more of the Common Shares of the Company then outstanding.
Furthermore, Syntex (U.S.A.), Inc., a Delaware corporation ("Syntex"),
shall not be deemed to be an "Acquiring Person" for purposes of this
Agreement so long as Syntex and any of its Affiliates or Associates have
acquired the Company's Common Shares solely (A) (i) upon conversion of the
Series B Preferred Shares (as hereinafter defined) or (ii) upon exercise
of the Warrants issued to Syntex, in each case acquired solely in
accordance with the terms of that certain Stock and Warrant Purchase
Agreement by and between Syntex and the Company dated April 8, 1994 or any
documents executed in connection with or pursuant thereto
1.
<PAGE>
(the "Stock and Warrant Purchase Agreement"), or (B) in accordance with
the terms of the Share Purchase Agreement (defined above); provided,
however, that this paragraph shall not apply to in the event that Syntex
or any of its Affiliates or Associates commences a tender or exchange
offer to acquire 15% or more of the Common Shares of the Company then
outstanding.
Solely for the purposes of the foregoing, "Corange" and "Syntex" shall
include any entity which acquires all or substantially all of the business
or assets of each respective entity."
2. Except as modified by this Amendment Agreement, the Rights Agreement shall
remain in full force and effect. This Amendment Agreement shall be deemed an
amendment to the Rights Agreement and shall become effective when executed and
delivered by the Company and the Rights Agent as provided under Section 27 of
the Rights Agreement.
2.
<PAGE>
The foregoing Amendment Agreement is hereby executed as of the date first above
written.
THE COMPANY:
GENEMEDICINE, INC.
By: Richard A. Waldron
- ----------------------
Title: Vice President and Chief Financial Officer
- -------------------------------------------------
RIGHTS AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: Herbert J. Lemmer
- ---------------------
Title: Vice President
- ---------------------
3.
<PAGE>
(ARTICLE) 5
(PERIOD-TYPE) 3-MOS
(FISCAL-YEAR-END) DEC-31-1998
(PERIOD-START) JAN-01-1998
(PERIOD-END) MAR-31-1998
(CASH) 24,823,233
(SECURITIES) 0
(RECEIVABLES) 0
(ALLOWANCES) 0
(INVENTORY) 0
(CURRENT-ASSETS) 24,987,722
(PP&E) 3,166,076
(DEPRECIATION) 0
(TOTAL-ASSETS) 28,162,993
(CURRENT-LIABILITIES) 1,010,504
(BONDS) 0
(PREFERRED-MANDATORY) 0
(PREFERRED) 3,750
(COMMON) 14,514
(OTHER-SE) 23,964,255
(TOTAL-LIABILITY-AND-EQUITY) 28,162,993
(SALES) 0
(TOTAL-REVENUES) 1,464,154
(CGS) 0
(TOTAL-COSTS) 4,725,670
(OTHER-EXPENSES) 0
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 8,807
(INCOME-PRETAX) (3,270,323)
(INCOME-TAX) 0
(INCOME-CONTINUING) (3,270,323)
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) (3,270,323)
(EPS-PRIMARY) 0
(EPS-DILUTED) (.23)
<PAGE>
EXHIBIT 13.3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
(281) 364-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of July 23, 1998, there were outstanding 14,579,374 and 3,750,000
shares of Common Stock and Series B Preferred Stock, par value $.001,
respectively, of the registrant.
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
COVER PAGE..................................................................1
TABLE OF CONTENTS...........................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1998 and December 31, 1997....................3
Statements of Operations for the three and six months ended
June 30, 1998 and June 30, 1997, and for the period from
inception (January 2, 1992) through June 30, 1998...........................4
Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1997, and for the period from
inception (January 2, 1992) through June 30, 1998...........................5
Notes to Financial Statements...............................................6
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................7
PART II. OTHER INFORMATION................................................10
SIGNATURES.................................................................11
Page 2 of 11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................................... $ 890,778 $ 873,180
Short-term investments ........................................ 20,783,329 23,708,845
Prepaid expenses and other .................................... 147,723 175,128
Total current assets ................................... 21,821,830 24,757,153
Equipment, furniture and leasehold improvements, net .......... 2,953,871 3,220,987
Deposits and other assets ..................................... 9,195 9,195
------------ ------------
Total Assets .................................................. $ 24,784,896 $ 27,987,335
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ...................... $ 800,319 1,454,986
Deferred grant revenue ........................................ -- 89,737
Current portion of capital lease obligations .................. 225,544 270,166
------------ ------------
Total current liabilities .............................. 1,025,863 1,814,889
------------ ------------
Long-term Liabilities:
Deferred contract revenue ..................................... 3,419,970 2,919,970
Capital lease obligations, net of current portion ............. -- 54,814
------------ ------------
Total long-term liabilities ............................ 3,419,970 2,974,784
------------ ------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding ........... 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
14,574,915 and 13,911,422 shares issued and outstanding 14,575 13,911
Additional paid-in capital .................................... 74,258,855 70,097,651
Deferred compensation ......................................... -- (56,348)
Deficit accumulated during the development stage .............. (53,938,117) (46,861,302)
------------ ------------
Total stockholders' equity ............................. 20,339,063 23,197,662
------------ ------------
Total Liabilities and Stockholders' Equity .................... $ 24,784,896 $ 27,987,335
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 11
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (JANUARY 2, 1992)
JUNE 30, JUNE 30, THROUGH
------------------------------- ------------------------------- JUNE 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue ........... $ 1,000,000 $ 1,000,000 $ 2,022,500 $ 2,500,000 $ 14,202,500
Research and development
grant revenue .............. 129,443 149,000 219,181 389,000 1,745,578
Interest income ............ 329,003 435,463 680,919 866,409 6,378,990
------------ ------------ ------------ ------------ ------------
Total revenues ............. 1,458,446 1,584,463 2,922,600 3,755,409 22,327,068
Expenses:
Research and development ... 3,991,145 3,488,969 7,721,595 6,768,298 57,209,343
General and administrative.. 1,267,093 1,187,237 2,262,313 2,191,753 18,544,279
Interest expense ........... 6,700 16,953 15,507 36,792 511,563
------------ ------------ ------------ ------------ ------------
Total expenses ............. 5,264,938 4,693,159 9,999,415 8,996,843 76,265,185
------------ ------------ ------------ ------------ ------------
Net loss ................... $ (3,806,492) $ (3,108,696) $ (7,076,815) $ (5,241,434) $(53,938,117)
============ ============ ============ ============ ============
Loss per share ............. $ (0.2) $ (0.2) $ (0.4) $ (0.39)
============ ============ ============ ============
Shares used in computing
loss per share ............. 14,520,094 13,702,578 14,413,660 13,583,073
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4 of 11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Inception
June 30, (January 2, 1992)
------------------------------ through
1998 1997 June 30, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss ............................................................ $ (7,076,815) $ (5,241,434) $(53,938,117)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ....................................... 544,024 469,506 3,322,001
Issuance of convertible debt for noncash consideration .............. -- -- 905,000
Issuance of stock for noncash consideration ......................... -- -- 107,644
Compensation expense related to stock plans ......................... 56,348 194,638 1,777,708
Loss on equipment retirements ....................................... -- -- 7,565
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other assets ...... 27,405 (69,360) (153,790)
Increase (decrease) in accounts payable and accrued liabilities (654,667) (593,599) 800,319
Increase in deferred revenue and deferred contract revenue .... 410,263 580,000 3,419,971
------------ ------------ ------------
Net cash used in operating activities ....................... (6,693,442) (4,660,249) (43,751,699)
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of equipment, furniture and leasehold improvements ......... (276,908) (964,545) (6,286,566)
Net sales (purchases) of short-term investments ..................... 2,925,516 3,883,330 (20,783,329)
------------ ------------ ------------
Net cash used in investing activities ....................... 2,648,608 2,918,785 (27,069,895)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations ........... -- -- 2,030,823
Repayment of notes payable and capital lease obligations ............ (99,436) (170,123) (1,674,279)
Advance on line of credit ........................................... -- -- 750,000
Proceeds from issuance of preferred stock, net ...................... -- -- 22,264,465
Proceeds from issuance of common stock, net ......................... 4,161,868 4,485,742 48,341,363
------------ ------------ ------------
Net cash provided by financing activities ................... 4,062,432 4,315,619 71,712,372
------------ ------------ ------------
Net increase in cash and cash equivalents ........................... 17,598 2,574,155 890,778
Cash and cash equivalents, beginning of period ...................... 873,180 2,145,404 --
------------ ------------ ------------
Cash and cash equivalents, end of period ............................ $ 890,778 $ 4,719,559 $ 890,778
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ............................ $ 15,507 $ 36,792 $ 448,560
Issuance of convertible debt for technology ......................... $ -- $ -- $ 905,000
Conversion of debt to preferred and common stock .................... $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GeneMedicine, Inc. ("GeneMedicine" or the "Company") is a Delaware corporation
in the development stage. The Company is developing non-viral gene therapies
that may provide unique clinical benefits in the treatment of a number of human
diseases. The Company intends to develop its products through alliances with
major pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and product
development and has not yet generated any revenues from the sale of products,
nor is there any assurance of future product revenues. In addition, the Company
expects to continue to incur losses for the foreseeable future, and there can be
no assurance that the Company will successfully complete the transition from a
development stage company to successful operations. The research and development
activities engaged in by the Company involve a high degree of risk and
uncertainty. The ability of the Company to successfully develop, manufacture and
market its proprietary products is dependent upon many factors. These factors
include, but are not limited to, the need for additional financing, the ability
to establish and maintain collaborative arrangements for research, development
and commercialization of products with corporate partners, and the ability to
develop or access manufacturing, sales and marketing experience. Additional
factors include uncertainties as to patents and proprietary technologies,
technological change and risk of obsolescence, development of products,
competition, government regulations and regulatory approval, and product
liability exposure. As a result of the aforementioned factors and the related
uncertainties, there can be no assurance of the Company's future success.
The accompanying interim financial statements are unaudited and reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. Results for
interim periods are not necessarily indicative of the results to be expected for
the entire year ending December 31, 1998. These financial statements should be
read in conjunction with the Company's audited financial statements included
with the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
Effective January 1, 1998, the Company adopted Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes
standards for reporting and displaying comprehensive income and its components.
Comprehensive income is the total of net income and all other non-owner changes
in equity. For the period from inception (January 2, 1992) through June 30,
1998, the only component of comprehensive income for the Company is net income.
Adopting Statement No. 130 had no effect on the Company's financial position or
results of operation.
Page 6 of 11
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
early stage of GeneMedicine, Inc.'s development and technological uncertainty,
dependence on collaborative partners and licenses, the failure of existing or
future partnerships to be successful, future capital needs and uncertainty of
additional funding, uncertainty of patent protection, uncertainty of government
regulatory requirements, level of competition and rapid technological change, as
well as those set forth in this section and in the section entitled "Risk
Factors" and elsewhere in the Company's Form 10-K for the year ended December
31, 1997.
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and to date has not received any revenues from the
sale of products. No assurance can be given that the Company will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. The Company expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At June 30,
1998, the Company's accumulated deficit was approximately $53.9 million.
RESULTS OF OPERATIONS
Revenues of $1.5 million and $2.9 million were recorded for the three and six
months ended June 30, 1998, respectively, which consisted primarily of contract
revenue of $1.0 million and $2.0 million, and interest income of $0.3 million
and $0.7 million, respectively. These results compare with revenues of $1.6
million and $3.8 million for the three and six months ended June 30, 1997,
respectively, which consisted primarily of contract revenue of $1.0 million and
$2.5 million, and interest income of $0.4 million and $0.9 million,
respectively. Contract revenues in each respective period primarily resulted
from a corporate partnership with certain Boehringer Mannheim subsidiaries
("Boehringer Mannheim") of Corange International Ltd. ("Corange"), which was
acquired by Roche Holding Ltd. in March 1998, to develop certain non-viral gene
medicines to treat selected cancer indications. The decrease in contract revenue
for the first six months of 1998 compared to the same period in 1997 was due to
the recognition in 1997 of a $0.5 million milestone payment from Boehringer
Mannheim for achieving clearance from the U.S. Food and Drug Administration to
commence a Phase I clinical trial using the Company's IL-2 Gene Medicine, which
GeneMedicine is developing for the treatment of head and neck cancer.
The Company's research and development expenses for the quarter ended June 30,
1998 were $4.0 million, compared to $3.5 million for the second quarter of 1997.
For the six months ended June 30, 1998, research and development expenses
increased to $7.7 million from $6.8 million for the same period in 1997. These
increases were generally due to the expansion of the Company's research and
development activities, resulting in staffing increases and the related salary
and benefit costs, as well as additional laboratory supplies and other support
costs. The expansion of the Company's research and development activities has
been driven primarily by the progression of research in the field of genetic
vaccines and clinical development efforts in the field of cancer. The Company
anticipates that research and development expenditures will increase over the
next several years as it continues to expand its research and product
development efforts.
Page 7 of 11
<PAGE>
General and administrative expenses marginally increased to $1.3 million and
$2.3 million for the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997.
Losses per share for the three and six months ended June 30, 1998 were $0.26 and
$0.49, respectively, as compared to losses per share of $0.23 and $0.39 for the
same periods in 1997. The increases in the Company's net loss per share for the
three and six months ended June 30, 1998 was primarily the result of decreased
contract revenue and increased research and development expenses as described
above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private and public sales of its equity securities, interest income on invested
funds and revenues from corporate alliances. Through June 30, 1998, the Company
had received approximately $70.6 million in net proceeds from sales of its
equity securities. At June 30, 1998, the Company had working capital of $20.8
million and cash, cash equivalents and short-term investments of $21.7 million.
In addition, in July 1998 the Company received a $1.25 million, quarterly
scheduled, contract research payment from Boehringer Mannheim.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including the ability to maintain existing and establish additional corporate
partnerships, continued scientific progress in its research and development
programs, the scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing, and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and anticipated funding from its corporate alliance with
Boehringer Mannheim, will enable the Company to maintain its current and planned
operations into the first quarter of 2000. There can be no assurance, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the expenditure of
such resources before such time. The Company intends to seek additional funding
through public or private financing, research and development arrangements with
potential corporate partners, or from other sources. There can be no assurance
that additional financing will be available on favorable terms, if at all. In
the event that adequate funding is not available, the Company may be required to
delay, reduce or eliminate one or more of its research or development programs
or obtain funds through arrangements with corporate collaborators or others that
may require the Company to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise seek. Insufficient financing may also require the
Company to relinquish rights to certain of its technologies that the Company
would otherwise develop or commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. Although the
Company's products may appear promising at an early stage of development, they
may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure
Page 8 of 11
<PAGE>
by the Company to obtain patent protection for its products may make certain of
its products commercially unattractive. There can be no assurance that any
collaboration will be continued or result in successful commercialized products.
Page 9 of 11
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual
Meeting of Stockholders of GeneMedicine, inc. was held on June 11, 1998.
(b) The matters voted upon at the meeting and the voting of stockholders
with respect thereto are as follows:
Proposal 1 To elect two directors to serve until the 2001 Annual Meeting
of Stockholders and until their successors are elected.
For Against
--- -------
Edward L. Cahill 11,357,136 41,964
Arthur M. Pappas 11,356,261 42,839
The following individuals term of office as a director continued after the
meeting: David F.J. Leathers, Eric Tomlinson, D.Sc., Ph.D., Stanley T.
Crooke, M.D., Ph. D., and Bert W. O'Malley, M.D.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
10.12 Amended and Restated Employment Agreement between
Registrant and Eric Tomlinson dated June 11, 1998
10.13 Secured Promissory Note between Registrant and
Eric Tomlinson dated April 8, 1998
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
Page 10 of 11
<PAGE>
GENEMEDICINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEMEDICINE, INC.
Date: 7/24/1998 By: /s/ John M. Dodson
----------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the
Registrant's Chief Accounting Officer)
Page 11 of 11
<PAGE>
EXHIBIT 10.12 AMENDED AND
RESTATED EMPLOYMENT
AGREEMENT
THIS AMENDED AND
RESTATED EMPLOYMENT
AGREEMENT (the
"Agreement") is made and
entered into effective
as of June 11, 1998 (the
"Effective Date") by and
between GeneMedicine,
Inc., a Delaware
corporation (the
"Company") and Eric
Tomlinson, D.Sc. (the
"Executive"). The
Company and Executive
are hereinafter
collectively referred to
as the "Parties," and
individually referred to
as a "Party."
RECITALS
A. The Company hereby agrees to continue to employ Executive, and Executive
hereby accepts continued employment by the Company, upon the terms and
conditions set forth in this Agreement.
B. The Company and the Executive have previously entered into an Employment
Agreement, dated effective as of January 1, 1998 (the "Prior Agreement")
memorializing the terms of Executive's engagement by the Company.
C. The Company and the Executive desire to terminate the Prior Agreement and to
enter into this Agreement, the terms of which shall supersede, amend and restate
in their entirety the terms of the Prior Agreement.
AGREEMENT
In consideration of the foregoing recitals and the mutual promises and covenants
herein contained, and for other good and valuable consideration, the Parties,
intending to be legally bound, agree as follows:
1. EMPLOYMENT AND TERM.
1.1 Executive shall serve as the Vice Chairman of the Board of Directors of the
Company and primarily be responsible for (i) coordinating and leading any and
all corporate partnering discussions and negotiations between the Company and
Boehringer Mannheim or Roche Holding Ltd., (ii) identifying and evaluating other
suitable strategic initiatives and corporate partnering opportunities for the
Company and (iii) assisting in the Company's investor relation efforts.
Executive shall report to and be subject to the general direction and control of
the Board of Directors of the Company (the "Board").
1.2 Except as otherwise provided for in this Agreement, the initial term of this
Agreement shall commence on the Effective Date and shall terminate on December
31, 1998 (the "Initial Term"). This Agreement shall automatically be renewed for
additional one (1) month periods (each a "Renewal Period" and, together with the
Initial Term, collectively the "Term") unless either Party provides written
notice to the other, no later than three (3) months prior to the commencement of
the applicable Renewal Period, of its election not to extend the Term as
1
<PAGE>
provided in this sentence. Notwithstanding anything herein to the contrary,
either party may terminate this Agreement at any time, with or without cause,
subject to the terms and conditions of Sections 4 and 5 herein.
1.3 Executive agrees to resign from the Board upon termination of his employment
with the Company for any reason.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE.
2.1 During his employment with the Company, Executive shall devote his full
business energies, interest, abilities and productive time to the proper and
efficient performance of his duties under this Agreement.
2.2 During the Term and for a period of eighteen (18) months thereafter,
Executive agrees to not, solicit, for himself or others, any person or entity
that is or was a customer of the Company during his employment with the Company,
or a potential customer with whom the Company had significant contacts during
his employment with the Company for any purpose or activity that is directly or
indirectly competitive with the business of the Company, or solicit the
employment or services of, or attempt to cause to leave the employment or
service of the Company, or any affiliate of the Company, or otherwise interfere
with the relationship of the Company or any affiliate of the Company, with any
person who is or was employed by, or otherwise engaged to perform services for,
the Company or any affiliate of the Company, whether such affiliation is in the
capacity of employee, consultant, independent contractor or otherwise.
2.3 Executive hereby acknowledges and agrees that the scope of the covenants set
forth in this Section 2 are reasonable and necessary to protect the interests of
the Company.
2.4 Although the restrictions set forth in this Section 2 are considered by the
Parties to be reasonable in all circumstances, it is recognized that
restrictions of the nature in question may fail for unforeseen reasons, and
accordingly it is hereby agreed and declared that if any of the restrictions set
forth in this Section 2 shall be adjudged to be void as going beyond what is
reasonable in all of the circumstances for the protection of the Company and of
the Executive or for any other reason, but would be valid if part of the wording
thereof were deleted or the periods (if any) thereof reduced or the range of
activities or area dealt with thereby reduced in scope, such restrictions shall
apply with such modifications as may be necessary to make them valid and
effective and such provisions shall be modified accordingly.
2.5 The provisions of this Section 2 shall survive any termination of this
Agreement.
3. COMPENSATION OF EXECUTIVE.
3.1 So long as Executive is employed by the Company, the Company shall pay
Executive a salary (the "Base Salary") of three hundred ten thousand one hundred
twenty eight dollars ($310,128) per year, payable in regular periodic payments
in accordance with Company policy. Such salary shall be prorated for any partial
year of employment on the basis of a 365-day fiscal year.
2
<PAGE>
3.2 So long as Executive is employed by the Company, the Company agrees to pay
Executive seven hundred sixty-five dollars and seven cents ($765.07) per month
or such other reasonable amount that the Executive is actually billed for
reasonable health and medical benefits chosen by the Executive.
3.3 The Company agrees to maintain Executive's membership at The Woodlands
Country Club (the "Club") so long as Executive is employed by the Company.
3.4 If Executive sells the home in which he resides as of the Effective Date, at
any time prior to the later to occur of (i) June 30, 2000 or, (ii) the date
which is eighteen (18) months after the Term, the Company agrees to reimburse
Executive for reasonable closing costs up to a maximum of thirty thousand
dollars ($30,000), provided that Executive personally incurs such closing costs
in the sale of his home. Executive shall also be entitled to receive from the
Company an additional payment (the "gross-up payment") in an amount that is
equal to the taxes imposed upon the reimbursement, if any. Executive shall not
be entitled to any additional payment on the gross-up payment. Executive must
submit appropriate documentation in accordance with the Company's expense
reimbursement policy in order to receive reimbursement for such costs.
3.5 So long as Executive is employed by the Company, the Company agrees to
reimburse the Executive for all reasonable and necessary business expenses in
accordance with the Company's expense reimbursement policies.
3.6 All of Executive's compensation shall be subject to customary withholding
taxes and any other employment taxes as are commonly required to be collected or
withheld by the Company.
4. TERMINATION.
Executive's employment with the Company may be terminated under the following
conditions:
4.1 DEATH OR DISABILITY. Executive's employment with the Company shall terminate
effective upon the date of Executive's death or "disability" as defined under
Section 4.1.1.
4.1.1 The term "disability" shall mean total mental or physical incapacity of
the Executive, which continues for not less than one (1) month and is based upon
a certification of such incapacity by Executive's physician or a duly licensed
physician selected by the Board.
4.2 TERMINATION BY THE COMPANY/EXPIRATION OF THE TERM. Executive's employment
with the Company shall be deemed terminated upon the expiration of the Term;
provided, however, that the Company may terminate Executive's employment under
this Agreement at any time and for any reason by delivery of written notice to
the Executive prior to the expiration of the Term. Any notice of termination
given pursuant to this Section 4.2 shall effect termination as of the date
specified in such notice or, in the event no such date is specified, on the last
day of the month in which such notice is delivered or deemed delivered as
provided in Section 9 below.
3
<PAGE>
4.3 TERMINATION BY EXECUTIVE. Executive may terminate his employment under this
Agreement at any time and for any reason prior to the expiration of the Term by
delivery of a written notice to the Company. Any notice of termination given
pursuant to this Section 4.3 shall effect termination as of the date specified
in such notice or, in the event no date is specified, on the last day of the
month in which such notice is delivered or deemed delivered as provided in
Section 9 below.
5. COMPENSATION UPON TERMINATION.
5.1 Termination by the Company/Expiration of Term. Upon the termination of
Executive's employment as described in Section 4.2, including upon the
expiration of the Term, and upon Executive's furnishing to the Company and an
executed waiver and release of claims (a form of which is attached hereto as
Exhibit A), Executive shall be entitled to the following:
5.1.1 Executive's Base Salary and accrued benefits through the expiration date
of the Term, payable promptly following termination;
5.1.2 A severance payment equal to one and one-half (1 1/2) times Executive's
annual Base Salary in effect at the time of termination, payable in accordance
with Section 5.5 below;
5.1.3 Amendment of each of the stock option grants set forth on Exhibit B (the
"Options") to reflect that: (i) the vesting of each of the Options shall be
accelerated such that the Options shall be fully vested upon termination, and
(ii) each of the Options shall be exercisable up to and including two (2) years
from the termination date of Executive's employment. Pursuant to applicable tax
laws, the Options will lose potentially favorable tax treatment afforded
incentive stock options if not exercised within ninety (90) days of Executive's
termination date.
5.1.4 Seven hundred sixty-five dollars and seven cents ($765.07) per month from
the Company for reasonable health benefits chosen by the Executive, plus
continued payment for Club membership, until the date that is eighteen (18)
months after the expiration date of the Term. Executive shall be solely
responsible for all expenses arising from his use of the Club other than the
Club membership fee.
5.2 DEATH AND DISABILITY. If Executive's employment shall be terminated by death
or disability as provided in Section 4.1, the provisions of Section 5.1 shall
apply.
5.3 TERMINATION BY EXECUTIVE. If Executive shall terminate Executive's
employment with the Company prior to the expiration date of the Term, then upon
Executive's furnishing to the Company an executed waiver and release of claims
(a form of which is attached hereto as Exhibit A), Executive shall be entitled
to the following:
5.3.1 Executive's Base Salary and accrued benefits through the date of
termination, payable promptly following termination;
5.3.2 A severance payment equal to one and one-half (1 1/2) times Executive's
annual Base Salary in effect at the time of termination, payable in accordance
with Section 5.5 below;
4
<PAGE>
5.3.3 Amendment of each of the Options to reflect that: (i) the Options shall be
accelerated such that the number of vested shares under the Options shall equal
the number of shares that would have vested under the Options had Executive
remained an employee for an additional eighteen (18) months following the date
of termination, and (ii) each of the Options shall be exercisable up to and
including two (2) years from the date of termination of Executive's employment;
5.3.4 Seven hundred sixty-five dollars and seven cents ($765.07) per month from
the Company for reasonable health benefits chosen by the Executive, plus
continued payment for Club membership, until the date that is eighteen (18)
months after the date of termination of Executive's employment. Executive shall
be solely responsible for all expenses arising from his use of the Club other
than the Club membership fee.
5.4 CHANGE OF CONTROL. If, during the Term, a Change of Control occurs as
defined in Section 7.1.1, and the Executive's employment with the new company is
terminated by the new company for any reason whatsoever, the provisions of
Section 5.1 shall apply upon such termination.
5.5 TIMING OF SEVERANCE PAYMENTS. Severance payments payable pursuant to
Sections 5.1.2 and 5.3.2 shall be paid in accordance with this Section 5.5.
Promptly following termination, Executive shall be paid an amount equal to the
product of (A) a fraction, the numerator of which is the number of months
(rounded to the nearest whole month) remaining between the date of termination
and December 31, 1999 and the denominator of which is twelve (12), times (B)
Executive's annual Base Salary in effect at the time of termination. No later
than January 15, 2000, Executive shall be paid an amount equal to (X) one and
one-half (1 1/2) times Executive's annual Base Salary in effect at the time of
termination minus (Y) the amount paid in accordance with the preceding sentence.
6. CONFIDENTIAL INFORMATION; EXECUTIVE'S DUTIES UPON TERMINATION.
6.1 No Confidential Information shall be disclosed by the Executive to any third
party or used by the Executive for the benefit of the Executive or any third
party without the prior written consent of the Company.
6.2 Confidential information shall not include information that:
6.2.1 at the time of its disclosure, is publicly available through no fault of
the Parties;
6.2.2 at the time of its disclosure, is, without fault of the receiving party,
part of the public domain;
6.2.3 subsequent to its disclosure hereunder, is obtained by the Executive from
a third party not subject to a contractual or fiduciary obligation for
confidentiality to the disclosing party;
6.2.4 is required to be disclosed under court or governmental order, rule or
regulation; or
5
<PAGE>
6.2.5 is disclosed pursuant to any research grant related to technology outside
of gene therapy.
6.3 Upon termination of the employment of Executive for any reason, Executive
will deliver to the Company all documents, notebooks, designs, specifications,
customer lists, drawings, manuals, reports, plans and other data of any nature
containing or relating to the Confidential Information, Technology or
Inventions, and Executive will not deliver to anyone else any of such documents
or data or any reproduction of such documents or data containing or relating to
the Confidential Information, Technology or Inventions of the Company.
6.4 Executive agrees to make prompt and complete disclosure to the Company of
every Invention. Executive agrees that the Company shall have sole ownership
rights to all Inventions and agrees to cooperate fully, at no expense to the
Executive, with the Company to secure and defend the Company's said ownership
rights. Executive hereby assigns to the Company any rights the Executive may
acquire in any such Inventions.
6.4.1 Exhibit C hereto contains a true, complete and accurate list of all
inventions, copyrights, patents or improvements of the Executive relevant to the
subject matter of the employment of the Executive by the Company that had been
made or conceived or first reduced to practice by the Executive alone or jointly
with others prior to the employment of the Executive and prior to Executive's
execution of this Agreement and which Executive desires to remove from the
operation of this Agreement.
6.5 Executive represents that the performance of all the terms of this Agreement
by Executive and as an officer of the Company does not and, to the best
knowledge of the Executive, will not breach any agreement or duty to keep in
confidence proprietary information acquired by Executive in confidence or in
trust prior to the employment of the Executive by the Company. Executive
represents that the Executive has not entered into, and the Executive hereby
covenants that the Executive will not enter into, any agreement either written
or oral, in conflict herewith. Executive represents that at the present time
Executive is not restricted from entering into this Agreement.
6.6 Executive represents that Executive has not brought to the Company and
covenants that Executive will not bring to the Company or use in the performance
of the Executive's responsibilities at the Company any proprietary information,
materials or documents of a former or present employer that are not generally
available to the public, unless the Executive has obtained prior written
authorization from the former or present employer. Executive hereby covenants
that the Executive shall not breach any obligation of confidentiality or duty
that the Executive may have to former or present employers.
6.7 The provisions of this Section 6 shall survive any termination of this
Agreement.
7. DEFINITIONS.
7.1 As used herein, the following terms shall have the following meanings:
7.1.1 CHANGE OF CONTROL means the occurrence of one or more of the following
events: (i) a dissolution or liquidation of the Company; (ii) a merger or
consolidation in which
6
<PAGE>
the Company is not the surviving corporation in which the Company's shareholders
immediately prior to the transaction do not hold beneficial ownership of a least
fifty percent (50%) of the outstanding voting shares of the new or continuing
corporation; (iii) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's common stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; (iv) at least a majority
of the outstanding corporate shares of the Company are sold, exchanged or
otherwise disposed of, in one transaction or series of related transactions and
the Company's shareholders immediately prior to such transaction or transactions
do not hold beneficial ownership of at least fifty percent (50%) of the
outstanding voting shares of the Company or of the ownership interests of the
entity for which shares of the Company were exchanged (taking into account only
such shareholders' ownership of the Company prior to the time such transaction
or transactions commenced); or (v) the Company sells all or substantially all of
its assets to a single purchaser or to a group of associated purchasers.
7.1.2 CONFIDENTIAL INFORMATION shall mean, subject to Section 6.2, the
Technology in the field of gene therapy known by, or disclosed to, or learned
by, or developed by, the Executive in the course and scope of the performance of
this Agreement, which information is not generally known in the trade, science
or industry in which the Company and/or its affiliates are engaged.
7.1.3 INVENTIONS shall mean all improvements, discoveries, inventions, whether
patentable or not, copyrightable works, copyrights, trade secrets, formulae,
processes techniques, and other developments and advances with respect to the
Technology in the field of gene therapy that are developed, conceived or reduced
to practice by the Executive in the course and scope of the performance of this
Agreement during the Term and for a period of one year thereafter that result
from the Executive's duties hereunder or result from the use of premises or
equipment owned, leased or contracted for by the Company.
7.1.4 TECHNOLOGY shall mean all know-how, information, ideas, concepts, designs,
specifications, suggestions, improvements, discoveries, inventions,
copyrightable works, uncopyrightable works, copyrights, patent rights,
unpatentable works, patents, trade secrets, formulae, processes, techniques,
methods, machines, devices, products, services, marketing plans, strategies,
forecasts and customer lists and other data, in each case that are included
within the field of gene therapy, and includes, without limiting the generality
of the foregoing, notebooks, drawings, computer software, manuals, reports,
specifications and other writings or compilations of information, engineering
and other scientific and practical information, models and records.
8. ASSIGNMENT AND BINDING EFFECT.
8.1 This Agreement, including Exhibits A, B and C shall be binding upon and
inure to the benefit of Executive and Executive's heirs, executors, personal
representatives, assigns, administrators and legal representatives. Because of
the unique and personal nature of Executive's duties under this Agreement,
neither this Agreement nor any rights or obligations under this Agreement shall
be assignable by Executive. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors, assigns and legal
representatives.
7
<PAGE>
9. NOTICES.
9.1 All notices or demands of any kind required or permitted to be given by the
Company or Executive under this Agreement shall be given in writing and shall be
personally delivered (and receipted for) or mailed by certified mail, return
receipt requested, postage prepaid, addressed as follows:
9.1.1 If to the Company:
Vice President, Human Resources GeneMedicine, Inc. 8301 New Trails
Drive The Woodlands, Texas 77381-4248
If to Executive:
Eric Tomlinson, D.Sc. 7 Morning Arbor Place The Woodlands, Texas
77381-6628
Any such written notice shall be deemed received when personally delivered or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.
10. CHOICE OF LAW.
10.1 This Agreement shall be construed and enforced in accordance with the laws
of the State of Texas without regard to the place of execution or the place for
performance thereof. This Agreement is to be at least partially performed in
Harris County, Texas, and, as such, the Company and the Executive agree that
personal jurisdiction and venue shall be proper with the state or federal courts
situated in Harris County, Texas, to hear such disputes arising under this
Agreement.
11. INTEGRATION.
11.1 This Agreement contains the complete, final and exclusive agreement of the
Parties relating to the subject matter of this Agreement, and supersedes all
prior oral and written employment agreements or arrangements between the
Parties, including without limitation the Prior Agreement and that certain
Employment and Stock Purchase Agreement, dated as of July 31, 1992, between the
Company and Executive, except for the benefits Executive may be entitled to
under the terms and conditions of the GeneMedicine, Inc. Cash Incentive
Retention and Severance Plan.
12. PUBLIC ANNOUNCEMENTS.
12.1 The Parties agree that no public announcements regarding the terms and
conditions of this Agreement, including Executive's termination of employment,
will be made by either party, except as is required in order to comply with all
applicable laws and regulations;
8
<PAGE>
provided that, the Company shall use reasonable efforts to give Executive an
opportunity to review and comment regarding any such required public
announcements.
13. AMENDMENT.
13.1 This Agreement cannot be amended or modified except by a written agreement
signed by Executive and the Company.
14. WAIVER.
14.1 No term, covenant or condition of this Agreement or any breach thereof
shall be deemed waived, except with the written consent of the Party against
whom the wavier in claimed, and any waiver or any such term, covenant, condition
or breach shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other term, covenant, condition or breach.
15. SEVERABILITY.
15.1 The finding by a court of competent jurisdiction of the unenforceability,
invalidity or illegality of any provision of this Agreement shall not render any
other provision of this Agreement unenforceable, invalid or illegal. Such court
shall have the authority to modify or replace the invalid or unenforceable term
or provision with a valid and enforceable term or provision which most
accurately represents the Parties' intention with respect to the invalid or
unenforceable term or provision.
16. INTERPRETATION; CONSTRUCTION.
16.1 The headings set forth in this Agreement are for convenience of reference
only and shall not be used in interpreting this Agreement. This Agreement has
been drafted by legal counsel representing the Company, but Executive has been
encouraged, and has consulted with, his own independent counsel and tax advisors
with respect to the terms of this Agreement. The Parties acknowledge that each
Party and its counsel has reviewed and revised, or had an opportunity to review
and revise, this Agreement, and the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
17. REPRESENTATIONS AND WARRANTIES.
17.1 Executive represents and warrants that he is not restricted or prohibited,
contractually or otherwise, from entering into and performing each of the terms
and covenants contained in this Agreement, and that his execution and
performance of this Agreement will not violate or breach any other agreements
between Executive and any other person or entity.
18. COUNTERPARTS.
18.1 This Agreement may be executed in two counterparts, each of which shall be
deemed an original, all of which together shall contribute one and the same
instrument.
9
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
The Company:
GENEMEDICINE, INC.
a Delaware Corporation
By: Kathryn Stankis
Name:
Title: Vice President, Human Resources
EXECUTIVE:
Eric Tomlinson
Waiver and Release Agreement - Exhibit A
Stock Options - Exhibit B
Inventions - Exhibit C
10
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in Sections 5.1
and 5.3 of the Employment Agreement dated June 11, 1998, to which this form is
attached, I hereby furnish GeneMedicine, Inc. (the "Company") with the following
release and waiver.
I hereby release, and forever discharge the Company, its officers, directors,
agents, employees, stockholders, successors, assigns and affiliates, of and from
any and all claims, liabilities, demands, causes of action, costs, expenses,
attorneys' fees, damages, indemnities and obligations of every kind and nature,
in law, equity, or otherwise, known and unknown, suspected and unsuspected,
disclosed and undisclosed, arising at any time prior to and including my
employment termination date with respect to any claims relating to my employment
and the termination of my employment, including but not limited to, claims
pursuant to any federal, state or local law relating to employment, including,
but not limited to, discrimination claims, claims under the California Fair
Employment and Housing Act, and the Federal Age Discrimination in Employment Act
of 1967, as amended ("ADEA"), or claims for wrongful termination, breach of the
covenant of good faith, contract claims, tort claims, and wage or benefit
claims, including but not limited to, claims for salary, bonuses, commissions,
stock, stock options, vacation pay, fringe benefits, severance pay or any form
of compensation.
I acknowledge that, among other rights, I am waiving and releasing any rights I
may have under ADEA, that this waiver and release is knowing and voluntary, and
that the consideration given for this waiver and release is in addition to
anything of value to which I was already entitled as an employee of the Company.
I further acknowledge that I have been advised, as required by the Older Workers
Benefit Protection Act, that: (a) the waiver and release granted herein does not
relate to claims which may arise after this agreement is executed; (b) I have
the right to consult with an attorney prior to executing this agreement
(although I may choose voluntarily not to do so); (c) I have twenty-one (21)
days from the date I receive this agreement, in which to consider this agreement
(although I may choose voluntarily to execute this agreement earlier); (d) I
have seven (7) days following the execution of this agreement to revoke my
consent to the agreement; and (e) this agreement shall not be effective until
the seven (7) day revocation period has expired.
Date: By:
<PAGE>
EXHIBIT B
STOCK OPTIONS
<TABLE>
<CAPTION>
GRANT DATE TYPE SHARES PRICE SHARES EXERCISED OUTSTANDING OUTSTANDING
GRANTED UN-VESTED EXERCISABLE
------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
30-Aug-94 ISO 50,000 8.375 0 7,217 42,713
--- ------ ----- - ----- ------
11-Jul-95 ISO 20,000 9.750 0 7,418 12,512
--- ------ ----- - ----- ------
1-Jul-96 ISO 40,000 3.813 0 24,990 15,050
--- ------ ----- - ------ ------
8-Jul-97 ISO 30,000 6.875 0 26,250 3,750
--- ------ ----- - ------ -----
8-Jul-97 ISO 20,000 6.875 0 17,472 2,521
--- ------ ----- - ------ -----
6-Jan-98 ISO 50,000 5.375 0 50,000 0
--- ------ ----- - ------ -
</TABLE>
<PAGE>
EXHIBIT C
INVENTIONS
<PAGE>
TABLE OF CONTENTS
Page
1. Employment and Term...............................................1
2. Loyal and Conscientious Performance...............................2
3. Compensation of Executive.........................................2
4. Termination.......................................................3
5. Compensation Upon Termination.....................................3
6. Confidential Information; Executive's Duties Upon Termination.....5
7. Definitions.......................................................6
8. Assignment and Binding Effect.....................................7
9. Notices...........................................................7
10. Choice of Law.....................................................8
11. Integration.......................................................8
12. Public Announcements..............................................8
13. Amendment.........................................................8
14. Waiver............................................................8
15. Severability......................................................8
16. Interpretation; Construction......................................9
17. Representations and Warranties....................................9
18. Counterparts......................................................9
i
<PAGE>
EXHIBIT 10.13
SECURED PROMISSORY NOTE
April 8, 1998
The Woodlands, Texas
FOR VALUE RECEIVED, ERIC TOMLINSON, D.SC., PH.D. ("BORROWER"), hereby
unconditionally promises to pay to the order of GENEMEDICINE, INC., a Delaware
corporation ("LENDER"), in lawful money of the United States of America and in
immediately available funds, the aggregate principal amount of all advances made
hereunder as set forth on Exhibit A hereto, as the same may be amended from time
to time, which aggregate principal amount shall not exceed Fifty Thousand
Dollars ($50,000) (the "LOAN"), together with accrued and unpaid interest
thereon from the date of each advance hereunder on the loan balance then
outstanding, due and payable on the dates and in the manner set forth below. The
undersigned hereby authorizes the holder of this Note to note on Exhibit A all
advances made by the holder hereunder, which notations shall, in the absence of
manifest error, be conclusive; provided, however, that the failure to make a
notation or the inaccuracy of the notation shall not limit or otherwise affect
the obligations of the undersigned under this Note.
This Promissory Note is the Note referred to in and is executed and delivered in
connection with that certain Stock Pledge Agreement dated as of even date
herewith and executed by Borrower in favor of Lender (as the same may from time
to time be amended, modified or supplemented or restated, the "PLEDGE
AGREEMENT"). Additional rights of Lender are set forth in the Pledge Agreement.
All capitalized terms used herein and not otherwise defined herein shall have
the respective meanings given to them in the Pledge Agreement.
1. PRINCIPAL REPAYMENT. The outstanding principal amount of the Loan shall be
due and payable on October 8, 1998.
Notwithstanding the foregoing, in the event that the Borrower (i) voluntarily
terminates his employment with Lender or (ii) sells any of the Collateral
securing the Loan (as identified and described in the Pledge Agreement), this
Note shall be accelerated and all remaining unpaid principal and interest shall
become due and payable immediately upon the occurrence of such event.
2. INTEREST RATE. Borrower further promises to pay interest on the outstanding
principal amount hereof from the date hereof until payment in full, which
interest shall be payable at the rate of 5.38% per annum or the maximum rate
permissible by law (which under the laws of the State of Texas shall be deemded
to be the laws relating to permissible rates of interest on commercial loans),
whichever is less. Interest shall be due and payable at the same time that the
principal amount of this Note becomes due and payable and shall be compounded
monthly and calculated on the basis of a 360-day year for the actual number of
days elapsed.
<PAGE>
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable at the
office of Lender, 8301 New Trails Drive, The Woodlands, Texas 77381, unless
another place of payment shall be specified in writing by Lender.
4. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first to
accrued interest, and thereafter to the outstanding principal balance hereof.
5. SECURED NOTE. The full amount of this Note is secured by the Collateral
identified and described as security therefor in the Pledge Agreement executed
by and delivered by Borrower. Borrower shall not, directly or indirectly,
create, permit or suffer to exist, and shall defend the Collateral against and
take such other action as is necessary to remove, any Lien on or in the
Collateral, or in any portion thereof, except as permitted pursuant to the
Pledge Agreement.
6. DEFAULT. Each of the following events shall be an "EVENT OF DEFAULT"
hereunder:
(a) Borrower fails to pay timely any of the principal amount due
under this Note on the date the same becomes due and payable or any
accrued interest or other amounts due under this Note on the date
the same becomes due and payable;
(b) Borrower files any petition or action for relief under any bankruptcy,
reorganization, insolvency or moratorium law or any other law for the relief of,
or relating to, debtors, now or hereafter in effect, or makes any assignment for
the benefit of creditors or takes any corporate action in furtherance of any of
the foregoing; or
(c) An involuntary petition is filed against Borrower (unless such
petition is dismissed or discharged within sixty (60) days) under
any bankruptcy statute now or hereafter in effect, or a custodian,
receiver, trustee, assignee for the benefit of creditors (or other
similar official) is appointed to take possession, custody or
control of any property of Borrower.
Upon the occurrence of an Event of Default hereunder, all unpaid principal,
accrued interest and other amounts owing hereunder shall, at the option of
Lender, and, in the case of an Event of Default pursuant to (b) or (c) above,
automatically, be immediately due, payable and collectible by Lender pursuant to
applicable law.
7. WAIVER. Borrower waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including, without limitation, reasonable attorneys'
fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
8. GOVERNING LAW. This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction.
2
<PAGE>
9. The undersigned represents and agrees that the amounts due under this Note
are not consumer debt, and are not incurred primarily for personal, family or
household purposes, but are for business and commercial purposes only.
10. PREPAYMENT. Borrower may prepay the unpaid principal in whole or in part,
without penalty, at any time, upon the payment of all unpaid interest accrued to
the date of such prepayment.
11. NOT-TRANSFERABLE. The right of Borrower to request and receive the Loan
hereunder, as well as the other benefits under this Note, shall not be
assignable or otherwise transferrable by Borrower.
12. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Borrower and shall extend to any
holder hereof.
Eric Tomlinson
--------------
Eric Tomlinson, D.Sc. PH.D
3
<PAGE>
(ARTICLE) 5
(PERIOD-TYPE) 6-MOS
(FISCAL-YEAR-END) DEC-31-1998
(PERIOD-START) JAN-01-1998
(PERIOD-END) JUN-30-1998
(CASH) 21,674,107
(SECURITIES) 0
(RECEIVABLES) 0
(ALLOWANCES) 0
(INVENTORY) 0
(CURRENT-ASSETS) 21,821,830
(PP&E) 2,953,871
(DEPRECIATION) 0
(TOTAL-ASSETS) 24,784,896
(CURRENT-LIABILITIES) 1,025,863
(BONDS) 0
(PREFERRED-MANDATORY) 0
(PREFERRED) 3,750
(COMMON) 14,575
(OTHER-SE) 20,320,738
(TOTAL-LIABILITY-AND-EQUITY) 24,784,896
(SALES) 0
(TOTAL-REVENUES) 2,922,600
(CGS) 0
(TOTAL-COSTS) 9,999,415
(OTHER-EXPENSES) 0
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 15,507
(INCOME-PRETAX) (7,076,815)
(INCOME-TAX) 0
(INCOME-CONTINUING) (7,076,815)
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) (7,076,815)
(EPS-PRIMARY) 0
(EPS-DILUTED) (.23)
<PAGE>
EXHIBIT 13.4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
(281) 364-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 5, 1998, there were outstanding 14,579,376 and 3,750,000 shares
of Common Stock and Series B Preferred Stock, par value $.001, respectively, of
the registrant.
Page 1 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
COVER PAGE................................................................ 1
TABLE OF CONTENTS......................................................... 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1998 and December 31, 1997............. 3
Statements of Operations for the three and nine months ended September
30, 1998 and September 30, 1997, and for the period from inception
(January 2, 1992) through September 30, 1998.............................. 4
Statements of Cash Flows for the nine months ended September 30, 1998 and
September 30, 1997, and for the period from inception (January 2, 1992)
through September 30, 1998................................................ 5
Notes to Financial Statements............................................. 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 8
PART II. OTHER INFORMATION...............................................11
SIGNATURES................................................................12
Page 2 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................... $ 1,201,190 $ 873,180
Short-term investments .............................................. 17,218,089 23,708,845
Prepaid expenses and other .......................................... 242,307 175,128
------------ ------------
Total current assets .................................... 18,661,586 24,757,153
------------ ------------
Equipment, furniture and leasehold improvements, net ................ 2,777,353 3,220,987
Deposits and other assets ........................................... 3,707 9,195
------------ ------------
Total Assets ........................................................ $ 21,442,646 $ 27,987,335
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities ............................ $ 957,654 $ 1,454,986
Deferred grant revenue .............................................. -- 89,737
Current portion of capital lease obligations ........................ 108,079 270,166
------------ ------------
Total current liabilities ............................... 1,065,733 1,814,889
------------ ------------
Long-term Liabilities:
Deferred contract revenue ........................................... 3,669,970 2,919,970
Capital lease obligations, net of current portion ................... -- 54,814
------------ ------------
Total long-term liabilities ............................. 3,669,970 2,974,784
------------ ------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding ............ 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
14,579,376 and 13,911,422 shares issued and outstanding . 14,579 13,911
Additional paid-in capital .......................................... 74,262,669 70,097,651
Deferred compensation ............................................... -- (56,348)
Deficit accumulated during the development stage .................... (57,574,055) (46,861,302)
------------ ------------
Total stockholders' equity .............................. 16,706,943 23,197,662
------------ ------------
Total Liabilities and Stockholders' Equity .......................... $ 21,442,646 $ 27,987,335
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended Inception
September 30, September 30, (January 2, 1992)
------------------------------- ------------------------------- through
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue ......... $ 1,045,000 $ 1,000,000 $ 3,067,500 $ 3,500,000 $ 15,247,500
Research and development
grant revenue ............ -- 120,000 219,181 509,000 1,745,578
Interest income .......... 286,369 406,143 967,288 1,272,552 6,665,359
------------ ------------ ------------ ------------ ------------
Total revenues ........... 1,331,369 1,526,143 4,253,969 5,281,552 23,658,437
Expenses:
Research and development . 3,788,791 3,299,805 11,510,386 10,068,103 60,998,134
General and administrative 1,172,758 1,192,736 3,435,071 3,384,489 19,717,037
Interest expense ......... 5,758 13,394 21,265 50,186 517,321
------------ ------------ ------------ ------------ ------------
Total expenses ........... 4,967,307 4,505,935 14,966,722 13,502,778 81,232,492
------------ ------------ ------------ ------------ ------------
Net loss ................. $ (3,635,938) $ (2,979,792) $(10,712,753) $ (8,221,226) $(57,574,055)
============ ============ ============ ============ ============
Loss per share ........... $ (0.25) (0.22) (0.74) (0.60)
============ ============ ============ ============
Shares used in computing
loss per share ........... 14,578,666 13,800,544 14,469,110 13,656,360
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Inception
Nine months ended (January 2, 1992)
September 30, through
------------------------------- September 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $(10,712,753) $(8,221,226) $(57,574,055)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ............................................ 799,702 727,924 3,577,679
Issuance of convertible debt for noncash consideration ................... -- -- 905,000
Issuance of stock for noncash consideration .............................. -- -- 107,644
Compensation expense related to stock plans .............................. 56,348 290,866 1,777,708
Loss on equipment retirements ............................................ -- -- 7,565
Changes in assets and liabilities:
(Increase) in prepaid expenses and other assets ................ (61,691) (156,235) (242,886)
Increase (decrease) in accounts payable and accrued liabilities (497,332) (432,627) 957,654
Increase in deferred revenue and deferred contract revenue ..... 660,263 710,000 3,669,971
------------ ----------- ------------
Net cash provided by (used in) operating activities .......... (9,755,463) (7,081,298) (46,813,720)
------------ ----------- ------------
Cash flows from investing activities:
Purchase of equipment, furniture and leasehold improvements .............. (356,068) (1,102,548) (6,365,726)
Net sales (purchases) of short-term investments .......................... 6,490,756 4,010,769 (17,218,089)
------------ ----------- ------------
Net cash used in investing activities ........................ 6,134,688 2,908,221 (23,583,815)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations ................ -- -- 2,030,823
Repayment of notes payable and capital lease obligations ................. (216,901) (289,434) (1,791,744)
Advance on line of credit ................................................ -- -- 750,000
Proceeds from issuance of preferred stock, net ........................... -- -- 22,264,465
Proceeds from issuance of common stock, net .............................. 4,165,686 4,575,466 48,345,181
------------ ----------- ------------
Net cash provided by financing activities .................... 3,948,785 4,286,032 71,598,725
------------ ----------- ------------
Net increase in cash and cash equivalents ................................ 328,010 112,955 1,201,190
Cash and cash equivalents, beginning of period ........................... 873,180 2,145,404 --
------------ ----------- ------------
Cash and cash equivalents, end of period ................................. $ 1,201,190 $ 2,258,359 $ 1,201,190
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................. $ 21,265 $ 50,186 $ 454,318
Supplemental schedule of noncash financing activity:
Issuance of convertible debt for technology .............................. $ -- $ -- $ 905,000
Conversion of debt to preferred and common stock ......................... $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
GeneMedicine, Inc. ("GeneMedicine" or the "Company") is a Delaware corporation
in the development stage. The Company is developing non-viral gene therapies
that may provide unique clinical benefits in the treatment of a number of human
diseases. The Company intends to develop its products through alliances with
major pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and product
development and has not yet generated any revenues from the sale of products,
nor is there any assurance of future product revenues. In addition, the Company
expects to continue to incur losses for the foreseeable future, and there can be
no assurance that the Company will successfully complete the transition from a
development stage company to successful operations. The research and development
activities engaged in by the Company involve a high degree of risk and
uncertainty. The ability of the Company to successfully develop, manufacture and
market its proprietary products is dependent upon many factors. These factors
include, but are not limited to, the need for additional financing, the ability
to establish and maintain collaborative arrangements for research, development
and commercialization of products with corporate partners, and the ability to
develop or access manufacturing, sales and marketing experience. Additional
factors include uncertainties as to patents and proprietary technologies,
technological change and risk of obsolescence, development of products,
competition, government regulations and regulatory approval, and product
liability exposure. As a result of the aforementioned factors and the related
uncertainties, there can be no assurance of the Company's future success.
The accompanying interim financial statements are unaudited and reflect all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. Results for interim periods are not necessarily indicative of
the results to be expected for the entire year ending December 31, 1998. These
financial statements should be read in conjunction with the Company's audited
financial statements included with the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes
standards for reporting and displaying comprehensive income and its components.
Comprehensive income is the total of net income and all other non- owner changes
in equity. For the period from inception (January 2, 1992) through September 30,
1998, the only component of comprehensive income for the Company is net income.
Adopting Statement No. 130 had no effect on the Company's financial position or
results of operation.
2. COLLABORATIVE AGREEMENTS
Effective February 1995, the Company and Corange International Ltd. ("Corange"),
the parent company of Boehringer Mannheim entered into a multi-year alliance
agreement to develop gene therapy products to treat selected cancer indications.
Under the terms of the agreement, Corange agreed to, among
Page 6 of 12
<PAGE>
other things, invest $20 million in the common equity of the Company at $4
million per year. The first four $4 million equity investments were made in July
1995, February 1996, February 1997 and February 1998 in which 444,444, 418,629,
533,333 and 533,333 common shares were issued at $9.00, $9.56, $7.50 and $7.50
per share, respectively. In August 1998, the agreement was amended to extend the
field of the alliance and the research term of the collaboration. In connection
with this amendment, GeneMedicine agreed to forgo the requirement of the equity
purchase by Corange due on February 1, 1999, and Corange agreed to pay the
Company certain additional research and milestone payments.
3. SUBSEQUENT EVENTS
On October 24, 1998, GeneMedicine entered into a definitive merger agreement
(the "Merger Agreement") with Megabios Corp. ("Megabios") pursuant to which the
Company will become a wholly-owned subsidiary of Megabios in a stock for stock
merger (the "Merger") intended to qualify as a tax-free reorganization. Under
the terms of the Merger Agreement, which was unanimously approved by the boards
of directors of both companies, each share of GeneMedicine Common Stock
outstanding at the time of the Merger will be exchanged, at a fixed exchange
ratio of 0.571, for newly issued shares of Common Stock of Megabios. This will
result in the issuance of approximately 9.1 million additional Megabios shares.
In addition, all outstanding employee stock options of GeneMedicine will convert
into Megabios options at the same exchange ratio. The proposed transaction will
be accounted for as a purchase, and is subject to the approval of the
stockholders of both companies and appropriate government agencies, as well as
the satisfaction or waiver of customary closing conditions. The transaction is
expected to close in the first calendar quarter of 1999.
Pursuant to its Amended and Restated Certificate of Incorporation, the Company
has provided Syntex Corporation written notice of the Company's intention to
convert all outstanding shares of its Series B Preferred Stock into 1,071,428
shares of its Common Stock, effective November 10, 1998.
Page 7 of 12
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
early stage of GeneMedicine, Inc.'s development and technological uncertainty,
dependence on collaborative partners and licenses, the failure of existing or
future partnerships to be successful, future capital needs and uncertainty of
additional funding, uncertainty of patent protection, uncertainty of government
regulatory requirements, level of competition and rapid technological change, as
well as those set forth in this section and in the section entitled "Risk
Factors" and elsewhere in the Company's Form 10-K for the year ended December
31, 1997.
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and to date has not received any revenues from the
sale of products. No assurance can be given that the Company will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. The Company expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At September 30,
1998, the Company's accumulated deficit was approximately $57.6 million.
RESULTS OF OPERATIONS
Revenues of $1.3 million and $4.3 million were recorded for the three and nine
months ended September 30, 1998, respectively, which consisted primarily of
contract revenue of $1.0 million and $3.1 million, and interest income of $0.3
million and $1.0 million, respectively. These results compare with revenues of
$1.5 million and $5.3 million for the three and nine months ended September 30,
1997, respectively, which consisted primarily of contract revenue of $1.0
million and $3.5 million, and interest income of $0.4 million and $1.3 million,
respectively. Contract revenues in each respective period primarily resulted
from a corporate partnership with certain Boehringer Mannheim subsidiaries
("Boehringer Mannheim") of Corange International Ltd. ("Corange"), which was
acquired by Roche Holding Ltd. in March 1998, to develop non-viral gene
medicines using certain genes to treat human cancer indications. The decrease in
contract revenue for the first nine months of 1998 compared to the same period
in 1997 was due to the recognition in 1997 of a $0.5 million milestone payment
from Boehringer Mannheim for achieving clearance from the U.S. Food and Drug
Administration to commence a Phase I clinical trial using the Company's IL- 2
Gene Medicine, which GeneMedicine is developing for the treatment of head and
neck cancer.
The Company's research and development expenses for the quarter ended September
30, 1998 were $3.8 million, compared to $3.3 million for the third quarter of
1997. For the nine months ended September 30, 1998, research and development
expenses increased to $11.5 million from $10.1 million for the same period in
1997. These increases were generally due to the expansion of the Company's
research and development activities, resulting in staffing increases and the
related salary and benefit costs, as well as additional laboratory supplies and
other support costs. The expansion of the Company's research and development
activities has been driven primarily by the progression of research in the field
of genetic
Page 8 of 12
<PAGE>
vaccines and clinical development efforts in the field of cancer. The Company
anticipates that research and development expenditures will increase over the
next several years as it continues to expand its research and product
development efforts.
General and administrative expenses remained relatively unchanged at $1.2
million and $3.4 million for the three and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997.
Losses per share for the three and nine months ended September 30, 1998 were
$0.25 and $0.74, respectively, as compared to losses per share of $0.22 and
$0.60 for the same periods in 1997. The increases in the Company's net loss per
share for the three and nine months ended September 30, 1998 were primarily the
result of decreased contract revenue and increased research and development
expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private and public sales of its equity securities, interest income on invested
funds and revenues from corporate alliances. Through September 30, 1998, the
Company had received approximately $70.6 million in net proceeds from sales of
its equity securities. At September 30, 1998, the Company had working capital of
$17.6 million and cash, cash equivalents and short-term investments of $18.4
million. In addition, in October 1998 the Company received a $1.25 million,
scheduled contract research payment from Boehringer Mannheim.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including the ability to maintain existing and establish additional corporate
partnerships, continued scientific progress in its research and development
programs, the scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing, and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and anticipated funding from its corporate alliance with
Boehringer Mannheim, will enable the Company to maintain its current and planned
operations into the first quarter of 2000. There can be no assurance, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the expenditure of
such resources before such time. If the merger with Megabios Corp. described in
Note 2 to the Notes to Financial Statements included elsewhere herein is not
consummated, the Company intends to seek additional funding through public or
private financing, research and development arrangements with potential
corporate partners, or from other sources to augment its current cash position.
There can be no assurance that additional financing will be available on
favorable terms, if at all. In the event that adequate funding is not available,
the Company may be required to delay, reduce or eliminate one or more of its
research or development programs or obtain funds through arrangements with
corporate collaborators or others that may require the Company to relinquish
greater or all rights to product candidates at an earlier stage of development
or on less favorable terms than the Company would otherwise seek. Insufficient
financing may also require the Company to
Page 9 of 12
<PAGE>
relinquish rights to certain of its technologies that the Company would
otherwise develop or commercialize itself. The Company's business is subject to
significant risks, including, without limitation, uncertainties associated with
the length and expense of the regulatory approval process, uncertainty
associated with obtaining and enforcing patents and risks associated with
dependence on corporate partners. Although the Company's products may appear
promising at an early stage of development, they may not be successfully
commercialized for a number of reasons, such as the possibility that the
potential products will be determined to be ineffective during clinical trials,
fail to receive necessary approvals, be uneconomical to manufacture or market,
or be precluded from commercialization by proprietary rights of third parties.
In addition, the failure by the Company to obtain patent protection for its
products may make certain of its products commercially unattractive. There can
be no assurance that any collaboration will be continued or result in successful
commercialized products.
The Company is currently developing and executing a plan to insure that its
system and software infrastructure are Year 2000 compliant. Key financial
information and operational systems will be assessed and plans will be developed
to address required systems modifications. Given the relatively small size of
the Company's systems and the Company's predominantly new hardware, software and
operating systems, management does not anticipate any significant delays in
becoming Year 2000 compliant. However, the Company is unable to control whether
its current and future strategic partners and vendors systems are Year 2000
compliant. At this time management does not believe that Year 2000 changes will
have a material impact on the Company's business, financial condition or results
of operations.
Page 10 of 12
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information
Pursuant to recent changes to the proxy rules, unless a stockholder who wishes
to bring a matter before the stockholders at the Company's 1999 annual meeting
of stockholders notifies the Company of such matter prior to March 21, 1999,
management will have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
-------------- -----------
10.24 Management Change of Control Incentive Plan dated
July 1, 1998
+10.25 Binding Letter Agreement between Registrant and
Corange International Limited dated August 4, 1998
27 Financial Data Schedule
(b) On July 27, 1998 and August 3, 1998 the Registrant filed a current
report on Form 8-K and Form 8-K/A, respectively, to report a change in
Registrant's certifying accountant.
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
Page 11 of 12
<PAGE>
GENEMEDICINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEMEDICINE, INC.
Date: 11/06/1998 By: John M. Dodson
------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the Registrant's
Chief Accounting Officer)
Page 12 of 12
<PAGE>
EXHIBIT 10.24
GENEMEDICINE, INC.
MANAGEMENT CHANGE OF CONTROL INCENTIVE PLAN
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
employees of the Company may be given an opportunity to participate in the
proceeds of a Change of Control transaction.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now employees of the Company, to secure and retain the
services of new employees, and to provide incentives for such persons to
exert maximum efforts for the success of the Company.
2. DEFINITIONS.
(a) "ACQUISITION POOL" means an amount of cash and/or securities,
determined pursuant to the Plan, equal to 3% of the Net Proceeds received
by the Company upon a Change of Control.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CHANGE OF CONTROL" means the occurrence of any one or more of the
following events: (i) a merger or consolidation in which the Company is
not the surviving corporation and in which the Company's stockholders
immediately prior to the transaction do not hold beneficial ownership of
at least fifty percent (50%) of the outstanding voting shares of the new
or continuing corporation; (ii) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common and
preferred stock outstanding immediately preceding the merger are converted
by virtue of the merger into other property, whether in the form of
securities, cash or otherwise; (iii) the sale, exchange or other
disposition, in one transaction or a series of related transactions, of at
least a majority of the outstanding shares of the Company's common and
preferred stock (determined on an as-converted basis) in which the
Company's stockholders immediately prior to such transaction or
transactions do not hold beneficial ownership of at least fifty percent
(50%) of the outstanding voting shares of the Company or of the ownership
interests of the entity for which such shares are exchanged (taking into
account only such stockholders' ownership of the Company prior to the time
such transaction or transactions commenced); (iv) the Company sells all or
substantially all of its assets to a single purchaser or to a group of
associated purchasers; or (v) any other transaction, or series of related
transactions, which, in effect, result in a change of control of the
Company, as evidenced, for example, by a change in a majority of the
members of the Board of Directors or the power to effect such a change,
all as determined by the Board of Directors as constituted before such
change.
<PAGE>
(d) "CLOSING" means the closing of a transaction constituting a Change of
Control.
(e) "COMPANY" means GeneMedicine, Inc., a Delaware corporation.
(f) "KEY EMPLOYEE" means any person employed by the Company who is
designated by the Board from time to time as a Key Employee. The
individuals currently designated by the Board as Key Employees are: Eric
Tomlinson, Norman Hardman, Alain Rolland, Joseph Bossart, Richard Waldron,
and Kathryn Stankis.
(g) "NET PROCEEDS" means the sum of all cash and/or the market value of
any securities received by the Company in connection with a transaction,
reduced (1) by the selling and other expenses incurred in connection with
such transaction; and (2) by the liabilities of the Company, if any,
retained by the Company's stockholders following such transaction (not
including any liabilities created as a result of the establishment of this
Plan). Any contingent payments payable in connection with any transaction,
less any related expenses and liabilities as discussed above, shall be
included in the determination of Net Proceeds. In the event that all or
part of the consideration received by the Company in a transaction is in
the form of securities, the Net Proceeds received by the Company shall be
deemed to include the fair market value of such securities, determined on
the same basis on which such securities were valued in the transaction.
(h) "PLAN" means this GeneMedicine, Inc. Management Change in Control
Incentive Plan.
3. ADMINISTRATION.
(a) The Plan shall be interpreted and administered by the Board, whose
actions shall be final and binding on all persons, including each
employee.
(b) The Board, in its sole discretion, shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:
(1) To determine from time to time which employees of the Company
shall be designated as Key Employees entitled to participate in the
Plan. This authority shall also include the ability to determine
that one or more employees previously designated as Key Employees
shall no longer be entitled to participate in the Plan.
(2) To determine whether or not a transaction or related series of
transactions results in a Change of Control.
(3) To establish, change and adjust, in its sole discretion except
to the extent specified in the Plan, the percentage allocation of
the cash or securities in the Acquisition Pool to each of the Key
Employees.
(c) The Board may delegate some or all of its powers and responsibilities
under the Plan either to a committee of the Board or to one or more
officers of the Company.
2
<PAGE>
4. ALLOCATION OF ACQUISITION POOL.
(a) The allocation of the Acquisition Pool to individuals designated as
Key Employees as of the date hereof shall be as follows:
(1) Eric Tomlinson 30%
(2) Norman Hardman 21%
(3) Alain Rolland 11%
(4) Joseph Bossart 8%
(5) Richard Waldron 8%
(6) Kathryn Stankis 7%;
(b) Under no circumstances will the Key Employees specified in
(a)(1) and (a)(2) above receive an allocation or distribution
pursuant to this Plan in excess of $700,000; and (ii) no other
employee shall receive an allocation or distribution in excess of
two (2) times his or her base salary as in effect as of the Closing.
(c) Other employees eligible to receive benefits under this Plan shall
receive allocations from 15% of the Acquisition Pool.
5. DISTRIBUTIONS.
(a) If the conditions for distributions set forth in the Plan are
satisfied, each employee shall be entitled to receive, upon the Closing, a
distribution equal to (i) such employee's allocation of the Acquisition
Pool times (ii) the aggregate dollar value of the Acquisition Pool,
subject to the limitations set forth in Section 4 above. Such
distributions shall be made in cash and/or securities as determined by the
Board. While generally each participant will receive his or her
distributive share of the Acquisition Pool in the same form or forms of
payment and in the same proportions as that made by the purchaser(s) upon
the Change of Control, the Board shall have the discretion to restructure
the form and timing of payment of such distributions to accommodate the
business objectives of the Company in the Change of Control, which may
include, but not be limited to, (1) consideration of the tax consequences
to the Company, its stockholders, and the Plan's participants, (2)
financial accounting consequences for the Company or the acquiror, and (3)
satisfaction of any applicable securities law requirements.
(b) An individual must be an employee of the Company at the time of the
Closing in order to receive his or her allocation of the Acquisition Pool.
(c) Subject to any adjustments made under Section 5(a) above, if any,
payments to employees under the Plan shall be made within 30 days of the
Closing, except for payments to be made with respect to contingent
payments payable in connection with a Change of Control, which shall be
made as soon as administratively reasonable following the receipt by the
Company of such payments.
3
<PAGE>
(d) Anything in the Plan to the contrary notwithstanding, in the event it
shall be determined that any payment or distribution by the Company to or
for the benefit of an employee (whether paid or payable or distributed or
distributable pursuant to the terms of the Plan or otherwise) (a
"Payment") would be nondeductible by the Company for federal income tax
purposes because of Section 280G of the Internal Revenue Code (the "Code")
and would cause the employee to be liable for an excise tax pursuant to
Section 4999 of the Code, then the aggregate present value of amounts
payable or distributable under this Plan may be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value
which maximizes the aggregate present value of benefits without causing
any Payment to be nondeductible by the Company because of Section 280G of
the Code or to create an excise tax liability under Section 4999 of the
Code. For purposes of this Paragraph (d), present value shall be
determined in accordance with Section 280G(d)(4) of the Code. The
decisions as to whether or not to reduce the benefits to the Reduced
Amount, and as to the manner of any such reduction, shall be made by the
Company in its sole discretion, and such decisions shall be binding upon
the Company and each employee.
6. AMENDMENT OR TERMINATION OF THE PLAN.
(a) The Board at any time, and from time to time prior to the Closing, may
amend or terminate the Plan.
(b) The Plan shall automatically terminate upon the earlier to occur of
(i) May 17, 2000 or (ii) the Closing and completion of all payments under
the terms of the Plan.
7. NO GUARANTEE OF FUTURE SERVICE.
Selection of an individual to participate in the Plan shall not provide any
guarantee or promise of continued service of the participant with the Company,
and the Company retains the right to terminate the employment of any employee at
any time, with or without cause, for any reason or no reason, except as may be
restricted by law or contract.
8. TAX WITHHOLDING
The Company shall withhold from any distributions under the Plan any amount
required to satisfy the Company's income and employment tax withholding
obligations under Federal and State Law.
9. CHOICE OF LAW
All questions concerning the construction, validation and interpretation of the
Plan will be governed by the law of the State of Texas.
10. HEADINGS
The headings in the Plan are inserted for convenience only and shall not be
deemed to constitute a part hereof nor to affect the meaning thereof.
4
<PAGE>
The Plan is adopted by an authorized officer of the Company effective as of the
1st day of July, 1998.
GENEMEDICINE, INC.
By: Kathryn Stankis
-------------------
Its: Vice President, Human Resources
5
<PAGE>
-1-
CONFIDENTIAL TREATMENT
REQUESTED UNDER 17 C.F.R.
SECTIONS 200.80(b)(4), 200.83 AND
240.24b-2. * INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF
A CONFIDENTIAL TREATMENT
REQUEST THAT IS FILED
SEPARATELY WITH THE
COMMISSION
EXHIBIT 10.25
BINDING LETTER AGREEMENT
This Letter Agreement is made and entered into this August 4, 1998 by and
between Corange International Limited, a Bermudan corporation having its
principal place of business at P.O. Box HM 2026, Hamilton, HM HX, Bermuda
("Corange") and GeneMedicine, Inc., a Delaware corporation having its principal
place of business at 8301 New Trails Drive, The Woodlands, Texas 77381-4248
("GMED") to amend the Alliance Agreement (the "Alliance Agreement") dated July
17, 1995 as amended and Share Purchase Agreement (the "Share Purchase
Agreement") dated July 17, 1995 by and between Corange and GMED. Capitalized
terms used and not otherwise defined herein shall have the meanings given such
terms in the Alliance Agreement.
The parties hereby set forth in this Binding Letter Agreement the terms for
amending the Alliance Agreement and Share Purchase Agreement. These terms are as
follows:
A) The Research Term of the Alliance Agreement shall be extended for twenty-
four (24) months to February 3, 2002, which is the date of the seventh
anniversary of the Effective Date of the Alliance Agreement.
B) The Research Plan of September 23, 1997 as updated April 2, 1998, which
is now in place, is continued with respect to the three Research Leads for
the genes IL-2 (clinical study phase II), Interferon-(alpha) (clinical
study phase I/II) and IL-12 (clinical study phase I/II).
C) No rights are or have been granted to GMED under the Alliance
Agreement, or any other agreement entered into prior to the date of this
Letter Agreement by GMED with Corange or an affiliate of Corange including
members of the Roche group of companies to any proprietary technology
owned or controlled by Corange or an affiliate of Corange relating to
genes IL-2, Interferon-(alpha) or IL-12 (all of said proprietary
technology herein referred to as Corange Proprietary Technology). Sect.
14.1 b of the Alliance Agreement remains applicable. GMED's rights to the
DOTMA technology under the License Agreement between Syntex (U.S.A.) Inc.
and GeneMedicine, Inc. dated April 8, 1994 remain unchanged.
*** confidential treatment requested
<PAGE>
-2-
D) GMED shall be entitled to develop and commercialize products in the
Field alone or with other partners under GMED's own proprietary
technology, or proprietary technology developed during the Research Term,
if Corange or an affiliate of Corange does not *** or if *** or if GMED
fails to ***. In the latter case, it is agreed that the Alliance shall
terminate and GMED and Corange shall each have the right to develop and
commercialize Products in the Field pursuant to Sect. 7.3 of the Alliance
Agreement. Even in these cases, no rights are implied or granted to GMED
under this provision to Corange Proprietary Technology.
E) Corange and GMED agree that the research funding continues as
contemplated in the Alliance Agreement. Out of this research funding GMED
will pay in particular all costs of phase II clinical development
including any cost for biological materials for conducting clinical
studies. The phase II clinical development will consist of (i) performance
of a phase II clinical trial using the Research Lead for IL-2 (one trial),
(ii) performance of a phase I/II clinical trial using the Research Lead
for Interferon-(alpha) (one trial) and (iii) performance of a phase I/II
clinical trial with the Research Lead IL-12 (one trial) and (iv)
associated preclinical development necessary to support such clinical
trials.
Corange and GMED agree that the milestone payment under Sect. 6.2 of the
Alliance Agreement will be payable upon *** during the term of the
Alliance Agreement of each of the milestone events described in Section
6.2 for ***.
F) The definition of "Field" in the Alliance Agreement is amended to read
as follows: "Field" means any non-viral Gene Therapy method using IL-2,
Interferon-(alpha) or IL-12 or any combination thereof for the treatment
of all cancer indications in humans.
G) GMED shall forego the requirement of the equity purchase by Corange due
on February 1, 1999 pursuant to Section 1.2 (b) of the Share Purchase
Agreement. In addition to funding under Section 6.1 of the Alliance
Agreement GMED shall receive from Corange an amount of *** payable during
the Research Term, at the latest on *** in consideration for extending the
Field.
Corange shall pay GMED a one time milestone in an amount of *** upon ***.
Except for the occurrence of payment of this milestone of *** the
milestone payments under Sect. 6.2 of the Alliance Agreement shall remain
unchanged.
H) Corange and GMED agree that failure to achieve an Interim Research
Milestone due to the use of inappropriate or unsuitable models,
inappropriate product concepts or inappropriate gene selections will
result only in modification of the Research Plan, if the RMC has approved
the Research Plan under which such work is performed.
*** confidential treatment requested
<PAGE>
-3-
This Letter Agreement takes precedence over all previous agreements by and
between the parties with respect to the subject matter of the Alliance Agreement
and Share Purchase Agreement. In case of any inconsistencies between the terms
of this Letter Agreement and the terms of either or both of the Alliance
Agreement and Share Purchase Agreement this Letter Agreement shall supercede and
predominate. Except as amended and modified herein, the Alliance Agreement and
the Share Purchase Agreement shall remain in full force and effect in accordance
with respective terms.
IN WITNESS THEREOF, the parties have executed this Binding Letter Agreement as
of the date first set forth above.
CORANGE INTERNATIONAL LIMITED GENEMEDICINE, INC.
/s/ JOHN R. TALBOT /s/ NORMAN HARDMAN
- ------------------ ------------------
By: John R. Talbot By: Norman Hardman
Title: President Title: President and COO
/s/ C GEORGE BURCH
- ------------------
By: C George Burch
Title: Director
<PAGE>
(ARTICLE) 5
(PERIOD-TYPE) 9-MOS
(FISCAL-YEAR-END) DEC-31-1998
(PERIOD-START) JAN-01-1998
(PERIOD-END) SEP-30-1998
(CASH) 18,419,279
(SECURITIES) 0
(RECEIVABLES) 0
(ALLOWANCES) 0
(INVENTORY) 0
(CURRENT-ASSETS) 18,661,586
(PP&E) 2,777,353
(DEPRECIATION) 0
(TOTAL-ASSETS) 21,442,646
(CURRENT-LIABILITIES) 1,065,733
(BONDS) 0
(PREFERRED-MANDATORY) 0
(PREFERRED) 3,750
(COMMON) 14,579
(OTHER-SE) 16,688,614
(TOTAL-LIABILITY-AND-EQUITY) 21,442,646
(SALES) 0
(TOTAL-REVENUES) 4,253,969
(CGS) 0
(TOTAL-COSTS) 14,966,722
(OTHER-EXPENSES) 0
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 21,265
(INCOME-PRETAX) (10,712,753)
(INCOME-TAX) 0
(INCOME-CONTINUING) (10,712,753)
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) (10,712,753)
(EPS-PRIMARY) (0.74)
(EPS-DILUTED) (0.74)
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
(281) 364-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 5, 1998, there were outstanding 14,579,376 and 3,750,000 shares
of Common Stock and Series B Preferred Stock, par value $.001, respectively, of
the registrant. Page 1
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
FORM 10-Q/A
TABLE OF CONTENTS
PAGE NO.
COVER PAGE......................................................1
TABLE OF CONTENTS...............................................2
PART I. FINANCIAL INFORMATION
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................3
PART II. OTHER INFORMATION......................................6
SIGNATURES......................................................7
Page 2
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
early stage of GeneMedicine, Inc.'s development and technological uncertainty,
dependence on collaborative partners and licenses, the failure of existing or
future partnerships to be successful, future capital needs and uncertainty of
additional funding, uncertainty of patent protection, uncertainty of government
regulatory requirements, level of competition and rapid technological change, as
well as those set forth in this section and in the section entitled "Risk
Factors" and elsewhere in the Company's Form 10-K for the year ended December
31, 1997.
Since its inception in January 1992, GeneMedicine, Inc. (the "Company" or
"GeneMedicine") has devoted its resources primarily to fund its research and
development programs. The Company has been unprofitable since inception and to
date has not received any revenues from the sale of products. No assurance can
be given that the Company will be able to generate sufficient product revenues
to attain profitability on a sustained basis or at all. The Company expects to
incur substantial losses for the next several years as it continues to invest in
product research and development, preclinical studies, clinical trials and
regulatory compliance. At September 30, 1998, the Company's accumulated deficit
was approximately $57.6 million.
RESULTS OF OPERATIONS
Revenues of $1.3 million and $4.3 million were recorded for the three and nine
months ended September 30, 1998, respectively, which consisted primarily of
contract revenue of $1.0 million and $3.1 million, and interest income of $0.3
million and $1.0 million, respectively. These results compare with revenues of
$1.5 million and $5.3 million for the three and nine months ended September 30,
1997, respectively, which consisted primarily of contract revenue of $1.0
million and $3.5 million, and interest income of $0.4 million and $1.3 million,
respectively. Contract revenues in each respective period primarily resulted
from a corporate partnership with certain Boehringer Mannheim subsidiaries
("Boehringer Mannheim") of Corange International Ltd. ("Corange"), which was
acquired by Roche Holding Ltd. in March 1998, to develop non-viral gene
medicines using certain genes to treat human cancer indications. The decrease in
contract revenue for the first nine months of 1998 compared to the same period
in 1997 was due to the recognition in 1997 of a $0.5 million milestone payment
from Boehringer Mannheim for achieving clearance from the U.S. Food and Drug
Administration to commence a Phase I clinical trial using the Company's IL-2
Gene Medicine, which GeneMedicine is developing for the treatment of head and
neck cancer.
The Company's research and development expenses for the quarter ended September
30, 1998 were $3.8 million, compared to $3.3 million for the third quarter of
1997. For the nine months ended September 30, 1998, research and development
expenses increased to $11.5 million from $10.1 million for the same period in
1997. These increases were generally due to the expansion of the Company's
research and development activities, resulting in staffing increases and the
related salary and benefit costs, as well as additional laboratory supplies and
other support costs. The expansion of the Company's
Page 3
<PAGE>
research and development activities has been driven primarily by the progression
of research in the field of genetic vaccines and clinical development efforts in
the field of cancer. The Company anticipates that research and development
expenditures will increase over the next several years as it continues to expand
its research and product development efforts.
General and administrative expenses remained relatively unchanged at $1.2
million and $3.4 million for the three and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997.
Losses per share for the three and nine months ended September 30, 1998 were
$0.25 and $0.74, respectively, as compared to losses per share of $0.22 and
$0.60 for the same periods in 1997. The increases in the Company's net loss per
share for the three and nine months ended September 30, 1998 were primarily the
result of decreased contract revenue and increased research and development
expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private and public sales of its equity securities, interest income on invested
funds and revenues from corporate alliances. Through September 30, 1998, the
Company had received approximately $70.6 million in net proceeds from sales of
its equity securities. At September 30, 1998, the Company had working capital of
$17.6 million and cash, cash equivalents and short-term investments of $18.4
million. In addition, in October 1998 the Company received a $1.25 million,
scheduled contract research payment from Boehringer Mannheim.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including the ability to maintain existing and establish additional corporate
partnerships, continued scientific progress in its research and development
programs, the scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing, and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and anticipated funding from its corporate alliance with
Boehringer Mannheim, will enable the Company to maintain its current and planned
operations into the first quarter of 2000. There can be no assurance, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the expenditure of
such resources before such time. If the merger with Megabios Corp. described in
Note 2 to the Notes to Financial Statements included elsewhere herein is not
consummated, the Company intends to seek additional funding through public or
private financing, research and development arrangements with potential
corporate partners, or from other sources to augment its current cash position.
There can be no assurance that additional financing will be available on
favorable terms, if at all. In the event that adequate funding is not available,
the Company may be required to delay, reduce or eliminate one or more of its
research or development programs or obtain funds through arrangements
Page 4
<PAGE>
with corporate collaborators or others that may require the Company to
relinquish greater or all rights to product candidates at an earlier stage of
development or on less favorable terms than the Company would otherwise seek.
Insufficient financing may also require the Company to relinquish rights to
certain of its technologies that the Company would otherwise develop or
commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. Although the
Company's products may appear promising at an early stage of development, they
may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products commercially
unattractive. There can be no assurance that any collaboration will be continued
or result in successful commercialized products.
IMPACT OF YEAR 2000 ON INFORMATION SYSTEMS
Year 2000 exposure is the result of computer programs using two instead of four
digits to represent the year. These computer programs may erroneously interpret
dates beyond the year 1999, which could cause system failures or other computer
errors, leading to disruptions in operations.
Genemedicine is currently developing and executing a plan to insure that its
system and software infrastructure are Year 2000 compliant. GeneMedicine is in
the process of conducting an internal review to identify financial information
and operations systems and applications from which it has exposure to Year 2000
disruptions in operations. Given the relatively small size of GeneMedicine's
information systems and GeneMedicine's predominantly new hardware, software and
operating systems, management expects to be Year 2000 compliant by the end of
the fourth quarter of 1999.
Additionally, GeneMedicine has contacted key vendors and other third- parties
with which GeneMedicine has a significant relationship to determine their
readiness with respect to Year 2000 issues. GeneMedicine has been assured that
such third parties are either Year 2000 compliant or will be compliant by the
end of the fourth quarter of 1999. GeneMedicine is unable to control whether its
current and future strategic partners' and vendors' systems are or will be Year
2000 compliant.
GeneMedicine has prepared a preliminary estimate of total Year 2000 remediation
expenses of $10,000. These anticipated expenses are primarily for training and
education of information systems personnel and upgrades of certain software.
GeneMedicine has not yet evaluated the consequences of its most reasonably
likely worst case Year 2000 scenario nor has GeneMedicine completed Year 2000
contingency planning to address the question of what GeneMedicine will do if
Year 2000 compliance is not achieved. However at this time, management does not
believe that any systems, applications or third-party relationships will have a
material impact on GeneMedicine's business, financial condition or results of
operations if GeneMedicine is not Year 2000 compliant prior to the end of the
fourth quarter of 1999.
Page 5
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
Item 5. Other Information
Pursuant to recent changes to the proxy rules, unless a stockholder who wishes
to bring a matter before the stockholders at the Company's 1999 annual meeting
of stockholders notifies the Company of such matter prior to March 21, 1999,
management will have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
On October 24, 1998 in connection with the Merger Agreement, the Company and
American Stock Transfer & Trust ("AST&T) executed an Amendment to the Rights
Agreement between the Company and AST&T, a copy of which is attached hereto as
Exhibit 4.3.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
-------------- -----------
4.3 Amendment to Rights Agreement between Registrant and
American Stock Transfer & Trust Company dated October
24, 1998
10.24 Management Change of Control Incentive Plan dated July
1, 1998
+10.25 Binding Letter Agreement between Registrant and Corange
International Limited dated August 4, 1998
27 Financial Data Schedule
(b) On July 27, 1998 and August 3, 1998 the Registrant filed a current
report on Form 8-K and Form 8-K/A, respectively, to report a change in
Registrant's certifying accountant.
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
Page 6
<PAGE>
GENEMEDICINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEMEDICINE, INC.
Date: 11/23/1998 By: /s/ John M. Dodson
------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the
Registrant's Chief Accounting Officer)
Page 7
<PAGE>
EXHIBIT 4.3
AMENDMENT TO RIGHTS AGREEMENT
BETWEEN
GENEMEDICINE, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made this 24th day of
October, 1998, by and between GeneMedicine, Inc., a Delaware corporation (the
"Company"), and American Stock Transfer & Trust Company, as rights agent (the
"Rights Agent").
WHEREAS, the Company is entering into an Agreement and Plan of Merger and
Reorganization (as the same may be amended from time to time, the "Merger
Agreement") among the Company, Megabios Corp., a Delaware corporation
("Megabios"), and Montana Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Megabios (the "Merger Sub"), pursuant to which Merger
Sub will merge with and into the Company and the Company will survive as a
wholly-owned subsidiary of Megabios, and the former stockholders of the Company
will receive shares of Common Stock of Megabios; and
WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement,
dated as of January 16, 1996, as amended (the "Rights Agreement"); and
WHEREAS, the parties desire to amend the Rights Agreement in connection with the
execution and delivery of the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein set forth, the parties hereby agree as follows:
1. The definition of "Acquiring Person" set forth in Section 1(a) of the Rights
Agreement is hereby amended by adding the following sentence to the end of that
section:
Notwithstanding the foregoing, no Person shall be or become an
Acquiring Person by reason of (i) the execution and delivery of the
Agreement and Plan of Merger and Reorganization, dated as of
October 24, 1998, among Megabios Corp., a Delaware corporation,
Montana Acquisition Sub, Inc., a Delaware corporation ("Merger
Sub"), and the Company (the "Merger Agreement") or the execution of
any amendment thereto, (ii) the merger of Merger Sub with and into
the Company, or (iii) the consummation of any other transaction
contemplated by the Merger Agreement.
<PAGE>
2. The definition of "Change of Control" set forth in Section 1(e) of the Rights
Agreement is hereby amended by adding the following sentence to the end of that
section:
Notwithstanding the foregoing, no Change of Control shall be deemed
to have occurred by reason of (i) the execution and delivery or
amendment of the Merger Agreement, (ii) the merger of Merger Sub
with and into the Company, or (iii) the consummation of any other
transaction contemplated by the Merger Agreement.
3. The definition of "Shares Acquisition Date" in Section 1(n) of
the Rights Agreement is hereby amended by adding the following
sentence to the end of that section:
Notwithstanding anything else set forth in this Agreement, a Shares
Acquisition Date shall not be deemed to have occurred by reason of
(i) the public announcement, public disclosure, execution and
delivery or amendment of the Merger Agreement, (ii) the merger of
Merger Sub with and into the Company, or (iii) the consummation of
any other transaction contemplated by the Merger Agreement.
4. Section 3(a) of the Rights Agreement is hereby amended by adding
the following sentence to the end of that section:
Notwithstanding anything else set forth in this Agreement, no
Distribution Date shall be deemed to have occurred by reason of (i)
the execution and delivery or amendment of the Merger Agreement,
(ii) the merger of Merger Sub with and into the Company, or (iii)
the consummation of any other transaction contemplated by the
Merger Agreement.
5. Section 7(a) of the Rights Agreement is hereby amended by
deleting the word "or" on the penultimate line of the section and
adding the following clause at the end of that section:
, or (iv) immediately before the Effective Time, as
defined in the Merger Agreement.
6. Section 13(c) of the Rights Agreement is hereby amended to add the following
parenthetic phrase at the beginning of the second line of that section: (other
than any such transaction contemplated by the Merger Agreement)
7. The Rights Agreement, as amended by this Amendment, shall remain in full
force and effect in accordance with its terms.
-2-
<PAGE>
8. This Amendment shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State. This Amendment may be executed in any
number of counterparts, each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument. If any term, provision, covenant or restriction
of this Amendment is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Amendment shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly
executed and attested, all as of the date and year first above written.
GENEMEDICINE, INC.
By: /s/ Norman Hardman
------------------
Name: Norman Hardman
Title: President & CEO
Attest: /s/ Richard A. Waldron
----------------------
Name: Richard A. Waldron
Title: Vice President and
Chief Financial Officer
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Wilbert Miles
-----------------
Name: Wilbert Miles
Title: Vice President
Attest: /s/ Susan Silber
----------------
Name: Susan Silber
Title: Assistant Secretary
-4-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Appendix III--Financial Information on Valentis" in the registration statement
(Form S-4) and prospectus of Valentis, Inc. (formerly Megabios Corp.) for the
registration of 4,400,000 shares of its common stock and to the incorporation by
reference therein of our report dated July 31, 1998, with respect to the
financial statements of Valentis, Inc. included in its Annual Report (Form 10-K)
for the year ended June 30, 1998, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 29, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Houston, Texas
July 2, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the registration statement on Form S-4 of
Valentis, Inc. of our report dated July 1, 1999 for the periods ended December
31, 1998, 1997 and 1996 relating to PolyMASC Pharmaceuticals plc and to the
reference to our firm under the caption "Experts" in the registration statement.
/s/ BDO Stoy Hayward
Reading, England
July 2, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF DIRECTOR
The undersigned hereby consents to be named as director of Valentis, Inc., a
Delaware corporation, effective upon the date of the merger, in its Registration
Statement on Form S-4.
/s/ GILLIAN ELIZABETH FRANCIS
Gillian Elizabeth Francis, MB, BS, MSc,
DSc (MED), FRCPath
Dated: July 1, 1999
