EXHIBIT 10.8
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is entered into as of the 26th day of September 1997, by and
between GenVec, Inc., a Delaware corporation with its principal place of
business at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the "Company"), and
FUSO Pharmaceutical Industries, Ltd., a corporation organized under the laws of
Japan, with its principal place of business at 3-11, 2-Chome, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇-
▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇ and its registered head office at 7-10 1-Chome, ▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇-▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇ (the "Investor"), with reference to the following
recitals:
WHEREAS, the Company was incorporated on December 7, 1992, under the laws
of the State of Delaware;
WHEREAS, the Company and the Investor have entered into a Collaboration
Agreement, dated as of the date hereof and a Commercialization Agreement, dated
as of the date hereof (the "Collaboration and Commercialization Agreements"),
pursuant to which the Company has granted to the Investor a license to certain
intellectual property described in the Collaboration and Commercialization
Agreements for the uses described in the Collaboration and Commercialization
Agreements and the Company and the Investor have agreed to collaborate to
conduct research and develop certain gene therapy products for the treatment of
human cancer (the "Collaboration"); and
WHEREAS, the Investor desires to purchase certain of the shares of the
capital stock of the Company on the terms hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements, undertakings and
covenants set forth in this Agreement, and for other good and valuable
consideration, the receipt, sufficiency and adequacy of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
1. Terms of Sale. Subject to the terms and conditions of this Section 1,
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the Company will issue and sell to the Investor, and the Investor will purchase
from the Company, 444,445 shares of the Company's Class E Convertible Preferred
Stock, par value $.01 per share (the "Shares"), for an aggregate purchase price
of one million one and 25/100 U.S. dollars ($1,000,001.25). On or before the
fourteenth (14th) business day after the date hereof, the Investor will deliver
to the Company a certified bank check, payable to the order of the Company, or a
wire transfer of immediately available funds, in an amount of one million one
and 25/100 U.S. dollars ($1,000,001.25) in payment for the Shares. Upon receipt
of such payment by the Company on a business day, subject to receipt of
stockholder approval ("Stockholder Approval") of the Company's Restated
Certificate of Incorporation attached hereto as Exhibit A (the "Restated
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Certificate"), the Investor will be deemed to be the holder of record of the
Shares and the Company will promptly execute a certificate
evidencing issuance to the Investor of the appropriate number of fully-paid and
non-assessable Shares.
2. Representations and Warranties of the Company. The Company hereby
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represents and warrants that:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(b) The Company has all necessary corporate power to enter into this
Agreement, and, subject to receipt of Stockholder Approval, to issue and deliver
the Shares hereunder and to carry out all of the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby, including,
without limitation, the issuance of the Shares, will, subject to receipt of
Stockholder Approval, be duly authorized by all requisite corporate action on
the part of the Company. This Agreement constitutes a valid and binding
instrument of the Company, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(c) Upon receipt of Stockholder Approval, the Company's authorized
capital stock will consist of (i) 52,005,095 shares of Common Stock, par value
$.01 per share, 5,687,473 of which are outstanding; (ii) 1,334,000 shares of
Class A Convertible Preferred Stock, par value $.01 per share, 1,334,000 of
which are outstanding; (iii) 11,800,468 shares of Class B Convertible Preferred
Stock, par value $.01 per share, 11,320,314 of which are outstanding; (iv)
21,065,000 shares of Class C Convertible Preferred Stock, par value $.01 per
share, 21,065,000 of which are outstanding; (v) 2,000,000 shares of Class D
Convertible Preferred Stock, par value $.01 per share, 571,429 of which are
outstanding and (vi) 444,445 shares of Class E Convertible Preferred Stock, par
value $.01 per share, none of which are outstanding. All outstanding shares of
capital stock are, and the Shares, when issued in accordance with or as
contemplated by the terms of this Agreement, will be, validly issued and
outstanding, fully paid and non-assessable. The shares of Common Stock issuable
upon conversion of the Shares are duly and validly authorized and reserved for
issuance. Each share of Class E Convertible Preferred Stock will be convertible
into a share or shares of Common Stock, at the rate, and otherwise has the
designations, preferences, limitations and rights, provided for in Article NINTH
of the Restated Certificate.
(d) The Company has made available to the Investor the Company's
audited financial statements for its most recent fiscal year and unaudited
financial statements for its most recent interim period, in each case, to the
extent available. As of the date of this Agreement, the financial statements
provided are attached hereto as Exhibit B. The annual statements have been
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prepared in a manner consistent with generally accepted accounting principles in
the United States ("GAAP") and the interim financial statements have been
prepared in a manner consistent with the annual financial statements (subject to
normal year-end audit adjustments and the omission of footnotes required by
GAAP).
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(e) The Company has no liabilities, except: (i) as disclosed or
reflected in the financial statements attached hereto as Exhibit B; (ii)
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liabilities not in excess of two hundred fifty thousand U.S. dollars
($250,000.00); or (iii) as disclosed on Exhibit C.
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(f) To the Company's knowledge, there are neither any pending nor
threatened suits, legal proceedings, claims or governmental investigations
against or with respect to the Company or its properties or assets nor any basis
for any such suit, legal proceedings, claim or governmental investigation.
3. Representations and Warranties of the Investor. The Investor hereby
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represents and warrants that:
(a) The Investor is acquiring the Shares for purposes of investment
for its own account and not with a view to, or for resale in connection with,
the distribution thereof, as those terms are used in the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and regulations promulgated
thereunder. The Investor has been advised and acknowledges that it will not be
able to dispose of the Shares, or any interest therein, without first complying
with the relevant provisions of the Securities Act and any applicable state
laws. The Investor also understands that the provisions of Rule 144 promulgated
under the Securities Act, permitting routine sales of securities of certain
issuers subject to the terms and conditions thereof, are not currently available
to it with respect to the Shares. The Investor acknowledges that the Company is
under no obligation to register the Shares or to take any action to assist the
Investor in complying with terms and conditions of any exemption that might be
available under the Securities Act or any state securities laws with respect to
sales of the Shares by the Investor in the future.
(b) The Investor has all corporate power to enter into this Agreement
and to carry out all of the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by the Investor and the consummation
of the transactions contemplated hereby have been duly authorized by all
requisite corporate action on the part of the Investor. This Agreement
constitutes a valid and binding instrument of the Investor, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
(c) The Investor is an "accredited investor," as that term is defined
in Rule 501 promulgated under the Securities Act.
(d) The Investor either is (i) not an "Investment Company," as that
term is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or (ii) excluded from the definition of an Investment
Company under Section 3(c)(1) of the Investment Company Act.
(e) The Investor acknowledges that the representations, agreements and
acknowledgments set forth above are being given by the Investor with the
understanding that they
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will be relied on by the Company and its Board of Directors to claim the
availability of the exemption from the registration provisions of the Securities
Act contained in Regulation D promulgated thereunder.
(f) The Investor believes that it has received all the information it
considers necessary or appropriate for deciding whether to purchase the Shares.
In addition, it has had an opportunity to discuss the Company's business,
management, and financial affairs with the Company's management and to review
the Company's facilities. It has had an opportunity to ask questions of
officers of the Company, which questions were answered to the Investor's
satisfaction. It understands that its discussions, as well as the written
information given to it by the Company, were intended to describe the aspects of
the Company's business and prospects which the Company believes to be material,
but were not necessarily a thorough or exhaustive description. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 hereof or the right of the Investor to rely thereon.
4. Covenants of the Company. The Company hereby covenants that, so long
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as (i) the Investor owns any shares of the Company's Class E Convertible
Preferred Stock or shares of Common Stock into which such shares of Class E
Convertible Preferred Stock have been converted and (ii) the Company has not
consummated an underwritten public offering of Common Stock pursuant to one or
more registration statements filed under the Securities Act (or any successor
statute), the Company shall furnish to the Investor the financial statements and
reports described in (a) and (b) of this section, such annual financial
statements to be prepared in accordance with generally accepted accounting
principles in the United States consistently applied (except as may be noted
therein) and such interim financial statements to be prepared in a manner
consistent with the annual financial statements (subject to normal year-end
audit adjustments and the omission of footnotes), certified by the Company's
chief executive or financial officer:
(a) As soon as available, and in any event within 120 days after the
end of each fiscal year of the Company, a balance sheet of the Company as of the
end of such fiscal year and related statements of operations, stockholders'
equity and cash flows for such fiscal year, all in reasonable detail and setting
forth in comparative form the figures as of the end of and for the previous
fiscal year, which financial statements shall have been audited and shall be
accompanied by an opinion addressed to the Company from independent auditors;
and
(b) As soon as available, and in any event within 60 days after the
end of each fiscal quarter of the Company, an unaudited balance sheet and
unaudited statements of operations and cash flows.
5. Covenants of the Investor.
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(a) The Investor agrees that it will not sell, assign, pledge,
hypothecate, encumber or in any other manner transfer or dispose (a "Transfer")
of the Shares or any shares of Common Stock into which such Shares have been
converted (collectively, the "Securities") during the
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Research Program Term (as defined in the Collaboration Agreement), without
express written consent from the Company.
(b) Before any Securities held by the Investor may be sold or
otherwise transferred (including transfer by gift or operation of law), the
Company shall have a right of first refusal to purchase the Securities on the
terms and conditions set forth in this Section 5(b) (the "Right of First
Refusal").
(i) Notice of Proposed Transfer. The Investor shall deliver to
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the Company a written notice (the "Notice") stating: (A) the Investor's bona
fide intention to sell or otherwise transfer such Securities; (B) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (C) the
number of Securities to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Investor proposes to
transfer the Securities (the "Offered Price"), and the Investor shall offer the
Securities at the Offered Price to the Company.
(ii) Exercise of Right of First Refusal. At any time within
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thirty (30) days after receipt of the Notice, the Company may, by giving written
notice to the Investor, elect to purchase all, but not less than all, of the
Securities proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(b)(iii) below.
(iii) Purchase Price. The purchase price ("Purchase Price") for
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the Securities purchased by the Company under this Section 5(b) shall be the
Offered Price. If the Offered Price includes consideration other than cash, the
cash equivalent value of the non-cash consideration shall be determined by the
Board of Directors of the Company in good faith.
(iv) Payment. Payment of the Purchase Price shall be made in
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cash (by certified bank check, payable to the order of the Investor, or wire
transfer of immediately available funds) within thirty (30) days after receipt
of the Notice or in the manner and at the times set forth in the Notice.
(v) Holder of Company Securities' Right to Transfer. If all of
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the Securities proposed in the Notice to be transferred to a given Proposed
Transferee are not purchased by the Company as provided in this Section 5(b),
then the Investor may sell or otherwise transfer such Securities to the Proposed
Transferee at the Offered Price or at a higher price, provided that (i) such
sale or other transfer is consummated within ninety (90) days after the date of
the Notice; (ii) any such sale or other transfer is effected in accordance with
any applicable securities laws; and (iii) the Proposed Transferee agrees in
writing to be bound by the obligations of the Investor set forth in this
Agreement. If the Securities described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company shall again be offered the Right of First Refusal
before any Securities held by the Investor may be sold or otherwise transferred.
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(vi) Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate upon an initial underwritten public offering of the
Company's securities.
(c) The Investor agrees to hold the Securities subject to all
applicable provisions of the Securities Act, the Restated Certificate and the
Amended and Restated Bylaws of the Company and this Agreement.
(d) The Investor shall give the Company prompt written notice of any
proposed disposition of the Securities and shall not proceed with any such
proposed disposition without the express written consent required by paragraph
(a) of this Section 5 and unless a registration statement under the Securities
Act is in effect with respect to the Securities and any applicable state
securities laws have been complied with or unless the Company shall have
received an opinion of counsel, satisfactory to the Company, to the effect that
such registration is not required. In addition, the Investor agrees the
certificates representing the Securities issued to it pursuant hereto may bear
the following or similar legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST
REFUSAL AND A CONTRACTUAL LIMITATION ON THEIR ASSIGNMENT, PLEDGE,
HYPOTHECATION, ENCUMBRANCE, TRANSFER OR OTHER DISPOSITION DESCRIBED IN THE
STOCK PURCHASE AGREEMENT DATED SEPTEMBER 25, 1997. IN ADDITION, THE SHARES
HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE. NEITHER THE SHARES NOR ANY INTEREST OR
PARTICIPATION IN THE SHARES MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF THE IN ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES
ACT, UNLESS, IN THE OPINION (WHICH SHALL BE IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION) OF COUNSEL SATISFACTORY TO THE
CORPORATION, SUCH REGISTRATION IS NOT REQUIRED.
(e) The Investor agrees not to disclose to third parties any
confidential or proprietary information concerning the Company which is
furnished to the Investor by the Company except as required by law or legal
process. the term "confidential information" does not include information which
(i) was or becomes generally available to the public other than as a result of a
disclosure by such Investor, or (ii) was or becomes available to such Investor
on a non-confidential basis from a source other than the Company, provided that
such source is not bound by a confidentiality agreement with the Company.
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(f) The Investor agrees in connection with the Company's initial
underwritten public offering of the Company's securities, (1) not to sell, make
short sale of, loan, grant any options for the purchase of, or otherwise dispose
of any securities of the Company (other than those securities included in the
registration) without the prior written consent of the Investor or the
underwriters managing such initial underwritten public offering of the Company's
securities (the "Managing Underwriter") for one hundred eighty (180) days, or
such longer period of time as may be requested by the Managing Underwriter, from
the effective date of such registration, and (2) further agrees to execute any
agreement reflecting (1) above as may be requested by the Managing Underwriter.
The Investor shall cause any proposed purchaser, assignee, transferee or pledgee
of any shares held by the Investor to agree to take and hold such securities
subject to this Section 5(f).
(g) The Investor agrees that it will not, directly or indirectly,
acquire, offer to acquire, agree to acquire, become the beneficial owner of or
obtain any rights in respect of any capital stock of the Company, by purchase or
otherwise, except as contemplated by this Agreement or as otherwise expressly
agreed to in writing by the Company.
6. Opinion of Counsel. On or before September 25, 1997, the Company's
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counsel will deliver to the Investor an opinion, in form and substance
reasonably satisfactory to the Investor, that the Shares, when sold and
delivered in accordance with this Agreement, will be duly authorized, validly
issued and outstanding, fully paid and non-assessable.
7. Miscellaneous
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(a) Amendments and Waivers. This Agreement and any provision hereof
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may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party (or any predecessor in interest thereof) against
which enforcement of the same is sought, provided, however, a change, waiver,
discharge or termination signed by a majority of the holders of the Securities
shall be deemed to be binding on all holders of Securities at the time
outstanding and each future holder of such Securities.
(b) Successors and Assigns. This Agreement will be binding upon and
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inure to the benefit of the successors and assigns of the Company and the
successors and permitted assigns of the Investor.
(c) Transferability. The Investor may not transfer or assign this
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Agreement, or any of the rights or obligations hereunder, unless it is
transferred or assigned to the purchaser of all of the outstanding capital stock
or all or substantially all of the assets of the Investor, including every right
and interest the Investor may have in the Collaboration Agreement. The Investor
further agrees that prior to any transfer of this Agreement, consistent with
this Section, or any transfer of the Securities, the Investor shall comply with
all provisions of Section 5 of this Agreement.
(d) Law Governing. This Agreement will be governed by, and construed
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and enforced in accordance with, the internal laws of the State of Delaware.
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(e) Notices. Unless otherwise provided, all notices, requests,
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demands and other communications required or permitted under this Agreement will
be in writing and will be deemed to have been duly made and received: (i) upon
personal delivery or confirmed facsimile to the party to be notified; (ii) seven
(7) business days after deposit with the Unites States Post Office, by
registered or certified mail or by first class mail, postage prepaid, addressed
as set forth below (or Japanese equivalent of the foregoing); or (iii) two (2)
business days after deposit with Federal Express or another reputable overnight
courier (for two business day delivery), shipping prepaid, addressed as set
forth below:
(i) if to the Company, then to:
GenVec, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: President
with a copy to:
Attn: Chief Financial Officer
(ii) If to the Investor, then to:
FUSO Pharmaceutical Industries, Ltd.
3-11, 2-Chome ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇-▇▇
▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇
Attn: President
with a copy to:
Attn: Chief Financial Officer
Either party may change the address to which communications are to be sent by
giving five (5) business days' advance notice of such change of address to the
other party in conformity with the provisions of this Section.
(f) Headings. The headings in this Agreement are for purposes of
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reference only and will not affect the meaning or construction or any of the
provisions hereof.
(g) Execution; Counterparts. This Agreement may be executed in any
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number of counterparts, each of which will be deemed to be an original as
against any party whose signature appears on such counterpart, and all of which
will together constitute one and the same instrument. This Agreement will become
binding when one or more counterparts of this Agreement, individually or taken
together, bear the signatures of all of the parties to this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement
as of the date first above written.
FUSO Pharmaceuticals Industries, Ltd.
By:
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▇▇▇▇▇ ▇▇▇▇
President
GenVec, Inc.
By:
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▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Ph.D.
President and Chief Executive Officer
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Exhibit A
State of Delaware
Office of the Secretary of State
I, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"GENVEC, INC.", FILED IN THIS OFFICE ON THE TWENTY-SIXTH DAY OF JUNE, A.D. 1996,
AT 9:05 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Secretary of State
RESTATED CERTIFICATE OF INCORPORATION
OF
GENVEC, INC.
The undersigned, ▇▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇, President of Genvec, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The present name of the Corporation is GenVec, Inc.
2. The original Certificate of Incorporation of the Corporation was
filed in the Office of the Secretary of State of the State of Delaware on
December 7, 1992.
3. This Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Section 245 of the Delaware General
Corporation Law, the Board of Directors having duly adopted resolutions
declaring advisable this Restated Certificate of Incorporation.
4. This Restated Certificate of Incorporation is being filed pursuant to
Section 245 of the Delaware General Corporation Law in order to restate and
integrate the Certificate of Incorporation of the Corporation. This Restated
Certificate of Incorporation does not further amend the provisions of the
Certificate of Incorporation of the Corporation as amended previously, and there
is no discrepancy between those provisions and the provisions of this Restated
Certificate of Incorporation.
5. The Certificate of Incorporation of the Corporation is hereby restated
in its entirety as follows:
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RESTATED CERTIFICATE OF INCORPORATION
OF GENVEC, INC.
FIRST: The name of the Corporation is:
GENVEC, INC.
SECOND: The address of its registered office in the State of Delaware is:
Corporation Trust Center, ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The name of its registered agent at such address is: THE
CORPORATION TRUST COMPANY.
THIRD: The nature of the business or purposes to be conducted or
promoted is:
To have unlimited power to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The name and mailing address of the incorporator is as follows:
Name Address
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▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ 12th Floor Packard Building
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.
SIXTH: Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
SEVENTH:
A. Elimination of Certain Liabilities of Directors. A director of
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the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided, however, that this shall not exempt a director from liability (i) for
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any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which a director derived an improper personal benefit. If the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal
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liability provided herein, shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal of modification.
B. Indemnification and Insurance.
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(1) Right to Indemnification. Each person who was or is made a
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party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "Proceeding"), by reason of the fact that he or she, or a person
for whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, the rights of
indemnification provided hereby shall continue as theretofore notwithstanding
such amendment unless such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of his or her heirs, executors, administrators and personal
representatives; provided, however, that, except as provided in Section (B)(2)
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of this Article, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) authorized by
the board of directors of the Corporation.
The right to indemnification conferred in this section shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
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requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall he made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this section or
otherwise. The Corporation may, by action of its board of directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
-4-
(2) Right of Claimant to Bring Suit. A claimant may bring suit
-------------------------------
against the Corporation under Section (B)(1) of this Article only if the
Corporation fails to pay in full within thirty days of its receipt of a written
claim for payment hereunder. If successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim
(including, but not limited to, attorneys' fees). It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct that make it
permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of providing such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its board of directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(3) Non-Exclusivity of Rights. The right to indemnification
--------------------------
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this section shall not be exclusive of any other
right that any person may have or hereafter acquire under any statute, provision
of the Certificate of Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(4) Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
C. Amendment. Notwithstanding the provisions of this Certificate of
---------
Incorporation and any provisions of the by-laws of the Corporation, no amendment
to this Certificate of Incorporation shall amend, modify or repeal any or all of
this Article SEVENTH unless adopted by the affirmative vote of the consent of
holders of not less than three-fourths of the outstanding shares of stock of the
Corporation entitled to vote in elections of directors, considered for purposes
of this Article as a class.
EIGHTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of
-5-
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
NINTH: The aggregate number of shares which the Corporation shall have
authority to issue is 88,204,563 of which 52,005,095 shall be designated as
Common Stock, par value $0.01 per share ("Common Stock"), 1,334,000 shall be
designated as Class A Convertible Preferred Stock, par value $.01 per share
("Class A Preferred Stock"), 11,800,468 shall be designated as Class B
Convertible Preferred Stock, par value $0.01 per share, ("Class B Preferred
Stock"), 21,065,000 shall be designated as Class C Convertible Preferred Stock,
par value $.01 per share ("Class C Preferred Stock"), and 2,000,000 shall be
designated as Class D Convertible Preferred Stock, par value $.01 per share
("Class D Preferred Stock") (the Class A Preferred Stock, Class B Preferred
Stock, Class C Preferred Stock and Class D Preferred Stock, unless otherwise
indicated, are hereinafter referred to collectively as the "Preferred Stock") .
The following is a statement of the designations, preferences,
limitations and relative rights in respect of the shares of each class of stock
of the Corporation:
A. Common Stock.
------------
(1) Voting Rights. Each holder of record of Common Stock shall
-------------
have the right to one vote for each share of Common Stock standing in the name
of such holder on the books of the Corporation.
(2) Dividends. Subject to the rights of the holders of the
---------
Preferred Stock, each holder of record of Common Stock will be entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors.
B. Preferred Stock. Except as provided in Section B(5)(d)(i) of
---------------
this Article, each share of Class A Preferred Stock, Class B Preferred Stock,
Class C Preferred Stock and Class D Preferred Stock is identical in all respects
and possesses the same designations, limitations and rights as each other share
of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and
Class D Preferred Stock, as the case may be. Except as provided in Sections
B(2)(b), B(3)(a), B(5)(a) and B(5)(d) of this Article, the Class A Preferred
Stock, Class B Preferred Stock, Class C
-6-
Preferred Stock and Class D Preferred Stock are identical in all respects and
possess the same designations, limitations and rights.
(1) Dividends. In the event that the Corporation declares or
---------
pays any dividend on the Common Stock or makes, directly or indirectly, any
other distribution in respect to the Common Stock, the holders of Preferred
Stock shall be entitled to participate with the holders of Common Stock in any
such dividends paid or set aside for payment, such that the holders of Preferred
Stock shall receive, with respect to each share of Preferred Stock, an amount
equal to (a) the dividend payable with respect to each share of Common Stock
multiplied by (b) the number of shares (and fraction of a share, if any) of
Common Stock into which such share of Preferred Stock is convertible as of the
record date for such dividend.
(2) Voting Rights.
-------------
(a) Except as otherwise provided herein or by law, the holders of
Preferred Stock shall have full voting rights and powers, they shall be entitled
to vote on all matters as to which holders of the Common Stock shall be entitled
to vote, they shall vote together with the holders of the Common Stock as a
single class, and they shall be entitled to one vote for each share of Common
Stock which would be held by them if all of their shares of Preferred Stock
would be converted into shares of Common Stock under Section B(5) of this
Article.
(b) Except as otherwise provided herein or by law, the vote or consent
of at least two-thirds of the outstanding shares of the Class C Preferred Stock
voting as a separate class shall be required for the following actions:
(i) any change in the rights, preferences, or privileges of
the Class C Preferred Stock;
(ii) any amendment, repeal or addition of any provision
of or to the By-Laws, if such action would adversely affect the
preferences, rights, privileges or powers of, or restrictions provided for
the benefit of, the Class C Preferred Stock;
(iii) the authorization of any class of equity securities
ranking prior to or having preference over the Class C Preferred
Stock with respect to dividends, redemption or assets of the Corporation;
(iv) the reclassification of any shares of Common Stock
into shares of any class of equity securities ranking prior to or having
preference over the Class C Preferred Stock with respect to dividends,
redemption or assets of the Corporation;
-7-
(v) the merger or consolidation of the Corporation into or
with any other corporation, the sale of all or substantially all of the
Corporation's assets, or the liquidation of the assets of the Corporation,
provided, however, that no such vote or consent under this Section B(2) (b)
-------- -------
(v) shall be required if the aggregate price to be paid to the
Corporation's stockholders in the merger, consolidation, sale or
liquidation is equal to or greater than an amount determined by multiplying
(X) $1.50 per share, as adjusted to reflect any change in the number of
shares of the Corporation's Common Stock as a result of a stock split,
stock dividend, distribution payable in shares of the Corporation's Common
Stock or other reclassification after September 19, 1995, by (y) the number
of outstanding shares of the Corporation's Common Stock (for purposes of
this determination only, a securityholder holding capital stock of the
Corporation convertible into the Corporation's Common Stock shall be
treated as having converted all such convertible stock into the
Corporation's Common Stock at the applicable conversion rate, pursuant to
Section B(5) of this Article, in effect at the time of this determination);
and
(vi) the acquisition by the Corporation of any corporation or
other business entity if such a transaction involves (A) the issuance of
equity securities of the Corporation resulting in the new securityholders
having more than 25 percent of the voting power pursuant to Sections A(1)
and B(2) (a) of this Article or (B) the payment of cash consideration
equivalent to 25% of the product of (x) the sum of the number of shares of
Common Stock and Preferred Stock then outstanding and the number of such
shares underlying options and other rights to acquire such shares
(irrespective of whether such shares, options or other rights are
conditional or unvested) times (y) the then most recent price per share at
which the Corporation sold any shares of Preferred Stock in an offering
that yielded gross proceeds of not less than $5,000,000 to the Corporation.
(c) Whenever holders of the Preferred Stock or Common Stock,
separately or as a single class, are required or permitted to take any action,
such action may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
(3) Rights of Liquidation.
---------------------
-8-
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation (any such event being hereinafter
referred to as a "Liquidation"), before any distribution of assets of the
Corporation shall be made to or set apart for the holders of the Common Stock,
the holders of the Preferred Stock shall be entitled to receive payment out of
such assets of the Corporation in an amount per share equal to $0.50 per share
for each share of Class A Preferred Stock held by such holder, $1.00 per share
for each share of Class B Preferred Stock or Class C Preferred Stock held by
such holder and $1.75 per share for each share of Class D Preferred Stock held
by such holder (such amounts being referred to herein as "Liquidation
Preference") plus any declared but unpaid dividends on such shares of Preferred
Stock. If the assets of the Corporation available for distribution to the
holders of the Preferred Stock shall not be sufficient to make in full the
payments required by this Section B(3)(a), such assets shall be distributed
ratably among the holders of the Preferred Stock based upon the aggregate
Liquidation Preferences of the shares of Preferred Stock held by each such
holder.
(b) If the assets of the Corporation available for
distribution to stockholders exceed the aggregate amounts payable pursuant to
Section B(3)(a) of this Article above, the remainder of such assets shall be
distributed to the holders of Preferred Stock and Common Stock on a pro rata
basis, with the amount distributable to the holders of Preferred Stock to be
computed on the basis of the number of shares of Common Stock which would be
held by them if immediately prior to the Liquidation all of the outstanding
shares of such Preferred Stock had been converted into shares of Common Stock
under Section of this Article.
(c) A merger or consolidation involving the Corporation in
which the Corporation is not the surviving entity and a sale, lease or transfer
of all or substantially all of the assets of the Corporation shall, at the
option of holders representing a majority of the Preferred Stock voting as a
single class, be deemed a Liquidation, unless in connection with such
transaction, each holder of Preferred Stock receives a preferred stock having
terms and conditions which are no less favorable than the terms and conditions
of the Preferred Stock held by such holder prior to the transaction.
(d) Notwithstanding the provisions contained in Section
B(3)(c) of this Article above, in the event of a merger or consolidation
involving the Corporation in which the Corporation is not the surviving entity,
or a sale, lease or transfer of all or substantially all of the assets of the
Corporation, in which a holder of Preferred Stock would receive cash and/or
marketable securities (i.e., securities registered under the Securities Act of
----
1933, as amended, at the time of delivery, or securities committed to be so
registered within 60 days after delivery) in an amount less than the aggregate
Liquidation Preference of the shares of Preferred Stock held by such holder,
then holders of a majority of the Preferred Stock then outstanding, voting as a
single class, may elect, in lieu of all other rights under the terms of the
transaction or this Article, to receive an amount equal to their aggregate
Liquidation Preference for such shares of Preferred Stock. If the holders make
such an election, each such holder shall have a priority on such holder's pro
rata portion of all cash and marketable securities received in such transaction
to the extent of the aggregate Liquidation Preference for such holder's shares
of Preferred Stock. Such election shall be made by the holders by
-9-
written notice to the Corporation within 30 days after the date of stockholder
approval of the transaction (or within 30 days after receiving notice of such
transaction from the Corporation if the transaction is not submitted for
stockholder approval).
(e) In the event that the Corporation shall, at any time,
issue any shares of Preferred Stock (i) by stock dividend or any other
distribution upon any stock of the Corporation payable in shares of Preferred
Stock, or (ii) by a subdivision of its shares of outstanding Preferred Stock, by
reclassification or otherwise, the Liquidation Preference then in effect shall
be reduced proportionately, and, in like manner, in the event of any combination
of shares of Preferred Stock, by reclassification or otherwise, the Liquidation
Preference then in effect shall be proportionately increased.
(4) Actions Requiring the Consent of the Holders of the Preferred
-------------------------------------------------------------
Stock. As long as any shares of Preferred Stock remain outstanding, the consent
-----
of the holders of at least a majority of the votes which holders of Preferred
Stock are entitled to cast, given in person or by proxy, either in writing
without a meeting or by vote at a meeting called for such purpose, shall be
necessary for effecting or validating any amendment, alteration or repeal of any
of the provisions of the Certificate of Incorporation or the By-Laws of the
Corporation which (a) increases the number of authorized shares of any class of
capital stock, (b) adversely affects the rights, preferences or powers of any
class of Preferred Stock or of the holders thereof or (c) decreases the required
time for the giving of any notice to which the holders of Preferred Stock may be
entitled.
(5) Conversion.
----------
(a) Right To Convert. A holder of record of any share or
----------------
shares of Class A Preferred Stock shall have the right at any time, at such
holder's option, to convert, without the payment of any additional
consideration, each share of Class A Preferred Stock held by such holder into
that number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (i) .50 by (ii) the Conversion Factor (as defined in
Section B(5)(d) of this Article below) then in effect for the Class A Preferred
Stock. A holder of record of any share or shares of Class B Preferred Stock,
Class C Preferred Stock or Class D Preferred Stock shall have the right at any
time, at such holder's option, to convert, without the payment of any additional
consideration, each share of Class B Preferred Stock, Class C Preferred Stock or
Class D Preferred Stock held by such holder into that number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (X) 1 by (Y)
the Conversion Factor (as defined in Section B(5)(d) of this Article below) then
in effect for the Class B Preferred Stock, Class C Preferred Stock or Class D
Preferred Stock, as applicable; provided, however, that the provisions of
-----------------
B(5)(d)(i) shall not apply to the Conversion Factor for Class D Preferred Stock.
No fractional shares or scrip representing fractional shares shall be issued
upon the conversion of any Preferred Stock. With respect to any fraction of a
share of Common Stock called for upon any conversion after completion of the
calculation of the aggregate number of shares of Common Stock to be issued to
such holder, the Corporation shall pay to such holder an amount in cash equal to
any fractional share to which such holder would be entitled,
-10-
multiplied by the current market value of a
share, as determined in good faith by the Board of Directors of the Corporation.
(b) Mechanics of Conversion. If the holder of shares of
-----------------------
Preferred Stock desires to exercise such right of conversion, such holder must
give written notice to the Corporation (the "Conversion Notice") of the election
by such holder to convert a stated number of shares of Preferred Stock (the
"Conversion Shares") into shares of Common Stock on the date specified in the
Conversion Notice (which date shall not be earlier than the date on which the
Corporation receives the Conversion Notice (the "Conversion Date)), and by
surrender of the certificate or certificates representing such Conversion
Shares. The Conversion Notice shall also contain a statement of the name or
names (with addresses) in which the certificate or certificates for Common Stock
shall be issued. Promptly after the Conversion Date and the surrender of the
Conversion Shares, the Corporation shall issue and deliver, or cause to be
delivered, to the holder of the Conversion Shares or such holder's nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
issuable upon the conversion of such Conversion Shares. Such conversion shall be
deemed to have been effected as of the close of business on the Conversion Date,
and the person or persons entitled to receive the shares of Common Stock
issuable upon conversion shall be treated for all purposes as the holder or
holders of record of such shares of Common Stock as of the close of business on
such date.
(c) Common Stock Reserved. The Corporation shall at all
---------------------
times reserve and keep available out of its authorized but unissued Common
Stock, solely for issuance upon the conversion of shares of Preferred Stock as
herein provided, such number of shares of Common Stock as shall from time to
time be issuable upon the conversion of all of the shares of Preferred Stock at
the time outstanding.
(d) Conversion Factor. The initial conversion factor for
-----------------
the Class A Preferred Stock shall be .50 and the initial conversion factor for
the Class B Preferred Stock, the Class C Preferred Stock and the Class D
Preferred Stock shall be 1, subject to adjustment, in each case, in accordance
with the provisions in this Section B(5)(d), except that the provisions of
B(5)(d)(i) shall not apply to the Conversion Factor for Class D Preferred Stock.
Such respective conversion factors in effect from time to time, as adjusted
pursuant to the applicable provisions of this Section B(5)(d), are referred to
herein as the "Conversion Factor" for the Class A Preferred Stock, the Class B
Preferred Stock, the Class C Preferred Stock or the Class D Preferred Stock, as
applicable. All of the remaining provisions of this Section B(5)(d) shall apply
separately to the respective Conversion Factors in effect from time to time;
provided, however, that the provisions of B(5)(d)(i) shall not apply to the
-----------------
Conversion Factor for Class D Preferred Stock.
(i) In the event that the Corporation shall, at any
time or from time to time, issue or sell any shares of the capital stock of the
Corporation (including treasury shares, but excluding (x) 1,334,000 shares of
Class A Preferred Stock and 21,065,000 shares of Class C Preferred Stock, (y) an
aggregate of 15,805,627 shares of Common Stock and an aggregate of 11,800,468
shares of Class B Preferred Stock that have been issued, have been reserved for
-11-
issuance or will be issued pursuant to options, warrants or other commitments
which have been granted or executed as of December 12, 1995 or will be granted
or executed pursuant to the Corporation's 1993 Stock Incentive Plan, and (z) the
shares of Common Stock issuable upon conversion of the Preferred Stock), then,
immediately upon such issuance or sale, the Conversion Factor shall be reduced
as follows:
(A) The Conversion Factor shall be changed to a
number determined by multiplying the Conversion Factor in effect immediately
prior to such issuance by the following fraction:
A + B
---
C
---------
A + D
wherein:
A = the number of Outstanding Shares (as defined below)
immediately prior to the subject issuance;
B = the aggregate consideration in dollars for the shares
then being issued, expressed as an absolute number;
C = the Conversion Factor in effect immediately prior to
the subject issuance with respect to the applicable
class of Preferred Stock; and
D = the number of shares then being issued.
The applicable Conversion Factor shall be further reduced from time to time
thereafter whenever any shares are so issued or converted for a price per share
lower than the amount of the applicable Conversion Factor, then in effect, as
adjusted prior to that date.
(B) In the event that any shares shall be issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor, without deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In the event that any shares shall be
issued for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to be the fair value
of such consideration, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith. Whenever shares are issued upon the exercise of warrants,
options or other conversion rights, the consideration received therefor shall
include both the consideration paid upon the issuance and upon the exercise of
such warrant, option or other right.
-12-
(C) In the event that the Corporation shall in
any manner grant (whether directly or by assumption in a merger or otherwise)
any rights to subscribe for or to purchase any Common Stock or securities
convertible into Common Stock ("Convertible Securities"), or any options for the
purchase of any Common Stock or Convertible Securities, whether or not such
rights or options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which shares
of Common Stock issuable upon the exercise of such rights or options or upon
conversion or exchange of such Convertible Securities (determined by dividing
(I) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Corporation
upon the exercise of such rights or options, or plus, in the case of any
Convertible Securities or rights or options to purchase Convertible Securities,
the minimum aggregate amount of additional consideration, if any, payable upon
the issue or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (II) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon the conversion or
exchange of all such Convertible Securities issuable upon the exercise of such
rights or options) shall be less than the Conversion Factor in effect
immediately prior to the time of the granting of such rights or options, then
the total maximum number of shares of Common Stock issuable upon the exercise of
such rights or options or upon conversion or exchange of all such Convertible
Securities issuable or issuable upon the exercise of such rights or options
shall be deemed to be outstanding as of the date of the granting of such rights
or options and to have been issued for such price per share, with the effect on
the applicable Conversion Factor specified in Section (5)(d)(i) of this Article.
No further adjustment of the applicable Conversion Factor shall be made upon the
actual issue of such Common Stock or upon the actual issue of such Convertible
Securities upon exercise of such rights or options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities.
(D) If the purchase price provided for in any
right or option referred to in Section B(5)(d)(i)(C) of this Article, or the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock shall change (other than under
or by reason of provisions designed to protect against dilution), the Conversion
Factor then in effect hereunder shall forthwith be readjusted (increased or
decreased, as the case may be) to the Conversion Factor which would have been in
effect at such time had such rights, options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold.
(E) Notwithstanding the foregoing, upon the
consent of the holders of two-thirds of the applicable class of Preferred Stock
affected and then outstanding, if the Conversion Factor for the applicable class
of Preferred Stock, as set forth in this Section B(5)(d)(i) otherwise would be
reduced, no such reduction in the Conversion Factor for the applicable class of
Preferred Stock, as set forth in this Section B(5)(d)(i), shall occur.
-13-
(F) Notwithstanding the foregoing, if any holder
of shares of Preferred Stock is entitled to exercise the preemptive rights (the
"Preemptive Right") set forth in Section 9 of the Second Class C Preferred Stock
Purchase Agreement, dated as of September 19, 1995, or in Schedule 9 of the
Amendment and Waiver Agreement, dated as of September 19, 1995 (collectively,
the "Purchase Agreement") with respect to any "Issuance" (as defined in Section
9.2 of the Purchase Agreement) which would, absent the provisions of this
subsection (F), result in a reduction of the Conversion Factor applicable to
shares of such holder's Preferred Stock pursuant to Section B(5)(d)(i) of this
Article, and if such holder (a "Non-Participating Holder") does not, by exercise
of such holder's Preemptive Right, acquire not less than such holder's
"Proportionate Percentage" (as defined in Section 9.2 of the Purchase Agreement)
of the Issuance, then all of such holder's shares of Class A Preferred Stock,
Class B Preferred Stock and Class C Preferred Stock shall automatically, and
without further action on the part of such holder, be converted effective upon,
subject to and concurrently with consummation of the Issuance (the "Issuance
Date") as follows: each share of Class A Preferred Stock held by such Non-
Participating Holder shall be converted into one share of a newly created series
of preferred stock (having such number of shares as the Board of Directors may
by resolution fix) which such class shall be identical in all respects to the
Class A Preferred Stock, except that the Conversion Factor of such class shall
be fixed immediately prior to the Issuance Date and shall be subject to no
further adjustments pursuant to Section B(5)(d)(i) of this Article; each share
of Class B Preferred Stock held by such Non-Participating Holder shall be
converted into one share of a newly created class of preferred stock (having
such number of shares as the Board of Directors may by resolution fix) which
such class shall be identical in all respects to the Class B Preferred Stock,
except that the Conversion Factor of such class shall be fixed immediately prior
to the Issuance Date and shall be subject to no further adjustments pursuant to
Section B(5)(d)(i) of this Article; and each share of Class C Preferred Stock
held by such Non-Participating Holder shall be converted into one share of a
newly created class of preferred stock (having such number of shares as the
Board of Directors may by resolution fix) which such class shall be identical in
all respects to the Class C Preferred Stock, except that the Conversion Factor
of such class shall be fixed immediately prior to the Issuance Date and shall be
subject to no further adjustments pursuant to Section B(5)(d)(i) of this
Article. The Board of Directors of the Corporation shall take all necessary
actions to designate each such new class. Upon such conversion, the shares of
Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock so
converted shall be cancelled and not subject to reissuance, but instead shall be
redesignated by the Board of Directors of the Corporation in accordance with the
terms of this Section B(5)(d)(i)(F).
(ii) Each adjustment in a Conversion
Factor shall be calculated to the nearest tenth of a cent.
(iii) As used in this Section B(5)(d), the
term "Outstanding Shares" shall be deemed to include the number of issued and
outstanding shares of Common Stock, plus the number of shares of Common Stock
issuable upon the conversion of the issued and outstanding shares of Preferred
Stock, but shall not include the new shares of Common Stock then being issued by
the Corporation.
-14-
(iv) In the event that the Corporation
shall, at any time, issue any shares of Common Stock (A) by stock dividend or
any other distribution upon any stock of the Corporation payable in shares of
Common Stock or in shares of Preferred Stock, or (B) by subdivision of its
shares of outstanding Common Stock, by reclassification or otherwise, the
Conversion Factor then in effect shall be reduced proportionately, and, in like
manner, in the event of any combination of shares of Common Stock, by
reclassification or otherwise, the Conversion Factor then in effect shall be
proportionately increased.
(v) If any capital reorganization or
reclassification of the Common Stock of the Corporation, or consolidation or
merger of the Corporation with or into another corporation, or the sale or
conveyance of all or substantially all of its assets to another corporation
shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holders of the Preferred Stock shall thereafter have
the right to receive, in lieu of the shares of Common Stock of the Corporation
immediately theretofore receivable with respect to such shares of Preferred
Stock upon the exercise of their conversion rights, such shares of stock,
securities or assets as would have been issued or payable with respect to or in
exchange for the number of outstanding shares of such Common Stock immediately
theretofore receivable with respect to such shares of Preferred Stock upon the
exercise of such rights had such reorganization, reclassification,
consolidation, merger or sale not taken place. In any such case, appropriate
provision shall he made with respect to the rights and interests of the holders
of the Preferred Stock to the end that such conversion rights (including,
without limitation, provisions for adjustment of the applicable Conversion
Factor) shall thereafter be applicable, as nearly as may be practicable in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise thereof. The Corporation shall not effect any such
consolidation, merger or sale, unless it provides the holders of the Preferred
Stock at least 30 days advance notice thereof, and prior to or simultaneously
with the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets, shall assume by written instrument, executed and mailed
or delivered to the holders of the Preferred Stock, the obligation to deliver to
such holders the shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to receive upon
conversion of the shares of Preferred Stock held by such holder.
(vi) If any event occurs as to which the
other provisions of this Section B(5)(d) are not strictly applicable, or if
strictly applicable would not fairly protect the conversion rights of the
Preferred Stock in accordance with the intent and principles of such provisions,
then the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
conversion rights as aforesaid, but in no event shall any such adjustment have
the effect of increasing the applicable Conversion Factor as otherwise
determined pursuant to this Section B(5)(d).
(e) Stock Transfer Taxes. The issuance of stock certificates upon the
--------------------
conversion of the Preferred Stock shall be made without charge to the converting
holder for any
tax in respect of such issuance. The Corporation shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares in any name other than that of the holder of
such shares of Preferred Stock converted, and the Corporation shall not be
required to issue or deliver any such stock certificate unless and until the
person or persons requesting the issuance thereof shall have paid to the
Corporation the amount of such tax or shall have established to the satisfaction
of the Corporation that such tax has been paid.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Factor, the Corporation, at its
expense, promptly shall compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Factor at the time in effect for the Preferred Stock, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such Preferred Stock owned
by such holder.
(g) Notices of Record Date. In the event of any fixing by the
----------------------
Corporation of a record date for the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any shares of
Common Stock or other securities, or any right to subscribe for, purchase or
otherwise acquire, or any option for the purchase of, any shares of stock of any
class or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Preferred Stock at least 30 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(h) Notices. Any notice required by the provisions of this Section
-------
B(5) to be given to the holders of shares of Preferred Stock shall he deemed
given if deposited in the United States mail, first class postage prepaid, and
addressed to each holder of record at such holder's address appearing on the
books of the Corporation.
(6) Mandatory Conversion.
--------------------
(a) The Corporation shall cause the conversion ("Mandatory
Conversion") of all of the shares of Preferred Stock into fully paid and
nonassessable shares of Common Stock, at the conversion rate then in effect,
upon the occurrence of the Corporation's underwritten public offering of its
Common Stock pursuant to a registration statement (other than a registration
statement relating to an offer and sale of securities to employees of, or other
persons providing services to, the Corporation pursuant to an employee or
similar benefit plan, registered on Form S-8 or a comparable or successor form)
filed under the Securities Act of 1933, as amended, which yields to the
Corporation not less than $15,000,000 (before deducting any underwriters' or
-16-
brokers' discounts, fees or commissions) and under which the offering price to
the public is equal to at least $1.50 per share (adjusted for any stock splits,
stock dividends, recapitalizations, mergers, consolidations or similar events
occurring after September 19, 1995) (a "Qualifying Public Offering").
(b) The date ("Mandatory Conversion Date") on which such Mandatory
Conversion shall be deemed to occur is the date on which a closing occurs
pursuant to a Qualifying Public Offering.
(c) On the Mandatory Conversion Date, all rights of the holders of
shares of the Preferred Stock as such holders shall cease except their right to
receive payment of any dividends declared and unpaid to such date; such shares
shall no longer be deemed to be outstanding; and the holders thereof shall on
and after such date be conclusively deemed for all purposes to be holders of the
shares of Common Stock into which their shares of Preferred Stock were
converted.
(d) The Corporation shall promptly give all holders of record of
shares of Preferred Stock written notice of the date that a Qualifying Public
Offering will occur or is anticipated to occur. Such notice shall also specify
the place designated for exchanging the shares of Preferred Stock for shares of
Common Stock. Such notice shall be sent by first class mail, postage prepaid,
to each holder of record of shares of Preferred Stock at such holder's address
as shown in the records of the Corporation. Each holder of shares of Preferred
Stock shall surrender its certificate or certificates for all such shares to the
Corporation or the transfer agent at the place designated in such notice and
shall, upon surrender, receive certificates for the number of shares of Common
Stock to which such holder is entitled.
(e) For the purpose of calculating the conversion ratio of Preferred
Stock into Common Stock in the event of a Mandatory Conversion, such calculation
shall be made in accordance with Section B(5) of this Article.
-17-
IN WITNESS WHEREOF, the undersigned have executed this Restated Certificate
of Incorporation on behalf of the Corporation and have attested such execution
and do verify and affirm, under penalty of perjury, that this Restated
Certificate of Incorporation is the act and deed of the Corporation and that the
facts stated herein are true as of this 19th day of June, 1996.
GENVEC, INC.
By:
--------------------------------
▇▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇
President
Attest:
By:
--------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ III
Secretary
(Corporate Seal)
-18-
KPMG
The Global Leader
GENVEC, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
KPMG Peat Marwick LLP
Suite 400
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GenVec, Inc.:
We have audited the accompanying balance sheets of GenVec, Inc. as of December
31, 1996 and 1995, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 GenVec, Inc. as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the.
Company will continue as a going concern. As discussed in note 3 to the
financial statements, the Company has no source of revenue, has incurred
aggregated net losses of $27,604,590 and has insufficient cash flows to sustain
its operations. Such conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
April 11, 1997
1
GENVEC, INC.
Balance Sheets
December 31, 1996 and 1995
================================================================================================
ASSETS 1996 1995
------------ -----------
Current assets:
Cash and cash equivalents $ 5,146,226 13,879,746
Investments (note 4) 2,579,124
Other current assets 268,640 284,689
Total current assets 7,993,990 14,164,435
Property and equipment (note 7):
Equipment 1,566,091 1,492,561
Leasehold improvements 176,311 176,311
Furniture and fixtures 58,256 45,399
1,800,658 1,714,271
Less: Accumulated depreciation and amortization (1,194,228) (690,943)
------------ -----------
Net property and equipment 606,430 1,023,328
------------ -----------
Other assets 37,950 38,464
------------ -----------
$ 8,638,370 15,226,227
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 955,986 463,831
Accrued payroll and related expenses 245,843 182,756
Current portion of capital lease obligation (note 7) 414,529 361,707
------------ -----------
Total current liabilities 1,616,358 1,008,294
Capital lease obligation, less current portion (note 7) 157,729 527,187
Stockholders' equity (notes 6 and 8):
Convertible preferred stock $.01 par value:
Class A, 1,334,000 shares authorized, issued and
outstanding (liquidation preference of $11,320,314) 13,340 13,340
Class B, 11,800,468 shares authorized and 11,320,314
shares issued and outstanding (liquidation preference of
$11,320,314) 113,203 113,203
Class C, 21,065,000 shares authorized, issuing and
outstanding (liquidation preference of $21,065,000) 210,650 210,650
Class D, 2,000,000 shares authorized and 571,429 shares
issued and outstanding in 1996 (liquidation preference of
$1,000,000) 5,714
Common stock, $.01 par value, 52,005,095 and 46,305,095
shares authorized and 5,826,087 and 3,683,141 shares issued
and outstanding in 1996 and 1995, respectively 58,260 36,831
Additional paid-in capital 34,095,613 32,813,151
Accumulated deficit (27,604,590) (19,496,429)
Treasury stock, at cost, 279,069 common shares (27,907)
------------ -----------
Total stockholders' equity 6,864,283 13,690,746
------------ -----------
Commitments (note 7)
$ 8,638,370 15,226,227
============ ===========
See accompanying notes to financial statements.
2
GENVEC, INC.
Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
Class A Class B Class C
Preferred Stock Preferred Stock Preferred Stock
--------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- -------- ---------- --------
Balance, December 31, 1993 1,334,000 $13,340 8,750,000 $ 87,500 -- --
Issuance of Class C
convertible
preferred shares, net
of issuance costs of
$______ (note 8) -- -- -- -- 8,700,000 87,000
Repayment of notes
receivable -- -- -- -- -- --
Purchase of Theragen,
Inc. (note 5) -- -- 2,165,696 21,657 -- --
Net loss -- -- -- -- -- --
--------- ---------- ---------- -------- ---------- --------
Balance, December 31, 1994 1,334,000 13,340 10,915,696 109,157 8,700,000 87,000
Issuance of Class C
convertible preferred
shares, net of issuance
costs of $53,698 (note 8) -- -- -- -- 12,365,000 123,650
Issuance of common stock -- -- -- -- -- --
Exercise of options -- -- -- -- -- --
Issuance of stock for
Theragen contingent shares,
net of issuance costs of
$13,335 (note 5) -- -- 404,618 4,046 -- --
Net loss -- -- -- -- -- --
--------- ---------- ---------- -------- ---------- --------
Balance, December 31, 1995 1,334,000 13,340 11,320,314 113,203 21,065,000 210,650
Issuance of Class D
convertible preferred
shares, net of issuance
costs of $8,683 (note 8) -- -- -- -- -- --
Exercise of options -- -- -- -- -- --
Options granted to
consultants -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- ---------- -------- ---------- --------
Balance, December 31, 1996 1,334,000 $13,340 11,320,314 $113,203 21,065,000 $210,650
--------- ---------- ---------- -------- ---------- --------
Class D Treasury
Preferred Stock Common Stock Additional stock
---------------- -------------------- paid in Accumulated -------
Shares Amount Shares Amount capital deficit Amount Total
------- -------- --------- ------- ----------- ----------- ------- ----------
Balance, December 31, 1993 -- -- 1,345,478 $13,455 $ 9,246,543 (3,254,126) -- 6,106,712
Issuance of Class C
convertible preferred
shares, net of issuance
costs of
$______ (note 8) -- -- -- -- 8,583,583 -- -- 8,670,583
Repayment of notes
receivable -- -- 30,000 -- -- 30,000
Purchase of Theragen,
Inc. (note 5) -- -- 1,796,469 17,964 2,329,000 -- -- 2,368,621
Net loss -- -- -- -- -- (8,693,131) -- (8,693,131)
------- -------- --------- ------- ----------- ----------- ------- ----------
Balance, December 31, 1994 3,141,947 31,419 20,189,126 (11,947,257) 8,482,785
Issuance of Class C
convertible preferred
shares, net of issuance
costs of $53,698 (note 8) -- -- -- -- 12,187,652 -- -- 12,311,302
Issuance of common stock -- -- 120,500 1,205 10,845 -- -- 12,050
Exercise of options -- -- 46,092 461 4,577 -- -- 5,038
Issuance of stock for
Theragen contingent shares,
net of issuance costs of
$13,335 (note 5) -- -- 374,602 3,746 420,951 -- -- 428,713
Net loss -- -- -- -- -- (7,549,172) -- (7,549,172)
------- -------- --------- ------- ----------- ----------- ------- ----------
Balance, December 31, 1995 -- -- 3,683,141 36,831 32,813,151 (19,496,429) -- 13,690,746
Issuance of Class D
convertible preferred
shares, net of issuance
costs of $8,683 (note 8) 571,429 5,714 -- -- 985,603 -- -- 991,317
Exercise of options -- -- 2,142,946 21,429 191,799 (27,907) (27,907)
Options granted to
consultants -- -- -- -- 105,060 -- -- 105,060
Net loss -- -- -- -- -- (8,108,161) -- (8,108,161)
------- -------- --------- ------- ----------- ----------- ------- ----------
Balance, December 31, 1996 571,429 $5,714 5,826,087 $58,260 $34,095,613 (27,604,590) (27,907) 6,864,283
See accompanying notes to financial statements
3
GENVEC, INC.
Statement of Operations
Years ended December 31, 1996, 1995, and 1994
=======================================================================================
1996 1995 1994
----------- ----------- -----------
Research revenues (note 6) 698,370 1,005,000 1,000,000
----------- ----------- -----------
Operating expenses:
Research and development 6,077,683 6,499,830 5,645,764
General and administrative 2,947,165 2,025,131 1,605,722
Clinical and regulatory 160,315 - -
Product development 117,335 - -
Purchase of in-process technology (note 5) - 442,078 2,580,798
----------- ----------- -----------
Total operating expenses 9,302,498 8,967,039 9,832,284
----------- ----------- -----------
Loss from operations (8,604,128) (7,962,039) (8,832,284)
----------- ----------- -----------
Other income (expense):
Interest income 571,239 486,435 180,498
Interest expense (75,272) (73,568) (41,345)
----------- ----------- -----------
Total other income 495,967 412,867 139,153
----------- ----------- -----------
Net loss $(8,108,161) (7,549,172) (8,693,131)
=========== ========== ==========
Net loss per share $ (1.71) (2.28) (4.18)
=========== ========== ==========
Shares used for computation 4,730,436 3,311,783 2,078,831
=========== ========== ==========
See accompanying notes to financial statements
4
GENVEC, INC.
Notes to Financial Statements
December 31, 1996 and 1995
================================================================================
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec, Inc. (the Company) was incorporated under the laws of the state of
Delaware on December 7, 1992. The Company is involved in the research and
development of in-vivo gene therapy products, whereby corrective or
therapeutic genes are introduced directly into affected organs and tissues.
The Company's early clinical applications are the development of gene
therapies for cardiovascular disease, cancer and cystic fibrosis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from research and development contracts is recognized when earned
as defined under the terms of the respective contracts. Revenue from
milestone events is recognized when the milestone is achieved. Revenue
recognized in the accompanying statements of operations is not subject to
repayment.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Such
costs include proprietary research and development activities and expenses
associated with collaborative research agreements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Capitalized lease assets are
stated at the lower of the present value of the future minimum lease
payments or fair market value at the inception of the lease.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets which is five years.
Leasehold improvements are amortized using the straight-line method over
the shorter of their estimated useful lives or the term of the leases.
Property and equipment held under capital lease are amortized using the
straight-line method over the lease term, which is 42 months.
5
INCOME TAXES
Income taxes are accounted for in accordance with Financial Accounting
Standards Board Statement No. 109 (Statement 109).
(2) CONTINUED
Under the asset and liability method of Statement 109, deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less, and are stated at market value which
approximates cost. Cash equivalents consist primarily of money market
funds and commercial paper.
INVESTMENTS
The Company's short-term investments, consisting primarily of bonds and
commercial paper, are classified as a held-to-maturity security portfolio
as the Company has both the ability and intent to hold the securities until
maturity. The portfolio is carried at amortized cost which approximates
fair value.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year.
Common stock equivalents, which consist of convertible preferred stock,
warrants and options, are not included in the calculation as their effect
would be anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles may require 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.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued
---------------------------
6
to Employees, and related interpretations. As such, compensation expense
------------
would be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
---------------------------------------
which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No.
123.
(3) LIQUIDITY
The accompanying financial statements have been prepared on a going concern
basis which contemplates the continuation of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business.
The Company has incurred aggregate net losses of $27,604,590 and has
terminated its contract with a corporate sponsor which was its sole source
of revenue. The Company has insufficient cash flows to sustain its
operations. Such conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In a continuing effort to improve the situation, the Company is focusing
its strategy on pursuing corporate partnerships and exploring a variety of
other financing options to raise additional capital. Nevertheless, there
can be no assurance that the Company's efforts will result in positive
effects on the Company's financial condition.
(4) INVESTMENTS
The amortized cost, gross unrealized holding gains and losses and fair
value for held-to-maturity securities by major security type at December
31, 1996 were as follows:
Gross
unrealized
Amortized holding Fair
cost gains (losses) value
--------------------------------------------------------------------------
Classified as investments:
Corporate bonds $1,686,350 15,759 1,702,109
Commercial paper 892,774 (6,537) 886,237
---------- ------ ---------
$2,579,124 9,222 2,588,346
---------- ------ ---------
Classified as cash equivalents:
Corporate bonds $ 601,932 37 601,969
7
Commercial 989,656 - 989,656
---------- ------ ---------
$1,591,588 37 1,591,625
---------- ------ ---------
The above securities all mature in 1997.
(5) PURCHASE OF THERAGEN, INC.
Pursuant to an agreement effective August 8, 1994, the Company acquired
Theragen, Inc., a gene therapy company incorporated under the laws of the
state of Michigan. This acquisition transferred all of Theragen's
technology, know-how and licenses to the Company. The purchase was
effected through an exchange of all shares of Theragen stock outstanding
immediately prior to the acquisition for up to 5,693,147 shares of the
Company's capital stock which is comprised of common stock, Class B
preferred stock and options to purchase common stock. This included
contingent shares of 1,498,200 that were to be issued or vested upon the
achievement of certain milestones. The cost of the acquisition was
$2,580,798 in 1994, which consisted of the fair value of the Company's
capital stock contributed on the purchase date as well as other direct
transaction-related costs. These costs were recorded as purchase of in-
process technology expense since no capitalizable technology was purchased.
The acquisition was accounted for using the purchase method. Accordingly,
the results of operations of the acquired company were included with those
of the Company for periods subsequent to the date of acquisition.
In 1995, the terms for the issuance or vesting of the contingent shares
were modified. Instead of issuing these shares upon the achievement of
certain milestones, shares and options were issued or vested in 1995 in an
amount equal to 55.066 percent of the original issuable contingent shares
in lieu of all contingent rights of former Theragen stockholders. As a
result, shares of stock totaling 779,220 were issued at fair market value,
as determined by the Company's Board of Directors, while options totaling
45,780 were vested, and 83,138 were canceled. The cost of the stock
transaction is deemed to be part of the acquisition cost, and is reflected
in the accompanying statements of operations as purchase of in-process
technology expense.
The following unaudited pro forma results of operations for the year ended
December 31, 1994, give effect to the acquisition of Theragen, Inc. as
though it had occurred on January 1, 1994. The unaudited pro forma results
of operations do not include the nonrecurring charge to operations of
$2,580,798 ($.82 per share) for the costs in excess of net assets acquired
which was recorded as purchase of in-process technology.
Total revenues $ 1,005,000
-----------
Net $(6,926,179)
-----------
Pro forma net loss per share $ (2.20)
-----------
Shares used for computation 3,141,947
-----------
8
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at January 1, 1994, or of results which may occur in the future.
(6) RELATED-PARTY TRANSACTIONS
RESEARCH AND DEVELOPMENT AGREEMENT
In May 1993, Genentech Inc., a stockholder owning 334,000 shares of the
Company's Class A preferred stock, and 2,000,000 shares each of the
Company's Class B and Class C preferred stock as of December 31, 1996,
executed a five-year research and development agreement with the Company.
Under this agreement, the Company performed research and development
activities with respect to gene therapy products for cystic fibrosis.
Genentech was required to make certain research and development payments
and certain milestone payments to the Company aggregating up to $12,750,000
in exchange for the right to develop, manufacture, and sell potential
products in the cystic fibrosis field. Contract revenues of $698,370,
$1,000,000 and $1,000,000 were recognized from Genentech in 1996, 1995, and
1994, respectively.
Effective September 12, 1996, the research and development agreement
between the Company and Genentech terminated due to a change in research
focus. In the event of termination, the agreement allows the Company to
require Genentech to purchase additional equity in the Company in an
aggregate amount as defined in the agreement. This transaction, totaling
approximately $474,000 in additional equity, is expected to occur in
1997.
(7) COMMITMENTS
LEASE AGREEMENTS
In January 1994, the Company entered into a capital lease agreement
allowing it to fund the acquisition of up to $1,500,000 of furniture and
equipment purchases. Lease terms of new purchases were 42 months with an
interest rate of 9.6 percent. In connection with this agreement, the
Company granted the lessor warrants to purchase approximately 140,000
shares of Series B preferred stock at a purchase price of $1.00 per share.
Pursuant to this lease agreement, in May 1994, the Company entered into a
sale lease-back transaction whereby it sold and subsequently leased-back
furniture and equipment to which it held title. Additional equipment
purchases have been funded under extensions made to this agreement through
1996.
Included in property and equipment at December 31, 1996 and 1995 are assets
recorded under this agreement of $1,404,620 and $1,288,065, respectively.
Accumulated depreciation and amortization
9
at December 31, 1996 and 1995 includes amounts for the capital lease of
$906,311 and $521,642, respectively.
Future minimum lease payments due under this capital lease at December 31,
1996 are as follows:
1997 $ 450,687
1998 149,321
1999 16,204
---------
Total minimum lease payments 616,212
Less amounts representing interest at 9.6% 43,954
---------
Present value of minimum capital lease payments 572,258
Less current installments 414,529
---------
Obligations under capital lease, net of current installments $ 157,729
---------
In addition to the aforementioned capital lease, the Company leases office
and laboratory space under operating leases which are cancelable at the
Company's discretion with a 30 to 60 day notice. Office and laboratory
rent expense under operating leases for fiscal years 1996, 1995, and 1994
was approximately $167,000, $156,000, and $105,000, respectively.
RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has agreed to provide grants for certain research projects
under agreements with several universities and research organizations.
Under the terms of these agreements, the Company has received exclusive
licenses to the resulting technology. Total grants paid by the Company
were $2,277,000, $2,598,000, and $2,791,000 during 1996, 1995, and 1994,
respectively. The Company has commitments to pay up to approximately
$2,600,000 related to these grants through 1999.
(8) STOCKHOLDERS' EQUITY
CAPITAL CHANGES
Effective in December 1995, the Company amended its Certificate of
Incorporation which effected the authorization of a total of 46,305,095
shares of common stock and 21,065,000 shares of Class C convertible
preferred stock, each having a par value of $.01 per share.
Effective in June 1996, the Company restated its Certificate of
Incorporation which effected the authorization of a total of 52,005,095
shares of common stock and 2,000,000 shares of Class D convertible
preferred stock, each having a par value of $.01 per share.
10
CONVERTIBLE PREFERRED STOCK
In November 1994, the Company issued 8,700,000 shares of Class C
convertible preferred stock in a private placement. In September 1995, the
Company issued an additional 12,365,000 shares of Class C convertible
preferred stock in a private placement. In May 1996, the Company issued
571,429 shares of Class D convertible preferred stock.
Since its inception, the Company has issued 34,290,743 shares of
convertible preferred stock (Class A, B, C, and D) for aggregate cash
consideration of $31,482,000. Preferred stockholders participate in the
dividends declared to common stockholders, if any, in an amount
proportionate to the number of shares of common stock into which the
preferred stock is convertible. Preferred holders are entitled to one vote
for each share of common stock into which the preferred shares can be
converted.
In the event of any voluntary or involuntary liquidation of the
corporation, before any distribution can be made to the holders of common
stock, the preferred stockholders are entitled to receive payment of $.50
for each share of Class A preferred stock, $1 for each share of Class B and
C preferred stock and $1.75 for each share of Class D preferred stock, plus
any declared but unpaid dividends. No dividends were declared for the
years ended December 31, 1996, 1995, and 1994.
Holders of Class A, B, C, and D preferred stock have the right at any time,
at their option, to convert without the payment of additional
consideration, each preferred stock share into an equivalent number of
common stock shares.
Upon the occurrence of an initial public offering (IPO) of company stock
which yields the Company at least $15,000,000 and under which the offering
price to the public is equal to at least $1.50 per share, all preferred
stock shares will convert to common stock shares.
TREASURY STOCK
Outstanding shares of common stock totaling 279,069 were repurchased by the
Company in 1996 at $.10 per share. The shares were purchased from two
employees who left the Company in 1996.
STOCK OPTION PLAN
Options to purchase common stock under the Company's stock option plan are
granted to employees and consultants at prices which approximate fair
market value as determined by the Board of Directors. The options vest
over four years for most employees and a combination of time and milestones
for certain employees and consultants. The exercise and expiration dates of
options are also determined by the Company's Board of Directors.
11
In adopting SFAS No. 123 for options granted to consultants, the total
compensation expense recognized in 1996 for compensation awards to
consultants was $105,060.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan for options granted to employees and accordingly, no compensation
expense has been recognized in the financial statements. Had the Company
determined compensation expense based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1996 1995
----------- ----------
Net loss As reported $(8,108,161) (7,549,172)
----------- ----------
Pro forma $(8,179,600) (7,571,594)
----------- ----------
Loss per common share As reported $ (1.71) (2.28)
----------- ----------
Pro forma $ (1.73) (2.29)
----------- ----------
Pro forma net losses reflect compensation expense under SFAS No. 123 only
for options granted in 1996 and 1995. Therefore, the full impact of
calculating compensation expense for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation expense is reflected over the options' vesting period and
compensation expense for options granted prior to January 1, 1995 is not
considered.
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 1996 and 1995: dividend yield of 0 percent,
expected volatility of 63 percent, risk free interest rate of 5.8 percent,
and expected life of 4.25 years.
A summary of the status of the Company's stock options as of December 31,
1996, 1995, and 1994 and changes during the period ending on those dates is
presented below:
1996 1995 1994
---------------------------- ---------------------------- --------------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
(000)'s price (000)'s price (000)'s price
--------- ----------- ---------- ----------- ---------- ----------
Outstanding at beginning
of year 5,093 $ .12 2,254 $ .10 1,542 $ .10
Granted 3,635 0.19 2,989 0.13 712 0.09
Cancelled (1,791) (0.10) (104) (0.03) - -
Exercised (1,863) 0.10 (46) (0.11) - -
------ ------ ----- ------ ----- ------
Outstanding at end of year 5,074 $ 0.18 5,093 $ 0.12 2,254 $ 0.10
Options exercisable at end
12
Options exercisable at end
of year 1,921 $ .15 1,875 $ .10 392 $ .10
Weighted-average fair
value of options
granted during the
year $ .11 $ .05 $ .03
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ---------------------------
Range Weighted-avg.
of remaining Weighted-avg. Weighted-avg.
exercise prices Number contractual life exercise price Number exercise price
--------------- ------ ---------------- -------------- ------ --------------
$ .01 - .03 54,697 8.82 years $.02 54,697 $.02
.10 3,830,513 8.5 .10 1,600,396 .10
11 - .17 63,783 8.42 .16 45,413 .15
.25 480,000 9.5 .25 52,514 .25
.60 644,999 9.55 .60 167,496 .60
----------- --------- ----------- ---- --------- ----
$ .01 - .60 5,073,992 8.73 $.18 1,920,516 $.15
--------- ---------
(9) INCOME TAXES
A reconciliation of tax credits computed at the statutory federal tax rate
on loss from operations before income taxes to the actual income tax
expense is as follows:
1996 1995 1994
----------- ---------- ----------
Tax provision (credit) computed at the statutory rate $(2,838,000) (2,642,000) (3,043,000)
State income taxes, net of federal income tax provision
(credit) (324,000) (284,000) (244,000)
Purchase of in-process technology - 155,000 903,000
Book expenses not deductible for tax purposes 6,000 5,000 3,000
Research and experimentation tax credit 41,000 (263,000) (241,000)
Change in the beginning of the year valuation
allowance for deferred tax assets allocated to tax 3,086,000 3,032,000 3,168,000
Expected tax benefit of acquired net operating
loss carryforwards - - (582,000)
Other, net 29,000 (3,000) 36,000
----------- ---------- -----------
Income tax expense $ - - -
----------- ---------- -----------
Deferred income taxes reflect the net effects of net operating loss
carryforwards and the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and
13
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets as of December 31, 1996 and 1995, are as
follows:
1996 1995
----------- ----------
Deferred tax
Net operating loss carryforwards $9,703,000 6,912,000
Research and experimentation tax credit 541,000 581,000
Cumulative effect of using cash basis method of
accounting for income tax purposes 364,000 141,000
Other 41,000 15,000
Property and equipment, principally due to
differences in depreciation 66,000 (20,000)
----------- ----------
Total deferred tax 10,715,000 7,629,000
Valuation allowance (10,715,000) (7,629,000)
----------- ----------
Net deferred tax asset $ - -
----------- ----------
The valuation allowance for deferred tax assets increased approximately
$3,086,000, $3,032,000 and $3,168,000 for the years ended December 31,
1996, 1995, and 1994, respectively.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $24,880,000 for federal income tax purposes which expire at
various dates through 2011, including $1,493,000 which were acquired from
the purchase of Theragen, Inc. (note 5). The Company also has research and
experimentation tax credit carryforwards of $541,000 at December 31, 1996
which expire through 2011. These carryforwards may be significantly
limited under the Internal Revenue Code as a result of ownership changes
experienced by the Company.
(10) DEFINED CONTRIBUTION PLAN - 401(K)
The Company has a defined contribution plan (the Plan) under Internal
Revenue Code Section 401(k) which became effective on January 1, 1995. All
full-time employees who have completed six months of service and are over
age 21 are eligible for participation in the Plan. Participants may elect
to have up to 15 percent of compensation contributed to the Plan. Under
the Plan, the Company's contributions are discretionary. During the years
ended December 31, 1996 and 1995, no discretionary contributions were made.
14
EXHIBIT B
UNAUDITED
GENVEC, INC.
BALANCE SHEET
AS OF APRIL 30,1997
Current Period Current Period
Actual Budget Variance
-----------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents 3,087,307 2,356,978 730,329
Short term investments 1,296,606 2,579,124 (1,282,518)
Accounts receivable 51,162 103,712 (52,550)
Inventory - - -
Prepaids and other current assets 378,819 164,928 213,891
-----------------------------------------------------------
Total current assets 4,813,894 5,204,742 (390,848)
Property, plant and equipment:
Building and improvements 176,311 176,311 -
Research equipment 1,569,575 1,496,000 73,575
Office equipment 85,260 70,091 15,169
Furniture and fixtures 62,234 58,256 3,978
Production equipment - - -
Assets under financing agreements - - -
Construction In Process - - -
-----------------------------------------------------------
Gross property, plant and equipment 1,893,380 1,800,658 92,722
Accumulated depreciation (1,361,735) (1,327,560) (34,175)
Net property, plant and equipment 531,645 473,098 58,547
Other assets:
Investments - - -
Other long term assets 37,950 37,950 -
Intangible assets - - -
-----------------------------------------------------------
Total other assets 37,950 37,950 -
Total assets 5,383,489 5,715,790 (332,301)
===========================================================
15
GENVEC, INC.
UNAUDITED
BALANCE SHEET
AS OF APRIL 30,1997
Current Period Current Period
Actual Budget Variance
------------------------------------------
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable 234,797 264,011 (29,214)
Payroll liabilities 53,742 54,593 (851)
Accrued expenses 311,379 883,226 (571,847)
Unearned revenue - - -
Current portion of notes payable - - -
Current portion of capital leases 339,344 339,344 -
Deferred taxes - - -
Other current liabilities - - -
------------------------------------------
Total current liabilities 939,262 1,541,174 (601,912)
Long Term Liabilities:
Long term notes payable - - -
Long term capital lease obligations 92,743 92,743 -
Unearned revenue - - -
Deferred taxes - - -
Other long term liabilities - - -
------------------------------------------
Total liabilities 1,032,005 1,633,917 (601,912)
------------------------------------------
Stockholders' equity:
Preferred stock 342,907 342,907
Common stock 58,715 58,260
Additional paid in capital 34,099,703 34,095,613
Treasury stock (27,907) (27,907)
Unrealized gain on investments - -
Retained earnings (deficit) (27,604,590) (27,604,590)
Net profit / (loss) (2,517,344) (2,782,410)
------------------------------------------
Total stockholders' equity 4,351,484 4,081,873 269,611
------------------------------------------
Total liabilities and equity 5,383,489 5,715,790 (332,301)
==========================================
16
GENVEC, INC.
UNAUDITED
COMBINED STATEMENT OF OPERATIONS
FOR THE MONTH ENDED APRIL 30, 1997
Current Current
Period Period Year to Date Year to Date
Actual Budget Variance Actual Budget Variance
-------------------------------------------------------------------------
Revenues:
Product sales -- -- -- -- -- --
Other sales -- -- -- -- -- --
Contract research revenues -- -- -- -- -- --
Royalties, licenses and other -- -- -- -- -- --
revenues
-------------------------------------------------------------------------
Total revenues -- -- -- -- -- --
Cost of sale:
Cost of products sold -- -- -- -- -- --
Costs of other sales -- -- -- -- -- --
Cost of contract research -- -- -- -- -- --
-------------------------------------------------------------------------
Total cost of sales -- -- -- -- -- --
Gross margin -- -- -- -- -- --
-------------------------------------------------------------------------
Operating expenses:
General and administrative 167,710 176,500 8,790 718,170 753,376 35,206
Research and development 465,577 468,924 3,347 1,852,739 2,012,196 159,457
Clinical and regulatory 16,217 36,714 20,497 47,647 98,505 50,858
Product development -- -- -- -- -- --
Manufacturing -- -- -- -- -- --
-------------------------------------------------------------------------
Total operating expenses 649,504 682,138 32,634 2,618,556 2,864,077 245,521
-------------------------------------------------------------------------
Operating income (loss) (649,504) (682,138) 32,634 (2,618,556) (2,864,077) 245,521
Other income and expense:
Interest income 30,372 23,750 6,622 117,853 95,000 22,853
Interest expense 3,740 3,333 (407) 16,641 13,333 (3,308)
Gain (loss) disposal of assets -- -- -- -- -- --
Other income (expense) -- -- -- -- -- --
-------------------------------------------------------------------------
Net other income and expense 26,632 20,417 6,215 101,212 81,667 19,545
Income (loss) before taxes (622,872) (661,721) 38,849 (2,517,344) (2,782,410) 265,066
Provision for income taxes -- -- -- -- -- --
-------------------------------------------------------------------------
Net income (loss) (622,872) (661,721) 38,849 (2,517,344) (2,782,410) 265,066
=========================================================================
17
GENVEC, INC.
UNAUDITED
COMBINED STATEMENT OF OPERATIONS
FOR THE MONTH ENDED APRIL 30, 1997
Current Current Year To Year To
Period Period Date Date
Actual Budget Variance Actual Budget Variance
---------------------------------------------------------------------------------------------------
Cash flows used in operating
activities:
Net loss (622,872) (661,721) 38,849 (2,517,344) (2,782,410) 265,066
Adjustments to reconcile net
loss used in operating
activities:
Depreciation expense 42,259 33,333 8,926 167,507 133,333 34,174
Decrease (increase) in
other current assets (205,424) - (205,424) (161,341) - (161,341)
Decrease (increase) in
other assets - - - - - -
Increase (decrease) in
accounts payable and
accrued expenses (104,546) - (104,546) (601,911) - (601,911)
---------------------------------------------------------------------------------------------------
Net cash used in operating
activities (890,583) (628,388) (262,195) (3,113,089) (2,649,077) (464,012)
---------------------------------------------------------------------------------------------------
Cash flows provided by
(used for) Investing activities:
Maturity (purchase) of
Short Term investments 977,327 - 977,327 1,282,518 - 1,282,518
Purchase of property
and equipment (28,682) - (28,682) (92,722) - (92,722)
Net cash used for
investing activities 948,645 - 948,645 1,189,796 - 1,189,796
---------------------------------------------------------------------------------------------------
Cash flows provided by (used in)
financing activities:
Proceeds from issuance
of stock 927 - 927 4,545 - 4,545
Payments under capital
lease obligations (35,464) (35,464) - (140,171) (140,171) -
---------------------------------------------------------------------------------------------------
Net cash used in financing
activities (34,537) (35,464) 927 (135,626) (140,171) 4,545
---------------------------------------------------------------------------------------------------
Decrease in cash and cash
equivalents 23,525 (668,852) 687,377 (2,058,919) (2,789,248) 730,329
Cash and cash equivalents,
beginning of period 3,063,782 3,020,830 42,952 5,146,226 5,146,226 -
Cash and cash equivalents,
end of period
18
Liabilities in excess of $250,000
Sponsored Research Agreement by and between Cornell University for its
medical college, and the Company, dated as of May 18, 1993, and related Side
Letter Agreement by Cornell University, dated May 18, 1993.
Exclusive License Agreement by and between ARCH Development
Corporation, ▇▇▇▇-▇▇▇▇▇▇ Cancer Institute and the Company, effective May 26,
1993, amended January 1, 1994 (currently under renegotiation).
Exclusive License Agreement by and between ARCH Development
Corporation and the Company, effective May 26, 1993 (currently under
renegotiation).