UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
COMMISSION FILE NUMBER: 0-24469
GENVEC, INC.
(Exact name of Registrant as specified in its charter)
| DELAWARE | 23-2705690 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| 65 WEST WATKINS MILL ROAD, GAITHERSBURG, MD | 20878 | |
| (Address of principal executive offices) | (Zip code) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:240-632-0740
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.oYesþNo
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.oYesþNo
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þYesoNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by a check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12n-2 of the Securities Exchange Act of 1934. Yeso Noþ
As of June 30, 2005, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on the closing sale price of such stock as reported by the Nasdaq National Market on such date was $83,490,458. For purposes of this calculation, shares of common stock held by directors, officers and stockholders whose ownership exceeds ten percent of the common stock outstanding at June 30, 2005 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that the person is controlled by or under common control with the Registrant.
As of February 28, 2006 there were 63,675,282 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.
Explanatory Note
This Amendment No. 1 to the Form 10-K for the fiscal year ended December 31, 2005 is being submitted to correct certain numerical errors in the shares covered by the stock option grants made to certain executives.
TABLE OF CONTENTS
| PART NO. | ITEM NO. | DESCRIPTION | PAGE NO. | ||||||||
| III | 10 | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 36 | ||||||||
| 11 | EXECUTIVE COMPENSATION | 38 | |||||||||
| 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 40 | |||||||||
| 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 42 | |||||||||
| 14 | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 42 | |||||||||
| IV | 15 | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 44 | ||||||||
| FINANCIAL STATEMENTS | F1 – F23 | ||||||||||
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (“EXCHANGE ACT”). FORWARD-LOOKING STATEMENTS ALSO MAY BE INCLUDED IN OTHER STATEMENTS THAT WE MAKE. ALL STATEMENTS THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS, BASED ON MANAGEMENT’S ESTIMATES, ASSUMPTIONS AND PROJECTIONS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THESE STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “BELIEVES,” “EXPECTS,” “INTENDS,” “MAY,” “WILL,” “SHOULD,” OR “ANTICIPATES” OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AS OF THE DATE THEREOF, ACTUAL RESULTS, COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING RISKS RELATING TO THE EARLY STAGE OF GENVEC’S PRODUCT CANDIDATES UNDER DEVELOPMENT; GENVEC’S ABILITY TO SECURE AND MAINTAIN RELATIONSHIPS WITH COLLABORATORS; UNCERTAINTIES WITH, AND UNEXPECTED RESULTS AND RELATED ANALYSES RELATING TO CLINICAL TRIALS OF GENVEC’S PRODUCT CANDIDATES, INCLUDING THE LENGTH OF TIME REQUIRED TO ENROLL SUITABLE PATIENT SUBJECTS AND OUR ABILITY TO SECURE CLINICAL TRIAL SITES; THE AMOUNT OF REVENUES ATTRIBUTABLE TO GENVEC’S VACCINE PROGRAM; THE TIMING AND CONTENT OF FUTURE U.S. FOOD AND DRUG ADMINISTRATION REGULATORY ACTIONS WITH RESPECT TO GENVEC, ITS PRODUCT CANDIDATES, OR ITS COLLABORATORS; DEPENDENCE ON THE EFFORTS OF THIRD PARTIES; COMPETITION FROM OTHER PHARMACEUTICAL OR BIOTECHNOLOGY COMPANIES; THE SCOPE AND VALIDITY OF PATENT PROTECTION FOR GENVEC’S PRODUCTS AND GENVEC’S ABILITY TO COMMERCIALIZE ITS PRODUCTS WITHOUT INFRINGING THE PATENT RIGHTS OF OTHERS; RISKS THAT GENVEC MAY LACK THE FINANCIAL RESOURCES AND ACCESS TO CAPITAL TO FUND ITS OPERATIONS, INCLUDING GENVEC’S ABILITY TO FULLY UTILIZE THE COMMITTED EQUITY FACILITY (CEFF) WITH KINGSBRIDGE CAPITAL LIMITED AS A SOURCE OF FUTURE FUNDING, WHETHER DUE TO THE MAXIMUM NUMBER OF 12,735,050 SHARES ISSUABLE UNDER THE CEFF CONSISTENT WITH NASDAQ NATIONAL MARKET LISTING REQUIREMENTS, GENVEC’S ABILITY TO SATISFY VARIOUS CONDITIONS TO DRAW DOWN UNDER THE CEFF, THE INVESTOR’S PERFORMANCE OF ITS OBLIGATIONS UNDER THE CEFF OR OTHERWISE; AND RISKS RELATING TO THE COMMERCIALIZATION, IF ANY, OF GENVEC’S PROPOSED PRODUCT CANDIDATES (SUCH AS MARKETING, MANUFACTURING, REGULATORY, PATENT, PRODUCT LIABILITY, SUPPLY AND OTHER RISKS). FURTHER INFORMATION ON THE FACTORS AND RISKS THAT COULD AFFECT GENVEC’S BUSINESS, FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS, ARE CONTAINED IN GENVEC’S FILINGS WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (SEC), WHICH ARE AVAILABLE AT WWW.SEC.GOV. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PRESS RELEASE, AND GENVEC ASSUMES NO DUTY TO UPDATE FORWARD-LOOKING STATEMENTS.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names and ages, as of February 28, 2006, of the members of the Board of Directors, their respective positions and offices with the Company, the period during which each has served as a director of the Company and their principal occupations or employment during the past five years.
Information concerning our Executive Officers is set for the in Part I of the Form 10-K.
Directors with Terms Expiring in 2006
Thomas H. Fraser, Ph.D.,age 57, has served as a director of GenVec since August 2003. Dr. Fraser has served as the Chairman of the Board of Directors since joining the Board. Dr. Fraser served as Diacrin’s President and Chief Executive Officer and as a director from 1990 to August 2003. Dr. Fraser was previously Executive Vice President, Corporate Development, for Repligen Corporation, a biopharmaceutical company. Dr. Fraser was the founding Vice President for Research and Development at Repligen in 1981 and served as Executive Vice President from 1982 through 1990 as well as Chief Technical Officer from 1982 through 1988. Prior to joining Repligen, Dr. Fraser headed the recombinant DNA research group in Pharmaceutical Research and Development at The Upjohn Company, a pharmaceutical company. Dr. Fraser received his Ph.D. in Biochemistry from the Massachusetts Institute of Technology and was a Damon Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University of Colorado.
Paul H. Fischer, Ph.D.,age 56, has served as President and Chief Executive Officer and as a director of GenVec since 1996. Prior to joining GenVec, he was Executive Vice President of Research and Development with Oncologix, Inc. (now Antigenics, Inc.), a biotechnology company. Previous experience included Manager, Cancer Research at Pfizer, Inc., a pharmaceutical company. Dr. Fischer received his B.S. in Biology from the University of Denver, his Ph.D. in Pharmacology from the University of California at San Francisco and performed post-doctoral research in Pharmacology at Yale University School of Medicine and was an associate Professor of Human Oncology at the University of Wisconsin.
Wayne T. Hockmeyer, Ph.D.,age 61, has served as a director of GenVec since December 2000. Dr. Hockmeyer is a member of the Nominating and Corporate Governance Committee and is the Chairman of the Compensation Committee. Dr. Hockmeyer founded MedImmune, Inc. in April 1988 as President and Chief Executive Officer and was elected as a director of MedImmune in May 1988. Dr. Hockmeyer became Chairman of the Board of Directors of MedImmune in May 1993. He relinquished his position as Chief Executive Officer in October 2000 and now serves as the Chairman of the Board of Directors and President of MedImmune Ventures, Inc. Dr. Hockmeyer earned his bachelor’s degree from Purdue University and his Ph.D. from the University of Florida in 1972. Dr. Hockmeyer was recognized in 1998 by the University of Florida as a Distinguished Alumunus and in 2002, Dr. Hockmeyer was awarded a Doctor of Sciencehonoris causafrom Purdue University. Dr. Hockmeyer is a member of the Maryland Economic Development Commission and the Maryland Governor’s Workforce Investment Board (GWIB). He is also a member of the Board of Directors of Advancis Pharmaceutical Corp., Vanda Pharmaceuticals, Idenix Pharmaceuticals, Inc., and TolerRx, Inc. and serves on the boards of several educational and philanthropic organizations.
Directors with Terms Expiring in 2007
Zola P. Horovitz, Ph.D.,age 71, has served as a director of GenVec since August 2003. Dr. Horovitz is a member of the Nominating and Corporate Governance Committee and is the Chairman of the Audit Committee. Dr. Horovitz served as a director of Diacrin from 1994 to August 2003. Dr. Horovitz was Vice President, Business Development and Planning at Bristol-Myers Squibb Pharmaceutical Group from 1991 until 1994 and was Vice President, Licensing from 1989 to 1991. Prior to 1989, Dr. Horovitz spent 30 years as a member of the Squibb Institute for Medical Research. Dr. Horovitz is also a director of Avigen, Inc., BioCryst Pharmaceuticals, Genaera Pharmaceuticals, Nitromed, DoV Pharmaceuticals, Immunicon and Palatin Technologies. Dr. Horovitz received his Ph.D. from the University of Pittsburgh.
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William N. Kelley, M.D.,age 66, has served as a director of GenVec since June 2002. Dr. Kelley is a member of the Audit Committee and is the Chairman of the Nominating and Corporate Governance Committee. Dr. Kelley brings a long history of involvement in experimental models of gene therapy to the Board. Dr. Kelley and his colleagues at the University of Michigan were the first to propose in vivo gene therapy as it is recognized today and the first to directly administer a human gene in vivo and obtain expression in an experimental animal model. In the fall of 1989, Dr. Kelley became Executive Vice President of the University of Pennsylvania with responsibilities as Chief Executive Officer for the Medical Center, Dean of the School of Medicine, and the Robert G. Dunlop Professor of Medicine and Biochemistry and Biophysics. In the national leadership arena, Dr. Kelley has served as President of the American Society for Clinical Investigation, President of the American College of Rheumatology, Chair of the American Board of Internal Medicine and Chair of the Residency Review Committee for Internal Medicine. Dr. Kelley also serves as a director of Merck & Company; Beckman Coulter; Advanced Bio-Surfaces, Inc., and Polymedix, Inc.
Harold R. Werner, age 57, has served as a director of GenVec since January 2002. Mr. Werner is a member of the Compensation Committee. Mr. Werner is a co-founder of HealthCare Ventures, a venture capital fund specializing in health care. Prior to the formation of HealthCare Ventures in 1985, Mr. Werner was Director of New Ventures for Johnson & Johnson Development Corporation. Before joining Johnson & Johnson in 1980, he was Senior Vice President of Robert S. First, Inc. Mr. Werner has served as a director for over thirty public and private companies in the health care field and has specialized in the formation of new high-science companies. Mr. Werner was elected to GenVec’s Board pursuant to the Investor Rights Agreement between GenVec and HealthCare Ventures in connection with HealthCare Ventures’ investment in GenVec in December 2001. In connection with its investment, HealthCare Ventures was granted the right to designate one individual to fill a vacancy created on the Board pursuant to the Investor Rights Agreement. Mr. Werner holds BS and MS degrees in engineering from Princeton University and an MBA from The Harvard Business School.
Directors with Terms Expiring in 2008
Barbara H. Franklin, age 65, has served as a director of GenVec since October 2002. Ms. Franklin is a member of the Audit Committee. Since January 1995, Ms. Franklin has served as the President and Chief Executive Officer of Barbara Franklin Enterprises, a private international consulting and investment firm in Washington D.C. Between January 1993 and January 1995, she was a lecturer and served as a director of various corporations and organizations. Previously, Ms. Franklin served as the 29th U.S. Secretary of Commerce. Ms. Franklin founded Franklin Associates, an internationally recognized consulting firm, and served as its President from 1984 through 1992. She was Senior Fellow of the Wharton School (1979 — 1988), one of the original Commissioners of the U.S. Consumer Product Safety Commission (1973 — 1979) and a staff assistant to the President, creating the first White House effort to recruit women for high level government jobs (1971 - 1973). Earlier she held executive positions at Citibank and the Singer Company. Ms. Franklin currently is a director of Aetna Inc.; The Dow Chemical Company; MedImmune, Inc.; and the Washington Mutual Investors Fund. She has been a director of the NASDAQ Stock Market, Inc., and the American Institute of CPA’s and has been awarded the John J. McCloy Award for contributions to audit excellence. She currently serves as a director of the National Association of Corporate Directors (NACD), a trustee of the Financial Accounting Foundation, and a member of the Public Company Accounting Oversight Board (PCAOB) Advisory Council. She has been chosen as Director of the Year by the NACD in 2000 and as Outstanding Director by Board Alert in 2003. Ms. Franklin graduated from the Pennsylvania State University and received an MBA from Harvard Business School.
Stelios Papadopoulos, Ph.D.,age 57, has served as a director of GenVec since August 2003. Dr. Papadopoulos served as a director of Diacrin from 1991 to August 2003. Dr. Papadopoulos is a Vice Chairman in the investment banking division at Cowen & Co., LLC focusing on the biotechnology and pharmaceutical sectors. Prior to joining Cowen in February 2000, he spent 13 years as an investment banker at PaineWebber, where he was most recently Chairman of PaineWebber Development Corp., a PaineWebber subsidiary. Prior to becoming an investment banker he spent two years as a biotechnology analyst, first at Donaldson, Lufkin & Jenrette and subsequently at Drexel Burnham Lambert. Before coming to Wall Street in 1985, Dr. Papadopoulos was on the faculty of the Department of Cell Biology at New York University Medical Center. He continues his affiliation with NYU Medical Center as an Adjunct Associate Professor of Cell Biology. Dr. Papadopoulos holds a Ph.D. in biophysics and an MBA in finance, both from New York University. He is co-founder and Chairman of the Board of Exelixis, Inc., He is also co-founder and member of the Board of Anadys Pharmaceuticals, Inc., a director of SGX Pharmaceuticals, Inc., and is a director of several private companies in the biotechnology sector.
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Joshua Ruch, age 56, has served as a director of GenVec since August 2003. Mr. Ruch is a member of the Compensation Committee. Mr. Ruch served as a director of Diacrin from March 1998 to August 2003. Mr. Ruch is the Chairman and Chief Executive Officer of Rho Capital Partners, Inc., an investment and venture capital management company, which he co-founded in 1981. Prior to founding Rho, Mr. Ruch was employed in investment banking at Salomon Brothers. Mr. Ruch received a B.S. degree in electrical engineering from the Israel Institute of Technology (Technion) and an MBA from the Harvard Business School. Mr. Ruch is also a director of a number of private companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the “1934 Act”) requires the Company’s executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such executive officers, directors and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports filed by such reporting persons.
Except as set forth below, and based solely on the Company’s review of copies of such reports furnished to the Company and written representations that no other reports were required during fiscal 2005, the Company believes that all Section 16(a) filing requirements applicable to the Company’s executive officers, directors, and greater than 10% beneficial owners were complied with.
Thomas A. Davis, GenVec’s Chief Medical Officer, did not timely report an open market purchase of 5,000 shares of GenVec common stock on November 22, 2005. Dr. Davis subsequently filed the Form 4 with the SEC on January 5, 2006. In addition, as the result of a clerical error, our Chief Executive Officer, Dr. Paul Fischer, failed to timely report 75,000 shares covered by an option grant. Dr. Fischer subsequently filed an amended Form 4 with the SEC on April 28, 2006.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation paid or accrued by the Company to the Chief Executive Officer and to the next four most highly compensated executive officers whose annual compensation exceeded $100,000 for 2005 for services rendered to the Company during the years ended December 31, 2005, 2004 and 2003.
Summary Compensation Table
| Long-Term | ||||||||||||||||||||
| Compensation | ||||||||||||||||||||
| Annual Compensation | Awards | |||||||||||||||||||
| Securities | ||||||||||||||||||||
| Underlying | All Other | |||||||||||||||||||
| Salary | Bonus | Options/SARS | Compensation | |||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | (#) | (1) | |||||||||||||||
| Paul H. Fischer, Ph.D. | 2005 | $ | 331,755 | $ | 25,000 | 150,000 | $ | 7,000 | ||||||||||||
| Chief Executive Officer, President | 2004 | $ | 320,072 | $ | 64,014 | 150,000 | $ | 8,000 | ||||||||||||
| and Director | 2003 | $ | 320,072 | $ | 128,030 | — | $ | 3,500 | ||||||||||||
| Jeffrey W. Church, | 2005 | $ | 236,151 | $ | 29,519 | 75,000 | $ | 5,904 | ||||||||||||
| CFO, Treasurer and Corporate | 2004 | $ | 229,273 | $ | 28,659 | 40,000 | $ | 5,732 | ||||||||||||
| Secretary | 2003 | $ | 221,520 | $ | 55,380 | — | $ | 3,003 | ||||||||||||
| Thomas A. Davis, M.D. (2) | 2005 | $ | 130,769 | $ | 282,329 | 150,000 | — | |||||||||||||
| Chief Medical Officer | 2004 | — | — | — | — | |||||||||||||||
| 2003 | — | — | — | — | ||||||||||||||||
| C. Richter King, Ph.D. | 2005 | $ | 207,987 | $ | 25,998 | 75,000 | $ | 5,200 | ||||||||||||
| Senior Vice President, | 2004 | $ | 199,031 | $ | 37,318 | 35,000 | $ | 4,976 | ||||||||||||
| Research | 2003 | $ | 192,299 | $ | 48,075 | — | $ | 3,000 | ||||||||||||
| (1) | Represents the Company’s contribution to GenVec’s 401-K Defined Contribution Plan. | |
| (2) | Dr. Davis joined the Company on July 26, 2005 with an annual salary of $300,000. Dr. Davis’ bonus represents the amount paid to him upon commencement of employment as well as the amount paid as an annual 2005 bonus of $15,000. |
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Option Grants in Last Fiscal Year
The following table sets forth grants of stock options made during the year ended December 31, 2005, to each of the individuals listed in the Summary Compensation Table.
| Potential Realizable | ||||||||||||||||||||||||
| Number of | % of Total | Value at Assumed | ||||||||||||||||||||||
| Securities | Options | Annual Rates of Stock | ||||||||||||||||||||||
| Underlying | Granted to | Exercise | Appreciation for the | |||||||||||||||||||||
| Options Granted | Employees | Price per | Expiration | Option Term (2) | ||||||||||||||||||||
| Name | (1) | in 2005 | Share | Date | 5% | 10% | ||||||||||||||||||
| Paul H. Fischer, Ph.D. | 150,000 | 9.2 | % | $ | 1.88 | 1/19/2015 | $ | 177,348 | $ | 449,435 | ||||||||||||||
| Jeffrey W. Church | 75,000 | 4.6 | % | $ | 1.88 | 1/19/2015 | $ | 88,674 | $ | 224,718 | ||||||||||||||
| Thomas A. Davis, M.D. | 150,000 | 9.2 | % | $ | 1.98 | 7/25/2015 | $ | 186,782 | $ | 473,342 | ||||||||||||||
| C. Richter King, Ph.D. | 75,000 | 4.6 | % | $ | 1.88 | 1/19/2015 | $ | 88,674 | $ | 224,718 | ||||||||||||||
| (1) | One-eighth of each option grant vests six months after the date of grant and the remainder vests monthly on a pro-rata basis over the following 42 months. The options were granted under the GenVec 2002 Stock Incentive Plan. | |
| (2) | In accordance with the rules and regulations of the Securities and Exchange Commission, such gains are based on assumed rates of annual compound stock appreciation of 5% and 10% from the date on which the options were granted over the full term of the options. The rates do not represent GenVec’s estimate or projection of future GenVec common stock prices, and no assurance can be given that these rates of annual compound stock appreciation will occur. |
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
| Number of Securities | ||||||||||||||||||||||||
| Shares | Underlying Unexercised | Value of Unexercised | ||||||||||||||||||||||
| Acquired | Options at | In-The-Money Options at | ||||||||||||||||||||||
| on | Value | December 31, 2005 | December 31, 2005 | |||||||||||||||||||||
| Name | Exercise | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
| Paul H. Fischer, Ph.D. | 65,592 | $ | 98,339 | 532,427 | 191,044 | — | — | |||||||||||||||||
| Jeffrey W. Church | — | — | 209,477 | 83,023 | — | — | ||||||||||||||||||
| Thomas A. Davis, M.D. | — | — | — | 150,000 | — | — | ||||||||||||||||||
| C. Richter King, Ph.D. | — | — | 202,809 | 79,690 | — | — | ||||||||||||||||||
Compensation of Directors
During 2005, each non-employee director received $2,000 per Board meeting attended, $1,000 per committee meeting attended and $3,000 per quarter as a retainer. The Company’s Chairman of the Board received $4,000 per Board meeting attended, $1,000 per committee meeting attended and $6,000 per quarter as a retainer. Directors were reimbursed for some expenses in connection with attendance at Board and committee meetings.
Under the 2002 Stock Incentive Plan, non-employee directors receive: (i) grants of options to purchase 20,000 shares of Common Stock which are exercisable ratably over a four-year period upon the effective date such non-employee director joins the Board and (ii) annual automatic grants of 15,000 options, 50% of which will be exercisable six months after the date of grant and 50% of which will be exercisable 12 months after the date of grant, except for the Chairman of the Board, who receives an annual automatic grant of 22,500 options instead of 15,000 options. The options granted to the Chairman become exercisable in the same proportion as the options granted to the other non-employee directors. Director options have an exercise price equal to the fair market value of GenVec common stock on the date of the grant and a ten-year term.
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Upon completion of the Diacrin merger in August 2003, GenVec entered into a consulting agreement with Dr. Thomas Fraser, Chairman of the Board of Directors. Under the terms of the consulting agreement, Dr. Fraser will devote approximately 20% of his working time to the business and affairs of GenVec (including time spent in his capacity as a Director of GenVec). Dr. Fraser received $32,500 under the terms of the consulting agreement in 2005.
Mr. Werner has declined to accept options for service on the Board.
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
The Company does not currently have employment agreements with its executive officers. Certain executive officers are party to a Salary Continuation Agreement and/or Change in Control Agreement. The material terms of these agreements are described below.
The terms of Dr. Fischer’s Salary Continuation Agreement provide that if Dr. Fischer’s employment is terminated without cause and other than by reason of death or disability, the Company will continue to pay Dr. Fischer’s salary and provide him with life insurance and health insurance for a period of 24 months from the date of his termination. In addition, the Company is required to pay Dr. Fischer an additional payment equal to the pro rata amount of his bonus for the last completed year of employment based on the number of months worked in the year of termination. Dr. Fischer’s Change in Control Agreement provides that if he is terminated or resigns for good cause in connection with a change in control of the Company, he is entitled to (i) a severance payment based on 24 months salary and bonus, (ii) an additional pro rata payment based on his highest annual salary in the past year and his highest bonus amount in the past three years, (iii) any bonus applicable to the preceding fiscal year, if not yet paid, and (iv) continuation of life and health insurance benefits for a period of 24 months. The Company is also obligated to provide a one-time payment to cover certain FICA and Medicare withholding taxes and excise taxes imposed under Section 4999 of the Internal Revenue Code of 1986, as amended due on such benefits. The Salary Continuation Agreement contains obligations on Dr. Fischer’s part regarding non-disparagement and non-competition, and both agreements provide for his nondisclosure of proprietary information. If Dr. Fischer should die while entitled to any payments or benefits under either agreement, such payments and benefits are payable to Dr. Fischer’s heirs or estate. To the extent Dr. Fischer becomes entitled to benefits under the Change of Control Agreement, the salary continuation agreement is superseded and he will not receive any benefit under such agreement.
The terms of the Company’s Salary Continuation Agreements with Mr. Church, Dr. Davis and Dr. King are identical to the terms of the Salary Continuation Agreement the Company entered into with Dr. Fischer, as described above, except that under their agreements Mr. Church, Dr. Davis and Dr. King are entitled to salary and insurance benefits for 12 months instead of 24 months.
The Company has also entered into a Change in Control Agreement with Mr. Church. The terms of this agreement are identical to the terms of the Change in Control Agreement that the Company entered into with Dr. Fischer, as described above, except that under his agreement Mr. Church’s severance payment is based on, and he is entitled to continuation of health and life insurance benefits for, 18 months instead of 24 months.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of February 28, 2006, regarding the beneficial ownership of the Company’s Common Stock by (i) those persons known to the Company to be the beneficial owners of more than 5% of the outstanding shares of Common Stock, (ii) each of the individuals listed in the “Summary Compensation Table” below, (iii) each director of the Company, and (iv) all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that person. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days after February 28, 2006 are considered outstanding for the purpose of computing the percentage ownership of the person holding such options, but are not considered outstanding when computing the percentage ownership of each other person. Except as indicated in the footnotes to this table, each stockholder named in the table below has sole voting and investment power for the shares shown as beneficially owned by them. Percentage of ownership is based on 63,675,282 shares of Common Stock outstanding on February 28, 2006.
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| Number of | Percentage of | |||||||
| Name of Beneficial Owner | Shares Owned | Class Owned | ||||||
| HealthCare Ventures LLC (1) | 10,436,462 | 16.4 | % | |||||
| Wellington Management Company, LLP | 3,357,800 | 5.3 | % | |||||
| Thomas H. Fraser, Ph.D. (3) | 1,193,456 | 1.9 | % | |||||
| Barbara Hackman Franklin (3) | 62,500 | * | ||||||
| Wayne T. Hockmeyer, Ph.D. (3) | 105,000 | * | ||||||
| William N. Kelley, M.D. (3) | 77,500 | * | ||||||
| Zola P. Horovitz, Ph.D. (3) | 114,723 | * | ||||||
| Stelios Papadopoulos, Ph.D. (3) | 412,918 | * | ||||||
| Joshua Ruch (2) (3) | 2,797,837 | 4.4 | % | |||||
| Harold R. Werner (1) (3) | 10,436,462 | 16.4 | % | |||||
| Paul H. Fischer, Ph.D. (3) | 824,479 | 1.3 | % | |||||
| Jeffrey W. Church (3) | 221,935 | * | ||||||
| Thomas A. Davis, M.D. (3) | 55,505 | * | ||||||
| C. Richter King, Ph.D. (3) | 213,539 | * | ||||||
| All directors and executive officers as a group (12 persons) | 16,516,355 | 25.9 | % | |||||
| * | Represents ownership that does not exceed 1% of the outstanding shares of the Company’s Common Stock. | |
| (1) | Healthcare Ventures LLC is an affiliate of and Harold R. Werner is a general partner of Healthcare Partners II, L.P. (“HCP II”), Healthcare Partners III, L.P. (“HCP III”), Healthcare Partners IV, L.P. (“HCP IV”), Healthcare Partners V, L.P. (“HCP V”), and Healthcare Partners VI, L.P. (“HCP VI”), the general partner of Healthcare Ventures II, L.P. (“HCV II”), Healthcare Ventures III, L.P. (“HCV III”), Healthcare Ventures IV, L.P. (“HCV IV”), Healthcare Ventures V, L.P. (“HCV V”) and Healthcare Ventures VI, L.P. (“HCV VI”), respectively. Mr. Werner, together with James H. Cavanaugh, John W. Littlechild, Christopher K Mirabelli, Gus Lawlor, Eric Aguiar, and William W. Crouse, the other general partners of HCP II, HCP III, HCP IV, HCP V and HCP VI (collectively, the “HC Entities”) share voting and investment control with respect to shares owned by HCV II, HCV III, HCV IV, HCV V and HCV VI, respectively. Mr. Werner does not own any shares of GenVec’s capital stock in his individual capacity. The address of Healthcare Ventures II, III, IV, V and VI, L.P. is 44 Nassau Street, Princeton, New Jersey 08542. This information is based on a Schedule 13D filed with the SEC on August 23, 2003. | |
| (2) | Rho Capital Partners, Inc. (“Rho”), of which Joshua Ruch is Chairman and Chief Executive Officer, may be deemed the beneficial owner of the shares owned by Rho Management Trust II pursuant to an investment advisory agreement that confers voting and investment control over such shares on Rho. | |
| Pursuant to a Loan Modification Agreement, dated November 28, 2003 with Nautilis Trust, an affiliate of Rho, Rho Investment Partners “H”, L.P., became eligible to purchase an additional 1,639,929 shares of GenVec’s common stock, in consideration for the cancellation of a previously contracted debt. Rho and its affiliate do not have investment control and do not have voting control over any of such 1,639,929 shares until the satisfaction of the conditions specified in the Loan Modification Agreement. Neither Rho nor its affiliate has the right to acquire investment or voting control over any such shares within the next 60 days. | ||
| The address for Rho Management Trust II is c/o Rho Capital Partners, 152 West 57th Street, 23rd Floor, New York, NY 10019. This information is based on a Schedule 13D filed with the SEC on September 2, 2003 and Amendment No. 1 thereto filed with the SEC on December 5, 2003. | ||
| (3) | Includes shares of Common Stock issuable upon exercise of options that are exercisable within 60 days of February 28, 2006 in the following amounts: Thomas H. Fraser, 381,200 shares; Barbara Hackman Franklin, 57,500 shares; Wayne T. Hockmeyer, 75,500 shares; William N. Kelley, 72,500 shares; Zola P. Horovitz, 97,138 shares; Stelios Papadopoulos, 107,078 shares; Joshua Ruch, 107,078 shares; Paul H. Fischer, 565,342 shares; Jeffrey W. Church, 220,935 shares; Thomas A. Davis, 55,505 shares; C. Richter King, 213,539 shares; and directors and officers as a group (12 people) 1,954,059 shares. |
41
Equity Compensation Plan Information
The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2005:
| (a) | (b) | (c) | ||||||||||
| Number of | ||||||||||||
| securities | ||||||||||||
| remaining | ||||||||||||
| available for | ||||||||||||
| Number of | future issuance | |||||||||||
| securities to be | Weighted- | under equity | ||||||||||
| issued upon | average exercise | compensation | ||||||||||
| exercise of | price of | plans (excluding | ||||||||||
| outstanding | outstanding | securities | ||||||||||
| options, warrants | options, warrants | reflected in | ||||||||||
| Plan category | and rights | and rights | column (a) | |||||||||
| Equity compensation plans approved by security holders | 4,932,051 | $ | 3.02 | 2,763,920 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 4,932,051 | $ | 3.02 | 2,763,920 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 26, 2005, the Company sold 7,600,000 shares of common stock to various investors at $2.00 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $13,990,000. SG Cowen & Co., LLC (“SG Cowen”) was engaged as the placement agent for this transaction. Stelios Papadopoulos, Ph.D., is a Vice Chairman in the investment banking division of SG Cowen and is a member of GenVec’s board of directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Accountant Fees and Services
The following is a summary of the fees billed to GenVec by KPMG LLP for professional services rendered for the years ended December 31, 2005 and 2004:
| Fee Category | 2005 | 2004 | ||||||
| Audit Fees | $ | 374,000 | $ | 380,600 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | 12,100 | 13,750 | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 386,100 | $ | 394,350 | ||||
Audit Fees
These fees consist of fees for professional services rendered for the audit of GenVec’s financial statements, review of the interim financial statements included in quarterly reports, and services in connection with statutory and regulatory filings.
42
Audit-Related Fees
These fees comprise assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees” above. GenVec did not incur such fees during 2005 and 2004.
Tax Fees
These fees comprise tax compliance and tax preparation assistance for state and federal filings, consultations concerning tax related matters and other tax compliance projects. Less than 5% of these fees comprise consulting fees, as it is GenVec’s intent to minimize consulting services in this category.
All Other Fees
All other fees consist of fees not included in any other category. GenVec did not incur such fees during 2004 and 2005.
43
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | (1 | ) | Financial Statements — See index to Financial Statements on page F below for a list of the financial statements being filed herein. | |||
| (2 | ) | Financial Statement Schedules — All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto. | ||||
| (3 | ) | Exhibits – The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. |
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 3.1 | Amended & Restated Certificate of Incorporation of GenVec, Inc. (8) | |
| 3.1(a) | Certificate of Designation of the Series A Junior Participating Preferred Stock. (8) | |
| 3.2 | Amended & Restated Bylaws of GenVec, Inc. (13) | |
| 4.1 | Rights Agreement dated as of September 7, 2001 between the Registrant and American Stock Transfer & Trust Company, the form of Certificate of Designation of Series A Junior Participating Preferred Stock attached as Exhibit A thereto, the form of Rights Certificate attached as Exhibit B thereto, and the form of Summary of Rights attached as Exhibit C thereto. (4) | |
| 4.2 | Stock Purchase Agreement dated as of December 21, 2001, by and among HealthCare Ventures V. L.P., HealthCare Ventures VI, L.P., and the Registrant. (5) | |
| 4.3 | Investor Rights Agreement, dated as of December 21, 2001, by and among HealthCare Ventures V. L.P., HealthCare Ventures VI, L.P., and the Registrant. (5) | |
| 4.4 | Registration Rights Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Registrant (filed herewith). | |
| 4.5 | Form of Warrant, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Registrant (filed herewith). | |
| 10.1 | Form of Indemnification Agreement for Directors and Officers. (1) | |
| 10.2 | 2002 Stock Incentive Plan.* (14) | |
| 10.3 | Amended and Restated 1993 Stock Incentive Plan and forms of agreements thereunder.* (2) | |
| 10.4 | 2000 Employee Stock Purchase Plan, and form of agreement thereunder.* (1) | |
| 10.5 | Amended and Restated 2000 Director Option Plan.* (7) | |
| 10.6 | License Agreement dated May 31, 1996 between Scios, Inc. and the Registrant. (1) | |
| 10.7 | New Collaboration Agreement dated January 1, 2003 between Fuso Pharmaceutical Industries, Ltd. and the Registrant. + (8) | |
| 10.8 | New Commercialization Agreement dated January 1, 2003 between Fuso Pharmaceutical Industries Ltd. and the Registrant.+ (8) | |
| 10.9 | License Agreement dated February 1, 1998 between Asahi Chemical Industry Co., Ltd. and the Registrant (12) | |
| 10.10 | Terms of Employment Arrangement between the Registrant and Thomas A. Davis (15) | |
| 10.12 | Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Registrant and Cornell Research Foundation, Inc. (8) | |
| 10.13 | Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Registrant. (1) | |
| 10.14 | Amended and Restated Registration Rights Agreement dated December 2, 1998 between the Registrant and certain stockholders. (1) | |
| 10.15 | Patent License Agreement dated January 8, 2000 between the Registrant and the Public Health Service, as amended, and amendment number 1 hereto dated March 9, 2000. (12) | |
| 10.16 | Patent License Agreement dated December 20, 2000 between the Registrant and Northwestern University. (3) | |
| 10.17 | Salary Continuation Agreement between the Registrant and Paul H. Fischer dated October 15, 2002. *(8) | |
| 10.18 | Change in Control Agreement between the Registrant and Paul H. Fischer dated October 15, 2002. *(8) | |
| 10.19 | Salary Continuation Agreement between the Registrant and Jeffrey W. Church dated October 15, 2002. *(8) | |
| 10.20 | Change in Control Agreement between the Registrant and Jeffrey W. Church dated October 15, 2002. *(8) | |
44
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 10.21 | Form of Salary Continuation Agreement between the Registrant and other executive officers and senior staff dated October 15, 2002. *(8) | |
| 10.22 | Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003. (12) | |
| 10.23 | Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health for the production of adenoviral vector-based HIV vaccine candidates dated December 31, 2001, and amendment 1 thereto dated January 25, 2002.+ (7) | |
| 10.24 | Sublease dated January 24, 1991 by and among Diacrin and Building 79 Associated Limited Partnership and Building 96 Associates Limited Partnership. (10) | |
| 10.25 | Amendment to Sublease dated April 30, 2002. (11) | |
| 10.26 | Research Collaboration Agreement between Cordis Corporation and the Company dated as of December 22, 2003.+ (12) | |
| 10.27 | Summary of GenVec, Inc. 2006 Annual Bonus Plan * (filed herewith). | |
| 10.28 | Common Stock Purchase Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Registrant (filed herewith) | |
| 23.1 | Consent of Independent Registered Public Accounting Firm (filed herewith). | |
| 24.1 | Power of Attorney (filed herewith). | |
| 31.1 | Rule 13a-14(a) Certification by Chief Executive Officer (filed herewith). | |
| 31.2 | Rule 13a-14(a) Certification by Chief Financial Officer (filed herewith). | |
| 32.1 | Rule 13a-14(b) Certification by Chief Executive Officer pursuant to 18 United States Code Section 1350 (filed herewith). | |
| 32.2 | Rule 13a-14(b) Certification by Chief Financial Officer pursuant to 18 United States Code Section 1350 (filed herewith). |
| * | Compensatory plan, contract or arrangement. | |
| + | Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment. | |
| (1) | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-47408) declared effective by the Securities and Exchange Commission on December 12, 2000. | |
| (2) | Incorporated by reference from our Registration Statement on Form S-8 (File No. 333-55590) filed with the Securities and Exchange Commission on February 14, 2001. | |
| (3) | Incorporated by reference from our Annual Report on Form 10-K (File No: 0-24469) filed with the Securities and Exchange Commission on March 30, 2001. | |
| (4) | Incorporated by reference from our Registration Statement on Form 8-A (File No: 0-24469) filed with the Securities and Exchange Commission on September 26, 2001. | |
| (5) | Incorporated by reference from our Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on January 3, 2002. | |
| (6) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No: 0-24469) filed with the Securities and Exchange Commission on August 14, 2002. | |
| (7) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 28, 2002. | |
| (8) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 31, 2003. | |
| (9) | Incorporated by reference from our Registration Statement on form S-4 (File No. 333-105320) filed with the Securities and Exchange Commission on May 16, 2003. | |
| (10) | Incorporated by reference from Diacrin, Inc. Form 10-K, as amended. (File No. 0-20139) filed on April 29, 1992. | |
| (11) | Incorporated by reference from Diacrin, Inc. Form 10-K (File No. 0-20139) filed on March 26, 2003. | |
| (12) | Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2004. | |
| (13) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 10, 2003. | |
| (14) | Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 8, 2005. | |
| (15) | Incorporated by reference from our Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on July 27, 2005. |
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to its Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| Genvec, Inc. | ||||||
| Date: April 28, 2006 | By: | /s/ Paul H. Fischer, Ph.D. | ||||
| Chief Executive Officer |
46
GENVEC, INC.
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
| PAGE NO. | ||||
Reportsof Independent Registered Public Accounting Firm | F-1 to F-2 | |||
| Statements of Operations—Years Ended December 31, 2005, 2004 and 2003 | F-3 | |||
| Balance Sheets as of December 31, 2005 and 2004 | F-4 | |||
| Statements of Cash Flows—Years Ended December 31, 2005, 2004 and 2003 | F-5 | |||
| Statements of Stockholders’ Equity and Comprehensive Loss —Years | ||||
| Ended December 31, 2005, 2004 and 2003 | F-6 | |||
| Notes to Financial Statements | F-7 to F-23 | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GenVec, Inc.:
GenVec, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Form 10-K, that GenVec, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).GenVec’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that GenVec, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, GenVec, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of GenVec, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006 expressed an unqualified opinion on those financial statements.
/s/ KPMG LLP
McLean, Virginia
March 15, 2006
March 15, 2006
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GenVec, Inc.:
GenVec, Inc.:
We have audited the accompanying balance sheets of GenVec, Inc. (the Company) as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of GenVec, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
McLean, Virginia
March 15, 2006
March 15, 2006
F-2
GENVEC, INC.
STATEMENTS OF OPERATIONS
STATEMENTS OF OPERATIONS
| (in thousands, except share and per share data) | ||||||||||||
| Years ended December 31, | 2005 | 2004 | 2003 | |||||||||
| Revenue from strategic alliances and research contracts (Note 8) | $ | 26,554 | $ | 11,853 | $ | 10,520 | ||||||
| Operating expenses: | ||||||||||||
| Research and development | 30,802 | 23,087 | 23,457 | |||||||||
| General and administrative | 8,333 | 7,884 | 8,405 | |||||||||
| Loss on disposal of assets (Note 3 and 6) | 1,895 | 2 | — | |||||||||
| Total operating expenses | 41,030 | 30,973 | 31,862 | |||||||||
| Operating loss | (14,476 | ) | (19,120 | ) | (21,342 | ) | ||||||
| Other income (loss): | ||||||||||||
| Interest income | 908 | 612 | 389 | |||||||||
| Interest expense | (426 | ) | (386 | ) | (486 | ) | ||||||
| Investment gain | 2 | — | 178 | |||||||||
| Total other income, net | 484 | 226 | 81 | |||||||||
| Net loss | $ | (13,992 | ) | $ | (18,894 | ) | $ | (21,261 | ) | |||
| Basic and diluted net loss per share | $ | (0.24 | ) | $ | (0.35 | ) | $ | (0.65 | ) | |||
| Shares used in computation of basic and diluted net loss per share | 57,823 | 54,331 | 32,963 | |||||||||
The accompanying Notes to Financial Statements are an integral part of these statements.
F-3
GENVEC, INC.
BALANCE SHEETS
BALANCE SHEETS
| (in thousands) | ||||||||
| As of December 31, | 2005 | 2004 | ||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,830 | $ | 5,366 | ||||
| Short-term investments (Note 4) | 25,169 | 25,397 | ||||||
| Accounts receivable | 4,049 | 1,544 | ||||||
| Prepaid expenses and other | 1,409 | 1,821 | ||||||
| Bond sinking fund (Note 7) | 296 | 276 | ||||||
| Total current assets | 37,753 | 34,404 | ||||||
| Property and equipment, net (Notes 5 and 7) | 4,147 | 5,418 | ||||||
| Long-term investments (Note 4) | — | 2,302 | ||||||
| Other assets | 1 | 65 | ||||||
| Intangible assets (Note 3 and 6) | — | 1,882 | ||||||
| Total assets | $ | 41,901 | $ | 44,071 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt (Note 7) | $ | 913 | $ | 1,227 | ||||
| Accounts payable | 1,180 | 1,622 | ||||||
| Accrued clinical trial expenses | 457 | 1,364 | ||||||
| Accrued other expenses | 3,544 | 2,128 | ||||||
| Unearned revenue | 1,182 | 2,042 | ||||||
| Total current liabilities | 7,276 | 8,383 | ||||||
| Long-term debt, less current portion (Note 7) | 2,351 | 3,264 | ||||||
| Other liabilities | 852 | 1,943 | ||||||
| Total liabilities | 10,479 | 13,590 | ||||||
| Commitments (Notes 7 and 9) | ||||||||
| Stockholders’ equity (Notes 8 and 10): | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized in 2005 and 2004; none are issued and outstanding in 2005 and 2004 | — | — | ||||||
| Common stock, $0.001 par value, 100,000 shares authorized in 2005 and 2004; 63,675 and 55,588 shares issued and outstanding in 2005 and 2004 | 64 | 56 | ||||||
| Additional paid-in capital | 181,110 | 166,656 | ||||||
| Deferred compensation (Note 10) | (121 | ) | (382 | ) | ||||
| Accumulated other comprehensive loss (Notes 4 and 12) | (45 | ) | (255 | ) | ||||
| Accumulated deficit | (149,586 | ) | (135,594 | ) | ||||
| Total stockholders’ equity | 31,422 | 30,481 | ||||||
| Total liabilities and stockholders’ equity | $ | 41,901 | $ | 44,071 | ||||
The accompanying Notes to Financial Statements are an integral part of these statements.
F-4
GENVEC, INC.
STATEMENTS OF CASH FLOWS
STATEMENTS OF CASH FLOWS
| (in thousands) | ||||||||||||
| Years ended December 31, | 2005 | 2004 | 2003 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (13,992 | ) | $ | (18,894 | ) | $ | (21,261 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 2,060 | 1,813 | 2,608 | |||||||||
| Stock option and warrant compensation (Note 10) | 261 | 229 | 1,176 | |||||||||
| Loss on disposal of assets (Note 3 and 6) | 1,895 | 2 | — | |||||||||
| (Gain) on investments | (2 | ) | — | (178 | ) | |||||||
| Loss on interest rate swap | 240 | — | — | |||||||||
| Change in accounts receivable | (2,505 | ) | 278 | (898 | ) | |||||||
| Change in accounts payable and accrued expenses | 67 | (193 | ) | (1,696 | ) | |||||||
| Change in unearned revenue | (1,634 | ) | 25 | 746 | ||||||||
| Change in other assets and liabilities, net | 102 | 676 | (125 | ) | ||||||||
| Net cash used in operating activities | (13,508 | ) | (16,064 | ) | (19,628 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of equipment | (398 | ) | (242 | ) | (568 | ) | ||||||
| Cash acquired in acquisition, net of transaction costs of $2,445 (Note 3) | — | — | 4,828 | |||||||||
| Purchases of investment securities | (31,570 | ) | (27,573 | ) | (19,174 | ) | ||||||
| Proceeds from sale and maturity of investment securities | 33,725 | 33,394 | 33,181 | |||||||||
| Net cash provided by investing activities | 1,757 | 5,579 | 18,267 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock, net (Note 10) | 14,462 | 12,099 | 3,450 | |||||||||
| Proceeds from debt borrowings | — | 29 | — | |||||||||
| Payments of long-term debt obligations (Note 7) | (1,247 | ) | (1,494 | ) | (1,469 | ) | ||||||
| Net cash provided by financing activities | 13,215 | 10,634 | 1,981 | |||||||||
| Net change in cash and cash equivalents | 1,464 | 149 | 620 | |||||||||
| Beginning balance of cash and cash equivalents | 5,366 | 5,217 | 4,597 | |||||||||
| Ending balance of cash and cash equivalents | $ | 6,830 | $ | 5,366 | $ | 5,217 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 265 | $ | 335 | $ | 388 | ||||||
| Supplemental disclosure of non-cash investing activities: | ||||||||||||
| Property and equipment financed by capital leases | — | $ | 29 | $ | 50 | |||||||
The accompanying Notes to Financial Statements are an integral part of these statements.
F-5
GENVEC, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
| (in thousands) | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other Comp- | |||||||||||||||||||||||||||
| Years ended December 31, | Common Stock | Paid-in | Deferred | rehensive | Accumulated | |||||||||||||||||||||||
| 2005, 2004 and 2003 | Shares Amount | Capital | Compensation | Income (Loss) | Deficit | Total | ||||||||||||||||||||||
| Balance, December 31, 2002 | 21,979 | $ | 22 | $ | 112,975 | $ | (1,590 | ) | $ | (339 | ) | $ | (95,439 | ) | $ | 15,629 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (21,261 | ) | (21,261 | ) | |||||||||||||||||||
| Unrealized change in investments, net | — | — | — | — | (105 | ) | — | (105 | ) | |||||||||||||||||||
| Unrealized change in cash flow derivative, net | — | — | — | — | 169 | — | 169 | |||||||||||||||||||||
| Total comprehensive loss | $ | (21,197 | ) | |||||||||||||||||||||||||
| Common stock issued under Shelf registration, net | 757 | 1 | 1,848 | — | — | — | 1,849 | |||||||||||||||||||||
| Common stock issued in connection with acquisition | 27,665 | 27 | 38,504 | (563 | ) | — | — | 37,968 | ||||||||||||||||||||
| Common stock issued under stock incentive plans | 949 | 1 | 1,600 | — | — | — | 1,601 | |||||||||||||||||||||
| Deferred compensation charge resulting from stock options | — | — | (366 | ) | 1,542 | — | — | 1,176 | ||||||||||||||||||||
| Balance, December 31, 2003 | 51,350 | $ | 51 | $ | 154,561 | $ | (611 | ) | $ | (275 | ) | $ | (116,700 | ) | $ | 37,026 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (18,894 | ) | (18,894 | ) | |||||||||||||||||||
| Unrealized change in investments, net | — | — | — | — | (137 | ) | — | (137 | ) | |||||||||||||||||||
| Unrealized change in cash flow derivative, net | — | — | — | — | 157 | — | 157 | |||||||||||||||||||||
| Total comprehensive loss | $ | (18,874 | ) | |||||||||||||||||||||||||
| Common stock issued under Shelf registration, net | 4,000 | 4 | 11,693 | — | — | — | 11,697 | |||||||||||||||||||||
| Common stock held in treasury cancelled | (70 | ) | — | — | — | — | — | — | ||||||||||||||||||||
| Common stock issued under stock incentive plans | 308 | 1 | 402 | — | — | — | 403 | |||||||||||||||||||||
| Deferred compensation charge resulting from stock options | — | — | — | 229 | — | — | 229 | |||||||||||||||||||||
| Balance, December 31, 2004 | 55,588 | $ | 56 | $ | 166,656 | $ | (382 | ) | $ | (255 | ) | $ | (135,594 | ) | $ | 30,481 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (13,992 | ) | (13,992 | ) | |||||||||||||||||||
| Unrealized change in investments, net | — | — | — | — | (30 | ) | — | (30 | ) | |||||||||||||||||||
| Adjustment for change in non-qualifying hedge, net | — | — | — | — | 240 | — | 240 | |||||||||||||||||||||
| Total comprehensive loss | (13,782 | ) | ||||||||||||||||||||||||||
| Common stock issued under Shelf registration, net | 7,600 | 8 | 13,990 | — | — | — | 13,998 | |||||||||||||||||||||
| Common stock issued under Stock incentive plans | 487 | — | 464 | — | — | — | 464 | |||||||||||||||||||||
| Deferred compensation charge resulting from stock options | — | — | — | 261 | — | — | 261 | |||||||||||||||||||||
Balance, December 31, 2005 | 63,675 | $ | 64 | $ | 181,110 | $ | (121 | ) | $ | (45 | ) | $ | (149,586 | ) | $ | 31,422 | ||||||||||||
The accompanying Notes to Financial Statements are an integral part of these statements.
F-6
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec is an emerging late stage biopharmaceutical company developing innovative gene-based therapeutics to treat cancer, heart disease and vision loss and vaccines to prevent infectious disease. The Company is focused on the development and commercialization of our lead product candidate, TNFerade, for the treatment of cancer. The Company’s advanced product candidates are:
| • | TNFeradeÔ, which is currently in a Phase II/III trial for the treatment of locally advanced pancreatic cancer and Phase II trials for the treatment of rectal and melanoma cancer; | ||
| • | BIOBYPASSÒ, which is currently in a randomized, placebo-controlled Phase II trial for the treatment of severe coronary artery disease. The Company previously completed a randomized, controlled Phase II study of 67 patients with severe coronary artery disease using a cardiac surgical procedure; and | ||
| • | PEDF, which has completed enrollment in a Phase Ib trial for the treatment of wet age-related macular degeneration, a leading cause of blindness in individuals over the age of 50. |
The medical use of many proteins has historically been limited by the inability to maintain sufficient concentrations of the protein at the site of the disease for a period of time long enough to provide a benefit, while minimizing side effects caused by the protein’s presence in other, non-target tissues. GenVec’s gene-based therapeutic product candidates are based on proprietary technology that uses an adenovector to deliver genes that produce proteins at the site of disease.
The Company’s gene-based product candidates have been generally well tolerated in multiple clinical trials. The Company believe results to date support the broad applicability and commercial potential of our product development programs and is working with our collaborators and customers to develop second generation vectors and new applications for our technology, such as preventative vaccines to treat HIV, malaria and other infectious diseases.
The Company is subject to various risks common to companies within the biotechnology industry. These include, but are not limited to, development by competitors of new technological innovations; dependence on key personnel; dependence on a limited number of products; risks inherent in the research and development of biotechnology products; protection of proprietary technology; acceptance of the Company’s products by the country’s regulatory agencies in which the Company may choose to sell its products, as well as the end customer; health care cost containment initiatives; and product liability and compliance with government regulations, including the U.S. Food and Drug Administration.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
(b) INVESTMENTS
The Company’s investments consist primarily of bonds, government agency notes and commercial paper. These investments are classified as available-for-sale securities, which are carried at fair value, with the unrealized holding gains and losses reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
F-7
(c) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company’s financial instruments, as reflected in the accompanying balance sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, short-term investments, long-term investments, bond sinking fund, accounts receivable, accounts payable, and long-term debt. The Company has an interest rate swap agreement to manage interest rate exposure. The swap agreement has been deemed to be ineffective due to the different pricing frequencies of the swap agreement and related debt instrument; as such, changes in fair value of the swap agreement are included in interest expense.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment is depreciated using the straight-line method over the estimated useful lives of assets, generally three to five years for equipment and seven years for furniture and fixtures. Leased property meeting certain criteria is capitalized at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Amortization of capitalized leased assets is computed on the straight-line method over the term of the lease. Repair and maintenance costs are expensed as incurred.
(e) REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). Under SAB 104, we recognize revenues when a contract is executed, the contract price is fixed and determinable, delivery of the service or products has occurred, and collectibility of the contract price is considered probable. Upfront non-refundable fees are deferred and subsequently recognized over the period in which we complete performance obligations when such fees are received in conjunction with an agreement that includes such performance obligations. Revenue associated with performance milestones is recognized based on achievement of the milestones as defined in the respective agreements. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, costs and billing factors (e.g. indirect rate estimates) are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment.
(f) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Such costs include internal research and development expenditures (such as salaries and benefits, raw materials and supplies) and contracted services (such as sponsored research, consulting and testing services) of proprietary research and development activities and similar expenses associated with collaborative research agreements.
(g) CLINICAL TRIAL EXPENSES
The Company accrues estimated costs for clinical and pre-clinical studies based on estimates of work performed and completion of certain milestones. The Company believes that this method best aligns the expenses it records with the efforts it expends. The Company monitors the progress of the trials and their related activities to the extent possible, and adjusts, the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known.
(h) INCOME TAXES
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.
F-8
(i) NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period.
If the Company had net income, diluted earnings per share would be presented based on the shares used in the computation of basic net loss per share as well as potential common shares related to outstanding options and warrants. Total outstanding options in the amount of 57,000 were excluded from the computation of diluted earnings per shares as of December 31, 2005.
(j) COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and unrealized holding gains and losses from available-for-sale securities.
(k) INTEREST RATE SWAP
The Company has an interest rate swap agreement to manage interest rate exposure. Amounts to be paid or received under this agreement are included in interest expense. The swap agreement has been deemed to be ineffective, as such, changes in the fair value of the swap agreement are included in interest expense.
(l) TECHNOLOGICAL LICENSE AND INTELLECTUAL PROPERTY
Technological license and intellectual property costs consist of payments associated with license agreements and legal costs associated with the acquisition and development of intellectual property. Costs associated with the acquisition, development and/or maintenance of intellectual property are expensed when incurred.
(m) STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
The Company accounts for stock-based compensation awards to employees in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees(APB 25), and related interpretations, and complies with the disclosure provisions of SFAS Nos. 123 and 148,Accounting for Stock-Based Compensation. Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the quoted market price of the Company’s stock and the exercise price. All stock-based awards to non-employees are accounted for at their fair value in accordance with the provisions of SFAS No. 123.
Option grants to employees have been issued only at fair market value prices as of the date of grant during the periods presented herein, and the Company’s policy does not recognize compensation costs for options of this type. The pro forma costs of these options granted have been calculated using the Black-Scholes option pricing model and assuming the following for each of the three years ended December 31, 2005, 2004 and 2003: expected volatility of 75 percent, 75 percent and 102.81 percent; risk free interest rate of 3.70 percent, 2.51 percent and 2.54 percent; expected lives of four years and no dividend yield. The pro forma amounts may not be representative of the effects on pro forma net earnings for future years. The weighted-average grant date fair market value of options issued was $1.10 per share in 2005, $1.64 per share in 2004 and $1.24 per share in 2003. The following table illustrates the effect on net loss and net loss per share if the fair value based method had been applied to all outstanding and unvested awards in each year (in thousands, except per share data):
| 2005 | 2004 | 2003 | ||||||||||
| Net loss – as reported | $ | (13,992 | ) | $ | (18,894 | ) | $ | (21,261 | ) | |||
| Deduct: Incremental stock-based employee compensation expense determined under fair value method for all awards | (726 | ) | (713 | ) | (484 | ) | ||||||
| Net loss – pro forma | $ | (14,718 | ) | $ | (19,607 | ) | $ | (21,745 | ) | |||
| Basic and diluted loss per share – as reported | $ | (0.24 | ) | $ | (0.35 | ) | $ | (0.65 | ) | |||
| Basic and diluted loss per share – pro forma | $ | (0.25 | ) | $ | (0.36 | ) | $ | (0.66 | ) | |||
F-9
The Company has a stock purchase plan that is considered to be non-compensatory under Financial Interpretation Number 44,Accounting for Certain Transaction Involving Stock Compensation; however, for disclosure purposes this plan is considered to be compensatory.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The Company’s significant accounting estimates involve recognition of revenue from research and development agreements, accrual of clinical trial costs and valuation of intangible assets.
(o) RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued FASB Statement No. 154,Accounting Changes and Error Corrections. Statement 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. This statement will be effective for the Company for all accounting changes and any error corrections occurring after January 1, 2006.
In March 2005, the FASB issued FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations,which requires conditional asset retirement obligations to be recognized if a legal obligation exists to perform asset retirement activities and a reasonable estimate of the fair value of the obligation can be made. FIN 47 also provides guidance as to when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company does not have any asset retirement obligations within the scope of this Statement.
In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards (or “FAS”) No. 123, “Accounting for Stock-Based Compensation.” The revision is referred to as “FAS 123R — Share-Based Payment” (or “FAS 123R”), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (or “APB 25”) and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. We intend to adopt FAS 123R using the modified prospective basis on January 1, 2006. Our adoption of FAS 123R is expected to result in compensation expense that will increase diluted net loss per share by an estimated $0.02 per share for 2006 with respect to unvested options outstanding as of December 31, 2005. However, our actual stock-based compensation expense for 2006 will be affected by changes in our stock price, the number of additional stock-based awards our board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuation assumptions include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. For any VIEs that must be consolidated under FIN 46R, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company does not have any financial interest within the scope of this Statement.
In May 2003, FASB Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,was issued.This Statement establishes standards for the classification, measurement and disclosure of certain financial instruments with characteristics of both liabilities and equity. The Company does not have any financial instruments that are within the scope of this Statement.
F-10
(3) BUSINESS ACQUISITION AND DISPOSITION
(a) ACQUISITION
On August 21, 2003, the Company and Diacrin consummated the business combination that was jointly announced in April 2003 under which GenVec acquired Diacrin through an exchange of stock. Under the terms of the agreement, each share of Diacrin Common Stock was exchanged for 1.5292 shares of GenVec Common Stock in a transaction intended to qualify as a tax-free reorganization. Based on GenVec’s average closing per share price of $1.28 for a five-day period around April 15, 2003 (the date the transaction was announced), the transaction was valued at approximately $38.5 million. At the time of closing, GenVec’s existing shareholders owned approximately 45.4 percent and Diacrin’s original shareholders owned approximately 54.6 percent of the combined company. The difference between the cash and cash equivalents acquired in the acquisition of $7.3 million and the transaction costs incurred of $2.4 million is presented in the Statements of Cash Flows as cash provided by investing activities. The Company is the acquirer and the transaction was accounted for under the purchase method pursuant to SFAS No. 141, “Business Combinations”. Accordingly, results of operations of Diacrin have been included in these financial statements from August 21, 2003.
The aggregate purchase price of $38.5 million includes 27,665,392 shares of common stock issued in the exchange, valued at $35.4 million and 1,937,197 common stock options valued at $3.1 million. The value of the stock options was computed using the Black-Scholes valuation model based on the closing price on the date of the transaction. Of the $3.1 million computed value, $563,000 represents the intrinsic value of unvested in-the-money options as of the date of the transaction and has been recorded as deferred compensation, to be amortized over the remaining vesting period of the options.
The acquisition costs are summarized as follows (in thousands):
| Value of GenVec common stock issued | $ | 35,412 | ||
| Value of Stock Options issued | 3,120 | |||
| Less amount allocated to deferred compensation | (563 | ) | ||
| Transaction costs incurred by GenVec* | 2,445 | |||
| Acquisition costs | $ | 40,414 | ||
* Exclusive of $16 of registration fees charged directly against additional paid-in capital. All transaction costs were paid as of December 31, 2003.
The fair value of the assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):
Cash and cash equivalents | $ | 7,273 | ||
| Short-term investments | 30,839 | |||
| Other current assets | 530 | |||
| Long-term investments | 2,681 | |||
| Property and equipment, net | 67 | |||
| Intangible assets | 1,981 | |||
| Total assets acquired | 43,371 | |||
| Current liabilities | 1,393 | |||
| Unearned revenue | 1,564 | |||
| Total liabilities | 2,957 | |||
| Net assets acquired | $ | 40,414 | ||
The excess of the acquisition costs over the fair value of the net assets acquired has been recorded as intangible assets. Management has identified such assets as pertaining to the patents related to the myoblast cell therapy program. The amortization is not deductible for tax purposes because of the tax-free nature of the business combination.
F-11
(b) DISPOSITION
On December 28, 2005, the Company completed the sale of its myoblast cell therapy assets to Mytogen, Inc. (“Mytogen”). In conjunction with the sale of these assets, the Company discontinued its cell transplantation therapy operations in Charlestown, Massachusetts and subleased a portion of the facility to Mytogen. Under the terms of the asset purchase agreement, GenVec will receive royalties on the sales of future myoblast-related products and a portion of specified milestone payments, licensing revenues and/or proceeds from the sale or transfer of key Mytogen assets, if any, that occur through December 2007. Royalty payments made to Company under this agreement will be recognized when received. In connection with the sale of the myoblast-related assets and the termination of our cell therapy operations in Charlestown, Massachusetts, the Company incurred cash charges of approximately $75,000 in staff termination costs, accrued $460,000 for continuing lease obligations for the Charlestown facility (net of expected sublease income) and recorded non-cash write-offs of $93,000 of fixed assets and leasehold improvements and $1.8 million of intangible assets.
(4) INVESTMENTS
The amortized cost, gross unrealized holding gains and fair value of available-for-sale securities by major security type at December 31, 2005 and 2004, are as follows (in thousands):
| 2005 | ||||||||||||
| Gross | ||||||||||||
| Unrealized | ||||||||||||
| Amortized | Holding | Fair | ||||||||||
| Cost | Gains/(Loss) | Value | ||||||||||
| Government and agency notes | $ | 2,254 | $ | (2 | ) | $ | 2,252 | |||||
| Corporate bonds | 22,960 | (43 | ) | 22,917 | ||||||||
| $ | 25,214 | $ | (45 | ) | $ | 25,169 | ||||||
| 2004 | ||||||||||||
| Gross | ||||||||||||
| Unrealized | ||||||||||||
| Amortized | Holding | Fair | ||||||||||
| Cost | Gains/(Loss) | Value | ||||||||||
| Government agency notes | $ | 6,522 | $ | 24 | $ | 6,546 | ||||||
| Corporate bonds | 21,200 | (47 | ) | 21,153 | ||||||||
| $ | 27,722 | $ | (23 | ) | $ | 27,699 | ||||||
Maturities of securities classified as available-for-sale had fair values as follows at December 31 (in thousands):
| 2005 | 2004 | |||||||
| Due within one year | $ | 25,169 | $ | 25,397 | ||||
| Due after one year through four years | — | 2,302 | ||||||
| $ | 25,169 | $ | 27,699 | |||||
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in thousands):
| 2005 | 2004 | |||||||
| Equipment | $ | 8,625 | $ | 9,712 | ||||
| Leasehold improvements | 6,474 | 6,566 | ||||||
| Furniture and fixtures | 414 | 519 | ||||||
| 15,513 | 16,797 | |||||||
| Less accumulated depreciation and amortization | (11,366 | ) | (11,379 | ) | ||||
| $ | 4,147 | $ | 5,418 | |||||
Depreciation and amortization expense related to property and equipment were $1,558,000, $1,813,000, and $1,927,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
F-12
(6) INTANGIBLE ASSETS
Beginning January 2004, intangible assets arising from the Company’s merger with Diacrin were being amortized through December 2024 on a straight-line basis. The carrying value of the intangible assets was supported by the discounted value of milestone payments due under the Terumo License and Development Agreement, which was acquired as part of the merger. As of December 31, 2004, the carrying value of the intangible assets (net of amortization) was $1.9 million. On December 28, 2005, the Company completed the sale of the Company’s myoblast assets, which included the assignment of the Terumo License and Development Agreement, to Mytogen, Inc. As a result of the assignment, the Company has recorded a non-cash write-off of the intangible assets (net of amortization) in the amount of $1.8 million.
(7) LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
| 2005 | 2004 | |||||||
| Industrial revenue bond | $ | 2,580 | $ | 3,130 | ||||
| Notes payable: | ||||||||
| Term loan from landlord | 440 | 531 | ||||||
| Equipment financing | 211 | 765 | ||||||
| Economic development loan | 33 | 48 | ||||||
| Other | — | 17 | ||||||
| 3,264 | 4,491 | |||||||
| Less current maturities | (913 | ) | (1,227 | ) | ||||
| $ | 2,351 | $ | 3,264 | |||||
Aggregate maturities of long-term debt are as follows (in thousands):
| 2006 | $ | 913 | ||
| 2007 | 754 | |||
| 2008 | 790 | |||
| 2009 | 807 | |||
| 2010 | — | |||
| Thereafter | — | |||
| $ | 3,264 | |||
(a) INDUSTRIAL REVENUE BOND
In June 1999, in connection with the lease of its Gaithersburg facility, the Company borrowed $5,000,000 under an Industrial Revenue Bond with the State of Maryland to fund leasehold improvements and additional equipment needs of the Company. The Bond is secured by a first priority lien on all equipment and fixtures financed, a $2,500,000 letter of credit facility guaranteed by the Maryland Industrial Development Finance Authority, and a $2,500,000 guarantee from The Warner-Lambert Company. The annual fee for the letter of credit is one percent of the outstanding balance, which totaled $27,000, $42,000 and $48,000 for the years ended December 31, 2005, 2004, and 2003, respectively. Warner-Lambert’s guarantee will remain in place as long as the outstanding principal balance on the Bond is greater than $2,500,000 and will be reduced in value dollar for dollar as the principal balance decreases below $2,500,000.
The Bond bears interest at a variable rate based on weekly market conditions and matures on June 1, 2009. The weighted-average interest rates during 2005, 2004 and 2003 were 1.72 percent, 1.62 percent and 1.12 percent, respectively. The Bond is subject to mandatory sinking fund redemption. The Company began making sinking fund payments in July 2000; the balance of the sinking fund at December 31, 2005 and 2004 was $296,000 and $276,000, respectively.
F-13
In October 2000, the Company entered into an interest rate swap agreement to reduce its exposure to adverse fluctuations in interest rates related to the Company’s outstanding bond payable. The Company does not utilize financial instruments for trading or other speculative purposes. The interest rate swap agreement entitles the Company, on a monthly basis, to receive a LIBOR-based floating rate of interest and pay a fixed rate of interest of 6.68 percent. The interest rate swap has a total notional amount of $3,645,000 and extends through the life of the outstanding bond.
The Company has determined the interest rate swap to be ineffective, as such, changes in the fair value of the swap agreement are included in interest expense. The fair value of the swap agreement was a liability of $99,000 and $239,000 at December 31, 2005 and 2004, respectively.
(b) TERM LOAN
In connection with the lease of the office and laboratory facility, the landlord loaned $858,000 for the construction of leasehold improvements in the form of a term loan. This loan is payable in monthly installments of $11,900, including interest at a fixed rate of 10.5 percent over the remaining term of the building lease.
(c) EQUIPMENT FINANCING
On December 27, 2002 the Company secured $939,000 in financing for certain assets purchased by the Company at an interest rate of 10.0 percent. The note is payable in monthly installments of $26,100 through December 2005 followed by monthly installments of $14,000 through December 2006. The equipment financed by the note secures the loan.
On April 3, 2002 the Company secured $1,564,000 in financing for certain assets purchased by the Company. The financing consists of two notes: one note for $1,054,000 at an interest rate of 9.54 percent, payable in monthly installments of $33,600 through April 2005; the second note for $507,000 at an interest rate of 9.99 percent, payable in monthly installments of $12,800 through April 2006. The equipment financed by the notes secures the loan.
(d) ECONOMIC DEVELOPMENT LOAN
On September 29, 1999, the Company entered into an economic development fund agreement with Montgomery County, Maryland (the County) and received $125,000 for the purpose of relocation and expansion related expenses. The $125,000 received was considered a loan, which accrued interest on the principal balance at 5 percent per year until we were required to commence payment as described below.
Quarterly payments of principal and interest were originally scheduled to commence on January 15, 2002. Subsequent loan payments were to be deferred or forgiven by the County if the Company achieved certain incentive provisions outlined in the loan agreement related to the hiring of new employees within the Company. As of December 31, 2003, the Company achieved certain incentive provisions related to increasing its workforce resulting in the following: On February 2004, the Department of Economic Development of Montgomery County, Maryland, converted $68,408 of the $125,000 conditional loan into a grant. Repayment of the remaining $56,592, plus accrued interest of $6,251, occurs in quarterly installments of $4,360, which commenced in April 2004 and continues through January 2008. The interest rate is fixed at 5 percent.
(8) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS
The Company has established collaborations and research contracts with pharmaceutical and biotechnology companies and governmental agencies to enhance its ability to discover, evaluate, develop and commercialize multiple product opportunities. Revenue is summarized as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
| Vaccine Research Center | $ | 18,791 | $ | 7,373 | $ | 7,230 | ||||||
| PATH/Malaria Vaccine Initiative | 1,496 | 979 | — | |||||||||
| US Naval Medical Research Center | 1,599 | 493 | 1,361 | |||||||||
| FUSO Pharmaceuticals Industries, Ltd. | 1,595 | 1,616 | 1,724 | |||||||||
| Terumo Corporation | 1,067 | 396 | 98 | |||||||||
| Cordis Corporation | 470 | 245 | — | |||||||||
| Other strategic alliances and research grants | 1,536 | 751 | 107 | |||||||||
| $ | 26,554 | $ | 11,853 | $ | 10,520 | |||||||
F-14
GenVec’s results of operations included $2.3 million, $435,000 and $98,000 during the years ended December 31, 2005, 2004 and 2003, of amortization of these upfront contract and license fees which were received in prior years. Amortized revenues for the year ended December 31, 2005 included $1.1 million from unearned upfront contract and license fees related to the Terumo agreement, including $667,000 of accelerated amortization due to the completion of our significant performance obligations under the Terumo agreement.
(a) VACCINE RESEARCH CENTER
In December 2001, the Vaccine Research Center (VRC) at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health selected the Company to collaborate in the development of a worldwide preventative AIDS vaccine candidate. This collaboration was expanded to include the development of a SARS vaccine candidate (April 2003) and an influenza vaccine candidate (February 2006). The Company has a cost-plus fixed fee sub-contract, managed for the VRC through SAIC-Frederick, Inc., which became effective January 25, 2002. Under the sub-contract, the Company is responsible for constructing and producing adenovector-based vaccine candidates utilizing its proprietary cell line and second-generation adenovector technology. The program encompasses a base year and six option years. The fourth option year covering 2006 has been exercised and work is continuing under the contract.
(b) PATH/MALARIA VACCINE INITIATIVE (MVI)
In March 2004, the Company signed a two-year, $2,581,000 contract for the development, production and evaluation of vaccines against malaria. Under the contract, the Company is responsible for constructing adenovector-based vaccine candidates using its proprietary cell line and second-generation adenovector technology. The contract includes $547,000 for work to be performed under a separate Collaborative Research and Development Agreement (CRADA) with the Navy Medical Research Center (NMRC). Under the CRADA, NMRC will provide the Company with optimized malaria genes to be used in the development of the adenovector vaccines as well as provide preclinical evaluation of the vaccine candidates.
(c) US NAVAL MEDICAL RESEARCH CENTER (NMRC)
In January 2003, the Company signed a two-year, $1,900,000 fixed price contract to aid in the development of vaccines against malaria and dengue fever. Under the contract, the Company is responsible for constructing and producing adenovector-based vaccine candidates using its proprietary cell line and second-generation adenovector technology.
In January 2005, the Company signed a one-year, $1,582,000 fixed price contract for the production of vaccines against malaria. Under the contract, the Company will be responsible for producing, testing and releasing malaria vaccines under current Good Manufacturing Practices (cGMP) standards for preclinical evaluation by NMRC. In conjunction with the preclinical evaluation of the vaccine candidates, the Company will provide regulatory support to NMRC with regard to an anticipated Investigational New Drug (IND) filing with the FDA.
(d) FUSO PHARMACEUTICALS INDUSTRIES, LTD. (Fuso)
In September 1997, the Company established collaboration with Fuso to conduct research and to identify, evaluate and develop gene therapy products for the treatment of cancer. Under the terms of the contract, the Company received $750,000 annually for five years, subject to Fuso’s right to terminate the collaboration upon 90 days prior written notice. The annual payments are non-refundable. As part of the collaboration, the Company granted Fuso an exclusive, royalty-bearing license to develop and commercialize products developed under the collaboration for the treatment of cancer in Japan and, at Fuso’s option, Korea and Taiwan. Fuso will be responsible for the development and commercialization of any products in its territory. The Company will receive additional payments for the achievement by Fuso of specific product development and regulatory milestones, with the earliest of such payments not expected in the near term. The Company will also receive royalties on the sale of any such products commercialized by Fuso. The Company has retained all rights to develop and commercialize these products for the treatment of cancer in the rest of the world, and generally for all other uses worldwide, subject to certain restrictions. In connection with establishment of the collaboration, Fuso purchased $1,000,000 of the Company’s capital stock consisting of 75,329 shares of the Company’s Class E convertible preferred stock for $13.28 per share. All preferred shares were converted into common shares in December 2000 in connection with the Company’s initial public offering at a rate of 1.5 common shares to each preferred share.
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In September 2002, the parties amended the collaboration agreement to increase the level of funding to $1,500,000 per year, effective April 1, 2002, and extended the agreement through December 31, 2003.
Effective January 1, 2004, the Company and Fuso established a new three-year, $4,500,000 research collaboration to identify a targeted cancer therapy product candidate designed to treat not only the primary tumor but also cancer that has spread, or metastasized to distant sites in the body.
As of December 31, 2005 and 2004, unearned revenue related to this collaboration was $0 and $42,000, respectively.
(e) TERUMO CORPORATION (Terumo)
In September 2002, Diacrin entered into a development and license agreement with Terumo Corporation, of which the Company has become a party as a result of the acquisition consummated on August 21, 2003. Under the terms of the agreement, the Company licensed to Terumo its human muscle cell transplantation technology for cardiac disease in Japan. Terumo would fund all development costs in Japan while the Company continued to independently develop its cardiac repair technology for commercialization in the U.S. and elsewhere. On October 1, 2002, the Company received an upfront non-refundable license fee of $2.0 million. The agreement also includes payments by Terumo to the Company for development milestones and a royalty on product sales. The Company recorded the upfront license fee as unearned revenue to be amortized through November 2007.
For the year-to-date period ended November 30, 2005, the Company recognized $367,000 of unearned revenue. On December 28, 2005, the Company completed the sale of its myoblast assets to Mytogen, Inc., which included the assignment of the development and license agreement with Terumo. As a result of the assignment, the Company accelerated amortization of the remaining balance of unearned revenue and recorded additional revenue of $667,000.
(f) CORDIS CORPORATION (Cordis)
In January 2004, the Company entered into a research collaboration with the Cordis Cardiology Division of Cordis Corporation, a Johnson & Johnson company, to study the clinical benefit of BIOBYPASS in a procedure involving guided delivery of the angiogenic agent directly into targeted regions of the heart in patients with severe coronary artery disease using the Cordis NOGASTAR® Mapping Catheter and MYOSTAR™ Injection Catheter.
The purpose of this collaboration is to conduct a randomized, double blind, placebo controlled study of the Company’s cardiovascular product candidate, BIOBYPASS. Clinical benefit will be assessed in the multi-center study, which will be conducted in Europe and Israel and is expected to enroll up to 129 patients with severe heart disease. GenVec and Cordis will collaborate on regulatory matters and share in the clinical trial costs. GenVec will supply all clinical material and Cordis will provide the NOGASTAR® and MYOSTAR® mapping and injection catheters and training to the interventional cardiologists conducting the trial. GenVec retains all commercial rights to BIOBYPASS and Cordis retains all commercial rights to the NOGASTAR mapping catheters and MYOSTAR injection catheters. The Company recorded a $1.0 million receivable and $1.0 million of unearned revenue as of December 31, 2003; the receivable was satisfied in January 2004 with the receipt of a $1.0 million payment from Cordis. Revenues are recognized as earned based on performance under the contract. In 2005, the Company recognized $470,000 in revenues earned under the collaboration.
(g) OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS
Revenues include $498,000 earned in 2005 under a $1.7 million extension of our foot-and-mouth vaccine development agreement with the U.S. Department of Agriculture.
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(9) COMMITMENTS
(a) LEASE AGREEMENTS
The Company has non-cancelable operating leases for its Gaithersburg, MD and Charlestown, MA facilities. The Gaithersburg office and laboratory lease expires in October 2009. The agreement includes a provision for a 3 percent annual increase in base rent. The lease contains renewal options for up to fourteen years and requires the Company to pay all executory costs such as maintenance and insurance. As part of the lease, the landlord’s initial contribution of $1,300,000 in incentives is considered a reduction of rental expense that is recognized on a straight-line basis over the term of the lease. The Charlestown lease expires on October 3, 2006. Rent expense under all operating leases was approximately $1,934,000, $1,492,000 and $967,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Future minimum lease payments under all non-cancelable operating leases are as follows (in thousands):
| 2006 | $1,454 | |||
| 2007 | 775 | |||
| 2008 | 792 | |||
| 2009 | 677 | |||
| 2010 | — | |||
| Thereafter | — | |||
| $3,698 | ||||
At December 31, 2005 and 2004, the Company had a straight-line lease liability of $745,000 and $885,000, respectively.
(b) LICENSE AGREEMENTS
In 2000, the Company entered into agreements with Public Health Service (PHS) for exclusive rights to develop and commercialize the PEDF gene for gene therapy applications in the eye. In October 2004, the Company entered into an agreement with PHS that superseded the 2000 license agreement, extending the Company’s rights to include the development and commercialization of the PEDF gene and protein for diagnostic and therapeutic applications in the eye. In December 2004, the Company entered into an agreement with PHS further expanding the Company’s rights to include the use of the PEDF gene and protein for the diagnosis, treatment and/or prevention of cancer (except cancers of the eye as covered under the October 2004 license agreement). In exchange for these licenses, the Company has committed to pay product royalties based on net sales of licensed products, net of a minimum royalty payable annually for the duration of the agreements. The Company has also committed to pay a one-time, $50,000 license fee under each of the two agreements upon the earlier of the achievement of certain commercialization milestones or stipulated anniversaries of the commencement date of the agreements.
In February 1998, the Company entered into a non-exclusive license agreement with Asahi Chemical Industry Company Limited (Asahi) for rights to gene therapy applications in the United States to its proprietary form of the TNF-alpha gene. In exchange for this license, the Company paid a $200,000 non-refundable fee to Asahi and has committed to additional payments upon the achievement of specified clinical milestones, as well as product royalties based on net sales of a licensed product. In September 2002 the Company paid $50,000 upon commencement of Phase II clinical trials involving the TNF-alpha gene.
In May 1996, the Company entered into an exclusive, worldwide license agreement with Scios, inc. (Scios) for rights to gene therapy applications of its proprietary form of the VEGF gene. Johnson & Johnson acquired Scios in April 2003. Scios will share in certain profits the Company realizes from the research, development and commercialization of products incorporating the VEGF gene. The Company has agreed to provide a minimum royalty on revenues generated from the development of these products, which is creditable against the profits to be shared. In connection with the license agreement, Scios purchased 96,852 shares of the Company’s Class D convertible preferred stock at a price of $10.33 per share. All preferred shares were converted into common shares in December 2000 in connection with the Company’s initial public offering at a rate of 1.5 common shares to each preferred share. In addition, the Company granted Scios a warrant to purchase 317,796 shares of the Company’s common stock, which vested upon the earlier of the achievement of specified product development milestone events or certain dates. All Scios warrants expired as of December 11, 2005.
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The Company’s license agreements often include event based milestone payments, the timing of which is dependent upon a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.
(c) RESEARCH AND DEVELOPMENT AND CLINICAL 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 rights to the resulting technology. Total grants paid by the Company were approximately $261,000, $483,000, and $1,000,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
As discussed in Note 2, the Company has agreements with clinical sites for the treatment of patients under clinical protocols. Total clinical costs were $3,154,000, $2,482,000 and $2,285,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Additionally, certain agreements disclosed above require the Company to pay royalties upon commercial sales, if any, of specified products. The Company generally bases the royalties on a percentage of net sales or other product fees earned. Royalties will become due when sales are generated.
(10) STOCKHOLDERS’ EQUITY
(a) CAPITAL STOCK
In December 2002, the Company filed with the Securities and Exchange Commission a $25,000,000 shelf registration statement on Form S-3.
| • | On January 22, 2003 the Company sold 756,800 shares of common stock to an existing shareholder at $2.50 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $1,849,000. | ||
| • | On April 16, 2004, the Company sold 4,000,000 shares of common stock to various investors at $3.15 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $11,787,000. Stonegate Securities was engaged as the sole placement agent for this transaction. |
In April 2005, the Company filed with the Securities and Exchange Commission a $35,000,000 shelf registration statement on Form S-3, replacing our prior $25,000,000 shelf registration statement.
| • | On September 26, 2005, the Company sold 7,600,000 shares of common stock to various investors at $2.00 per share under the shelf registration. Proceeds, net of offering costs, from this sale totaled $13,990,000. SG Cowen & Co., LLC (“SG Cowen”) was engaged as the sole placement agent for this transaction. Stelios Papadopoulos, Ph.D., is a Vice Chairman in the investment banking division of SG Cowen and is a member of GenVec’s board of directors. |
As of December 31, 2005, $19.8 million of unissued securities are registered under the shelf registration statement on Form S-3 filed in April 2005.
In September 2001, the Board of Directors of the Company declared a dividend which was issued on September 28, 2001 of one preferred stock purchase right (a “Right”) for each share of common stock outstanding. The Rights initially trade with, and are inseparable from the common stock. The Rights will become exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the outstanding common stock of GenVec (an “Acquiring Person”), or announces the intention to commence a tender or exchange offer the consummation of which would result in that person or group becoming an Acquiring Person. Each Right allows its holder, other than the Acquiring Person, to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock (the “Preferred Share”), at a purchase price of $50.00, subject to adjustment. This portion of a Preferred Share gives the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. The Rights expire on September 7, 2011, unless redeemed earlier by the Company at a price of $0.01 per Right at any time before the Rights become exercisable.
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In addition to the Common Stock reflected on the Company’s balance sheets, the following items are reflected in the capital accounts as of December 31, 2005 and 2004:
| • | 4,400,000 shares of $0.001 par value preferred stock have been authorized; none are issued or outstanding. | ||
| • | 600,000 shares of $0.001 par value Series A junior participating preferred stock have been authorized in connection with the preferred stock purchase rights referred to above; none are issued or outstanding. |
(b) STOCK OPTION GRANTS
At the Company’s Annual Meeting of Stockholders, held on June 6, 2002, the stockholders approved the adoption of the 2002 Stock Incentive Plan (“the Plan”), which replaced the 2000 Director Option Plan and the 1993 Stock Incentive Plan (collectively, “prior plans”). The Plan, which is administered by the Compensation Committee of the Board (“The Committee”), authorized for issuance 1,000,000 shares plus any shares available under the prior plans at their termination date.
| • | On August 21, 2003, in connection with the Diacrin acquisition, the stockholders approved an increase in the number of common shares to be issued under the Plan by an additional 1,000,000. | ||
| • | At the Company’s Annual Meeting of Stockholders, held on June 15, 2005, the stockholders approved an increase in the number of common stock shares to be issued under the Plan by an additional 1,680,000. |
Employees, non-employee directors and consultants are eligible to receive stock option grants or restricted stock under the Plan. Under the Plan, options are granted at not less than existing market prices and expire 10 years from the date of grant. The Committee has broad powers to determine eligibility and terms of all awards. Grants to employees generally vest ratably over a four-year period; grants to consultants generally vest over the terms of their contractual agreements; and grants to non-employee directors generally vest over 12 months.
Changes in stock options were as follows:
| Average | ||||||||
| Number of Shares | Exercise | |||||||
| (in thousands, except per share data) | Under Option | Price | ||||||
| Outstanding at December 31, 2002 | 4,640 | $ | 3.18 | |||||
| Assumed from acquisition | 1,937 | 2.84 | ||||||
| Granted | 209 | 2.73 | ||||||
| Exercised | (914 | ) | 1.69 | |||||
| Cancelled | (1,624 | ) | 3.63 | |||||
| Outstanding at December 31, 2003 | 4,248 | 3.15 | ||||||
| Granted | 1,105 | 3.03 | ||||||
| Exercised | (289 | ) | 1.19 | |||||
| Cancelled | (279 | ) | 3.64 | |||||
| Outstanding at December 31, 2004 | 4,785 | $ | 3.20 | |||||
| Granted | 1,633 | 1.91 | ||||||
| Exercised | (342 | ) | 0.96 | |||||
| Cancelled | (1,235 | ) | 3.05 | |||||
Outstanding at December 31, 2005 | 4,841 | $ | 3.01 | |||||
As of December 31, 2005 options covering 3,402,086 shares were exercisable at $0.70 to $9.63 per share (weighted average $3.36 per share) and options covering 2,763,920 shares remain available to be granted.
F-19
Options outstanding at December 31, 2005 are summarized below:
| Outstanding | Exercisable | |||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||
| Shares | Exercise | Remaining | Shares | Exercise | ||||||||||||||||
| Exercise Price | (thousands) | Price | Life | (thousands) | Price | |||||||||||||||
| $0.00 – $1.00 | 57 | $ | 0.72 | 5.7 years | 34 | $ | 0.73 | |||||||||||||
| $1.01 – $3.00 | 2,314 | 2.09 | 6.8 | 1,214 | 2.26 | |||||||||||||||
| $3.01 – $4.00 | 1,572 | 3.28 | 5.9 | 1,256 | 3.29 | |||||||||||||||
| $4.01 – $5.00 | 646 | 4.39 | 3.3 | 646 | 4.39 | |||||||||||||||
| $5.01 – $10.00 | 252 | 6.73 | 2.4 | 252 | 6.73 | |||||||||||||||
| 4,841 | $ | 3.01 | 5.8 years | 3,402 | $ | 3.36 | ||||||||||||||
For options granted to consultants, the Company recorded $0, $0 and $65,000 of gross deferred compensation for each of the three years ended December 31, 2005, and the amortization related to this and prior years deferred compensation amounted to $0, $0 and $191,000.
As a result of the merger with Diacrin in August 2003, the Company recorded deferred compensation of $563,000 for the difference between the exercise price of outstanding unvested Diacrin options and the fair value of the Company’s common stock at the date of the acquisition. The deferred compensation is being amortized over the remaining vesting period of the related options. Net amortization for 2005, 2004 and 2003 related to this and prior years deferred compensation amounted to $261,000, $229,000 and $1,542,000, respectively. The $121,000 balance as of December 31, 2005 will be fully amortized by the end of 2007. This deferred compensation is subject to reduction for any employee who terminates employment prior to the expiration of such employee’s option vesting period.
(c) EMPLOYEE STOCK PURCHASE PLAN
In December 2000, the Company adopted the 2000 Employee Stock Purchase Plan, referred to as the “Purchase Plan”. The Company reserved a total of 350,000 shares of common stock for issuance under the Purchase Plan, plus annual increases on the first day of each fiscal year beginning 2001 equal to the lesser of 350,000 shares; 2 percent of the outstanding shares as of such date; or a lesser amount determined by the Board of Directors.
Substantially all employees are eligible to participate. Participants may purchase common stock through payroll deductions of up to 15 percent of the participant’s compensation. The maximum number of shares a participant may purchase during a six-month offering period is 6,250 shares.
The price of stock purchased under the purchase plan is 85 percent of the lower of the fair market value of the common stock at the beginning of the offering period or the end of the offering period. Employees purchased 98,357 shares, 66,124 shares and 34,939 shares during 2005, 2004 and 2003 at a weighted average purchase price of $1.39, $1.75 and $1.74. The Purchase Plan will terminate on October 18, 2010, unless sooner terminated by the Board of Directors.
(d) WARRANTS
Warrants to purchase common stock were granted to organizations and institutions in conjunction with certain licensing and funding activities. The warrants vested according to a combination of time and events as prescribed in the agreements. Outstanding and vested warrants are summarized below (in thousands, except per share amounts):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Exercise Price | Outstanding | Vested | Outstanding | Vested | Outstanding | Vested | ||||||||||||||||||
| $3.60 | 66 | 66 | 66 | 66 | 66 | 66 | ||||||||||||||||||
| $3.93 | 25 | 25 | 31 | 31 | 56 | 56 | ||||||||||||||||||
| $8.85 | — | — | 318 | 318 | 318 | 318 | ||||||||||||||||||
| 91 | 91 | 415 | 415 | 440 | 440 | |||||||||||||||||||
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(11) 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 (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
| Tax provision computed at the statutory rate | $ | (4,676 | ) | $ | (6,424 | ) | $ | (7,229 | ) | |||
| State income taxes, net of federal income tax provision | (962 | ) | (751 | ) | ( 982 | ) | ||||||
| Book expenses not deductible for tax purposes | 7 | 8 | 8 | |||||||||
| Research and experimentation tax credit | (1,146 | ) | (787 | ) | (460 | ) | ||||||
| Nondeductible compensation expense | 94 | 89 | 381 | |||||||||
| Change in valuation allowance for deferred tax assets | 6,683 | 7,865 | 8,282 | |||||||||
| Income tax expense | $ | — | $ | — | $ | — | ||||||
The valuation allowance for deferred tax assets increased approximately $6.7 million, $7.9 million and $8.3 million for the years ended December 31, 2005, 2004 and 2003.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. Based upon the Company’s historical operating performance and the reported cumulative net losses to date, the Company presently does not have sufficient objective evidence to support the recovery of its deferred tax assets. Accordingly, the Company has provided a full valuation allowance against its deferred tax assets. Recording this valuation in no way affects the Company’s ability to utilize this asset.
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 the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
| Net operating loss carryforwards | $ | 76,689 | $ | 71,682 | $ | 64,695 | ||||||
| Capital loss carryforwards | 328 | 328 | — | |||||||||
| Research and experimentation tax credit | 10,425 | 9,279 | 8,492 | |||||||||
| Deferred rent | 178 | — | — | |||||||||
| Unearned revenue | — | 485 | 465 | |||||||||
| Property and equipment, principally due to differences in depreciation | (507 | ) | (655 | ) | (727 | ) | ||||||
| Deferred compensation expense | 747 | 785 | 873 | |||||||||
| Intangible asset | — | (727 | ) | (765 | ) | |||||||
| Other | 151 | 139 | 426 | |||||||||
| Total deferred tax assets | 88,011 | 81,316 | 73,459 | |||||||||
| Valuation allowance | (88,011 | ) | (81,316 | ) | (73,459 | ) | ||||||
| Net deferred tax assets | $ | — | $ | — | $ | — | ||||||
At December 31, 2005, the Company has net operating loss carryforwards of approximately $198.5 million for federal income tax purposes of which $59.4 million expire at various dates through 2013, and $139.1 million expire at various dates through 2025. The Company has research and experimentation tax credit carryforwards of $10.4 million at December 31, 2005, of which $1.7 million expire through 2013 and $8.7 million expire through 2025. The Company also has capital loss carryforwards of $0.8 million which will expire 2008.
F-21
The Company’s NOL and tax credit carryforwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2005 and in prior years, the Company may have experienced such ownership changes. Diacrin might have also experienced ownership changes in prior years and/or as a result of its merger with the Company.
The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryforwards that can be utilized. When the Company completes the necessary studies, the amount of NOL carryforwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryforwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues and expenses for the periods presented.
(12) OTHER COMPREHENSIVE INCOME (LOSS)
The purpose of reporting comprehensive income (loss) is to report a measure of all changes in equity, other than transactions with stockholders. Total comprehensive income (loss) is included in the Statements of Stockholders’ Equity. The components of accumulated other comprehensive income (loss) are as follows (in thousands):
| Unrealized | Accumulated | |||||||||||
| Unrealized | Gain (Loss) | Other | ||||||||||
| Gain (Loss) | on Derivative | Comprehensive | ||||||||||
| on Securities | Instruments | Income (Loss) | ||||||||||
| Balance, December 31, 2002 | $ | 227 | $ | (566 | ) | $ | (339 | ) | ||||
| Unrealized gain from available-for-sale securities | 73 | — | 73 | |||||||||
| Loss in operations | (178 | ) | — | (178 | ) | |||||||
| Unrealized loss on cash flow derivative | — | (45 | ) | (45 | ) | |||||||
| Interest expense realized in operations | — | 214 | 214 | |||||||||
| Balance, December 31, 2003 | $ | 122 | $ | (397 | ) | $ | (275 | ) | ||||
| Unrealized loss from available-for-sale securities | (137 | ) | — | (137 | ) | |||||||
| Loss in operations | — | — | — | |||||||||
| Unrealized loss on cash flow derivative | — | (25 | ) | (25 | ) | |||||||
| Interest expense realized in operations | — | 182 | 182 | |||||||||
| Balance, December 31, 2004 | $ | (15 | ) | $ | (240 | ) | $ | (255 | ) | |||
| Unrealized loss from available-for-sale securities | (30 | ) | 240 | 210 | ||||||||
Balance, December 31, 2005 | $ | (45 | ) | $ | — | $ | (45 | ) | ||||
Other comprehensive income (loss) does not reflect the effect of income taxes because the Company had no income tax provision during the three years ended December 31, 2005.
(13) QUARTERLY RESULTS (UNAUDITED)
The Company’s unaudited quarterly information is as follows (in thousands, except per share data):
| 2005 | Q1 | Q2 | Q3 | Q4 | ||||||||||||
| Revenue | $ | 4,549 | $ | 7,348 | $ | 6,897 | $ | 7,760 | ||||||||
| Net loss | $ | (3,458 | ) | $ | (2,956 | ) | $ | (3,249 | ) | $ | (4,329 | ) | ||||
| Basic and Diluted Loss Per Share | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.07 | ) | ||||
| 2004 | Q1 | Q2 | Q3 | Q4 | ||||||||||||
| Revenue | $ | 2,741 | $ | 3,151 | $ | 2,932 | $ | 3,029 | ||||||||
| Net loss | $ | (5,650 | ) | $ | (4,776 | ) | $ | (4,789 | ) | $ | (3,679 | ) | ||||
| Basic and Diluted Loss Per Share | $ | (0.11 | ) | $ | (0.09 | ) | $ | (0.09 | ) | $ | (0.07 | ) | ||||
The loss per share was calculated for each three-month period on a stand-alone basis. As a result, the sum of the loss per share for the four quarters does not equal the loss per share for the respective twelve-month period.
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(14) SUBSEQUENT EVENT (UNAUDITED)
On March 15, 2006, the Company entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd., under which Kingsbridge has committed to purchase up to $30.0 million of the Company’s common stock within a three-year period, subject to certain conditions and limitations. As part of the arrangement, the Company issued a warrant to Kingsbridge to purchase 520,000 shares of the Company’s common stock at a price equal to 125% of the average closing bid prices during the five (5) days preceding the issuance date of the warrant. The warrant is exercisable beginning six months after the date of grant and for a period of five years thereafter.
Under the CEFF, the Company may require Kingsbridge to purchase shares of common stock at prices between 88% and 92% of the volume weighted average price (VWAP) on each trading day during an 8-day pricing period. The value of the maximum number of shares the Company may issue in any pricing period is equal to the lesser of 1.75% of the Company’s market capitalization immediately prior to the commencement of the pricing period, or $5.0 million. The minimum VWAP for determining the purchase price at which the Company’s stock may be sold in any pricing period is the greater of $1.25, or 75% of the closing price of the Company’s common stock on the day prior to the commencement of the pricing period. The CEFF also requires the Company to file a resale registration statement with respect to the resale of shares issued pursuant to the CEFF and underlying the warrant, to use commercially reasonable efforts to have the registration statement declared effective by the SEC, and to maintain its effectiveness. The Company is obligated to sell a minimum of $2.0 million of common stock available under the CEFF within a two-year period.
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